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December 13, 2024
PI Global Investments
Gold

Gold Is Speaking Very Loudly Now, Is Anyone Listening?


Mountain Valley Spring Water is bottled in Arkansas. Roughly two months ago an unexpected snowstorm in the state briefly shut down production. Sufficient inventory meant that the production interruption didn’t initially have an impact on customers, but two months later there’s a very real inventory shortage that has customers experiencing near-term delivery delays.

What’s happening for Mountain Valley customers is useful to think about with the happenings of March 2020 and beyond top of mind. A brief interruption at a water plant is being felt around the U.S. a few months later. In which case, readers might better understand why shortages and higher prices were – and still are – so notable across the U.S. and global economy four years after politicians around the world panicked about the coronavirus, and in panicking, shut down the world economy.

If a brief interruption at a water plant can have such a profound impact on water availability, is it any surprise that all manner of goods and services are still quite a bit more expensive today in the aftermath of a global shutdown that lasted weeks and months? Hopefully the question answers itself, but if not, just stop and think about the remarkable global cooperation that goes into the production of everything that we buy today. That prices are still elevated is a statement of the obvious.

Why all this throat clearing ahead of a piece about gold? It’s pretty basic: the higher prices we’ve endured in the months and years during and since the mindless lockdowns weren’t “inflation,” and we know they weren’t because there was no notable decline in the value of the dollar ahead of the Fed’s pivot to rate hikes in 2022. On the other hand, there were global shutdowns of production and there was evisceration of global commercial relationships built up over many decades. Of course the prices of numerous market goods are higher now when it’s remembered that globalized production relationships were what had prices so low before March of 2020. Alas, the bitter, expensive fruits borne of command and control are NOT inflation. Inflation is a decline in the unit, a decline that hadn’t occurred leading up to when the Fed began hiking in 2022.

All of which brings us to the gold price. To be clear about the yellow metal, its price doesn’t move as much as the currencies in which it’s priced move. Which is why markets happened upon gold as money long, long ago. Constant as a measure of value, it was money par excellence simply because money exchanges always and everywhere signal the exchange of actual goods, services and labor. Since those exchanging want roughly equal value for what they bring to market, gold offered producers the stability necessary for near-frictionless exchange.

Yet as you’re reading this, gold sits at all-time highs in dollars. What that signals is that the dollar’s value against the constant that is gold is at all-time lows. It’s a reminder that the Fed’s rate hiking begun in 2022 was the equivalent of a doctor treating the elbow when it’s the leg that’s broken. Really, what would rate fiddling have to do with the value of the dollar as is? Furthermore, and as evidenced by the value of the dollar after 525 basis points in hikes, it plainly achieved nothing. See the gold price. $2,350 gold is signaling actual inflation, as opposed to the higher prices that naturally revealed themselves after global production shutdowns.

Responding to the gold price, editorialists at the Wall Street Journal asked if markets are “concluding that the Fed is willing to declare victory before inflation slows to the central bank’s 2% target, despite official avowals to the contrary.” The analysis reads as a non sequitur. As we saw with the falling dollar in gold terms amid the first 525 basis points in hikes, the value of the dollar is immune to Fed fiddling. We saw the same in the 1970s as the dollar price of gold soared amid a rapidly rising Fed funds rate. Never explained by the Fed focused is what blind stabs at rate price controls have to do with the value of the dollar.

Not acknowledged by the Fed focused is that devaluation (actual inflation) is as old as government issued money is. In other words, governments devalue. To bring the Fed into a discussion of the dollar is just odd.

The main thing is that gold is speaking loudly now about a dollar in decline. And with it in decline, watch the economy weaken as investment flows more into hard assets representing wealth that already exists, and away from stocks and bonds representing the creation of future wealth. Here’s your inflation. Too bad the “inflation hawks” of the various economic religions near unanimously fell for a fake version borne of command and control, but are ignoring the real one along with the simple truth that a stable currency is a policy choice of governments, not an effect of Fed meddling.



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