Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
How to Protect Your Site from Bots & Spam? - 20th Aug 19
Fed Too Late To Prevent A US Housing Market Crash? - 20th Aug 19
Gold and the Cracks in the U.S., Japan and Germany’s Economic Data - 20th Aug 19
The Gold Rush of 2019 - 20th Aug 19
How to Play Interest Rates in US Real Estate - 20th Aug 19
Stocks Likely to Breakout Instead of Gold - 20th Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 20th Aug 19
Holiday Nightmares - Your Caravan is Missing! - 20th Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19

Market Oracle FREE Newsletter

The No 1 Gold Stock for 2019

The Gold Stocks Compared to Past Bull Markets

Commodities / Gold & Silver Stocks Jul 10, 2012 - 03:09 PM GMT

By: Jordan_Roy_Byrne


Best Financial Markets Analysis ArticleIn researching past equity bull markets, we've found numerous similarities between all. Each bull market has three clearly defined phases. The last phase of each bull market is driven by valuation expansion which is made possible through the wall of worry phase in which valuations contract and the weak hands give way to the strong hands. Though the gold stocks may have already bottomed, plenty of fear and despondency persists. However, when one compares the present bull market in the gold stocks to five previous equity bull markets, they should realize that things are on par with the past and the gold stocks are right on track.

Below we plot (thanks to Professor Robert Schiller's data), the S&P 500 and its PE ratio during the 1942-1966 bull market. Note that the PE surged from 1942 to 1946 and then fell dramatically as the market digested its initial advance. The market made an important breakout in 1950 and the PE ratio would rise from about 8 to nearly 24 from 1951 to 1961. Note that at the low in 1949, the market had made no progress in the last six years.

S&P 500 & PE Ratio

The Barron's Gold Mining index surged from 1960 to 1967. Its wall of worry period lasted from 1968 to the end of 1972. Note that at a bottom in late 1971, the market had made no progress over a six year period. Nevertheless, the gold stocks absolutely exploded thereafter, more than four-fold in only two years. After one final correction from 1974 to 1976, the sector surged higher once again, advancing more than six-fold in four years. We could not find valuation data.

Barrons Gold Mining Index

Japan was in a bull market from 1967 to 1990. The first phase lasted until 1973. The market peaked with a PE ratio of 24. Its wall of worry period lasted five and a half years. The market made its second major new high in 1978 and didn't look back. Note that the PE ratio didn't begin to accelerate until after 1982. This means that in the period 1978-1982, the gains in stocks were entirely driven by earnings and not valuation expansion. From 1982 to 1987 valuations almost quadrupled.

Japan Chart

Next is the Hang Seng which never experienced a true bubble because valuations never reached an extreme. This is similar to the 1942-1966 bull market in the US. As a result, both bull markets endured mild secular bear markets. The first phase of the Hang Seng's bull market was clearly from 1974 to 1981. It made a sustained new high in 1986. Post wall of worry phase, it is similar to the Barron's Gold Mining Index. Each experienced two strong cyclical bull markets separated by one noticeable cyclical bear.

Hong Kong Hang Seng Index

The case of the Nasdaq is quite interesting as its stealth phase was more choppy than the others. There was a sizeable correction in both 1981 and in 1983. The crash in 1987 marked the start of the Nasdaq's wall of worry phase which continued until 1991-1992. The market broke to the upside in late 1991 and then retested the breakout in 1992. Out of all of these bull markets, the Nasdaq had the weakest initial post-breakout move (from 1992-1994) but it would experience the greatest bubble. Its PE ratio surged from 30 in 1994 to over 200.

Nasdaq Chart

Now, what can we infer from this history? In each case, the bull market had a strong stealth phase and then a wall of worry period which lasted four or five years. Valuations peaked at the end of the first phase and would not be matched or exceeded until after the wall of worry phase. Finally, note that it is combination of rising earnings and rising valuations which causes an acceleration in the price action which ultimately leads to a bubble. That being said, the typical equity bull market looks something like this:

Stealth Phase - Wall of Worry Phase

It's interesting to note that the HUI has been stronger than the previous bull markets in the wall of worry phase. While it endured the deepest correction, it had the largest and fastest rebound.It has been four years and three months since the HUI's first high. The S&P 500 and Nasdaq both broke to and sustained new highs after four years while it took the Hang Seng, Nikkei and Barron's Gold Mining Index five years. Thus' we'd expect the HUI's next breakout to come before April 2013.

HUI Gold Bugs

The bottom line is the bull market in the gold stocks remains well on track. The downturn since September 2011 has dampened some spirits but it was necessary as the gold stocks were well beyond the historical template at that point. (I wish I had studied this template a year ago!) With the exception of the Nasdaq, it took these bull markets four or five years just to print a new high. The Nasdaq made a marginal high in 1990 while the HUI made a marginal high (22% above 2008) last year. That is impressive considering the HUI had the deepest correction. Recent weakness is nothing more than a correction of and digestion of the massive gains from 2009-2010.

Considering the history of the five bull markets, we are looking for the HUI to sustain a breakout to new highs within the next 9-12 months. Sure, the gold stocks could struggle for a few months as uncertainty in Europe creates uncertainty in the Gold market. However, as Frank Holmes wrote: In the ongoing euro crisis, we won't know the details of how Europe will clean up its debt mess for a while, but we're pretty confident the story ends well for gold. Investors need to be patient and keep their eyes on the bigger picture. Patiently accumulate your positions over the coming months. We continue to focus on the companies best positioned for and most likely to take advantage of the inevitable next leg up in this bull market in precious metals.

Good Luck!

Service Link:

Bio: Jordan Roy-Byrne, CMT  is a Chartered Market Technician, a member of the Market Technicians Association and from 2010-2011 an official contributor to the CME Group, the largest futures exchange in the world. He is the publisher and editor of TheDailyGold Premium, a publication which emphaszies market timing and stock selection for the sophisticated investor.  Jordan's work has been featured in CNBC, Barrons, Financial Times Alphaville, and his editorials are regularly published in 321gold, Gold-Eagle, FinancialSense, GoldSeek, Kitco and Yahoo Finance. He is quoted regularly in Barrons. Jordan was a speaker at PDAC 2012, the largest mining conference in the world.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules