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Significant Characteristics of Bull Markets and Gold and SilverPinank Mehta A lot of views are expressed about the recent fall in the prices of gold and silver. Linking the arrest in the fall of the US$ to the fall in the price of gold and silver is a popular view. The arrest in the fall of the US$ is apparently considered more of a "technical" necessity than a fundamental move. Similarly the fall in the prices of gold and silver are considered "technical" necessities to relieve the overbought conditions. Some market commentators look to the 2-year correction in the 1970's gold bull market and are now calling for a similar correction! History rhymes but does not necessarily repeat! Since I found this reasoning to be quite inadequate, and studying the charts not as helpful, I went over the fundamentals once again. The monetary and fiscal policies of the global governments are expansionary and unsustainable. The value of the currencies in terms of purchasing power has been shrinking and the people are being lied to shamelessly about the extent of price "inflation." The stock bull of the last twenty years has changed the perception of the masses towards equities (and now real estate) and the concept of wealth. Debt-based consumption is being promoted as economic nirvana! Is there a simpler view to the gold and silver story? Assuming that gold and silver are in a secular bull market, I revisited the last secular bull market in the asset class called equities. Looking at the chart of S&P500 from 1983 to 2000 (the approximate duration of the bull market) I observe a few significant characteristics: Corrections follow periods of sizable gain. In the corrections, the drop is sharp and the markets again start advancing immediately after the drop, a rising trend. Lengthy periods of declines are virtually non-existent. In the early years, the markets were not fancied by the masses but only by smart money (steady accumulation) - a stealth bull market!
The chart of Nasdaq and Microsoft from 1985 to 2000 also exhibit similar characteristics as described above.
In bull markets, the markets stay overbought much longer than we can imagine. In bear markets, they stay oversold far longer than we can imagine (US$ please note). In light of the above observations, let us look at the charts of gold and silver from 1999 till the present - very young and nascent bull markets in my opinion.
The silver chart shows that the bull market in silver (poor man's gold) seems to have begun later than gold and is far more volatile.
Assuming that gold and silver are in a bull market, how many of the same significant characteristics described earlier for the equities are also observed in the gold and silver charts of the last five years? This assessment has to be made now to guide our investments in real time. In my opinion these significant characteristics are observed in the gold and silver charts shown above. A lot of observers calling for a sharp correction in gold and silver due to the overbought conditions are overlooking the fact that both metals were in a corrective mode for most of this year. Gold had just crossed the April 2004 high in November 2004 and silver has yet to cross the April 2004 level of about US$ 8.301! Consider the larger markets (not an exhaustive list at all): The US$ seems "technically" oversold. Gold and silver seem "technically" overbought. Official intervention in the currency markets is considered normal. Global central banks are in a damned if you do and damned you don't situation with respect to the US$ component of their foreign exchange reserves. Fixed income markets appear to confuse observers about inflation / deflation and growth / recession in the real economy. Equities seem overvalued considering the poor economic fundamentals. Risk has been completely discounted as evident from the very low spread between the strong and emerging countries' sovereign debt. It is possible that the generic leveraged short dollar trades by hedge funds and others will add tremendously to the short-term volatility, along with the commodity and the bond markets, as these imbalances are resolved. The bull market in gold and silver has begun and the safer thing is to let the fundamentals of various asset classes dictate our asset allocation, rather than getting clever in attempting to maximize returns by micro-managing our holdings. Hence, maintaining my core precious metals position is the most logical thing for me to do. As has truly been said, sitting quietly after making our investments is the hardest part of investing, requiring the courage of conviction in our assessment. Pinank Mehta Métier
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