The emotional inflexibility that dominates most gold analyzes contributes to confusion and misunderstanding. For example, “The backdrop for gold today is as bullish as it has been in a long time”; or “The precious metals sector is in a major buy signal.” These and similar claims are often backed up by reams of technical analysis – the best money can buy.
And this adds to the general misstatements of fact. It would seem that there is virtually no justification for lowering gold prices, except when caused by manipulation associated with conspiratorial forces.
Otherwise, world tension, terrorism, natural calamities, social unrest, economic weakness, interest rates, inflation, trade deficits, demand for Indian jewelry, etc, etc. they all put a ‘floor’ under the price of gold. At least this is what they tell us.
And the weather. Oh my word; the timing! “It’s now or never).” “Gold has finally broken above its overhead resistance.” “$2,000/oz by the end of 2017.”
Does understanding gold require a degree in cyclical theory or financial mathematics? Or is it related to climate change?
There is a better and simpler explanation for gold. It just requires a bit of historical observation.
1) First and foremost is the simple fact that gold is real money.
Its value (purchasing power) is constant and stable. And its role as money came about through trial and error. Gold has stood the test of time.
2) Second, paper currencies are substitutes for real money.
Gold is also original money. It was stored in warehouses and receipts were issued to owners reflecting ownership and title to the gold on deposit. Receipts were bearer instruments that were negotiable for trade and exchange.
3) Third, inflation is caused by the government.
One thing that should be clear from history is that governments destroy money. That may sound harsh, but it’s true. And when we say “destroy” we mean precisely that. Inflation is intentionally practiced by governments and central banks. Its effects are severe and unpredictable. The US Federal Reserve Bank has managed to tear the US dollar to pieces over the last century. The result is a dollar that is worth 98 percent less than it was in 1913, when the Federal Reserve began its great experiment.
The relationship between gold and the US dollar is similar to that between bonds and interest rates. Bonds and interest rates move inversely. The same goes for gold and the US dollar.
If you own bonds, then you know that if interest rates go up, the value of your bonds goes down. And conversely, if interest rates are going down, the value of your bonds is going up. One does not ’cause’ the other. Either result is the real inverse of the other.
A stable or strengthening US dollar means lower gold prices. A declining US dollar means higher gold prices.
In other words, higher gold prices are a direct reflection of the weakening of the US dollar.
And please don’t confuse the US dollar with the US dollar index. The US dollar indices tell us nothing about the price of gold. A dollar index reflects changes in the exchange rate of the US dollar against other currencies.
The real changes in the value of the US dollar are shown in the general increasing level of prices of all goods and services, over time.
The threat of world war is ominously present today. Countries and municipalities go bankrupt. And acts of terrorism are an almost daily occurrence. This adds up to an economy that can’t seem to improve enough or maintain an acceptable growth rate.
So let’s buy gold, shall we? Maybe, maybe not. You see, gold doesn’t care about such things. It doesn’t matter whether or not someone fires a rocket armed with a nuclear warhead or whether the state of Illinois goes bankrupt. And he doesn’t react to comments from Janet Yellen or Donald Trump. The demand for Indian jewelry is not on their radar. No housing starts either.
Gold responds to one thing. Changes in the US dollar. Nothing more.
A continually weaker dollar over time means higher gold prices.
Periods of dollar strength are reflected in a falling gold price.
Let’s talk for a moment about North Korea and the threat of war. It is a very scary situation. But even if things get worse, it won’t have an impact on gold prices. This is why:
In the late 1990s, there was much speculation about the potential effects on gold of the impending Gulf War. There were some price spikes and anxiety increased as the ‘action’ deadline approached. Almost simultaneously with the start of the bombing by US forces, gold pulled back sharply, giving up its previously accumulated price gains and actually moving lower.
Most observers describe this turn as something of a surprise. They attribute this to the swift and decisive action of our forces and the results achieved. That’s a convenient explanation but not necessarily accurate.
What mattered most for gold was the impact of the war on the value of the US dollar. Even prolonged engagement would not necessarily have undermined the relative strength of the US dollar.
All of which brings us back to a better and simpler explanation:
When it comes to gold, it is the US dollar.