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Gold: Why the 1980 Top Is Still the Most Relevant Point of Comparison for Investors

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We use this top for comparison because it seems that human nature and emotionality hasn't really changed since 1980.

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It is also worth noting that, once the panic about inflation and the war in Afghanistan was over, gold retraced back to as low as $485.25 as soon as on March 27, 1980. So the craze started in December the previous year and lasted for only about four months. And this relatively short period seems to be defining how people perceive the 1980 bull market now.

Now, let's make a quick comparison between 1980 and the current bull market. Back in 1980, official inflation numbers were two-digit, while today they stand at approximately 0% (official data) or 4%-10% (inflation calculated according to methodologies that were in place in 1980 or 1990). In 1980, the scare of the Soviet war in Afghanistan was an important factor. Today, the situation in Iraq has been getting less and less attention, particularly since the US withdrew its military personnel from the country in December 2011.

So, there doesn't seem to be a war in the equation, and the current economic environment is deflationary rather than inflationary (according to official figures). On the other hand, alternative inflation figures suggest that that environment is not as deflationary as one might think. But, all in all, the situation today is in fact very different than it was in 1980. So why do we even use the 1980 top in comparisons?

First of all, even though we don't see inflation eating away at our pockets doesn't necessarily imply that there uncertainty about the economy is limited. Right now, with unemployment at 7.7% and with a debt pile larger than GDP and growing, the US economy doesn't look deprived of uncertainty. To pay off such amounts of debt the economy either needs to start growing or the government can inflate the debt away. So, even though the inflation as seen in 1980 is definitely not here, it is at least possible (and in our opinion – likely) that it will materialize in the future.

Secondly, if the economic situation suddenly deteriorates, we could experience effects similar to the ones seen in 1980 because of the Soviet war in Afghanistan (unlikely but possible). Even if financial turmoil brought gold temporarily lower as in 2008, it seems conceivable that such an event would be followed by strong appreciation of both gold and silver.

Finally, and probably most importantly, even if we don't see considerable inflation or the deterioration of the dollar, we still seem to be in a long-term bull market. This bull market can continue to unfold as in the last decade, quite differently than the 1977-1980 appreciation in gold, but human emotions haven't changed that much since 1980. So, in the third phase of the bull market, when everybody would want to own gold, we might see a similar "exponential" price growth pattern. Actually, the events could play out a lot quicker than they did in 1980.

The 1980 serves as a reference point, but right now the audience that might want to take interest in precious metals is a lot broader than it was back in 1980. As we pointed out in our essay on gold and the dollar collapse, right now there is no Iron Curtain to prevent people from Central and Eastern Europe from taking part in the bull market. China and India are developing and investors from these countries may fuel the bull market as well. And right now, it's a lot easier to manage your money than it was in 1980. Taking or reversing your positions in gold is a matter of seconds and minutes and not hours or days. Because of that, it is possible for any rally in the end stage of the bull market to be even more pronounced than it was in 1980.

To sum up, we use the 1980 top for comparisons not because the current economic situation is very similar to the one in 1979-1980. In fact, it's very different in some crucial areas, but the key point is the same – the fundamental situation was positive for gold in 1970s and it is the case right now. We use it because it seems that human nature and emotionality hasn't really changed since 1980. We still can see a period of "crazy buying" at the end of the bull market. What has changed, though, is the number of people that can participate in the bull market and the technological infrastructure. Because of that, the 1980 top can only be used as a general reference point and not as a precise target. The changes in the markets may make the final rally of this bull market significantly more volatile than it was in 1980.

Thank you for reading.

For the full version of this essay and more, visit Sunshine Profits' website.

Twitter: @SunshineProfits
No positions in stocks mentioned.
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