The New York Times had the definitive take on the vicious sell off in gold. To summarize one of their articles:
Two years ago gold bugs ran wild as the price of gold rose nearly six times. But since cresting two years ago it has steadily declined, almost by half, putting the gold bugs in flight. The most recent advisory from a leading Wall Street firm suggests that the price will continue to drift downward, and may ultimately settle 40% below current levels.
The rout says a lot about consumer confidence in the worldwide recovery. The sharply reduced rates of inflation combined with resurgence of other, more economically productive investments, such as stocks, real estate and bank savings have combined to eliminate gold's allure.
Although the American economy has reduced its rapid rate of recovery, it is still on a firm expansionary course. The fear that dominated two years ago has largely vanished, replaced by a recovery that has turned the gold speculators' dreams into a nightmare.
This analysis provides a good representation of the current conventional wisdom. The only twist here is that the article from which this summary is derived appeared in the August 29, 1976 edition of The New York Times. At that time gold was preparing to embark on a historic rally that would push it up more than 700% a little over three years later. Is it possible that history is about to repeat itself?
At the time The Times article was written, gold had fallen to $103 per ounce, a decline of nearly 50% from the roughly $200 it had sold for in the closing days of 1974. The $200 price had capped a furious three-year rally that began in August of 1971 when President Nixon "temporarily" closed the gold window and allowed gold to float freely. Prior to that decision gold had been fixed at $35 per ounce for nearly two generations. That initial three year 450% rally had validated the forecasts of the "gold bugs" who had predicted a rapid rise in gold prices should the dollar's link to gold be severed. The accuracy of these formerly marginalized analysts proved to be a bitter pill for the mainstream voices in Washington and Wall Street who, for reasons of power, politics and profit, were anxious to confine the "barbarous relic" to the dustbin of history. Incredulous as it may seem now, with gold still priced at $35 per ounce, official forecasts of both the Secretary of the Treasury and the Chairman of the Federal Reserve were that demonetizing gold would undermine its value, and that its price would actually fall as a result.
Of course government experts could not have been more wrong. Once uncoupled from the dollar, gold's initial ascent in the early 1970s was fueled by the highest inflation in generations and the deteriorating health of the U.S. economy that had been ravaged by the "guns and butter" policies of the 1960s. But the American economy stabilized during the mid-years of the 1970s and both inflation and unemployment fell. When gold reversed course in 1975 the voices of traditional power elite could not contain their glee. When the gold price approached $100 per ounce, a nearly 50% decline, the obituaries came fast and furious. Everyone assumed that the gold mania would never return.
Although the writer of The Times piece did not yet know it, the bottom for gold had been established four days before his article was published. Few realized at the time that the real economic pain of the 1970s had (to paraphrase The Carpenters 1970s hit) "Only Just Begun." When inflation and recession came back with a vengeance in the late 1970s, gold took off (to quote another 1970s gem), like a skyrocket in flight. By January 1980, gold topped out at $850 an ounce. The second leg of the rally proved to be bigger than the first.