Reader Alert: This is Part One in a Two Part series.
The higher you climb the harder the fall. It’s a lesson from the 1970s that many gold bugs should heed. Back then, after soaring to record highs, the yellow metal fell almost 70% in a jump-off-the-cliff drop. Little surprise then that the frighteningly parabolic surge in gold prices today is making economists nervous. Given the long history of gold, the crash of the 1970s remains a relatively recent incident, fresh in the memory of gold experts.
If history repeats itself, the time may be ripe for the prices of gold to take one hell of a tumble. Is it time then for investors to cash in their chips, pocket the profit and move onto the next table? Analysts and industry experts say no, the game has only just started.
If you’ve been watching from the sidelines, it’s time you got in the game, says Martin Murenbeeld, chief economist, DundeeWealth Economics.
“There’s still time to jump in; I think gold will go significantly higher. On an inflation-adjusted basis, gold has not had a new high,” he says. On an inflation-adjusted basis, the 1980 high of $850 remains the record. To top that in today’s dollars, bullion needs to top $2,400. “Gold is going through at least that,” he says.
Murenbeeld does concede a correction, not a steep plunge, could be lurking round the bend. He has a theory to support that assertion. “The shortest cycle in gold was from 1970 to 1980, [which was] an up cycle; this cycle would last much longer,” he says. “What we do know is that somewhere in the middle of the cycle there’s a massive correction.”
In a long-term down cycle, there will be a year or two where the prices rise. In an up cycle, there will be a year or two when the prices decline on a year over year average basis, he adds. “We have not seen this for gold in this cycle; there should be one.”
The good news is that the correction, both in the short- and long-term, won’t be as brutal as that of the 1970s, “because [then] the policy response was slow, today the policy responses are much faster which mutes the downside correction.”