Gold has finally hit the milestone of $3,000 per ounce. It first hit $2,000 in August 2020. It has risen 50% in less than 5 years.
Perhaps it is more accurate to say that the dollar has fallen by a third since that time. In 2020, $3,000 would have bought you 1.5 ounces of gold. Now it would buy just 1 ounce of gold.
But the price of gold retreated after hitting the $2,000 mark in 2020 and stayed in a somewhat narrow range for a while. It was trading slightly below $2,000 as late as February 2024. It has absolutely exploded in price over the course of one year.
Inflation is Here to Stay
It was surprising that gold hadn’t risen much before 2024, especially given the elevated price inflation that American consumers have experienced. Gold is typically thought of as a good hedge against inflation, but some were wondering if that was no longer true.
That has all changed now. It is important to realize that the price of gold isn’t just a reflection of current inflation. It is a reflection of future inflation expectations.
Perhaps there is more of a realization now that inflation isn’t going away given the massive budget deficits. Even with DOGE, there is little sign that spending at the federal level is going to get under control any time soon.
We also have to consider that we are living through this Everything Bubble. When price inflation was roaring in 2022 and 2023, a lot of money was still being used to buy other assets like real estate and stocks. A lot of money went into housing in 2020 when the Fed was creating massive amounts of new money out of thin air.
The new money was bidding up the prices of other assets, while investors and speculators were not jumping into gold. Things have finally started to shift in this respect.
Gold in a Recession
It is likely we are entering into a recession after nearly 2 years of an inverted yield curve. A recession is bad for asset prices in general. People look to sell things for available cash. The one exception may be a recession that happens when there is still high price inflation.
We should expect the price of gold to go down in dollar terms with a recession. This is what happened in late 2008 with the financial crisis. But gold did not go down to the same degree that stocks did. Also, gold recovered quite quickly during that time.
While every recession is different, we will probably see something similar play out here. In fact, any downturn in gold might only last a couple of months as the digital money printing presses get fired up again.
Again, it is all about future expectations. If there is a lot of monetary inflation with the onset of a recession – and there is little reason to believe we won’t see this – then people will want to hedge against this with gold, even as other assets continue to come down from their bubble highs.
Gold should be a long-term play. It is there for insurance. It is there for diversification, which a lot of investors miss. Gold can really smooth out a portfolio.
It’s not to say that you can’t speculate with gold and mining stocks. In fact, mining stocks have a lot of potential to rise in multiples of their current prices. But they could also take a big initial hit in a recession.
Even in bad economic times, there are opportunities. Sometimes there are better opportunities because things get so relatively cheap. Either way, you should always have a core of gold holdings for insurance and diversification.