Gold investors have been getting destroyed in recent weeks, with the yellow metal falling nearly 40% from its 2011 high to this year’s low.
But it may be premature to declare the end of the yellow metal.
Tom Fitzpatrick, Citi’s top chartist, reminds us of the 1970’s when we witnessed a similar move under similar conditions.
He starts with a clip from an old New York Times article. Via King World News:
New York Times, August 29, 1976:
“Two years ago gold bugs ran wild as the price of gold rose nearly six times. But since cresting two years ago it has steadily declined, almost by half, putting the gold bugs in flight. The most recent advisory from a leading Wall Street firm suggests that the price will continue to drift downward, and may ultimately settle 40% below current levels.
The rout says a lot about consumer confidence in the worldwide recovery. The sharply reduced rates of inflation combined with resurgence of other, more economically productive investments, such as stocks, real estate, and bank savings have combined to eliminate gold’s allure.
Although the American economy has reduced its rapid rate of recovery, it is still on a firm expansionary course. The fear that dominated two years ago has largely vanished, replaced by a recovery that has turned the gold speculators’ dreams into a nightmare.”
What happened next? Here’s Fitzpatrick:
In 1976 the Gold correction ended in August and the Equity market began a deep correction in September (27% over 18 months). During that period Gold rallied by about 78% and over the 1976-1980 period it multiplied in value by a factor of 8 from just over $100 to over $800. The final part of that rally saw Gold rise from about $470 to $850 over about 4 weeks on the back of the USSR invasion of Afghanistan. Even without that move it still multiplied by about 4.5 times in just over 3 years.
So, just because gold is down, it doesn’t mean it’s out.
Here’s Fitzpatrick’s chart.