Tuesday, September 20, 2016

Russia's "Can't Lose" Financial Strategy

17 February 2014 - updated 22 August & 22 December 2014; 30 January 2015; 21 April 2015; 2 January & 20 September 2016

This is a legacy article, dating back to February 2014. I have been adding updates as they come available:

Here's a strategy I've thought about for a while now. This is only possible because we have abandoned the gold standard (and with it, sound money - you can talk to Ben Bernanke and Janet Yellen about that). 

Let's just say a government decided to print money out of thin air and use it to buy gold. You start with something that is an entirely artificial construct (any national currency in today's world meets this criterion) and use it to buy something that is real, scarce and irreplaceable (gold still meets THOSE criteria!). Voila, you have a "can't-lose" strategy for getting leaps and bounds ahead of everyone else. 

And... I think one country may actually be doing this (I originally commented on this a couple of years ago). Check out these two Russian charts.... 

(1) They are buying-up gold hand over fist; and 

(2) They are printing funny money like crazy (it's virtually without cost for any nation to increase their "money supply" like this today, for as long as the current insanity lasts). 

Vladimir Putin is NOT a nice guy. We all know that. But is he a smart guy? Yeah. And a wise guy, too. Perhaps a few of the rest of us should clue in... and catch up. 

Russia's gold reserves are up 150% in 7 years:

Russia's money supply is up 33% in 2 years:

I have said earlier that the Federal Reserve should have just put $10,000 in the mailbox of every US citizen (yes, they HAVE spent that much "new" money to "rescue" the still-staggering economy). This would have done MUCH more for the economy than bailing out BOTH political parties, GM, Countrywide Financial and Bank of America. 

But a better scheme even that that would have been to take the $3 trillion printed dollars (yes, they did print $3 trillion to bail out the government and the banks) and to quietly, discreetly, buy gold with it. 

Well, have no fear. Ben Bernanke gave all his money to Citibank, Fannie Mae, General Motors, and the US Congress. It's gone. 

But Vlad Putin bought gold with his "printed money." In my world, Mr. Putin is BY FAR the wiser man.


22 August 2014: While some reports show slow periods and even temporary reversals in Russia's accumulation of gold, the most recent figures from the World Gold Council show that Russia has (again) reported an increase in its official reserves since February 2014, moving its place in global national gold rankings up two additional slots. What can I say? Print money, buy gold. It's legal. Just what I don't really get is why only the Russians are doing it.... (Believe me, some day, this will no longer be allowed!)

Russia (#5 globally):
Official gold holdings:
1,094.7 tonnes

Percent of foreign reserves in gold:

Russia has increased its gold holding since February 2014 and has eclipsed both Switzerland and China. In August 2014, Russia's central bank decided to buy up even more gold and diversify away from the dollar and the euro as a result of economic sanctions imposed by the West.

Russia's central bank gold holdings crossed the 1,000-tonne mark for the first time in Q3 2013.

Source: World Gold Council

22 December 2014: While I disagree with Mr. Putin on many points, in particular, the suppression of diversity at home and my belief that Ukraine should shape its own future, the Russians continue to be cleverer than we in many respects. Despite rumours that they have been selling gold, in fact, it is US dollars that they are unloading, while (wisely) buying ever more gold.

For more information, click here.

30 January 2015: Russia's gold purchases were up 123% during the first 11 months of 2014, including the period during which the Ruble began to collapse. The Financial Times reports:

"Russia’s central bank purchased 152 tonnes of gold worth $6.1bn at today’s prices, according to GFMS estimates. Analysts also said Russia’s purchases might have been due to the buying of domestically produced gold that could not be easily sold overseas due to sanctions.

“'This is a clear positive for the gold price,' said Matthew Turner, analyst at Macquarie. 'If central banks had not purchased that gold it would have been bought by private investors or jewellery consumers, and this would likely have required a lower gold price.'

"While Russia was a strong buyer this year, analysts say purchases could slow and the country could become a seller if it continues to liquidate its reserves to support the domestic currency."

For the full story, click here.

21 April 2015: Kitco News reports that Russia has resumed gold buying following a 2-month hiatus (click here):

"After a two-month hiatus the Central Bank of the Russian Federation jump back into the gold market, demonstrating that official demand remains strong, say analysts.

"According to media reports, the Russian central bank bought 28 tonnes of gold in March, the biggest one-month purchase since September. In January the central bank sold 0.5 tonnes of gold and didn’t purchase anything in February.

"The report noted, as of April 1, Russia’s official gold reserves stood at 1,128.3 tonnes, compared to the previous level of 1,207.7 tonnes. According to data from the World Gold Council, Russia has the fifth largest gold reserves in the world (not including reserves held by the International Monetary Fund).

