Excellent read on gold--are we in a bull market? Somewhat longer read but good ideas.
So meandering back to my original questions, how do we know when a genuine, bona fide gold bull
market has begun? It¹s easy to answer, "Well, silly, the price begins to rise!" But a few months of
gradually rising prices does not necessarily comprise the makings of a powerful bull market! Then
what else do we look for? Well, for one thing we look for the "magic numbers" I promised you earlier.
Once again, let¹s take a look at our most recent modern-day examples. One of the characteristics we find when examining gold bulls over the past 25 years is that the first -- and most violent -- wave of the great ?79-?80 bull market (which, you¹ll recall, actually began forming in mid-¹77) contained at least four subsequent monthly highs within a six-month period. These new highs need not occur in four
consecutive months; they just need to occur within a six-month timeframe.
In other words, after the bottom of the cycle in June of ¹77, there was a new high established in July, another in September, a third in October and a fourth in November. Again, I want to emphasize that this pattern applies only to the first and earliest stage of a newly forming major gold bull market (such as the one I believe we are
entering right now).
Have we established four subsequent new highs within a six-month period since the triple-bottom lows last year? Let¹s take a look. Since the third occurrence of those lows in April last year (around $255), a new high was established in May. A second new high subsequently was not established until September. So even if a new high had occurred in October (which it didn¹t), it wouldn¹t have mattered,
since it would have been only the third new high in the series and October was the six-month deadline after the first new high in May.
But what about this year? After the double-bottom lows in November and December a newer high was
established in January (high #1) another new high was established in February (high #2). No new high
was established in March. Then, this month (written in April), a third new high has been established
(just last week). A still higher high may be established before the month is over, of course. Either
way, it doesn¹t matter, since whatever the final April high, we need only surpass it one time between
May 1 and June 30.
Remember that the first high in this series was presented to us in January, thus making June 30 the six-month deadline. Should a fourth new high occur between these dates, it¹s a strong indication we are, indeed, in the early stages of a powerful new bull market in gold. This would apply to silver as well, since it always follows gold in the major moves.
A Rare Occurrence Happening Before Our Eyes
Just to put this rare four-highs-in-six-months phenomenon in perspective, the last time the gold
market established four or more subsequent new monthly highs within six months was nearly a
decade ago in 1993! Even during the buying frenzy ensuing after the announcement of the Washington Agreement, gold put in only two subsequent monthly highs before the Cartel "managed" the price back down to below even pre-Agreement levels. So, the bottom line is this: we now have three full months to establish a fourth new subsequent high above April¹s final high. Don¹t forget, though, that
after this initial stage of the early gold bull market, this indicator becomes worthless.
How High Can Gold Fly?
Once a gold bull market gets going in earnest, it makes sense to ask the next logical question: how
high is "high"? Here, we can make use of a few more additional "magic" numbers. The first is $400.
Since 1989, which was the bottom of the downleg of the last great gold bull market begun in 1987,
gold has met consistent resistance at, or just above, $400 per ounce. This was the case in ¹89, ¹90,
¹93, ¹94, ¹95 and ¹96.
Since we now know that the Gold Cartel¹s ongoing indiscretions have created serious imbalances in the gold market and that a higher-than-normal price increase is likely, we¹ll assume that gold can, indeed, blow past the $400 level. If it does, the next serious resistance point is $500, as shown in ¹82, ¹83, and finally in ¹87 ? the last time gold ever sold for $500. Since then, it hasn¹t even been in the same zip code, much less in the neighborhood.
But what if there really is justice in the world and the Gold Cartel has its head handed to it on a
platter? What if the price of gold really soars? Well, then, we have two more "magic" numbers to
watch for. The first is $730, which represents the peak price of gold after the 50% retracement of the
original tsunami wave increase, which took gold to around $875 per ounce. Should the $730 level be
taken out, I suppose you could theoretically view the all-time high of $875 as "resistance," but to do
so would be exactly that: mere theory. Because in today¹s anything-goes, derivatives-laden,
cheap-money environment, were gold to explode upward of $730 we would be navigating uncharted
waters and anything would be possible.
Planning Your Exit ? the Most Important Number of All
Every chess match has an endgame, of course, and the coming gold party will be no exception. Whether the gold scenario plays itself out in two years or twenty, no one can say for sure. If history is to be trusted, the fireworks display we expect will likely be drawn out over 4 to 6 years. But history rarely repeats itself. Rather, like a politician trying to rework someone else¹s old material, it tends to
paraphrase. No doubt this time around the market will throw in a few surprises.
