More Thoughts on Gold

A ratio of two ratios determines the dollar price of gold.

         Dollar supply (base money)
         Dollar demand (base money)
                 Gold supply
                 Gold demand

Since the supply of gold (all the gold ever mined) is so great relative to demand (annual production), the bottom ratio is a constant. The top ratio determines the price of gold. The Fed controls dollar base money, so it determines the POG. The POG is therefore the inverse of the value of the dollar. This holds true for every currency. Currency supply relative to demand determines the POG of every currency. For this reason, inflations and deflations do not occur across all currencies at the same time.  The policy of individual central banks isolate inflations and deflations to the currency they control.  All inflations, everywhere, are preceded by a rise in the price of gold in that country’s currency.  If an increase in the demand for gold caused the POG to rise, inflations and deflations would occur across all currencies at once.  Venezuela is a current example.  An increase in bolivar supply relative to demand is what is causing Venezuelan hyperinflation.  To end Venezuelan hyperinflation, the Venezuelan central bank need only extinguish the excess supply of bolivares–relative to a stable monetary reference.  This is the solution for any currency losing its value.  It is also how currency boards work and achieve stability of value.

When dollar supply increases relative to dollar demand, the POG rises. A rising POG will increase demand for gold (in  the bottom ratio), which increases the POG, but it does not drive the POG. It is an effect of an increase in the top ratio.

Probably 95% of the gold industry and investing community think that gold supply and demand drives the POG.  They have it wrong.  This is why predictions for the POG’s direction are so often incorrect. 

Gold’s absence of a supply/demand component is what makes it the monetary standard of reference–a unit of account. Gold is unique among all commodities in this respect.  It is why gold never backwardizes. Gold’s future price is equal to its spot price plus the rate of interest over that time period. 

Cryptocurrency acts the opposite of gold.  Because of its fixed supply design flaw, demand for cryptocurrency determines its value.  As long as the fixed supply demand flaw exists, cryptocurrency can never act as a unit of account, nor will it achieve stability of value.    

If you grasp this concept and understand how Fed policy affects dollar supply, you will achieve an edge in gold investing.

The Dollar Price of Gold

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