Gold Market Cycles - A Glimpse at the Rising Bull

by David EngstromFebruary 17, 2015

Since 1972 through 2007 there have been 14 bull and 13 bear market cycles in Gold.  Bear market #14 started in 2011 as the gold price began to decline from crisis-driven highs above $1900 an ounce.  The average bull market has lasted 434 days followed by average gains of 94.89%.  Bear markets, prior to the beginning of bear market #14, have lasted an average of 538 days and have resulted in average declines of 33%.  Today’s bear market is different. 

Gold Bear Market #14 is now 965 days old and has seen the gold price decline 36%.  [As of this writing]  One startling fact however, causes me to question what kind of bear market this really is.  Maybe it’s just a Teddy Bear market.  Since the onset of the financial crisis on September 15, 2008 – the day Lehman Brothers went bankrupt – the Dow has risen 64%.  It is said the Dow is in a roaring bull market.  Record high after record high has been achieved giving investors the sense that all is well in Mudville. 

Indeed a 64% gain over less than a seven-year period is respectable.  It may even be cause for celebration, complete with party hats and horns.  Contrast this with the sentiment surrounding gold and you would think we are attending gold’s funeral.  Not so fast Bucko.  This may amaze you.  Since that day, September 15, 2008, gold is up 62%.  It has matched the performance of the Dow yet it is deemed to be a LOSER!

So here we sit.  Stocks are at or near record highs and gold is enveloped in record high scorn.  Yet, both have risen equally since the onset of “Crisis 2008”.  Consider this as well.  How real can this bear market in gold really be?  With Gold prices now hovering near $1200 an ounce, nearly 40% of all gold producers are reported to be losing money.  Just as falling oil prices cause hundreds of oil wells to shut down, falling gold prices can cause mines to do the same.  Today, by some accounts, half of all gold producers are unprofitable.   

All this considered, this is why I believe we are seeing a major opportunity to buy low and sell high.  Especially, if we call today’s gold market a bear market that historically has been followed by an average 90% increase in price. 

So why is gold still down? 

It’s simple.  Investors have been scarred by a couple of difficult years and widespread media reports that the markets and the economy are in a recovery that could see record high after record high.  But, make no mistake! The smart money sees the opportunity and is seizing the moment.  Physical demand is strong as ever and it's coming at a time when production is under pressure.  Just one example:  Russia has been buying gold for 9 straight months.  You don’t make money or prepare for the worst by buying high and hopefully selling higher.  The logic is so simple yet so difficult to follow.  Buy low and sell high.  

So why is now a good time to re-invest in gold?

Again, as reports would suggest, sell-offs in gold appear to be massive.  Many eyes are fixated on Gold ETFs, the holdings of which appear to be dwindling.  This has been a primary catalyst in the drop of gold prices.  But, there is always two sides of the story.  If one party is selling, that means another party is buying.  As massive as ETF selling may appear to be, an equal amount of gold is being bought.  You can’t have a seller without a buyer.  So, who’s doing the buying?

The Smart money is now betting on the long term.  To them, indicators are just too obvious to ignore and not prepare for or respond to.  Debt is rising to unsustainable levels.  The labor participation rate is falling.  Stock markets are being artificially driven by corporate buy-backs.  Global turmoil is escalating.  Physical gold supplies themselves are shrinking.  The bond market is in a huge bubble.  Need I go further?    

On the production side, exploration for new mines is being curtailed.  Output from current mines is decreasing, and, as illustrated, mines that are losing money today may be gone tomorrow.  See it this way.  Today, for many gold mines, it is cheaper for them to buy gold on the open market to fill orders than it is for them to produce their own.  It seems to me, every mine could stop losing money today, if they simply stopped producing gold at a loss and in fact, bought it on the open market at a cheaper price.  Something just isn’t right.  I’m not saying this is what’s going on, but why wouldn’t it be?  And, if it is, the gold supply may be shrinking a lot faster than some suspect.

On the demand side, the picture looks very bright.  Asian citizens are being encouraged to buy gold to prepare for any unforeseen financial disaster.  Central banks like Russia, (as alluded to earlier) China, India and others are buying gold.  Still other countries like Germany and Venezuela are repatriating foreign held gold reserves and some of the world’s smartest investors are now owning gold.  To be sure, China just built a new gold vault large enough to hold an entire year’s worth of global production.  If they built it, they will fill it.

So, with…

  • The supply side shrinking;
  • Global demand rising;
  • The gold price sitting on a $1200 per ounce floor; and
  • A 90% potential rise in price looming. . .

I think we could see gold do very well in 2015-16.  No cycle lasts forever.  That’s why they call them cycles.

As always some of this is just my opinion but much of it is fact.  You decide.


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