Gold Market Comparison: 1970s vs 2000s

Through four charts by Nick Laird, I would like to show you why I don’t believe the recent gold bull market, started in 2000 and that ended in 2012, was a bubble.

There is another aspect that is impossible to show with graphs and that is the euphoria that existed in 1979 and that was nowhere near in 2011. I was there during the whole bull and bubble phases of the 70s gold market and I followed gold closely since the 60s but it will be longer to describe the euphoria in words so I will stick in this short article to a few charts.

In the first chart you can see a superposition of the present gold bull and bear market on the typical bubble model as created by Dr. Jean-Paul Rodrigue from the Dept. of Economics and Geography, Hofstra University and its different phases. This is my preferred scenario for the price of gold.

Gold Bubble Model

Bellow you can see how well the gold bull and bubble market of the 70s fits on this model. It’s not a perfect match but very close. I expect the same thing in the next bubble.

Gold Bubble 70 3

The third chart compares the recent gold bull and bear market that started in 2000 to the gold bubble market started in 1970 and that ended in 1980. If a similar pattern is to repeat gold has been recently in a correction within a secular bull market rather than a secular bear market. The bubble phase has not started yet and we are only in the late stage of the Awareness phase and in a Bear trap. If a similar pattern is to repeat, we will see the gold price rise by approximately 2,000% which means approximately a price of $25,000.

Gold Bubble 70

There is no better technical quantitative indicator than the Price Rate of Change, which in plain English is the acceleration of price, to show you why the recent bull market in gold was no were near a bubble. Didier Sornette, author of Why Stock Markets Crash, says that the major characteristic of a bubble is a parabolic shape not only of price but of its acceleration (in technical analysis – Price Rate of Change) and I agree. Price momentum being price speed if I can use this analogy with cars. Speed (momentum) is the first derivative of price and acceleration (rate of change) is the second derivative. Look at the SUPER parabolic shape of the price acceleration in the 1970s bull and bubble vs a flat one in the 2000 bull. No need of a Ph.D. in geometry to see the difference.

Looking at an arithmetic chart of gold price and comparing the 70s bubble and the 2000 bull market you might say that both were in a parabolic trend. However, look at price acceleration (price rate of change) and you can clearly see no acceleration in price in 2000.

Gold PROC1

To get a better view of what I mean look bellow to the same chart but now price is graphed in semi-logarithmic form. On the semi-log (price change) chart the price pattern is no longer parabolic in 2000 bull market but linear while it remains parabolic in the 70s bubble market. This shows that all during the 70s bubble gold price was accelerating while in 2000 it was increasing with a relative constant speed.

Gold PROC2

There is no reason to believe that history will repeat itself in identical fashion but I have a feeling it will. The crisis of the international monetary system started in the late 60s that collapses the Bretton Woods Agreement and delinked the US dollar from gold in 1973 is not over but in a slow process to a reset. Price projections are probabilities based on incomplete information and I don’t predict a price of $25,000 even though I don’t exclude it in a hyperinflationary environment. My estimate for a reset has been a gold price of approximately $5,000. Gold is definitely being accumulated and taken of the market both by individuals and states (through central bank buying). All the information I get points to that.

I would end by quoting American author Ernest Hemingway when asked how he did go bankrupt, he replied in two ways, gradually and then suddenly. I would say gold has been going up gradually until now but in the next phase it will go parabolic.