Gold: Not a Bull Market

Gold Bullion is money itself. The standard investment cycle may not apply...

WHAT IS a "bull" market? asks Julian Phillips of the GoldForecaster.

It is a market in an upward price phase, necessarily creating the expectation that it will be followed by a "bear" or downward phase. This mindset is common to all markets. Sayings like, "Everything the at goes up must come down" are standard, and taken as part of life itself.

But few examine if it is really true. Why should every asset price that goes up come down? For some years now, gold has been thought of as moving in the opposite direction to the US Dollar. So if gold goes up, only to come down, then the Dollar goes down only to come back up. Is that true?

The history of currencies in the last few thousand years tell us something quite different. Currencies have gone down and never come up again, just disappearing instead. Gold has always retained a monetary value. From the early Eighties to 1999, the Gold Price went down, and in this century has gone up. So we take issue with the saying, in the light of the history of gold.

Even though the 'powers that be' have tried to discredit gold and underlying money, the vast majority of central banks have retained most of their gold because they believed it to be a very valuable reserve asset.

What sort of market is gold? A very accurate saying is doing the rounds at the moment, it is that, "People Buy Gold not to make money, but because they have money to lose." This has always been true, because gold is the ultimate money! Unlike commodities, it is hardly consumed. Lost yes, but not consumed as other metals and commodities are. It is held as a measure of wealth by bankers, funds and individuals.

The gold market is important in the context of this subject too, because gold is different from any other. It comes into its own when trust breaks down, when fear rises and confidence falls. And pre-1971 it was always money. This is important because the Gold Price has been defined by a currency price since the early thirties.

Why do we say this? Before then, the price of a currency was defined by gold. Each note of currency at one time was described as the number of ounces, grains or grams it represented. It was a bill, a representation of the gold backing it. It was a gold "IOU" in short.

Then the mental switch came, somewhere in the murky monetary days between the dropping of the Gold Standard and the Nixon administration's floating of the Gold Price four decades later. Where gold had previously backed currencies as the ultimate reserve asset, now it was priced in currency instead. But it remained the ultimate money – always accepted in extremis – unlike today's unbacked paper.

The next question, then, is how can money be in a "bull" market? It is a misnomer because it conveys the wrong concept to investors. Gold is not in a "bull" market. It is rather money itself, and now in the long process of returning to center stage in the monetary system.

As this happens, prudent individual and institutional investors will continue acquiring it, while they can, ahead of the devaluing of un-backed currencies. We do not believe that the Gold Price is going to fall back below $300 an ounce and probably not below $1,000. Gold will not enter a bear market by falling as equity markets are prone to do today. It is not an item whose demand will fall away. We expect that once its rise does plateau at some point, it will remain at whatever level it reaches. Many do feel that the current Gold Investment demand will peter out once confidence returns to un-backed currencies. But we find it more than difficult to believe that as we watch monetary authorities from the corners of the world moving to acquire more for their long-term reserves while worrying about the future of the currencies they have in their reserves.

Central banks have started to re-acquire gold, while previous sellers of gold have stopped their disposals. Central banks are the very authorities that deemed Gold Bullion to be money before they invented un-backed currencies. As the world's governments try to retain their international competitiveness by moving their exchange rates down, their role as a measure of value is being debauched. This gives rise to the need for something to measure currencies against.

It will happen eventually, we believe in a careful process. First we expect a basket of currencies to be used. In time, gold will be introduced into that basket, if not from the outset.

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