What Happened To The Gold Bull Market?

| About: SPDR Gold (GLD)

Every couple of days, I run into an article rejecting gold (NYSEARCA:GLD) investments now as essentially being for people in denial. Apparently, the gold bull market ended in August last year, and there are no more riches to be made buying and holding gold.

Is this correct? Not quite.

Why Gold Prices Dropped and Stayed Down

In general, markets overreact to almost everything. George Soros has written a thick book on his theories, as have many others. But in general, when big news occurs, people begin to overreact. People are often emotional; they overextended the "here and now" sense of crisis, and they often create a feedback loop in the market that creates a kind of self-fulfilling prophecy.

Last year, the run-up in gold in August was almost certainly just the market still moving along from the Aug. 2 debt ceiling raise, mixed with the boost from the U.S. losing it's perfect credit rating just eight days later. The fear of the debt being defaulted on pushed gold into a frenzy. Then the debt wasn't defaulted on, and the world didn't end when the U.S. lost its rating. Mix this with people being willing to sell off gold for profits after a nice run-up, and you have a substantial correction waiting to happen. And it did.

Since then, gold has been a relatively boring asset, and it's difficult to see if it's in bull or bearish territory, though both "sides" seem to think theirs is right. I'm not entirely sure, but I do know if this is a bear market, I'll buy all the way down because of these three trends. The crisis isn't over yet, and we're setting ourselves up for a hard fall.

The Future of Gold

I honestly don't think we're necessarily going to see doomsday soon, though that's speculation and I could be wrong. Doug Casey is famous for saying something that's important to understand: "Inevitable is not the same thing as imminent."

There are quite a few ways that the U.S. could begin to see economic recovery. Tax cuts, bringing the troops home, continued profits for large corporations, interest rates staying at least flat or going up for a while, natural gas boom, oil exploration boom -- all of these could create a temporary economic movement that could help "hide" the fundamental problems.

But the ending is inevitable. It's economically impossible for the U.S. to watch our debt grow because every new dollar in debt has less of an economic impact than the dollar before it. That can't end well.

Either way, more money has been lost betting on economic crashes in the short run than have been made. Caution is important; even caution about being overly cautious is important.

If Gold Doesn't Move...

Gold has been in a type of limbo for a while, as well as silver (NYSEARCA:SLV) to a lesser extent, because the economy, the dollar, and almost everything else has been in limbo. We keep getting data "head fakes" pointing toward recovery and then recession and then recovery.

Some are trying to take gold's lack of huge moves to mean that the meaning has changed. This isn't true -- gold's economics haven't drastically changed in the last 12 months at all. There have even been plenty of longer corrections in the last couple of years. We just have to be patient.

A Long-Term "Hoarder" Strategy

I am not a day trader, and likely never will be. I'm in this for the very long run. If the price of gold begins to plummet, I'll be happier than a kid in a candy store because the long-term fundamentals aren't going away anytime soon. If anything, I hope gold falls substantially.

The long-term trend of interest rates destroying capital has existed for decades. The structural problems with our labor market are just getting worse. The marginal debt productivity has been falling since the 1950s, at least.

For the long-term gold bulls: hang tight, buy dips, and stay patient. Our problems aren't over yet.

Disclosure: I own gold and silver and buy more regularly. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.