What’s Going on With Gold?
The price of gold has been swinging wildly over the last several months; from over $2,000 oz. in May, then dropped to around $1822 oz. early in October. The middle east war reignited and it quickly jumped back up around $50. What’s going on?
The swing was a low of $1636 and a high of $2100, almost $500 oz differential. In January one of the pundits will claim victory for their prognostication (aka guess).
I started my writing career with Casey Research, a company chock full of gold experts. As good as they were, historical data was heavily relied upon; no one had a perfect crystal ball.
Why is gold so volatile and prices hard to predict? Prime XBT explains:
“Because gold is such a mature and established market, there are a number of factors that come into play when determining its price and how it is affected. Gold is also a rather unique asset compared to things like stocks and bonds, and that also makes it act differently. The fact that it operates as a hedge means one needs to look for factors that impact other assets differently.
A list of the factors to consider include: Consumption demand, Protection against volatility, Gold and inflation, Gold and interest rates, Good monsoon, Correlation with other asset classes, Geo political factors, Weakening dollar, Future gold demand.”
|In other words, pundits predict gold will hit a price range, by a future date, as long as there is not a bank bailout, pandemic, high inflation, oil crisis, another war, a meteor strike, a manufactured political crisis or an unforeseen event.|
It’s time to check in with another real gold expert, Rich Checkan, President and Chief Operating Officer of Asset Strategies International. I’ve been a client since 2008.
In 2008, I felt the bank bailouts would inevitably lead to high inflation. I bought gold to hedge that risk. It took longer than any of us imagined, but it finally arrived.
This Macrotrends chart outlines what happened along the way.
On January 2, 2008 gold was $857.25 oz., in August, 2020 it reached $2,074.88, and has now dropped back down around $200 ounce. Over the long-term gold has done the job.
Rich, let’s look at the short term, beginning in September 2023. The price was still hovering near $2000 and then it quickly dropped around $150 oz. Inflation is still high, and the Fed is clear there’s a long way to go. It took a major world conflict to reverse the trend.
Can you explain how, with inflation still looming large, the price could drop so quickly?
RICH: Dennis, thank you for inviting me. We have long been fans of your excellent insights since the beginning.
I hear your question a lot. In my opinion, it comes down to two things… bad information and alternative investments.
First, the bad information…
The Fed wants you to believe inflation is getting under control and can be defeated with increases in interest rates. Both are false. Reported inflation may be down to just under 4%, but that is still high. High inflation continues, but, for whatever reason, people believe the Fed has the tools and the know-how to conquer it.
Their track record is appalling. Most importantly, they can’t beat inflation with interest rate manipulation alone. Congress must stop overspending… which seems unlikely to happen. No leaders in Congress have the courage or will to do what is right.
The Fed creates a false sense of security, and they are wrong.
Secondly, the biggest reason gold’s price has faltered is because bond prices are plummeting as interest rates rise. Short term, “safe” U.S. Treasuries are over 5%.
Foreign investors are piling in, creating significant headwinds for the gold price.
DENNIS: I’m sure you have seen the wild TV ads predicting gold will soon top $10,000 oz.; buy now, get rich before it is too late. You’ve been in the business a long time. How do you feel about these predictions?
How do investors protect the value of their nest egg?
How do retirees pay their skyrocketing living costs?
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RICH: Yes. Unfortunately, I’ve seen them. They are using fear to sell gold.
As long as we continue to value gold in fiat currencies – U.S. dollars, euro, etc. – the predictions will all come true; just not anytime soon.
Prudent investors dismiss these ads and emotional tactics. Gold should be a rational and important holding in every portfolio. It’s plain common sense to hold a small percentage for wealth insurance. I define wealth insurance as a store of highly-liquid purchasing power, to hedge against a potential financial crisis you hope to never have.
Generally, I favor a 10% allocation, but everyone is different.
DENNIS: Readers ask about price manipulation by the big banks. Some have been indicted, fined, but no criminal charges. The fines are never enough to change their behavior.
Readers ask why they should buy gold, feeling the price manipulation keeps it from being a free market. How do you address their concerns?
RICH: We’ll never know the back-room conversations of the bullion banks and their traders, but to answer your question….
I believe every market is manipulated in some form or fashion. The biggest market manipulator is the Fed with interest rates and market moving statements. They affect markets worldwide!
There clearly has been illegal market manipulation; we’ve seen the convictions.
Here’s what I do. Do not be concerned with things you cannot control; take the necessary action to protect yourself in spite of those things.
We recommend a regular accumulation program. This way, without emotion, you steadily acquire an ever-increasing position in gold. The prices even out as you accumulate your wealth insurance.
Despite the criminal manipulation, the gold price marches higher, and will continue to do so.
