What's a bear case for gold: A historical perspective

The second bear run

Gold experienced its second major adjustment in the early 1980s. Following a staggering return of 541% between August 1976 and September 1980, gold plunged 52% between September 1980 and June 1982.²

The fall from US$667/oz to US$318/oz during that period was driven by factors similar to those seen in the first bear run: 

• A rising real rate – the resurgence of inflation prompted the then-Fed Chair, Paul Volcker, to rapidly hike rates – as high as 20% in March 1980 and then again to 20% in May 1981 – significantly outpacing inflation growth and leading to unseen real rate levels
• A stronger dollar driven by rapidly rising real US rates and strong economic growth, before the US entered a recession in late 1981  
• Cooling geopolitical and inflation risks – the second oil crisis eased and the impact of the Soviet invasion of Afghanistan settled, causing geopolitical concerns to cool. And with inflation coming down, investors’ hedging needs also reduced. 

The third bear run

The third gold price bear run came soon after the second. After a brief surge of 57% after June 1982, gold dropped by 42% between January 1983 and February 1985, falling from US$500/oz to US$288/oz. 

The US economy finally shook off the shadow of stagflation after 1982, supported by a number of factors including Reaganomics and lower interest rates, leading to a strong economic recovery. 

At the time, the fear that inflation would reinflate amid the strong economic rebound prompted the US Fed to hike rates. And with inflation remaining in control, real yields climbed quickly and the dollar strengthened notably as a result of higher yields and the stronger economic growth. 
But as inflation stabilised, the economy recovered, and geopolitical risks remained largely stable during the late phase of the Cold War, gold came under pressure from a sharp reduction in safe-haven demand. Higher opportunity costs also weighed on gold heavily at that time.  

The fourth bear run

The fourth bear run was the longest. Between November 1987 and August 1999, gold fell by 48% from US$493/oz to US$255/oz. And this time around the drivers were a little different:

• Sustained central bank selling

The fall of the Berlin Wall in 1990 and the collapse of the Soviet Union in late 1991 marked the end of the Cold War, significantly reducing both geopolitical risks and safe-haven demand for all investors, including central banks. 

At the time, gold had reached a post-Bretton Woods high in global reserves (~80%). As developed nations began demanding higher returns on reserve assets – and some countries used gold to repay debts – central banks started selling gold. 

From 1989 onwards, global central banks sold gold for 21 consecutive years, with 3,554 tonnes dumped between 1989 and 1999 alone. 

• Rising mined gold supply

Our data shows that mined gold production jumped from 1,354t in 1980 to 2,620t in 2000, averaging a 3% annual growth rate, notably higher than 1.7% over the longer run.³ Combined with central bank gold sales, this created a structural oversupply and weighed on gold. 

Other factors also impacted gold during this period:

• US equity bull run: the S&P 500 Index rose by more than four times during the period, improving investor risk appetite significantly
• Booming US Treasuries: the issuance of US Treasuries surged during the 1980s, promoting various derivatives such as Treasury futures. As their popularity increased, so gold’s safe-haven role diminished.

The fifth bear run

The most recent gold price adjustment occurred between August 2011 and December 2015. Gold had experienced its longest bull run since 1971, rallying 612% between August 1999 and August 2011. But it was followed by a 42% fall from US$1,814/oz at the end of August 2011 to US$1,060/oz in December 2015. 

This bear run was driven by a blend of factors: 

• Rising real yields and a strengthening dollar amid the end of the Fed’s quantitative easing program; rate hikes in 2015 and cooling inflation that pushed up the opportunity cost of holding gold
• Rising investor risk appetite as the world shook off the Global Financial Crisis and the European sovereign debt crisis – global equities rose and safe-haven demand fell. 

In addition, with investors’ risk appetite rising and opportunity cost increasing, global investors liquidated a significant amount of their gold ETFs – in particular, global gold ETFs lost 1,215t between 2013 and 2015 – further adding to the price pressure via weakening momentum. Meanwhile, the average growth of above 4% in mine production, well above the sector’s long-term average, may have also contributed to the gold price weakness.