Many parallels have been drawn between current moves in gold and the events of 1971 to 1980.
But, the World Gold Council argues, this recurring comparison is, “a simplistic and flawed parallel”.
In the latest edition of its Gold Investor publication, the WGC says the two periods are characterized by different price performance and remarkably dissimilar fundamental drivers.
“During the 1970s, the advent of fiat currencies made gold a free-floating market while private gold ownership was once again permitted in the US. During that decade, oil prices spiked and tensions in the Middle East rose, leading to hyperinflation and instability. Gold prices shot up on the back of these tailwinds. However, speculative flows led the way, not giving enough time for demand to grow organically.”
In contrast, it says, the bull market of the 2000s was influenced by a number of important structural shifts, including the creation of gold ETFs (which made investment into physical gold much easier) and the liberalization of the Chinese gold market.
Adding that while the latest bull market has been driven by growth in Asian emerging markets and economic problems in developed markets, the WGC says, “demand and supply are more balanced and geographically diverse resulting in a measured and less volatile trajectory.”
To support its argument, it points to the fact that while gold prices during the 1970s rose by an average of 30% per year, the market saw similar levels of volatility.
“At their peak, inflation-adjusted prices rose 12-fold to more than US$2,500/oz amid violent pullbacks of over 40%”, the council writes.
Adding, “A combination of fewer financial assets available, strong gold investment demand, and a meteoric price increase, substantially increased gold ownership levels to a 14% share of all financial assets. In comparison, gold represents just 1% of assets today.”
While the WGC admits that short term factors like market momentum and sell-offs on the back of downward analyst revisions, could take the precious metal lower in the near future, it points out that over the last 12 years analysts have generally tended to underestimate the rise in the gold market.
And, it adds, “Data suggests that some investors in developed markets are betting on a swift economic recovery, and while economic data may seem encouraging in the US, many of the underlying issues that financial markets face are still relevant: countries face high level of debt while monetary policies have yet to unwind.
At the same time, it points out, the precious metal’s performance is linked not only to western economic malaise, but also to long-term economic expansion.
“There is consensus that emerging market economies will continue growing. Most economists agree that emerging markets will continue to grow and surpass developed market economies by 2020 in term of GDP.”
And, it says, “The US dollar will likely remain a crucial component of the monetary system, but may have to make room for others. As central banks diversify their foreign reserves, gold will continue to be one of the most relevant assets.”