World Economy

GOLD – Is $3,000/Oz in 2025 Cheaper than $35/Oz in 1971? GOLD – Is $3,000/Oz in 2025 Cheaper than $35/Oz in 1971? by Shanmuganathan N March 19, 2025 Economic Reforms, Indian Liberals, World Economy Gold prices have nearly doubled in the last 18 months from the lows of $1575/oz in September 2022. Despite the heady returns in a safe-haven asset, we are still in the early days of a super cycle that will last a decade or longer. As I explain in this article, gold prices are headed for levels most analysts cannot conceive of today.   What does “Cheaper than in 1971?” imply? During the decade starting 1971, Gold prices rose nearly 25 times to top at $850/oz by 1980. That is a 25-fold return in 10 years; a similar performance would mean a $75,000/oz price by 2035. What is the probability of that happening in the decade ahead? As I explain in this article, it’s a probable event but not a certainty. At least, not yet. What is almost certain is the target of $24,000/oz, as explained in the book “RIP USD: 1971-202X …and the Way Forward”. Undeniably, even the much lower target of $24,000/oz would still be a spectacular bull market in Gold. What caused gold prices to go up 25 times during the 1970s? DeepSeek gave several reasons: the end of the Bretton Woods System, High Inflation and Stagflation, US Dollar Weakness, Geopolitical Uncertainty, Increased Investment Demand, and Central bank policies. All of these are indeed valid proximate reasons, yet DeepSeek misses out on THE fundamental reason, i.e., Price catching up with Value. The proximate reasons are nearly irrelevant in the big picture. Without the deep discount between Price and Value as it prevailed back then, none of the proximate reasons would have increased gold prices appreciably. Gold was money from about 2800 BC until 1971. In 1980, the market priced gold at a level that would have allowed for the restoration of the Gold Standard, enabling Gold-Dollar convertibility at a fixed rate. This property of being the free market choice of money determined the value of gold in dollar terms during the 1970s; it is the same reason that is playing out today. Incidentally, when the gold window was closed in 1971, all the paper economists (i.e., the Communists, Keynesians, and the Friedmanites) unanimously predicted that the price of gold would fall well below $35/oz. It was forecasted that the price of gold would fall to $10/oz, accounting only for the industrial demand. Only to see gold prices go up 25 times in the next 10 years. The graph shows that the markets had priced gold at a level where the value of gold held at Fort Knox would have backed about 55% of the US money supply (M1). The US Federal Government could have restored the Gold-Dollar convertibility standard, with the US Dollar defined as 1/600th of an ounce of gold in 1980 / 1981. Most forms of the Gold Standard have operated with a 40% backing by bullion, and technically, the US could have transitioned to the Gold Exchange Standard that prevailed before 1971. Incidentally, the Bank of England had operated on a Gold Standard from 1717 to 1931 using a 40% reserve ratio. Ronald Reagan, a supporter of limited government and the Gold Standard, missed the last opportunity to close the Pandora’s box that Richard Nixon had opened in 1971. It is not to argue here that a 40% reserve ratio is the correct adaptation of the Gold Standard. Anything less than 100% backing is “stealth inflation”, and as long as Governments are in charge of the money supply (either through a Central Bank or with a regulatory system as was the case in the US before 1913), we are going to have the Fractional Reserve Banking system. There is no getting away from that. The point to be recognized is that even this 40% backing is vastly superior to our current unbacked paper monetary system. How high can gold prices go? – What does the above “Gold Stock – M1” graph imply for a return to the Gold Standard today? The ratio as of Q1 2025 is 0.035, and to achieve a 40% backing of the current money supply (M1), gold prices have to be about $35,000/oz. At this point, the key question is, what would the money supply be 10 years later?  That would indicate whether the current bull market in gold can rival what happened during the 1970s. Forecasting M1 Growth Two factors account for the substantive increase of M1 since 2008. Increase in National Debt: The accumulated National Debt from 1789 to the end of 2007 was a little over $9 trillion. In the subsequent 16 years, starting in January 2008, we have increased it by $27 trillion, and the National Debt today stands at $36 trillion. Increase in Federal Reserve Ownership of the National Debt: The US Fed owned less than 5% of the National Debt until 2007. However, since the 2008 GFC, the US Fed has monetized an increasingly more significant portion of the federal deficits, and this percentage increased to 10% by 2010 and 20% by 2022. The trend of the US Federal Reserve owning an increasing percentage of the National Debt will likely continue. This is for geopolitical reasons, as the US Government has practically weaponized the US Dollar since the Ukraine conflict. Most countries have their price inflation / recessionary issues to deal with. So, the tendency to either pay down the National debt (e.g., Japan) or stimulate the economy (e.g., Germany) by selling the US Dollars held would only increasingly leave the US Fed as the only buyer for the US National Debt. To project this forward, even if we assume that the M1 is set to grow at a CAGR of 10%, it will grow from the current $18.5 trillion to $48 trillion over the next 10 years. With a 40% reserve backing, gold prices would have to be well