The recent price falls were not a surprise. We said in an interview on Bloomberg when gold was near $1,900 that there was going to be a correction and that in a worst case scenario gold could replicate the 1970s bull market when gold fell nearly 50%.
In the 1970s, gold rose from $35/oz in 1971 to over $197/oz by January 1975. In the next 21 months, gold fell in value by nearly 50% to $103/oz by late August 1976.
This led to many pronouncements that gold’s bull market was over and the bubble had burst.In the next 40 months from August 1976 to January 1980, gold rose 8 fold from nearly $100/oz to $850/oz. We see think there is a real possibility of the same pattern playing out in the coming months.
Roche Kelly’s piece makes a historical price comparison which lack any sense of all important historical context. Indeed, it does not even look at gold’s last bull market and the clear precedent of a 50% correction.
As an Irishman, Roche Kelly should also understand the importance of considering assets including gold in local currency terms. In Ireland, people who owned gold during the property and stock market crash protected and grew their wealth.
Similarly, people in Greece who owned gold during the property and stock market crash protected and grew their wealth. Indeed, gold was one of the few forms of physical savings and money that Greeks could access during the draconian capital controls and deposit withdrawal restrictions which continue to this today.
In euro terms, the currency used by some 337 million Europeans on a daily basis, gold rose 12% in 2014 and is another 2% higher in 2015. People in Ireland, in Greece, in Germany and throughout Europe invest in physical gold in euros, not dollars. This underlines once again gold’s importance as a way to hedge currency risk.
We would remind readers of the words of Ray Dalio, founder of one of the most massive hedge fund companies in the world, Bridgewater, and regarded by Bloomberg Markets as one of the “50 Most Influential People”.
In May, when addressing the Council on Foreign Relations he said, “it’s not sensible not to own gold.”
He added “there is no sensible reason other than you don’t know history and you don’t know the economics of it”.
Owning physical gold is a historically – and academically – proven safe haven asset. This means that it preserves wealth and protects people in times of crisis. When one buys physical gold it is as a form of insurance rather than as a speculative means to make a profit. Profit is a secondary motivation.
We do not buy house insurance with the expectation of a dividend or interest payment. Nor should we expect such from gold. It can and has made many people very wealthy indeed but this should not be the primary reason for owning gold.
To conclude, Lorcan Roche Kelly may be right and gold prices may be at $1,000 per ounce in 2035. This in itself is the value of gold – it will always have a value. There is no guarantee that the government bonds, nor the fiat and digital currencies throughout the world today will have a value or indeed will be accessible.
Diversification and holding some of your investments, savings and pension in gold outside of the current fragile financial system remains prudent.