The old adage “history repeats itself” has been applied to all facets of the investing world, but it’s especially apparent in the commodity world. With most assets displaying cyclical returns and seasonality, the history of many commodities is bound to repeat itself the following year. When it comes to gold, Peter Schiff
believes that the phrase points the path to a major run up in gold that few investors will be counting on.
Gold Drawing Historical Parallels
In 1976, gold had just finished bottoming out as a correction put an end to a multi-year bull run. Schiff notes that at this point in time, the American economy was at a point where confidence was returning and investors where beginning to increase their risk appetite. Schiff then pulls segments of an article written in 1976 that continues to describe an economy eerily similar to that of today’s. The rest, is history, as gold would embark on a bull run that saw its price jump by more than 700% in just a few years.
Schiff goes on to point out that the sentiment for gold today is nearly identical to what it had been in the mid-’70s, as investors lost their love for the precious metal. With improving economies and consumer confidence on the rise, gold was seen as less of a safe haven in both time periods; with no yield and a plummeting price, investors quickly exited their precious metal positions. But, of course, those who exited in the mid-’70s unfortunately missed out on a massive rally the following years, a rally that Schiff argues can easily happen again.
Past Performance Does Not Predict Future Results
Of course, anyone can cherry-pick a time period to show that gold has the ability to rise again. But what Schiff failed to mention was gold’s sputtering stretch after the late-’70s and early-’80s bull run. Gold sat dormant for nearly 20 years, failing to establish any kind of major trend until it entered its recent bull run
that 2013 is threatening to end. So if history does repeat itself, gold could very easily return to a period of dormancy.
Comparing today to the 1970s is an argument of apples and oranges. Gold just came off the longest bull run in its history and one of the most impressive runs any commodity has ever seen. This is all coupled with an economic environment that includes trillions in Fed printing. And while many have outlandish predictions for how the Fed printing will turn out, the truth is nobody knows for sure. Just ask John Paulson who has seen his gold bet lose him more than $800 million
It was, after all, Schiff who predicted gold to rise to $5,000/oz in July of 2012; gold has dropped over 20% since that prediction. Schiff can easily come back and state that his timeline is much longer, but that falls under the category of heavy speculation. Anyone can make a prediction without a definitive timeline as long as they can morph it as time goes on, even a stopped clock is right twice a day.
The fact remains that while there are some striking similarities between today and the mid-’70s, our current economy is unlike what anyone has ever seen. We are truly wading into uncharted territory and it is nearly impossible to definitively say where we will be heading next. Those looking to buy into gold would do better to check on some fundamentals and the supply side
of the equation to find where they think the appropriate bottom lies. Gold will probably rise once again, but the truth is nobody knows when that will happen and to what magnitude it will jump.
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Editor's note: This article by Jared Cummans was originally published on Commodity HQ.
No positions in stocks mentioned.