2 January 2016, The world's smartest gold buyers have done it again. As of November 2015, we have these figures:

- Russia adds another 700,000 ounces (22 tonnes) to gold reserves in November
- Russian ally Kazakhstan increased gold reserves for 38th month – 7 Mil ounces
- Russia has added 197.1 tonnes in 2015 – Compared with 172 tonnes in all 2014
- November gold buying is Russia’s ninth straight month of increase
- Russia now has sixth largest gold reserves in the world
- Central bank buys all Russian gold production
- Other Russian gold demand imported
- Russia views gold bullion as “100% guarantee from legal and political risks”


Russia continues to add to its gold reserves and added another 700,000 ounces in November or another 22 metric tonnes, and analysts believe this buying will continue and may intensify in the coming months.
Russian ally Kazakhstan increased its gold reserves for a 38th month to 7.03 million ounces in November from 6.96 million ounces a month earlier.
The latest large increase in Russia’s gold reserves – a “buying spree” as reported on Reuters Africa has again gone largely unnoticed by most analysts. Indeed, the important monetary and geopolitical ramifications continue to be largely ignored in western media.
Russia’s total gold reserves have now increased to 44.8 million ounces or around 1,392.8 metric tonnes (up 40% from February 2014, when this article was originally published), with a current value of just $48.3 billion. Russia’s total FX reserves are $371.2 billion and their gold allocation remains just 13% of their total reserves.
The share of gold in Russian foreign exchange reserves is much lower than in many other countries such as the U.S., Italy and France. Russian diversification into gold is likely to continue and could intensify if relations with the U.S. and NATO powers further deteriorate.
Russia still has less than a fifth of the gold reserves of the U.S. which are believed to be over 8,400 metric tonnes of gold. However, the U.S. has no foreign exchange reserves and is the largest debtor in the world – indeed it is one of the largest debtors the world has ever seen.
Russia now has the sixth highest gold reserves in the world – behind the U.S., Germany, Italy, France and China.
In 2014, Russia bought more gold in than in any year since the break-up of the Soviet Union. The country acquired over 173 metric tonnes according to World Gold Council figures. Reserve diversification intensified after April — averaging about 20 tonnes per month....
Click here for the full story from GoldCore....

Meanwhile, Russian money supply has grown another 7% since the end of 2014, an increase of about 2.2 trillion roubles. 

As I've been commenting, why not print money and buy gold with it? The Russians have got it figured out....

20 September 2016. The Russians have outdone themselves again. Russia, which has defaulted 5 times and has been in that state for 10 of the last 26 years, just sold a stack of bonds to a collection of hedge funds, pensions and "smart" buyers. Some if not all the proceeds at the government level apparently went to buy yet another 700,000 ounces (21.77 metric tons) of gold in a single month! The Russians are truly unequaled at the level of long-term financial strategy. Click here for more information. 

Monday, March 07, 2016


7 March 2016

A couple of months ago, I took an online political quiz that classed me as a “liberal libertarian,” a phrase I had not previously heard, possibly because I'm pretty sure there are very, very few of us (most prominent libertarians are socially conservative, and I'm not). As a consequence of my way of understanding the world, on political issues, I both agree and disagree with almost all, if not all, of my friends, on one major point or another. Fortunately, and very much like me, my friends are for the most part a tolerant and independent-thinking lot. Nobody has unfriended me for my outlying political views – to my knowledge, at least.

The above said, there are real-world politicians with whom I am considerably more than 50% in accord, and at the top of my list would be such names as, in Canada, Tommy Douglas (by chance a fiscally conservative socialist; probably my ultimate political hero) and Paul Martin (a fiscally conservative political liberal who advocated and ran balanced budgets), and, in the US, Ron Paul and David Stockman (both somewhat socially conservative libertarians). Internationally, I am very much in accord with the thinking of Muhammad Yunus and Hernando DeSoto, though neither is a politician, per se.

Those I almost never agree with include such diverse persons as Donald Trump on the right (no wonder he keeps failing at business, except during episodes of “bubble” economics), Paul Krugman on the left (who invariably favours more intervention in markets when less is almost always what is needed), and most all extremists of the right and left, from the National Front and the Ku Klux Klan on the right to the Communist Party and the kleptocracies of Venezuela, Zimbabwe and Greece on the left. Oh yeah, I probably have many points of difference with other liberal libertarians.... That's how it goes, isn't it!
In brief, what do I believe?
1. Building and maintaining social and physical infrastructure is the first priority of government (and thus, government is legitimate, in that it acts as an arbiter of competing social interests). This is a focus that is distinct from regulation (governments use regulation to create jobs for bureaucrats, so it always gets overdone everywhere, as bureaucrats seem to exist to create more jobs for other bureaucrats). I also look askance on efforts of government to intervene in most aspects of public affairs, particularly in markets and in establishing or maintaining social norms. I do consider the rule of law to be a legitimate component of infrastructure, based on the principle that all human lives are equally valuable, and also that private property and free trade are the ultimate foundations of social security and financial health.

2. Governments should spend less than they take in – always. The balance should be set aside as a fiscal hedge for unanticipated future events. This also means that government spending is not useful as so-called “fiscal stimulus” (it fails in that respect every single time). However, of the funds that governments spend, the priority should continue to be #1 above – social and physical infrastructure, which means that no one is without food, shelter, the protection of the law, and access to equitable health and educational services.

