Essay on gold - 12 February 2015
Comparing the current gold bear market to the 1974-76 bear market
The 1974-76 bear market in the middle of the 1971-1980 bull market had a correction of about 60-61% of the previous upmove. It depends on the exact prices you choose (futures, spot prices or London Fixes). I am using 1971 gold at $35-$40, 1974 gold top at $195-198, 1976 bottom in gold at $103 and the 1980 top at $850.
The 1974-76 retracement from $198 to $103 was about 60% of the upmove from $35 to $198. This is very close to a so-called Fibonacci 61.8% correction, which to be more correct should be called a golden ratio correction (the golden ratio is 1:1.618 or 0.618:1 - the two are the same and come from the formula 1+x = 1/x and is similar to the ratio seen in the Fibonacci series of numbers).
I would propose that it could be possible that the present bear market could have a similar correction. The market started at $252.80 in 1999 and the high in 2011 was $1920. A 61.8% correction of this move would take gold to $890 as shown on my yearly chart made at the end of 2013:
Interestingly, as I have pointed out before on my blog, $890 is also the price at which gold futures topped on 21 January 1980 (the day that the London Gold fix was at $850) at the end of the 1970s bull market, giving a beautiful symmetry to the price action in gold over the last 30 years.
As for the timing of this move, the rabid goldbugs have long been comparing this current bear market to the 1974-76 correction, assuming it is a mid-term cyclical correction in the middle of a gold bull market. They seemed to expect that it would run for no more than two years - but here we are at three and a half already.
I would like to point out that the 1970s gold bull market ran for a total of just under 10 years and there was a
19-year secular bear market to follow. The bull market was actually split into 4 years up, 2 years down and about 3½ more years up into the 1980 price top. The cyclical mid-term correction was about half the length of the previous upmove.
In the 2000s bull market there were 12 up-years if you look at year end prices, from 2001-2012 inclusive. One might say that 2012 was an anomaly because the actual price high was in 2011 and then there was a secondary high in 2012. If we look at the actual length of the bull market from the very low to the very high, it lasted from 1999 to 2011, which is again a 12-year period. There was actually almost a double bottom in gold at the lows and the gold price had a low at $255 in 2001, so taking that secondary low, the bull lasted 10 years from 2001-2011.On the strength of that minimum of 10 years of bull market action, one might expect the correction to be half that length or at least 5 years. That would last from September 2011 to September 2016.
Comparing the present gold market to the 1970s one, we see that this bull market is running about 40% of the speed of the previous one, i.e. it has taken 2.5-3 times as long to run its course. One might therefore expect another upleg in gold that compares to the one that happened in late 1976 until January 1980, or about 2.5-3 times three and a half years, which is 8-10 years. That would allow the market to run up from 2016 to around 2024-2026, let's say 2025.
Potential upmove if we have a second half of the gold bull market.
Let's look at the potential upmove if this bull market is a copy of the past one. The initial upmove in gold from $35 to $398 is almost a 6x move. The upmove in the 2000s bull market was $252 to $1920, about 7.5 times. We are postulating a 61.8% correction of the upmove in this current market to $891, while the 1970s correction was about 60%. Then the final upmove in the 1970s was from $103 to $850 or 8.25 times. Applying that to a forecast low of $891 in 2016, one might then see a final top at $891 x 8.25 or $7352. Applying an adjustment that recognises that the first leg of the 2000s market was stronger than the first leg of the 1970s bull market, a price top of $9800 might be possible. My original estimate came out at $8400 - it depends how you make the estimate, but let's average it at around $8000. The timeline for this would be in 2025 as mentioned in the previous paragraph.
