What the Heck Happened to Gold?

The Facts [The Daily Reckoning] September 30, 2022 [WEBSITE]( | [UNSUBSCRIBE]( What the Heck Happened to Gold? - Why isn’t gold skyrocketing in the face of massive inflation?... - Not all inflations are equal… - Gold and the global dollar shortage… [***Important Message From Customer Service***]( [This Simple Chart]( If you’re seeing this message, that means your name is on a [list of customers]( who are not using our services to the fullest potential. Dustin Weisbecker, the director of customer service, has recorded an urgent video to explain everything. [Click here to watch this important message]( [LEARN MORE]( Portsmouth, New Hampshire September 30, 2022 [Jim Rickards] JIM RICKARDS Dear Reader, I’ve gone on record predicting that gold will ultimately reach $10,000 or higher. That’s probably why I’m always asked why gold isn’t skyrocketing in the face of the worst inflation we’ve seen in 40 years. Gold has lost about $150 on the year. “If not now, when?” people want to know. It’s a legitimate question. Long story short, it’s been a rough time for gold investors. The rallies are fewer and further between, and the smashes are more frequent and severe. As Randy Newman sang in one of his hits, “That ain’t no way to have fun.” Indeed. Consider gold’s recent action… Gold crashed from $1,743 per ounce on Sept. 13, 2022, to $1,708 by 9:30 a.m. the same day. That’s a 2% plunge in a matter of minutes. As if to add insult to injury, gold plunged again from $1,699 per ounce on Sept. 15 to $1,662 on Sept. 16, another 2% nose dive on top of the one just three days earlier. The overall drawdown from interim high to low went from $1,743 to $1,662, a 4.6% dive in just three days. Currently, gold stands at around $1,670. Of course, gold mining stocks and ETFs dipped in lockstep with the metal. That ain’t no way to have fun. The “Strong” Dollar If the gold price dip mechanics are familiar, so are the reasons. The U.S. dollar index (DXY) surged from 107.7 on Sept. 13 to 110.25 on Sept. 16 (intraday), a 2.55% spike over the same three trading days that gold plunged. So the dollar goes up and the dollar price of gold goes down. Is it really that simple? Superficially and in the short run, yes. It’s really that simple. Of course, there’s nothing simple about the dollar index itself. The main shortcoming of any dollar index is that the index components are other central bank currencies, primarily the euro but also including sterling, Swiss francs and yen. [Urgent From Jim!]( [This Simple Chart]( Hey, it’s Jim Rickards. Big changes are coming to my research service, and I wanted to make sure you saw what was going on. [Just click here now to see my announcement.]( [LEARN MORE]( There are no commodities or other asset classes in the basket, so all the index really tells us is how the dollar is performing relative to other currencies. The euro is suffering because of coming energy shortages and severe economic recession. Sterling is suffering for the same reasons. The yen is drowning due to neglect by the Bank of Japan (something I warned about months ago) and its unwillingness to raise rates to defend it. That won’t change before mid-2023 at the earliest. King dollar may be a one-eyed man in a kingdom of the blind, but it’s still the king. Although many factors come into play in determining dollar strength relative to other currencies (interest rates, inflation, growth, deficits, debt levels, etc.), there’s little doubt that the dollar price of gold and the dollar itself move inversely. A stronger dollar usually means a lower dollar price for gold and vice versa. At least in the short run, it really is that simple. Not All Inflations Are Equal Won’t inflation save the day? With inflation at 41-year highs, why isn’t the price of gold surging as it did during the last sustained bout of inflation in the late 1970s? There are two reasons for this. The first is that not all inflation is created equal. Inflation can come from the supply side (so-called “cost-push”) or from the demand side (so-called “demand-pull”). Those two drivers are not the same. Supply shortages in energy, consumer nondurables, baby formula, trucks and drivers (and much more) will drive prices higher, but they do not lead to the kind of behavioral changes on the demand side that can translate into a scramble to buy gold (as did happen in the 1970s). The opposite is true. Higher prices for gas at the pump, food in the grocery and service fees of all kinds do not induce an inflationary mindset. Instead, they cause people to reduce consumption, save more and spend less. Demand for gasoline is somewhat inelastic (until the day you get laid off, when it goes to zero). Once you’re done filling up your car, there’s not a lot left over for anything else, including gold. Consumers correctly perceive that higher prices from the supply side will result in lower prices sooner rather than later as consumer discretionary purchases dry up, businesses fail and unemployment rises. This process takes time, but it has begun. It turns out that consumers are much better economic forecasters than Ph.D. economists. No surprise there. [Strange 2022 Prophecy Rapidly Coming True]( [This Simple Chart]( America’s #1 Futurist George Gilder is telling American’s to “brace yourself” for the coming $16.8 trillion revolution. This same revolution could redefine millions of jobs and radically transform the way just about every major corporation does business. It could even change the way you get paid, save and invest for retirement. [And, says George, it could make you exceedingly rich — click here to see why.]( [LEARN MORE]( Inflation from the demand side operates differently. There’s not necessarily a supply shortage. Instead, there’s a change in behavior. Workers demand raises. They rush to buy goods before the prices go up. (That pulls future demand forward, hence the name “demand-pull” inflation). This process feeds on itself and price pressures spread widely through the economy. Gold is along for the ride and can soar both as a substitute for cash and as a measure of a shrinking dollar. The U.S. is feeling the effects of cost-push inflation from the supply side. This can morph into demand-pull inflation as happened in the 1970s. But it can also turn into a severe recession, even depression as it did during the Great Depression of the 1930s. When that happens the cost-push inflation does not turn into demand-pull inflation. It turns into deflation. The Global Dollar Shortage Another driver of a strong dollar that has nothing to do with gold (although gold is affected) is the fact that there is a global dollar shortage playing out behind the curtain of the international monetary system, especially in leveraged bank balance sheets and derivatives trading. There’s a lot to this story but here’s the short version: Derivatives positions require collateral, Treasury bills are the best collateral in the world, and Treasures are denominated in dollars. As the dollar shortage grows worse and banks begin to deleverage, the demand for Treasury bills skyrockets and banks need dollars to buy them. That demand really is inelastic right up to the point where the global monetary system breaks as happened in 2007. We’re getting closer to a replay of that catastrophe. To gold investors, I say hang in there. Gold will have its day. Either the cost-push inflation will morph into demand-pull inflation or the monetary system will break down under relentless pressure for dollar-denominated collateral. Both are bad for the economy and markets generally — and good for gold. Regards, [James Altucher] Jim Rickards for The Daily Reckoning P.S. With conditions moving toward a reversal in the gold price, now is the time to buy gold at such a low entry point. When the bug really hits the windshield, gold will likely explode in value and quickly become out of reach for most investors. That’s why I recommend [Hard Assets Alliance]( as the go-to place to purchase your physical gold. Hard Assets Alliance allows you to buy and take delivery with exceptionally low costs. Or with a single click, you can buy and store your metal in your choice of five audited vaults worldwide. It’s the hands-down easiest way to get started with gold and silver. It’s FREE to sign up for an account. Once you’ve completed the short account-opening process, you’ll be able to shop for the types of gold bars and coins you want to buy right away. [Go here now to get started.]( Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Brian Maher] [James G. Rickards]( is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( The Daily Reckoning is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. 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