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Indicators Suggest Gold Stocks and Silver Will Double

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What happens after 60% gold stock bear markets? Also, silver shows bullish signs.

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Gold Stocks

The recent gold stock bear market has had the fifth largest decline in history (data starts December 1938). It is also the third longest in history. Let's look at what has happened after 60% gold stock bear markets.



Every single time gold stocks went down 61% to 73%, they went up least 164%. The initial leg of the 1980-2000 gold stock bear market was -73% in one year and 8.3 months. At this point gold stocks had a 205% bear market rally. This means only the 1939-1942 bear went as down long as the recent bear without a 164% rally. As for the pesky 1942 instance, the 1937-1942 "regular stocks" bear market was the third worst bear market in the history of the US going back to 1800 (behind 1929-1932 and 1835-1842). There are no US stock bear markets, depressions or World Wars now. So one can argue that the current situation is not as dire as 1942 and perhaps gold stocks are overdue for a rally.

Is the recent bear the final cyclical bear of a secular bull market like 1974-1976? Or is this decline more akin to the first leg down of secular bear market a la 1980-1982? The first rally coming from the 1976 bottom went up 275% before a brief bear market in January 1980. And gold stocks went up 205% in the first bear market rally from the 1982 low as previously mentioned. Either way gold stocks tripled.

Over the 32 weeks ending June 27, 2013, gold stocks underperformed the S&P (INDEXSP:.INX) by 53.05%. This is the second worst 32-week stretch of gold stock underperformance in at least 74 years. The worst stretch was the 54.78% underperformance in the 32 weeks ending on October 24, 2008. Note this was the exact day of the gold stocks bottom. Here are other extreme readings:



Silver

The Commercials Net position in the Silver Commitment of Traders Report is currently at an all-time high. The previous record was July 29, 1997.



The top chart is silver. The bottom chart is the indicator. The bottom chart is inverted to make the correlation easier to decipher. From July 17, 1997 to February 5, 1998 silver went up 89%. One may also note that the commercials spent a good number of weeks near the current levels in 2001. That was a good time to buy silver as well. About the only negative aspect of this indicator is that it only goes back to 1986. Can it withstand the stress tests of the 1974-1976 or 1980-1982 declines? So at this point it is a complementary indicator. But the indicator deserves some credit as it did not give an all-time extreme reading until now. If silver can establish a low here, the indicator can be allowed a heavier weighing next time around.

A silver indicator I stumbled upon hit an extreme on June 26 which may offer the highest reward/risk ratio of all-time.

The four major bottoms in this indicator since 1959 were:

  1. June 21, 1982
  2. June 26, 2013
  3. Feb 25, 1991
  4. Oct 12, 1971
The only days below the June 26, 2013 reading since 1959 were June 17-22, 1982.

June 21, 1982
The day of the signal low was the exact day of the May 26, 1978-May 16, 1986 low in silver.
Reward: From June 17 signal, 185% in 8 months
Risk: From June 17 signal, -6.8% in 4 days

June 26, 2013
Off to a good start thus far.

Feb 25, 1991
February 22, 1991 was the date of the lowest intraday price for silver from Jan 16, 1974 to today.
Reward: 1,275%
Risk: Trading day after low

Oct 12, 1971
Fifteen days after signal, the greatest secular silver bull market of all time started.
Reward: 3,063% in 8.3 years
Risk: -1.87% in 15 days

(Data from chartsrus.com.)
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No positions in stocks mentioned.
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