Saturday, April 2, 2011

Gold moves to next bubble phase?

Most regular readers would be familiar with my thoughts on where we are in the precious metals bull market, I think we are at the business end and will soon (within 2-3 years) be heading parabolic (into a bubble).

The Prince posted a great article the other day on Macro Business and is happy for me to share it with readers here. I will post a few comments at the end.


Gold moves to next bubble phase? 

Investing and speculating in gold is almost as emotive a subject as residential property, so I’ll try to keep this short and sweet.

I treat physical gold as a “Type Zero” security asset, a small insurance hedge against financial instability – a “Minsky Metal”. (I will publish an article regarding my research into the “Minsky Metal” and how I treat capital assets differently in the future) 

Physical gold may have a place in a future reserve currency or SDR (most likely alongside a basket of other currencies and goods) if the modern monetary system changes, and if so, the intrinsic value of gold should increase, but this is nothing more than speculation.

When it comes to the derivative of the shiny physical stuff, I throw out all these notions and see gold for what it is: a speculative commodity/currency. I trade gold futures from time to time (only because its behaviour is very similar to my equities based trading system) and have studied its long and medium term price behaviour, correlated against other risk assets. 

Most of the time, in a flight to safety during a dip or correction in a secular trend (or the current bear market rally), it is dumped alongside other risk assets as speculators move back to the USD. Interestingly, this hasn’t happened as harshly in recent “safety” events, which may show an internal resilience to the gold “bubble”.

There are (worrying?) signs that gold may be moving into the “Media Phase” of the classic bubble chart by Dr Jean-Paul Rodriguez, as seen below, which may go someway to explaining this slightly different behaviour.

If the GFC was the Bear Trap....

Mad Jim Cramer, the notorious CNBC shock stock jock, has proclaimed that everyone should have gold in their portfolio. This is usually a deathknell for stocks and other assets (although to give Cramer a break, he has been right most of the time during this crack-up boom in US stocks – but then everyone thinks they’re a stock-picking genius when everything is going up.) 

Rotten Apple (Macro’s man in Manhattan) has reported before about the bombardment in the US media for retail investors to pile into gold. The Bullion Baron (my favourite Australian gold blogger) has also talked about gold’s rise in the Australian/Asian media.

The definitive main in Australian “mainstream” media, NineMSN has recently published an online article (h/t to Burbwatcher) claiming that “gold could hit $US1600 an ounce”, although the story is made up of a series of quotes from a very bullish gold investor. 

The Bullion Baron (my favourite Australian gold blog) has talked about this new media previously.

From Media to Public
What makes this seemingly new media phase different to the even more bullish “public enthusiasm” stage? Similar to other speculative assets like property, you need to take care of signs that the bubble has taken hold with the crowd including:
  • almost all financial planners advocating a strong gold presence in your portfolio (and never physical, always via an ETF or a structured product) – by strong I mean more than 2% which seems to be the standard for professional investor advice
  • talk at social gatherings (e.g BBQ’s, dinner parties etc) about people buying gold, shares in gold mining companies etc online and claiming “its obvious to anyone that it will replace the dollar as a currency – you’ve got to buy some!”
  • any discovery, or possible discovery or expansion of current mining operations publicised by any gold mining company results in said companies shares skyrocketing that day (intraday moves of over 100% are not out of the question – bigger companies like KCN, NCM etc could go up by more than 10% each day). Year on year tripling or more of share prices will not be uncommon.
  • mainstream media articles explaining how even if a bit expensive, gold is now a good part of your portfolio for diversification, pointing to the lack of downward price whenever markets correct or dip (thus self-justifying the “it can only go up” behaviour)
  • charts proliferating showing gold is “not in a bubble” but rising in correlation with the fundamentals. Most of these charts will be constructed to obfuscate the exponential price rise, like the current “price-to-income has been flat for 10 years” for property.
  • more ETF/trading vehicles for gold become available for the retail investor, including built-in leverage (the “Ponzi” moment when investment banks look for as many ways possible to make money out of the bubble)
Tin-foil hat conspricacy theorists aside, have you heard or seen any of the above in great quantity or broad reach yet? 

