A golden bubble bursts Thirty-three years ago today, on Jan. 21, 1980, gold reached $850 per ounce, its all-time high on an inflation-adjusted basis. The momentum of the final spike in prices was tremendous: During the first 11 1/2 months of 1979, the price of gold had doubled to $457; over the next 36 days, it came close to doubling again (+88%). The next day, however, the price gold fell 13%; over the following years, the loss amounted to nearly two-thirds.
The causes of the bubble are clear, in hindsight. Advanced economies had suffered the ravages of inflation during the 1970s and political tensions were at a high at the beginning of the 1980s: The Soviet army had just invaded Afghanistan the previous month and the hostage crisis at the U.S. embassy in Iran had erupted one month prior to that.
Finally, there was an important financial condition that fuelled the gold bubble: Negative real interest rates. The following graph shows the yield on the 10-year U.S. Treasury minus the rate of inflation over the prior year: