By Addison Wiggin

04/13/11 Zurich, Switzerland – Precious metals are proving resilient after yesterday’s beat-down. Gold is back up to $1,461. Silver spent a few nanoseconds below $40 yesterday and as of this writing sits smartly at $40.56.

With regular runs at historic highs, it’s no longer cranky gold bugs and dollar bears doing their share of gold price forecasting. Analysts for the proper, if stodgy, British bank Standard Chartered announced yesterday they are expecting gold to reach $2,107 an ounce by 2014.

What’s more, they say, “our modeling suggests a possible ‘super-bull’ scenario,” based on a “powerful relationship” between per capita income in Asian emerging markets and the gold price.

Standard Chartered estimates that per capita income in China and India will reach 30% of the US level over the next 20 years. On that basis, the bank sees “gold prices rallying up to $4,869 per ounce by 2020, should current relationships between Asian demand and gold persist.”

Standard Chartered wouldn’t find much argument from US Global Investors chief and Vancouver alum Frank Holmes, who was the lunchtime keynote presenter here in Zurich today at the European Gold Forum.

For starters, he furnished visual evidence to back up Marc Faber’s claim in this space on Monday that gold is not in a bubble.

You’ll see the chart follows the trajectory of three bull markets – gold beginning in 1971, the NASDAQ beginning in 1990 and gold again beginning in 2001.

“Bubbles require massive leverage,” Frank says, and there’s no evidence investors are borrowing to load up on gold.

For now, gold demand will increase steadily, driven by two of Frank’s favorite themes – the “fear trade” and the “love trade.”

That is, investors buy gold because they fear what the Federal Reserve is doing with its balance sheet…

The result – negative real interest rates. That’s when inflation is greater than the nominal interest rate. “Whenever you have negative real interest rates coupled with increased deficit spending,” says Frank, “gold tends to rise in that country’s currency.”

Likewise, the two party blockade on fiscal reform writ large in the US Congress.

The “love trade,” on the other hand, is something alien to North Americans and Europeans. “It is customary in most emerging countries to give gold as a gift to friends and relatives for birthdays, weddings, and to celebrate religious holidays,” he explains.

Thus, the point to which Standard Chartered agrees: As incomes rise in China and India, jewelry demand is driving the “love trade.”

Gold demand in India during the first three quarters of 2010 exceeded all of the previous year. And China was on a pace to exceed the 2009 figures as well… all of that despite a steadily rising gold price all last year.

Addison Wiggin
for The Daily Reckoning

Read more: Visual Evidence to Disprove the “Gold Bubble” Theory http://dailyreckoning.com/visual-evidence-to-disprove-the-gold-bubble-theory/#ixzz1JYhFJnic

Source: Daily Reckoning

10/30/10 Binghamton, New York – Most serious gold investors follow a basic principle: that gold is stable in value. Changes in the “gold price” represent changes in the currency being compared to gold, while gold itself is essentially inert.

This is why gold was used as a monetary foundation for literally thousands of years. You want money to be stable in value. The simplest way to accomplish this was to link it to gold. Today, we summarize this quality by saying that “gold is money.”

From this we can see immediately, that if gold doesn’t change in value – at least not very much – then it can never be in a “bubble.” There may be a time when many people are desperate to trade their paper money for gold, but that is because their paper money is collapsing in value. It has nothing to do with gold.

Let’s take a look at some of the great gold bull markets of the last hundred years:

• From 1920 to 1923, the price of gold in German marks rose from 160/oz. to 48 trillion/oz.

• From 1945 to 1950, the price of gold in Japanese yen rose from 140/oz. to 12,600/oz.

• From 1948 to 1967, the price of gold in Brazilian cruzeiros went from 648/oz. to 94,500/oz.

• From 1970 to 1980, the price of gold in US dollars went from 35/oz. to 850/oz.

• From 1982 to 1990, the price of gold in Mexican pesos went from 8,000/oz. to 1,025,000/oz.

• From 1989 to 2000, the price of gold in Russian rubles went from 1,600/oz. to 8,120,000/oz.

Each of these situations was an episode of paper currency depreciation. Today is no different. The rising dollar/euro/yen gold price is simply a reflection of the Keynesian “easy money” policies popular around the world today.

We can also see that, if gold remains stable in value, then the supply/demand considerations that affect industrial commodities do not affect gold, which is a monetary commodity. This is why gold is used as money. If its value was affected by industrial supply/demand factors, we would not be able to use it as money.

Thus, “jewelry demand” or “peak gold,” or any other such factor, has little meaningful effect on gold’s value. Day-to-day money flows will affect the price at which currencies trade vs. gold, but this ultimately affects the currency in question, not gold.

