What is a bull market? A bull market is a sustained upward trend in prices. Typically, this can last for a number of years. Then it is followed by a bear market, which is a sustained decline in prices. Put the bull phase together with the bear phase and you have a market cycle.
Since gold has only been free to move since 1971 (before that the world was on some form of a gold standard: domestic convertibility until 1934 and international convertibility until 1971), we have only about 50 years of history to draw upon. In that 50-year history, we have only two market cycles, so historic experience is limited. That makes the task even harder than usual to define a change in trend.
The first modern bull market in gold began in 1971. Gold was $35 per ounce and peaked at around $850 in 1980. The first phase no doubt contained a degree of “catch up.” Inflation had been heading higher for some time, but gold was fixed in price. Like a coiled spring, the first bull market had a huge multiple from the beginning to the end, not likely to be repeated. After legalization in January 1975, gold fell by 50%, from $200 to around $100 in 1976, and then went up another eight-fold.
A bear phase began in 1980 and lasted about 20 years until 2000. This itself is a little unusual. Usually bull markets, for example in the stock market, last more years in the bull phase and fewer in the bear phase. Fear seems greater than greed in the minds of investors. In gold’s case, at least the first market cycle was quite different. The bull lasted about 9 years, but the bear phase slightly more than twice that long.
The next bull market began in 2000 with gold at $250 per ounce and lasted until about 2011, peaking at $1940. It was a move again close to eight-fold. Then the bear phase lasted until December 2015, bottoming at $1054 per oz. Here the bull phase was much longer than the bear phase.
The above chart shows the last market cycle for gold with the bear phase lasting much less time than the first bear market cycle for gold.
Since the definition of a bull or bear phase sometimes pivots on certain market characteristics beside price trend, what are some of the market characteristics we should look for to tell us we are now in a bull phase? Below are a number of characteristics specific to gold that have typically been present during bull markets.
One characteristic is that there is central bank gold buying. In the first bull market, various governments were sellers of gold (the US government, the IMF), but other central banks were the buyers and offset the liquidations. In the current cycle, we are not seeing any government selling, but we are indeed seeing strong central bank purchasing, which has not been this large since the failure of the fixed exchange rate system back in 1971.
A second characteristic is that the gold price needs to be strong in terms of all currencies. We are seeing that manifest itself recently.
Thirdly, in bull markets, silver will tend to confirm the price action in gold, and often has a phase when it will outperform gold. This is the contraction of the gold to silver ratio, and that seems to be developing once again. We have written in the past about this phenomenon and you might want to check past issues. Silver is confirming the price action in gold but itself advancing at a slightly higher rate.
Fourth, gold and silver mining shares should confirm the price action of bullion in a bull market and vice versa. Investors generally don’t buy them until their confidence in the price trend has improved. Lately, the mining shares are acting well, confirming the price trend in bullion. Over the last 200 trading days, mining shares have handily beaten the stock market with GDX up about 40% and the stock market up a little better than 4%. The shares remain quite cheap relative to bullion.
A fifth characteristic is that bull markets are born from the ashes of bear markets. Usually this means investor sentiment gets extremely pessimistic at the bottom of the bear part of the cycle and improves gradually as you enter the bull phase. From almost all measures, the last few years have seen extreme bearish sentiment for the precious metals. In the physical market, there is currently still more client liquidation than purchasing. This is likely to change as the cycle progresses.
Since the strict definition of bull or bear refers to price trends, a bull market must prove that it can break the previous negative trend, forming a new upward trend. This means displaying a series of rising bottoms, rising tops, turning multi year linear trend, and also turning a series of long-term moving averages that smooth out the price action.
Again, we have showed you these charts some time ago as these breakouts were occurring. If you missed those, you might again want to look them up. To update you, see the chart above. Here we see rising bottoms and a break out above old tops. We see the bear linear trend from the peak back in 2011 has been broken to the upside, the market has maintained that breakout for a long enough time that this likely is not a false breakout. Finally, we show in the pop out chart to the right, the 40 week and 65 week moving averages are both rising and they have crossed. That constitutes a long term moving average buy signal.
Gold bull markets also tend to be associated with negative trends in the equity market. Just now, we are not surprised to see stocks and gold part company, which is what they usually do as the cycle advances. Gold now shows superior relative strength to US stocks, and US stocks have been leading the world. So, much like currencies, gold is acting better than global equity markets. Again, this is a sign of a bull market for gold.
In addition, bull markets in gold tend to be associated with dysfunction in the monetary system. People and institutions buy gold when they feel the government is mismanaging one of its most important responsibilities, the management of its fiscal status and the money it issues. In short, you buy gold when you feel paper money and government finance are being mismanaged.
What once was a system of intervention to act as a counter balance to the business cycle (deficit spending, easy money, and low interest rates), is now being applied when unemployment is at historic lows, the economy is booming and stocks are at all time highs. The Central Banks of the world are now acting to preempt a slow down that is not even evident. They are not just fighting recession; they seem ready to fight the slightest downturn. Why? Likely it is because they know once revenue starts to fall, marginal debt (of which there is considerable amount) will start to fail. With rates already at zero, they have little means to fight the next recession except massive fiscal stimulus.
You can see why the markets sense that government finances and the management of money is out of control. So, count up the ways. There are many. We have a bull market in gold that should last for a least several years and soon will take out the old highs of 2011.