WSJ Finally Notices Gold’s Bull Market

Should we be worried now that the Wall Street Journal has “discovered” the bull market in gold?  Relax. This bull market has years to go. It’s so powerful, in fact, that it will easily be able to shrug off yesterday’s front-page headline in the Journal, “Gold Vaults to New High,” and continue into the ozone. With the price of gold up 353% since 2000, the Journal was bound to notice the bull market sooner or later.  A related headline on page two further qualified gold’s leap to new record highs as being related to “global worries.”  This is true as far as it goes, but it overlooks the fact that gold has risen even in years when we weren’t so worried. And that is what we like most about the bull market in bullion: Whatever investment “story” has been out there over the last decade, gold as an asset class has led the pack.  It has flourished during periods when investors were worried

A cautionary tale for gold bugs?

about inflation, but also when they were worried about deflation.  The rally has weathered good economic times and bad, high and low unemployment, and a secular decline in interest rates. Gold has performed well when corporate bonds were in favor, and when they were not. Its price has risen when muni bonds and Treasurys were all the rage, and when both have been out of favor. If hell or high water lie ahead, we expect that neither will diminish gold’s allure.

There’s Midas to Consider

All of which makes it difficult to put the knock on the stuff. Not that we can blame the Journal and their ilk for trying. For how could they not when Gold’s price has quintupled off the lows? However, the arguments that skeptics are trotting out are so feeble that gold bulls should only laugh. For instance, a broker at J.P. Morgan was quoted as saying that “a change in investor attitudes could cause a significant correction in gold prices.” This from a spokesman for a firm which, in its role as bullion banker, makes huge profits by lending out gold promiscuously. Under the circumstances, we’re surprised the broker didn’t try to pull out all the stops with some cautionary tales concerning the fate of King Midas. Or Tilly Masterson.  So, besides the supposedly scary fact of gold’s decade-long run-up, what other reasons are there to be cautious? For one, silver has been acting pretty frisky, and this can be a sign that gold’s rally is in its final stages. While it is true that silver’s price has climbed 50% this year, from $14.74 per ounce in February to a recent $22.07, it’s possible the rally is just warming up and that a blow-off top lies as far above as $50, or even $100. If so, gold at yesterday’s $1310 settlement price may yet prove to be the best investment bargain of 2010-12.

Whatever the case, we’re encouraged to see that these good times for precious metals are bringing out the nervous Nellies. Imagine how nervous they’ll be when gold and silver are enjoying very good times…then great times – and, finally, spectacular times. We may be ready to part with some coins and ingots ourselves at that point, but if we’re reading the signs correctly, that day could still be a few years off.

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  • FranSix October 3, 2010, 6:42 pm

    One thing about the silver/gold ratio that has been repeated a couple of times before a major correction in the markets was a double top. 1998-2000 saw a major double-top in the silver/gold ratio, the same with late 2006-2007. Looks like a doubling up here. The risks are all in the corporate bond sector, since all the continued unabated gambling is now backstopped by the taxpayer anywhere you care to look.

    One thing I find astonishing, more so than the hardiness of inflationists that just won’t go away, is the zero interest rate policy whiners. The discount rate and the treasury bill rates are set by the market.

    Nobody was complaining about yield curve inversion when it happened, because everybody was making money at the top of the markets. Yet, this if anything, was the very root of low interest rates that followed since 2007.

    TIPS rates are declining here, and 5-year TIPS are yielding negative.

  • Chris T. October 1, 2010, 4:50 pm

    Not a bad idea, most of them prob. have no clue what their stuff is worth, you could get it cheap.!

    OK, just kidding, of course not.
    What I am suggesting is that there is plenty of pm coin out there, that does not exactly fit the Silver Eagle, Gold Eagle, K-Rand model of PM accumulation.
    Some of that started out as truly and horrendously overpriced precious metal junk — such as the Pacific Island PM coins (Cook Islands, Marshall Islands, NIUE, etc, etc), which for all intents are silver or gold medals, with nominals of a sovereign on them. They used to be and are still sold at many multiples of the metal’s price. The only input these “states” have in this coin is granting the right to produce them to mints in the US and Europe (Sunshine, MDM, Franklin…) for a cut of the profit. They are always well made, have decent engraving and great packaging. That last is a super giveaway about the overpriced initial sale, and also applies to the large commemorative issues of the RCM, and other gov. mints.
    Much, if not most of that issue, on the secondary market has that premium disounted to zero and less.

