Another example came up today in the as the Wall Street Journal discusses the “traditional relationship” between gold and the dollar in Gold Prices Hit Record as Dollar Drops.
The number of errors in the article is staggering.
- “You’re seeing money slipping out of the stock market or out of other assets and just eking into gold,” said David Govett, head of precious metals at commodities brokerage Marex Spectron.
- “Gold’s traditional inverse relationship with the dollar had frayed this year, as both assets benefited from haven buying during the pandemic,” said WSJ author Joe Wallace.
- “So far, a burst of buying by investors has more than offset the dearth of jewelry demand.”
Myth 1: Money Slipping Away
Money does not “slip away”. It is impossible for money to flow out of stocks into gold or bonds or from bonds to stocks or any other combination.
An individual can choose to dump stocks for gold but in aggregate, for every buyer there is a seller so there is no net flow. Rather there are repricing events.
Here’s another example. A “For Sale” sign on one house in a neighborhood can impact the price of every home, even before a sale is made. There is no flow, but the houses were all repriced.
Myth 2: Inverse Relationship
Gold does not have a traditional inverse relationship with the dollar. This subject came up today in a pair of Tweets.
Myth 3: Jewelry Demand is Important
That comment shows huge ignorance about the true demand for gold as well as the price driver for gold.
Gold vs US Dollar Index 2019-12-16
Gold’s vs the US Dollar: Correlation Is Not What Most Think
I posted the above chart on December 23, 2019 in Gold’s vs the US Dollar: Correlation Is Not What Most Think.
This was one of my comments at the time
“With the US dollar right where it is now, gold has been at $450, $380, $1080, and $1480.”
Gold vs US Dollar Index July 27, 2020
The lead chart reflects the price of gold vs the US dollar index on July 27.
The horizontal dashed line is the US dollar index at 93.7, When the solid blue line touches the dashed blue line the dollar index at that time is 93.7.
Price of Gold vs Dollar Index at 93.7
- July 27, 2020: $1931
- Mid 2016: $750
- Mid 2003: $370
Repeat after me: The US dollar has little to do with the price of gold.
What About Jewelry?
According to the World Gold Council, demand for Gold jewelry in 2019 fell 6 percent overall to 2,107 tons. How did the price of gold react?
Gold vs Jewelry Demand
Marginal Utility?
The subject of marginal utility of gold and jewelry came up in a Twitter discussion on May 30.
Jewelry demand is actually a contrary indicator (people buy more when price is down).
Supply of Gold
Nonsensical analysis of gold demand happens because people do not understand the the supply of gold nor the driver for the demand.
Misunderstanding the Supply of Bitcoin and Gold Leads to Silly Projections
I covered the topic recently in Misunderstanding the Supply of Bitcoin and Gold Leads to Silly Projections
People confuse jewelry buying with the demand for gold and bitcoin mining with supply of Bitcoin.
Contrary to popular myth, the supply Bitcoin goes up every day. This is why halving the mining rate of Bitcoin did nothing for the price.
Similarly, people confuse demand for new gold jewelry as the demand for gold.
Misconceptions About Gold
The best explanation of the demand for gold comes from Pater Tenebrarum at the Acting Man blog. He was my teacher in Austrian economics.
Tenebrarum wrote Misconceptions about Gold as a guest post on my blog in June of 2007 under the pseudonym Trotsky, a name he regrets. Gold was $650 at the time.
One can further illustrate gold’s unique nature as money with a study of gold prices vs. jewelry demand. If record fabrication demand for gold (jewelry) must be good for the price of gold, then a historic high in jewelry demand should in theory coincide with a high gold price.
However, record high jewelry demand in 1999 – 2000 in actual fact coincided with a 20 year bear market low in the gold price – the exact opposite of what traditional commodity supply/demand analysis would suggest.
We can therefore conclude that there must be a source of gold demand that is of far greater importance than the jewelry and industrial demand components, and that demand constitutes the true driver of the price of gold in terms of fiat money.
Indeed, there is. This demand component is called ‘monetary demand’. Monetary demand and the supply of gold is actually best described as the ‘degree of reluctance of the current owners of gold to part with their gold at current prices’ since, as mentioned above, some 160,000 tons are owned by somebody already.
Monetary Demand is the True Price Driver
Someone must hold every ounce of gold ever mined. Similarly, someone most hold every Bitcoin ever mined.
Diminishing new supply is meaningless in both. Demand for the total supply is what matters.
