Understanding Gold's Decline And Recovery

Whether on Twitter, by email or on LiveChat, we are so often asked ‘when will the gold price go up?’ It’s the question all of us would like to know the answer to, but if we did then it wouldn’t be much of a market would it? However, it is handy being able to grasp a little understanding of gold’s decline and when the price of gold may or may not go up, and even where it is heading towards.

In today’s Best of the Web, Jeff Clark explains why he believes ‘the bigger the correction, the lengthier the recovery.’ Whilst there have been smaller corrections in the last decade or so, Jeff Clark believes that this correction holds a greater similarity to that seen in the 1970s, when gold took 187 weeks to return to former highs. This, the author believes is the time to stock up on gold whilst it is so low. He writes, ‘Investors who bucked the conventional wisdom of the day and bought a basket of gold and silver producers in the autumn of 1976—after they had dropped by almost 70%—more than tripled their investment.’

Waiting 187 weeks for gold to return to its former glory may well seem like a painful prospect. But in the meantime, recall why you invested in gold – currency devaluation, negative real interest rates and increasing rates of inflation. Lucky for you, you don’t need to do anything to drive up the price of gold, it’s all being done for you, quite willingly by central bankers and governments.

As of last Friday, gold has now fallen as much 35.4% (based on London PM fix prices) over 96 weeks. But if you’re like us, you still recognize that the core reasons for investing in gold haven’t changed. People who sold their gold recently made a shortsighted decision. Before too long precious metals will rebound—and probably in a big way.

But when? Does history have any clues about how long we’ll have to wait for that rebound?

Perhaps the most constructive way to forecast a turnaround in gold is to look at how its price behaved in prior big corrections.

Here’s an updated view of gold’s three largest corrections since 2001, along with the time it took the price to return to the old high and stay above that level.

It has taken a significant amount time for gold to return to old highs after each big selloff this cycle. And the bigger the correction, the longer it has taken—with each correction lasting longer than the last.

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However, I think our current correction more closely resembles what occurred in 1974-1976 than any of the dips so far this cycle. Here’s an updated overlay of the gold price then and now.

As you can see, during the big correction of the 1970s, gold declined 47% and took 187 weeks to recapture old highs. This fits in with the pattern discussed above: the bigger the correction, the lengthier the recovery. Another interesting pattern: the time to reach new highs always equals or exceeds the duration of the decline.

While the current correction hasn’t been as deep as that of the mid-’70s, the decline is already longer, and it’s the most prolonged of the current cycle. It is thus reasonable to expect gold to take two years or more to regain the $1,900 level and continue beyond. Barring a best juniors .

Written By: The Real Asset Company