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Precious Metals Life Cycle Nears an End – Final Stage of Denial

June 27th, 2013 · Chris Vermeulen · 28 Comments

The life cycle of most things not matter what it is (living, product, service, ideas etc…) go through four stages and the stock market is no different. Those who recently gave in and bought gold, silver, mining stocks, coins will be enter this stage of the market in complete denial. They still think this is a pullback and a recover should be just around the corner.

Well the good news is a recovery bounce should be nearing, but if technical analysis, market sentiment and the stages theory are correct then a bounce is all it will be followed by years of lower prices and dormancy.

I really do hate to be a mega bear or mega bull on anything long term but the charts have painted a clear picture this year for precious metals and I want to share what I see. Take a look at the chart below which shows a typical investment life cycle using the four stage theory.

The Four Stages Theory

Classic economic theory dissects the economic cycle into four distinct stages: Accumulation, Markup, Distribution, and Decline.  Stock, index or commodities are no different, and proceeds through the following cycle:

  • Stage 1 – Accumulation: After a period of decline a stock consolidates at a contracted price range as buyers step into the market and fight for control over the exhausted sellers.  Price action is neutral as sellers exit their positions and buyers begin to accumulate.
  • Stage 2 – Markup: Upon gaining control of price movement buyers overwhelm sellers and a stock enters a period of higher highs and higher lows.  A bull market begins and the path of least resistance is higher.  Traders should aggressively trade the long side, taking advantage of any pullback or dips in stock price.
  • Stage 3 – Distribution: After a prolonged increase in share price the buyers now become exhausted and the sellers again move in.  This period of consolidation and distribution produces neutral price action and precedes a decline in stock price.
  • Stage 4 – Decline: When the lows of Stage 3 are breached a stock enters a decline as sellers overwhelm buyers.  A pattern of lower highs and lower lows emerges as a stock enters a bear market.  A well-positioned trader would be aggressively trading the short side, taking advantage of the often quick decline in share price.

Stages1

 

Gold Price Weekly Chart – Stages Overlaid

gold11

 

Silver Price Weekly Chart – Stages Overlaid

silver11

 

Gold Mining Stocks – Monthly Chart

This chart is a longer term picture using the monthly chart. I wanted to show you the 2008 panic selling washout bottom in miners which I think is about to happen again. While physical gold and silver are in a bear market and should be some a long time, gold mining stocks will likely find support and possibly have a strong rally in the coming months.

Many gold stocks pay high dividends and are wanted by large institutions and funds. The lower prices go the higher the yield is making them more attractive. So I figure gold miners will bottom before physical metals do. A bounce is nearing but at this point selling pressure and momentum continue to plague the entire PM sector.

gdx11

 

Precious Metals Investing Conclusion:

In short, I feel with Quantitative Easing (QE) likely to be trimmed back later this year, and with economic numbers slowly improving along with solid corporate earnings the need or panic to buy gold or silver is diminishing around the globe.

While there are still major issues and concerns internationally they do not seem to have any affect on precious metals this year. Long terms trends like the weekly and monthly charts shown in this report tends to lead news/growth/lack of growth by several months. So lower precious metals prices may be telling us something very positive.

The precious metals sector is likely to put in a strong bounce this summer but after sellers will likely regain control to pull prices much lower yet.

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28 responses so far ↓

  • 1 Greg Atkinson // Jun 27, 2013 at 2:54 pm

    Well I am not normally a gold guy but yesterday I attempted to catch a falling knife and made a small foray into Newcrest Mining (ASX:NCM) at under $10.

    I still think gold has further to fall but even a gold bear like me has trouble resisting a stock that has been battered as much as Newcrest. (it’s a risky strategy & I am not suggesting anyone should follow it)

    As for gold itself, well if it gets near $1000 USD an ounce then I will give it a good look, but for now I will leave the trading to those who know what they are doing.

  • 2 Lachlan // Jun 28, 2013 at 11:48 am

    Oh well Greg, unless you think they are going our the back door, which I doubt, then most of the risk has been eliminated at that price…. even if they go down another 5 bucks…not saying they will of course.

  • 3 Greg Atkinson // Jun 28, 2013 at 12:23 pm

    Well that was my thinking as well Lachlan. Despite the current woes at NCM they still have access to some substantial gold deposits and perhaps at some point they become a takeover target?

