Barring a price spike of Bitcoin-style proportions, gold is set to have its first losing year for 13 years.
It hardly seems possible.
After all, isn’t the US Federal Reserve printing US$85 billion a month?
Doesn’t that mean gold should appreciate as the US dollar depreciates?
That’s right, it should.
But it isn’t. Here’s why…
Over the past three or four years we’ve heard a lot of claims about what gold is and what it isn’t.
We’ve also seen many charts claiming to ‘prove’ that gold must go higher as the US Fed prints more money. Most of those charts involve overlaying a chart of the rising money supply with the rising gold price.
These charts appeared to show that gold rises as the money supply rises. That was the ‘proof’.
It was a nice theory. Unfortunately, as the last two years have shown, it was also a woefully naïve theory. What those who used such arguments failed to realise is that it wasn’t a fair comparison.
The money supply chart represents a factual increase in the supply of a ‘good’, namely money.
The gold price chart is completely different. It represents the price of something. Price relies on what a buyer is prepared to pay and what a seller is willing to receive.
In other words, the relationship between the money supply and gold price was little more than a casual or coincidental relationship.
Nothing Has Intrinsic Value
Now, we know that won’t endear us to our friends in the gold world.
But facts are facts. That doesn’t mean we’ve given up on gold, or silver. We still hold both in our personal portfolio, and we’ll continue to hold both. Plus, with the price so soft at the moment there’s a good chance we’ll add to our position for the first time in at least six months.
And what’s more, we don’t accept the argument put about by the anti-gold crowd. They say gold doesn’t have any intrinsic value. Of course, what they forget to mention is that nothing really has an intrinsic value except for what people are prepared to pay for it.
An Aussie ten dollar note doesn’t have any real intrinsic value. Its value only exists due to its status as legal tender. If the parliament revoked legal tender laws on the Reserve Bank of Australia’s currency you would soon realise that it doesn’t have any more intrinsic value than gold.
That’s the important thing to remember about the price of anything. Something is a certain price because that’s the price at which buyers and sellers will transact.
If buyers are willing to pay more, sellers will soon figure that out and charge more. If buyers aren’t willing to pay more, then sellers will soon figure that out too and charge less.
That is exactly what has happened to the gold price over the past two years. Regardless of what the Fed has done by increasing the money supply, buyers didn’t want to pay the higher price, and so sellers had to drop their asking price.
The result of this price action is the following chart. Barring a miracle recovery in the next three weeks, gold is heading for its first losing year in a long time:
But having a losing year isn’t unique to gold. So it’s not worth turning it into a big deal. It happens to every market, as we’ll explain below…
All Bubbles End the Same Way
You may remember the ‘weight of money’ argument during the 2003 to 2007 bull market. Many argued that share prices would always go up because of the billions of dollars flowing into super funds every year.
They argued that there just weren’t enough shares to go around and so there would be so much demand for the current shares in circulation that prices would have to rise…forever.
Again, they forgot the most important thing. They forgot that people don’t actually have to buy shares. Prices got to such a level that investors no longer perceived them to be good value. So they lowered their price expectations. This forced sellers to lower their price expectations too.
A more recent example is the hysteria over Bitcoin. Again, folks have gotten themselves in a lather about the limited supply of Bitcoin. They see this as a reason that the price will always go up.
At the time it’s happening those arguments always seem bizarrely rational – even though we know it’s irrational. Over the past month the Bitcoin price soared from US$329 to a high of US$1,242.
Comments from Fed chairman Dr Ben S Bernanke, who said that Bitcoin was a legitimate form of payment, helped fuel the price rise. A report in the press over the weekend notes that someone had paid for a US$100,000 car with Bitcoins also helped legitimise it.
However, that hasn’t stopped the Bitcoin price falling. It hit a low over the weekend of US$576. Today it’s trading off that low at US$760.
The Meaning of Money Takes a Turn
So what does this all mean? For us it means that the notion of money is at a key inflection point. Our guess is that for the first time under the current monetary system even people in the mainstream are questioning its meaning and whether it’s sustainable for central banks to print money from thin air.
To your editor’s mind it means changes are afoot. Some say that it means a return to a gold standard. Others say it means Bitcoin is about to hit the mainstream and become a widely accepted medium of exchange.
But we say they’re both wrong.
We’ll expand more on this from time to time over the next few weeks and months. But to put it simply, the definition of money is what the consumer wants it to be. That’s what makes the future of money so unpredictable.
And that’s why we’re so excited about presenting our view at the Port Phillip Publishing ‘World War D’ conference next March.
You can find out more here, including the line-up of A-list keynote speakers.
Cheers,
Kris+
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