Understanding Long Term Moves in Gold, What’s Going On? – Mish Talk

A long-term chart suggests the real driver for gold is not inflation, not the dollar, not conspiracies, not China, and not oil, but rather faith in central banks.

Timeline Synopsis

  • Nixon closed the gold redemption window on August 15, 1971. The price of gold was $35 an ounce.
  • Faith in the dollar and central banks collapsed. Inflation soared.
  • Gold peaked at $850 per ounce on January 21, 1980.
  • That’s when Fed Chair Paul Volcker jacked up interest rates to 20 percent to squash inflation.
  • Volcker was followed by Alan Greenspan, deemed the “Great Maestro”.
  • There was inflation every step of the way yet, gold fell from $850 an ounce to $250 an ounce proving gold is not an inflation hedge.
  • In the period between 1999 and 2002, Gordon Brown, UK Chancellor of the Exchequer (roughly the equivalent of the US Secretary of Treasury), sold off 395 tons of gold, showing great faith in fiat currencies over gold. This event is known as “Brown’s Bottom”.
  • To bail out banks that invested in worthless DotCom companies and also lost then huge amounts of money on bad loans to South American countries Greenspan recklessly lowered interest rates and held them too low too long.
  • Gold took off thanks to Fed stimulus that culminated in a housing bubble and bust.
  • Gold, like everything else sold off hard in that bust. In March of 2009, the Fed suspended mark-to-market accounting of bank assets. The stock market took off and so did gold.
  • The Fed launched QE and so did the ECB. Credit stress in the EMU was also brewing. There was a huge risk of the Eurozone would break apart. Greece was the weak link but fears were of a cascade if Greece left.
  • On 26 July 2012, the President of the European Central Bank, Mario Draghi, delivered a speech at a conference in London that brought a crucial turnaround in the euro crisis.
  • Mario Draghi said “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.’
  • What did Mario Draghi do? The answer is amusing. Absolutely nothing. However, eurozone bond yield collapsed, temporarily saving the day.
  • In 2016 the Fed and ECB were both engaging in more QE and sovereign yields went negative in Europe and Japan. Gold blasted to a new high, double topping in 2021.
  • In 2022 the Fed finally got around to hiking. Gold started dropping hard in 2022 despite the fact that year-over-year inflation topped 9 percent. Once again this shows gold is a poor inflation hedge.
  • The Fed has kept up a steady stream of hawkish talk and here we are.

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