The graph above contains all the factual content of this post. The price of gold is up quite a bit of late, but the dollar price is nowhere near its all-time high in real (inflation-adjusted) terms.
Odd lots
Participants in the gold bullion market are an odd lot. They range from seemingly rational investors to individuals anticipating Armageddon with undisguised glee. They include the biggest of big money (central banks), and the dirtiest of dirty money (drug money).
Plus the occasional numismatist taking a walk on the wild side.
Here’s the weird and central fact of the retail market for gold bullion: Everybody agrees that when the price of precious metals is up, something bad is happening, or is about to happen. Or already happened somewhere. But nobody agrees on what, exactly, that bad thing is.
The end-timers, in particular, have an inexplicable fondness for “junk silver”, that is, U.S. pre-1965 coinage that is 90% silver. I used to own some, until I came to the realization that all it meant was that, come the end of civilization, if I survived, I’d still be able to make change.
It’s as if the gold market is the stock market’s evil twin. When there’s a bull market in stocks, all you hear about is all the wonderful things this portends, or the politicians who take the credit for it. But when the price of gold is up, pundits start crawling out of the woodwork to assert that this is the result of some sort combination of war, inflation, civil unrest, The End of Civilization as we know it. Or the immanent threat thereof.
And nobody takes credit for it.
Equally weirdly, in an age where cryptocurrencies have broadened an already-unclear definition of money, there’s a big contingent betting that this whole crazy experiment in paper (fiat) money is finally going to crumble. And like sinners returning to church, the world’s governments will finally go crawling on hands and knees back to the real money — the Gold Standard. Which, if you stayed awake during your college courses in economic history, you understand would be an unmitigated disaster for the modern economy. But would surely put the kibosh on inflation. And it would, purely incidentally, make kings of those who own gold. Gold. GOLD!
When I stir that around a bit, I consider gold to be a proxy for the level of world-wide anxiety. Or perhaps psychosis. So, for those of you who heed such nebulous indicators, it appears that anxiety levels are rising.
And it worries me that I can’t quite figure out why.
Background: How I ended up owning the silver equivalent of blood diamonds.
I’ve been tracking precious metals prices of late, because last week I sold a silver brick that I’ve owned for about three decades. This was just another part of döstädning, or Swedish death cleaning, tidying up the physical loose ends of my life.
Officially, this is a hundred-troy-ounce bar. That should make it an easily-tradeable commodity. That’s why you buy it in this form, instead of as a tea service or something at least nominally useful or pretty. Basically, silver is silver. And no matter what, if it’s of a known amount and fineness, you’ll always be able to sell it easily.
Or so I thought.
Unofficially, it was a seven-pound doorstop with an ugly back-story. The crude ingot of fine silver pictured above was poured ages ago by a now-defunct U.S. refiner, Ohio Precious Metals. Turns out, between the time I bought it, and now, they went out of business after their corporate owners were convicted of laundering drug money for some cartel. This killed the company, which, at the time, employed close to 300 people in central Ohio.
And, while the silver itself is an innocent bystander, that money laundering conviction tainted this bar. When I tried to sell it, I found that I couldn’t. Precious metals dealers of record (e.g., Kitco), would not touch it. Not as a silver bar, and not even at a lower price, as scrap silver to be remelted.
Decades after I bought it, I now owned the silver equivalent of blood diamonds.
Even without that, bullion tends to be a poor investment most of the time. It’s sterile, that is, bears neither interest or dividends. And, in retail amounts, you’ll automatically lose about ten percent of the purchase price when you sell it. If you can sell it. And sell it to a reputable dealer.
The prices listed are today’s prices at the bullion dealer of record for North America, Kitco. If you buy and sell that listed, “good-delivery-list” silver bar, you’ll lose about 10.5% on the transaction.
OTOH, it’s “liquid”. In theory, you can always find a ready taker for your silver bullion.
Except sometimes, as I found out last week.
Luckily (?), the second-tier market for silver in the U.S. does indeed treat all metal equally, regardless of its shady past. I made a pilgrimage to my local coin-and-collectibles shop, who took the bar for a fair price.
So, why is gold up now? Beats me.
The all-time high for gold, in real (inflation-adjusted) terms, occurred in 1980, at the equivalent of around $3200 in 2024 dollars. This compares to the current spot price of just under $2600 today.
In the runup to the 1980 peak, it was pretty clear what the worry was. The world had just gone through a decade of “supply shocks”, owing mostly to the energy crises of the 1970s. The U.S. (and world) rate of inflation was climbing, with no clear end in sight. The U.S. annual inflation rate peaked somewhere around 14%, as I recall. And folks were just generally freaked out about the dollar inflating away to nothing, in short order.
