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Chart 1: Gold's Longest Bear Markets
The analog chart below shows Gold's longest bear markets.
Note that the three other longest bear markets ended right around this time. That tells me this bear market, (let's term it that for simplicity) does not have much time left.
Furthermore, it is important to note that bear markets do the majority of their price damage in the first 2-3 years. This is something we pointed out in our book. Note that two of the other three bears did not exceed their lows (in the first 2-3 years) materially. The 1987-1993 one did so but even that new low was less than 10% lower.
It is fun for people to draw lines and project $800 Gold but there really is no historical or technical basis for that. If Gold were to enter a secular bear market then it would have already plunged down to $700-$800 in the first few years of its bear. Technically speaking, the strongest support targets are $1080, $1050, $960-$1000 and around $900 (support from 1980 high). I think $960-$1000 is most likely.
My view on Gold is back to where it was a year ago. A US$ breakout above 100 will trigger a final decline to $960-$1050 and the bear market will be over. Gold stocks then were the cheapest they had ever been and that is why we went 50% long in December 2015 even though we felt the bottom wasn't imminent. That was the greatest buying opportunity for the gold stocks ever and I believe we are getting a second chance in the next three to six months.
The sector is oversold and due for a bounce which should be used to further de-risk portfolios and raise cash for three to six months ahead. Low risk buys will come when Gold is trading below $1100/oz.
We reiterate what we wrote last week:
In our summary we discussed the backdrop that could evolve into a catalyst for the sector. Simply put, we need to see stock market weakness and probably economic weakness. Nominal GDP growth and inflation should rise under Trump but his policies may not begin to affect the economy until 2018. In other words, inflation may not accelerate until 2018. Thus, Gold may need lower yields in the first half of 2017 which would result from stock market weakness and economic
weakness.
In short, keep your eyes on the stock market.
The next few quarters could be really tricky. If Gold breaks below $1200, I expect many bulls to throw in the towel and they could be doing so at exactly the wrong time. People will overthink it and risk missing the next rebound. In my opinion, the sector is poised to rocket higher and sustain it after the next low.
I remain extremely confident in Gold's bullish outlook in the quarters and years ahead. Negative real rates are unavoidable in the years ahead due to extreme amounts of record debt piled on government and corporate balance sheets at 0% interest rates. Sadly many bulls will give up at precisely the wrong time. In fact, that is almost a precursor required for the start of the historic bull we've all been waiting for. There will be more pain in the weeks and months ahead but
once Gold breaks below $1100/oz, we all need to get ready for the bullish reversal.
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Disclaimer: This newsletter is intended for informational and educational purposes only and should not be considered
personalized and individualized investment advice. Investment in the precious metals sector contains significant risks. You should consult with an investment advisor and do your own due diligence before making any investment decisions. This email may contain certain forward looking statements which are subject to risks, uncertainties and a multitude of factors that can cause results and outcomes to differ materially from those discussed herein.
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