When Does Gold Finally Correct?

Gold’s meteoric rise has captured the world’s attention and is leaving the usual voices in traditional finance stupefied. There’s talk of bubbles, frenzies, and froth. Gold is down now from its peak, but when will it substantially correct? 

On a long enough timeline, when central bankers print infinite amounts of fiat currency, gold is bound to go up. But the recent action has everyone wondering when the yellow metal will actually correct and take a breather, and by how much. In hyperinflationary periods, it never does. Gold just keeps going up relative to fiat paper until, relative to gold, the money becomes worthless. Is that the point we’re arriving at?

A currency crisis is hardly out of the question. No fiat currency lasts forever, and since Nixon took us off the gold standard in 1971, we’re well over five decades in. But even if the gears of global finance can continue kicking the can down the road, a blow-off top in gold doesn’t mean that we’re entering a secular bear market, or that the inevitable decline of fiat has been stopped.

It might merely mean that the slow-motion collapse of the dollar is taking a temporary breather after drastically accelerating earlier this year. With the weekend gold “correction” still holding above $4,000, even with a drop below that level, the message would remain loud and clear: 

We are in a new era of price discovery for the most important instrument for financial and economic protection that has ever existed; a 5,000-year journey nearly as old as human commerce itself. As pundits keep calling the top and scratch their heads as to why gold is above $4,000 at all, the yellow metal continues to defy them, frustrating short-term speculators and technical traders looking for a clean, decisive reversal, and making fools of Keynesian careerists.

No monetary system lasts forever, and history shows that once they begin, transitions tend to come suddenly rather than gradually. Currencies collapse quickly once the process starts. Whether we are nearing a full-blown currency crisis or simply witnessing a temporary shift in global sentiment magnified by a speculative boom, investors are losing faith, and gold is where that faith is stored.

Gold vs. USD 5-Day Chart

So when does gold correct decisively? Some say this latest up is just an emotion-driven frenzy. There has certainly been a wave of retail gold buyers helping to support the bull run. Even before this latest dramatic rise, retail gold fever was already intense enough that the froth at the lips of casual investors was being recognized. But if the recent moves are supported by a fundamental systemic decline in faith and a repricing of risk, then waiting for a sharp dip back below $4k may be wishful thinking even if the speculative rush dies down.

When central banks keep buying the top, you know that retail speculation doesn’t explain the entirety of the gold bull. Instead, signs are pointing toward a collective realization that we must prepare for a world where monetary trust is going to be tested in new and uncomfortable ways.

As Peter Schiff recently said about the 2007-2008 financial collapse and the recent movements in gold:

“What this move portends is a crisis, just like the subprime collapse was a harbinger of a financial crisis. Gold soaring the way it is is a harbinger of a dollar crisis, of a sovereign debt crisis.”

A currency collapse scenario still feels extreme to most investors, but we are seeing the signs of structural shifts, and have been for years. Countries are rethinking their reliance on the dollar, central banks are buying physical gold at a pace not seen in decades, and investors are starting to ask difficult questions about the sustainability of the system. 

Central banks in Asia, the Middle East, Europe, and Latin America are steadily adding to their gold reserves, and these institutions are not chasing short-term price moves. Even JPMorgan has begun discussing “the debasement trade,” leading to a burst of conversation in mainstream media about the rapidly declining purchasing power of US dollars.

Whether gold undergoes shorter-term corrections or not, no one wants to be left without hard money when the music finally stops.