It’s has been evident for many years that gold and silver (and commodities) are in secular bull markets, which usually last 17 years while secular bear markets last around 15 years. Since the recent bull market for commodities began in 2000, we can predict that this secular commodity bull market will end in around 2016. (Yes, I do believe that the “experts” who predict the “death of commodities” are wrong.)
But like all large cycles, there are smaller cycles in between. Although the large secular cycle points towards a continuous uptrend for gold and silver, I believe that for the next year or two, gold and silver are in for a decline. Here are the reasons.
- The USD will be in a major bull market. The USD and gold/silver prices have an inverse relation: when the USD rises, gold/silver usually fall because of less of a need to hedge against the potential demise of the USD, and vice versa. The recent market action for the USD is typical of a major market bottom: many large retracements with every support line being higher than the previous one (which indicates that there are many powerful forces buying into the market whenever it retraces). From a market action point of view, the USD seems to be forming a major bottom. Take a look at the following chart. From a fundamental perspective, the United States is also one of the most fundamentally sound nations in the world. Europe is in shambles, and China’s problems have just begun to emerge. Meanwhile, the American real estate market has bottomed, and American corporations are becoming fat cash cows. These two factors, technicals and fundamentals, combine to tell me that the USD is heading higher, which means that, (probably) gold and silver prices will fall.
- China is falling really hard. I have a friend in China who owns a fashion product dealer, and he tells me that sales of high end products are really starting to slow down. This has never happened before, even in 2008 when global markets crashed because, at the time, China’s economy was still humming along nicely. Since high end products are highly susceptible to changes in the economic weather, he’s concluded that China’s growth is really starting to slow down, which means that gold and silver will probably fall even further in the future (one of the major drivers in this commodity bull market is Chinese demand).
- Chinese policies are gunning for the real estate market. Almost 20 years ago, Chinese President Deng Xiao Ping decided that real estate would be the primary driver of growth in China. “You hold up the real estate industry, and everything else in the economy will come up with it.” But this time, China is really putting the hammer down on the real estate market because many ordinary Chinese people can’t even afford homes (this could create social unrest in China). As such, Chinese Premier Wen Jia Bao (who, in all respect, is an honest politician who doesn’t make “officially approved” speeches but instead speaks from the heart) recently said that this time, the Chinese government is going to bring down the real estate industry. When real estate does slow down, you can expect many commodity prices to fall, which in turn will drag gold and silver down.
I’ve already stated why I believe that gold and silver are in for another medium-term decline. BUT, here’s why after this decline, the gold and silver markets will surge towards their peaks (which will effectively end this secular bull market).
- The Chinese are buying. The Chinese government, heavily laddened with U.S. dollars, is encouraging its citizens to buy gold and silver as hedges against the potential demise of the USD. In addition, Chinese tradition favours physical assets such as gold and silver as opposed to paper assets (this tradition comes from the Century of Humiliation in which paper assets became nearly worthless due to Western suppression). This means that the Chinese will buy whenever the prices comes down.
- Many large fund managers who believe in the long term bull market for gold and silver are buying. Jeremy Grantham from GMO has already stated that he will buy gold and silver when they decline.
- I’m a big believer in cycles. Predicting that this medium term decline will last for another year, I think gold and silver should bottom in around mid-2013. This means that from mid-2013 to the predicted 2016 peak, there are only 2 ½ years, which is characteristic of the length of the final stage of most bull markets.
I’ve concluded that gold and silver are in for one last retracement before they’ll surge upwards. But the question remains: how far will this retracement go? Although I’m not too sure as to how far gold’s retracement will be, I have a general idea about silver’s decline. The best way to predict the maximum boundary of silver’s retracement is to look at the major support lines.
- Silver has a ton of MAJOR supports in the $20-range. Keep in mind that silver is currently at $27-$28 an ounce. The first major support is $26. This line has been tested multiple times since January 2011, none of which have broken through $26.
- But if silver does break through $26, next stop is $22. This line is the peak in 2008 (remember crude at $144?), and the market had a hell of a time trying to break through it in 2010 on the upside. Once past, most resistance lines turn into supports, which means that silver will need a huge force to break below $22.
- Next stop will be $20, because it’s a multiple of $10 (human psychology favours multiples of 10s).
With every dollar that the price of silver goes down, the amount of selling will decrease as more long term buyers are entering the markets.
Disclaimer: Although I anticipate a decline in gold and silver prices, I am not short these 2 commodities (nor am I long). I plan on buying when they fall.