Sunday, December 18, 2011

Gold/Silver on the verge of bubble phase

Many times over the course of writing this blog I have attempted to publicise that I believe we are on the verge of Gold (and Silver) heading into the bubble (3rd) phase of the precious metals bull market.

Back in January this year I made some observations:
- Similarities between bubble chart and the metals (2008 being the bear trap)
- Similarities in time frame between this bull market and the 1970s
- An increase in mainstream media & investor/trader coverage
- Increase in retail sized bullion demand resulting in shortages/wait times
- Premiums increasing on sites like eBay

Further coverage included this post where I compared month on month gains between the 1970s Silver spike and today's: Silver Bull Market - 70s vs Today and then another similar one more recently where I looked at the percentage gain between the Gold bull market in the 1970s and today where the 700% gain marked where Gold headed parabolic last time (and we just passed the same mark earlier this year).

I've looked at the cyclical nature in Gold vs other assets such as houses, oil, the dow and even vs wages. In many of these cyclical measurements there is room for Gold to head higher if it is going to perform similarly to the last bull market peak. Of course we can't take it for granted that things play out exactly the same as last time.

There were some interesting comments made by poster 'briefly' on Macro Business last week. After suggesting it looks like the Gold bull market run is over (not really providing any real reason to support this specific point) he went on to post the following:
The property bubble lasted for a lot longer than 13 years. I think the gold market – like the property market – depicts a series of ricochet effects from the whole anarchic credit expansion cycle.

The credit load in advanced industrial economies has become incredibly large, so large in fact that even with very low or negative interest rates, the real economy is struggling to support the accumulated debt burden.

In my opinion, this is ultimately related to the role of the USD as the global reserve currency. Long-run stable growth in the non-US world and the corresponding increase in global trade flows has required a plentiful supply of USD. This supply has been met by the ongoing creation of dollar surpluses, at least since the 1960′s.

Of course, the obverse side of this is that the dollar supply needs to be financed somewhere inside the US economy – in practice, in the balance sheets of households and their proxy, the US Government. This process appears to be on the point of exhausting itself. It is axiomatically almost impossible for the both the US Government and households to achieve a net income balance at the same time, while also maintaining economic stability. However, the US is not far from the point where achieving income balance is going to become a mathematical imperative.

Like the Europeans, the US is now in a position where it is almost impossible to either grow or shrink their way to fiscal balance. The logical consequence of this is either depression or permanent fiscal instability.

The result of moves to simultaneously balance the accounts of both the US Government and households will be deep and irrevocable contraction in the US economy. If this occurs, it will catalyse a reversal of the process by which surplus dollars are supplied to the global economy. Dollar shortages will ensue, which will provoke additional contraction in the non-US world.

In turn, this will induce the collapse of the post-Bretton Woods reserve system as economies seek to combat the deflationary consequences of USD-hoarding.

For the moment, the unfolding and completely ineluctable collapse of the Euro is driving flight to the USD. But this is not sustainable for long, as USD-appreciation will impel contraction in the already-labouring US-economy. This will only be intensified by the competitive devaluations that will follow the re-basing of European economies in non-Euro currencies.

The result will be recurrent crisis, contraction, deflation and insolvency. My contention is this is far more likely to lead to the widespread cancellation of debts than to money-printing, not least because in an insolvent world, money-printing will cease to be an effective means of re-booting stricken real-world demand.

Will gold hit USD275? In a deflationary world, anything is possible.
I agree with a lot of what he posted. Deflation, contraction and debt cancellation could come about as opposed to the hyper-inflationary, end of all fiat currencies destruction that some predict. Although I don't think Bernanke & The Fed are going to go down this path (deflationary) without a fight. They have continued to highlight that they are "prepared to employ their tools to promote a stronger economic recovery in a context of price stability". I think 2012 is likely to bring in the use of increased stimulatory measures by the Fed, most likely to be publicly titled as QE3 (4/5/6?).

