The Great Gold Bubble Finally Pops

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 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 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 executive John DeLorean, the youngest division head in the company's history at that time. DeLorean was then riding a string of professional successes that had included developing the Pontiac GTO, the Pontiac Firebird, and the Pontiac Grand Prix for GM before founding his own company in 1973. The DMC-12 first appeared as a prototype in 1976, and DeLorean required nearly $200 million to build out the infrastructure necessary to make it into a profitable vehicle.

Unfortunately, DeLorean Motor Company wound up in bankruptcy a year after the DMC-12's rollout, because of poor sales and its founder's high-profile drug bust, which ended in acquittal too late to save the floundering automaker. The DeLorean achieved iconic status in 1985, when it served as the vehicular star of Back to the Future, but this was far too late to save 2,500 jobs and more than $100 million in investment capital. However, you might still be able to get a DMC-12 to build your own time machine like Doc Brown -- a robust community of DeLorean enthusiasts has kept thousands of the cars on the road to this day.

Toyota on top
GM was the world's best-selling automaker in 1981 when its former executive first produced his own cars. It remained tops in the world until Jan. 21, 2009, when it revealed that its 2008 annual sales had been 8.36 million vehicles, lower than Japanese rival Toyota's annual sales (8.97 million vehicles) for the first time. It was the first time in 77 years that GM was not the world's best-selling automaker.

GM execs offered unconvincing spin to CNNMoney as the news broke, saying that "being No. 1 in global sales [doesn't] mean much at all to the average consumer. ... [W]hat matters most to the consumer is strong brands and strong products." As it turned out, GM's brands and products weren't strong enough to stave off its bankruptcy, which occurred less than six months later.

Toyota didn't benefit much from claiming the crown. In April of that year, the Japanese giant posted its first operating loss in 70 years. A devastating earthquake in Japan allowed GM to squeak back into first place for 2011, but with its capacity rebuilt, Toyota reclaimed the crown in early 2013, reporting 400,000 more global auto sales than GM in 2012.

Will today's high gold prices fall as far as those of the '80s? It might happen, but it's unlikely as long as global macro fears keep investors fixated on precious metals. There are ways to profit phenomenally right now, even if gold prices remain flat for years. Want to find out how you can cash in? Our exclusive free report details one tiny gold stock digging up big profits. All the information you need to find your next multibagger is a click away -- just click here to get all the information you need, at no cost.

The article The Great Gold Bubble Finally Pops originally appeared on Fool.com.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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