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.