Tiho Brkan | Aug 24, 2014 12:29AM ET
Traders buy and sell assets everyday. For example, despite ridiculously high P/E ratios and a huge gain over the last 5 years, there are traders who continue to purchase Biotech stocks every single day. On the other hand value investors are different. Their main goal is to buy an asset on cheap, or as the old adage states “buy low, and sell high”. The problem value investors face is figuring out what cheap is, and when low is low enough to be the bottom (or at least close to it so the drawdown is limited).
If you are a value investor today, surely you would be looking to allocate at least a small portion of your portfolio towards the precious metals sector. Unlike the US stock market, which has tripled in value over the last 5 years, precious metals have been selling off lower since middle of 2011 and offer great value. The question most investors continue to ask is how low do the metals go, before that value starts showing up in the P&L?
Chart 1: Gold bear market is turning three years old in early September
Source: Short Side of Long
There is no easy way to answer that question, but one way to try and estimate it is by looking at previous historical bear markets. Both Gold and Silver started its free market trading in early 1970s, so the data is obviously limited to just over four decades. During that time frame both Gold and Silver have suffered many pullbacks and corrections, but have only gone through 8 serious bear markets.
Since Silver is one of the most volatile assets on the planet, we do not use a simple 20% sell off rule for a bear market, and instead gauge it based on a more serious sell off and a prolonged downtrend of lower lows and lower highs. Finally, the observations made below are done with an assumption that the bear market will still produce one final lower low. If this does not end up being the case, both metals have already bottomed in middle of 2013.
Starting with Gold in Chart 1, we can make a few observations:
Chart 2: Silver has now been in a bear market for 3 years and 4 months!
Now for some Silver observations, so please refer to Chart 2:
Guessing isn’t very useful when it comes to investing, but if I had to make a guess I would say that both metals sell off one final time into a lower low by early 2015. Based on historical analogues alone, Gold seems to be following the 1996-99 bear market quite well and could bottom around March 2015. At the same time if Silver falls to a lower low around March 2015, that would be one of the longest and most oversold downtrends (not including the 1980-82 bubble crash).
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