It’s Time for You to Jump Into Gold

It’s Time for You to Jump Into Gold

Gold is on a tear.

US markets may have been closed on Monday in honour of Martin Luther King Jr., but international markets were open for business, and gold led the way.

Some disaffected gold buyers may say, in effect, ‘So what? We’ve seen this movie before. Just when gold rallies and we get our hopes up, some hidden hand comes along and slams gold in the futures market, and the gains disappear. What’s the point?’

I feel your pain.

Personally, I’ve never been affected by the occasional gold slams. Yes, they happen, and yes, they are a by-product of market manipulation.

It’s usually hedge funds trying to trigger stops, or China trying to keep a lid on the gold price until its gold acquisition program is further along.

You should do what I do. Treat the slams as a gift. Take the interim lows as a good entry point and ride the next wave up.

I try to avoid clichés, but ‘buy low, sell high’ is a good way to make money. Buying low and holding on, while gold goes much higher, is an even better way to make money.

With that said, it’s critical to understand that what’s going on in gold right now is more than the usual push and pull of institutions, individuals and governments in the market. It’s not just the usual pattern of rally-slam-rally-slam that we’ve seen over and over.

Gold has entered a new secular bull market that promises to run for years, despite the occasional pullbacks that are part of any bull market.

Widening the aperture from days to decades is a good way to gain perspective.

One of the greatest bull markets in history

Beginning in August 1999, gold had one of its greatest bull markets in history, rallying from US$252 per ounce to almost US$1,900 per ounce in September 2011, a gain of 655% in 12 years.

That early-2000s bull market was second only to the historic bull market of the 1970s, when gold went from US$35 per ounce in August 1971 to US$800 per ounce in January 1980, a gain of 2,190% in just over eight years.

In fairness, that US$800 super-spike price in January 1980 only lasted for a day. The average price of gold for the month of January 1980 was approximately $650 per ounce.

Even using that more realistic figure, gold rose 1,760%…still a record.

For every bull market, there’s a corresponding bear market. That’s what makes the world go ’round.

After the January 1980 super-spike, gold fell 69% over 19 years (or 62%, if you use the more realistic US$650 per ounce price).

However, this was not a dramatic crash-and-burn situation. Gold just slowly but surely ground its way down to the US$252 per ounce level, after bouncing around in a trading range of US$300–500 per ounce for most of the 80s and 90s.

The fact is that gold was a pretty boring investment in the 80s and 90s, as first Paul Volcker and later Alan Greenspan pursued a steady monetary policy known to economists as the Great Moderation.

The price action indicates that after 1987, Greenspan put the country on a de facto gold standard, using the dollar price of gold as a reference point for monetary policy.

Greenspan never admitted this in so many words, but there is good anecdotal evidence from Greenspan’s speeches and contemporaneous opinion in The Wall Street Journal that this was precisely what was going on.

‘Brown’s Bottom’: one of the worst sells ever

By 1999, gold looked dead. This was exactly the time that the UK sold approximately half its gold reserves at the lowest prices in 25 years.

Those sales, at multidecade lows, were dubbed ‘Brown’s Bottom’ in honour of Gordon Brown, then chancellor of the Exchequer and later prime minister of the UK, who made the decision to sell.

As is often the case, just when sentiment is low and investors are completely discouraged, the market turns and a new bull market begins.

That’s what happened in September 1999 — it’s just that almost no one saw it at the time.

The few who did, including legendary gold investor John Hathaway, reaped the greatest gains from the new bull market. But the new bull market lasted so long, there were plenty of great years left to come.

While Greenspan may have been on a de facto gold standard in the 90s, he threw in the towel in the early 2000s. Greenspan was scared to death of deflation after the bursting of the dotcom bubble in 2000, a mild recession the same year, and the shock of September 11.

He kept rates too low for too long to fight deflation. What he got instead was an asset bubble in home mortgages and a new bull market in gold.

Gold scored gains of 23% in 2003, 7.8% in 2004, 20% in 2005, 17.6% in 2006 and 36.5% in 2007.

Gold’s gains slowed down to 2.6% in 2008, the year of the greatest liquidity crisis since 1933. After the bull caught its breath, it charged again, rising 24% in 2009 and 29% in 2010.

The point is that even if you did not get ‘in’ on the rally on day one in 1999, you had plenty of strong double-digit gains ahead in 2003–2010. You don’t have to catch the bottom; you just have to ride the wave.

The selloff in gold is now history

The next bear market was brutal. Gold fell from US$1,900 per ounce in September 2011 to US$1,053 per ounce in December 2015, a 44.5% decline in absolute terms and a 50% retracement, using the August 1999 price of $253 per ounce as a baseline.

By September 2015, gold was friendless. Prominent voices were calling for US$800 gold, a round trip to the 1980 price.

One by one, gold’s fair-weather friends shuttered their gold dealerships and turned off their podcasts. The more opportunistic among them even reinvented themselves as bitcoin evangelists. Whatever works.

The evidence for the new bull market is crystal clear.

Gold was up 8.6% in 2016.

Gold was up again 13.1% in 2017. Gold is the best-performing major asset class of 2018 so far.

The 2016–17 gain of 22.8% represents the first back-to-back years of gains for gold since 2011–12. Overall, today gold is up 27.5% from the start of the new bull market in December 2015.

The good news is that this bull market has far to run. Most of this 27.5% gain has come in the face of rising real interest rates and Fed tightening of nominal rates. These are powerful headwinds, but gold has weathered the storm.

My expectation is that the Fed will soon back off from its current path of higher rates and destroying money by reducing the size of its balance sheet.

This balance sheet normalisation, so-called ‘quantitative tightening’, or QT, is the opposite of the notorious QE (quantitative easing) policy of money printing. The Fed is delivering a double-whammy to the economy with higher rates and reduced money supply.

If gold has rallied 27.5% with the Fed in tightening mode, imagine what will happen when the Fed flips to ease first through forward guidance and then a halt to balance sheet normalisation, and finally outright rate cuts.

Such a Fed flip-flop will turbocharge gold and send it well past the $2,000 per ounce level. From there, the path is clear to $3,000 per ounce, and then much higher as confidence in the global dollar-based system erodes.

Russia and China have been preparing for this moment for years. Both nations have more than tripled their gold reserves in the past 10 years, mostly at the low prices available during the 2011–15 bear market. They will be the big winners in this new bull market.

You can be one of the big winners too. The bull market started in December 2015 when almost no one noticed. That’s OK. The new bull has years to run. But don’t wait much longer. Annual double-digit gains are yet to come. The time to jump in is now.


Jim Rickards Signature

Jim Rickards
for The Daily Reckoning Australia