A bull market is characterized by optimism, investor confidence and expectations that prices will tend to go up. During a bull market in stocks prices are expected to rise even after severe declines. In the precious metals market, however, the situation is quite different. Bear markets can last for a long time and there is no confidence that serious slumps will be followed by periods of recovery.
Our trio is in a zoo, where Jill and John have just explained to Eric what a bear market is. Eric still seems to have a lot of questions for his friends.
Metals vs. stocks
A comparison of trends in the stock market and the gold market is found in the chart below. (courtesy of).
The upper part of the chart presents the(ticker: $INDU) quotes from 1980 to 2011. The lower part presents the prices of gold (ticker: $GOLD) in the corresponding period. It is easy to notice that the Dow Jones follows an upward trend most of the time. The same cannot be said of gold. For instance, gold declined most of the time from 1987 to 2001. This means that investors experienced an almost 14-year-long bear market for gold. Moreover, after severe declines in 1981, gold needed about 25 (!) years to recover.
This has serious implications for investors. The general stock market seems to have been more friendly for long-term investors in the 1980s and 1990s (indices used to move up after declines), while the same cannot be said about the precious metals market. It seems that one cannot be sure that gold will rebound after a serious slump and that in specific situations one can suffer significant losses even in a very-long term.
The relationship between the price of metals and the stock market
What is even more interesting is the fact that the end of the bear market for gold (2001) coincided with the weakening of the upward trend in the stock market. This can be explained by the dot-com bubble of 2001. As the stock market collapsed after the bubble burst, investors were looking for secure investments, including precious metals. This fueled the price of gold while the stock market declined. A similar situation could be observed in 2008 as gold proved to be bullish in the wake of the international financial crisis.
These factors are essential for precious metals investors as they might predict a bull market for gold from the price trends and developments in the general stock market. In such a situation, investors open long positions in metals in hope of profiting if metals actually move higher.
What is interesting, bull markets can be perceived differently by investors focused on speculation (therefore on the short-term) and by those concentrated on the long term. A long-term bull market does not have to result in a bear market in the short term. Moreover, a short term bull market does not stipulate a long-term bear market. In reality, bull and bear markets may exist simultaneously for the same asset, however in different time spans.
A precious metals investor needs to remember that it is fundamentals that determine the dominant trend, either a long-term (secular) bull market or a long-term bear market. So a secular (long-term) bear or bull market is defined by fundamentals. A secular bull market can turn into a secular bear market only in case of a change in the fundamental situation on a particular market; even a powerful technical pattern cannot reverse a long-term trend.Back