Bull market

The term bull market - as well as its opposite, bear market - can be used when referring to gold, and is simpler than the terms may make it sound. A bull market is a financial term that refers to any market that is rising over a period of time. It is generally applied to stock markets during periods of optimism and investor confidence. A bull market typically occurs in times of strengthening economies, rising employment, and growing corporate profits.

The term bull market is used loosely by investors and financial commentators and there is no precise definition regarding specific numbers on growth. Bearing this in mind, a movement of 20% over an extended period of few months is conventionally expected before the term is applied.

Bear market

The opposite of a bull market is a bear market. A bear market refers to a financial market that is falling, which generally occurs to stock markets during periods of pessimism and falling confidence. A bear market is characterised by declining economies, rising unemployment, and low corporate profits.

It is therefore common to hear financial analysts referring to stocks or commodities being ‘bullish’ or ‘bearish’.

Why bull and bear?

There is no agreement on why the animals – bull and bear – are used as financial terms. There are however two common explanations. The first is from the way in which each animal attacks an opponent. A bull will thrust its horns up, whilst a bear will swipe down, therefore representing market movements either up or down.

The second explanation derives from middlemen in the sale of bearskins. These middlemen sold options to buy skins before they had received the goods. They then hoped to buy skins for less than the option they agreed to sell them for.

From this trading practice a falling price became associated with bears. At the same time, blood sports pitted bulls against bears, hence bulls became associated with rising prices.

Gold bull market

Gold and silver metal markets do not generally follow the stock price trends. Typically, they move in counter directions, so as the stock markets fall, gold prices have historically risen. This is one of the main reasons for buying gold; it acts as a hedge against stock market crashes and financial crises.

Unlike most other markets, gold bull markets generally occur during periods of widespread pessimism and falling confidence. The gold market is also extremely susceptible to movement in the price of the US Dollar. Therefore, gold bull markets are more likely during weaker performance in the US economy.

Gold bear market

Conversely, in times of optimism and confidence - with expectation of corporate profits - investors will take more risks on the stock markets. In these times, wealth protection becomes less of a priority to some investors, and gold can enter a bear market.

Thus, as stock markets rise, gold typically turns from a bull to bear market with declining prices.

Safe haven gold

Though many promise to foresee market movements, no economist can predict with certainty future bull markets. Gold bull markets have though historically occurred during bear stock markets. This makes gold an effective hedge against other investments and a method for diversifying an investment portfolio, and a proven safe haven in times of economic turbulence. It is therefore often advised that investors should allocate 5% or more of a portfolio to gold or other precious metals.

• A bull market refers to any market that is rising
• A bear market refers to any market that is falling
• A gold bull market usually coincides with a bear stock market