Gold – Five reasons the bull market isn’t over

Written by Jordan Eliseo, Chief Economist, ABC Bullion

With gold prices correcting by over 20% in 2013, many analysts have been quick to call the end of the bull market that began at the turn of the century. The focus on the US Federal Reserve, and the potential for them to ‘taper’ their money printing scheme, has been one of the key arguments these analysts have given as to why the gold bull market is dead.

We believe this analysis is flawed, and that investors who ignore gold are taking an extraordinary level of risk in their portfolios. Not only that, but by ignoring gold, they’re likely to miss out on what will continue to be a very profitable asset class through the middle to latter half of this decade.

There are several factors supporting this conclusion, including;

  • Persistent low to negative real interest rates globally

Low, or even negative real (after inflation) interest rates are the key driver of the gold price. This is natural, as gold is a non-yielding asset, therefore the higher the rate of return you can get in a term deposit, the higher the opportunity cost of holding gold.

In environments where real interest rates are 3% or higher, gold prices can struggle, but when they are lower than 3% (which they are all around the world today), then gold and silver prices tend to appreciate by more than 10% annually, as they have the past decade.

Due to the unprecedented levels of debt in society today (not just government but private sector debt too), we can’t afford higher interest rates, or our economy will grind to a halt and there’ll be a raft of individual, corporate and potentially sovereign defaults.

As this article goes to press, we notice that the Fed is now talking about maintaining a zero interest rate policy out to the end of 2016, that the Europeans are discussing negative interest rates, and even in Australia, the RBA is committed to loose monetary policy.

Low rates are here to stay, meaning it will be impossible to effectively save and preserve wealth in a normal bank account for the foreseeable future.

Cash in a bank is now just a put option on the market, with a premium that will go up alongside inflation.

For real savings, precious metals are the only answer, and this will boost their appeal.

  • Rising Government Debts

Ultimately, a rising gold price is a hedge against unsustainable debt in general, specifically unsustainable government debt. Since the GFC hit several years ago, government debts around the world have exploded. In Europe, despite the talk of austerity, every country there is running a budget deficit and debt to GDP ratios worsen.

In Japan, they literally need to print money to pays their bills with a government debt over 200% of GDP.

Even in America, in the 12 months to September, the US government went a staggering $680 billion further into debt, and this is set to blow out again toward $1 Trillion a year by the end of the decade, as spending on Medicare and Social Security etc. are set to grow at 2-3 times the rate of the overall economy.

All round the world, government debt levels continue to rise in an uncontrollable fashion, and balance sheets continue to deteriorate.

Too much debt caused the GFC. More debt won’t solve it.

  • Ongoing Quantitative Easing (QE)

First, it must be stressed that the central banks of the world don’t need to be printing trillions of dollars through QE in order for gold to rise. In the 1970’s, gold went up 25 times in value, and even between 2000 and 2008, long before QE became a daily feature of Western economies, gold prices went from USD $250 to USD $1000

QE is merely the cream on the cake so to speak in terms of supporting higher gold prices. And like rising government debts and low interest rates, QE is not going away anytime soon, for despite the fact that 2013 was supposed to be the year the Federal Reserve ended their QE program, as it stands, they haven’t even begun winding it back.

It’s not just the US either, but the Japanese, the Europeans, the British, and the Swiss. The entire developed world is in a race to debase their currencies, as financial markets and the global economy remain on life support, requiring constant doses of printed money to function.

This money is needed to finance government spending and to keep interest rates low. Without it, we’d likely see not only a recession and rising unemployment, but a share market and potentially property market crash, something no politician or central banker wants to see on their watch.

As more investors realize the QE process will continue indefinitely, they will be drawn to gold.

  • Institutional portfolio allocations in the developed world

At present, most western asset managers have little to no allocation to precious metals in their portfolios, a situation that has not changed despite the +500% return we’ve seen in gold since 2000.

Globally, it is estimated that a maximum of 1% of investable capital is sitting in gold currently, well below where this number has been historically.

As investors grow more wary of the risks in the stock and bond markets, where prices are near all time highs, and of saving in a bank account, which will suffer higher inflation risk in the future, more capital will rotate toward precious metals, causing prices to rise.

  • Emerging Market buyers – both individuals and their central banks

The table below is an important one to understand when assessing the outlook for gold. As you can see, traditionally wealthy nations have held 60-70% of their foreign exchange reserves in physical gold.

The developing world on the other hand currently owns very little physical gold, at least as a percentage of their foreign exchange reserves.



Of Gold

% of Forex Reserves


Tonnes of Gold

% of Forex Reserves

























Source: World Gold Council

This is a situation emerging market nations are trying to rectify, with central banks purchasing bullion at the fastest pace in decades, a huge switch from the mid 80’s-mid 2000’s when they were net sellers.

Indeed in China, where we are also seeing unprecedented retail demand for physical gold, they are now regularly importing well over 100 tonnes a month, encouraged by their government who are actively promoting the merits of gold ownership to their citizens.

Emerging market gold demand is not only extremely robust, but it’s likely to strengthen in the years ahead.


Despite the understandable uncertainty the current correction in precious metal prices is causing to investors, all of the fundamentals underpinning rising bullion prices remain in place.

And whilst those reasons might appear pessimistic in terms of one’s outlook on the global economy, it’s important to remember that the reason to own bullion is for portfolio insurance.

No one insures their house and hopes it burns down. Investors should look at their portfolios in the same way.

Should they do so, they will likely come to conclusion that despite the daily volatility in precious metal prices, in today’s economic environment, investing in physical gold and silver remains the simplest and most liquid way to protect their wealth through the difficult years ahead.

Tips for buying physical bullion

When looking for a physical bullion supplier, there are a handful of key points one should consider. First is the time your potential supplier has been in business. Dealing with a business that has been in operation for decades gives investors comfort that they’re dealing with a trusted, reliable institution.

The second point to look for is the brand of gold you’re able to purchase. Make sure you’re buying a recognized brand of bullion, which is easily tradable and acceptable.

Third is the premium, or what you’ll pay over the spot price to buy physical precious metals. There are some operators who charge enormous premiums, when in fact investment grade bullion can be bought for very reasonable spreads.

Finally, ensure the business you’re dealing with has a ‘buy-back’ guarantee, so you know you have the capacity to sell your bullion when and if the need arises.

At ABC Bullion, we’ve been in business for over 40 years, charge some of the lowest premiums in the business, and have been producing our own investment grade bullion for decades. We’re also Australia’s leading precious metal educators, meaning not only can you get top quality bullion at great prices from us, but we’re the perfect place to stay informed on what’s driving bullion prices, and the global economy.

Jordan Eliseo ABC Bullion Chief Economist
Jordan Eliseo

Chief Economist

ABC Bullion


ABC Bullion Logo Enlarged

ABC Bullion is Australia’s oldest and largest private bullion dealer, and leading precious metals educator, helping investors protect their wealth through physical bullion for over 40 years.

With the lowest premiums in the market, and a full range of storage solutions for our clients, including private vaulting through our sister company Custodian Vaults, ABC Bullion is the perfect choice for investors (including SMSF Trustees) looking to invest in physical bullion.

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Precious Metals Investment Symposium