Why this gold bear market is different

May 15, 2015 01:38 PM

Earlier this week, I had the pleasure to appear on Jim Puplava’s Financial Sense Newshour radio program and discuss the state of the gold market.

Along with my peers John Doody of the Gold Stock Analyst and Ross Hansen of Northwest Territorial Mint, I shared my thoughts on how we arrived in the current bear market, what factors might help us get out of it and the role real interest rates play in prices.

Below I’ve highlighted a few of my responses to Jim’s questions.

Q: Let’s begin with the bear market that began in 2011. Two questions I’d like you to answer. Number one: What do you believe caused it? Number two: Do you think this is cyclical or a secular bear market?

A: As I often say, two factors drive gold: the Love Trade and the Fear Trade.

In 1997 and 1998, the bottom of the emerging market meltdown took place. Four years later, we saw China and Asia starting to take off and GDP per capita rise.

This is an important factor in this whole run-up that I would characterize as the Love Trade. A strong correlation is rising GDP per capita, and in China, India and the Middle East, they buy gold and many gifts of love.

We saw the Fear Trade starting to take place after 9/11. The biggest factor behind the Fear Trade is negative real interest rates.

So when you had both—negative real interest rates and rising GDP per capita in the emerging countries—you had gold demand going to record numbers.

At the very peak of 2011, the dollar had just been basically downgraded by Moody’s and we had negative interest rates on a 10-year government bond.

It was a record negative real rate of return, like in the ‘70s. You saw this spending from the Fear Trade, but this Love Trade was in negative real interest rates.

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About the Author

Frank Holmes is CEO and chief investment officer of US Global Investors. This first appeared in his Frank Talk blog. For more updates on global investing from Frank and the rest of the U.S. Global Investors team, follow on Twitter at www.twitter.com/USFunds or like on Facebook at www.facebook.com/USFunds.