Is This the End of the Bull Market in Gold and Silver?

By Przemyslaw Radomski, CFA  APR 17, 2013 1:50 PM

The Dow to gold ratio suggests that the bottom may be in already. However, the gold to bonds ratio tells a different story.

 


On Friday, we witnessed a great plunge in gold (almost $80 – from $1560.30 to $1480.50) and silver (almost $1.7 – from $27.58 to $25.89) and we are seeing even lower prices this week.
 
It doesn't matter if we look at gold from the USD perspective, the average non-USD perspective, or gold priced in individual non-USD currencies -- we will see that the price has broken below the key support levels.
 
What about silver? On Friday, it moved insignificantly below some support levels (intraday 2011 and 2012 lows), and at this time, silver confirms the bearish outlook for gold. In fact, it’s only a few dollars above its 2008 high.
 
Does this mean that the bull market for gold and silver is gone for good?
 
The only answer my firm has to this question is a resounding “No.” And we say that because we realize that even the greatest of bull markets can at times decline significantly with no particular logical reason. We know that something like that happened over 30 years ago during the previous bull market when the price of gold dropped by almost half before it moved to the high, which was multiple times the previous one.
 
Forbes magazine ran an interesting piece a couple of weeks ago, which quoted a Time Magazine article: “To hoarders and speculators, gold lately has had about as much luster as a rusty tin can.”

The article itself is a bit rusty. The Great Gold Bust ran in August 1976 right at the bottom of a 50% retreat in the 1970s gold bull market. It had been only 19 months since gold purchases became legal for US citizens and, according to the article, “the price has fallen more than 40% from its peak of $198 an ounce. In three chaotic days of trading last week, gold fell $14 on the London market, reaching a 31-month low of $105.50 an ounce. Though the price recovered to $111 by week's end, that is still a dismal figure for goldbugs, who not long ago were forecasting prices of $300.”
 
Back then, gold declined from $198 to $105.5 (over 46%) and then proceeded to gain 750% over the next three and a half years. The bull market didn’t end with the 46% decline. The current correction didn’t take gold that low, so if we take the similarity to the previous bull market into account, gold bulls shouldn’t worry about it too much as it seems it’s just a matter of time that gold will soar once again.
 
We are not thinking that the fundamental situation is now less favorable for precious metals than it was in the previous months. With QEs being launched almost regularly now, it doesn't take a lot of analysis to figure out that the precious metals sector almost has to move higher eventually. The key point here is that the current decline -- no matter how bad it may appear -- is in all likelihood not the end of the current secular bull market in precious metals.
 
Is the decline already over? It’s a tough call, but there are charts that we can use to estimate it and some of them suggest so. Here’s one of them. (Charts courtesy of http://stockcharts.com.)



The Dow to gold ratio suggests that the bottom may be in already as the long-term resistance line has already been reached.
 
However, if we take a look at another chart – the one featuring the gold to bonds ratio -- we get different signals.



The support level is relatively close, but it has not been reached so far and thus more declines may be seen shortly. The key point is that almost all charts suggest that the bottom is either in or close to being in.
 
Summing up, we think that the bull market in the precious metals market remains in place. Is the decline over yet? Mining stocks are still strongly underperforming metals, so the decline may not be over just yet, but it seems that it’s close to being over.
 
Thank you for reading. Have a great and profitable week!

For the full version of this essay and more, visit Sunshine Profits' website.

Twitter: @SunshineProfits
No positions in stocks mentioned.

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