On August 15, 1971, Richard Nixon shocked America.
He interrupted Bonanza…
The show was wildly popular at the time, and Nixon knew interrupting it would be unpopular. But the president’s advisors told him he had to make his announcement before markets opened on Monday.
And so, that evening, Americans turned on their television sets and heard the news – the gold standard was finished.
Ever since the conclusion of World War II, major global currencies were pegged to the U.S. dollar. The dollar, in turn, was convertible into gold. The Bretton Woods system had worked well for decades. But by 1971, the U.S. gold reserves were dwindling, inflation was rising, and the federal government feared there would be a run on the U.S. dollar.
That’s why Nixon severed the final link between gold and the dollar, effectively ending Bretton Woods.
In many ways, Nixon crossed the proverbial Rubicon on that day. The dollar became strictly a fiat currency. And gold soared.
Between 1971 and 1979, one ounce of gold climbed from approximately $40 per ounce to well over $660. This didn’t happen out of nowhere. The 1970s are remembered for stagflation, ballooning government deficits, and stagnant growth. Gold, unbound to the dollar, was simply responding to these macroeconomic conditions.
Today, with gold hovering near nominal all-time highs around $3,300, the metal is back in the news. And just like in the 1970s, I believe gold’s tremendous rally is a harbinger of things to come.
And it’s “hidden” in plain sight.
Why Is Gold Rising?
Let’s start with the Federal Reserve.
All things equal, cutting interest rates is bullish for gold. The math is simple.
When money is cheaper (lower cost to borrow), there is more of it. Think about mortgage and auto loans. Banks create and loan out a lot more money when it’s cheap to borrow, just like when interest rates were near zero. When money is expensive (high interest rates), few people want to borrow, and the growth in the amount of dollars sloshing around the system slows or reverses.
Dollars can be loaned into existence. But the supply of gold can’t be so easily increased. It’s expensive, difficult, and time consuming to get out of the ground. If the supply of fiat increases faster than new supply of gold, the price of the commodity, again, all else equal, goes up.
The latest jobs report was a train wreck. Brad covered it here. As a result, the Fed is likely to make a small cut next month, but that’s not the main driver of gold prices today.
Investors are nervous for a host of reasons. To be fair, they’re always nervous, but more so now than in years past.
You can measure this via the S&P CBOE Volatility Index, better known as the VIX. It’s a gauge of expected future volatility. For that reason, some refer to it as Wall Street’s “fear gauge.”
The VIX jumped from 17 to over 50 in April when tariffs went live. Many investors aren’t sure how tariffs and the new “Big, Beautiful Bill” are going to impact the economy. This is also a factor in gold’s rise, but secondary in my view.
Several large central banks, including China, Russia, and Turkey, are piling up gold reserves. In 2024, central banks around the world acquired more than 1,000 tons of gold. That was the third year in a row, and far beyond what they bought in the previous 10 years. The first quarter of 2025 reported 244 tons, 25% above the five-year quarterly average. Aggressive central bank buying definitely pushes gold higher.
But it’s what I’ll discuss next that’s really driving it, and few are connecting the dots.
A Slow Deficit Death
All those factors are contributing to the powerful momentum behind gold prices. But they all miss the big picture.
Cemented in the last tax bill are roughly $2 trillion annual deficits for as far as the eye can see. Add to that roughly another $2 trillion in annual “unfunded liabilities” due to Social Security and government-funded health care programs (e.g., Medicare).
It means only one thing: The U.S. has quietly given up on its finances.
The latest estimates show that the true annual deficit is (or will soon be) greater than all tax revenue. The most tax revenue the government has collected in a single year is $4.9 trillion. Our annual deficit will soon be larger than that, if it’s not already.
We’d have to double tax revenue just to break even. It’s never going to happen. Another option would be to massively slash government expenditures. As Elon Musk just demonstrated with the Department of Government Efficiency, there’s precisely zero appetite for that.
There’s only one “solution.”
The government will fill that massive hole with paper. And in the event investors aren’t eager to buy those Treasurys, the Fed will have to step to the plate and buy them. It is, after all, the lender of last resort. You might know this as “monetizing the debt.”
What I’m saying is that this isn’t something that can be fixed eventually. It’s not something we’ll have to worry about down the road.
The game is already over, even if hardly anybody sees it yet.
What Can an Investor Do?
That’s a pretty grim prognosis. And there’s really nothing you or I can do about it.
But here’s what we can do…
And now the government has to add $2 trillion to $4 trillion to the debt load every year just to keep itself solvent. Gold is a decent way to protect yourself, but I’ll tell you about much better options.
I am a firm believer that market chaos is nothing more than an opportunity for intelligent and disciplined investors. I’ve spent years studying how different asset classes behave under different inflationary periods.
- U.S. Commercial Real Estate: Rents tend to go up with inflation, and so does the replacement cost of the building. But publicly traded real estate investment trusts (“REITs”) are often volatile during recessions and when interest rates change rapidly. Both are common when inflation kicks off. The key is to choose the right type, like multifamily, if inflation is your core concern. Different REITs of the same type can vary a lot in quality, so it helps to have an expert. Fortunately, you do. Brad covers REITs extensively in The Wide Moat Letter. I’m sure that will be a great resource in the years ahead. As a bonus, they are great long-term holds, too. U.S. real estate has matched the performance of the S&P 500 over the past 25 years.
- U.S. Farmland: This is tougher to access, but farmland may be the best all-around hedge against inflation. Land is scarce by nature, and agriculture crops tend to increase in value right alongside inflation. There are a couple farmland REITs, but do your homework, as their performance hasn’t always kept pace with the farmland index. Over the past 25 years, U.S. farmland has outperformed the S&P 500 by 1 to 2 points a year, and with less volatility. Again, I know Brad covers this space in the pages of The Wide Moat Letter. So, be sure to check in with him regularly.
- S&P 500: Over the long term, the S&P 500 combats inflation well. But severe inflation tends to knock stocks down, and performance within sectors varies tremendously. If you are looking for protection during the inflationary period, the S&P 500 as a whole isn’t a safe bet. Instead, I recommend strategically buying dividend stocks. Many of these companies sell products and services that quickly adjust in price due to inflation. Done right, they can match the upside of the S&P 500 while providing growing income and better inflation protection.
- Other Real Assets: Did you know that people purchased pianos as an inflation hedge during the hyperinflation of Weimar, Germany? It’s true. And it does make some sense. Pianos are valuable, useful, and real. I’m not saying you need to go buy a piano. But it might not hurt to have exposure to companies that own real assets. What’s a real asset? If it’s valuable, useful, and would hurt if you dropped it on your toe, it’s probably a hard asset. Think things like natural gas pipelines, oil derricks, cargo ships, and manufacturing equipment. The world will need these things no matter what happens. In an inflationary world, it might not be such a bad thing to have exposure to assets that are a little more solid.
In the 1970s, gold signaled the coming stagflationary regime and the consequences of the fiat system we’re still living under. It was signaling what was coming. Gold is doing the same thing today.
There’s nothing you or I can do to stop what will happen over the next few years. But you can prepare. And you probably should.
Paradigm-altering events like I’ve described today don’t happen often.
But they do happen.
Regards,
Stephen Hester
Chief Analyst, Wide Moat Research
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