When will gold’s bear market end?

Gold bars © Getty Images
Gold: the bear market is ‘mature’

One of the ‘fundamental’ arguments for holding gold is the state of our governments’ finances – the US government in particular.

Many would argue that there’s no reason for US debt levels and gold to have any sort of relationship. Why should they? Gold no longer has any monetary role – it hasn’t for more than a generation.

Others take the opposing view. If gold has no purpose, then why is the US government still sitting on 250 million ounces of the stuff? And if the US dollar were to fail as a currency (unlikely, but never say never), what else would it pay its debts with?

I get both arguments. At present, I’m in the former camp. But it wouldn’t take much – a nice few months of rising gold prices, say – to lure me over to the other side.

But recently I heard trader Michael Hampton discussing this very subject. A chart he showed – courtesy of our old friend Nick Laird at Sharelynx – rather caught my eye…

How US debt and gold are linked

The chart below shows gold, US debt and the US debt ceiling since 2001. The gold line shows the gold price – currently about $1,290 an ounce.

The thin red line shows US national debt – currently just shy of $17.5trn. (I’m shaking my head in disbelief as I write that number). The black line shows the US debt ceiling – currently $17.2trn.

(Yes, US debt is currently higher than its debt ceiling. Perhaps ‘ceiling’ is another one of those words whose meaning is manipulated, and it will soon come to mean ‘floor’.)

Gold price v US debt

What’s interesting about this chart is the way that, since 2000, there does appear to have been some kind of long-term relationship between US debt (the red line) and the gold price.

There’s no exact science to it. But the two have tended to rise together. Sometimes one gets ahead, sometimes the other. In 2010, the gold price started rising at a much faster rate than US debt until, by September 2011, it was way ahead. Then we got the two-year sell-off in gold. The price went all the way back to the point at which it had started to surge ahead.

Meanwhile, US debt continued to grow. Now debt is way ahead of gold. You’ll notice something similar happened in 2008, though on a much smaller scale. Gold got ahead of debt, then it fell, debt got ahead, gold caught up and then the two got back in sync.

What is tickling my fancy at the moment is the idea that gold will start to ‘catch up’ with US debt again. If it does, that would entail an easy $500 of gold price appreciation, just to get back in sync.

But US debt always rises. It’s the nature of our modern monetary system. The only thing that varies is the rate at which US debt grows. The more it rises – by this argument at least – the more potential upside you have in gold.


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When will the gold bear market end?

But this ‘getting back in sync’ isn’t going to happen tomorrow. So what we have to ask is: when will this bear market end?

Let’s look at previous bear markets. Newsletter Atlas Pulse (ask him nicely, I’m sure he’ll give you a free copy) has put together an interesting table of bear market stats, which, with his kind permission, I post below.

Bear Start End Length (wks) Price fall (%) Gold/S&P500 ratio fall (%)
1 Feb 1975 Aug 1976 80 45 63
2 Jan 1980 Jun 1982 127 63 80
3 Nov 1983 Mar 1985 107 43 32
4 Dec 1987 Mar 1993 275 34 67
5 Feb 1996 Aug 1999 134 39 70
Average 145 45 62
6 Sep 2011 ? 120 36 60

 

This current bear market is some 123 weeks old. Of the other major bear markets, three have been shorter and two longer. So, in terms of duration – unless this is an enormous bear of 1987-93 magnitude – there shouldn’t be too long to go.

The average fall has been 45%. So at 36% so far, we have not yet fallen ‘enough’. But that average included the steep falls from the exceptional 1980 intraday high of $850, so you could argue that an average closer to 40% could be used.

The scale of the fall relative to the stock market (the gold to S&P ratio) is ‘on target’ at 60% against an average of 62%.

Based on these comparisons, I think it’s fair to say the bear market is mature – the end cannot be too far away. We may already have seen it.

Another bullish factor is that, even though the gold price has been flat for two months, around or just below $1,300, the exchange-traded funds have still experienced outflows – selling in other words. The more money that leaves the gold market, the more money there is to come back in.

I’m all too aware that my call of a few months back to see $1,425 by May hasn’t worked out. My stop at $1,275 got hit, rather annoyingly, so I’m out of that particular trade for a $30 loss.

What is interesting to me at present is the flat price, the low volatility and the total lack of interest. I go to a regular dinner with a bunch of fund managers and we all talk about the markets. At the most recent one, a fortnight ago, gold wasn’t even mentioned. That must be a first. The lack of interest is a positive sign – the sort of thing you hope to see towards the bear markets.

Now, I’m not wildly positive about gold in the short term. June normally sees the low for the year, so perhaps we’ll drift lower over the next month or so. I’m expecting a flat summer and it really wouldn’t surprise me, when writing my next gold article in a few months’ time to see the price almost exactly where it is now.

But in the longer term, for reasons stated above, I’m starting to feel positive.

One final note – a thought that has recurred to me in writing this. By my limited reckoning, there is no hope that US debt will ever be paid back. At the moment, national debt doesn’t seem to matter. Everyone just seems to carry on. But what if one day it does actually matter?

