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How Long With the Gold Bull Market Run?

Commodities / Gold & Silver 2009 Nov 24, 2009 - 07:52 AM GMT

By: Neil_Charnock


Best Financial Markets Analysis ArticleThe train left the station with gold stock prices on board as we predicted months ago but fear not if you are not already aboard as there are always “stops” (read that as “dips”) along the way.  These dips should be bought because the rally is running along nicely and you know what they say... the trend is your friend. 

Profits are still there to be made and in my humble opinion the best is yet to come, the next station for boarding is only a week or two ahead.  This will not be very deep just a nice safe entry point for those who like to time their market entry.

The gold bull in the 70’s yielded fantastic returns that we can only dream of for now but only in the final few years to 1980.  Many stocks that traded under 50c ran to $100’s per share as savvy investors made their fortunes.  I look on the years I have spent investing in this gold bull thus far as educational and profitable with the emphasis on essential education. 

The education I am gaining will reward me most later on if I can pinpoint the stocks that will repeat those gains.  But I bank on much smaller gains and make superb profits in the meantime.  We should concentrate on learning to follow the market and gain understanding of the resources and factors that effect profitability for a gold miner.  This might be an approach that could work for you because knowledge is power.  In this case it could be the knowledge you use to gain financial survival or potentially freedom.

Action is usually choppy this time of year and at this stage of a rally.  I have seen it all before since 2001.  If you are sitting in a losing gold stock investment however the chances are that it will continue to base (flat-line at a low level) or fall as the rally progresses - not all stocks do well contrary to popular belief.  Hold and hope is not generally a successful strategy.

Some gold stocks will fail and go into liquidation and some will get there but only much slower than originally planned.  Who wants to be invested in the non-performers or mediocre performers with their capital stagnating or shrinking while the performers increase strongly?

That is why research, knowledge, technique, experience, discipline and good information are paramount when it comes to profits.  Winning stocks with great technical setups and strong fundamentals are delivering fantastic profits to some investors and I hope you are among them. 

Successful investment strategy is variable as different techniques work well for some and not for others for many different reasons.  This is a topic for a book but worth mentioning briefly because it should be understood that you need to develop an approach that works for you possibly through trial and error.

How long does this bull market run?
There are years yet to go on this gold bull and the most exciting years are certainly still ahead of us.  Gold bull markets can run for well over a decade and you should remember the last one ran from 1971 to 1980.  Yet the gold price was fixed until 1971 under the Bretton Woods agreement which had been signed and accepted in 1944. 

I have read credible research in the past that showed that the real value of gold was rising for many years before 1971.  In fact it was the steadily rising unofficial value of gold that was driving physical convertibility of dollars for gold until this trade was stopped in 1971. 

The gold dollar peg, in the face of rising supply of USD’s after 1944 and particularly during WW2 was causing a flow of gold out of the USA that eventually forced Richard Nixon to close the convertibility window for good. 

Once this convertibility window closed and, in effect Bretton Woods 1 had been defaulted on, the printing presses were set free and a new era of paper prosperity began.  So began a higher rate of inflation and a new era of banking began which eventually led to rampant casino style gambling and derivative instrument proliferation… Oh you get the idea you have read recent history - here we are dealing with the resultant and expected mess.

My point is that the 70’s rally would probably have started in 1960 if it was not for the fixed price of gold at that time.  This distortion of events currently gives the wrong impression that the current gold bull market will be shorter lived than it actually will be.  If you were to compare this rally to the time of duration of the 70’s version then it might appear that this is almost over.  But think of this for a moment - what if we are getting into the interesting part of the first half of this rally?

The ills, continued denial and insistence of our esteemed leaders to manipulate and fix this mess with more of the same that caused it in the first place will ensure the pain will last a long time.  If you don’t believe me look at Japan today so many years after their collapse.  I strongly believe we will see massive waves of financial disruption and adjustment as the world seeks to find solutions and a new state of relative stability.  The trick for you individually is to find the way through as best you can even if Governments and banks and currencies come and go.

Mini gold bulls since 1980 were mere bear market corrections so don’t be fooled by those either – apples and oranges – no meaningful comparison is possible.  This bull started in 2001, some say 1999, but we made a double bottom during both years so I work off the most recent bottom in 2001 as a matter of preference. 

This bull has had many stages and has so far been quite predictable.  Using Mandelbrot fractal analysis we have been able to time the gold behavior and price breaks with regular success however the added dimension of currency and equity fluctuations have made the shares somewhat more difficult to finesse here in Australia. 

With enough data and experience this too has become more possible and just in time too.  With the most profitable years ahead as this rally accelerates it would be a great shame to miss any of it.  The massive global demand building will spill over into every stock exchange seeking a return on gold shares as the pressure really hits.  I have written about this subject too and now notice more and more interest in our market from offshore. 

This current rally is showing signs that it will continue into the second quarter of 2010.  These articles and my web site are designed to assist you to gain capital through intimate knowledge of the Aussie gold sector so you can fight the ravages of this dangerous economy with its stagflation (prices up and most assets down) and poor investment yield conditions.

