Over the last couple of years gold and silver have had a lacklustre performance compared to previous years. Since autumn 2012 we’ve seen gold fall from close to 1800 to today’s level of around 1580. Does that mean the bull market for precious metals is over for this time? That’s what we are taking a closer look at in this blog post.
People buy gold and silver for many reasons. Some use it as insurance. Others speculate in the short term movements of the metals through various securities. The gold and silver miners is another investment option. The shorter the time horizon of your holdings the more nervous you will get when the markets get choppy.
In 2011 gold was up 9.1%, and in 2012 about 8.3%. An interesting observation is that the S&P 500 in 2012, for the first time since 2004, had a stronger performance than gold. Does this really mean that the gold bull run is over? I don’t believe so.
The most simple reason for the bull market not being over is simply this: nothing goes up in a straight line. There will always be up’s and down’s along the way. Now let’s get a bit more technical, but before we do so we must start with a definition.
A bull market for stocks is characterized by rising valuations, which usually means rising stock prices. For precious metals a bull market would mean a rising price trend. Conversely, a bear market in stocks is characterized by declining valuations, which over time usually translates into lower stock prices. A bear market in precious metals is equivalent to a declining price trend.
During a bull market there tends to be both tops and bottoms. A full bull market can be said to be secular in nature – meaning a longer trend. During a secular bull market one will see both cyclical bull- and bear markets. A good example of this is today’s stock market where many agree that we saw a secular decline start around 2000, when we had extremely high valuations, followed by a cyclical bull market 2003-2008 and a cyclical bear market 2008-2009.
It’s not unreasonable to assume that the same conditions would apply to gold and silver. To make this perfectly clear. It would be strange for gold to rise for more than a decade without having temporary declines along the way.
The table below shows gold’s annual performance in varying currencies since 2003.
Gold’s performance has, on an annual basis, been consistently positive measured in USD. What rarely is discussed is the declines during this period. These declines can actually be even more revealing than the positive periods.
During the last 12 years there has been many occasions where the price of gold has dropped – sometimes significantly – without breaking the rising price trend. Fact of the matter is that these drops are viewed as a good buying opportunity, often making the declines temporary.
Over the last 12 years gold has risen by approximately 500%. To some that statement would be seen as evidence for gold not possibly being able to go any higher. History doesn’t support this assumption though. The price of gold is lower today than it was back in the 1970’s adjusted for inflation.
In fact, there are a number of occasions in the last 40 years where bull markets in other assets have been stronger. Today’s bull market in gold is by comparison the smallest – so far. As comparison, the last bull market in gold meant a price increase of about 2000%.
Source: click here
A “normal” bull market usually lasts for 5-15 years. In some cases they’ve lasted longer. There’s nothing “normal” about the current bull market though. The central banks of Japan, China, Europe and not to mention the U.S. are all printing as much money as they can, which is distorting the markets. This makes predicting the duration of gold’s bull run very difficult. It’s safe to say though that the prerequisites for gold hasn’t changed.
Finally, a typical bull market usually top’s off with a parabolic price rise – which has yet to be seen. In 1979 gold rose by 120%. So far, the strongest year was 2007 when gold rose with 31%.
I’d like to point out, yet again, that the current gold run doesn’t have to correlate with previous bull markets. You can’t really compare the reasons why the fiat currencies all are declining in value compared to gold (or gold rising in fiat currency value) with the dotcom bubble, which lacked fundamental drivers.
A few of the strongest trends we are seeing at the moment, supporting gold – apart from the commonly know reasons such as debt monetisation – is:
– Today, less than 2% of the worlds assets are allocated to gold in comparison with 5% during the 1970’s. Many institutions and prominent investors are now positive towards gold.
– Central banks were net sellers of gold as late as 2009. This trend has now reversed for the first time since the 1970’s. During the first 9 months of 2012 central banks bought over 351.8 tonnes of gold, which was an increase by 2% compared to the year before. These are just the official numbers though.
– Then we’ve got countries like China and India where demand is enormous. China only reports their purchases every 5 years and we know that they have accumulated mines, companies and physical gold – the question is how much. When the numbers are reported in 2014 it may become a very strong catalyst for gold prices.
– It’s important to realise that when central banks now are net buyers of gold again this is a long term trend that won’t easily be reversed. Central bank buying will constitute an important support for gold going forward.
– We recently saw that Germany is repatriating parts of its gold reserves from the U.S. and all of the reserves from France. An increased mistrust among central banks is definitively positive for gold prices.
– Even though I take this with a pinch of salt, apparently now many investment banks such as Morgan Stanley, JP Morgan and Bank of America Merrill Lynch are positive to gold’s performance in 2013.
I bet few of the above believe that the current gold bull market is over.
Let’s finish where we started, with the prerequisites for gold and silver in 2013.
For the long term buyer this discussion will be of academic nature. Since gold is the best way of storing value over time, the important question is if gold will continue to keep it’s purchasing power in the future. The answer to that question has to be yes – it’s done that so far.
The central banks solution to all the deficits and debt is to print more money and consequently increase the debt and deficits even more. This will have huge, if not catastrophic, consequences for the value of the fiat currencies and we’ve only seen the beginning of this yet. I guess we shouldn’t be surprised though – over time all fiat currencies have an expected value of zero.
How the exact future for gold and silver will look is uncertain in terms of how much they will rise – but, at least according to me, there is little doubt that they will rise in value going forward.
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