None of these historical “gold bull markets” resulted from jewelry demand or mining supply.

Any attempt to attach a valuation to gold is mostly a waste of time. Concepts like the “inflation-adjusted gold price” or the “gold/oil ratio,” or a ratio of outstanding debt or currency to a quantity of gold bullion, are a distraction. An item that doesn’t change value is never cheap or dear. That’s what “gold is money” means.

The “price of gold” may reach five thousand, ten thousand, a hundred thousand, a million, or a billion dollars per ounce. The gold bubble-callers will be frothing at the mouth, until they finally have the realization that there was never a bubble in gold, but only a crash in paper money.

Gold is money. Always has been. Probably always will be. This time it’s different? I don’t think so.

Regards,

Nathan Lewis
for The Daily Reckoning

One of the reasons the gold bull market has far more time and room to run is that people have bubble fatigue. With numerous bubbles blowing up in the last ten years, Wall St and the public are quick to declare anything a bubble despite their inability to understand and analyze sentiment. Hence, we hear asinine concerns about too many advertisements. Tell me; are bonds in a bubble only because Pimco is advertised around the clock on CNBC?

Unlike these armchair analysts, we use a handful of sentiment indicators that are far more reliable and actionable.

Sentimentrader.com’s public opinion is simple but effective. It shows what percent of the public is bullish. Their data shows that the public was actually more bullish on Gold from 2005-2008 as public opinion spent a fair amount of time in the range of 75% to 90% bulls. In the last 24 months public opinion has yet to surpass 75% bulls.

COT data is another way to gauge sentiment. Did you know that open interest is about the same as where it was at the 2008 peak? Gold has climbed nearly 25% yet open interest hasn’t accelerated the way it did in late 2007.

We also track put-call data from the International Securities Exchange. Below is an updated chart of GLD’s put-call. As you can see, it has been quite reliable.

Why do we focus so much on sentiment? Sentiment is more important in the precious metals markets as they are emotionally driven. Sentiment helps us predict and measure potential volatility. It helps us gauge short and medium term risk.

Even after 20 months of record gains in the precious metals and related shares, sentiment remains relatively favorable. In fact, it looks better relative to 2006 and 2008. With the collapse of 2008 still fresh in mind, investors are quick to worry and that worry is sustained and enhanced by the sustained advance in the metals and shares.

Of course the misguided and ill-informed think the spectacular recovery is an aberration.  Not once have they said it’s a bull market. We have to remember that your typical trader, broker, analyst has never witnessed a bull market in Gold. They think the days of the 80s and 90s are the norm. Throw in the “bubble fatigue” as a result of the past 10 years and there will be plenty of skepticism as Gold soars to $2000/oz and higher in the next 12-18 months.

For complete sentiment and technical analysis and fundamental analysis on the gold and silver stocks, consider a free 14-day trial to our premium service.

Best of luck!

Jordan Roy-Byrne, CMT

http://www.thedailygold.com/newsletter

Jordan@TheDailyGold.com

Mega bull markets also take time to run their course and this time will unlikely be an exception. Bull markets tend to end in euphoria, when everyone’s invested and they can’t get enough of it. Gold is far from this.

Comparing the current 10 year gold run to the 12 years leading up to the 2000 tech explosion in the stock market, and gold’s bull market in the 1970s, you can see that gold’s rise is still tame (see Chart 1). A bubble is still well into the future.

Here is their chart, comparing Gold today to the previous Gold bull market and the Nasdaq:

Read their full missive at 321Gold

Once they do start to “get it” we will have about a year to a year and a half as gold enters the parabolic stage before the bubble pops. See the Nasdaq chart below from late 98 to March of 2000.

At gold’s top, half of your neighbors will be buying gold (not selling like they are doing now).

At the top there will be lines outside the the local coin dealer waiting for the next shipment of gold to come in.

At the top 7 of 10 billboards you see driving down the highway will have something to do with precious metals.

At the top the guy standing next to you in the grocery store will tell you how many thousands of dollars he made last month off his gold coins.

At the top everyone will have become convinced the dollar is toilet paper and will only continue to decline until it has become worthless.

At the top the population will believe that we have to go back on a gold standard. By the way, a gold standard never stopped any country from debasing its currency. In ancient Rome they clipped some of the gold out of the coins. Roosevelt confiscated and arbitrarily revalued gold in the 30′s. A gold standard will not prevent a government from trying to get something for nothing by debasing the currency.

At the top stocks will be universally hated and gold universally loved. In reality, stocks will at that time, represent true value. Much more so than a shiny metal with virtually no industrial uses.