So, the prior peak was understandable. Gold-as-inflation-hedge is an adequate explanation of the 1980 all-time peak.
Now, however, it’s not so clear.
Gold rose steadily during the low-inflation, economically stable period of the Bush (Jr.) Administration.
That era ended with the collapse of the U.S. housing bubble and the near-collapse of the U.S. banking system. During which gold did not so much as twitch, but simply continued on its modest upward trend.
Gold continued to rise, and peaked — at roughly the same inflation-adjusted price it is now — in 2011, or part-way through the Obama Administration. It didn’t drop much, and rose to challenge that recent peak at the end of the Trump Administration. And now it’s again approaching that short-term peak, at the end of the Biden Administration.
So, whatever’s going on, it seems to be an apolitical worry, from the U.S. standpoint, and does not appear linked to U.S. inflation.
Nor do international exchange rates appear to be driving this. Gold is traded internationally, so currency fluctuations affect its price in dollars. But, in fact, the dollar shows an almost-unbroken decade-long trend toward high value relative to other currencies. If anything, that should have been bad for the price of gold, in U.S. dollars.
Source: Federal Reserve Bank of St. Louis.
Ouch. Upon re-reading that, I am reminded that when I assume, I make and ass out of you and me. I’m not sure if that’s a dollar value index, or a dollar deflator index. I checked, that is described as a trade-weighted exchange rate (?), so it is in fact an index of the value of the dollar, as it purchases a basket of foreign currencies, relative to what it used to buy, at some point in the past.
Or, Up is Good, as assumed.
Low interest rates are good for gold, as it faces less competition from, say government bonds. And while there is an expectation that the Fed will eventually, sometime, lower interest rates, that hasn’t happened yet. And it surely doesn’t explain the lack of a material decline in the real price of gold over the past decade or so.
Finally, wars are good. For gold, that is. There’s always a war or three going on somewhere.
But in particular, the conventional wisdom is that gold-as-war-hedge is a strong tradition in both the Middle East and in frequently-overrun parts of Europe. Both of which, as it happens, have shooting wars going on right now, with no obvious end in sight. This demand includes both private citizens and their central banks. (Of which, only central bank demand is known to any real degree, with the rest of the information appearing to me to be just one step up from rumor.)
Probably ought to toss out de-dollarization, even though the index of the dollar’s value appears on a long-term trend. If folks are “dumping the dollar”, I think that shouldn’t be true. But exchange rates reflect a lot of stuff.
Conclusion
Unlike the all-time real gold price peak of 1980, I’m not seeing any clear reason why the price of gold is high and rising.
Maybe it’s the wars. Maybe it’s not.
The purpose of holding gold is economic refuge. So whatever’s driving this latest price increase, I’m sure it’s something bad. I wish I could figure out what.
Addendum: My Junk Silver Indicator Says …
… things are getting better?
FWIW, I had a lot easier time finding junk silver for sale, in this last foray into the market, than I have in the distant past.
There was an extended time period, starting many years back, and extending into the COVID period (2020, say), where it seemed like just about every on-line dealer was sold out of bags of junk silver.
It wasn’t even a case of the product commanding an unreasonable premium. There just was no product to be sold. It was out-of-stock.
I may misremember. But this is what I recall.
And recall what this product is. It’s bags of pre-1965 U.S. (mainly) 90% silver coinage. So they ain’t making no more of it. That’s my point. There’s a totally fixed total supply of junk silver.
But now, seems like junk silver is back in stock.
By reputation, your typical junk silver owner is a prepper. And you know (reference decoy gold, Ron Swanson here), the kind of people who would buy “hard money”, in order to prepare for the worst, are not, themselves, like to re-sell that hard money.
Sell their silver, for paper money? That’s not the common mindset.
So I wonder if we don’t have a generation of geezer-preppers dying off, and their heirs are selling the carefully hoarded bags of junk silver back into (metals-dealer) circulation.
I say this, by the way, as a fan of disaster preparedness in general. So I am not at all dismissing holding some “hard money”. But otherwise, I have a hard time figuring out where all this now-readily-available junk silver is coming from. When, in the distant past, I think I recall the supply of that just kind of drying up for a while.
This does not really bode anything, other than time takes us all. If true — that availability of junk silver now is a sign of turnover of generations — all this would show is that some appreciable fraction of the heirs of aging preppers either are not of that mindset themselves, or do not consider large amounts of silver coin to be as necessary as the older generation did.
FWIW.
