Gold and Silver a bubble: True of False ?
10 and more reasons to invest in gold NOW
The low number of Bullish advisers versus Bearish advisers and the fact that some analysts even see the end of the Bull market for Gold and Silver is one of the indicators for the Gold price evolution over the next couple of months.
The overt suppression of the Gold and Silver price has, for the informed investor a very limited shelf life. We know better: Precious metals offer one way out. However, the Government and the Fed with the help of the mainline media do all in their power to distort and discredit such investments for it is the barometer by excellence for their mismanagement.
The alternate to the deflationary depression (which is will be WORSE than what was seen in the 1930’s and is sold each time the price of Gold is correcting), is unlimited creation of paper and electronic money throughout the Western World. The recognition of this by all will propel both gold and silver to new and unseen highs over the next couple of years.
What we have seen so far is only the hors d’oeuvres before the arrival of the main meal. The banking system leverage and the derivatives will ramp things up beyond imagination. Worst case scenario Gold and Silver could keep meddling for a couple of more weeks but trying to make some extra bucks by getting out NOW and trying to get back at a lower level can be extremely difficult, treacherous and not worth the effort.
I. Gold in a bubble?
Just like you will never find the prediction about a coming stock and/or Real Estate market crash in your newspaper you will never find the prediction about a potential Gold bubble. Such is by definition impossible.
There can be no bubble without a prior exponential Blow off! People who compare the recent price evolution of Gold with the South-Sea and Tulip Mania fail to understand a Bubble is the top of a Exponential price increase whereas Gold is still following a linear. They fail to understand that very few people hold Gold and Silver and that the majority is still holding on to Cash. Saving Accounts, Bank deposits, Money market funds and Treasuries (which all are fiat money) sit in a bubble.
[note the small dip for Gold on the Scenario chart for Gold]
A The second mistake is that they see the price of Gold go up and do not understand that in reality the price of Gold is more or less stable and it keeps buying a constant amount of Goods and Services. It is in fact the value of Fiat Paper/digital money which is falling due to the exponential quantities created by Bankers and Governments. They fail to understand that this such action always result in Price inflation as more money chases a same amount of goods and services. They fail to understand that preserving the EU and the EURO will need exponential amounts of additional money. Letting Greece and Portugal leave the EUROZONE would lead to apocalyptic situations. Reasoning quickly shows that a slide from the local currency into the Euro was an easy one, to reverse the process however, is a completely different exercise. Honestly, I don't think the European politicians have neither the will nor the brains to do it. Printing money is a LOT EASIER...and POLITICALLY more REWARDING.
The US Monetary base increased by a factor 3.3 since 2008. Using this multiplication index to the price of Gold ($ 1000 in 2008) results in a gold price of $ 3300 today. Not hard to imagine what today's Gold price would be if one includes the increase in Monetary base of the EU, China and India in the formula.
As the Dow Jones managed to go up by a factor 12 from 1000 in the 1980's to 12,000 in 2012 , why would Gold not go up with the same factor ($ 300 x 12 = $ 3600) !?
I am convinced the price of Gold will at least rise to $ 6000 per oz. To put it in a different way, I know that they will create so much Fiat Money that it will become so worthless that you will need at least $6000 to buy one ounce.
Compared to what happened in the Stock markets, Real Estate markets and more recently in the Bond markets, this objective is a rather conservative one. Especially if you take into account the trillions of created money created since 2008. [forget the propaganda about mopping up the excess as this is just NOT happening].
Today one can either keep his purchasing power in Worthless Fiat money (which is nothing more than an a Mirage) or keep it in Real Assets. Gold happens to be a real asset without any counter party allowing to store a lot of purchasing power in a small quantity of Metal: $1600 = 1 oz. And at today's price $ 1 million is about 20 kg. Do you have an idea how many gold bars fit into a shoe box!?
