Gold moving closer to climactic third phase

Mon, Oct 18, 2010 - 8:47am

This is an excerpt from the Dow Theory Letters newsletter originally published on October 15, 2010.

"Buy 'em right, and your futures' bright, buy 'em wrong, and your money'll be gone."

Question -- Russell, you bought gold early around the year 2000, and you've stuck with gold and gold items ever since. What made you so sure that gold was the royal road to riches?

Answer -- Around 1999 and 2000 gold was selling at just above 260 an ounce. But more important, many well-known gold shares were selling like second-hand rain coats. These formerly much-loved gold shares were selling at such low or bargain prices that I thought one could buy thousands of shares and just "put 'em away" and forget about them. I knew gold wasn't going out of style, and it was just a matter of time before interest in gold returned, as it has in all history.

Great bull markets start with stocks selling "below known values." That's where gold mining shares were selling around 1999 and 2000. I equated gold shares in the year 2000 with the Dow in June 1999 at a time when the Dow was priced at 161. In the year 2000, I thought to myself, "Could this be the very beginning of a great bull market in gold, a bull market that could ultimately take gold above its January 1980 peak price of 850? That idea stuck in my head; in fact I became obsessed with the idea that a great bull market was beginning and very few people even suspected that was happening in gold.

Question -- OK, Russell, gold is now well above its peak price of 850 struck in 1980. So what do you expect next?

Answer -- I went through this same phenomenon in the 1960s with the stock market. We went through the correction of 1953, and we staggered through the vicious correction of 1957. In 1957 a severe recession enveloped the US economy, and almost everybody was convinced that the bull market that had started in 1949 had ended.

I learned from George Schaefer that big bull markets almost always end with a speculative explosion. We had not seen that kind of action in the bull market that started in June, 1949. I was convinced that a speculative third phase of the bull market lay somewhere ahead. For that reason I was convinced that the bull market was not over.

In fact, I was so sure of my stand that I wrote an article that was published in Barron's (December, 1958) in which I made the case for a coming final boom phase in the stock market. That article drew a great amount of interest, and it put me in business. A speculative third phase did appear in the stock market during 1956 through the early '60s.

Today I am taking the same stand regarding the gold bull market. The gold bull market will not end with a fizzle and a whimper. It will end with intense speculation and widespread interest from the funds and the public. We haven't seen that kind of activity yet, but I'm convinced that a period of wild speculation in gold lies somewhere ahead.

This is why I continue to beg my subscribers to load up with gold. As I see it, we are nearing a period of intense speculation that will be beyond anything seen before by the last three generations of Americans. Ironically, more money made in the final explosion in gold than was made during the first two phases combined.

Great bull market are seen maybe once or twice in a lifetime. The current "stealth" gold bull market has sneaked up on most Americans. The very phrase, "gold bull market" is sneered at by most analysts today. In fact, most of the comments on gold today come in the form of warnings; "Gold is too high." "Gold is in a bubble." "Gold will sink back below 1000." "Gold is a fool's play."

Nonsense. Gold is moving ever-closer to it's climactic speculative third phase. The negative comments about gold will only serve to make the gold bull market that much stronger. In this business, there is nothing more powerful than a primary bull market that has been denigrated, spat at, and held back for years.

And that's the end of my "lecture" about the fabulous gold bull market.

Below, the profile of one of history's greatest primary bull markets (and it's not finished yet).

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