It is my opinion that these last ditch efforts by the Fed to avoid deflation will send the USD tumbling and Gold soaring as it launches into the final bubble phase of this bull market. The deflationary bust that briefly predicts could come about after this in a couple of years and be the driver of Gold's bear market following the bubble (although given the heights I think Gold is heading to I very much doubt it will be dropping below US$1000oz let alone to the US$275 briefly suggests is possible).

Gary Savage is the trader behind the Smart Money Tracker blog, a trading blog which I have linked on this site before. For awhile now he has been talking about a top for Gold following another 8 year cycle low in 2016, suggesting a peak of the bubble around 2017-2018, this from July:
2016 is when the next eight year cycle low is due. My best guess is that we will get the parabolic bubble top for gold in 2017 or 2018.
However, here is what he had to say a couple of days ago:
I know that during a correction of the magnitude we are seeing right now it seems more like the gold bull is dead than on the verge of moving into what I expect will be one of the greatest parabolic moves in history.

However, all of the conditions necessary to launch the bubble phase are now in place. Gold is in the process of putting in an intermediate degree bottom. That bottom, which is only days away if it didn't already happen today, is going to be the single greatest buying opportunity, probably of the decade.

Gold sentiment is at multiyear lows. Retail traders that bought at $1900 have gotten wiped out. The media is full of stories calling for the death of the gold bull. Institutional traders from John Paulson, George Soros, and Dennis Gartman have all gotten knocked off the bull.
And then a little further on:
The scenario that is unfolding in the CRB and dollar indexes has me wondering if the gold bull isn’t going to start evolving much faster than I originally expected. Let’s just say that if I am correct and the dollar is on the verge of topping then we are probably going to see a much shorter consolidation than originally expected. Gold could launch much more quickly out of the B-Wave bottom than I expected and move to new all-time highs as early as the next intermediate cycle.

As a matter of fact I’m pretty confident that if the dollar turns down it is going to trigger the beginning of the third and final, bubble phase, in the gold bull market.

The public is already starting to become aware of the gold bull. All we need at this point to start the flood is for gold to recover quickly from this selloff. If gold quickly shoots back up and tags, or penetrates that big psychological $2000 number I expect it will be the siren call that draws the public into the bull market. And it is the public coming into a market that triggers the bubble phase.

During this phase of the bull I expect we will see the normal ABCD wave pattern break down as gold starts to accelerate into what will almost certainly be the most incredible parabolic advance, maybe in history. By the fall of 2014 I expect we will see gold somewhere between $7,000 and $20,000 an ounce.
I subscribe to Gary's premium site. I don't actively trade following his model portfolio, but I do find his charts and common sense commentary worth the subscription cost (although he shares a useful amount on the free blog). He raises some great points along the way and often superbly catches bottoms in the stock and Gold market using a combination of signs including sentiment, cycles and technical analysis. If he thinks Gold is putting in an important bottom here, I am listening. His new target date for the bubble phase in Gold fits in with my statistical and anecdotal observations on where we are in this bull market.

The correction that is playing out presently has the potential to push Gold lower short term, however it certainly could be the last great buying opportunity before the move to astronomical highs as the metals go from strong growth to bubble territory.

Bubble markets can shock with their intense moves higher. Gold went up a multiple of 5x in the last 2 years of it's last bull market and a repeat performance today is definitely possible if the right environment presented itself.

If you're expecting a similar outcome for the metals to me then I hope you're prepared for what's to come, both from an aspect of asset positioning as well as mindset ready to sell into what could be a deafening stampede from the public into Gold and Silver (as they seek to protect from themselves from the perceived or real danger that quantitative easing will lead to the death of fiat currencies).


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  1. of course if there *is* real danger of fiat failure (Fix It Again Tony) then it would seem selling ones gold may not be prudent unless one has another investment strategy for that

  2. It's certainly a possibility (fiat failure), although not an outcome that should be relied on in my opinion. I won't be attempting to sell all my Gold at the peak, will continue to hold an ongoing physical position. If we get back to 100 ounce per median house Gold price that's probably where I'll be trading it rather than going back to cash.

