By Matthew Worley

“If it ain’t broke, don’t fix it,” my father always liked to say. Status quo momentum is something in which we take comfort. On the flip side, something that is broken is bothersome, something that sticks in the craw of the human desire for justice and rectitude. Gold prices are broken.

The 1970s saw a tremendous rise in gold prices alongside inflation, followed by a choppy downtrend in the 1980s as the Fed put the interest-rate breaks on, and sharp fall through the 1990s as the good times rolled. After the Dotcom Bubble burst and the tragedy of 9/11, gold enjoyed a rally through 2012 that was almost as impressive as that of the 1970s. But since? Eight years of range-bound doldrums, and in inflation-adjusted terms the 1980 peak has not since been reclaimed.

To which period can we liken the current gold price environment? A global pandemic has not yet reached its zenith, oil is near $20 a barrel on the back of an OPEC-Russo price war, the Dow Jones Industrial Average is down more than 24% year-to-date, and 3.238 million people filed for unemployment in the week ending March 21. This seems the perfect storm for a gold haven, yet in the last 30 days gold prices have decreased .56%. How can we possibly explain this?

First, if I were able to perfectly predict the price action of gold or any asset, I would own my own island. Prices will fluctuate, but it is the trend that we seek to explain and predict, in a manner similar to how the Fed treats inflation. This at the top of mind, let us explore together a few of the levers of gold prices, to see if prices might be unstuck from the morass of the prior eight years.

Gold as an inflationary hedge is one of its conventionally accepted qualities. Widely accepted economic theory attests that the price of any commodity valued in dollars is generally going to rise as the dollar falls. It makes sense that if a dollar is worth less it can buy less of anything priced in it, so price of those things has risen. How does the data fit with the periods prior discussed?

CPI data taken from usinflationcalculator.com Gold prices inflation-adjusted from macrotrends.net

Inflation marches ever on, while gold prices ebb and flow. The correlation between gold and inflation is not so simple as an if then statement. What we see from the table above is not a paced match to inflation’s increase, but perhaps a movement indicative of the relationship between the velocity of inflation and the price of gold.

The 1970s were a period of accelerating inflation and accelerating gold prices. The 1980s were a time in which inflation decelerated in response to the Fed’s action raising interest rates to slow it down. The 1990s saw a low-interest rate environment as business boomed.

The decades starting in the year 2000 and 2010 were very different. In the 2000s inflation growth barely changed at all, a frightening prospect to fiscal policy makers. In a developed country, if inflation continues at the same clip as GDP levels out with small annual growth, the rise of prices will outweigh the rise in production. This imbalance in supply and demand will exacerbate the situation further, leading to hyperinflation. Gold’s rise in this period was a testament to the one crucial element that was lacking in the late 1980s and in the 1990s: Fear.

Those that try to explain the movement of gold as a function of inflation, or when stocks are down, miss the simple, fundamental truth that requires no charts and figures to explain: It is in times of great fear that the price of gold rises. In the 1970s the fear of uncontrollable inflation sapping away the paychecks of Americans was rampant. After 9/11 the fear of national security was and still is at the forefront of American interests. The Great Recession ushered in the notion of historically unshakeable assets like real estate values evaporating overnight, and the fear of a future cataclysmic chain of events developing because of algorithms and passive index funds dominating stock market volume is real and unpreventable, barring legislation.

Fear doesn’t come and go within the world, any more than it comes and goes in the individual human heart; fear sleeps and wakes. One may conquer a powerful fear, but it will be born again in another place, to sleep and wake and gather strength until it is conquered and reborn again. Fear has woken in the markets again, for quantitative easing did nothing but put the Great Recession fear to sleep.

The Government of the United States and the Federal Reserve have made moves to arrest the panic that persists in the markets. The Federal Reserve cut interest rates back to near zero back to where they went after the Great Recession (monetary policy). The Fed can do little else. The Government has passed the CARES act to use fiscal policy to inject $2.2 trillion into the economy in relief. More is expected.

The rush to buy toilet paper was a clear symptom of mindless fear, and it is in this environment that gold begins a relentless climb. In times of concern the peacetime dynamic changes completely. Investors are no longer looking to find the most aggressive growth; they are looking to safe havens to weather the storm. No currency, no government debt, no business is unaffected by the soulless ravages of a dispassionate pandemic. It cannot be negotiated with; it cannot be stopped by man’s machinations. It can only be slowed.

If there is so much fear, why have gold prices not shot skyward like they did in 2007? There is so much money supply in the economy after quantitative easing and government stimulus programs that gold price movement lags the fear. Central bank policies and government bailouts have been used to synthetically put fear to sleep and break gold. The natural order of things means the flip side of my dad’s phrase is about to have its day: If it is broke, fix it. Take it for what it’s worth, but it is of my opinion that the time has come to start gathering gold immediately.

Matthew Worley is a seasoned financial writer with published work on equities, commodities, currencies, and macro and geopolitical concerns in publications such as Forbes (as a ghostwriter), Motley Fool, Investopedia, Seeking Alpha, and WorldFirst to name a few.