Gold’s Summer Price Performance and the Prism of Uncertainty

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Golds Summer Price Performance and the Prism of Uncertainty
Shopping for gold now, before the price goes up…
Public domain image by Joseph Hendricks, U.S. Navy

It’s tradition to remind gold investors that summer is the weakest quarter in the year for the metal. Lackluster performances in June, July and August tend to be the norm.

Yet an analysis on Seeking Alpha highlighted why this year, gold’s summer woes could easily end with a tepid June.

Gold often outperforms even during its worst quarter

As the analysis notes, it’s not unheard-of for gold to outperform during its worst quarter. That’s precisely what happened two years ago, as the metal moved to post a then-all-time-high of $2,070 in August.

While the analysis cites stock market panic as the primary reason, the truth is that broad uncertainty was by and large the real driver.

Let’s not forget that, traditionally, all financial markets are more thinly-traded in the summer. Wall Street flees the concrete canyons of Manhattan to sip single-malt Scotch in the Hamptons, or relocate to their summer homes on Nantucket and play sailboat on their yachts.

Financial markets don’t slow down, not exactly, but overall, volume tends to decline. Volatility, too, tends to be lower during the summer months (here’s a 20-year retrospective). Although there’s no obvious and pleasing pattern in the chart, volatility peaks tend to happen less often when so many traders are away from their desks.

Overall, volatility and gold’s price tend to be negatively correlated, albeit weakly. You’d expect a stronger negative correlation, wouldn’t you? Keep in mind, though, that old Wall Street saying, “In times of crisis, all correlations go to 1.”

So how’s this summer shaping up? Another snoozefest for gold?

It probably depends on inflation reports…

Are we one inflation update away from a new gold all-time high?

Today’s economic environment seems even more bullish for gold. May’s 8.6% CPI year-on-year increase marked the third consecutive month of what’s shaping up to be an inflation superspike. May’s report affirmed that, so far, there haven’t been any improvements. Rather the opposite.

Remember, the last two inflation superspikes both happened during  the 1970s, during the stagflation episode. Gold’s price tripled during the first bout, and quadrupled during the fourth.

The theme of inflation forcing the Federal Reserve to tighten monetary policy, and a subsequent train wreck in the stock market? That happened in the 1970s, too. So what’s different this time?

For starters, the benchmark interest rate back then was 13% compared to 1-and-a-fraction percent as it stands today. With that in mind, thinking of bonds as a credible alternative to gold would be outlandish.

The disparity in the rates further places into question what difference the Fed can make to stop inflation – without cranking the Effective Federal Funds Rate into double digits and above. (Just think of the howls we’d hear from Wall Street if that happened…)

The analysis points out that the current inflationary superspike isn’t likely to end until the dollar supply is normalized. In other words, you can’t inflate the money supply by 40% (this isn’t a joke, look at the chart) without expecting these kinds of consequences!

The Fed is trying to do this with tightening, but it’s already caused a recession in the U.S. and other nations, also playing catch-up, seem determined to do the same. From Australia to South Korea, Canada to the Euro zone, a global downturn seems nigh inevitable. (Many are already calling out Fed officials and saying that they’ll have to revert to an easy-money policy sooner rather than later – before even raising interest rates above 2%!).

Say the Fed does blink in the face of a stagnating economy – what prospect will be left besides hyperinflation? Recent polls showed that inflation is at the forefront of Americans’ minds and consumer confidence is low. It’s not clear what could bring a change of hearts.

All of this indicates a heightened demand for gold this summer. Wall Street may check out for the summer. Big traders may not be at their desks. But we seriously doubt that the average American family will be quite so complacent. With dollars buying less and less food and fuel month after month, we fully expect to see a broad-based surge of interest in gold as the inflation-resistant investment par excellence.

Don’t be surprised if the lowest days of gold’s price are behind us. We don’t expect this to be a quiet summer for the gold market.

