To Buy or Not to Buy
The precious metals have been undergoing a correction
since hitting their all-time highs in 2011. This is standard behaviour in long
term ‘bull’ markets, where the price has a substantial rise followed by a
period of consolidation, before commencing the next phase of the rally.
Silver started its correction a few months earlier
than Gold’s, but both the metals have now been correcting for some time and are
looking deeply oversold. The mining shares have been hit even harder with some brutal
price movements and heavy volume, suggesting there has been a capitulation,
where all the loose holders of stock get washed out in a flurry of selling,
setting the stage for a powerful rally.
Everything
seems to be indicating that we have reached a major low point and should be
buying, so should we dive in?
Well
unfortunately there is a rather large fly in the ointment, namely a pending
2008 style financial collapse, which will have major repercussions.
When the
financial crisis of 2008 arrived it did not just come out of thin air. It
occurred as a result of the credit fuelled boom we had experienced for the
preceding twenty-five plus years and was an entirely predictable event, despite
what you may have heard in the media.
The credit
crisis was bad enough, however that event only signalled the start of a process
that will eventually unwind the excesses of those prior years. This process
normally takes the pattern of a series of cyclical economic collapses and
recoveries, gradually squeezing the excess debt out of the system and returning
asset valuations to normal.
The global financial crisis of 2008 signified the
first of these collapses, the recovery we have seen since is now getting long
in the tooth by historical standards and the next collapse will likely begin
soon, if it hasn’t already started.
When this collapse starts in earnest it will likely
trigger falls in global stock markets and a stampede to ‘safe-haven’ assets,
namely US Treasury bonds, which will drive up the value of the US Dollar
against its counterparts, all of which will initially put pressure on the
precious metals and the mining shares.
I knew that we were facing a major correction in the
precious metals sector and assumed it would coincide with the next collapse,
but I believed that we would have another rally before we reached this point, intending
to exit the sector during this period. I also believed that we would have
another rally in global stock markets that would also help the precious metals
sector.
In short, the
pieces suggesting we had reached the top just didn’t seem to fit together.
Unfortunately over the last couple of months, instead
of staging a rally, global stock markets have gone lower, and the normal
correction in the precious metals has morphed into a serious one, with the
sector showing technical analysis readings not seen since the depths of the
crisis in 2008. All this before the next collapse has even truly begun!
It is the way
the markets have reacted over the last couple of months that has now raised the
probability of the collapse being just around the corner.
It is this imminent risk of collapse that is forcing
me to hold fire on the precious metals at the moment.
In the short term I expect to see a rally in global
stock markets, gold, silver and the mining shares as the conditions are ripe
for a rebound, but I think this rally will most likely run out of steam and
when the crisis starts to bite they will all succumb and go to new lows.
In conclusion, the precious metals realm is very
oversold currently, but it is hard (though not impossible) to see them being
able to mount a sustainable rally in the face of another 2008 type crisis.
Those currently invested in gold and silver may want to sell some during the
course of this coming rally in order to re-deploy their cash at the better
entry levels that will likely present themselves over the next few months, or
they may just choose to buckle up and enjoy the ride.
Be in no doubt, the fundamentals for the precious
metals are amazingly bullish and the upside potential is huge. My expectation
is that once the downdraft from another global crisis passes, the sector should
not only recover quickly, but will also begin the longest and most powerful
rally of its bull market to date. I fully expect to see gold over $5000 an
ounce and silver over $100 an ounce, with the mining shares leveraging those
gains.
This is the first of my comments on the financial
markets. Over the coming weeks I intend to cover a range of financial subjects,
both local and global, as well as elaborating on some of the themes discussed
here.
