Is the Party Over for Gold and Silver?

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

I doubt it. 

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%.  The Fed is still cutting.  Futures markets are expecting the funds rate to be another 50 bps 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 is if we are entering into a deep and prolonged recession, which I do not believe we are.

Third, nothing structurally fundamental has changed.  There have been no new sources of supply found.  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, stocks from 1981 through 2000 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, which you can read here, and here.  Generally, tops are marked by buying frenzies, not average people holding parties to sell their gold and silver.

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

Silver is more volatile.  Silver 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, 16% in March 2006 which ultimately lead to a 25% correction ending in September.  Silver corrected 22% last week.

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.

I own gold.

Comments

[Running Amok In Fantasyland]

The bull market in commodities and especially gold is not over. The question is, when do you sell.

That usually depends on your entry point. Those in early tend to sell early. They miss the blowoff top (difficult to identify anyway) but also the downdraft when the bottom falls out and there are NO buyers.

That is the trouble with benchmarks. Everybody knows them and they can keep you in too long until it is too late.

I own gold...but less of it. And by the end of the year, probably none.

Then the question is, buy what? Probably something everyone including me is hating or ignoring now. And now is the time to start buying it. That is the benefit of diversification but it's hard to do. The tendency is to concentrate your bets on momentum.