Is This A Gold And Silver Bear Market Or A Correction In A Secular Uptrend?

Does the following contrast sound familiar to you? Mainstream media headlines, mostly based on either mainstream economists or large financial institutions, report continuously how weak the precious metals market is; they hasten to remember readers how the bull market had burst in 2011 and that much lower prices are just around the corner. In their view, after peaking in 2011, gold and silver are in a clear bear market. On the other hand, writers and analysts that are non-mainstream (most of them non-Keynesian) consider today’s gold and silver market as a long correction in a gigantic secular uptrend; they expect (much) higher prices in the years to come. The interesting thing is that everyone is looking at the same data and charts.

The key question is whether the gold market is correcting in a secular trend or the bear market is here to stay (till the next cycle starts).

In order to answer that question, the team at ShortSideOfLong did an excellent job comparing the ongoing correction in gold and silver with previous corrections. Based on purely chart observations it seems feasible (with a high probability) to come to a reliable answer. One should note that the data in the following two charts come from the period after 1971, as that was the year when gold started to trade in a “free market” (after US President Nixon closed the gold window on August 16th 1971).

The first chart shows different gold bear markets since 1971. The conclusions from the chart come from the analysts at ShortSideOfLong:

  • Observation 1 is related to the steepness of the correction: Precious metals bears who claim that Gold was a bubble in 2011 with similarities to 1980 are most likely mistaken. When real bubbles burst, they sell off rather rapidly by falling in similar fashion to the way they risen, generating amazing losses. When the Gold bubble burst in 1980, the price sold of by 66% (two thirds) in the pace of 18 months. The recent sell off was only one third at its worst point; this clearly is not the bursting of a bubble.
  • Observation 2 is related to the length of the correction: The current bear market has so far been the third longest in time. The longest bear market for Gold started from the peak just before 1988 and lasted for 5 long years, all the way to the beginning of 1993. Assuming we follow a similar pattern, Gold would move sideways until October 2016. If this was to be the case, those who purchased Gold would not experience a large downside risk, however there capital would be trapped in a nonperforming asset. This is commonly known as a value trap.
  • Observation 3 is related to the correlation with previous corrections: The closest correlation the current downtrend has with previous ones, is the 1996 to 1999 bear market drawn in yellow. The initial sell off lasted about two years, at which point a long consolidation started. Both bulls and bears became frustrated at the lack of a trend, similar to what has been happening as of late. While the Gold bulls claimed that it was a basing pattern at the time, the price actually collapsed one last time into a final low before a bull market took off.

 

Gold-Bear-Market-Analogue_August-2011-2014

Gold bear market is turning three years old in early September

 

Related to Silver, the team at ShortSideOfLong came up with similar observations:

  • Observation 1 is related to the steepness of the correction: Since Silver peaked around a similar price point in both 1980 and 2011, precious metal bears were once again predicting a 1980s style bust and total wipe out. After peaking at $50 in early 1980, Silver fell to $5 per ounce (90% decline) in a space of just over two years. However, as the analogue clearly shows, the current bear market isn’t anything like the 1980-82 bubble crash. It is actually correlating more with 1983-86 and 1987-91 downtrends in both time and price drawdowns.
  • Observation 2 is related to the steepness of the correction: Silver bear market is currently almost 3 years and 4 months old. By historical precedent, this is one of the longest bear markets since Silver started trading in late 1960s. We have just taken over the 1983-86 downtrend and in a month this bear market will also be longer then the 1968-71. In theory, if Silver does make a lower low, we are now only months away from setting a new record. Already we are given a hint that the downtrend is exhausted, so a lower low well into 2015 would be a true historical anomaly and most likely a terrific buying opportunity.
  • Observation 3 is related to the correlation of previous corrections: Each one of the final bottoms produced some kind of an extraordinary gain. After bottoming out in 1971, Silver shot up by more then 450%. As the 1974-76 downtrend ended, Silver managed an amazing performance of 1200% or 12-fold over the next 4 years. This was the end of a secular bull market. The huge bust in 1982 eventually saw the metal triple from the lows. The 1986 bottom saw gains of 100% within the following 12 months. The 1991 bottom was the most disappointing of all even though it was the lowest low, as Silver spent majority of the time moving sideways. Gains of 100% only showed up seven year years later in 1998, as Buffett was reportedly buying the metal. Silver’s bottom in 2001 produced gains of over 500% in the years after, while the Global Financial Crisis bottom of 2008 produced another 550% plus rally in less then three years. Even without counting the speculator gain in late 1970s, Silver averaged around 350% gain after every bear market. As we can see, buying Silver at the bottom is incredibly difficult task, but has amazingly lucrative gains for those who have the skill and luck to execute it.
Silver-Bear-Market-Analogue_August-2011-2014

Silver has now been in a bear market for 3 years and 4 months!

 

A concluding note from analyst Tiho Brkan

Guessing isn’t very useful when it comes to investing, but if I had to make a guess I would say that both metals sell off one final time into a lower low by early 2015. Based on historical analogues alone, Gold seems to be following the 1996-99 bear market quite well and could bottom around March 2015. At the same time if Silver falls to a lower low around March 2015, that would be one of the longest and most oversold downtrends (not including the 1980-82 bubble crash).

 

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