Is Gold Cheap Today?

by Nov 13, 2020Investment Strategy, Market Insights

Soon, it’s time to sum up 2020, a year that will go into history as one we’d like to forget as soon as possible. A raging pandemic, political and civil unrest, the worst recession in a century… the list goes on. Businesses were adversely affected, and many investments went south.

But 2020 also saw gold set a new record, passing the $2,000 barrier.

All of the above is interlinked—gold surged because of the pandemic, the recession, etc. And I would claim that gold’s high is more than a sign of what has been. It is a sign of what’s to come: an earth-shattering change in the monetary system that will see gold rise above all other assets.

What lies ahead is the demise of the US dollar if our government doesn’t dramatically change the monetary policy it has pursued for the past couple of decades. What are the chances that politicians will do the right but painful thing?

The Fed has made its choice

Since 2000, the Fed has added trillions of dollars to the economy, first to fight the Great Recession and then to counter the current pandemic. They didn’t halt the money presses even towards the end of the normal business cycle. Instead, they’ve kept the stock market rally going, which has resulted in enormous asset bubbles.

The Fed is left with two options to prevent these asset bubbles from bursting:

  1. Halt the money printing. This would lead to dropping asset prices, business bankruptcies, and eventually a deflationary recession; or
  2. Accelerate the money printing. The increased money supply would sustain the business cycle and postpone the recession. However, it would lead to hyperinflation and strip the US dollar of most of what’s left of its worth.

What option has the Fed chosen? The answer is obvious from the chart below. (The blue line represents our money supply, while the red line represents the Fed interest rate.)

Just in 2020 alone the Federal Reserve has increased money supply by 25 percent, and the central banks have kept interest rates record low for years.

Our central bank has stuck to Option 2 for the better part of the past two decades, most recently during the current recession where it has further lowered interest rates and increased the money supply by close to $4 trillion. In other words, almost 25% of all the money the Fed has created in over 100 years was created in 2020 alone.

This year as the Fed has ventured down the road of excessive money printing again the stock market is higher than ever, and we’re facing another housing bubble… The Fed is not stimulating the economy to regenerate it; it’s infusing dollars into our economy to keep it alive—the bubbles are so inflated now that if they popped the damage to our economy would be unimaginable. So, the Fed has committed itself to keeping the zombie economy afloat and kick the can down the road.

With all this in mind, let’s turn to gold as an investment. Gold’s history is centuries-long with protecting wealth against financial crises and uncertainty. We have discussed that in further detail here. But what about the timing? Are you late to this party? This begs the following question:

Is gold cheap today?

Before we get to the answer, let’s first recognize this important fact: gold is money, whereas the dollars circulating today have value only because they represent a claim against money. 

Don’t believe me? Here’s a simple test that shows you that your paper money is nothing but a note and not real money. Take a $1 bill, cut it in half, and shred one of the halves, leaving you ½ of a bill. Is the remaining piece money? The answer is no. You need both sides to show a bank you have the full note to be accounted for. The half you have in your hand is nothing but paper now. 

Compare that to gold: You can take a 1-ounce gold piece and cut it in 2, 3, 100 pieces, and each piece will have the fractional value of 1 ounce of gold depending on its weight. Gold is money that has no debt associated with it and needs no one to back it up. It cannot be printed, and has an intrinsic value that is not dependent on anyone else but represents the costs to extract it from the ground and refine it with the premium related to its demand. 

In order to evaluate if gold is cheap or expensive, we need to look at the ‘70s, which were marked by a significant crisis caused by the oil embargo. This decade is the one most similar to our current historic decade. When looking at the ‘70s, we can ignore the bell-bottom style of jeans worn then. But, look at what happened then in terms of the growth of the money supply, the political aptitude towards higher interest rates and inflation, and the strength of the US economy.

In the decade from 1971 to 1981, the money supply doubled. For the decade from 2020 to 2030, we already know that we’ll see substantially higher growth in the money supply—we saw above that it’s grown by almost 25% so far in 2020 alone, and both political parties are talking about a massive stimulus package next year.

In terms of interest rates, then Fed Chair Paul Volcker set short-term interest rates at 20%—backed by President Reagan. Today, Powell was threatened with removal by the White House when he suggested maintaining interest rates at just 2%. Lower interest rates are what we should expect to see in the next few years.

Today’s US economy is held up by asset bubbles in equities and housing that need record-low interest rates and injections of dollars to stay inflated. Even raising the rates to 1% would tear open the bubbles. Inflation is also on an upwards trajectory with the Fed’s recent announcement that the central bank will let inflation go to 2% or higher.

With these factors in mind, we can make the rational argument that, yes, gold at $2,000 an ounce seems like a high number, but that number is misleading. Our paper money today has lost so much value that it’s simply our bias that makes us think that $2,000 per ounce of gold is a lot. From a purchasing power perspective, when million-dollar homes are not the mansions they were in the ‘70s, of course gold will be worth a whole lot more.

Last, the money printing that was already done in 2020 eclipsed that of 2008–2010, and back then the gold price went up close to 3 times. We are only about one-sixth of the way there… so far.

What’s in stock for gold as an investment?

Historically, we consider the monetary system stable when the money supply (physical money in addition to less liquid assets such as checking and savings deposits) are backed 40% by actual money.

If we look at M1 money supply (physical currency), it’s around $5 trillion today. If it were to be backed 100% by the US gold reserves (around 260 million ounces), then these gold reserves would need to be valued at $20,000 per ounce. That’s more than 10 times the price of gold today. Even with 40% backing, we would have to value gold much higher than its current price, at $8,000 per ounce.

In other words, to correctly value gold, it would have to increase by at least 300% and perhaps as much as 900%!

How to invest in gold

Taking advantage of the many benefits of gold investing is easier than most people think. You can buy gold directly from us for delivery to your home, or you can consider converting a portion of your existing retirement account (such as an IRA or a 401(k)) to a Gold IRA, which will hold your physical gold in a depository, fully insured, and under your name.

What option is best for you depends on your goals and financial situation. At Gold Alliance, our precious metals specialists have decades of experience in the industry, and we can provide you with all the information you need so that you can make an informed decision. Start your education now by scheduling a free, no-obligation consultation at 888-734-7453.