  3. just a question in theory. I had some sort of understanding that there was no capital gains taxes or GST on gold sales (ato has some interesting and unclear points). So in theory on refined gold which one may have been accumulating over some years, one could fund a house purchase and not be subject to crippling taxes ... at least as things stand now ... is that your understanding too?

  4. GST does not apply to 'investment grade' bullion, so your .999 bullion bars and coins won't attract GST, but for example gold sovereigns (.916) and sterling silver coins (.925) will attract GST (when purchased from a dealer).

    CGT does apply to Gold and Silver bullion, so theoretically if you buy and then sell or use the metals to transact in a housing purchase you will owe CGT on the gains (held over 12 months would see the usual 50% discount). There are some exemptions, for example potentially sovereigns could fall into the purchased under $500 collectables category and some say that the legal tender status of Perth Mint coins means they do not attract CGT, but I think you would find there would be limited practical applications to these loopholes and if caught trying to use one inappropriately would probably be bulldozed by the ATO.

    If purchased discreetly there are ways to ensure your Gold and Silver has no paper trail...

  5. My 2c...

    I think we will see some more movements down in USD terms, possibly to around $1500.

    But, honestly, I think that there will be far too many people (even including evil speculators!) that would think $1500 is too cheap for, given the amount of actual and potential fiat/govt carnage in the works, such that $1500 would see the bottom for quite some time.

    Personally, i think slow-ish rallies with sharper but less substantial "corrections" will occur after the next substantial phase of selling in PMs - ie. maybe gold to $1500 and silver to $25 USD/ounce...but steps and and down from there, gathering parabolic pace over the next few years.

    The truth is, this is currently about Faith - the fundamentals.

    But, like many bubbles, it will morph into a fundamentally-based frenzy that will build upon itself until the relative price is significantly divorced from its justifiable basis.

    The way it gets "there", though, is what is confusing many people at the moment, IMHO: for the "gold is a bubble" crowd, they are confused why such a liquid asset has "bubbled" for so long, has had major corrections, and still keeps going up; for the "gold has fundamentals" crows, too many of them are too simplistic in their thinking - if it's supposed to "go up" because of the fundamentals, why does it keep coming down so far and fast, so often?

    For both, they underestimate just how significant speculative financialisation is, and just how far it can drag a price in either direction, on a fundamental base. For the former, they do not quite realise that it is not REALLY about fiat dilution (printing, etc), but about fiat FAITH...

    ...where the USD and Gold (PMs) do not actually represent two commodities competing as "money", but, instead, two stores of mutually-opposed FAITH: the USD as a store of faith in fiat/govt decree; and Gold (PMs) as a store of "non-fiat" or "un-dollar" FAITH.

    ie. they are opposite sides of the same coin, so to speak (excuse the pun!).

    /end sermon

    sorry, i just blogged on your blog!!

    Thanks again,

  6. BB thanks for the refresh on the regs (as you understand them). There is very little paper trail on much of my holdings as much was purchased over 20 years ago.

  7. Stewart, I think there is a lot of truth in what you write. Many talk about the fundamental supply/demand drivers of the Gold market, but a lot of this is driven by faith/sentiment and will turn on a dime when the time comes.

    $1500/$25 for Gold/Silver is a definite possibility.

    I think the parabolic move could develop quickly, very quickly with the right environment. It certainly did in the 1970s:

    Gold $35 -> $169 in 8 years, then $169 -> $850 in 2 years (doubled from $400 in last 2 months).

  8. Hey, $1550 now, AND the AUD is holding up relatively well....

    Am considering getting the AUD pennies out once is gets to around $1500...

  9. Some good buying at the moment, I've dipped my toe in with some Silver and if we get back down to under $26 I'll be after some more. Gold at $1500 would be tempting as well.