- Richard Russell has been editing his Dow Theory Letters
since 1958 and brings great wisdom to the markets. Here are his thoughts
on bull markets and the ongoing gold and silver bull market from his March
13, 2007 Remarks, which come with a subscription to Russell's Dow Theory
Letters, $250 a year.
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- Russell deals primarily with the stock market, but he
became a gold bull in 2000, the timing of which illustrates Russell's insight
into the precious metals markets. He was also a gold bull in 1970s. For
more about Russell's Dow Theory Letters, visit www.dowtheoryletters.com.
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- There are four kinds of gold or non-gold people (1) They
know nothing about gold and never even think to ask. (2) They know a little
about gold, but can't afford to buy any. (3) They trade small amounts of
gold, but as soon as gold moves up or down 5 dollars or more, they sell
it or are stopped out. (4) the so-called "gold bugs," the small
minority who understand gold and money and adhere to a policy of accumulating
gold.
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- I'm in category number 4. But let me give you my reasons.
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- The great majority of investors don't understand bull
markets or the concept of the primary trend. When the primary trend of
an item turns up -- whether it be stocks, commodities, agriculturals, precious
metals -- we call that a bull market. There are small, medium and large
bull markets. Once the primary trend of a category turns bullish, there's
no way of knowing beforehand, how big the coming bull market is fated to
be -- nor exactly what path the bull market will take.
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- We do know that in major bull markets there are psychological
or sentiment phases. The first phase of a bull market is the accumulation
phase. This is the early phase where informed investors accumulate an item
because they know the item is underpriced or that the item is underused
or simply not understood.
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- The second phase of a bull market, usually the longest
phase, sees the professionals, the funds, the big money, the smartest of
the public, taking positions in the item. The second phase tends to be
characterized by many reactions, corrections, adverse news events that
cause the public to dump the item.
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- The third phase of a bull market is the speculative phase,
Here we see rising volume, the wholesale entrance of the public, accompanied
by news and endless hype by the Wall Street "experts." People
who wouldn't touch the item during the first and second phases, are now
enthusiastic buyers. The third phase sees systematic distribution by the
early first phase buyers. Third phase buying can easily turn to hysteria
and madness. Towards the end of the third phase, we see hints of the beginning
of the next primary bear market.
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- Question -- Do all bull markets progress as described
above?
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- Answer -- Almost all major bull markets do. It's a judgment
as to whether an ongoing bull market is fated to become a major bull market
or not. There's no definitive answer to that question.
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- Now I want to talk about the current bull market in gold.
This is a bull market that began in August 1999 with gold priced at 252
an ounce. Gold is the most emotional of all items -- loved by much of mankind,
hated by certain elements including governments and central banks. Because
gold is real money, and because gold is collected, traded and accumulated
by millions of people the world over, gold bull markets tend to be BIG
bull markets.
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- The gold bull market that started in 1999 has already
taken gold up 291% to a high of 734 recorded in May of 2006. But what's
so interesting about the ongoing gold bull market is that neither the public
nor the funds have entered the picture. In fact, most people really have
no idea that gold is in a primary bull market, this despite that fact that
since 1999 gold has consistently outperformed the Dow and the S&P.
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- I believe that the gold bull market is now in its very
early second phase. Informed investors have already established healthy
positions in gold. I think that a very minor sector of the investing public
has now taken some kind of a position either in gold or gold stocks or
a gold ETF or a gold fund. Nevertheless, it's still unusual today to find
an individual who has any kind of a position in gold.
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- Gold has been in a corrective phase ever its May high
of last year. This backing-and-filling has served to discourage many Johnny-come-lately
and in-and-out traders. Meanwhile, gold remains in what I consider its
"bargain phase" below 734. But what about the future?
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- This is important. Almost all BIG bull markets (and I
believe gold is in one) ultimately move into a third speculative phase.
I believe this phase lies ahead for gold, maybe a year or so, maybe three,
four or five years out. It doesn't matter -- in my opinion, the longer
the time elapsed prior to the entrance of the third phase, the bigger the
third phase for gold is fated to be. But before entering the third phase,
we have to complete the second phase. The second phase, from the looks
of it, may has quite a while to go before it is completed. Question --
how many of your friends own any gold?
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- My thinking is that when gold finally moves into its
third phase, we may see one of the most speculative third phases in history.
I believe we will see gold in the thousands of dollars. I believe we will
see one of the most emotional bull market third phases in history. People
will look back on the year 2007 and wonder what the world was thinking
about with gold selling for $650 US dollars, dollars that were created
out of thin air, fiat dollars which could be created by central banks in
any quantity in at any time.
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- At any rate, that's the way I see this sluggish, unexciting,
slowly-moving gold bull market here in 2007. I lived through and profited
during the gold bull market of the 1970's. That bull market was based on
inflation fears. This bull market when it moves into its third phase will
be based on fear of the viability of the dollar and all fiat money. This
bull market is fated to be much bigger than the bull market of the 1970's.
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