At the top smart money will eventually come to their senses and realize that true value (profitable companies making the necessities for life on Earth) are being given away for pennies on the dollar to purchase a shiny metal that really has no intrinsic value.

Here is a chart of the Nasdaq followed by a chart of gold. You tell me, does gold look like a bubble yet?

Since early 2009 we’ve written about the super-bullish long-term cup and handle pattern in Gold. It dates back to 1980 and has a logarithmic target of about $2,100. We noted that previous cup and handle patterns in Gold all reached their logarithmic target¹. We expect that this move to $2,100 will be the recognition move that awakens the masses to the Gold bull market and the reality of severe inflation in the near future.

Speaking of the near future, the relative strength of Gold in the face of a strong US dollar (or weak Euro) is one big hint that this recognition move is around the corner. We’ve noted this before and it is important to explain to new readers. Gold priced in foreign currencies has been leading Gold in US$ terms. It is true for the entire bull market and is quite evident in just the past few years.

In the chart below we use the foreign currency ETF (UDN) to show Gold against currencies ex the US Dollar. The lower half shows Gold in US Dollars. Note how Gold/UDN is breaking away to new highs. That chart is so strong that it barely had time for even a small correction. Since Gold/UDN has been leading Gold reliably, this is an indication of what is eventually coming in the US Dollar price of Gold.

Nowhere Close to a Bubble

As Gold pierces $1200 and makes a new high, surely we will hear a new round of calls that Gold is in a bubble or it is a crowded trade. Be sure to avoid this unsubstantiated nonsense, as it will only serve to waste your time and inevitably reduce your net worth. Let me provide you with just a few pieces of information, which refute this baseless claim.

First, did you know that as of a few months ago, Gold equities and ETF’s only accounted for 0.7% of all managed assets in the world³! Can you imagine how high precious metals could rise, if everyone in the world just put 2% of their assets in this sector? What if it was 5% or 10%?

Second, Jim Rogers recently spoke at a conference with, in his words, 300 big-time money managers. Apparently 76% of them had never owned Gold!

Third, superstar fund manager John Paulson of subprime fame has had great difficulty raising money for his Gold fund⁴. Even one of the top fund managers can’t even convince people to get aboard the Gold train.

Finally, consider public opinion on Gold, courtesy of sentimentrader.com. In the past, public opinion followed Gold higher. Yet, since the end of 2008, public opinion has stayed in a range, while Gold has climbed about $300/oz. The public hasn’t budged despite the historic breakout and holding of $1000/oz level.

Policy Makers are Shooting Blanks

Mainstream and amateur analysts will make the claims that the Fed will tighten or that the government will get serious about its troubling finances. There is almost nothing the authorities can do to stop the coming inflation and the roaring bull market in Gold and Silver.

First and most importantly, because of the overall debt level, which is massive compared to 1980, the US cannot afford to let interest rates rise. If interest rates rise, the market will only lose greater and greater confidence in the US as the interest burden will accelerate thereby hurting the economy’s ability to grow and hastening the threat of bankruptcy. However, if interest rates remain low, speculation in hard assets will become rampant as these markets continue to rise, inflation ticks up and purchasing power declines.

Second, the Fed would have difficulty trying to tighten the money supply. Remember that to do this, the Fed would need to sell assets into the market. Remember, the Fed’s balance sheet consists of garbage assets that the Fed overpaid for. Yes they could raise interest rates but then how would the banks survive? They wouldn’t be able to borrow at 0.25% and repair their balance sheets. If the Fed would raise rates above the level of inflation, it would certainly end up threatening the financial system.

Moreover, as we’ve noted again and again, severe inflation results from a loss of confidence in a government’s ability to meet its debts. This manifests in a falling bond market, rising interest rates and currency weakness. Debt crisis’ go hand in hand with currency crises. Hence, we see Gold breaking out against numerous currencies even though “the banks aren’t lending” and “velocity is falling.”

The last line of defense is the Treasury market. If and when interest rates breakout to the upside, the authorities will effectively lose both control and power. At that point, the inflation genie will be out of the bottle. The action in Gold is already hinting at that outcome.

Conclusion

Even though Gold has risen nine years in a row, it is nowhere near a bubble. Just take a look at this chart courtesy of Frank Holmes. It compares Gold’s current bull market with its bull market in the 1970s.

Note that Gold rose about six-fold the first eight years into the bull market (it began in 1970). Ultimately it rose 25-fold. The Nasdaq from 1982 to 1992 advanced about four fold. Ultimately it rose 29-fold. The Nikkei advanced less than three fold from 1970 to 1978. From 1970 to 1990 it gained 19-fold. Gold is nine years into its bull market and has advanced less than five fold. See a pattern here?

