Phases of a Bull Market and Gold
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It is often said that there are three phases or stages to a bull market in anything; The Stealth Stage, The Institutional Stage, and the Mania Stage. The Stealth Stage is so named because it is recognized by only those very bright early adopters who can see the changes taking place and position themselves accordingly. The institutional Stage is so named because this is the time during which Institutional Money begins accumulating the asset. The smart money managers such as pension fund and hedge fund managers get on board for the coming parabolic rise in price. The Mania Stage is so named because it is when the General Public becomes aware that the asset’s price has been rising uninterrupted for years and doesn’t want to miss out on a piece of the action. By virtue of the size of the funds coming from the public, the market becomes self-fulfilling in that the public makes the market rise and the more it rises, the more funds people throw at it until all investable funds are exhausted.
Lorimer Wilson, in his July 7, 2010 piece titled ‘Historical Silver: Gold Ratio Suggests Parabolic Top for Silver of Over $100 per Ounce!’ explains these stages this way:
“The collective demand trends of gold/silver investors effectively divide precious metals bulls into 3 distinct demand-driven stages, namely:
1. Stage One which occurs when a devaluation of the dominant currency in which gold is priced, i.e. the USD, leads to a moderate increase in the price of gold. Stage One for gold began on February 15th, 2001 when it reached a 22-year secular low of just $255.10.
2. Stage Two which occurs when the decoupling of gold from local-currency devaluation begins to outpace the dollar’s losses and gold starts rising significantly in virtually all currencies worldwide. Stage Two began on June 5th, 2005 when gold (at $417.67US) first surpassed 350 Euros for the first time.
3. Stage Three which occurs when the general public around the world starts investing in gold and this deluge of capital into gold causes it to escalate dramatically (i.e. to go parabolic) in price. We are approaching Stage Three and it will become clearly evident when the price for gold begins its daily record ascents to dramatically higher prices.”
James Turk of GoldMoney.com says that “…when gold climbed above $1,000, it only entered its second stage.” Gold first climbed above $1000 in early 2008.
Casey Research reported in June 2010 that it believed that we are at the same spot, when we decisively moved above $1250 gold, that we were in the 1970s when gold took off and went parabolic. Gold has briefly touched $1250 in 2010, pulled back, and has not yet cleared that number as of mid-2010 but should shortly (by the end of 2010).
John Hathaway of The Tocqueville Gold Fund sees things a bit differently. He speaks of the 4 Phases of the Gold Bull Market and defines them thusly:
· The Beginning.
· The End of the Beginning.
· The Beginning of the End.
· The End.
He believes that when we passed $1000 gold, that we entered the Beginning of the End phase.
What all of these forecasts have in common is that we have definitely passed the Stealth Stage and are approaching widespread recognition of the Gold Bull Market, similar to about 1995 when the general public began heavily investing in the stock markets a couple of years before the final parabolic ‘blow off’ phase of late 1999 and early 2000. What this means is that a wave of money is about to enter the gold market and should continue and propel the price of gold and gold equities northward for the next couple of years.
Let’s look a little closer at the parallels between today’s gold bull market and the last one of 30 years ago.
In the 1979/1980 gold bull mania phase, the price of gold rose 34.1% in the final 10 days before the ultimate top in price on January 21, 1980. In the final 20 days before the top, the gold price surged 80.3%, and in the final 30 days the gain was 95.9%. Gold nearly doubled in price from mid December 1979 to the third week of January 1980 after almost a decade long bull market. This is why I say that we’re maybe in the sixth or seventh inning time-wise but only maybe the second or third inning price-wise of this gold bull market. The greatest percentage gains come at the end of the Mania Stage. The 1970s gold bull market had to transition through the three stages and it took about 8.5 years from the time gold was detached from the monetary system on August 15, 1971.
According to the writings of Jordan Roy-Byrne of February 8, 2010:
“In the 1970s, Gold began to go parabolic in the middle of 1979, almost 10 years into the bull market. The important breakout occurred in 1978, and then corrected 20% back just below the breakout point. This time around, the important breakout occurred at the end of 2007 and then in 2008 we had the snapback to support, though the snapback was a large 34%. Note that in the last bull market the process of breakout, snapback and parabolic move took a year to develop, while this time it is taking about two years. That means this parabolic move will last longer.”
and
“There are some distinct similarities with other bull markets. Look at Oil. Its major breakout occurred in 2004 and its parabolic move began about two and a half years later. The difference is Oil’s snapback to support didn’t occur right away. Its parabolic move began in the ninth year of that bull market.”
So we have some similarities with other bull moves for comparison. This all points to a similar move in gold in the not-too-distant future.
Lastly, in mid 2010, writer and analyst Dudley Baker has done some research on other bull market moves to determine the multiple of the final market move from the final pullback. He first looked at the Nasdaq index from the 1990s. He found that the beginning of the final move started at about 1500 and when the Nasdaq ultimately reached its pinnacle of about 5200, he saw that the final move was a multiple of 3.5 (5200 divided by 1500). Then he looked at the Japanese Nikkei index of the 1980s and found the multiple to be 5.6. Using Toll Brothers as a proxy for the housing market bubble of the early 2000s, he came up with a multiple of 3.6. Next, he looked at the late 2000s surge in the price of crude oil. That multiple came in at 3.7. The final move he investigated was the move in the price of Homestake Mining in the 1930s. Homestake was the largest gold miner in the United States at the time. The move in that gold stock was a multiple of 3.6.
Mr. Baker sums his research as follows: “Taking the minimum multiple of 3.5 from the above table and a conservative starting point of 700 for gold, we have the possibility of a peak of at least $2450. We personally believe there is a strong argument for using $1000 as our beginning point and this projects a target of at least $3500.”
No arguments with Mr. Baker here. I think he’s being very conservative. Since we have an arguably longer and stronger bull market than either the 1930s or 1970s, I believe that the ultimate multiple will be much greater, perhaps double or more the multiple he uses, thus a double of his ultimate price figures.
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About the author:
Jerry Western is author of the newly available work,
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A Book on How to Protect your Wealth with the 21st Century Gold Rush and
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