An excellent report I received yesterday…

“Gold and Gold Stocks: A 20-Year Chart History
Wednesday, October 5, 2016

It was a big drop.

Gold fell 3.3%. The Gold BUGS Index dropped 10.1%. NovaGold Resources (NG) lost 12.3% of its market value.

Silver and silver stocks were as bad and worse.

If you’re speculating in the gold and silver space, you probably didn’t enjoy yesterday’s freefall.

But that’s now in the past.

The question for today is, what do we have to look forward to?

As you might have guessed from the headline, today, we’ll look to history for perspective. We’ll look at both gold and gold stocks. If you’re a visual person, this issue is for you…

Let’s start with the past six years. Here’s where gold stands today…

Gold dropped 45% over the course of about four and a half years. It shot 30% higher in seven months. And now, it’s down 7% from two months ago.

Here’s how that compares to gold stocks…

Gold stocks fell much, much further than gold. Like gold, they started off by dropping 45%. Then, they dropped an additional 46%. And then, just for good measure, they dropped 46% from there. That is a total of an 84% fall.

This year, gold stocks rocketed 182% higher… six times as much as gold. Then, as of yesterday, they had fallen four times as much (down 28% versus the 7% drop for gold).

Considering the extreme nature of the four-year decline in gold stocks and this year’s rally, a 28% correction is reasonable.

Now, let’s go further back to the last bull market to put these moves into context. Before going on the bull run that took gold stocks 1,330% higher, they bottomed in late 2000. So let’s start there, but with gold.

Here are all of the corrections in gold – during the bull market – larger than the 7% drop we’ve seen over the past two months. Notice that they’re common. Drops of 12% or more were big, but normal…

When you look at gold like this, you realize that the 2008 credit-crisis drop of 29% was nothing more than a correction in a massive bull market. In less than 11 years, gold soared 644%…

Could a gain of this size happen again now?

Gold bottomed last December at $1,050 per ounce. A 644% rise would take it up to $7,812. Don’t bet your financial well-being on seeing gold at $7,800. But I suggest being positioned to benefit if it does.

The bull market was rockier for gold stocks. You can see the corrections that were similar and larger than the most recent 28% drop in the charts below…

The beginning of the first correction in gold stocks – the 21% drop in 2001 – matches up with an 8% correction in gold. The 36% gold-stock drop in 2002 also matches up with an 8% correction in gold.

When you compare the pullbacks in the chart directly above with the chart of gold over the same time frame, you’ll again see that the current correction isn’t just reasonable in the context of a bull market… It’s ordinary.

Here are the next six years in gold stocks. Unlike gold, this is the end of one bull market and the entirety of another one. For gold stocks, I wouldn’t call the 71% drop in 2008 a “correction” like the 29% drop in the physical metal.

If you were holding gold stocks with trailing stop losses in 2008, you would have stopped out… But if you had gotten in at any time in the first year of the bull market and used a 50% trailing stop, you would have ended up with a gain of nearly 300%. (Yes, 50% is a wide trailing stop.)

Here’s the gold-stock index during the full 11 years, from October 2000 through October 2011…

We’re presenttly holding a handful of different gold and gold-stock positions. We’re holding Newmont Mining (NEM) with a 33% trailing stop. We’re up 109% on that position and we’re about 10% away from our stop. We’re holding NovaGold Resources (NG) with a 50% trailing stop. We’re up 43% on that position and about 25% away from our stop.

With Goldcorp (GG) and the VanEck Vectors Gold Miners Fund (GDX), we’re down 8% and 9%, respectively… And we’re still 18% and 17% away from our 25% stop losses on those positions, respectively.

Finally, we hold two positions in the physical gold and silver closed-end fund (CEF), each with a hard stop at $9.50. Yesterday, the fund closed at $13.34. We’re up 7% and 18% on the two positions and we’re still 29% away from our stop.

In other words, with most of our positions, we should be able to hold on through any normal volatility. If this is the beginning of the next great bull market, we’re well-positioned to ride it for profits. If you’re not, now is an excellent time to take a position. I would suggest starting with a fund, like GDX.

I promised a 20-year history and we’ve only covered 16 years so far. So let’s look back to the years before the last great bull market began. First, we’ll look at gold…

If you noticed that the first part of this chart looks very similar to the first chart in today’s issue – a big drop around 40% followed by a quick near-30% gain – well done. I’m not saying that the recent 7% decline in gold is going to turn into a 21% decline… But that is what happened in 1999. It could happen again.

Here’s what happened to gold stocks during that time…

That is a reminder to use stop losses if I’ve ever seen one. The bull market had already started in gold… Yet gold stocks dropped 63%. From their late-2000 bottom, gold stocks had to rise a full 69% just to get back to their 1999 lows.

Again, I’m not saying this is what we have coming. There’s a good chance that the lows of the past year will remain the lows for a long time to come. But it’s best to be prepared for any future scenario.

The last 20 years in gold and gold stocks give us excellent guidelines for how we should behave with our speculations and investments going forward. There are plenty of reasons for optimism. And there are plenty of reasons to be cautious. Trade accordingly.”

Here’s to your accumulation of real wealth!

Harold F Crowell


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