Time to Buy Gold and Silver?
By: Jeff Clark, BIG GOLD
Gold and silver have both cooled from their recent highs, so many investors are asking if it’s time to pounce with their buy orders. Is there really a way to know if you’re getting a good price, one that allows you to buy with confidence? I think there is.
Many precious metals investors know that gold and silver prices tend to be soft during the summer months – but what many don’t realize is that that trend is measurable. By looking at what prices have done over each summer since the bull market began in 2001, we can recognize what a bargain price might look like today.
The charts below are based on a simple premise: Gold and silver tend to perform well through May and then pull back during the summer. This year, gold peaked on May 4 and silver on April 28 (based on London PM fix pricing).
How much do they pull back? I calculated the smallest, average, and biggest retreats from the May high to the summer low (June, July, or August) in each year of our current bull market (2001 through 2010). The charts below display the prices for gold and silver when those declines are applied to this year’s May high.
Here’s what the smallest, average, and biggest summer declines look like for gold since 2001, and what price that would represent today.
(Click on image to enlarge)
Gold’s smallest decline in the current bull market has been 2.2%, which, subtracted from this year’s May high, gives us a price of $1,506.74. The average drop over the last ten years is 8.6%, which would give us $1,407.53. The largest summer drop was 21.7%, which would take us to $1,205.17.
Gold’s low so far this summer is $1,498, a drop of 2.7% – barely more than the smallest summer decline in our current bull market. We’ve come nowhere near the average decline and have two months of summer to go, so I would be inclined to be patient here.
In fact, the data tell us that a $1,407 gold price would be completely normal. In my opinion, that would signal a great buying opportunity. Given all the monetary, fiscal, and economic issues that continue to plague most parts of the globe, I wouldn’t hold my breath that we match the biggest summer decline.
Here’s what the data look like for silver.
(Click on image to enlarge)
From silver’s May high of $43.61, the average summer decline would give us a price of $36.62. We hit $33.96 on June 28, a 22.1% fall and a greater-than-average decline. I think any price below the average 16% correction is attractive.
However, given silver’s greater volatility and the sharp declines it has experienced over past summers, one shouldn’t be shocked if we see it touch the low $30s. That’s not a prediction, but rather a reminder that this would be totally within normal limits (and keep in mind that July is historically the weakest month for silver prices). Anything below $30 would be an indubitable back-up-the-truck signal.
It’s noteworthy that the summer lows have usually represented the bottom of the market for the remainder of the year, with one big exception: 2008, when the summer decline was merely a precursor of uglier things to come. We’re not inclined to think a waterfall selloff is in the cards again, but the risk isn’t zero, and we’re thus keeping some Grants and Franklins in our brokerage accounts.
Further, I wouldn’t use this data for trading or in anticipation of an immediate gain. It’s really for the investor who is looking for a fair price to add some monetary insurance to his portfolio. That’s the whole point of buying gold and silver.
And let’s face it: if you’re not hedging your assets against currency devaluation, you’re taking far more risk than what price you pay for your insurance.
Buy smart, but make sure you buy.
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Posted Sunday, July 10 2011