3. Science is the ultimate arbiter of material truth. Even if science were to come at odds with religion, I would choose science 100% of the time, though this has not stopped me from being religious. There is a very large domain on which science by necessity must reserve judgement, from the randomness of the quantum realm, to the unknowableness of first causes (or, if you prefer, the mysteries of acausaility). Science leaves ample room for the practice of religious faith, in my view. I am a universalist in the sense that whatever creator we all respect or worship in our diverse ways, that must be the very same creator. Thus I strive to be respectful of religious views different than my own, and I shun religious teachings that divide versus unite (which is not to say that I accept religion as a justification for any kind of political oppression).

4. Following from #4 (based on the principle that science yields the best approximation of the truth that is achievable), global warming is real, and the current spike in global mean temperature is caused by human activity. Both climate change and human population growth threaten ecological diversity and the carrying capacity of our planet. However, secondary to this, solutions to ecological problems have to happen in the real world. I'm impatient with my friends who want to tax carbon emissions (that just employs more bureaucrats), shut down pipelines, or otherwise constrain the carbon infrastructure, when we presently require carbon energy to keep our power grid running. Additionally, I'm not “against” renewable power, I just don't regard it as a replacement for carbon. As I'm sure all of my friends know, the fusion scientists are telling us that they're ready to build prototype fusion power generators now. We have spent enough on fracking in North America in the past decade alone to have gotten many competing fusion prototypes up and running by now (honestly, we could have done this – albeit more primitively – 2 or 3 decades ago if we’d been properly focused). I favour continuing to use carbon energy until we get fusion going – it’s just that we need to light a fire under our fusion power development program. As an aside, what an opportunity it would be for Canada to choose to be the global leader in fusion power development. (My interest in space exploration is entirely apart from the issue of our threatened global habitat, except that having non-Earth settlements is a safeguard against catastrophes in a universe that is catastrophic in its very nature.)

5. I could go on from here. For example, I think problems in public morality (for example, the “right to life” issue, which is an example of a social problem that lacks any kind of “ideal” solution) should be settled by a “marketplace” of private donations, outside the government sphere. Thus, the best ideas could compete for the most charitable donations. In my ideal world, government would be small enough that the private charitable sphere could be much larger and healthier than it is today. Regarding taxation, I favour a simple flat tax. Everybody would pay 17% (or so) on all income, from the poorest to the richest, and there would be no deductions or complicated tax codes (though there would be social infrastructure to safeguard the poorest). Government revenue collection departments could thus be all but shut down. I regard foreign military intervention as the most likely to fail of all international actions we can take, and thus reserve military deployment primarily for cooperative and multimodal international responses to the systemic victimization of vulnerable peoples, particularly in situations of lawlessness. I favour keeping other countries liveable over bringing people here (though that is a last resort for humanitarian reasons), and observe that most of the world’s current hotspots are unstable precisely because of excessive past military interventions (including weapons trading). Specifically, we had no business attempting to undermine the Russians in Afghanistan, Saddam in Iraq, Qaddafi in Libya, Assad in Syria, and so on. I would terminate the war on drugs immediately and fund addiction treatment as a component of social infrastructure. Nor would I populate the prisons with persons involved in the drug trade (which would cease to be profitable with decriminalization). 

I also believe that good infrastructure has many secondary economic advantages. For example, in Canada, if the TransCanada Highway were divided (dual) coast to coast, we’d be dealing with lower accident and injury rates. I would also prioritize the completion of a real coast-to-coast TransCanada Trail, suitable for walking, skiing and biking every foot of the way across the country. Not only would that boost tourism, it would strengthen Canada’s relations with the people of other nations. With that, I’ll leave it here, for now….

