Guest Post: Telegraphing The Turnaround In Gold

Tyler Durden's picture

Submitted by Jeff Clark via Casey Research,

As of last Friday, gold has now fallen as much 35.4% (based on London PM fix prices) over 96 weeks. But if you're like us, you still recognize that the core reasons for investing in gold haven't changed. People who sold their gold recently made a shortsighted decision. Before too long precious metals will rebound - and probably in a big way.

But when? Does history have any clues about how long we'll have to wait for that rebound?

Perhaps the most constructive way to forecast a turnaround in gold is to look at how its price behaved in prior big corrections.

Here's an updated view of gold's three largest corrections since 2001, along with the time it took the price to return to the old high and stay above that level.

It has taken a significant amount time for gold to return to old highs after each big selloff this cycle. And the bigger the correction, the longer it has taken—with each correction lasting longer than the last.

However, I think our current correction more closely resembles what occurred in 1974-1976 than any of the dips so far this cycle. Here's an updated overlay of the gold price then and now.

As you can see, during the big correction of the 1970s, gold declined 47% and took 187 weeks to recapture old highs. This fits in with the pattern discussed above: the bigger the correction, the lengthier the recovery. Another interesting pattern: the time to reach new highs always equals or exceeds the duration of the decline.

While the current correction hasn't been as deep as that of the mid-'70s, the decline is already longer, and it's the most prolonged of the current cycle. It is thus reasonable to expect gold to take two years or more to regain the $1,900 level and continue beyond. Barring a black swan event, gold will likely log its first annual loss since 2000 this year. These are not predictions, just possibilities, and a reminder that if gold is slow to recover, it's simply adhering to past patterns.

However, it's not all bad news, as the chart shows: gold nearly doubled in the two years from its '76 low to its '78 return to former highs. The message here is obvious: add to your inventory at depressed levels. And don't worry about missing the bottom; investors who waited to buy until gold had retraced 30% of its decline still netted about a 70% gain once it returned to prior highs.

The same patterns hold true with stocks. You can see the high-to-low-to-prior-high time frame was longer, but the gains were bigger once the dust settled.

Investors who bucked the conventional wisdom of the day and bought a basket of gold and silver producers in the autumn of 1976—after they had dropped by almost 70%—more than tripled their investment. We're now approaching the degree of selloff that was seen then, setting up a similar opportunity to profit.

Don't let the long recovery times shown in the charts deter you. Stay focused on the pattern; once the declines reversed, the general trend was up. Contrarians and forward-thinking investors need to prepare for that reality, rather than take umbrage with how long it might take to beat old highs. By the time mainstream analysts—who know little about gold in the first place—declare it has entered a "new" bull market, the lows will be long behind us, along with the best buying opportunities.

Selloffs Can Be Profitable Setups

Once gold bottomed at $103.50 on August 25, 1976, the trend reversed and the metal rose a whopping 721% to peak at $850 on January 21, 1980.

Silver's climb was even more dramatic. From its 1976 low of $4.08, it soared 1,101%. This is the 10-bagger grail of investing, where investors had the chance to add a zero to their initial investments.

But remember: the process was multiyear and began after a dismal two-year decline that was punctuated with sharp selloffs, similar to gold's behavior since its 2011 high. While that's a stupendous return within a short time frame, the biggest gains were seen in the final five months. The patience of some investors would certainly have been tested in those first three years.

Here's a look at the gains for the metals from their respective lows.

Both gold and silver logged double-digit returns every year after the bottom (except silver the first year). Once the momentum had shifted, buying and holding while the fundamental forces played out led to huge profits. No "trading" was necessary; just buy after a big correction and hold on for the ride.

No need to attempt to time the bottom, either; those who bought a year after the lows still reaped gains of 490% for gold and 996% for silver. The largest chunk of profits came in the second year and beyond.

Also of note is that the second leg up in precious metals was bigger than the first. There's no reason to think we won't experience the same thing this time around.

The messages from history are self-evident:

  • Be patient. Odds favor gold emerging from a period of price consolidation and volatility. This process will take time.
  • Be prepared. Big gains follow big selloffs. We can't be certain if the final bottom is in yet, but buying at these levels will ultimately net big profits if you're buying the most solid of the major producers and potentially life-changing gains if you're buying the best juniors.

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bigdumbnugly's picture

the turnaround comes the day after kwn throws in the towel.

James_Cole's picture

No need to attempt to time the bottom, either; those who bought a year after the lows still reaped gains of 490% for gold and 996% for silver. The largest chunk of profits came in the second year and beyond.

Buy buy buy!! Always a good time to buy!

Interestingly - and I don't meant to be critical of course - there seems to be a hole in the space time continuum of this meticulously researched Casey article (as all their articles, very very top notch). I notice a dearth of charts from the 80s and 90s. 

What beautiful correction / recovery patterns of gold greatness are you hiding from us Jeff? Don't be such a tease, let us drool at the resilience of pms during those two decades!

life-changing gains if you're buying the best juniors.

