Three Phases of the Gold Bull Market

Golden Opportunity: 3 Phases of a Bull Market, Part II
by Brent Harmes, GoldSilver.com
Reprinted Wednesday, May 19th, 2008

take a look at the last one. From 1970 to 1980 the gold market went from $35 to $850, a
2,350% gain, and during this same period silver rose from $1.30 to $50, a 3,750% gain.
Look at the following chart and note two things. One, overall the shape of gold's ascent is
very much like a parabola. Two, there were several hair-raising exceptions where gold
diverged from its course for a period of time scaring many investors out of the market
only to later resume the parabolic shape.

A saying of successful investors is "A bull market's job is to throw you off and your job is
to hang on." This is another way of saying that as soon as you start feeling good about
your investment the market will turn the other way and make you doubt your decision,
trying to cause you to sell. I would add that this saying applies during phase 1 and 2
because this is when it does not feel good to be an investor in that particular sector. You
will be told by the media and your friends that investing in that sector is not a good idea
(the list of reasons will be long and told with much authority). Keep in mind that these 3
phases and the sentiments attached to them apply to all kinds of investment arenas. I can
personally testify to this fact regarding the real estate sector during phase 1 and 2. It was
a lonely place to be with most people thinking that being in the business was not a very
distinguished way to make a buck. Now who are the celebrities on TV, and who draw
40,000 people to their investing conferences? Donald Trump and the other real estate
gurus.

During phase 3 is where I feel this bull market saying does not apply. It actually will seem
like a great idea to be in this market but phase 3 is where you need to start devising an
exit strategy. However it will be difficult to even consider getting out of the market
because finally it will feel good to be in the market. Your friends and family will congratulate
you for your foresight and pat you on the back as they now see the light and rush to get
into the market. However, precisely when you feel like standing up, telling your great story
of triumph and taking your bows in the limelight is when you should be figuring out if you
really are willing to sit tight through the down side of the market. If you prefer to see your
assets grow rather than shrink as the market shifts gears your next question should be
figuring out what your next sector should be and how to efficiently get out of the current
one and into the new one. In other words when riding the bull becomes comfortable you
need to make sure you are on the right bull.

The current bull market

Phase 1. The Stealth Phase. This phase started in 2001 with the bottoming out of the
last gold bear market and, as Mike Maloney points out, ended in June of 2005. No one in
the public seemed to notice, let alone care. Only people actively looking for this rise paid
any attention. Mike also points out an interesting aspect of phase 1. Even though gold
and silver had been rising in U.S. dollars it was not rising nearly as quickly in terms of
other currencies, notably the Euro. If you were a European investor between 2001 and
June of 2005 you would have noticed that gold kept rising to 350 euros but would 'bump
its head' and quit rising. During this same time gold measured in US dollars rose from
$256 to $440 (a 72% increase)". In other words gold and silver had been rising basically
because the US dollar had been dropping. This demonstrated how the precious metals are
"the-anti dollar" investment but for the whole world to become interested in the precious
metals and push us into phase 2 of this bull market the metals had to take on a life of
their own and rise against all major currencies.

Here is a five year chart of gold in U.S. dollars

But take a look at this five year chart of gold denominated in euros.

Phase 2. The Wall of Worry Phase (The current phase)

This phase started in June of 2005 when gold broke out against all major currencies. Even
though smart money from Europe and Asia had already been buying, the average
European and Asian investor did not see the gold and silver prices increase appreciably in
euros and yen so they did not get very interested. This changed when the precious metals
started increasing in terms of their local currencies and was one of the factors that led to
the acceleration of precious metals prices so far in 2006. Along with the new strength of
the precious metals markets has come the expected volatility of the hedge funds jumping
in and out trying to time the market. However the long term trend remains fully intact.
The market continues to act in a classic fashion. The gold and silver markets race forward
then fall back to their 200 day moving averages only to repeat the process over again. As
this market progresses we expect the metals to fall back to their 200 day moving
averages less often as the markets heat up.

Phase 3. The Euphoria Phase

There is a lot that can be written about what this precious metals phase 3 will most likely
be like but to keep it simple and short I think it can be simplified to one idea. When the
public becomes aware that precious metals offer the best hedge against fiat currency
meltdown and the intense inflation that seems almost certain to be in our future then it
will become "obvious" that this is where a person has to keep their wealth if they are going
to preserve it. Just as it became "obvious" that tech investing was where a person had to
invest in the 90's and "obvious" last year that Real Estate is where a person has to invest
in they want to accumulate wealth. Of course these sectors are cyclical and any one way to
wealth has its ups and downs- but no one seems to pay any attention to the possibility of
a down segment during phase 3. This is where a disciplined sell plan will have to come into
play.

Of course, since we just started phase 2, we are no where near phase 3 but there will be a
time where you will need to transfer your wealth in the precious metals back into real
estate and paper wealth. Let me just warn you now that when we issue the sell
recommendation it will seem like we are throwing cold water on the party just like it did
when Mike Maloney made his recommendation to get out of stocks and in to precious
metals.

We are also working on strategies to deal with significant changes in the ratio between
silver and gold. If this occurs we will let you know, but for now silver is still very
undervalued and should be the majority of your precious metals portfolio.

In summary, the public is just getting involved in the precious metals so we just entered
phase 2 of this bull market. There will be hair raising ups and downs during this phase but
the time to get invested is now. Don't wait until the precious metals seem like the "can't
lose" investment or you will be buying too close to the top of the market.

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Disclaimer: This article was originally published on www.GoldSilver.com on August 28, 2006 and was reprinted here
with the author's permission. Homemade Investors is published by Homemade Investors LLC. The information
contained in this article does not constitute personal investment advice and is not designed to meet the personal
financial needs of any individual. Investors should seek advice from a qualified investment advisor before
entering into any transaction. The information contained in this article is deemed reliable but is not guaranteed.
The information and opinions contained in this article are subject to change without notice, and there is no
obligation to update such.

Homemade Investors

The Current Phase of Precious Metal
Investing

As you think about these phases consider
the geometric shape of a parabola. Phase
1 is the relatively flat sloped portion,
Phase 2 is where the slope starts to arc
higher and Phase 3 is where the angle
becomes very steep.

The last precious metals bull market

To get a historical perspective on what a
precious metals bull market looks like let's

In the last newsletter we discussed how investments generally go
through 3 stages during their bull markets. If you have not had a
chance to read the article or would like to review it, then please
click here to read it. [Ed: Unless you are already familiar with a
bull market's three phases, the previous article should be
considered prerequisite reading.]

The above chart is provided courtesy of Zeal, LLC. The chart may be found
in its original context here: http://www.zealllc.com/2004/au3stage.htm.