Inflation Is Here. Why Isn't Gold $3,000 an Ounce Yet?
Inflation Is Here. Why Isn't Gold $3,000 an Ounce Yet?
Understanding why precious metals haven't skyrocketed despite rising inflation and what modern investors should know about gold and silver
Introduction
It seems like a frustrating time to make decisions on precious metals, doesn't it? So many people want to buy precious metals and aren't sure what to do. Should they wait? Buy now?
Let's be frank—the current state of the economy is challenging. Even if some of the economic reports are genuinely positive, this is certainly not the best economic picture imaginable. Not by a long shot.
Unemployment may be low, but inflation is still problematic. The Federal Reserve is trying to stem rising prices by increasing the key interest rate, but too much of that may send us into a recession. And the stock market isn't what it was in 2020 or 2021.
Investment Reality Check
If you've got a stock-based retirement plan and are over 55 or 60, this market volatility is genuinely concerning. If you're in your early 40s or younger, you're buying stocks at bargain prices—there's plenty of time for the market to improve. But precious metals present a different investment thesis entirely.
Table of Contents
Today's Economic Landscape vs. Expectations
Making matters even more complicated is that bullion doesn't seem to be playing by the rules right now, or at least not the rules so many of us seem to know. You may know one of the old golden "rules" where rising inflation tends to mean rising bullion prices.
Current Economic Conditions
- Persistent inflation above Fed targets
- Rising interest rates to combat inflation
- Strong employment market
- Stock market volatility
- Supply chain disruptions
Traditional Gold Expectations
- Inflation hedge performance
- Safe haven during uncertainty
- Dollar weakness correlation
- Crisis-driven demand spikes
- Portfolio diversification benefits
The disconnect between inflationary pressures and current gold prices has left many investors questioning traditional precious metals wisdom. However, understanding the broader context reveals why this relationship isn't as straightforward as many assume.
Historical Perspective: The Late 1970s and Early 1980s
Let's take a journey back to the late '70s and early '80s for context. Some of you may remember it, some probably don't. Those who lived through it witnessed one of the most dramatic precious metals bull markets in modern history.
Economic Chaos Emerges
Sky-high inflation, soaring interest rates, rampant job insecurity, and a looming nuclear threat from Russia. The energy crisis gripped the nation as gas prices soared above a dollar.
Geopolitical Tensions Peak
Cold War tensions escalated with conflicts between Russia and Afghanistan, revolution in Iran, and general global instability. These events created perfect conditions for precious metals appreciation.
Record Precious Metals Prices
Gold hit $850 an ounce and silver topped $50, both in the earliest weeks of 1980, before falling to figures that saw relatively little significant change for years to come.
Sound Familiar?
We had sky-high inflation, soaring interest rates, rampant job insecurity, and a looming nuclear threat from Russia. We were in some of the chilliest days of the Cold War, and energy crises dominated headlines. Even alternative energy solutions like electric cars and solar panels were being discussed—much like today.
The Hunt Brothers Silver Corner
Meanwhile, during this period of economic turmoil, an extraordinary story was unfolding in the silver market. The bulk of the world's private silver holdings were being scooped up by two brothers named Nelson and William Hunt in an attempt to corner that market.
Market Manipulation on an Epic Scale
The Hunt Brothers' attempt to corner the silver market represents one of the most audacious financial schemes in history. Their massive accumulation of physical silver and silver futures contracts drove prices to unprecedented levels, demonstrating how concentrated buying power can dramatically affect silver prices.
The Strategy
The Hunt Brothers accumulated massive positions in both physical silver and silver futures, attempting to control a significant portion of the world's silver supply.
The Peak
Silver prices reached over $50 per ounce in early 1980, representing a more than 10-fold increase from levels just a few years earlier.
The Collapse
Regulatory intervention and margin changes eventually broke the corner, leading to a spectacular collapse that bankrupted the Hunt Brothers.
The Complex Inflation-Gold Relationship
If inflation and global tensions are what caused gold to rise in the late '70s and early '80s, you may wonder why gold is relatively restrained today, when inflation and global tensions are exactly what rule the headlines. But let's examine this more closely.
Historical Context Matters
We don't necessarily need inflation to push gold prices to the ceiling. Think back to 2012, when gold hit new highs of $1,800 an ounce, or summer 2020, when gold surpassed $2,050. The influencers then weren't rising prices on milk or housing, but rather a weakening dollar and overarching economic uncertainty.
Inflation really wasn't the problem then that it is today, with prices rising at about 3% back in 2012 and approximately 1% in the summer of 2020. We can't pretend inflation is a non-factor in gold prices—it's just not the only one.
