Gold is sending a major economic warning

Of course, gold isn't just another asset. Investors view gold as a safe haven, and they tend to rush to it in times of uncertainty. So, gold can tell us a lot about the health of the economy, and right now, it's sending a very concerning signal.

So, what is this recent spike in gold prices telling us about the US economy, and should investors be worried about it? That's what we'll dig into in this video.

Historically, there is a good reason to be worried about gold price spikes like this

Major breakouts in gold have often served as an early warning for serious economic trouble. And gold price spikes have generally signaled two different types of economic trouble. One of them is economic stagnation.

That's what we saw in 2007. That year, gold broke out to new all-time highs, rising more than 50% in just over 6 months. And sure enough, trouble was on the horizon. The gold rally was followed just months later by the Great Recession. Unemployment peaked at 10% and the stock market collapsed, falling 57% in under a year.

And that's not the only time gold sent a signal like this. We saw something very similar in 1980. Gold prices surged, doubling in under two months. That was soon followed by the 1980 recession. Unemployment rose to nearly 8%. The stock market fell 17%.

Both these instances, 1980 and 2007, remind us that gold rallies like we're seeing today suggest that investors are concerned that economic difficulty could be on the horizon. Of course, that's not guaranteed, but recession isn't the only thing gold price spikes might signal.

Historically, they've also pointed to inflation on the horizon

The 1970s provide multiple examples of this. From 1970 to 1972, gold prices nearly doubled right before a destructive wave of inflation sent the core CPI to 12%. And the same thing happened again in 1977, when a 70% rise in gold prices preceded a second big wave of inflation that decade. The CPI rose to nearly 15%.

Now the question is whether the recent gold price spike indicates a recession or wave of inflation on the horizon, or if something is different this time.

To find out, we need to look at why gold price spikes have historically so often signaled economic turmoil ahead

And this chart helps explain it. Here we have gold prices in black and real interest rates in blue. Real interest rates are the true return on cash holdings — how much your money grows or shrinks after subtracting inflation.

Notice how gold prices often move in the opposite direction from real rates. This is especially clear during the 2010s. And that inverse relationship is the key here.

When real rates are high, investors prefer holding interest-bearing debt like treasury bonds instead of a store of value like gold. But when real rates are low or negative, that debt can't keep up with inflation. That's when investors flock to gold.

So, a rising gold price is at least in part a reaction to the fact that real interest rates have fallen over a whole percentage point since May of this year — from 2.2% to 1.2%.

This shows that investors may anticipate real interest rates will continue to fall

And that's a pessimistic outlook, because real interest rates are a direct reflection of economic health since they factor in both long-term yields and inflation.

Falling real rates and a major gold rally like we're seeing have in the past typically signaled one of two dangerous scenarios for an economy.

The first is stagnation — a severe economic downturn where growth collapses and the Fed drastically cuts rates to boost the economy, pushing real rates negative. We've already seen the Fed resuming rate cuts, and that could continue. In this case, gold could continue to rise as investors flee from stagnant cash holdings that no longer pay much interest.

This is exactly the scenario we saw play out in 2007. The Fed slashed rates to boost the economy, real rates collapsed, and gold prices rallied — leading right into stagnation: the Great Recession.

The second dangerous scenario that falling rates and rising gold could point to is runaway inflation

In this case, if the Fed keeps cutting rates, the economy could heat up too much, causing inflation to come roaring back. If that happens, it would depress real interest rates even more than the Fed rate cuts alone. And in this scenario as well, gold prices would likely keep rising.

This is what happened in the 1970s — a gold rally coinciding with runaway inflation and collapsing real rates. A recession followed.

When we look at what's going on today, it looks like we could be facing a challenging mix of economic stagnation and inflation

Better known as stagflation.

Real rates are showing a downward trend and gold prices are rallying. At the same time, we're seeing early signs of potential resurgent inflation. Services inflation remains stubbornly high at 3.8%, and headline CPI has ticked back up to 2.9%. Both are above the target of 2%.

So nowhere close to the runaway inflation of the 1970s, but these are concerning trends.

But there's another scenario.

If the Fed holds rates steady or even raises them due to slow growth and resurgent inflation...

This could raise the real interest rate, making cash more attractive and potentially stalling gold's rally.

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