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The Secret Bull Market

Commodities / Gold & Silver 2009 Sep 13, 2009 - 12:43 AM GMT

By: Sean_Brodrick


Best Financial Markets Analysis ArticleGold’s recent push above $1,000 an ounce is finally catching Wall Street’s attention. And yet many of the talking heads on TV still rush to say that gold is not a good long-term investment, that it’s “dead money” because gold doesn’t really do anything.

That’s a lie. Gold does something very important — preserve your wealth in an age when paper currency can be printed by the metric tonne. And gold has been doing a lot more than that since 2001. Take a look at this chart showing the 10-year performance of gold vs. the S&P 500 …

Gold started 2002 at $279 an ounce. Talk about coming a long way! Meanwhile, speaking of dead money — the S&P 500 has lost 20 percent of its value in a decade.

Gold vs. S&P 500

You might think this kind of compare-and-contrast performance would be worth the attention of the chuckleheads in the mainstream media. Apparently not. Maybe it’s a big secret they intend on keeping from you.

Or maybe it’s the scale of the chart I’m using? On a 15-year chart, gold STILL beats the performance of the S&P 500. You have to go to a 20-year chart to see the S&P 500 outperform gold. And we don’t all have 20 years to wait around.

Anyway, that’s the past. What about the future? Well, here are some interesting statistics.

  • Going back to the 1800s, the average length of a secular (long-term) bull market in stocks is about 14 years. They can be shorter, but even by this measure, if the bull market in commodities is average, it should have some years to run.
  • Commodities (natural resources) are generally acknowledged to have been in a big bear market between 1980 and 2000 before shifting to a bull market. A commodity supercycle — which I believe we are in now — can last 20 to 25 years.

So apart from any other factors, this bull market in gold should have much longer to run.

Now, let’s look at some more immediate forces.

September is historically the best month for gold. In fact, the price of gold has risen in 16 of the 20 Septembers since 1989. I talked about this in a column in July, and the “September effect” for gold is in full force.

Why does gold go higher in September? There are a number of factors: Jewelers usually restock gold in advance of the Christmas holidays, the post-monsoon wedding season in India is usually a big time to buy gold in that country, and China’s run-up to the Chinese New Year also starts around this time.

Investors expect gold to go higher in September, so they’re less hesitant to buy the metal. That doesn’t mean that gold MUST go higher in September, but psychology is an important part of the market, so the easiest path for gold is to the upside.

A Bet Against the Dollar. If you’ve been reading my blog, you’ve seen how I’ve chronicled the long-term breakdown in the U.S. dollar. Take a look at this weekly chart …

U.S. Dollar Index (Weekly)

Even if the U.S. Dollar Index is experiencing an average correction, that should take it to 69 — a long, long way down from here.

Why is this happening? The U.S. Treasury is running its printing presses at warp speed. It’s adding debt to the burden of every American man, woman and child at a frightening pace.

According to the Peter G. Peterson Foundation, “Our $56 trillion in unfunded obligations amount to $483,000 per household. That’s 10 times the median household income — so it’s as if everyone had a second or third mortgage on a house equal to 10 times their income but no house they can lay claim to.”

The U.S. deficit for this year alone is $1.8 trillion. The Peterson Foundation points out that a deficit that large is adding debt at a clip of $3.4 million a minute, $200 million an hour or $5 billion a day.

All that debt has to be paid back eventually, and paid back with dollars. When you create more of something, you cheapen its value. In a nutshell, that’s one reason why the U.S. dollar is breaking support and heading lower.

There are others …

Rumblings from Abroad. In Uncommon Wisdom, I’ve been following the actions of China, Russia and other countries who are itching to dump the U.S. dollar as the world’s reserve currency.

China made more noises about this recently. Cheng Siwei, former vice-chairman of the Standing Committee and now head of China’s green energy program, said Beijing was dismayed by the Fed’s recourse to “credit easing”.

At a policy workshop, according to press reports, Cheng said: “If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in U.S. bonds, and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies.”

But it’s not just China … or Russia … or any of the other usual suspects that would like to see the dollar humbled. The U.N. is the latest to get in on the act. On Monday, the United Nations Conference on Trade and Development laid the blame for the financial crisis at the dollar’s feet, and said the whole system had to be “reconsidered.”

One of the report’s authors, Detlef Kotte, told the London Daily Telegraph that: “Replacing the dollar with an artificial currency would solve some of the problems related to the potential of countries running large deficits and would help stability.”

This is the first time a major multinational institution has suggested dumping the U.S. dollar as the world’s reserve currency.

Meanwhile, China, Russia and others are buying gold on every dip. This is probably part of their plan for a long-term shift away from the dollar. But it also puts a floor under the price of gold … and means the easiest path for the yellow metal should be higher.

Plenty of Bears. You know a bull market is peaking when everybody and his brother thinks it’s a smart investment. Luckily for us gold bulls, there are plenty of bears out there.

Heck, you can’t turn on the TV without some deflationist trotting out. Are prices going down where you live? Heck, just a trip to the grocery store or gas station is enough to show me that prices are zig-zagging higher.

Sure, there is deflation in some parts of the economy, especially wages. But the price of hard assets seems to be going up. So it’s amazing to me that there are so many commodity bears right now. Let them continue that way — the longer they remain bearish, the longer the gold and commodity bull market can run.

I believe we will continue to see gold and other commodities grind higher even as deflationary experts line up to find reasons that the bull market in gold should end or is already over.

These are just some of the forces pushing gold higher — a surge I think will carry gold to $1,300 and beyond.

How to Buy this Bull Market

I don’t recommend you run out and buy gold or a gold mining stock. We will have pullbacks, just as we’ve had all along, just as we’ve had in every bull market. That’s what the Chinese are waiting for — do the smart thing and wait along with them.

When the pullbacks come, you’ll still have to be careful. Do your due diligence on anything you buy. And I think it’s smart to use a protective stop, in case a short-term pullback turns into a deeper correction.

Yours for trading profits,


P.S. Join Me in Toronto …

I’ll be attending and addressing the Toronto Resource Investment Conference in Toronto, Canada on September 26 & 27. It should be a great show – the other speakers include Frank Holmes, Doug Casey, Paul van Eeden, Jon Nadler, Eric Coffin, James Turk and lots more. I hope you attend, and if you do, please stop by my seminars on Saturday and Sunday and say “hello.” I enjoy meeting subscribers and getting your feedback.

To find out more about this conference, point your web browser to: For free admission, enter promo code SBT9.

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