    Even RCM products have that fate, if not as often perhaps.
    IMHO, the more the intrinsic value of these products goes up (which is really just the content), the less weight these factors will carry, and the more the intrinsic will predominate, for discounts as well as premiums…
    None of that stuff is numismatic, despite what many may claim.
    The subjective element is how far down the ladder you’ll go on the PM-junk-scale:
    from say, an RCM “Canadian Wildlife” 0.999 series to a NIUE “great female tennis players of the 1980s” 0.585 series…

    As to the market: no names from me until I have spent my last cent (just kdding), but its not hard to find in this day and age.

  • Bradley October 1, 2010, 4:22 pm

    Good lord! Sounds like a politician’s answer! Are suggesting going door to door asking whether folks want to sell their silverware??…

  • Chris T. October 1, 2010, 2:07 am

    If you had any sort of item that you either wanted to buy or sell, but had no knowledge of potential buyers/sellers, or what is currently being paid for such an item, where would you look first these days?

    And despite the transparence and presumptive liquidity, you can still find discounts to spot. How you evaluate the amount of that discount to spot in relation to what (which form) you are aquiring, is purely subjective of course. (if one assumes that the spot only applies to good-delivery-bars, then of course another form at <spot may not seem "cheap". But who wants those as an insurance for a calamity…).

    imo, a metal is a metal, and if its form is not so important (within a certain reason of course; after all, the gold in a K-Rand is identical to that in a Gold Eagle, or a Buffalo to a Maple), then you can find those discounts.

    Ex: silver @19.36 this past weekend — coined sterling. Same standardization (known weights, content amounts, only alloyed differently, .925 vs .999, imo care not).
    Of course others would disagree, they would advise you only to buy gold and silver eagles if you live in the US, and thus to always pay about 6-10+% premium. Even non-coin/bar PM does not require a huge discount to spot to become viable, seeing how inexpensive it is to have that converted to a more fungible, at-spot form.
    no point in searching out US Mint bullion like this though….

  • Bradley September 30, 2010, 9:22 pm

    OK. I’ll bite:
    How exactly are you buying your gold and silver at a discount to spot?

  • Andy September 30, 2010, 6:00 pm

    Has anyone connected the top in March 2008 to the top in December 2009 to the price today? Doesn’t matter whether you do log or not, the result is the same. One could argue that a top is very close at hand, not much higher than perhaps 1325. We got to 1315 today, is that it, or do we go up another $10 to hit the line?

    If you draw a line from the bottom in October 2008 to the small bottom in December 2009 and beyond you get the first line of three fan lines. This line is broken to the downside in January 2010. On a log chart the rally after the February 2010 bottom does not exceed this line.

    A second fan line can be drawn from the October 2008 bottom through the February 2010 bottom. Broken to the downside in July 2010. This line was barely exceeded to the upside by the current rally off the July 2010 lows.

    The third fan line is the October 2008 bottom through the July 2010 bottom.

    What happens if we break down below this line?

    These lines are very reminiscent of the same lines during the oil rally to 147. I kept thinking a top was in place only to see the price go higher. Finally a top was reached and the price crashed in 2008. Are we seeing the same effect here with gold?

    No fan lines with an arithmetic chart, just one long upward trending line from the October 2008 bottom, with a small break below in July 2010.

    I would think an awful lot of players are sitting on some very large profits, wondering when they should take them. Prices NEVER go up forever.

    Andy

    • Benjamin September 30, 2010, 8:15 pm

      “I would think an awful lot of players are sitting on some very large profits, wondering when they should take them. Prices NEVER go up forever.”

      An otherwise sound assumption, except we’re talking about a limited supply in a still very small market. So it’s possible that $4 dollar silver sells in some quantity at $20. In turn, those who bought it at $20 will not sell back for less, if at all. They’ll hold it until they realize a gain vs anything else they could’ve invested in. Some day, if we haven’t already, we’ll run out of cheap, $4 dollar silver and $250 gold, $8 silver/$500 gold, and so on.

      Of course there will be panic sells, like in 08. But suppose you bought in at 250. Over the next nine years, with a bottom of 750, you still averaged 33% gains every year. But if you bought in at 500 (around Nov 2005), and sold the late 08 bottom, your gains would’ve been better than buying at 250, at 50% every year over three years. Not bad, for being late, eh?