Yes, particularly life-changing after they post their financials! 

And potentially life-ending if you happen to buy the worst juniors. 

Pop quiz: what's the difference between the best juniors and the worst juniors?

Answer: A few months!

 

disabledvet's picture

not an expert of course but i wouldn't go crazy either. QE is in my view causing/caused the price of gold and silver to get absolutely crushed contrary to the popular (made for television ad) view. in other words "we have to ditch the whole money printing meme to discover the value of gold and silver" as the argument has been as big a disaster (if not bigger) than the price action. one big reason to buy gold and silver...and other monetary assets...(that does not include any other metal in my view) is because there is so much "idle cash" lying around. what does a huge bank or corporation do with all that cabbage lying around doing nothing? one thing is to buy a gold mine. "it only needs to make a dollar" right? then it's off to "ye olde price manipulation game on the high side" the way Wall Street really plays the game (just look at oil and the price of gasoline, right!) just some idle thoughts of course. i'd be "revving it up" but it costs too much right now.

RockyRacoon's picture

I always want to know what Parick Heller thinks.  Yeah, he's in the business, but always seems to have a level-headed commentary.   When he sees manipulation you can rest assured there is likely manipulation.

Where’s The Gold?

 

DoChenRollingBearing's picture

Good article!  It would cost peanuts to do an audit of Ft. Knox.

SAT 800's picture

What's wrong with a mining stock? it's a stock; that's what's wrong with it. Buying metal and buying stock are two entirely different things. The rationale for buying mining stocks is that it's a play on metals prices; this is completely crazy. it adds another layer, or several layers, of risk on to the fundamental bet on metals prices. If you want to bet on metals prices, buy metals; not stocks. "A mine is a hole in the ground with a liar standing next to it". Mark Twain.

James_Cole's picture

The rationale for buying mining stocks is that it's a play on metals prices; this is completely crazy.

Correct, particularly the type of 'juniors' a lot of these online hucksters pimp. They're not even a liar with a hole in the ground frequently they're a liar with only a bag of rocks. 

A year ago projects with nothing but grab samples were being pushed to ordinary investors on the pitch of absurd valuations. 

http://www.mining.com/klondike-gold-jumps-after-positive-grab-samples-84...

Fucking insanity. 

As far as actual juniors go, remember they're always owned by BANKS and are totally at the mercy of financial markets. Consider investments accordingly...

Panafrican Funktron Robot's picture

Casey is now working with Jim Fucking Cramer at TheStreet to pimp gold paper promises, including miners.  More muppets to slay.  Casey has less than zero credibility on gold.  The people that are non-fucking idiots buy phys as insurance/wealth preservation in the event of an adverse fiat currency event, such as, say, the loss of USD hedgemony, or the breakup of the EUR, or the collapse of the JPY, or [insert problem in your local area currency; I'm sure those in Argentina with phys are very much not sad about having it right now].  If you are buying for any other reason (including speculation), you are Kermit the Fucking Frog.

Panafrican Funktron Robot's picture

I would also really enjoy Eric Sprott telling his retail investors in PHYS just how much they actually have to own in order to redeem for physical gold.  Hint:  If you're less than $450K invested, your shares are cash redeemable only.  Sprott is a fellow Cramer pimp, and can kindly fuck off.

Praetorian Guard's picture

Speaking of Argentine, from some one who lives there:

"Remember those debates about gold being a currency or not? Well, that debate is settled for the Argentine government: Yes, it is a currency. No, you cannot buy it unless you travel to a country that uses it. You may be wondering “But no country uses gold as currency….” Ok, so you cant buy it then. Genius. This is how they explain the new ban, given that after the USD ban people ran to gold to protect themselves, the sale of gold going up 400%. Little by little, they have closed all loopholes and windows."

Ownership and use is also banned...

 

oddjob's picture

the turnaround comes when big banks are properly positioned on the long side.

Kirk2NCC1701's picture

This will happen when they repo the bankrupt gold mines, who will default on their bank loans.

How ironic that mines owe fiat for fiat borrowed. Here, fiat is money, and gold is a metal. Amazing.

Quinvarius's picture

The number of up votes that comment got indicates the turn around has probably already started. 

jomama's picture

on a long enough timeline...

Joebloinvestor's picture

Hope it happens in my lifetime and I have enough time left to enjoy it.

101 years and counting's picture

what a ridiculous post.  finding 1 analog and saying gold will rise because it did then.  gold is in a bubble, has been and will be until about $800-900.  when bubbles pop, they fully deflate.

JailBank's picture

I ask this question of people that throw out numbers like $800-900 calls on gold. What makes you say that is the bottom? Is that a number you heard? A number you made up? A number you researched? Just asking, because if you think $800 is the bottom why not $600? What makes you think we haven't seen the bottom already?

akak's picture

I assume that the rationale for his (shallow, unsupported, specious) price prediction for gold is the same as Jon Nadler's in his constant denigrations of gold (and "Radical Goldbug Extremists") in his recently terminated role as bankster mouthpiece, er, official spokesman for Kitco: no matter what the price of gold is today, or how much the price of gold may have recently fallen, its long-term future price is always going to be $300 or $500 lower than the current price.

