Gold has been one of the better-performing asset classes this year. And here’s the good news. It’s only just begun.

Cut US dollar interest rates in the least and the greenback takes a hit. That is a major gold positive.

Trapped in a narrow trading range for three years, the yellow metal has suddenly become everyone’s favorite hedge.

Now that gold is back in fashion, how high can it really go?

The question begs your rapt attention, as a plethora of new positive fundamentals for the barbarous relic are making their way to the surface.

It turns out that gold is THE deflationary asset to own, and inflation has just fallen for ten consecutive months.

Who knew?

I was an unmitigated bear on the price of gold after it peaked in 2011. In recent years, the world has been obsessed with yields, chasing them up to historically high levels across all asset classes.

Websites purveying investment grade coins and bars crashed multiple times, due to overwhelming demand. Some retailers have run out of stock.

So I’ll take this opportunity to review a short history of the gold market (GLD) for the young and the uninformed.

Since it last peaked in the summer of 2011 at $1,927 an ounce, the barbarous relic was beaten like the proverbial red-headed stepchild, dragging silver (SLV) down with it.

It faced a perfect storm.

Gold was traditionally sought after as an inflation hedge. But with economic growth weak, wages stagnant, and much work still being outsourced abroad, deflation became rampant.

The biggest buyers of gold in the world, the Indians, have seen their purchasing power drop by half, thanks to the collapse of the rupee against the US dollar. The government increased taxes on gold in order to staunch precious capital outflows.

Chart gold against the Shanghai index and the similarity is striking until negative interest rates became widespread in 2016.

In the meantime, the gold supply/demand balance was changing dramatically.

While no one was looking, the average price of gold production soared from $5 in 1920 to $1,400 today. Over the last 100 years, the price of producing gold has risen four times faster than the underlying metal.

It’s almost as if the gold mining industry is the only one in the world that sees real inflation since costs soared at a 15% annual rate for the past five years.

This is a function of what I call “peak gold.” They’re not making it anymore. Miners are increasingly being driven to higher-risk, more expensive parts of the world to find the stuff.

You know those tires on heavy dump trucks? They now cost $200,000 each, and buyers face a three-year waiting list to buy one.

Barrack Gold (GOLD), the world’s largest gold miner, didn’t try to mine gold at 15,000 feet in the Andes, where freezing water is a major problem, because they like the fresh air.

What this means is that when the spot price of gold fell below the cost of production, miners simply shut down their most marginal facilities, drying up supply. That has recently been happening on a large scale.

Barrick Gold, a client of the Mad Hedge Fund Trader, can still operate, as older mines carry costs that go all the way down to $600 an ounce.

No one is going to want to supply the sparkly stuff at a loss. So, the supply disappeared.

I am constantly barraged with emails from gold bugs who passionately argue that their beloved metal is trading at a tiny fraction of its true value and that the barbaric relic is really worth $5,000, $10,000, or even $50,000 an ounce (GLD).

They claim the move in the yellow metal we are seeing now is only the beginning of a 30-fold rise in prices, similar to what we saw from 1972 to 1979 when it leapt from $32 to $950.

To match the gain seen since the 1936 monetary value peak of $35 an ounce, when the money supply was collapsing during the Great Depression, and the double top in 1979 when gold futures first tickled $950, this precious metal has to increase in value by 800% from the recent $1,050 low.  That would take our barbarous relic friend up to $8,400 an ounce.

To match the move from the $35/ounce, 1972 low to the $950/ounce, 1979 top in absolute dollar terms, we need to see another 27.14 times move to $28,497/ounce.

Have I gotten your attention yet?

I am long term bullish on gold, other precious metals, and virtually all commodities for that matter. But I am not that bullish. These figures make my own $3,000/ounce long-term prediction positively wimp-like by comparison.

The seven-year spike up in prices we saw in the seventies, which found me in a very long line in Johannesburg, South Africa to unload my own krugerands in 1979, was triggered by a number of one-off events that will never be repeated.

Some 40 years of unrequited demand was unleashed when Richard Nixon took the US off the gold standard and decriminalized private ownership in 1972. Inflation then peaked at around 20%. Newly enriched sellers of oil had a strong historical affinity with gold.

South Africa, the world’s largest gold producer, was then a boycotted international pariah and teetering on the edge of disaster. We are nowhere near the same geopolitical neighborhood today, and hence, my more subdued forecast.

But then again, I could be wrong.

You may have noticed that I have been playing gold from the long side recently since it bottomed in March. I’ll be back in there again, given a good low-risk, high-return entry point.

You’ll be the first to know when that happens.

As for the many investment advisor readers who have stayed long gold all along to hedge their clients other risk assets, good for you.

You’re finally learning!