Real Gold Far From Peak

is forging into new-record-high territory for the first time in several years.  That is starting to generate some excitement, with financial-media coverage growing more frequent and bullish.  That’s increasingly attracting back traders, who love chasing upside momentum on record breakouts.  Despite these recent nominal records, gold remains far from its real inflation-adjusted peak implying it still has a long ways to run yet.

On December’s opening trading day, blasted 1.7% higher to a $2,071 close.  That strength resulted from the Fed chair speaking at an Atlanta college.  Traders expected him to wax hawkish and push back against loosening financial conditions.  Instead he declared Fed monetary policy was already “well into restrictive territory”.  So market-implied rate-cut odds for the FOMC’s mid-March meeting doubled to 80%!

While that was a big up day for gold, its absolute level was more interesting.  That $2,071 was gold’s first new record high since early August 2020’s $2,062 fully 3.3 years earlier!  Records usually run in streaks, as traders pile in to ride breakouts which accelerate them.  But gold suffered a sharp pullback right after, on fears top Fed officials would soon unleash hawkish fury at their looming mid-December FOMC meeting.

Yet instead they surprised, pivoting dovish.  The latest Federal Open Market Committee statement added a qualifier making further rate cuts less likely, top Fed officials cut their year-end-2024 federal-funds-rate projections by 50 basis points, and the Fed chair himself sounded dovish in his press conference!  So gold soared 2.3% to $2,024 on that Fed Day, violently reversing its healthy pullback to rally higher since.

Mid-week gold was trading near $2,084, and closed at another record of $2,077.  So a typical new-record streak is building despite being interrupted by incorrect FOMC expectations.  While the great majority of both speculators and investors love chasing winners on record breakouts, contrarians have always been gold’s core constituency.  We want to buy low before selling high, not buy high then hope for a greater fool later.

Despite gold’s nominal records, it isn’t yet extremely high in real inflation-adjusted terms.  Reflecting the endlessly-eroding purchasing power of money, real prices are far more relevant over multi-decade timeframes.  Central banks perpetually grow their money supplies, and gold is prized for staying ahead of that inflation.  Since mining gold is so challenging, its global above-ground supply only grows about 1% per year.

That’s a stark contrast to central banks’ fiat currencies, which often increase an order of magnitude faster.  The Fed’s balance sheet is essentially the US dollar’s monetary base, controlling the world supply of them.  Even in normal non-crisis times, that is constantly climbing.  In the decade ending 2019, the Fed grew its balance sheet 86.5% which annualizes to a 6.4% rate.  But that trajectory radically steepened in early 2020.

Top Fed officials panicked after the pandemic-lockdown stock panic, when the flagship stock index cratered 33.9% in just over a month!  So they frantically redlined their monetary printing presses for over two years after that.  From just before that stock panic in late February 2020 to mid-April 2022, the Fed ballooned its balance sheet an absurd 115.6% in just 25.5 months for crazy-extreme monetary inflation!

That monetary base more than doubling in a couple years is the dominant reason inflation has raged in recent years.  The FOMC finally realized how dangerous its extreme monetary excesses were in mid-2022 as reported inflation soared.  So the Fed has shrunk its balance sheet 13.8% since then.  Yet crazily over these past four years, that monetary base has still skyrocketed 85.4% tying the previous decade’s growth!

That annualizes to a shocking 16.7% growth rate, well over an order of magnitude larger than gold’s world mined-supply growth!  Unlike fiat currencies, gold can’t be conjured into existence by central banks.  That natural scarcity is the main reason this leading alternative asset has been universally valued for millennia.  No matter how extreme governments debasing their currencies becomes, gold preserves purchasing power.

That has seriously eroded in recent years thanks to the Fed’s epic monetary largesse.  The most-closely-watched inflation gauge is the US Consumer Price Index.  The Bureau of Labor Statistics in charge of it defines the CPI as “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”  But the CPI chronically understates real-world inflation.

During these last four years where the Fed’s balance sheet soared 85.4%, the headline CPI has merely climbed 19.5%!  Does that sound righteous to you?  Are the prices you are paying for goods and services only about 20% higher than pre-pandemic levels?  Anyone running a household or business has likely seen the prices they are paying soaring 50% to 100% in that timeframe!  We all wish they were only up 20%.

The BLS has long intentionally lowballed the CPI for political reasons.  Excessive money-supply growth is a devastating stealth tax on wealth, so Americans despise it.  Politicians want to hide actual inflation from voters, otherwise they’d be run out of office.  Higher reported inflation also limits government spending on multiple fronts.  Politicians hate that, as they want to expand spending to bribe their constituents for votes.

The higher reported inflation, the higher prevailing interest rates.  Those leave government borrowing and servicing debt more expensive, constraining its expansion.  Higher rates also consume larger fractions of government budgets, restraining discretionary spending.  They also increase transfer payments indexed to inflation, also leaving less money for politicians to spend.  So they are loath to honestly report inflation.

General price levels Americans are paying have climbed faster than the CPI for the decades I’ve been studying both.  Various statistical distortions the BLS uses to manipulate the CPI to placate its political masters have continually underreported true inflation.  But that makes the CPI very conservative to use to illuminate real gold prices.  Annualized CPI growth since late 2019 is only running 4.5%, which is laughable.

Gold’s real all-time-record high was seen in late January 1980, when prices skyrocketed to $850 nominal.  That capped a mighty 10.0-year secular bull at life-changing 2,332% gains!  That peak gold price inflated using the lowballed CPI as of its latest November 2023 print translates into $3,355 in today’s dollars!  Gold won’t hit real records until at least that is exceeded, which is another 62% higher from mid-week levels.

Here’s a chart of gold’s 1970s super-bull rendered in current-dollar purchasing power as claimed by the CPI.  Underneath those real gold prices are the CPI inflation rates, which were far more honest back then.  The political manipulation of key economic data has soared since, especially in the Biden years.  Gold’s bull-market trajectories closely mirrored underlying monetary inflation, which gold stayed way ahead of.

CPI Inflation Vs Real Gold