Precious metals are back at that their long term make-or-break levels. Although those price levels have been tested several times in the last 24 months, chances are high that “this time will be different” … but not in a way gold bulls would prefer.
If anything, there is a lot of pessimism when it comes to sentiment. Extreme sentiment levels mostly beget structural trend changes. While that rationale is correct, in our view, we doubt that we have achieved extreme levels of pessimism. In other words, it can get worse until we have reached extreme levels.
So the key question is: how far can gold and silver fall within their secular uptrend?
When it comes to gold, there is still some room left to the downside. We derive our answer from the charts. The following gold chart shows that a secular support level kicks in at the 800 to 1000 USD area. That is 13% to 30% below today’s price.
The reason we believe that gold can fall that low but still respect its secular uptrend, is because it coincides with gold’s peaked during its previous secular bull trend (70ies to 80ies).
We have witnessed a similar case lately in crude oil. Earlier this year, crude oil dropped to below 43 USD, which is very close to oil’s peak of 1980 (i.e., the peak of its previous secular uptrend). So far, crude oil has respected its secular uptrend, as it remained above the peak of the 80ies. We expect gold to behave similarly.
When it comes to silver, we prefer to look at another chart in order to answer the key question of this article, in particular Fibonacci retracement levels. The reason is that silver’s price structure is totally different than the one in gold.
Silver’s make-or-break level is 15 USD. In case silver breaks down, we expect long term support to kick in at the 8 to 10 USD level. That is substantially lower than today, i.e. 33% to 46%. That definitely is a big drop, but silver is always much more volatile, both to the upside and downside.
Our conclusion is that gold could fall to 800 to 1000 USD and silver to 8 to 10 USD while still remaining in their secular uptrend. If both metals would fall that low, it would result in extreme pessimism, which would likely lead to a trend change. That would set up for an incredible buying opportunity.