Wednesday , 17 April 2024

What Will Cause Higher Gold Prices? Huge Money Creation OR a Weakening USD?

The expectation for a much higher gold price resulting from huge money creation by the Federal Reserve is shared universally by investors, analysts, and others BUT that is simply not the case. Here’s why.

Below is a chart (source) which shows the ratio of gold prices to the monetary base dating back to 1918…

Since the gold price peaked in 1980, the ratio has declined starkly:

  • The low point (.28) was reached in December 2015…[and] occurred within the context of quantifiably larger growth in the supply of money and credit…while the price of gold increased from $850 to $2000 per [troy] ounce;
  • whereas the decline in the ratio between 1934 and 1970 occurred while the gold price remained fixed at $35 per [troy] ounce

so, we have an ongoing increase in the gold price, yet the ratio of the gold price to the monetary base continues to decline. Seems like it should be the other way around.

Maybe, though, it is not the money supply growth which determines the gold price. Maybe the gold price is reflective of something other than the supply of money and, in fact, it is. The higher price of gold is correlated to the loss in purchasing power of the U.S. dollar.

Equally important is that the loss in purchasing power of the U.S. dollar is NOT quantifiably predictable. In other words, a doubling of the money supply over any specific period of time, does not necessarily mean that the U.S. dollar will lose half of its purchasing power.

Bottom Line

The expansion of the supply of money…IS inflation and the effect of that inflation is a loss in purchasing power of the U.S. dollar and that is what should cause a much higher gold price going forward.

Editor’s Note:  The original article by Kelsey Williams has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read.  The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.  Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

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One comment

  1. Inflation, or loss of dollar purchasing power, results in higher gold prices,
    but, to me, but wouldn’t inflation be the result of more dollars in circulation?