Are You Still Worried if Gold is in a Real Bull Market or Not?
After climbing 9% in 2016, from $1050 to $1150 and another 10% gain during the first half of this year, in July and again in early August, gold prices dropped down to $1210, before rallying back up both times to $1290 and $1350 per ounce respectively. This back and forth price action has some investors worried if this is a real bull market in gold or yet another flash in the pan for the coveted yellow metal?
To get a clearer picture, one has to closely examine how a typical bull market acts during its movements through various stages.
Although the definition of a bull market is sustained gains in value of a certain asset class year after year over a 5-8 year period, the beginning, middle and the end of this cycle vary in performance. Let me explain what this means to you as an investor.
Typically after the conclusion of a bear market in an asset class which pushes the value of the assets down over a 2-4 years period, it begins a new bull market that goes through the following phases:
Phase I (Hope)
In the early stages of this new bull cycle, a great majority of investors are still skeptical, sitting on the sideline and periodically glancing at it from a distance to see if the market is continuing to stay depressed or if it has concluded its bear market and has begun to climb, entering a new bull market.
This stage is known as the “Hope” phase, which lasts 1-2 years, during which the price movements to the upside is usually painstakingly slow as institutional investors such as major banks and nations see the opportunity and jump in stockpiling gold at discounted depressed prices while the rest of the population remains on the sideline.
During this phase it is not unusual to see periodic short term pullbacks followed by modest rebounds. Yet, during this phase, the market shows some signs of life as it makes modest annual gains. From January of 2016 till now, gold has moved up from $1050 to $1331 (26.6%) with silver up from $13.80 to $17.81 (28.8%) in a little over 20 months. This is the phase gold and silver just concluded and are about to move into the next phase. The main thing to remember during this phase, is how each rebound is greater than the last one, as has been the case in the current gold and silver markets.
Phase II (Relief Optimism)
Gold and silver are in the beginning of these two phases known as “Relief Optimism” which lasts another 2-3 years as the market begins to hit higher highs with sustain gains for longer periods of time and with fewer and shorter term pullbacks as investors begin to gain confidence and more people start to jump in, most of whom are usually professional investors such as hedge funds and money managers while the general public continues to ignore it.
Phase III (Excitement Thrill)
The next step is the “excitement” phase which is quickly followed by “Thrill” phase as the prices start moving up fairly rapidly with even fewer short term pullbacks.
This is also the phase where the mainstream media begins to take notice of the bull market and starts to talk about the market virtually daily, enticing the general public to jump in while the professional investors begin to slowly cash in and jump out of the market with fistful of dollars as the unsuspecting general public is finally getting in, long after the bargain-basement prices have past.
This is also where the late-comers are mostly susceptible to great losses as the aged bull market is quickly winding down and approaching its final stage …
The Final Phase (Euphoria)
The “Euphoria” phase which typically lasts 6-12 months, turns the market into chaos and pandemonium. This is where you will see asset values move up in leaps and bounds with hardly any pullbacks at all.
For example, if you go back and look at how gold prices moved in the last 12 months of its last bull market, you will see from August 2010 through September 2011 it went from $1227 per ounce to $1924, a whopping 57% jump in just one single year. This is what a Euphoria Phase looks like. The stock market is currently in the midst of this phase. As we are witnessing today, regardless of how negative the fundamentals, the economic data or how dangerous the geopolitical risks around the world, the stock market keeps hitting new record highs month after month. Former Federal Reserve chairman’s coined phrase “Irrational Exuberance” is hard at play in today’s stock market.
But unfortunately this is also when a massive crash occurs as investors watch their entire life savings get wiped out as the markets sink back into a new cyclical bear market for the following 2-4 years.
As clearly demonstrated, once again the early bird always gets the worm and the late ones get the shaft. The key in making money in any market is to go into a bull market in its early stages and not wait till it is too late to benefit you. Since early 2016, we have been seeing banks such as JP Morgan and others have been getting into this new bull market in precious metals. “Follow the smart money,” was one of my father’s favorite sayings.
Although hindsight is always 20/20, to see this point clearly, you won’t have to go further than the last bull market in gold and silver which lasted from 2001 through 2011. Those who got into the market in 2001- 2003 in the early phase of that bull market when gold prices averaged at $345, made the most profit in 2011 when the prices had topped out at $1924. In contrast, those who waited till the late stages of the bull market around 2010 when gold had already gone over $1200 per ounce, made the least amount of profit, if not burned to ashes after the market dropped a year later.
For those of you who missed the last bull market in its early stages, here is your second chance. It is 2002 all over again, only 20 months into this new young bull market. Are you going to be the early bird who catches the worm, or wait till it is too late before pulling the trigger?
You decide! – Peter Ginelli
Gold Analog Charts Signal Early Stages Of Cyclical Bull
We started employing analog charts during the latter stages of the seemingly forever bear market in precious metals. Comparing current to past trends by using price data is not considered technical analysis but it is extremely valuable because history tends to repeat itself. It also helps us identify extremes as well as opportunities. For example, in 2015 it was clear the epic bear market in gold stocks was due for a major reversal. Today, precious metals appear to be in the early innings of a cyclical bull market and the analogs suggest there is plenty of room to run to the upside.
The first chart compares the current recovery in gold to past recoveries. In recent quarters we had anticipated a similar, explosive rebound like in 2008 and 1976. However, with 18 months of evidence we can now say the current rebound most resembles the rebounds that started in 1985 and 2001. Both of those rebounds imply gold could reach $1700/oz by Q4 of 2018. However, if gold cannot take out the resistance around $1375 then it could end up following the path of the 1993 rebound.
Next we look at the large cap gold stocks. The data is from the Barron’s gold Mining Index (BGMI) which is one of the few indices with a multi-decade history. If one were to look at the HUI or GDM(parent index of the VanEck Vectors gold Miners ETF (NYSE:GDX)) it would show the gold stocks are currently behind the rebound that began in the fourth quarters of 2000 and 2008.
Data from the BGMI implies the rebound in gold stocks is ahead of schedule. In a broader sense, the BGMI certainly has plenty of room to run as many of its bull markets have achieved 7-fold returns.
Next is an analog constructed from data from my custom junior gold indices. The juniors are currently right at the point where the 2001-2007 bull made a massive move higher over the next 12 months. The two bulls for comparison are a very long cycle (+6 years and less than 3 years). At worst, I’d expect this bull to last somewhere in between. If gold makes a clean break above $1375/oz then I’d expect this bull to advance to the 14x peak the other bulls achieved before 2019.
Finally, here is the TSX Venture Index. The three previous bulls averaged close to a 250% gain. The current bull is up roughly 60%. The gains for the overall index are muted as the index contains a large amount of worthless companies. Nevertheless, the bull market has plenty of room to run in terms of time and price.
The analogs show that the current bull market in gold, gold stocks and juniors is obviously in the early innings in both time and price. Interestingly, the analog for gold and the junior gold stocks suggests there is the possibility of strong upside potential over the next 12 months.
If gold breaks above major resistance around $1375/oz, then the juniors and large gold stocks could realize that upside potential over the next 18 months. Although the fledgling correction in precious metals could continue and expand, the broader risk to reward is skewed to the upside. Therefore, we want to accumulate the best opportunities in the juniors on weakness. – Jordan Roy-Byrne
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