Confused by Gold? The 1970s Redux
I am always a little wary when someone rolls out a historical comparator, adds a few anecdotal observations that appear to mirror the present, and concludes: there you go — outlook solved. As a sceptic, I wonder whether they are working from first principles upwards, or from a top-down desire to corroborate an already-held view.
It is with precisely that concern in mind that I offer my understanding of the parallels between today and the 1970s — and, by extension, what they might tell us about where gold prices are headed. For those currently wondering whether they are simply “long and wrong”, the comparison may at least provide some solace.
For those looking for further evidence that we are back in 1975, flared trousers are fashionable again, inflation is troublesome, oil is causing headaches and gold investors are wondering why their inflation hedge isn’t behaving like one. All we need now is a Ford Capri… There you go. I couldn’t help myself: a rubbish comparison.
In short, though, there is significant overlap.
The first oil shock began in late 1973, when the Arab oil embargo sent crude prices dramatically higher. US inflation accelerated sharply, the world was on tenterhooks, and interest rates and Treasury yields rallied. The 10-year Treasury yield, which had been around 6% at the beginning of the decade, moved above 8% during 1974.
As oil rose roughly fourfold from its pre-embargo level, gold initially rallied — but then collapsed. Importantly, by the mid-1970s serious questions were being asked about whether gold’s role as a long-term store of value, an asset of last resort and an inflation hedge had somehow broken down. Rather like where we are now.
Consider TIME magazine’s January 1975 article, “The Rush That Wasn’t”, describing the surprisingly muted response after Americans had only recently regained the right to own bullion. The US Treasury offered 2 million ounces of gold at auction but sold only 756,000 ounces. An IMF review later recorded that speculative and investment purchases had collapsed from 519 tonnes in 1974 to just 164 tonnes in 1975, referring to the “unexpected weak demand” from US investors. Gold itself fell from around $200 in late 1974 to close to $100 by August 1976.
But enough history.
Perhaps we are not in 1979 at all. The more intriguing parallel may be the 1975 lull: an inflationary shock has already occurred, inflation remains troublesome, but rising bond yields and confidence in the policy response are temporarily suppressing gold.
The danger for the bears lies in what happens next.
Gold fell in 1975–76 not because inflation had disappeared, but because investors increasingly believed the medicine was working. Inflation was falling, nominal yields remained high and real rates were improving. But gold began its great second advance when markets discovered that the patient wasn’t cured.
Oil being at the centre of both episodes is no coincidence — especially if, like me, you regard the economy fundamentally as an energy-conversion system — but again, I digress. The key point is that energy costs are, in my view, likely to remain structurally elevated. The green transition and windfall taxes have discouraged investment in conventional supply, while geopolitical tensions have increasingly weaponised key energy chokepoints. Cheap and reliable energy can no longer be taken for granted. Once again, events in the Middle East have exposed the economy’s vulnerability.
Meanwhile, the shifting of the geopolitical tectonic plates suggests that the more polarised world we now live in will increasingly be reflected in de-dollarisation and the weaponisation of anything that matters to the opposition — currencies, payment systems, trade, technology, commodities and, of course, energy.
But we are missing the important bit here — and it provides much of the explanation.
Gold does not stand alone as a barometer. There are transmission mechanisms. Gold gives more than a nod to the dollar and Treasury yields — and not merely to their absolute levels, but to expectations about where they are going next. Markets move in anticipation of what comes next.
By 1975, markets increasingly believed that elevated interest rates and recession would kill off inflation. There was a degree of optimism that the medicine was working. Prematurely, as it transpired.
Inflation subsequently returned, and the second oil shock of 1979 provided the coup de grâce to that optimism. The important change was psychological: markets began to realise that inflation had not been conquered and that policymakers remained behind the curve. Gold, having bottomed near $105 in 1976, ultimately reached $850 in January 1980.
To be clear, gold plainly overshot. It subsequently corrected sharply before establishing a new, much higher nominal trading range at more than double its former level. The lesson is therefore not that the 1970s provide us with some magic multiplier for today’s gold price. They don’t.
The relationship is not simply:
Oil up → inflation up → gold up.
It can instead be:
Oil up → inflation expectations up → Treasury yields up → gold initially restrained.
And then, potentially:
Inflation persists → confidence in the policy response weakens → real yields deteriorate → gold rises.
The lesson of the 1970s is not that gold loves inflation. It is that gold loves inflation which policymakers are unable — or unwilling — to get ahead of.
If 1975 is the analogue, today’s weakness in gold may not be telling us that the inflation thesis is wrong. It may simply be telling us that markets still believe the medicine will work. The bigger move in gold comes if they discover that it doesn’t.
I am going to resist the temptation to translate 1970s gold prices and what subsequently transpired mechanically into today’s market. Apart from being intellectually dubious, the resulting number inevitably becomes the headline — and it shouldn’t. It is the reasoning that matters.
In my admittedly crude and over-simplistic reading of things, the clue to gold’s next major move may therefore originate in the bond market.
Higher yields can be interpreted as evidence of economic strength and confidence in the effectiveness of monetary policy. But just as a man with a red face might be enjoying exceptional health — or running a dangerously high fever — so high bond yields can signify two very different things.
They may reflect stronger economic activity and confidence in the future. Or they may reflect the opposite: growing unease about inflation, fiscal sustainability and the willingness of investors to own long-dated US IOUs without demanding substantially greater compensation.
Knowing when one becomes the other may prove rather important for gold.
Let’s see.
Ross Norman