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Toby Connor
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Toby Connor is the author of Gold Scents, a financial blog with a special emphasis on the gold secular bull market. Mr. Connor's analysis skill of the markets is largely self-taught, though he admits to being an avid reader of Richard Russell and Jim Rogers, among several others. Toby is an avid... More
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  • Still Just a Baby Bull
     Still Just a Baby Bull
    By Toby Connor, Gold Scents
     
    It's sad to say but I'm afraid 90/95% of all retail traders/investors are not going to successfully ride the gold bull.  The reason of course is that they are deathly afraid of draw downs.  It's glaringly apparent every time gold pulls back or suffers the slightest correction.  Immediately a slew of traders come on the blog and warned of impending doom.  "Gold is going to $600" (think Elliot wave).  Some are even brave (maybe I should say 'foolish') enough to short.  Here is one we hear a lot lately, "miners are going to get crushed if the stock market enters a new leg down in the secular bear market".
     
    Pure nonsense!
     
    Let me show you what happened to gold and miners during the 2000-2003 bear market. 

    During one of the worst bear markets in history gold rallied over 50% and miners well over 200%. So this notion that the precious metals sector has to get hit during a bear market is simply ludicrous.
     
    Now I know what you are going to say, "Just look at what happened in `08".
     
    The reality is that the crash in `08 was a very special set of circumstances that aren't likely to repeat. Up until September the bear market was following the normal path most bear markets follow. Slow grinding declines followed by explosive counter trend rallies. Gold was holding up amazingly well during this period as were miners. Both were actually up significantly during the first 5 months of the stock market bear. It wasn't until gold entered a normal D-wave correction in March of `08 that either corrected at all.

    In September a rare event happened that drastically changed the entire fundamental picture of the bear market. At that time roughly $700 billion in debt came due. The financial system needed to roll that debt over but couldn't as the credit bubble was in the process of imploding. That led to one of the few true stock market crashes in history.
     
    The ensuing panic led to a selling climax in every asset class even including, to some extent, gold. The actual price of physical gold never even came close to dropping to the levels of the paper market. Smart money investors were taking advantage of the irrational selling by buying up every single available oz. of physical gold on the market. At the time premiums on physical were over $100 above the paper price.
     
    The point I'm trying to get across is it took a very special set of circumstances to create the kind of selling climax that could take down the precious metals sector. Those circumstances are not present today. The EU has already gone to the printing press to halt their debt problems. The US has done away with the mark to market rules and Ben stands ready to print so we have no looming debt crisis in our future.
     
    So if we are about to enter another leg down in the secular stock market bear the odds are it will be another slow grinding affair, very similar to the 2000-2003 bear. There will be plenty of sharp counter trend rallies and one can bank on the Fed throwing more and more trillions of freshly printed dollars at the problem all along the way.
     
    And that, my friends, is the fundamental bedrock of the gold bull.
     
    Now let me show you a long term chart of the last great secular bull market.

    This is just about text book for a big secular bull market. We see a very extended period of consolidation below a key resistance level. Eventually that resistance level gets broken. Once it does it's like a damn breaking, the force then becomes unstoppable, ultimately reaching heights far beyond what anyone can foresee at the original break out.
     
    In oil's case the secular bull rallied almost 300% above the $40 breakout level, topping out with a massive parabolic move lasting about a year and a half (remember me saying bubbles tend to last about 1 to 1 1/2 years as the final phase tops out?).
     
    I want to point out this happened in oil, a commodity that was virtually impossible for the average Joe to invest in. This was a bubble driven purely by the the investing community. Remember this because it's important.
     
    Now let's take a look at the next secular bull, one that's still in the baby stage.

    Gold has just recently broken out above the old 1980 high of $850. It hasn't even doubled yet much less rallied 300%. Now if you think gold rallying to $3500 is ridiculous you are absolutely correct. There is no way gold is going to stop at a mere 300%.
     
    Unlike oil, gold is readily available to the public and ultimately that is what drives the final stages of a secular bull market/bubble. When the public comes into the market their panic buying drives the final parabolic move to unbelievable heights. We saw perfect examples with both the tech and housing bubbles. The public was deeply involved in both.
     
    And now, for the topping on the cake. The precious metals markets are infinitely smaller than the stock market, real estate markets or energy market. That means it won't take anywhere near as much money to drive these markets to incredible heights.
     
    Look at that chart of oil again. A 300% gain in a very large liquid market without ever drawing in any perceptible buying from the general public.
     
    Now look at that chart of gold again, only this time with fresh eyes. The possibilities are simply staggering. I wasn't kidding when I said this will be the greatest bull market any of us will ever see in our lifetime.
     
    If, and this is a big if, you can ignore the nonsense from the Nervous Nellies or the gold Bears (a breed destined for extinction) and just hold on to your positions you will ultimately reap unimaginable rewards as this bull progresses.
     