Not gold sits in a bubble but Fiat Money (Treasuries) does. Once the Fiat Money bubble bursts, its value will drop to ZERO and Gold expressed in Fiat money will have no other alternate but to geyser. Add to this that any economic recession and depression is logically the motor of excellence behind the rising price as Authorities keep on printing fiat money hoping it will help.
Most politicians have not a single clue of what Gold is and the role it plays in the worldwide financial and economic system. During this process it certainly is possible (though I doubt it) that Governments may further liquidate Central bank's gold holdings. Who doesn't remember that Brown sold the bulk of the British gold exactly at the bottom!? There is no doubt in my mind that any so offered Gold shall be bought by sovereign countries like China, India...even before it reaches the open market.
Those who believe Gold is a bubble fail to see that we're absolutely not out of the woods and that the Economic and Financial crisis will get a lot worse before it hits a bottom. They fail to see that we are living a paradigm not seen since 1945. They fail to understand that contrary to the 1980's we now have passed the point of No Return.
The fact that Gold doesn't pay interests is absolutely not important and should not be used as a valid argument. Money also should not pay a interest. Today it does because it is one of the factors which keep the Herd believing that it has some value after all. The reality that Paper Money and also Bonds (which are nothing more but an option to buy paper money) pay in fact a NEGATIVE INTEREST doesn't seem to alert the markets – at least not yet. But an accident can change this perception over night.
As debt (debt=fiat money) defaulted in the 1930's it took only two years before a (hyper)inflation turn. Sovereign debt was downgraded as it is today in Greece and Portugal or the resale value of existing debt declined. Such undermines the banks which increasingly start to avoid sovereign debt and kills pension funds and insurance companies as their asset values decline (pension funds and insurance Co’s hold their major part of their assets in Treasuries). During the process the Bond holders start to realize that they are better off with private and real assets. Gold in particular because it is so handy and widely recognized.
“No government debt is safe and no government ever pays off its debt. It is now merely a question of time before we end up with a new world monetary system. Only when this happens one will have to exchange his gold holdings for another instrument”.
II. Why would Gold slump?
Q. Gold is a wonderful inflation hedge. But the metal is up more than five-fold over the last 12 years and inflation is still not a problem. Is it not conceivable that inflation could tick up and gold – having already discounted this – moves lower?
A. Inflation remains a problem though partially hidden by the cooked figures. Compared to the Dow Jones and the SP500, Gold has been a laggard. There has never been a time with rising inflation figures and a falling Gold price. Investors mainly buy Gold as insurance because they mistrust the Government and Bankers. Therefore its price can also go up during Deflation. Compared to the 1960 – 1981 run, Gold has gone nowhere. If it would have risen according the same multiplication effect, it should now sell for $ 6,000
Q. Gold is a great performer in an economic crisis. But we already had the crisis. It ended in 2008. Things are getting slowly better, not worse.
A. We haven’t seen anything yet. We’re just in the eye of the storm. Things may be improving in India only…they surely are not in the Western world. A sign on the wall is the NEGATIEVE return on each additional created unit of Fiat Paper Money. Also, we are clearly sliding down this vicious circle as explained by Jim..click here for the formula
Q. With gold prices still in the stratosphere and the value of the rupee falling, India – the world’s biggest consumer of gold – is likely to experience a pronounced drop-off in demand this year. Not good.
A. India is important but doesn’t make the price for Gold. More important, expressed in Indian Rupee we had no blow off…and still a steady uptrend (see Goldonomic site). Also, I would not advocate that Gold & Silver prices are in the stratosphere (see ratio Gold to Dow Jones & Stock Markets). Add that the fact that India intends to settle in Gold for any oil it buys from Iran and this will increase the demand.
Q. Gold is now well above the marginal cost of production. New mines are opening and old mines are re-opening. It’s Economics 101. Greater supply depresses prices.
