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Ignored, Dismissed, Disliked

Richard Russell snippet
Dow Theory Letters
Apr 6, 2010

April 5, 2010 -- The great bull market in gold is in its tenth year. The incredible thing about this bull market, is that it is still ignored by the media and by the public at the same time that it is hated by the central banks, although ironically, they are now actually buying gold. On top of that, the sovereign funds of the various nations are adding gold to their currency mix. Since the year 2000, the best asset class to be in was precious metals and gold. Yet, never was a huge bull market so ignored, so dismissed, and so disliked. Even today, after rising from 250 in 1999 to 1120 today, only a tiny fraction of Americans own so much as one single gold coin. Most Americans have never seen a gold coin. And I ask myself, how long can this go on?

Today, the newspapers are waxing poetic over the upward progress of the Dow and the S&P. The chart below was borrowed from my very good friends, the Aden sisters, Mary and Pamela. I borrowed it from their well-known publication, the Aden Forecast. Here we see the 10-year gold bull market compared with the S&P from 1974 to the present, both bull markets are indexed to 100. The gold bull market is steeper and younger, but, so far, literally ignored.

linked to Aden article

In traditional common stock bull markets, we old-timers always watched the action of the low-priced "cats-and dogs." (there used to be a "low-priced stock average.") Somewhere towards the latter part of a bull market, the cats-and-dogs would make their moves. When the low-priced stocks perked up, that was usually a sign that the public was entering the bull market. Most of the veteran analysts would follow the low-priced index, and when the "dogs" started to move, we'd load up on them and ride them to the end of a bull market. Often, fortunes were made when the cats-and-dogs started to surge. At such times, many low-priced stocks would double and triple in price within a year or two. We bought them willy-nilly, who cared about the names, if they were selling below 3 or 4 dollars a share, that was enough, we just piled in and bought them.

I've wanted to apply the same logic and technique to the gold bull market. Up to now, interest in the gold stocks has largely been confined to the better-known mining companies. But recently, an exchange traded fund (ETF) has been made available, its symbol is GDXJ. I equate GDXJ to the former "low-priced stock Index" of "cheapie" stocks that we monitored in older traditional bull markets.

The recent action and relative strength of GDXJ has been interesting. The first chart below compares GDXJ with GDX. GDX is the ETF which includes the larger and better known gold mining stocks. Here we see that GDXJ is out-performing GDX, which means that the smaller and more speculative gold miners are now out-performing the larger, better known gold mining stocks. Thus, speculation in gold mining stocks is beginning to increase.

The next chart [below] compares GDXJ with actual gold. This chart tells us that during recent months, the "cats-and-dogs" of the gold mining world are acting stronger than gold itself. What interests me here is that based on the relative strength action of GDXJ, I'm assuming that interest in gold is heating up.One reason for this is that as the price of gold rises, large miners will want to increase their gold reserves, often by buying up smaller mining stocks (which have proven gold reserves but who lack the money to recover their reserves).

Rising interest in gold is coming at a surprising time. With the Greek problem in the news and with talk of a crippling euro and thus a stronger dollar, gold should be weakening (the stronger dollar would ordinarily be placing pressure on gold). If so, then why is GDXJ picking up in relative strength? Is something else going on that we don't know about?


Richard Russell
website: Dow Theory Letters
email: Dow Theory Letters

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