The Next Great Gold Bull Market Is Underway

Gold has a reputation for being the most forward-looking of all macro indicators. Gold investors smell trouble and opportunity long before stock and bond markets catch the scent.

Gold’s trading at around $1,427 today, up well over $100 since the year began. We’re seeing a flight to quality, meaning people are losing confidence in central banks all over the world. They realize the banks are out of bullets.

They printed money for ten years and kept rates close to zero or negative. But it still hasn’t worked to stimulate the economy the way they want.

And a new, long-term, secular bull market in gold is underway. This new bull market in gold is the real deal and should last until 2028 or beyond.

I expect this new trend will take gold past $4,000 per ounce by 2020 (if not sooner) and ultimately to $10,000 per ounce.

The moves so far have been relatively small compared with what’s ahead. This is the perfect time to make your allocation to physical gold and gold mining shares.

The last secular bull market began on Aug. 25, 1999, when gold bottomed at $252 per ounce. From there, it began a spectacular 12-year run until peaking at just under $1,900 per ounce on Sept. 2, 2011.

The 1999–2011 bull market represented a 655% gain over the starting price, easily outpacing stocks, bonds, emerging markets and other competing asset classes. The latest bull market actually began on Dec. 17, 2015, when the dollar price of gold sank to $1,051 per ounce.

There’s good reason to believe that gold should be in a long-term trend right now.

To understand why, let’s first look at the long decline in gold prices from 2011 to 2015. The best explanation I’ve heard came from legendary commodities investor Jim Rogers. Like me, he personally believes that gold will end up in the $10,000 per ounce range.

But Rogers makes the point that no commodity ever goes from a secular bottom to top without a 50% retracement along the way.

Gold bottomed at $255 per ounce in August 1999. From there, it turned decisively higher and rose 650% until it peaked near $1,900 in September 2011. So gold rose $1,643 per ounce from August 1999 to September 2011.

A 50% retracement of that rally would take $821 per ounce off the price, putting gold at $1,077 when the retracement finished. That’s almost exactly where gold ended up on Nov. 27, 2015 ($1,058 per ounce).

This means the 50% retracement is already behind us and gold is set for new all-time highs in the years ahead.

Gold has multiple tailwinds behind it. The physical fundamentals in particular are stronger than ever for gold. On a worldwide basis, demand is up and supply is down, and that can only mean one thing in the long run — higher prices. Russia and China continue to be huge buyers.

There is a large imbalance between physical supply and demand. I have seen both sides of this equation firsthand.

On the supply side, I have visited gold mines in South Africa, Canada, Australia and the U.S. I have been to gold refineries in Switzerland and gold vaults in Sydney, Switzerland and New Castle, Delaware. I’m used to speaking with gold dealers on an almost daily basis.

On the demand side, I have met with government officials in Russia and China and with the senior officers responsible for gold trading at the biggest banks in China.

In every visit and every conversation, I encountered the same complaint: Physical gold is in short supply. Refiners can’t get enough to meet demand. Miners are looking at five-year lead times on new discoveries and reopening old mines shut in during the price collapse of 2013–15.

You can learn a lot about the gold market from the Swiss. The Swiss report gold imports and exports by source and destination on a regular basis. The Swiss information gives us a window on the world. That’s because Swiss imports and exports are mostly about the Swiss refining business, which is the largest in the world.

Switzerland does not produce its own gold. There are no major gold mines in Switzerland and Swiss citizens are not known as major buyers of gold (unlike, say, Chinese or Indian citizens). The Swiss watch industry does use a lot of gold, but imports are balanced out by exports; Switzerland itself is not a major destination for Swiss watches.

In effect, Switzerland is a conduit for much of the gold in the world. Gold arrives in Switzerland as 400-ounce good delivery bars, doré bars (those are 80% pure ingots from gold miners), and “scrap” (that’s the term for jewelry and other recycled gold objects).

This gold is then melted down and refined mostly into 99.99% pure 1-kilo gold bars. These 1-kilo “four nines” quality bars are the new global standard and are the ones most favored by the Chinese.

By examining Swiss imports and exports, we can see where the supply and demand for physical gold is coming from and how close to balance (or imbalance) that supply and demand is. This information can help us to forecast the coming super-spike in gold prices.

The “big five” destinations are China, Hong Kong, India, the U.K. and the United States. Those five destinations account for 91% of total Swiss gold exports.

That data have indicated that gold refiners have been working around the clock and cannot meet demand. Gold refiners have also experienced great difficulty finding gold to refine as mining output.

Acute shortages of physical gold have set the stage for a delivery failure or a short squeeze.

Any one of these developments is enough to send gold soaring in response to a panic or as part of a flight to quality. The only force that could take gold lower is deflation, and that is the one thing central banks will never allow.

Private bullion has also migrated from bank vaults at UBS and Credit Suisse into nonbank vaults at Brinks and Loomis, thus reducing the floating supply available for bank unallocated gold sales. In other words, the physical supply situation has been as tight as a drum.

In addition, we are looking at several major gold spike catalysts in 2019, including the trade war with China and a possible shooting war with Iran, as well as China.

Russia, China, Iran and Turkey, what I call the “Axis of Gold,” have been buying gold overtly and covertly in prodigious quantities.

The western gold powers such as France, Italy, Switzerland, Germany and the IMF have not sold an ounce of gold since 2010. The U.S. has barely sold an ounce of gold since 1980. And other nations that have stored their gold in the U.S. and U.K. are demanding their gold back.

This combination of fundamental, technical and geopolitical factors is converging in 2019 in a way we have not seen since the late 1970s. The new bull market in gold will be even more powerful than the 1971–1980 bull market and the 1999–2011 bull market.

And in the short term, gold will spike when the Fed cuts interest rates on Wednesday. It’s a trend that will only accelerate as the Fed sends rates even lower.

Get ready for an explosion to the upside in the dollar price of gold. Make sure you have your physical gold and gold mining shares.


Jim Rickards
for The Daily Reckoning

The Daily Reckoning