Precious Metals Bear Markets: How Much Longer?

The problem value investors face is figuring out what cheap is, and when low is low enough to be the bottom (or at least close to it so the drawdown is limited).

If you are a value investor today, surely you would be looking to allocate at least a small portion of your portfolio towards the precious metals sector. The question most investors continue to ask is how low do the metals go, before that value starts showing up in the P&L?

There is no easy way to answer that question, but one way to try and estimate it is by looking at previous historical bear markets. We can make a few observations:

  • The current gold bear market has so far been the third longest in time. The closest correlation the current downtrend has with previous ones, is the 1996 to 1999 bear market. The initial sell off lasted about two years, at which point a long consolidation started. Both bulls and bears became frustrated at the lack of a trend, similar to what has been happening as of late. While the Gold bulls claimed that it was a basing pattern at the time, the price actually collapsed one last time into a final low before a bull market took off.
  • Silver has now been in a bear market for 3 years and 4 months! By historical precedent, this is one of the longest bear markets since Silver started trading in late 1960s. In theory, if Silver does make a lower low, we are now only months away from setting a new record. Already we are given a hint that the downtrend is exhausted, so a lower low well into 2015 would be a true historical anomaly and most likely a terrific buying opportunity.