Gold Bull Market?

Author: Ian Davis - Chief Operations Officer

Published: 1 Mar 2010

Last Updated: 1 Feb 2023


Are we in a bull market for gold? Prices have risen from lows of $252.80 and £157.033 to recent highs of over $725.75 & pound.

Are we in a bull market for gold? Prices have risen from lows of $252.80 and £157.033 to recent highs of over $725.75 and £378.249Highs & Lows in US Dollars (USD)

In dollar terms, the "recent" low was on the afternoon fix of 20th July 1999 when gold fixed at $252.80 US per troy ounce. Its recent high was $725.75, on the morning of 12th May 2006. This represents an increase of over 187% in under 7 years, an increase of over 27% per annum.

Highs & Lows in Pounds Sterling (GBP)

In sterling terms, the "recent" low was on the morning fix of 10th September 1999 when gold fixed at £157.033 per troy ounce. Its recent high was £378.249, on the morning of Wednesday 10th May 2006. this represents an increase of over 140% in under 7 years, an increase of over 20% per annum.

Performance Differential

The difference in the apparent price performance is due to the exchange rate fluctuations between the two currencies, sterling and dollars. Effectively the dollar has slid against the pound during this period.

Which Way Now?

During the recent bull run, we started to hear many pundits talking about gold hitting $1,000 per ounce again. Before this it had become fashionable, especially amongst "hack" journalists, to criticise gold as a "poor" investment, because it had come down in price since 1980. Since the recent highs listed above, gold has dropped by over 21% in dollars or 18% in sterling. Some commentators have opined that this marks the end of the bull market for gold, others have suggested that this is a "correction". A correction being n opposite move compared with recent trends, usually indicating that some speculators are taking profits, or that the market is pausing or consolidating before continuing in its previous direction. Anybody who has ever followed share or commodity prices for any length of time knows that prices fluctuate. Even long term trends are marked by numerous spikes and dips, prices very seldom continue in one direction for any sustained length of time.
We subscribe to the "correction" view at present. We mention on other pages of this site, the view that the US dollar is overvalued, and that fiscal and trade deficits cannot continue indefinitely. Possibly the main factor keeping the dollar at its presently high value is the fact that, for some years, it has been the international reserve currency of choice. Once sentiment changes, and a significant number of countries, central banks, or just investors or speculators realise that the dollars strength is maintained by illusion, then the dollar could be due for a very large "correction". Because of the large numbers of dollars held internationally by investors and central banks, there could be some very serious "hot money" flowing out of dollars and into...

...into what?

Into Gold

Obviously, we cannot predict exactly what each of many investors will switch into from dollars. Euros, Chinese Renminbi, and South Korean Won are three possibilities. The euro already has some credibility as a reserve currency, but gold is also a currency, the ultimate currency in a number of highly respected opinions. The ECB will not welcome any strengthening of its currency, as this could contribute to the economic difficulties of its members, many of whom are already struggling to maintain competitive economies. Gold is not political in this respect, and it will end up being used as the ultimate reserve currency by many.

Recent Strengths Indicate Potential

We do not know exactly who has been buying gold at the recent high levels, but we can say that the increases were rapid and considerable. We were often surprised by the continuing strength of the market over a longish period. It would appear that "hedge funds" were buying, and the new ETFs have made it easier for institutions to invest very directly in gold. Whoever was doing most of the recent buying, it remains clear to us that there is and will be demand for gold at prices up to, and beyond recent peak levels.

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