Question 5: What will be the market trend for gold and silver in this coming 5 years?
Answer 5:The next 5 years are exciting times for gold and silver. This is because we are about to move into the final phase of the present commodity cycle. For a start, gold and silver moves on a long-term bull market in a commodity cycle. There are 4 phases of a typical bull market. I would use gold to illustrate what the 4 phases are:
Phase 1 –
It is the beginning of a commodity cycle. Savvy investors start to buy gold when most are still unaware of the change in investment cycle.
Phase 2 –
Slowly, many become more aware of gold and start to buy the metal. This caused gold prices to rise more quickly and become more visible.
Phase 3 –
The bull market has reached the mid-point. Some investors believed that gold has become overvalued and start to cash out. It is a phase of correction or confusion. Many began to believe that the bull market has ended for gold. Savvy investors are on the prowl for bargains in this phase.
Phase 4 –
Once the confusion phase is over, gold prices move upwards at a much faster pace than the increase in Phase 2. It is similar to the dotcom bubble in 1995 – 2000. In fact, that period was Phase 4 of the previous stock cycle. Usually, Phase 4 will end in hysteria. This is the time for savvy investors to exit the market and reap their investment rewards.
Lessons from the Previous Commodity Cycle
Here is the chronology of the 4 Phases of gold’s bull market in the previous commodity cycle.
Phase 1 –
The previous commodity cycle started in 1966. Savvy investors started to accumulate the yellow metal despite no changes in gold prices.
Phase 2 –
In 1971, gold prices started to float freely away from the official price. That marked the starting point of Phase 2. Soon, except for America, the whole world began to accumulate gold and thus, driving gold prices up 471%, up from US$ 35 per ounce to US$ 200 per ounce.
Phase 3 –
Many thought that gold was ridiculously priced. This sent prices down by 50% to US$ 100 per ounce. This period lasted from 1974 to 1977. It was Phase 3 of the bull market. The decline in prices, however, was not backed by real fundamentals. On the demand side, the US government had lifted its ban on gold ownership among its citizens in 1974.
The US market was opened, ignited a boom in gold trading in the 1970s. On the supply side, South Africa, the single largest gold producer in the world, accounted for 50 – 60% of global production, had experienced decline in production.
Phase 4 –
In 1978, Phase 3 was over, making way for Phase 4 of the gold bull market. Inflation had skyrocketed due to an oil crisis. There was a gold mania over the next 2 – 3 years. From US$ 100 per ounce, gold shot up to US$ 850 per ounce. Hence, from the start to the end of the previous commodity cycle, gold had gone up by 24 times.
Looking at the Present Commodity Cycle
We find many similarities between the present commodity cycle with the previous one.
Phase 1 –
From 2000 to 2008, savvy investors started to make an entry into gold when prices were at US$ 300 – US$ 600 per ounce. Most people are not aware of the new bull market of gold.
Phase 2 –
Since 2008, the US subprime crisis served as a wake-up call to the world to start thinking about gold. This includes central bankers. As a result, gold prices went up by 579%, up from US$ 280 per ounce to as high as US$ 1,900 per ounce.
Phase 3 –
Many thought that gold was in a bubble and thus, disposing them. They are mostly traders who did not really own physical gold bullion in the West. Prices have dropped to US$ 1,200 per ounce presently. The price drop was yet again, not backed by fundamentals. The physical gold market has become more vibrant.
Demand rises due to increasing buying activities across China, India and the ASEAN region. Asia now accounts for 60 – 70% of total global demand for gold. Supply is straining because of depletion of existing reserves, aging plants and poor investment returns from gold exploration activities. This phase has started since 2011 and we are now entering the 4th year of the current phase. It is possible that Phase 4 is just around the corner. Some believe Phase 4 will start in 2016.
Phase 4 –
This is the phase that all gold investors are waiting for. The clue to the answer lies in the 3 graph shown below:
This article is contributed by bestselling book author, Ian Tai. Want to learn more about gold and silver investment? Get Ian’s free training at Gold Silver Method.
