Forecasts, Commentary & Analysis on the Economy and Precious Metals
Celebrating our 47th year in the gold business


“Gold’s value rests in the eye of the beholder. … The fact that we will never scientifically arrive at a ‘correct’ price need not stop us from trying, however. And after going through the various valuation exercises, the rally looks rational. While the current price looks expensive, it could easily rise further.” – John Authers, Bloomberg opinion columnist

Gold’s relativity
Do not take your eye off the prize

photo stack of modern gold bullion coins

Gold’s value is relative. It doesn’t really matter how many digits it takes to express the price. Its true value lies in what those digits represent in terms of purchasing power. During the post-World War I hyperinflation in Germany, for example, a 20-mark gold coin in 1918 purchased the equivalent of twenty marks worth of goods and services in the marketplace. By 1924 that same 20-mark gold coin (weighing roughly one-quarter troy ounces) provided the purchasing power of nearly 25 billion paper marks.

By pointing out this example of gold’s constancy, we do not intend to imply that the United States is headed the way of the Weimar republic.  What we do mean to say, though, is that those who track the nominal value of gold by itself without taking into account the current and future value of the currency in which it is measured take their eye off the prize. 

What are the intentions of the central bank and federal government, we should ask ourselves, and what will be the likely effect on the currency?

In a recently released report titled Gold Views: In search of a new reserve currency, Goldman Sachs’ Commodities Research team warned that debasement of the dollar is already underway. “We believe this disconnect,” it says, “is being driven by a potential shift in the US Fed towards an inflationary bias against a backdrop of rising geopolitical tensions, elevated US domestic political and social uncertainty, and a growing second wave of COVID-19 related infections. Combined with a record level of debt accumulation by the US government, real concerns around the longevity of the US dollar as a reserve currency have started to emerge.” [Emphasis added]

The research team at Goldman went on in that report to forecast a $2300 price of gold and $30 price of silver over the next 12 months. The day the report was published gold traded at $1955 per ounce and silver at just over $24. It took only eight trading days for silver to threaten Goldman’s $30 target (at $29.80) and for gold to hit a new record price of $2,070. Those numbers, given the rest of the analysis, look more a beginning than an end.

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graphic image of investors queuing up

 New smart money queues up in the gold market

First institutions and funds came over to gold’s corner, then central banks. Now, one of the more important stories in the gold investment arena is the developing interest among a whole new grouping of professional investors – pension funds, private wealth management, insurance companies, and sovereign wealth funds.  “It’s a bit like what happened to big tech,” says highly respected economist Mohammed El-Erian. “People like [gold] because it’s defensive. People like it because it’s a reflation trade. People like it because it’s inflation protection.  What we are starting to see with the narrative about gold is starting to be like the narrative about big tech.  It gives you everything.” These groups bring considerable purchasing power and market savvy to the table. One immediate result might be more buying interest on price dips.  Another might be a better blend of investment psychology and objectives that could have a settling effect on the market overall. 

Government spending is a tailwind for gold

cartoon showing giant sinkhole labeled the national debtCartoon courtesy of

The problem with monetary stimulus is that it requires takers, i.e., people and businesses willing to borrow and spend. Private borrowers, though, are not as prolific as the Fed or federal government would like at this juncture. Governments, on the other hand, are ready borrowers and big ones at that.  In fact, as Manhattan Institute’s Brien Riedl recently pointed out in a National Review article, the Fed has already financed roughly half of government spending to combat the economic hit from COVID-19.  How is all of this a ‘tailwind’ for gold?  The overlay chart below showing the federal debt and gold tells the story at a glance.  With the rest of the world worried about financing its own debt, the buyers of U.S. debt are likely to become scarcer and that is where the Fed steps in by monetizing those obligations. When all is said and done, that is perhaps the most basic reason why gold has behaved as it has since March of this year when it sold for $1470 per ounce.

overlay chart showing gold and the national 1970 to present

Sources: ICE Benchmark Administration,  U.S. Treasury, St. Louis Federal Reserve [FRED]
The national debt trendline (graphed quarterly) does not reflect the current $26.5 trillion figure.

