The financial world is once again buzzing with familiar advice: invest in gold. A recent headline from CBS News boldly declared, "Inflation rose in August. Here’s why a gold investment makes sense now." This sentiment echoes loudly, particularly when inflation figures show an upward trend and whispers of economic uncertainty begin to circulate. Yet, for those with a longer memory in the markets, such pronouncements are often met with a healthy dose of skepticism, born from past experiences and hard-learned lessons. Is the current enthusiasm for gold truly a sensible move, or are we witnessing the prelude to another significant market test, reminiscent of a historical "Death Valley" for investors?
Recalling the Great Investment Event of 1980
To understand the present, it is crucial to revisit the past. Many seasoned observers recall the "greatest investment event ever" held in New Orleans, an era that shaped the investment philosophies of many. It was a time of grand pronouncements and fervent beliefs, where luminaries like Margaret Thatcher and Milton Friedman shared their insights. Thatcher famously articulated the principle that "societies that allow individuals to use their talents to create and flourish…also allow their economies to flourish." Her words highlighted the intrinsic link between individual freedom and economic prosperity, a timeless truth.
Milton Friedman, a champion of free-market capitalism, also stood before the crowd, asserting that "central planning never worked." He advocated for conservatives to actively resist the inherent tendency of politicians and bureaucrats to expand their power, a warning that seems ever-relevant. Ironically, it was this very same Milton Friedman who played a pivotal role in what many consider one of America’s most significant financial shifts: the encouragement of the Nixon administration in 1971 to detach the dollar from the gold standard. This decision ushered in an era of monetarism, a form of central planning for the nation's money system.
Friedman's Experiment and Gold's Initial Surge
Friedman's theory suggested that a committee of bankers and economists could manage the economy by setting interest rates and carefully expanding the money supply, ideally at about 3% per year, to maintain price stability. The Federal Reserve, armed with this new mandate, would "loosen up" on credit during economic downturns and "tighten back down" in prosperous times. However, Friedman, despite his brilliant economic mind, was perhaps "woefully ignorant about politics…and had a dangerous shortage of cynicism in regard to human nature." His oversight—allowing federal authorities the unchecked power to print money—set the stage for unforeseen consequences.
This monetary shift created an environment ripe for the emergence of figures like Howard Ruff, a former tenor turned financial soothsayer. At the 1980 New Orleans conference, Ruff’s message—"ditch the dollar, buy gold"—resonated powerfully. His advice had proven prescient over the preceding five years, as the price of gold skyrocketed from a mere $35 to over $600 an ounce. This remarkable surge fostered a widespread belief among investors, often dubbed 'gold bugs', that gold was the only true money, and that paper currencies were destined to revert to their intrinsic value of zero. Amidst this fervor, Ruff boldly predicted, "Gold will go to $5,000 an ounce." The notion of "Weimar…here we come!" became a rallying cry, implying an impending hyperinflationary collapse of the dollar.
The Volcker Shock and the Long Winter for Gold
However, the narrative took a dramatic turn. On January 21, 1980, gold reached a high of $875, a peak that, unbeknownst to many at the time, marked the beginning of a prolonged decline. The fate of gold was decisively altered by another key figure: Paul Volcker. On October 6, 1979, Volcker, then Chairman of the Federal Reserve, delivered a technical but profoundly significant announcement. He warned of his intention to bring inflation under control by "emphasizing the supply of reserves and constraining the growth of the money supply through the reserve mechanism." While his predecessors had made similar promises, Volcker's resolve was different. His approach gained critical political backing with the election of Ronald Reagan on November 4, 1980, empowering Volcker to embark on a relentless campaign to crush inflation.
The consequences for gold investors were severe. Far from reaching $5,000, gold plummeted to $259 over the subsequent two decades. This represented an approximate 80% loss for investors, factoring in inflation. In real terms, the price of gold languished, failing to reclaim its 1980 value for an astonishing 40 years. It was only recently, as Barrons reported, that "Spot gold prices rose 0.1% on the session to $3,656.40 an ounce, topping the inflation-adjusted record of $3,498.77 an ounce established in 1980." This recent surge was driven by new economic data suggesting "mounting stagflation risks in the world’s biggest economy," with rising jobless claims and quickening inflation.
Another Death Valley? A Question of Prudence
Today, the cycle appears to be repeating. Once again, the case for investing in gold seems impeccable. Individual investors, central banks, and investment funds are all reportedly increasing their gold holdings. The narrative of gold as a safe haven against inflation and economic uncertainty is potent and widely disseminated. But recalling the lessons of the past instills a crucial sense of caution. Are we on the cusp of another profound learning experience, another "Death Valley" for gold that could span decades? Is this another opportunity for investors to lose their "investment virginity" by succumbing to the persuasive allure of a seemingly flawless argument, only to face significant losses and a long wait for recovery?
History, though it doesn't repeat itself precisely, often rhymes. The current economic climate bears a striking resemblance to the conditions that preceded gold's last major correction. While the arguments for gold may seem compelling on the surface, a deeper understanding of market dynamics and historical precedents urges prudence. It is essential for investors to look beyond the immediate headlines and consider the broader context, armed with the lessons learned from past cycles. The question remains: will the present generation of investors heed these historical warnings, or are they destined to rediscover the hard way that even the most glittering promises can lead to a long and arduous journey through the financial desert?
