This gold bull is not over – not by half

By Bill Bonner Mar 07, 2008

Bill Bonner.

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At the end of the last century, nothing seemed more obvious: the price of gold would go up. We pass over the previous 20 years, in which the same blindingly obvious truth practically bankrupted us.

But there’s nothing quite like two decades in which the price of his favourite commodity falls continuously, to grind down a man’s youth, wear away his pride and polish off his fortune. And there’s nothing like a bull market to perk him up again.

In 1980, the gold price peaked at $850. Year after year, it went down. Year after year, we gold bugs became less sure of ourselves. The dollar “should” fall, we kept saying. Gold “should” rise. Instead, gold fell until it hit $253 in July of 1999. Adjusting for inflation, gold lost about 92% of its value. By then, our confidence and money were almost all gone. Of course, we’d rather have the money. But that is just the way the financial markets work; if you live long enough they will make a fool of you twice – coming and going.  

Then, in July 1999, the long bear market was over. We bought at $300, hardly bothering to think about it. At $400, we were carefree and bought more. At $500, we called for more. At $600, $700 and even $800, we happily added to our stash. Then, last year, gold passed the $850 mark – finally, we broke even on the Kruggerands we had bought in 1979! We guessed it would go up more – at least to $1,000. Now that it has almost hit the $1,000 mark, maybe it is time to think twice. What if gold were to take another 20-year dive? Anything is possible, isn’t it?

We live in a world of wonders. Who would have imagined 30 years ago that that communist China would soon have the world’s fastest-growing economy and Americans would have to borrow from it to maintain their standards of living? Back then, the Chinese were still waving their Little Red books of Mao’s silly quotations and trying to make steel on their backyard barbecues. And who could have known that Gordon Brown was the world’s biggest chump when he sold Britain’s gold in 1999 at the very bottom of the 20-year bear market?  

But even at today’s price, around $975, gold is still less than half the inflation-adjusted high it set the year after Maggie Thatcher moved into 10 Downing Street. A lot has happened since then. For one thing, more gold has come onto the market. Gold is never destroyed or used up. Still, an extra ounce of it is much harder to make than a crisp, new $100 bill. You have to find it and dig it out of the ground. That’s why the world’s gold supply grows only about 2%-3% a year.

But the supply of paper money – in which gold is calibrated – goes up much, much faster, at least four or five times as fast over the past 30 years. The world’s assets – also measured in paper money – have skyrocketed, too. Our houses are worth many times what they were in the early Thatcher years. So are our stocks. What’s more, now there are trillions of dollars worth of tradable financial assets in places where none existed at all in 1979.

Gold began floating on this flood of liquidity nine years ago. It has doubled, and doubled again. Since 2001, it has gone up 240%. Since Ben Bernanke began cutting rates on September 18, 2007, it has gone up 37%. If you believe in the volume theory of money – and we do – you can reasonably expect its price to keep going up. Gold is, ultimately, money and it is also the world’s ultimate money. Adjusted for inflation, it will have to hit $2,500 just to match the peak in 1980.

The classic advice is to divide your investment portfolio into thirds, with one third in property, another third in stocks and bonds, and the final third in precious metals – notably gold. That’s still good advice, even with gold at $1,000. This is much easier to do than it was in the 1970s; now there are exchange-traded funds, which follow the gold price.

So what could go wrong? When we were young and clever, we didn’t worry about such things. But now, we put a “probably” before every verb. Buying gold at $253 per ounce was one thing. Like robbing a liquor store; you could scarcely miss. But buying gold at $1,000 is another matter, more like robbing a bank. In theory, a big security guard like “Tall Paul” Volcker could appear, raise rates and tighten lending standards. Unlike Greenspan or Bernanke, he might take his duty to protect the dollar seriously. The price of gold could fall.  

But it is extremely unlikely the Fed will raise rates soon. Bernanke will be elected as the new Pope before he becomes a hard money man. Bernanke is no Volcker, and the America of 2008 is not the America of the Reagan years: 30 years ago the US economy was strong enough to take Volcker’s medicine. With today’s debt levels, a prime rate of 15% Volcker’s dose would probably kill it.

A more likely threat to gold is that the world economy will enter a long, slow Japan-like slump – despite Bernanke and company. Prices for just about everything would fall – including gold. While that is a possibility, it does not seem imminent, and its first stages are likely to bring a boost for gold anyway. Initially, investors will turn to gold as a safe haven against bankruptcy and default. Later, they may wish they held more cash – but for the moment, investors’ money is safer in Kruggerands than in sterling or dollars.

For what it is worth, we’re at least as sure that the gold bull market will continue now as we were in January 1980.

Published in Precious metals & gems | More articles by Bill Bonner

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