How long can the gold bull market last?

The driving force behind the gold bull market does not subside, and the bull market will not end.

The US dollar remains the anchor of the global monetary system. From 2020 to 2022, the US dollar was issued rapidly. In January 2020, the broad money supply (M2) grew from 15.4 trillion to 21.6 trillion by January 2022, an increase of 40.3%. Against this backdrop, the value preservation and appreciation capabilities of gold are highly regarded by many.

In January 2024, we wrote and published the "Top 10 Economic Forecasts for 2024," which predicted the rise in gold prices. Since February 2024, the spot gold price on the London Exchange has continuously broken historical highs. $2,000 per ounce was a price that gold found difficult to surpass before November 2023, but on April 12, 2024, the gold price had already touched above $2,400 per ounce.

However, on the very day that gold broke through $2,400 per ounce, the gold price plummeted and eventually closed at $2,344.6 per ounce. Has the gold market reached its peak?

Many readers are curious about when this gold bull market will end. To understand this, you must first grasp that the other side of gold is the US dollar: every gold bull market is definitely accompanied by one or more factors that weaken the value of the US dollar.

This factor could be the credibility of the US dollar as a foreign exchange reserve being questioned. If the US dollar does not keep its credit and does not follow the rules of fair play, its value naturally takes a significant hit.

This factor could also be high inflation in the United States. High inflation in the US means that the US dollar depreciates relative to goods, and of course, its value will decrease.

This factor could also be a recession in the US economy. A US recession first implies a decline in American power and also implies that the US is likely to issue more currency, leading to a decrease in the value of the US dollar. This factor could also be something else, such as the threat of war.The endnote is a brief history of gold over the past 110 years; readers unfamiliar with the history of gold can refer to it.

Let's first review the two historical bull markets for gold to see what the driving factors of the US dollar devaluation were at that time and how the bull markets ended.

01 The First Gold Bull Market

The first gold bull market occurred from 1968 to 1980, with the first peak and correction happening from December 1974 to August 1976, and the true peak occurred in January 1980.

After World War II, the United States' gold reserves reached over 200,000 tons. With this strength, the Bretton Woods system in 1944 fixed the gold price at 35 US dollars per ounce. Although the Bretton Woods system officially collapsed in 1971, in reality, the United States' gold reserves began to net outflow after 1957, accelerated after 1960, and fell below 10,000 tons in 1968.

In 1968, the gold price began to loosen. From 1968 to 1969, the US unemployment rate remained around 3.5%, and the economy was not bad; inflation was about 5%, which was high. But at this time, people were most worried about the original promise of the US dollar: anyone could exchange 35 dollars for one ounce of gold.

In 1971, the United States indeed changed its face, and President Nixon announced the decoupling of the US dollar from gold. The reason for the decoupling is easy to understand: the US gold reserves could not cover so many US dollars. With the decoupling of the US dollar from gold, the credit of the US dollar was questioned, and its value was greatly reduced. Along with the devaluation of the US dollar, various commodities began to rise in price, and inflation came with great momentum.

Therefore, the first gold bull market had two driving forces: first, the credit of the US dollar was questioned; second, inflation.

The United States strengthened the credit of the US dollar through measures such as the "petrodollar," and the United States' economy and technology were leading the world, so people gradually accepted the fact that the US dollar was no longer pegged to gold. In this gold bull market, inflation became the main reason.In response to inflation, the United States began to raise interest rates starting in 1971. The U.S. federal funds rate was around 4% in 1971, and by the second half of 1973, the rate had broken through 10%. Interest rates above 10% were maintained until October 1974. The U.S. unemployment rate steadily rose from less than 5% in 1973, and by January 1975, it had already surpassed 8%. Moreover, starting from January 1975, inflation data began to decline continuously.

The economic weakness provided ample justification for interest rate cuts. In fact, the rate cuts began in August 1974, rapidly decreasing from a peak close to 12% to 4.8% by February 1976. According to traditional theory, lower interest rates are beneficial in reducing the cost of capital for gold, and gold should have continued to rise.

