Is this the end of the gold bull market?

As usual gold has few friends in the mainstream investment world and media, and when the price rises we hear little about it, whereas there is no end of headlines on gold when the price is down. Experienced investors know better than to invest, or even trade, based on TV airtime. In fact it is a good contrarian rule of thumb to do the exact opposite of what the headlines and TV anchors say, at least if you want to buy cheap and sell dear.

If we want to keep our heads when all about are losing theirs, we need to have facts; objective, cold, hard facts about the fundamentals of the gold market on which to base our assessment rationally. We also need perspective.

The first question that any saver in gold, who has patiently been accumulating the precious metal while it is undervalued, needs to ask is: what is the fair value of gold? The second question must be: what stage of the bull market are we in?

You want to accumulate undervalued assets and sell them when they become overvalued. All bull markets end up in bubbles and at a certain point, when it becomes overvalued, it will make sense to sell (or spend) your gold. To be able to know when to do so and at what price, knowing the answer to the aforementioned questions is absolutely necessary.

James Turk has worked hard to provide an answer to the first question with his Gold Money Index, which gives a time-tested measure of gold’s fair value.

The question of where we are in the current bull market is actually not that difficult to answer when we look past the headlines and into the numbers. For example this Bloomberg story makes a big deal of several large investors’ holdings of gold ETPs, and their recent reduction in their positions. The impression is of investors piling in, as usually happens in a bubble, and now rushing out as in a typical post-bubble crash. However this impression becomes laughable the moment we look at the numbers.

To pick two well-known examples from the article: Soros Fund Management LLC still has 530,900 shares of GLD (SPDR Gold Trust). That sounds like a lot! It’s over $70 million at current prices! However, this impression fades when we realize that Soros Fund Management LLC has over $6.000 million in Assets Under Management and that George Soros’ total investments total an estimated $20.000 million. In other words this “huge bet on gold” represents less than 1.2 % of the assets that Soros had in just one of his investment vehicles.

Another very relevant example, since it is the world’s largest money manager, is BlackRock, according to Bloomberg they own 4.1 million shares or approximately $550 million in (paper) gold. Considering that BlackRock manages over $3.7 trillion, that princely sum happens to be smaller than 0.015% of their investments.

In other words, as we have said repeatedly, participation by institutional investors (not to mention the general public) in the gold market is tiny and indicative of the early stages of a bull market.

Corrections are inevitable and normal in bull markets, in fact a 30% correction from previous highs is a normal part of consolidation and base-building that usually precedes new highs. If you think that this gold bull market has been a wild ride, you should take a look at the charts from the 1970s and 1980s. The large corrections in 1976 and 1978 are particularly poignant.

Patient accumulators should take advantage of the opportunity to buy a few more ounces for the same amount of dollars. As long as central banks keep printing them indiscriminately, the gold bull market has a long way to go.