Gold has been quite volatile in recent months setting an all-time high above $2,070 in August 2021. Since then, the precious metal has been corrected by over 23% with critics saying that it might plunge further.
Interestingly, the 2019-2021 gold chart is very similar to that of 2010-2012. However, it does not need to be the harbinger of a bear market. Many of the traditional and ancient cultures saw history as cyclical. Based on that view, society passes through multiple repeated cycles.
Can this cycle apply to gold as well? Analysts are not referring to the existence of bulls and bears in the market. Instead, they have discovered that the pattern of the price of gold seen in 2019-2021 resembles that of 2010-2012. Here are the scenarios of these timeframes:
It is clear in both periods that gold was steadily surging to a peak in Q3 of the second year. Ten years ago, the precious metal gained about 29% in 2010 and 74% as it hit the peak. Then, gold, declined 19% by the end of 2011. In recent times, Gold gained around 18.4% in 2019 and 62% at the top. Later on, it lost 9% by the end of 2021.
Thus, even though the magnitude has now been weaker compared to the aftermath of the Great Recession, the pattern is similar. The next chart represents the normalized gold prices in both of these timeframes to indices when the starting point is 100. In this case, it also shows how gold in 2019-2021 disturbingly resembles gold from 2010-2012.
The similarity may be quite overwhelming. Should this pattern hold, then the precious metal may go down considerably and remain in a sideways trend for years. Here is what happened around ten years ago. The gold bulls fought until the end of 2012 when they eventually gave up and the precious metal entered a full bear market. It dropped by 45% from the top to the bottom in December 2015.
After bottoming, it remained generally flat till the end of 2018. If that cycle repeats, the price of gold might sink below $1,200 by the end of 2024. Currently, some arguments support the bearish scenario.
Just as it happened in the 2010s, the world is slowly recovering from the global economic crisis. The recession is finished and the prospects are only getting better. Maybe they are not attractive, but they appear better than most people previously expected and that is what matters for the financial markets.
The worst seems to be behind us now and the risk appetite is returning in the market. If this market sentiment continues, it might put gold and many other haven assets into oblivion. Some might even say that gold might now drop even earlier because ten years ago it was supported by the European sovereign debt crisis that peaked in 2011-2012.
Nonetheless, there are also critical reasons why gold may break the pattern and diverge from the 2010-2012 trend. First, there is a much more dovish Fed. The United States central bank cut the federal funds rate more rapidly and increased its balance sheet more decisively.
Moreover, to avoid a taper tantrum that arose from its announcement about tapering asset purchases, this time around the Fed will slowly normalize its monetary policy, if at all it happens. Therefore, it means that interest rates will remain lower for longer.
Finally, the United States central bank altered its monetary policy framework; it prioritized the labor market over price stability and it became more tolerant to elevated inflation.
Secondly, there is also a much easier fiscal policy currently. Even before the global pandemic struck, President Trump had expanded budget deficits considerably. However, the great lockdown made the deficits even bigger.
Pundits said that the fiscal response in the wake of the global financial crisis of 2007-2009 was very small. This time around they want to go big with Biden’s $1.9 trillion economic plan is waiting to pass in Congress.
Thirdly, the recovery may be more inflationary than ten years ago. Not only did the monetary base increase, but also the wider money supply did as well. In the last time, the Fed injected a lot of liquidity into the banking industry to bail out the banks.
Today, the money has flowed much more via Main Street and the household sector. That may turn out to be more inflationary when all the money will get spent on goods and services.
Furthermore, last time it was seen that there was some level of deleveraging in the private sector. Now, the supply of loans is constantly increasing at a positive rate. There is also some reflation in the form of a commodity boom, so it is expected that gold may follow suit.
In summary, the patterns that are seen in the gold space in 2010-2012 and 2019-2021 are majorly similar. Hence, the recent gold’s weakness may be quite disturbing. Nonetheless, the resemblance does not have to be a harbinger of more problems and challenges coming for the gold bulls.
Mark Twain is known to have said:
“History doesn’t repeat itself, but it often rhymes”.
The macroeconomic and political environment is now considerably different compared to how it was a decade ago. Today, it is fundamentally positive for the gold price.
