Goldman Sachs has lowered its gold price projections and says the
metal is headed to $1,200. Credit Suisse and UBS are bearish. Citigroup says
the gold bull market is over.
So I guess it's time to pack it in, right?
Not so fast. As we've written before, these types
of analysts have been consistently wrong about gold
throughout this bull cycle. Another reason to disagree, however, is history;
we've seen this movie before. In the middle of one of the greatest gold bull
markets in modern history – the one that culminated in the 1980 peak – gold
experienced a 20-month, one-way decline. Every time it seemed to stabilize,
the bottom would fall out again. From December 30, 1974 to August 25, 1976,
gold fell a whopping 47%.
1976 had to be a tough year for gold investors. The price had already
been declining for a year – and it just kept on sinking. Since that's similar
to what we're experiencing today, I wondered, What were the pundits were saying then? I
wanted to find out.
I enlisted the help of two local librarians, along with my wife and
son, to dig up some quotes from that year. It wasn't easy, because
publications weren't in digital form yet, and electronic searches had limited
success. But we did uncover some nuggets I thought you might find
interesting.
The context for that year is that the IMF had three major gold
auctions from June to September, dumping a lot of gold onto the market. Both
the US and the Soviet Union were also selling gold at the time. It was no
secret that the US was trying to remove gold from the monetary system; direct
convertibility of the dollar to gold had ended on August 15, 1971.
The public statements below were all made in 1976. You'll see that
they aren't all necessarily bearish, but I included a range to give a sense
of what was happening at the time, especially regarding the mood of the gold
market. I think you'll agree that much of this sounds awfully darn familiar. I
couldn't resist making a few comments of my own, too.
To highlight the timing, I put the comments into a price chart,
pinpointing when they were said relative to the market. Keep in mind as you
read them that the gold
price bottomed on August 25, and then began a three-and-a-half year, 721%
climb…
(Click on image to enlarge)
[1] "For the moment at least, the party seems to
be over." New York Times,
March 26.
[2] "Though happily out of the precious metal, Mr.
Heim is no more bullish on the present state of the stock market than any of
the unreconstructed gold bugs he's had so much fun twitting of late. He's
urging his clients to put their money into Treasury bills." New York Times, March 26.
Me: These comments remind me of those today who poke fun at gold
investors. I wonder if Mr. Heim was still "twitting" a couple years
later?
[3] "'It's a seller's market. No one is buying
gold,' a dealer in Zurich said." New
York Times, July 20.
Turns out this would've been an incredible buyer's market – but only
for those with the courage to buy more when gold dropped still lower before
taking off again.
[4] "Though the price recovered to $111 by week's
end, that is still a dismal figure for gold bugs, who not long ago were
forecasting prices of $300 or more." Time
magazine, August 2.
The "gold bugs" were eventually right; gold hit $300 almost
exactly three years later, a 170% rise.
[5] "Meanwhile, the economic conditions that
triggered the gold boom of 1973 through 1974, have
largely disappeared. The dollar is steady, world inflation rates have come
down, and the general panic set off by the oil crisis has abated. All those
trends reduce the distrust of paper money that moves many speculators to put
their funds in gold." Time
magazine, August 2.
This view ended up being shortsighted, as these conditions all
reversed before the decade was over. Does this sound similar to pundits today
claiming the reasons for buying gold have disappeared?
[6] "Our own predictions are that gold will go
below $100, with some hesitation possible at the $100 level." As stated
by Mr. Heim in the August 19 New
York Times.
Yes, this is the same gentleman as #2 above. I wonder how many of his
clients were still with him a few years later?
[7] "Currently, Mr. LaLoggia
has this to say: 'There is simply nothing in the economic picture today to
cause a rush into gold. The technical damage caused by the decline is
enormous and it cannot be erased quickly. Avoid gold and gold stocks.'" New York Times, August 19.
You can see that these comments were made literally within days of the
bottom! Take note, technical analysts.
[8] "'Gold was an inflation hedge in the early
1970s,' the Citibank letter says. 'But money is now
a gold-price hedge.'" New
York Times, August 29.
