After gold peaked in January 1980 at $850.00 per ounce, it dropped in price by two-thirds (66%) over the next five years. The low in February 1985 was $284.00 per ounce.
At that point it began a strong move upwards over a three-year span peaking at just under $500.00 ($499.75) per ounce in December 1987. That translates to an increase of seventy-six percent.
The advance was solid and well-defined. Those who had been waiting for the price of gold to go back up were confirmed fundamentally and technically. Or so they thought. With the “clear, technical confirmations” of a “new, bull market in gold” came a deluge of predictions regarding $1,000.00 gold and higher. At the time that would have marked a nearly four-fold increase from its previous low of $284.00. (That equates similarly to today’s predictions of $4000.00 gold assuming that $1040.00 was the low in December 2015.)
It was not to be. In January 1988, gold began a long an arduous decline which lasted fifteen years. Trading in gold was confined to a range between $300-400.00 per ounce for the next ten years. Then, seemingly as a result of sheer exhaustion, gold broke down through $300.00 per ounce and traded as low as $252.00 per ounce in September 1999. From its temporary peak at $500.00 per ounce to its ultimate low of $252.00 per ounce, gold’s price had dropped fifty percent.
Even after reaching its ultimate low of $252.00 per ounce, gold continued to trade mostly at under $300.00 per ounce for nearly three more years (April 2002).
Let’s see how this compares to more recent history regarding gold.
From its peak in September 2011 at $1895.00 per ounce, gold declined to $1040.00 per ounce over a period of four and one-half year.
Subsequent to that, gold’s price increased by almost thirty percent to $1363.00 per ounce in a period of seven months. Almost fifteen months later, gold has not traded any higher.
Question No. 1: Are we in the midst of a three-year period similar to that which occurred between 1985-88 (with respect to the price of gold)?
Question No. 2: If so, what might we possibly expect going forward?
It is certainly a realistic possibility that the answer to question no. 1 is yes. This is possible even if gold’s price goes higher first.
It seemed a well-known fact that after dropping in price by two-thirds, gold had seen its ultimate low at $284.00 per ounce. With three successive years of incredibly profitable gains, who would proclaim otherwise? And the technical signals confirmed it.
The situation today is not entirely dissimilar. Whether $1360.00 per ounce is a long-term intermediate/reaction top or not, the prospect for gold to resume a longer-term price decline would not be out of context with its earlier history.
Gold’s initial decline from its peak price in January 1980 lasted for five years and totaled sixty-six percent. Its initial decline from the recent peak in September 2011 lasted for four and one-half years and totaled forty-five percent. Reasonably similar.
Gold’s price increase from its low in February 1985 lasted for three years and totaled seventy-six percent. Its price increase from the recent low in December 2015 has lasted for twenty-two months. At its peak of $1360.00 last summer and again recently this represents an increase of thirty percent. Considerably smaller percentage gains, but not entirely dissimilar when considering the broader picture.
And if gold were to move higher soon it would not negate the possibility of going much lower again and disappointing lots of people.
The additional technical confirmations and increased comfort level that came as gold increased in price from $284.00 to $500.00 between 1985-88 did nothing to stop the subsequent fifteen-year decline to new lows.
If gold were to decline back towards $1000.00 per ounce, how low might it go? What might we expect?
One possibility is that it could trade between $1100.00 and $1300.00 for several years. And then break down below $1000.00. And depending on how quickly it establishes its eventual low point, it might trade for several years under $1000.00. Gold might settle out somewhere just above its previous all-time high in 1980 at $850.00 per ounce. Say $875-$975.00 per ounce.
There are also technical studies that point to a gold price as low as $700.00 per ounce before a resumption of the “eternal” bull market.
Ironically, none of the above is about gold. It is about the U.S. dollar.
Whatever you think or expect regarding gold, you need to make sure your expectations for the dollar are inversely similar. (see here)
During the entire fifteen year period of gold’s price decline between 1988-2002, the U.S. dollar was gaining in value. When the U.S. dollar peaked in January 2002, gold was priced at $282.00 per ounce (gold had posted its low price of $252.00 a year or two before this but was still trading under $300.00).
At that point, gold and the dollar reversed directions simultaneously. Over the next eleven years, the U.S. dollar gave up nearly thirty percent of its peak value. Gold, meanwhile, gained five hundred and seventy percent in price. That increase seems a bit outsized on the surface, but it is not dissimilar to the outsized declines gold suffered during the previous twenty years while the dollar was gaining in value.
Between September 2011 and January 2016 the U.S. dollar gained significantly and gold’s price declined in similar fashion. The low so far for gold was the $1040.00 per ounce in December 2015. The peak for the dollar occurred just a few short weeks later in January 2016.
After January 2016, both reversed directions again. The dollar headed lower and gold reversed and went higher. Similar turning points occurred in the summer of 2016 and December 2016.
Which brings us to the present. If gold moves higher from here it will be because of continuing weakness in the U.S. dollar. Conversely, if the U.S. dollar moves higher, it will be reflected in a lower gold price.
(for a scenario about possible gold prices see Gold Price – US$700 Or US$7000?)