      We can overbuild houses, overpump oil, overbuy mortgages etc etc etc. Those can (and must) be marked down and losses taken, as per the rules of the market. But quantities so limited as gold and even silver, with mining supply falling?

      Pehaps I’m wrong, but I would advise skepticism in applying the normal rules here. The monetary metals are clearly a unique class of “investment” precisely because they aren’t investments, but rather money itself.

    • Chris T. September 30, 2010, 8:44 pm

      Those are short periods in the large cycles of AU since 1968/1971.

      If we had a 20% correction, that would still stay above the 1000/1030 support from 2+ years ago.
      If you connect your points on a 25 or 30 year chart of AU (log), you can hardly kepp them apart.
      In that time-*frame its noise.

      Important for traders, but for those who hold gold not for a quick profit, but as an insurance policy, trading is meaningless. And if you trade physical, there will be a time, when you will find that the last chair has been removed, and you can’t get it back.
      Why risk that for a little intra-move extra?

      Better off, playing the Gold/Silver ratio thing, which BTW, dropped below 60 for the first time in quite a while today. THAT is an interesting chart to line-out…

      And all these charts are in nominal dollars. Even just with CPI, are only about 60% to the last major top…
      Plus, to repeast about the EUR (and other currencies), no highs there.

    • Chris T. September 30, 2010, 8:46 pm

      …and, meant to add this, if you buy your gold and silver at a discount to spot, you already have a built in buffer.

  • andequip September 30, 2010, 5:46 pm

    Speaking of the “rise” in gold and the PMs as a whole, may I proffer a couple of points?

    – Since 2001 ($260 spot gold) to current prices of $1310, the “price” has gone up 503%. Really? I tend to look at the gold price as a reflection of the devalued fiat currency, and it’s inability to inspire any confidence in the financial world. In other words, for every dollar I spent in 2001, it is now worth .20, according to the value of gold. For every $5 spent in 2001, it is now worth a dollar. THIS IS THE REAL STORY IN THE CURRENT GOLD PRICE.

    – For over 100 years the price of 1 oz. of gold was $35. During that time, the vast majority of our growth, as a country, occurred in a stable financial environment. In fact, the cost of most things remained fairly stable, during this 100 year period. It was only after the installation of a central banking system, that this stability was replaced by periods of inflation and deflation.

    My conclusion: Central Banks are not good for the economy and need to eliminated, or at least vastly overhauled, to remove the grip off of our economy.

    If you are following the upcoming elections, bear in mind that certain “parties” are very interested in the elimination of the Federal Reserve system. So, as someone said above, “the stuff will hit the fan” if this movement takes hold. Nothing less than a revolution will dis-lodge the Feds’ hold over the economy. Nothing less than revolution, will restore the value of our currency and subsequent economic stability.

    Tell me I am wrong……PLEASE.

    • Steve September 30, 2010, 6:15 pm

      Let it be peaceful revolution on our side by refusal to play the game, starving them out as they starved out legitimate government in 1851 Oregon. Just refuse to fund the con. Peaceful revolution is always first.

      What the other side will do is unknown.

      Be Prepared to take care of yourself.

    • Chris T. September 30, 2010, 7:13 pm

      “For over 100 years the price of 1 oz. of gold was $35. ”

      Minor correction: actually $20.70/oz.
      (Double Eagle = 0.966oz).

      Agree with the point though.
      Of note though should be the fact, that gold was not fixed per-se, meaning by law, decree, regulation.

      Anyone could have asked whatever they liked for 1 oz pure gold.
      @ 20.70 the buyer would have been foolish

      The seignorage-free coining of gold into the eagle/double eagle is what kept this in check.
      Conversely, the ability to get metal coined kept the face of the eagle from diverting too much from the non-coined price.

      This is what Fekete means by “opening the mint” to gold/silver and is not the same as a “fix” (wherein any imbalance between decree and actual is prevented from self-correcting by natural market forces).
      It was that regime that provided the price stability you mention

    • Chris T. September 30, 2010, 7:17 pm

      this: “@ 20.70 the buyer would have been foolish”
      should have read:

      >@ 20.70 the buyer would have been foolish (excepting only the cost of converting 0.900 fine into whatever alloy was desired– not huge in fact).
      <@ 20.70 the seller would have been foolish (excepting only the cost of producing 0.900 alloy, which might or might not include a refinement step, but again not huge, even today).

