Gold and Silver: Is the Party Over?

There seems to be a fair amount of kudos over the collapse of commodities last week. Both gold and silver got whacked. So, is the great bull run over?

I doubt it, and this is why:

First, consider that the past two bull markets/bubbles - tech and housing - ended after interest rates rose to cyclical highs. Today, the Fed funds rate is 2.25%. I think it is a pretty safe bet that we are not at a cyclical high in interest rates.

Second, the problems in the financial system are being solved with the creation of liquidity. It is unlikely that the excess liquidity will be mopped up any time soon. Heck, we haven't mopped up the excess liquidity from the response to the collapse of the tech bubble, let alone the housing bubble.

Tech stocks collapsed once the Fed funds rate hit 6.5% and housing began rolling over when the rate topped 5.5%, and the Fed is still cutting. Futures markets are expecting the funds rate to be another 50-basis points lower to 1.75% by summer. Bull markets/bubble usually do not end when rates are being cut, and liquidity is being created. The only caveat would be if we are entering into a deep and prolonged recession, which I do not believe we are.

Third, structurally, nothing fundamental has changed. There have been no new sources of supply found, and emerging markets are not going to collapse back to pre-2000 levels. Could there be a global recession? Absolutely. Will that dampen demand? Probably. But that does not mean the end of the structural bull market. Remember that from 1981 through 2000 stocks went through corrections, a crash, a recession and a war, but the bull market continued.

Finally, despite all the clamoring about investors rushing into gold and silver, it seems that there are a lot of average people very willingly to sell their jewelry. At least two articles on people selling their jewelry were published over the last few weeks. You can read them here, and here. Generally, tops are marked by buying frenzies, not average people holding parties to sell their gold and silver.

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Gold fell 25% in a month in May and June 2006. There was a 14% correction in April and May of 2004. Last week's correction was 13%.

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Silver is more volatile. It fell 35% in April/May 2004, 23% in December/January 04/05, 38% in May/June 06, 20% in September 2006, 15% in December 2006, and 16% in March 2006, which ultimately lead to a 25% correction ending in September. Last week, silver corrected 22%.

Until shown otherwise, I must conclude that the sharp sell-off last week was merely a correction in a bull market (a correction, which may not have run its course entirely, however). With gold and silver at less than half their all-time inflation-adjusted highs, I doubt the bull market is over.

Disclosure: I own gold.

Comments

[EE]

You are right, but you better switch to physical silver as it is in a supply crisis that few realize. Try to buy a bar, maple leaf, eagle in any meaningful quantity. Read Hommel's ( silverstockreport.com ) & Butlers comments at (investmentrarities.com) a new one should be out tonight.

[David Lentz]

I'm about 90 percent in agreement, with a couple of bothersome doubts.

What if it turns out that we ARE at a cyclical high in interest rates, with the Fed about to follow the path so well-illuminated by the Japanese, trying to push a string with ever-lower rates for the next decade or two? I don't think that this will occur, as we have the lesson of the Japanese to guide us. But ...

And the other qualm is whether or not we are sliding into a "deep and prolonged recession". Looking at the fiscal challenges ahead of Uncle Sam, with the boomers draining Social Security and Medicare in a single gulp, and the demographics indicating that our only hope of having sufficient workers to bail out our economy is in immigration ... well, you can see my concerns there.

Uncle Sam is not quite ready to make the changes of mind-set that will be required to chart a course out of the mess we are in. OTOH, the US is significantly different from other nations in that we are amazingly willing/eager to shoot the wounded in our societal/economic problems and move on.

[Dragon Master]

One barometer to tell if gold and PM bull run over is to check all of these ANALyists and commentators start bullish without doubts. At that time you don't see such idiot article questioning about gold bull. Then you may think selling half of your position. Another indicator is CNBC Mario big mouth starts blow, not questions. These indicators never be wrong in my trading.

[Gromit]

Very good Dragon Master, you wait for the Chorus to start singing and then its high time to dump and run.