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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. Über 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.]
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:
 
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.]
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