This sell off in the precious metals stocks over the past 3 days has created quite a stir among PM investors. Is it the hoped for opportunity which will allow late, sidelined investors who missed the rally a way to get into this market at reasonable prices? This would be the fabled “gentleman’s entry” which allows those who were caught sleeping to get a position down at those break out levels that they wished they had bought, but missed. Will the correction we are in allow this? In two words…fat chance!
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It is my contention that we are in Phase I of a bull market in the precious metals. Phase I is where after a prolonged bear market stocks return to “Known Values”. In the fall of 2015 PM stocks were compressed down in a breath collapse at the end of the great bear market. Because of that severe compression they have been exploding to the upside since their bottom on January 19th. This path towards known values has resembled a beach ball underwater that has been released. It has been a dramatic power fueled run to the upside offering no pullbacks to the frustrated bulls on the sidelines. Newsletter writers, unbelievably have erred by keeping their subscribers out of this rally and looking for a more attractive entry after a pullback.
The dominant emotion of the PM market is now fear. That is, a fear of missing out on the start of a bull market that they have longed and lusted for over the past 5 years. Because of this fear, I contend that this “correction” will be short lived as hair triggered sidelined gold bugs will see this as a gift and soon rush in and provide support at these levels.

There will be no “Gentleman’s Entry”.

In Phase I of a bull market the initial rally is meet with deep skepticism, we have seen this. The public and institutions are not even aware that the trend has changed, this is also where we find ourselves today. However, a small group of core PM investors are aware, but due to their doubt find themselves on the sidelines or underinvested. They want to get in, but they want in at yesterdays prices. So the market advances without them as they still harbor their doubts. As the rally continues the price action convinces them one by one that the move is real and they finally embrace the trend by buying it. Remember they have been lusting for the next bull market for five years and the price action convinces them it’s here.

This is when the first secondary reaction strikes. It will arrive when least expected and has a duration of typically 3 weeks to 3 months. It will arrive when the consensus is that lower prices are out of the question. It serves the purpose of correcting the accompanying excesses and dampen the enthusiasm of amateur investors. Many will mistake it as a true reversal of the primary trend and will conclude the rally was just a bear market rally after all. In extreme cases, it may even develop into a cyclical bear market lasting 6-8 months. Structurally its function is to separate Phase I and II in the bull market. From a psychological perspective I view this current pullback as a minor shakeout that should be immediately bought. The market rarely presents the fabled gentleman’s entry and the current level around HUI 210 is likely as much of a gift Mr. Market is going to offer.