how to ride the gold bull

  1. 9,081 Posts.
    Here is one view of the emeging bull market in Gold.

    I am not too sure about the "wild" figures thrown around re. gold's ultimate price prediction but I tend to agree with the writer on his view about where we are on the "gold cycle".

    It is worthwhile reflecting on the "cycle theory" and keeping it in mind for future reference.

    "Bull Cycles & $5600 Gold

    Mario Ricchio

    The Early Stages

    In the early stages of a bull market, insiders accumulate slowly and over a long period of time. While this occurs, financial media does their best to discredit any new entrants - technicians, speculators or fundamental analysts - from putting money into a barbarous relic. Smart money knows how to play the media and as such caps rallies so that the average investor doesn't catch the newly formed trend. By the time smart money has its fill of the undervalued asset, they let the asset rise. In technical terms, the asset bases during accumulation and has a breakout when the buying is complete. In my opinion, the guys behind this work begin to spread positive news around the trading desks and instruct them to get in. These institutions go in and bid up the asset not caring about the price, only that the microenvironment is positive for making money. Once the tide begins to rise, the institutions that took the asset out of its accumulation phase spread good news to momentum traders who see rising prices and buy into the rally.

    The Mid-Stages

    Before we go further, let's realize we had smart money accumulation, followed by institution bidding up and unleashing the asset out of its trading range, followed by momentum traders chasing a rising trend. Once the market move has advanced 50%-100%, the financial media begins to talk about it but still doubt the gains, are they sustainable? At this point, strategists begin to increase their allocation to the asset and mutual funds and pension funds dive in scooping up the bargains. We probably double once again before CNBC begins hyping the move and the small guys gets in. Once Joe Q. Public buys, the original smart money begins to distribute their shares to them on rallies. The market has advances, but they encounter much more resistance before breaking higher. Smart money sells some more to the unsuspecting public. The public thinks the move is for real because every dip in price appears to be a buying opportunity as the market bounces back and makes new highs. As with equities in 1998, insiders had begun to sell and the public began to buy in, but it didn't mark the top.

    The Last Stages

    In the last stages of a bull market, a mania occurs which defies even the smart money ability to predict how far the move can go. Like today, once a bubble in equities and real estate begins, there is no way to predict when it will end and how high prices will go. In the mania stages, the institutions pare back their holdings and the smart money is completely out, but the public and momentum investors continue to believe in a trend that began years before they began to play it. Nobody cares about valuation. Traders and investors only care that prices will go higher and that somebody is stupid enough to buy it from them at elevated prices (Greater Fool Theory). You reach a stage in the bubble where corporate insiders (not the smart money that kicked off the bull, but still smart) begin to dump supply in the form of share options and realizing the overvaluation, begin to dump equity to raise capital for the company. In a bubble, the cost of equity falls and companies issue an IPO and/or secondary stock that overwhelm any Joe Q. Public money inflows.

    Please realize that the smart money that first exited is now on the sidelines missing the blow-off stage and is beginning to ponder when to short this rising market. They begin to short and get squeezed; the strong traders have close stops and keep their powder dry waiting for the tide to turn. The market begins to top and fall, because everyone who can be in the market is in the market, so the demand for stocks peak out. BUT THE SUPPLY OF STOCK PICKS UP AS INSIDERS DUMP OPTIONS, ISSUE IPOs AND SECONDARY STOCK AND SHORT SELLERS INITIATE POSITIONS.

    Gold's First Stage

    What does this all have to do with gold? Well, the folks at Xtreme Investing have been bullish on gold at $260 and we want to note where gold stands in this investment cycle. From the above example, gold is still in the first phase characterized by heavy smart money buying, capping of prices so that accumulation can continue, and public discredit and disdain for gold by the financial media.

    So if gold is in the first stages of a bull market, how long can it go for and how high?

    Well, the lesson of this story is that once a bull gathers steam and enters the mania stage, the sky is the limit and none of it will makes sense from a valuation perspective. Every Joe and Jane will be chasing the trend regardless of price and institutions will buy because they have to garner exposure or else risk missing a rally! I think the gold rally can last a minimum of 5-8 years and has durability for more than a decade. As for price, gold could rally near $5600/ounce if the US Federal Reserve decides to devalue the Dollar by letting the printing presses run. The Dollar devaluation would be promoted as serving two purposes: One, import prices would rise helping to offset Deflationary pressures. And two, a falling dollar would serve to narrow the trade and current account deficits.

    Mario Ricchio
    Publisher and Editor of Ricchio Report

    December 5, 2002"

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