Blinded by the Money Illusion

graphic image of a pile of green money

“Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be.” – Fed chair Janet Yellen

With those words, Janet Yellen put investors around the world on notice, though probably not in the way she intended. In the past, such smug assurances have been enough to send contrarian villagers heading for the safety of the nearby woods. The informed student of financial history knows that panics, manias, crashes, and collapses are as common to investment markets as thunderstorms are to placid summer afternoons. To think that suddenly we have banished their recurrence for ‘our lifetimes’ smacks of the kind of misguided hubris that contributed directly to the 2008 meltdown and subsequent untold financial hardship. Just about the time most everyone came to the conclusion nothing could go wrong, everything went wrong …… and in a hurry.

from the July 2017 edition of
News & Views

Forecasts, Commentary & Analysis on the Economy and Precious Metals

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Gold, silver outperform stocks by a wide margin

“We want you on board the gold train as it pulls out of the station,” write Mary Ann and Pamela Aden in a recent Forbes article. “It’s also important to understand why you’re on board. Gold is — and always has been — the world’s favorite safe haven. That is, during times of uncertainty, insecurity, economic or political upset, war, devaluations and more, gold has always come out as #1. And this impressive track record goes back more than 5,000 years.” 

Thus far, as the present crisis wreaked havoc in global economies, precious metals have provided ample comfort to investors while the stock market has languished. Gold is up 35.51% over the past 12 months (through the end of July). Silver, now outperforming gold on a 12-month basis, is up 48.23%. The Dow Jones Industrial Average over the same period is up 2.76%. Year to date, gold is up 29.68%; silver is up 36.36%, and the DJIA is down 8.45%. 

Gold exceeded its all-time high of $1923 per ounce on July 24th and went over the $2000 mark on August 4th. As for the future, some of the big banks are out with their latest forecasts for gold. Goldman, UBS, and Citi see the yellow metal going to the $2300 level over the next twelve to eighteen months. Bank of America, still the most bullish of the big institutions, projects a $3000 price over the next eighteen months.

Gold, silver and the DJIA – Year to Dategold silver Dow Jones Industrial Average performance through 7-31-2020

Chart courtesy of • • • Click to enlarge.

Gold, silver and the DJIA – One Yeargold silver dow jones industrial average performance 12 mos througbh7-31-2020

Chart courtesy of • • • Click to enlarge

Cash is cold comfort over the long term

A  ten-dollar bill stuck under the mattress in 1971 would have the purchasing power of roughly $1.60 today. The equivalent of $10 in gold (.286 troy ounces) put under the mattress in 1971 would have the purchasing power of over $585 today (at $2050 per ounce).  Over the long term, cash is cold comfort to the saver …… if its comfort at all.  That is why Ray Dalio, manager of the largest hedge fund in the world, recently said ‘cash is trash’ and recommended a long term holding in the yellow metal instead.

The sharp downward spiral in the dollar is one of the primary drivers for gold’s bull market. Earlier in the year, the two were rising together as investors sought safe-haven protection from the economic ill effects of the coronavirus.  Since late May, gold has headed up, though, while the dollar has headed down. The chart shows the performance of the U.S. Dollar Index year to date through July 31. “The US dollar has tumbled the most in a decade this month,” reports the Financial Times, “propelling sterling and the euro higher amid questions over the recovery of the world’s biggest economy and growing political uncertainty.”

overlay line chart showing the price of gold and US dollar index

Time to make sure one has enough ounces

“One could be excused for wondering if gold can maintain its pace,” writes Jeff Clark in a Strategic Wealth article, “but how many of the risks that pushed it higher in the first place are gone? Check out the risks that remain around the world and see if it’s really time to reduce exposure – or instead make sure one has enough ounces.” These days, the name of the game is maintaining wealth under extraordinarily difficult economic circumstances. The Stein cartoon below is from another era but it still resonates today.

An argument can be made that the difficulty we’ve encountered has yet to manifest itself entirely on Wall Street and in other financial centers. On the other hand, it has certainly begun to manifest itself in the gold market. “I think [gold] is the story of the year in financial markets,” said Sprott’s Peter Grosskopf in a recent Financial Times article. “Gold has finally come on to Main Street as an asset people actually need to have.” 

cartoon showing the net devastation from a crisis on a city and economy

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Disclaimer – Opinions expressed on the website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. USAGOLD, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. The utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD does not warrant or guarantee the accuracy, timeliness, or completeness of the information found here. The views and opinions expressed at USAGOLD are those of the authors and do not necessarily reflect the official policy or position of USAGOLD. Any content provided by our bloggers or authors is solely their opinion and is not intended to malign any religion, ethnic group, club, organization, company, individual, or anyone or anything.

Michael J. Kosares is the founder of USAGOLD and the author of The ABCs of Gold Investing – How to Protect and Build Your Wealth With Gold. He is also editor and commentator for USAGOLD’s Live Daily Newsletter and editor of the News & Views monthly newsletter.