A few days later when we talked, Jim said he had received a prominent metals newsletter which was very bearish and Jim began to shift over into the bullish camp. The story doesn't end there however as we agreed to go the gold show in San Francisco. For some reason Jim wanted to arrive a day early to see who was there setting up their booths. I reluctantly agreed as we were driving together and he was my ride (beggars can't be choosers). A funny thing happened when we first started to walk around and see who was setting up booths. I overheard a gentleman in front of us say he had just sold all of his gold. I turned to Jim and he couldn't believe it when I shared this information with him. We then bumped into several other bearish industry people. Jim was quickly getting the concept that folks were just plain bearish into the advance of gold and silver and gold and silver stocks.
The Unbelieving Gold Camp
Fast forward to the ride home from the gold show and I could clearly see I had created a monster. Jim was far more bullish than I was (if that's possible) and he had me convinced we were on to something. Jim was instantly buying right out of the gate after the gold show and the HUI was up 5 straight days. This was too easy. I began to believe that at some point the gold camp would surely join us in our bullish euphoria and we would have to become cautious. Well, here we are many weeks down the road and most all of stocks I watch are hitting brand new 52-week highs. The HUI is a stone's throw away from a new all-time high and what does Mark Hulbert report? More pessimism now with only 11.6% exposure by the gold camp at this point. This is one of the lowest readings ever in his 23 years of tracking the gold camp.
Taking all of this information in, I thought I would try to give folks some visuals of what a mania is really about and hopefully give people a feel for why it is a mistake, as Richard Russell correctly points out, to try to trade in and out of a secular bull market.
I liken the secular bull market and coming consolidation phase or as I call it the "PAC-MAN PHASE" in the mining shares to what the networking sector experienced from 1990 to 2000. It was an unbelievable mania, so let's take a look at some interesting charts.
Let's start off with a look at 3COM:
During the period from 1990 to 1996, 3COM vaulted from a split-adjusted price of around 20 cents/share to roughly $16.00/share, a staggering 80-fold increase! Money flows were extremely strong and will be shown with many of the charts.
CSCO exploded from a split-adjusted price of 5 cents/share to roughly $7.50, an amazing 150-fold increase! Tremendous money flows are also shown on the chart.
Well something had to be done, the networkers as a group were on fire, so somebody had the bright idea to create the NWX (AMEX Networking Index). As you can see, even though some of these stocks already had astronomical moves by the time the NWX was created in 1996, the party continued and roared from a level of around 200 to roughly 1200. Altogether that's one hell of a mania!
Now let's take a look at some more of the astronomical gains investors enjoyed during the mania:
The public bought in, sending money flows skyrocketing as shown on the CSCO chart. Now that's a mania, going from 5 cents/share in 1990 to over $80/share in 2000!
The following chart shows NT (Nortel Networks) went to incredible levels as well.
Look at this nice 3 1/2 year run by LU (Lucent Technologies). Ah, the money flows!
The NWX during the Lucent run
Gold and Silver's New Bull Market
I hope folks are getting it from the above charts. This gold and silver mania is in its infancy as Russell says and has a long way to go.
Let's take a look at the HUI as of the close today 1/5/2004. Many in the gold camp are talking about the fact that the HUI is extended above its 200-day moving average. Today the HUI sits at roughly 256, while the 200-day moving average sits at roughly 180. So the HUI is roughly 42% above its moving average.
Yes it is extended, but let's take a trip back to the beginning of the summer of 2002. The HUI's 200-day moving average was roughly 155 on 6/4/2002, while the 200-day moving average on the HUI was roughly 82 at the time. So the HUI was trading 89% above its moving average!
So if the HUI were to simply equal what it accomplished back in the beginning of summer of 2002, it would be trading today at slightly above 340!!! Will the HUI get to 340 on this leg? Who knows? I am simply pointing out that yes, things are extended, but it is possible the HUI can get a hell of a lot more extended before this leg is over.
What should investors get from all of this? I don't know. Everybody's brain works differently. But hopefully it opened up some minds of folks who are bearish or constantly trading themselves out of this secular bull market and looking for the pullback that never seems to come. Smart money is accumulating on pullbacks in gold and silver stocks as the weak hands are shaken out of what in all probability will be a very, very long secular bull market in gold and silver shares.
Russell summed up the situation succinctly in his daily commentary today:
"A good day all around for the precious metals and the precious metals stocks. All the experts continue to predict a correction. Is there any such thing as an 'expert?' Meanwhile, the public is oblivious of the metals. Pretty fascinating situation. I bought more PDG and NEM today." - Richard Russell, January 5, 2004
Subscribers to Richard Russell should already be positioned long gold and silver and long gold and silver stocks at much lower prices. Their job is to hold on and not get bucked off the bull too early. If you are not a Russell subscriber, then sign up. The $250 will be some of the best money you'll ever spend. Russell has been studying the markets for almost half a century and is a living legend. Go to www.dowtheoryletters.com to subscribe. Think of it as a New Year's resolution.
Eric King
January 6, 2004