"The recent
12-year bull market in gold has come to an end. Gold today is 22% below its
2011 high, but it is still 480% above its 2001 low. This could be a wild ride.
The first great gold
rally occurred in the 1970s, sparked by Nixon's decision to abandon the
dollar's link to gold. The Fed had been failing to tighten policy since the
mid-1960s, despite continual outflows of gold which were symptomatic of
declining dollar demand and rising dollar supply—in short, dollars were in
excess supply. Set free, gold rose from $35/oz. to a peak of $850 in January
1980, for a spectacular gain of over 2,330%, and the excess of dollars combined
with loss of confidence in the dollar fueled a surge of inflation. That
incredible gold rally was brought to an end by Fed chairman Paul Volcker, who
in 1979 decided to slam on the monetary brakes in order to bring inflation
under control. From its peak in early 1980, gold proceeded to fall for the next
21 years."
