Monday, November 15, 2010

Speculative Phase Of Gold Bull Lies Ahead

Speculative Phase Of Gold Bull Lies Ahead

By Richard Russell | 15 November 2010

Richard Russell is not only the preeminent expert on Dow Theory, he is one of the most prolific newsletter writers (Dow Theory Letters) and thanks to his epic longevity, will hopefully go on to break records for many years to come. The "Oracle of the Dow" is not omniscient, unfortunately. Otherwise, we mere mortals could simply follow his sage advice to riches.

He was definitely in fine form in the summer of 2000 when he prophesied that "we're in the first phase of a bear market that could be long, tedious, grinding and very painful. Before it's over, I believe we'll see big pools of money moving out of stocks and into cash".

But since then Russell has had an especially tough time with deciphering the stock market. Especially so these past few years. He was bearish for some time but then in May 2007 Russell switched to the bullish camp and pronounced that "an unprecedented world boom lies ahead." It would seem that Russell has basically given up on trying to time the market's gyrations, writing recently that "the stock market is too unsettled, too questionable, for me or my subscribers to assume an all-out bullish or bearish position."

But he continues to be an unabashed gold bull. This is the one market he has been pounding the table about for quite a long time and he has been absolutely correct. To my chagrin, it took me far far too long to realize that gold is indeed in a secular gold bull market. And, of course, the next thought after that is the dread that I will 'overstay' the market.

Russell puts those thoughts to rest writing recently:

"I'm going on the thesis that the highly speculative phase of the gold bull market lies ahead. Now I'm depending on my experience with other bull markets:
  1. Most great bull markets go higher and further than almost anybody thinks possible.
  2. Most bull markets progress in three psychological phases.
  3. I believe the first phase of the gold bull market has passed. It's over. This is the phase where students of great values take their initial positions.
  4. I believe we are now deep into the second phase [[§oand nearing the end of that phase?§c: normxxx]] of the gold bull market. This is the phase where the institutions and funds join in the bull market show.
  5. Often, more money is made in the third or 'speculative' phase of a bull market than is made in the first and second phases combined. This can mean that the late-comers to bull markets often make a fortune, more than those who had the courage to buy early in the game, but they have to have fortitude to sit in the highly volatile second/third phases.
  6. Obviously, I could be wrong, but I believe that gold and silver are both still a buy.
  7. I've said this before, but I'll repeat it. You do not trade in-and-out in a confirmed primary bull market. You take an early position and add to your position as the bull market progresses.
  8. Great bull markets don't usually provide marvelous entry points. Those who are waiting for the ideal or "safe" place to enter the bull market in precious metals may have a long and frustrating wait.
  9. In a great primary bull market, you just "shut your eyes and buy."
  10. Are you buying right or are you buying wrong? Great bull markets tend to bail you out of your mistakes. Perfect timing is nearly impossible in a great bull market. You're either in or you're out.
  11. Great or fabulous primary bull markets may come along once or maybe twice in a generation. I believe the bull market in precious metals is just such a one— a once-in-a-generation bull market. We may never see another one to match this one in our lifetimes.
  12. I started writing Dow Theory Letters 52 years ago in 1958. Three times I've staked my reputation and my business on a bullish market call.

    The first instance was in 1958, when I told my subscribers that the third phase of the bull market lay ahead, and it was time to load up on stocks. I said so in my first Barron's article. That call and that article put me in business. I thank Barron's late, great editor Bob Bleiberg (who had faith in me and went out on a limb for me).

    In late-1974 at the end of that horrendous bear market, I told my subscribers that I thought the bear market was over, and it was time to buy stocks.

    In the year 2000 I told subscribers that I thought the bear market in gold was over, and that it was time to buy what was left of the gold stocks and
    "put 'em away". I told my subscribers that we should treat the gold shares (many under five dollars) as perpetual warrants. "Buy 'em and forget them."
  13. Lucky thirteen. I'm confirming what I said in 2000. Buy gold and silver, put 'em away and sit tight. The great speculative phase of the precious metals bull market lies ahead. My advice is concentrated in four words— "Buy, and be patient."

Looking at the very long term chart of gold, the base at the millennium is apparent, as is the unrelenting march of the secular bull market. While it does deviate from time to time away from the long term trend, it quickly returns to it. Right now we are above the trend but not at an extreme point that has historically lead to regression to the mean:

Currently the price of gold is trading at 16.3% premium relative to its 200 day moving average. Historically tops have corresponded with a premium of 20%+ so we still have some room the upside in this most recent cycle. And as Russell so eloquently puts it, quite a ways still from the "highly speculative phase".

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