Goldman Sachs: When Risks Rise, Gold Is Your Best Bet

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Goldman Sachs: When Risks Rise, Gold Is Your Best Bet

The current geopolitical environment highlights the many reasons gold can thrive in any scenario. It’s a reminder to the attentive investor why gold has been the financial hedge of choice throughout recorded history. Let’s examine how gold compares with other assets when market volatility, recession, geopolitical conflict and inflation are all risks that are either on the horizon, or have already materialized.

Gold vs. “digital gold”

Bitcoin has emerged to prominence for several reasons, not the least of which is its fixed-supply cap. In January, the CPI saw its fastest monthly rise since 1982, exceeding already-pessimistic inflation expectations. Investors and even those who have previously had little to no interest in actively managing their savings are growing wary of currency depreciation. In other words, as time passes, each dollar buys noticeably less. A quick glance makes a fixed-supply asset look very appealing when trillions of dollars are being printed.

Yet, in a recent note, Goldman Sachs’ analysts called bitcoin a “risk-on inflation hedge” and gold a risk-off inflation hedge. The top crypto is, for better or for worse, infamously volatile, having recently shed 50% from its November high. With clear signals of a growth slowdown and worries over a recession, the team views a long gold position as the best way to protect oneself against market downturns. Recent history has indicated that, while bitcoin and other cryptocurrencies have tremendous growth potential, their astonishing volatility is all-too-tightly correlated with speculative, “risk-on” investments. By this measure, bitcoin isn’t a suitable hedge.

Gold as the investment of last resort

It seems that traders are equally concerned and unconcerned about a conflict between Russia and the West, the latter by proxy via Ukraine. Some estimate an only 10% chance of a true shots-fired escalation. Nevertheless, there has been no shortage of scrambling among traders. Any conflict would make riskier investments, such as equities, vulnerable to a market rout. So what are some of the options traders are exploring to cover their bases?

With the cost of defensive assets going up, investors are betting on everything from French and German stocks to safety in the U.S. dollar and the yen. But one hardly needs reminding that the stock market can never really offer protection. And in the face of the highest inflation in decades, is hedging with paper currencies really a good idea?

Roberto Lottici, fund manager at Banca Ifigest in Milan, has minimized both cost and exposure to risk by doubling the gold and silver allocation of his fund to 6%. It’s a percentage many would find conservative even in the absence of huge red flags. Nonetheless, to Lottici, it’s enough to offer peace of mind in whatever scenario unfolds.

“If the situation spirals out of control,” said Lottici, “then it’s going to be one of the very few assets that can offer protection.”

That’s just the thing with gold, though: even if the Russia-Ukraine situation unfolds in the most peaceful manner possible, Lottici won’t regret his precious metals allocation. Just the opposite, as any of the aforementioned risks stands prepared to turn gold from a hedge and into a top performer.

Surging Inflation Launches Gold Rocket “To the Moon”

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Inflation is the fuel that will send the gold rocket to the moon

The Bureau of Labor Statistics (BLS)’s December 2021 inflation update pushed the cost of living to a nearly 40-year high of 7% after nineteen consecutive months of increases. A far cry from the Federal Reserve’s self-imposed target of 2%.

The bad news is, inflation is most likely headed higher. The most recent Producer Price Index (PPI) report, which tracks cost increases at the manufacturing level, measured 9.7%. The official BLS press release didn’t even try to sugarcoat the news…

the largest calendar-year increase since data were first calculated in 2010.

Gold futures climbed and continue to climb on this double helping of bad news.

As Peter Spina, president and CEO of Goldseek put it,

The most important takeaway for gold here is that gold is a rocket ship and inflation is its fuel. Now with inflation showing itself to be baked into the system and growing recognition of inflation, gold is going to benefit in a big way.

The U.S. dollar fell against most currencies after these reports. It seems as though global traders aren’t really expecting the Federal Reserve to follow through on its 3 predicted price hikes in 2022 (or maybe they’re already priced in?)

Jeff Wright, chief investment officer at Wolfpack Capital, said of Powell’s recent comments,

No fireworks, rather dovish and no surprises. Gold has done well with Powell’s ‘go slow’ management of the Fed.

