I first invested in gold miners eight years ago, and in that time I’ve been through a few big swings in the market. Booms and bear markets are just a fact of life in precious metals investing. Knowing your history helps to deal with them. It teaches you not to be too elated in the good times or depressed in the bad.
Now, last year was terrible for gold by any standards. It was its first annual loss in 12 years, and it fell by 27.3%.
But this is not the first time that the gold price has experienced a sizeable drop. And while past performance does not guarantee future results, there are parallels that can be inferred from studying gold price falls in the past.
According to the World Gold Council, the gold price has had 12 periods with pullbacks of 20% or more since 1971. You can see these in the chart below:
Analysis of gold price pullbacks larger than 20% since the 1970s
| Dates | Retracement | ||||||
|---|---|---|---|---|---|---|---|
| Peak | Trough | Length (months) | Time to next peak (months) | Gold price correction | Same length forward | Before next pullback | |
| 1 | 7/6/1973 | 11/14/1973 | 4 | 13 | -29% | 196% | 242% |
| 2 | 4/3/1974 | 7/4/1974 | 3 | 6 | -28% | 44% | 127% |
| 3 | 12/23/1974 | 8/25/1976 | 20 | 41 | -46% | 75% | 834% |
| 4 | 1/21/1980 | 3/18/1980 | 2 | 6 | -43% | 10% | 62% |
| 5 | 9/23/1980 | 6/21/1982 | 21 | 7 | -58% | 49% | 51% |
| 6 | 2/15/1983 | 2/25/1985 | 24 | 33 | -44% | 54% | 96% |
| 7 | 12/14/1987 | 9/15/1989 | 21 | 5 | -29% | 41% | 47% |
| 8 | 2/7/1990 | 3/10/1993 | 37 | 35 | -23% | 81% | 91% |
| 9 | 2/5/1996 | 8/25/1999 | 43 | 81 | -39% | 58% | 292% |
| 10 | 5/12/2006 | 10/6/2006 | 5 | 17 | -23% | 63% | 274% |
| 11 | 3/17/2008 | 10/24/2008 | 7 | 34 | -30% | 88% | 396% |
| 12 | 9/5/2011 | 12/20/2013 | 28 | 7 | -37% | 7 | 7 |
| Average | 18 | 25 | -36% | 69% | 228% | ||
| 1st Quartile | 5 | 7 | -44% | 47% | 77% | ||
| Median | 20 | 17 | -33% | 58% | 127% | ||
| 3rd Quartile | 25 | 34 | -29% | 78% | 283% | ||
Source: Bloomberg, World Gold Council
During each of the pullbacks, the gold price fell on average by 36% over 18 months. There were even a few occasions where the correction period lasted more than 30 months.
Now, if you look at the second column from the right labelled “Retracement”, you’ll see some big numbers – there’s always been a nice bounce, and sometimes even an explosion, after the fall.
Remember, this is the retracement of the gold price. So basically, the gold price has typically more than recovered its losses before the next significant pullback occurs.
Getting back to the chart, you’ll note that we’re now more than 30 months into one of the largest pullbacks in history (this data is up to the end of 2013). And this is where history can serve as a guide.
If this is to equal the second longest pullback in history, then we can expect the price to start moving in July. Should it equal the existing record of 43 months that takes us to January 2015. It could obviously be longer, but that would be breaking all records!
How long does a gold boom last?
The following chart shows how long a gold bull market could be expected to sustain itself, assuming a price ‘take-off’ on 1 March 2014:
| Months | Price ‘take-off’ | Market peak | |
|---|---|---|---|
| Shortest time to peak | 5 | 1 March 2014 | 1 August 2014 |
| Longest time to peak | 81 | 1 March 2014 | 1 November 2020 |
| Average | 25 | 1 March 2014 | 1 April 2016 |
| Median | 17 | 1 March 2014 | 1 August 2015 |
There are several things to consider.
First, although investors have been through a lot of pain, there could still be several more months before the gold price rises. We’re still some way off a ‘healthy’ price for the industry which is probably in the range of $1,550-1,650. To give you some perspective on this, the average prices in 2011, 2012 and 2013 were $1,572, $1,669 and $1,411 respectively.
Second, when the gold ‘take-off’ does happen, gold stocks could see explosive gains. At a gold price of $1,800 the wheels could still be on the runway and investors could be in for a nice ride.
Third, and perhaps most important, should gold investors get that kind of uplift, they need to be very careful. Selling too early could leave them on the sidelines watching the bull market roar away. Similarly, going too late could wipe out all our profits.
The only way to make that decision properly is to know your history. When the time comes, we’ll be ready!