Sunday, June 30, 2013

Parallels Between the 1970's Gold Bull Market and Today

There are many parallels between the bull market in gold in the 1970's and today's 12-year bull run in gold.

1) Between 1971, when Nixon closed the gold window of redeemability, and 1980, gold soared from $35/oz. to $$875/oz., a 25-fold move up.

Gold reached its double-bottom secular low of around $250/oz., in 1999 and 2001.  A 25-fold move up is approximately $6250/oz..

2) In the late 60's/early 70's, the U.S. was running huge deficits of several billions fighting an undeclared war in Vietnam.  Overspending was financed by debt.

Today, the U.S. is running huge deficits in the trillions fighting numerous undeclared wars globally, and especially in the Middle East.  Again, government spending is debt-financed.

3) In the 70's, inflation was running wild due to currency debasement, as price controls failed.

Today, official CPI inflation data indicates low inflation, but real world inflation is running closer to 9% when prices of all items are factored in, including food and energy.  CPI data is understated due to other reasons, including hedonics and substitution recalculations.

For instance, if the price of steak rises, the BLS replaces the cost of steak with the cost of hamburger; the logic being households adjust to rising prices by buying a cheaper product.  Inflation problem solved.  I guess the next recalculation will institute replacement of hamburger with dog food.

4) During gold's historic rise from $35/oz. to $875/oz., it corrected 47.7% between January 1975 and August 1976, from approximately $197/oz. back down to $103/oz..  Of course, gold then recovered from $103/oz. all the way up to $875/oz. between 1976 to January 1980.

Gold peaked in August 2011 at $1923/oz., before dropping to an intraday low on June 27, 2013 of $1186/oz., a drop of 38.3%.

Traders of markets understand that 61.8% is a significant Fibonacci number, as are 38.2% and 50%.

History suggests this recent correction in the gold bull market is just that--a correction.  The implication is this bull market in gold is not over, especially given the fundamentals of currency debasement and government indebtedness are still intact.

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