How long before gold and silver get back to their highs?

I received two especially troubling emails today. The first was from a reader who had bought silver at $48 in April 2011 and gold in September at $1900, who wanted to know my opinion regarding when he might once again break even.

The second was from the Screwtape Files auditors, who wished to remind me that contributors are not actually paid by the word (or indeed paid at all, a revelation that was something of a shock to me), and so I might wish to keep my next few posts a little briefer.

Alors, on y va:

Assumption 1: both gold and silver will continue to rise, supported by inflationary pressure, the fear factor (in the case of gold, predicated on militaristic events and oil shocks and the like) and the green shoots of industrial growth (in the case of silver, which is supported by its commercial applications far more than its retail investment qualities)

Assumption 2: Gold and silver are not so heavily manipulated (don't get me started...) that they will plunge out of the sky (or sky-rocket up - an interesting take on the the manipulation angle, which has its merits)

Assumption 3: A shock deflationary event does not hit Planet Earth in the next couple of years, such as a new credit crunch, a systemic banking collapse, or an oil price shock so extreme that industry can no longer function.

Given the above, the best we can hope for in the precious metals, represented in the two simplest charts I can muster, is the following:



Gold's ascent has been remarkable in its consistency. I challenge anyone to produce for me a chart which shows such regularity during the last three years (with the possible exception of Autumn 2011). Really, those who refuse to even countenance the idea of gold being 'manipulated up' should have a look at this chart (I know I'm being provocative here: (a) it's what I do, and (b) if you don't consider both sides of the argument, you're as good as dead in the trading waters).

From this gold chart, you'll be back even by November 2012. Obviously, there'll be peaks above the line, as there have been since 2008, so it's likely to be a bit earlier than that, but November 2012 seems to be the limit.

En suite, l'argent:



Same assumptions. A bigger move away from the trend line in 2011, which needs no introduction. If you bought at the top then you might have quite a long wait. Again, assuming that that the fundamentals, events and sentiment don't significantly change, then October/November 2013 looks like the time when you might again break even.

What's going on, Jeanne, I hear you say? This week alone you published not just one but two very bullish pieces on gold miners and gold, and a potentially bullish (long-term) piece on silver (although it was pretty bleak short term). That's true, I did. And I stand by them. Gold is set for a big move up, and its miners could have a really big move up. But then it will come down again, and then go up again, and so on, and so on. The long term trend should not be ignored.

Do I know if it will continue? Of course not. It could go parabolic next week, or break down to $1100. All we can do is buy or sell according to current sentiment (meaning if sentiment is low, we buy, and vice versa) and hope that the long term trend line remains in our favour.

Gold's long term trend line looks strong, as does silver's. Either or both could break, but as we only have history upon which to base our judgements, we have to draw from that evidence base. It will work until it doesn't. Those who made disastrous purchases last year will probably be saved - if they hold long enough. But - for the future, if you still have an appetite for trading/investing - it's far better to think more carefully about where the smart money is going - or from where it's exiting - before following the herd and stampeding into positions which you may soon regret.

Let's hope the above assumptions hold. If last year's events teaches us patience, then that can only be a good thing.

29 comments:

Ol'FordTrk said...

Simply buy now while we are down around the trend line and dollar cost average into more metal. It will shorten your break even date assuming the long term trend charts hold. A small down side risk in my opinion.

victorthecleaner said...

Jeanne d'Arc,

I agree with your idea that gold is manipulated up. Well, it has been manipulated to rise by 19% annually in terms of US$ since 2001 (could be 20% sharp depending on how you draw the line). Have you ever seen such a beautiful long-term chart?

How could this work? In 1996-1998, the Europeans plant a financial bomb under the City of London. They light the fuse and walk away.

Then, early 1999, they phone Summers/Rubin/Greenspan. Hey, guys, did you notice this thing is going to blow off soon? In order to defuse it, you need some 3000+ tons of physical. How are you planning to pull this one off?

Well, if you kindly ask, we might be willing to assist you. But the condition is.....

Victor

Boefke said...

Assumption 2: Gold and silver are not so heavily manipulated (don't get me started...) that they will plunge out of the sky (or sky-rocket up - an interesting take on the the manipulation angle, which has its merits)

Hmmm, don't want to get you started indeed, lol.

But we're not talking about a physical market here. The physical aspect is very small compared to the paper price discovery we have today.

Isn't it more manageable (hate the manipulation-word) because of this, as it is easier to create paper contracts out of thin air instead of physical gold?

Ever thought of what would happen to the spot-price when almost all paper contracts are being dumped, and the big rush for the physical is catching momentum...

