The concept of the “Debasement Trade” has gained significant traction recently. Last Thursday, Ray Dalio, the renowned founder of Bridgewater Associates, characterized gold as the “safest money.” This perspective echoes his previous assertion a month ago that current economic conditions mirror the early 1970s, suggesting investors should allocate more to gold. In a similar vein, Mike Wilson, Chief Investment Officer at Morgan Stanley, voiced his preference for a portfolio configuration of 60% equities, 20% fixed income, and 20% gold, diverging from the traditional 60/40 model. He referred to gold as the “anti-fragile asset,” favoring it over Treasuries.
These evolving viewpoints come as gold has already outperformed other asset classes this decade, indicating a potential underinvestment in gold among investors. The rationale aligns with historical investment principles. During the uncertainty triggered by the COVID-19 pandemic, gold’s appeal was evident, largely overshadowing various stock forecasts, many of which fell short of expectations. Economic and geopolitical factors, including the Russia-Ukraine conflict and US-China tensions, have further heightened gold’s status.
The key question remains whether the recent price surge of 53% year-to-date (following a 48% increase in 2024) is justified. Although high volatility and corrections are common after such escalations, observers argue that the price surge is indeed rational. An article from March 17, 2024, in bl.portfolio, posited that gold’s long-term prospects were favorable, even while it was trading at a historic high of $2,182. With a notable 83% return in USD over the subsequent 20 months, many analysts maintain that gold may outpace equities in the next two to three years, suggesting it remains a compelling option in investors’ portfolios.
This article’s exploration of gold’s historical performance is crucial for understanding its trajectory in the current decade. John Kenneth Galbraith famously noted that historical context often weighs little in finance, but analyzing gold’s past, particularly its performance against other asset classes, unveils valuable insights.
The 1970s
The 1970s, characterized by significant cultural and political shifts in the United States, were economically tumultuous. Events such as the Nixon Shock, Federal Reserve miscalculations, and global conflicts contributed to a decade of stagflation, during which gold returned an astonishing 1,475%. In stark contrast, the S&P 500 achieved a mere 47% return.
The Bretton Woods system, in place since 1944, pegged the US dollar to gold at $35 per ounce. By the late 1960s, growing budget deficits caused pressure on the dollar, prompting countries holding dollars to seek gold. The resulting crisis forced Richard Nixon to suspend the gold standard on August 15, 1971, transforming the dollar into fiat currency. This move led to a dramatic 10% plunge in the dollar index (DXY) and a swift doubling of gold prices in two years, exacerbated by the Yom Kippur War and subsequent oil embargoes, which saw gold prices rise another 70%.
Gold’s performance can be divided into three phases during this decade: a 400% rise from 1971 to end-1974, a 6% decline from 1975 to end-1977, and a 235% gain from 1978 to end-1980. The period’s economic instability and high inflation drove gold’s price skyward.
The 1980s
If the Nixon Shock initiated a gold bull run, the “Volcker Shock” effectively curtailed it. Paul Volcker, who became Federal Reserve Chairman in August 1979, faced rampant inflation exceeding 9%, which persisted despite efforts to control money supply. High inflation expectations were entrenched, leading to wage demands, consumer behavior shifts, and price hikes by businesses.
Volcker reinstated public confidence in monetary policy through aggressive interest rate hikes, raising rates to an unprecedented 20% by May 1981. This strategy temporarily inflicted economic pain, resulting in a severe recession in 1981-82, with unemployment spiraling to 10.8%. However, inflation eventually fell significantly, marking the end of the gold bull run. Gold prices fell 33% in the year of the Volcker Shock, while S&P 500 dropped 10%. This period also witnessed a robust bull market in equities lasting nearly 18 years.
The 1990s
The decade was marked by the end of the Cold War in 1991, a development that eliminated the geopolitical threat pivotal to gold’s value. Gold underperformed significantly, declining by 29% while the S&P 500 surged 300%. Low inflation, fiscal responsibility, and the dotcom revolution led to a favorable environment for stocks, solidifying the dollar’s strength, which increased by 32% over the decade.
The 2000s
Following two decades of subdued gold performance, the 2000s kindled a resurgence in gold values. After the dotcom crash, the Federal Reserve adopted an easy-money policy, characterized by ultra-low interest rates and extensive government spending. This environment fostered a new bull market for gold, which returned 422% during the decade. The post-2007 quantitative easing marked a significant pivotal moment, with gold prices rising dramatically against tepid equity performances.
The 2010s
This decade exhibited unusually low interest rates despite aggressive central bank policies. Economic anomalies resulted in a decade where growth for equities overshadowed gold’s performance, with gold achieving a modest 34% return while maintaining its value against inflation.
The Current Decade
As suggested by current trends, excessive money printing and substantial fiscal stimulus have culminated in persistent inflation, with the US experiencing inflation above the Federal Reserve’s targets for 54 consecutive months. This situation mirrors the economic climate of the 1970s and has underpinned gold’s recent outperformance. Growing fiscal deficits, as government spending escalates to unsustainable levels, further cement gold’s pivotal role in investment portfolios.
In summary, the intricate historical relationships between gold and other asset classes underscore its relevance amidst the current economic landscape, suggesting that an increased allocation to gold relative to equities might be prudent for investors moving forward.
