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Last Wednesday, February 29, gold dropped 4.8% and
silver 6.2% (based on London fix prices). That's quite the fall for one day. We've
seen prices that have risen that much, too. But as I'm about to show, these ain't nothin', baby.
Based on our experience, we've been saying for some
time that volatility will increase as the markets fight their way to the
mania phase of this cycle – and that once there, the gyrations will
jump even higher. This call doesn't exactly require one to go out on a limb;
it makes sense since more investors will be crowding in – and
volatility was high in the 1979-'80 mania.
First, let's put last Wednesday's big plunge in
perspective. Here's a picture of the daily changes in the gold price since
2003, based on London fix prices. (This chart is very busy, but I want to
show the bulk of the bull market in one visual.)
A 4.8% decline is one of gold's bigger one-day
movements over the past nine-plus years. But as you can see, there have been
a number of days where gold rose or fell more than 5%. And it exceeded 6% on
five occasions.
Here are the data for silver.
Last Wednesday's decline of 6.2% was one of the
metal's bigger one-day movements. However, it's exceeded 10% on 14 occasions,
15% three times, and rose an incredible 20.06% on September 18, 2008.
You might think this kind of volatility is high
– and it's true. Worse – or better, depending on how you see
things – the volatility in the underlying commodity is magnified in the
related company stocks. This is why Doug Casey calls mining stocks,
especially the juniors, "the most volatile stocks on earth." But
the thing is, metals volatility has been higher in
the past, particularly during a mania.
Here's what I mean.
The following chart documents gold's daily price
changes from 1976 through the end of 1980. Take a look at the jump in
volatility in 1979-'80.
Volatility became the norm in 1979 and especially
1980. Fluctuations of 4% or more were not uncommon.
Here's the same chart for silver. The metal's volatility
during the 1979-'80 period became extreme.
Daily price movements of 6% or more didn't occur
once prior to 1979 – but then they became commonplace.
I wanted to take a closer look at the biggest price
fluctuations during this period, so I ferreted out the largest days of
volatility for each metal. For gold, I selected
daily movements of greater than 5%.
During this five-year period, gold saw fluctuations
greater than 5% on 38 days (19 up, 19 down). Not surprisingly, more
"up" days occurred leading up to gold's peak of January 21, 1980,
and more down days came after it.
And yes, gold rose an incredible 13.3% on January 3,
1980. As it turned out, that biggest one-day rise was only 18 calendar days
away from the very peak of the market. And the biggest decline of 13.2% on
January 22, 1980 was the signal that the top was in.
For silver, I used one-day movements of 10% or more,
all of which occurred in 1979 and 1980.
The silver price had fluctuations of 10% or more on
34 days (17 up, 17 down). They occurred over a period of only 15 months, an
average of more than two per month.
And yes, silver really did rise a whopping 36.5% on
September 18, 1979.
So while last Wednesday's price movements for gold
and silver were big, we simply haven't seen this kind of volatility in our
current bull market.
Now let's have some fun. Let's say we match the most
volatile days from 1979-'80 at some point before the current bull market is
over. If we use gold's biggest up day (13.3%) and biggest down day (13.2%), here's
what would happen to prices from various levels. Remember, these are one-day
gains and retreats:
Gold Price
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+13.3%
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-13.2%
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1,700
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1,926.10
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1,475.60
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1,750
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1,982.75
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1,519.00
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1,800
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2,039.40
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1,562.40
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1,900
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2,152.70
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1,649.20
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2,000
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2,266.00
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1,736.00
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2,250
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2,549.25
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1,953.00
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2,500
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2,832.50
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2,170.00
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2,750
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3,115.75
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2,387.00
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3,000
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3,399.00
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2,604.00
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4,000
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4,532.00
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3,472.00
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5,000
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5,665.00
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4,340.00
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Imagine gold jumping from $1,800 to $2,039.40 in one
day!
However, unless you think $1,800 is the level from
which the mania starts, it's more likely we'd see a 13.3% advance (or
something similar) from a higher starting point. We'd thus probably see gold jumping
to $5,665 from $5,000, for example. And further, that would probably signal
we're near the top.
Keep in mind that volatility worked both ways during
the mania, so dropping from $4,000 to $3,472 or something similar is likely
to occur as well.
Here's the same table for silver, with its biggest
up day of 36.5% and down day of 18.5%.
Silver Price
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+36.5%
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-18.5%
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30
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40.95
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24.45
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35
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47.78
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28.53
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40
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54.60
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32.60
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50
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68.25
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40.75
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60
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81.90
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48.90
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70
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95.55
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57.05
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80
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109.20
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65.20
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90
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122.85
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73.35
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100
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136.50
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81.50
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125
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170.63
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101.88
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Can you imagine silver starting the day at $80 and
hitting $109.20 before you go to bed that night? Something like that will probably
happen at least once before this bull market is over. As with gold, though,
that kind of movement is more likely to take place from a higher level, such
as $100 or $125 (or higher?). And a fall like $100 to $81.50 will probably be
part of the trend as well.
There are some definite conclusions we can draw from
the historical picture:
- First, if history repeats, or even rhymes, our
biggest days of volatility are ahead. And they will be normal.
- Second, big price fluctuations will be common
as we enter the mania and approach the peak. In fact, when large daily
movements become the norm, the historical record suggests we will be
nearing the end of the cycle.
- Third, since current volatility has thus far
been lower than what was experienced during the final phase of the 1970s
bull market, we are not in a bubble, nor yet in the mania phase, and nowhere near the top. Remember that the
next time you hear some nincompoop spew bubble talk on CNBC.
What can an investor do with this information?
Prepare yourself for bigger daily swings – in both directions. And
buying on those outsized drops is probably a good strategy…
Because we now know what volatility looks like.
[Believe it or not, volatility is even greater in
the junior resource sector, where many opportunities abound to see doubles
and triples on your investment. This is especially true of juniors that are ripe to be bought
out.]
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