The Three Phases of Every Secular Bull Market in Gold – By Gary Rosenthal

Phase I:

In the early years a rising gold price is greeted with suspicion, doubt and often complete disbelief. The market is dominated by speculators and traders seeking relatively quick short term profits. Although gold may double or even triple in price during this phase(which can last five or more years) the price is subject to periodic violent selloffs of 20%-30% as short term traders are easily routed by the bullion banks. During this period gold bullion dramatically outperforms gold mining stocks as the market is disciplined to distrust the rise and avoid buying assets in the ground.  Indeed, most investors completely avoid gold during this period.

How to recognize when phase I is coming to a close:

Throughout the first phase the periodic selloffs follow a specific pattern. During the early years the selloffs are frequent, deep and can last for months. The gold mining stocks often decline as much as 50%, underperforming the metal in both directions.  However as time goes on the frequency, intensity and duration of the selloffs moderate as physical bullion buyers gain in strength and gradually erode the capability of the bullion banks to raid and manipulate the paper gold futures market. The mining stocks continue to react but begin to close the gap of underperformance. Phase I will come to a close when paper gold futures sell off for a few days but the gold mining stocks give up little or no ground or even a few of the stronger issues appreciate. Of course, mass media and so called market pundits will continue to call the top in gold which will keep most investors on the sidelines.

Phase II:

During phase II the rising pattern of gold will begin to accelerate .  However, the gold mining stocks will experience rising relative strength verses the metal as explosive quarterly earnings reports bring attention to the sector. Takeovers will begin to populate the landscape at substantial market premiums as the larger companies bid for the successful exploration companies that have toiled quietly for more than a decade. Sometime before the end of this phase the major Wall Street brokerage firms will scramble to rebuild a research presence and recommendation lists in an area they have long proselytized against. All of a sudden the smaller companies will successfully be able to come to market and new funds will flood into the exploration area. Very quickly a drilling equipment shortage will emerge and all participants in the industry will experience labor shortages.

Phase III:

Now the fun begins. This is the shortest but most explosive phase of the secular bull market in gold. This is the phase when all the sleepy financial institutions and the public finally wake up. Almost every week a new precious metals mutual fund or exchange traded fund will be launched as money pours into the sector. This is the inflection point when the public clamors to get aboard in true “gold rush” fashion and Wall Street is more than happy to accommodate with a constant flow of recommendations. Prices will continue to climb considerably beyond all prior fundamental benchmarks. Abrupt corrections will still occur as the COMEX will progressively raise futures margin requirements and so called pundits repeatedly try to foolishly call the top. But no top will be reached until the final excessive quantitative easing of fiat currencies (printed by the U.S. Federal Reserve, the European Central Bank and the Japanese Central Bank) finds its way into the gold market.

At Rosenthal Capital Management we recognize that QE has become a permanent drug of western central banks and believe no cure will be forthcoming for this long term addiction.  Over the last five years we have developed a considerable global research expertise in precious metals which has been a core focus in Fortune’s Favor I(our flagship fund) and guided Fortune’s Favor Precious Metals to significant returns since inception in the fall of 2006. Our primary focus has been owning bullion but we have recently begun to shift to the mining stocks as we enter the second phase outlined above. In addition to a mixture of the senior and junior issues we have broadened our approach to encompass what we believe is a global collection of the potentially most successful smaller exploration entities. While these issues collectively may occupy the smallest portion of our funds together they have the potential to have the greatest impact on the portfolio. We believe phase III of the current bull market may be able to yield a speculative exploration crop superior to the 1975-80 list below:

Name                         1975                      1980

Lion Mines              $0.07/share       $380/share

Bankeno                    $1.25                    $430

Wharf Resources   $0.40                    $560

Steep Rock                $.93                      $440

Mineral Resources $.60                       $415

Azure Resources     $0.05                    $109

An investment in Lion Mines of $700(10,000 shares) in 1975 would have netted a total profit of around $3,799,300 if held for the 5 years.

Final Comments:

First, we have purposely left out any comments on silver. Suffice it to say that if you research the archives of the Rosenthal Capital Management blog you will discover we believe silver will outperform gold in the current environment and is a major focus of our investment activities. Finally, in case you missed it, we believe Phase I of the current secular bull market in gold ended last week!

Positions: Long Gold and Silver assets. Not long stocks mentioned