The last three major bull markets of the Dow have been followed by a bull market in gold. This is no coincidence since these massive bull markets have been mostly driven by the huge expansion of the money supply. When this expansion of credit is exhausted the confidence in all things (like stocks) inflated by this expansion of credit fails causing a massive rush to gold. There are many similarities between the period around the current bull market in gold the period around the 70s bull market in gold and that of the Great Depression.
The main difference between the period of the 70s versus those of the Great Depression and the current period is the fact that debt levels relative to GDP were much lower in the 70s. Total US Debt as a percentage of GDP was at about 299% at its peak in the 30s and at about 369% in 2009 versus a level of just lower than 160% during the 70s. In my opinion this is probably one of the main reasons why the crisis of the 70s did not lead to a full scale depression like in the 30s. Below is a chart by which I illustrate the similarities between the current period and that of the Great Depression: original charts by gold eagle.com and from finance.yahoo.com The above chart should make it clear that there is a relationship between the expansion of the money supply bull markets in stocks and bull markets in gold. It is my believe that the extent of the bull market in gold is mainly determined by the extent to which credit was expanded in the years prior to the gold bull market and the extent to which it led to an increase in things like stock values. Based on my research I believe we are now at a period which is similar to the end of 1932 with the worst years of the Depression like during 1933 and 1934 almost upon us.
This period will likely be longer than that of the Great Depression bringing significant economic decline and a lower standard of living. Just like during 1933 and 1934 gold stocks are likely to be the best performing assets over the coming years. I have created the following charts to illustrate how the bull markets in gold could be related to that of stocks. The chart below features the Dow from 1942 to 1966 and gold from 1966 to 1980. The starting and final points for both bull markets were chosen since they represent the significant turnaround points based on the Dow/gold ratio. After a 24 year bull market in the Dow and a 10.8 fold increase from top to bottom gold started a bull market which lasted 14 years with a 24.8 fold increase from top to bottom. Notice how different the bull market in gold developed compared to that of the Dow. The Dow had a fairly steady rise throughout its entire bull market whereas the gold price rose violently towards the end of the entire bull market with a parabolic blow off top. Also notice that the gold price increased much faster than the Dow (14 years vs 24 years) as well as to a greater extent (24.8 years vs 10.8 years). The chart below features the Dow from 1980 to 1999 and gold from 1999 to November 2011.
The starting and final points for both bull markets were chosen since they represent the significant turnaround points based on the Dow/gold ratio. The latest Dow bull market was 20 years long increasing the Dow about 16.3 fold. Will gold have a more significant increase compared to its 24.8 fold increase due to the fact that the Dow s increase was more than its previous bull market increase? If gold only matches its 1970s bull market increase it could go to $6200 ($250*24.8). Will the gold bull market have a similar parabolic blow off like it did at the end of the 70s? Notice that the gold bull market is already 12 years old. The 1970s gold bull market was about 58.3% the duration of the Dow s bull market before that.
At 12 years the current gold bull market is already 60% the duration of the last Dow bull market. Could this mean that the gold bull market is over? Or Could it mean that this gold bull market is not just related to the 1980 1999 Dow bull market but the entire Dow bull market since silver and gold was demonetized? The end of a huge cycle. If this (the latter) is the case then could it mean that the Gold bull market could still last for many more years with gold going to extreme highs or even not being available for sale in Dollars? Or/and could this further support the possibility that a parabolic blow off is due almost immediately? For possible answers to these questions and more as well as analysis of gold silver and gold stocks you are welcome to subscribe to my premium or free service.
