Gold Bull Stage Two 3
Adam Hamilton
Archives
May 5, 2006
2006 has been a banner year for gold, with the Ancient Metal of Kings powering from $515 to over $650 in just the first four months of this year. This particular mighty gold upleg, since its humble beginnings in early June, is up an unbelievable 60%! It utterly dwarfs all uplegs that came before it in this bull.
As a long-time gold and gold-stock investor and speculator, I have been diligently studying this gold bull since it arose from its own ashes in the $250s back in late 2000 and early 2001. Five years ago this week, gold was trading at $265ish and deflationary predictions of sub-$200 gold abounded. Back then only a radical fringe believed a global commodities super bull was being born.
With gold now up 160% since its April 2001 multi-decade low, this bull is off to a great start. There have been many ups and downs over the past five years, spectacular uplegs and brutal corrections, but on balance gold kept marching resolutely higher despite the naysayers. And as in any bull market, the true students of this gold bull have been blessed with the greatest financial rewards by far from trading it.
As I continue to try and wrap my mind around this awesome bull in order to better understand the probabilities governing its likely future behavior, lately I've been pondering one particular facet of gold bull research. This thread has to do with the major stages through which great secular bulls often evolve.
Great gold bulls generally have three stages. While I wrote an essay on this a couple years ago, here is the short version. In Stage One, gold's modest gains are driven primarily by the devaluation of the dominant global currency of the time. In our current bull, most of the gains in gold up until last summer were attributable to the parallel secular bear unfolding in the US dollar.
But about a third of the way into a great gold bull, anywhere from several to five years in, a critical transition into Stage Two occurs. In Stage Two gold starts rising simultaneously in all currencies. Global investment demand for gold becomes large enough to push it up regardless of action in national fiat currencies. Stage Two is a self-feeding process, the higher investors drive gold the more alluring it becomes to investors.
Eventually, probably in the last couple years of a secular gold bull, prices will have been driven so high by investors in the preceding years that a popular mania erupts. When the financial media becomes all-gold-all-the-time and normal mainstream investors across the world cannot stop discussing how rich gold is making them, a mania has arrived. This final buying by everyone drives a vertical parabola into a breathtaking secular top. But once all mainstreamers are heavily long gold there are no buyers left so its great bull ends.
In this idealized chronology, we are now in the transition between Stage One and Stage Two. Euro gold bursting above its long-vexing ¤350 resistance last June was the catalyst that announced this transition was beginning. Since then there have been many more signs, ranging from gold rising in all major global currencies simultaneously to its once ironclad strong inverse correlation with the US dollar being annulled.
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