On the downside, Wright said there’s a possibility that both quantitative tightening and tapering could accelerate, which would stop a gold rally in its tracks.

What are the odds?

Bond king on “recession watch”

Jeffrey Gundlach, the billionaire “Bond King” doesn’t think the Federal Reserve will be able to thread the needle and bring the economy to a soft landing.

Inflationary pressure is building. If we look at the economy, it’s undeniable that’s been supported by the quantitative easing and the Fed’s balance sheet expansion. And since that’s going away, it is just not plausible to think that we don’t have more headwinds in 2022 for risk assets and, ultimately, for the economy. The signals from the bond market are starting to look a little bit like a pre-recessionary period.

Gundlach believes gold is the best asset to hold in periods like this, when inflation consumes so much of our purchasing power and the world’s central banks don’t seem able to contain the chaos.

He’s bullish on gold because he’s bearish on the long-term value of the U.S. dollar. And when dollars shrink in value, it takes more and more of them to buy the same amount of gold. (From this perspective, buying gold early offers a sort of discount…)

Gold Is the “Best Omicron Virus Defense You Can Buy”

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Inoculate Your Savings Against the Omicron Virus with Gold

For the third time in as many years, governments around the world have declared a pandemic. What are we to expect, and is the virus likely to infect your portfolio? Gold pushed above $1,800 following the announcement, and not without reason. It was the conditions of last year that caused it to post a new all-time high of $2,070.

Since we’re already and again hearing the words like “lockdown” and “shutdown”, it pays to reassess the road so far. Especially considering today’s gold price is under $1800/oz.

Early last year, governments around the world shut down their economies and started printing money out of thin air to make up for it. It pays to note that most, if not all of these economies were already underperforming, nearing or having reached stagnation. There was a broad sell-off in all asset classes as the situation was unprecedented, and even gold wasn’t spared from the havoc. Nations, for that matter, were briefly selling their bullion as uncertainty peaked.

This time around, however, there is no broad selloff. But there was a marked one in stocks. After all, who wants to own stocks of companies that aren’t operating? Uncertainty is once again peaking, and it seems that gold is even better positioned to benefit from it.

Some present a short-term model that includes record low consumer spending, a lack of appetite for sending kids to school and a federal government that borrows anywhere between $2 to $5 trillion more to deal with this. The model might as well be titled “Economic Disaster”. Going back to the first half of last year, there were talks of how the global economy could take years to recover in a best-case scenario. We are either in, or steadfastly approaching, a worst-case scenario. Anyone touting economic recovery over the past two years was either easily duped or had other motives.

The companies were performing, but they were doing so in the same thin-air fashion as the economy itself, being propped up by newly-printed money handed to them. The same money printing caused inflation to spike to 6.2% this year, over three times the intended target, with projections that it will reach 9% and onwards to double digits next year. This is mostly the result of a $3 trillion stimulus.

The aforementioned model finds it plausible that the Federal Reserve alone could pump anywhere between $5 to $10 trillion more into the global banking system. That’s not counting other central banks, whose countries are also dealing with record inflation as a result of their own money printing.

Anyone who’s watching these inflation numbers soar can appreciate the value of a truly inflation-resistant investment. In a world where outrageous inflation and currency debasement are one of the few things that have emerged, physical gold is becoming less of an investment and more of a must-have household item.

Inflation? Stagflation? Gold Is Fine With Either

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Inflation? Stagflation? Gold is fine with either...

Gold’s price has seen some action recently, again climbing past strong resistance at $1,800 to a high of $1,813 before finishing the day above $1,790. Does this mean that market participants are finally, but very slowly, waking up to the economic reality? TD Securities’ analysts seem to think so, having initiated a $1,850 and $2,000 long call spread for gold’s price for April.

In their recent report, the commodity analysts said that inflation, stagflation and dubious tightening all play a part in the bullish forecast for the next four months. Even with nothing to support the notion, the markets still seem to be fully pricing in some kind of Federal Reserve tightening. This includes a reduction of the balance sheet, hikes and so on. This sentiment has been weighing heavily on gold over the past months, with November being the targeted date. It remains to be seen how the Fed intends to tighten its monetary policy in the current environment.