A. Price of Gold as a matter of fact is never a lot above the marginal cost of production. Reality is that miners move from rich to poor ore each time price moves up and reverse to richer ore each time price comes down. Such allows mining of any grade ores of a gold mine: rich and poor. Add to this that the main increase of production came AFTER the 1981 top as production was being switched from Poor to Rich ore; the mining process is a slow process. It usually takes 5 up to 7 years for a miner to adjust to the changing market conditions. Rising gold prices have in reality come with a decrease of production. The reserves of Gold majors are being depleted and soon these will have to buy the juniors.
Q. If you believe the gargantuan debt load that Washington has run up will cause gold to rally from here, you may want to think again. Japan’s debt load as a percentage of GDP is more than twice ours and the end result has been disinflation, not inflation. Why will it be different this time? Indeed, George Sores and several other major speculators are openly forecasting outright deflation. That would not be good for gold.
A. Japan’s debt to GDP is larger but Japan has (so far) been able to finance it by internal savings. The USA cannot. If you want to be on the good side, do exactly the opposite of what Sores advocates. I am sure he’s buying all the Gold sold by weak hands. Having said this if the Financial system collapses tomorrow – and such surely can happen – the price of Gold will crash because Fiat money and Bond holders will during the process have lost ALL their savings. After a Deflation drama there will be holders of Gold (real money) and past holders of fiat money left. Which group do you want to be part of?
We all know that the price of Gold goes up as debt goes up and Debt continues to go up…..
Q. Note that while gold ended the year up in 2011, gold shares dropped 16%. Already, equity investors are taking a dim view of the sustainability of gold’s advance. I think they’re right.
A. Gold shares mainly came down because the small capitalization makes it an easy play for the Hedge fund managers and because part of the traditional Stock investors now buys Gold ELF’s instead of Gold stocks. At the same time however Earnings and Dividends of Gold mine stocks are rising exponentially. They will continue to do so even at a Gold price of $ 1200. Markets can be irrational for a long time but sooner of later they always catch up. And you want to be positioned BEFORE this happens.
Q. Investment demand for gold has soared in recent years. Seven years ago, it made up just 16% of total demand. Today it’s more than 40%. But hedge fund managers who piled into gold, unlike Mom and Pop, have no emotional commitment to the metal. These are hair-trigger traders. When the primary trend turns unequivocally south, you can bet these guys will dump gold faster than a freshman girlfriend.
A. Demand for Gold has soared because more and more people start to distrust the Governments and Banks….as long as they do, demand will continue to go up….We are barely moving into the 2nd fase of the Secular bull trend for Gold where institutional investors start to see what is happening and that time has come to invest in the Gold and Silver sector. Remember that Bankers and Brokers are most of the time very, verys stupid investors.
The total capitalization of the Gold sector is still extremely low. Not hard to imagine what would happen if all holders of the Coca-Cola stock would convert their holdings in Gold and Gold shares.
Hedge fund managers have not accumulated physical Gold. They are only playing the Paper Gold Market (Futures). Because the rising margin requirements, it becomes increasingly harder for hedge fund managers to do so and because margin requests will continue to go up they will at a certain point be forced out of the Gold market.
During the previous Gold runs about 20% of the financial assets were invested in the Gold sector, so far only 1.50% is.
Add to this that the Chinese government is buying tons of Gold and is advising all its citizens to do so and agreements have been signed with Iran to pay for Oil with Gold.
III. Marc Faber bearish on Gold. He may be right, but he can also be wrong. I’ve learned to be extremely careful about what Financial Guru’s like Sores and Faber preach. We can’t even reason about their arguments because they have none. Having said this it is hard to understand that somebody can be bullish on gold today, bearish tomorrow and bullish again next week and how somebody dwelling the world still has some time to make his home work.
IV. The Dollar a reserve Currency?
Q. With growth being impacted everywhere, the US dollar is likely to keep its status as the world's reserve currency by default. This will again put downside pressure on the gold price.
A. The Dollar won’t be able to keep its status as reserve currency and today its status is already under attack by Russia, India, China, Venezuela,…..In reality the economic and debt figures for the USA are far worse than those for Europe. The USA however is getting a free ride on the back of the EU-donkey. Even if the Dollar does succeed to temporarily keep this status we will see more are more indications the Titanic is sinking and therefore more and more people will move out of Fiat money and into Gold.