If you’d like professional assistance riding the coming acceleration and eventual mania in the Gold and Silver market, then visit our website and consider a free 14-day trial to our premium newsletter.

Jordan Roy-Byrne, CMT

Jordan@TheDailyGold.com

Footnotes:

1) http://thedailygold.com/chartstechnicals/gold-cup-and-handles/?p=3117/

2) http://wallstcheatsheet.com/trading-markets/gold-in-euros-is-about-to-go-parabolic/?p=6862/

3) http://thedailygold.com/chartstechnicals/gold-is-0-7-of-global-managed-assets/?p=887/

4)http://online.wsj.com/article/SB10001424052748703615904575053793439062452.html

http://www.usfunds.com/investor-resources/frank-talk/?i=2751

Gold is getting a lot of attention these days. It’s all over the media, the backlog to purchase gold coins from the U.S. Mint is years long, and one gold exchange company even ponied up for a Super Bowl ad.

Many point to this and shout “Bubble!” Gold has risen too far too fast, they say, and soon the euphoria will give way to despair. We’ve been hearing this since February of last year, when gold was trading around $900. That’s more than 25 percent below where it is today.

Why didn’t the gold “bubble” burst? It could be because there isn’t a gold bubble.

The chart below compares the price performance of gold bullion during the 1970s bull market (green line) to the current price trend (red). As you can see, the price line since the start of 1999, when gold was trading just under $300, has been far less volatile than during the earlier period.

Gold remains as a safe haven during times of economic uncertainty – in the 1970s, double-digit inflation rapidly eroded wealth, and these days there is a lingering fear of higher inflation as the federal government piles more debt onto its already groaning balance sheets.

But a key difference is that gold has gained stature as a legitimate asset class for investors. During the 1970s runup, investment demand peaked around 27 million ounces, about half of what it is today. Contributing to this demand are new investment vehicles, including gold-oriented mutual funds and bullion-backed ETFs, both of which have made it easier for investors to allocate a portion of their portfolios to the yellow metal.

We also have greater affluence in the developing world, where people have traditionally turned to gold to store their wealth. Central banks in these countries, most notably China and India, have built up their gold holdings as a way to diversify their foreign reserves away from the dollar and other paper currencies.

The 1990s dot-com era was a bubble, and likewise the 2000s housing market. But gold? We don’t think so.

Investments in natural resources, emerging markets and infrastructure are subject to distinct risks as described in the funds’ prospectus.

Try our service for free for 14 days! We help you navigate the gold bull market and keep you invested in the best junior gold and silver companies. Click Here to Learn More

Let me start out by asking a few questions. How many of you were pro-bailout? How many pro-healthcare? How many think borrowing trillions of dollars to “stimulate” will really have any long term effect what-so-ever on the economy? How many realize that borrowing and spending really isn’t the cure for a problem caused by too much debt and too much consumption?

Now let me ask another question. Aren’t our politicians supposed to represent the will of the people?

I’m going to assume that the vast majority answered no to the above questions and yes to the last one. If that is the case then why in the hell did we hand over billions and billions of dollars to the banking industry? Was that in our best interests? How on earth did the health care bill get passed? And why, why, why are we throwing trillions of dollars down the drain in stimulus that has no earthly chance of having any long term positive effects?

Of course we all know the answer to the question. All these things came to pass because politicians don’t actually represent the will of the people. Politicians represent our desire to avoid short term pain and their own personal desire to get re-elected.

So how did we get in the mess we are in?

Let’s start off with a little history. Let me say that nothing is happening today that hasn’t happened many times in the past. I’m fairly certain human nature hasn’t changed in the last 5000 years or so, and I really doubt it’s going to materially change in the next 5000 either, so I can virtually guarantee we will go through this again…and again, and again.

Historically about every 70-80 years humanity suffers through an economic depression. It takes about that long for society to forget the ravages of the last depression and. And what causes it is a credit bubble.

I know we would like to blame our troubles on the greedy bankers and leave it at that. But that is way too simple. Bankers are just human, no different than anyone else. Trust me, no one is immune to the pull of greed. Sure the financial system should have foreseen that no good could possibly come from loaning half a million dollars to someone with a $30,000 a year job. And what about the speculator that bought that half million dollar house. He knew darn well when he took out the loan he couldn’t afford to make any payments once the teaser rates expired. Isn’t it also his fault when he lied about his income? Or how about the loan originator? Was it really in everyone’s best interest to underwrite a loan for several hundred thousand dollars to a guy sitting on the other side of the table wearing a McDonald’s work uniform? Or was it just the quickest way to make a commission? And what the heck, everyone else was doing it. If they didn’t make the loans they were just going to put themselves out of business while all their competitors were getting rich.

