The current gold market cycle bears resemblance to the latter half of the 1970s.
How did gold perform in the latter half of the 1970s?
In 1975, the price of gold declined steadily, ending the year down about 21% (monthly average basis/London PM). In 1976, gold spent the first eight months in relatively weak territory, bottoming at around -14%. After bottoming, gold had a spectacular November and December, pushing gold up 3% for the year. In 1977 and 1978, the trend of steady appreciation continued, ending up 21% and 20% respectively. Akin to now, inflation was just beginning to appear. In 1979, gold exploded, ending 1979 up 107%.
Why is the 1970s experience relevant today?
In 2013, gold dropped about 27% (again, monthly average basis of the London PM). Presuming 2013 is akin to 1975, the current 2014 return of 2% is comparable to the weak conditions at this time in 1976.
What is also common between the two years? Inflation was just beginning to show up. The 2010, 2011, and 2012 returns were due to unwise government spending. This time, it looks like inflation will do the job everyone expected it to do earlier. If history is any guide, gold could be the beneficiary of a late 1970s repeat.
