Disclaimer: I've found this topic to be an emotive one for some precious metal enthusiasts. Keep in mind this is my personal opinion. I may end up wrong, I may end up right. I would ask you keep an open mind while reading though and I encourage you to comment on this post whether you agree or disagree (providing some reasoning for your position).
It's been my opinion for a few months now that we are entering the 3rd phase of the precious metals bull market. I believe that there is not much time left in this bull market and that we will have seen the peak within 2-3 years (max), quite possibly much sooner.
That does not mean I'm about to close my positions at today's prices.
It does not mean I think the metals are close to a "price" peak.
All it means is that I think the bull market will soon come to an end (likely in a parabolic blow off) and there have been several indicators that are leading me to this opinion.
Comparison to Bubble Chart
Some of you may have seen this chart in the past, it was produced by Dr. Jean-Paul Rodrigue and visualises the 4 "phases" of a bubble.
Now I know using this chart is likely to put many on the back foot. Let me say that I don't think Gold is in a bubble at today's prices... but I do believe that the price will ultimately end in a bubble. Based on that assumption we can try and work out what phase we are in the bull market currently and if we simply look at the price action of Gold or Silver over the last 8-10 years there is a eerily similarity between that time and the first 2 phases on the chart above.
10 Year Gold Chart
10 Year Silver Chart
With the dip in 2008 looking very much like the first sell off (bear trap) in the bubble chart and increasing media attention (as discussed in more detail below), it looks very likely that we could be in in the transition from 2nd to 3rd stage.
Here is a video that I found charts the recent Silver action onto the bubble chart:
Not every bull market is going to look exactly the same, we may yet have another severe correction before seeing the peak, but with the heavy buying of the metals occurring on each dip I find this unlikely.
Similarities to 1970s Bull Market
The precious metals bull market in the 1970s ran for approximately 9 years, the current bull market we are in has been running for around the same length of time. By itself the timing similarities could have been overlooked, however with a host of other reasoning it’s hard to go past mentioning this.
The 1970s bull market also had a large dip (bear trap) like we saw in 2008, infact it was even larger than the 2008 fall, dropping almost in half over 1975/1976 and then rallying out of the late 1976 low to a high in January 1980, approximately 3.5 years later. If we were to consider the 2008 drop to be the “bear trap” and expect a similar length of time to the peak (compared to 1970s) then we could expect the timing of the peak to be around early 2012, well within the time frame of when I expect we will see it.
Mainstream Media Coverage
Everyday comes an increase in coverage of precious metals in newspapers, magazines and on websites.
Now I've heard Jim Cramer talk about Gold before, to his credit I recall him in a late 2008 video where he talked about Gold as a crisis/chaos hedge. However, whether he's right more often or wrong more often the reality is that the smart money would not follow a character like this. He is larger than life and more often than not a spruiker with too much airtime to fill with too little worth telling. In this clip which aired November 2010 he:
- Discusses Bernanke's money printing
- Talks of Gold's 5000 year history as money
- Suggests 20% of a portfolio should be in Gold
YourTradingEdge is a popular traders magazine here in Australia. A mainstream investment magazine, here is the front cover for Jan/Feb 2011:
The article in the magazine not only talks about industrial demand, historical ratios such as the GSR and currency devaluation, but even brings up the topic of manipulation & GATA (who have been working to restore integrity to the precious metal markets)!
The below image/advert (rotating .gif) was recently spotted as the main banner on the Commsec trading website (the trading platform of Australia's largest bank):
Now Commsec may not be a mainstream media site, however it is a popular trading platform (possibly the most used in Australia) and is indicative that retail level investors are starting to get in on the Gold trade.
Gold and more recently Silver have been hitting mainstream news sites as well.
An article on news.com.au discussing a "beginner's guide" to investing in Gold:
Beginner's guide to investing in goldGOLD'S glittering run up to record highs in the past few weeks has sparked intense interest in the precious metal.
There are several ways to invest in gold, however before you take the plunge you need to do your homework and understand what you want or expect from your investment.
Here is a recent article on Silver before it really took off in late 2010:
Silver looks ready to ripBNP Paribas obviously thinks the price of silver is about to go on a tear.
