In today’s Exponential Investor:

  • The battle of the generations – reference the rise of the fin-fluencer
  • Like compound interest, gold is a multi-year commitment
  • Don’t invest because of fear, look for the facts

If you asked me to quantify my age and describe my views, I’d describe myself as a “geriatric millennial”. I have been having a duel with a Gen Xer. The weapon of choice is text.

Our clash of words began innocently enough.

He – an Australian gold industry insider – sent me an article from a fin-fluencer today, a few years younger than me.

The article talked up all the good thing young investors have to look forward too. Opportunity! Access! Information! Time! The article claims there has never been a better time to start investing.

Information is readily available. There are plenty of experienced investors to learn from and markets are far more accessible than they were in our parents’ time.

The Gen Xer argues in our text exchange, that young investors would never invest in gold. That perhaps millennials are too optimistic to embrace a doomy investment like gold.

I disagree. I argue that, thanks to the effort of libertarian leaning baby boomers and Gen Xers, millennials are going to embrace the shiny pet rock.

I myself have personally been investing in physical gold and silver for over 15 years, I tell him.

Sure, the doom and gloom story is alluring. But the more I learnt about the benefits of owning gold over the long term, the less I believe in the fear narrative.

The difference is that the new investors on the block won’t need the fear narrative to buy gold, which the prior two generations did.

Instead, they just need to understand what drives the price of gold…

Gold bull markets have a pattern

Gold bull markets follow a pattern.

Rather than using fear mongering to encourage investment in precious metals, you simply need to look how gold has reacted to past economic conditions to see what causes it to move higher.

As I see it, a gold bull market moves in three distinct stages:

  • Currency devaluation
  • Investor phase, and then…
  • Mania.

Of course, you can never predict the mania phase. However, you do need to be prepared for it.

For a classic example of a currency devaluation, think for a moment about the “Nixon Shock” of 15 August 1971. That was the day when US President Richard Nixon ended the convertibility of gold into US dollars at a fixed rate of $35 per ounce.

In effect, Nixon violated the international agreement that had been made at Bretton Woods in 1944 – which had set the stage for the world’s reserve currency backed by gold.

Nixon said that his move was to “defend the dollar”. It had the opposite effect and the value of the US dollar crashed, while gold’s value soared…

Early gold investors picked up on this sudden devaluation of their local currency and lobbied to have the private laws around gold ownership changed in the United States.

Within the first 12 months of this decoupling, the gold price doubled.

By the end of 1974 gold was some 431% higher from when the gold-dollar link was broken…

What enabled the market to move along further, however, was the creation of a gold futures contract, in 1974. Once Wall Street finds a way to bet on something, it’s usually a sign that investors will flock into the market…

… and they did. This was the investor phase.

As central banks began to raise rates and sell down their gold, the gold price chugged sideways until 1978.

At that point, the price of gold surged upwards as spiralling inflation, stagnant economies, energy supply shocks and inconsistent central bank policies drove investors to the only safe haven they could think of…

… and the mania began.

History doesn’t repeat but it does rhyme

Of course, this was thought to be a once-off situation.

But come the 2000s, a similar pattern began to emerge.

The US government started the new millennium with trillions of dollars in debt. Which of course, wasn’t a problem until market shocks like the bursting of the bubble in technology, media and telecommunications (TMT) stocks and the events of 11 September 2001 caused the Federal Reserve (a.k.a. the Fed – the US central bank) to panic and to cut the federal funds target (i.e. the policy rate) to 1% by the middle of the first decade of the new millennium.

This rocked international faith in the US dollar, and its value began to fall once more.

Meanwhile, Wall Street did it again, and the introduction of gold exchange-traded funds (ETFs) from 2003 meant the average investor could trade gold like shares on the stock exchange.

Accessibility attracted enormous retail investment into precious metals: gold-backed ETFs were very large buyers of physical gold, pushing the price up. The investment phase was underway.

The catalyst to gold’s extraordinary price run however, came along in 2007 with something called the Global Financial Crisis. This caused the yellow metal to nearly triple in price over the next three years…

… as the mania took hold.

It starts with currency weakness

Of course, this is condensed version of the 1970s and 2000s gold bull markets.

To tell the stories properly requires a lot more space than we have here at Exponential Investor..

What matters is the pattern. The bull markets began with currency devaluation

… which was then followed by investor interest

… and finally completed a mania.

You don’t need fear or doom or gloom to encourage you to invest in gold.   

You just need to understand what drives the price of the yellow metal to see its future potential. And we’ll touch on this next week.

Until next time,

Shae Russell
Co-editor, Exponential Investor

PS When I joined Southbank Investment Research a few weeks ago, there was one man in particular I was seriously enthusiastic about learning from. Charlie Morris. I was already such a fan of his work that I may or may not have faked a dodgy internet connection when I found out I was going to be on a panel with him. True story.

Charlie is, frankly, a legend in these parts. And if you want to drastically improve your ability to make money from the markets, learning from Charlie is a must. Handily, until tomorrow, he’s sharing his personal wealth building strategy with anyone who wants to listen. Get the details by clicking here.