Three bull makets since Nixon closed the gold window

Since Nixon closed the gold window August 15, 1971, three massive bull market have rewarded precious metals believers handsomely.  Each of these bull market runs have been preceded by reckless financial policies.

The official price of gold was $35 in 1971.  By 1974 the free market put a price of nearly $200 on gold.  Blame wage-price controls, the Arab oil embargo, and double-digit inflation, but much of the rush to gold was caused by Lyndon Johnson’s “guns and butter” during the Vietnam War.  Johnson had refused to cut domestic spending to finance the war.

Under Jimmy Carter, deficit spending became worse and resulted in the highest peacetime inflation in American history, at double-digit levels.  Gold climbed from just above $100 in late 1976 to $850 in January 1980.  Silver hit $50.

The next bull run came with Fed Chair Alan Greenspan’s easy money policies.  He took office in 1987 with the fed funds rate at about 7% and steadily gave us lower rates.  Shortly before leaving office in 2006,  the rate was 1%. Of course, we know what happened in 2008.  Gold went from the $600-$700 in 2007 to $1900 in 2011.  Again, silver touched $50.

To “save the world’s financial system,” the Fed printed $4 trillion, and other central banks joined in, with Japan’s CB and the Swiss CB actually buying equities.  Some German bonds, because of massive ECB buying, have negative interest rates.

Reckless monetary policies are now viewed as mainstream.  As the world’s economy slows, the billions of dollars in malinvestments will surface, and then we will see still another rush to gold – as fear sets in and the central banks print still more money.