Friday, April 8, 2011

Someone Please Explain To My How There Can Be A Bubble In Gold And Silver

The idea is absurd.  In today's Denver Post, just like everyday, there are two outfits running full page ads asking/begging to buy your gold and silver.  These ads are not cheap to run, which means there are plenty of people out there unloading their bounty.  DEFINITIONALLY, an asset class is in a "bubble" state of being when the masses can't buy enough of an asset class.  The most recent and obvious examples are the internet stocks of the late 1990's thru April 2000 and the housing market.  With housing, there were bidding wars among buyers of crappy homes that had already quadrupled in price, buyers typically owned multiple homes and were looking to buy and flip and leverage was being used to the fullest possible extent.  THAT is a bubble.  THAT state of being does not exist in the metals markets.  It's that simple. 

Here's some support for my view from James Turk, one of best market analysts I have ever come across in 30 years of involvement in finance:
We finally broke through resistance of $1,440 and in my opinion we’re starting to see the beginning stages of an upside explosion in gold.  It’s sort of amazing to think Eric that here we have gold at record highs and it still hasn’t yet caught the public’s attention.
Here's the LINK to the full text of Turk's comments.

In fact, not only is the general public a better seller of gold and silver, rather than chasing the prices higher as buyers in true bubble form, but big institutions have not yet moved into the sector.  GLD exposure does not count - or any ETF for that matter except the Sprott trusts - because the ETF's are nothing more than paper investements.  You need to have the ability to take delivery of the physical metal at your command in order for it to be considered a true purchase, or transfer of ownership/title transaction.  Anything else is fiat paper.  Here is a perfect, factual illustration of my point - I sourced this chart from Casey Research (edit in red is mine):

This chart shows the value of gold as percent of total global investment assets.  Still under 1%.   As  you can see, back in 1968, before anyone even knew what an investment bubble was, gold represented just under 5% of global financial assets.  Now, historically it has been an accepted tenet of portfolio management that gold should represent 5-10% of any investment portfolio, if just for the reason that it has a negative market beta.  That chart shows me that, at best and on average, gold is less than 1% of investment portfolios, institutional and individual.  How the hell can this possibly be the statistical profile of an asset that is in a bubble?  This chart tells me that there is an absolute tsunami-sized flood of capital that still has yet to flow into the sector before we can even begin to whisper the "B" word.

Thus, not only is gold NOT in a bubble state, but it BARELY registers as an investment with big institutions AND the public is still dumping it.  The day that I open up the Denver Post and I see several full-page ads of companies offering to SELL me THEIR gold and silver is the day that I start to unwind my investment in gold/silver/mining stocks and come up with a new investing paradigm (rest-assured, I will likely have already formulated a gameplan before that happens).

So, for all of you who want to believe that the gold trade is "too crowded" and is in a bubble, I am happy to buy everything you want to sell....buon fine settimana a tutti!


  1. The day my friends, neighbors, brothers and brother in laws come to me and want to know how to approach the PM market is the day I sell.

    on target post Davey

  2. Hal, from what you told me, those folks will drown in their own paper lol.

  3. and I bet we all think the shutdown is orchestrated to mask the GDP weakness-another excuse.

  4. Dave: when my wife tells them about the TP and canned food I have stashed--they are almost literally ROFLTAO.

  5. Brick from Channel 4 News TeamFriday, 08 April, 2011

    Where'd they get that paper? ... the toilet store?

  6. Dave, so in your opinion, and from all the indicators out there, do you believe this is still a good time to buy PM's, even at $40 & $1470 per oz, plus the premiums?


    Just interested in others' opinions; of course I will Do My Own Due Diligence.)

  7. LOL Hal, Brick

    Mammoth. It may not be the best entry point in the context of the next few months, and then again it might be. But eventually there will come a time when people are lined up outside of coin shops waiting for mint shipments to come in and they'll clean out the coin shop in minutes. That happened in 1980.

    Eventually you will have to pay much higher higher prices and pay MUCH higher premiums to get metal.

  8. The only obvious bubbles I can see are coming out of Bernank's and Obama's pie holes.

  9. I keep seeing silver = Nasdaq charts but that is not comparing like things. I think Redhat was up 4000% in 3 years or something stupid.

    In any case, played AUY, CEF, SA, and todays big winner PAAS since Monday-Tuesday. It was a good week.

  10. Dave,

    Regarding the graph of gold as a percentage of financial assets. Does that 1% include paper gold or is that just the $$ value of physical gold?

    If it includes paper gold that's uber-bullish b/c then the percentage of real gold has an even smaller %.

  11. Hal,
    I wouldn't sell the day they come to you, but more likely appx 6 to 9 months after they ask.
    The public flood usually lasts a little while. I will be using the Nasdaq of 1999-2000, and other public investing manias as my models.

  12. Hal,
    I agree except that i will just be looking for topping patterns as they ask me. Typically the public mania last a good year to 18 months. I've been telling friends and family to buy for a couple years now. Have consistently got the same response..."How much is gold? Isn't that too expensive?" or Laughter, ridicule etc.. In late July i was telling my brother in law that silver was likely setting up for a run (obviously I didn't realize how good my timing was), he laughed.

    Fortunately my Dad and step mom let me invest their retirement accounts for them. THey've had a good year.

  13. Dave, so in your opinion, and from all the indicators out there, do you believe this is still a good time to buy PM's, even at $40 & $1470 per oz, plus the premiums?


    Always is a good time to buy Physical. These prices are a gift..BTFD


  14. The 0,7% are physical gold?

    It would be interesting to know how much the percentage of paper gold & silver is. The people who THINK they own REAL gold/silver...Does anybody know this?


  15. Fubsy:

    Selling my PM positions cannot be done in a short time frame as I suspect many here would face the same issue.

    I suspect there will be a moment when we realize it's time and we start selling into what might be topping action.

    That would take care of miners and the better ETFs (CEF, GTU, PHYS and PSLV). For Physical, the kids already know these are the family crown jewels so to speak and get handed down in case of an economic emergency landing (which may be closer than I think it to be).

    In retrospect, the nasdaq was a slow leak. But all too many threw in the towel early 2000 and bought CSCO etc.

    Most folks do not want to spend the time and energy and effort to figure this whole thing out. They will attribute our success in this to luck. Frankly, I have given up on my family and friends who do not want to buy into this concept. Even non prec metals--I game them rare earth names 2 years ago and they did not even go there. So no more discussion.

    I am going to the Chicago Nat resources conf this weekend --2 day affair--been going for 4-5 years now twice a year-I could go golfing or to a playoff game like others--but this stuff as we know is rather important.

    But this is like preaching to the choir. The folks here are far more into this (appropriately so) than the 99 percenters.

    You get out of something what you put into it.

    Let's see silver stay above 40.

  16. I also like marc faber comments on gold " At a meeting of financial professionals, when he asked how many of you have at least 5% position in Gold, he said not a single person raised their hand"

  17. It is strange that I see other people who present charts that show that gold is at the very least approaching a bubble. Everyone seems to have their own charts that they pick and choose from to support their position. No one knows whether or not gold is in a bubble. How high is up? We do not know. Does anyone here have a crystal ball? People might think they know and then sound arrogantly sure about it but they do not really know. The best thing for most people is to have a diversified portfolio allocated according to their risk tolerance.