One debate that’s constantly raging is whether gold is in a “bubble.”
Is the precious metal overpriced and due for a major, long-term correction? Or are the periodic pullbacks in gold prices a normal part of any long-term bull market?
The position of gold “bears”—those who believe gold has reached the end of its bull market run, which began in 2001—have some strong points.
One of those points is time.
Most bull markets don’t last this long. The boom in housing started around the same time gold’s bull run began. Yet by 2007, housing lost its steam. And as we all know, over the next few years, housing took a beating. Home prices in some areas are still falling.
On the other hand, gold “bulls” would contend that underlying conditions still favor long-term price growth, and that the length of time is actually irrelevant. Even though gold pulled back from the all-time high set in August last year, the decline is part of a normal correction in any healthy bull market.
As you might imagine, we tend to agree with the last point. And it is instability—both geopolitical and economic—along with record-breaking money printing by the world’s central banks that lead us to that position.
Yet things change.
So how do we know if gold’s bull market is ending?
To answer that question, it’s important to examine gold’s last long-term bull market.
The 1970s were a time of great economic turmoil in the United States. Throughout the Disco Decade, the nation experienced the worst economic downturn since the Great Depression.
After the U.S. dollar severed ties with gold in August of 1971, gold began a steady upward climb from $35 per ounce. Over the course of the decade, it rose and collapsed several times. (In fact, it dropped nearly 50% in one year alone in the mid-70s.)
Yet without fail, gold managed to return, repeatedly reaching new highs.
From late 1979 into January 1980, the precious metal began to spike. Over the course of a few months, it doubled—considered a “parabolic” move by veteran market analysts.
From January 1 – January 22, 1980, gold rose an astounding 52%. In just 3 weeks!
Gold peaked at $850/oz on January 22. By the end of February, it dropped to $630. From the early 1980s to the early 2000s, gold fluctuated between a low of $100 and a high of $300.
What contributed to the rising price of gold?
There were multiple factors. High inflation, strong oil, the Soviet invasion of Afghanistan and the revolution in Iran all combined, boosting gold to untold heights.
If we were approaching an end to gold’s long-term bull market, analysts argue there would be another “parabolic” move—like prices that double in only 12 months.
To this date, that hasn’t happened. And it probably won’t.
According to Howard Ruff, publisher of 2005’s Little Book of Big Fortunes in Gold and Silver, gold would have to top out at $2000. Ruff continues to recommend investors keep an eye on gold bullion and other metals. Absent a reversal in central bank policy, gold will continue to increase over the long term.
Ruff—along with countless others—believes the 70s bull market came to an end when Fed chairman Paul Volcker raised interest rates to combat inflation. Once interest rates exceeded the rate of inflation, returns on savings and cash holdings grew more attractive. This led to a long-term sell-off in gold.
Adjusting for inflation, $850 in 1980 would equal roughly $2300 today.
That fact alone is why we believe gold’s bull run has a long way to go. Any long-term bull market—like gold—has its corrections. Short-term investors will continue to take profits while the dollar experiences a temporary rally, putting downward pressure on gold priced in dollars.
In the end, these corrections are temporary. And though we can’t predict the future, we believe gold will continue to grow until many underlying issues are addressed.
What do you think? Drop us a line in the comments section below or track us down on Facebook.
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