Friday, April 23, 2010


Let me start off by saying the market should be correcting. Sentiment has reached ridiculous bullish extremes, the kind of extremes that led to the January /February correction.

That correction separated the second leg of the bull from the third. But let’s face it, sentiment has been in this condition for several weeks now and the best we could muster was a minor correction of 30 points on the news the SEC was filing charges against Goldman Sachs for fraud.

We’ve had three opportunities to “sell the news” with the April jobs report and recently with INTC and AAPL earnings. None of them have panned out. The market could use the Greek excuse as a downside catalyst, the same as it did in January. And now Greek short term bonds are tanking as the EU waffles about writing that check in front of the German elections in May.

All in all it boils down to the market has had every chance to correct and it has failed to do so.

Last month I speculated that we were "On the Brink of an Asset Explosion" . Well, we may not be on the brink anymore. We may very well be moving into the heart of the explosion right now.

We’ve just seen one of the most powerful rallies out of a corrective low in many years. Until Friday the market had held above the 10 day moving average 42 days in a row. That’s the longest stretch in over 10 years. Since the February 5th low the market has risen 71% of the time. That’s the kind of stuff parabolic blow off tops are made of.

I don’t really think we are in a parabolic blow off top just yet. What I do think is that we may have entered a runaway move similar to the August 06 to February 07 time frame.

During a runaway move, corrections tend to be uniform in both magnitude and duration. During the 06/07 rally all corrections fell in a range of about 20-35 points.

So far the rally out of the February bottom has followed this script. The February corrective move dropped 25 points in 4 days and the recent pullback on the Goldman news dropped 30 points in three days.

If the S&P and Dow can follow the Russell, Nasdaq, NDX, midcaps and banks to new highs, the odds are going to increase dramatically that the market is now in one of these runaway rallies.

It’s anyone’s guess as to how long one of these moves will last. The rally in 06/07 lasted 7 months. I can tell you that once a market gets drawn into one of these things you can pretty much throw out every trading tool as the mechanics of the rally just roll over any and all trading strategies. Sentiment becomes useless, cycles get stretched to ridiculous lengths, technical analysis and oscillators are worthless.

There are a couple of signs to look for as one of these moves comes to an end and I will keep subscribers updated as the move progresses.

The next question we need to ask ourselves is which sector is likely to see the largest gains if this kind of move takes hold? I expect a rally like this will affect every sector as virtually all assets have been moving in tandem since the March 2009 bottom.

Before I answer that question I think we need to recognize one indisputable fact. And that is that the stock market is undeniably in a long term secular bear market, and has been since March of 2000. And, it’s a bear market the Fed and every central bank in the world has chosen to fight tooth and nail with the one weapon at their disposal. I’m talking about the printing press.

As you can see from the next chart it’s a battle that is only producing temporary periods of false prosperity driven by bubbles. As anyone with a little common sense can understand, you cannot drive an economy by creating bubbles. Bubbles always pop and are followed by periods of economic devastation.

Perhaps our leaders should look at this chart and figure out that it isn’t the size of the dose that’s the problem. WE ARE USING THE WRONG MEDICINE!

Hello, Keynes was wrong! You can’t fix this kind of problem with a printing press. All this does is make the problem bigger and ultimately more painful.

I dread the end result of the current liquidity experiment when the government debt and currency bubbles burst. Unfortunately, there is no short term cure for a currency crisis. I’m afraid the world is going to learn this lesson the hard way, once again.

So the question is where should we be invested if the price explosion unfolds, or maybe I should say continues?

Firstoff, let’s take a look at the stock market.

If, and this is a big if, the S&P does manage to make it back to the old highs one would be looking at a 30% gain from today’s level.

Now that’s certainly not a bad return but we also have to take into account that this is still a secular bear market and as such, it’s probably wishful thinking that the powers that be can force the market back to the old highs on the back of a government debt and currency bubble. Realistically I think we have to expect the upside is probably limited in this area to maybe another 20%, give or take.

Next let’s look at the ‘go to’ sector from the last cyclical bull market – energy.

At first glance there appears to be more potential in this sector than the general stock market. But is there really?

For one thing, the leading sector of the last bull rarely ever leads the next one. We can see from the chart this is, in fact, the case.

