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When will the gold bull market end?

Steve Saville
Posted Apr 12, 2011

Below is an excerpt from a commentary originally posted at www.speculative-investor.com on 10th April 2011.

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 my 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
email: sas888_hk@yahoo.com
Hong Kong

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