by
Co-Head of Real Asset Strategy

Analysis and outlook for the real assets market

  • We believe gold remains stuck in a commodity bear super-cycle, where it will probably remain for the next five years or so.

What it may mean for investors

  • We do not feel gold is an attractive buy today. Our target range for 2017 is $1150 - $1250 per ounce. We suspect gold miners will struggle to hold rallies throughout 2017.
  • Over the remainder of the bear super-cycle, we expect gold prices to fluctuate between $1050 and $1400 an ounce. This may offer good trading opportunities – potentially buying as gold approaches $1050 an ounce; selling near $1400. The fortunes of gold miners will likely be tied to gold, as it swings within its wide price range.

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Gold and Gold Miners in 2017

We hope that this week's series has helped investors gain perspectives on gold. Gold has a history like no other investment. Today is our final installment—what we expect in 2017. Chart 1 shows the price of gold. Shaded in light blue is the range in which we suspect gold will float throughout 2017, which is $1150-$1250 per ounce.

Said simply, we are lukewarm on gold for 2017. (For you Millennials out there, "lukewarm" translates best into the word "meh".)  That said, we will probably remain lukewarm on gold for the next five years or so. The reason is that pesky commodity bear super-cycle1, which began in 2011. As we learned in Wednesday's gold installment, How Gold Behaves, gold typically moves with the commodity family2, and the family remains stuck inside a multi-year bear market. Commodity bear super-cycles last 20 years on average, based on data back to the year 1800.

Now, before gold bulls get too depressed, we do have some good news: #1) historically most of the price damage was typically done within the first five years of commodity bear cycles. This year, 2017, is the sixth year in the current bear market, which suggests that gold (along with most other commodities) has likely seen its low or close to it. We expect the remainder of the bear market to be marked by lots of low, range-bound price action. Our best guess is that gold will trade in a wide range between roughly $1050 and $1400 per ounce over at least the next five years. We say this is "good news" because such a wide price range can offer good trading opportunities— potentially buying close to $1050 and selling as $1400 is approached. #2) We aren't expecting this commodity bear cycle to last for 20 years. We're thinking that this cycle will last fewer than 15 years because commodity super-cycles (both bulls and bears) have been shortening in length since 1913. And #3), on the "good news" front, should the world's central banks overprint paper currencies, gold could be the first of the commodity family to re-enter a new bull market. (However, we don't anticipate this happening for at least another five years).

Chart 1. Gold Price & 2017 Target Range


Graph of gold price performance (in US dollars per ounce) during the period of February 2014 - present. Contact your Relationship Manager for more information.

Source: Bloomberg, Wells Fargo Investment Institute, 2/17/17. Daily Data: 2/1/2014 - 2/15/2017. Gray area represents anticipated 2017 trading range. Dates selected to show recent price moves and current 2017 year end target. Past performance is not a guarantee of future results. There are no guarantees target prices will be met.

Good Gold News #1 – Most Commodity Price Damage has Typically been Done in the Bear's Early Years

If you've been reading this week's gold series, Chart 2 will look familiar. It shows the price of gold (blue line) versus the commodity family (red line). Gold in this snapshot is a combination of gold and silver prices. The price of gold did not float freely prior to 1968, so silver is used as a proxy prior to 1968. Our research shows that gold could have largely tracked the price of silver, had it been able to float freely prior to 1968. Notice that the gold price line tracks quite closely with the commodity family over time.

The good news for gold can be seen in the shaded areas of Chart 2. These shaded areas represent the commodity bear super-cycles since 1900. Notice that most of the price damage was typically done early in the bear markets. After the first five years or so, most commodities found their bottoms, and the remainder of the bear was marked by low, range-bound price action as excess supply was worked-off. Because 2017 is the sixth year of this commodity bear super-cycle, we believe gold has likely reached or neared its low for this cycle.

Chart 2. Commodity Super-Cycles and Gold


Graph of gold price performance (in US dollars per ounce) compared to Commodity Composite Index from 1900 - present. Contact your Relationship Manager for more information.

