Why a 500% Jump in Gold Prices Isn't Far-Fetched

If there is a repeat of what happened in the 1970s, gold could see enormous gains.
By Kim Iskyan ,

One doesn't have to be gold bug, think that a financial apocalypse is around the corner or know that predicting anything will increase 500% in value sounds a little crazy to think that history suggests that the precious metal's price could soar.

The decade that brought us disco music, velour jumpsuits and Pong also saw a 2,300% jump in gold prices. Gold traded at $35 an ounce in 1971, but by the beginning of 1980, it had reached $850 an ounce.

Meanwhile, stock markets were volatile but with ultimately flat returns, it was a lost decade.

Due to double-digit inflation, a weak dollar, political instability and an oil crisis, investors in the 1970s were nervous and fearful. This uncertainty drove more investors into gold, as they viewed the metal as a global currency and a store of wealth.

By the end of the decade, there was a veritable gold rush.

But sometimes history repeats itself.

Today's gold market rally has a lot in common with what happened in 40 years ago.

Here are three ways.

1. Crisis of confidence

The specific economic problems are different now than they were in the 1970s. Today, low oil prices are a problem, deflation is looming and recession is very possible.

But there are other broad parallels between the two decades.

In 1979, then President Jimmy Carter described a "crisis of confidence" in government and the future. This crisis eventually reached Carter himself when he lost re-election to Ronald Reagan in 1980.

And what campaign slogan did Reagan use in 1980? "Make America Great Again," yes, the same slogan Republican Donald Trump has used for his presidential campaign this year.

The current crisis of confidence extends all across the globe -- from Hong Kong to Paris to Washington.

The 1970s crisis of confidence peaked in 1979, at about the same time gold prices went parabolic.

2. Central bank policy isn't working

After the U.S. stopped using the gold standard in August 1971, the Federal Reserve started playing a more important role in the economy.

At the time, the Fed followed the Keynesian philosophy of economic policy. In a nutshell, this theory contends that the solution to high unemployment and low economic growth is to increase the money supply.

So in the early 1970s when unemployment was rising, the Fed decided to print more money. But all the extra money didn't help.

Instead, the extra money led to inflation. Plus, it didn't help the economy grow faster.

So, in the 1970s stagflation, which is stagnant economic growth and high inflation, took hold.

Then, to help control inflation, central banks started raising interest rates. The federal funds rate was 4% in 1971, but by 1979 it was more than 13%.

Right now, we are again in the midst of a grand central bank experiment with the global money supply. And it again doesn't seem to be working.

Economic growth is stagnant. But the problem now is deflation, not inflation.

To prevent this, central banks have started printing money like never before, and they have cut rates to the lowest that they have ever been.

Many countries have a negative interest rate policy. This means that they are offering bonds that pay negative rates, and the really crazy thing is that investors are buying them.

Concern about markets is running so high that investors are willing to earn a guaranteed small loss to avoid a potentially larger loss.

3. Similar price patterns

It isn't that uncommon for price patterns to repeat themselves over time. And based on current performance, this might be happening with gold prices.

For instance, in 1971 gold hit a low of $35 per ounce.

Then by late 1974 it peaked at $180, before correcting nearly 40% by August 1976. But from that low of $110, gold rallied back to its previous high by June 1978.

And from there it went ballistic; by January 1980 gold surged to $850 an ounce.

What is interesting is that the current gold market is looking very similar to what happened in the '70s.

In 1974, gold had reached $180, a 414% gain from the price in 1971. More recently, gold peaked at $1,888, a 574% gain from $280 an ounce in 2000.

In the 1970s, there was a gold correction as the price fell 44% to $110 from $197 an ounce between 1974 and 1976. These days, gold ended its four-year correction last year when the price fell to $1,056 an ounce from $1,888, also a 44% loss.

Gold has climbed about 26% from its November low. This follows the pattern of gold prices of $132 an ounce in November 1976.

If what happened in the 1970s repeats itself, gold could reach $6,800 within the next three to four years.

The following chart shows how similar the two bull markets look up to this point. If the pattern holds, gold prices may go parabolic in the coming months and years.

Was the November low the end of a correction phase in a long-term gold bull market? Will gold reach $6,800 an ounce soon?

Maybe.

But gold will need to have a mania phase before that happens. This means that everyone and their mother would be interested in gold, prices would lose touch with economic reality and investors would keep chasing prices higher.

There also needs to be some sort of catalyst. In 1979, political instability and a second spike in oil prices led to panic mode for gold investors. This led to the January 1980 peak in gold prices.

Something similar or something no one sees coming could trigger a similar historic spike in gold prices.

So, is it probable for gold to see a repeat of what happened in the 1970s? No.

But is it possible? Yes.

Conditions for higher gold prices are getting more favorable by the day.

Whatever the case, though, it is prudent to hold gold investments -- whether it is gold bullion, exchange-traded funds or gold mining stocks -- as part of a diversified portfolio, because when the global economy faces a crisis, gold offers great insurance.

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For more information on the favorable conditions for gold prices, and how to best position a portfolio, download this special report.

Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore. Click here to sign up to receive the Truewealth Asian Investment Daily in your inbox every day, for free.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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