The Golden Bull

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CaptainDan

CaptainDan

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What have been the greatest drivers of gold price increases throughout history? I'll tell you. An increase in the money supply of a nation and the public's awareness of that increase. The public becomes nervous that the paper money they hold will purchase less of what they'll need, so it converts its paper money into metal money. It's that simple and this type of thing has happened over and over again throughout history.

The other driver of the increase in the price of gold is the printing of the money itself, although this type of increase isn't as dramatic as the previous one has the potential to be. As the paper money supply grows in any given economy, so does the price of gold in that economy. It's one of those laws of economics that we haven't been able to get rid of yet. It's just the way it is.

If you're old enough to remember the 1970s, you're old enough to remember some intense inflation. I remember my mother telling me about couples who had 16% or more interest rates in their mortgages. Today, we pretend there's a huge difference between 4% and 4 1/4%. Try paying 16% if you want to know what throwing money out the window feels like. It was nuts.

Because of all the money printing that occurred during the 1960s in the United States as well as all the printing that occurred after the second world war, inflation was on the rise drastically throughout the 1970s and part of the 1980s. And if you remember that inflation from your own personal experience, you likely recall the oil embargo that occurred in 1973. Some people say that this embargo was one of the primary drivers of the monetary inflation that was occurring at the time. These people would be incorrect. What was actually happening was that the holding back of oil was actually driving the price of that raw crude back up to the point it was during the Bretton Woods agreement. You see, the oil producing nations in the Middle East knew all about currency devaluation and when they realized that they were getting paid pennies on the dollar for what their oil was actually worth, they began holding it back to create a squeeze in supply. Because supply became so tight, the price rose drastically, which put it back in line with what it should be. It's sort of like having to work for $5 per hour and not getting a wage increase while the price of bread increases from $1 to $2 to $4 to $8. Obviously, you'd ask for a raise because you wouldn't be able to live soon enough. If you had enough clout, like OPEC did, you'd get that raise. Sometimes you have to play hardball.

Do you remember when I said that the U.S. government made it illegal for any citizen to own gold? Well, in 1974 they made it legal to own again. And since its price was no longer pegged to the U.S. dollar, it was allowed to float based in market demand. Can you guess what happened to the price of gold once it became legal to own again? Yes, that's right. Because of all the additional dollars that had found their way into the global economy, the price rose from $35 to $50 to $100 to $200 to $300 and beyond. The market was resetting the price, just as it did for many other commodities, such as oil, wheat, pork bellies, and so on.

Before I end this post, I'd like to point out one small detail in regards to "money printing." When that phrase is used, many folks think of actual physical dollars being printed on a printing press. While that does happen, most money printing occurs in the form of debt issuance. In today's day and age, that debt issuance is to the many governments around the world. You're surely aware of how much the United States government borrows to pay for all sorts of things. Another type of debt that needs to be taken into account though is consumer debt. Each time someone uses a credit card to pay for an item, the currency supply is increased. Yes, that money is never actually seen, but once it hits a vendor's bank account, it becomes part of the system. So while government borrowing does cause inflation, so does consumer borrowing. Think credit cards, car loans, mortgages, personal loans, student loans, and anything else people borrow money from banks for. We're all in this together and the more we borrow, the more expensive things become.

This post is part of a series: Guide to Investing in Gold & Silver by Michael Maloney
 
The Golden Bull was posted on 06-03-2021 by CaptainDan in the Economics Forum forum.

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