Originally posted at BullionBullsCanada.com.
In any long-term bull market, we would normally expect to observe several phases. Put another way, in any long-term trend (in this case higher) we would not expect to see this entire period dominated by a single trading pattern.
In “free and open markets”, the simple dynamics of supply and demand will almost always change trading patterns as the years go by – and rising prices re-shape a market. Even in our own, heavily-manipulated markets we would expect that the combination of rising prices and time would serve to create new patterns and dynamics.
This is certainly true with precious metals markets. The gold market in particular has exhibited three, distinct phases since its massive, bull market began a decade earlier. The 10-year chart below provides us with an illustration of these phases (and patterns).
The first phase can be succinctly summed-up as the “sleeper” phase, in more than one respect. First of all, this was clearly the “stealth” segment of this bull market. Only the most-savvy gold bulls and investors were buying the yellow metal back in those days – with most of the public still “asleep”. Similarly, the bullion-bankers were smug and apathetic themselves; still not even dreaming that their multi-decade choke-hold on this market was about to be broken. The result is a very “sleepy” chart pattern: a slow-and-steady rise in the price of gold – right up to the beginning of 2006.
We can think of 2006 as either the year of “awakening” in the gold market, the year that the “war” (to control this market) really began, or simply both. Clearly, when gold sailed past the $500/oz mark without even a pause this (finally) got the attention of both significant numbers of investors and the bullion-banks themselves.
What followed over the next three years can be thought of as the bullion equivalent of “The Battle of the Bulge”. It was nothing less than a struggle for the “control” of the gold and silver markets. That infamous World War II battle marked Nazi Germany’s last major “offensive” in the West which was actually aimed at “victory” – rather than merely delaying defeat. In the gold market, it was the banksters’ last attempt to demonstrate that they still “owned” this market, and (as with the Nazis) it ultimately ended with their own, crushing defeat.
During those three years, however, we see that the bullion banks were successful in one respect: in each of those years they were able to generate at least one dramatic reversal – with the result being that the years 2006 – 2008 marked the period of most-extreme volatility over that first decade.
Following the decisive defeat of the bullion banks at the end of 2008, we moved into the third phase of this bull market: controlled ascent. Obviously the price of gold did not move in a simple, straight line from the start of 2009. However, while we see some mild oscillations in the 60-day moving average (above), they are virtually “rhythmic” in their pattern – with the result being a relatively smooth progression from roughly the $800/oz level to the $1600/oz level.
Not only myself, but also many other commentators noted this “new era” in the gold market, and it produced something for investors which had been absent since prior to 2006: a certain “comfort level” in their investing. Like a rather tame rollercoaster, this “controlled ascent” provided plenty of fun for investors – without actually giving them any big scares.
Sadly, I would suggest to investors that this “third phase” has also now run its course. Looking at events (and charts) over the past several months – and the extremely erratic moves for both gold and silver – it is clear that the phrase “controlled ascent” no longer applies. First we saw the extreme, completely illegitimate take-down of the silver market this spring. This has been followed a few months later by equally wild gyrations in the gold market.
Let me be very clear here. As we begin “the fourth phase” of this bull market for precious metals I am in no way suggesting that the banksters are about to reassert “control” over this market. Rather, in clearly recognizing that they are now “fighting a losing battle” the bullion-banks have now resorted to a new tactic (or “weapon”) to attempt to forestall their defeat as long as possible: extreme volatility.
Here I suspect that to some extent the bankers have simply observed what their carnage in U.S. equity markets has wrought: many retail investors have been driven by fear right out of equities altogether. Applying that “lesson” to the precious metals sector, the bullion banks appear to have come to the realization that while they cannot stop the relentless advance (toward their fair market value) by gold and silver they likely can still frighten many investors to the point where they will be too timid to enter (or remain) in these wildly oscillating markets.
