What the '70s bull run can teach us about today's gold market

The last bull market in gold could be said to have begun on 15 August, 1971, when US President Richard Nixon ‘shut the gold window’.

He ended the direct convertibility of the US dollar to gold at $35 an ounce. In effect, he took the US – and the world – off the last vestiges of the gold standard.

The bull market probably began earlier than that, however. Perhaps even before 1961, when buying pressure was such that the London Gold Pool was introduced to ‘stabilise’ the price of gold.

However, any gains were not visible as the official gold price remained at $35 an ounce, even with all the dollar printing that was going on.

The bull market ended on 21 January, 1980 – at 3pm, if you were in Britain, with the London PM gold fix. Gold spiked to $850, at a time when US interest rates were as high as 20%.

Today I want to draw a couple of comparisons between the current bull market and that of the 1970s, to see what we can learn.

If this was the ’70s, we’d still be in 1975

One comparison I enjoy making is that gold began the 1970s at $35 an ounce. By the time the $850 level was reached, it had gone up almost 25 times.

Gold began the current bull market at $250 an ounce. A 25-fold increase would give us an eventual target of $6,250.

Ha ha.

It does show what is possible, but this is a slightly misleading comparison. That original $35 an ounce starting point – fixed by governments and not the open market – was artificial. The US had issued way more dollars than a gold price of $35 reflected.

So let’s look at the following chart from Nick Laird at Sharelynx (thanks once again Nick), which charts the two bull markets in terms of percentage gain:

Gold bull runs - 1970s and 2000s

The blue line represents the 1970s bull market and shows the price rise in percentage terms from 1970. The yellow line shows the current bull market, and the percentage gain since the 1999 low for gold. So far in the current bull market, the gold price has risen by 600% – which, if we compare to the 1970s bull market, takes us to 1975.

This time it’s different – so far

Whenever I talk to non-goldbug friends about gold, the most common objection I get from them about buying gold is: ‘It’s gone up too much’. I do sympathise with this sentiment – although it’s one I’ve been hearing since about $700 an ounce.

However, gold’s ascent has actually been quite gradual. The table below from Goldmoney shows gold’s annual percentage gain since 2001 in the nine major global currencies. (Here’s what the foreign exchange codes represent: US dollar (USD); Australian dollar (AUD); Canadian dollar (CAD); Chinese renminbi (CNY); euro (EUR); Indian rupee (INR); Japanese yen (JPY); Swiss franc (CHF); British pound (GBP)).

Gold – % annual change

USD AUD CAD CNY EUR INR JPY CHF GBP
2001 2.5 11.3 8.8 2.5 8.1 5.8 17.4 5.0 5.4
2002 24.7 13.5 23.7 24.8 5.9 24.0 13.0 3.9 12.7
2003 19.6 -10.5 -2.2 19.5 -0.5 13.5 7.9 7.0 7.9
2004 5.2 1.4 -2.0 5.2 -2.1 0.0 0.9 -3.0 -2.0
2005 18.2 25.6 14.5 15.2 35.1 22.8 35.7 36.2 31.8
2006 22.8 14.4 22.8 18.8 10.2 20.5 24.0 13.9 7.8
2007 31.4 18.1 11.5 22.9 18.8 17.4 23.4 22.1 29.7
2008 5.8 33.0 31.1 -1.0 11.0 30.5 -14.0 -0.3 43.7
2009 23.9 -3.6 5.9 24.0 20.4 18.4 27.1 20.3 12.1
2010 29.8 14.0 24.3 25.3 39.1 25.0 13.2 17.0 34.5
Average 18.4 11.7 13.8 15.7 14.6 17.8 14.9 12.2 18.3

The strongest currency has been the Aussie dollar, against which gold has made average annual gains of 11.7%. The weakest currency has been the US dollar – beating our own pound to the title by just 0.1%. Gold has made average annual gains of 18.4% against the US dollar.

Of all gold’s annual gains against all major currencies over the last ten years, the greatest was in 2008 against the pound, when our glorious leader Gordon Brown was in charge. It appreciated by 43.7%.

Brown’s record with gold really isn’t very good, is it?

Over those ten years there have been periods were gold has actually fallen against some currencies. In 2008, for example, it fell by 14% against the Japanese yen.

But the average annual appreciation lies anywhere between 11% and 18%. That’s not bad, not bad at all – many hedge funds would be pleased with average annual returns like that. And it vindicates the buy-and-hold strategy employed by so many in this bull market.

But it’s still a steady, gradual increase. It’s nothing stellar or exponential.

We haven’t seen gold go ballistic yet – but it will

In the 1970s, the story was rather different. Remember over the last ten years, of all the major currencies, gold’s biggest gain was that 43.7% rise against the pound in 2008.

Looking at the US dollar alone, as Mark O’Byrne of Goldcore observes, gold rose against it by 49.7% in 1972. In 1973 it rose by 73.5%, and in 1974 by 60.1%. In 1979, as the bull market reached its final phase, gold moved 140% higher.

Gold’s moves in this bull market so far have been much more measured and restrained. Wouldn’t it be nice if these types of moves lie ahead?

As for the wider economy, there are numerous similarities between now and the 1970s: a bull market in commodities, inflation, rising unemployment, all sorts of economic and social problems, floundering governments and policy-makers, pronounced rises and falls in equity markets and so on. That makes such comparisons as you see above a valid exercise.

But there are also many differences. Perhaps the most significant is that the post-Bretton Woods monetary system was in its infancy. Now it is well established, entrenched even in the minds of many. The idea of any other system of money apart from government currency is simply alien to most people. Perhaps that means gold’s gains are likely to remain in this steady, stately, even 11-18% range.

However, as regular readers will know, I think that this modern fiat system of money is simply not substantial enough to take the strain it is under, a strain that is growing all the time. If I’m right, then gold’s upward moves will become less leisurely and resemble more and more the violent rises of the 1970s. If you still haven’t got any gold, I advise you to get hold of some before those more volatile spikes start to materialise.

By the way, if you’re coming to the MoneyWeek conference in London tomorrow, I look forward to meeting you then. If you didn’t manage to get hold of a ticket, I believe the sessions will be recorded and you’ll have the chance to get your hands on a copy next week – my colleagues John or David will send all the details when we’ve got them.

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