However, by January 1975, the price of gold had already begun to decline. This indirectly proved that the main factor driving the rise in gold (inflation) had been alleviated, and the impetus for gold's rise dissipated.

Interest rates below 5% were maintained until April 1977, but as early as January 1977, signs of a resurgence in inflation were already very apparent. In early 1979, the U.S. CPI rose above 10% year-over-year once again. In August 1979, Paul Volcker became the Chairman of the Federal Reserve and announced that tackling inflation would be a priority. Ultimately, by the end of 1980, the federal funds rate was raised to close to 20%, after which inflation began to steadily decline.

Gold reached $850 per ounce in January 1980 and then began to gradually decline, marking the end of the gold bull market. The rate cuts that began in the second half of 1981 did not bring about another gold bull market. This once again proved that with the main cause being recession, gold lost its upward momentum.

This period of inflation lasted for about 10 years (1970-1980), and the gold bull market also lasted for 10 years.

02 The Second Gold Bull Market

The second gold bull market occurred from 2001 to 2012, with the first peak and correction happening from April to November 2008, and the true peak occurring in September 2011.

The burst of the internet bubble in 2000 is marked by a rapid increase in the U.S. unemployment rate, which rose from less than 4% to over 6% by 2003. Concurrently, the Federal Reserve quickly lowered interest rates, with the federal funds rate dropping rapidly from 7% in July 2000 to below 2% by November 2001. At this time, the U.S. dollar index began to decline continuously, and the gold bull market became more apparent, with gold prices starting to rise continuously from $270 per ounce.The initial driving force behind this gold bull market was economic recession.

At the end of 2004, inflation began to rise, and the Federal Reserve quickly raised interest rates, which increased from 2% in December 2004 to over 5% by May 2006, and then rates above 5% persisted until August 2007. The rate hikes did not successfully curb inflation, nor did they affect the rise in gold prices.

In the second half of 2007, the subprime mortgage crisis began to emerge and its impact continued to expand, with gold prices accelerating their rise. In March 2008, the subprime mortgage crisis reached its most severe phase, and gold prices broke through $1,000 per ounce at this time. In April 2008, various remedial measures began to be implemented intensively.

However, after a brief decline in 2008, gold prices rebounded quickly by the end of that year. Gold peaked in September 2011, reaching $1,895 per ounce. At this time, the subprime mortgage crisis and the European debt crisis were alleviated, and various measures changed people's expectations of recession.

The main driving force behind this gold bull market was economic recession. The recession lasted for about 10 years, and the gold bull market also lasted for 10 years.

03 When will this gold rally end?

By analyzing the previous two gold bull markets, we find that when the main driving force behind the rise in gold prices subsides, the gold bull market also comes to an end. So, what is the driving force behind this gold rally?

There are two schools of thought: one believes it is the expectation of monetary easing and the downward trend of U.S. dollar interest rates; the other believes it is the questioning of the U.S. dollar as the main reserve currency.

Since March 27, 2024, the rise of the U.S. Dollar Index and the upward movement of U.S. Treasury yields have meant that the expectation of monetary easing has been broken. Under these conditions, gold still rose rapidly, indicating that the main driving force behind this gold rally is the questioning of the dollar's status.The main reasons for skepticism are twofold.

First, the United States federal government's debt is excessively large, currently exceeding 34 trillion U.S. dollars. In February 2024, the Congressional Budget Office (CBO) released the "Budget and Economic Outlook: 2024 to 2034," which projected that interest expenditures will grow rapidly over the next decade—from 951 billion U.S. dollars in 2025 to 1.6 trillion U.S. dollars in 2034.

The high interest expenditures lead to a fiscal deficit ratio (fiscal deficit ratio = fiscal deficit / current year GDP) of 6.8% for the United States in 2024, and it is expected to exceed 4.5% for the following decade (Figure 5). It is generally believed that a fiscal deficit ratio exceeding 3% is unsustainable.