Sources: Bloomberg, Kitco, Prices by G.F. Warren and F.A. Pearson. Monthly Data: 1/31/1900 -1/31/2017. Data shown in log scale. Silver price moves used as proxy for gold prices from 1900 – 1968 (please see addendum  on page 9). Gold prices used 1968 - today. Dates selected to show majority of modern history of gold and commodities. Past performance is not a guarantee of future results.

Good Gold News #2 – We're Not Expecting a 20-Year Bear Market

At the core of our strategic gold advice is an understanding of how commodity super-cycles have operated in the past. Chart 3 shows commodity prices since the year 1800. Notice the long waves in commodity prices; swinging from bull to bear over multi-year periods. The grey shaded areas represent the bear markets; the white areas show the bull markets. Below Chart 3 are performance statistics comparing bull and bear markets. There are four points to highlight:

  • Commodity bear markets on average have lasted longer than bull markets. Since 1800, the average bear market has lasted nearly 20 years, while the average bull market has lasted only 16 years.
  • Historically, bull markets have always ended with a parabolic move higher, followed by a thundering crash. We just witnessed the thundering crash from 2011-2016.
  • Now in 2017, the worst appears to be over for this cycle. The market declined by 49% at its low, and the price damage from this cycle has surpassed those of the 1980 and 1951 bear markets.
  • Most importantly, the super-cycles have been shortening in length. The advent of the Federal Reserve (Fed) in 1913, with its ability to create liquidity, changed the structure of commodity super-cycles. Notice the higher highs and the higher lows in the cycles after 1913—this can be viewed as Fed-manufactured inflation. The Fed's influence on the length of super-cycles can be best seen by looking at the shaded areas. Notice how much longer the shaded areas are in the 1800s versus the 1900s.

To be fair, the 1980-1999 commodity bear super-cycle did last the average 20 years. We doubt this cycle lasts as long, however. We say this because the 1980-1999 bear was "competitively unique." By that we mean that stocks and bonds, the major competition for commodities investments, were both super cheap at the start of the 1980s. Bond yields at times topped 20%, while the S&P 500 Index's price-to-earnings (P/E) ratio routinely sat in the single digits. Today's commodity bear super-cycle, in contrast, is not starting from nearly the same competitive disadvantage. The 10-year U.S. Treasury sits at an historically paltry 2.4% as of February 2017, while the P/E ratio on the S&P 500 Index is 21. Our best guess is that the current commodity bear super-cycle lasts 15 years—or possibly even fewer.

Chart 3. Commodity Bear Market Super-Cycle


Graph of Commodity Composite Index performance during bear market cycles from 1800 - present. Contact your Relationship Manager for more information.

Source: Bloomberg, Ned Davis Research Group, Prices by G.F. Warren and F.A. Pearson, Bureau of Labor Statistics (BLS), Bureau of Economic Research (NBER), Wells Fargo Investment Institute, 2/17/17. Monthly Data: 1/31/1800 - 1/31/2017. Dates selected to show all available data on commodity bear markets. Past performance is not a guarantee of future results.

Tables of commodity bull market and bear market gold super-cycles by percentage change and length in years. Contact your Relationship Manager for more information.

Source: Bloomberg, Ned Davis Research Group, Wells Fargo Investment Institute, 2/17/17.

Even though we doubt that today's bear super-cycle lasts as long as the 1980s/1990s bear, we do expect the trend in gold's price to look similar. This can be seen in Chart 4. The blue line tracks the performance of gold from its January 1980 peak to its 1999 low. The green line tracks the performance of gold from its August 2011 peak to today. The overall pattern of low, range-bound prices is something that we do expect to see in the coming years, even if today's bear super-cycle does not last as long as the 1980s/1990s cycle.

Chart 4. Gold Bullion Cycles


Graph of peak gold bullion cycles from 1980 - 1999 and from August 2011 - present. Contact your Relationship Manager for more information.

