Gold and Silver a bubble: True of False ?

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 indicator of how Gold prices may move over the next couple of months.

For the informed investor, the overt suppression of Gold and Silver prices has 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 mainstream media, do all in their power to distort and discredit such investments, for it is the barometer par 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. If everyone recognizes this, it will propel both gold and silver to new, unseen highs over the next couple of years.

What we have seen so far is only the hors d’oeuvres before the main meal. Banking-system leverage and derivatives will ramp things up beyond imagination. Worst-case scenario, gold and Silver could keep meddling for a couple 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 as you will never find a prediction about a coming stock and/or Real Estate market crash in your newspaper, you will never find a prediction about a potential Gold bubble. is definition, that's 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. Savings accounts, Bank deposits, Money market funds, and Treasuries (all fiat money) sit in a bubble.

[note the small dip for Gold on the Scenario chart for Gold]

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 that is falling because bankers and governments create it in exponential quantities. They fail to understand that such action always results in Price inflation, as more money chases the 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 sliding from the local currency into the Euro was easy; reversing the process, however, is a completely different exercise. Honestly, I don't think the European politicians have either the will or the brains to do it. Printing money is a LOT EASIER...and POLITICALLY more REWARDING.

The US Monetary base has increased by a factor of 3.3 since 2008. Applying this multiplier to the price of Gold ($1000 in 2008) yields a gold price of $3300 today. It's not hard to imagine what today's Gold price would be if you include the increase in the monetary base of the EU, China, and India in the formula.

As the Dow Jones went up by a factor of 12 from 1000 in the 1980's to 12,000 in 2012, why didn't gold go up by 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 another way, I know they will create so much Fiat Money that it will become so worthless 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 rather conservative. Especially if you take into account the trillions of dollars created since 2008. [Forget the propaganda about mopping up the excess, as this is just NOT happening].

Today, you can either keep your purchasing power in Worthless Fiat money (which is nothing more than a Mirage) or keep it in Real Assets. Gold is a real asset with no counterparty, letting you store a lot of purchasing power in a small quantity of Metal: $1600 = 1 oz. At today's price, $1 million is about 20 kg. Do you have an idea how many gold bars fit into a shoebox!?

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 alternative but to geyser. Add to this that any economic recession or depression is logically the engine behind rising prices, as Authorities keep 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 banks' gold holdings. Who doesn't remember that Brown sold the bulk of the British gold exactly at the bottom!? is have no doubt that sovereign countries like China and India will buy any so-called gold 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 1980s, we have now passed the point of No Return.

The fact that Gold doesn't pay interest is absolutely not important and should not be used as a valid argument. Money also should not pay interest. Today it does because it is one of the factors that keep the Herd believing that it has some value after all. The reality that Paper Money and also Bonds (which are nothing more than 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 overnight.

As debt (debt=fiat money) defaulted in the 1930s, 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. This undermines banks, which increasingly avoid sovereign debt, and hurts pension funds and insurance companies as their asset values decline (pension funds and insurance companies hold the majority of their assets in Treasuries). During the process, the bondholders 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 S&P 500, Gold has been a laggard. Inflation has never risen while gold fell. 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 had risen according to 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 NEGATIVE return on each additional unit of Fiat Paper Money created. 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 importantly, expressed in Indian Rupees, we had no blow-off…and still a steady uptrend (see Goldonomic site). Also, I don't think Gold & Silver prices are in the stratosphere (see the ratio of Gold to Dow Jones & Stock Markets). Add that India's intent to settle in Gold for any oil it buys from Iran will increase 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. The 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. This allows mining of any grade of ore in a gold mine: rich and poor. Add to this that the main increase in production came AFTER the 1981 top, as production was switched from Poor to rich ore; the mining process is slow. It usually takes 5 to 7 years for a miner to adjust to the changing market conditions. Rising gold prices have in reality come with a decrease in production. Gold majors' reserves are being depleted, and soon they 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 Soros 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 bondholders will, during the process, have lost ALL their savings. After a Deflationary drama, only holders of Gold (real money) and former holders of fiat money will be 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%. Equity investors already take 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 buy Gold ELF’s instead of Gold stocks. At the same time, however, earnings and dividends for 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 or 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 phase of the Secular bull trend for gold, where institutional investors start to see what is happening and realize it's time to invest in the Gold and Silver sector. Remember, bankers and Brokers are often very, very stupid investors.

The total capitalization of the Gold sector is still extremely low. It's not hard to imagine what would happen if all Coca-Cola stockholders converted their holdings into gold and Gold shares.

Hedge fund managers have not accumulated physical Gold. They are only playing the Paper Gold Market (Futures). Because margin requirements are rising, it's becoming increasingly hard for hedge fund managers to do so, and because margin requirements will continue to rise, they will, at some 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 is bearish on Gold. He may be right, but he can also be wrong. I’ve learned to be extremely careful about what financial gurus like Soros 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 in the world still has some time to do his homework.

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 USA's economic and debt figures are far worse than Europe's. The USA, however, is getting a free ride on the back of the EU-donkey. Even if the Dollar succeeds in temporarily keeping this status, we will see more and more indications the Titanic is sinking, and 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 is the Elliott Wave. [As of Jan 24, 2012, only the short-term indicators are overbought].
• The chart of Gold expressed in Indian Rupee is still 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 the 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, when expressed in real terms, is still available at historic real BOTTOM levels.

Long-term chart for gold and bonds says it all:

• Maturing debts are astronomical, and to cover them and the interest, governments will be forced to create even more fiat money. Creating 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 euros, 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 the price of Gold and Silver sitting at 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 low volume, which is typical for certain types of bottom formations. Also, on certain charts, a bullish reversed HS pattern is 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.

For as long as I can remember, we have 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 it 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 stage, Mister Crook himself and/or his buddy buy and sell the shares. By doing so, the stock price of ABC is pushed up to $1, allowing for even more advertising on the Internet and in 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 cashes in his profit and leaves for the Caribbean to enjoy martinis and Cuban cigars, nobody is left to pick up stock from other investors trying to cash in. The price of ABC dips, and the Angels and Charlatans on the Internet disappear as 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-called revolutionary products/inventions. A deadly financial trap.

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