Gold at Foothills of a Mania

By: Jeff Berwick | Sun, Oct 24, 2010
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The connotation of "foothills" is a perfect way of stating precisely where we are at in the collapse of the US Dollar based global financial system and the return of the king, gold, as money. It is perfect because while we are certainly seeing a movement towards a mania, with gold hitting fresh all-time highs in US Dollar terms on almost a daily basis throughout September and much of October, we are still far from reaching the top of the mountain.

We have begun a) to enter into the mania stage but b) we are still a long away from reaching its peak. Here are arguments and proof for both statements.


Indications that the beginning of a Mania Has Started

We borrowed the following illustration (below) from Dr. John Paul Rodrigue of Hofstra University because we thought it gave an excellent depiction of the progression of most manias. It should be pointed out, however, that we don't necessarily see gold as being in a "typical bull market". What we believe we are witnessing is the return to gold as money after decades of suppression. However, we believe that the mania phase of this progression will transpire. The part of this graph that does not make sense in terms of gold is the part after the "New Paradigm" is reached.

It is our belief that once we reach the new paradigm, it actually will be the new paradigm. There will not be any denial nor "return to normal" because returning gold to functioning as money is in itself a return to normal. That is not to say that certainly gold will likely overshoot, by a great amount, its "true" value at the height of the collapse of the US Dollar based global financial system in terms of its value in comparison to other goods. And there will be a time when it will make sense to sell some or all of your gold in favor of other assets. But for our purposes lets use this chart to try to approximate where we currently are in the mania stage of gold.

In our opinion the "Stealth phase" was the phase between 2001-2004 when absolutely no one but a few, such as The Dollar Vigilante's all-star Senior Analyst, Ed Bugos, were pounding the tables to buy gold and gold stocks - but no one listened.

For those that have been invested in this sector since 2004, you will recognize the period from 2004-2009 as being the awareness phase. Many junior precious metals stocks, such as Osisko Mining (T.OSK) and literally hundreds of others were all of a sudden going from $0.25 to $5 and doing massive $50 million+ financings with savvy institutional investors.

And, for those of you who lived through the brutal sell-off of 2008, you will recognize that as being the "first sell off / bear trap" on the chart below.

And that brings us to August of 2010, which began the very first baby-steps into the mania phase. You can see all the signs of it around us now. Gold is mentioned more and more in the media and it has begun to start making all-time highs on a regular basis.

Mania Phase

The dumb money, governments and central banks, are finally starting to catch on to what is happening. The central bank of Bangladesh bought 10 metric tonnes of gold from the IMF last month. This is on top of 212 tons of gold the IMF sold last year to the Reserve Bank of India, the Bank of Mauritius, and the central bank of Sri Lanka. And Saudi Arabia, Russia and the Philippines have recently announced big additions to their gold reserves.

Even Jim Cramer now likes gold. If that isn't proof we have begun the mania phase we don't know what is.


Gold No Where Near Peak

But how can we be sure that we aren't very close to the peak in the precious metals market? Nothing is certain in life but there are numerous indications that we are still early on in the mania phase.

First, Nick Laird who runs the superb gold-data website, Sharelynx.com, and is a subscriber to The Dollar Vigilante, gave us permission to use a chart he put together comparing gold & silver at its current levels to 50 historical bubbles.

Gold/Silver VS 50 Historical Bubbles

As you can see, if we are near the top then this was one of the most disappointing bull markets in bubble history! In fact, just to match the gold & silver bull market of the early 1980s gold would have to quadruple in price from here to $5,200 per ounce. And we think this bull market will be much stronger than the 1980 bull market.


What Will "The End" of the Bull Market Look Like?

We dug up a copy of the front page of Canada's Globe & Mail Newspaper from January 4th 1980. You can view it here. This is what the end of the last bull market in gold looked like. The news story features countless stories of line-ups starting very early in the morning with many people even admitting to having called in sick to work just to line up to try to buy gold coins. And from Toronto to London to Paris they were all sold out and there was an "absence of sellers."

