Since the speculative highs of 2011, the precious metals are continuing to correct and head lower, even in the face of Operation Twist and the ECB's Long Term Refinancing Operation (LTRO) printing. And with the elections in France and even more socialism on its way, it looks like Euroland is ready to run the printing press again and the Fed will join the party. But I am not convinced that gold and silver will take off right away. Everyone knows that the central banksters are running the printing presses on overtime, so in effect, we always had and always will have QE, yet the price of the metals continues to drift lower.
When comparing the 2007-2008 peak and crash to what we are dealing with now, I think we have to look beyond the chart patterns and timing. Looking at market conditions and sentiment for clues to turning points is just as important. Back in '08 we had a liquidity event which caused the nose dive in the markets. Once the system was liquefied by TARP and then QE, the precious metals came bouncing back fairly quickly and then went on to make new highs right after QE2.
We appear to be in a period where the gold price will not run away quickly anytime soon, but we are also in the midst of a long drawn out liquidation of the metals as the central banksters keep accumulating gold at lower prices. Many central banks have been net buyers and importers of gold, and that trend looks sure to continue. So, where is the selling coming from?
From Where Comes The Selling?
The paper selling we are witnessing is most likely squeezing the weak hands into coughing up their gold. Hopefully it's only paper gold that is getting liquidated. Investors in gold and silver may get frustrated and then capitulate into selling as the paper pushers continue to force them out of their positions. But there are two potential catalysts that could reverse this trend:
1. If the shorts are forced to cover their position and decide to jump on the long side
2. The paper traders are forced to deliver the physical, which will most likely never happen.
Black swans are always lurking in the background, but they have yet to rear their ugly heads and the gold market is not anticipating any of them at the moment. Until they appear, the precious metals may continue to drift lower.
The metals have been in a great bull run for the last decade. But, what we haven't seen yet is a 1974 style peak and trough that lasts for a couple of years. That is where we could be heading with precious metals right now. In September of 2011, the price of gold peaked over $1900 and ever since then has been correcting lower (now almost nine months later). During 1974 the peak price was just under $200 at which point it went into a tail spin falling to just above $100 in the summer of 1976. After the negative trend continued for almost 2 years and then a sideways base during 1977, the gold bull market raced to its 1980 high around $850.
Until we see the fundamental shift back to gold, we are more than likely to continue correcting and then build a base just like in the mid 1970s. The one thing to note is that gold peaked in early 1974, corrected for about six months and then went on to make a high by the end of 1974 before the major correction started that lasted almost two years. If a similar scenario plays out, then the correction we are currently in may end at the support and third test of the $1550 price range. If this is the case, we could see a strong rally which would take the price of gold right back up to $1900 or higher before starting another bear phase in the long term bull market.
The End May Not Be Near
This standstill could last for some time still. Especially since all the "speculators" are getting wrung out of the system as they have been taken to the cleaners in the last year. More than likely, the average investor will stay away from precious metals until we have a major currency crisis. Something that is more than just the problems that we currently see in Euroland. Until then we can expect the downtrend to continue and move sideways. If this scenario plays out like it did in the mid 1970s, we could still be in a period of time where the gold price continues to correct lower. This could bring the price of gold towards $1200-$1400 in the coming year.
If gold can hold support at $1530, then this correction may be over and the price of gold will continue higher toward the end of this year or early next year. If the broader stock market continues to sell off, the Fed may pull the trigger on more easing, which could reverse gold's negative trend and then we are looking at a target price of around $2100.
There seems to be no consensus among investors or analysts on which way the price of gold will go from here. But if the mid 1970s bull market in gold is any guide, be mentally prepared for a lower price. Then be ready to take advantage of the coming basing period and average down on your physical holdings at these lower prices. If the correction is over and we get a strong bounce from here, expect higher prices and a much better opportunity to sell. We are currently in the eye of the storm of The End Of The Montetary System As We Know It (TEOTMSAWKI). The pain is not over yet and neither is this gold bull market, the looming currency and debt crisis will make sure of that. Just remember that the hardest thing to do as a trader and investor is to stay long for the full extent of the bull market. This rough patch is again testing the mettle of investors.
The TDV Trader Strategy and Outlook
We have been lucky to have played the last six months almost perfectly. We were strong buyers of the junior gold stocks throughout December and then after they rose significantly on March 2nd we issued a dispatch to TDV Golden Trader subscribers entitled, "Trade Alert: Close Out Many Of Our Trading Positions". We sold most of our trading positions on that day... something that has worked out tremendously well as shown by the chart of Market Vectors Junior Gold Miners ETF (GDXJ).
Will this be the bottom? Nobody knows. But we are remaining patient and waiting until we see the whites of their eyes before we reload and buy back in. In the meantime we are advising subscribers to do the same and looking for stink bid opportunities to buy some of our favorite gold stocks at ludicrously low prices should a seller need to get out in an illiquid market.