A recent series of events has profoundly influenced the price of gold. From the Dot-Com crash in 2000 to the easy funding financial crisis in 2008, through the unprecedented challenges brought by the COVID-19 pandemic, learn how gold has remained a resilient asset, even in times of economic uncertainty.
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At the end of the 20th century, the advent of the internet, the surge in personal computing, excitement over tech startups and the significant contribution by venture capital institutions prompted a surge in tech companies, summarized as “The Dot-Com Boom.” The principal bubble ran its course for about five years, and in 2000, the bubble popped. The resulting relatively minor Dot-Com financial crisis ushered in the 21st Century and gold’s return to prominence as an important and well-regarded asset class. The quest for stable government and sound monetary policies in the 1980s ended in 2000. Since then, we see that the average annual spot price of gold has experienced average gain of 9% per year.
The two main factors that contributed to the real estate boom of the early 21st Century were (a) political policies and (b) Fed Reserve interest rate suppression. Government policies aimed at expanding homeownership made loans more accessible to individuals who might not otherwise afford or choose to own a home under previous criteria. These policies directly led to the relaxation of lending standards and prompted the proliferation of the subprime mortgage problem.Basically, lenders were under pressure to extend loans to those who would naturally not qualify for taking on that debt. Moreover, under pressure from the Dot-Com recession, the Federal Reserve chose to intervene in the economic downturn, manipulating interest rates to levels lower than their fair value through various forms of stimulus. These factors facilitated easy funding and resulted in the first bust of this century.Though the recession is said to have commenced in 2007, the noted trigger of the crisis was in September of 2008, when financial firm Lehman Brothers collapsed and the United States government stepped in to suppress the financial institution’s domino effect. The Troubled Asset Relief Program (TARP) used around $245 billion in taxpayer money to stabilize more than 700 banks. For example, as part of the plan, the government bought preferred stock in troubled banks such as Bank of America, Citigroup, Goldman Sachs, J.P. Morgan, Morgan Stanley, Wells Fargo, Bank of New York Mellon and State Street Bank. The failure of the banking system promoted the benefits of gold, which eventually rallied to new heights at the $1,800/oz level in 2010.
The unprecedented government interventions during the COVID crisis have been monumental. These included widespread and longstanding restrictions on commerce and staggering monetary stimulus globally. In the United States alone, the U.S. Dollar money supply, reported as M1 (cash currency or like cash) by the Federal Reserve Economic Data (FRED), grew a staggering 400% between March 2020 and March 2022, from about $4 trillion to about $20 trillion. And, interest rates were held near zero for years. This policy of cheap money, coupled with imposed production interruptions, has financial analysts questioning where the bubble might develop weaknesses. Quite possibly, the weakness is in easy banking, where institutions have been financially spoiled by sourcing capital at near-zero rates.Some banks have experienced substantial growth by rapidly raising capital at reduced rates, particularly when there was a readily available rate spread to bonds and consumer loans. As rates normalize, the banking industry balance sheets could present one potentially catastrophic weak link. Some analysts see a banking crisis looming as if we were in the eye of the storm.In 2023, there were signs of banking problems with five failures, including:
To see gold’s price reaction through all this, look at the Monex Spot Gold Price Chart. As previously noted, gold’s exceptional liquidity in a liquidity crisis puts downward pressure on prices in the very short term, which transpired at the onset of the COVID crisis in March of 2020, when the Monex Spot Gold prices fell from the mid-$1,600 level to $1,476 per ounce in just a few weeks. However, it then recovered and advanced to $2,000 in August of 2020, which is unsurprising in hindsight, as hedge funds replace their lost gold position and are further fueled by growing safe haven gold marketplace demand.
Another anomaly ushered in by COVID-19 impositions is supply chain degradation. For example, mints and refineries closed or otherwise slowed production in a high-demand period, causing premiums over gold’s bullion value to explode. It took two years for premiums to start normalizing.
If history tells us anything, we know that the price of any gold bullion product is unpredictable. That said, paying attention to the economic, political, and financial conditions the world was in during significant price fluctuations can offer valuable insights into potential trends and factors influencing gold prices. Understanding historical context provides a broader perspective on the forces that have historically driven gold’s value. While predicting future price movements remains uncertain, a well-informed investor can make more educated decisions by drawing parallels between past scenarios and the prevailing global conditions.
If you are interested in investing in gold bullion bars, carefully consider the current precious metals market conditions and consult a professional to help you make your purchase. Monex offers a selection of expert reports, reference materials, and knowledgeable Account Representatives to help you make an informed decision. Contact us for more information.
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