Precious metals have posted their best quarter in nearly 30 years and mining stocks are soaring from oversold multi-year lows. Those that were willing to buy when everyone else was selling have been handsomely rewarded in 2016. But we believe the gains are just getting started.
After such a huge move to start the year, many have been anticipating a sharp pullback for gold and silver on profit taking. This would make sense, especially considering the record short positions by commercial traders. Plus, nothing goes straight up, not even deeply oversold assets awakening from a 4-year correction. It is almost always a roller coaster ride.
Yet, gold and silver are refusing to give back any significant amount of their recent gains.
The first mini-pullback occurred during early February, when gold fell from $1,250 to $1,200. But this 4% decline lasted less than a week and gold proceeded to climb to a new high of $1,272 on March 10th.
The second mini-pullback brought gold down from its 2016 high of $1,272 to around $1,215. This 4.4% decline lasted roughly 3 weeks, but gold once again bounced back above $1,250 on April 11th.
Most recently, we’ve had a 3-day pullback to $1,227. This was followed by another spike above $1,250 and a subsequent pullback to a higher low of $1,232 on Friday. But today, gold is once again pushing higher and looks poised to reclaim $1,250 once again.
There seems to be no major momentum to the downside, as we’ve become accustomed to over the past several years. Most of the weak hands have been shaken out of the market and primarily strong hands remain.
Where are all of the Sellers?
We already know that central banks aren’t selling, as they continue to accumulate gold at a record pace (especially in the East). We also know that investors are not selling, as investment demand has increased sharply (especially for silver). Hedge funds have also been piling into precious metals, chasing value on signals that the bottom is in.
And perhaps Deutsche Bank is no longer piling on paper short contracts to exacerbate the downswings in precious metals after getting caught manipulating prices. With the spotlight on big bank manipulation of gold and silver, lawsuits springing up and rumors that Deutsche Bank will be ratting out their co-cospirators at other banks as part of their settlement, maybe (just maybe) we are seeing price discovery function as intended in the free markets.
If the price manipulation via the COMEX does resume in full force, it will be interesting to see how much prices diverge versus the new price fix on the Shanghai Gold Exchange. The arbitrage opportunities could wreak havoc and the CRIMEX may have to resort to cash-only settlements or finally default.
Whatever happens to these fraudsters in the long run, I expect a short-term boost to the gold price following the FED meeting on Wednesday. The likelihood of the Federal Reserve announcing another rate hike is slim to none and the sinking realization that the FED can’t raise rates will continue to bolster gold and silver. The chance of an April rate hike is currently priced in at 2%, while a June hike has a 17% probability.
Hesitant gold investors, still licking their wounds from the past few years, have been cautious to jump back into the water. Too many of them have completely missed a rally of historic proportions this year. The water is warm, yet they are waiting for a big correction and lower price. But the problem is that a big correction hasn’t materialized. We continue to see only mini-pullbacks and the buying opportunities evaporate quickly. This doesn’t mean that a bigger correction can’t happen, but let’s look closer at the upside potential and downside risk from current levels.
Price Targets of $3,000 Gold and $75 Silver to Match Previous Advances
If gold did indeed bottom around $1,050, this new bull market trend is only getting started. The rally that followed the 2001 low generated returns of around 295% for gold. It advanced roughly 4X from $255 in March of 2001 to over $1,000 in March of 2008!
The rally that followed the 2008 financial crisis generated returns of 132% for gold in under three years. The gold price more than doubled from the low of $681 in October of 2008 to a high around $1,577 in April of 2011.
So, while the 20% move higher toward $1,300 has been exciting, gold would still need to climb to somewhere around $3,000 per ounce ($1,050 bottom x 3) to match the gains that gold experienced after bouncing from its prior bottoms.
Silver is holding around the $17 level, up 23% so far in 2016. The rally that followed the 2001 low generated returns of around 433% for silver. It advanced roughly 5.3X from $4 in March of 2001 to over $21 in March of 2008!
The rally that followed the 2008 financial crisis generated returns of roughly 500% for silver in under three years! The silver price went up 6X from the low of $8.40 in October of 2008 to a high of nearly $50 in April of 2011. Could we see another run of this magnitude in the years ahead?
If you thought the $3,000 price target for gold was exciting, consider the following. If the current bull move in silver matches these previous uplegs, silver would need to climb towards $75 per ounce ($13.60 bottom x 5.5).
Of course, there are no guarantees that the current bull move from multi-year lows will match those of the past. But it helps to put some context around the current move and the upside potential ahead.
Investors kicking themselves for not buying near the lows have certainly not missed the train. We are only in the early innings of this ball game. Investors might want to consider edging into new positions now and getting some skin the game. They can then add via buying in tranches over the next few months and lower their average cost if prices do drop.
I estimate that gold has upside potential of around 120% from current levels and downside risk of only around 30%. I project silver’s upside potential at around 440%, with downside risk of 40%. The risk/reward set up is extremely favorable to the long side.
Owning quality mining stocks increases your leverage and potential returns. So far in 2016, mining stocks have been offering leverage of around 4X the gains in the underlying metals. Many of the mining stocks that we track are up 100% to 200% in 2016 alone! Of course, it is very important to do your homework and pick only best-in-breed mining companies with management that you can trust.
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