  • 4 Biker // Jun 28, 2013 at 6:36 pm

    Nah, under ten bucks you’d have to be relatively safe, Greg. Those in the business see this as a hiccup.

    ‘‘We expect the prevailing gold price uncertainty to persist short term…”

    Even the ANZ agrees!~

    http://www.watoday.com.au/business/mining-and-resources/price-slide-whacks-gold-miners-20130628-2p2ee.html

  • 5 Greg Atkinson // Jun 28, 2013 at 8:30 pm

    We shall see. By the way, by under $10 I mean between $9-10$ just to be clear. So if the shares get down below $9 I will taking hits.

  • 6 Biker // Jun 28, 2013 at 8:49 pm

    And if NCM hits five bucks, I’ll _probably_ buy… .*

    * Always looking for the absolute bargain(s). 😀

  • 7 Lachlan // Jun 29, 2013 at 9:17 pm

    I agree with Chris above on the technical side of the argument and I also admire the man as a price technical trader. It looks bearish for gold technically. His prognosis imo is correct from that side of the coin…. but the fundamentals still point to financial instability longer term so that technical prognosis may be trumped at some point and the up-trend regained. Have to wait and see.

  • 8 Biker // Jun 29, 2013 at 11:00 pm

    “…the fundamentals still point to financial instability longer term…”

    There’s no doubt about that, Lachlan. There are two problems inherent: 1.) How _long_ a term?; and, 2.) Does this automatically mean PMs will recover (let alone reach the heights proposed by goldbugs)? There are some very complex factors in the latter proposition.

    I can’t help but think that the simple equation used in proposing astronomical gains for PMs is just that: too simplistic. Fear and greed are certainly two of the elements in play, but there are so many other variables… .

  • 9 Greg Atkinson // Jun 30, 2013 at 7:02 am

    Well regarding gold the price this has now crashed below production costs which makes things very interesting.

    From CNBC:

    “Gold fell to its lowest level since 2010 on Friday to under $1,200, which is what it costs many miners to produce an ounce of gold, and analysts tell CNBC that miners will be “severely” impacted if prices stay here.

    Andrew Su, CEO at brokerage Compass Global Markets said the average cost of producing gold in Australia, home to some of the world’s biggest gold miners, has jumped from $500 an ounce in 2007 to over $1,000 an ounce this year.

    “What I believe is that the official costs, the costs in reality, are significantly higher than $1,000. So we’ve had quite a few gold mines close in Australia,” Su said on Friday. “We’ve had some companies actually go bust and we’ve also got significant job cuts by big miners like Newcrest, Barrick, and Silver Lake Resources.”

    Source: Gold Crashes Through Production Cost Levels

    Now in theory we should see supply start fall as expensive gold mining operations are mothballed. That should help support prices but at what level? $1000 USD an ounce?

  • 10 Lachlan // Jun 30, 2013 at 7:41 am

    That is all true BP, I agree. It is more complex than bugs commonly thought since I have observed the thoughts of the group very closely. Handy little thing this internet.
    From the price action point of view it is more possible now that my PM’s could fail as a speculation. I originally bought as a trade on adjustments in the land to gold price ratio. Some degree of adjustment came and I held my position which has now reversed again.
    However Bernanke’s gold as a tail risk hedge is always going to hold true. In truth that is a seldom event, but not irrelevant either. And over a longer term it is a reliable inflation hedge just as any other. If my business remains on the same growth trajectory then my PM’s holdings will reduce to a more reasonable percentage on their own in a few years ie 5-10%. I am hoping to maintain some forms of business income until I depart planet Earth. The idea is to remain engaged in activities I enjoy. I have them included in a business plan and my hopes are high, expectations need not be so.

  • 11 Lachlan // Jun 30, 2013 at 7:44 am

    There was a small sharp price recovery last couple days Greg. May fail of course but it is better than the previous weak, flagging action following other down spikes of late.

  • 12 Biker // Jun 30, 2013 at 9:10 am

    “I am hoping to maintain some forms of business income until I depart planet Earth. The idea is to remain engaged in activities I enjoy. ”

    Worthwhile goals, Lachlan.

  • 13 Stillgotshoeson // Jun 30, 2013 at 9:57 am

    “I am hoping to maintain some forms of business income until I depart planet Earth. The idea is to remain engaged in activities I enjoy. ”

    The coffee shop has been a winner for me in that respect Lachlan, it is providing a steady income and gives a bit of security.

