Published by
William Anderson
Gold and Precious Metals in general have always been an emotional topic in the investing world - typically you either love them or hate them, but most people don't understand them. I want to change that with this article about Gold's performance in different regimes. The "regimes" are focused on interest rate dynamics, government spending & geopolitics.
1970-1980 Inflation & High Interest Rates
In 1971 President Richard Nixon was forced to end the Gold Standard, which allowed convertibility of US Dollars to Gold because the system was coming apart. The government spending for the Vietnam war and other social programs meant that there were too many dollars floating around and foreign countries started to redeem USD for Gold causing the U.S. to lose it's Gold reserves. By ending the Gold Standard, Nixon opened the door for the Government to print money without worrying about gold backing, which also let Gold "float freely," facilitating true price discovery (Gold went from $35/oz in 1971 to over $800 at the peak in 1979). The entire decade was characterized by oil shocks, high government spending, out of control interest rates, and political chaos. It was a perfect environment for the yellow metal to outperform stocks.
1980-2000 Disinflation & Falling Interest Rates with Globalization
After the oil shocks, inflation & high interest rates of the 1970's, there was a period of "disinflation" for the next ~20 years. Interest rates trended lower (bond yields declined) and real returns on financial assets improved as confidence in fiat money was restored. Globalization was a massive deflationary force during this time as China was gradually integrated into the global economy which allowed for the expansion of supply chains, importing of cheap goods, and offshoring of labor-intensive manufacturing. This capped wages and controlled input costs which kept a lid on inflation - all of these were tailwinds for the Stock Market which benefits from falling interest rates and strong productivity growth. This was a very poor time for Gold, which was in a secular bear market until 2001.
2001-2011 Tech Bubble & GFC
In March of 2000 the Tech Bubble burst and drove the NAZDAQ down over 80% & the U.S. economy dipped into a mild recession by 2001. In response, Fed Chairman Alan Greenspan slashed interest rates from 6.5% to 1% in 2003, flooding the system with cheap credit. Along with 'innovations' in Mortgage-backed securities, home prices soared along with borrowing and inflated a huge bubble in housing culminating in the 2008 Great Financial Crisis. The price of Gold had bottomed around $250/oz in 2001 and moved up to around $800 in 2008 before correcting 25% from the deflationary impulse of the GFC. Then it ran from $500/oz to $2,000/oz on fears of a debt crisis in Europe and the US Federal Reserve experimenting with Quantitative Easing.
2011-2019 Post-GFC Recovery
The recovery after the financial crisis saw meager growth in the economy which is typical after a deflationary event like a housing collapse. Financial assets did well, mostly because of Quantitative Easing (QE) and falling interest rates. The Federal Reserve’s policy is basically in times of low growth, if they can inflate asset prices with QE that it will bleed into the economy and create growth. It’s beyond the scope of this article to consider if that works or not, but it’s pretty obvious that it just creates more inequality.
2020-Present day
The global economy was transformed from the COVID Lockdowns and the Government response to the pandemic. Stimulus checks, unemployment expansion, and PPP loans to businesses ballooned our fiscal deficits to record levels and they are showing no signs of stopping. In reality, the Federal Reserve can’t control inflation when the government won’t quit spending money. Politicians may show concern for inflation and the debasement of our currency, but this has been happening since the Roman emperor Nero debased the currency in the first century. In a debt-based monetary system, it’s likely that this will continue to happen. In order to protect yourself, you buy hard assets like Precious Metals.
What Kind of Period Are We Currently In?
Since 2022 we have had the Ukraine war, China-Taiwan increasing tensions, the Israel-Hamas/Israel-Iran Escalations, and a global arms buildup via worldwide defense-spend surging. It’s pretty clear we have geopolitical tensions building along with economic challenges in the form of out of control inflation and government spending. With equity valuations continually pushing new highs, the thought of investing in stocks today is challenging. It's highly likely that we are in an era of Hard Assets and I encourage ownership of physical Gold & Silver, and Precious Metals in general. Glancing at the various 'regimes' I outlined in this article and considering our current political situation globally, it's difficult for me to see when Gold & Silver wouldn't outperform most other assets.
