The Long-Term Trend of Gold
As a commodity, gold prices fluctuate. These fluctuations can be very minor and can at times appear to be more significant. Any financial news channel you may tune into, or any financial news website you may visit will likely have the current price of gold, silver and even other precious metals readily available.
The current price of gold can be affected by many different factors. Some of these factors include:
- Central bank activity
- Currency markets
- Geopolitical events
- Economic conditions
When looking at gold as an investment, we feel it is important to base such an investment on your objectives. For example, someone who wishes to invest in gold for a short-term move is “trading” gold rather than investing in gold.
It is very important to distinguish between “trading” and investing. Those who want to try to capitalize on short-term price fluctuations in gold-using technical analysis for example-are traders. Those who want to invest in gold for the long run are investors.
Gold investors are often not concerned with the day-to-day, week-to-week, or even year-to-year fluctuations in the gold price. They are often buying gold for the potential of an increase in value, but are also investing in gold for many other reasons. Some of these reasons may include:
- To hedge potential inflation
- To hedge currency risk
- To provide peace of mind
- To own a hard asset that is not tied to a central bank and carries no counterparty risk
Whatever the case may be, knowing where gold has come from and where it could potentially go may provide some peace of mind.
The long-term investor is likely only concerned with the “long-term” and therefore we felt it prudent to outline gold’s trend over a larger time period.
Mid Seventies: Gold traded for under $200 per ounce
Late Seventies: Gold prices began to climb, and climb rapidly. As inflation began to accelerate, gold prices accelerated along with it.
1980: The price of gold, already benefitting from high inflation, spiked to over $800 per ounce. Some believe that this parabolic move during this year was due to the Soviet invasion of Afghanistan.
1981: The price of gold settles down and prices move all the way back down to around $350 per ounce.
1982-2002: The next 20 year period saw gold essentially range bound. The metal fluctuated between about $500 per ounce on the high side and $250 per ounce on the low side.
2004/2005: Gold begins to find more buying interest, and prices eventually break above their highs of the last two decades. This could likely be attributed, at least partially, to the end of the tech boom, affectionately referred to as the “dot-com bubble” and corresponding bear market in equities.
2006-2011: Gold prices appreciate rapidly, moving almost straight up during this five year period until they hit their all time high of nearly $2000 per ounce. Gold’s rise may be attributed to massive central bank action including low interest rates and quantitative easing.
2011-Present: Gold prices have pulled back since making their 2011 high, and currently sit around the $1200 per ounce level. While the U.S. has ended its bond buying program of the last several years, many other nations, including Europe and China, are still actively engaged in QE or other economy-boosting measures.
There are a couple key elements we feel are of importance here.
Gold’s trend is clearly up: When looking at the yearly gold chart, the price is undeniably trending higher. Does this guarantee gold will resume its uptrend? No. It does mean, however, that for the patient long-term investor, gold at current levels may represent an excellent long-term buying opportunity.
Gold may potentially rise during periods of uncertainty: Looking at the price of gold over the last several decades, you can clearly see how gold sometimes reacts to uncertainty-whether it is economic, geopolitical or otherwise.
Gold’s pullback has corresponded with a bull market in equities: As gold has retreated from its all time high in recent years, stocks have done the opposite, making new all time highs themselves.
What this tells us is that:
- If gold resumes its uptrend, it has the potential to move significantly higher. Think $5000 per ounce gold sounds silly? Think again.
- Gold may provide a hedge against falling stocks and a number of other economic calamities. Think the current bull market in stocks will last forever?
- Gold may continue to rise because it is a commodity of limited supply. As fiat currencies depreciate over time, demand for hard assets like gold may rise, and potentially drive prices significantly higher from current levels.
We believe that all of the pieces are in place for gold and other precious metals to rise sharply over time. While price trends can and do change, we believe that gold will in fact resume its uptrend to much loftier levels based on simple supply and demand, paper currency depreciation and economic/geopolitical factors.