The Gold Price Surge is an Important Signal: The Endgame Has Begun

Analysing the likely reasons for the surge, we find it does send a key message. It is likely only the beginning of the re-emergence of gold as key asset

By Richard A. Werner

The price of gold has taken off since about February this year, reaching an all-time high of $ 2.448.8 per ounce on 12 April 2024. This is a 34% rise compared to the lowest price in the past 12 months, which was $ 1,823. This recent surge follows several years of relative calm, when the gold price remained largely range-bound between the beginning of 2020 and late 2023, in a band from ca. $1,700 to ca. $1,950.

What are we to make of the sudden surge in the gold price? Is this a warning signal of looming major events? The short answer is yes.

So how should individual investors react? We’ll come to that. First, we need to understand the cause of the surge in the gold price and what exactly it is signalling to us.

Throughout history, gold has been considered valuable in many societies and cultures. Why? Some scientists think that gold arrived on our planet from outer space, a kind of magic dust from the stars, created when two neutron stars collided. It certainly has captivated humanity as a highly valuable substance. It is special in many ways – it is wholly resistant to corrosion or other chemical reaction and so does not deteriorate. It is highly reflective (“shiny”, to put it simply), so that very thin gold films are used in applications where high reflectivity is crucial (including spectroscopy equipment and mirrors for lasers, telescopes, and optical instruments). It is malleable and a good conductor, hence finding many applications in electronics. Gold is the only element that can be thinned out to the level of merely one atom and yet stay coherent. Gold has many industrial uses and there is therefore always a certain industrial demand for it, even if humanity could be persuaded to drop gold as monetary instrument.  Of course, we have not seen a surge in such industrial demand sufficient to explain the recent rise in the gold price. We need to look for other factors.

Inflation Hedge

In modern times, gold has long been considered a reliable store of value. In other words, it has been a sensible hedge against inflation.

The first hypothesis we should check is whether its function as inflation hedge explains the surge in the gold price. In the inflationary 1970s the gold price indeed recorded a dramatic surge. The rise started in late 1970. By early 1973, the price had doubled to almost $70 per ounce. By May 1974, the gold price had risen to $170. It then fell in 1975 and 1976, before resuming its surge as the second bout of inflation struck. It outdid its prior peaks and reach around $700 per ounce in 1980. After this it gradually declined again over the following two decades, hitting a temporary low of $ 260 in mid-1999.