Saturday, January 02, 2016

LPP Fusion Is Making Rapid Advances in Fusion Power Technology

Based on a technological concept originating in 1964, LPP Fusion is developing a dense plasma focus (DPF) device. No external magnetic field is required, since the method generates its own magnetic field --- making it potentially much more compact than mainstream fusion technologies.
For a few millionths of a second, an intense current flows from an outer to an inner electrode through a low pressure gas. This current starts to heat the gas, creating an intense magnetic field. This in turn generates a super-dense plasma, condensed into a tiny ball only a few thousandths of an inch across called a plasmoid. Again, all of this happens without being guided by external magnets.
The magnetic fields very quickly collapse, and these changing magnetic fields induce an electric field which causes a beam of electrons to flow in one direction and a beam of ions – atoms that have lost electrons – in the other. The electron beam heats the plasmoid to extremely high temperatures, the equivalent of billions of degrees C (particles energies of 100 keV or more). (This temperature level is orders of magnitude hotter than the core of the sun, and many times hotter than alternative fusion power technologies.)
This technology can in principle be used to produce X-rays or to generate fusion power.
To create fusion power, energy can be transferred from the electrons to the ions using the magnetic field effect. Collisions of the ions with each other cause fusion reactions, which add more energy to the plasmoid. Thus, in the end, the ion beam contains more energy than was input by the original electric current. (The energy of the electron beam is dissipated inside the plasmoid to heat it.) This happens even though the plasmoid only lasts 10 ns (billionths of a second) or so, because of the very high density in the plasmoid, which is close to solid density. This level of density makes nuclear collisions (and thus fusion reactions) very likely, and they occur extremely rapidly.
The ion beam of charged particles is then directed into a decelerator which acts like a particle accelerator in reverse. Instead of using electricity to accelerate charged particles, they decelerate charged particles and generate electricity. Some of this electricity is recycled to power the next fusion pulse while the excess (net) energy is the electricity produced by the fusion power plant. Some of the X-ray energy produced by the plasmoid can also be directly converted to electricity through the photoelectric effect (as occurs in solar panels).
An interesting aspect of the DPF design is that it generates sufficient temperature levels to power fusion reactions in elements with higher molecular weights, which in turn holds out the promise of a shortcut to boronic fusion, the "holy grail" of fusion power research, as this particular fusion reaction generates electricity rather than neutron radiation... and electricity is what we actually want!
Another interesting feature here is that LPP Fusion is an incorporated company (in this sense, similar to General Fusion), and thus they accept investments from private contributors. Again, this is all "micro" scale when compared, say, to Exxon Mobil or Conoco Phillips, but at least a base has been established to which further investments can be added.....

Monday, January 12, 2015

Fed Bubble #3 Will Hit Canada Harder Than Bubbles #1 and #2

22 & 23 December 2014, 12 & 13 January 2015

This post refers to a well-researched article published yesterday by Sober LookIf energy prices remain near current levels, Canada's economy is in trouble.

Collapsing energy prices will be the story of the year for Canada, due to our high costs of production in the oil sands sector. In the US, the primary impact of low oil prices will be on the over-leveraged, capital-intensive and high-turnover shale fracking sector. In Canada, the oil sands operations are much better-funded, but they're not economic at these prices, and we have fracking going on here, too. 

But the real Canadian story is that we have so far entirely missed the US real estate correction (due to riding the commodity boom), but the turndown in oil prices is going to hit Canada's real estate market very hard. 

While our energy sector is much less leveraged than in the US, our housing sector is clearly vulnerable. Our household debt load has doubled as a percentage of income since 1990. 

Canadians are now also borrowing more than Americans, which would not be a good sign at the best of times:

The collapsing oil price is thus emerging as Canada's biggest economic setback in decades (and the natural gas business is no better).

By the way, one statistic really caught my eye. I have been commenting for as long as I can remember that we keep our local construction workers busy full-time without building any new houses. In fact, I have been on the mark. Canada has been involved in a renovation boom for years (see story and chart). Falling energy prices will impact that, too, and it's likely that real estate prices have already peaked, given how fast the rig count is dropping in the oil patch. 

Now... will this be the crisis that triggers a resurgence in gold? Well, Mr. al-Naimi just announced that the Saudis don't care if oil falls to $20/barrel. They are obviously wishing to preserve market share, and they are fighting a battle they can win. 

Note that the Asians have been playing years ahead of us in stockpiling gold, as a hedge against bad debt and economic volatility. This trend has not reversed since 2011, when the chart below was created. 

Despite being embroiled in their own crisis situation, the Russians haven't stopped buying gold either. 

In fact, they are selling US dollars to enable their gold purchases (I would, too). 

The gold price will be leveraged if there is a credit crunch, and that appears to be what is shaping up. Once again, the crazy Americans have started another boom/bubble with the only real economic and employment growth of the past 7 years having occurred in only 5 shale fracking states. (A map of US shale-energy sites is presented below.)

And of course, everybody will pay for the Federal Reserve's latest experiment in bubble-blowing. 

What is the moral of this story? You can't print $4 trillion of funny money and not have consequences. The Fed brought on the so-called Great Recession in 2008 --- arguably a depression, which has so far been masked by moneyprinting and borrowing, but it has not gone away. 

The chart below shows that the Federal Reserve has recently accumulated $4 trillion in assets, purchased with printed money, that it cannot sell without creating irreparable market dislocations.

Booms are not the same thing as economic growth. Rather, they are temporary and unsustainable events caused by economic central planners who believe that moneyprinting stimulates the economy. However, moneyprinting always results in malinvestment, which results in transient booms that ALWAYS go bust with real capital loss. 

Only saving, combined with capital investment for the long-term, produces growth, whereas stimulating borrowing and debt (the strategy used by economic central planners since 1987) always fails. 

As evidence of the current "boom" dynamics, Peter Schiff points out that the number of energy workers in the US has doubled in the past decade.... Let's call this the "stealth bubble," because most of us don't see its direct evidence. Mr. Schiff believes that other bubbles will be unmasked by the collapse of the US energy bubble: Could An Energy Bust Trigger QE4?