Source: Bloomberg, London Bullion Market Association, Wells Fargo Investment Institute, 2/17/17. Data Sample; Daily 1/21/1980-12/30/1999, 8/17/2011-2/15/2017. Gold Bullion Prices are indexed to 100 at 1/21/1980 and 8/17/2011. Dates selected to show how current gold bear market compares to 1980's bear market. Past performance is not a guarantee of future results.

Good Gold News #3 – Central Banks Continue to Print Lots of Paper Money

We made this point in this week's first gold piece, Gold's Uniqueness, but it bears repeating—the global money printing machines have slowed, but they have not stopped. Should the paper money printing machines pick-up their pace once again, we believe gold could very well kick-off the next commodity bull market, potentially ending the bear super-cycle much sooner than the average 20 years.

Paper currencies not backed by gold are the prime medium of money exchange today. However, some investors believe that today's central banks have gone too far—printing too much paper money not backed by anything other than the full faith and credit of a country or a region (such as the Eurozone). They are arguing for a return to gold-backed paper currencies, fearing that excessive paper money printing eventually leads to hyperinflation and the collapse of the currency. Chart 5 emphasizes that global money supplies sit near record highs. Notice the dramatic expansion in money supply since the 2007-2008 Financial Crisis.

Chart 5. Global Money Supply


Graph of global M2 money supply (in billions US dollar) from 1986 to present. Contact your Relationship Manager for more information.

Source: World Bank, Federal Reserve Economic Data (FRED), Bloomberg, Wells Fargo Investment Institute, 2/17/17. Monthly Data: 1/31/1986 - 12/31/2016. Dates selected to show modern increase in money supply across major economies.

Chart 6 is one way to track whether excessive money supply growth could lead to higher gold prices. The dark blue line is the price of gold. The light blue line is global money supply divided by global above-ground gold supply. A rising light blue line means that paper money supplies are growing faster than gold supplies, which is one way of saying that central banks may be overprinting. In recent years, the light blue line has stopped moving higher, which fits well with gold prices sinking (less fear of overprinting paper currencies). To be clear, we're not anticipating collapsing currencies. However, as Chart 6 indicates, if the growth in paper money printing again outpaces gold supply growth, then gold prices could begin a new bull super-cycle.

Chart 6. Global Money Supply / Global Gold Supply


Graph comparison between global money supply and global gold supply by gold prices (in US dollars per ounce). Contact your Relationship Manager for more information.

Source: Bloomberg, U.S. Geological Survey (USGS), World Bank, Federal Reserve Economic Data (FRED), Wells Fargo Investment Institute, 2/17/17. *Global Money Supply estimated by combining M2 Measures for the U.S., UK, China, Japan, Canada, and the Eurozone. Ratio is the global money supply divided by the global gold supply. Monthly Data: 1/31/1987 - 12/31/2015. Dates selected to show how the modern increase in money supply and gold have moved in relation to each other. Past performance is not a guarantee of future results.

Gold Miners in 2017 and Beyond

Flat gold prices for the next few years will likely mean flat gold-mining stocks as well. This could be the case even if stock markets rise in general. Chart 7 helps explain what we're expecting. It shows us what happened with gold and gold miners during the 1980s and 1990s. The price of gold is shown in the first panel; the S&P 500 Index is the second panel; gold miners are in the third panel; and the fourth panel highlights gold mining stocks relative to the S&P 500 Index. As we've discussed, commodities entered a fresh bear market in 1980, while stocks entered a new bull market in 1982. These turning points in the 1980s are marked in Chart 7 with vertical black dashed lines.

The main message: when gold (first panel) was in its last bear market, gold miners (third panel) struggled mightily, especially compared to other stocks (fourth panel). And importantly, gold miners struggled even though stocks generally were in a bull market from 1982 to 2000 (second panel).

By comparing the 1980s to today, we are not saying that cycles repeat exactly. But cycles do often rhyme, which is why we think it's a comparison worth making. Gold miners did perform well in 2016, but we pin that performance on gold's relief rally after five straight down years. Now that gold's relief rally appears to have lost its bullish mojo from the first half of 2016, we'd be careful with gold miners. Should gold move sideways for the next few years, as we suspect it will, gold miners are likely to move sideways too.

