The Really Useful Gold Thread

October 21, 2005 -- Refco says unit's cash isn't sufficient and halts withdrawals while hiring advisors. Refco Inc. is the biggest independent US futures broker. Refco said its Refco Capital Markets unit isn't liquid enough to keep doing business and the company sets a 15-day moratorium on withdrawals to prevent it from collapsing. Russell Comment -- How'd you like to be a Refco customer with a large chunk of your assets locked into this outfit? Is there a derivative "accident" waiting somewhere in the wings? We await developments.
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The whole concept of the primary trend seems to be beyond the understanding of most people, including, I'm afraid, many of my subscribers. As I see it, there are three primary trends in force today.

The stock market is in a primary bear market.

Tangibles with and emphasis on gold are in a primary bull market.

Oil, natural gas and energy are in a primary bull market.

I've gone over the phases of primary bull and bear markets hundreds of times since I first started writing Dow Theory Letters back in 1958. Therefore, I'm going to spare my older readers a description of the three phases that accompany every bull and bear market. I simply want to talk about the end of the second phase and the entrance of the markets into the third or final phase.

The stock market is currently in its second phase with the third phase lurking somewhere ahead. The second phase is usually the longest and most difficult phase of any bull or bear market. When the stock market ends its current second bear market phase, the brutal times will arrive. This will be the panic phase of the bear market in which those still holding stocks will decide that it's time to "dump everything." The third phase, as the great Dow Theorist described it, is the phase where "those saving for a rainy day -- wake up to find that it's raining."

In the third phase, unlike conditions today, stocks will be selling at single digit price/earnings ratios while dividend yields will be moving into the 6 percent or more zone. As opposed to today's stubborn optimism, in the third phase investor sentiment will turn black-gloomy, and phrases will be heard such as "this is the end of capitalism," or "I don't want to ever hear the words, Wall Street, again."

OK, enough of bear market action -- let's turn to bull markets and energy, oil and gold. We're now probably early in the second phase of the energy/oil/gold bull market. The second phase of the bull market is the longest and most difficult. This is the phase where erratic action, corrections and scare-declines will appear. During the second phase the bull will do everything in his power to shake investors out of their holdings.

I've shown on the gold chart how gold has risen from one zone to the next higher zone, but within each zone we suffered through correction, sudden slides, adverse news reports and instance after instance of negative (scary) news about gold. Anybody who has held gold or gold stocks over the last four years should probably receive the coveted "Stubborn Holders and Survivors" metal. Holding any item through the entire length of a bull market is one of the most difficult feats that any investor can accomplish.

I've stated over and over again during this gold bull market that we should HOLD on to our gold and gold shares. And I'll say it again as gold currently corrects -- "Hang tight, hold on, and if you must do something -- then buy more gold." This is a primary bull market in gold. In a bull market, you close your eyes, you shut off your ears, and ride the bull.

Those subscribers who were with me during the '70s know what I'm talking about. We sweated when we bought gold back in the early 1970s, during the bull market's first phase. We're sweating again now as gold and tangibles move erratically through the tedious, extended second phase.

Finally, the third phase of the bull market will arrive, and this is ironic -- more money will be made during the third phase, and made faster, than was made during the entire first and second phases taken together.

I remember during the early 1970's how gold climbed laboriously higher -- each dollar higher seemed to be accomplished through waiting and agony. Repeated vicious corrections scared us to our bones. Then came the late '70s, and we saw gold surge by huge chunks. Often in one day gold would climb in terms of points almost equal to the entire price of gold during early 1974.

That was the "blow-off" third phase of the bull market in gold. It was comparable to the final explosive move in tech stocks that we witnessed during 1999 and early-2000.

So my advice -- don't let the news, the corrections, the Fed, the propaganda, the Commercials, scare you out of your gold and gold shares. Somewhere ahead the third phase of the gold/tangible will materialize, as it does during all primary bull markets. At that time of intense excitement, subscribers will look back on the year 2005 and ask themselves, "What was I worrying about. That old coot, Russell, told us to sit tight with our gold and tangibles. Damned if he wasn't right."

Below we see a daily chart of gold. Note the rounding-bowl bottom that started in December 2004, then the upside breakout in September of 2005, and most recently the consolidation that began in late-September as gold became overbought. Once the current consolidation is over, gold should climb to new highs in the 480s area, finally moving above 500 by the end of this year or in 2006.