Precious metals have posted their best quarter in nearly 30 years and mining stocks are soaring from oversold multi-year lows. Those that were willing to buy when everyone else was selling have been handsomely rewarded but we believe the gains are just getting started. In fact, gold would need to climb to somewhere around $3,000 per [troy] ounce to match the gains that gold experienced after bouncing from its prior bottoms and silver would need to climb towards $75 per [troy] ounce.
After such a huge move to start the year, many have been anticipating a sharp pullback for gold and silver on profit taking. This would make sense, especially considering the record short positions by commercial traders. Plus, nothing goes straight up, not even deeply oversold assets awakening from a 4-year correction. It is almost always a roller coaster ride. Yet, gold and silver are refusing to give back any significant amount of their recent gains.
- The first mini-pullback occurred during early February, when gold fell from $1,250 to $1,200 but this 4% decline lasted less than a week and gold proceeded to climb to a new high of $1,272 on March 10th.
- The second mini-pullback brought gold down from its 2016 high of $1,272 to around $1,215. This 4.4% decline lasted roughly 3 weeks, but gold once again bounced back above $1,250 on April 11th.
- Most recently, we’ve had a 3-day pullback to $1,227. This was followed by another spike above $1,250 and a subsequent pullback to a higher low of $1,232 on Friday but today, gold is once again pushing higher and looks poised to reclaim $1,250 once again.
There seems to be no major momentum to the downside, as we’ve become accustomed to over the past several years. Most of the weak hands have been shaken out of the market and primarily strong hands remain.
Where are all of the Sellers?
We already know that central banks aren’t selling, as they continue to accumulate gold at a record pace (especially in the East). We also know that investors are not selling, as investment demand has increased sharply (especially for silver). Hedge funds have also been piling into precious metals, chasing value on signals that the bottom is in…
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I expect a short-term boost to the gold price following the FED meeting on Wednesday. The likelihood of the Federal Reserve announcing another rate hike is slim to none and the sinking realization that the FED can’t raise rates will continue to bolster gold and silver. The chance of an April rate hike is currently priced in at 2%, while a June hike has a 17% probability.
Hesitant gold investors, still licking their wounds from the past few years, have been cautious to jump back into the water. Too many of them have completely missed a rally of historic proportions this year. The water is warm, yet they are waiting for a big correction and lower price…The problem is, [however,] that a big correction hasn’t materialized. We continue to see only mini-pullbacks and the buying opportunities evaporate quickly.
Price Targets of $3,000 Gold and $75 Silver to Match Previous Advances from Bottoms
If gold did indeed bottom around $1,050, this new bull market trend is only getting started. The rally that followed the 2001 low generated returns of around 295% for gold. It advanced roughly 4X from $255 in March of 2001 to over $1,000 in March of 2008!
The rally that followed the 2008 financial crisis generated returns of 132% for gold in under three years. The gold price more than doubled from the low of $681 in October of 2008 to a high around $1,577 in April of 2011.
So, while the 20% move higher toward $1,300 has been exciting, gold would still need to climb to somewhere around $3,000 per ounce ($1,050 bottom x 3) to match the gains that gold experienced after bouncing from its prior bottoms.
Silver is holding around the $17 level, up 23% so far in 2016. The rally that followed the 2001 low generated returns of around 433% for silver. It advanced roughly 5.3X from $4 in March of 2001 to over $21 in March of 2008!
The rally that followed the 2008 financial crisis generated returns of roughly 500% for silver in under three years! The silver price went up 6X from the low of $8.40 in October of 2008 to a high of nearly $50 in April of 2011. Could we see another run of this magnitude in the years ahead?
If you thought the $3,000 price target for gold was exciting, consider the following. If the current bull move in silver matches these previous up-legs, silver would need to climb towards $75 per ounce ($13.60 bottom x 5.5).
…There are no guarantees that the current bounce from multi-year lows will match those of the past but investors have certainly not missed the train, as we are only in the early innings of this ball game. Investors that remain on the sidelines waiting for a big pullback may never get the opportunity. They might want to consider edging into new positions now and getting some skin the game. They will then have some skin in the game and can add via buying in tranches over the next few months but don’t get paralyzed as a scared spectator waiting for a perfect moment that never arrives.