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Speculating About the Next Bull Market for Gold

September 27, 1999


Inflation is a monetary phenomenon. Prices for everything, including gold, increase over the long run because modern currencies weaken over time. Therefore, this article will examine the price of gold (POG) in relation to the U.S. money supply for the past half century, and draw some conclusions about POG in a future bull market. To keep it simple, the article uses monthly figures for the Currency Component of U.S. Money Stock, obtained at . Monthly closing prices for gold are courtesy of Daan Joubert.

Setting the Stage: the 1950s and 1960s

At the end of 1950, U.S. currency outstanding was $25 billion, and there were 652 million ounces of Treasury gold, resulting in $38 in currency outstanding for every ounce of gold in the U.S. Treasury. This provided virtually a one to one relationship between official POG ($35/oz) and currency outstanding per ounce. The table below shows what happened to currency outstanding and Treasury gold over the two decades from 1950 to 1970. During this period currency doubled to $49.5 billion, while Treasury gold declined to 314 million ounces. This resulted in $158 currency outstanding per ounce, a figure four times that of 1950. This profound weakening of the dollar during the 1950s and 1960s lay the foundation for the great gold bull market of the 1970s.


Year U.S. Currency Outstanding
(in billions of dollars)
U.S. Treasury Gold
(in millions of ounces)
U.S. $ Outstanding Per Oz
of Gold in U.S. Treasury
$ 38.34
$ 45.66
$ 57.64
$ 93.18

The 1970s Bull Market

The graph below shows monthly closing prices for gold compared with currency outstanding per ounce from January 1971 to December 1980. During this decade, U.S. Treasury gold declined to 264 million ounces while US currency outstanding increased to 117.4 billion, resulting in $444 outstanding per ounce on 12/31/80. POG stood at $623 at the close of the period.

As the above graph illustrates, once gold broke loose, POG tracked the currency per ounce figure fairly well, until the final blow off at the end of the period. During the middle seven years of the decade (for the majority of the bull market) gold traded in a fairly narrow band relative to currency per ounce, ranging from 40% to 60% of that figure.

1974 was an exception to this rule. At the October 1974 peak, POG was $191, while currency per ounce was $250, placing POG at 76% of the currency per ounce figure. The subsequent nadir established June 1976 saw POG at $110 and currency outstanding per ounce at $278. Therefore, gold declined to a low of 40% of the currency per ounce figure, which was the bottom end of the band prevalent during the majority of the bull market.

Subsequent to this nadir, gold roared upward virtually unabated, and by January 1980 POG exceeded currency per ounce. In terms of month end prices, POG experienced a double top at $674 in February 1980 and October 1980.

The Great Bear Market: 1981 to 1999

Similar graphs were prepared for 1981 to 1990 and 1991 to 1999. During the first ten years of the bear market, shown below, POG never once declined below the bull market band established in the 1970s (40% to 60% of currency per ounce).

During the initial phase of the bear market, until August 1984, POG remained above 60% of currency outstanding per ounce. At the April 1985 nadir of $304, POG stood at 50% of currency per ounce, exactly midway in the band. At the subsequent peak of $486, in December 1987, POG stood at 64% of currency per ounce. By the end of December 1990, with POG at $391, gold was trading at 41% of currency per ounce, which was $953. So it could be said, in spite of a bear market that had already lasted a decade, that gold was reasonably priced on 12/31/90, at least in relation to currency outstanding per ounce. On the low side, to be sure, but reasonably priced.

The following graph illustrates what happened during the second decade of the bear market to 8/31/99. How this decline transpired in the face of mounting deficits between supply and demand for gold is beyond the scope of this article. That subject has been analyzed in depth by other Gold Eagle authors.

During the decade shown in the above graph, Treasury gold remained constant at $262 million ounces. Currency outstanding increased from $249.5 billion to $490.1 billion, and currency per ounce therefore increased to $1,871 by 8/31/99. With POG at $255 on that date, gold was trading at an incredible 14% of currency per ounce.

This is the lowest relationship between POG and currency per ounce ever recorded. If we were experiencing a bull market instead of the bottom of a bear market, we might expect gold to be trading in the band between 40% and 60% of the currency per ounce figure (ie. $748 to $1,122). Therefore, if a bull market were to begin soon, and carry POG to a relationship with currency per ounce similar to the 1970s and 1980s, gold would have to triple in price fairly quickly.

Speculations About POG in the Coming Decade

A fourth graph similar to the first three is presented below. This should not be construed as a monthly prediction of POG for the next ten years. It is merely an expression of what POG would be if it were to follow the same relationship to currency outstanding per ounce, month to month, that it did in the 1970s. As a result, the graph looks extremely similar to the one for the 1970s. The following assumptions were made in constructing the graph: 1) U.S. Treasury gold will remain constant during the period, 2) currency will increase at ½% per month, less than during recent years, and 3) the bull market will begin in earnest by January 2000.

Under this scenario POG would reach $1,000 in March 2002, and peak at $1,781 in February 2004. The subsequent nadir would be $1,046 in July 2005, and the final top would be $5,413 in November 2009. The actual price of gold will, of course, be driven by many factors including supply and demand for gold, political and economic conditions, and investor psychology, but a number of useful observations can be made from the foregoing data nonetheless.

Just as the weakening of the dollar in the 1950s and 1960s lay the groundwork for the bull market of the 1970s, the weakening of the dollar in the 1980s and 1990s has laid the groundwork for a bull market of equal or greater proportions. This bull market is likely to proceed through three basic phases:

  1. Incipient Phase: POG rises from 14% of currency per ounce to 40% of currency per ounce.
  2. Primary Phase: gold trades roughly in the band between 40% and 60% of currency per ounce.
  3. Blow Off Phase: POG rises to and exceeds currency per ounce.

If history is any guide, we could expect the incipient phase to last about two years, the primary phase to last about seven years, and the blow off phase to last about a year. We must remember, however, that while history repeats, it never repeats exactly. And there are a number of significant differences between 1999 and 1970, including:

  1. POG has been driven to depths (relative to currency and relative to mine profitability) never before seen,
  2. Central banks have sold a substantial amount of gold,
  3. There is a massive short position in gold that must be unwound,
  4. Y2K will be a unique event of unknown consequences, and
  5. The U.S. stock market is at heights never before seen.

I'm sure you can add to this list. The point is, that if anything, POG's move upward is likely to be more violent than during the 1970s. It is possible that this bull market will be swifter, steeper, and of greater duration than before.

Also, the above graph is based on U.S. currency growing at 6% annually, considerably less than recent years. This estimate is probably too conservative. Even at 6% growth, U.S. currency would be roughly one trillion dollars at the end of 2010. That's with a "T", friends and neighbors. One hundred years earlier, in 1910, U.S. currency was a mere $3.1 billion.

One final note about the blow off. If and when POG reaches the currency per ounce figure in a future bull market, it is a warning to us that we are probably entering a blow off phase, and we should proceed with extreme caution. At that point, gold will be trading at thousands of dollars per ounce.

In 1792 the U.S. Congress adopted a bimetallic standard (gold and silver) for the new nation's currency - with gold valued at $19.30 per troy ounce
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