Wow, were they kidding?! This reminds me of those dimwits
journalists who said in 2011 to not invest in gold because it isn't "backed by
anything."
[9] "Private American purchases of gold, once this
was legalized at the end of 1974, never materialized on a large scale. If the
gold bugs have indeed been routed, special responsibilities fall on the
victorious dollar." New
York Times, August 29.
The USD's purchasing power has declined by 80% since this article
declared the dollar "victorious."
[10] "Some experts, with good records in gold
trading, declare it is still too early to buy bullion." New York Times, September
12.
Too bad; they could've cleaned up.
[11] "Wall Street's biggest brokerage houses, after
having scorned gold investments during the bargain days of the late 1960s and
early 1970s, made a great display of arriving late at the party." New York Times, September
12.
No comment necessary.
[12] "He believes the price of bullion is headed
below $100 an ounce. 'Who wants to put money over
there now?'" As stated by Lawrence Helm in the New York Times, September
12.
The price of gold had bottomed two weeks before, making the timing of
this advice about the worst it could possibly be.
[13] Author Elliot Janeway,
whose book jacket states, "Presidents listen to him," was asked by
a book reviewer about his preferred investments. He writes: "Then, gold
and silver? He likes neither. In fact he writes: 'Any argument against
putting your trust in gold, and backing it up with money, goes double for
silver: silver is fool's gold.'" New
York Times, November 21.
Mr. Janeway ate his words big-time: from the
date of his comments to silver's peak of $50 on January 21, 1980, silver rose
1,055%!
[14] "Mr. Holt admits that 'in 1974, intense
speculation caused the gold price to get too far ahead of itself.'" New York Times, December
19.
So,
anything sound familiar here? Yes, it was a brutal time for gold investors,
but what's obvious is that those who looked only at the price and ignored the
fundamentals ended up eating their words and dispensing horrible advice.
Investors who followed the "wisdom of the day" missed out on one of
the greatest opportunities for profit in their lifetimes.
I was pleased to learn, though, that not all comments were negative in
1976. In fact, in the middle of the "great selloff," there were
those who remained stanchly bullish. These investors must've been viewed as
outliers – they, much like some of us now, were the contrarians of the day.
Also from 1976…
- "Many gold issues, in fact, are down 40
percent or more from their highs. Investors who overstayed the market
are apparently making their disenchantment known. The current issue of
the Lowe Investment and Financial Letter says, 'We are showing losses on
our gold mining share recommended list… but keep in mind that these
shares are for the long-term as investments.'" New York Times, March
26.
Sounds like what you might read in an issue of BIG
GOLD or
the International Speculator.
- "The time to buy gold shares," [James
Dines] declares, "is when there is blood in the streets." New York Times,
September 12.
If you glance at the chart above, Jim's comments were made within two
weeks of the absolute low.
- "We're recommending to clients that they
hold gold and gold shares," [C. Austin Barker, consulting
economist] says. "The low-production-cost mines in South Africa
might be interesting to buy for the longer term because I see further
inflation ahead." New
York Times, September 12.
Investors who listened to Mr. Barker ended up seeing massive gains in
their gold and gold equity holdings.
- "The probability of runaway inflation by
1980 is 50%... In light of this, the only safe investments are gold,
silver, and Swiss francs,'" said the late Harry Browne on November
21 in the New York Times.
Browne's Special Reports were edited by our own Terry Coxon for 23 years, along with all
his books since 1974.
- "In the longer run, [Jeffrey Nichols of
Argus Research] believes gold's price trend 'is much more likely to be
upward than downward.'" New York Times,
December 19.
The "longer run" won.
- "'I think the intermediate outlook for
gold is a period of consolidation and a bit of dullness,' says Mr. Werden. 'However, six or
nine months from now, we could see renewed interest in gold.'" New York Times,
December 19.
He was right; within nine months gold had risen 13.5%.
