Is the 1970s Gold Run back?
3rd March 2012

We often create stories to make sense of what is going on around us and look at history to find reasoning that provides the substance to base our thesis on. In doing so,we often find historical events, which seem close proximations and follow them as a guide, unless proved wrong by the recent unfolding. And in financial markets,ths process could be really painful.

In gold markets, we're also comparing the current bull run to that of 1970 s expecting the same result. But there is a cautionary remark - as gold hits set a new peak at $1920/oune- is gold poised for a similar tumble, the way it did in the 80s-tumbled after peaking at $850/ ounce. This has become a thesis and market experts would battle against any view as it threatens their sense of meaning. They tend to ignore the subtle difference that underlies the current movements. They believe that history repeats itself and the recent patterns will mimise its historical past in terms of duration as well as price magnitude.

By the logic, let's see where we are in the current bull run as compared to that of 70s.

Chart: 1970s and today (gold price comparison) (in $/ troy ounce)

*Rebased to 100
Source: Bloomberg

The 70s bull run began in 1971 when U.S president Rrichard Nixon shut the gold window; ending the direct convertibility of U.S dollar to gold at $35 an ounce.In effect, he took the whole world off the vestiges of the gold standard, which completed a duration of 9 years till gold price peaked in 1980.

The current run, starting in 1999 when prices bottoned totals a dupation of 12 years, Surpassing the earlier bull run. Does this make irrelevant? No! Looking at price history, however, it seems the rally started in 1971.

The bull market probably began before than that-perhaps even before 1961-when buying pressure was suchthat the London Gold pool was introduced to stabilise the gold prices. However ther were no visible gain as the official gold price remained at $35 an ounce,even with the on going dollar printing. So from a duration perspective,ther is no logical comparison.

Let's get the price magnitude in the picture. Gold began at $35 an ounce in 1970's. By the time it reached $ 850 level, it had gone up almost 25 times. Gold began the current bull market at $250 an ounce. A 25-fold increase will give us a target of $6250. It suggests a three - fold increase, from the high set in 2011. Then how do people suggest that gold has peaked based on historical comparisons?

No one can predict prices based on such parameters because the markets, economies and policy making at the broad level are very different during both the periods to even attempt such baseless comparisons, studying what has hppened in the past does not tell what will happen in future, but it helps set our expectations as to what is possible and reasonable. It also prevents us from being surprised when markets dont do the obvious. It is better to learn from the past, and one should not overlook, while appreciating the similarities, the subtle differences among the different time periods.

source: equitymaster.com