Q&A of the Day – Is Gold’s Record Run a Sign of Trouble for the U.S. Economy?
Each day I feature a listener question sent by one of these methods.
Email: brianmudd@iheartmedia.com
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Today’s entry: @brianmuddradio Do you think gold’s move to record highs above $4,100 is a sign of trouble as some are saying?
Bottom Line: The short answer is...no, that is unless you also view the current price of commodities like Gallium, Palladium, Lithium, Rhodium, Indium, Silver and Crude Oil as signs of trouble as well and also the current value of the stock market. I mention them because they are all examples of assets that have appreciated at a faster rate than gold from the onset of commodities trading until today. There’s no doubt that gold has been on a historic run this year up 58%+, a figure that year-to-date outperforms just about any investable asset. Such a surge in value amid a time of turbulence globally and within our own country as U.S. deficits persist, the federal debt has surpassed $37.6 trillion. To be sure gold’s performance has been phenomenal this year, and for that matter over recent years. With that said, in a historical context...not so much.
Even factoring in the recent record run, as of yesterday’s price, the average annual rate of return for gold all-time has been only 4.5%. That’s a rate that’s well below that of the other commodities mentioned and well less than half of the rate of appreciation of stocks as well. Now some will point to price controls that were in place fixing the price of gold until the end of the Gold Standard in 1971, and that factored in during the years of the price controls no doubt, however it would be easy in the open market for the price appreciation of the commodity to well more than account for the previous performance with an enormous catch up rally. So, in other words, as we’re 54 years removed from price controls, there’s been ample time for gold to adequately adjust and account for the historical controls.
How gold is used:
- 44% Jewelry
- 26% investors
- 23% Governments (central banks)
- 7% Technology devices
So, there are a couple of instructive points here. It’s often said/advertised that governments are stocking up on gold to guard against a crisis, etc. There’s an element of truth to this, however in reality the demand for gold jewelry still runs at twice the rate of demand by governments. What’s more is that demand from investors is greater than that of governments and central banks. Rising investor demand has been driving the price more than the action of governments. On that note, given that gold is a commodity, with pricing based on supply and demand, the risk factors (both for higher prices and potential lower prices).
Gold jewelry remains the largest factor in driving close to half of the demand for the commodity. Combined with the use of gold in certain technology devices, over half of the total gold demand is consumer-based demand. If consumer demand remains strong, it’s likely the price of gold will remain strong. That’s a key dynamic in addition to investors and government demand. Of course, mining supply is also something that’s always worth keeping an eye on as well.
Relative to concerns about the strength of the US Dollar, and the potential for a federal government collapse, etc. There are a couple of dynamics to consider. Did you know that the value of the U.S. Dollar on a relative basis is higher today than it was in on the same date in 1987? The U.S. Dollar Index, which values the U.S. Dollar against a basket of the world’s leading currencies shows that the U.S. Dollar is stronger today than it has been for all but about five years out of the past 40.
The US Dollar index is currently about $99. Its all-time high was $122 in 1986; its all-time low was $82 in 2008. The Dollar is weaker than it was earlier this year, so the value is worth watching as all commodities are U.S. Dollar denominated, and the value of the dollar directly impacts inflation as well. However, there’s nothing about the current value that’s close to alarming. For additional perspective ten years ago today, the value of the US Dollar Index was $96.
Many gold bulls will talk about a consistently declining Dollar value. It’s a fundamentally false argument. The fact of the matter is that the Dollar is worth more on a relative basis than it was a decade ago today. This is why, for example, our stock market has been enjoying record highs, along with historical high employment, amid other macroeconomic events that aren’t consistent with a collapse. This isn’t to say that our country’s debt and deficit problems aren’t significant, they are and do need to be meaningfully addressed. However, there’s certainly no imminent collapse on the horizon, nor is there any for the foreseeable future.
My outlook would change if the US Dollar dropped near or broke below its 2008 levels – during the onset of the financial crisis that led to the Great Recession. For now, the Dollar’s value remains 20% higher than those levels and above its historic average value. The bottom line from my perspective is that if you want to add gold to an investment portfolio as part of a strategic decision, that may make sense based upon, your circumstance.
As always, my first rule of money is to never let your money and emotions cross paths. If you’re feeling emotionally pressured into hoarding the commodity because of fear of an economic collapse, that’s probably not a good thing.