The Precious Metals Correction

by David Galland

As I write, the markets are taking a drubbing – and by “markets,” I mean pretty much all of them.

Given the lack of time and our only tangential interest in the broader equity markets, I’ll comment only on the precious metals and related investments. From its recent peak of $1,421 on November 9, gold has fallen to $1,330 in the spot markets – or about 6.4%. Likewise, silver has fallen back from a recent high of $28.50 to $25.11 – an 11% correction.

As explained in an article titled When Gold Corrects, How Low Does It Go? in the current edition of The Casey Report, helpfully published before the correction, BIG GOLD editor Jeff Clark presented a chart showing gold’s corrections back to 2001. In the most recent correction, June 10 – July 28, gold dropped 8.2%. In the two corrections prior to that, gold fell just over 12%.

As for the gold stocks, especially those of the smaller variety followed in our International Speculator service, their oft-noted volatility has again been in evidence in this sell-off. Using the example of Alexco, which was trotted out in a cautionary article in this service on November 5 in which Louis James warned existing holders to take profits on the juniors, we can see the stock has fallen by about 18%.

Quoting Louis from his article…

    So, this note is just a friendly reminder to all our readers that you should take profits when you have them. I’m not referring specifically to Alexco here (though it is up 140% from a year ago), but to any big winners in your personal holdings. If this latest spike has given you your first double or better on any of your shares, we recommend selling half or at least recovering your initial investment.

    This does reduce your upside in those shares, should they continue higher, but it completely eliminates any risk you have in the play. Let me repeat that: You still have the same exposure to the upside you started with, and ZERO risk. That’s the Casey Free Ride, and I heartily encourage you to take it.

Words to the wise, and words that I hope those of you sitting on the big wins (and there have been many of late) heeded.

But even the large-cap stocks followed in BIG GOLD have come off, hard. Silver Wheaton, featured in another article in this service titled This is Not Normal, which ran on November 9 – the apex of the recent run-up, it turns out – is now trading at $31.50, off from its recent high of $37.15. That’s a hard hit of 15%.

In that article, I wrote:

    Personally, my answer is that they [the metals] have definitely gotten ahead of themselves. But this is little more than the entirely ordinary ebb and flow to be expected in a secular bull market. It would be shocking to me if the precious metals didn’t take a breather in here – but I don’t think that if they do, they’ll drop overly far (5%?) or stay down for any length of time.

So, for the record, the size of the fall has been more than I anticipated.

But all of that is looking backwards. It is, of course, the future that most concerns us.

The current setback in the commodities can be attributed to two factors. The first is that there is an increasing amount of institutional money in these markets, much of it dedicated to gold and silver. The managers of these funds invariably get paid bonuses based on performance. Thus, it is entirely normal that the sort of run-up recently experienced by the metals will trigger profit taking/bonus making. 

This does not change the fundamentals for precious metals, although it does suggest that, going forward, especially energetic run-ups will be followed by opportunistic institutional selling – even as the underlying trend for the metals remains intact and moves higher over time.

Secondly, and more importantly, the world’s monetary system is seriously damaged and at risk of coming apart at the seams. That means big changes – and big changes don’t happen overnight, and not without a lot of thrashing about.

An appropriate way of thinking about things is to picture a cartoon character running away from a crocodile, only to come face to face with a lion blocking his path.

The character screeches to a halt, yelps, then heads back in the opposite direction, but before long again comes face to face with the croc. Again, he slides to a stop and reverses directions, but as the lion has steadily moved in, has even less room to maneuver before coming nose to nose with the lion.

As the scene ends, the lion and the croc share lunch.

Back in the adult world, the dollar has been horribly chewed up of late – despite the growing storm clouds over Europe, especially Ireland, Portugal, Spain, and Greece, which has again been in the news in an unflatteringly way. Here’s just a smattering of the bad news now coursing through the wires…

Signaling that the crisis in Europe is again about to become acute, the cost of insuring the sovereign debt of those countries has soared to levels last seen only at the height of the first round of the Greek crisis.

As a consequence, the world’s money managers – after having run screaming from the crocodile of $600 billion in quantitative easing by bailing out of the dollar – find themselves at the point where they are again unable to ignore the hot breath and sharp teeth of the lion of European sovereign default. And so they’re rushing back toward the dollar croc… if only in the hope that some miracle will appear before they run out of room and out of time.

The chart here shows that reversal in the dollar, with the greenback strengthening against the euro and – as you are well aware –  tangibles priced in the greenback, most notably gold and silver.


Again, the fundamentals of the situation for all the fiat currencies, and the bankrupt sovereign states standing behind them, have not improved one iota. They have only grown more dire.

Thus, to let this temporary run back into the dollar rattle you into intemperate action would be a big mistake – in our opinion. 

Some thoughts on profitable actions you might take.

If you’re still in the process of building your precious metals portfolio, then the current sell-off is a great opportunity to fill in around the edges. As we discussed in the November 8 edition of this service, we continue to recommend limiting the metals to no more than 33% of your total portfolio, and periodically rebalancing  to that level.

Looking over the stocks we follow in our paid services, I can see some tremendous values reappearing – companies with proven assets and great management teams. When this correction ends, there will be a scramble to snap these stocks up. If you have a good tolerance for risk and volatility and are looking for the big returns, then you definitely want to take us up on our 3-month no-risk subscription to the International Speculator. That will give you the biggest bang for your bucks.

For the more conservative among you, the sell-off in the big producers followed in BIG GOLD allows you to buy at steep discounts to where they’ll be heading once the institutions pile back in (most are limited by prospectus to invest only in the liquid large-cap stocks). The trick is to get back into these stocks before they do. Quoting the Explorers’ League motto, Fortune Favors the Bold!

If your portfolio allotment to the precious metals is already topped off, then at this point holding tight and maybe doing some dollar cost averaging makes a lot of sense. If you’re like most of our paid subscribers, you already have a number of favorite stocks that you follow – and soon will be a good time to start buying more.

Could the correction in gold take it down by 10% – to the technical support level of around $1,275? At this point, that has to be a real possibility, though if I had to bet I think the bottom is more likely to be put in at or around $1,300 – as below that, the yellow metal will again seem cheap to many.

As no one can know, the best bet, in my view, is to hold fire just a bit longer and see if gold breaks under $1,310 (that would take it down by about the 8% witnessed in the last two corrections) – and then start buying in tranches. I would also favor focusing on the very best of the gold stocks, big and small, over the physical metals, as those will offer the greatest leverage to the upside as this thing turns around. Given that silver has sold off even harder than gold, I have to think that it – and the silver stocks – will bounce back further and faster.

Of course, this is all conjecture – but hopefully of some use in your own calculations.

The key thing here is that the fundamentals haven’t changed and so, in time, the dollar will again weaken and the metals bounce back.

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