In the chart below, we see how decades of Federal Reserve bubble-blowing has decimated US breadwinner jobs.

If you want to know more about how Fed bubble #3 is unfolding (with the usual dire consequences), David Stockman has summarized it here: The Fracturing Energy Bubble Is the New Housing Crash

Here, we see that Federal reserve intervention has added to jobs only in the least stable and lowest wage sectors.

And for a little more digging into risky energy finance, have a look at John Mauldin's recent review, here (though I disagree with his speculation that we've outgrown our need for jobs --- rather, Fed-induced malinvestment keeps killing them): Oil, Employment, and Growth

Combined with the above charts, it is evident that the latest boom has led to the creation of only low wage jobs (above) and speculatively-financed carbon energy sector jobs in only 5 states (below).

It's also worth noting that there is presently $173 billion in US energy junk ("high yield") debt presently outstanding, and that it is dragging other debt markets down with it. This is the part of retrenchment with the greatest implications for the economy as a whole. Read more here: U.S. shale junk debt tumbles amid oil crunch.

As would be expected, the Canadian energy sector is under severe pressure as well, as summarized here: Canadian energy firms hit the alarm bells.

The article linked at the start of this post is brief, full of charts, easy to read, and sobering. If I'm right, the energy sector will remain weak until the vulnerable players get taken out of the game. It is bad debt that will eventually force interest rates higher, whether our central planners wish for rates to go that way or not. 

On the upside for Canada, which has more mining companies than all other countries in the world combined, the fallout in bad debt from the collapse in the carbon energy sector could be counterbalanced to some degree by a resurgence in the gold mining sector, which will certainly benefit the region where I live (Northwest Ontario). 

Keep watching, and look out! The oil price collapse seems quickly to be unmasking Fed bubble #3, as far as I can tell from here. 

When do the bubbles and booms stop? When the central planners stop intervening by printing money and "stimulating" borrowing and debt in the absence of viable targets for investment. 

Where should the investment be coming from? 

Savings, not borrowing. 

What should we be investing in, instead of booms and bubbles?

Let the market decide --- without intervention by central planners.


23 December 2014: Here are some US oil statistics from Wikipedia. 

Oil products constitute 7.6% of exports and 14% of imports. The U.S. is the world's largest producer of oil and natural gas. It is the second-largest trading nation in the world as well as the world's second largest manufacturer, representing a fifth of the global manufacturing output. 

The United States is the second largest energy consumer in total use. The U.S. ranks seventh in energy consumption per-capita after Canada and a number of other countries. The majority of this energy is derived from fossil fuels: in 2005, it was estimated that 40% of the nation's energy came from petroleum, 23% from coal, and 23% from natural gas. Nuclear power supplied 8.4% and renewable energy supplied 6.8%, which was mainly from hydroelectric dams although other renewables are included.

American dependence on oil imports grew from 24% in 1970 to 65% by the end of 2005. Transportation has the highest consumption rates, accounting for approximately 68.9% of the oil used in the United States in 2006, and 55% of oil use worldwide as documented in the Hirsch report.

In 2013, the United States imported 2,808 million barrels of crude oil, compared to 3,377 million barrels in 2010. While the U.S. is the largest importer of fuel, the Wall Street Journal reported in 2011 that the country was about to become a net fuel exporter for the first time in 62 years. The paper reported expectations that this would continue until 2020. In fact, petroleum was the major export from the country by 2011.

For some Canadian petroleum statistics, please click here

12-13 January 2015: Arthur Berman offers an insider's view on the economics of shale oil. He clarifies that the real breakeven cost in shale oil is $85, and that a $90 crude oil price is needed to make shale investable. A very strong argument can be made that shale investment "happened too soon" due to central bank intervention and bubble creation. Mr. Berman's article is here

Mohamed El-Erian explains why "this time is different" here. To be honest, central bank intervention always makes everything different... and worse. Remember: a boom is not growth. It's that simple. Booms are driven by debt and speculation, whereas growth is driven by redeployment of savings and long-term consideration of investment returns under all circumstances.

Jeff Gundlach reiterates the warning hereGundlach, who correctly predicted government bond yields would plunge in 2014, said on his annual outlook webcast that 35 percent of Standard & Poor's capital expenditures comes from the energy sector and if oil remains around the $45-plus level or drops further, growth in capital expenditures could likely "fall to zero." Gundlach, the co-founder of Los Angeles-based DoubleLine, which oversees $64 billion in assets, noted that "all of the job growth in the (economic) recovery can be attributed to the shale renaissance." He added that if low oil prices remain, the U.S. could see a wave of bankruptcies from some leveraged energy companies.

Wednesday, December 10, 2014

A Three Stage Gold Bull Market?

27 December 2005, 16 April & 9 May 2010; 10 December 2014

This is a legacy article from 2005 which I though might be interesting to update and republish. Here, for your interest, is the original text, followed by today's update at the end:

I was reading the most recent issue of Fortune Magazine last night, and what should be on the cover but bars of gold bullion? As you might imagine, Gold is now on Fortune’s top 25 list of recommended investments for 2006.

