It is tempting to think gold's upsurge is just due to jitters about the stock market. Or traders covering their short positions. Or simply a price blip in an ongoing, years-long bear market.
But I'd like to challenge those assumptions. Not because I'm long and want to see the gold price rise (I am and I would), but because the data, historical trends, and strong mainstream interest suggest otherwise.
If I'm right, you'll find the chart below a real eye-opener.
There are three reasons why I think the gold run is just getting started. The first is a growing concern about not only world events, but about the Fed itself…
#1: Central Bankers Losing Control
The Fed is deep into a grand monetary policy experiment and has so far dodged a depression. But endless interventions across multiple markets always come at a price. Thinking about all the possible consequences doesn't exactly leave me feeling warm and comfy about the road ahead.
After all, as Stan Druckenmiller points out, "when you have zero money for so long, the marginal benefits you get through consumption greatly diminish-but there's one thing that doesn't diminish, which is unintended consequences."
Druckenmiller is not alone. Many investors have recently expressed similar doubts about whether central planners can steer us safely out of the corner they've backed themselves into…
Maria Bartiromo, February 11: "The trigger for the meltdown today was the increasing concern that the Federal Reserve and other central bankers around the world no longer have the ability to turn around this weakening global economy… rates are so low already that investors are questioning if the Fed really has any tools left in the toolbox to turn things around."
Phil Flynn, senior market strategist with Price Futures Group, said on February 11 that there is "an apparent lack of market confidence in central bankers' ability to control the economy."
Bob Michele of JPMorgan, on CNBC February 11: "There is a serious credit contraction underway, I think [Yellen] should acknowledge that… they're supposed to be bulletproof… and oh, by the way, gold at $1,200 an ounce, what does that tell you? It tells you that in a flight to quality, in a safe haven, people have more confidence in gold than in bank deposits or paper money. I think things have gotten out of control."
Economists Malcolm Barr and Bruce Kasman at JPMorgan Chase on February 11: "… after seven years of interest rates around zero and bumper bond-buying, central banks are now out of ammunition."
AP, February 16: "With interest rates below zero in some cases, it's much harder for central banks to apply more stimulus if needed… markets may be realizing this is one downturn where the central banks can't ride to the rescue as before."
There are plenty more examples like these. The upshot is that there is a spreading uncertainty among "mainstream" investors about the ability of central bankers to overcome chronic deflation, subpar growth, another crisis, or whatever may come next. These are not short-term issues but major complications, and investors increasingly sense that central bankers lack the tools to fix them.
So, it is more likely that gold soared in response to these worries than from traders scrambling to cover their short positions in gold.
#2: Runaway Gold Demand
Check out the global level of bullion demand for 2015. Keep in mind that this buying spree happened while gold was making new lows last year…
Central Bank net gold purchases hit 281 tonnes (10.2 million ounces) in the second half, 170% higher than the first half.
China's bar and coin demand totaled 201 tonnes (7.1 million ounces), 21% higher than 2014.
Investment buying in Europe grew 12%.
Indian jewelry demand recorded its third highest level in history.
Japan's demand of 16.2 tonnes (571,438 ounces) was the strongest since 2005.
Q4 coin and bar demand in the US was up 15%, the highest level since 2011.
For 2016, sales of American gold Eagle coins in January were up a whopping 53.1% over the same month last year.
I can't think of another asset that's declined for nearly five years that's seen this level of demand. I've said for a long time that pent-up gold demand would eventually impact the price-and do so in a big way. It appears that time has arrived.
#3: Bear Markets Lead to Bull Markets
If one accepts the premise that bear markets don't last forever, and that bear markets are the authors of bull markets, then it's worthwhile to look at what happened to the gold price coming out of its past bear markets.
My calculations show there have been six major bear markets (including the current one) since 1975, when gold again became legal to own. Here's what happened to the price after the first five.
If the $1,049 low on December 17 marked the bottom of the bear market (and I think it did), then the next dip in price will be nothing more than the normal ebb and flow you find in virtually any bull market.
The gold bear market was the second longest on record. It's time to prepare for the next bull market.
The kind of returns we can expect are pretty mouthwatering. If we ignore the highest (+717%) and lowest (+25%) gains shown above, the average bull-market advance in gold is 175%.
It's Time to Hedge
It has become increasingly clear that gold has bottomed and is on the cusp of its next bull market. It may not yet have started, and the price could spend some time base building at current levels. Either way, mainstream investor sentiment will continue to shift-less confidence in the Fed, and greater desire to own gold. If you're among those investors with a growing unease about markets and politics, then it's time to buy some gold insurance.