Gold’s value is not determined by world events, political turmoil, or industrial demand. The only thing that you need to know in order to understand and appreciate gold for what it is, is to know and understand what is happening to the U.S. dollar. Gold is priced in U.S. dollars and since the U.S. dollar is in a state of perpetual decline, the U.S. dollar price of gold will continue to rise over time.
The U.S. dollar is in a constant state of deterioration, punctuated with periods of temporary strength and stability [and] the dollar price of gold reflects the deterioration by moving higher over time, usually after the fact, [because] gold is not forward-looking. The higher price of gold in dollars is a reflection of the loss in purchasing power that has already occurred.
There are five major turning points for gold’s price that are reflected on the chart (source) below which illustrates the link between gold’s price and the U.S. dollar. All five turning points (1933, 1971, 1980, 2000, 2011) coincided with changes in the U.S. dollar…and these changes can last for years (1980-2000; 2011-2016):
- 2001 – 2008:
- Beginning in 2001, the U.S. dollar began a significant decline on world markets lasting until 2008 [and] during that time the price of gold rose from $256 ozt. to as high as $1023 ozt..
- A secondary low for the U.S. dollar occurred in 2011 [and] this was closely concurrent with a peak in gold’s price at $1896 ozt..
- 2011 – 2016:
- The U.S. dollar then began a multi-year period of strength and stability [and] the muted effects of inflation between 2011 and 2016 resulted in…the price of gold declining 45% from $1896 ozt. to $1049 ozt. during that period.
- The price of gold since then has risen to $2060 ozt. and subsequently declined back to $1675 oz. Meanwhile, the US dollar has neither gotten much weaker nor strengthened to any measurable degree.
GOLD – WHAT TO EXPECT NEXT
As far as gold is concerned, the only thing that will take its price higher is further lasting deterioration in actual purchasing power of the U.S. dollar.
- If you think that a collapse in the U,S. dollar is imminent, and that runaway inflation is just around the corner, then load up on gold – but don’t expect to get rich if you are correct. At best, all you can expect is to maintain your current level of purchasing power for whatever wealth you have already accumulated.
- If we have a period of relative tranquility and economic prosperity with mild inflation effects, then gold’s price could languish or decline for many years.
- A financial collapse with credit defaults would likely usher in a long-lasting economic depression and deflation…[which] would result in price declines for all assets of anywhere from 60-90 percent or more, and, yes, that includes gold.
The value of gold is constant. Its price changes according to changes in actual purchasing power of the U.S. dollar…[so] if you want to know and understand what is happening to gold’s price, then you need to know and understand what is happening to the U.S. dollar. Changes in the price of gold do not tell us anything about gold; they tell us what has happened to the U.S. dollar.
The above version of the original article by Kelsey Williams was edited for a faster and easier read.
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