Hard Money Bull Market

Hard Money Bull Market: The Bulls and Bears of Precious Metals
A Daily Reckoning White Paper Report
by Pinank Mehta, Whiskey & Gunpowder (Sign up FREE today!)

A LOT OF VIEWS are expressed about the recent fall in the prices of gold and silver. Linking the arrest in the fall of the U.S. dollar to the fall in the price of gold and silver is a popular view. The arrest in the fall of the dollar is apparently considered more of a “technical” necessity than a fundamental move. Similarly, the fall in the prices of gold and silver are considered “technical” necessities to relieve the overbought conditions. Some market commentators look to the two-year correction in the 1970’s gold bull market and are now calling for a similar correction! History rhymes, but does not necessarily repeat!

Since I found this reasoning to be quite inadequate and studying the charts not as helpful, I went over the fundamentals once again. The monetary and fiscal policies of the global governments are expansionary and unsustainable. The value of the currencies in terms of purchasing power has been shrinking, and the people are being lied to shamelessly about the extent of price “inflation.” The stock bull of the last 20 years has changed the perception of the masses toward equities (and now real estate) and the concept of wealth. Debt-based consumption is being promoted as economic nirvana!

Hard Money Bull Market: The Last Secular Bull Market

Is there a simpler view to the gold-and-silver story? Assuming that gold and silver are in a secular bull market, I revisited the last secular bull market in the asset class called equities.

Looking at the chart of S&P 500 from 1983-2000 (the approximate duration of the bull market), I observe a few significant characteristics:

*Corrections follow periods of sizable gain

*In the corrections, the drop is sharp, and the markets again start advancing immediately after the drop, a rising trend

*Lengthy periods of declines are virtually nonexistent

*In the early years, the markets were not fancied by the masses, but only by smart money (steady accumulation) — a stealth bull market!

S&P 500 1983-2000

In bull markets, the markets stay overbought much longer than we can imagine. In bear markets, they stay oversold far longer than we can imagine (U.S. dollars, please note).

In light of the above observations, let us look at the charts of gold and silver from 1999 till the present — very young and nascent bull markets, in my opinion.

Assuming that gold and silver are in a bull market, how many of the same significant characteristics described earlier for the equities are also observed in the gold and silver charts of the last five years? This assessment has to be made now to guide our investments in real time.

In my opinion, these significant characteristics are observed in the gold and silver charts shown above. A lot of observers calling for a sharp correction in gold and silver due to the overbought conditions are overlooking the fact that both metals were in a corrective mode for most of this year. Gold had just crossed the April 2004 high in November 2004, and silver has yet to cross the April 2004 level of about US$8.301!

Hard Money Bull Market: The Larger Markets

Consider the larger markets (not an exhaustive list at all):

*The U.S. dollar seems “technically” oversold

*Gold and silver seem “technically” overbought

*Official intervention in the currency markets is considered normal

*Global central banks are in a damned-if-you-do-and-damned-if-you-don’t situation with respect to the U.S. dollar component of their foreign exchange reserves

*Fixed-income markets appear to confuse observers about inflation/deflation and growth/recession in the real economy

*Equities seem overvalued considering the poor economic fundamentals

*Risk has been completely discounted, as evident from the very low spread between the strong and emerging countries’ sovereign debt.

It is possible that the generic leveraged, short-dollar trades by hedge funds and others will add tremendously to the short-term volatility, along with the commodity and the bond markets, as these imbalances are resolved.

The bull market in gold and silver has begun, and the safer thing is to let the fundamentals of various asset classes dictate our asset allocation, rather than getting clever in attempting to maximize returns by micromanaging our holdings. Hence, maintaining my core precious metals position is the most logical thing for me to do.

As has truly been said, sitting quietly after making our investments is the hardest part of investing, requiring the courage of conviction in our assessment.


Pinank Mehta
Whiskey & Gunpowder

P.S.: We encourage you to sign up for a FREE subscription to Whiskey & Gunpowder, written by some of the most unconventionally brilliant minds out there. Whiskey & Gunpowder helps prepare its readers by alerting them to current events on a wide variety of topics. Our writers explore how current discussions on civil liberties, world history, economic trends, and other issues affect your investment opportunities… especially in the face of unstable markets and insane circumstances. You won’t find a better source of passionate, thought-provoking debates anywhere else on the Internet.

Here are some other Whiskey & Gunpowder articles about the Hard Money Bull Market:

A Roadmap to Financial Ruin!
by Marc Faber
“…For as long as the Fed perceives the economy to be healthy, it is almost a certainty that it will continue to increase the Fed fund rate in baby steps to between 4.25% and 4.50%, and possibly even higher. Some observers believe that in order to gain credibility, Mr. Bernanke will increase rates more aggressively than Mr. Greenspan intended…”

Slouching Towards a Currency Crunch
by Sean Brodrick
“…Taken in this context, that steep, steep slide we’ve seen since 2002 seems like just a correction. Ah, if only that were true, amigo (hey, I’ve got dollars in my pocket the same as you — you think I want to see them go down in value?). Because if you look at the far right end of that chart above, the dollar’s rally is fizzling even before the greenback goes up to test its ’04 highs…”

When Currency Empires Fall
by Avinash Persuad
“…For example, at any one time, there tends to be a single dominant currency in the financial world — not two or more, just one. Some people believe that while the euro may not topple the dollar, it will at least share the spoils of financial hegemony. History suggests not…”

Why Has Gold Been Soaring Recently?
by Mike Shedlock
“…The short answer is the yield curve is starting to widen, Congress is going on another spending spree, the market thinks rate hikes are nearly done, and the Fed is likely to print more money for more government handouts. That combination is more important than a U.S. dollar that has somehow held together in the face of the above…”

Useful Links about the Hard Money Bull Market:

A Golden OpportunityMoneyWeek looks at why the bull market in gold is only beginning, and compares potention gold profits with those from other commodities.

Money Market Tutorial An introduction on how to profit in the money market when the stock market gets ugly. It includes descriptions of different types of monies to invest in this market.

Why Gold? An explanantion of why gold is so hot… and a showcase of historical periods of when gold was the best investment to have.

Yahoo! Finance A dynamic resource for pooling information about market prices, inflation, currently profitable investment opportunities, and the overall health of the economy.

Looking for More on the Hard Money Bull Market?

Visit The Whiskey & Gunpowder Archives and you can search hundreds of unique Whiskey & Gunpowder issues and articles.