The same could be said for the appraisers. They certainly knew the prices they were quoting had no basis in reality, but then if they tried to act responsibly they would quickly find themselves out of a job.

How about the home owner who annually or biannually refinanced their house so they could take equity out and buy a new Hummer, home theater system, or a swell vacation, etc. Aren’t they also just as much to blame as the bankers?

We’ve coined the term Banksters as a sign of the contempt we feel towards the perceived instigators and originators of our current malaise, but perhaps we need another term, one that is a bit harder to stomach but just as appropriate. Sure, the Banksters were a big part of what went wrong but no more so than the average Americanster. All those folks living on home equity, all those buying houses, sometimes several at a time to flip, all those people lying about their income, were they not also driven by greed? Weren’t they just as much at fault for the mess we are in as any banker?

Next I want to point out that none of this would have been possible without the co-operation of our elected officials and especially the Federal Reserve. After all it was Alan Greenspan and now Ben Bernanke who cut rates to near zero and supplied the free money that was required to get the ball rolling down the hill. No bubble was possible without the consent of the Fed, the very people who are supposed to be looking out for this very thing.

Of course Greenspan has insisted it isn’t possible to spot a bubble before it pops. What a load of baloney. Anyone with half a brain could spot not only the tech bubble but also the housing bubble a mile away.

Amazingly we are now going to give the Fed even more power to regulate and oversee markets. The very people whose monetary policies enabled the credit bubble in the first place. The very same people who couldn’t see it as it formed. The very same people who repeatedly denied it as it imploded.

Do we really want to trust these folks with regulating the system? Let’s face it, their track record leaves a lot to be desired. Why should we think they will get it right this time when so far they are batting zero?

There are right and wrong ways to deal with this kind of problem though. History has shown over and over that the quickest and cleanest solution is to let the market work. Let the system collapse and cleanse. Sure it means hard times. There really is no avoiding that. The countries that have allowed the market to function have suffered 2 or 3 years of extreme pain. Regretable, but unavoidable.

However, every country that buckled down and accepted the cleansing process emerged from the other side much stronger. Brazil in the early 80’s, Vietnam in the mid 80’s and Russia in the late 90’s are just a few examples. And without exception these countries all saw explosive growth after allowing the cleansing process to run its course.

On the other hand the countries that fought the market without exception entered long periods of hard times. In the 1930’s Roosevelt took this path and turned what should have been just a bad recession into the Great Depression. Ultimately all the efforts to halt the depression only made it worse, culminating in World War II.

Japan chose this path and was rewarded with 20 years of on again, off again recessions, culminating in finally bankrupting their country.

Now we are faced with the same problems as Japan in the 1990’s and Roosevelt in the 1930’s and what path have we chosen? The path of least resistance, of course. We’ve decided to kick the can down the road.

We are certainly in good company as almost every major empire in the history of the world has chosen this path to oblivion. And it always starts with currency debasement.

Take a good look at the following chart.

You can clearly see when it began. As the US started to decline the powers that be took the easy way out and started printing. We managed to borrow and print our way to one hell of a party in the middle of the last decade.

Unfortunately, that party was built on a fantasy of credit expansion and real estate speculation. We certainly created a lot of jobs during this period. Jobs in finance, construction and anything related to the housing industry. As a matter of fact, almost all aspects of the economy exploded as it appeared we had true demand for everything from $5.00 for a cup of coffee at Starbuck’s to strip malls on every available corner.

Unfortunately, and like all great parties, there is a price to pay…the hangover!

Our fantasy economy built on a foundation of debt and currency debasement couldn’t continue indefinitely and it didn’t. What followed was the second worst bear market in history and the single worst economic collapse since the Great depression.

Yet amazingly enough, our leaders have learned nothing from this experience.

They are now back at it again printing oceans of money and racking up trillions and trillions of dollars of new debt. This is the exact same recipe that led to the last catastrophe. This is the same government whose leader stood in front of the American population and told us with a straight face that we needed to spend our way out of the recession. Seriously?

Too much consumption and too much debt is what got us into our current mess in the first place. How does it help us to get more bankrupt because let’s face it, the USA is bankrupt.

It’s simply not possible to borrow trillions and trillions of dollars and spend our way out of bankruptcy. The old adage that you never get something for nothing has been conveniently overlooked. I don’t think the laws of economics are going to be magically revoked for a country anymore than they will for an individual. Just ask Greece!

So where is all this leading us?

I’ll tell you where it’s leading. We are going to continue to borrow more and more money. We are going to continue to stimulate and bailout failed companies. And none of it is going to work. It didn’t work for Roosevelt in the 1930’s. It didn’t work for Japan in the 1990’s and it’s not going to work for the USA now.

