In which phase of the gold bull market are we?

Gold is seen as transitioning from phase 2 to phase 3 in an ongoing bull market which still has some way to run

Author: Ronald Stoeferle
Posted:  Friday , 25 Jun 2010 

VIENNA (Erste Bank) - 

A central pillar of the Dow Theory is the description of the phases of a bull market. According to Dow the three phases reflect the confidence of the investors:  

- 1. Accumulation 

- 2. Participation of the public 

- 3. Distribution  

The first phase is dominated by a drawn-out process. We think that this phase was happening in 1999 to 2003. At the beginning, only "early adaptors" are invested. The fundamental picture tends to be bleak, and there is a selling overhang. The longer this phase takes, the stronger the development in phases 2 and 3. For example, the oil price was traded within a bandwidth of USD 10-35 for more than 25 years. In 2004 it broke out of this range and increased to USD 147/barrel within four years. Something similar happened on the equity markets. The Dow Jones index traded within a bandwidth of 600 to 1,000 points from 1962 to 1982. The outbreak was followed by 18 years of bull market, which took the index to 11,700 points or +1,400% (annualised performance 16.5%). This is the nature of a bull market.  

The second trend phase is characterised by improved fundamentals, higher confidence, and new groups of investors. And lastly, phase 3 is the euphoric phase that culminates in a "blow-off", i.e. in a parabolic increase. At the end of each cycle the smart money is distributed.  

The following chart, depicting the sharply rising volume of contracts at the COMEX, highlights the soaring interest that is integral to a bull market.

From our point of view we are currently located at the transition from phase 2 to phase 3. Gold is getting gradually more accepted as an investment vehicle. Legendary investors such as Paul Tudor Jones, John Paulson, and David Einhorn have reported purchases of gold, the turnover is increasing, and numerous new products are being launched. In addition, gold is becoming more and more important in the asset allocation of institutional investors. We think that the passing of the "magic" USD (or EUR) 1,000/ounce mark heralds the imminent start of the trend acceleration phase. We saw a similar situation when oil increased above USD 100/barrel.

If we compare the current bull market to the most recent big gold rush, we can see a pronounced distribution phase that ended in a parabolic "blow-off". The finale phase ended in January 1980 at a high of USD 850/ounce. In the course of the previous ten trading days the price increased by 35%, in the previous six weeks the price had almost doubled (+94%). The same thing might occur in the final phase of the current bull market.

 "Buying the dips" seems to be the motto of the current phase. Within the corrections, gold moves from weaker to stronger hands. Consolidations in the current bull market have become shorter and less pronounced in terms of the underlying trend. We have seen this very development since the beginning of 2009. As soon as the corrections turn really small, the market will probably make the transition to its final phase. The transformation definitely has psychological reasons. The unshakeable myths and misunderstandings (gold does not pay interest, buying physical gold is expensive, gold is speculative and volatile...) are being de-mystified. Given that many of such arguments, defamations, and convictions were deeply engrained after a 20-years' bear market, the change of heart is accordingly drawn-out and tedious.

Gold is a gauge for risk, and thus the currency of fear. In that sense, both fear and greed can trigger the often-quoted "irrational exuberance" and thus the parabolic increase in the final phase.   

It is a fact that gold is certainly no contrarian investment anymore, as opposed to 2000, although investors are still sceptical, and the same old arguments still abound in the market.

Having a closer look at the sentiment, we find that we are far from anything like euphoria, so gold is definitely no mainstream investment. In comparison with the Nasdaq at the beginning of 2000, gold is certainly more of a dark horse. If one were to ask ten people for names of three gold mining shares, chances are they would not know any. This is a stark contrast to the situation a couple of years ago when the vast majority of people were talking about technology shares and invested in highly speculative start-ups, or US consumers who were taking out mortgages, hoping to benefit from continuously rising property prices.   

The numbers, too, substantiate the notion that the parabolic phase of gold should still be ahead of us. For example, the Nasdaq 100 index increased by 85% in 1998 and by even 102% in 1999. It rose by an additional 27% in 2000 before collapsing at the end of March. At the end of the bull market, 30 shares had gained more than 1,000% by 1999. Is the comparison of trends in different asset classes admissible? We certainly think so, given that human behaviour patterns and emotions in extreme phases are the same. Greed and fear determine the beginning and the end of bull markets. Therefore we assume that gold and gold shares could show a similar performance to the one of the Nasdaq at the end of the 1990s.

The last bull market came to an abrupt end in 1980. The then chairman of the Federal Reserve, Paul Volcker, increased the key lending rates to 20% within only a few months. Could this be possible today? Definitely not! In 1980 the USA was one of the biggest creditor nations in the world and had a positive trade balance. On top of that, the financial industry was substantially smaller in terms of the GDP, and excessive debt was neither in the private nor in the public sector an issue.

The above article is abstracted, with permission, from the Erste Bank 85-page analysis of gold and the gold market prepared by Ronald Stoeferle and entitled Special Report Gold - In Gold we trust (2010)

INDEPENDENT VIEWPOINT | Mineweb.com - The world's premier mining and mining investment website

In which phase of the gold bull market are we? 

