We have seen it headlined everywhere, from the net to the local newspaper: "Gold enjoys its best year for 23 years!". And so it has. At its spot future close of $US 349.20 on Friday, December 27, Gold has had its best annual percentage gain since 1979. Now, 1979 happens to be the year when Gold had its best percentage gain ever, so here is some data to put 2002 into better perspective.
The table below lists the seven best annual percentage gains for Gold since President Nixon closed the "Gold Window" on August 15, 1971. The gain for 1971 is included as a reference. Please note, for the years 1971 and 1972, the calculation is made on the average monthly Gold price.
UPDATE: December 31 - Year-end 2002
We can now show the final annual performance for Comex spot future Gold for 2002.
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Please note carefully the fact that ALL these "winning" Gold years, with the exception of 2002 itself, took place in the 1970s - the last decade when "inflation" was regarded as a problem. Now, look at this chart.
Note the breakthrough this year of a downtrend line which stretches back to the beginning of 1980. Note that it has taken the best annual gain posted by Gold since the 1970s to do it. And finally, note that having broken through a 22 year downtrend (1980-2002), Gold now has a GLORIOUS opportunity to begin to post the kind of gains that were last seen in the 1970s.
What kind of gains were posted in the 1970s? Well, there were two bull markets in that decade:
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So far in this bull market, which began in April 2001, Gold has gone from $US 255.50 to $US 349.20. That's up $US 93.70 or 36.7%. In comparison to what happened in the 1970s, the gain so far pales into comparative insignificance.
Now, as we come to the end of 2002, the best year for Gold since its best ever year since 1979, we can almost hear the question being asked. "Isn't the risk now, as opposed to the end of the 1970s, one of 'deflation' rather than runaway 'inflation'? Please let us place this question in its proper context. The risk faced in the late 1970s and today was not a question of rising or falling prices. The risk faced was the prospect of a MASSIVE loss of confidence in the US Dollar. In this context, the investment climate of the late 1970s and of today are IDENTICAL!
The 1970s was a decade of ever-increasing distrust of paper money which culminated in a Gold "bubble" and in US interest rates skyrocketing to banana republic levels above 20%. Even more important, it was a decade when the debate over the nature of money was at centre stage throughout. That being the case, there were a large number of investors, analysts, and advisors, even some of the ones on Wall Street, who understood that the rising prices were merely a SYMPTOM of the problem. The problem itself was the rampant increase in the stock of money.
Since 1980, the rampant increase in the stock of money has proceeded at a pace that has left anything seen in the 1970s for dead. But the debate over the nature of money has been very effectively silenced. It has been silenced to the point that for the past decade, all that has been necessary is for whoever happened to be Treasury Secretary to state that the US had a "strong Dollar policy". Of course, until comparatively recently, nobody cared about "monetary policy" at all, no matter how insane it became, because they were all too busy making paper fortunes on Wall Street.
Those paper fortunes have evaporated over the past three years, but THIS YEAR, the Dollar has tottered and then fallen off its perch too. That event was always necessary as the last "domino" to fall, the one which would push $US Gold prices up no matter how massive the efforts of the financial powers that be to keep it under control. This year, all the "alarm signals" that drove the Dollar down and Gold up in the late 1970s have emerged full force. Government deficits have exploded upwards. After a year of rate cuts in 2001, the Fed has spent this year continually accelerating the rate at which the US money stock was growing.
The major difference between the situation now and the one in the late 1970s is that now, almost no-one is familiar with the debate over the nature of money, and most still take it for granted that there is no danger to the economic and financial system no matter how much "money" is produced out of thin air. The vast majority of investors are still looking around, more and more frantically, for viable investments WITHIN the fiat-based financial system. Only those comparatively few who have taken the trouble to UNDERSTAND the system have looked OUTSIDE the system at Gold. This year, they have been rewarded for their efforts.
There is one final and fatal difference between the end of the 1970s and today. In the early 1980s, US interest rates were voluntarily (under the Volcker Fed) pushed up and then held above 20% for the best part of two years in order to lure investors back into Dollar-denominated assets. It worked. Today, such a course of action is OUT OF THE QUESTION. Even doubling the Fed Funds rate from its present 1.25% level would lead to financial DEVASTATION as debtors would find it impossible to service existing debt.
This is the potential rocket under Gold. The US Administration cannot lure anyone back into Dollars with interest rates without bankrupting themselves and their nation in the process. All they have left to "offer" is geo-political pressure and the threat of war, both ultimately backed up by raw political and MILITARY power. The more obvious this state of affairs becomes, the more the urgency will grow to protect one's financial affairs from this threat. That is ALWAYS, historically, caused a ripple which becomes a flow which becomes a flood which becomes a rampage - into Gold.
We are in the VERY early stages of a MAJOR Gold bull market - of a magnitude unseen since the 1970s. 2003 will be the first full year of this bull market. Enjoy the New Year celebrations and stay tuned for 2003. It could well be an historic year.