We are just going to go deeper and deeper into debt. Taxes will continue to rise (by the way does anyone realize how many hidden taxes are buried in the new health care bill)? And inflation (a hidden tax that none of us have any say in) will continue to worsen.

Ultimately none of these ill fated policies will achieve any of their goals. And when these policies fail politicians will do what they always do. They will look for some way to divert public attention away from their inability to solve any of society’s problems.

That invariably means they will look for someone to blame. That almost always leads to wars.

Regrettably all this could be avoided if only our leaders would accept responsibility and choose the right path. Understandably that path is going to be painful and it’s a path that doesn’t lead to being re-elected. But it is a path that leads to a bright future, a path that doesn’t lead to our sons and daughters dying on some battlefield.

If left to their own decisions our leaders are never going to choose the hard path. It’s human nature to avoid short term pain, to push the problem down the road for someone else to deal with even though that choice only leads to a much bigger problem in the long run.

Folks we have mid-term elections coming this year and we have an opportunity to get our message across. If you want a brighter future for your children, if you want politicians to represent their constituents instead of special interests, if you want to put an end to the pork in every bill that’s used to “buy” votes, if you want to stop the bailouts, if you want to send a message that you aren’t happy with the government wasting our tax dollars on stimulus that only benefits a few while it costs the rest of us in higher taxes and higher inflation, if you want to let the congress know you’re mad as hell about the 50% increase in health care that their ridiculous new bill immediately cost each and every one of us (and that’s not even including all the hidden taxes) there is a way.

Simply vote out every single incumbent. If left up to politicians they will never put a limit on terms. They will never end the pork. Big money will continue to “buy” elections. Limiting terms certainly won’t cure all of the problems but if politicians knew going in that they would only be allowed one term they might be more likely to do the right thing.

For one thing, there would be no need to waste money trying to get re-elected. It would never happen. It’s time to take back control of our political system. It’s time we let the politicians know we’ve had enough of the waste and corruption. It’s time we were actually represented by our representatives.

It’s time for a change and I’m not talking about the Obama change, which was really just more of the same. I’m talking about real change. I’m talking about sending our elected officials a reminder that they work for us, not the other way around. It’s time to let them know that when they do a poor job we are going to fire them.

It’s time to just say no!

For a variety of reasons I am almost certain our on-going gold bull is nowhere close to Stage Three yet. Gold isn’t going parabolic anytime soon, so if you are planning on retiring in 2010 from this years’ gold gains I suspect you’ll be sorely disappointed. www.zealllc.com; By: Adam Hamilton; Words: 1616

In further edited excerpts from the original article* Hamilton goes on to say:

[Let's review the 3 stages in the price escalation of gold and see where we are at and why.]

Stage One
Stage One stealthily emerges out of a secular-bear low when everyone loathes gold. In response to a devaluation in the dominant currency it quietly begins to creep higher. Stage One in today’s bull began in April 2001 and ran for over 4 years. It was marked by modest yet consistent gains in gold.

Stage Two
Once global investors figure out that gold is moving up on its own supply-and-demand-driven fundamental merits, Stage Two dawns. More and more investors “discover” gold and deploy increasing amounts of capital in it. Today’s bull transitioned into Stage Two shortly after the euro gold broke decisively above €350 in June 2005.

A gold breakout in a secondary currency may not sound like much but it was a game-changing event that finally convinced global investors that the young gold bull was the real deal. Before that, to everyone but Americans (who see gold through a dollar-centric lens), gold’s strength was perceived as nothing more than the other side of the dollar-bear coin. They thought gold was only rising because the dollar was falling.

Stage Two can run for many years and is the longest phase of a gold bull’s lifespan by far. It persists for so long due to the way bull markets affect investor psychology. Early on in a bull, few investors believe it is real so little capital chases it but as a price powers higher, more and more investors start to believe which gradually yet relentlessly increases capital inflows. This drives prices even higher, forming a virtuous circle that attracts in even more investors. All this takes a long time.

Stage Three
Some bulls end at Stage Two but the truly great ones ultimately transition into Stage Three. Lasting less than a year, this is the terminal phase of a secular bull. After professional investors are already fully deployed in gold, the general public soon grows enamored with it and wants in at any price. The resulting massive influx of capital drives a popular speculative mania and its resulting parabolic blowoff. There is nothing else like a Stage Three speculative mania. They are impossible to miss.

