Is the Correction Over?
By Jeff Clark, Senior Precious Metals Analyst, Casey’s Research,
Given last week’s selloff in gold and silver, it’s time to refresh our “corrections” chart and put the pullback in perspective. The drop in precious metals hasn’t been fun for those who already own all the gold they want, but unless one thinks the bull market is over, it’s important to end-game profitability to look at corrections as good buying points.
First, for those who’ve been rattled by this recent selloff, it’s times like these when you have to examine the fundamental reasons why you own gold and silver in the first place. If you bought gold primarily as a speculation that would “only go up,” I have some bad news: Your reason is weak, and you might get flushed out by one of these corrections before it’s really time to exit.
Conversely, if you bought because you genuinely fear what is happening to the value of your currency, or the very real possibility of high inflation, or that global events will affect your personal standard of living, or because “real” interest rates provide a negative return, or you’re tired of government meddling and mismanagement, then you understand what gold is really for and will see a temporary pullback for precisely what it is.
Just because the Federal Reserve’s minutes stated last week that it is refraining from further “monetary accommodation” unless the economy sputters, that doesn’t mean there won’t be more money-printing – nor that the money already printed won’t have any further effect. Economics 101 says you can’t dilute the currency to the extent we have and not experience any negative repercussions. And with the amount of debt, deficit spending, and unfunded future liabilities that have to be dealt with, it’s not difficult to see that inflation is the easiest way out for politicians. Until there is an abrupt shift in both fiscal and monetary policy, history tells us we should continue to purchase gold.
When precious-metals prices aren’t going the direction you expect, return to the core reasons for owning them and the big-picture trends in motion to determine what you should do. Based on the points outlined above, we’re looking for entry points, not exit signs.
With that in mind, let’s take a look at the recent correction. The following chart shows all corrections in gold in the current bull market that have been greater than 5%. It’s been updated to show the recent pullback.
(Click on image to enlarge)
From the recent high of $1,781 on February 28, we’ve fallen 9% (as of the April 4 low of $1,621). The average of all of these declines is 11.9%, so this correction – if it’s over – hasn’t been anything out of the ordinary.
Perhaps what makes it “feel” bigger is that we just experienced a 14.7% pullback in December, an unexpected drop that bucked the seasonal trend. We’ve also experienced one of the greatest concentrations of corrections in the current bull market: in the past 17 months, we’ve had four drop-offs of more than 5% in the gold price. I think this is a reflection of the increased volatility we’ve been warning about, though I know that doesn’t make it more fun to swallow.
Let’s take a look at silver. This chart measures corrections greater than 10% since 2001 and includes the recent decline.
(Click on image to enlarge)
Silver has fallen 14.1% from its February 29 high of $37.23 (as of the April 4 low of $31.98). The average of these declines is 20%, so like gold, this pullback – if it’s ended – is below average.
Also like gold, silver is coming off an 18.7% drop in December, along with two additional and much bigger corrections from the prior May and September. In fact, silver has now had five corrections greater than 10% in the past 15 months. It’s thus understandable if you’ve been frustrated with its price fluctuations – though remember it will always be more volatile than gold.
Lest we focus only on the negative, let’s also take a look at surges in gold and silver to see what might be ahead. This chart shows gold’s advances of 10% or more since 2001, and includes the recent 16.3% climb that ended on February 28.
(Click on image to enlarge)
The average of these surges is 22.1%. Given the trend in past years, I’m betting we’ll see another one this year, and if I’m right, the only question is if you bought during the selloff to take advantage of it.
Here are the same data for silver, which includes the 32.1% run-up that peaked on February 29.
(Click on image to enlarge)
The average of all advances greater than 10% is 33.9%. Will we see another surge like it this year? If history is any guide, it’s highly likely. If so, current prices are awfully attractive.
So, is the correction over? If not, it certainly seems we’re closer to the bottom than the top, and given the fact that both gold and silver have had more than their fair share of recent corrections, we’re buying. In fact, the question in our minds isn’t whether or not to average down, but how much. We’re not going “all in,” but we do think current prices represent a real bargain.
As far as I’m concerned, the current downdraft in gold and silver is an opportunity to prepare for the next upswing. But remember that the speculative upside is secondary. The primary reason to buy gold (and silver) is prudence; they are the two assets that can protect you from the big monetary and fiscal fallout that’s headed our way.
Categories: Commodities