Energy is woefully underperforming and there is a reason for this. The world has now moved into a long period of ‘on again off again’ recession. The energy sector has lost a very important fundamental driver which is the demand side of the equation. Demand for energy is going to be permanently impaired during this prolonged period of high unemployment.

Energy also has another strike against it. Unfortunately, spiking oil prices always have and will lead to economic contraction. High oil prices are oil’s worst enemy because they lead to economic collapse and that means even less demand.

I’m afraid the energy sector will probably be on a wild roller coaster ride for years to come as monetary policy drives prices to levels that stymie economies, followed by price collapse as demand evaporates during periods of recession.

So even though it appears the energy sector has a lot of room to run, the reality is that the fragile global economy will collapse long before oil reaches $147 again. I suspect the upside in the energy sector is probably limited to 20-30% at best.

If the stock market isn’t a great place to put our capital and the energy markets are going to be impaired for years to come, which investment sector should we look at, you ask?

That one is easy to answer. We go to the one secular bull market that’s left. The one area where the fundamentals are actually improving. The one and only sector that stands to benefit from these insane monetary policies.

Gold! Precious metals.

This is the one sector where the fundamentals aren’t impaired. In fact, they are only getting better and better as the powers that be continue down their misguided Keynesian path to ruin.

Now let me point out that every secular bull market in history eventually ends in a bubble. Gold will be no different. After it has gone up far enough and long enough we will reach a point where the public comes to believe that gold is a sure thing, just like they thought tech stocks were a sure thing and just like they bought into the housing myth that real estate only goes up in price.

The difference is that the precious metal markets are fairly small markets. When the public finally catches gold fever it will drive a bubble the likes of which none of us have ever seen before. I expect $5,000 gold is probably a conservative estimate for a final top.

Now keeping in mind that this secular bull is far from over, let’s take a look at mining stocks.

Unlike the S&P and energy sector the mining sector has already tested the old highs. As a matter of fact the mining sector has led this bull from the very beginning.

When the rest of the market was putting in a final bottom in March of last year, the miners were already over 100% above their November lows. How’s that for relative strength?

From today’s level back to the old highs would yield miners a 20% gain. That’s probably equal to the best we can expect from either the stock market or the energy market.

However, miners are not limited by impaired fundamentals like virtually every other sector. The mining sector has an incredible wind at its back. Does anyone really believe mining stocks ($HUI) would be trading anywhere close to $519 with gold at $1,500? How about with gold at $2,000?

Before the secular bull is over I expect we will indeed see $5,000 gold. I would be completely dumbfounded if mining stocks don’t have 500-1000% of potential in them during the remainder of this secular bull market.

So one can fight with a secular bear market and impaired fundamentals for small gains or one can just get on board the only remaining secular bull market and hold on for one heck of a ride. This is how millionaires and billionaires are made. Not by trying to trade in and out of impaired markets.

So if we are on the verge of an asset price explosion I want to be invested in the one area best poised to benefit from the fundamental driver of that explosion…gold!


  1. Given Gold:Silver ratio is at an historical low, wouldn't I be better off with Silver rather than Gold ?

  2. One will certainly make a lot more in silver than gold. Personally I'm buying silver miners and junior miners.

  3. Great Blog Toby!

    When we finally have our stock market correction. How closely do you think the mining stocks will follow the market into the abyss?

  4. There's no telling how long a runaway move will last. I expect when it does come to an end that won't be the end of the bull. We will likely see one more final push higher before entering a long grinding bear market.

  5. Toby,
    Just wanted to say I'm really pleased with the subscription service. I will be renewing for a year when my monthly subscription is up.

  6. The XLE breakout just blew your view out of the water. It's all about rotation. COP is trading at a forward p/e of about 10 w/ a 3.9% dividend, I'd rather be in that any day then gold.
    JPM will constantly crush the price of gold using derivatives.
    Buy something you can use. I sold some gold eagles at $1175/oz to buy groceries, and a silver bar only good as a doorstop.
    Look at CCJ-Cameco after selling down near $25/share, they control 20% or so of world uranium production. Gold's a fad, hype.

  7. Doubtful.

    I'll stick with gold over the next 5 years.

  8. Thinking JPM has the power to hold gold down forever via derivatives is the same kind of nearsightedness as my friends who were gloating over all the money they were making in real estate in '05.

