Gold: Why the 1980 Top Is Still the Most Relevant Point of Comparison for Investors

On December 12, my firm published an essay on gold and the dollar collapse in which we pointed out why you might profit from gold even if the US dollar doesn’t deteriorate completely. Today, we will elaborate on why we actually use the 1980 top in comparisons.

The fact that nobody really knows with absolute certainty where gold will really go from today onward makes people try to make their own guesses about what can happen with the yellow metal. One of the methods to do that is to look back into past situations and try to estimate if what is happening now is somehow similar to those past events.

In fact, history doesn’t repeat itself precisely. What happened once doesn’t come back in exactly the same way. Therefore the future is not something that is completely predictable. But what happens now can be similar to what has happened before. It may be possible that some patterns repeat themselves. The same goes for everything that’s happening with gold. And even if past patterns don’t give you any certainty, sometimes they can limit the uncertainty.

The situation in the gold market today is different than that one in 1980 in a few important areas. Let us analyze that in more detail. The chart below presents US inflation figures.

The red line represents official inflation data as published by the Bureau of Labor Statistics. The gold line represents the inflation data calculated according to the methodology used in 1980. There is visible divergence between the two lines after 1980, and particularly after 1985.

Let’s focus on the 1977-1980 period. The annual inflation rate went up from 5.2% in January 1977 to 14.8% in March 1980. This rise was partially due to the deteriorating political situation in Iran, one of the OPEC nations. In early 1979, Iran saw a revolution that resulted in political power being shifted from the Shah of Iran to a religious leader, Ruhollah Khomeini. In the wake of the revolution, oil exports fell, curtailing global supply and driving prices of oil higher, which, in turn, fueled the rise in prices of many other goods.

This is, however, only part of the story. OPEC countries increased oil supply to compensate for shortages but the oil crisis was exacerbated by an embargo on Iranian oil imposed by US President Jimmy Carter following an incident in the US Embassy in Teheran, where more than 60 US citizens had been taken hostages. With the embargo in place and public panic about the availability of oil, buyers rushed to acquire oil while they could. Increased demand caused even further increases in prices, and so the cycle continued. This is quite important as it shows that the effects of adverse events can be worsened by crowd behavior.

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