Adam Hamilton | May 13, 2012 03:42AM ET
Gold has had a rough time lately, grinding relentlessly lower. Such technical weakness has naturally spawned increasingly bearish psychology. This has led to a fringe view growing in popularity that gold’s mighty secular bull has already given up its ghost. If these new-bear arguments are correct, gold’s secular bull had to peak last August. But was that latest topping gold-bull-climax worthy? Not even close.
As the word describes, “secular” bull markets last a long time. In the stock markets, secular bulls and bears tend to run for an incredible 17 years each! Gold’s latest bull was born way back in April 2001, over a decade before its alleged climax in August 2011. With investors only having 30 or 40 productive years at best over which to invest, any decade-plus secular trend eats up a major fraction of this lifespan.
And naturally the longer any trend runs, the more it influences market psychology. Just a year or two into a new secular bull, skeptics still greatly outnumber believers. But a decade or more later after this same bull has matured, nearly everyone believes. The longer prices trend higher, the more excited investors get about their future potential. So greed and complacency gradually bloom within any secular bull.
But eventually this optimism grows excessive and spawns full-blown euphoria, and a popular speculative mania is born. These rare events are insane. Remember the tech stocks in late 1999 and early 2000? Popular manias marking secular-bull climaxes seduce in everyone, even non-investors. The resulting massive influx of capital ignites vertical gains, leading to exploding mainstream-media coverage of that bull.
The resulting feeding frenzy drives a terminal parabolic ascent. The bull market’s prices rise faster and faster at an accelerating pace until they skyrocket vertically. In the final 7 months alone of the tech-stock mania, the NASDAQ more than doubled! But once everyone remotely interested in buying has already bought in, only sellers remain so the price bubble promptly collapses. The resulting losses are epic.
These parabolic ascents driven by popular speculative manias are the calling card of secular-bull climaxes. That kind of all-in universal euphoric psychology is necessary to suck in enough capital to kill the mighty bull. So when a topping isn’t accompanied by such a monstrous vertical surge and widespread adoration, the odds are great it was merely an interim high and not the bull’s swan song.
While gold was definitely overbought at its latest peak last August, there was nothing even remotely parabolic or universally euphoric about it. Gold’s own history easily proves this. When the topping we saw in August is compared to gold’s last secular-bull climax several decades ago, they are not even in the same ballpark. But this isn’t readily apparent until gold prices are viewed in inflation-adjusted terms.
Thanks to the Fed’s relentless money-supply growth, a dollar today certainly isn’t the same as a dollar in January 1980 when gold’s last secular bull climaxed. Back then when gold first hit $850, the US median household income was under $18k. New houses averaged $76k while new cars were less than $6k! A candy bar only cost a quarter. So directly comparing nominal prices across decades is effectively nonsensical.
So we need to use real gold prices, adjust them for inflation, to make an honest apples-to-apples comparison of last August’s topping and January 1980’s indisputable secular-bull climax. As in my real gold essays, I used the US Consumer Price Index to adjust gold prices over the years for inflation. Yes the CPI is a joke, a government fiction that seriously understates true inflation for political purposes.
But since everyone outside of Washington realizes actual inflation is considerably higher than our lying government claims, the CPI is very conservative. This flawed yardstick seriously understates the actual magnitude of gold’s last secular-bull climax. In these charts this CPI-inflated real-gold metric is rendered in blue, while the raw nominal gold prices are shown in the background in light red for comparison.
But in real inflation-adjusted terms, even when using a pathetic understated political index like the CPI, a radically different picture emerges. Our latest secular bull is actually much smaller than the 1970s one, and its August topping occurred at much lower real levels. And most importantly of all, it has been far more gradual. As the final chart below clearly reveals, gold had no parabolic verticality last summer.
On the pure size front, the 1970s bull utterly dwarfs our latest one. In real terms gold rocketed 1082% higher between January 1970 and January 1980. In the misleading nominal terms gold bulls love to cite, this was a staggering 2332% gain! But our current bull isn’t even half this size yet. In real terms it was only up 478% between April 2001 and August 2011, which was merely 640% in nominal terms.
The main reason our latest bull is less than half the size of its predecessor is there has been no popular speculative mania yet. While gold’s excellent secular-bull gains have gradually won over investors, they’ve yet to become enamored with it. Nor has the general public that fueled the NASDAQ’s parabolic secular-bull climax in early 2000. Gold simply hasn’t become a universal market darling yet.
While the next couple charts zoom into the 5 years or so leading into the January 1980 and August 2011 toppings, this secular perspective really accentuates the extreme nature of a parabolic blowoff. Gold literally skyrocketed back in 1979 after it started shooting parabolic, blasting to dizzying heights that were unimaginable at the time. And as always immediately after a parabolic climax, gold plummeted in a vertical collapse.
Meanwhile gold not only didn’t shoot parabolic from this secular perspective last summer, it didn’t collapse after August’s peak. The latest topping doesn’t even look remotely like January 1980’s secular-bull climax. So whenever I hear bears advance their this-gold-bull-is-over thesis, I have to wonder if they’ve ever bothered looking at a real gold chart. August’s topping was nothing like a secular climax.
And these next charts really drive home that point. In order to make them as comparable as possible across the vast sea of time separating these events, I kept their vertical axes zeroed. And of course the blue real-gold series are the same CPI-inflated constant 2012 dollars. The only gold-bull climax of modern times was January 1980’s, the popular-mania gold standard. It was a wild and crazy event!
And if gold’s bull isn’t over, then gold is destined to power to new all-time highs sooner or later. And once that inevitable recovery gets rolling, capital will flood back into this metal and the stocks of the companies that bring it to market. So if you can stand strong as a contrarian and fight the popular fear gold’s latest correction spawned, there is a vast smorgasbord of incredible bargains in the precious-metals realm.
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