Why I Still Believe in Gold and Silver
The correction in gold, silver, and mining shares continues into this week- a correction not necessarily unexpected after this sector was up for most of the past 12 weeks. Still, the correction may rattle the cages of precious metal investors since we are still off roughly 60% from 2011 levels in silver and many of the mining stocks are down even more.
Revisiting my original prediction for 2014, I think this year will mark the end of a three to three and a half year consolidation pattern for the precious metals within a secular bull market. However, I still think that we will make some kind of sloping or sideways bottom over the course of the year, especially in silver. The closest historical comparison for me continues to be the 1968-1971 cyclical bear market in silver, where the white metal was cut in half before embarking on a truly spectacular run to nearly 50 dollars. During that long three and a half year consolidation, however, many former enthusiasts lost their nerve for owning the white metal.
So, yes, consolidations take time, and in the process many, many former bulls will simply move on to other investments (many already have.) It is, after all, the easy thing to do. As an investor/speculator, however, you have to ask yourself whether or not all of the precious metals-positive news was priced into this sector when it peaked in 2011. Is the possibility of significant inflation really priced into gold or silver? Is the possibility of China competing with India as the world-s largest consumer of gold priced in? How about the possibility of huge taxes or bail-ins on savers - or as they are often referred to in officialdom - hoarders? The reality that rising rates are not so much a sign of an improving economy as signs that central banks regret bailing out the super- rich while the real economy stagnates or deteriorates - has this fact been priced into gold and silver? Aren-t many equity bulls mistaking a once in a generation wealth transfer from the real economy to speculators (like themselves) for a genuine economic recovery? And then we have all of the talk that still persists- in spite of attempts to ignore it - regarding certain nations- (like China and Russia) unhappiness with the U.S. dollar. The U.S dollar does not have to collapse (or even drop more than 10 or 15%) to send investors/speculators scurrying into the perceived safety of gold and silver. Finally, what about efforts - however small- to remonetize gold and silver. Were those efforts fully priced into gold and silver three years ago?
I think you can guess my answer to the above when thinking about the relationship of fundamentals to precious metals prices. At the same time, I can-t comfortably offer you a time-table for when these fundamentals will be properly priced in. This is why people practice some form of diversification, since markets are not only a mind game, but are about getting the timing right.
There will be many out there who read my list of fundamentals and dismiss them as things that might have relevance for the gold and silver price 10 years from now, but not anytime soon. And they could be right. But if you are on the fence regarding whether or not to put money into a stock market flirting with all time highs after having been up for 5 years, or a precious metals sector that has been left for dead by so many, I would remember that the best investments are those that are made when everyone else thinks you are crazy for making them.