    Now I will say that yes, there are times to take profits in bull markets. You take profits when gold and miners are stretched far above the 200 day moving average. Everything eventually regresses to the mean. So when we see the HUI 40-55% above the 200 DMA then yes, you should think about selling at least some portion of your positions. But to sell positions with the miners 3% above the 200 DMA is ... well, it's just plain dumb. This isn't the time to sell it's time to buy, buy, buy.
     
    Let me say this as plain as possible. If you want to get rich from this, the largest bull market you are ever going to see, you don't listen to the traders and you certainly don't adopt their flawed strategies. You simply can't think like that if you want to ride this bull. You need to think like a value investor. When you see value you scoop it up no questions asked. And if the market is foolish enough to give you an even better bargain down the road you buy more.
     
    Unfortunately here is what happens. Retail investors are unable to buy value. For the average retail investor to buy he needs emotional confirmation. I see this all the time. "Wait till the breakout for confirmation before buying." The problem with that approach is that most breakouts soon fail. If one waited for the recent breakout above $1225 to buy they then had to weather an immediate draw down.
     
    I saw this in spades at the December top. Retail traders entered in droves during that time. They were getting the emotional confirmation they needed. Then when gold corrected they either got knocked out for a loss or they held on just long enough to get out even. Most simply don't have the patience to ride the bull on his terms. They want the bull to do what they want, when they want. I suspect more investors have been lost to boredom that draw downs.
     
    The best strategy right now is to just sit tight. Remember this is still just a baby bull and it has a long long way to go yet.
     
    GoldScents is a financial blog focused on the analysis of the stock market and the secular gold bull market.   Subscriptions to the premium service includes a daily and weekend market update emailed to subscribers.  If you would like to be added to the email list that receives notice of new posts to GoldScents, or have questions,email Toby. 
     


     


    Disclosure: None
    Jun 07 12:45 PM | Link | Comment!
  • IS THIS the ENDING PHASE?
    Is This the Ending Phase?
    By Toby Connor, GoldScents
     
    I have to wonder, are we entering the ending phase of this cyclical bull? 
     
    For some time now I've noticed the similarities between the `02-`07 cyclical bull and what we've experienced since March of last year.  The one difference is that this time we've truncated the middle phase of the bull. I suspect that was a direct result of the massive liquidity Bernanke ... and all central banks have pumped into the system. 

    Both bulls exhibited powerful moves out of the bottom followed by a 9% correction separating the second leg from the third.  In the `02 - `07 bull we then entered a 2 year phase were the market ground higher.  That phase is missing from the current bull. 
      
    What followed the `06 correction was a powerful runaway move into the February `07 top. That persistent rally skewed sentiment extremely bullish at the time.  We saw the exact same thing develop as the market entered the runaway move out of the February 5th bottom.  At its peak sentiment had reached bullish levels exceeding what we saw at the top of the last bull market in the fall of `07. 
      
    In `07 the runaway move led to investor complacency and severely depressed put buying. The same thing happened at the recent top in April.  Investors became terribly complacent. Protective put purchase fell off the chart.  The market had no safety net under it.  In that condition it was at risk for a crash if investors all tried to head for the door at the same time. They did, and we suffered a mini-crash in the spring of `07 and again in May. 
      
    In `07 the initial crash low was tested and broken followed by a 2b reversal. 

    Recently the S&P also broke to lower lows and bottomed with a 2b reversal.
    Both markets experienced volatile swings as the market put in the intermediate term bottom.

    Both crashes quickly moved sentiment back to extreme levels of bearishness. In `07 sentiment turned sourer than at any other time during that cyclical bull.  At the recent bottom sentiment was blacker than at any time in the last 10 years as measured by a basket of intermediate term sentiment indicators.

    These kind of extreme sentiment levels are the building blocks for powerful moves.  In `07 the extreme bearish sentiment drove the market into a final double top that capped the cyclical bull.

    If sentiment levels are any indication we should now be set up for at least one more explosive move higher before the fundamentals final overcome this market and drag it back down into the next leg of the secular bear.

    The similarities are piling up:
     
    Initial runaway move drives sentiment to extreme bullish levels?  Check!
     
    Protective put buying dries up leaving the market with no safety net and vulnerable to crash conditions?  Check!
     
    Mini-crash?  Check!
     
    Test and 2b reversal of the initial crash low?  Check!
     
    Sentiment depressed to extreme levels of bearishness?  Check!
     
    Volatile swings back and forth during bottoming process?  Check!
     
    If history is any indication we should now be on the verge of one more explosive move higher before this cyclical bull expires and heads back down into the next leg of the secular bear.
     
    Toby Connor’s website, GoldScents. is a financial blog focused on the analysis of the stock market and the secular gold bull market.   Subscriptions to the premium service includes a daily and weekend market update emailed to subscribers.  If you would like to be added to the email list that receives notice of new posts to GoldScents, or have questions, email Toby. 