Gold is and will continue to be one of the few profitable games in town and I will keep on saying this until it is no longer true.  Get aboard and get with the happy crowd because we are prospering.

Current conditions

It is great to talk to investors and receive feedback from my Members at GoldOz as it keeps me in touch with prevailing attitudes and needs of retail investors.  As an experienced gold stock investor I take certain stock behavior and knowledge for granted so this is valuable feedback for me.  Not only can I assist them but you get a two way street effect and I am more able to deliver what is required and desired.

The first major concern I am hearing is that “I am expecting the next major down leg shortly” meaning that investors still fear an immediate crash similar to 2008.  I have written about the problems that the global economy is yet to overcome in some detail myself over recent years and I have not changed my view on this topic.  However many investors fail to underestimate the effect that the stimulus packages have had or the significance of near zero interest rates in the USA.

The big question is obviously timing.  If the Fed thought the US economy could withstand a rate rise up from near zero it would.  The US is trying to reflate their economy however with a high proportion of prime mortgages in default, never mind sub-prime mortgages, and resets set to peak again next year they have no choice but to leave rates where they are or the housing problems get even worse. 

This would have terrible consequences for the corporate and banking sectors and so this simply cannot be allowed.  This is why inflation is not a concern; the concern is reflation and the purchase of time to allow restructures to take place.  Will it work – yes for a while well sort of?  I doubt the jobless feel happy about how things are going but they do want a system to live in and order to be put back.  Interest rates will remain at near zero for quite some time to come.

So for now and the next 12 – 18 months at least we will see low US rates offering cheap US dollars to reflate the US and other sovereign economies, gold and some asset classes will benefit.  Even though the reason for the low rates is bearish we see a confusing result for most investors – a bullish outcome for certain asset classes.  The carry trade for US dollars will have time to blow up into a shocking bubble and will cause problems when it has to be unwound however my view for now is “let’s make hay while the sun shines”.

That is what the banks are doing except they are trying to rebuild their balance sheets.  Come to think of it many investors are in the same boat after leveraging their portfolios with margin loans or being hit by severe Super Annuation losses.

Yes I hear you scream and gnash your teeth – this is a jobless recovery in the USA and the consumer is dead RIP.  Danger is all about how can the stimulus dollars hold up this charade?  Well they are and they can and the big boys want it to be so and they will not stop it either.  The big banks need to buy time and so do the Central Banks.  The stance on monetary policy will be accommodative over the coming 18 months hence my current stance on investment opportunity.

The Chinese and every other economy still need the USD so it will not collapse for now – too much demand for it due to the carry trade where you can borrow near 0% cash and invest it for a yield elsewhere. 

The whole game now is to buy time and all the while some bubbles will form that can make you wealthy.  So participate or watch your money lose value – or build an investment strategy that accommodates both.

Will the Fed buy more US mortgages?  I would hazard a guess and say yes they will.  Will all these activities and resultant fear / lack of confidence continue to drive investment demand for gold and silver and related equities?  Yes again of course monetary inflation, negative real interest rates, fear and a BS index off the charts will inflate the price of gold.   The song remains the same.

For that matter easy carry trade money with no safe place to find a home with much prospect of decent yield will also partially gravitate to gold.  Central Bank buying will continue and oh yes, the Chinese will keep on managing their banking system to ensure that business and the consumer in China finds a loan to drive growth.  They will also buy gold – lots of gold.

They will buy silver too – lots of silver and I consider this highly rare and useful metal will out perform gold into the latter years of the gold bull as it has already done for much of the bull to date.  Australia has a vibrant modern mining sector and we enjoy one of the highest sovereign risk ratings in the world.  If this makes sense to you and you want to learn more you might like to join us at GoldOz and get aboard Down Under.

Our bonus time offer is nearly over now for GoldOz Gold Membership subscriptions as this deal only runs for the next 6 days to the end of November.

Good trading / investing.
Neil Charnock

GoldOz is currently developing a Member area and has added further resources for free access. We have stepped up our research and stand by to assist investors from all walks of life. We sell an updating PDF service on ASX gold stocks from only $AUD35 for 3 months – the feedback is grateful and enthusiastic because we are highlighting companies that have growth potential and offering professional coverage of the sector. GoldOz web site is a growing dynamic resource for investors interested in PGE, silver and gold companies listed in Australia , brokers, bullion dealers and other services.

Neil Charnock is not a registered investment advisor. He is a private investor who, in addition to his essay publication offerings, has now assembled a highly experienced panel to assist in the presentation of various research information services.  The opinions and statements made in the above publication are the result of extensive research and are believed to be accurate and from reliable sources. The contents are his current opinion only, further more conditions may cause these opinions to change without notice. The insights herein published are made solely for international and educational purposes. The contents in this publication are not to be construed as solicitation or recommendation to be used for formulation of investment decisions in any type of market whatsoever. WARNING share market investment or speculation is a high risk activity. Investors enter such activity at their own risk and must conduct their own due diligence to research and verify all aspects of any investment decision, if necessary seeking competent professional assistance.

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