It has agreed to pay $US20.58 an ounce for 680,000 ounces of the white metal to be delivered from December through to June 2012. That compares with a closing price on Friday in New York of $US20.79/oz (although intraday it poked its head above $US21/oz).
Even on a popular finance and banking informational website they recently covered Gold in an article that discussed the RBA's decision to sell a large portion of our Gold and how much it cost us:
Australian Central Bank Decision To Sell Gold Reserves Cost Country $5 BillionJust over ten years ago, Australia’s central bank the RBA sold off most of the countries gold reserves under the belief that the price of gold would continue to remain flat, and that as an asset, it would no longer play any role in the future financial system, or any crises that may result.
Based on the current market price of $1,400 an ounce for gold, the decision to sell 167 tonnes of the precious metal by the central bank has cost Australia approximately $5 billion.
Now I can't claim to have seen a Gold related article hitting the front page of a physical newspaper, but I have seen (positive) articles about Gold hitting the home page of popular mainstream news sites such as news.com.au.
The above is only a taste of what I've seen in mainstream media or mainstream investor circles.
Mint Production/Retail Demand
One thing we’ve seen over the last 12-24 months is a large increase in demand for retail level mint products.
Perth Mint recently suspended production of their 5 and 10 ounce Silver coins so they could concentrate on more popular weights such as the 1oz and 1kg coins.
Some Silver Bullion Coins Suspended As Perth Mint Focuses On Most Popular WeightsAt The Perth Mint, the silver coin presses are now at maximum output. In fact, we’re at the stage where we may not be able to completely satisfy wholesale demand, circumstances we were forced to confront during the GFC.
Before anyone suggests we’re running out of metal – simply not true. It’s manufacturing capacity that is the issue here.
So how are we handling the situation? As we’ve already communicated to our dealers, we have initiated a capital project which will provide a solution in the medium term. Right now, however, we’ve decided to focus production on kilo, 2oz, 1oz, and 1/2oz silver bullion coins at the expense of the 10oz and 5oz weights.
Since the launch of the 2011 bullion coin program (in September 2010) 1.75m ounces worth of 1kg coins have been sold (up to mid December), that’s approximately 55,000 (1kg) coins.
To put that in context, Australia was the world’s 5th largest Silver producer in 2009 with 57.8m ounces produced. Assuming that level of production is similar today and we see similar demand for the 1kg coins over the next 9 months (that we’ve seen over the last 3), then we will see approximately 5.9m ounces worth of 1 kg coins purchased from Perth Mint (Sept 2010 to Sept 2011) or almost 10% of this country’s entire Silver production. Does that raise an eyebrow?
The Lunar 1oz range has continued to be popular with 230,000 of the 2011 Rabbits having left the mint, with the final 70,000 (of 300,000 mintage) being in production. It seems likely the series will be a sell out well in advance of the 2012 (Dragon) release.
Bumper Demand For Rabbits In Advance Of Chinese New Year
With just over three weeks to go before Chinese New Year celebrations kick-off on 3 February, 230,000 1oz silver bullion coins marking the Year of the Rabbit have left or are awaiting shipment from the Mint.
With a full mintage of 300,000, that means 76% of these coins are now accounted for. Sales are looking strong and as I write this post the factory is in the process of manufacturing the remaining 70,000 1oz silver coins.
The possibility of a sell-out is now looking extremely likely.
It’s not only the Perth Mint that has seen record demand for retail Silver products. The US Mint reported huge demand in the first two weeks of their 2011 coin sales with 3.4m coins being sold to date in January with 1.7m alone sold in the first day. Given the record of 4.26m coins sold in November 2010, it looks likely a new record will be set.
US Mint Sales: 2011 Bullion Eagles Off to the Races2011 bullion eagles launched on January 3, 2011. Silver Eagles already have last year’s January record in their sight. The coins have raced to 3,407,000 in less than two weeks after their latest weekly pick-up of 1,322,000. Until January 2009, the silver coins had never topped the 3 million mark during the first month of a year. Those record sales totaling 3,592,500 may get clobbered in mere days. The all-time monthly high of 4,260,000 which was just set in November could be the next victim. As a side note, the 3,407,000 sold this month includes 469,500 of the 2010-dated issues. The US Mint had buyers order one 2010 Silver Eagle for every five of the 2011′s.
