Market News

How Far is Gold from its Historical Peak?

April 17, 2024

When reading a headline like "How far is gold from its historical peak?", most readers might likely have one of the following reactions:

1. "Gold surpassed $2,400 last week, setting a new high. Was the author in deep sleep?"

2. "This must be an outdated article, or it's just overstatement. Not worth reading!"

If your reaction is one of the above, I hope you can take 5 minutes to read the entire article to discover what's behind the gold price, and see if the author was asleep, after all.

Discussion of gold prices must begin with the end of the Bretton Woods system in the early 1970s. The system was established in 1944 after World War II with the aim of rebuilding the international monetary order and restoring the normal operation of international trade. One of the most important policies was the implementation of a "fixed exchange rate" system, linking the US dollar to gold at a rate of 35 dollars for one ounce of gold. By the end of the 1960s, with Europe's economy having fully recovered and the US facing a prolonged trade deficit, there was a significant outflow of US gold reserves. This led President Nixon to declare in December 1971 that the United States would stop converting US dollars to gold for foreign governments, effectively terminating the gold standard. As a result, historical gold price data usually begins from 1970.

Over the following 50 years, the key turning points in gold prices are as follows:

August 1972: The US dollar devalues to $38 per ounce of gold.

May 1973: The US dollar devalues to $42.22 per ounce of gold.

January 1980: Gold reaches a then-record high of $850 per ounce.

August 1999: Gold falls to a low of $251 per ounce.

May 2006: Gold rises to $730 per ounce, the highest in 26 years.

January 2008: Gold surpasses $850 per ounce.

March 2008: Gold reaches a then-record high of $1,030 per ounce.

September 2011: Gold reaches a then-record high of $1,920 per ounce.

December 2015: Gold falls to $1,046 per ounce.

August 2020: Gold reaches a then-record high of $2,074 per ounce.

March 2022: Gold touches a high of $2,070 per ounce.

October 2022: Gold falls to $1,617 per ounce.

May 2023: Gold reaches a then-record high of $2,079 per ounce.

November 2023: Gold reaches a then-record high of $2,144 per ounce.

February 2024: Gold falls to $1,984 per ounce.

On April 12, 2024, gold hit a record high of $2,430 per ounce.

In general, except for the "lost 20 years" from the 1980s to the end of the last century, gold has been on a steady upward trend since the turn of the century, constantly setting new highs. Even when it is at a low point, it is higher than the previous low, which proves that gold is indeed very bullish.

Having read this far, isn't the article still stating that last Friday's $2,430 is a historical high? Hold on! When we review asset price history, sometimes we consider inflation over the years. What would happen if we adjusted past gold prices for today's dollar values using inflation data?

It turns out that the $850 gold price in 1980 is equivalent to $3,370 today*! This explains why the author proposed a seemingly counterintuitive headline. Now, the answer is evident: gold needs to rise by nearly a thousand dollars more to reach its historical high.

It's worth mentioning that the two major geopolitical events that drove gold prices to record highs at the time were: 1) the Soviet (Russian) invasion of Afghanistan and 2) the Iran hostage crisis. Coincidentally, today's skyrocketing gold prices are also related to these two countries. Reflecting on this, one can't help but recall a famous quote:

‘The longer you can look back, the farther you can look forward.’ --- Winston Churchill

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