Vooter's picture

Bubbles require PARTICIPATION. How many people do you know who own gold or silver bullion? I can count the number I know on NO HANDS. Nice "bubble." Maybe you should try to think a little before you just pull random thoughts out of your ass...

RockyRacoon's picture

Missing element:  Blow-off top.   Ain't seen anything like that yet.  Ask some random folks you stop at the mall what they think about gold.  Your response would be, "Gold what?".  Their mental image is that of gold lamé, not gold coins.

SAT 800's picture

Absolutely. There has never been a market that just "went to sleep"; they go out with a bang.

Al Huxley's picture

Yeah, mister bubbles, tell me, why was gold a bubble but not this?

 

http://research.stlouisfed.org/fred2/series/BASE

 

And if the above is a bubble, then why has gold suddenly stopped tracking it?  You think the correlation was just coincidental?  Or the money supply's going to suddenly contract by 1.2 Trillion, and gold's just anticipating that?

LawsofPhysics's picture

Well, according to two CEO/owners of successful venture capital firms, "gold is irrelevant in modern finance".

The hubris/arrogance among these ivy league folks is simply unbelievable, you really have to experience it to believe it...

 

ATM's picture

But it is irrelevant to modern finance which is entirely built upon hope, counterparty risk and creation of currency from the vacuum of space.

However, gold is not irrelevant to modern safekeeping of wealth, or the ancient safekeeping of wealth or any safekeeping of wealth. It is a timeless safekeeper of wealth. It doesn't rely on hope, counterparty solvency, a printing press or full faith and credit of anyone or anything.

 

Praetorian Guard's picture

Most ancient forms of "wealth" were the necessities of life, i.e. FOOD... the world as we know it is completely different than a juxtapose of the past 5000 years +, the key to continued life TODAY is energy, the world is an energy world which translates to food, etc. Never before has the population been at these levels. If we are talking about a collapse in the full faith and credit of fiat, from a global perspective, many people do not understand the importance of JiT, which translates to FOOD and commods that keep lif as we know it and enjoy rolling from day to day. Unfortunately, if things do not pan out, everyone will be in the same boat. "Wealth" become unrealistic, and non essential. The examples of Weimar and Zimbabwe would not correlate to a GLOBAL event. Much like comparing apples and oranges...

The Thunder Child's picture

Yes because massive money printing causes bubbles in commodities.....

oddjob's picture

How much grain does the Federal reserve keep in the basement?

resurger's picture

maybe you should go back and read gold lease rates goes negative, or maybe you dont know what that means you nub fuck troll.

Quinvarius's picture

Because oil and iron ore are both up 10x since 1999, you think gold up 50% in 40 years is a bubble? 

LOL.  Dude.  Turn off the TV.  There is no metric by which gold is in a bubble.  Especially not here.  This price is the result of CB dumping.

SAT 800's picture

GLD sold off 5.2 Tonnes last month. Hedge funds and Sheeple are dumping; basically. Central Banks are large and unwieldy creatures; and there's no reported sales; and they do get reported.

Quinvarius's picture

CB's lease their gold to others to sell.  They rarely report a sale.  But they lose a lot of gold into the market via leases. 

Al Huxley's picture

GLD sold 14 tons YESTERDAY (according to their dubious inventory reporting, anyway).  Even as of June 18 they had 1001 tons.  Now down to 946.  At the current rate they'll be out by this time next year, if not sooner.

Temporalist's picture

Well Al we are all doing our part and trying to alleviate them of their nasty barbarous relics before they run out.

silverserfer's picture

Gas prices are a bubble too. Dont buy gas untill its $under $2 a gallon.

gjp's picture

at this point it's not going to turn around until the banksters really lose control ... a lot of other shit may be going down at the same time

Scro's picture

Charts and analysis are pretty but do they take into account psychotic behavior?

RockyRacoon's picture

Which brings the modern media to mind.  If gold is such a relic, why is the "price" even reported -- anywhere by anyone?  Why does it roll up at the top of the CNBC screen a hundred times an hour? They can't have it both ways.

Tinky's picture

Simpler yet, why is it obviously so important for Central Banks to accumulate and own it?

viahj's picture

because we are still pricing gold in $, but will not be doing so forever.

ATM's picture

Doesn't matter what you price it in. 

RockyRacoon's picture

Oh.  Yeah.  I forgot.  Ben's famous (last) words.

Quaderratic Probing's picture

Straight line from bottoms at 22,29 and 35 tells me if we get another naked short soon and the Central banks want to break Gold...don't get in the way of it

akak's picture

Despite their pretensions of omnipotence, central banksters are not God (although they do remarkably resemble the other guy who lives 'down below').

dr.charlemagne's picture

JUST KEEP STACKING. I AM LOVING THIS