Is gold headed for bear capitulation?

Credit Suisse argues today that gold is confronting a capitulation phase in its bear market:

What is striking about a longer term chart of the gold price is just how consistent the 2002-2012 bull market was in terms of the rate of increase, the metal posting an almost 17% CAGR between 2002 and the turn in the market. The trend line on the chart in Exhibit 6 showing the US$ gold price on a logarithmic scale is an extraordinarily good fit – an Rsquared value of 0.98.

We have no doubt that gold is in a bear market now and the metal appears to be in an equally well-defined down trend. The slope of the downward trend-line plotted on the chart in Exhibit 6 naturally changes depending on which start point one uses but taking September 2012 as the beginning of the bear market results in another very good fit.


The pace of the decline to-date may appear steep to some (a CAGR of -28%) but is not excessive relative to historical precedents – the end of the late 1970s/1980s bubble in gold saw the metal lose value at a CAGR of -33% between January 1980 and July 1982.

…Consequently we think that it is worth considering what could happen if the price were to continue to fall back at a consistent pace. Of course there were substantial fluctuations around the trend on the way up and will undoubtedly be similar fluctuations on the way down but if gold were to continue to retreat along its current trajectory the metal would be trading close to $900 / oz by the end of 2014.

In fact in real terms the fall in price so far has not been excessive relative to the 1980s experience – see Exhibit 7.


And a comparison of the pattern of decline from the early 1980 peak with the pattern of decline from the August 2011 peak shows some strong similarities. At a comparable point in the unwinding of the 1980s bubble gold staged a 15% bounce off an interim low (nominal price, indexed to the capitulation point) before falling back to the starting point and subsequently losing another 30%. Fast-forward to this year and gold staged a 12% bounce off what we believe will prove be an interim low and has since given most of that back. If the parallels were to continue and gold lost a further 30% that would take the metal down to just under $900/oz.

History is, of course, not necessarily a guide to the future. But we think ignoring the parallels with the deflating of the 1980s bubble risks making the mistake of believing “this time is different”. To be clear, we are not at this point changing our Q4 2014 forecast for gold of $1,150/oz but we think the risks to that number are building to the downside.

This argument makes sense to me in a cyclical sense. But given I see the cycle not as a process of normalisation in US and monetary and fiscal policy but as a re-inflating bubble, I do not see gold entering the kind of bear market that followed the seventies spike. Rather, any capitulation phase will be a chance to load up as the great US dollar crisis probably lies ahead.

Houses and Holes
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  1. Forget Bear capitulation what JPM has been trying is Bull decapitation — anyone see those minutes from Henry Kissinger?

    “Mr. Enders: It’s against our interest to have gold in the system because for it to remain there it would result in it being evaluated periodically. Although we have still some substantial gold holdings—about 11 billion—a larger part of the official gold in the world is concentrated in Western Europe. This gives them the dominant position in world reserves and the dominant means of creating reserves. We’ve been trying to get away from that into a system in which we can control”

  2. The $US crisis does lie ahead, most certainly, maybe not next year, but soon. Now is not the time to load up. We need mayhem in the markets before its time,, then pin your ears back and go for it.WW

  3. The longer I watch the AUD/USD pair bounce around to the vague musings of central bankers, the more I want to buy physical gold.

  4. Ah, I see! Bear with a lower case b; the verb, not the noun…the nouns are looking for it to go lower.

  5. Hmmm…

    Can’t say i’m too impressed with this analysis – it’s interesting, but very superficial.

    One thing, among others, that they have not assessed is the effect of such prolonged low prices on gold supply – ie. we are at cash cost for many mines now, and they will shut if this keeps up much longer – thus reducing supply, and providing some upwards pressure on prices.

    Additionally, dips have been getting bought well by investors and non-Western central banks, so I cant see why this wouldn’t keep happening (it is virtually mandate for some of them).

    Could it touch $900? Yeah, maybe, but I would ager it would have to be another takedown – the floor seems to not be too far away…

    But we’ll see, I guess.