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Gold – Boy is it Frustrating!

 -- Published: Thursday, 8 May 2014 | Print  | Disqus 



Charts and commentary by David Chapman

26 Wellington Street East, Suite 900, Toronto, Ontario, M5E 1S2

Phone (416) 604-0533 or (toll free) 1-866-269-7773 , fax (416) 604-0557



Hands up if you are amongst the gold believers who are frustrated with the long bear in gold. Hands up if you are a part of the group that could care less about gold and may even believe that it is a barbarous relic. And finally hands up if you are amongst the few that believe that gold is going to the “moon” over the next number of years because the worlds central banks are out of control madly printing money.


I have never seen any survey but my suspicions are that the former is a small group maybe 5-10%, the middle group is the largest maybe 80-90% and the latter group is very small maybe 1-2%. The latter group are, however, very prolific in touting the benefits of owning gold. Oddly enough it is fairly well known that the so-called 1% do own gold and in some cases quite a bit of it.


The bear for gold is now approaching three years. The top in the market was seen on September 6, 2011 at $1,911 on the futures charts and $1,923 on the cash charts. But what if I told you that the bear market in gold has been going on for even longer. I would probably get a lot of disbelievers. Maybe even some bricks thrown my way. If one uses an inflation adjusted chart (shown above) gold remains below the all-time high seen in 1980 currently at $2,744. With gold currently at $1,285/$1,300 it is a long way from those lofty levels. On that basis, one can only claim a gold bull market once it confirms with a new all-time high above the inflation adjusted 1980 high.


There are numerous analysts out there that claim “why even own gold….you have never made any money on it”. If one starts at the 1980 high, they are probably right. On a nominal basis, gold is up roughly 47% from the January 1980 high. If one bought the high of the Dow Jones Industrials (DJI) in January 1980, they would be up on a nominal basis 1,750%. Quite a difference. On an inflation-adjusted basis, gold is down 53% from its 1980 peak. The DJI saw its inflation-adjusted peak in January 2000. The DJI is down a small 1% from that inflation-adjusted peak although from the January 1980 high the DJI is up 505%.


If timing is everything then a re-examination of the gold DJI relationship looks a little different. Gold became free trading in August 1971 when former US President Richard Nixon took the world off the gold standard for good. Since then on a nominal basis, gold is up 3,570% vs. a gain of 1,840% for the DJI. On an inflation-adjusted basis the DJI is up only 215% vs. a gain of 417% for gold. If one only looks at performance since 2000 then on nominal basis gold is up 344% while the DJI has gained only 44%. On an inflation-adjusted basis, gold is up 221% vs. a gain of only 5% for the DJI.


I have summarized these in the table below.

What all this demonstrates is that gold can outperform or underperform depending on where one starts. Gold has outperformed since August 1971 when Nixon took the world off the gold standard and gold has outperformed since the start of the current millennium. But if one starts at Gold’s January 1980 peak then gold has underperformed stocks as represented by the DJI.


If you are a believer in the gold story then the past few years and especially the past year has been very frustrating. Gold has fallen on a nominal basis from the September 2011 peak by 33%. On the other hand, the DJI is up roughly 41%. On an inflation-adjusted basis, gold is down 25% while the DJI is up 41% the same as its gain on a nominal basis.


Picking your start point does influence one’s perspective. Stock markets and gold go through their own bull and bear markets. Take the DJI. The DJI peaked in September 1929 and on an inflation adjusted basis the DJI did not take out the 1929 peak until 1959 a period of 30 years. The final bottom for the long bear market that followed the 1929 peak was made in 1949. The DJI next made a peak in January 1966. It took until 1995 to regain the 1966 top a period of 29 years. The final bottom for the bear market that followed the 1966 peak was seen in 1982. The DJI next made an inflation-adjusted peak in January 2000. The DJI is still waiting to take that peak out. If past history is any guide then it could take until 2030 before the DJI finally takes out the 2000 peak.


On an inflation adjusted basis gold did see a peak in 1934. That peak came following the revaluation of the gold price by the Roosevelt administration from $20.67 to $35. The gold price was held at $35 until Nixon set gold to trade freely in August 1971. The result was a long bear market for gold on an inflation-adjusted basis. Gold was up sharply during the 1970’s peaking in January 1980. The gold panic that followed that peak was because Fed Chairman Paul Volcker hiked interest rates to 20%. Thirty four years later gold bugs are still waiting for gold to take out its 1980 peak.


The good news is there was a major bottom for gold in April 2001. Gold has been in a bull market since then interrupted by intermediate term bear markets. Since then there has been four previous periods where gold fell by 10% or more. A correction in 2002 saw gold fall 16%; in 2004 another correction got underway and gold was off at its low by roughly 12%; the correction in 2006 was more severe as gold fell 23% and the correction did not end until 2007; finally there was the 2008 drop where gold fell 30% even as the DJI was falling 47% (and other indices even more).


The current decline is the steepest and has lasted the longest and still shows no sign of being over. The question is this a correction within the context of bull market as was seen from December 1974 to August 1976 when gold fell from $190 back to $102 or is this the start of a major bear market as was seen from 1980 to 2001. The long bear from 1980 to 2001 saw a number of bears that lasted a long time. There was one from 1987 to 1993 and another long bear from 1996 to 2001. Those markets just grinded lower and lower.


Thus far, the characteristics of the current bear are more akin to the 1974-1976 mini bear as opposed to the long bears of the 1990’s (see chart below). The reasons for owning gold have not changed. On the other hand, there are most likely going to be those who constantly disparage gold and predict that gold is going to fall to $1000 or lower. The prime reason to own gold is to protect against currency devaluation. Gold is not necessarily to protect one against inflation, deflation or war. From 1774 to 1913 the purchasing power of the US$ was relatively steady against gold. Since the Federal Reserve of 1913 the purchasing power of the US$ has fallen roughly 96% against gold. It is interesting that the US$ maintained its purchasing power in the earlier period even though there were wars. Yes, there was a dip as can be seen on the chart below in the 1860’s during the civil war. But a US$ bought largely the same in 1900 as it did in 1800. That has not been the case since.




1974-1976 Gold Correction vs. Today


Source: Incrementum, Liechtenstein


The CPI adjusted gold chart shown at the outset is based on the CPI as reported monthly by the Bureau of Labor Statistics (BLS). Shadow Government Stats ( reports an alternate CPI based on how the CPI was reported back in 1990 and 1980 before the Reagan and Bush administrations introduced measures to depress the reported CPI number. This chart is even more stark then the CPI adjusted gold price.


Based on the alternate CPI as reported by SGS the gold price today would have to rise to $11,580 just to equal the high of 1980. Curiously enough, if gold were to fully back M1 in the US (i.e. a return to a gold standard), the price of gold would need to be at least $9,565 (based on the US’s gold reserve holdings of 8,133.5 tonnes).  Maybe the SGS number is not so far-fetched after all.


It has been a long frustrating period for those who believe in holding gold. The last phase of a bull market is usually the most spectacular and often ends in a panic. The current correction is somewhat similar to the correction seen in 1974-1976. Despite the rise in gold’s price since 2001, the best may be yet to come. Patience, as they say, will be required.





Copyright 2014 All rights reserved David Chapman


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