Wade Guenther, managing partner at Wilshire Phoenix, recently told Kitco that he believes the Fed won’t be able to rein in inflation. Guenther has also dismissed the idea that supply chain disruptions are being caused by consumer spending, something that has garnered quite a bit of ridicule as of late, and supports a far more grounded view that the cause is across-the-board inflation.

With the ever-hawkish Fed Chair Jerome Powell going as far as to admit that these disruptions could persist well into next year, it’s turning inflation into an even bigger problem, and also a worldwide one. In Canada, the latest report on consumer prices showed that they have risen to their highest level in more than a decade.

As TD Securities’ analysts noted, this is part of why stagflation is becoming a greater concern with every passing week. The threat of energy prices rising has turned into what the analysts call a global energy crisis, one that seems to be intensifying. There is also much to be said about crumbling economies, an issue that everyone seems to be ignoring right now. With hyperinflation being mentioned on one end and parallels being drawn with the Great Depression on the other, we might yet see the term stagflation redefined.

Another interesting bit of information is that speculators have, mostly based on optimistic sentiment, liquidated more than 190 tons of paper gold this year. Yet the massive dump, as opposed to slicing the metal’s price, only seems to have thwarted its rise for the time being.

Regardless of whether we see inflation or stagflation, TD Securities says that the conflux of factors appears to have primed the gold market for a very strong move upwards by early next year. In the shorter term, Saxo Bank’s head of commodity strategy Ole Hansen said that a breakout above $1,835 could move a lot of interest away from the stock market and into gold.

Inflation, Other Forces Will Continue to Push Gold Higher

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Inflation, Other Forces Will Continue to Push Gold Higher

As Forbes contributor Frank Holmes points out, two weeks ago, the greenback hit its highest level in about a year. It beat a basket of other currencies in doing so, and once again showed strength against expectations. But was it a show of strength on the U.S. dollar’s part, or a show of weakness on the part of foreign currencies?

We’ve mentioned in the past that gold has been hitting all-time highs in currencies around the world heading up to 2019. Only when it comes to the greenback has its rise been slow, last year notwithstanding. And sure enough, checking the gold market’s price action in dollar denominations shows a familiar correlation: dollar up, gold down.

Dollar’s effect on gold’s price

Yet simple logic demonstrates that gold has little to worry about regarding dollar strength. With trillions of U.S. dollars printed last year, it’s questionable where that strength is coming from and how long it can persist.

Interestingly, despite the dollar’s relative strength recently, oil’s price has skyrocketed over the last few months. Americans notice at the gas pump when filling their tanks. However, oil price has much more far-reaching consequences than an extra $20 spent at the convenience store. Higher oil prices mean higher transportation prices, driving up costs of everything from fresh foods to imported manufactured goods.

Which leads us directly into the highest inflation in the last 30 years…

The Fed is losing control of inflation

The Federal Reserve has done nothing but downplay the threat of inflation so far. The PCE index, which monitors the prices of goods and services purchased by U.S. consumers, rose by 4.3% year-on-year in August. It was the ninth straight month of massively surging inflation, and the highest figure in the last 30 years.

It just so happens that the PCE index is the Fed’s preferred measure of inflation, which might explain why Fed Chair Jerome Powell voiced expectations of ongoing market disruptions, which are intrinsically tied to inflation, well into next year. Quite a statement for someone promising to embark on a major tightening program next month.

As just one example of the kind of damage that inflation is doing, home prices, as measured by the S&P CoreLogic Case-Shiller National Home Price Index, rose 19.7% in the year ended July 2021. Hearing that it’s the highest annual rise since 1987 is troubling. Learning that the index started in 1987 really puts this number into perspective.

The dollar’s role in determining gold’s price

One of the key points of Trump’s presidential tenure was an ongoing back-and-forth with the Federal Reserve over various things, with the greenback being near the top of the list. President Trump wanted a weaker dollar for trade purposes, often saying that China’s devaluation of the yuan is continuing to give the nation a trade advantage.

