PMs: Why Has Gold Not Exploded Upward Yet?

[ThePenguinLibertarian]

It is just that mathematically, it has not been going up as fast as the rate of dollar creation by the Fed. But yes, of course it has performed well, relatively speaking. I have certainly been happy about the gold I own over the past bunch of years. So to you I would ask a different question: what is the reason gold has performed so well?

Both are really two forms of the same question, which is: What is the reason gold has performed the way it has? (whether you consider that good or bad)

Probably because of the Mass government expansion post 2008 crash had brought in overload of new cash. This "new liquidity" then spiked up demand. Hell, Falling gold prices is not a bad thing. However, this does not invalidate the ABCT. If anything, the Yen dropping in value and excess liquidation leads to a false boom. THis is the classic Austrian Business Cycle.

 

[ThePenguinLibertarian]

Gold doesn't follow the money supply. Why did the price of gold fall from 1980 to 2001? I have observed that it generally follows economic expectations. If the economy is expected to be bad, the price goes up. If the economy is improving, the price of gold goes down. To answer my question I posed, the rate of inflation was declining from 1980 to 2001. As inflation declined, the price of gold also fell. The recent spike came when the economy collapsed and as the economy started to improve, the price of gold started back down again.

Zippy does that mean that the Keynesian policies worked?

 

[Zippyjuan]

Zippy does that mean that the Keynesian policies worked?

The dramatic raising of interest rates in the late 1970's, early 80's was very successful in slowing the economy (leading to double digit unemployment) which did lead to lower price inflation. Have their more recent moves been successful? I would say no. I have not supported most of their quantitive easing.

 

[Seraphim]

Nixon closed the gold window on the international community because the US had exported a ton of inflation that was NOT backed by gold (AS PROMISED).

De Gaule, the French President - called the bluff and the International community followed. The US was losing it's gold VERY fast.

As usual, black/free markets adjust prices faster/better then government price controls (which Bretton-Woods was).

This was primarily occuring globally and in Europe. The rest of ther world was far more aware of USD devaluation then Americans were.

If you're looking for some official chart - there are none. The official peg was 35$ an ounce.

The US was effectively the world bank - promising not to print more then 35$ per physical ounce of gold. The US broke that promise and the world called the bluff (BANK RUN).

The gold price was rising around the world before the official breaking of the peg because there were more dollars circulating around the world then the promised 35/1 ratio.

could you explain/elaborate on/prove that?

 

[helmuth_hubener]

As usual, black/free markets adjust prices faster/better then government price controls.... This was primarily occurring globally and in Europe.

So are you saying that the black market price of gold was around $70 in the late 60s and 1970 and 71? And where could one actually sell gold at such a price -- dark back alleys in Europe? I am not meaning to make fun, I am not an expert of the history of this stuff, so I'm just trying to get a fuller picture.

 

[IDefendThePlatform]

Like Zippy said, Gold isn't really used as a currency much so it doesn't necessarily track the supply of dollars in a 1:1ish ratio like the yen, pound or other comparable paper currencies. It's looked at as more of an investment, and so competes with the stock market, real estate, etc.. for all those extra dollars.

With that said I could easily see an event causing the price of gold to skyrocket much faster and make up for the somewhat less than expected (though still very very good) return of the last decade or so. Especially if it returns to its historical role as money.

 

[IDefendThePlatform]

Gold's potential future as money: http://en.wikipedia.org/wiki/E-gold

 

[thoughtomator]

Gold is a hedge against currency debasement... its price is - in general - related to the faith of the market in monetary authorities. The more confidence they have in fiat authorities, the more they'll be comfortable with fiat currency and the less they'll demand gold. With round-robin currency debasement going on globally, gold in general has a very strong outlook.

There's some funny stuff going on in paper gold - the ETFs. Those prices can be and are manipulated like any other stock price. It is easy for a large bank to leverage up on fiat credit and move the market by placing a large bet in one direction or another, and there is evidence that this has been done recently. There doesn't have to be any actual gold to back these bets, though; or perhaps a small amount of gold is leveraged many times over, so that it backs far more bets than it can actually cover. However, physical gold is now trading at a larger premium to the spot price than it has in the past, an indication of a widening gap between the value of actual gold and its paper representation. There are interesting movements at the JPM vault as it nears zero gold reserves, in the face of a torrent of actual physical redemption.

Then there's the issue with Germany which is incredibly serious; they wanted some of their gold back, we told them it would take seven years - which any reasonable person would conclude translates to "we don't got it". And of course there's the gold owned by the United States itself, which the Fed is entrusted with. Trust 'em?

 

[helmuth_hubener]

Thanks, everyone, for your thoughts.

Here is my own model of things, which is really Harry Browne's idea. The US dollar is the number one most popular money in the world. Gold is the number two most popular money. When there is crisis and uncertainty, yes, people want to hold more money. They feel vulnerable and want to be more liquid, they want more in their pocket. That does not necessarily mean that gold goes up. It does probably mean that the dollar goes up. Gold may or may not go up.

So, there is no direct and necessary link between a crisis and gold prices going up. E.g.: 9/11 happened, and gold prices did not go up.

However, when there is significant price inflation in the US, as in 5, 6, 7% or higher, then people all over the world start to get antsy about the dollar. They were holding it for safety, and with price inflation they are losing that. So, they start to get out of the dollar and instead hold the number two worldwide money: gold.

So there is a direct causal link between gold and price inflation. There is also the well-known link between monetary inflation and gold (and all commodities, and all products, really). When the Fed inflates the money supply, then, all else equal, prices of everything will go up eventually, and that includes the price of gold. But that can be a very delayed reaction. It's uncertain how long it will take for monetary inflation to manifest in the economy as price inflation. But because gold is used worldwide as a money (not for many day-to-day transactions, but as a store of value), there is that additional factor which will make it tend to go up when its competitor, the dollar, goes down.

The dollar and gold are both competing for market share as money. As things are, the dollar has many, many advantages over gold for most people and so it is number one. But if the dollar's downsides suddenly increase -- as in the situation of a major inflationary period (see the 1970s) -- gold will look better in comparison and some people will convert to using gold for their savings.

As eric_cartman said, the dollar is still strong. That is, even though there's been lots of monetary inflation, there has been no serious price inflation yet. Until there is, gold's future is uncertain. Once there is, then gold will have a strong tendency to go up, and go up a lot.

We do not know when, or even if, this will occur.

Thoughts?

 

[oyarde]

So are you saying that the black market price of gold was around $70 in the late 60s and 1970 and 71? And where could one actually sell gold at such a price -- dark back alleys in Europe? I am not meaning to make fun, I am not an expert of the history of this stuff, so I'm just trying to get a fuller picture.

I would say by early May,1971 the " black market " prices were set in Europe, but, again, coins were more. By Aug 1972 , around $70 on the regular market probably , by '73 , as much as near $130, all London.I probably could have gotten as much as 4 times those for old US gold coins outside of the US.... ( might be able to in India, now )

 

[oyarde]

But I have seen old US gold coins, somewhat rare that will still bring well over spot , consistently,even at these prices. I have , right here , an 1858 California solid gold 1/2 dollar that I purchased at one time( yes, some time ago ) for $11.50, I have not put it on a scale, but guess 1/2 gram . I would not take $100 for it ( not for sale ), easily worth more.