     
     



    Disclosure: None
    Jun 06 1:36 PM | Link | Comment!
  • How Do You Answer the Question?
    How Do You Answer the Question?
    By Toby Connor, GoldScents

    Let me start off by pointing out that we did indeed break below the yearly cycle low yesterday.
    I've been saying for a couple of weeks now that a break of 1044 would change the pattern of higher lows. That would be the first warning shot across the bow that the cyclical bull might be in the process of expiring.

    Does that mean I want to short stocks? Are you crazy? No way I want to fight with a bear market and the Fed’s printing press. For one Ben has already aborted a left translated 4 year cycle.


    Never in a million years would I have believed that was possible, but happen it did. Print enough money and the Fed could just as easily negate a broken yearly cycle low. And if you think he won’t do it I have some ocean front property here in Las Vegas I’d like to sell ya? Sell short? No way no how. Not even with your money.
     
    Let’s face it the mathematics on the short side are just not conducive to getting rich. It took a year and a half for the market to drop 58% in the second worst bear market in history. Sure one can leverage up but if you happen to get hit with a vicious bear market rally or the rules are changed (ban on short selling) you run the risk of losing everything. Need I remind everyone that leverage is what is bringing down the global financial system? Leverage is like walking through a dynamite factory with an open flame. Sure you might survive but you’re still an idiot.
     
    Trading bear markets is tough to do even if the bear is allowed to run its course undisturbed. But I guarantee the powers that be will throw everything they can at the bear. I just don’t need those kind of odds stacked against me, especially when there is easy money to be had.
     
    Now I’ve made my position clear. (Just so there won’t be any misunderstanding later. There will be none of this “hey you said the bear is back and we should short stocks. How come the market went up and I lost all my money”).
     
    I’m emphatically telling you that by selling short you are taking your life into your own hands. If you are bound and determined to fight the Fed, Wall Street, Washington and an angry and tricky bear, you are going to do it all on your own. Leave me out of it. I’m going to be over in the corner picking up gold coins, you can join me if you want to.
     
    Whenever the market doesn’t do what it’s supposed to do it’s probably a good idea to pay attention. Yesterday markets all over the world were down and down hard. Some by over 3%. The futures were signaling a big gap down. By all rights the S&P should have followed the rest of the globe lower today. It didn’t. We ended the day positive.
     
    I’ve been warning for over a week now that sentiment has reached severe bearish extremes. Quite a few sentiment indicators are now at levels lower than the `09 bear market bottom. When these kind of extremes are reached the market runs the risk of running out of sellers. Yesterdays reversal may be a signal of selling exhaustion. When that happens, even in bear markets, we can look for a violent 1 to 3 month short covering rally. (In bull markets we can expect a 3 to 5 month new leg up.)
     
    Lately we are hearing the D word (deflation) thrown around quite a bit. Let’s face it we are going to hear this every time assets start to drop. However let me remind everyone that Ben halted the worst deflationary spiral in 80 years in just a little over 7 months. Ben has clearly proven that a determined government, in a purely fiat monetary system, can reverse deflation. The question isn’t whether or not we are going to experience deflation. The question is simply how long will the powers that be allow it to last before they crank up the presses and flood the world with paper again.
     
    The cold hard reality is that the USA has now gone down the path of no return. We are piling on trillions upon trillions of debt in a futile attempt to spend & stimulate our way out of bankruptcy. I don’t know about you but generally speaking isn’t it counterproductive to go deeper in debt if one is already broke?
     
    This debt can’t possibly be serviced … ever. So we have two choices. One we can eventually just default on our massive mountain of debt. At some point we just throw up our hands and cry uncle. Folks if the United States of America chooses to default on its debt then yes we are going to see a deflationary storm cover the world in ruin and despair.
     
    The second choice is to inflate away the debt by printing trillions and trillions of federal reserve notes out of thin air. This course will buy us some time. It may even briefly appear that we’ve cured our problems (it has seemed that way until recently hasn’t it?). If we choose this path, then unless someone like Volker comes along and forces us to take our medicine, the inflationary spiral will continue until a final hyperinflationary storm destroys the country.
     
    Now each of you has to ask themselves which you think is more likely. Will the US all of a sudden come to its senses, default on its obligations to halt the exponential growth of debt, thus unleashing a deflationary holocaust upon the world…or will we just continue to kick the can down the road like we’ve been doing for the past 10 years, thus making the debt burden bigger and bigger and rendering it serviceable only by hyper inflating the money supply?
     
    How you answer that question will dictate how you want to invest for the next 5-10 years.
     
    If you think like I do that we will continue to kick the can down the road then the easy investment is to just get on board the secular gold bull and hold on.
     
    GoldScents is a financial blog focused on the analysis of the stock market and the secular gold bull market.   Subscriptions to the premium service includes a daily and weekend market update emailed to subscribers.  If you would like to be added to the email list that receives notice of new posts to GoldScents, or have questions,email Toby (goldscents@gmail.com)
     


    May 30 8:46 AM | Link | Comment!
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