Gold rises and falls based on monetary demand. If one views Bitcoin as a competing currency, the same claim can be made but speculation clearly plays a larger role for Bitcoin and it has additional problems with potential central bank or government regulation.
Gold vs Faith in Central Banks
I need to update that chart but it tells the right story.
Gold’s monetary demand is a function of faith in central banks. When ECB president Mario Draghi promised to do “Whatever it Takes” to save the Euro faith in central banks was temporarily restored.
That faith continued until the Fed’s talk of “normalization” dies on the vine. And now?
If you think the Fed has things under control you left your thinking cap on Mars.
Mish
Gold, and shortly after silver, is bought with expectation of inflation. The chart that is shown misses something VERY important, it does not factor in inflation. REAL inflation, not the CPI. So what would that 1920 gold price be from 2011 if inflation were factored in or the high from 1980? Depends on what inflation number you use. But based off of the phony CPI calculation gold price from 1980 would be about 1800-1900, but if you raise that number up by one percent per year (which is still probably way too low) but if you take inflation up 4 percent a year the price goes to 2900. (young people won’t understand this cause they might believe the cpi numbers but the older you are you would understand that the cpi is crap)
this is a great book to refer to for this argument. also “power of gold” authored by the great peter bernstein, who penned “against the gods”, too. the comment above about DXY not being the dollar is correct. the short hiatus away from sound money is a blip in world history of money. won’t be forever. cheers mish, you have a great blog.
exactly right. now you just have to come right on the covid story.
The worry is that at $2,000 (or even $4,000 eventually) the supply of fake gold is certain to rise. I was in the mid ’00 involved in gold futures and we hedge our portfolio with gold ingots…we found (at out 200 gold bars) about 5 fake one. One consequence we only bought gold for reputable dealers, or it had to be “reminted” by a reputable dealer before we acquire title. Also you quickly discover that gold is “expensive” to store, and sell.
I agree there is no correlation between the USD and gold, but it is a store of wealth, never made the connection with bitcoin, but you are absolutely correct. Extration (mining) is the cost of producing new gold, just like bitcoin — therefore it shoud exhibit the same tendencies.
As to myth number one, in repricing, money can go “poof” and vanish.
Don’t quite agree with point 2. There is ofcourse a mechanical inverse relationship between the price of gold in USD and that of the USD in other currencies. The relationship is easily overwhelmed because the pricing of gold in other currencies than the USD has little weight in the markets.
The problem is what you’re calling “the dollar.”
DXY is not the dollar. That’s the dollar vs. a basket of currencies. Currently, the dollar and all other currencies are going down vs. gold.
Yes, saying gold is not related to the dollar by showing various dollar index values equaling the same gold value doesn’t take into account inflation/deflation and the ‘real’ purchasing power of the dollar at those various times. Because dollar index just related to other currencies, not physical things.
As a short term (meaningful for an hour, a day?) Kitco shows minute by minute how gold price varies according the worth of the dollar. But that is just the dollar that day.
Gold and Silver surging again. Man, these guys are now stonking.
“Jewelry is totally irrelevant to the price of gold”
Not really, it stabilises the price normally because jewellery purchases tend to be in fiat terms. So when gold is high jewellery purchase by weight is lower, when gold is cheaper more goes to jewellery helping support prices.
When there is financial stress a lot of gold jewellery gets sold, for profit because of high prices or out of need. So again it stabilises prices to a degree. That gold might then end up as investment for another.
Also, that background of steady demand for jewellery sets a floor or adds meaning to owning gold.
Simple investment though is what really drives prices because that is where value is traded fastest, but jewellery is also an investment even if high premiums are paid for it. It just works in a different way.
We are seeing rising interest in both precious metals and cryptocurrencies. Several factors are driving this trend. One is the idea governments have targeted cash and wish to move us towards a “cashless” society where they control our every move. Another is rooted in the idea inflation is about to raise its ugly head as currencies are debased.
Most likely the dollar will be around for a while yet and could be about to strengthen. This is not in conflict with gold moving higher because the dollars strength or weakness is generally seen in comparison to other currencies. More on the state of currencies in the article below.
Cashless doesn’t mean “control your every move” It means tracking your income and outgoings. Tax will be paid accordingly on everything unless it is something like food.
This kind of analysis is why I read your blog Mish, keep it up!
It’s a fear investment. People buy gold when they’re worried about war, the economy, a pandemic, deficits, or anything else. Although I think this latest price surge is largely driven by Covid, I agree with Mish and his generally grim views. We’re a heavily indebted country hell-bent on spending a lot more.