The Canadian Mint has been no exception seeing record production of their Silver maple leaf coins in 2010. Shortages of this coin in the last quarter of 2010 saw premiums on eBay (and other auction sites) for Maples soar.
Speculators polish up the price of silverDavid Madge, director of bullion sales at the Royal Canadian Mint, says it has already sold in excess of 30 per cent more of its popular silver Maple Leaf coin than last year’s record 10m ounces.
One has to keep in mind that these are small retail products being sold in record numbers, not products that institutional and professional investors would normally be buying.
Not only are we seeing record sales, but there are reports of shortages here in Australia. Auspm, a member on the Silver Stackers forums reports:
Went into Downies in Sydney (Town hall arcade) today.Absolutely no specimen silver on display at all.No Kooks, No Lunars, No Koalas. No Eagles. No Maples. No Philharmonics. NOTHING!Asked when the next lot was in?'Nothing until MARCH' I am told!
'Silver is Money' in the same thread reports that:
A dealer in Sydney sent out an email yesterday informing that due to the holiday season there are short delays in the production of silver bullion bars from their suppliers and as a result there will be delays of between 2 - 3 weeks for 1kg.In another thread, MelbBrad reports that:
I ordered 15x1kg PAMP silver (amongst other things silvery and shiny) from ABC in mid December.
Was advised at the time that delivery to Melb would be the week of Jan 10th.
Just called now, they have revised the delivery date to LATE FEBRUARY!!!
John from the stellaconcepts youtube channel also discussed Silver shortages with Bryan from Ainslie Bullion (a Brisbane dealer):
Relevant section from 3:20
Shortages have not been limited to Australia, Zero Hedge recently reported that BullionVault.com in Germany had run out of Silver:
Due to high demand our own silver stocks are exhausted right now.Not a long delay, but a sign of a tight market none the less.
As BullionVault is only dealing with physical bars which are already in our possession, we are currently unable to offer, silver on our own market. Of course, our market is still open to all our clients act with each other and set their own prices. This situation could lead to buyers and sellers at higher prices. Buyers are asked to check the price again before they confirm their order.
On Tuesday, 18 January 2011, we expect the next delivery for silver.
Kruggerands, a popular South African Gold coin was also in high demand earlier this year leading to shortages that were reported in mainstream investment news:
World's Largest Gold Refiner Runs Out of KrugerrandsOf course an order of this size can hardly be considered "general public" buying, however given the form of purchase it also seems unlikely to be institutional buying. More like a retail buyer with deep pockets.
Aug. 28 (Bloomberg) -- Rand Refinery Ltd., the world's largest gold refinery, ran out of South African Krugerrands after an ``unusually large'' order from a buyer in Switzerland.
The order was for 5,000 ounces and it will take until Sept. 3 for inventories to be replenished, said Johan Botha, a spokesman for Rand Refinery in Germiston, east of Johannesburg. He declined to identify the buyer.
So with retail sized products being snapped up in almost "mania" quantities it's hard to believe that a majority of this buying is coming from the "smart" investors who have entered this bull market stealthily over recent years.
It’s becoming apparent that eBay users are buying up precious metal products (predominantly obvious in Silver currently) at well above prices available from the Perth Mint and other bullion dealers. In my opinion this activity is due to new buyers getting caught up in the hype and not doing their research on where to buy for a better price.
The below picture shows 10oz Perth Mint bars selling for well above prices available direct from Perth Mint on the same day, where these bars could be acquired for $320 + delivery costs:
Large premiums have not only been seen on Silver products, there have been circumstances where Gold products have also seen a premium, like in early 2010 where demand for Sovereigns increased strongly due to the financial instability in some Euro-zone areas:
Profits from Gold Sovereign ShortageEven as South African Krugerrands continue to be in strong demand in Europe, British sovereigns are the coin of choice for gold buyers in Greece.
In the first four months of 2010, the Greek central bank reported selling 50,000 sovereigns from its gold reserves. Bank officials also estimate that another 100,000 coins had changed hands in the nation’s black market. The Bank of Greece has sold these coins at prices so high that buyers effectively are now paying more than $1,700 per ounce for the gold content.
The last time I recall Silver premiums like we are seeing now was in late 2008, however that was at a spot price low, rather than near 30 year spot price highs like we are seeing today.
