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.

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.

• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.

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