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History Shows We Should Expect a Gold Stocks Bear Market in 2014


Over the last half century, gold stocks have a 23% to 72% decline every three years.

Since 1964, gold stocks have seemed to follow a three-year cycle. Every three years, they establish a peak and then start a 23% to 72% decline.
In the table below, the data before 1983 is in the Barron's Gold Mining Index (which is weekly). The data after 1983 is in the PHLX Gold/Silver Sector Index (INDEXNASDAQ:XAU) (daily with a December 1983 inception). This indicator did not work as consistently prior to 1964.

In the table above, the most common month for a top was a tie between March and July. Those two months together accounted for half the peaks. The 2014 high in gold stocks thus far has been on March 14.
If you look at the 11 post-1979 dates, seven of them saw gold stocks peak on April 8 or earlier. Let's look at the four years that had a post-April 8 peak and see if there was any weakness in the first half of the year.

In 1987 and 1999, gold stocks had a 28%/25% decline commence in the first 3.5 months of the year and a second decline of 72%/54% start in September. Therefore, gold stocks have had a 24.62% decline that started before April 15 nine out of the last 11 times in the three-year cycle peak years.

This leaves us with only two instances since 1979 when there was not a 24.62% decline that started before April 15. While the 2002 correction was relatively subdued, all of the gains from the subsequent March 8 to June 4 rally were wiped out (and 9.5% more) by July 26. The only three-year cycle peak year since the 1970s when gold stocks managed to make it to July before a major decline set in was 1993.

The minimum decline in the table is -23.77%. If the XAU were to decline by that amount from its March 14 high, precious metal stocks would retest the 2013 lows. This fits in with last month's article, which was based on a completely different indicator, but reached a similar conclusion. The signals that show up in both indicators are April 14, 1987 (-28% in 69 days), March 9, 2005 (-24% in 68 days), and March 14, 2008 (-22% in first 48 days). If the cycle would continue, it would likely also adversely affect owners of GDX, GDXJ, SIL, SILJ, NUGT and JNUG.

James Debevec runs
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No positions in stocks mentioned.
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