Gold Price: It’s ALL About the Strength Of the USD, Stupid!

Currently, the U.S. dollar is strong and that trend may continue for some time. As long as it does or for as long as the U.S. dollar maintains stability, there cannot be new highs in the gold price.

…At one time there was a fixed ratio of dollars to gold ($20 U.S. to 1 troy ounce of gold) but, after finally admitting (sort of) that they had created too many dollars to maintain that ratio of convertibility, the U.S. reneged on its promise to exchange its gold for the cheaper dollars that it had put into circulation worldwide.

Without convertibility and with no limits to restrain government, the supply of dollars continues to grow at an alarming rate [and all] the “new money” cheapens the value of all the money (dollars) in circulation. This leads to a loss in purchasing power which results in higher prices. This is why it continues to cost more and more for the things we buy.

The higher prices resulting from the loss in purchasing power are not  inflation. Inflation is the conscious action of governments and central banks to expand the supply of money and credit. The higher prices are an effect of inflation.

…Since a higher gold price reflects the actual loss in U.S. dollar purchasing power, it will be necessary for further permanent losses in U.S. dollar purchasing power before those higher gold prices can occur. However, you will need the higher gold price just to maintain your own purchasing power since the prices of the goods and services you buy will also be much higher.

Summary/Conclusion

1. Currently, the U.S. dollar is strong and that trend may continue for some time. As long as it does or for as long as the U.S. dollar maintains stability, there cannot be new highs in the gold price.
2. Gold is not forward-looking. The higher price of gold over time reflects the actual effects of inflation that have already shown up in the loss of purchasing power (higher prices of goods and services) in the U.S. dollar.
3. New highs can occur only after a longer period of sustained U.S. dollar weakness resulting in a further loss of purchasing power.

The above post by Lorimer Wilson, Managing Editor of munKNEE.com, is an edited ([ ]), abridged […], retitled, restructured, reformatted, highlighted and grammatically corrected version of an article by Kelsey Williams (kelseywilliamsgold.com) for the sake of brevity and clarity to ensure a fast and easy read.