Wednesday, 13 November 2013

Commentary for Korelin Economics Report 2013-11-13

This is my comment on the guests' blog for 13 November 2013.

"Things usually look very technically bad and scary at a market bottom but gold's performance this year has been so disappointing. Gary sounds like he has been right on track with his forecasts but we have not broken below 1251 or 1180 just yet. I think we might get a test of about 1190 and if it fails then 1120-25 based upon my own charts. But it's all guesswork really.

Secular bear or cyclical bear? Well, looks more and more like a secular bear to me. A break below $1180 would prove a secular bear market because it would be 39% down in about 2.3 years.

I don't think that gold will be in as long a bear market as the 1980-1999 bear market (about 20 years), but I think is more serious that the little bear market of 1974-76, which actually took 4 years (between 1974 and 1978) to get back to the roughly $200 high before going on up to $850 in the final phase of the bull market

The 1974-78 correction and consolidation was actually a 4 year round trip from 200 to 100 and back to 200. That was equal in length to the first leg of the bull market from 1970/71 until 1974 (which went from $35 to just under $200).

In this cycle, we have had a 10 year bull with some spikes and correction but more or less uninterrupted (as far as year over year increases were concerned it was a 12 year bull from 2001-2012). Let's call it 10 years. I wonder if we are going to have a round trip that might last about the same length, about 10 years from 2011 to 2021 let's say. That is a significant bear market. The low might be $1180 or $1030 but I fear it could be even as far as 3 figures, perhaps $850-900 or even $650-700.

Buyers are going to become more price sensitive as the prices drop. On 2011-2012, a price of $1520 was a bargain, then in April 2013, $1321 was a bargain and in June $1180 was a bargain. As we look now, $5120 was NOT a bargain. I cannot see gold going above $1520 for a long time, because it was massive support turned into resistance. So we need to look at the psychology as the price drops further and for longer. Today's prices for physical gold buyers ($1250-1300) may look expensive next year. People might say ,"$1250 gold? No way!" That is a big danger as we go lower, that could extend the bear market for years to come.

Note that we were in a trading range of $1520-1920 for 18 months. It was bearish because the price spent most of its time at $1600-1650, well into the bottom half of that range. Semi-numismatic coin premiums were also very low, typical of market tops, indicating a bearish prospect. Now we are in a $1120-1520 range perhaps and are again languishing in the lower half of the range. $1520 is a long way away. I am going to do a bit of research into whether semi-numismatic coin premiums are higher now.

I begin to favour a market that acts as Ross Clark of CIBC mentioned on years ago. It is running at 1/3 the pace of the 1970s market. That would imply at least a 10 year round trip before the gold price gets back to $1920 where it topped in 2011. Similar for silver. Maybe then there might be a bubble phase in to the early 2020s.

So is it time for me to sell? I don't know. Such a long correction could mean that money sitting in gold, silver and PM stocks is not a good investment for me and any money in those things over and above an insurance allocation is not going to result in good investment returns that might be available elsewhere. It would also wear out many others in the space ("wear you out of scare you out" as David Morgan says). That would almost be the most inconvenient set of circumstances and that is what often happens in markets. As Sinclair has said, the people at the top in 1980 were not the same as the people coming in 1970 There was a turnover of investors several times (I think he said about 3 times) over the length of the 1970-80 bull in gold. Such a situation would be a fantastic opportunity for long term well-heeled investors with cash to accumulate stocks in a ravaged industry for a potential fabulous gain sometime in the fairly distant future as the demand comes back in and the supply of precious metals is likely to be hugely curtailed due to lack of investment and development. (Currently, certain market experts are still telling us that mine supply is increasing because of new projects that have been developed during the 2000-2011 bull market). I think it's going to be a really long slog - a 5year round trip at an absolute minimum and perhaps 10 years."

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