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NYTimes: Analysts Question a Threat by Fannie

From The New York Times:

Analysts Question a Threat by Fannie

Experts wondered what Fannie Mae, the mortgage finance giant, hoped to achieve by announcing it would punish owners who strategically defaulted.

http://nyti.ms/9siHcc

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Chávez Opponent Flees Venezuela - WSJ.com

Chávez Opponent Flees Venezuela

By DAN MOLINSKI AND JOSé DE CóRDOBA

CARACAS, Venezuela&lsqauo;The principal owner of Venezuela's last remaining
opposition television station has fled the country, as President Hugo Chávez
continues to ratchet up the pressure on his rivals months ahead of crucial
September legislative elections.

Guillermo Zuloaga fled Venezuela after a warrant was issued for his arrest
last week, a station representative confirmed.

"He's no longer in Venezuela," said Edith Ruiz, director of institutional
relations at Mr. Zuloaga's Globovision television station Wednesday. She
said his exact whereabouts outside of Venezuela were unknown.

Venezuelan authorities issued an arrest warrant for Mr. Zuloaga on Friday on
charges that a car dealership his family owns had hoarded automobiles. Mr.
Zuloaga denies the allegation.

In a call to Globovision earlier in the week, Mr. Zuloaga said the
government's accusation against him was trumped up for the sole purpose of
shutting down the station.

Officials at the president's office and the Attorney General's office
weren't available to comment Wednesday on the news of Mr. Zuloaga's
departure.

In March, Mr. Zuloaga was briefly arrested for saying on a television show
that the nation lacked freedom of expression. But he was released after an
international outcry.

Over the years, Mr. Chávez has moved to take over the airwaves, opening a
plethora of state-run channels that give the president fawning coverage.

In 2007, the government went after private broadcasters, ordering that the
license of the biggest and most outspoken broadcaster, RCTV, not be renewed.
The move forced it off the airwaves. The government then later forced the
channel off cable television as well.

Other TV broadcasters, cowed by the government, softened their coverage of
the government. But Globovision has remained the exception, infuriating
Chávez officials.

Mr. Zuloaga is the second major shareholder and director of the station to
flee or refuse to return to the country in the last few days. Globovision
director Nelson Mezerhane, who is also president of Banco Federal, a midsize
bank seized by Venezuelan authorities Monday, said earlier this week he
wouldn't go back to Venezuela because he feared judicial persecution.
Venezuelan authorities said the bank wasn't meeting liquidity requirements,
an allegation Mr. Mezerhane says is false.

"This is part of a political agenda," said Mr. Mezerhane in an interview. He
was outside Venezuela when the bank was seized. "The president wants to bend
Globovision to its will and put it at the service of the state."

During recent days, Mr. Chávez has taken to the airwaves to urge both
Messrs. Mezerhane and Zuloaga to turn themselves in. He has denied that
their legal problems stem from their association with Globovision. "That's a
lie," said Mr. Chávez in an address. "They are running for some reason. ...
He who hasn't done anything wrong, doesn't fear anything."

Some analysts say Mr. Chávez's apparent attack on Globovision is an attempt
to distract Venezuelans from growing economic problems and spreading
scandals.

Venezuela's economy contracted nearly 6% in the first quarter of the year.
Inflation, meanwhile, is running at about 30%. While shortages of basic
foods have proliferated, so have corruption scandals in the government's
multibillion-dollar food purchasing program. Thousands of tons of imported
food, bought by the government's main purchasing arm, have been found
rotting in Venezuela's main port&lsqauo;creating a public outcry.

Given that bleak landscape, a number of analysts wonder if Mr. Chávez will
force Caracas-based Globovision off the air now that its principal owner,
Mr. Zuluaga, is an international fugitive. Others say Mr. Chavez won't go as
far as to shut down the station&lsqauo;which would bring international
condemnation&lsqauo;but will pile on further pressure to muzzle the station.

"I don't think the president wants to shut down the channel," said Alberto
Federico Ravell, a shareholder and former editor in chief of Globovision who
stepped down from his post under pressure earlier this year. "He just wants
to strangle it with measures against its owners, tax audits and other
regulatory measures."

The latest arrest warrant issued for Mr. Zuloaga has raised an outcry from
governments and international human-rights groups. In Washington, the U.S.
State Department said earlier this week the arrest warrant was "the latest
example of the government of Venezuela's continuing assault on the freedom
of the press."

Other international groups have also come out in recent days to protest the
latest arrest warrant for Mr. Zuloaga. "If the government is using Zuloaga's
prosecution as a pretext to silence and intimidate the only remaining
critical broadcaster, the rights of citizens to be informed will be
seriously restricted and Venezuela's democracy will suffer yet another
blow," the New York-based Committee to Protect Journalists said Monday on
its website.

During his 11 years in power, Mr. Chávez has frequently been accused of
trying to silence his critics by trumping up charges against them so he can
have them arrested and put in jail.

A former state governor, Oswaldo Álvarez Paz, was arrested in March for
saying on a television show that Venezuela has become a haven for drug
traffickers. Mr. Chávez said such statements break a law that prohibits
"spreading false information" or making any incendiary comments deemed
threatening to peace and stability.

Write to Dan Molinski at Dan.Molinski@dowjones.com

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