US Dollar bull market accelerating in 2014-15
Now let's look at gold's nemesis: the US dollar. The US dollar has been in a bull market since its low in March 2011 at about 71.3 on the USDX or the US dollar index. Since President Nixon defaulted on the gold redeemability of the US dollar on 15 August 1971, the dollar has had 3 bear markets and two and a bit bull markets. 1971-1980 was a bear, 1980-1985 was a bull, then the dollar crashed from 1985-87 and continued near the lows in a bear market until approximately 1992 when the USDX bottomed at the key level of 80, another bull market from 1992-2001 (when the USDX topped at 121), the 2000s bear market from 2001-2008 that took it to a low of 71 and then a bull market from 2008-2015, so far. These are about 7-year or 8-year upmoves and downmoves to a first approximation.
One might therefore expect the US dollar bull market to last from March 2008 to approximately early 2015-16.
This has a good coincidence from the potential gold correction to go on until 2016. I note with interest that Martin Armstrong has a key date of 2015.75 (end of September 2015), which I would assume is his mathematically determined target time for the top in his Economic Confidence Model cycle. I am not sure if he is applying this target time to the US stock marker and/or the US dollar.
The previous 43 years of experience in the performance of the irredeemable US dollar would indicate that in 2016 an 7½-year bear market in the USD might ensue, taking the USDX to a low in 2024, which could coincide with another significant bull market in gold, which usually runs inverse to the USD by and large.
This cycle has been similar to the 1985-2001 dollar cycle. Once the dollar reached the bottom of these cycles, there was an upmove followed by a secondary low. The secondary lows were in 1995 and 2011 in the respective cycles, the latter coinciding with the top in the gold bull market at $1900.
In both cases we have seen a subsequent big run-up in the value of the dollar index. In 2014, we have seen the emergence of this rapid upsurge in the current bull market in the US dollar, similar to what occurred in 1997-2001. See the great USD public chart on Stockcharts.com.
Also, one could look at the time interval between tops in the USDX. There were tops in the USDX in early 1985 and late 2001, nearly 15 years apart. Counting 14 more years from 2001 would take us to a target zone for the next top in 2016 perhaps.
Signs of a possible turn in the current gold bear market.
I see some potentially positive signs in gold:
Gold has just broken above 1000 Euros and also 1200 Swiss France and 800 British Pounds as of 8 January 2015.
I was also shocked today to see that the Pound has fallen from nearly $1.71 to $1.50 in just 6 months, down about 12.5% from high to low, wiping out all the last couple of years' gains in the GBP. Gold is up about 10% for 2014 in GBP from a low near720 GBP to the current price near 800 GBP.
So, gold was up in almost every currency in 2014, except most notably the US dollar where it was flat until the last trading day when it fell about $20 to go negative for the year.
In January 2015:
· Euro gold has blown past several past highs and reached the highest since September 2013 (when gold topped at $1434, following the 2013 crash).
· Sterling gold has exceeded several past highs and reached the highest since February 2014 (when gold topped at $1393 in the early 2014 rally).
Bob Hoye of Institutional Advisors likes to track the real price of gold (the US dollar gold price divided by his proprietary commodity index as a substitute for allegedly unreliable government inflation figures).. This has been increasing since June 2014. He is calling this a cyclical bull market in the real price of gold and typical during a post-bubble contraction in the economy, though he doesn’t really look at the US dollar gold price so closely. A decent substitute for his index might be the ratio of gold to the CRB or CCI Commodity Indices.
Off-topic? Correlations between gold and the Yen and between oil and the Pound
The gold price had its crash the same time in 2012-2013 as the Japanese yen crashed, still not fully explained by anyone. I posted many comments on this topic, not only on my blog but many more times on the Korelin Economics Report forum at www.kereport.com during the last 2 years.
I wrote to Eric King about this and he said it was an interesting point but I never heard anyone comment on this gold-Yen correlation until the end of 2014, when there have been a couple of podcasts that have mentioned it. However, the correlation has already weakened, so it might not be of any use to anyone now that it is in the public domain!
It has been postulated that there might have been a huge proprietary trade between the Japanese markets (Yen or Nikkei) and gold.
I also noticed that the oil price has crashed at the same time as the British Pound has had a big fall from mid-2014 until January 2015. One wonders, could there be any connection? Perhaps the pound is still a petro-currency but this is tenuous because Britain is now hardly a net oil exporter overall because of declines in North Sea oil production in recent years.
