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I recently completed a visit to Australia where I was invited as the keynote speaker at the 2019 National Conference sponsored by ABC Bullion, one of the two largest gold refiners and gold dealers in Australia along with the Perth Mint.
ABC Bullion also kindly invited me to tour their facilities in Sydney. I visited five separate locations (out of a total of 15 in Sydney alone), which included refineries, gold bar casting facilities, jewelry design, trophy fabrication and secure storage. It was an intensive one-day crash course in all things gold outside of actual gold mines.
During these tours, I was able to observe state-of-the-art technology for the separation of gold from silver and other metals without the use of chemicals. These processes were invented by Russians, but are obtained under license from third-party intermediaries. Precise melting-point temperatures are combined with high-pressure gas to achieve the separation without the use of cyanide, chlorine or other chemicals.
It was also fascinating to observe the final stages of gold and silver bullion bar casting. These were entirely handled by robots without human intervention. Gold or silver beads of pure metal were poured into graphite molds and a top was placed on the mold. The molds were heated to high temperatures, which melted the bullion into the exact shape and size desired. The bars were then cooled and measured by weight before being etched with a unique serial number and the ABC Bullion logo.
I was not surprised to learn that much of the refinery output is sold to China. But, I was surprised to learn that many of the bars make a “round-trip” and end up back in Australia for secure storage. This can be verified by referring to the serial numbers on the bars.
In effect, the Chinese are converting dollars to gold and then diverting the gold out of China through various channels. This is easier than sending dollars directly out of China due to Chinese capital controls. The gold leaving China can go to many destinations including Singapore, Canada and Switzerland, but Australia is popular for this purpose.
This round-tripping of gold is one of the reasons China recently imposed a ban on private gold imports (although the ban was eased somewhat for those with special licenses granted by the government).
China’s voracious appetite for gold (despite recent restrictions) is one of many gold market developments I was able to learn more about first-hand during my visit Down Under. The local Australian demand for gold bullion is also at an all-time high, as is true elsewhere in the world.
With a bull market in gold firmly underway, what are the prospects for gold prices in the months and years ahead?
At Project Prophesy, we use third-wave artificial intelligence (AI) to offer readers the most accurate and powerful predictive analytics for capital, commodities and foreign exchange markets available anywhere.
First wave AI involved rules-based processing. Second wave AI involved deep learning as the iteration of rules produced new data that could be incorporated into the original rules. Third wave AI combines deep learning with big data as machines read billions of pages of information in plain language, interpret what they read, and add that to the big data input.
With Project Prophesy, machines are never on their own. Human analysts oversee the output and update algorithms as needed to steer the system on a smart path. Human+Machine processing is at the heart of Project Prophesy predictive analytics.
Project Prophesy relies on four scientific disciplines: complexity theory, Bayes’ Rule (a statistical method from applied mathematics), behavioral psychology, and history. A network of nodes and links is created with specific nodes conveying information from each of those disciplines.
Nodal input comes from data feeds, news services, exchange prices, and machine reading using systems such as IBM’s Watson supercomputer. Nodal input also comes from other nodes in a densely configured neural-type network.
Certain nodes are highlighted as containing actionable price information on stock sectors, fixed income instruments, commodities, currencies, and macroeconomic indicators generally.
Right now, the action nodes are telling us that the new gold bull market is intact and has far to run. To support this estimate, it’s important to take a longer historical perspective than the short-term rallies and dips that most analysts discuss. This longer perspective is illustrated in the chart below.
This chart graphs the U.S. dollar price of gold from 1970 until today. It illustrates two major bull markets, 1971-1980 and 1999-2011. It also illustrates two major bear markets, 1980-1999 and 2011-2015. Finally, the chart highlights a new bull market that began in 2015 and should continue for years.
It does not make sense to discuss bull and bear markets prior to 1970 because the world was on a gold standard for a century from 1870 to 1971. Prior to 1870, gold was simply money measured by weight and was not typically thought of in terms of currency equivalents. This pre-1971 gold standard went through many variations including the “classic gold standard” (1870-1914), the “gold exchange standard” (1922-1939) and the “Bretton Woods system” (1944-1971).
There were also periods when gold trading and gold shipments were suspended due to war and its aftermath including World War I (1914-1922) and World War II (1939-1944). Gold was occasionally revalued, for example, by France in 1925, the UK in 1931, the U.S. in 1933 and on a global basis in 1944.
However, all of these standards, suspensions and price resets were dictated by governments for policy reasons and were not the direct result of market forces. A true market for gold (albeit with government manipulation) did not emerge until 1971, so that is the appropriate starting point for considering bull and bear dynamics measured in dollars.
The first great bull market lasted from 1971 to 1980 and saw the price of gold go from $35.00 per ounce (the original Bretton Woods price) to $800 per ounce; a 2,100% gain in less than nine years. This rise was fueled by near-hyperinflation in the U.S. as the dollar lost half its purchasing power in a mere five-year period from 1977 to 1981.
The bull market was followed by a slow but persistent bear market that lasted from 1980 to 1999 and saw the price of gold fall 68% from $800 per ounce to $250 per ounce. This bear market was fed by extensive central bank sales including the infamous “Brown’s Bottom” where Gordon Brown, the UK Chancellor of the Exchequer (later Prime Minister), sold 395 tons of gold (more than half the UK’s gold reserves) in 17 auctions from July 1999 to March 2002 at an average price of $275 per ounce, near the lowest price for gold in the past forty years. Compared to today’s prices, this sale cost the UK over $17 billion in lost profits on gold.
The second great bull market lasted from 1999 to 2011 and saw the price of gold go from $250 per ounce to $1,900 per ounce; a 670% increase. This bull market was fueled by a combination of low interest rates (2001-2005) under Fed Chair Alan Greenspan and flight-to-quality dynamics during the mortgage crisis (2007), global liquidity crisis (2008), zero interest rate policy (2008-2015), and a new currency war, which produced a record low value for the U.S. dollar (2011).
Another bear market arrived in August 2011 just as dollar weakness turned to dollar strength. A persistently stronger dollar starting in 2011 and the promise of monetary tightening by the Fed starting with the “taper tantrum” in May 2013 were among the forces driving the decline.
As prices declined, gold miners struggled, mines were closed and gold mining rights and equipment were sold for cents-on-the-dollar, especially after the gold price crash in April 2013. The IMF added to the selling pressure by dumping 400 tons of gold on the market in 2010; another example of official manipulation of gold prices.
The turning point came on December 15, 2015 when gold bottomed at $1,050 per ounce, a dramatic 45% drop from the all-time high of $1,900. At that point, the third great bull market began. Almost no one saw this at the time because sentiment was completely depressed and many past rallies had been followed by new declines and new lows. Top gold analysts were still calling for $800 per ounce gold prices as late as 2017.
The point is, bull and bear market turning points are usually only seen in hindsight and rarely understood in real time. To our credit, we urged readers to buy gold at the $1,050 per ounce level and have been urging allocations to gold ever since. Gold has rallied almost 50% in less than four years as part of this new bull market.
The purpose of this long-term perspective is to illustrate the huge upside potential still remaining in this new gold bull market. The first bull market rallied over 2,100% in nine years. The second bull market rallied over 670% in twelve years. In both cases, the majority of the gains came toward the end of the bull market in a super-spike blow-off.
The current bull market is still in its early stage. A 50% gain in four years is impressive, but that’s just a down payment on what’s to come. If we simply average the performance of the past two bull markets and extend the new bull market on that basis, we would expect to see prices peak at $14,000 per ounce by 2026. Of course, even greater gains and a longer bull market are possible.