Gold will Glitter when Inflation and the Dollar Fall

Archeological evidence hints that Gold held value with cave dwelling paleolithic humans as long 40,000 years ago. The Egyptians 4,000 years ago and later the Greeks cherished the glitter and rarity of the yellow metal, using it as a currency. Precious metals, with Gold at the vanguard, have been central to the development of civilization that required a monetary system backed by a stable store of value. When the 1929 US stock market panic triggered an economic collapse and a fear of “deflation”, President Roosevelt not only stopped the run on the banks and withdrawal of Government Gold, but outlawed its ownership to increase Government holdings. This allowed a 1930’s money printing campaign and accumulation of public debt to create jobs. As the war on poverty spending peaked in the Vietnam era, a new run on the banks occurred as global creditors demanded gold instead of the artificially over valued Dollars. This triggered an inflation shock that caused President Nixon to leave the Gold Standard backing of currencies in 1971 and force the world to adopt a fiat system of floating currencies backed by faith in Government. Ironically, the US shut the Gold Window for currency exchange, yet they accumulated the largest reserves of Government gold in the world.

 Due to US economic dominance and no alternate monetary system, everyone played along and drove the legal holding of precious metals to unimagined heights. Global gold prices, in Dollars, rose by more than 2,000% from 1971 to 1980 along with record consumer price inflation. During the same period the US Dollar fell over 20% relative to other major currencies. It was during the consumer price spiral of the 1970’s that gold was considered an excellent hedge against inflation and Government instability. However, over time the price of precious metals delinked from inflation and were more directly tied to the US Dollar. With inflation adroitly managed since the fiat currency inflation shock of the 1970’s, 1st world countries maintained low consumer inflation (CPI) in line with Central Bank targets. That unblemished record of monetary manipulation since the 1980’s ended temporarily this year due to excessive fiscal and monetary stimulus that was accelerated despite thew clear and present danger of soaring inflation. If the Fed had been less focused on potential new waves of Covid and the White House less concerned about missing the traditional 1st term spending splurge, it’s likely the resulting smaller consumer spending boom would have curtailed inflation far faster. What this economic and monetary experiment of 2021-22 did prove was that inflation can surge while gold falls. Throughout most of 2022 the CPI remained at 40-year highs, so has the US Dollar, yet Gold has fallen to 18-month lows. Now investors can clearly see that Gold has no direct connection to out of control prices and is a poor hedge against inflation, but an excellent hedge against a falling dollar. 

With the US economy buffered from much of the worst part of the energy and food problems of the world due to our self-sufficiency, our currency has appreciated steadily the past 2 years due to the latitude of the Fed to raise rates aggressively in a stronger economy vs the rest of the world. The tighter monetary policy in the US compared to our trading partners keeps our currency supreme and lower commodity prices relative to our trading partners. With the Fed hinting they will keep raising rates until the economy or CPI breaks, investors are waiting for obvious signs of a recession. When unemployment jumps well over 4% and the record spending on travel today normalizes, that is when falling inflation will trigger the Fed to take a credit tightening timeout and forecast a future pivot toward lowering US interest rates vs the world. It may take a few more months, but a much weaker US economy is needed before the Dollar begins a longer-term decline, sending gold and precious metals higher. Gold is due for a bounce higher in December, but more time is required before a weaker Dollar and economy is ready to trigger a new Bull market.





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