The other human emotion which is also produced by markets which zig-zag violently up and down is greed. Such greed can be used by the bankers in two ways. Rather than adding to their bullion in regular intervals (which also encourages an even progression in price), buyers are encouraged to think like “traders” – and look for the “perfect buying opportunity”, and thus perhaps miss out on buying bullion altogether. The other way that greed plays into the hands of the bankers is that traders get over-extended in the rallies, which simply makes it that much easier for the banksters to engineer a violent (but temporary) reversal, when such traders are “flushed” out by increases in margin requirements and/or aggressive “shorting”.
Even before the violent action in precious metals markets began to coalesce into a new pattern, my own response to these extreme swings in the price of gold and silver was to encourage investors to avoid being turned into “traders” by this price action. Only a small proportion of market participants have either the temperament or the savvy to engage in short-term or “swing” trading – profitably. For those who don’t, attempting to engage in short-term trading in extremely volatile markets will most likely inflict painful losses, even where the potential for profitable trading exists.
Being a successful trader requires (among other things) not only a good understanding of a particular market, but also being highly attuned to when a reversal in direction is about to occur, and the “nerve” to take a position in anticipation of that reversal. Conversely, the “amateurs” who attempt to trade in markets are typically late to recognize a new direction in markets. They are “late” to enter a trade, and consequently tend to remain in a particular trade for too long – trying to catch up to the traders who anticipated the move better than they.
Between being late entering a trade and being late in making their exit, such pseudo-traders make it virtually impossible for themselves to turn a profit. This is why I urge newer investors, and those who simply aren’t suited for trading to remain buy-and-hold investors. I continue to remind such investors that precious metals is the one sector which still gives us the luxury of “buy and hold”.
Indeed, with extreme volatility seemingly with us to stay, I would even recommend that newer investors revert to “dollar-cost averaging” with their bullion – a still more conservative means of investing in any particular sector. The problem with being in a period of such dramatic swings in prices is that it becomes much harder to objectively evaluate when gold (or silver) is “cheap”, and when it is “expensive”. Through dollar-cost averaging, newer buyers can be assured of purchasing at least some of their bullion at near optimal prices.
Investors need to focus on the fact that over the long term it is completely irrelevant whether a market goes up in a straight, steady line; or whether it goes up via a series of violent zig-zags. Market propaganda endeavours to induce investors to forget this fundamental fact, to continually attempt to goad them into becoming traders by always-and-exclusively focusing on the short-term gyrations in gold and silver.
Like walking through a “red light district”, investors need to make themselves immune to the seductions of these media whores. The only difference between the two groups of prostitutes is that those working in red light districts tend to infect their patrons with venereal diseases, while the two diseases transmitted by the media whores are “fear” and/or “greed”.
Becoming resistant to such infections requires nothing more than discipline. In the case of bullion this simply means steadily accumulating our “insurance” (real, physical bullion) – and not attempting to sell or trade that bullion. With respect to our investments in the miners (the “growth” vehicle in our portfolios), we need to remain true to the principles of “value investing”: adding to our shares in these miners when they are pushed down into “troughs”, and taking profits regularly when they enter one of their explosive rallies.
In many of the realms of human activity, maintaining discipline and consistency in one’s own behavior is often the difference between success and failure. In the perenially manipulated gold and silver markets, with the banksters having recently cranked-up the “heat” to maximum, keeping our “cool” is a real challenge.
We must remain focused on the fundamental distinction between “trading” and “investing”. In the former, we endeavour to (hopefully) capitalize on each-and-every dramatic swing in a particular market. With the latter, we seek to correctly position ourselves in advance – and then simply wait for the market to come to us.
For those who are already “positioned” we must resolutely avoid being “shaken out” of those positions due to mere volatility, and (equally) we must resist the “siren song” which seeks to goad us into ill-advised trading. For those just entering now, you must commit your dollars to this sector steadily but cautiously, “nibbling” your way into your holdings.
The fact that the gold and silver markets have begun oscillating even more wildly and unpredictably changes absolutely nothing regarding the (bullish) long-term future for these two markets. However, it does add an additional “complication” (and source of stress) for investors. Fear not. As with any activity, we will become steadily “acclimatized” through experience. Soon we will become just as “immune” to these wild price-fluctuations as we are to the bankers’ absurd, gold-bashing propaganda.