Monday , 17 June 2024

Gold’s Long-term Bull Market Is Intact With Prices Expected to Surge – Here’s Why (+2K Views)

Gold prices have been trending higher in the last twelve years and might continue to do so over the next decade. This article is in defense of current gold prices from a money creation perspective. Further, this article completely rules out a bubble in gold. Hence, the expectation is that the long-term bull market for gold is intact and gold will surge higher over the next decade. Words: 914

So says Economics Fanatic ( in edited excerpts from an article posted on Seeking Alpha entitled Justifying Gold Prices From A Money Creation Perspective.

Lorimer Wilson, editor of (Your Key to Making Money!), has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.

The article goes on to say, in part:

As mentioned earlier, the focus is just on gold price appreciation from a money creation perspective. The simple logic that works here is that if the supply of gold can’t be increased at the same pace as the supply of money, gold will appreciate in fiat money terms even if demand remains stable or relatively sluggish.

In the modern banking and money creation era, debt is essentially money. Had there been no debt, there would have been no money. Therefore, it would be interesting to look at the debt growth multiple from 1980 and the number of times gold has appreciated since the 1980’s. I am particularly selecting the 1980s as a reference point because expansionary monetary policies began in the United States way back in the 1980s after the bear market for Treasury bonds ended.

The total credit market debt in the United States has increased from $4.4 trillion in 1980 to $55.0 trillion by the second quarter of 2012. During the same period, the total government debt increased from $930 billion to $15.8 trillion.

Looking at the impact of this money creation on asset markets, the S&P 500 index has increased from 106 in 1980 to 1460 currently. I am certainly not suggesting that only liquidity has resulted in the index surging by 13 times in 3 decades. However, liquidity does play an important role in asset markets. The best evidence comes from the credit freeze as a result of the Lehman collapse in late 2008. The S&P 500 index touched a low of 666 during that period. Very clearly, two quarters of earnings slump did not justify the S&P slipping to 666 levels. The liquidity factor was the most important factor.

Finally, gold prices have increased from $560 at the beginning of 1980 to $1780 as of October 2012. That’s a 3.2x increase over a period of three decades.

As evident from the chart, appreciation in gold prices has been much lower when compared to the increase in money in the system over a period of three decades. Clearly, purely from the perspective of the amount of money present in the system, gold looks undervalued and not overvalued or fairly valued.

(click to enlarge)

Another interesting chart given below can be used to talk about current gold valuations. The foreign reserves in Asia has swelled from $2 trillion at the beginning of 2006 to $5 trillion now – exceeding 45% of GDP. Therefore, over a period of six years, Asian currency reserves have increased by 2.5 times. During the same period, gold prices have increased by 3.4 times.

(click to enlarge)

The important point to note here is that deficits in the advanced economies have been a source of excess reserves and liquidity in the emerging economies. Further, the 2.5 times increase in reserves does not account for all the new money creation during this period. One can therefore conclude with some conviction that the 3.4 times increase in gold prices during this period is justified.

A strong relation also exists between the US adjusted monetary base and gold prices. As the chart below shows, the gold price has surged in the recent past, along with a surge in the US adjusted monetary base.

(click to enlarge)

Going forward, with the Fed expected to continue with its expansionary monetary policies, the adjusted monetary base will trend higher and gold prices should also trend higher. It is also worth mentioning here that the CBO expects $10 trillion of budget deficits in the United States over the next ten years. This will result in significant additional money creation in the system. In line with this, gold prices should be supported at higher levels.

I also strongly believe that gold is far from being in a bubble territory. The chart below would serve as a good point in defense of my argument.

(click to enlarge)

Of the total amount of marketable potentially safe assets, the holding of gold is only 11%. In times of a bubble, the holding of any asset is abnormally high. From that perspective, the government bond sector, and not gold, is in a bubble.

Also, for central banks around the world, gold as a percentage of total reserves is at relatively low levels. This is especially true for emerging markets, which have high reserves.

(click to enlarge)

Going forward, one can expect central banks to increase their gold holdings as the prolonged economic problems in the advanced world impact their currencies negatively.


All… [of the above] factors combined make a strong case for another decade of the bull market for gold. I would personally look to accumulate physical gold, gold ETFs and gold stock in my portfolio on every correction in the precious metal.

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Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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