Kid Dynamite said...

"I challenge anyone to produce for me a chart which shows such regularity during the last three years"

challenge accepted: CMG. check it out. unreal chart....

ps - @Boefke: physical and paper prices are the same - they have not diverged. So we ARE talking about the physical market here: physical and paper prices thus far remain one and the same.

"Ever thought of what would happen to the spot-price when almost all paper contracts are being dumped, and the big rush for the physical is catching momentum"

that's been the rallying cry of the people who try to get you to buy physical metal and bury it in your backyard - they've been shouting that for 30 years... just keep that in mind.

victorthecleaner said...

CMG doesn't look that neat over more than 3 years. Rejected. I want a full decade.

Victor

Michael H said...

Jeanne,

The correct response to the email query would have been: "Now is a great time to buy AAPL. You'll make your money back in no time."

Boefke said...

@ Kid Dynamite,

Let us state it as the following.

Not YET diverged.

To say that the price is still the same so we're talking of a physical market here is not the way I look at it.
Better look what is traded. When we're talking about yearly mining capacity a day, I think it's hard to stick to the fact this is a physical market......

Not trying to get someone to buy and bury his PM's or whatsoever. Simply act to the knowledge acquired.

My take

victorthecleaner said...

By the way, congrats on managing to deactivate that silly captcha.

Victor

/SleepingVillage/ said...

I enjoy your writing style, JdA:)

I think the Turd and co are on to something with the TITS and the whole sentiment thing. My question is this; have any of you traders formulated a trading system that incorporates mass data like Googly trends etc? One crafty dude at Turdville layered a chart of the gold price over a chart of the number of people searching "gold price" and the result was quite interesting.

Blue line="gold price" search data - Green/red line=gold price


It just made we wonder if a person could use data from the collective consciousness/superorganism to anticipate moves and then trade on it...

I would imagine people are maybe already doing this?

Someday Soon

Nowhuffo said...

George Ure is connected to a fairly long running project of that nature, Sleeping Village. Has a web site at Urbansurvival dot com. I'm almost sure there are others.

Kid Dynamite said...

Victor - JdA asked for three years!

Boefke: "Not YET diverged."

exactly. that's a fact that's lost on so much of the metals community.

I am of the opinion that if any such divergence does happen, it will be short lived (ie, a Hunt-corners-the-market type of dislocation) and quickly disappear/revert.

Dan D. said...

It is this very reason, buyers who bought near the top of the parabolic moves, that I turned against the perma-bears offering to provide my own readers with both sides of the coin commentary. It is difficult for the staunch gold and silver bugs (of which I counted myself until I started to think for myself) to realize that we may be a ways away from seeing those highs again, at least in 2012.

Perhaps to their detriment, the metals were clearly gripped by speculative fever and so many people took such massive losses that they have been spooked and will need time to gather their senses and return to the market.

Best advice is buy the down days.

It's sad that there are people down almost 50% from their holdings because they bought the constant "to the moon" drivel.

Kid Dynamite said...

DanD - sounds like you meant "perma-BULLS" not perma-bears"???

Jeanne d'Arc said...

Thanks for all the comments, guys. Sorry that my time zone difficulties makes it difficult for me to join the conversation.

And to tell the truth, I've been hiding a bit after the Randgold debacle - can you believe I picked some up on Tuesday (!?!) - talk about bad luck. I certainly didn't see that one coming... Oh well, I guess that's now become a 'long-term hold'

(Hey KD - you're the expert trader. What do you do when fate hands you a screwball like that? I'm sure our readers would be interested - as would I..!! I mean, I bought on Tuesday, I was nicely in the green by close yesterday, and then today - bam - down 15%... Do you just suck it up? Bail? Buy more to average down? Hold until it recovers? Buy more hedges? Something else? Or do you never get caught out like that... ;-) )

Anyway, @KD - you win the 'perfect chart challenge'. +1. I did say 'three years', and that CMG graph is a real beauty! What's the explanation, in your opinion?

@Dan - as so often, you and I are exactly on the same page with this. It's what inspired me to get into blogging in the first place: I wanted to try to dispel some of the utter rubbish peddled by perma-bulls, which can have such a harmful effect on the small retail players.

@Sleeping Village: Thanks for the flattery ;-) I'm glad you enjoy the articles. On 'sentiment', I'd been planning a post for a while on it, but it looks like Turd's TITS has beaten me to it. Funnily enough, it's been remarked on at Screwtape on more than one occasion that the readers' comments at Turd's are often a wonderful contrarian indicator. No disrespect to Turd or his followers intended there: but because he has such a large audience, it is a great 'captive sample' of how small investors are feeling on any given day.

