Gold, Silver, and Inflation: No Predictable Correlation
April 17, 2008
Because I believe that newbie investors in the precious metals are unaware of these facts, I have posted this in the public section of my site. Feel free to forward this page.
I have been a silver investor ever since July, 1963, when I bought silver coins at my local bank at face value. I have been a gold investor since 1967, just before the British devalued the pound and the price of U.S. $20 gold pieces soared. I used to sell gold and silver coins at Monex (1973). I have been following these markets for a long time. I have been taught certain lessons the hard way. I don't want you to pay for these lessons the way I did.
I was an advocate of gold coins as money long before it was legal for Americans to own gold. My first booklet on monetary theory, Inflation: The Economics of Addiction, appeared in 1964. It was reprinted as Chapter 3 of my 1973 book, An Introduction to Christian Economics. You can read it for free here. My 1986 book, Honest Money, is here. My book, Mises on Money (2002), is here.
In short, I am an old timer. I have paid my dues.
Before you accept anyone's interpretation of gold, silver, and inflation, you must first know some fundamental facts. Begin here every time.
Fact #1: Gold went from $105 in 1976 to $850 in January, 1980. Consumer prices increased by about 28%. Verify this here: http://data.bls.gov/cgi-bin/cpicalc.pl.Fact #2: Gold went from $850 in 1980 to $256 in 2001. Consumer prices more than doubled.
Fact #3: Gold went from $256 in 2001 to $1,011 in March, 2008. Consumer prices went up about 20%.
Summary: The rate of price inflation, 1976-2008, has always been positive, year to year, but since 1980 has been under 4% per year. Gold has gyrated wildly, moving up by 8 to 1, 1976 to 1980, falling by 70%, 1980-2001, and rising by 4 to 1, April 2, 2001 to March 17, 2008.
There are some recent gold owners who say this: "The CPI is rigged. Price inflation has been at least twice as high as the CPI indicates." I don't believe this is true, but if it is true, then the discrepancy between price inflation and the precious metals, 1980-2001, is even greater.
Conclusion: There has been no predictable correlation between American price inflation and the price of gold in U.S. dollars.
What about monetary inflation? Look at the rise of M1, 1975 to today. It tells the same story: no predictable correlation.
The other Ms (M2, M3, MZM) tell the same story: no predictable correlation. They rise constantly; the price of gold gyrates wildly.
What I have written about gold is even more true for silver. Silver was under $4 in 1976, peaked at $48 in January, 1980, and was back to $4 in 2001. For prices each year, click here.
For a chart on its classic bubble performance, due to the Hunt brothers' attempt to drive up the price by buying silver futures contracts and demanding delivery of physical silver, look at this chart: 1792 to 1999.
If someone offers his opinion on where the prices of gold and silver are headed, he should first explain why there has been no predictable correlation, 1976-2008: monetary inflation and price inflation vs. gold and silver. If he tells you that inflation has something to do with the prices of gold and silver, he needs to begin with this page.
This is also where you should start your research.
If you look at these prices and think, "these look like bubbles," you have begun the second step in assessing silver and gold.
Then ask yourself this: "If these two metals have not been bubbles in the past, then why do they move in the same direction at the same time, even though the fundamentals of supply and demand are completely different for the two metals?"
Gold is used as jewelry, especially in India, and as a monetary reserve by central banks and the International Monetary Fund. Gold does not get consumed. It does occasionally get dumped by central banks or the IMF, which announce their sales in advance, which sellers of all other commodities never do, since the announcement tends to lower the price.
Silver is mainly an industrial metal. No central banks hold it as a legal reserve. It gets consumed. Yet two billion ounces have come onto the market since 1980. No one has explained the sources of this silver. It seemed to come out of nowhere, year after year, decade after decade.
Gold is produced in gold mines. Silver is mainly a byproduct of base metals mining: copper, lead, and zinc. Increased demand for silver does not lead to economically significant increases in its output. Increases in the supply of copper, lead, and zinc do lead to increased supplies of silver.
Note: I told my Remnant Review subscribers to buy gold in October, 2001.
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