Goldbug obsession with 1974-76 gold correction
It seems to me that the goldbugs are hanging on obsessively to the notion that the current gold bear market is a repeat of the correction in the 1970s bull market. They would do this of course because an 8.5 times increase in the gold price followed, taking gold from $103 to $850 in under 4 years and a similar move this time could take gold over $8000, a goldbug’s pipedream!
Direct comparison of current bear market with other bears, large and small
I consider this gold and silver bear market to be midway in magnitude between the 1971-76 mini bear market and the 1980-1999 gigantic bear market. In the former case, the round trip to get to the 1974 highs was about 4 years and new highs were again reached in 1978 before the final top was attained in 1980. In the 1980-1999 bear market, the lows took 19 years to arrive and the total round trips for gold and silver to reach new highs were 27 years and 31 years respectively.
When we look at the 1980s/1990s bear market in totality, the final low in gold at $253 was a -70% move from the $850 high and the final low in silver at under $4 was a -93% move from the $50 high. However, I feel at the moment it is more relevant to look at the interim lows in the early to mid-1980s.
Our current silver correction is about -70% from $49 all the way down to the $14.50 low of November 2014. In the early 1980s, silver fell from $50 in January 1980 to $5 by 1982, a move of -90%, so that correction was particularly severe! Note that in the next decade or more of the bear market, silver went only a little further down to just under $4 - but it spent 15-20 years trading near or below $5! Our current correction is not nearly as severe.
However, the current silver bear market is actually much more severe than the mid-cycle bear in 1974-76, where silver fell from around $6.50 to about $4 or about -40%.
Interestingly, the present silver correction is also slightly worse than the 1980-82 gold correction, which was from $850 to around $300 or -65%. One would expect silver to be more volatile but it is an interesting comparison.
The current gold correction is -42% from $1900 to $1130 (which is fairly similar to the mid-1970s -40% silver correction incidentally) but it is also slightly less severe than the mid-1970s gold correction which was from $198 to $103 or (-48%) and also the 1980-82 gold correction of -65% where gold fell from around $850 to $300.
It is strange that the silver correction in the mid-1970s was not as severe as that for gold and I cannot think of a reason for this except that it may indicate that speculative interest in silver did not really emerge until around 1979-80.
For a long term chart, there is an excellent silver chart by Hubert Moolman here:
Here is another one from a different author:
We can see that after the 1980 bubble top, silver returned to the $4-6 level, which was the congestion zone of the mid-1970s. With a similar analysis, the present correction might return to the congestion zone near to 2008 where silver traded a long time in the region of $8-18 and especially around $12-14. This would seem a likely region for a low to me but there could possibly be a long period of trading in that area, possibly several years.
Look at the long term gold chart:
Gold never quite retraced to the sub-$200 mid-1970s levels after the top in 1980. Perhaps one might compare the $200 level in 1974 to the $1025 high in 2008 when he trading range from 2006-2009 was between around $650 and $1000. Perhaps the low for gold could be in that region. However, if gold performs as in 1980-1999, the correction might not reach the $1025 high of 2008 and low in gold would therefore be above $1025. The price has reached $1130 already, so gold might already be at or close to the low for this bear market. One caveat, as with silver would be the possibility that gold could trade in that region for a number of years.
A more sober view of the gold bear market
However, take a look at this chart courtesy of sharelynx.com to be found at this link. The third chart from the top:
and for silver:
The two main features on the charts are the huge topping formation in 1980 and the huge topping formation in 2011. Note the similarity in chart action on the monthly chart 1980-1982 versus 2011-2013. This is not a nice similarity. Here is a breakdown of the topping action.
Dates of topping formation 1979-1982 2011-2013
Parabolic run up to bull market top 1979-1980 2010-2011
Isolated top $850 $1920
First Trading range $430-$700 $1520-$1800
Breakdown to lower trading range $298-$500 $1180-$1430
Further breakdown to lower lows To $252 To $1130 so far?