@VTC - could you expand on your European conspiracy theory a little? I'm feeling a bit dim today...

Jda

Dan D. said...

@ Kid D

Yes ... my apologies ... meant "Bulls"

Bradley said...

If anyone still cares about the miners anymore, there are a plethora of them that have held the lows of Monday even though the metals futures did not.

GG (2 gap down then high close on 2 of last 3 days)
RBY ("quintiple bottom" 3.20-3.25) and some huge bids were filled all the way from 3.25-3.20
EXK (gap down then close nicely postiive)
ABX (not as good as GG)
AUY (one of the only ones holding 200EMA)
among others.

Also positive is the backwardation now in gold and silver. I don't think I've ever seen backwardation in the gold futures in my 6 years of trading the metals.

Negatives -
Many miners still look awful, though more extended than I've ever seen (MUX THM AG SLW NEM)

The equity markets had a decent pullback today, and I can see the miners' rubberbands being stretched even more if the equity market gets pummeled.

Green Trivial said...

Nice to see some critical thinking standing out a bit from the usual sheep like BS of perma bull/bears.

I used to be long silver until at some point last year when I`ve reversed position and started shorting. Signs were pointing to no more QE in the foreseeable future.
World economy is a giant mess and decoupling` s some fairytale. Without constant injections of cash it would succumb under its own weight. http://juicygrabs.blogspot.com/2011/10/signs-of-worldwide-economic-colapse-and.html

Now with oil possibly hitting 300$/barrel in the very likely event of an Iranian war, chances of more money printing are pretty remote. It would also go against the fake data FED released regarding employment numbers.
Top this with GOP talk of no more money printing. Both Santorum, Gingrich and perhaps even Romney with Ron Paul as sidekick would take away FED`s dual mandate and force them to stick to controlling inflation only.

This is why I think it make sense to go long dollar and treasuries until the November elections and perhaps even further if GOP takes the White House. Europe is a disaster waiting to happen, China is hiding real estate ghost towns, sluggish growth, Australia is leeching on China, US leeching and feeding all of the above`n so on.

Some tend to forget silver is above all else an industrial metal. If industry goes to shit, silver tanks. World economy is pretty much in the toilet atm, riding on hopium. If there`s no hyper inflation, it should only go lower.

I don`t see money printing coming from US this year but there might be some from ECB although chances are not that high. Germany is strongly against it and will continue to be against more LTRO as long as Spain, Greece n rest of the Pigs keep mocking the deficit issue and fake cutting spending(as they do now).

The upcoming European elections in France should be the total fuck up and might seal the end of the EU as we know it. If Sarkozy loses, Hollande(an idiot who wants to increase taxes on rich to 75%, pensions, wages etc) who`s credited with best chances to win, will most likely cause a major split between France and Germany, killing the whole thing. If Marine le Pen wins, it will all go to shit pretty fast as she wants to exit EU and Eurozone.

Elections in Greece also spell trouble as the new government might back away from austerity pledges setting the stage for an abrupt bankruptcy and messy exit.

victorthecleaner said...

Kid Dynamite,

yes, you are right, Jeanne said 3 years. But then I said take a look at the gold price over 10 years and explain it to me. I still think this is a remarkable chart, in particular if you know it is a commodity or if you know it is a currency. In both cases, it is strange, isn't it?

Jeanne,

that's a loooong story and cannot be summarized easily. Take two weeks off (at least!). Go to FOFOA's blog. Read "It's the flow, stupid." and "Flow addendum", "The View: A classic bank run", "Once upon a time" and "Return to honest money".

It is a story about how gold was officially removed from the financial system in the early 1970s, but in fact never was. About how the US$ was kept strong by selling gold to the oil states for cheap. About how the Europeans were pissed off about oil being priced in US$ and how they positioned themselves for the case that the US$ would lose its reserve function. And, of course, about the US$ and how it will eventually end. After reading some FOFOA, go to the old archive and read "Another".

Then think about it and decide whether he was (a) a nutcase, (b) a bragger, (c) an insider.

If you conclude (a) or (b), you just wasted two weeks. If you conclude (c), you understand the world much better than before.

Have fun,

Victor

David Markle said...

Inverse H&S. Second shoulder forming on weekly chart. Two weeks and then up from the 28-30 area.

Jeanne d'Arc said...

@VTC - Thanks for the quick explanation :-) I appreciate it. I'd assumed there was a FOFOA link behind your comment, but I have to admit that I've never bothered to read the comments there (don't be shocked) so I was unaware of your particular geo-political interpretation behind it.

