An article on Bloomberg comparing the gold market in the late 1970s – dramatically peaking in 1980 – to that of recent years has suggested that “gold could soon get very boring” and a “repeat of that trend would leave gold at around $1,000 an ounce in 2035.”
We have long noted the importance of focussing on gold as a diversification and therefore not focussing solely on gold’s price. Price predictions are foolhardy at the best of times and when we occasionally venture into that space, we are always cautious and give caveats.
What is odd about this call for gold to fall nearly 10% in dollar terms in the next 20 years is that it is completely devoid of any kind of all important historical, geopolitical, macroeconomic or indeed monetary context. So, too, it completely ignores the supply demand fundamentals in the physical gold market and the huge demand for gold coins and bars today that is leading to bottlenecks, delays and rising premiums.
The article on gold by Lorcan Roche Kelly says that “the 2011 gold price spike looks a lot like its 1980 spike” and provides charts that indicate the same. Price spikes in many assets can frequently look remarkably similar when overlaid in a chart.
Especially if you are selective in the time periods shown. If you only select a certain time period, it can be used to support a hypothesis. But given the very limited set of data and singular comparison, such comparisons are simplistic, may not be representative and may be liable to mislead.
If such analysis regarding the stock market was done, it would be roundly laughed at and dismissed out of hand.
Following the 1980 parabolic price move – when gold rose 24 times in 9 years – prices fell sharply and then remained fairly static for the next twenty years. On this basis, Kelly concludes that another prolonged and “boring” period may be ahead for gold prices.
He argues that the price stabilised in the 1980’s because the inflation “panic” of the 1970s had subsided.
The actual significant bout of inflation and indeed stagflation did indeed subside but only after Fed Chairman, Paul Volcker had increased interest rates to over 15%.
Similarly, he argues that the “panic” of the financial crisis caused the 2011 spike and that those fears are now subsiding and so gold prices have fallen and are now stabilising at lower levels. While those fears may indeed be subsiding – and we are not convinced that they are given the incredible demand for physical gold and silver coins and bars across the world in recent weeks – we doubt that they will remain subdued for long.