I disagree. Everyone always looks at it from the viewpoint of why they should buy Gold or not. I own Gold, why on earth would I want to buy another currency at the moment. Everywhere’s riddled with problems, there’s no return, and the likelihood is that whatever return you can get will deteriorate, Nothing to do with fear or Covid.
Reading your comment, which is more important:
Covid or
‘heavily indebted country hell-bent on spending a lot more.’
Gold is not an investment.
Very good piece on gold, It is a shame you dont use as much logic on the other drums you continue to beat.
Isn`t it funny how you moan about mainstream media with regard to gold but deliberately use them as backup in your quest against Trump or the way to deal with the COVID19 plandemic. Your piece the other day on Sweden was woefully biased. Now take how Sweden has dealt with the crisis and are coming out the other side to how the state of Victoria in my home country of Australia has dealt with it. Victoria has been in lockdown of various degrees since the start of the crisis and are still peaking. This will no doubt spread to all Australian states. Look at all these countries previously in lockdown as they try and come out and surprise,surprise the virus re emerges.
p.s I read the other day that Chris “We`re all going to die” Martenson was championing the correct use of Hydroxychloroquine . That was something else you were totally wrong on.
Mish, I think you responded to the wrong article.
Google is an amazing company with innovations that will change the world. self-driving for starters.
And its employees are highly compensated. The idiots in the EU would break it up
The hype does not match reality. A Japanese automated toilet/bidet adds more to life than Google’s self driving car, which is what again? When the biggest boosters of self driving car like Andrew Ng (famous AI expert, inventor of Google Brain), started calling for changing regulations to help their AI, you know the effort has stalled.
Pretty sure any monopoly will compensate its employees well. Microsoft created a ton of millionaires.
The outbidding-each-other-over-“AI”-silliness, is largely a recruiting tool as far as the big techCos go. They’re all vying for the latest grads, and 20-something recent grads from sheltered backgrounds can be a bit naive. Flying cars, teleportation and Hal-like fantasies tend to excite them, as “AI” has the gullible since at least the 50s. Once at Google, the good ones do tend to percolate over to viable parts of the business, though. Where they can be pretty amazing at developing software, despite falling a bit short of having God like abilities to recreate intelligent life.
In the end, Google is probably the most incompetent company in the whole world. Say what? Think about it, who has the most data about human beings in the whole world? Can we say Google? Well in that case, they should be able to answer two very basic questions:
and use the answer(s) to create mindblowing consumer products. But no, like pretty much every single one of their better performing consumer products were acquired.
People who admire Google like Mish need to reflect on that.
The dirty little secret about differences between humans, is that they are preciously small. The biggest human brains are 50% bigger than the smallest. And even if, as some naively seem to believe, absolutely all so-called “higher functions” are concentrated solely in the frontal cortex, the differences in size is still less than 2 to 1.
Just like the Olympic 100 yard dash, the winner, strictly speaking, is faster than the rest.. But by any absolute standard, they are all pretty much equally fast.
IOW, the difference only appears big, when amplified by competition aimed specifically at ranking the participants, and awarding all spoils to the ordinal winner, rather than in proportion to how “fast” each of them really are.
Things aren’t much different wrt cutting edge software companies. It is true, as Paul Graham pointed out back when, that the “best” programmers are easily 100x as productive as average programmers (in his case in the context of explaining why it makes financial sense for the “best” of them to “do a startup”, since there is no way for salaries to reflect such disparities between people holding seemingly similar “jobs”).
But just as in the Olympics, noone on the starting line in Google vs Microsoft vs Apple vs IBM vs Amazon…., is average. And while there are great individual productivity differences between programmers even at that level, the productivity differentials between those recruiting them, is pretty much nil. So rockstars among rockstars, in those rare instances where they do exist, are invariably fairly evenly distributed across all the big techCos. Any claim to the contrary, is just hype and advertising.
Point being, that while Googlers are “smart”, they’re not all that different from a guy working construction. And much less so than from guys at Amazon. Such that, until what men and women want is sufficiently well understood that construction guys are within spitting distance of knowing the answer, Google isn’t there either. They’re not magicians. They can’t create intelligent life. They don’t walk on water. And even fruit fly levels of effective intelligence is 99% as far outside of the realm of the possible for them, as it is for anyone else. And, again, any claim to the contrary is just hype and advertising. As it has been since the 50s. And will continue to be. Kind of like how being twice as tall as a 5 year old, doesn’t amount to all that, as far as reaching out and touching the moon is concerned.