Make an Entrance, Not an Exit
by Jeff Clark
BIG
GOLD
Recently
by Jeff Clark: Why
Gold Should Set New Highs for the Holidays
It wasn’t a
fun week for gold. By the close on Friday, the metal was down 6.7%
(based on London PM fix prices), the biggest weekly decline since
September. It got downright irritating when the mainstream media
seemingly rejoiced at gold’s decline. Economist Nouriel Roubini
poked fun at gold bugs in a Tweet. Ãœber investor Dennis Gartman
said he sold his holdings. CNBC ran an article proclaiming gold
was no longer a safe-haven asset (talk about an overreaction).
While the worry
may have been real, let’s focus on facts. Have the reasons for gold’s
bull market changed in any material way such that we should consider
exiting? Instead of me providing an answer, ask yourself some basic
questions: Is the current support for the US dollar an honest indication
of its health? Are the sovereign debt problems in Europe solved?
How will the US repay its $15 trillion debt load without some level
of currency dilution? Is there likely to be more money printing
in the future, or less? Are real interest rates positive yet? Has
gold really lost its safe haven status as a result of one bad week?
And one more:
What is the mainstream media’s record on forecasting precious metals
prices?
Our take won’t
surprise you: not one fact relating to the trend for gold changed
last week. We remain strongly bullish.
So why did
gold, silver, and related stocks fall so hard?
The reasons
outlined in this month’s BIG
GOLD are still in play (the MF Global fallout, a rising dollar,
year-end tax-loss selling, and the need for cash and liquidity to
meet margin calls or redemption requests). Last Wednesday’s 3.5%
fall took on a life of its own, selling begetting selling, fear
adding to fear(especially the case with gold stocks). None of these
reasons, however, have anything to do with the fundamental factors
that ultimately drive this market. Once those issues shift,
then we’ll talk about exiting.
So, should
we buy now? Is the bottom in?
Let’s take
a fresh look at gold’s corrections and compare them to the recent
one. I’ve updated the following chart to include the recent selloff.
[How do I calculate
the data? I look for the periods in every annual gold chart that
represent a distinct fall greater than 5%, then measure the highs
and lows.]
(Click on image
to enlarge)
Our recent
drop equals 12.5%. This isn’t to suggest that the correction is
over, but it does show that we’ve already matched the average decline,
which is also 12.5%. This comes on the heels of the 15.6% fall in
September. You’ll notice something else: We’ve now had three major
corrections (greater than 5%) in one year, the first time that’s
happened in this bull market.
The worst-case
scenario would be a drop that matched the biggest on record, 27.7%.
From $1,795 – the recent interim peak price – that would
take us to $1,295. That wouldn’t be fun, but a fall to that level
would not by any stretch signal the end of the bull market, nor
a fall into unprofitability for our producers. And it would represent
a true blood-in-the-streets buying opportunity. After all, that’s
exactly what happened in 2006 and again in 2008, and in both instances
gold eventually powered much higher. The bears were wrong then,
and they’ll be wrong again this time, even if that extreme scenario
were to come to pass.
Here’s the
updated picture for silver:
(Click on image
to enlarge)
Silver’s volatile
nature really comes through in these data, which measure corrections
of 10% or more. The recent decline tallies 18.4%. It, too, comes
on the heels of a recent correction, a 35.2% tumble in September.
The average of these declines is 20.3%, which would take our current
correction to $28.22, close to last Thursday’s price. Like gold,
we’ve now had more corrections this year (four) than we’ve ever
had in this bull market.
The worst plausible
scenario we see for silver in the near term would be a fall to $16.32,
matching 2008’s 53.9% drop. But you’d have to be awfully bearish
to think it will plummet that far.
These data
should actually give you some comfort. We’ve been here before. We’ve
seen worse before. And yet, in every instance, gold and silver
eventually climbed higher. So, unless you really believe that Obama
and Merkel have brought happy days back to the world economy, precious
metals will resume their ascent, and probably sooner rather than
later. And when they do, you may well never be able to buy at these
prices again. Those who were too scared to buy at $560 in 2006 and
$700 in 2008 missed out on what were some of the greatest buying
opportunities of this bull market.
Would I buy
now? Given that each metal has already met its average decline,
and that both have seen more corrections this year than any other,
we’re likely closer to the bottom than the top. So yes, I added
an extra contribution to my
favorite bullion accumulation program last week.
Either way,
my advice is to spend a little more time watching the drivers for
gold and a little less time worrying about the price. Until those
things change, look for an entrance, not an exit.
We don’t know
if gold has bottomed or not, but we do know that selloffs like this
are great buying opportunities. This is especially true with gold
stocks – get the newest recommended gold producer in BIG
GOLD at a lower price than when we first bought. Meanwhile,
International Speculator recently identified two new
stock recommendations in the December issue. Join us in picking
up the best companies at some the lowest prices we’ve seen in a
long time.
December
21, 2011
Jeff
Clark is editor of BIG
GOLD in Casey’s Daily Dispatch.
Copyright ©
2011 Casey
Research