Going For The Gold

Back in the halcyon days of iTulip, when gold first traded over $1200, I posted to the effect that it would never trade in the triple digits again. That was a pretty bold call, considering that never is a very long time. Yet it wasn’t so bold, considering that it wasn’t so much about gold gaining as about dollars losing.

And as with virtually every fiat currency, its decline and fall is a safe long term bet. Made made currencies are usually made to go down, as their issuers are unable to resist financial and political pressure from those who benefit from its decline and fall. It’s a clandestine means to transfer purchasing power from the working classes to the political and financial elite that control them.

So as the value of dollars declines, it takes more of them to buy the same stuff. When the currency is also the unit of account, this creates the appearance that the stuff is going up. This whether the stuff is bread, beef, rent, or stocks.

Or gold. Yet this proves reliable only over time frames several decades in extent. Shorter time frames can prove exceptional, the most notable and recent such exception being the nineteen eighties and nineties, when gold managed the rare feat of declining in dollar terms even as dollars depreciated against most other things.

Notably including stocks. To get some insight into when this might happen again, we can look to what circumstances such an exceptional period began and ended with. We don’t have to look hard. At the beginning of the 1980s, gold had just risen over twenty times in dollar terms. Like a submerged beach ball suddenly being released, it had been just been set free after having been linked to the dollar for decades. It shot high into the air, its momentum carrying it into overvalued territory from $35 an ounce to $800 in a mere few years. For a deeper dive, see Copper & Gold and Making Stock Market History.

At the same time, stocks had just spent over a decade in a grinding bear market, leaving them historically cheap by the early eighties. The S&P 500 traded near twenty times annual dividends, in contrast to more like sixty times today, a level that would require a price decline of around two thirds to be reached from current levels.

It’s safe to say the 2023 setup is nothing like that of 1982.

So are we in danger of a repeat performance of the eighties and nineties over the next two decades? The likelihood is remote. It way well turn out that even from these lofty valuations, US stocks may beat dollars over the next twenty years, but dollars are hardly stiff competition.

At beginning of the millennium, stocks were trading at nosebleed valuations. Over the next two decades, stocks outperformed depreciating dollars, but underperformed gold. Todays setup much more closely resembles the turn of the millennium configuration. Gold may no longer be as cheap as it was in 2000, but US stocks are similarly expensive, especially a handful of teracap names dominating the cap weighted indices.

Gold has recently again nosed over $2000 an ounce. Or put better, the dollar has declined to under 1/2000 ounces of gold. Given that this obtains even after an extended high profile effort by its issuer to support its value, the outlook for the Federal Reserve Note is again coming under pressure as the Federal Reserve itself comes under pressure to relent. Wall Street and Washington both exert considerable influence on the Fed and it’s only a matter of time before it yields.

In a related aspect, gold is also benefitting from a strong rally in Treasuries off of what may have been the bottom of an epic bear market. As higher yields made Treasuries more attractive, gold faced more competition. That competition is ebbing.

So it seems safe to take a victory lap on my call for gold to never trade below $1000 again, however long never may be. Although I’m not ready to make the same call on $2000, it too will one day become a safe bet, and that day may not be far off.


2 thoughts on “Going For The Gold

  1. jk says:

    I’ll nominate the late 1960’s and the nifty fifty with rates rising as an analog. the turn of the century was still in the midst of a long bind bull, with dropping interest rates, while I see long rates likely rising. Janet can only drain the rrp for about another quarter before it’s empty, and the flood of Treasury paper really takes a toll. then we’re back to qe, likely with yield curve control and financial repression. I like real assets- energy, gold, real estate, uranium, as well as tips

    1. Finster says:

      Alas it gives us no guidance on gold. In the late sixties gold played poster child for the world’s most manipulated market, having been nailed for decades at a highly artificial $35 per ounce.

      It’s tempting and popular to assume that the return of rampant consumer price inflation heralds another seventies like decade for gold. It doesn’t hold up on close examination.


      Although I agree gold has an important place in investment portfolios, it’s not because it is uniquely powerful as an inflation hedge, but because among inflation hedges it is uniquely uncorrelated with stocks.