A historical barometer of financial governance is the price of gold. In past seven years, gold has gone up in price over 500%. How can we gauge the price of gold in light of current economic and political conditions?
First, a few historical benchmarks. The price of gold was $18-20 per ounce from 1807 until 1930. The price rose during the depression until FDR fixed the price of gold at $35 per ounce in 1935. This price held until the late 1960s. The price rose to about $100 per ounce in 1973. The US went off the gold standard in 1974, and the price peaked at about $800 in 1980. A twenty year bear market ensued, and gold bottomed at around $300 per ounce 1997-2002. Another rally started and gold rallied to its current peak of $1400.
Prior to the past decade, the 70s was the most violent gold bull market (priced in dollars). Taking the 1973 price ($100), the price advance was 600-800% (depending on whether average or peak prices are used). Using that same measure and a starting point of $300, $1800-2400 is a projected top.
Some of the economic drivers for this gold bull market are similar to the drivers of the 70s bull market. In the 70s, there was rapid growth in private credit and public debt. In the 2000s, there was rapid private credit growth until 2007, then very rapid growth in public debt and trade deficits. A major difference in the two periods is inflation. In the seventies, there was rapid inflation. In the 2000s inflation has been more subdued because we have reached a multi-generational peak in credit creation.
The question? Has this gold bull market run its course? The bull market ended in 1980 when the Federal Reserve slammed the brakes and broke the inflationary spiral. The drivers for this gold bull market are the twin deficits (trade and budget). The housing bubble burst, and private credit collapsed. To forestall a depression, the Fed and Congress are doing everything possible to promote private credit expansion. The twin deficits continue to expand.
The Achilles Heel in this process is the status of the dollar as a reserve currency. So long as the dollar is the world reserve currency, the Federal Reserve will simply print money to support the growth of the twin deficits. This policy is supposed to ignite real economic growth which will then bring deficits back under control.
My forecast is that this policy will ultimately fail. In the short run, while the dollar maintains its value, some growth will result. In the medium run, the twin deficts will swamp economic growth. The new Congress will not be able to manage the deficits. Dollar weakness will drive gold much higher The 70s gold bull market will pale in comparison. The collapse of the euro-zone will add more fuel to the fire.