Shades of the 1970s

Gold: September 1979 revisited

‘If there ever was an area in which to do the exact opposite of that which the government and the media urge you to do that area is the purchasing of gold. Start buying gold now, regardless of the price. By acting now, you will not have to react when it is too late…too late will be when the majority of the public finally figures out what is happening (to paper assets) and frantically tries to get aboard.

Remember, if you are one of the ones holding paper in the end, you will have given away your products and services for nothing.’ – Robert Ringer, US author

Analysing gold with respect to real interest rates

Since the end of 2022, the US Federal Reserve has reduced the size of the total US monetary base by US$896bn, or 14.0%. However, recent data suggest that this form of monetary tightening has now been brought to a close in favour of another type – namely interest rate rises.

In common with past reports, this report continues to predict future gold prices based upon the gold price’s historically statistically significant relationships with 1) inflation, 2) the US monetary base and 3) US currency in circulation. In this case however, we have also added two further analyses: one that looks at gold in the context of the absolute level of the US Consumer Price Index (CPI) and one that looks at the gold price in the context of real US interest rates.

June 2023 directly analogous to October 1979

As has been well documented, since March 2022, the Fed has raised interest rates 11 times to result in real interest rates that have become meaningfully positive for the first time since late 2007 and, arguably, since early 2001. In so doing however, it has created a real interest rate profile that is almost directly analogous to the last time real interest rates became meaningfully positive for the first time in a long time, in October 1979.

History shows US$3,000/oz a realistic possibility

We believe that three features of the general, western economic crisis of the 1970s are relevant to current conditions both in the gold market and in the wider US economy. First, it heralded a period of significant volatility in real interest rates that lasted until December 1981.

During this time, the gold price materially re-based itself from US$315/oz in August 1979 (when real interest rates were -0.438%) via US$382/oz in October 1979 (when real interest rates were 3.428%) to US$653/oz in January 1980 (when real interest rates were 0.091%). Second, the gold price did not peak until real interest rates attained a level of 4% on a sustainable basis in November 1980.

This level of real interest rates not having remotely been reached and the Fed now seemingly pausing its tightening cycle, we believe that the gold bull market remains intact and that, while it is possible to predict a lower gold price in the next few years (down to US$1,126/oz if latent inflationary forces fail to come through and 2029 becomes the analogue of 1985), in the shorter term a number of our analyses demonstrate that a price in excess of US$3,000/oz is a realistic possibility and that one of US$4,500/oz is an outside possibility. Our updated gold price forecasts are shown in Exhibit 13 on page 8 of this report.

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