- Gold is enjoying its third major bull run since 1971
- Precious metal has retreated by a sixth from January’s all-time high
- Both of the first two bull runs witnessed several major pull backs
- Government debt, geopolitics, the dollar and inflation could all yet shape future price trends
“Gold’s status as a haven may now be tarnished in the eyes of some as the precious metal is falling in price even as war roils the Middle East and financial markets alike, and some may even be tempted to say that the third major bull run in the commodity since 1971 is now over,” says AJ Bell investment director Russ Mould.
“Neither interest rates staying higher for longer nor a stronger dollar may help the investment case for precious metals, but both the 1971-1980 and 2001-2010 bull runs saw several retreats which did not ultimately nullify or prevent major gains, so it may be too early to give up on gold just yet.
“Sceptics who still view gold as a barbarous relic, a useless lump with no yield or even an asset that currently has a cost of ownership of 3.75% thanks to lost interest on cash will all be nodding as the metal slips back from January’s all-time high. A pause in interest rate cuts, or even tentative talk of fresh hikes, may also take the shine off gold by increasing that cost of ownership, but long-term bulls may not be so easily deterred, in the knowledge that gold has been here before.
“The precious metal’s first bull run began when President Richard M. Nixon withdrew the US dollar from the Gold Standard and killed off the Bretton Woods monetary system that had prevailed from the conclusion of the Second World War. As Nixon began to run up the US federal deficit, and inflation surged, not helped by two oil price shocks, gold motored from $35 an ounce in August 1971 and peaked at $835 in January 1980.
Source: LSEG Refinitiv data
“That helped to shelter investors from the ravages of inflation but there were still some lumps and bumps along the way. Even that gilded run in the 1970s featured no fewer than three mini bear-markets, where gold fell by more than 20%, in 1973, 1974 and one that lasted more than eighteen months from January 1975 to summer 1976. To further test bulls’ mettle, gold also endured five corrections where its price fell by between 10% and 20%, in 1972, 1973, 1977, 1978 and 1979. The last two lasted barely a month but they still challenged the resolve of gold bugs even as its price went almost vertical in the final blow-off phase of the bull run.
Source: LSEG Refinitiv data
“Gold then went into hibernation as the Paul Volcker-led US Federal Reserve, and the UK’s Thatcher administration, took it upon themselves to crush inflation, helped along the way by deregulatory policies on both sides of the Atlantic, a return to peace in the Middle East and lower oil prices. Double-digit interest rates also made the opportunity cost of owning gold simply too great to bear.
“However, the metal hit bottom just above $250 an ounce in 2001 and then won over a new generation of investors, who sought refuge from the ultra-loose monetary policies which followed the bursting of the technology, media and telecoms bubble in 2001-03 and then the Great Financial Crisis of 2007-09. In the face of zero-interest-rate policies (ZIRP), Quantitative Easing (QE) and balance sheet expansion the hunt was on for stores of value or haven assets, and some investors felt that gold was a good candidate.
Source: LSEG Refinitiv data
“Even during this second surge, gold did its best to test the resolve of believers with a pair of bear markets, one in 2006 and one in 2008, while there were also five corrections of more than 10%, one in each of 2003, 2004, 2006, 2009 and 2010.
Source: LSEG Refinitiv data
“Gold peaked at just shy of $1,900 an ounce in 2011 and then quietly slipped to barely $1,000 an ounce by 2015, as central banks and politicians did a good job of convincing the world they were back in control after the Great Financial Crisis. Mario Draghi’s 2012 promise to do whatever it took to preserve the Eurozone edifice was also seen as a warning shot and a period of low growth and low inflation persuaded many that calm had returned, and gold’s services were not required, especially as the EU debt crisis seemed to blow over.
“Yet the metal actually bottomed in 2015 and began to make stealthy gains, long before Covid-19, lockdowns, soaring Government support payments came along, let alone tariffs and military conflict in both Eastern Europe and the Middle East.
“The war in Iran and its effect on oil and gas prices is stoking fears of inflation and how that could force central banks to raise interest rates, just as it did in 2022 and, in the case of the European Central Bank, in 2007.
“Tighter monetary policy would damage one of the key parts of the investment case for gold, but the ECB’s tightening in 2007 proved badly timed and the issues of burgeoning Western government sovereign debt and inflation could yet play to the precious metal’s advantage.
“After all, the inflation, or stagflation, of the 1970s, thanks in part to the oil price shocks of 1973 and 1979, meant gold turned out to the optimal portfolio selection during that decade. Moreover, a slowdown or recession due to higher hydrocarbon costs would surely only further stretch governments’ already brittle finances, as welfare payments rise and income from taxation drops, and that is before any additional expenditure on defence or the waging of war.
“Any sudden increase in government debts could strengthen the case for gold, at least if central banks reach for their now customary solutions to shocks, in the form of interest rate cuts and looser monetary policy in the form of tools such as Quantitative Easing.
Source: LSEG Refinitiv data
“This third multi-year advance has also had its downs as well as its ups.
“A swoon of more than 20% caught some bulls off guard in 2022, as the world emerged from lockdowns and 10%-plus corrections in each of 2016, 2018, 2020, 2021 and 2023 warned that volatility was never far away.”
Source: LSEG Refinitiv data
