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The Great Gold Bubble Finally Pops

Alex Planes
January 21, 2013

On this day in economic and financial history ...

Gold hit an all-time high of just over $1,920 per ounce in September 2011 as rattled investors sought out hedges in the wake of a disastrous debt-ceiling battle. But this was not its true peak. Adjusted for inflation, Jan. 21, 1980, remains gold's highest level. At one point in trading on the New York Commodity Exchange, the precious metal touched an intraday level of $875 per ounce, which would be the equivalent of $2,438 in 2012 dollars.

At the time, annual inflation was running in the double digits, as it had in 1979 and as it would in 1981. However, the only real speculation surrounding gold's huge surge was some vague rumbling about the Russians. Nine years earlier, President Nixon had ended gold convertibility. It was worth $35 an ounce then, and its rise -- which only began in earnest in 1976  -- had increased its value by 2,400%. Even when taking inflation into account, gold had gained nearly 800% during a time in which the Dow Jones Industrial Average (INDEX: ^DJI) moved from 846 points to 872 points. For nine years, the country's leading stock index saw its real returns turned into a laughingstock by a shiny yellow metal. Jan. 21, 1980 is the only day in history when a single ounce of gold was valued more highly than the Dow (on a points-to-dollars basis).

But then, just as rapidly as it began, the rampaging golden bull market of a lifetime was over. The Federal Reserve, under inflation-buster Paul Volcker, began to ratchet up the funds rate to a peak of 20% in 1981. Inflation began to fall. By the end of 1982, the Dow began to boom into one of the greatest stock market bull runs ever seen, and gold had lost about half of its value. Even this was a high point for gold, relatively speaking. As the Dow rose from 1,000 points to more than 11,000 points, gold dropped from a nominal $450 an ounce to less than $300 an ounce. Although the metal rose spectacularly after the dot-com bust as equity markets struggled to regain their peaks, it's yet to post anything like the spectacular gains it enjoyed in the 1970s. In nominal terms, gold's post-dot-com rise has tacked on about 600% of new value from trough to peak, less than the post-Nixon rise in either nominal or real terms.

Black Monday (for everyone else)
Markets around the world plunged on Jan. 21, 2008, several days after a flood of warning signs pointed to a likely recession in the United States. In London, the FTSE 100 (INDEX: ^FTSE) lost nearly $150 billion in value as it dropped 5.5%, adding pressure to a market that had at that point lost 14% since the start of the year. In Japan, the moribund Nikkei lost 4%. German and French indices both took a painful 7% haircut, and the MSCI Emerging Markets Index fell to late-2006 levels with a 3.3% loss.

That same day, Fortune magazine tut-tutted the notion of a truly devastating recession, noting that U.S. GDP increased 4.9% in the third quarter of 2007 and was still expected to grow in the fourth. The Fed was not forecasting a 2008 recession, according to Fortune, and even if it did in fact occur, it could just as well be a shallow decline during which unemployment would not rise beyond 6%. Fortune also expressed concern that Fed Chairman Ben Bernanke's stimulative policies ("pumping money into the system") would result in an inflationary spike.

Fortune's projections turned out to be wrong on nearly every count, and the global index crashes of Jan. 21 turned out to be prophetic, after a fashion. All five of these indexes peaked in the late spring of 2008 before enduring steep declines that bottomed out in 2009, following nearly the same trajectory that the Dow took during the financial crisis in the United States. In the four years that followed, only Germany's DAX index managed to surpass the highs reached shortly after Black Monday.

When this baby hits 88 miles per hour ...
On Jan. 21, 1981, the first DeLorean DMC-12 rolled off its production line in Belfast, Northern Ireland. It was the only model ever built by the DeLorean Motor Company, founded by former General Motors (N