If the US were to use its gold to pay off its debt, what would the price have to be? Take current US debt – roughly $17.5 trn – and divide it by the 250 million ounces of US gold (most of which is stored in Fort Knox) and you arrive at a figure of $70,000 per ounce of gold.

Ain’t going to happen. But it’s something to think about.

• Dominic Frisby’s latest book, Bitcoin – the Future of Money will be available soon. His first book, Life After The State, is available at Amazon. An audiobook version is available here.

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10 Responses

  1. 21/05/2014, I think you are just hedging your bet wrote

    I think you are hedging your bets

  2. 21/05/2014, Nutty Physicist wrote

    Jim Sinclair has a $50000 dollar call on gold by 2020

  3. 21/05/2014, MichaelL wrote

    Interests rates haven’t started to rise yet. If they do, surely that will push gold down even further? Any hint an normalizing interest rates and thats it for gold.

    • 24/05/2014, Inquisitor wrote

      Interest rates, at least for mortgages, have; the banks are anything but stupid, they are pricing in future interest rate rises.

      There is no such thing as “that’s it”, for gold. Interest rates normalising will drastically increase the unaffordability of govt debt, and according to research, it will make many mortgages become unaffordable. Not so long as govts insist on being profligate, debt junkies will gold’s end come. And if a gold standard is reinstated, so much the worse for paper trash.

  4. 21/05/2014, John Hannan wrote

    Dominic,
    I refer to your acticle on Gold. It beats me that gold is still flat considering that China and Russia are buying Tonnes each year. Would that not leave a shortage?
    Maybe the Central banks are also interfering with Price ats they have with other things
    Regards,
    John Hannan. Galway Ireland

    • 21/05/2014, Ellen12 wrote

      Yes, it does, John. But the short side is so massively big, and the biggest among the shorts, according to us conspiracists, belong to the US FED. The naked shorts that took place last April were, I think connected to the German request to take their gold back from the FED vaults. Regardless of who is behind shorting gold, there does appear to be very large interests in keeping us, the western public, from owning the stuff.

  5. 21/05/2014, Chester wrote

    Interesting that the emotive connection between “fundamentals” and the gold price remains hard to shift

    Gold is an asset, not money (although it probably will be again in future). It’s price is not affected by supply, demand, central bank purchases, price repression etc as much as it is by social mood and historical price action. It has been in a consolidation pattern for months, setting up for what is likely to be the next leg down to around $1050. After further consolidation, some forecast a bottom around $400, after which it will become a screaming buy

    The fundamentals don’t speak to this, but prices have fallen despite US debt exploding (which will likely be defaulted on, not repaid in gold), record China, Russia, India purchases, uneconomic extraction costs pointing to shortages and so on. If anything, central bank buying has historically been the most reliable contrarian signal available. As we saw when Brown sold UK gold at a market bottom, they are usually behind the curve – the time to buy will be when they start selling again

  6. 22/05/2014, DiggerUK wrote

    Golds price is always motivated by supply and demand.
    If it is not, then it is the only saleable item on the planet that is exempt from those fundamental laws of economics.

    Once the boom begins to falter and funds seek the safe haven, the price will go bullish. Until such times gold will stay bearish.

    The demand change in the market to watch out for, is in the gold ETF sector.
    …_

  7. 22/05/2014, Pinkers Post wrote

    Pinkers Post entry on Gold 1 January 2014 (The Post, ‘Clairvoyant Readings’):

    “The precious metal appears to be in meltdown. After an amazing bull run lasting 12 years, 2013 has seen the first negative return: Trading at around the $1,700 an ounce mark in January gold has slumped to just over $1,200, which represents a 30pc fall. This is the biggest yearly drop since 1981. So what does the future hold? The sentiment is overwhelmingly negative and, for once, Pinkers does not take a contrarian view. In fact, Pinkers believes most analysts are still too optimistic with their forecasts ranging from $1,090 to $1,200 average for 2014. In the first half of the year, gold will probably test the major support level of $900-950. This should represent a good entry point. Even a drop to $750 is not inconceivable. However, we should see consolidation in the second half, especially with Eurozone troubles reemerging and higher inflation in the US and UK. Pinkers believes gold will end 2014 around the level where it is now: $1,200. The shiny metal doesn’t need polishing: It is and always will be a ‘safe haven’ asset and widely held as an insurance policy. Physical demand, especially from India and China, will remain robust at current and lower levels but it will not be enough to make up for ETF outflows.”

    “… doesn’t need polishing…”. Well, Pinkers isn’t so sure, anymore. Gold has been a bit of an unruly child recently, responding in an erratic and unpredictable manner to hitherto reliable indicators such as the threat of inflation (QE!), political turmoil and currency movements. This new, rather random ‘behaviour’, appears to have coincided with the rise of Exchange Traded Funds (ETF) that have introduced more flexibility and ease of trading and hence facilitating more speculative trading. Dubbed as a ‘cheaper’ and more ‘user-friendly’ platform, the ETF appears to have eroded gold’s traditional role as a trusted hedge and insurance policy.

    It is a myth to believe gold is a constant store of value. Like anything else, the price of gold is created by supply and demand. http://pinkerspost.com/inout.php

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