Gold Bull And Bear Markets

What is happening with gold cycles? Let’s look at the chart below, which shows the long-term behavior of gold prices.

Chart 1: Gold bull and bear cycles (from 1971 to 2018, London P.M. Fix, in $).

As one can see, there were only four cycles compared to six in the U.S. dollar: two gold bull markets and two gold bear markets. The first bull market started symbolically in August 1971, when President Nixon closed the gold window and terminated the gold standard. The collapse of Bretton Woods and the following surge in inflation caused a rally in gold. The bonanza ended in 1980, as the U.S. inflation rate started to decline thanks to the aggressive actions of Paul Volcker, the Fed Chair at the time. As the economy flourished, while the greenback strengthened, the yellow metal entered that bear market. It lasted until 1999/2001, when the dot-com bubble burst. In the 2000s, due to the financial turmoil, rising public debt, and the new wave of terrorism, the confidence in the American economy and its currency dropped, and gold reached its all-time height of $1,895 in 2011. But the economic recovery after the Great Recession has been pushing gold down. Interestingly, a similar (although not identical) pattern – i.e., two bull markets interrupted by a lengthy two decade bear market – can be found in most of the commodities.

Let’s see whether gold will continue its bearish trend or turn it upside. The historical analysis is even more difficult than with the case of the U.S. dollar, as gold experienced only one bear market before the current (recent?) one. All conclusions drawn from such a comparison should thus be taken with a grain of salt.

Having said that, it is worth noting that the previous bear market persisted 228 months and gold prices then plunged 64.44 percent. The bear market which originated in 2011 lasts only 77 months, and the price of gold fell just 29.7 percent (if we assume that the bear market ended in December 2015, it would have survived only 52 months with a 44.31percent decline). Hence, looking at duration and the cumulative percent change during each phase of the cycle (see the table below), we might still be in the gold’s secular bear market (it seems unlikely, but if history repeats exactly, the price of gold will decline to about $660 in 2031), and is now experiencing a technical rally.