Zoltan Pozsar, the Four Prices of Money, and the Coming Gold Bull Market
Zoltan Pozsar, the Four Prices of Money, and the Coming Gold Bull Market
How historical patterns in monetary policy reveal why current market conditions signal a new gold bull market ahead
Introduction
Over the past 100 years, there has been a remarkable correlation between major equity bear markets, adjustments in one of the four "prices of money," and subsequent gold bull markets. If we let history be our guide, the current equity bear market is signaling a new gold bull market, supported by fundamental changes in the price of money.
One of the more intriguing financial analysts of our times is Zoltan Pozsar, Managing Director and Global Head of Short-Term Interest Rate Strategy at Credit Suisse. In his writings of the past months, one of the things that caught attention was his framework for multiple prices of money. Remarkably, when examining historical changes in the price of the US dollar, they usually succeeded equity bear markets and introduced gold bull markets. Because equities are in a bear market as we speak, we can expect a gold bull market in the years ahead, enabled by the Federal Reserve changing the price of money.
Table of Contents
- Pozsar's Four Prices of Money Framework
- Historical Gold Bull Markets and Money Price Changes
- The 1930s: Currency Devaluation and Gold
- The 1960s-1970s: From Gold Standard to Inflation
- The 2000s: Interest Rate Manipulation
- Stock Market Bubbles and the Cheapening of Money
- Current Market Outlook and Investment Strategy
Pozsar's Four Prices of Money Framework
Pozsar's money framework, which he adapted from his intellectual mentor Perry Mehrling, states that money has four distinct prices. Understanding these prices is crucial for investors looking to build a strategic gold position in their portfolios.
1. Par
The price of different types of the same money. Cash, bank deposits, and money fund shares should always trade at a one-to-one ratio.
2. Interest Rates
The price of future money. When central banks manipulate rates, they're directly altering this fundamental price of money.
3. Foreign Exchange Rates
The price of foreign money. For example, the ratio between the dollar and the euro, or historically, between dollars and gold.
4. Price Level
The price of commodities and, via commodities, the price of all goods and services. This is usually referred to as inflation.
Key Insight
Each of these four prices has historically triggered major gold bull markets when significantly altered by monetary authorities. Understanding this framework helps investors anticipate when conditions become favorable for gold price appreciation.
Historical Gold Bull Markets and Money Price Changes
Let's examine how changes in the price of the dollar have caused gold bull markets over the past century, and then add the stock market component to complete the picture.
Credit Expansion and Devaluation
Credit expansion created an economic boom followed by severe depression. The US internally discontinued the gold standard in 1933, devaluing the dollar against gold from $20.67 to $35 per ounce.
Dollar Printing and Inflation
Excessive dollar creation relative to gold reserves led to the end of the Bretton Woods system. Gold prices skyrocketed from $35 to a peak of $800 in 1980 due to inflation.
Interest Rate Manipulation
Following the dot-com crash, the Fed slashed rates from 6% to 1%. Gold rose from around $300 to $1,900 per ounce as real interest rates turned negative.
Current Cycle Beginning
Current equity bear market conditions and monetary policy shifts suggest the beginning of a new gold bull market cycle.
The 1930s: Currency Devaluation and Gold
In the 1920s, credit expansion created an economic boom that led to the inevitable bust and severe depression that followed. Eventually, in 1933, the US government decided to internally discontinue the gold standard. Externally, the dollar continued to be fixed to gold, but the peg was lowered from 0.048 troy ounces per dollar to 0.029 ounces.
Price Change
- Gold price rose from $20.67 to $35 per ounce
- 69% increase in dollar terms
- Devaluation vs. other currencies
Mechanism
- Third price of money: foreign exchange rates
- Competitive devaluation strategy
- Alignment with global currency trends
Strictly speaking, this wasn't a traditional gold bull market, but the gold price did increase significantly. The dollar was devalued against gold to get even with countries that devalued before the US did and to cheapen the dollar against foreign currencies that weren't devalued yet.
The 1960s-1970s: From Gold Standard to Inflation
In the 1960s, the US started printing too many dollars relative to the amount of gold it owned backing those dollars. The gold price of $35 was under pressure, and the US Treasury had to sell thousands of tonnes of gold to defend the peg.
The Nixon Shock and Its Aftermath
To stop the bleeding, it was decided to let the gold price float in the free market in 1968. Foreign central banks could still redeem dollars for gold at the US Treasury after 1968 (at the statutory price, not the free market price), continuing to deplete reserves. Finally, President Nixon suspended dollar convertibility in 1971, removing the last check on unbridled monetary expansion.
