Are Gold’s Gains Signaling a Dramatic Paradigm Shift?

Gold is up over a 110 percent since the beginning of 2024. Some analysts say that the yellow metal is in a bubble destined to pop. However, there is another possibility. What if the meteoric rise in the price of gold is signaling a paradigm shift?

Conventional wisdom holds that when an asset swiftly rises in price, it is setting up for a fall. Every time the gold price falls, mainstream pundits declare the air is coming out of the bubble. And every time gold rallies again.

Most recently, the mainstream declared the bottom was falling out when gold corrected in late October. But that downturn only trimmed about 9.8 percent from October’s record high price, and gold is once again testing that level less than two months later.

Of course, all this proves is that the gold bulls are resilient. It doesn’t preclude a deeper correction or even a deflating bubble in the future. But this resiliency could also signal that gold’s rapid price increase isn’t just bubble behavior.

Some analysts point to gold’s bull market in the 1970s to make the bubble case. The price rose rapidly through the 70s only to crash in the early 1980s when Paul Volcker cranked interest rates to 20 percent to slay the inflation dragon. After its peak in late 1979, gold gave up nearly two-thirds of its price.

And despite the fact that this is going to be the best year for gold and silver since 1979, this is not the early 80s, and needless to say, there is no Volcker waiting in the wings. The next Federal Reserve Chairman is likely to be even more inclined toward easy money than Jerome Powell.

As we sit here today, could we be on the cusp of another monetary paradigm shift? After all, the yellow metal is certainly behaving differently than in the past.

The prevailing thought is that the price of gold moves inversely to real interest rates. Historically, the gold price has dropped when long-term interest rates rise, since it is a non-yielding asset. This is why we saw constant price pressure on the yellow metal in the early days of the Fed’s monetary policy tightening in early 2022. Conversely, falling rates tend to be bullish for gold.

However, in late 2022, gold began to break out of the doldrums despite falling inflationary pressures and rising inflation-adjusted bond yields.

In other words, the bull market picked up speed during a period when market dynamics should have been driving the price lower.

What happened that might account for this defiance of conventional wisdom?

Well, the U.S. and its allies aggressively sanctioned Russia after it invaded Ukraine. Then, in the spring of 2024, the Biden administration threatened to liquidate and sell some $300 billion in frozen Russian assets. This weaponization of the dollar drove gold to fresh record highs.

Using U.S. bonds and the dollar as a foreign policy Billy club could certainly incentivize other countries to “behave,” but it also sends another message – get out of dollars while you can.

Central banks have been aggressively adding gold to their reserves over the last three years.

You might look at the sudden surge in central bank gold buying and dub it a bubble. But the irrational exuberance that normally accompanies a mania is absent.

And as one commentator noted recently, “Speculators are too busy obsessing about cryptocurrencies and anything related to artificial intelligence to pay much attention to the barbarous relic.”

Gabelli Gold Fund portfolio manager Ceasar Bryan pointed out that the 1970s gold bull market was extremely volatile with several significant reversals. Knowing this history, investors hold their breath every time gold corrects. But so far, it has recovered quickly with each dip. Bryan said this time “feels different.”

There's another reason for the pivot to gold. The U.S. government keeps right on borrowing and spending despite a $38 trillion debt. Last month, the federal government posted a $173 billion deficit in November, despite a massive increase in tariff revenue. At some point, you stop loaning money to your drunk uncle who can’t get his spending under control.

But the paradigm shift isn’t complete. While central banks have aggressively bought gold, most investors – particularly in the West – hold relatively little gold in their portfolios, if any at all.

However, that paradigm may be shifting as well. In what was described as a “seismic shift,” Morgan Stanley CIO Michael Wilson recently came out with an investment strategy that includes a 20 percent allocation to gold.

Historically, the norm on Wall Street was a 60/40 portfolio, with 60 percent of the holdings in equities and 40 percent in fixed-income investments, primarily bonds. Given the changing market dynamics, Wilson said investors should consider a 60/20/20 strategy, swapping half of the bond portfolio for gold to serve as a “more resilient” inflation hedge.

Since Wilson floated this idea, the 60-20-20 allocation scheme has received increasing attention in the mainstream financial media. If the idea gains widespread acceptance, it could push gold to even loftier highs.

With the average allocation to gold in most portfolios under 1 percent, investors would need to buy a lot of yellow metal to boost their gold holdings to 20 percent!

To be sure, it's certainly possible that gold is in a bubble. But it's probably not. The fundamentals argue otherwise. It's more likely that this historic gold bull market is telling us something.

Well, before we get to this week’s interview let’s take a look at the weekly market action.

Gold is up 1.1% to check in at $4,360. Should it stick here this would be the highest weekly close ever for gold.

Turning to silver, the white metal is up more than $5 again this week and currently trades at $67.36 an ounce, good for an 8.4% gain. And yes, today’s price marks yet another all-time nominal high in silver.

Some real fireworks going on in the PGMs this week with both up more than $200. Platinum is up 13.0% to trade at $1,986 an ounce. And finally, palladium is 14.1% to check in at $1,728 an ounce as of this Friday morning recording.

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