There is presently much discussion among precious metals analysts as to whether we have entered “stage two” of gold’s bull market, which is expected to be marked by increased mainstream interest in gold investment. I will attempt to show here, in accord with one of my mentors, Ed Bugos (http://www.goldenbar.com/
), that despite increasing public interest, we remain in “stage one” of the gold bull market, though I believe stage two is fast approaching.

Bull markets are generally presumed to evolve through three stages. In the first stage, astute individuals who are alert to emerging trends often experience considerable gains while their area of investment interest remains "under the radar."

In stage two, the general public and the professional investment community develop increasing interest in the emerging opportunities in a particular field of investment. In my understanding, stage two is typically characterized by increased risk, as a later stage pullback can erase the gains of new investors, and restore investment values to levels somewhere between the peak and the (typically lower) close of stage one. This is significant, as some early investors may sell out to new investors at or near the stage two peak, and new investors tend to become discouraged with the new bull market after a dramatic pullback has erased their gains.

Strikingly, just at the point where the general public and the broader investment community (including the majority of professional advisors) become most disillusioned with the now maturing bull market, stage three typically begins. Once again, the early investors, who have a clearly thought-through rationale for their investment preferences, are those most likely to benefit by the third, and most dramatic bull market stage, which is one of parabolic growth over a relatively short period of time.

I can think of two excellent illustrations of these three bull market stages. The first is the gold bull market of the 1970’s, which ended in a dramatic 1980 peak with gold values over $800 per ounce.

NOTE: All three charts originated by Mary Ann and Pamela Aden (http://www.adenforecast.com/). Readers are advised to visit their excellent website for fuller understanding.

In stage one, gold values began drifting up from $35 per ounce, where they had been fixed by international accord through 1968. In 1971, President Nixon removed the US dollar from the gold standard, thereby fully opening up the value of gold to market pricing, which saw gold’s advance to about $120 per ounce in 1973. Stage one closed when gold pulled back modestly to about $100 later that year.

Stage two of the gold bull market was associated with the return of private ownership of gold to US citizens in 1974. The gold price moved up rapidly, almost to $200 by 1975, drawing in increasing public interest. But, as is characteristic of bull markets in their second stage, gold’s price then pulled back to the $100 per ounce range, thereby erasing the gains of new investors, but preserving the gains of the early investors.

As is typically the case in bull markets, this second stage collapse actually set the stage for the stage three parabolic move upwards in gold’s value to over $800 per ounce.

By 1980, with gold nearing its peak values, market fundamentals changed, and the wisest of investors sold their holdings of gold in recognition of the changed fundamental situation. (The best known of these is Jim Sinclair: http://www.jsmineset.com/).

The particular development in 1980 was that Paul Volcker was appointed to chair the US Federal Reserve Board. Volcker steadily raised interest rates to wrestle inflation to the floor, ushering in a 21-year secular bear market in gold. Oblivious to these fundamental changes, many members of the public were by this point anticipating near-infinite gains in the value of gold, and steadily lost their gains (or their invested capital) due to holding their investments as the gold bull market at first precipitously, and then gradually, unwound in a 21-year downtrend, ending in 2001.

My second example of a three stage bull market is the recently concluded “technology bubble.” The three stages are well-illustrated in a study of the shares of Dell Computer. Dell’s stage one accumulative phase continued through the end of 1992, at which point the price (in contemporary post-split terms) had risen from mere pennies to 78 cents a share, creating dramatic gains for early holders. However, stage one concluded with a pullback to 22 cents per share in 1993.

This laid the foundation for the stage two rise to $1.54 per share in late 1995, essentially doubling the gains of early stage one investors, and increasing the holdings of early stage two investors sixfold.

However, Dell’s share value then collapsed dramatically by over 50% to 72 cents per share that same year, essentially erasing all of the share value gains from the 1992 peak through to 1995 – a discouraging three-year period of non-performance.

This wrenching late stage two pullback, once again, set the stage for a dramatic stage three bull market move for Dell. From its 1995 low of 72 cents, Dell never looked back until 2000, at which point it had attained a value of $59.69 per share, confirming the wisdom of the longer term investors who had correctly perceived (or luckily discovered) that Dell had entered its stage three bull market phase.

Note that the shares of Dell are now unwinding, as did the value of gold after 1980, and that, in my opinion, Dell’s shares have much more to lose before its “secular” bear market is done. Dell had collapsed to the $16 range shortly after its 2000 bull market peak. It since recovered to a $42.57 high in late 2004, but in my view will be facing a long downward slope for many years to come as the investment community gradually recognizes that computer hardware has become a “commodity” in an emerging globalized economy (that is, fundamental factors have again brought an end to a dramatic and exciting bull market).

