The 70s bull run began in 1971 when U.S president Richard Nixon shut the gold window; ending the direct convertibility of U.S dollar to gold at $35 an ounce. In effect, he took the whole world off the vestiges of the gold standard, which completed a duration of 9 years till gold price peaked in 1980.
The current run, starting in 1999 when prices bottomed totals a duration of 12 years, surpassing the earlier bull run. Does this make irrelevant? No! Looking at price history, however, it seems the rally started in 1971. The bull market probably began before than that- perhaps even before 1961- when buying pressure was such that the London Gold pool was introduced to stabilize the gold prices. However there were no visible gain as the official gold price remained at $35 an ounce, even with the ongoing dollar printing. So from a duration perspective, there is no logical comparison.
Let's get the price magnitude in the picture. Gold began at $35 an ounce in 1970's. By the time it reached $850 level, it had gone up almost 25 times. Gold began the current bull market at $250 an ounce. A 25-fold increase will give us a target of $6250. It suggests a three - fold increase, from the high set in 2011. Then how do people suggest that gold has peaked based on historical comparisons?
No one can predict prices based on such parameters because the markets, economies and policy making at the broad level are very different during both the periods to even attempt such baseless comparisons, studying what has happened in the past does not tell what will happen in future, but it helps set our expectations as to what is possible and reasonable. It also prevents us from being surprised when markets don't do the obvious. It is better to learn from the past, and one should not overlook, while appreciating the similarities, the subtle differences among the different time periods.
There are numerous similarities as for wider economy, between now and the 70s: a bull market in commodities, inflation, high unemployment, economic and social problems, floundering government and policy makers, volatility across asset markets and so on.
In the 70s, for instance, there was big spending on account of the Vietnam War and President Lyncon Johnson’s Great Society’s social programmes.
Deficits were large and inflation, oil and gold were soaring whereas the dollar was sliding down. Today, there is even bigger spending as the war on terror continues. Deficits are huge, oil and gold have been soaring, inflation is picking up, and the dollar is declining. But there are many differences too. The most significant is that the post-Bretton Woods monetory system was in its infancy. Whereas, the fiat monetary system is well established today.
In the 70s, the economy was in a better shape than today. At the end of the 70s (nearing the end of the bull market in gold), the employment picture was quite healthy. But now, we have a massive problem with unemployment along with wildly out-of-control debt on both the private and public levels. Thus, Paul Vockler’s simplistic solution to inflation which also served as the trigger for the end of the 1970s gold bull market of increasing interest rates, is off the table.
Chart: U.S. Unemployment rate (%)
Source: Bloomberg
There is unprecedented inflation that has been defined as an increase in the monetary base. What’s missing, so far, is the inevitable consequence of the inflation - steady rising prices. Inflation will appear and when it does, the government will find it difficult to put the inflation genie back in the bottle, as increasing interest rates would not be desirable with such high levels of debt.
Chart: Fed Funds rate (%)
Source: Bloomberg
Gold lights up as the Fed backs the Dollar
The action to dramatically raise interest rates during the 1970 era indicated that the Fed was willing to take an economically destructive move to support the Dollar's value. However, at present, actions have been more accommodative and liquidity infusions are sustained with a policy to mask the problems faced. The debt burden today is so huge that rising interest rates would make servicing the debt incredibly difficult.
The past doesn't tell us what will happen in the future, but it does help us set our expectations with regard to what is both possible and reasonable. It should also prevent us from being surprised when markets don't perform the way they should.
More buyers as the race to bottom continues
The interesting difference with the gold bull market of today and that of the 1970’s is that today the rest of the world is getting involved due to the global economic crisis and fear of fiat paper. As evident from World gold council’s, gold demand trend reports, China and India are buying gold in hundreds of tons over the last few years. It is estimated that only about 10% of the world could own gold during the 70s bull run. This was due to either legal restrictions or a lack of liquid capital, 90% of the world populace was unable to join the gold buying league. Today, few countries prohibit gold ownership, and a far higher percentage of the world's population has transitioned out of poverty. Still, the fact remains, today less than 1% of assets internationally are allocated to gold investments is another bullish contrarian indicator. That is in stark comparison to the end of the last bull market in 1980 when 26% of global investments were allocated to gold.
Another difference this time around is that no country wants a strong currency, in order to compete in the global market place. The end result is that gold is now rising around the world, hitting records and attracting attention, reinforcing that investors worldwide are putting more faith in gold.
These differences suggest the current gold rise could be even bigger than the bull market of the 1970s, and they provide even more fuel for today’s gold bull market. The recent recoil in its prices should be viewed as a buying opportunity rather than the beginning of its downtrend.
The Golden Truth is authored by Chirag Mehta. Chirag is Fund Manager - Commodities at Quantum Mutual Fund.
The views expressed in this article are the personal views of the Fund Manager of Quantum Gold Fund. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. This information is meant for general reading purpose only and is not meant to serve as a professional guide/investment advice for the readers. This article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments.
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