What's More Worth Noticing Behind Gold's Pullback: The Loosening of the Old System
- Core Viewpoint: The article argues that the current pullback in gold is fundamentally different from the historical trend in 1979. The core difference lies in the fact that the foundation of the global monetary credit system is now being shaken, unlike in 1979 when gold was suppressed due to the strengthening of US credit and soaring interest rates.
- Key Elements:
- The 1979 gold decline stemmed from Volcker's extreme interest rate hikes (rates near 20%) and the global flow of capital back to the US credit system, which jointly suppressed the gold price.
- The current macroeconomic backdrop is the opposite: US debt has reached its limit, the fiscal deficit is out of control, the financial system is highly sensitive to high interest rates, and the Federal Reserve's policy space is constrained.
- The nature of the Middle East conflict is different; it has evolved into a self-reinforcing systemic shock, directly disrupting energy and shipping, and touching upon the core status of the US dollar as the energy settlement currency.
- The underlying variable is the challenge to the foundation of US dollar credit. Capital is now "seeking a new anchor," which stands in stark contrast to the "capital repatriation" to the US in 1979.
- The current gold pullback is more a rebalancing of short-term capital taking profits after a significant price surge, rather than the end of a long-term trend.
Original | Odaily (@OdailyChina)
Author｜Xiao Fei
Today, many bloggers are trying to use events from 1979 as a rigid template to understand the recent consecutive pullbacks in gold prices.
The path indeed looks similar: Middle East conflict, rising oil prices, resurgent inflation, gold rising first then falling. Simply comparing the coupled price charts seems to allow one to pontificate on the market.
However, upon closer examination, the world's operational logic and macroeconomic expectations have undergone earth-shattering changes. Armchair theorizing by drawing price charts is meaningless, but a comparative exploration of the underlying fundamentals can allow us to glimpse the bigger picture.
Learning from History: What Happened in 1979
The key to 1979 lies in two events following the Iranian Revolution.
The first event was the Federal Reserve's use of extreme interest rate hikes to directly change the entire game's rules. After Paul Volcker took office, he pushed interest rates all the way to nearly 20%. At such an interest rate level, holding cash itself became the best asset, and gold, which yields no return, was systematically abandoned.
The second event was the global capital flow back into the US credit system. The Cold War entered a détente phase, US-Soviet confrontation no longer escalated continuously, and the US began moving towards unipolar dominance. Around 1982, the market was trading on the expectation of "the US re-stabilizing the global order." Capital flowed back into dollar-denominated assets, and gold lost its support.
Therefore, the sharp rise and subsequent fall of gold back then was because interest rates skyrocketed + US credit was strong enough; its price was suppressed by the reconstruction of the authoritative system.
Today and Tomorrow: The System is Loosening
Looking at today with the same logic, the key variables are exactly the opposite; we are standing on the cliff on the other side of the mountain.
The reality today is that US debt has ballooned to its limit, fiscal deficits are chronically out of control, and the entire financial system is highly sensitive to interest rates. Not cutting rates already counts as tightening.
A more noteworthy underlying structural change is that another reason for gold's decline back then was that global capital regained trust in the US.
But the nature of today's Middle East conflict is completely different. It is not only not a local event that can be quickly concluded through negotiation (even though Trump occasionally spouts nonsense), but has even evolved into a self-reinforcing system. This conflict is cyclically producing outcomes that compound: energy is being targeted, shipping is being disrupted, costs are being pushed higher, and fiscal burdens are being increased. All participants are locked into this structure.
Furthermore, this conflict touches the core part of the dollar system—energy. If US influence in the Middle East declines, if oil is no longer stably priced in dollars, or if relevant countries begin to choose different settlement methods, then the problem is not just oil prices, but: The petrodollar cycle itself will be shaken.
Once cracks appear in this narrative, the foundation of dollar credit is no longer solid. And the "gold as a safe haven" narrative we've always understood is, in essence, a hedge against this very credit system.
This comparison becomes very interesting.
Over forty years ago, gold corrected because that system became stronger. The current decline is happening during a process where the system itself is being challenged and disrupted. Back then it was "capital flowing back"; today it's "capital searching for a new anchor."
Today's gold is closer to a phased release. The sharp rise has already priced in the conflict and inflation; short-term capital is starting to realize profits, and the market is entering a rebalancing phase.
The Changing Variables
Returning to the beginning, comparing today's gold price chart with 1979's holds no value, but the "changing variables" within it are worth pondering.
In 1979, the US dollar was the answer. In 2026, the US dollar is also being repriced.
The logic of how conflict transmits to inflation via energy, how inflation affects interest rates, and how interest rates change asset pricing is already different. Today's world has become more absurd and complex, far from the world that could be re-stabilized by one round of extreme interest rate hikes.
Conflict spillover, Trump's erratic policy changes, persistently high energy prices, the US no longer having the capacity to suppress inflation with interest rates—the world might reprice the entire credit system.
At that moment, gold will also assume a new role.