Looking back to the 1970’s gold bull market, and its subsequent 1980-2001 bear market decline, it strikes me that bear markets may be characterized by three stages as well. The bear market pullback may appear less dramatic in terms of the currency value of shares, due to the persistent eroding background interference of monetary inflation, which, by matter of government policy, steadily undermines the purchasing power of all money.

In my view, the 1980-82 gold market decline would constitute stage one of the bear market, pulling the price back inside the long-term channel of gold’s appreciating value in terms of a steadily inflating currency; then 1982-93 constituted stage two, returning the price to the middle of the channel defining gold’s value in terms of an inflating currency; and 1993-2001 constitutes stage three of the bear market, bringing the price of gold to a 21 year channel bottom, and preparing the stage for the present gold bull market.

Given that the length of gold’s recent (1980-2001) bear market was almost twice as long as its 12-year 1968-1980 bull market, I now suspect that we may be seeing a much longer and more gradual, but ultimately more powerful gold bull market than in the 1970’s.

Chart analysis shows that we have not yet attained even gold’s long-term mid-channel values (presently in the $600 per ounce range), and there is still the move to the top of the channel to anticipate (stage two), as well as a possible parabolic move above the channel to culminate stage three of the present gold bull market.

The background to my speculation that the present gold bull market will be lengthier and more powerful than the 1970’s bull market is due in large part to the fact that the value of gold mining company shares steadily weakened against the value of gold from the date of the initial free market trading of gold (1968) through 1980.

In the present gold bull market, gold mining company shares have appreciated strongly relative to the value of gold, obviously due to the fact that their relative value remains, even now, in a 36-year downtrend.

I find it difficult to countenance that the value of gold shares relative to gold will not break out of their present 36-year downtrend channel during the present gold bull market

Any breakout in share values above this channel top (we are now very near this point) will almost certainly see an end-of-stage-one pullback to the upper line of the (gold share relative value) downtrend channel, possibly on a strong move in gold, though possibly also due to short-term renewed weakness in the gold mining shares due to a range of very real fundamental issues, including inflating production costs, political risk, and questions about demand for gold at higher prices (by the way, don't worry about this latter issue – if any currency were climbing in value, would people wish to own more or less of it?).

On the upside, resistance to gold shares’ continued upward movement will be set by their 1993, 1973 and 1969 highs, respectively.) The time to sell gold shares and diversify into other investments would be at the time that the 1969 ratio high is reattained, very likely a decade or two in the future, if not longer. By then, equities, bonds or some other class of investment (perhaps real estate) would likely have returned to attractive values.

As I am working with a conceptual model which indicates that the present bull market in gold and gold shares could last much longer than the 1970’s “flash in the pan” gold bull market, I suggest that we could anticipate 20 or even 30 more years of strength in gold mining shares relative to gold. Bear in mind that only 4 years have been logged so far. Of course, there will be many surges up and down along the way. But a 20 to 30-year buy and hold strategy in gold mining shares would seem to be a workable choice in this market, even allowing for the likelihood that there will be a substantial correction at the end of stage one (if it has not already concluded), and an even greater, perhaps 50% correction, at the close of stage two.

So if we are not yet in stage two in this bull market, where are we? I suggest that we probably are moving quite near to the end of stage one, which I expect to conclude with gold values in the $600 per ounce range.

However, stage one is also likely to conclude with a greater correction in the price of gold than we have seen so far (that is, closer to a 20% - or greater - correction than to a 10% correction). The associated correction in gold shares may be more modest, and is more likely to follow the gold shares’ breakout from their 36-year downtrend than to precede that breakout move.

Psychologically, while Fortune Magazine’s cover certainly signals awakening public interest in the gold market, there remain several missing pieces to that puzzle as well. To begin, while gold itself has qualified as a recommended investment for 2006, no gold or precious metal mining companies have yet been named. Secondly, the analysis offered by Andy Serwer really neglects the primary driver of gold’s appreciation, which is ongoing inflation in the quantity of money in all of the world’s major currencies. I believe that a fundamental grasp of gold’s role as a hedge against deterioration in the value of money will need to be more clearly understood during stage two of the gold bull market.

I invite readers to share their thoughts and comments about gold’s three-stage bull market with me.

10 August 2008: Also - be sure to read my more recent posts on the topics of precious metals and secular trends, starting here: "Gold's 1980 High – Think $5000 - No $6000 - per Ounce."

16 April 2010: I thought this topic was important enough to revisit 5 years later. Though some details may be off to some degree (particularly my prediction that stage one would run no higher than $600 or so), the scenario I painted in 2005 has more or less come to pass. In my view, the 34% pullback in the gold price in October 2008 (from $1033.90 to $681.00) constituted the end of stage one in the present 3-stage gold bull market. The recovery in the gold price from this level since that time appears to constitute the early era of stage two, and that is where we are now.

Where then will stage two end? Pamela and Mary Anne Aden have recently proposed that the gold price is likely to see a level over $2000, perhaps as high as $3000, by February 2012 or so.

This prediction is based on a pattern of gold prices reaching peaks 11 years following major lows. The assumption is that a large pullback would follow that interim high - and then the fabled stage three would launch from the second primary pullback low.

