There aren’t many investment scenarios you can point to with any degree of certainty and say, “This asset is going to rise.” Saying so is usually fraught with risk, even if in hindsight it turns out to have been an accurate call but there are certainly times when you can see that the odds are heavily stacked in your favor and we have one of those potential scenarios right now in gold.
The original article has been edited here for length (…) and clarity ([ ]) by munKNEE.com – A Site For Sore Eyes & Inquisitive Minds – to provide a fast & easy read.
It’s a rather strong setup, based on a simple algebraic equation: if A happens, then B is likely to happen. And in this case A equals the direction of the US dollar.
As most readers know, gold and the US dollar are inversely correlated. Which makes sense; since gold is priced in greenbacks, it tends to rise in value if the dollar falls – and vice versa. Like most inverse correlations, it’s not a perfect “one goes up exactly 1.2%, the other falls exactly 1.2%” pairing, but it’s especially accurate over long periods so, if the dollar has begun a long-term decline, it would be reasonable to expect the gold price to rise during that span.
The US dollar has had some very long, very big declines since the late 1960s.
The average of the three major declines was 35.3% over an average span of 11 years and, as you can see in the chart above, it looks like the dollar is rolling over again, starting another one of its long-term descents. This seems supported by the lower highs and lower lows it has exhibited since 1985.
How did gold perform during these long-term dollar bear markets?
While gold’s rise varied greatly, it rose in all three dollar bear markets. The average gain was 637% and those percentage gains are based on the average annual price, so those returns as an investment were actually achievable (and potentially even greater).
What happened from the mid-80s to mid-90s? You’ll recall this was only a few short years after gold’s biggest rise in modern history (2,328% over 10 years, ending in 1980) so it’s not exactly shocking that gold didn’t rise much after that kind of run and, of course we have the opposite situation today—gold fell for four years, bottoming in 2015, and has risen only 25% since then.
Bottom line, it seems likely that a new long-term bear market is beginning in the US dollar, which would mean gold is beginning a new long-term uptrend. Of course, if the dollar falls to its intrinsic value of zero, the rise in gold will be of manic proportions…
Related Article From the munKNEE Vault:
Gold is getting closer and closer to breaking out of a giant Head-and-Shoulders base pattern and it won’t be stopped from doing so by any minor short-term reaction.
We’re inching closer and closer to a major move in the gold market and you’ll want to be positioned beforehand to take full advantage.
For those who believe in cycles, the timing is perfect for a strong run up in gold. Here’s why.
Gold has historically shared a low-to-negative correlation with many traditional assets such as cash, Treasuries and stocks, both domestic and international. This makes it, I believe, an appealing diversifier in the event of a correction in the capital and forex markets. Need more reasons to add to your gold holdings? Below are 10 charts that show why the yellow metal is undervalued right now.
Gold just entered a new bull market but the price of gold has failed to garner any meaningful rally so, what gives? Why haven’t gold prices rallied? Well, it’s just a matter of time.
Because investment professionals are generally well informed, competing in an industry in which performance is king, one would assume any asset class deserving of rightful consideration would enjoy a fair hearing so it begs the question “Why Doesn’t Gold Get The Respect It Deserves?”
One of gold’s allures is its use as a hedge against negative economic outcomes: inflation, deflation, general economic collapse and even war [with] investors and speculators enter[ing] the market based on their guesstimate of how bad things might get. [An analysis of] how gold performs during inflation and deflation [suggests, however, that there has to be some another] market force – some secret force – that has driven gold prices by +370% over the last 10 years.
Markets are expressing no fear and seem very comfortable at, or near, all-time tops. There is no concern that stocks are massively overvalued or that bond rates are at historical lows and only have one way to go so, whilst we are waiting for markets to wake up from the dream state they are in now, what signals should we look for and what about timing?
Gold may be about to get its shine back in a big way, as a number of significant technical developments suggest a strong potential for the resumption of the bullish medium- and long-term trend. [Here are the specifics.]
For all the latest – and best – financial articles sign up (in the top right corner) for your free bi-weekly Market Intelligence Report newsletter (see sample here) or visit our Facebook page.