Knowing quite a bit about how governments and foreign policy works - especially foreign economic policy - I have to say that I'm afraid I don't buy it for one second. I'm somewhere between (a) and (b), tending towards (a).

But, rarely for me, this is one discussion I probably won't enter into further(sorry, I won't be expanding on that. Call me a tease, if you will. I know that my not going into detail, or coming up with any kind of coherent argument is both unhelpful and churlish).

Regardless, I'll leave the FOFOA discussions to RLP and Warren, who know far more about FOFOA, Another, and Freegold than I ever will.

Thanks again for contributing to your discussion. You've seen Warren's post on this, and I'm about to leave a comment there which I hope you'll be interested in.

And sorry for not joining in. I only play games I can win, and I know which battles to pick (to mix two clich├ęs at once...) ;-)

Jeanne d'Arc said...

@Bradley,

Oh, I still really care about the miners. We're ready to go ;-)

So, you have a mixed set of calls for the first day of the apparent rebound ;-)

For your positives, (at the time of writing 18:15 GMT, Fri 23 March): GG +2.08%, RBY +3.96%, EXK +4.00%, ABX +1.65%, AUY +4.03%

For your negatives: MUX +10.70%, THM even, SLW +6.16%, NEM+2.39%

My view is that those (solvent) miners that were stretched the most (NEM, MUX for example) will recoil back the most fiercely. Let's see how this plays out long term.

And let's not forget Randgold (RRS in the UK, GOLD in the US) - after the Mali coup this could be either the buy of the decade, or the dumbest trade of the century... Looks like a reversal day so far, but let's see how this story pans out...

Thanks for giving your view here: I'd really like it if you came back again to say more about what miners you follow and why you think they're good bets.

victorthecleaner said...

Jeanne d'Arc,

It would be a pity if you lost a lot just because you don't care, and so I give you another chance:

Knowing quite a bit about how governments and foreign policy works - especially foreign economic policy - I have to say that I'm afraid I don't buy it for one second.

Have you every considered that this might explain the position of sterling in the international financial system?

Finally, why don't you take a look at these:

http://history.state.gov/historicaldocuments/frus1969-76v31/d61

http://history.state.gov/historicaldocuments/frus1969-76v31/d63

http://history.state.gov/historicaldocuments/frus1969-76v31/d64

http://history.state.gov/historicaldocuments/frus1969-76v31/d78

They do have some educational value after all, don't they?

Victor

Jeanne d'Arc said...

@VtC - Nice try, VtC, nice try. I'm not biting ;-)

(PS - I never said I "don't care", I just don't buy it. Government incompetence beats conspiracy every time.)

Jeanne d'Arc said...

But thank you for the links anyway - I promise I'll read them in full. I'm not that churlish... :-)

Warren James said...

Hey Victor, thanks for these links I had not seen these before. Read them with my morning coffee ... I do enjoy a bit of international mystery and I'm glad to have managed to use the word 'conspiracy' in my summary post.

In relation to the low in the gold price, Adam Brochert is calling a bottom in gold (I subscribe). In theory silver should also follow up over the next couple of months. I hope so, since similar to the reader at the top of this post, my 2011 purchases (where I did not dollar-cost-average) are looking quite sad (bought around $43).

Boefke said...

@Warren James

Can you please offer me an insight why you think silver is in for a revaluation?

Eager to know..

Warren James said...

Hi Boefke, revaluation is not exactly a word I would use in relation to silver but if the general uptrend of gold continues it will get some support from the gold price. I have no qualms with silver being in my family's investment portfolio and believe it has great upside potential.

Simply, the price movements of both gold and silver are currently dominated by paper contacts which I presume is why technical analysis works well. And I'm guessing that HFT plugs in values which keep silver and gold roughly in proportion.

But once those paper contracts start to fold, lookout! It won't be a nice experience, as described in an email from FOFOA, "... You can fully expect silver to track gold on the way down. But don’t expect there to be a big shortage of the physical stuff. Don’t expect silver to go into hiding. What’s out there is being held by shrimps and weak hands, not giants with intergenerational strong hands. That’s part of the reason I think FOA saw the GSR going to the extremes he mentioned.".

Hope that helps shed some light on my comment. Explained best as 'date silver, marry gold'.

victorthecleaner said...

Warren,

to be honest, I don't like the word 'conspiracy' at all - because this usually implies that the topic is full of crackpots. It isn't. It is just the case that not all details of international negotiations are open to the public. Such is life.

Victor

Boefke said...

@Warren

You're aware of the risks, good to hear.

Was a bit confused. You clarified it, I hope you will have a good timing to make the best decision if necessary.