Steve's note: This weekend's essay is from one of the best investors in the world, my friend Chris Weber. For his latest thoughts on what's happening in the precious-metals market read on...
Could Gold Fall to $600? Yes...
By Chris Weber
August 23, 2008
The price of gold rose during the 1970s. In fact, it soared.
From $35 in January 1970 to a high of $850 in January 1980: that was a rise of 2,329%.
And might I remind you that for most other investment classes, like stocks and bonds, the decade of the '70s was dismal.
But what is often overlooked – except by those who actually lived through that era and were holders of gold – is that there was a long period in the middle of the decade when gold either went nowhere or lost up to 50% of its value.
No price goes up – or down – forever. And even the mightiest bull market makes time to correct. It has often been observed that a price can retrace its prior great move by 50%. It tests that 50% level, and how it passes the test can determine what the next leg looks like.
Well, this is what happened to gold starting with its $200 peak in December 1974. Over the next 19 months, the price worked its way lower. Indeed, in August 1976, gold touched the $100 level – meaning it had lost 50% of its prior bull market move.
Of course, at the time, no one was certain this would be the absolute low – that no future price would ever get so low.
And – crucially – it wasn't until well into 1978 that gold surpassed its previous record high of $200.
So think about that. Someone who jumped on the gold bandwagon at the end of 1974 had to wait over three years to stop losing money. And that's assuming they waited. I'm sure many threw in the towel long before those three years passed.
But those who held on to their positions were greatly rewarded.
From the $100 low in August 1976, gold soared over the next 3½ years to a high of $850 in January 1980. Those few lucky enough to time their purchases at the low saw 750% returns.
But those who identified the bull market early and were able to keep their heads about them in the correction were able to reap as much as 2,300% over the life of the bull. (That's not using leverage, either.)
Of course, today it is possible gold will turn up from here and start to soar again, soon testing its old $1,030 high.
But we have to keep open the possibility that the correction will last much longer and take gold even lower than it is now.
How far could it fall? Well, there's no way to be sure, of course. But there are a couple of ways that are possible. A fall similar to the 50% decline we saw from end-'74 to summer '76 would mean a fall in half from $1,030... or $515 gold as the low.
However, there is a more optimistic way to look at things. If gold retraced 50% of the giant move it made from the low of $253 to the high of $1,030, this would mean giving back half of the $777 difference between those two extremes. Half of this is $388.50, and subtracting this amount from the $1,030 high gives us a much better low of $641.50.
(One important point: I'm not predicting gold will touch either $641 or $515. I'm just saying it is possible, given history and a study of the markets.)
My advice remains as it has been. Have enough cash to ride through any unexpected correction in any of your other assets. But by all means, own some of the metals area. Don't try to time the purchases; if you get it exactly right, it'll be by accident alone.
Good investing,
Chris Weber
Editor's note: Gold is so cheap now, if you don't own any, there's never been a better time to take a small position. Chris has three safe gold ideas that are perfect for any investor... as well as a great savings account that's made him 1,700% gains. Better yet, Chris will personally show you exactly how to take advantage of these opportunities. Click here for the details. |
