Is Gold Following Its 2007-2008 Bullish Trajectory?
The current period shares several similarities with late 2007, which could signal a highly bullish outlook for gold.
Students of financial markets often focus on historical patterns, analogs, and scenarios that mirror past events. These parallels can serve as valuable models for anticipating how current trends might unfold. As the saying goes, history doesn’t repeat itself, but it often rhymes. Edwin LeFèvre captured this idea perfectly in his classic novel, Reminiscences of a Stock Operator: “Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street.” In this report, I will delve into the theory that gold may be tracing a path similar to its bullish trajectory from 2007 to 2008. Inspired by insights from gold investor and commentator Eric Yeung, I will expand significantly on this idea to provide a deeper analysis.
Let’s examine the gold chart from late 2007 through early 2008. During the summer of 2007, gold was consolidating within a trading range before breaking out and embarking on a strong rally. The catalyst for this breakout was the growing unease surrounding the emerging subprime mortgage crisis, highlighted by the collapse of two subprime-focused Bear Stearns hedge funds in July 2007. This turmoil prompted the Federal Reserve to cut the fed funds rate by 50 basis points (0.5%) on September 18th, marking the beginning of a rate-cutting cycle.
Interest rate cuts are generally bullish for precious metals, particularly when they are aggressive. A 50-basis-point cut, especially at the onset of a rate-cutting cycle, is a bold move by the Federal Reserve, typically signaling heightened risks of a financial crisis or recession—just as it did in late 2007. Following the initial rate cut, gold rallied before pausing to consolidate, forming a triangle pattern—a common continuation pattern. In late December, gold broke out of this pattern, resuming its strong rally through March.
Fast-forward to 2024, and we see striking similarities to the summer of 2007. Like then, gold consolidated within a summer trading range before breaking out strongly in September. This breakout preceded an aggressive 50-basis-point rate cut on September 18th, marking the start of a new rate-cutting cycle—exactly 17 years to the day after the 2007 rate cut of the same magnitude.
Following its 2007 trajectory, gold continued to rally after the rate cut, and is now consolidating within a triangle pattern. To fully confirm that we are indeed following the 2007 playbook, I’m looking for breakout from the triangle pattern as well as a decisive close above the $2,800 resistance—the October 30th high—accompanied by strong trading volume. If gold successfully breaks out, it will also need to remain above $2,800 for the tactical/timing portion of this thesis to remain valid.
Despite gold already gaining approximately 31% this year, history shows that there is a strong tendency for gold to continue to rise strongly after the first fed funds rate cut in a rate-cutting cycle. As the In Gold We Trust report aptly stated, "rate cuts are like rocket fuel for gold." The report showed that over the past three rate-cutting cycles, gold has risen an average of 32% within two years of the initial rate cut. If gold follows a similar trajectory this time, it could climb to $3,380—a 26% increase from its current price of $2,680.
In 2007, few realized that the U.S. economy was hurtling toward a severe recession and financial crisis. It was only later confirmed that the recession officially began in December 2007. While the official start of recessions is only confirmed in hindsight, predicting an upcoming recession is relatively straightforward for several reasons—the most significant being their consistent occurrence after rate-hiking cycles, as illustrated in the chart below. In general, the Federal Reserve continues to hike rates “until something breaks”—and it’s usually industries or speculative booms that thrived under the previous environment of low interest rates.
Over the past few years, the Federal Reserve has undertaken an aggressive rate-hiking cycle, raising the fed funds rate from near zero to its current 4.75%—the most rapid increase since the early 1980s. This cycle has been even more aggressive than the mid-2000s rate hikes that precipitated the housing bubble collapse and the ensuing Great Recession. While many economists and investors remain hopeful for a soft landing this time, such outcomes are quite rare—especially following a rate-hiking cycle of this magnitude.
What will break this time? My theory points to the potential collapse of the "Everything Bubble"—a term I coined in 2014 to describe the numerous asset bubbles that emerged during the era of unprecedented quantitative easing (QE) and zero interest rate policy (ZIRP) following 2008. In the U.S., this includes bubbles in housing, equities, tech startups, the AI arena, much of the cryptocurrency space, healthcare, higher education, and auto loans. Outside the U.S., similarly precarious housing bubbles exist in Australia, Canada, and Western Europe, further amplifying the global risks.
Other vulnerabilities are likely lurking beneath the surface, waiting to be exposed. As the billionaire investor Warren Buffett famously remarked, "Only when the tide goes out do you discover who's been swimming naked." The bursting of a massive global bubble and the resulting severe recession should be highly bullish for gold. Such an event would spark tremendous fear, driving demand for safe-haven assets like gold, while also prompting large federal budget deficits, interest rate cuts, and a return to quantitative easing—essentially digital money printing—all of which boost gold’s appeal and value.
Several indicators are flashing warnings of an imminent recession—or even suggesting we may already be in one. Among the most reliable is the 10-year/2-year yield spread, calculated by subtracting the 2-year Treasury note yield from the 10-year Treasury note yield. This measure has accurately predicted the last six recessions. When the spread drops below 0%, it signals an inverted yield curve—a strong indicator that a recession is likely on the horizon. The shaded gray areas on the chart below highlight past recessions, illustrating the correlation between yield curve inversions and economic downturns.
The yield curve has been inverted since July 2022—a prolonged period—but that doesn’t diminish the validity of the signal. In fact, when the yield curve starts to uninvert, as it did in August this year, it often serves as a clear indicator that the economy is already in a recession. This likely explains why the Federal Reserve acted decisively with a 50-basis-point rate cut in September.
