Ever since the federal government permitted the American people to own gold again in 1974, the gold price has been a remarkable barometer of the economy and investment prospects. In the latter 1970s, gold shot up like a rocket. An ounce went for $175, then $400, then peaking over $800 in 1980. This was as stagflation first menaced the economy in the mid-1970s, calmed down slightly, and then roared back to greater extent as the decade turned. As gold gyrated up, the economy was in a stagflation rut, each cycle more extreme than the next.
In the early 1980s, gold fell, establishing a range between $300 and $400 for nearly two decades, until the turn of the millennium in 2000. The economy exchanged stagflation for sharp disinflationary growth for the 18 years after 1982. Output growth had several long, multi-year runs over 4 percent per annum. The authorities measured one recession in that extended span, and it was short and mild. Entrepreneurialism went wild; stocks went on a tear.
The 2000s began with gold at about $300. It then increased in a remarkable exponential pattern over the next eight years to $1800, at the arrival of the Great Recession in 2008. Gold dipped and held in a $1200-$2000 range until recently, when it has neared $2100. Gold has increased seven-fold since 2000. For the Dow industrials to have kept up, they should now be at 70,000, twice the current level.
The correspondence with the economy was once again tight. Growth since 2000 has been a fraction, about half, of that of the nearly two-decade post-1982 boom. Bouts of inflation have happened. As for policy, the long trend of consolidating greatly reduced tax rates, particularly at the top, in the 1980s and 1990s, flagged. Policy under President George W. Bush switched to tax cuts and credits at the bottom end of the income scale while toying with top tax-rate cuts that were small and impermanent. Under President Barack Obama, the economy endured the prospect of a socialized economy that faded with the administration’s waning of initiative in the latter portion of the presidency (the time that the stock market took off).
Gold voted nay on the un-broadening of the tax base under W., was greatly concerned about Obama and then found him a paper tiger, while it thereafter maintained skepticism about the general orientation of policy toward the potentially prodigiously productive American economy. Economic growth has been very poor, outside of all comparisons excluding the 1930s and the 1970s, even in the 2010s. That gold is experimenting with ever new highs at the moment is in part a reflection of a vast and deep global market, the oldest in the word, wondering if policy indulgence toward such things as high tax rates (given ludicrous American government spending) might be in the offing.
The argument that gold is a weird inscrutable market—Ben Bernanke would say such things as presidential chief economist and as Federal Reserve chair—has no basis. In the 1970s, gold acted as always as a hedge against the investment prospects in the real economy. It went up as policy (high tax rates, a fiat dollar prompting a great inflation) made after-tax, after-inflation returns to enterprise activity poor. People bounded out of gold in the 1980s and the 1990s as returns came in a surer dollar medium and were taxed less, especially at the margin. Fascination with gold flowered once again as W. prioritized low-income tax and child credits over serious commitment to tax-rate cuts at the top that were permanent. It was enough for the gold market to suppose that the Reagan Revolution was over. Hence 2008.
The 2-percent-style “boom” of the 2010s, coupled with an admirable, if modest stock market run (again, the Dow badly lags gold in the 2000s—it has at every moment in this millennium) after 2012 corresponds well with gold in an elevated holding pattern and trending up. Get serious about tax, regulatory, and spending reductions, particularly regarding people aspiring to really make money, and gold will fall like a stone. The great missed opportunity of the 1980s and 1990s was not to reintroduce a formal gold standard when gold was low. If we had done that, W. would have had pause to mess with the supply-side-reformed tax code as he did.