Gold: How Long Will the Bull Market Last?

February 24, 2009 | By: Mark O'Byrne

Despite the continual wave of mini-tsunamis shaking the global economy, gold and silver remained resilient yesterday - gold was slightly lower and silver was slightly higher. World stock markets continue to reel from the deterioration of the financial system, which is spreading to the global economy, as the DJIA fell to levels last seen in 1997 and the Nikkei fell to levels last seen 26 years ago, in 1983.

The United States vowed to prop up ailing banks such as Citigroup (C) and the giant insurer AIG (AIG) if needed, but worries that yet more massive bailouts, cash injections and even nationalization, will fail to staunch the global economic crisis are weighing on stock markets around the world. This means that safe haven demand for gold remains robust.

click to enlarge

Gold will remain in a bull market as long as central banks continue to debase their currencies by trying to inflate their way out of this recession through zero interest rate policies, and massive money printing and digital money creation. The correlation between rising interest rates and rising gold prices can be clearly seen in the charts below. From 1971 to 1980, gold rose by 2,400% and the Federal Funds Rate rose from below 4% to over 18%.

Today, interest rates are close to zero, so there is no opportunity cost to owning the non-yielding finite currency that is gold. Indeed, there is unprecedented counterparty and systemic risk in keeping one’s savings in a bank. In addition, government bonds look increasingly risky and even the most developed nations’ sovereign bonds are at risk of being downgraded. Considering they are considering printing money top buy their own bonds, it is amazing that they have not already been downgraded.

Gold prices will only stop rising when bond yields and interest rates have risen significantly, and systemic risk has abated. We are still a long way from there. As the bubble in bond markets begins to unravel, large sums of capital will flow into the safe haven of gold.

click to enlarge

click to enlarge

There are interesting parallels with the mid-1970s, when gold rose from $35/oz to $200/oz. Then, in 1976, gold prices fell from $200/oz to $100/oz, prior to surging by more than 800% - from $100/oz to over $800/oz - in the latter part of the 1970s.

Gold fell from $1,030/oz in March 2008 to a low of just above $700/oz in late 2008. If gold were to repeat the performance of the mid-to-late-1970s, then it could rise to over $5,000/oz (8 X $700/oz = $5,600/oz) in the coming years. Thus, besides essential safe haven diversification attributes, gold also has significant potential for real and substantial capital gains that could help investors recoup some of the significant losses they have suffered in property and equity markets in recent years.

Disclosure: No positions

To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.

[ Back To Home ]