Gold Bull Market not yet Manic

Courtesy : Jack Adamo in Forbes

Gold Bull Market Not Yet Manic

Bull markets begin with attractive fundamentals and then momentum slowly takes over until utter insanity prevails. We're not there yet.

Ride the gold bull market without getting bucked. Click here for the complete model portfolio in Jack Adamo's Insiders Plus newsletter and advisory service.

"The hardest thing in investing is to ride a bull market all the way to the end."
--Richard Russell

The "R-Man" is 85 years old and has been writing about the market since the 1950s. The reason he gives for the above statement is that the psychological pressure to lock in your gains when you face a rough patch is very strong. Few people have the strength of conviction to weather such tough times.

There have been numerous gut-wrenching corrections on gold's journey in price from a low of $256 back in early 2001 through its recent run past $1,100, but gold has continued to rise inexorably. Each time it pulls back, the media give reasons why it was just a bubble and it's deflating. They're wrong.Gold has been acting very strongly. Depending on whether a gold bug or traditional financial writer is telling it, agreement is wide that we are due for a correction, minor or sharp. The more I hear that, the more convinced I am that the correction is further out, and will be smaller than we expect. Central banks are now holding back or even buying gold to replace their rotting dollar reserves. For years they've been dumping their gold to buy dollars. They've wised up.

Look at the strength in gold just this year.

Gold is simply the inverse of the dollar, which is worth less and less every year. The dollar has its short-term reversals, but that's all they are, just as gold's pullbacks are short-term corrections.

What is the top for gold? I don't know. But I know it isn't there yet. How do I know? Because the vast majority of the public still doesn't take the metal's rise seriously. What happened to tech stocks will happen to gold. What happened to oil will happen to gold. What happened to housing will happen to gold. It will have a parabolic move. And since it's a much more liquid asset than housing, the move will be more like oil in 2007–08 when it jumped from $80 to almost $150 a barrel, or tech stocks in 1999–2000, when the Nasdaq 100 jumped 88%.

When gold is near a top, it will be all over the mainstream media, not just the financial media. People will say that buying gold is a no-brainer, and we'll probably hear numbers like $8,000 an ounce or more. Miniature gold bullion will be sold in fancy department stores here, as it is now in England, or even in vending machines, as it is in Germany. We're nowhere near the end yet. So, I'm going to bite the bullet on any corrections, and increase our gold positions now. They will be for the long haul, until and unless I see one of my own indicators say it's time to get out for a while--or for good. I don't expect that to happen soon.

Is gold heading to $2,200? That would be in line with the 1976–80 gold bull market gains. How do you play it? Click here for six mining stocks to buy now in Forbes' Gold Stock Strategist newsletter.

We're buying two 4% positions in ETFS Physical Swiss Gold Shares ( SGOL - news - people ), the same ETF we bought last month. The ETFS Physical Swiss Gold Shares are a buy up to $114. You may also buy the more well-known street TRACKS Gold Shares (nyse: GLD) as an alternative to the ETFS Physical Swiss Gold Shares. I prefer the Swiss shares because custody is outside of the U.S. The U.S. forbade private citizens to own gold back in 1933. It's not likely, but in case that ever happens again, I'd rather have my gold in Switzerland.

We recently sold one of our mining positions, Barrick Gold Corp. ( ABX - news - people ), not because it has underperformed its brethren lately, but because it deserved to. After saying it was eliminating all its "nonproject" hedges (agreements to sell future gold production at agreed-upon prices) a few years ago, it went and increased them again--by a lot. Now the company is buying the hedges back again. Barrick management can’t seem to make up its mind. Barrick took a $5.6 billion charge in the third quarter for its dehedging program, and the program will continue into next year. On top of that, the share count will be expanded by 12.5% to pay for it all, diluting current shareholders.

We will replace Barrick with a 4% position in the Market Vectors Gold Miners ( GDX - news - people ). The ETF does have Barrick as its largest holding, but the rise in the other components, particularly the number two and three weightings,Goldcorp. ( GG - news - people ) and [org]Newmont Mining[/org], as an alternative to the ETFS Physical Swiss Gold Shares. I prefer the Swiss shares because custody is outside of the U.S. The U.S. forbade private citizens to own gold back in 1933. It's not likely, but in case that ever happens again, I'd rather have my gold in Switzerland.

The GDX is not the ideal way to invest in the gold miners in terms of fundamental values. For that, we have two positions already in the best gold stock there is, but the GDX does provide us with greater diversification, and I do believe that the ETF is where the money will flow when the gold miners finally go parabolic in their ascent. The Market Vectors Gold Miners ETF is a buy up to $52.