US Vice President and Democratic presidential candidate Kamala Harris gives thumbs down as former US … [+]
Gold is referred to as a constant for good reason. It’s price doesn’t move. What moves are the currencies in which it’s priced.
Which is a reminder that when the price of gold in dollars declines, that’s the sign of a rising dollar. Conversely, when the price of gold rises, that’s the sign of a falling dollar.
This is important right now as gold continues to test all-time highs. Readers would be wise to not dismiss the signal. While economists and their enablers in punditry and media have wholly redefined inflation as something it’s decidedly not (too much economic growth), the real definition for inflation still exists: it’s a decline in the unit of measure, in our case the dollar. $2,700+ gold signals a substantial decline in the value of the dollar. Its average price in 2020 was $1,769.
The economic implications of such a big decline in the value of the dollar cannot be minimized. To see why, consider what’s true, that information is wealth. Information is a consequence of capital flows into stock (public and private) and bond (public and private) returns and income streams. The problem, particularly as we look into the future, is that returns and income streams come in dollars. Which is a reminder that a falling dollar exists as a major tax on investment.
If the dollar continues its decline, investors can retreat from intrepid wealth discoveries borne of investment, and pile dollar wealth into hard assets: think houses, land, art, rare stamps, oil, and yes, gold. In other words they can retreat from investment in the creation of new information (wealth) in favor of consumption of wealth that already exists. Economists believe consumption of existing wealth is growth, but in reality it represents stasis. We’re buying knowns. Hard assets in particular are least vulnerable to declines in the dollar and frequently rise as the dollar declines (see gold yet again), which is why they’re called inflation hedges.
A falling dollar raises the relative cost of putting wealth to work via investment. Why buy future returns in dollars that are in persistent decline? See equity returns in the 1970s and 2000s to get a better grasp of the end result of falling dollar.
All of which raises an obvious question: why the rise in gold, as in why the falling dollar? There’s no way of knowing what exactly is at work, but it’s worth speculating.
For one, there’s growing speculation that war looms between Israel and Iran. Given the U.S.’s long history in the region, it’s easy to see where this might be weighing on the dollar. There’s also Ukraine, and a war with Russia that’s not ending. What if Putin goes nuclear? What about China? Particularly given political uncertainty in the U.S., it’s possible some dollar weakness relates to uncertainty about what the U.S. will do if China moves to acquire Taiwan. Will any of the three scenarios happen? There’s no way of knowing, but markets are markets. They’re constantly pricing in probabilities.
Lastly, but most obviously, there’s Donald Trump vs. Kamala Harris. My Parkview Institute colleague Bob Landry points out how explicit Trump has been about his desire for more tariffs and weaker dollar if elected. Almost as scary, Harris hasn’t exactly backed away from the tariff mindlessness that gained greater currency under Trump, and that has continued under her boss. Markets are a look into the future, and Trump in particular has made plain his desire for a weaker dollar in the future.
All of which calls for Trump, Harris or both to act like a president. Never in history has currency debasement resulted in prosperity. That’s not about to change. Trump has people like Larry Kudlow near him and close to him who know this truth, but so theoretically does Harris in the form of Robert Rubin, Treasury secretary under Bill Clinton.
The price of the constant that is gold is speaking loudly about a falling dollar. Trump and Harris may not care about the dollar, but the dollar cares about them. Showing they seriously care would amount to an impressive act of the presidential kind. Kudlow and Rubin know this, and they owe it to their flocks on the right and left to bring the most important price in the world into the election discussion.