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"The HUI is
probably going to make a short-term bottom within the next three weeks, but
speculators who focus on gold and silver stocks should be financially and
emotionally prepared for frustrating back-and-forth price action to continue
until at least the final quarter of this year."
The reasoning behind this statement has been
covered a number of times in TSI commentaries over the past 9 months, but it
is worth reiterating. The first of two main reasons was described as follows
in our 30th November 2011 discussion about the Barrons
Gold Mining Index (BGMI):
"After the 60s-70s bull market reached
the top of a major upward leg (the points labeled 1 and 2 on our BGMI chart),
more than 5 years elapsed before there was a decisive break to a new all-time
high. If the current market does something similar then there won't be a
decisive break into new all-time-high territory prior to the second quarter
of 2013. The point, here, is that the gold sector's seeming inability over
the past 12 months to embark on a powerful new upward trend is consistent
with what happened during the previous long-term bull market."
And:
"...we shouldn't blindly assume that
the current long-term bull market will continue to track the earlier
long-term bull market. Real-time analysis is required at each step along the
way, because the current market could end up doing better or worse than the
earlier one in response to contemporary fundamental developments. We are
simply trying to show that the frustration being experienced by today's
holders of gold stocks was most likely also experienced by holders of gold
stocks at a similar stage of the 60s-70s bull market. In fact, the level of
frustration could have been higher back then because this time around the
BGMI was quicker to recoup the losses incurred during its first major
correction."
In our 2102 Yearly Forecast we repeated the
above comments and went on to say:
"Real-time analysis will continue to
be the primary influence on our expectations, but it makes sense to also keep
the 60s-70s pattern in mind. The fact is that despite the important
fundamental differences between today's situation and the situation four
decades ago, on a 'big picture' basis the current bull market in gold stocks
is unfolding in similar fashion to the earlier one.
Perhaps the best way to view the current situation is to accept that while
the bull market's next major upward leg could soon begin, there's a realistic
chance -- based on the historical pattern -- that it
won't begin until next year."
The second of the two main reasons relates to
the silver market's spectacular 2010-2011 rally and has also been covered in
earlier TSI commentaries. It can be summarised as
follows:
After silver completes a parabolic rise that
results in a weekly RSI of more than 80 and a Market Vane bullish percentage
in the 90s (ideally, 95 or more), the correction low is typically put in
place within 8 months of the peak but the overall correction tends to last a
minimum of 15 months. To illustrate what we mean, peaks over the past 10
years that meet the aforementioned criteria have been labeled "A"
on the following weekly chart. The points labeled "B" on the chart
are the correction lows and the points labeled "C" are when we deem
the overall 'corrective' process to be complete.
The distance from "A" to
"C" was 15-17 months during each of the prior corrections of the
past 10 years. Given that silver was more 'overbought' at its late-April 2011
peak than at any of the preceding three peaks, it is
unlikely that the current correction will end up being shorter than the
shortest of the preceding episodes. It is more likely to last 17 months or
longer. To be more specific, the current correction's price low was probably
put in place during December of last year, but the choppy trading that
constitutes 'corrective activity' probably won't be complete before September
of this year.
While the idea that
the next major advance won't begin until at least the final quarter of this
year is primarily based on historical price action as discussed above, it
also has a fundamental basis. The fundamental basis is that economic
confidence is presently on the rise, leading to the conclusion in the
collective mind of the investing community that central banks will no longer
feel the need to aggressively promote inflation. This explains why gold and
other 'safe havens' are falling out of favour. The
upward trend in economic confidence probably won't last much longer, but once
it ends -- as indicated by a downward reversal in the stock market -- it
wouldn't be normal for gold-related investments to immediately benefit. A
normal sequence would go something like this:
1. The stock market reverses downward on an
intermediate-term basis, indicating the start of a multi-quarter decline in
economic confidence.
2. During the first few months of the downturn,
cash -- especially the US$ variety -- is king.
3. The Fed panics and either introduces new
inflation-promoting schemes or clearly hints that such schemes are in the
offing.
4. Gold begins to trend upward in anticipation
of more Fed profligacy and its deleterious effects on money and the economy.
In other words, economic trends, or at least
the general perception of the economy's trend, could push the starting points
of the next major advances in the prices of gold, silver and the associated
equities out to at least the final quarter of this year. In the interim there
would be tradable rallies, but these rallies would end prematurely.
Steve Saville
www.speculative-investor.com
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