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American Eagle Gold Coin Bullion Investment Obverse

Contributed by Steven Kirkpatrick, produced with Avi Gilburt.

If you’re contemplating gold as an investment, it might be the right move. However, chances are, your reasons might be misplaced. The pervasive confusion and false perceptions about gold prices make for a daunting investment landscape. Currently, we are bullish on gold and other precious metals, but not for the reasons commonly assumed.

Gold: A Myth-Busting Journey

A multitude of analysts and pundits love to attribute the fluctuation of gold prices to various external factors. However, nearly all of these assumptions miss the mark entirely.

Imagine a show such as β€œMythBusters”, known for testing suppositions. If there ever was an episode on what drives gold prices, it would likely start off with the following:

MythBusting #1 – Money Supply Affects Gold Prices

Between March 1, 2020, and Oct. 1, 2022, the money supply surged a staggering 40%, the most significant uptick since World War II. Despite this massive inflow of money, the price of gold actually slid during this period, from $1,715 per ounce to $1,632, marking a nearly 5% decline.

Even more recently, as the money supply decreased by about 6%, the price of gold hovered near $2,000 per ounce. One would reasonably assume that such a monumental surge in the money supply would drive up the price of gold substantially. However, there is virtually no meaningful correlation between money supply growth (as measured by M2) and the price of gold.

Charting the gold price data normalized to match the money supply at the beginning of the timeline (November 1980), the lack of correlation becomes clear. Evidently, the massive surge in money supply starting in 2022 has had no impact on the price of gold.

MythBusting #2 – Recessions Impact Gold Prices

The notion that gold is a solid investment during a recession is devoid of truth. Recessions have virtually no impact on the price of gold, as evidenced by data.

There is no discernible β€œcause and effect” relationship between gold prices and a recession. None whatsoever.

MythBusting #3 – The Value of the Dollar Affects the Price of Gold

Another frequently cited rationale for gold price fluctuations is based on the premise that a weakened dollar is bullish for gold, whereas a strong dollar is bearish.

However, over the past 40 years, the value of the dollar (i.e., DXY) has spanned a wide range, from about 160 (February 1985) to a low of 72 (March 2008).

Comparing the value of the dollar to the price of gold accords no correlation. It becomes evident that the value of the dollar does not affect the price of gold.

MythBusting #4 – Inflation Will Cause Gold Prices to Rise

The widely held belief that gold is a hedge against inflation is not as sound as it seems. There is a vague correlation at best; the sharp swings in the price of gold do not align with changes in the Consumer Price Index (CPI).

Recall a significant period of inflation from the late 1960s that persisted for decades. Did this make gold a lucrative investment at the time? Not quite. As per Robert Prechter’s book, The Socionomic Theory of Finance:

β€œInflation continued during the decade from 1970 to 1980, and gold and silver soared… Inflation continued from January 1980 to April 2001, during which time the money supply nearly tripled. But gold and silver lost a stunning 83% of their combined value during those 21 years…”

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