An abundance of dollars created in the 1960s and 1970s led to double-digit consumer price inflation. The gold price skyrocketed to a peak of $800 in 1980. The dollar price of gold in the 1970s went up because of the fourth price of money: price level (inflation).
Historical Parallel
The inflationary period of the 1970s shares striking similarities with today's monetary environment. Excessive fiscal spending, loose monetary policy, and supply chain disruptions created conditions remarkably similar to our current situation.
The 2000s: Interest Rate Manipulation
In 1998, under the guidance of several Nobel prize-winning economists, an American hedge fund blew up (Long-Term Capital Management). The Federal Reserve reacted by lowering interest rates, further fueling a stock boom.
Federal Reserve Response
- Dot-com bubble burst in 2000
- Fed slashed rates from 6% to 1%
- Real interest rates turned negative
Gold Market Response
- Gold price started rising again
- Reached $1,900 per ounce in 2011
- 11-year bull market cycle
As inflation was rather stable from 2000 through 2011, the gold price mainly went up because of the second price of money: interest rates. When real rates (nominal rates minus inflation) turn negative, gold becomes an attractive alternative store of value.
Additional Factors
Other events around 2000 influenced gold's rise as well: the dollar declined, the stock market crashed, the Central Bank Gold Agreement was signed, and central banks curbed gold lending programs that had previously suppressed prices.
Stock Market Bubbles and the Cheapening of Money
Changes in the price of money often come after an economic downturn that a central bank counters by, for example, lowering interest rates. Easy money blows a new equity bubble. Once that pops, easier money still blows another bubble to replace the previous one.
The Vicious Cycle Pattern
This leads to a vicious cycle of bubbles and ever-easier money, in which the value of money incrementally declines, and the gold price appreciates. Understanding this cycle is crucial for investors timing their entry into gold positions.
Now we understand why, historically, the stock market often peaks just before the price of money is changed, and as a consequence, the gold price rises. The pattern is remarkably consistent:
Historical Sequence
- After the stock market crash of 1929, gold price went up
- After the Nifty Fifty bubble in early 1970s, gold price went up
- After the dot-com bubble in 2000, gold price went up
- Current bear market suggests similar pattern emerging
Market Timing Indicators
- Equity market cap to GDP ratios
- Central bank policy responses
- Real interest rate environment
- Currency devaluation pressures
Current Market Outlook and Investment Strategy
How will the price of money be altered this time around? According to Pozsar, through interest rates and price level (yield curve control). After the US weaponized its currency to freeze Russia's assets, the amount of US government debt that needs to be financed is larger than the world is willing to absorb.
Pozsar's Prediction
The Federal Reserve will bail out the government by buying up bonds of all maturities, effectively capping yields across the curve. Inflation will stay elevated, above the entire yield curve, which lowers the value of money. In this environment, investors and foreign central banks will flee to gold.
Investment Implications
For investors looking to add gold to their portfolios, understanding these macroeconomic trends is essential. The current environment of negative real interest rates, persistent inflation, and massive fiscal deficits creates ideal conditions for gold appreciation.
- Consider dollar-cost averaging into gold positions
- Monitor real interest rate trends closely
- Watch for changes in Fed policy rhetoric
- Track central bank gold purchasing patterns
Current Catalysts
- Yield curve control implementation
- Persistent above-target inflation
- Massive government debt financing needs
- Currency weaponization concerns
Strategic Considerations
- Physical gold vs. paper instruments
- Storage and insurance considerations
- Portfolio allocation percentages
- Tax-efficient holding strategies
The convergence of factors—equity bear market, monetary policy shifts, and geopolitical tensions—suggests we're at the beginning of a new gold bull market cycle. Investors who understand these historical patterns and positioning themselves accordingly may benefit from what could be a significant appreciation in gold prices over the coming years.
Conclusion
Zoltan Pozsar's framework of the four prices of money provides a powerful lens for understanding why gold bull markets emerge when they do. The historical pattern is remarkably consistent: equity bear markets coincide with fundamental changes in monetary policy that alter one or more prices of money, creating conditions favorable for gold appreciation.
Today's environment exhibits many of the same characteristics that preceded previous gold bull markets. With equity markets under pressure, central banks implementing unprecedented monetary policies, and persistent inflationary pressures, the stage appears set for another significant cycle of gold price appreciation.
Key Takeaway
Investors who recognize these historical patterns and understand the fundamental drivers of gold's value may find current market conditions present a compelling opportunity to establish or expand their gold positions as part of a diversified investment strategy.