Revisiting the Run from the Dollar via Gold

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On a personal note, I saw a mainstream business outlet offer, “People are chasing gold,” as they offered it, it was a sign that people are operating on the old “FOMO” approach, which stands for “Fear of Missing Out.”

In the most literal sense, are there people out there in the investment landscape that are “chasing gold” to use the phrase? Absolutely.

They see something trending upward when priced in U.S. dollars, and when it occurs long enough, they do begin the chase.

If the chase builds in numbers, it does devolve into a collective “fear of missing out.” This is a collective psychological state where the masses are convinced X cannot possibly go lower and is viewed as a guarantee to only go higher and higher as time unfolds.

When this process unfolds long enough, it devolves further into collective “bubble psychology” and the various stages of such unfold with predictability. As the stages of bubble psychology unfold, they are ignored by the growing masses that are immersed in it.

History has displayed the above process – initial chase leading to FOMO with FOMO then leading to full-on bubble psychology – time and again. Importantly, an initial chase does not assure follow-on FOMO, and FOMO does not assure full-on bubble psychology.

Current day, relative to gold, we are far from FOMO and even further from a collective bubble psychological state.

As citizens let’s hope we do not get to that collective state relative to the gold price when quoted in U.S. dollars. Why?

Local Currencies

Gold is gold; it is not a monetary unit of a specific country/government sponsor. An ounce of gold is ubiquitous – the ounce in your proverbial pocket is viewed the same whether you are in the U.S. or on the other side of the planet.

It is not a question of whether it has value, as it is recognized as an ounce of gold everywhere. The only question is what its value is when priced in X local currency depending on where you find yourself on planet Earth.

For example, you may find yourself in country A – a country that has displayed very bad long-running fiscal and monetary policies, and as a result, you note, when priced in country A’s local currency, it has never seen such a high price level.

Conversely, country B may be the direct opposite in that they have enacted very sound and disciplined fiscal and monetary policies within their country.

With this, you note your ounce of gold, when quoted in country B’s local currency, is near historic lows. Simply, country B’s local currency, as a result of said disciplined fiscal and monetary policies, has maintained its purchasing power strength and is “as good as gold,” as is often stated in such scenarios.

Obviously, the U.S. fits squarely into country A’s backdrop, and the price of gold reflects this fact when quoted in local currency, i.e., U.S. dollars.

Interestingly, in this 21st century, nearly all countries around the globe align with country A rather than B’s disciplined approach.

Importantly, it is not about gold per se, when talking about gold, rather it is about the currency of the country you are pricing your gold in.

Underneath the currency, as is always the case, is the quality of the fiscal and monetary policies enacted, and through them, whether their local currency has maintained strength in its underlying value.

So, gold offers a reflection, if you will, of the quality of said policies. (We must add this is not a day-by-day or even month-by-month tally; rather, the big picture tells the story. The overall trend of gold is where the message is offered.)

The story rests squarely on the lack of quality and soundness of the underlying fiscal and monetary policies with the downstream debasement of the currency as concluded by market, general economic, and citizenry participants of the country in question.

If they are offering, “Give me gold; you can have this paper currency,” by bidding gold ever higher when priced in said currency, that is their way of offering the fiscal and monetary policies of the nation are notably lacking in quality, and hence they want little to do with the underlying paper currency of the nation in question.

The various participants know the currency will take the hit in its reduction in value and strength as money and certainly as a store of value.

The Bottom-Line Essence of Gold (A True Contender for the Most Misunderstood Asset)

Gold has been both money and a store of value for thousands of years the globe over. Its “store of value” aspect is our focus and is what is underneath gold’s performance when priced in U.S. dollars.

As a reference point, many can recollect back to the beginning of this 21st century, circa year 2000. Back then gold was valued at a mere 250 U.S. when quoted in dollars. If you had an ounce of gold, you had $250 of value in your possession.

As of this writing, if you have an ounce of gold, you have $4416 of value in your pocket when quoting that ounce in dollars. The same one ounce of gold in your pocket became valued at 17x the level it was in the year 2000 when quoted in dollars.

As shared above, this says little about gold, but it says everything about the currency it is quoted in.

There is a simple old adage about gold that offers: “An ounce of gold 100 years ago would have bought you a very nice suit. Today, an ounce of gold will still buy you a very nice suit.” You could apply this adage on a timeline, and it holds true as an easy phrase to emphasize its store of value aspect.

Simply, it maintains its purchasing power and, in so doing, protects citizenry wealth the globe over, throughout time, from government officialdom’s fiscal and monetary policy shenanigans with the logical follow-on debasement of their currencies.

The Abridged Version

On a personal note, the above piece is an abridged version of an edition written just under two years ago with edited price quotes updated to the current day. I chose to share a reduced version of that original edition as an additional way of looking at our fiscal and monetary policy problems, which have been ongoing in this 21st century.

Said differently, the intention for this edition aimed to address an aspect of those policies. Upon consideration, rather than going into you name it data set or chart(s) relative to those policies, the above would do so while also offering an opportunity to address gold and the seemingly endless confusion around that asset class.

With this, using the gold price and its big picture overall trend, such as is offered above, as of this updated writing, its U.S. dollar quote is 4416.00. Whereas in the above piece when written (again, just under two years ago), it was quoted at 2750.00 in U.S. dollars.

This represents a 61% increase in its dollar-quoted price level in just under two years.

Using the above piece as a descriptor for why participants exchange their dollars for gold, we can see, via the tremendous increase in gold’s U.S. dollar price, that since the origination of the above edition, said participants see no substantive change in the U.S. fiscal and monetary policy results.

Speaking to this, just this morning updated price inflation data reflected the CPI came in at a 3.4% year/year increase. As the headlines offer, this was in line with consensus expectations; hence, it is a victory.

Never mind it remains far north of the Fed’s often-referenced 2% price inflation target. That target that has now been unattainable for 65 consecutive months.

Said differently, the debasement of the currency continues as reflected via its ongoing reduced purchasing power.

I wish you well…

Ken Reinhart

Director, Market Analysis & Research