Twenty-seven years ago, driven by a frenzy of buying activity, the price of gold, very briefly, hit $850.

 

It was a time when Russia invaded Afghanistan, US inflation peaked at 23%, Bin Laden was created and Al Quauda started its inexorable rise to power in the western world.

 

Gold didn’t hold those dizzy heights for long, as the buying avalanche that drove it up was just that; a frenzy so heated that it was unsustainable – as those who visited their dentists to remove and sell their gold fillings, along with those who rushed to dispose of their Krugerrands, manifestly affirmed.

 

Reflection on those heady days goes beyond mere nostalgia, for the situation that then prevailed could today be instructive as gold steadily reaches for higher price levels.

Back in early 1980, following its initial correction from $850 flirtation, the gold price continued to lose ground as it entered an ultra-long bear market that only bottomed out some 20 years after it had peaked.

 

It is now evident that a renewed bull market is underway, prompting several relevant questions:

• At which price level will the current bull market peak?

• When?

• Are conditions favourable to a bull market peak in excess of its 1980 predecessor?

 

What makes it difficult to furnish convincing answers is that the underlying factors currently driving investors into the gold market are different from those that prevailed in the late 1970s.

 

Few investment savvy individuals are unaware that gold is a hedge against uncertainty. Indeed, uncertainty, while anathema to investors in equities, is manna to investors in bullion.

 

Uncertainty comes in several guises, among them inflation, conflict, political chaos and currency instability. Inconceivable as it might appear to those who weren’t there to experience it first-hand, inflation – and a lot of it – was the prime reason for the 1980 gold spike.

 

Hard as it might be to credit in today’s low single-digit inflationary climate, lax Jimmy Carter-inspired US monetary policies pushed that country’s annual inflation rate to an atmospheric 23%, with most other countries around the globe tending to follow suit.

 

As the American dollar – then, as it is now, the world’s yardstick currency – started losing its purchasing power, so the world sought shelter in gold.

 

The unfolding events provided a fascinating insight into the market’s anticipatory mechanism, since the bear market was triggered prior to the Reaganomics that subsequently slew the inflation ogre, in the wake of which the golden lifebelt lost its attraction and the gold price declined steadily for a couple of decades thereafter.

 

All this by way of (essential) background.

 

Whether or not we believe that history repeats itself, as matters stand at present it is unlikely that rampant inflation will once again rear its head in the foreseeable future.

 

Yet bullion has been attracting a fair measure of investment (and speculative) attention, prompting the thought that such buying is driven by a desire to hedge against a host of unpredictable uncertainties.

 

Candidates include dollar weakness, the ongoing Iraqi saga, growing Muslim militancy, the possibility of a democrat in the White House, a nuclear-fired Iran and/or North Korea, an emerging market meltdown and global warming, and with oil headed for $100 a barrel, well anything is possible now.

 

While the imagination needs to run rampant to conceive of a situation sufficient to spark a bullion buying frenzy of the ilk witnessed 27 years ago, more than one of these factors – or even, perhaps, a future event that currently defies imagination – could in due course eventuate in a way profound enough to drive precious metals prices to well above former peaks.

 

In the process of interrogating your crystal ball, bear always in mind that in our highly efficient free market system, today’s prices do not reflect the past or the present but, rather, collective expectations of what awaits us in the future. In short, Adam Smith’s “invisible hand” is a staggeringly accurate barometer that dare not be ignored.

 

One of the crystal ball’s revelations could, of course, convey the message that the past couple of years’ gold price revival represents no more than a rectification of an oversold position, in which event the bull run could soon peter out to be succeeded by (at best) a long period of consolidation.

 

Such a scenario is not out of the question, though the long-term cycle points to the likelihood that a new peak is in prospect, with the time frame hinging on the extent and longevity of global stability.

 

If the crystal ball is telling you that heightened uncertainty lies in store and that refuge will be sought in gold, as it has for centuries, then an investment strategy aimed at accumulating Krugerrands – the world’s most successful-ever gold coin – should be seriously contemplated.