Another yield curve-based recession indicator is the New York Fed Recession Probability Model, which estimates the likelihood of a recession within the next 12 months. As this indicator rises, so does the probability of a recession. However, when it starts to decline, it coincides with the yield curve's uninversion—a signal that the economy is likely already in a recession. Over the past year, this indicator has turned downward, suggesting that the U.S. economy is, unfortunately, already in a recession.
Another category of recession indicators focuses on employment data. One example is the year-over-year percentage change in the U.S. civilian employment level. When this metric turns negative, it has historically been a near-certain precursor to a recession. In August, this indicator dipped into negative territory, signaling that a recession is likely imminent. The Federal Reserve took this into consideration when it cut rates in September, noting that “since earlier in the year, labor market conditions have generally eased.”
Another employment-based recession indicator is the Sahm Rule, named after former Federal Reserve economist Claudia Sahm. This rule warns of a recession when the three-month moving average of the national unemployment rate increases by at least 0.50 percentage points relative to the previous 12 months. The Sahm Rule has accurately predicted every recession since the 1970s, with only two false positives since 1959. In July, the indicator triggered a recession warning but has since fallen slightly back below the 0.50-point threshold. It remains an important metric to monitor, as a renewed rise above this level would signal that the economy is heading deeper into the recessionary danger zone.
Another key metric to watch is the total assets held in money market funds, which tend to rise significantly in the lead-up to a recession. Over the past three years, these assets have surged from $5 trillion to $6.55 trillion—a concerning 31% increase.
As the economy slows and moves toward a recession, consumer loans in serious delinquency (90+ days overdue) typically increase. True to form, there has been a notable rise in serious delinquencies in U.S. auto loans and credit card debt, signaling mounting financial stress among consumers.
As mentioned earlier, we are currently experiencing a massive "Everything Bubble," which is the result of an unprecedented monetary experiment that began in 2008. One key component of this overarching bubble is the U.S. stock market bubble. A highly revealing measure of whether the stock market is in bubble territory is the total U.S. stock market capitalization-to-GDP ratio, which compares the market's total value to the underlying economy. This metric is often referred to as the "Buffett Indicator," as Warren Buffett has famously called it "the best single measure of where valuations stand at any given moment."
When the stock market grows faster than the economy, the stock market capitalization-to-GDP ratio rises—leaving the market vulnerable to a correction. Currently, this indicator stands at a staggering 206, which is 142% above its long-term average of 85, dating back to 1971. This suggests that the U.S. stock market is significantly overvalued and at risk of a severe downturn, as valuations historically tend to revert to the mean over time.
Under the leadership of CEO Warren Buffett, Berkshire Hathaway has significantly increased its cash reserves in recent quarters, reaching an astounding $325 billion. This strategic move reflects Buffett's awareness of the stock market's current overvaluation and positions the company with substantial dry powder to acquire undervalued assets once the anticipated market downturn plays out. In my view, this is a prudent approach given the mounting economic risks.
Additionally, stock sales by corporate insiders—who are likely aware that a downturn is ahead—just hit an all-time high after the U.S. presidential election:
While "smart money" players like Warren Buffett and corporate insiders are reducing their stock holdings in anticipation of a downturn, everyday consumers—often referred to as "dumb money" for their tendency to misjudge major market turning points—have never been more bullish. According to a recent survey, a record 56.4% of retail investors are optimistic about the stock market’s prospects over the next 12 months. From a contrarian perspective, this is deeply concerning and it suggests that retail investors are acting as "exit liquidity," eagerly purchasing stocks that the smart money is offloading. Unfortunately, as history shows, these retail investors end up holding the bag when the market sinks.
The inevitable bursting of the "Everything Bubble" is likely to trigger, coincide with, and exacerbate a severe recession. I firmly believe that a significant portion of the capital exiting stocks and other risk assets will flow into gold, driving its price to $10,000 an ounce—and eventually even higher. In this scenario, I strongly favor physical gold over Bitcoin and other cryptocurrencies, as cryptos tend to move in near lockstep with the stock market, a dynamic I recently explained.
In response, the U.S. government and the Federal Reserve will take extraordinary measures to support the collapsing bubble. These efforts will include massive increases in government debt, cutting interest rates back to zero (and then into negative territory), and injecting trillions of new dollars into the economy through quantitative easing. Each of these actions will be profoundly bullish for gold, reinforcing its role as the premier safe-haven asset in times of economic turmoil.
In recent years, the Federal Reserve has engaged in quantitative tightening (QT), the opposite of quantitative easing (QE), by reducing its balance sheet of assets, primarily bonds. QT is typically bearish for gold, making gold’s recent strong performance all the more remarkable. However, in the looming recession, I believe the Fed will be compelled to reverse course, shifting from QT back to QE. This policy reversal would inject additional liquidity into the financial system, providing further fuel for gold’s ongoing bull market.
Coming back full circle, gold appears to be following a path similar to its bullish trajectory during the 2007-2008 period, driven by a confluence of economic, monetary, and market dynamics. With recession signals flashing, the Federal Reserve's pivot from rate hikes to cuts, and the likely eventual return of quantitative easing, gold’s role as a safe-haven asset is increasingly clear. The "Everything Bubble" and its ultimate collapse add further weight to the argument for gold’s rise, as fear and economic instability drive investors toward reliable stores of value. As history suggests, these conditions should propel gold to unprecedented heights, reaffirming its position as a cornerstone of financial security during periods of uncertainty.
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