Chart 7. Gold, S&P 500, and Gold Miner Stocks During Last Commodity Bear Super-Cycle


Graphs comparing price of gold (US dollars per ounce), S&P 500, and Gold Miner Index/Stocks during last commodity bear super-cycle. Contact your Relationship Manager for more information.

Sources: Bloomberg, Dartmouth (Professor Kenneth French), Center for Research in Security Prices (CRSP), Wells Fargo Investment Institute, 2/17/17. Monthly Data: 1/31/1980 - 12/31/2002. Gold Miners index is a composite index that combines a value weighted index composed of gold stocks that traded on the NYSE, AMEX, and NASDAQ and the Philadelphia Stock Exchange Gold and Silver Index (XAU Index). The gold value weighted index was constructed by Professor Kenneth French using CRSP data. The XAU Index is a cap-weighted index which includes the leading companies involved in the mining of gold and silver. Gold Miners index connects the aforementioned components at the following years: French's Value Weighted Gold Index 1963 - 1983, XAU 1983 - Current. Ratio is the Gold Miners index divided by the S&P 500. Past performance is not a guarantee of future results.

Addendum: Using Silver as a Gold Proxy Prior to 1968


Tracking the price of gold historically is no easy task. The reason is that it was used as money for centuries, which means that governments routinely fixed its price. Or said another way, the price of gold was not allowed to float freely. This changed in the United States in 1971 when President Nixon closed the gold window. Closing the gold window meant that the U.S. Treasury would no longer sell an ounce of gold for the fixed price of $35 per ounce to foreign governments. In anticipation of the gold window being closed in 1971, gold prices did begin to slowly float freely, starting around 1968.

We believe that using silver as a proxy for gold prior to 1968 makes sense, but we want to be clear that no proxy is perfect, and if gold had traded freely, obviously the price of gold could have been dramatically different than what is illustrated. Gold and silver do have a kindred connection of sorts, though. Both have routinely been used as money throughout history. Chart A shows the rolling three-year correlation between gold and silver, since 1968.

Through much of golds' history of being official money in the U.S., silver has been too. From America's earliest years in the 1700s, official money was counted as a fixed combination of gold and silver. By the 1870s, however, with the signing of the Coinage Act of 1873, silver slowly began to lose its official status as fixed money. This allowed the price of silver to float more freely, which can be seen in the chart below. Silver may have lost its official money status in the U.S. in 1873, but many individuals still believed in silver as money and bought it as such for decades after. 

Chart A. Silver and Gold Correlation


Graphs comparing the price of gold to the price of silver (in U.S. dollars per ounce), and the three-year rolling correlation from 1968 to the present. Contact your Relationship Manager for more information.

Sources: Bloomberg, Wells Fargo Investment Institute. Monthly Data: 1/31/1968 - 1/31/2017. Dates selected to show all available data once gold began to float freely. Past performance is no guarantee of future results.

Chart B. Gold and Silver versus Commodities (1914 – present)


Graph comparing the gold, silver, and Commodity Composite Indexes from 1914 to the present. Contact your Relationship Manager for more information.

Source: Bloomberg, Prices by G.F. Warren and F.A. Pearson, Bureau of Labor Statistics (BLS), Bureau of Economic Research (NBER), Kitco, Wells Fargo Investment Institute. Data Sample; Monthly where available, yearly otherwise. 1/31/1914 - 12/31/2016. Values shown in log scale. Indexed to 100 as of 1/31/1914. Past performance is no guarantee of future results.


1 Commodity prices over the very long term (hundreds of years) tend to move in overall bull and bear cycles, some lasting decades. These are super-cycles.

2 Commodity family includes the major commodities commonly represented by commodity indexes such as the Thompson Reuters Continuous Commodity Index (CCI Index). See definition.

image of gold bars

First in the "Focus on Gold" series:

Gold's Uniqueness