Will History Repeat for Gold?

Last week, I wrote about crude oil in Money Morning ― sentiment is coming back. My plan was to update the story this week. But, commitments got the best of me. I’ll return to analysing crude next week.

Today, let’s talk about one of my favourite topics ― gold.

The yellow metal has had a rough ride over the past few months. US interest rate rises and emerging market chaos has caused it some trouble. Gold’s short position is up more than 250% over the past year:

Graph of hedge funds

Source: Bloomberg

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Hedge funds have never been shorter since 1993! That said, the data doesn’t show on the chart.

I believe the worst is coming to an end.

But, if there’s another emerging market stock, who knows…

I’ll explain…

History’s story

Take a look at the gold price from 1994 to 1996:


Source: Tradingview.com

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Gold trades sideways prior to the Asian crisis of 1997–98. That happened, even though interest rates doubled.

The greenback also surged.

Now don’t be shocked…

The US economy was strong ― there was little reason to buy gold.

Confidence in the financial system was high.

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The International Monetary Fund wrote a paper in December 1998. It was titled, ‘Financial Crises in Emerging Markets’. Here’s a snippet (my emphasis added):

It is difficult to argue, strictly on the basis of macroeconomic factors, that the Asian economies in 1996 were poised for the kind of turmoil they have experienced.

Although there were signs (rapidly growing domestic credit, real exchange rate overvaluation, declining stock markets, and a growing volume of bank claims on the private sector) that policy corrections might be needed, they did not presage the depth of the crisis that would eventually engulf the region.

Moreover, the macroeconomic situation of the Asian countries in 1996 was, by and large, better than Mexico’s in 1994 — and economic fundamentals were stronger in Mexico in 1994 than they had been in the highly indebted Latin American countries in 1981.

The economy looked good heading into the Asian crisis. And unlike most financial crises dating back to 1971, when gold rallied into the event, gold stayed flat. It didn’t fall lower into the emerging market meltdown.

Just because interest rates rise with the US dollar, it doesn’t mean that gold will crash!

History shows gold rallies with interest rates…

Remember what happened heading into 1980? I wasn’t alive at the time. But, I know my history. US Federal Reserve Chairman Paul Volcker raised interest rates. The official rate jumped from 13% to 18% from January to March 1980.

Gold didn’t crash at the time…

Instead, when adjusted for inflation, the yellow metal hit an all-time high of US$875 per ounce:

Graph of gold prices during the 1970s

Source: Metastock

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Gold broke out during mid-1979…

On 15 July 1979, US President Jimmy Carter addressed the nation on TV. He said there was a ‘crisis of confidence’ among the American people. The US was recovering from its defeat in the Vietnam War, the Watergate scandal and Nixon’s subsequent impeachment.

And then there was inflation… 

US inflation figures went through the roof and hit an all-time high of 13% in December 1979. The gold price went parabolic with higher interest rates into 1980. Confidence in the financial system was in free-fall. That’s the exact opposite to what happened before the Asian crisis of 1997/98.

The yellow metal didn’t crash into the Asian crisis, the 1980 ‘crisis of confidence’, or the Global Financial Crisis of 2008. Instead, when interest rates rose into each event, gold either stayed flat or skyrocketed.

Here’s when gold crashes…

The yellow metal crashes when a crisis becomes real. The Global Financial Crisis of 2008 and the Asian Crisis of 1997–98 are good examples. The greenback surged and most asset classes crashed together.

Gold also crashes when a crisis is avoided.

For example, the European sovereign debt crisis of 2011/12 and the 1980 ‘crisis of confidence’. The yellow metal rallied into the pending crisis and crashed once it was avoided.

It was a typical ‘buy the rumour and sell the news’ type trade.

Looking at the Asian ‘emerging market’ crisis, gold started to fall towards the end of December 1996:

Graph of gold prices

Source: Tradingview.com

[Click to open in a new window]

The yellow metal fell just before the meltdown started. Remember, while the US dollar traded flat for most of the year, gold dropped by roughly 9% during 1996. It wasn’t until the end of the year, when everything changed:

Graph of gold prices

Source: Tradingview.com

[Click to open in a new window]

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In percentage terms, the US dollar surged by 12.78% and the gold price fell 10% from January to July 1997. That’s when the Asian crisis gained momentum. The Thailand government floated the baht on 2 July, which led to a region-wide contagion. The gold price crashed DURING the crisis ― with the US dollar ― from January 1997:

Graph of gold prices

Source: Tradingview.com

[Click to open in a new window]

Gold nose-dived in January of 1997. That’s when emerging market economies started to experience difficulties ― the greenback was going through the roof. It crashed during emerging market crisis.

The gold price also crashed during the Russian sovereign debt default of 1998.

Indeed, with another financial crisis looming, we ask: when will gold start to rally? If you don’t own any gold stocks, in my view, you could be missing out. I believe the gold price is on the verge of taking off. For more details on this, go here.


Jason Stevenson,
Resources Analyst, Markets & Money

Jason Stevenson is Markets & Money’s resource analyst. He shares over a decade’s worth of investing and trading experience across resource stocks and commodity futures and options. He originally studied accounting and finance at Curtin University, where he was awarded a first-class honours degree. His professional background stems across high-net-worth, top tier accounting (corporate finance, tax and auditing), and sell-side equities research. Before joining the team at Markets and Money, Jason worked at boutique firms which advised fund managers and high-net-worth clients on where to invest. Whether it’s gold, crude oil, copper or an obscure metal like vanadium, you can rely on an in-depth analysis in Markets and Money. Jason also brings you extensive macro, political and geopolitical analysis from around the world. He leaves no stone unturned when it comes to telling the truth. Jason is also the lead analyst of Gold Stock Trader, a premium service for investors serious about precious metal stocks. Websites and financial e-letters Jason writes for:

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