- "Mr. Holt offers some advice to investors
who are taking tax losses on their South African gold shares – some of
which are selling at just 30 to 35 percent of their peak prices in 1974. 'If leverage has worked against you on the way
down,' he reasons, 'why not take advantage of it on the way up?'" New York Times, December
19.
Solid advice for investors today, too.
- "What's his [Thomas J. Holt] prediction
for the future price of gold? 'A new high,
reaching above $200 an ounce, within the next couple years.'" New York Times,
December 19.
His prediction was conservative; gold reached $200 nineteen months
later, by July 1978.
It's clear that there were positive "voices in the
wilderness" during that big correction, and as we all know, those who
listened profited mightily.
There were other interesting tidbits, too. For example, gold stocks
had been performing so poorly for so long that some advisors suggested a
strategy we also hear today…
- "It is probably too late to sell gold
shares, the stock market's worst-acting group these days, except for one
possible strategy: selling to take a tax loss and switching into a
comparable gold security to retain a position in the group." New
York Times, September
12.
Even back then, it was widely known that gold often bucks the trend of
the broader markets…
- "You might put a small portion of your
money into gold shares and pray like the dickens that you lose half of
it. In that way, chances are that if gold shares go down, the rest of
your stock portfolio will go up." New
York Times, September
12.
Gold miners provided critical revenue and jobs, just like today. From the August 2 issue of Time magazine…
- "South Africa, the world's largest gold
producer, is being hurt the most. The price drop will cost it at least
$200 million in potential export earnings this year."
- "Layoffs at the gold mines would make it
even worse – the joblessness could intensify South Africa's explosive
racial unrest."
- The Soviet Union, the world's second-largest
gold producer, is feeling the price drop, too. The Soviets depend on
gold sales to get hard currency needed to buy US grain and other
imports."
Gold was also used as collateral…
- "The international gold market was also
roiled yesterday by a report by the Commodity News Service that Iran was
negotiating to lend South Africa roughly $600 million, predicated on a collateral of 6.25 million ounces of gold."
And just like today, there were plenty of stupid misguided US
politicians: From the New
York Times on August 27:
- "The drop in gold bullion prices from
$126, which was the average at the first IMF auction June 2, provoked
the Swiss National Bank to attack Washington's attitude toward the metal
as 'childish.' Aside from the estimated $4.8 billion of gold reserves
held by Switzerland, bankers there advocate some role for the metal as a
form of discipline against unrestricted printing of paper money."
That last statement from the Swiss bankers is hauntingly just as true
today.
Last, you know how the government in India has been tinkering with the
precious-metals market in its country? And how it's led to smuggling? From
the New York Times
on August 27:
- "India announced it was resuming its ban
on the export of silver. India is believed to have the largest silver
hoard and the government there freed exports earlier this year as a
means of earning taxes levied on overseas sales. However, most silver
dealers minimized the significance of India's move yesterday. As one
dealer explained, 'Smuggling silver out of India is so ingrained there
that the ban will have no effect on the flow. It never has. Indian
silver will continue to ebb and flow into the world market according to
price.'"
So what's the difference in mood today vs. the mid-1970s? Nothing! This
shows that the same concerns, fears, and confusion we have now existed at a
similar point in the gold market then. There were also those who saw the big
picture and stayed vigilant. Virtually every comment made in 1976 could apply
to today. Keep in mind that most of the statements above are from two
publications only; there are undoubtedly many more similar comments from that
year.
The obvious lesson here is that patience won out in the end. It took
the gold price three years and seven months to return to its December 1974
high. It only took another 18 months to soar to $850. Today, that would be
the equivalent of gold falling until June this year, and not returning to its
$1,921 high until April, 2015. It would also mean we climb to $6,227 and get
there in November, 2016. Could you wait that long for a fourfold return?
This review of history gives us the confidence to know that our gold
investments are on the right track. I hope you'll join me and everyone else
at Casey Research in accepting this message from history and staying the
course.
So, what will your kids or grandkids read in a few decades?
- "Buy gold. It's going a lot higher."
- Jeff Clark, Casey Research, March 4, 2013.