DENNIS: Hopefully the Israeli conflict, and war in Ukraine will get under control quickly. If these conflicts end, or reasonably subside, what do you see happening to gold prices?
RICH: My heart goes out to all the victims, and I pray hostilities will end soon.
|I encourage everyone not to chase gold prices in times of war or geopolitical crisis. These price movements, historically, have been short-lived.|
Long-term, Gold moves in response to monetary policy. If governments continue overspending and inflating their currencies; the gold price will rise. Look what happened since Nixon took us off the gold standard in 1971:
DENNIS: One final question. Friend Chuck Butler worries about out-of-control inflation. He cites several factors, the US dollar losing world currency status, out of control government spending, higher deficits, and government interest cost skyrocketing. How long before the Fed is once again monetizing our debt?
There’s quite a gap between government reported inflation and what consumers are feeling. This Wolf Richter headline summarizes:
“Social Security COLA for 2024 Will Be Meager 3.2%, Likely to Be Outrun by Inflation”
Rich, a multi-part question.
- How does the “inflation numbers gap” affect gold prices?
- Can Chuck’s prediction really happen; the Fed once again will monetize the debt?
- If so, what happens to gold prices?
RICH: Thanks again for an opportunity to address your readers.
Dennis, Chuck Butler’s Daily Pfennig is required reading at Asset Strategies International, as is your weekly newsletter.
I agree with Chuck. Government reported inflation numbers are way too low. I buy groceries, put my kids through college, and consume like the rest of Americans. The official figures are not reality.
On main street, wages are not keeping up with the rising cost of goods and services. With high interest rates, people can’t simply re-finance to pull money out of their home like years past; the short-fall between their wages and ever-rising prices is going on their credit card.
That scenario does not end well.
I see three things coming to a head in the next few years…
- Individual delinquencies will continue to climb.
- Commercial real estate delinquencies will set off a banking crisis like never before.
- Buyers of U.S. government debt will start to dry up.
The net effect is the Fed will abandon “higher for longer” – they will have no choice but to do so. Unlike the 1970’s, there’s a limit to how high Chairman Powell can raise interest rates. Chairman Volcker raised rates higher than inflation; he didn’t have to deal with financing a $33 trillion debt.
I feel Chairman Powell is caught in a trap, and is nearing the end of his rope. Despite tough talk, he’s running out of ammunition.
As for gold, the answer is clear. When governments overspend and expand the money supply, the price of everything goes higher.
Gold is the world’s only real money. I strongly suggest you secure your allocation. Buying well goes a long way towards helping you Keep What’s Yours!
You’ve said it before, owning gold allows you to sleep better without worry.
Dennis here. I appreciate Rich’s straight, common-sense perspective. Gold is a store of wealth – don’t sweat the daily fluctuations. As long as the government keeps spending and borrowing, over the long-haul gold will reflect the ever-declining value of the dollar. I’m not selling mine!
|Editor’s note: I’ve been a client of Asset Strategies International for well over a decade. While I’m a customer – I have no other financial arrangement with them of any kind, no referral fees, kickbacks – nothing.
They are true precious metals experts, straight-shooters, and I’m happy to give them a forum in exchange for sharing their expertise for our readers benefit.
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On The Lighter Side
Last weekend we said good-bye to Indiana. It’s the time of year when the leaves are turning brown, and some trees more quickly than others. In a few more weeks, the area would be alive with beautiful fall colors.
We drive on nice country roads, where the trees are huge, sometimes covering most of the road. There are times you feel like you are in a tunnel, with little sunshine coming through. It can get a bit dicey when the road is covered with leaves and it rains.
If things go as planned, we will head back for the Thanksgiving and Christmas holidays. The trees will be bare, and the skies grey as winter approaches.
Quote of the Week…
“You have to choose between trusting to the natural stability of gold and the natural stability and intelligence of the members of the government. And with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.” — George Bernard Shaw
We’ll end this week with some Ben Franklin wisdom:
- Never ruin an apology with an excuse.
- There are three faithful friends – An old wife, an old dog and ready money.
- You may delay, but time will not.
- Laziness travels so slowly that poverty soon overtakes him.
- He that lies down with dogs, shall rise up with fleas.
- “It is the first responsibility of every citizen to question authority.”
- Well done is better than well said.
- Many people die at twenty-five and aren’t buried until they are seventy-five.
- Lost time is never found again.
- Dost thou love life? Then do not squander time, for that’s the stuff life is made of.
- You will find the key to success under the alarm clock.
- When you are testing to see how deep water is, never use two feet.
- “To find out a girl’s faults, praise her to her girlfriends.”
- Never confuse motion with action.
And my favorite:
- We do not stop playing because we grow old, we grow old because we stop playing.
Until next time…
“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken
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