Holmes notes that while a strong dollar might sound good on paper, it’s actually harming U.S. exporters, and it’s doing so during a time when no nation can afford to have economic weakness.

How this plays out remains to be seen. And while we wait for gold to truly respond to any of these tailwinds, it’s good to remind ourselves just how liquid of an asset gold is during a time when cryptocurrencies are taking their place on the global market.

While Holmes often tells people that gold is the fourth most liquid asset, the latest World Gold Council data shows that it’s actually the second, coming only behind S&P 500 stocks. Its daily trading volume beats all commodities, government and corporate debt and even currency swaps. Even amid bouts of tepid price action, the gold market itself is as action-packed as they come.

Buy the Dip While Panic Selling in Gold Lasts

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Buy the Dip While Panic Selling in Gold Lasts

Gold has always been prone to bearish Wall Street sentiment and investor overreactions, and this was perhaps on full display after the latest Federal Reserve meeting. Optimistic GDP forecasts and hints at interest rate hikes in 2023 and onwards sent gold tumbling to a two-month low, with weekly losses above 5% percent. Yet, as usual, the drivers of the move downwards are questionable at best.

Adrian Day, president of Adrian Day Asset Management, said that the Fed meeting was actually bullish for gold upon closer inspection. He expects prices to bounce back in the short-term. Day notes that the Fed chair essentially said the government wants to rein in its loose monetary policy, but doesn’t have a way of doing it. This is clearly demonstrated by their inability to hike rates for at least two more years.

Day believes a lot of the selling was automated on some level and that investors will soon return to their previous bullish outlook.

Colin Cieszynski, chief market strategist at SIA Wealth Management, said that markets were looking for an excuse to rebalance from technically overbought gold and oversold U.S. dollar, and that the Fed meeting was just that.

Cieszynski said that it wasn’t so much the Fed’s projections that caused the pullback, but rather the signal that officials are looking for a way to tighten monetary policy. While the statement alone was enough to send the markets selling, Day is among the numerous experts who don’t see any feasible way for the Fed to either tighten its monetary policy or subdue inflation.

The latter has been an especially prominent talking point as of late, with core and consumer inflation rising at their fastest pace in over a decade and consensus forecasts that more inflation is coming. Phillip Streible, chief investment strategist at Blue Line Futures, said that his firm has been waiting for an opportunity to buy gold.

Streible said his company has already started buying the dip, noting that they are positioning themselves for higher inflation accompanied by weaker-than-expected growth later in the year.

Last week’s Kitco News Weekly Gold Survey of 18 Wall Street analysts showed that 56% were bearish on gold in the short-term, with bullish and neutral sentiment tied with 22% votes for each. A Main Street poll with 2,174 respondents showed considerably more optimistic sentiment, with 52% of voters expecting gold to bounce back this week, 31% expecting additional pullbacks and 17% voting neutral.

“Gold as an Inflation Hedge” to Push Gold Price to $1,850: Scotiabank

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Gold as an Inflation Hedge to Push Gold Price to $1,850: Scotiabank

In their monthly commodity report, Scotiabank went over their expectations for gold and silver in the face of what they refer to as the best economic growth in 40 years. This, of course, refers to the bank’s forecasts that the U.S. economy will expand by 6.2% this year and 4.4% in 2022.

Economic Forces Driving Gold Higher

These figures would normally be staggering, yet context is very much a key factor in this scenario. A growth of this magnitude has only been made possible in the form of a rebound from what most agreed was the biggest blow to the U.S. economy in the last century. Unsurprisingly, investors have been quick to adopt positive sentiment and have pushed both bond yields and the U.S. dollar higher, creating tremendous short-term pressure for gold.

Nonetheless, as gold price bounced back-and-forth between the $1,700 level, it pays to reassess the foundations on which the rebound, as well as the supposed growth, lie. To facilitate a recovery, the Federal Reserve had to commit to a zero-interest-rate policy along with pumping trillions of dollars into the economy. How soon and in what way this prolonged loose monetary policy will affect the nation has been the subject of plenty of speculation, but inflation seems to be on the mind of even the most optimistic market participant.