From Bull to Bubble
I contend that for a bull market to transition to a bubble, the uninformed (and greedy) crowd has to move in and bid up the prices, using “fundamentals” to justify their fear of “missing out”. This clearly occurred in the NASDAQ boom and the US housing boom of the last decade, and its peak has probably occurred already with the Australian housing bubble (although I can only hear a hiss, not a pop – I’ll let others work that one out).

The DotCom NASDAQ Bubble....

TEOTWAWKI – and I feel fine…
Just to be clear (I’m beginning to sound like John Cleese in Life of Brian) I contend that physical gold is not a speculative endeavour, as only a very small minority of people actually own physical “Minsky Metal” although its price is quoted daily at the end of our nightly news as if we all have a few ounces at home.

However, like all other risk assets, gold trading in non-physical form is purely speculative and there are clear signs that this speculation is spreading. The memes of “higher inflation” and continued ZIRP by the ECB, BOE and The Fed could provide the turning points for the crowd to step in and bid up gold to new heights, thus justifying the bubble itself.

Participants and non-participants alike need to observe the careful dynamic of psychological behaviour of bubbles and manias and take defensive (and possibly profitable) actions where necessary.
Disclosure: Regular readers know I’m a full time equities trader, but I also trade gold from time to time (usually long but sometimes short). I also own physical gold, but only as a “Minsky Metal”, and only as a small part of my portfolio. My investment company does not trade in, nor invest in gold or gold mining companies.


The Prince points out in the above article that Gold's intrinsic value could be pushed higher in the event of it's use in an SDR. Presumably such a change in the monetary system would require allocated Gold to be set aside for this purpose pushing up demand. Something to consider is that Gold may very well reach the price peak of the current bull/bubble before a new monetary system is introduced, so waiting for monetary or currency changes (because they are "inevitable") before trading out of Gold could be a mistake.

I like the practical suggestions The Prince has made for signals to look for when watching for signs of a bubble mentality. More often than not when I see commentators talking about signals to watch for they make a list in jest such as Peter Schiff did here. Funny, but not particularly helpful.

Not all buyers of Gold and Silver are looking to try and time their exit from the bull market, some simply "stack" the metals as a form of savings. For these buyers talk about the different stages of a bull market is largely irrelevant. 

For those of us who are looking to time the market The Prince talks about some signs that indicate we could be entering the 'media attention' section of the phase chart (start of the mania phase). He posts a link to where popular TV host Jim Cramer advocates Gold in the above article. Not only has Jim Cramer been advocating Gold recently, but also Silver (!) as per the below video:

As I've mentioned before, (to his credit) Jim Cramer has been an advocator of holding (some) Gold for a number of years and I have heard him talk about Silver before (usually the ETF: SLV), but not in the same way he does in the above video. One comment he made really rings true:

"Those who do not deal with the physical really don't understand the true demand."

Until you physically hold and own some real metal for yourself it's just not possible to understand.

A bar I bought recently


Disclosure: Position held in Silver & Gold. Not investment advice. Do your own research.


  1. Good Morning BB

    Well, a great end to the week with all them Banksters running wet scared with their shorts (pun intended) meeting a fiercely determined stand against the British forces.

    Most analysts don't understand that 5 billions Asians culturally and traditionally deal in Gold daily where the European team A is merely a handful (but now has grown far more but still nothing compared to the Asian Dream Team.

    Gold is an innate retreat when one senses that "leadership" is done and governments are about to collapse - a revolution - such as now. Fiat currencies collapse, goods demand more fiat and Gold appears to increase in value.

    Gold does not increase in value, but the demand increases as a proportion to the size of the popularization that has access to hold.

    Don't mistake Oz jewellery Gold for real Gold.

    Gold is the expression of a loss of Trust and Confidence in Government.

    Trust, Truth and Ethics are the three sources and the foundational fundamentals of socio-economic growth and prosperity - and you may have noted that none are in play in the "leadership" sandboxes anywhere in the World with perhaps the exception of Singapore.