Second, in an environment where international contradictions are highlighted, many countries' confidence in the security of U.S. assets has weakened. Under such conditions, gold assets are more certain.

Therefore, the main contradiction of this bull market in gold is the issue of the U.S. dollar's status. As long as the U.S. dollar cannot regain trust, this bull market in gold will not end.

Some readers may think that the above answer is somewhat opportunistic because they are more interested in the specific duration of the gold bull market. For this, we also provide a theoretical reference.

04 Analysis Framework of Chaotic Era and Stable Era

This theory borrows the concept from "The Three-Body Problem," dividing the history of the U.S. economy into a Chaotic Era and a Stable Era. The characteristic of the Chaotic Era is that there are unresolved major issues that threaten economic stability, which could be sluggish economic growth, inflation, debt problems, the threat of war, or in the future, it could be a rapid environmental deterioration, etc.

The transition from stability to chaos may come from a small shock, but due to the accumulation of many contradictions within the economy, this small shock is amplified layer by layer.However, chaos eventually leads to stability. Many economists have discussed the underlying reasons. For instance, during times of chaos, residents' savings increase, which represents future consumption power; furthermore, rents, raw materials, and labor become cheaper; thirdly, durable goods that have been reluctant to replace during the chaotic era are now in need of replacement, along with similar pent-up demands.

There is a turning point in the transition from chaos to stability, known as "clearing." The clearing of an economy is akin to the removal of a human illness; it is not immediately apparent, but the body indeed improves day by day.

In the United States, stock market gains are an excellent indicator to define the chaotic and stable eras. Looking at the Dow Jones Index, since 1900, the U.S. economy has experienced four chaotic eras and four stable eras.

Historically, chaotic eras have lasted more than 10 years, so it is premature to discuss the end of the golden bull market now. Of course, if gold prices undergo significant adjustments in 2025 and 2026, it would not be surprising.

Endnote: The history of gold over the last 110 years

In 1913, the Federal Reserve was established, becoming the sole institution for printing U.S. dollars. At that time, the Federal Reserve still strictly adhered to the gold standard rules; anyone could exchange 20.67 U.S. dollars in paper currency for 1 troy ounce of gold from the Federal Reserve. The troy ounce is approximately 31.1 grams, and at that time, the gold content of 1 U.S. dollar was about 1.5 grams.

Before the United States stopped the gold standard in March 1933, the price of gold had been fixed at $20.67 per troy ounce. In 1934, the Roosevelt administration enacted the Gold Reserve Act, adjusting the legal price of gold to $35 per troy ounce. At this time, 1 U.S. dollar could be exchanged for about 1 gram of gold.

In July 1944, the Bretton Woods system was established, with the price of gold still fixed at $35 per troy ounce. At the beginning of Bretton Woods, the U.S. gold reserves were close to 220,000 tons, accounting for more than 70% of the world's total. However, after 1957, U.S. gold reserves flowed out rapidly, and by 1968, U.S. gold reserves fell below 10,000 tons. At this time, although the Bretton Woods system had not yet collapsed, the price of gold had already begun to loosen.

The London gold spot market is one of the world's most important gold trading markets. By the end of 1968, the price of gold had reached $41 per troy ounce.

In 1971, Nixon announced that the United States would no longer undertake the obligation to exchange gold for dollars, leading to the collapse of Bretton Woods. The price of gold began to soar, breaking through $600 per troy ounce by 1980. In just ten years, gold prices increased by 17 times.However, in the 20 years following 1980, gold entered a bear market, with prices generally falling. In 2000, the average spot price of gold in the London market was $280 per ounce, more than half of the peak price in 1980.

From 2001 to 2011, it was a bull market for gold; from 2012 to 2017, it was a bear market for gold; and after 2018, gold has once again become strong.