PART II

The Golden Bulls

1979 and 2006

ESCALATING CRUDE OIL PRICES

1979

THE SECOND YEAR OF THE CARTER ADMINISTRATION(1978) was brewing with trouble, most of it beyond their control.  In early 1978, Iranian students staged mass protests against the Shah of Iran and his government.  A year later, in January 1979, the Shah was forced to leave the country, "on vacation".  Oil production in Iran had been dropping significantly since December the year before.  OPEC, led by the Saudis, seized the opportunity to increase crude oil prices in April, and again in July, 1979.

The other shoe dropped in November 1979.  The Carter Administration allowed the ailing Shah to visit the US in order to receive medical attention.  Unfortunately, the now radicalized Iranian student leaders were not feeling so generous.  Students seized the US embassy, and took over 50 American hostages.  In retaliation, Carter ordered cessation of Iranian oil imports to the US.  Not to be outdone, the Iranian Shia government cancelled all contracts with US oil companies.

Through it all, crude oil prices increased 83% between 1978 and 1979,  the result of lower production, a waive of OPEC price increases and now political turmoil in the Mid-East.  Adding more fuel, the US Consumer Price Index experienced its highest year to year increase since 1947, 11.3% over 1978 levels.

What was happening in the untested Gold Markets?  Gold no longer backed the dollar.  Remember, it was six years earlier (1973) the US dollar was taken off the gold standard.  It had been only four years since the US public was allowed to trade in gold bullion for the first time in forty-three years.  Like crude oil in 1979, gold in 1979 was experiencing only its second big jump in an immature but free market.  To many, gold was still thought to be a hedge against all the unknowns of the day.

So it seemed reasonable, with crude oil prices out of control and the US dollar quickly morphing into confetti,  Gold could once again protect liquid assets against all that depreciating paper.  That's what the "smart money" thought, and they bought gold with a vengeance, driving up prices 116.5% between 1978 and 1979.  Bullion was now 29% and 80% above their projected norms, 1978 and 1979 respectively.  It took another year before the US public got into full swing, but that's a story for Part III.

2006

As history has a tendency to repeat itself, in 2003 we were embroiled in another Mid-East conflict. This time, it was an effort to pre-empt events and results similar to those experienced  beginning in 1978-1979.  By 2006, the pre-emption was a total failure, resulting in lower oil production and escalating crude oil prices beginning in 2004.  Prices increased 44.7%, 28.0% and 4.3%, 2004, 2005 and 2006 respectively. 

The gold hedgers, in the doldrums since late 1980, were finally reinvigorated as crude oil prices broke new ground since 1984.  Gold prices, significantly below projected norms for almost ten years, steadily increased beginning in 2002.  During the 2004, 2005 and 2006 years, gold increased 9.6%, 12.5% and 27.2% respectively.

The Golden Bulls

The First Golden Bull, 1978-1980, was short-lived. 

Crude oil prices peaked in 1981, went down gradually over the next four years, and plummeted in 1986.  Crude oil traded in a very narrow range for the next fifteen years.  Gold also flattened during the same period, but not quite as much.  After all, the Consumer Price Index (CPI) continues to tick up every year.  The gold hedgers continue to believe gold prices are buoyed by these increases, resulting in the slow but steady depreciation of the US dollar.

The Second Golden Bull, 2005-2007, and beyond?

As long as the Mid-East remains in turmoil, and crude oil prices are not impacted by alternative energy sources, our short history lesson tells us gold prices should continue to advance.  Offsetting the potential advances, gold prices at the end of 2006 were almost 12% above their projected norms.  Remember what happened in the First Bull.  1979 prices were 80% above projected norms, and 29% the year before. 

Has the market already over-compensated? 

PART III will tell us more.  We will compare 1980 with 2007, and perhaps we will be able to see into the future.  Look for PART III in early January, 2008.        thmxs09/03/2007          

The Floating Bar Chart

2006 (Black Bars) Compared To 1979 (White Bars)  

copyright2007thmxs

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