Precious Metals Life Cycle Nears an End – Final Stage of Denial

The life cycle of most things (living, product, service, ideas, stock market, etc…) goes through four stages. Those who recently bought gold, silver, mining stocks, and coins will be enter this next stage of the market in complete denial. They still think this is a pullback and a recovery should be just around the corner.

The good news is a recovery bounce should be nearing, but if technical analysis, market sentiment, and the stages theory are correct, then a bounce is all it will be. A bounce followed by lower prices and dormancy.

I really do hate being a mega bear or mega bull on anything long term, but the charts are painting a washed-out picture this year for precious metals. Take a look at the chart below which shows a typical investment life cycle using the four stage theory.

The Four Stages Theory

Classic economic theory dissects the economic cycle into four distinct stages: Accumulation, Markup, Distribution, and Decline.  Stocks, indexes and commodities proceed through the following cycle:

• Stage 1 – Accumulation: After a period of decline, a stock consolidates at a contracted price range as buyers step into the market and fight for control over the exhausted sellers. Price action is neutral as sellers exit their positions and buyers begin to accumulate.
• Stage 2 – Markup: Upon gaining control of price movement, buyers overwhelm sellers and a stock enters a period of higher highs and higher lows.  A bull market begins and the path of least resistance is higher.  Traders should aggressively trade the long side, taking advantage of any pullback or dips in stock price.
• Stage 3 – Distribution: After a prolonged increase in share price the buyers start becoming exhausted, and the sellers again gain dominance.  This is another period of consolidation, and distribution produces neutral price action and precedes a decline in stock price as buyers lose ground. 
• Stage 4 – Decline: When the lows of Stage 3 are breached, sellers overwhelm buyers and the decline ensues.  A pattern of lower highs and lower lows emerges and the stock enters a bear market period.  A well-positioned trader would be aggressively trading the short side, taking advantage of the often quick declines in share price.

Example stock moving through the four stages:

Gold Price Weekly Chart – Stages Overlaid

Silver Price Weekly Chart – Stages Overlaid

Gold Mining Stocks (GDX) – Monthly Chart

The chart below is a longer term picture using the monthly chart. Notice the 2008 panic selling washout bottom in miners. That may happen again. While physical gold and silver are in a bear market and should be for a long time, gold mining stocks will likely find support and possibly have a strong rally in the coming months.

Many gold stocks pay high dividends and are wanted by large institutions and funds. The yield rises as prices drift lower, making the stocks more attractive. I think gold miners will bottom before physical metals do. A bounce is nearing but at this point selling pressure and momentum continue to plague the entire precious metals sector.

Precious Metals Investing Conclusion:

With Quantitative Easing (QE) likely to be trimmed back later this year, and with economic numbers slowly improving along with solid corporate earnings, the need or panic to buy gold or silver is diminishing around the globe.

The precious metals sector is likely to put in a strong bounce this summer but after that, I think sellers will likely regain control to pull prices lower.