V. The opinion of Goldonomic
- As long as our charts remain bullish, I won’t change my vision. Today the daily and monthly indicators for Gold are bullish as well as the Elliott Wave. [as of Jan 24, 2012 only the short term indicators are overbought].
- The chart of Gold expressed in Indian Rupee still is a normal bullish one. As long as there is a market, advisers will be bullish and others bearish. The more bearish advisers the better for the price of Gold…
- Gold majors have broken through a 27 year resistance and the zone is holding! A 27 year resistance zone is something…see PF of the HUI-index on Goldonomic site.
- The fundamentals haven’t changed and Gold ALWAYS goes up when real interest rates are negative (like now).
- Bonds are at historic TOP levels and hence Gold is when expressed in Real Terms still available at historic real BOTTOM levels.
Long term chart for gold and bonds say it all:
- Maturing debts are astronomical and in order to cover these and the interest Governments will be forced to create even more fiat money. The creation of fiat money = inflation. The amount of money to be created rises exponentially as soon as interest rates rise.
- The number of visitors we have on Goldonomic is extremely low = indication of a bottom.
- I remain careful and as always anything can happen….but as long as authorities keep printing money, Gold will continue to go up.
- If and when Gold breaks out of the congestion zone which is best visible on the Point and Figures charts for Gold expressed in US-Dollars and Euro, Gold will geyser up and all those who have not bought Gold at these levels or lower will start to buy. [technically the size of the congestion zone defines the subsequent move]
Silver and several gold and silver shares are accumulating bullish technical signals. The candle chart of the Gold ETF is a good example and shows 8 bullish signals!.
Technically speaking we have a price of Gold and Silver sitting in the bottom of their uptrend channels; we have GAPS to be filled; once the Gaps are filled we have a de facto BEAR TRAP; last but not least we have alow volume which is typical for certain types of bottom formations. Also, on certain charts there is a bullish reversed HS pattern visible....
“There can be no other criterion, no other standard than gold. Yes, gold which never changes, which can be shaped into ingots, bars, coins, which has no nationality and which is eternally and universally accepted as the unalterable fiduciary value par excellence.” – Charles De Gaulle
Appendix: Penny stocks can be a holdup in clear daylight.
Ever since I remember we had Penny Stocks. Most of the time these are quoted/traded on the Vancouver Stock Exchange or Pink sheets because regulations/reporting are minimal. Toronto trades some but is safer.
The mechanism is an easy one. Mister Crook buys 500,000 shares of Gold-exploration-ABC for 1 cent a share. Total expense is $ 5,000 plus commission. The paperwork of ABC is cleaned up and through different channels (Internet, blogs, forums, charlatans) they start to promote the stock.
In the first stadium, the shares are basically sold and bought by Mister Crook himself and/or his buddy. By doing so, the stock price of ABC is pushed up to $1 and allows for even more advertising on Internet and certain media. As it is catching more and more the attention of the misadvised investors out for a quick profit, Mister Crook now starts to sell his own position (which is now worth half a million dollars) at increasingly higher prices. Assuming Mister Crook and his friends do a proper job, the price can sometimes be pushed up to $2, $3 and sometimes higher.
By the time ABC sells at $ 2 ½, Mister Crook has liquidated all his stock and cashed $ 1,250,000 . . His final net profit after expenses is $ 1,250,000 - $ 5,000 = $ 1,245,000 .
The stock has reached its culminating point. As Mister Crooks has cashed in his profit and left for the Caribbean to enjoy Martini’s and Cuban Cigars there is nobody left to pick up some stock from other investors trying to cash in on their profit. The price of ABC dips and the Angels and Charlatans on Internet disappear as the price of the Penny stock quickly drops to $ 1 and below.
This kind of game isn't limited to Gold and Silver shares and Miners. The game is often played with so said revolutionary products/inventions. A deadly financial trap.