The newly-printed dollars have to go somewhere and wind up debasing the currency, and many economists believe that the effect could be felt the hardest in the form of a sudden inflationary spike. The general consensus is that prices for all base goods will see a considerable rise over the next five years. (In other words, inflation.)

$1,850 Average Gold Price per Ounce in 2021

In good part because of this, Scotiabank’s team is sticking to the average $1,850 gold price forecast for both 2021 and 2022. While the bank projects strong economic growth around the world, the ongoing negative developments surrounding the health crisis leave much to be desired in terms of certainty. It also pays to notice that countries around the world were reporting stagnant or contracting growth ahead of the crisis, with Germany’s manufacturing sector being just one example.

Regardless of how global growth unfolds over the next two years, Scotiabank sees silver as an investment that is poised to appreciate even more than gold.

Scotiabank’s Case for Silver

In the event of another flare-up, silver is well-positioned for a flock to safe-haven assets such as the one seen last year.

While manufacturing activity was contracting in 2019, industrial demand for silver was growing due to a heavy push for green energy, and it is also something that the Biden administration has emphasized. Silver is a critical component for solar panels, and also has eco-friendly uses in high-capacity batteries, water purification and electronics manufacture.

If the manufacturing sector indeed recovers as sharply as Scotiabank forecasts, silver stands to gain significant support so long as nations’ economies grow, and even more so as the developed world pivots toward a lower-carbon footprint.

A Stagflation Flashback Ahead? Keep an Eye on Gold

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Stagflation flashback ahead? Keep an eye on gold

Ever since gold’s correction from August’s high, market participants have been watching closely as to whether we will bear witness to a similar scenario to the one between 1971 and 1980. Back then, economic conditions eerily mimicked what seems to be on the horizon today: a stagflation environment propelled by low growth, rising prices and excessive interest rates.

That bout of stagflation came, most would agree, as the result of the U.S. dollar being untethered from gold. The metal subsequently jumped from its $35 tether valuation to $200, corrected to $100 and then soared far above to reach $850 within a few years’ time. What might we guess, based on this historic pattern?

Today there’s no tether-based gold valuation. Recent calls for a return to a gold standard or a similar tangible backing of the dollar from various corners have very much driven that point across.

The Federal Reserve maintains inflation is running well below its stated annual target of “around 2% on average,” and that they know this because their measurements are accurate. We are forced to wonder how that’s possible, given the historic amount of money printing. Even such a luminary as former U.S. Treasury Secretary Lawrence Summers fears the nation could be facing its biggest inflationary problem in 40 years.

Wealth preservation and inflation concerns

Reports from various government mints show that precious metals purchases have maintained their record-shattering pace over the past few months ‑ regardless of fluctuations in price. In other words, buyers seem very much concerned about long-term wealth preservation and aren’t deterred by momentary corrections.

And it appears they have every right to be.

With the debt bubble ballooning and government deficit perpetually increasing, many wonder how and when the Fed will choose to address these issues. In the absence of a debt default (which is viewed as highly unlikely), the remaining options boil down to spending cuts, tax increases or allowing inflation to run its course.

Spending cuts mean austerity, less services for taxpayers, less money for special interests. That’s simply not a politically tenable path.

Tax increases could raise funds for federal coffers. On the other hand, taxing the wealthy all too often results in nothing more than emigration to more wealth-friendly nations. To raise taxes on a thing is to risk driving it away.

That leaves us with inflation, which seems to be the Fed’s favored option. And it is almost certainly already underway.

Inflation destroys debts

The Fed’s comments indicate the official sector has braced for a public response over claims they wouldn’t oppose inflation running past the desired target. Given how the Fed measures inflation, it seems citizens are especially vulnerable to being caught by it off-guard in the form of a sudden spike in consumer prices.