    They were so full of themselves and knew it all...Gold $5000 - one dollar for every year that it has not been a fad -- 5000 years.

  9. I read Morgan will hold the price of gold down...... Ever heard of Russia? China, India, there's even enough money in the Netherlands alone to get gold to $5.000, let alone with Canada, Australia, Kazachstan, Belgium, England, France etc.

    But this is not even important. There is no bull market after a bull market, regular stocks had their bull market, as did houses, it was all a scam, as was the growth of all Western governments, all these scams will destroy our societies and during that period gold will go up because it's the only thing they can't inflate.

    And there will be panic. I predict the panic of 2011 when people realize money is inflated and loses value day by day, people will panic and want to buy something of value, gold, they will run to the nearest gold shop, even an hour late will cost money, lines will form. Rich people will panic, poor people see it as a chance to get rich, everybody will want to be in gold.

    But I could be wrong, already there's more and more talk about gold, already I see some websites where the popular maple leafs are sold out. Everybody thinks the stock market will go up more, even the bears write this. Maybe the panic into gold will start earlier.

  10. A good question: what impact do you think the Greece/Euro troubles could have on all this?

  11. The action in both the stock and commodity markets would suggest the problems in Greece are having absolutely zero effect on anything.

  12. If the price of gold goes up just because of the printing press (i.e., inflation), the prices of the raw materials, machines, etc. will go up too - which means that the profit margin of the gold mining companies is not going to improve much. This is precisely when $HUI has been lagging $GOLD in the past few years.

  13. Have you ever taken a look at that same S&P chart you have there ,except on a longer timeframe say since 1970 or so,up until today? Same as the Dow Jones chart using the same reference points, you will see the largest head and shoulders formation ever .Both the Dow and the S&P are headed back down to where they belong unless the powers that be inflate the heck out of everything ,and if thhey do then gold, silver and anything else that has a tangible valuee is going to the moon (in dollar terms anyway)

  14. After a parabolic rise sell after 8 consecutive days of decline or an 8% decline from its pea

  15. great analysis. what do you think about buying precious metals outright? is that better than mining stocks or part of the approach?

  16. Buying physical is certainly an option. Personally I wouldn't waste my time with gold. The percentage gain in silver will be many times bigger than those attained in gold.

    Personally I prefer miners at this point because they are still grossly undervalued due to the crash in 08. They have been recovering ever since but the gold:XAU ratio is still above 6 which historically has been very cheap. So ultimately I think one will make a much better return in either silver or miners at this point.

  17. With inflation, all production costs increase. Mining is a decreasing efficiency business but the demand for gold will out pace cost increments. Why are stock markets outpacing both silver and gold? I think it is bcos people prefer risk to safety.

  18. Nothing mysterious going on. Gold is just consolidating after a big move and the dollar is storng due to troubles in Euro land.

    The secular bull is far from over. This will run it's course and once it does the next leg up will unfold.

  19. When prices roll over later this year the Fed won't be able to deflate the dollar. What will that do to precious metals?

  20. I'm not sure what you mean by the Fed not being able to deflate the dollar.

    We just saw the Fed halt the worst deflation in 80 years in less than a year.

    The reality is that any amount of debt no matter how large can be inflated away as long as a country is willing to risk destroying it's currency.

    Let's face it we don't even have to chop down trees anymore. Any government can print 1, 2, 50 or 100 trillion dollars in the blink of an eye.

    I think it's safe to say that the deflationary theory doesn't hold water in a purely fiat system.

    But all that is irrelevant. Gold is in a secular bull market. Never in history has one of those ended until it reached the bubble stage.

    The same thing will happen with gold. Needless to say we are a long way from that stage yet.

  21. Toby:

    Great blog, you're turning me into a believer.

    A little late to the party with this question, but what do you make of Soros and his "ultimate bubble" commentary on gold?

    I know he's taken a major long position in gold. Buying into the nascent stages of a bubble makes for a killer play, but the context in which he talks about it is curious. Perhaps he knows dumb money is dumb money and calls it like it is?

    Keep up the great work!

  22. Because the precious metals markets are fairly thin markets and very emotional, I'm completely confident that ultimately this will be the greatest bull market that any of us will ever see in our life. And the bubble phase when it comes will be utterly unbelievable.

    I'm pretty sure Soros understands how secualr bull markets work, especially gold bulls.


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