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Given last week's selloff in gold and silver, it's time
to refresh our "corrections" chart and put the pullback in
perspective. The drop in precious metals hasn't been fun for those who already
own all the gold they want, but unless one thinks the bull market is over,
it's important to end-game profitability to look at corrections as good
buying points.
First, for those who've been rattled by this recent
selloff, it's times like these when you have to
examine the fundamental reasons why you own gold and silver in the first
place. If you bought gold primarily as a speculation that would "only go
up," I have some bad news: Your reason is weak, and you might get
flushed out by one of these corrections before it's really time to exit.
Conversely, if you bought because you genuinely fear
what is happening to the value of your currency, or the very real possibility
of high inflation, or that global events will affect your personal standard
of living, or because "real" interest rates provide a negative
return, or you're tired of government meddling and mismanagement, then
you understand what gold is really for and will see a temporary pullback for
precisely what it is.
Just because the Federal Reserve's minutes stated last week that it is refraining from further "monetary
accommodation" unless the economy sputters, that doesn't mean there
won't be more money-printing – nor that the money already
printed won't have any further effect. Economics 101 says you can't dilute
the currency to the extent we have and not experience any negative
repercussions. And with the amount of debt, deficit spending, and unfunded
future liabilities that have to be dealt with, it's not difficult to see that
inflation is the easiest way out for politicians. Until there is an abrupt
shift in both fiscal and monetary policy, history tells us we should continue
to purchase gold.
When precious-metals prices aren't going the direction
you expect, return to the core reasons for owning them and the big-picture
trends in motion to determine what you should do. Based on the points
outlined above, we're looking for entry points, not exit signs.
With that in mind, let's take a look at the recent
correction. The following chart shows all corrections in gold in the current
bull market that have been greater than 5%. It's been updated to show the
recent pullback.
From the recent high of $1,781 on February 28, we've
fallen 9% (as of the April 4 low of $1,621). The average of all of these
declines is 11.9%, so this correction – if it's over – hasn't
been anything out of the ordinary.
Perhaps what makes it "feel" bigger is that
we just experienced a 14.7% pullback in December, an unexpected drop that
bucked the seasonal trend. We've also experienced one of the greatest
concentrations of corrections in the current bull market: in the past 17
months, we've had four drop-offs of more than 5% in the gold price. I think
this is a reflection of the increased volatility we've been warning about,
though I know that doesn't make it more fun to swallow.
Let's take a look at silver. This chart measures
corrections greater than 10% since 2001 and includes the recent decline.
Silver has fallen 14.1% from its February 29 high of
$37.23 (as of the April 4 low of $31.98). The average of these declines is
20%, so like gold, this pullback – if it's ended
– is below average.
Also like gold, silver is coming off an 18.7% drop in
December, along with two additional and much bigger corrections from the
prior May and September. In fact, silver has now had five corrections greater
than 10% in the past 15 months. It's thus understandable if you've been
frustrated with its price fluctuations – though remember it will always
be more volatile than gold.
Lest we focus only on the negative, let's also take a
look at surges in gold and silver to see what might be ahead. This chart
shows gold's advances of 10% or more since 2001, and includes the recent
16.3% climb that ended on February 28.
The average of these surges is 22.1%. Given the trend
in past years, I'm betting we'll see another one this year, and if I'm right,
the only question is if you bought during the selloff to take advantage of
it.
Here are the same data for silver, which includes the
32.1% run-up that peaked on February 29.
The average of all advances greater than 10% is 33.9%.
Will we see another surge like it this year? If history is any guide, it's
highly likely. If so, current prices are awfully attractive.
So, is the correction over? If not, it certainly seems
we're closer to the bottom than the top, and given the fact that both gold
and silver have had more than their fair share of recent corrections, we're
buying. In fact, the question in our minds isn't whether or not to average
down, but how much. We're not going "all in," but we do
think current prices represent a real bargain.
As far as I'm concerned, the current downdraft in gold
and silver is an opportunity to prepare for the next upswing. But remember
that the speculative upside is secondary. The primary reason to buy gold (and
silver) is prudence; they are the two assets that can protect you from the
big monetary and fiscal fallout that's headed our way.
[While we wait for the Mania Phase to hit the gold and
silver market, we're picking up some dividend income. The latest pick in BIG GOLD features a producer that offers the best
dividend plan in the industry… and its stock price is very attractive
right now.]
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