Gold’s Secular Bull Market

Past, present & future

A secular bull market, according to Investopedia, is one "driven by forces that could be in place for many years, causing the price of a particular investment or asset class to rise or fall over a long period of time. In a secular bull market, strong investor sentiment drives prices higher, as there are more net buyers than sellers… Secular markets are typically driven by large-scale national and worldwide events, which occur in combination. For example, wars, demographic/population shifts and governmental/political policies are all events that could drive secular markets. A secular bull market will have bear market periods within it, but it will not reverse the overlying trend of upward asset values. For example, most economists agree that U.S. equities were in a secular bull market from about 1980 to 2000, even though the stock market crash of 1987 occurred within the same time period."

In 1980 the Dow Jones Industrial Average began its secular bull market at 760 and topped twenty years later at 11,723 — rising roughly 15.5 times. If gold were to match the Dow's performance, it would rise to $4058 per ounce by 2021 — a 15.5 times gain over a 20 year period. In gold's secular bull market of the 1960s to early 1980s, it rose nearly 25 times — from $35 per ounce to $850 per ounce. If it were to match that performance, it would rise to $6500 per ounce.

The Three Stages of a Secular Bull Market

Returning to Investopedia, we find that, according to Dow Theory, secular bull markets move through three stages — accumulation, public participation and excess (mania). The accumulation stage starts the up trend and usually comes at the end of a down trend, when the psychology is overly negative. Gold reached that turning point in early 2001. True believers capitalized on the negative sentiment buying gold at what turned out to be bargain prices. For gold that phase ended in 2006 as it crossed the $500 per ounce threshold.

The public participation phase began in 2006 and it is the stage in which gold finds itself today. According to Investopedia, the public participation stage is characterized by good news and strong supporting data, and is the longest lasting of three phases. Since 2006, investment demand has risen steadily with annoucements throughout the period of new hedge fund and institutional interest as well as very strong private investor demand in the form of coins and bullion.

In early 2012, the World Gold Council reported central banks, after decades of heavy selling, also became strong net buyers of the metal — a significant turn of events. When one considers what might propel gold to the ultimate mania phase of its secular bull market, central bank and institutional fund demand come up as the primary candidates and for good reason. At present, according to a study by Sprott Asset Management, gold comprises just .7% of global financial assets, compared to 5% in 1968 and 3% in 1980. Such statistics suggest that there is plenty of room for upside as the percentages return to the historical average.

A Third, a Third and a Third…

Gold is not simply an investment vehicle. It is a also a savings instrument and a form of wealth insurance. As such, the argument goes, it cannot and should not be analyzed along the lines of a stock or the stock market as a whole. Since gold is essentially a kind of money by which investor-citizens hope to counter negative economic trends, many owners are likely to retain ownership as a lifetime estate hedge, particularly if the conditions that necessitated the hedge remain unresolved. Central banks and hedge funds accumulating physical gold, for example, often point to global economic uncertainties and the unreliability of national currencies as their incentive. That would suggest that they will retain their gold holdings as long as these problems remain a threat.

In a recent essay, James Rickards, the author of the definitive book, Currency Wars, explores the nature of what he calls "old money" – dynastic wealth that goes back 300 years or longer. "This type of wealth," he says, "has survived not only business cycles but also war, invasion, the collapse of empires, revolution, and natural disaster. In order for family wealth to persist through so many centuries and through such adversity, something more is needed than ordinary investment skill. This rare kind of success in wealth preservation requires a longer view, infused with a sense of history and a keen appreciation for worst-case scenarios that too frequently become real."

He goes on to say that the formula for wealth preservation reduces to the phrase "a third, a third and a third" – one third land, one third gold and one third fine art. The point in all of this is not that stocks and bonds should be banished from the contemporary portfolio, but instead something a bit more subtle — that gold is quietly restaking its claim to primacy and should not be ignored in the modern era. The fact that this has taken on the appearance of a secular bull market is a secondary consideration.

Click here for the complete analysis, "Gold secular bull market - a timeline from 1998 to 2012"

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