So much capital flooding in so fast drives vertical price gains into a parabolic ascent. The last Stage Three gold parabola unfolded over several months climaxing in January 1980 at $850 (just under $2400 in today’s dollars). That event was blisteringly fast – gone in the blink of an eye. Over the final 10 trading days leading to the end of its bull, gold soared 34.1%. Over the final 20 trading days, it was up 80.3% and over the final 30, just 6 short weeks, it nearly doubled with a 95.9% gain!

Where Are We Today?
We are obviously a far cry from the last Stage Three climax’s 34%, 80%, and 96% so there is no doubt at all that we have not witnessed anything Stage-Three-like in the recent exceptional gold strength.

Even though gold clearly hasn’t entered Stage Three, could it be on the cusp of rocketing parabolic as many analysts assert today? The only honest answer is sure, of course it could. Anything can happen in the markets, and none of us mere mortals can see the future.

Nevertheless, for a variety of reasons I am almost certain our current gold bull is nowhere close to Stage Three yet. Gold isn’t going parabolic anytime soon, so if you are planning on retiring in 2010 from this years’ gold gains I suspect you’ll be sorely disappointed. As any student of the markets who has studied history and psychology can tell you, today’s conditions are all wrong for Stage Three dawning.

Gold is Still Grossly Underinvested
Think of bull markets as popularity contests. The higher prices go, the more popular those assets get and the more popular the bull gets, the more investors deploy more capital to chase the gains. Stage Two chronicles this journey from relative obscurity among investors to widespread adoration. This long stage lasts until professional investors are fully invested. Has this happened yet with gold? No way.

There are many ways to illustrate this truth. Despite the GLD gold ETF’s huge success in enticing stock-market capital into gold, stock investors are still incredibly underinvested. Stock investors are hardly fully invested in gold yet with a current allocation of under a half percent. At today’s levels they have barely even started deploying in gold! I don’t know if “fully invested” in this bull will ultimately cap out at 5%, 10%, or even 20%, but it is certainly not going to be 0.4%.

Central banks are also big gold investors, and the growing Eastern central banks (CBs) are woefully underinvested in gold. The top 5 Asian CBs in terms of gold holdings now have an average of just 3.5% of their foreign-exchange reserves in gold. Is this fully-invested? Certainly not. For comparison the top 5 Western CBs have an average of 64.8% of their forex reserves in gold bullion today! Given the Eastern CBs’ undiversified heavy exposure to the ailing US dollar it is impossible to imagine them not wanting to sell more dollars and buy more gold. Like American stock investors, Asia has barely even started investing in gold.

How can Stage Two transition into Stage Three when the only investors with heavy gold exposure today remain a relatively small fraction of contrarians? It can’t. Stage Two will not reach maturity until large professional investors all over the world have great-enough allocations in gold to consider themselves fully invested. I suspect it will be many years yet before professionals reach this milestone.

No Love Affair Yet With Gold
Simply having professionals fully invested in gold is not enough to spark Stage Three on its own. Even more important is popular psychology. For a Stage Three parabola to ignite, ordinary folks who aren’t even serious investors have to utterly fall in love with gold. We need to see a popular gold rush flare up across the vast majority of the populace that doesn’t even follow the financial markets on a regular basis.

As the NASDAQ bubble proved, the seeds for a popular speculative mania are not sown overnight (or even in a few months). It really takes years to prepare the soil of popular psychology for a mania. While gold’s favorable exposure in the financial media has grown considerably over the past few months, all this coverage is just a drop in the bucket compared to what is necessary to enthrall the people. If you ask the average person you see anywhere whether they are excited about gold investing, the vast majority will give you a dumb stare.

While today’s hardcore investors and speculators who religiously follow the markets and financial media may feel like gold is becoming popular, our perceptions are skewed. Sure, gold is more popular in this specialized realm than ever before in this bull but to an average casual investor who doesn’t follow these things, at best all they’ve seen is some sporadic gold-coin and scrap-gold commercials on mainstream TV. Popular psychology among normal folks has barely even started considering gold, let alone getting excited about it.

Without people who’ve never been gold investors rushing in to become new gold investors solely to plow their lives’ savings into gold, we won’t see a Stage Three parabolic blowoff. They are called popular speculative manias for a reason. They extend far beyond contrarians, professional investors, and even mainstream investors to a general populace that isn’t yet in the gold market in any meaningful way.

Groundwork Not Yet Ready for Stage Three
Professionals are not fully invested in gold and mainstream casual investors still largely aren’t paying attention to it so neither the capital foundation nor sentiment foundation necessary to undergird a Stage Three superspike have been laid yet.

Since Stage Three bull-ending parabolas are such exceedingly rare events, once every third of a century or so on average, the probabilities wildly favor any sharp move higher merely representing a short-term overbought condition within a bull instead of the precursor to the end of that bull. When you consider that Stage Two hasn’t matured yet and the groundwork for a popular mania hasn’t been laid yet, it is almost certain that gold’s big gains today also merely represent overboughtness.

