How Long Until Gold Prices Spike In This New Bull Market?

Even after a dead cat bounce for stocks and oil last week gold was only off half of one per cent, a tiny correction following the best start to the year for the precious metal since the annus mirabilis of 1980 when it quadrupled in price.

There is plenty of technical analysis out there now to show that the gold price decisively bottomed out in December with a classic double-bottom and has since reversed direction to a higher high, something it did not manage to do in four years of falling prices and the usual indicator of a new trend. 

US buyers

Buying momentum has picked up strongly, particularly in the important exchange traded products like GLD. It is not just in India and China that investors now love gold, US traders battered by a falling stock market are selling up and parking their wealth in this safe haven.

Indeed, from discussions last December about the end of gold as an asset class and the potential for much lower lows the talk is about how high can gold go and how long will it take to get there. Basically there are two schools of thought on this.

The pure historicists take the late 1970s as their paradigm and the recent sell-off puts us somewhere in the recovery from the 50 per cent correction of 1975-76. In that case we face several bumpy years in financial markets ahead followed by a gold price spike in 2019 or 2020.

It’s a different story for those who think we are entering the Global Financial Crisis Part II. You only have to look at the latest cover story of The Economist magazine to get the sense of where this is leading.

Helicopter money

This editorial boldly flags up the only policy options now available to central banks with negative interest rates already looking shot to pieces by the surge in the yen after the introduction of negative rates, namely checks in the post to consumers or forced salary rises.

To wit, this is Keynesian economics gone mad: the helicopter drop of money. There is, of course, another alternative too horrible to contemplate: a downward deflationary debt spiral and deep economic depression. 

I wonder which option the old lady at the Federal Reserve past retirement age will foist on the global economy? Most likely the Fed will eventually be left with no option but to join in with the rest of the global banks in the race to the bottom and will not have much choice anyway.

Turning back to the 1970s which was when I first became aware of economics as a prospective candidate for Oxford University and I can remember quite a bit about what it is like when central banks lose control or, perhaps more charitably, decide to flood the world with money to eliminate debt mountains by depreciating their currencies and creating inflation. 

Personal experience

Personally I ended up with a Saturday repricing goods in the newsagents WH Smiths with a new price list almost every week to work from, and sorting out silver coins from the family business’s ever growing supply of small change. Well that was in 1978-9. It was a race to keep inflating my pocket money up until then.

It was not a great decade. My father’s only ever brush with bankruptcy was in 1975 when a property deal went bad on him. Thankfully he was not a stock market investor in the crashes of 1973-4 which were still being discussed when I left university and applied for a job in the City. 

However, personal digressions aside I must admit to being in the Global Financial Crisis Part II school of thought. The double-digit falls in exports for January from China, Japan, Korea and even India have shades of deja-vu from 2009. So too does the fall in bank stocks since the beginning of the year which is actually worse than in 2009; think bad debts and a credit squeeze.

If I am right then the next step is surely some real cracks appearing in the credit system with defaults on bonds or other debts either by a highly cash-strapped oil producing country or a Chinese conglomerate. Or it could be a more junior entity whose failure causes a market panic and rush for the exit. 

Bearish markets

Nervous and uncertain global stock markets already in bear market territory would only react in one direction. Would all that money then pile into the safe haven of treasury bonds in the developed world? 

But it is just not looking such an attractive proposition with negative interest rates and the prospect of central banks deciding to increase them so as to make holding cash an even less attractive proposition.

In this environment investors will not have anywhere else to go as a safe haven to park their money other than gold and silver. Will this kind of a market breakdown happen very quickly and without notice, or will we be discussing this for another four years before it occurs? 

In my experience of markets this is not how they work. If they are on the edge of the precipice they either plunge or move on. But what could possibly move us on this time around? The central banks are running out of ammunition. That much we know from the front page of The Economist this week. 

Gold prices

Back in the 1970s hard assets were the place to hide and as the final crisis took off at the end of the decade it was oil and gold that soared and silver prices went to the moon. 

Commodity producing countries are already experiencing the extreme inflation that we saw in the West in the late 1970s due to steep currency depreciation, and it may be that the major central banks ensure that the rest-of-the-world is not so far behind by a helicopter drop. 

For goldbugs the recent four-year price correction should perhaps be compared to the basing of 1976-9 just before the gold price took off, and that is where I think we are today.