On this topic, Indonesia’s 30% increase in tofu prices since December, Russia’s 60% rise in sugar prices over the last year and a 20% spike in grain prices are worrying examples of how consumer goods can shoot up both suddenly and unevenly.

The market response to a high-inflation environment is fairly well laid-out. An initial boost of the stock and real estate sectors is followed by erosion of purchasing power, together with excessive monetary demand, a loss of confidence in fiat currencies and an ongoing increase in money printing.

Look familiar? Initial boost in stock and real estate? Check. Erosion of purchasing power? See food inflation data above (or recent stories about manufacturing concerns over steel or lumber prices). Excessive monetary demand? Yes in capitals; businesses are issuing new debt at a record page. Might the boom in bitcoin and other digital currencies have something to do with the loss of confidence in money backed by nothing but faith? Increased money printing: yes, again at record levels.

What does the future hold?

It should come as no surprise that the public have flocked to precious metals, with the latest social-media driven rush to silver being perhaps the first of many warnings.

When inflation does hit in such a way that not even distorted CPI can disguise it, the small subset of the public who have invested in gold and silver have managed to preserve the majority of their wealth. The rest scrambled to secure any sort of hard asset with their rapidly-depreciating currency.

The End of the Gold Standard and the Explosion of Federal Debt

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The End of the Gold Standard and the Explosion of Federal Debt

2021 marks the 50th anniversary of the U.S. dollar going off the gold standard. This is a timely if sordid occasion. In response to the crisis, last year saw the Federal Reserve issue an unprecedented multi-trillion dollar stimulus in what seems to be a precursor of things to come. The influx of free-floating money has brought on inflationary concerns ranging from those depicting a late 1970s scenario all the way to a Weimar worst-case.

The separation of gold from the dollar in 1971 did much for both in the decades to come. The loss of the dollar’s purchasing power was expedited in force, and governments learned that they could respond to any crisis or even need by simply printing more money. Officials were also far less compelled to think about the consequences of government spending, and the comparison of federal debt now versus 70 years ago shows exactly that.

Federal debt growth over the last 60 years

In 1960, the federal debt amounted to just over half the size of the U.S. economy. Today, it sits at 130% of the U.S. economy, paired with a $28 trillion national debt figure that seemed unfathomable decades prior. The rise of the Modern Monetary Theory (MMT) shows just how unfathomable the debt is, along with any solution to it. Proponents of MMT say that governments should freely print more money whenever needed, and in many ways, it’s difficult to argue that MMT hasn’t already been implemented.

The M1 money supply, or the amount of currently available liquidity, rose in December by a record 67% year-on-year. And with plans for a $1.9 trillion stimulus package to be issued in the short-term, the path to inflation appears to be unavoidable.

Gold as a store of value

Gold’s tale is one of sharp contrast. The metal became available for purchase and trading in the U.S. in 1974, and by 1980, an ounce of gold was worth $850, representing a 385% increase. Many are quick to point out that this was a high inflation period for the U.S., yet gold’s value over the coming years and decades continued to grow exponentially whereas the dollar eroded.

Today’s gold price of above $1,800 attests to that, as the metal has posted a compound annual growth rate (CAGR) of about 8%. Its scarcity, liquidity, popularity and unquestionable value have made the 50-year anniversary a particularly notable one. At no point over the past 50 years were calls for a return to the gold standard louder, as it becomes clear that faith and reassurances won’t be enough to back the dollar for much longer.

How much longer can record debt last?

Whether the Federal Reserve and the Treasury Department are considering any sort of return to money backed by gold is a matter of hot debate. The enormous difficulty of returning to the gold standard stems from, and highlights, the sheer amount of money that has been printed in the meantime.

With official gold reserves at around 261 million ounces or $493 billion, the government would need to fix the price of an ounce of gold to about $100,000 to keep the economy afloat. However implausible a return to the gold standard might seem, Americans who own gold can get just as much reassurance in their investment from the inflationary policies of MMT.

In a clear example of cause and effect, each newly-printed U.S. dollar bill makes gold more valuable and the greenback less valuable. Gold’s value increases most visibly when compared to the decreasing value of the dollar.