On days like last week, where gold was once again making new lows, and where it feels like the yellow metal won't stop until it hits zero, you may need the fortitude of Charlton Heston to hang on to your precious metals investments. You will recall that Mr. Heston told a crowd interested in another investment popular in recent years (firearms) that you would have to pry said investment out of his cold dead hands. I certainly feel the same way about gold, silver, and mining stocks. But my beliefs or preferences don't matter much when dealing with a multi-trillion dollar market dominated at the moment by the bears.
However, for those who believe all is lost in gold, silver, or mining stocks I need to remind you that broken parabolas do not mean the bull is dead. People always seem to remember the 1929 crashes, without also remembering the mid-1930s, where stocks did rise from the dead. More recently, in the last decade the Nasdaq Composite crashed nearly 75% (and I believe Apple stock was below 9 dollars), before that index took a swing higher of nearly 300% and Apple went on to make many people rich.
As I wrote in early 2012 regarding the Silver Parabola, the price of silver took three years to be cut in half from 1968 to 1971 before rocketing higher 20 times in less than 7 years. Any veteran junior explorer investor will tell you stories of companies that went from 1 dollar to 5 cents and then back to a dollar on their way to 10 dollars as a reminder that volatility, like broken parabolas, don’t have to mean the end of your investment thesis. The question is whether or not you as a speculator/ investor have the fortitude to withstand the pain of months, days, and years like what we have seen recently in the precious metals space. I certainly hope you do.
It is also the case that bears and shorts make money, and those with a negative view of bullion prices have certainly had the wind at their backs these past 2 years. For those living on the bearish side of the street, here are some downward price targets for you for gold and silver.
The Case for 900 Dollar Gold
In the 1970s bull market, the gold price pulled back roughly 50% from 1975 through 1976. So even if the gold bull market is not over, we could still see a 50% decline from the 2011 peak, or roughly 900-950 dollar gold.
The Case for 500 Dollar Gold
According to many sources, investment demand for retail ETF products has crashed over the last year, with gold ETF holdings at levels not seen since at least 2010, if not 2009 (depending on how you count the stockpiles). If this is the beginning of a reversal in terms of official or central bank interest in gold as well, and if we are in the beginning of a secular bull market both in the equity markets and in the dollar, then a case can be made that gold will reprise its early 1980s price performance. That was a decline, depending on how you measure price (daily, weekly, or monthly) of between 60 and 75%. We should therefore not expect gold to bottom until roughly 500 dollars an ounce.
The Case for Silver Below 10 Dollars
If the above is true regarding a 1980-1982 type event for gold, then the pain for us silver bugs will be even greater. The downside target for silver bullion would be somewhere below 10 dollars. You think it can’t happen? Well, silver hit these levels less than 5 years ago. Of course at 10 or 5 dollars an ounce, I don’t think many primary silver mines would exist, so possibly 30% of global mine supply would vanish (not including problems for secondary silver producers.) The crash in mine supply without a major world depression would be a major catalyst for silver rocketing back closer to its total cost of production—which I believe is far higher than advertized. Likely north of 20 dollars an ounce as the all-in cost of mining silver. So I wouldn’t expect single digit silver to last for long, but it just might happen.
But to go back to my earlier comment about parabolas, a 75% gold or silver crash may not mean all is lost, at least as long as you don’t let the mind game that is the market win out. Besides gold and silver, several other commodities (most notably sugar in the 1960s) experienced 60% plus declines before moving on to new all time highs. Investors always remember the crashes. Just like investors always say they buy low and sell high, or that they are in it for the long term. Many claim more ability than they possess. For anyone who has made a decent sized investment in the precious metals space, history is not necessarily comforting in the short term, but I still believe—for all sorts of reasons—that history is on your side for the long term.
