Gold has recently seen some price drops that some have taken as the harbingers of the end of the yellow metal’s historic 12 year bull run. A huge sell-off at the beginning of last week was triggered by the biggest price drop in 30 years. Such action can doubtlessly take its toll on the gold investor’s morale, so let’s put the situation into a bit of perspective in order get a grip on what’s happening with gold right now.
Not an Isolated Event
It’s important to remember that even though gold’s fall from its peak in 2011 – from $1,885 to $1,320, a 30 percent drop – is not unprecedented. In fact, similar price drops have already happened in the current bull run.
It was in 2006 that we saw a top-to-bottom fall of 25 percent; in 2008, the gold price fell a whopping 34 percent. Certainly, a price drop of 30 percent can be quite painful, but it is far from new. It’s actually kind of par for the course in this bull run, a point we’ll get to presently.
Gold’s previous bull run in the ‘70s was no stranger to precipitous price drops, either. In 1977, the gold price actually plummeted 50 percent from top to bottom. This, however, came right before the yellow metal gained more than 800 percent during the next three and a half years.
The point is, price slumps, even ones as dramatic as the current one, are quite common within gold bull markets. Furthermore, they are actually beneficial to investors who need to take advantage of the buying opportunities they provide.
Gold’s Current Price Cycles
Let’s hark back to those two similar price drops that we’ve already seen in the current bull run. Notice the years. They came about two years apart from each other – 21 to 22 months, to be exact. This is because gold has been seeing cyclical price patterns during the current bull run. Gold has consistently reached new price peaks every 21-22 months since 2006 (prices from Kitco spot gold data):
- May 12th, 2006: $710.50
- March 14th, 2008: $1,002.50
- November 27th, 2009: $1,176.70
- September 2nd, 2011: $1,884.20
Of course, each peak came with a responding and proportional price drop, as well. From here on out, the caprice of the gold price is going to be more and more volatile. It’s possible that we’re going to see even bigger price drops than the ones already experienced in the bull run so far, but don’t forget the yin to the gold price yang. Gold will reach unprecedented heights before this whole thing is through.
You may have noticed that that last date in the cycle listed above was just about 20 months ago. We are currently on the cusp of another peak in the cycle, and the next couple of months are going to be very interesting for gold investors, especially those who have availed themselves of the current buying opportunity.
The Fundamentals Are Still Here and Stronger Than Ever
One thing that has played a role in gold’s price drop in recent months has been the expectation of the Fed putting the kibosh on quantitative easing. This was due to the minutes of a couple FOMC meetings revealing that a few committee members had qualms about the U.S. central bank printing money with reckless abandon.
Even though the votes to continue doing so were one vote short of unanimous, many in the financial media took the mild compunction of a few members of the committee to mean that QEternity was over! Not as eternal as we thought. Well, that was back in January, and the Fed is still buying up securities to the tune of $85 billion a month.
If anything, the same fundamentals that have been the impetus behind gold’s historical rise over the last 12 years are even stronger today than they were back in 2011. The money printing bug has caught on across the sea, as Japan’s prime minister Shinzo Abe has the country on track to double its monetary base within the next couple years.
Debt is piling up across the globe. Britain’s debt has increased 112 percent since 2010. U.S. national debt is pushing $17 trillion. The end of this bull run will be marked by the liquidation of this debt, which will happen someday, but not right now. When this does happen, the gold price will go through the roof.
Physical Demand Is Soaring
Physical demand the world over is skyrocketing. From India to Japan to Australia to right here in the U.S., gold bullion dealers are seeing lines trail out of their stores and around the corner, as people are flocking to take advantage of one of the greatest buying opportunities in the yellow metal’s history.
So far in April, the U.S. Mint has sold 153,000 ounces of American Eagle gold coins – over twice as much as March sales and seven times higher than last April – and 19,000 ounces of Gold Buffaloes. If the pace of physical buying keeps at it, it will inevitably come back around into the paper gold market, and the price will rise again.
So what is gold going to do next? Is it going to turn it back around and rise sharply? Is it going to founder a bit longer as it takes the market a little longer to realize the metal’s true potential? No one can be sure. The best predictions are inferred from the past, and the recent past tells us that gold is going to peak once again in the next few months.
However, even then the bull run will not be over. It still has a few years left to go. So learn from gold’s cyclical behavior and get in while the prices are low – like now – and stick with it for the long haul. You don’t want to get out of gold and see a few years down the line that it has reached heights we never even dreamed of.