The dollar price of gold has surged well above the $2,000 per ounce mark.  It briefly touched $2,100 before retreating.  Today it was down, but still holding well above the $2,000 mark.

It has been a frustrating time for gold investors, at least in recent times.  It has been even more frustrating for investors in gold mining companies.  When the price of gold goes up, gold stocks typically do even better.  When gold goes down, gold stocks tend to go down much farther.  In recent years, the mining stocks have not really done well, even when the price of gold has gone higher.

Perhaps the frustrating part for gold investors is that gold has barely kept up with price inflation in recent years.  One of the main reasons for owning gold is to hedge against inflation and dollar depreciation.  When price inflation goes really high, gold generally goes up at an even greater rate.

When price inflation briefly hit over 9% on an annual basis, gold did not surge.  Stocks surged for a while with all of the new Fed money in circulation, but the craze never really hit the gold market.

In fact, gold and other precious metals seem like the only sector that hasn’t been in something of a bubble.  When you think of oil, stocks, bonds, real estate, and cryptocurrency, they have all had their bubble moments.  Some of them are still in a major bubble.  The bond bubble has somewhat imploded, but even here the future is far from clear.

A Recession vs. Deficits and Fed Money

Up until recently, it seems that gold investors – or the lack of gold investors – are betting on a recession.  They certainly appear to be betting on the rate of price inflation coming down, and to a certain degree that has been correct.

It seems that the sentiment has started to shift, especially since the market seems to be betting on rate cuts by the Fed in 2024.  I am betting on rate cuts in 2024 too, but that is because I think there will be a recession.  It will be more than just a slowdown when it finally hits.

There is also a bit of a debt problem, to put it mildly.  Congress is racking up deficits well in excess of a trillion dollars per year, and this is during a time of supposed growth.  Imagine how bad the deficits will get when a recession hits.  Meanwhile, the payments on the national debt have skyrocketed because of the higher interest rates.  Unless the Fed drastically lowers rates back down, this will continue to get worse as bonds mature and are rolled over into new debt at much higher rates.

A recession is typically bad for the price of gold in the short run.  Gold went down in late 2008 with the financial crisis.  It did turn around quickly though with the Fed’s money printing spree.

This is a bit of a tug-of-war game.  There are different factors trying to pull gold in different directions.  A recession would be bad for the price of gold (if you are already an investor), but the reaction of the Fed could be good for gold investors.  A strong dollar hurts gold, but the dollar is falling out of favor with much of the rest of the world.  Still, it is the least bad of the major currencies.

It will also depend on the Fed’s reaction to the next major downturn.  It is usually safe to bet on a loose monetary policy, but it is not quite so obvious if there is still a price inflation problem.

Conclusion

It is buyers and sellers that ultimately determine the price of gold.  But buyers and sellers react to Fed policy and what they think will be Fed policy in the future.

Perhaps it has been frustrating for some gold investors in the last few years, as stocks have seemed to soar with higher consumer prices.  It is during the mania times that it is important to remember your reasons for investing in gold.  The number one goal should be insurance.

It is impossible to know if gold will hold above $2,000.  It probably won’t, but maybe we’ll have some time around that number.  If gold continues to surge and the economy stays out of an official recession for a while longer, then I do expect gold stocks to finally surge with the price of gold.

Just watch out for the crash, as the gold stocks could get hit hard with the rest of the stock market.  The price of actual gold should be far less volatile.  It will actually be a calm in the storm when the economy gets worse.