Blackers Blog

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.