Has the secular bull market in gold ended? (Part Two – Bearish arguments for gold)

22 April 2013

Bullish arguments in favour of a continuation of the secular bull market in gold were laid out in this post.

This post will lay out the bear case. But first, some charts to consider and form the backdrop of our discussion. The first set of charts are 3-year weekly charts of gold, silver, and the ETFs GDX (gold miners) and SIL (silver miners).

3 year chart of gold (weekly)


3 year chart of silver (weekly)


3 year chart of GDX (weekly)


3 year chart of SIL (weekly)


The next set of charts are 7-year weekly charts of gold, silver, to get a view of a longer timeframe.

7 year chart of gold (weekly)


7 year chart of silver (weekly)


The bear case

1. The manner in which long term support was broken

Long term support has never been broken in such a manner before. Usually, the most intensive part of a cyclical correction in gold and silver will come within 6-12 months after the cyclical high is made. After that, the price will spend a few months consolidating and even moving higher, before embarking on a strong uptrend.

This time, long term support has been broken 19 months after the previous cyclical high for gold (in September 2011), and 23 months after the previous cyclical high for silver (in May 2011). This has never been seen before in the secular bull market starting in 2001. The break has also been on high volume.

Usually we should allow a few weeks to see if the price can recover and re-take long term support. Sometimes, a break merely serves to flush out the stop-losses lying just beneath it. In that case, this would be a false breakdown.

Suffice it to say, if within the next 4-5 weeks, the price of gold and silver does not re-take the long-term support and push higher, we can safely conclude this is not a false breakdown. I am currently ascribing a greater than 50% chance that the breakdown is real, and price will not be able to recover that soon.

2. Gold and silver prices are primarily a function of psychology

Gold and silver are used both in industry, and are also regarded as jewellery. However these do not form the bulk of the momentum driving price action. Unlike metals like palladium, zinc or copper, it is investment demand rather than industrial or jewellery demand which determines price.

However, what in turn drives investment demand? Gold is not a financial asset that can be evaluated on earnings or cash flow. It yields nothing (in fact, it costs money to store gold). Investment demand comes from central bank purchases and other investors who want to diversify their holdings of fiat currencies. Gold has always played a central role in the global monetary system, up till 1971 when Nixon delinked gold permanently from the US dollar. However the tradition of regarding gold as a monetary metal and holding it as a form of reserve or store of value has persisted till today.

This means the price of gold and silver is primarily a function of investor psychology. The 10 year bull market has been driven by the thinking that gold acts as a credible reserve and is a suitable hedge against the negative effects of central bank money printing, national deficits, and currency depreciation. Once this psychology is broken, it may takes years to recover.

3. Comparison with the previous secular bull market

The previous secular bull market lasted from 1971 to 1980. The current secular bull market began in 2001. It has been 12 years. History would suggest that the current secular bull is over.

Gold rose 24 times and entered bubble territory in the 1970’s because of a unique confluence of events. People had lost confidence in financial assets like stocks. Inflation was rampant. Unemployment rose to twice as high as the worst of the 2008/2009 financial crisis, and consequently, it was primarily fear which drove the markets. Geopolitical risks were extraordinarily high too, and the oil market had also entered a bubble.

Currently, confidence in financial assets have not been eroded. Unemployment, though at uncomfortable levels, is nowhere near as high as the 1970’s. There is no wage-inflation spiral as well, although there are pockets of inflationary pressure that do not appear in the government-manipulated CPI readings.

Overall, the situation cannot be compared to the 1970’s, and we cannot expect gold to perform anywhere near that record.

Even after the massive correction, gold is still trading over 5 times its secular bear market low of $250, and silver is still trading over 5 times its secular bear market low of $4. How much more do investors expect?

We cannot expect the same asset class to experience another bubble a mere 30 years after the previous bubble burst, although bubbles in general have become an increased fixture of the financial landscape after Bretton Woods was demolished by Nixon in 1971.

In general, I believe that bubbles in the same asset class happen at most once in the average lifespan of a human being. 30 years is too soon to expect gold to enter a bubble phase again.

4. The gradual demonetization of gold. Gold is not a store of value, not a safe haven, and not an “insurance policy”.

Gold is gradually being demonetized, despite the recent increases in central bank purchases from countries like China and other emerging economies. As it is, the western countries are dumping gold, as gold has ceased to be a store of value.

It has been 40 years since gold was delinked from fiat currencies. You cannot use gold to purchase goods, even in a financial crisis. You can only use fiat currencies to do so. This means that even if the worst fears of the gold bugs are realized, gold will not function as a neutral currency that will be accepted as payments for goods and services. Gold is not the “insurance policy” that the gold bugs think it is.

Gold will not protect you for a crisis in the financial markets or even a crisis in the monetary system itself. In a real crisis, as the debacle of 2008 amply demonstrated, the real price of gold will plummet along with other fiat currencies and other commodities.

In the 2008 credit crisis, only the US dollar and US sovereign debt served as true safe havens. In future crises, I believe the same will hold true. Gold will behave just like any other risk asset. It is therefore not a safe haven.


As people gradually realize that gold is neither an insurance policy against the ill-effects of central bank money printing, nor a safe haven with which one can weather a crisis in the financial markets, psychology in gold will fundamentally shift.

In fact, the shift may have already begun.

If, within the next few weeks, gold and silver do not re-take previous support levels with strong price action, we can safely conclude that the current secular bull market is over. The next one may be decades away. In the meantime, financial assets will outperform gold and silver and will be better long term investments.


About E-Jay Ng