Wednesday, November 28, 2007

A Gentle Bull Market in Gold

28 November 2007

Gold's last bull market was in the 1970s. That market's period of greatest strength was from August 1976, where gold had actually fallen by almost 50% (from almost $200 in February 1975) to about $100 per ounce, to January 1980, where gold briefly traded over $800 per ounce in a 3-day spike.

That $800 gold price was not to be revisited for 27 years, as new technologies and industry consolidation made commodity extraction cheaper and cheaper, conservation moderated demand, and economic dynamics strongly favoured increasingly globalized business and industry over commodity production.

During our era, the Dow Jones Industrial average has mounted a 33-year bull market extending from 1974 (or if you prefer, from 1982) through 2007. Our generation has only known rising financial markets. (These charts are available through Adam Hamilton at Zeal.)

In my view, we are therefore ill-prepared for the economic fate that soon awaits us. The present 2001-2007 gold bull market has already extended much longer than the 3-1/2 year bull run of the late 1970s. As already discussed on this site, in inflation-adjusted terms, gold's 1980 high was actually closer to $5000 per ounce.

Our present gold bull market has been very gentle, as the present chart (borrowed from Richard Russell) illustrates. Most citizens are unaware that financial investments are collapsing in value in terms of gold, or that they are soon likely to decline in US dollar terms as well.

From all appearances, the present gold bull market will extend much longer than the 1970s gold bull market, even if we date that historic run from $35 in 1970 to $882.50 in January 1980 (with that dramatic 50% pullback situated almost dead-centre, from 1975-1976).

The present gold bull market remains in its gentle stage, and parabolic growth (of the kind which attracts popular attention) is likely still many years away. It appears that our present gold bull market will be of much longer duration, and that suggests to me that the corresponding inflation-driven economic decline, which is generally associated with gold bull markets, will very likely be of longer duration also.

My advice - take care, and continue investing in gold and silver. It appears that this strategy will work for many more years to come!

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