Dates of bear market 1980-1999 2011-2015 so far
Length of bear market 19 years 3.5 years so far
Bear market rallies 1982-83 2013 or not yet?
$298 -> $500 $1180 -> $1434 maybe
1986-87 2014 or not yet?
$300 -> $500 $1180 -> $1393 maybe
Later rallies 1989 & 1993 None so far
The price action in 2011-2013 was uncannily similar to 1980-82 with a major top followed by a severe correction and an initial bounce to a secondary, lower high, then some trading between the first low and this lower high, followed by a new visit to the low and a breakdown to lower lows and a secondary lower trading range.
The current price action as of January 2015 is similar to that near the 1982 low and might indicate that a good rally is due soon.
On the other hand, it may be that we are later in this cycle and that the rally to $1434 in the summer of 2013 could correspond to the bear market rally of 1982-83. However the two bear market rallies in the 1980s from $300-500 penetrated back into the previous post-bubble $430-700 trading range. This time the $1434 high has not penetrated into the previous $1520-1800 trading range, so this is weaker action.
We also have an isolated low at $1130 in November 2014. This could indicate another breakdown to a slightly lower trading range, which could be a parallel with the later stages of the previous bear market in 1998-99. That would ultimately be more bullish and there are lot of similarities between now and that period, i.e. Russian economic crisis, Asian emerging market crisis possible, weak Euro, bear market in crude oil, chronically strong
US dollar and surging US stock market approaching a major top. Goldbugs might hope that in this case the bear market in gold could be ending fairly soon:
Parallels with 1990s:
Event Last time This time
Bear market low in gold $253 in 1999 $1130 in 2014
Stock market top Early 2000 2015 perhaps?
US dollar top Late 2001 2015-16 perhaps?
Asian debt crisis 1997 2015?
Russian economic crisis and fall of Rouble 1998 2014-15?
European upheaval and Euro bear market 1999-2001 2010-15!
Crude oil bear market low 1998 2015?
If gold bear market unfolds like the 1980s and 1990s
This would be unfortunate for gold investors and would imply a very long wait for new highs in gold and silver. The previous bear market lasted 19 years, from 1980 to 1999. A similar bear market would take the date for a final low in gold out to 2011+19 or 2028. The round trip to get back to the $850 high took 27 years from 1980 to 2007, so the round trip to a new high could take from 2011 to 2011+27 = 2038. For silver, the 1980 high was not reached until 2011, a 31-year round trip. A similar unfolding would take investors until 2042 until silver got back to $50 again.
These are sombre numbers and should be taken as just as realistic as an immediate moon shot to $7000 as constantly floated by goldbugs. They should be laid against Eric Sprott’s ridiculous forecast of $2000 gold by Christmas 2014, when the final price was actually under $1200! However, the sombre numbers actually have precedent in the last gold bear market.
The 1987 rally in gold was interesting as a mid-term and large bear market rally in gold priced in US dollars. It coincided with a crash in the dollar which fell about 40% from 160 to 85. This was a stunning dollar crash but it was not accompanied by a new high in gold. Gold rallied to $500, more than 4% under its 1980 high at $850. Such a rally might be seen as pathetic, since the dollar had moved convincingly to new lows and made its final low in 1992 at the now key 80 level.
This table correlates the gold action to the bull and bear markets in the US dollar:
Last gold cycle (bull+bear) This gold cycle (bull+bear)
US dollar action Gold action US dollar action
$ Bear market 1971-1980 Gold bull $ Bear market 2002-2008
$ Bull market 1980-1985 Gold bear mkt $ Bull market 2008-2015/16?
$ Bear market 1985-1992 Gold BM rally $ Bear market 2016-2024?
$ Bull market 1992-2001 Gold bear mkt $ Bull market 2024-2031/32?
($ Bear market 2002-2008) New gold bull mkt? ($ Bear market 2031-2038?)