A key peculiar tendency in overbought times is the widespread attempts to justify further technical gains with fundamental arguments. You’ve heard them; gold will continue higher because the dollar is weak; central banks are buying; mining it is getting harder; etc. All these things are certainly true, and bullish, but realize gold’s fundamentals were just as bullish in past overbought times yet the metal still corrected hard. Long-term fundamentals never override necessary rebalancings of extreme short-term sentiment!

The bottom line is gold is not going parabolic despite all the hype today. Only a popular speculative mania can drive a bull-ending vertical superspike, and we are still years away from one. While gold has indeed rallied far and fast in the past few months it hardly looks like a bull-ending omen. It merely looks like a mature upleg taking a breather so be wary of all the gold hype today.

*http://www.zealllc.com/2009/goldpara.htm

Editor’s Note: The above article consists of edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered. (editor@MunKnee.com)

A Storm is Brewing

When the tech bubble burst in 2000, Greenspan tried to “fix” the problem by cutting rates and printing money. Fix the problem he did … well sort of! What Greenspan did was create two new bubbles in the credit and real estate markets to replace the tech bubble that had burst. Millions of jobs were created in these two industries. Much needed jobs to replace the ones lost as the tech boom came to an end.

I think we will all admit it was one heck of a party, but like all good parties there’s a price to pay. The Hangover!

The truth is the economic boom of the mid 2000’s was built on a lie. Instead of a foundation of productivity the last bull market was founded on an ocean of liquidity. That ocean of liquidity fostered risky investments and massive speculation. It was only a matter of time before the house of cards came crashing down.   And crash it did.  The world suffered through the second worst bear market in history almost taking down the global financial system in the process.

Apparently the powers that be have learned nothing from this near death experience because they are back at it again, printing, printing, printing  in another vain effort to create prosperity with the printing press. I dare say the average 6th grader can understand that the act of putting ink on paper does not create wealth. It’s too bad our elected officials can’t understand this.

So here we are, we’ve survived the credit crisis and all appears to be well in the world. I’m here to say that all is not well. We now have a cancer growing under the surface of the economy many times bigger than the one Greenspan created. This cancer isn’t going to show up in real estate or credit markets, that bubble has already burst, never to be inflated again. No, this time I expect the cancer is going to flare up as inflation in the commodity markets.

Witness the strange resilience of oil at $80 despite a very strong dollar the past 3 months. Gold has been holding over $1100. Sugar is at multi-year highs. Copper is less than 15% from all-time highs.

The commodity markets are now poised to unleash a massive inflationary storm. I think there’s a very good chance that storm will strike this spring.

The dollar is now deep into a counter trend rally and in jeopardy of putting in an intermediate term top at any time. When it does the flood gates could break and we will have to deal with the unintended consequences of Bernanke’s actions.

Unfortunately, there are no painless cures for spiking inflation, especially in an ongoing recession. The cure is to let the market clean out the excesses. The cure is to raise rates and drain liquidity, to induce a recession. That course leads to 20%+ unemployment and a deflationary depression. Does anyone really believe our elected officials will choose the that course of action?

On the other hand, doing nothing leads to higher and higher inflation and running the presses faster and faster to stay ahead of rising prices, eventually culminating in a hyperinflationary event if government debt is allowed to spiral beyond the point of no return.

Unfortunately, I think it’s probably too late to stop the storm. Let’s face it, you don’t start turning the Titanic when it’s 100 yards from the iceberg. By then it’s too late and the ship is doomed.

The same principle applies with our economy.  If the Fed waits until inflation starts to pop up it is too late.  The damage is already done and there’s no going back. If the inflation Genie gets out of the bottle there’s no easy way to get him back in. I would argue that the commodity markets are already trying to tell us there’s trouble coming.

History has been crystal clear – every time oil spikes 100% or more within a year’s time, it has pushed the our economy into a recession. We already have a spike from $32 to over $80 and this is against a backdrop of high unemployment. The last thing we need in an economic environment that’s already under stress is surging energy prices again.

The question investors have to ask themselves is whether it’s more likely the powers that be will do the right thing, raise rates, drain liquidity and force the world into a deeper recession before inflation gets out of control or will they continue to kick the can down the road making the problem bigger and bigger?

Knowing human nature, my bet is that our elected officials will do whatever they have to do to avoid short term pain - even if it means compromising our future.

The storm is brewing. It’s time to batten down the hatches.

That means gold and silver!

John Townsend

The Smart Money Tracker