With this latest correction, plenty of pundits are coming out of the woodwork to claim the bull market in metals is over. These outrageous claims pop up every time there is a healthy correction in the gold bull market and frankly are laughable. I don’t know if these writers truly belive it or are just begging for attention, but the last time we heard this chatter was in April of 2005, just prior to the HUI going on a run that saw the index double in about a year. Richard Russell from the Dow Theory Letters put it best with his rodeo bull analogy:
When you are in a long-term bull market it will do everything in its power to throw you off and make you leave prematurely. The safest, easiest way to accumulate real wealth in these conditions is to hang on until the ride is over.
We could go on in detail about how the fundamental reasons for investing in gold are still in tact, but let’s take a look at the long-term chart to see what it tell us.
The first thing to point out is that the long-term uptrend channel is not even close to being broken. Gold stocks (HUI) would have to drop below 250 before the bottom of the channel is violated and before anyone should be talking about the bull market in gold being over. Even then, we would need the HUI to sustain levels below that bottom channel for several weeks before talking about the end.
What might be confusing and worrying some analysts is that the HUI has broken the bottom support of channel II. Gold stocks entered into a short-term channel with a steeper slope in 2005. The slope of this channel was much steeper than the long-term channel and simply couldn’t be expected to continue in the long term. Breaking below this channel and into the long-term channel should not be misinterpreted as the end of the bull market. It might signal the end of the aggressive (channel II) slope, but it clearly does not signify the end of the gold bull market.
We believe that gold and silver are in a secular bull market. A secular market trend is a long-term trend that lasts 5 to 20 years, and consists of sequential primary trends. In a secular bull market the bear markets are smaller than the bull markets. Typically, each bear market does not wipe out the gains of the previous bull market, and the next bull market makes up the losses of the bear market. Looking at the chart above, it is clear that the corrections (including the current one, in all its severity) have failed to completely wipe out the gains of the previous uptrends.
If you agree that we are in a secular bull market, there is additonal evidence to support the view that we are in a correction and not the end of the gold bull. Secular bull markets consistently make new (record) highs. In the case of gold and silver, neither has come close to their 1980 highs ($850 gold / $50 silver). But even those goals are modest: In 2006 inflation-adjusted dollars, gold would need to surpass $2000 to make new highs. So is it believable that gold’s May spike to $725 was the end of the bull market? What about silver’s recent high of $15? Is that the highest it has to go? Is the bull market over? Yeah right.
As I am writing this, the HUI is continuing to drop and has shed 4% today. Gold is down $9 and has given back all of yesterday’s gains. We could see additional downside action, but don’t expect the price to fall below $550. It is still our position that times like these should be used as buying opportunities. Gold under $600 is going to look very cheap in the near future and those with the nerves to buy into this weakness will be rewarded handsomely.
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