Introduction to Gold Busts

The gold market has experienced four significant busts under the fiat dollar money regime since the gold price was "freed" in March 1968. Each of these busts was triggered by a sense of optimism about the reform, replacement, or better management of the US fiat money system. The level of hope is relative to the prior desperation, suggesting that the more desperate the situation, the more impactful the subsequent optimism can be.

Understanding the Pattern

During the boom times in gold that precede these busts, a common theme is the potential for gold to play a much larger role in the monetary system in the long run. As the failure of the fiat dollar system becomes more apparent, the value of gold bullion and coins soars, consistent with the growing likelihood of gold replacing fiat money to a considerable extent. However, this optimism has been interrupted four times, leading to significant declines in the gold price.

The First Gold Bust

The first gold bust occurred in mid-1974, with the gold price falling from $1002 to $580 by mid-1976 in terms of 2025 purchasing power dollars. This decline was preceded by a late but fierce monetary squeeze by the Burns Fed, starting in Spring 1973, which led to a great recession and a subsequent sharp fall in reported CPI inflation. The successes of German and Swiss monetarism at the time suggested a potential for fiat money reform in the US, supported by both political parties in Washington.

The Second Gold Bust

The second gold bust started in New Year 1980, following the announcement of the "Volcker Monetarist Experiment." The gold price fell from a peak of $1629 to a low of around $880 in early Spring 1985. The introduction of monetarist policies in the US was seen as a significant step towards reforming the fiat dollar system, albeit the Volcker Fed soon veered into a new phase of monetary inflation, masked initially by a crash in energy prices and the OPEC cartel.

The Third Gold Bust

The third gold bust was characterized by two back-to-back declines. The first part began in early 1988, as markets anticipated a monetary tightening following the extraordinary injections by the Federal Reserve in response to the October 1987 stock market crash. The gold price fell from $1360 to $900 by mid-1993. The Greenspan Fed imposed a tight monetary squeeze through 1989/90, culminating in global asset inflation turning to deflation and a big fall in consumer price inflation. The second part of this bust saw the gold price fall further to $480 from 1993 to 2000/2001, a period marked by the "Great Moderation" and the adulation of Maestro Greenspan, despite underlying monetary inflation.

The Fourth Gold Bust

The fourth gold bust occurred from September 2011 to February 2016, with the gold price collapsing from $2316 to $1680. This was triggered by the success of the Republicans in reaching a deal on meaningful budget expenditure reductions and the subsequent talk of the Fed pulling back from quantitative expansion. The narrative of the Fed printing money to finance run-away budget deficits, which had driven the gold boom of 2008-11, began to lose traction.

Potential for a Fifth Gold Bust

Given the current state of desperation about the flaws in the fiat dollar regime and the improbability of sound reforms, the potential for a fifth gold bust hinges on a change in this pessimistic outlook. The Great Pandemic Inflation and its aftermath have eroded confidence in the fiat dollar system, making it more challenging to pinpoint a specific event that could trigger a fifth bust. However, scenarios such as a rise in CPI inflation leading to substantial monetary tightening, a large program of government spending cuts, or a new round of proposals for sound money reform could potentially rekindle hope in the fiat dollar system and thus trigger another gold bust.

Conclusion

The pattern of gold busts under the fiat dollar regime suggests that each bust is preceded by a period of optimism about reform or better management of the system. As the global economic landscape continues to evolve, with challenges such as deepening public finance issues and geopolitical tensions, the possibility of a fifth gold bust cannot be ruled out. However, it’s also plausible that the cycle of busts may be broken if the current level of pessimism about the fiat dollar system proves to be a turning point, marking a shift towards a new monetary paradigm where gold plays a significantly different role. Ultimately, the future of gold and the fate of the fiat dollar system will depend on the choices made by policymakers and the evolving expectations of investors and the public.