Gold Crash in 1980

[tir38]

I am trying to understand how the price of gold fell in 1980 and whether that could happen again. It seems to me that the price of gold goes down only if people are more willing to hold dollars thand gold. However, I’m fuzzy about how this happend in 1980.

A contraction in the money supply surely could have triggered the price drop, but there was no contraction in 1980. If you look at the monetary trends page, the money supply has steadly grown since pre-1980.

The only thing I can figure is that people want gold now for different reasons than they did in 1980. In 1980, political and oil-production instability could have spurred people to transfer their dollars to gold. Sort of a panic move. Then once political stability evened out, people felt comfortable returning to dollars. I think people were less concerned with gov’t debt and inflation. So even though these things were growing, the reduction in political instability, wars, etc, caused people to feel safe about dollars.

So, now people are again moving their money from dollars to gold. Us who read Mises think this is because people are becoming worried about inflation, price increases, and gov’t debt. But what if we’re wrong? What if people are moving their money to gold because of similiar poltical instability as 1980? We are now in 3 different wars and always on the verge of invading Iran.

My point is, if, as unlikely as it may seem, the U.S. ends its wars, and there is general peace and stability, and gas prices remain more-or-less constant. Could we see a reduction in the price of gold as people start to feel safe and move back to dollars? This would of course be happening in the midst of inflation and increases in gov’t debt, just like 1980.

We austrians think that because we’ll never have a contraction of the money supply, this spike in gold price can only be followed by the big hyper-inflation catastrophy. But If that was the case, why did the crash of 1980 happen? Why wasn’t it massive, Weimar Republic style hyper inflation? Then based on those reasons, could the same be happening today?

[ClaytonB]

@tir38

I am trying to understand how the price of gold fell in 1980 and whether that could happen again. It seems to me that the price of gold goes down only if people are more willing to hold dollars thand gold. However, I’m fuzzy about how this happend in 1980.

The 1980 collapse is a great object lesson in the fact that gold is not immune to speculative bubbles. People who say “it’s never the wrong time to buy gold” are obviously wrong… if you put your life’s savings into gold in Jan 1980, you would have been a pauper by Jan 1981. It can absolutely happen again.

A contraction in the money supply surely could have triggered the price drop, but there was no contraction in 1980. If you look at the monetary trends page, the money supply has steadly grown since pre-1980.

You’re assuming a mechanistic connection between dollars and the gold price. There is no such connection. Gold goes up and down in response to supply and demand. Both have a psychological component to them.

The only thing I can figure is that people want gold now for different reasons than they did in 1980. In 1980, political and oil-production instability could have spurred people to transfer their dollars to gold. Sort of a panic move. Then once political stability evened out, people felt comfortable returning to dollars. I think people were less concerned with gov’t debt and inflation. So even though these things were growing, the reduction in political instability, wars, etc, caused people to feel safe about dollars.

There is another possible explanation… the gold price did not collapse in 1971 as the “experts” all predicted that it would. Gold bugs, instead, began loading up on the now-legal gold and the price steadily rose and rose. The London Bullion Market Association (LBMA) which was a consortium of Western central banks that concerned themselves with controlling the gold price was fighting a tsunami of gold demand and could not keep the price suppressed. It is my theory (yes, this is a conspiracy theory but it’s what I believe) that at a certain point, they stopped trying to suppress the price when they realized they just couldn’t control it anymore so, instead, they decided to pounce gold bugs and teach them a lesson. So, they went into the market and started buying gold like crazy, driving the price through the stratosphere. This whipped gold bugs up into greater excitement and attracted a lot of people who otherwise would never have taken any interest in gold. Once they had drive the price to whatever their target goal was, they started dumping it in the market. Losses don’t matter when you’re a central bank (obviously, how else could they do what they do???). This killed a lot of small-time investors who started dumping their gold at a loss, driving the price below what had obtained in the 1970’s in inflation adjusted dollars.

I am nervous about the possibility of the central banks trying to teach gold investors another lesson.

So, now people are again moving their money from dollars to gold. Us who read Mises think this is because people are becoming worried about inflation, price increases, and gov’t debt. But what if we’re wrong? What if people are moving their money to gold because of similiar poltical instability as 1980? We are now in 3 different wars and always on the verge of invading Iran.

My point is, if, as unlikely as it may seem, the U.S. ends its wars, and there is general peace and stability, and gas prices remain more-or-less constant. Could we see a reduction in the price of gold as people start to feel safe and move back to dollars? This would of course be happening in the midst of inflation and increases in gov’t debt, just like 1980.

We austrians think that because we’ll never have a contraction of the money supply, this spike in gold price can only be followed by the big hyper-inflation catastrophy. But If that was the case, why did the crash of 1980 happen? Why wasn’t it massive, Weimar Republic style hyper inflation? Then based on those reasons, could the same be happening today?

I recommend you read everything by Marc Faber you can get your hands on. They can’t not print money. Money printing is inevitable and will continue unabated. That doesn’t mean they can’t pounce markets like gold or oil or whatever and I believe they in fact do this though I have yet to uncover any hard evidence to that effect.

Clayton -

[billott1]

In 1980 the Fed raised interest rates so high that savers switched from gold into fixed income securities. These interest rates also had investors leaving equities, previously issued bonds and foreign bonds as well. The results were horrible as demand for commodities and large ticket items collapsed. Of course the bond buyers and Treasury auctioneers were very happy. The rest of the treasury and government was not happy at all as more resources moved from spending to interest payments.

The biggest differences between 1980 and now is about 13.75 trillion in debts. So any significant rise in interest rates will hurt existing bond prices most. To really drive savers and investors out of gold and commodities, there would have to be a huge increase in rates. Any increase in rates would raise the interest payments on the debt. So those most hurt by rising rates are lenders with long term loans and the government.

[skylien]

Just to give you a reference. On this site you can see the feds fund rate. They hiked it to 20%! in Jan. 1980.

@ Clayton

Never thought about that possibility. But you are right, nothing easier than pushing the gold price insanely only to sell heavily. EDIT: But wouldn’t such a buyer/seller leave an easy to find trace?

[BlackNumero]

Gold and silver can (and might) go down in the short to middle term, but in the long term I am defintely sure it will go up. The only reasons it could not is 1)Government Prohibition 2)U.S government takes care of budget problems through draconian spending cuts 3)Another world currency arises and gains extrordinary promise and stability from inflation. The situation was different in the 80s and cannot be repeated. Back then consumer/private/government debt was much smaller and most government bonds were long term structured (I think). Now debt levels have exploded and government debt is primarily short term bonds held by foreign nations. Our government constantly needs to issue new debt every month. If Gold/silver were to get to “outrageous” levels,and the Fed were to raise I.R to such a level that would drain inflation (or at least perceptions) out of the system, there would be massive bankrupticies everywhere, especially with the government. Seeing as the government will have extraordinary difficulty servicing its debt for the next ten years under extremely low I.R, I see it as literally impossible for them to do so under 8-15% ones.

Also, I do know that Peter Schiff (at least when I watched a video) has stated he does not believe gold will go up forever, only in the next 10-15 years while the world suffers from hyperstagflation. If they get their finances and order and confidence returns, gold and silver will drop preciptiously. Its just when (and if) that will occur, and that anyone who has kept their money in his suggested investments during that time will make a killing.