Lines at bullion/coin stores
When talking about the signs we might see in a 3rd phase of the bull market a lot of Gold bugs & commentators will talk about the "lines around the block" to the bullion/coin stores, like was seen in the last bull market. They imply that until we see that level of visible public activity that we are not yet in the mania phase. This fails to take into account a few different factors.
ETFs/Online Trading/Electronic Gold & Silver
We are living in a world that is constantly evolving and changing to keep up with technological advances. It's only been during this bull market that we've had the introduction of precious metals ETFs, pool accounts and electronic metals that allow the easy purchase of Gold/Silver online (sometimes backed by real metal, stored by a custodian).
Access to changes in the price of Gold/Silver using these products means that there may be a rush on precious metals without seeing people lining up on the streets to buy physical. Unless we see a situation where people literally need to barter with physical (e.g. a SHTF situation) or if one of the major companies that store physical metals for their customers defaults on delivery (and we see a fear of "paper metal" products), then I find it highly unlikely that the entire general population will head down the physical path
The reality is that we may not see the “lines around the block” to the coin/bullion store that was seen in the 70s (at least not in western societies). There are much easier ways to buy or gain exposure to precious metals than there was 30-40 years ago.
Further to this, forums, blogs and other resources on the internet make it much easier for people to research precious metal mining companies. This may lead to more money being allocated to the precious metal stocks (which often offer leverage to the physical price) than was the case in the 1970s bull market.
Another factor that will reduce the foot traffic at bullion stores is the ability to buy physical metals online and have it delivered. There are many dealers that offer online purchase and delivery, infact some rely entirely on this business model without having a physical shop front.
There is a lot of discussion about online ordering of metals on related forums such as Silver Stackers, GoldIsMoney and Kitcomm. eBay and other online trading sites also allow the exchange of precious metals via post or in person without the need for a bullion store.
I have no doubts that those that invested in bullion early are a resourceful and intelligent bunch. It seems more likely when it comes time to sell they will redistribute to the public via channels that will net them the best price (and most anonymous form of disposal) and that's unlikely to be via sale to a dealer.
West vs East
Another thing that most fail to consider and discuss is that during the 1970s Australia and other western economies had a much higher savings rate. Also we were much less choked by the interest payments on our mortgages, which begs the question... just how many dollars does the average Australian (or American) have spare to put into Gold and Silver if we do hit a mania/bubble stage?
The chart below shows how much of our (Australia's) disposable income goes into the interest on mortgages. Even with interest rates much lower today than in the 70s the cost of interest alone is higher than double what it was during that time, simply due to the ridiculous house prices we have today.
Today's savers are not in the west, they are in the East. Based on this I think rather than watching the lines of stores in developed/western countries, rather we should watch the store lines in emerging economies in countries such as China and India.
Summary and Conclusion
So to quickly summarise what we are currently seeing:
- Price action which is mimicking a bubble chart
- Similar length of time to 1970s bull market
- Mainstream media coverage increasing
- Record mint production of retail products
- Shortages of retail sized products
- Premiums where public would be buying
The above discussion points are not hard evidence that we are entering the 3rd phase of the precious metals bull market; however they certainly do paint the picture that we may be doing so. Some of these occurrences (shortages, premiums, etc) were seen in late 2008, with the difference being that it was with a falling Silver price, rather than with the 30 year highs that we are seeing at the moment. I expect the interest in Silver to remain strong over 2011, likely pushing the price to new 30 year records. I think there is a real opportunity in Silver stocks which are still reasonably priced given the rise we’ve seen in the Silver spot price.
All the above said, while I think the time left in the bull market will be short, I think the price rise from here could be spectacular. In my opinion the 3rd phase of the 1970s bull market started in mid 1978 and the price of Gold better than quadrupled between then and the intraday peak in January 1980, a short 1.5 years later.
If heavily invested in the metals, make sure you have an exit plan, make sure you keep your eyes open and you're mentally prepared to sell your metals when it makes sense. No doubt there will be a lot of hype at the peak, greed will consume most when Gold really starts to move, many will hold through the peak and all the way down the other side. Don't be one left holding the bag.
As I said at the start of this post, I welcome and would encourage you to comment below.
Disclosure: Positions held in Silver, Gold and related stocks. Not investment advice. Do your own research.