Storm Watch Update from Jim Puplava March 29, 2003
The Golden Bull I'm bullish on "things" by Jim Puplava
The Basics on Market Cycles
One of the central tenets of technical analysis is that markets run in cycles. We have bull cycles where an asset class is in a rising trend and bear market cycles where asset classes move in downward trends. A trend is a time measurement of the direction in price levels. Within a market cycle, three trends make up that cycle. They are the primary trend, the intermediate trend, and the short-term trend.
Recognize the Primary Trend
Having discussed the point that markets run cycles and that within a cycle there are corrective trends it is now important to look at what is the primary trend of the markets. As I wrote in The Next Big Thing and what Marc Faber has written before me, investors need to make only a few key investment decisions in their lifetime. If they can get on board a primary trend in its initial stages and then have the patience to ride that trend until it is discredited, they would do very well as an investor. In the last half century, there have been four key primary trends and investment themes where an investor could have done exceedingly well as an investor. They are listed below:
*U.S. stocks 1952-1966 *Gold/silver and commodities 1971-1980 *Japanese stocks 1980-1989 *U.S. stocks, especially technology 1990-2000
If all that you did was to find these trends, get on board and ride them out, your investment decisions would be simplified. On a similar note, it is what has made Warren Buffett the second richest man in the world. Buffett invests in companies with a durable competitive franchise and then has the patience and good sense to hold on to them. His investments in Geico, Washington Post, Coca Cola, American Express, and Gillette were made and held for as along as three decades resulting in a annual gain in book value of Berkshire Hathaway of 22.2 percent a year. Very few investors have realized that return because there are very few investors that have his insight and patience.
Maybe it is difficult to replicate Buffett's genius in ferreting out great business franchises, but it is possible to duplicate another element of his success, which is patience. If you can spot a new bull market or a new primary trend and then get on board and ride it until it is completed, that is how big fortunes are made.
The next set of charts show the last and newest primary trend in the financial markets. The last or old primary trend, which is breaking down, is the U.S. equity markets. The new bull market or primary trend is in the metals market as shown in the charts below. It should be pointed out that it is only in the third and final stage of a trend that the public becomes interested. The first stage of a new trend is made up of insiders or smart money that moves in early, buys at a cheap price and then rides the trend to completion. In the final stage of the trend when the public jumps in and drives prices up to maniacal levels is when the smart money moves out and sells. Does anyone remember the insiders selling tech stocks and cashing out in 1999? It may be noteworthy that Bill Gates has been a major seller of Microsoft stock in the last month as Microsoft has rallied along with the NASDAQ.
A New Bull Market in Metals
It is clear from the charts above which market is in a bull trend and which market is in a bear trend. Metals have begun a new primary bull market. The reasons are simple and are listed below:
*supply/demand imbalances which have created bullion deficit *large U.S. current account deficits *breakdown of the monetary system and the drop in the dollar *distrust in paper assets and their substitutes *depression and war
All of these elements are now in place, which is why gold is in a new bull market.
Today leading mining companies acknowledge that the production of gold and silver will decline over the next decade. Lower prices have discouraged new exploration even while worldwide demand has expanded. Outside western industrial nations, investments in gold and silver are much more important to lesser developed nations. The developing world, which does not have established financial markets gold and silver, are the preferred investments of choice. As Asia becomes a center of economic power in this century and in this decade in particular, investments in gold and silver will become more important. There are already movements in Asia and in the Middle East to go to gold-backed currencies. Gold and silver are slowly transitioning back to their historical role as money. This is an important point to remember as you view the deterioration of paper assets over this coming decade. We have already experienced our fourth year of negative returns for equities here in the U.S. With these facts in mind and in reference to the charts above, it is clearly established that equities are in a bear market and gold is in a new bull market.
The Current Lull in Metals
I have already mentioned that within primary trends, there are countertrends that emerge periodically. Gold and precious metal equities are currently in one of those countertrends that should shortly end over the next few weeks. The average investor and professional money manager is still chasing the last primary trend in the belief that equities are in a new bull market that began last October. Professionals are bidding up the shares of tech stocks, Internet companies and many of the growth stocks of the last bull market. I believe this is only an intermediate trend that will not last long as more news on the economy, earnings, and war finally put this trend to an end. It is still possible that we could get a 10-15 percent move in the markets if the war goes well or when final victory is achieved. However, this temporary rally will be short lived. Fundamentals are now running strongly against a long-lasting bull market in stocks unless the Fed starts its own mutual fund and starts monetizing the equity markets. As ridiculous as that sounds, they have written papers on this very concept. Currently in Japan, the government is propping up the markets by buying shares in bankrupt banks in order to prop up their banking system. It could happen here. However, this will not detract from the strong fundamentals that now favor precious metals equities.
The Establishment's Bias Against Metals
They're Not Prepared Remember that when a new trend first emerges, it is most likely to be discredited by the establishment. Wall Street has no interest in seeing gold and silver bullion or precious metals equities rise in price. The government has no strong love of gold because it discredits its own paper. A rise in gold and silver serve as a barometer of investor fear or distrust trust in paper assets. So don't expect any encouragement from Wall Street or Washington. All you can expect from the establishment is disinformation and discouragement. They have a stake against metals. Wall Street is in the business of selling paper and Washington is in the business of printing paper. The Street doesn't follow the sector and isn't set up to handle a major bull market in precious metals equities. The precious metals equity sector is too small. Total market capitalization of all the world's metals stocks is somewhere around $70-$80 billion or about a third of the market cap of Microsoft. There aren't enough precious metals equities to make it worthwhile to follow the sector. The commodity markets in actual bullion are even smaller.
Positioning Against Metals In addition to no interest in the sector, the financial industry has taken positions against the metals sector. In the commodity markets commercials hedgers have made fortunes shorting the metals still and do so today. This is evident in viewing the major short positions in both gold and silver and the monster derivative positions on the books of major bullion banks such as J.P. Morgan Chase and Citigroup. In addition to their short positions in actual bullion, Wall Street and the financial community is also short the precious metal equities. Below you view the table of the current short positions in major unhedged gold and silver producers. With the exception of a few recent short coverings in a few companies, short positions have gone up every month since the beginning of last year. These short positions increase every time the metals shares rally. This is remarkable when you consider the float of many of these company shares and especially considering that strong hands hold many of these companies.
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