    • Steve October 1, 2010, 12:36 am

      Dollar, 371 4/16ths grains fine 99.999, or 413 grains in Coin silver Specie alloy, or 90%. Legislatively set “value”, Coinage Act of 1792 – quid pro quo Spanish Milled Dollar. Eagles are valued in Dollar, and thus the Article I, sec. 8, cls. 5 “value” of a current Mint Legal Tender Coin is 50 x 371 4/16ths grains fine silver, Act of 1985.

    • Chris T. October 1, 2010, 3:00 am

      putting all the coinage act defs aside, the current bullion produced by the US mint (as for likes from other mints), are standardized troy ounces of a precious metal, nothing more, nothing less:
      whether unalloyed and refined to triple, quadruple, quintuple niner state, or alloyed at a common fineness, such as 900, 916.6, 925, 986 etc.

      ANYthing on the face, whether a “legal tender” nominal or not, is just a pretty picture on the troy ounce inside. Everyone admits this, the IRS when they prosecute for tax fraud upon trying to claim teh face as binding, or the EU customs authorities, when they seize your 10x $50 for failure to declare the >10k Euro in your posession…

      The only extra value of the denominated kind versus medallion is their greater fungibility due to the greater trust the production via an official mint gives, that what everyone believes there to be inside is actually inside.
      What a shock there would be, if Philly Mint products, or Perths, RCM, etc were discovered to have a tungsten core!

      But why bother with paying attention to the face? Useless. 200 Euro face, 50 CAD face, or 50 USD face, irrelevant. And the few pm coins still issued at face>content, are fast disappearing, see the soon to be debased EUR 10 Ag coin.
      The only truly honorable full troz coin amongst the bunch is the Krugerrand. Undenominated legal tender, and really, that is exactly what the dollar once was:
      not a fixed price for metal, but just a NAME for a given, known quantity of a pm, silver in this case.
      If they had chosen to call that same silver amount a “sylvan” instead of “dollar”, you would buy a new Merc for 80k sylvans instead today.

  • Steve September 30, 2010, 5:22 pm

    Chartists work works because there are certain immutable Laws. With gold, and with the markets, manipulation always works to draw out that that should happen in a more natural way, causing greater damage, but; maybe in a supposed kinder way. If the gold market has been artificially manipulated down, suppressed, then it will spike violently before seeking the mean at 1 oz gold = good suit of clothes. My earthquake theory – tension builds, and the longer it builds the worse the destruction – forecast earthquakes – not yet; only an estimate of time for the big one in 500 year guesses. (all based upon history – the science of geology) The more the stock market is manipulated, the worse the waterfall event in regard to the depth of the damage. Rick’s system works because it taps Natural Law. Day trading can only be done by a small minority, or by computer. What is true is that the majority are all in futures of some sort. What is true is that social mood ‘believes’ in the new bull, and believes in the new paradigm that things are different this time. Gold is not going up because it has a value 1 oz equal to a suit. Certain persons are getting rid of federal reserve notes, yet; I see no real fear, only the belief that casino odds can be beaten. The bet here is that the Laws of Nature have been beaten by a new pedit god Bernanke, and owners of the shearing company. Remember ‘human nature’ Wagon Train Party of Six – Wagon Train Party of Six; your corpse is ready at table 2. Elliott Wave, Dow Theory, et.al.; the forces are still Law. The bet is that manipulation can prevent gravity from working on the ball, and that is certainly true until the bearings wear out on the pump supplying the air. How long can Bernanke and crew compress reality – I do not know. How long will the people take gold when they have no food store – I do not know. What I know is that Rick has a system that works for short term trading. What I know is that Elliott Wave has a system that works long term, and is subject to more influence by manipulation. What I know is the Richard Russell has been spot on long term. Mechanical systems are based in the Laws of Nature, and thus they work.

    • keith October 1, 2010, 2:18 am

      Gosh dang Steve, What did all that have to do with what I wrote? Let’s just keep it simple, step by step. How about this as a rebuttal- go back to every bull market and track out an elliot wave and you then come back to me and show me how it played out. It’s completely subjective and backwards looking. While I do believe in waves and cycles it’s always backwards looking and any fool can do that. Even myself. It’s far beyond what man has been able to comprehend as of yet. In my post I was only trying to point out that greed is what drives a market to parabolic rises.

