Gold blew through $3100 $3200 $3300 $3400 / ounce this morning.
Source: Kitco, Inc.
We’re now a little over $100 below the all-time high price of gold, in real (CPI-adjusted) dollars.
The last time the price of gold was at this level, in real terms, was the end of 1979/start of 1980. Not quite half a century ago.
It may be worthwhile to reflect on how god-awful the economic situation was, at the end of 1979.
First, to set the stage, the U.S. was forced off the gold standard in 1971. This was largely a consequence of the inflation typically attributed to U.S. spending for the war in Vietnam. That’s when Nixon “closed the gold window”, and no longer allowed foreign governments to redeem dollars for gold. Prior to 1971, the price of gold in dollars was not market-determined, but instead was set (by the Treasury, I think). That went hand-in-hand with it being illegal for Americans to hold gold bullion (that is, bulk metal held solely for its investment value, not as jewelry or coins of numismatic value). In 1974, it became legal for U.S. citizens to own gold again.
Source: Federal Reserve Bank of St. Louis FRED system.
Second, the term “stagflation” was invented in the 1970s. Two Arab oil embargoes on shipments to the U.S., and the resulting energy crises, resulted in both a stagnant economy (high unemployment) and rapid inflation. That, on top of the inflation caused by (mainly) the war in Vietnam. There was, as I recall, a 12-month period in the last 1970s during which U.S. prices rose just over 18%. I believe the highest calendar-year inflation was about 14.5%.
If there is a key lesson from the stagflation period of the 1970s, it’s that a big surge of cost-push inflation — where, suddenly, there is a physical scarcity of commodities key for running the economy, and the price of those items gets bid up — handcuffs the Federal Reserve. If you study the graph above, you’ll find that, outside of the 1970s, recessions typically followed a rise in interest rates. But in the 1970s, in order to keep inflation from going totally out-of-control, the Fed was forced to raise interest rates during recessions.
A practice, which I hope it goes without saying, is generally frowned-upon in normal times. As it just tends to make the recession deeper and longer.
In any case, if you were wondering why economic policy wonks make such a big deal out of the potential for stagflation, that’s the heart of it. In effect, you lose the ability for the Fed to stimulate the economy during an economic recession or depression. (Or, the Fed can go ahead and do that, but only at the cost of significantly worsening inflation.)
Post 2002: TiLite fork bearing replacement, Part 2: A short treatise on wheelchair bearings.
And if you are wondering about that “key for running the economy” phrase, just try finding (e.g.) a small bearing, for sale in the U.S., NOT made in China. I went through that exercise for the bearings used in wheelchairs, and I sure didn’t see any. And I suspect there are many classes of industrial inputs that are just like that. So, ponder running the U.S. economy with no replacement bearings for a while.
Here’s an interesting question: What was the value of imported crude oil circa 1975, as a fraction of (then) GNP (not GDP, though nobody cares about the difference between the two). Based on the data, I make it out to be about 1.1% of GNP.
Last year, imports from China alone ($440B) amounted to about 1.5% of US GDP (about $28T). (In terms of the magnitude, I mean. Imports are not part of GDP.)
But in addition, now, because the MAGA-run U.S. can no longer be trusted, for much of anything, the U.S. appears to be losing its status as international reserve currency, and U.S. treasury bonds are losing their place as safe-haven investments.
Stir in the fact that markets are forward-looking.
My takeaway is that we — that is, MAGA-America — we deserve to set a new record price of gold.
And we are just about to reap everything that comes with that. High gold prices don’t cause harm. They’re a sign that people are willing to pay a huge premium to try to sidestep the worst of the economic losses going forward.
In other words, the price of gold is rising out of sight precisely because a lot of people see a lot of economic pain ahead. And we’ve trashed one of the major asset classes (U.S. Treasuries) that they would run to, in more normal times.
That’s how I interpret these particular entrails.
Conclusion
I don’t think the near-record price of gold is a fluke. I think it’s a rational reaction to a world where America dances to the tune of irrational MAGA economic policy.
At least the economic debacles of the 1970s weren’t entirely our fault. A decades’ worth of energy crises was the prime mover for those economic hard times. Following on the heels of inflation set off by the war in Vietnam.
Now? It’s pretty much a case of shooting ourselves in the foot. For no reason except that The Leader decided to pull the trigger.
I’m guessing it’s going to take the next Great Depression before those who elected Trump will change their minds. If then. Until then, we remain at the mercy of whatever crazy-ass notions catch The Leader’s eye.
Meanwhile, I’m shopping for a polyester leisure suit. If we’re headed back to the ’70s, I might as well dress the part.
