From the 1998 lows, oil prices rose 14 times to a peak of $147 in July 2008. Gold prices rose to a high of $1,895 last September and closed at $1,734, almost seven times the value of 1999. Could gold prices move higher? Even after all these gains, almost everyone thinks not. That is the perfect investor sentiment for higher prices.
The lowest long- term gain for Oil or Gold since the 1960’s, was 13 times for Oil, in 1981. Thirteen times the low gold price of $253 equals $3,289. That is 90% higher than today’s price. The largest gain was 24 times for Gold in 1980. Should that increase occur again, gold prices would rise to $6,072 per ounce.
Analysts have looked at asset bubbles over the last century. They looked at the long term price patterns before and after bubbles, for the Dow Jones Industrial Average in 1929, Gold in 1980, the Japanese Stock Market (Nikkei) in 1989, the NASDAQ in 2000, and Oil in 2008. The blue line in the chart below shows the pattern of prices when all these bubbles are combined. The black line shows how the price of Gold has followed this typical bubble pattern since 1999. The horizontal axis shows the number of months and the vertical axis shows the increase. If gold prices continue to follow this pattern, they should rise from approximately 450 on the left hand scale to 1000 in the next 20 months. That would project a gain from $1,734 to $3,853 by the end of 2014. If the uptrend for Gold moves into a bubble phase, a very sharp rise could begin at any time. If prices follow previous patterns, the downside should be limited at this point in the cycle.
Is such a rise possible?Since stock markets have performed so poorly for so long, let’s look at of some recent occasions that show unusual advances. After advancing along with other markets for many years, the technology laden NASDAQ Index closed at 1,300 when Federal Reserve Chairman Alan Greenspan thought it was overvalued in 1996 and remarked about ‘irrational exuberance’ in technology stocks. Yet, a year later, the NASDAQ had risen another 26% to 1,633. Then, from a low of 1,357 in October 1998, the NASDAQ rose 278% in seventeen months to close at 5,132 in March 2000. In other words, the NASDAQ skyrocketed almost another 300%, for another three years, after one of the most experienced and informed individuals in the world thought it was overvalued.
Oil prices advanced from $10 a barrel to $80 a barrel in 2006. Then, from January 2007 to July 2008, oil prices leaped from $60 to $147 – a gain of 145% in 18 months.
Recent history shows that it is indeed possible for gold prices to rise more than most imagine. One of the major factors that propelled gold prices higher in the 1970’s was negative real interest rates. At times in the 1970’s, interest rates were at 8% while inflation rates were at 10%. Those who wanted to save money to buy something in the future were losing ground because the value of the item increased faster than their savings did. While interest rates were at 8%, the real rate was negative 2%.
Presently, short term interest rates are at 0% and inflation is at 2%. Believe it or not, the conditions of the 1970’s are back with us again, as we experience negative real interest rates. Dennis Gartman wrote that the Chinese are now buying 45 times as much Gold as they did ten years ago. Very soon, India and China will be purchasing one half of all the worlds annual production of Gold. Last week, India announced that they would pay for Iranian Oil with Gold. All of the countries which receive billions of dollars every year from Oil sales need to invest that somewhere. With all the problems in Europe and the United States, many countries are investing more of their cash reserves in Gold. The resource cycle is in the final phase of the 16- to 18-year cycle uptrend, as it was for Gold and Oil in the late 1970’s and technology stocks in the late 1990’s.
History suggests this is the period when Gold should really shineThe long-term Trend is still positive for the TSX. The S&P 500 index is up 20% from last summer’s lows; a rise of more than 20% is defined as a bull market. It doesn’t seem possible that markets could start a long term uptrend with all of the problems in Europe, yet we can recall that the 2000 to 2003 bear market ended in March 2003, when North America was still in a severe recession, when the U.S. invaded Iraq and when the SARS virus was spreading around the world.
Follow the Trend indicators, not the news or your emotions.