Gold sentiment too bearish

Mark Hulbert says gold sentiment is too bearish. I mentioned before that I love it when the blog is filled with investors telling me that gold and silver are finished. That they are in a bubble. That adjusted for inflation they are a terrible investment. These comments are music to my ears. This is not how bull markets end. Bull markets end when everyone thinks gold will continue to rise forever. Just like real estate never goes down or tech has entered a new era where profits don't matter. All that matters is how many eyeballs look at your site. No my friends the bull market is quite intact and looking as healthy as ever if sentiment is any indication.

daily comment

Unfortunately I can't annotate charts on my friends computer. A couple of quick comments. The dollar appears to be on the verge of or is breaking down out of the triangle. The S&P broke below support today and the XAU has extended it's gains after completing the 1-2-3 reversal. How about oil? The COT has been suggesting this was coming.

Subscribers should understand all the above. Hopefully I'll be up and running again tomorrow afternoon.

Computer Problems

My computer crashed this morning and I can't get anyone out to fix it till tomorrow. I'm using a friends computer to post this. I don't have access to my e-mail so there will be no update tonight. If anything important happens I'll just post it on the blog.

QQQQ:Silver ratio

I'm responding to Tom's assertion that the Q's have been a better investment than silver. Since 02 silver has appreciated 4 times as much as than the NDX. Even if you pick the exact bottom in 02 silver has appreciated almost twice as much as the NDX. In 02 it took 10 oz. of silver to buy one share of the cubes. It now takes 2.5 oz. I don't know about anyone else but I think I'll keep holding my silver. Now you really don't want me to put up a chart starting in 2000 when the secular bear market started because it will be much worse. Likewise you don't want me to compare the Q's to oil or base metals as it will also be much worse. It's not what you know that hurts you. It's what you think you know that just ain't so.

I've added a long term chart starting at the end of the last commodity bull cycle. We can see that stocks clearly outperformed silver until 2000. At that point stocks became grossly overvalued and silver terribly undervalued. Now the trend has clearly changed in favor of silver. Does anyone see anything that would suggest that this trend has changed? Is silver grossly overvalued yet? I'll point out again that human emotions don't swing to the average. We always go to extremes. That's just how fear and greed work. It's never changed in all of recorded history as far as I know and I seriously doubt that it's changed now. As a matter of fact looking at the tech and real estate bubbles I would say it's operating as strong as ever. No this trend won't change until we've taken it to the bubble phase. That's still many years away yet.

What DOES the future hold?

Here are two of the last great bear markets. The first one is the US markets between 66 and 82. The next one is the Japanese Nikkei since 1990. You want to know what was similar about both of them? Yep the government tried to prop everything up. The natural forces of the market weren't allowed to play out. In Japans case the financial system was not allowed to cleanse itself. (sound familiar? Think BSC) The end result in Japans case is an ongoing 18 year bear market. The US fared a bit better but not much. When we got entangled in Vietnam the country started printing money to pay for that war. Alas human nature will never change. We will always try to get something for nothing. The final stage of a bubble is caused by investors desire to get rich without having to actually do anything. (all one has to do is by tech and retire or housing only appreciates).

In the 80's we got lucky with Volker. He was willing to take the necessary painful steps required to clean out the system so the economy could start fresh.

Fast forward to today. So far I see no hint that Greenspan was or Bernanke is prepared to make the tough decisions necessary to cleanse the system of the excesses created in the last decade and to set the foundation for the next major bull market. As a matter of fact I see the exact same behavior that Japan has followed since 1990 and that the US followed in the 60's and 70's. Namely run the printing presses, try to inflate away debt and patch the problems.

Until the powers that be accept the fact that you can't get something for nothing I expect we will continue to be mired in a long term bear market similar to the last one with rising inflation and slow or stagnating growth.

In this type of investing climate you have two avenues to make money. You either have to be a great market timer or you have to stay invested in commodities.....The second one is easier.

P.S. I'm getting tons of e-mails questioning my call that the 4 year cycle low is in especially since I think we are still in a recession. I'll have my view of what is in store now that I think we've seen that low in tonight's update.

It's starting!!

Inflation is starting to take it's toll. Three airlines have now gone out of business in quick succession. ATA, aloha and now Skybus have filed for bankruptcy recently. One of the major causes in all three failures, high fuel prices. Who knew? Now we are seeing that many of the truckers around the country are contemplating striking in protest of high diesel costs. We've already seen the writers guild strike. Americans are having trouble paying the escalating costs of living. Does anyone realistically think this will be the end of this or is it more likely only the beginning? Since the Fed has shown no inclination to halt the cause of inflation, namely massive monetary expansion, then I'm guessing we're just entering the second inning. I fully expect congress to go down the price control avenue again. First it will be on oil pricing. I expect to hear rhetoric by this summer from politicians about how the evil oil companies are driving up the price of energy. In fact I'm already starting to hear this on some of the business channels. (funny how the media nevers talks about the evil government taxes on gasoline driving up prices.) Amazing since the XOM, CVX and COP of the world are only tiny players in the energy markets compared to the state owned companies. I wonder how the politicians plan on regulating Saudi Aramco. I fully expect legislation to prevent truckers from striking will come forward soon. For any of you who lived through the 70's does this sound familiar? While I expect the market has put in a bottom for a while probably at least till the elections, the Fed is laying the foundation for much more serious problems. Problems that can't be cured by flooding the world with money. In fact, problems that are caused by flooding the world with money. But hey when have politicians ever worried about the future?

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.