The Dawn of a Prolonged Gold Bull Market

Written by Jan Nieuwenhuijs of Gainesvillecoins.com

In recent times, the dollar gold price has forcefully surpassed a multiyear resistance level due to escalating wars, concerning asset bubbles, and persistent inflation. Long-term indicators suggest that gold is undervalued in these conditions and could potentially double in price in the forthcoming years.

The Trust Erosion in Credit Instruments

The past few decades have seen a high level of trust in credit instruments, inflating the global financial system to enormous proportions. However, issues such as East-West tensions, debt saturation, and inflation are gradually eroding this trust. As a result, there will be a shift in the balance between financial instruments with counterparty risk (credit) and those without (gold), favoring the price of gold.

The Theory of Money and Exter’s Inverse Pyramid

All forms of money are backed by trust, given that money is a social agreement. It can take many forms such as tobacco, salt, paper slips, silver, book entries, and so on. The acceptance of money by market participants allows it to function. However, not all forms of money are equal. Some, like tobacco and salt, are impractical in the modern age. Others, issued by banks, carry counterparty risk. Since the late 19th century, gold has been the only form of money that is universally accepted, carries no counterparty risk, and therefore underpins the global financial system.

Exter’s Inverse Pyramid Visualization

Exter’s inverse pyramid visualizes gold at the bottom, providing indispensable trust to the financial system by "backing" all forms of credit resting on top of it. Credit, when used in moderation, benefits a capitalist economy. However, excessive credit (debt) results in lower growth, while too little means missed opportunities. Generally, and particularly during a crisis, people place more trust in gold than credit.

The Start of a New Multi-Year Gold Bull Market

From a technical perspective, the price of gold has recently broken out from a multi-year consolidation phase. Historical trends suggest that we are now entering a multi-year bull market.

Long-Term Fundamental Indicators

Next, we examine the long-term fundamental indicators that show gold is undervalued under conditions of declining trust in credit. Unfortunately, it's not possible to find global data on all financial assets going back 150 years to compare the value of all credit to that of gold. However, estimates by Bridgewater Associates on the ratio between gold and "financial assets" from 1924 until 2020 were found. Using Bridgewater’s methodology for the last two decades, the data series could be extended.

Gold’s Value Relative to Financial Assets

During periods when trust in credit is poor, such as the Second World War and the end of the 1970s, gold’s value relative to financial assets was between 7 and 10%. Currently, gold is worth 3%, indicating significant potential for gold in this bull run.

The Value of Monetary Gold Supporting the US Dollar Broad Money Supply

The value of the US monetary gold underpinning the dollars in circulation is rising from a near historic low. The two previous lows were in 1971 and 2000, both followed by multi-year gold bull markets. Therefore, it is likely that a new bull market is imminent.

Gold and Credit Relationship

The relationship between gold and credit, in the form of foreign exchange, is also noteworthy. On the classical gold standard in the 19th century, it was mainly gold that underpinned confidence in central banks. Most of their reserves consisted of gold that literally backed the monetary base as currency could be redeemed for physical metal at a fixed parity.

Gold as a Percentage of Global International Reserves

Currently, gold’s share of total reserves is on the rise due to the freezing of Russian assets worth $300 billion since the war in Ukraine that started in 2022 and the spiraling out of control United States’ public debt. Central banks are currently buying record amounts of gold, driving up the price.

The Size of the US Equity Market Versus the Size of the Economy

Lastly, we will look at the size of the US equity market versus the size of the economy (GDP) going back 120 years. Equity can be seen as a form of debt with no maturity. The data reveals cycles of easy money (credit) blowing equity bubbles, followed by the debasement of currency, reflected in a higher gold price.

Conclusion

Tensions between East and West are unlikely to be resolved quickly, indicating that the gold price will continue to rise and gold’s share of global international reserves will increase to the detriment of the dollar. In 2023, it was speculated that the gold price could reach $8,000 dollars an ounce in the decade ahead. Based on all the data gathered in writing this article, this still seems to be a reasonable number that would stabilize the financial system by adding more trust to it.

What are your thoughts on this article? Do you agree with the predictions for the gold market? Share this article with your friends and let us know your thoughts. Don't forget to sign up for the Daily Briefing, every day at 6pm.