Gold analysts generally expect stage three to be a "bubble" stage, during which the gold price will rise to unprecedented levels in an atmosphere of general panic. I have blogged earlier that the gold price can easily run to a level of $6000 or higher, depending on what happens with inflation, which of course now appears to be picking up steam.

As the chart above shows (comparing gold to previous well-established investment bubbles), there is no detectable "bubble" action in the price of gold at all so far, so it is not difficult to envision how the gold bull market could easily extend for an additional decade or so from here.

Speaking in broad brush terms, if stage two wraps up with a primary correction (that is, a major pullback) in say 2012 or 2013, then the stage three bubble high will occur some years after that. We are now of course speaking very speculatively. But if the Adens are correct in describing an 11-year pattern in gold price highs, then the bubble peak might possibly occur 11 years following the October 2008 low, that is, somewhere near the year 2019. This speculation thus projects that the present gold bull market will run approximately 18 years from 2001 through 2019 or so.

Interestingly, drawing on a separate source, Jim Rogers has recently reminded his followers that "previous commodity bull markets averaged about 17 to 18 years in length and experienced very large percentage increases." That is, the speculation that stage three of the present gold bull market might run approximately to the year 2019 is well-grounded in history.

If I have been wrong anywhere so far in my original 2005 speculations about the 3-stage gold bull market, it has been in my original assumption that gold stocks would begin to leverage the gold price early in the process.

In fact, gold stocks well outperformed gold from 2001-2003, and since that time (now almost 7 years), have dramatically underperformed gold itself, as can be seen in the chart above (and the HUI index is the best-performing of the alternative gold stock indices!).

If gold stock investors (I am one) can take any solace, then it is in the current positive trend in the price of gold stocks relative to gold since October 2008, as can be seen in the same chart. Should gold stocks continue their more recent pattern, then it is possible that we could see a new high in the HUI:Gold ratio by February 2012 or so. Given that gold exploration and mining companies (1) own gold in the ground at a substantial discount to the market price of gold itself, and (2) have established their ability to get it out of the ground efficiently, that would in fact be a rational outcome, though as all investors know, markets are under no requirement whatsoever to perform in a rational manner at any time!

(The photo above is of the new headframe at the Goldcorp Red Lake Gold Mine, in which my wife and I are investors.)

10 December 2014: I thought it might be worth commenting, this article has basically been proven correct, though the winding down of the stage two phase of the gold bull market has emerged as far more brutal and extended than I had imagined, even in my most recent previous post, in 2010. As it turns out, gold peaked at stage two in September 2011 at about $1930 per ounce, and there have since been four apparent bottoms, the most recent in the $1130 range in early November 2014. 

The recent bottom can be seen here (Stockcharts' daily closing gold prices are approximate):

Referring to the above article, a more extended and brutal downturn presages a stronger and longer rally back the other way (and higher) --- whenever it starts. (Timing is the most unknowable factor in the investing world, or "everybody" would win.) 

As has often been discussed here, gold mining stocks amplify the movements of gold in both directions, and the present downturn has been no exception. As you can see, gold mining stocks, as represented by the now "old hat" HUI Gold Bugs Index, have been slammed for over three years, and we're still searching for the bottom. I will just comment that this kind of (primary) correction cleans out ALL the nonbelievers, and even quite a few of the "faithful!" It has been horribly ugly and longlasting --- though, of course, that is what downturns are supposed to be, especially "primary corrections," as their function in the market is to clear out "weak hands," and thus to position holders for longer-term gains at very low entry prices. 

Even worse is the HUI:Gold ratio (the value of gold mining stocks relative to gold), as we have now revisited (and fallen slightly under) the absurdly low levels of the year 2000, prior to the beginning of the present 13-14 year gold bull market. It's as though the price of gold had not changed since the year 2000 (when it was in the $250/ounce range), though, more precisely, it's as though gold mining is no better a business at $1200 gold than it was at $250 gold 13 years ago, which is a little bit of a ludicrous concept (though mining costs have certainly sustained severe inflation during that period). 

Given how lengthy the stages of the current gold bull market have proven to be (the previous one in the 70s lasted only 8-11 years), I am now rethinking whether 2018-19 (that date is speculative guesswork, by the way) is likely to be "the top," or just another way station. For example, bonds have remained in a multi-decade bull market (which is now likely to end reasonably soon), and my present guess is that we're going to see something more like that in gold now... that is, continuing gains for decades to come, though of course, as in all markets, with surprises (both ways) and ample volatility to keep shaking out the uncommitted. 

Bear in mind, the gold price rises when real interest rates are negative, and when the global macroeconomic picture is unfavourable, due to such issues as excessive debt, monetary inflation, poor government leadership, and so on. I honestly don't see how that problem gets fixed by 2018-19. It's probably going to take much, much longer than that... and gold should sustain its appreciating trend throughout that period!

So, what can I say, but "hold on for the ride!"