In any case, we¹ll have to "know when to fold ?em," as any good "gambler" must. Once again, thankfully, we have a "magic" number to help us determine when to scoop up our chips and leave the casino. It may be the most
important "magic" number of the bunch: That number is 25%.
Let me explain. When "the Big One" hit in 1979 and took gold from about $215 to more than $850 in
12 months, there were three months (September and December ¹79 and January ?80) when gold
moved up about 25% or more in one month! These three big moves all occurred within a 5-month
period. (Are you beginning to see now why Bill Murphy has so often cautioned traders in the gold
market to be careful? It¹s easy to get caught without a position only to watch the market skyrocket
almost overnight, leaving you standing knee-deep in swamp water!).
Later, after the initial 50% retracement of the first huge run-up, gold resumed its ascent in mid-1982.
Once again, this time for each of three consecutive months, gold climbed about 25% or more in only
four weeks¹ time! That, my friends, is how you know you¹re in a gen-yu-whine bull market!
Don¹t Get Caught at the Top
And that, too, is how we¹ll know when to get out. Because just as a charging bull knows no bounds,
neither does a dying one take any prisoners. Once again referring to the 25-year gold chart, we see
that once gold made its initial stunning ascent to the $875 level, it promptly began declining at equally breathtaking rates.
Even bull markets in gold have their share of greater fools, and once all the fools
had bought at $800 and above expecting gold to proceed on to $1,000, they were promptly
slaughtered in the ensuing decline! (Anyone buying in right now won¹t lose money in such a scenario,
of course; but you could certainly risk forfeiting the bulk of your profits.)
Notice that gold opened in January 1980 at roughly $565, climbed in stellar fashion to the peak at
$875 (a stunning 55% increase in less than one month!) and then immediately began plummeting. It
closed the month at $680 (a 22% decline in just a few days!), and less than eight weeks later was
back down to $450 (an additional 34% decline). For those who bought at the top, nearly half their
wealth had disappeared (or perhaps more than half if they were leveraged) ? all in fewer than 90 days!
The point is, the first time you see a 25% (or greater) decline after a serious bull run has unfolded,
begin protecting your positions. For those bolder investors who are willing to take the chance, it is
possible to wait out a decline and hope to get out on the 50% retracement back up. But while they did
indeed take place in the bull markets we¹re studying, such retracements are only theoretical, and
there¹s no guarantee they¹ll happen. I suspect there are plenty of Lucent, Global Crossing, Enron, and
millions of other high-tech investors waiting for 50% retracements that never happened ? and never
will!
To put the 25% number in perspective, were gold to decline 25% from its current level of about $310,
we would be looking at a gold price of $232 ? far below its modern-day low established just prior to the
Washington Agreement! Twenty-five percent is a huge number in terms of investing, and when you
see it occur, either to the upside or to the downside, within the scope of one month, you know
something serious is taking place. Ignore it at your peril.
No Trend Lasts Forever ? J. Paul Getty¹s Secret to Wealth
Bear in mind that we¹re in the gold market because we see present value, not because we¹re in love
with some pretty, yellow metal. We¹re trying to make a buck while trying to make a point. But when
gold finally takes off, as is almost inevitable now, we¹ll have made both our point and a few bucks. By
then, when the average, uninformed investor is just jumping into the market and pictures of gold bars
are featured on the covers of Time and Newsweek, we should be packing our bags and moving on to
greener pastures ? looking for the next great undervalued investments (probably the real estate and
general equities markets, which, by then, will have likely been beaten to a bloody pulp).To have come
all that way and then hang on for dear life as if gold is somehow sacred would be foolish. When
irresistibly obscene profits are calling and the market seems to be losing steam, take them, for
heaven¹s sake! The irrefutable maxim of "buy low, sell high" still holds. Don¹t ever forget it.
J. Paul Getty once said, "To get really rich, buy when everyone else is selling and then hold until
everyone else is buying." It¹s virtually certain in this crazy world where mere paper is considered real
money and guys with suits and fancy diplomas are assumed to be "experts," that, at some point in
this newly forming precious metals bull market, everyone will be buying gold, silver and their related
equities. And they¹ll be paying enormous premiums for the privilege of doing so, since by then the
demand will have far exceeded the supply. But that¹s OK. When that happens, we¹ll gladly sell them
ours?
Derek K. Van Artsdalen
San Antonio, Texas
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