Big Corrections Are Normal During Gold Bull Runs

Last week was a tough one for gold and silver investors. Both metals saw significant corrections. This led some people to declare the gold bull market dead. But historically, big corrections have been a normal feature of gold bull runs.

Last Tuesday, the price of gold dropped more than 5%, falling far below the $2,000 level. It was the worst single-day rout in seven years. Gold continued to fall in Asian trading Wednesday morning and briefly dropped below $1,900 before clawing back later in the session. Silver also had a precipitous fall, diving some 13%. A lot of people went into panic mode, but as Peter Schiff pointed out in his podcast the biggest daily moves in a gold bull market tend to be down.

What the market is doing is trying to flush out the weaker players. When it comes to a bear market, it’s trying to create some hope and sucker people back into the market by having a really big rally. Well, in a bull market it’s the opposite. The market is trying to instill fear in the weaker hands, so you get these spectacular one-day moves in the opposite direction of the primary trend to shake people out, to get the weaker players out of the market so you can clear away the excess baggage and then continue the trend.”

In fact, we can look back at other big gold bull markets and see this phenomenon play out.

In 1979, gold climbed over 274%, rising from just over $200 an ounce to over $800 an ounce. But during that year, there were 11 corrections of more than 3%. At one point in August of that year, gold plunged over 12%. Seven of those corrections were greater than the 5% drop we saw last Tuesday.

Silver saw an even bigger gain in 1979, rising 480% from just over$5 to $49 an ounce. Silver corrected a dozen times that year, falling more than 5% each time. The biggest selloff led to a 23% freefall in October. Silver also dropped 18% just before making its top.

We saw a similar pattern of corrections in gold’s bull run between 2009 and 2011. In that time, gold gained 116.7% but corrected more than 3% 17 times. Eleven of those corrections were greater than 5%. That averages to roughly one big pullback every two months. The biggest drop was 10.6% in December 2009.

Meanwhile, silver dropped more than 5% 23 times during its bull run between 2009 and 2011 on its way to a 339.5% gain.

History proves Peter right. You’re going to see big selloffs during a bull market. We will likely see plenty more before the current gold bull runs its course. It’s important not to panic when metals sell off. Keep your eyes on the fundamentals. As Peter said, they are still extremely bullish for gold and silver.

And it’s not just about the pandemic.

Gold and silver are not up because of COVID. Now, COVID is part of the reason, but it’s not the actual cause. You see, what happened is governments, and in particular central banks, they have responded to COVID by printing a lot of money. Governments are running big deficits and central banks are printing the money to monetize those deficits, especially the Federal Reserve. And so, it is the money printing.  It is the inflation that central banks are creating in order to monetize government debt that is a response to COVID — that is helping to drive the gold price higher. So, it is not COVID itself that is bullish for gold. It is the government’s response. It is central bank and Federal Reserve policy in response to COVID that is very bullish for gold.”

The bottom line is the Fed isn’t about to normalize rates or end quantitative easing or shrink its balance sheet. And it is not going to worry about inflation. As long as the Fed persists in this extraordinary monetary policy, the momentum will stay with gold and silver.