The Start of a New Era!

Ladies and Gentlemen, mark it down.  Let me make one of my bold flamboyant statements.  "May 9th, 2012, is the day that marks the beginning of a new era.  The 11-year cycle of increasing fear is about to start a long period of receding.  Optimism is about to start that slow climb back to a postive trend."

Excuse my excitement about the Fear Index - in other words, the price of gold.  A few weeks ago, I posted some comments on this subject, which you can read by clicking here if you didn't get the chance to read them then.  As we mentioned in that post, the price of gold has been in a strong upward trend since the terrorist attacks on 9/11/2001 started a new era of fear in the world, and especially in the US.

The main point of that post (which still holds true today) was to suggest that the 17-month moving average of the price of gold was the only one that we could find that has almost a perfect record of containing this huge attack of fear as measured by the price of gold in US dollars.  I say almost, since the financial panic of 2008 also violated that moving average...but if you look at the relative strength of gold (vs. the S&P 500), it was soaring during that time period.  However, today the S&P 500's relative strength is soaring and gold's is plummetting.  I think that is important.  The relative strength of US stocks is the best barometer in the world to measure all the wisdom of the world concerning the outlook for economic propserity.  So the 11-year record of fear is breaking a trend that has not really been broken since that horrible event on 9/11.

9/11 was an event that changed the world.  It woke up an ignorance of blind bliss that had pervaded us all.  We had just ended that bull market that started in 1982, and those dot-com memories were still fresh in our minds.  The corporate greed that sustained Worldcom, Enron, etc. was being exposed, but this growing threat to capitalism, free enterprise and democracy was being hood-winked.  9/11 started a massive 11-year effort to overcome this threat.  So does today mean the threat is over?  No, most definitely not, but it is a powerful message in the right direction.  It is a message not totally different than this Fear Index sent in January 1981 when it broke down after another terrible growing fear was about to subside.  That fear was the demise of American productivity and the fear of runaway inflation.  Fear arises when productivity destroyers are winning.  Inflation was a terrible productivity destroyer, and the rise of terrorism was another one that threatened democracy and capitalism.

Popular opinion was nowhere close to admitting that inflation was defeated in 1981, but it was, and the stock market (and the price of gold) was already telling that message.  I don't know how your memory is, but do you think that stocks exploded on the upside in 1981 when the Fear Index broke down?  Here's the real record.


So, this exciting development (and we are a little early to start waving the flags - admittedly) is not necessarily a sign that we are about to enjoy this rip-roaring instantaneous reignited bull market.  You can see in that prior time (in the chart above), the bull market started in 1980, but the public investor was absolutely a non-player (like they are today).  The public investor had some growing interest, but shocks in 1987, 1990, etc. kept them very nervous until...you guessed it...1996-2000, in the final years of the bull market.

We don't bet anything on this breakdown of the price of gold, but it is another sign of the evolution of this powerful wave that you and I are going to see in these next few years.  We'll have shocks along the way, but the long-term trend looks very exciting.

Don Hays

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