on the psychological perception stages of a bull market:

"You touched briefly in Friday's audio about gold being early in the third phase, could you please expand on the three phases again."

Eoin Treacy's view Thank you for this question which others may also find of interest. The three psychological perception stages of bull and bear markets is a fairly big subject and is something I cover in detail during the second day of The Chart Seminar next held in London on November 18th & 19th.

For those of a philosophical persuasion the interaction of supply and demand during the course of a major bull market and subsequent bear market is comparable to Hegel's master-slave dialectic which has been used to describe the interaction between dominant and submissive parties for centuries.

The dialectic helps to describe how one party will seem to be all powerful, but the seeds of its own destruction are sown through its dominance of the other party, its belief in the contradictions evident in every major bull market, unquestioning acceptance of the status quo and refusal to consider evidence to the contrary. The proverbial masters of the universe that epitomize the persona of a given bull market will almost certainly become those most derided by investors during the inevitable bear market. Therefore the three psychological perceptions stages of bull and bear markets are an attempt to describe the intensity of feeling that drives the dominance of one argument over another during market cycles.

The first psychological perception stage for the new bull market - disbelief - occurs the bears will seem to omnipotent and the only ones making money. No one will want to consider the possibility that the market will ever recover and a legion of investors will have been scared away following the trauma of the bear market decline. It can take time for the supply overhang to be unwound but eventually supply will be expended and demand will slowly begin to regain dominance. Sentiment at this point will be almost universally bearish so even those who see the long-term potential are likely to have relatively small positions because the perception of risk will still be high. No one will want to believe those propounding the new bullish argument and such is the lack of participation that the vast majority will not be aware of it at all. The first psychological perception stage of the new bull market - disbelief - will be analaguos to the third psychological perception stage of the bear market - dysphoria (the opposite of euphoria).

The second psychological perception stage - acceptance - occurs when the market is already well off its low. Those who have participated have been rewarded and those seeking to short the market will have to be nimble if they are to profit. While in the base, shorting the rallies and buying dips was a winning strategy, in the second psychological perception stage the buy and hold strategy gains ground. Investors realize that by trading their accounts they are increasing their transaction costs and just need to hold on and continue to buy dips in order to profit handsomely. The bears will still be unwilling to accept the new bull market hypothesis but will have a more difficult time because the trajectory of prices is going against them. In classic terms, the second stage is the wall-of-worry category because there will still be plenty of arguments for why the market shouldn't go up but demand is quite clearly in the driving seat. At this stage you will often see the secular versus cyclical argument develop. The bulls will say that the market is in a secular, as in long-term, uptrend. The bears will say; yes, prices have gone a lot but this is a cyclical move and prices are going to top out any day and will collapse back into the base.

The third psychological perception stage of the bull market - euphoria - is often characterized by a major acceleration in the pace at which prices are advancing. While in the second stage of the bull market the hypothesis is still considered, albeit favourably, as conjecture, in the third stage certainty is a defining characteristic. Participation is rising, coverage of the sector has improved considerably, the bullish argument is seen to have real teeth and helps to redefine our view of how the world works. Powerful bull markets suck investors in from all over the world and go on for much longer than even most of the bulls ever thought possible. They go on for long enough to convert the vast majority of the pool of potential investors to the bullish hypothesis. Once that pool has been exhausted all one is left with is a pool of potential supply and prices can only go one way. Those who question the veracity of the argument are ridiculed for having the temerity to question the new paradigm. Some of them will later be seen as prophets when they come to personify the inevitable bear market. The third psychological perception stage of the bull market - euphoria - is analogous to the first psychological perception stage of the bear market - disbelief.

So how do we apply this to gold?

Gold went through a lengthy bear market and in 2000 no one believed it would be at $1300 within a decade. It was at its most consistent between 2003 and 2009 when it posted a rhythmic progression of accelerations followed by 18-month consolidations and important breakouts in September of 2005, 2007 and 2009. Everyone has heard of the gold bull market by now. The buy and hold mentality has returned to dominance and large investors such as pension funds are beginning to take positions. I am in this business long enough to remember when gold was viewed with nothing short of animosity by a large cohort of investors. That is not the case today; rather the opposite in fact, as investors look for a store of value whose supply cannot simply be increased using a printing press.

The rhythm of the uptrend has changed. Rather than seeing breakouts every second year, gold has now broken upwards on consecutive years. Gold bulls are acting and speaking with much greater confidence. This suggests we are in the third psychological perception stage which, if the bulls are lucky, will end in 'gold fever' and a massive acceleration higher. A sustained move below the 200-day MA would raise questions about the uptrend's consistency while a decline below $1000 would complete at least a medium-term top.