December 2023 - Week 3 Edition

Gold Shoots Up!

Gold shot above $2,030 after the Federal Reserve’s Open Market Committee meeting last Wednesday, followed by their “dovish” statements and a press conference by Fed Chair Jerome Powell, where he indicated there may be three interest rate cuts in 2024 and six or seven cuts through 2025. He further added that the Fed would not wait until inflation reached 2% before cutting rates, due to fear that inflation could “overshoot” on the downside, risking deflation. This supercharged gold and stocks. February gold futures reached a Friday peak of $2,043. Silver likewise hit $24 per ounce after the Fed’s meeting last week. With the impact of the Federal Reserve’s actions, the turmoil in countries around the world and the continued economic struggles being experienced by millions of Americans, I encourage you to buy gold to help protect your investments and assets. As I wrote above – and before on so many occasions in this column – gold holds its value when currency and other commodities and investments falter. Whether you are an ardent reader or this is the first time you’ve seen my weekly metals market report, please heed my advice, and call one of our professional account representatives today and they will help you plan out your precious metals investing strategy in a way that works best for you.

The Track Record of the Fed Since Christmas Eve, 1913: 99% Dollar Devaluation to Gold + 1,100-Fold Paper Explosion

The Federal Reserve Board was born 110 years ago this week. On December 23, 1913, Congress passed the Federal Reserve Act – creating a new national bank to match those already existing in Europe – and President Woodrow Wilson quickly signed that Act into law at 6:02 pm that night, with four gold pens.

In her recent book, “Broken Money,” Lyn Alden writes about the fruits of what happened in the 110 years after that momentous event. Even though the U.S. was on a gold standard for 20 years (until 1933) and a partial gold standard until 1971, the dollar was devalued by 99% as Treasury presses worked overtime.

Here’s her basic math of America’s monetary inflation since 1913:

“In 1913, when the Federal Reserve was created, there was $19.31 billion in broad money. At the end of 2022, there was $21.4 trillion ($21,400 billion) in broad money, which is an increase of 1,108 times over, or an average of 6.6% per year when compounded for 109 years. The population of the United States was 97 million in 1913 and about 333 million in 2022. That means that in 1913 there were 199 dollars per person in the system, and in 2022 there were over 64,265 dollars per person in the system. This is a per-capita broad money supply increase of 323 times over, or 5.5% compounded annually.”

She also chronicled how gold and oil have gained nearly 100-fold in price since 1913, so one penny in 1913 money had the same buying power as one dollar today. Gold has risen from $20.67 to about $2,030 today (over 98-fold) and “a barrel of oil,” she writes, “went from an average of $0.95 in 1913 to an average of $94 in 2022” (a 99-fold rise). Also, “the price of beef similarly increased at a 4.1% compounded annual rate from the 1930s through 2022” (that’s a 37-fold gain in 90 years), while prime land did even better: “One particularly well-documented Miami Beach waterfront property was originally sold for $100,000 in 1930 and by 2022 was worth around $30 million, which was a 6.4% compounded annual growth rate, in line with the growth rate of the money supply over that long period” (from Broken Money, p. 241).

Deflation reigned during the gold standard era, from 1789 to 1913 but the modern inflationary era began in 1914 – the first full year of the Fed, plus the inflation was partly fueled by World War I spending. In 1914, the warring powers of Europe (and later America) pressured their citizens into exchanging gold coins for paper promises that were based on the credit of the government rather than on precious metals.

The English word “money” stems from the Latin word moneta, which means coins. American money was mostly gold or silver coins, minted from precious metals that carried intrinsic value in themselves.

America’s Monetary Erosion Has Worsened Since 2000 – and Even Worse After 2020!

Since the year 2000, as we have chronicled here each week, the price of gold has beaten stocks (and inflation and most other assets) by a long shot. Alden confirms this trend in her book, “Broken Money,” saying that between 2000 and the end of 2022, “the broad money supply per capita grew at an annual compounded rate of 6.8% per year…while the official consumer price index grew at a 2.6% compounded rate. The gold price increased by 8.3% per year…. The oil price grew at 4.7% per year. The median house price grew by 4.7% per year… Average hourly earnings for non-supervisory personnel went up by 3.2% per year. The average bank account had a yield of less than 2% per year.” As our weekly chart shows, gold is up 600% since 2000, vs. 224% for stocks – outperforming stocks by over 2-to-1.

The situation has mushroomed out of control since 2020 – with almost $10 trillion in new federal deficit spending and a clueless Fed: In the first month of President Biden’s first year, when the new President was passing inflationary stimulus bills into an already bustling post-COVID economy, a Congressman asked Federal Reserve Chairman Jerome Powell about the 25% year-over-year surge in the broad money supply (the highest since the 1940s). Powell dismissed those concerns, saying that such a big surge in broad money supply wouldn’t have any important economic or inflationary implications. He continued, stating that we may have to “unlearn” the idea that monetary aggregates have any important impact on the economy (Reuters, February 23, 2021, “Powell’s Econ 101: Jobs Not Inflation. And Forget About Money Supply.”)

In late 2021, when inflation was over 6%, the Fed was still holding interest rates at zero and expanding the money supply rapidly. Only in April 2022, when inflation was rising rapidly, nearing its peak, did the Fed start raising rates. When inflation peaked in mid-2022, the Fed began raising rates in giant steps of 50 and 75 basis points, the fastest rate in history. These actions choked off businesses and doubled mortgage rates, leading to the banking crisis of early 2023, when five regional banks with assets of $750 billion failed.

Clearly, the 1913 Federal Reserve was a big mistake 110 years ago, despite the gold pens Wilson used!

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