    I was asked to go partners in it a while back and kept saying no and finally commiting to it.

    With out a doubt it has been the single best investment decision I have made to date.

  • 14 Richard // Jun 30, 2013 at 10:59 am

    Excuse my ignorance Biker,but what is the PM you refer to ?

  • 15 Lachlan // Jun 30, 2013 at 11:06 am

    Maybe that says something for diversification Shoes. In our nearest big town there are a few coffee shops and they seem to be busy whenever I go in there…usually waiting for my car servicing. There is a massive new mitre 10 also with a coffee shop which it never had at its old location.

  • 16 Richard // Jun 30, 2013 at 11:10 am

    Never mind – just realise Precious Metals (duh).

  • 17 Stillgotshoeson // Jun 30, 2013 at 11:26 am

    Retail stores are flooded with those DIY coffee makers using the pods and I thought they might put a dent in sales but still going strong. Workers pop in for a take away coffee and something to eat and people still like to socialise whilst having a cuppa or two.

    Sales drop a little around this time of year as it is colder in Melbounre and the outdoor chairs/tables are not used as much.

    Last week was good though with some nice sunny winter days.

  • 18 Biker // Jun 30, 2013 at 11:52 am

    Many a family fortune has been built on the back of a quality cafe. Interesting to see very slow business in those in WA hardware stores. The stand-alones are doing brisk trade.

    Singapore coffees are surprisingly expensive (Perth prices); whereas most consumables there are cheap.

    Hard to go wrong with coffee in Melbourne, Shoes.

  • 19 Ross T // Jul 1, 2013 at 10:12 pm

    Interesting post, but I doubt the long term trend. The gold markets are way too easy for banks and the rich to short as part of the ongoing currency wars. Its another part of their ongoing theft of small investors funds.
    Now that the market (the free part) is aware of the tactic they will adjust their computers accordingly and find other ways of fighting back.
    As for the mythical growing economy – the Fed has overestimated the US economic growth many times. Cutting the gold price wont make it better and government expenditures will never stop growing.
    It almost feels like they are trying to make another GFC so they can gain more control.

  • 20 Biker // Jul 2, 2013 at 12:32 am

    It’s unlikely to be a conspiracy, Ross; but government intervention is undoubtably a factor.

    The likelihood of any political leader anywhere introducing and maintaining austerity measures is slight. You just don’t get elected or stay elected by sticking it to the voters. There just aren’t enough winners wandering about on scorched earth to keep you in power. Voters need that little bit of stimulus to keep ‘em happy… .

    ‘Cutting the gold price’? Why bother? Gold was never a threat to paper currencies. Gold is harder to print (even with these new-fangled 3D printers) than 2D paper.

    No, gold may thrive in times of fear and inflation, but it’s an inert hedge at best; no rents or dividends… and it’s easy pickings for miscreants.

    Most of the predictions I’m reading at present view gold in a three-year slump, some longer. If it drops below $1000/oz, real panic will set in.

    Ironic, isn’t it, that goldbugs have long and loudly predicted such a scenario for Australian property? Always messy when the karma hits your dogma… .

  • 21 Greg Atkinson // Jul 3, 2013 at 7:07 am

    Well maybe gold has found a support level around US$1200 an ounce but is this a level from which it will rise again or is it just a pause before it heads towards $1000?

    For those who believe in the reversion to the mean when it comes to financial markets the outlook could be for the gold price to maybe drop some more and then bounce around sideways for a few years.

    For gold bulls…well I imagine they expect the price to bounce back strongly and their faith in gold has not been shaken..much.

    For the gold bears, well from what I have read many of them expect gold to get down near $1000.

    As for me…well I have been talking about a sudden drop in gold prices for some time and now that it has happened, I will sit back for a while and see what happens next. I am in no rush.

  • 22 Ross T // Jul 7, 2013 at 11:01 pm

    Not an intentional conspiracy, however according to Tal, whenever the money printing “tapers” off, prices need to readjust and in the process some speculators take a beating. The real question is whether all that stimulus has improved employment or not. Its pretty clear that the employment participation rate in the USA has been falling since 2000 and in Australia we are hanging in there, just.

