What’s Driving The Price of Gold During the Pandemic?
What is going on with gold right now? That is the question I am asked more than any other. Frankly, I don’t know and neither does anyone else. Many of you know that I’m a gold guy. I love gold and silver because it’s outside of the central banking system.
However, I will tell you the answer to that question is it depends on the inflation rate and how the Fed responds to the inflation rate.
Under normal circumstances, the price of gold rises when people expect higher inflation. In times of inflation, people buy gold because gold tends to maintain its purchasing power better than dollars (or other currencies).
When the inflation rate is high, it takes more dollars to buy the same amount of goods one year later; whereas, with gold, it is possible to buy the same amount of goods with the same amount of gold. I believe everyone reading this understands this point.
The Dying Dollar
The U.S. dollar stopped being money and became a currency in 1971. In 1973, while in Vietnam, I directly observed the change in the rules of money via the information received about the panic in the South Vietnamese people’s lives. They knew the war was lost and they were on the losing side.
In 1971, gold was pegged at $35 an ounce. In 1973, I watched its price go up past $80 an ounce. As the North Vietnamese began their march south, fear was approaching a panic level. The rich who sided with the United States were getting ready to run.
Instead of clinging to the U.S. dollars, they were buying all the gold they could get their hands on. One intelligence report I received stated, “Confidence lost. People ready to flee. Trading dollars and ‘Ps’ [piasters] for gold.” Sitting in the Top Secret room, I realized that people wanted gold. I assumed they knew gold would buy them passage to another country. I could feel their anguish. They knew that gold could save their lives.
I knew the facts. The United States was losing the war. The enemy was taking ground. Internationally, the dollar was dropping and gold was going up in price. From the intelligence report, I knew the South Vietnamese people were panicking and dumping their currency to buy gold. To me, this trend was an investment opportunity. I used it to form an opinion…
A few days later, a friend and I flew north, just behind enemy lines, hoping to buy some gold. Our opinion was the Vietnamese gold miners would be desperate to sell to us their gold since the NVA had just overrun their village. Our opinion was the miners would jump at the opportunity to take our U.S. dollars. Our opinion was we would be in a good position to buy gold at a discount. Because of our opinion, based upon a few facts, we were willing to break a few rules and risk our lives just to make a few dollars.
Instead of making a killing, I was nearly killed. Instead of buying gold at a discount, I learned a valuable lesson about gold and currencies. That day I found out that the price of gold really was the same price all over the world. On that day, the price was about $82 an ounce. I found out that regardless of whether I was buying gold in U.S. territory or NVA territory, its price was the same.
Standing behind enemy lines, hoping to buy gold at a lower price, is a perfect example of becoming smart by being stupid. I was getting an MBA in international finance standing in front of the mine’s bamboo-hut sales office, arguing with an old woman whose teeth were stained red from chewing betel nuts. Although I did not ask, I sincerely doubt if this woman was a Harvard graduate. I doubt if she had any formal education at all, but she was a great teacher. Even though she did not seem to be well-educated, or dressed for success, she knew her stuff when it came to the value and price of gold. She was financially intelligent and tough as nails. She was not going to let a couple of young American pilots sweet-talk her out of her gold with rapidly declining U.S. dollars.
To this day, I vividly remember standing in front of her, arguing for a $5 discount. I was willing to pay $77, not the world price of $82. Instead of taking our money, she just kept shaking her head and chewing on her betel nuts. She knew the price. She knew the local and geopolitical economic forces in the world. She was informed, she was tuned in, she was cool, and she was in no hurry to sell her gold. She knew the trend was on her side and not on ours, and that there were people far more desperate for her gold than two pilots trying to make a few bucks.
Once it dawned on me that she was not going to budge, I said silently to myself, “I’m dead. Today I am going to die, standing behind enemy lines, asking for a $5 discount. No one will find us. No one will ever know what happened to us. We will be missing in action and we aren’t even in any action. I won’t be killed for a noble cause. I’ll be killed trying to shave a few dollars off the price of an international commodity. I will die because I am cheap and stupid. If I stand here any longer, I will be shot in the back, arguing with this woman for a discount. I’m so stupid that I deserve to die.”
I often think of that old woman. The first thing I do is to check the trends. Instead of joining the crowd and going into panic mode, I simply keep my fear in check and refocus on the trends in the market, not on its ups or downs. I verify the facts and form my own opinion about the future.
The world shakes in terror because the bankers are in deep trouble. The bankers are unable to pay back their own loans to other banks. If the banks do not make loans or cannot pay back their loans, the economy starts to collapse and people suffer. That is because 75 percent of our economic growth is a result of consumer spending. And since we currently have the worst savings rate in the history of the United States, we have no other way to spend than to borrow money. If credit dries up—that is, if the banks stop lending money or make it much harder to qualify for credit—the U.S. consumer will not be able to spend. If consumers stop spending, the economy will suffer greatly. The only way for the economy to grow is for us to begin to borrow once again.
Credit proliferation on such a scale only became possible when money ceased to be backed by gold with the collapse of the Bretton Woods system in 1971.
Afterward, not only did credit make the global economy much larger, but it also changed the nature of the economic system itself. Capitalism was transformed into Creditism.
For years, the Federal Reserve Bank, the World Bank, and the International Monetary Fund (IMF) have been handing out credit cards to subprime countries, subprime investors, and subprime borrowers all over the world.
Now, they’re suffering from subprime CEO’s and CLO’s, Collateralized Loan Obligations.
The credit problem today is measured in the trillions of dollars of “magic” money—money created out of thin air, hoping that people will keep paying the interest and continue to borrow more money.
We are now watching this system slowly collapse. Blinded by greed, banks and institutions lowered their standards such that they gave loans out to anyone who could make a mirror fog.
Why I Like Gold
For thousands of years, people who had access to gold and silver valued these precious metals for use as money in this way. Gold and silver have intrinsic value, which means they can be used for something other than money, such as jewelry. So true money had intrinsic value. True money could be accurately measured. And true money could be stored for years. Gold and silver were compact enough to be carried long distances.
Today, millions of people are calling for a return to the gold standard. In other words, they want to turn the clock back to pre-1971. While it is possible that this might happen, it is not probable, and the pain of doing so would probably mean a massive collapse of the entire global economic system.
One of the reasons I like gold and silver is because there is always a market for it. It is relatively liquid, and if I need cash, I can get cash pretty quickly.
Gold was my first real investment as a young adult. I began investing in gold before I began investing in real estate. In 1972, at the age of 25, I began buying gold coins when gold was approximately $70 an ounce. By 1980, gold was approaching $800 an ounce. Today, gold hit an all-time high of over $2,000 per ounce.
The uncertainty about the current economic climate, the dying dollar, and a major credit crisis is making those who hold gold very happy.
Editor, Rich Dad Poor Dad Daily