Modern Factors Affecting Precious Metals
There are many economic factors in play right now, and the current constellation of events won't necessarily drive gold and silver into the stratosphere. Several unique modern circumstances are shaping today's precious metals market.
Post-Pandemic Effects
- Supply chain disruptions
- Labor market transformation
- Changed work preferences
- Manufacturing slowdowns
Geopolitical Landscape
- Russia-Ukraine conflict
- China tensions
- Middle East instability
- Global supply concerns
Economic Differences
- Strong job market
- Different inflation dynamics
- Technology sector growth
- Alternative investment options
Understanding Modern Market Dynamics
We are still coming out of a pandemic—one that not only affected millions of lives but also reprogrammed the way people think about their jobs, their lives, and where and how they live. These supply-chain shortages we are facing influence current global inflation, but this is partly due to many people deciding they don't want to be manufacturers, truckers, or laborers anymore.
The unrest overseas seems concerning, but there is still reasonable hope that conflicts can end without catastrophic escalation. Yet, other pockets of the world demand attention too: China, the Middle East, North Korea, South America. It seems there's something ominous going on in just about every corner of the globe right now. But is this really a new phenomenon? In hindsight, no—there have always been multiple geopolitical situations simmering simultaneously.
The Cryptocurrency Factor
We can't forget one other significant factor that wasn't present 40 years ago: cryptocurrency. Billions upon billions of dollars have been parked in cryptocurrencies over the last several years, with speculations that money invested in these digital currencies could explode in value by many multiples.
Investment Capital Diversion
Massive amounts of investment capital that might historically have flowed into precious metals have instead been attracted to cryptocurrencies and digital assets.
Alternative Store of Value
Many investors view cryptocurrencies as a modern alternative to gold's traditional store-of-value proposition, particularly younger investors.
Market Speculation
The potential for explosive gains in crypto has attracted speculative capital that might otherwise seek precious metals during uncertain times.
The Crypto Consideration
Those who invested in Bitcoin a few years ago did very well for themselves, but as more recent history has shown, positive results are spotty at best. What if crypto hadn't entered the picture? It's natural to assume at least some of that crypto money would have been invested in precious metals, potentially supporting higher prices.
Strategic Approach to Precious Metals Investment
So, where do we go from here? With all the complexity of the current moment, it's easy to get lost in the confusion. This may not be gold and silver's most spectacular moment, but they remain fundamentally strong and ready to perform when conditions align.
The 5,000-Year Perspective
Gold and silver have been prized commodities for 5,000 years. Think about that—five millennia. Cultures have come and gone, been wiped off the map and born anew. Yet, silver and gold are still here, still valued, still treasured.
Investment Philosophy
Approach gold and silver not as your quickest vehicle to getting rich, but as one of your surest vessels to staying wealthy. Gold and silver are best thought of as safety nets, insurance plans. They'll help protect you if the value of the dollar falls and will remain strong through economic turbulence.
Portfolio Allocation Guidelines
- 3-10% of investment dollars in precious metals
- Diversification across gold and silver
- Physical metals vs. ETFs consideration
- Regular rebalancing strategy
Risk Management Benefits
- Protection against dollar devaluation
- Insurance during economic turbulence
- Hedge against extreme inflation
- Long-term wealth preservation
Investment Timing
- Dollar-cost averaging approach
- Focus on long-term trends
- Avoid market timing speculation
- Regular portfolio reviews
Nobody worth their expertise will ever tell you to throw all your money at gold and silver. We know what happens when you put all of your eggs in one basket. But anybody of prudence will remind you that gold and silver are fundamentally important additions to any investment portfolio.
The Bottom Line
How much money you should spend on gold or silver is a question only you can answer. However, allocating anywhere from 3% to 10% of your investment dollars in precious metals is generally regarded as a prudent approach. At that rate, you can afford to make meaningful purchases without risking too much during bearish markets while still positioning for potential rewards when bullion bulls return.
Conclusion
Believe it or not, what we're going through today is not the worst economic environment in history. The Great Recession, stagflation, and the Great Depression were genuinely challenging times, and society persevered through them. This is a rough patch, yes, but we will navigate through this as well.
Why should we believe that anything we've seen in the past few years is enough to dramatically diminish the importance of gold and silver, which have proven themselves time and time again for 50 centuries?
Looking Forward
At reasonable allocation rates, you can afford to make meaningful purchases of bullion without risking too much pain during bearish markets while still inviting plenty of reward when the bullion bulls return. And, sooner or later, those bulls are sure to come calling.
The relationship between inflation and precious metals prices is more nuanced than many realize. While inflation can drive gold and silver prices higher, it's not the only factor—and sometimes not even the primary one. Understanding these dynamics helps investors make more informed decisions about when and how to add precious metals to their portfolios.