    Gold is where it is at - Silver is also where it is at but it is also a bet as the spread is seen to be reduced from 50:1 to a more ancient and traditional 16:1 - at the moment it is at 38:1; compelling. Those that don't hold physical will be disadvantaged - but beware of Government confiscation! The Laws to confiscate our Gold are well in Place in Australia; placed there by British orders, naturally and typically. Ask Peter Costello, he's an expert along with Gordon Brown.

    The Governments and Central Bankers have now manipulated so much and in so many places, while in their sudden desperation for urgent purchases of Gold, have forgotten what their original purposes of the stealth market interventions and manipulations were all about - their models are glaringly paradoxical and will wrought them a place with the dinosaurs.

    The Government system in Oz and throughout the World is guaranteeing its own demise by the insanity of their actions and the incompetences of their bleetings aka policy, all, analogically, in the known biological state of "extremis".

    Expect the exponential break-out in Gold and Silver at any time now (I have no idea when) and at this time, the most significant global socio-economic event will me marked (measured) since ~1300 BCE. Keep your eyes open for a new Epoch.

    The trigger? - any small event the tips the scales to a "critical mass". The Minsky Moment of the Epoch. Consilience - Resonance.


  2. "Until you physically hold and own some real metal for yourself it's just not possible to understand."


    PeterJB, can you elaborate on:
    "The Laws to confiscate our Gold are well in Place in Australia"
    I was not aware of any confiscation act?
    (I am also not a lawyer)

  3. @ Anon
    I am also not a lawyer but I have seen and read the parts of the relevant Laws pointed out to me.
    There are some discussions at:

    Follow the links and you will find the arbitrary right of the government to confiscate your Gold and Silver. There is no confiscation Act that I am aware of.

    Research is your responsibility as is paranoia.

  4. Another reference for you on the British Government right by Law to have its Australian Government confiscate YOUR / our Gold on its behalf: Keywords: | Governor General | "shall deliver the gold to the Reserve Bank" |

    Do you really think that they would stop at just Gold?

  5. Thanks Peter for the great references.

    I guess the reality is that there is a possibility, however slim, that some form of confiscation could occur in Australia. It would take an unprecedented incident in my opinion.

    I think for the general public with personal holdings of Silver (under the 500oz) mark need not be too concerned. Even the odd ounce of privately held Gold is pretty safe.

    Registered metals stored with the Perth Mint carry a greater risk of confiscation is my interpretation of the above material.

    Thanks Again
    Great Info

  6. Some great posts as per usual Peter.

    Indeed the price action must have those short the metals in a panic. Silver's march higher has been impressive and Gold is looking like it will make new all time highs again soon.

    I do think the risk of confiscation is slim, but you never know, pays to spread the risk, some physical, some miners and Gold proxies (e.g. ASX:PMGOLD)...

    Recent events in the Middle East have shown that all it takes is the right trigger to set off a chain of events that almost defies belief!


  7. From all the clamour of 'cash for gold' - here comes one on the 'buy gold!' side. is selling, get this, "The Smallest Gold Coins In The World"

    Check out their 'Our Products' - 'Collections' and you will see it, but without any scale beside it.

    The summary details are amazing. They claim to sell "genuine legal tender gold coins" that are 0.5 gram, "99.99% pure gold" (making it unusable for handling) and you can get this "‘Australian Kangaroo’ at the introductory offer of only $59.95, a saving of $70 off the regular price, $129.95."

    Wow. Gold coins at better than half price! Hmm.

    My little investigation so far has found that these people are indeed members of the ADSA (Australian Direct Selling Association) as their website says, but under a different name

    A Google Search shows that this 'mint' has been offering badly overpriced coins at least since 2009, and for this coin it seems that they are reselling the Mini Roo from Perth Mint as seen here:

    The scams are turning from sell to buy! The mania begins!

  8. There is a silver plated Pan Am bar doing the rounds.
    Some say it is fake.

    Does anyone have any answers?

    1. There are some fake Pan Am Bars going around, see this post:

      Make sure you buy from reputable dealers. Avoid eBay.