Perhaps the most important question for precious metals investors is whether the recent sharp declines in gold, silver, and platinum are a "selling climax"—which will reverse powerfully to the upside and provide strong long-term investment opportunities—or are harbingers of even further weakness to come.
According to my chart analysis, all sorts of red warning flags are flying regarding the short to intermediate terms for the precious metals and their associated shares.
Gold, over the past couple of years, resembled a giant overhanging top. I believe that when a major topping formation such as that breaks down, the resultant market action is normally not consistent with a selling climax laden with immediate opportunities, but rather a red warning flag that high levels of caution would be in order.
There is no point in attempting to predict an exact number where gold will find a true and long-lasting point of reversal, but I do suggest that further important declines in the precious metals may take place.
Of all the past golden bull markets, the one which left the deepest impression was the phenomenal run from $106 in August 1976 to about $850 in January 1980. Huge fortunes were made in relatively short order.
One of the most important factors was inflation, which reached an annualized rate of 20% in the US by 1980. Although anecdotal evidence suggests some strong inflation, virtually all official government data suggest inflation is under control.
However, there are many economists who believe that inflation is more a matter of escalating monetary aggregates. There is plenty of evidence that rising inflation should become an increasingly positive factor for the precious metals.
During periods of rising inflation—such as 1976 through very early 1980—inflation-driven gains in interest rates can also be very positive for the precious metals. However, rising rates driven by efforts to clamp down on the money supply—as in mid-1980 through the end of 1981—coincided with negative performance in the metals. Interest rates are now at historically low levels, as are reported levels of inflation.
International tensions were also a substantial factor leading to January 1980. Today, we appear to have a growing sense of international confrontations with the North Korea-South Korea squabbles at the top of the list.
From 1976 through 1980, these markets were moribund, idling between 750 and 850 on the Dow Industrials. Many market observers noted this indicated a general sense of pessimism among investors. Today's markets, on the other hand, are roaring ahead to all-time highs.
While there are other factors, these are among the most important. Many of these factors have at times appeared ready to burst into prominence, generally in favor of the metals. But somehow any genuine crisis has been averted, which has led to a growing level of skepticism, now coming to fruition in the form of a technical breakdown in the metals' price charts.
I would not be surprised if a "snap-back" rally in both metals and mining shares will take place. In all likelihood, margin calls are beginning to diminish, technical selling will abate, and a sense of panic will be followed by a sense of opportunity among some that this is the time to pick up bargains.
If a snap-back rally does occur and is short-lived, not rising to recover all the recent losses, then I would offer the opinion that more selling—perhaps of a severe nature—will be in store. However, if the rally does recover that lost ground and then some, a full resumption of the golden bull market may indeed take place.