April 23, 2007 – It is widely recognized and understood that bull markets have three stages. What is less well understood is how those three stages apply to any market.
Each stage is distinct. Stage 1 begins when the previous bear market ends. The last of the weak hands are flushed out, and the low price has been reached. The price will not fall any further because the strong hands start accumulating an asset they recognize to be undervalued, and on balance, their buying power is stronger than any remaining selling pressure. So the price begins to rise, slowly but surely. Widespread sentiment toward the asset is poor, given the length and severity of the bear market that preceded it. In summary, stage 1 is marked by “widespread apathy”. Only the smart money understands the undervaluation of the asset and the opportunity it presents.
Stage 2 is marked by “general disbelief”. During this period investors become aware from news reports that the asset is rising in price, but because the previous bear market is still foremost in their minds, they watch the price rise from the sidelines. They do not yet believe that a new bull market is underway, and therefore take a wait and see attitude. Importantly, the group of people beginning to watch the asset grows considerably, which sets up stage 3.
The best words that describe Stage 3 are “growing excitement that becomes rampant and pervasive”. The public at large is by now increasing its participation in the bull market in this third stage, and prices bubble higher in the prevailing frothy atmosphere until the eventual price peak is reached.
There is no set length for any of the three stages. But they evolve over a long time, and each lasts years, not months.
The following chart can be used to explain the stages of gold’s present bull market. Stage 3 of its last bull market is also seen on this chart, as the gold price soared from $100 in August 1976 to its all-time peak in January 1980, which was then followed by a 19-year bear market.
Stage 1 of gold’s present bull market began in July 1999. It is marked by the selling climax that flushed out all of the remaining weak hands, which occurred after the Bank of England announced that it was selling one-half of its gold reserve. Gold touched $252 during July 1999, and has not been lower since.
It is now eight years later, but gold remains in stage 1. There is still widespread apathy about gold’s potential, mainly because there is still widespread belief that the Federal Reserve is attempting to control the growing inflationary pressures that are destroying the dollar. Relatively few people are watching gold, and even fewer understand the importance of owning real, physical gold at this moment in time as protection from the dollar’s problems. But that is about to change.
The above chart is telling us that gold looks ready to make a new all-time high. When that happens, stage 2 begins. There will not yet be widespread excitement about gold in the next stage, because that won’t occur until stage 3. But when gold makes a new record high, and particularly after it breaks into a 4-digit price, people will begin paying attention, albeit from the sidelines. Stage 2 by then will be well underway, with stage 3 and a soaring gold price still in the future.
So don’t wait for stage 2 to buy, let alone stage 3. Establish your gold position now, while this stage-1 gold is still cheap and relatively undervalued. And be sure to buy real, physical gold that you own, whether you hold it in hand or have a reputable company store it for you safely in an insured, non-bank vault. Do not accept paper substitutes. To be safe make sure you own the real thing.