Thursday, October 9, 2008

4 Phases of the Bull

There are four phases to any bull market. They are:

1. Pessimissim
2. Skeptisim
3. Optimism
4. Euphoria

Markets usually move in 20 year cycles. Stocks had their most recent run from 1982-2000. Before 1982 only 17% of the country owned stock. It was just coming off its previous bear market that ran from 1966-1982 and people thought that owning stock was a losing bet. People were also bearish on real estate at the time with interest rates running at close to 20%. What were people investing in back then? Something called gold. People were standing outside gold dealers waiting in line to get their hands on the precious metal. When you turned on the evening news, the broadcaster did not start the news with how well the DOW finished, he started with the price of gold and speculation on how high the price could go.

In 1980, we were just finishing up the bull market in precious metals which started with the price of gold at $35 in 1970 and ended with it finishing at $850 in 1980. We had reached the euphoria stage for gold and people investing in stocks at the time, which was just entering the pessimism stage of its new bull market, were considered crazy.

I bring this up because no one remembers this. Investors are now told that stocks go up by an average of 10% per year and that investing in diversified stocks for the long run is their best chance of enjoying the American dream of retirement. The creation of the 401K and Wall Street's appetite for the generous fees involved with this new "retirement mantra" fed this new notion of investing.

No one tells investors that markets move in 20 year cycles and if you plan on retiring during a 20 year bear cycle you're probably going to be in serious trouble. No one tells investors that throughout history we get a depression about every 75 years. The last one came in 1930.

Why would no one tell the public this? Wall Street does not make money if you invest in gold. Wall Street does not make money if you invest in real estate. That's why during the recent real estate bull market in every "financial" magazine they compared the "long term" advantages of owning stocks over real estate.

The secular bull market for gold and silver began in the year 2000. The first five years marked the pessimism stage, and we have been in the skepticism stage since the year 2005. It is obviously the most difficult to invest in these stages because your friends and family tell you that you're crazy. Just like people investing in the stock market in 1980 were considered crazy. We will probably start the optimism stage of the gold and silver bull market sometime next year. This is when we'll start to see the first part of the American public enter the market.

You'll probably start to hear about friends and family putting a small portion of their money into the metals, and it'll probably start when gold crosses back over $1,000. Its run to $2,000 will be much, much faster than its run from $250 (2000) to $1,000 (2008). How high will it ultimately go during it's euphoria stage? Well that's looking better by the hour based on the current government policies.

Gold started the decade at a 50 to 1 ratio to the DOW.
Last year it ended at a 15 to 1 ratio.
It is currently hovering at around a 10 to 1 ratio. (9000 DOW - $900 Gold)

It will go to at least a 1 to 1 ratio during its euphoria stage. The actual dollar amount does not matter because we're moving toward hyperinflation. The early entrants will then be selling their gold to the American public which is rushing back into the market just as they were in 1980. When you turn on the news at night you'll hear the broadcaster start with the new record price of gold and why it will go up forever. The bottom will then fall out, and the masses will get slaughtered. It happens the same exact way during every bull market in history, and it's happening again right now.

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