As is clearly shown, there was a bear market in the US dollar in 1985-1992, in the middle of the last gold bear market cycle. This 1987 rally in gold was just a bear market rally and gold later went to new bear market lows.
We are currently in a USD bull market and the dollar accelerated to the upside in 2014. This is line with the behaviour of the dollar since the end of the Bretton Woods system in 1971. The dollar bulls and bears average about 7.5 years each, so a top in the dollar should be expected in 2015-2016, followed by a 7.5 year down cycle. This is when gold could have a major rally and it is yet to be determined if it will simply be a bear market rally or if it will go to new highs.
In the 1987 gold rally, gold increased 66% from $300 to $500 while the dollar fell 40%. This means that in other major currencies, the gold rally would have been practically invisible. Can we expect something similar in the 2016-2024 timeframe?
In this scenario, goldbugs would have to wait until the next dollar bear market in 2030-2038 to get their new gold secular bull market. A top in gold might then be expected roughly as the dollar makes its lows, perhaps around 2038, a long wait from today! This coincides with the previous mention of the possible 37-year round trip for gold to get back to $1920 on the way up to its new bull market highs in the late 2030s.
Chronic US dollar strength, deflation and shale oil
Shale oil and gas in the USA has been a very interesting development, following the bull market top in oil in 2008.
Peak Oil was the mantra at that time and was being heavily promoted in the media with various reports from the mainstream catching on to it just as the shale oil boom was about to reverse the 38-year decline in oil production in the USA.
I am fascinated by the confluence of events surrounding the period around 1971:
1967 Arab-Israeli war
Late 1960s London Gold Pool to hold gold at $35/ounce
1970 Peak Oil production in the USA’s lower 48 states (therefore excluding Alaska)
1971 President Nixon suspends gold redeemability of US dollar ending Bretton Woods era
1971 US dollar bear market starts accompanied by bear market in US Treasury debt
1973 Arab-Israeli war, Saudi oil embargo and oil crisis
1973-74 Spike in inflation and commodity prices including silver and gold and crude oil
1979 Iranian revolution and apparent resurgence of Muslim power
1979-80 Second spike in inflation and commodity prices including silver, gold and $40 peak in crude oil
1980 US dollar bear market ends as dollar comes close to losing reserve currency status
1980-82 15% interest rates bring capital back into the US dollar
1982 US Treasury bull market starts and lasts for 30+ years
1990-91 Iraq’s invasion of Kuwait
1991 First Iraq War – Operation Desert Storm – oil spiked to $40 again
I postulate that a key event was Peak Oil production in the USA. This could have been a main driver for all the surrounding events, with the USA becoming a chronic oil importer, weakening geopolitically and economically and suffering from inflation for a decade afterwards.
Now let’s compare to the present day. We have rapidly increasing US oil production of oil and natural gas from 2010 to 2014, reversing half of the previous 40-year decline, a halving of US oil imports from the rest of the world and a 50% crash in the oil price in 2014, record low US interest rates, a continuing US Treasury debt bull market, etc.
I am beginning to wonder if this reversal in Peak Oil continues in the USA, will the US dollar index reverse its 40 years of declines too? See the chart on the next page.
We have two factors that could create a larger degree bull market in the US dollar than the three rallies that we have seen since 1971. Both of these factors have been operating recently:
One is the possible reversal of Peak Oil in the USA and a sustained increase in oil production, surely a major geopolitical plus for the USA.
Second is the credit crisis, where as Bob Hoye loves to point out in his interviews on Howestreet.com, and elsewhere, the senior currency is usually chronically strong for most of the time of a credit contraction as debtors and speculators and move to raise US dollar cash to pay off debts and margin calls. This would be comparable to the 1930s, a once in 80 years type event, so why would we assume that the movements in the dollar would simply follow the downtrend of merely the past 40 years?
Both are deflationary in their implications and tend to strengthen the US dollar, which is the reserve currency.
Looking at the chart of the USDX since 1980 from Stockcharts.com, we can also see that there is a potential bullish falling wedge pattern in the dollar and the measured move from such a pattern usually undoes the entire wedge - this could take the USDX back to its starting point of 160.
