At the end of the last century, nothing seemed more obvious: the price of gold bullion would go up. We pass over the previous 20 years, in which the same blindingly obvious truth practically bankrupted us. But there’s nothing quite like two decades, back-to-back, in which the price of gold, his favorite commodity, falls continuously, to grind down a man’s youth, wear away his pride and polish off his fortune. On the other hand, there’s nothing like a gold bull market to perk him up again.
In 1980, the gold price peaked out at $850. Year after year, it went down. And year after year, we gold bugs became less sure of ourselves. The dollar ‘should’ fall, we kept saying to one another. Gold ‘should’ go up. Instead, gold went down until it hit a bottom at $253 almost twenty years later. And this was in a period in which the dollar was losing purchasing power every year, too. Adjusting for inflation, gold bullion lost about 92% of its value. By then, our confidence and our money were almost all gone, but at least we had a full tank of humility. Of course, we’d rather have the money. But that is just the way the financial markets work; if you live long enough they will make a fool of you twice…coming and going.
Then, in July of 1999, the long bear market in gold bullion was over. We bought at $300, hesitantly, not sure prices wouldn’t keep going down. At $400, we were still buying…cautiously. Then at $500, we called for more, practically sans soucis. At $600….$700…and even $800, we happily added to our stash. And then, last year, the gold price passed the $850 mark — finally, we broke even on the Kruggerands we had bought in 1979! We guessed it would go up more – at least to $1,000. And now that it has almost hit the $1,000 mark, maybe it is time to think twice. What if gold were to take another 20-year dive? Anything is possible, isn’t it?
Yes, we live in a world of remarkable wonders. Who would have imagined 30 years ago that that communist China would soon have the world’s fastest-growing economy and Americans would have to borrow from the thrifty Chinese to maintain their standards of living? Back then, they were still waving their Little Red books of Mao’s silly quotations…and trying to make steel on their backyard barbecues. And who could have known that Gordon Brown was the world’s biggest chump when he sold Britain’s gold bullion in 1999…at the very bottom of the 20-year bear market?
But even at today’s price around $975, gold is still less than half the inflation-adjusted high it set the year Ronald Reagan moved into the White House. And think of all that has happened since then! For one thing, more gold has come onto the market. Gold is never destroyed or used up. Still, an additional ounce of bullion of it is much harder to make than a crisp, new $100 bill. You have to find it and then dig it up out of the ground. That’s why the world’s gold supply increases only about 2% to 3% per year. But the supply of the paper money – in which gold is calibrated – goes up much, much faster, at least 4 or 5 times as fast over the past 30 years. And the world’s assets – also measured in paper money – have skyrocketed too. Our houses are worth 3, 5, 10 times as much as they were in the early Reagan years. So are our stocks. What’s more, now there is trillions of dollars worth of tradable financial assets in places where none existed at all in ’79 – such as in India, China, and the former Soviet Union.
Gold began floating on this flood of liquidity nine years ago. It has doubled…and doubled again. Since 2001, it has gone up 240%. Since Ben Bernanke began cutting rates on Sept. 18, 2007, it has gone up 37%. And if you believe in the volume theory of money – and we do – you can reasonably expect its price to keep going up. Gold is, ultimately, money and it is also the world’s ultimate money. Adjusted for inflation, it will have to go up to $2,500 or so, just to match the peak set in 1980. Most likely, it will go far further; we’re no longer young and foolish enough to think we know where.
What could go wrong with this forecast? When we were callow and clever, we didn’t worry about such things. But now, we put a ‘probably’ before every verb, and take it for granted that Plan A won’t work and the car won’t start in the morning when we have an important meeting.
Investing in gold bullion at $253 per ounce was one thing. Like robbing a liquor store; you could scarcely miss. But buying gold at $1,000 is another matter, more like robbing a bank. Theoretically, a big security guard like “Tall Paul” Volcker could appear at any minute. Unlike Greenspan or Bernanke, he might take his duty to protect the dollar seriously. He could raise rates and tighten lending standards; the price of gold could fall.
But it is extremely unlikely that the Fed will raise rates any time soon. Mike Huckabee will be elected as the new Pope first. Bernanke is no Volcker…and the America of ’08 is not the same as it was during Reagan’s ‘Morning in America’ years; thirty years ago the U.S. economy was strong enough to take Paul Volcker’s bitter medicine. Now it is evening; the U.S. economy is weak and tired. With today’s debt levels, Volcker’s dose of 15% prime rates would probably kill it.
A more likely threat to gold bullion is that the world economy will enter a long, slow Japan-like slump – despite Bernanke and company. Prices for just about everything would fall — including gold. While that is a possibility, it does not seem imminent, and its first stages are likely to bring a boost for gold anyway. Initially, investors would turn to gold as a safe haven against bankruptcy and default. Later, they may wish they held more cash…but for the moment, investors’ money is safer in Kruggerands than in sterling or dollars.
The classic investment advice is to divide your investment portfolio into thirds, with one third in property, another third in stocks and bonds, and the final third in precious metals – notably gold bullion. That’s still good advice, even with gold at $1,000. And this is much easier to do than it was in the ’70s; now there is an ETF, with the symbol GLD, which follows the gold price.
For what it is worth, we are at least as sure that the gold bull market will continue now as we were in January ’80.
for Markets and Money