    The next problem is overall uncertainty, people need to make plans and when powerful entities inflict uncertainty they essentially force people to abandon any long-term thinking they might have had. Last if the best and brightest waste their lives making short-term profits by double guessing the Fed, then they are not using their time and effort to optimize productive output.
    The central banks talk about improving productivity, whilst at the same time ensuring the opposite happens. The Cantillion effect.
    Update – The first reports of a rent price drop are appearing in perth as the 457’s depart are coming in.

  • 23 Lachlan // Jul 8, 2013 at 4:59 am

    There may be a conspiracy and maybe not. None of us have the direct evidence at hand or the time to find it. There is all sorts of circumstantial evidence as there is for many things. It probably does not matter. If powerful entities have a motive to manipulate gold it would not be so hard. Commodities can all be short sold in the futures market without owning physical.
    Maybe its better just to forget all the manipulation concerns as best we can an concentrate on the longer term. All prices go up and down. Every dog has its day. Whatever you invest requires patience. Since I cant control prices I see the value in some diversification.

  • 24 Biker // Jul 8, 2013 at 10:46 am

    It’s interesting how rapidly and forcefully share markets jump at even a mischosen word by the banksters, either from a Fed or RBAit. It’s got to the point where a raised eyebrow or upward glance is interpreted as a signal to buy… or sell. Even a line in jest(?) can affect currencies… .

    Long-term investing? With this focus on minutia (and the refinement of algorithms to seize the moment) I wonder how few investors these days believe in long-term investing(?)*

    More logical is data which indicates a rise or fall in global economic activity, but national politics demand that this data is often presented in such a way that it shines the best light on economic growth (Not so much ‘lies, bloody lies and statistics’ but the short-term political survival imperative).

    * My first thought, noting that Greg had picked up NCM was to ponder his next step. Had you set a sell… and at what point, Greg? It seemed far too aggressive to ask that question early-in-the-piece, but having almost always ‘sold too soon’ myself, it might provide perspective. (My father would never have counselled I’d ‘sold too soon’. Nor did I when our son quit gold hundreds below its ‘ceiling’… .)

  • 25 Paul // Jul 10, 2013 at 11:20 pm

    Chris. The fed had to retract the tapering statement a few days later as the markets were in free fall. You are showing GLD and SLV charts which are hugely manipulated not physical PMs, which are commanding massive premiums. Technical charts are a waste of time in todays algo markets. Though I hope many listen to you and dump their metals so I can do what Germany, China and India are doing, and that is buying Gold and Silver for a steal. I’ll give you spot price for your metals right now, if you are so confident about your charts.
    Kind Regards

  • 26 Biker // Jul 11, 2013 at 12:40 pm

    I’m not sure Chris holds PMs, Paul. There’s no need to offer to buy gold and silver from Chris right now. If you’re confident that higher values will eventually return, buy it from the Perth Mint instead.

    But if you’re expecting ‘many’ to ‘dump their metals’, sell yours now… and buy cheaper bullion ‘for a steal’ when that happens. Seems logical to us… .

  • 27 Paul // Jul 11, 2013 at 11:07 pm

    Biker

    Thats the thing nobody is dumping metals only paper. The uptake of metals has increased. This is not supply and demand fundamentals but rather manipulated paper selling. Chris should make the distintion between physical Precious Metals and paper which has no intrinsic value.

  • 28 Biker // Jul 12, 2013 at 8:51 am

    Certainly I’ve watched with interest as some large gold mining portfolios lost around half to two-thirds of their value, Paul.

    You may be right about gold bulls holding their bullion. And I imagine those holding hundreds of thousands of dollars worth of PM miners must be in the same boat. You only lose when you sell, right?

    To less well-informed folk like me, it’s hard to see any difference between ‘paper’ and bullion. Neither small cap miners nor bullion are earning any dividends… and because values have fallen so much, speculators really are forced to hold PMs _or_ gold mining shares.
    Long-term investment must certainly appear far more sensible than it did when immense fortunes were just months away… .

    But you’ve suggested that values might fall further, so you (we) can (all) take advantage of cheap gold and steal it. That sounds like a pretty good plan to me! No guns or masks needed, OK?

    Given their firm grip on the stuff, how do you suggest we encourage those currently holding bullion to part with their treasure; or do you see them eventually forced to unearth it, in exchange for food, shelter, transport, cash and other basic necessities?

    It all reminds me of that rousing 1970s National Lampoon warcry: “Nuke the Swiss, Steal Their Gold!”

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