Now of course, this is quite an extreme possibility and would likely necessitate the US becoming a net energy exporter again with an uninterrupted increase in oil production to new high to exceed the 1970 peak of over 10 million barrels of crude oil per day.
Such a situation could mean that the top in the gold price in 2011 might be a very long term secular top. Perhaps gold might not resume its bull market until shale oil has peaked, whenever that happens. Some forecasts from the EIA indicate that could happen in 2020-2025. Shale gas production is forecast to peak even later.
and this figure (which is © OECD/IEA 2012 World Energy Outlook, IEA Publishing):
However, the new shale oil production is more expensive to bring to market than conventional oil. The recent crash in oil prices due to this increased production and to demand destruction in the light of the economic slowdown in various parts of the world might halt shale oil development and cause a credit crisis centred on this new oil industry. The success of shale in boosting oil production so quickly could be its downfall, at least temporarily. Perhaps there will be a year 2000 technology bubble style crash. However, the tech boom did not stop, nor should we expect progress in shale oil to stop altogether, even if the bubble bursts, making for quite a complicated situation.
This is a fascinating dynamic and the whole shale oil boom phenomenon seems to put a dampener on the prospects for a spectacular gold bull market going forward in my view.
Here is another piece of evidence to back up this hypothesis. US oil production had basically a 40 year decline from 1970 until around 2010. During this decline there was a reversal and increase in oil production between around 1980 and 1985 and a big drop in US oil imports. See this file:
The increase in US oil production and drop in imports in the early 1980s werecoincident with the exceptional strength of the US dollar index, which spiked up to 160 in 1985. The subsequent dollar crash from 1985 to 1987 is usually attributed to the Plaza Accord but it is also coincident with the downtrend of US oil production resuming and a renewed increase in oil imports.
The present time is comparable to the 1980 to 1985 period where there is a significant increase in US oil production and now we have the renewed US dollar bull market. It would be typical for the US dollar bull market to last 7.5 years on average, perhaps up to 9 years since the low (in March 2008) but might it instead last until shale oil production in the US reached its peak?
The fairly optimistic but realistic scenario
On balance, one could conclude that the $2000 gold by Christmas scenario was an extreme and the 27 year round trip scenario is perhaps the other extreme.
Perhaps a more balanced view would be that gold is in a bear market pretty much until shortly before the US dollar tops and a bull market might resume (at least a cyclical one) if the dollar then enters another of its usual declines to new lows. However the US oil production boom might be a factor to lessen the chances of a big dollar decline until shale production peaks. One the other hand, maybe shale oil has come too late to save the US dollar and the $17 trillion US national debt still exists and is constantly increasing – perhaps this could re-assert itself as a driver for higher gold prices.
We might then expect some of gold bull market from 2016-2024 and possibly new highs in that time period. This bear market has not been as severe as the one in the 1980s. The 1987 rally was from $300 to $500. The $300 figure was already nearly 2/3 below the $850 high of 1980. As we stand in 2015, the low in gold at $1130 is 41% below the high at $1920. A 70% rally would take gold to new highs (compared to 1987, when the gold price would have to have nearly trebled to exceed the 1980 high of $850). So, new highs before 2024 are feasible.
We seem to be in a fairly protracted bearish period for gold and silver and also the other precious metals, the base metals and crude oil. There is a goldbug’s obsession with the mid-1970s cyclical bear market that seems hardly justified given the length of the current gold and silver bear markets and the depth of the silver correction. There are just as many similarities with the long term top in 1980 and the 19-year bear market that followed. Chronic US dollar strength caused by deflationary pressures following the credit bust of 2008 and geopolitical factors related to increased US oil production are weighing on gold and silver. A realistic scenario might be for the bull markets to resume once the dollar reaches a top and turns down into a new bear market, perhaps in the 2017-2024 timeframe.
Text © 2015 David Bellamy.
Essay on gold comparing current gold bear market to the 1974-76 bear market