Wednesday, April 2, 2008

The big picture

Often when the daily noise gets confusing it's helpful to step back and look at the long term perspective. In the first chart we see the S&P. Notice that during the entire bull market the corrections were fairly uniform. 7-10% was the norm for every correction on the way up. Once this bull market became mature any correction that exceeded that norm would likely be a sign that the bull was done. We saw that correction in Jan. once the S&P dropped over 13%. Looking at the long term view of the general stock market one has to say we are in a bear market until proven otherwise.

Now let's look at gold over the same period. So far all corrections have been uniform in the 10-15% range except the 06 correction. That waterfall decline had to potential to begin a bear market in gold as it exceeded the "normal" correction up to that point. However gold didn't respond like it was in a bear market. Instead of the trend reversing gold preceded to chop back and forth gradually working higher and in the process building a large base. Not typical bear market action. The end result, we experienced another runaway leg up in the precious metals this year. About what should be expected as gold is in a secular bull market. Since I've been along for almost this entire ride I can tell you that every single one of these corrections has been accompanied by the Chicken Little's of the world coming out and telling us how the dollar is starting a multi year bull market and how gold is in a bubble and the run is over.

Moving on the the next chart I'm going to show you why I think the run is still in the early stages. I've pointed out in previous posts that the size of the consolidation is often a good measure of how large the rally will be once a breakout occurs. I've noted the consolidations so far in this bull on the chart. For the most part the rallies have roughly equalled the consolidations. But let's ignore these for now and again look at the big picture. What we see is a huge almost mind boggling 20 year consolidation in the gold market. We also see that gold has just now broken out of that consolidation. I have no doubt that before this bull is done we will ultimately see a rally of similar magnitude as this huge consolidation. Gold when it's all said and done is going to go higher than any of us can possibly foresee. That being said I think silver will end up putting gold to shame simply because the fundamentals are much stronger and it will be more affordable for the public when we finally do enter the final blow off stage.

While I'm at it take a look at the S&P:CRB ratio. When the trend is up stocks are outperforming commodities and when its heading down the opposite holds true. Now I have to ask, since the stock market is quite likely in a bear market and commodities are still showing no signs of a top why would anyone want to take a chance investing in stocks? This trend is only 8 years old. The average commodity cycle is 15-22 years. Trying to call the end of the commodity cycle at this point would seem to be a rather dangerous proposition.