Where Does Gold Go From Here? Let’s Use 40 Years Of History As Our Guide

5-little-known-facts4-spouse-lgMy Comments: I’ve never been a gold bug. My mother collected silver but that had nothing to do with silver, or gold, as an investment.

But it should be included in the category most of us call “alternative investments”, along with real estate, precious metals and other commodities. I make sure my clients include alternative investments when they have the ability to diversify beyond the normal categories.

If you like gold, there are ways to play it just as there are with other investments. But if you are not going to own the idea, then be prepared to lose your money. On the other hand, if your timing is right…

Hebba Investments / Feb. 26, 2014

Let’s just get this out of the way – nobody truly knows gold will be in the short or medium term and certainly not next month or next year. Prognosticators and price targets abound, but in reality gold is a very difficult asset to predict because it has so many different factors involved in its price movements which include the understanding of the macroeconomic picture, the mining industry, the financial markets, and even the world political climate – not an easy task for any firm let alone individual investors.

If that wasn’t enough, the gold market is very opaque and its political nature means that it historically has been manipulated (GATA has done excellent research on this issue) by many types of entities for different purposes. So even if you get the fundamental analysis right, you could be dead wrong when it comes to the actions of the large players in the gold market.

But we do believe that even though gold may be tough to predict, there are fundamentals in the gold trade that make it a strong investment for the long-term. We may not know where the gold market is going in the short-term, but we certainly can use the fundamentals to give us a higher probability of seeing where it’s going in the long-term.

In the past we’ve gone into the fundamentals of why physical gold ownership and the gold ETF’s (SPDR Gold Shares (GLD), PHYS, CEF) should give investors very good returns over an extended period of time, but in this article what we want to do is analyze the historical price movements of gold. We’re going to analyze some research put out by the World Gold Council of the historical price action of gold in similar situations to where we find gold today to try and see where it could be headed – and how fast it should get there.

A Historical Gold Price Analysis
As bad as 2013 was for gold investors, it wasn’t very different from many other corrections that gold has experienced since the 1970’s. In fact, gold’s 37% drop from its September 2011 highs was only the fifth largest drop over the last 40 years.
gold-40-yearsAs investors can see, gold has experienced twelve pullbacks that have been greater than 20% since the 1970’s and Richard Nixon officially ended the gold standard. The current correction of 37% has been almost exactly average (36% is the average) and at a length of 28 months, has been a bit longer than the average 18 months seen in the research.

We don’t know for sure if the correction is over, and even though we would be surprised to make new lows we cannot count it out. But it is more than likely that we saw the bottom in December of 2013, as gold registered a London AM fix low of around $1190 dollars per ounce (it went lower intraday), and with the current turnaround it makes it a good time to calculate where gold will go from here based on its prior recoveries.

What we’ve done in the table above is summarize the average historical retracement lengths and gains. Then we’ve used the $1190 bottom that we reached in December 2013, to estimate the expected date and gain of gold’s historical retracement performance.

Historically, gold has gained 69% from its low to its retracement date (the same length forward as the downturn – in the current case that would be 28 months). As investors can see, that would mean that we should expect gold to reach $2011 dollars per ounce in April of 2016 – an excellent return that we’re sure almost every gold investor would be happy with.

If we take it one step further and examine the average gain until the next gold peak, we find that historically gold has recovered 228% from its downturn low until its new peak. Using that in our calculations for our $1190 gold price, we would expect gold to reach $3903 per ounce – though for this calculation the date is much harder to estimate. If we had to put a date on it based on historic numbers, we would calculate the peak date as about 150% of the downturn length or about 42 months from the low (around June of 2017).

Conclusion for Investors
When it comes to gold we think the fundamentals are still very strong as the financial crisis is far from over, the debt load of governments continues to grow at a faster pace, geopolitical tensions continue to raise the odds of “tail-risk” event, gold all-in production costs hover around current prices, and we could go on and on. But this study by the World Gold Council gives investors a much more historical view on the past recoveries of gold, and it helps gold investors realize that these vicious drops in the gold price have happened before – twelve times to be exact.

Investors should remember that every single time the forward retracement (i.e. the same period forward as the length of the pullback) led to a gold price increase that averaged 69% – not bad at all even if that means a 2-3 year wait. Thus we remain gung-ho on gold and we believe it’s a good time to continue to build positions in physical gold and the gold ETF’s (SPDR Gold Shares , PHYS, CEF). For investors looking for higher leverage to the gold price, they may want to consider miners such as Goldcorp (GG), Agnico-Eagle (AEM), Newmont (NEM), or even some of the explorers and silver miners such as First Majestic (AG).

Gold investors don’t miss the forest for the trees here and get caught up in the daily or weekly movements in the gold price – history shows that we should be expecting much higher gold prices. If we match the average gain of the last twelve 20% declines, then we should expect to see a gold price of $2000 per ounce somewhere in 2016. Be patient gold investors because history is on your side.