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There aren’t many investment scenarios you can point to with any degree of certainty and
say, “This asset is going to rise.” Saying so is usually fraught with risk, even if in hindsight it turns out to have been an accurate call but there are certainly times when you can see that the odds are heavily stacked in your favor and we have one of those potential scenarios right now in gold.
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It’s a rather strong setup, based on a simple algebraic equation: if A happens, then B is likely to happen. And in this case A equals the direction of the US dollar.
As most readers know, gold and the US dollar are inversely correlated. Which makes sense; since gold is priced in greenbacks, it tends to rise in value if the dollar falls – and vice versa. Like most inverse correlations, it’s not a perfect “one goes up exactly 1.2%, the other falls exactly 1.2%” pairing, but it’s especially accurate over long periods so, if the dollar has begun a long-term decline, it would be reasonable to expect the gold price to rise during that span.
The US dollar has had some very long, very big declines since the late 1960s.
The average of the three major declines was 35.3% over an average span of 11 years and, as you can see in the chart above, it looks like the dollar is rolling over again, starting another one of its long-term descents. This seems supported by the lower highs and lower lows it has exhibited since 1985.
How did gold perform during these long-term dollar bear markets?
While gold’s rise varied greatly, it rose in all three dollar bear markets. The average gain was 637% and those percentage gains are based on the average annual price, so those returns as an investment were actually achievable (and potentially even greater).
What happened from the mid-80s to mid-90s? You’ll recall this was only a few short years after gold’s biggest rise in modern history (2,328% over 10 years, ending in 1980) so it’s not exactly shocking that gold didn’t rise much after that kind of run and, of course we have the opposite situation today—gold fell for four years, bottoming in 2015, and has risen only 25% since then.
Bottom line, it seems likely that a new long-term bear market is beginning in the US dollar, which would mean gold is beginning a new long-term uptrend. Of course, if the dollar falls to its intrinsic value of zero, the rise in gold will be of manic proportions…
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