    • keith October 1, 2010, 2:21 am

      Opps, my humble apologies to steve. I see he wasn’t replying to me.

  • keith September 30, 2010, 3:26 pm

    So far this gold bull has been driven mostly by fear. Can anyone give an example of a bubble top that has blown off in fear? When the greed enters the market is when you’ll see the parabolic rise. These people talking about gold being a risky investment because it is too overbought will be overtaken by their human nature. When it starts going strait up they won’t be able to contain themselves and buy in so they don’t miss out.

    • keith October 1, 2010, 2:20 am

      Opps, my humble apologies to steve. I see he wasn’t replying to me.

  • Daman Prakash September 30, 2010, 1:02 pm

    Probably it is a one off occassion when you sound more emotional than rational. HP do not have sentimental issues but your article in my opinio does have.

    In my opinion it is better to play Gold or Silver with numbers rather than sermons

    • redwilldanaher September 30, 2010, 3:55 pm

      Hi Daman, I think you’d be making a mistake in terms of long term speculation, if you were to ignore the sentiment and signs that emerge from the media and society. I think it’s worth keeping an eye on them. Due to the decline in so many things but to isolate one let’s say journalistic standards in this case, Time and Newsweak have become poorly written comic books and the Wall St. Journal has become the daily paper equivalent of CNBC. Historically “outlets” such as these have gotten it wrong at just the right time. If you know what I mean.

    • Rick Ackerman September 30, 2010, 8:00 pm

      Ha-ha, you are joking, right? Did you perhaps miss shorting Silver at 21.645 the other day?

  • VegasBob September 30, 2010, 10:22 am

    The only thing that will derail gold is honest interest rates. I’m not sure it is even possible any more for the Fed to normalize interest rates without crashing the economy.

    Recall that the last time we had normalized interest rates, they lasted for only a couple of years (2006-2007) before the financial system collapsed, at which point Bernokio quickly took us to ZIRP.

    One thing is certain. Honest interest rates will never happen so long as Bernokio is running the Federal Reserve.

    • Rick Ackerman September 30, 2010, 7:57 pm

      High real rates would be as destructive to the illusion of prosperity as gold circulating as money. Come to think of it, today’s “low” nominal interest rates, when measured against falling asset values, already ARE high in real terms.

  • Benjamin September 30, 2010, 3:15 am

    Wall Street got run over by a Gold Bull
    After a whooole decade, finally!
    You could say that gold isn’t money
    As for me and Mr Market, we believe!

    Sorry, sorry… I couldn’t help thinking that after the first couple sentences 🙂

    Anyway, the number one reason that some give that always slays me is that gold is “too overbought”, and destined to bring about buyers remorse. Never mind that when the price drops, less is for sale. And there will come a time when NONE is for sale, at any price.

    • Chris T. September 30, 2010, 3:27 am

      … until then, always hoping for some more weak hands to sell this stuff when a little down-move happens, more for the rest of us.

    • Benjamin September 30, 2010, 7:23 pm

      For now, it’s more more more because I can can can. But I hold no delusion as to whom the weaker hands really are. It’s me, it’s you, it’s anyone not inside the banking circle. They hold the lion’s share and have a seemingly limitless ability to keep gold and silver in a faux contango, through futures shenanigans.

      Not that the price will nessecarily have to crash. As this depression winds out, keeping it higher means the limited are forced to sell. Victory by attrition.

  • Chris T. September 30, 2010, 2:54 am

    Rick!

    Good article, and timely, if only to head off those others that would prefer to go with the Journal as somehow being a sign for the contrarian to follow.

    Two additions:

    In Euros, gold has actually dropped over the last week. A final bubble top without new highs in all paper-measures (EUR, etc) is hardly credible.

    As per my post on yesterday’s comment about the semi-log charts:
    On a 25-year semi-log chart, gold, and silver are on an orderly, straight-line upward path since their respective long corrections/bottoms. No hint of anything parabolic to be seen there, and the slope is not even that steep.
    Just looking at those charts, without knowing the scaling or time-frame, one would be hard pressed to find any signals that would suggest anything other than a continuation.
    (no reference to your pivots of course, which I do not understand…)
    Thanks.