After gold had set one all-time high after another in spring, and the silver price also advanced from one multi-year high to the next, things have quieted down a bit for the two most well-known precious metals over the past three months.
The prices of gold and silver entered a roughly three-month sideways phase. This consolidated the preceding steep ascent. Such corrections are common in any long-term uptrend. They are not only normal but also healthy, as the alternative would be a parabolic rise, and it is known that these tend to collapse just as quickly and powerlessly after their peak as they had previously surged upwards.
The summer correction was therefore nothing unusual for either gold or silver. Nevertheless, what has happened in the last three months is remarkable, even though many investors might have the impression that nothing really happened at all.
Gold and Silver: a Pause at High Levels
The resolution of this apparent contradiction is that the correction, especially for gold, occurred primarily through time, rather than price. The price low of the correction was approximately $200 below the all-time high. After a preceding $800 increase, this represented a correction potential of only 25%.
That is far less than a minimal correction, which typically sees prices decline by about 38.2%. Not to mention a normal correction (-50%) or a maximum correction (-61.9%). However boring and frustrating the past weeks may have been for many gold investors: In terms of price, no significant damage occurred. On the contrary: the correction was harmless.
Even in terms of duration, the correction is by no means unusual, as it covered the seasonally weakest months of the year. It is normal for gold and silver prices not to perform exceptionally well in May, June, July, and usually August. Only after the end of the summer holidays, when all major players in the financial markets are back in play and the jewelry industry begins to cover its demand for gold and silver for the upcoming holiday season, do prices typically pick up again.
Gold and Silver: the Strongest Phase of the Year Begins
Not only gold bugs but also silver investors have every reason to be very optimistic about the future these days. The best time of the year, the winter season, is just around the corner, and in the charts, the correction of the past few months can be interpreted as a rectangle that could form the basis for the next major upward movement.
Fundamentally, there is still much to be said for gold, and at least as much for silver. Confidence in the US dollar is suffering from Donald Trump’s erratic nature, which was an omnipresent part of the political theater throughout the summer. A first interest rate cut by the Fed is also expected by the market. Whether this is justified remains to be seen. But should it come in September, it will further support the gold price.
In the coming months, the USA will have to refinance a large portion of its $37 trillion debt. This will once again draw international attention to the vexing issue of spiraling debt. Uncle Sam is not alone in the spotlight here. France’s long-term unsustainable debt burden is also likely to be increasingly scrutinized.
Few Real Assets against Abundant Fiat Money
If rising and unfinanceable debts must be addressed with lower interest rates, because otherwise the affected states would only stumble and collapse even faster, investors will react differently than they did ten years ago, when they celebrated the period of low and negative interest rates with a strong stock market rally.
Instead of another stock market rally, a flight to real assets outside the unstable financial system should rather be expected. Gold and silver are ideal in this regard, as they have survived every financial crisis to date and have protected their owners from significant losses, whether during inflation or deflation.
Even if a stock market rally were to occur, precisely those assets could be particularly sought after by investors that were largely ignored by most investors ten years ago: the gold and silver mines and the shares of companies that develop gold and silver deposits.
