Why a Correction in Gold Is Good

January 27th, 2011Before I talk about gold, let us take a step back…maybe two. There are two cycles in the world of investing. A paper cycle and a physical cycle and the world is always in one of them and only one A paper cycle is when stocks grow exceptionally well over a very long time period, think 1982 to 2000. During this time period stocks went up 1054%. A “physical cycle” is when physical assets grow exceptionally well over a very long period of time, think 1965 to 1982. Note that during physical asset cycles gold and silver are always two of the best performing investments. During the last “physical cycle” gold went up 2400% in price! A physical cycle ALWAYS follows a “paper cycle”. And a paper cycle ALWAYS follows a “physical cycle”.An investor can measure a physical cycle by tracking the CRB. The CRB is the S&P 500 of physical assets, called the Commodity Research Bureau (think energy, grains, metals, precious metals and softs). The CRB went down -9% over that same 1982 to 2000 “paper cycle”. Clearly 1982 to 2000 was a “paper cycle” and not a “physical cycle”. BUT since 2000 the world, yes even the United States, has been in a physical asset cycle. During this period, which we are ten years into, the physical cycle has taken stocks down -14%, while moving physical assets up over 300%. These cycles last an average of 17.5 years and have been tracked all the way back before the American Civil War in the 1860s.Today we are deep into a physical asset [secular] bull market…sometimes known as a “stock” bear market. I have compared the CRB to the SP-500 over the past 100 years, and what I noticed is nothing short of remarkable.People have been concerned about gold’s recent 8% correction. So let’s talk about this 8% correction.
First – ALL corrections (in anything) are accompanied by bad news.
Second – ALL raises in gold are ALSO accompanied by bad news.
Third – Eight plus percent corrections in gold are common.Here are all the correction over the past five years that are 8% or more in gold and the S&P500:GOLD’s BIGGEST CORRECTIONS
2005 = -10% (new highs were then hit)
2006 = -16%, -25% (new highs were then hit)
2007 = -8%, -8%, -8% (new highs were then hit)
2008 = -32% (gold ended up for the year…and yes, new highs were then hit)
2009 = -13%, -13% (new highs were then hit)
2010 = -8%, -8% (new highs were then hit)
2011 = -8%??? (new highs were then hit???) SP-500 BIGGEST CORRECTIONS
2005 = -8%, -8%
2006 = -8%
2007 = -8%, -10%, -11% (new highs were then hit)
2008 = -38%
2009 = -27%, -8%
2010 = -16%
2011 = none so farI’ve been looking for a correction in gold for months. For gold to go up 32% in eleven months and silver to go up 102% during the same time and not expect a healthy correction would be dangerous. Dangerous because the longer a correction is put off the steeper the correction is going to be and the harder it will feel to the investor’s brain. So I get worried, not for myself, but for new investors that have not experienced a few healthy corrections in the gold sector. I do not think this correction is over and I know this will not be the last gold correction we will “survive” before the cycle has run its course. Let me be clear, if I were to see a change in the fundamentals, for example…The government ending the $1.5 trillion dollar annual deficient
The government paying down the $13 trillion debt
The government cutting 30% of its employees
The defense budget getting cut to a mere $350 billion
Wages increases for the bottom 90% of the country
Housing prices increasing nationwide
The S&P500 providing a dividend yield of 6% (right now it’s 1.8%)
The S&P500 “as reported” P/E ratio below 12 (right now above 20)…then I would be screaming to get out of gold and silver. But we are not there…not yet at least. If the amount of gold or silver you own is keeping you up at night then you can do one of these things:

Sell some gold/silver until you are able to sleep at night
Turn off the radio or TVTogether, we are growing and protecting your wealth,
RC Peck. CFP