When will the gold bull market end?
The short answer is: not soon. The slightly longer answer
is provided herewith.
During the second half of last year some analysts were
treating the gold market as if the current situation could be likened to the
upside blow-off that occurred during 1979-1980. Our view, at the time, was
that this couldn't be right because it implied that the gold bull market was
nearing its conclusion. Our view then, and now, is that the gold bull market
won't end until at least 2013-2014 and could easily extend through to the end
of the decade. We therefore think that the gold market is at least 2-3, and
possibly as many as 8-9, years away from the bubble-like conditions that many
gold bulls continue to anticipate.
Before we outline why gold's bull market probably has many
years to run, we will quickly note that anyone claiming that gold is
presently in a bubble is, as far as this particular topic is concerned,
completely 'out to lunch'. The "gold is now in a bubble" assertion
is nonsensical for the following reasons:
First, the following long-term monthly chart of the
inflation-adjusted US$ gold price (with the inflation adjustment done as per
our Dec-2010 article) reveals a steady advance over the
past several years. Up until now there has not been anything like the sort of
parabolic price action that tends to be associated with investment bubbles.
Second, the gold/CCI chart displayed below shows that
relative to the prices of other commodities the gold price is near its LOWS
of the past 2.5 years. (As an aside, relative to other commodities gold has
done exactly what it should have done every step of the way over the past 15
years. For example, it rocketed upward during the
mid-2008-through-to-early-2009 crisis and then trended lower during the
2-year mini-boom that began in March-2009.)
Third, the public's enthusiasm for gold is nothing like
what it would be if bubble conditions were present in the gold market. In
particular, only a very small percentage of the population owns any gold and
very few people care about the gold price.
Fourth, gold's valuation relative to the stock market is
much lower today than it was at the previous major gold price tops of the
past 80 years.
The fact that the gold investment theme does not yet show
any signs of being in a bubble is one reason to expect that gold's bull
market is not close to an end. There is no guarantee that it will become a
bubble, but under the current monetary system it is 'par for the course' for
a long-term bull market to evolve into an investment bubble before it ends.
The main reason that we expect the gold bull market to run
for at least a few more years relates to the theories that dominate thinking
within the halls of policy-making -- chiefly the theory that the economy can
be made stronger via more monetary inflation, more credit expansion and more
government spending. In effect, policy-makers have been trying to fight
cancer by feeding the cancer, and there is every indication that they will
continue to do so. Consequently, a genuine/sustainable economic recovery is
almost out of the question, and every economic setback will be used as an
excuse to implement policies that only add to the overall problem. Over the
years ahead we are therefore likely to get progressively shorter boom/bust
cycles, with each cycle prompting ever-greater monetary, fiscal and
regulatory intervention until things get so bad that real change becomes
politically feasible. The point is that there is a very good chance of this
being a multi-year process, with gold making a sequence of higher highs along
the way.
Another consideration when trying to figure out when the
gold bull market will end is the link between the secular bull market in gold
and the secular bear market in US equities. Just as the beginning of gold's
secular bull market roughly coincided with the beginning of the secular bear
market in US equities (as it should, given gold's role in the financial
world), the ends of these secular trends are also likely to roughly coincide.
The implication is that the long-term gold bull market will probably not end
until after the average dividend yield of the stocks that comprise the
S&P500 Index has risen above 5%.
Steve Saville
www.speculative-investor.com
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