That is what the end of a mania looks like.

Now, take a look at this headline from the Calgary Herald on September 14th. "Calgarians Rush to SELL Gold After Record High Hit". They were lining up to sell gold! Nothing could make us feel more content in our position on gold than headlines such as this. When we start seeing headlines that Calgarians are lining up to buy gold, then we may start to look around for an exit. But it's obvious we are a long way from that.


Gold Slowly Returning As Money

There are almost daily stories now from around the world of small movements towards using gold & silver once again as money.

In Mayalysia, gold Dinar and silver Dirham coins were introduced in early August by an opposition Islamic political party. Umar Ibrahim Vadillo, an officer with Kelantan Golden Trade, revealed that the first batch of gold and silver coins worth two million Ringgit (US$625k) were sold out in less than a month. The response apparently has been enormous in Malaysia. In Kelantan, businesses from garage owners and taxi drivers are using the gold and silver coins. Even civil servants in Kelantan are paid up to 25% of their salary in Dinars and Dirhams, if desired.

As well, in neighboring Indonesia, we featured a video in a blog posting entitled, "Indonesians Get It" where it shows that slowly gold Dinar and silver Dirham are returning to circulation in that large muslim country.

Even in Michigan this news story, "Competing Currency Being Accepted Across Mid-Michigan" shows gold, silver and even copper have begun to slowly be used as money. Notice, however, how the American article treats gold & silver as being a possible "novelty" and make ridiculous statements such as this when referring to gold & silver coins, "They sound like real money and look like real money."

Sadly, Americans have been so repressed, even having private gold ownership outlawed for a good portion of the 20th century that they are much slower than the Malaysians, Indonesians, Chinese and others to even realize what is "real money" anymore.

 


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Jeff Berwick

Author: Jeff Berwick

Jeff Berwick
Chief Editor
The Dollar Vigilante

Jeff Berwick

Anarcho-Capitalist. Libertarian. Freedom fighter against mankind's two biggest enemies, the State and the Central Banks. Jeff Berwick is the founder of The Dollar Vigilante, CEO of TDV Media & Services and host of the popular video podcast, Anarchast. Jeff is a prominent speaker at many of the world's freedom, investment and gold conferences as well as regularly in the media including CNBC, CNN and Fox Business.

Jeff's background in the financial markets dates back to his founding of Canada's largest financial website, Stockhouse.com, in 1994. In the late '90s the company expanded worldwide into 8 different countries and had 250 employees and a market capitalization of $240 million USD at the peak of the "tech bubble". To this day more than a million investors use Stockhouse.com for investment information every month.

Jeff was the CEO from 1994 until 2002 when he sold the company and still continued on as a director afterwards until 2007. Afterwards, Berwick went forth to live on and travel the world by sailboat but after one year of sailing his boat sank in a storm off the coast of El Salvador. After being saved clinging to his surfboard with nothing but a pair of surfing shorts left of all his material possessions he decided to "live nowhere" and travel the world as spontaneously as possible with one overarching goal: See and understand the world with his own eyes, not through the lens of the media.

He went on to visit nearly 100 countries over four years and did and saw things that no education could ever teach. He met and spoke with a plethora of amazing people, from self-made billionaires to some of the brightest minds in finance - as well as entrepreneurs from a broad range of backgrounds and locations from tech companies in southern China to resource developers in Mongolia, Thailand, Russia and Chile. He also read everything he could find on how the world really works... politically and financially. A pursuit he continues to this day.

He expatriated, long ago from his country of birth, Canada, and considers himself a citizen of the world. He has lived in numerous locales since including Los Angeles, Hong Kong, Bangkok and currently lives in Acapulco, Mexico and is building a home in Cafayate, Argentina. In essence, everything he writes about here for TDV he has done or is doing.

As well, during his travels, both real and virtual (through the internet), he met some amazing people who have a similar shared vision of what is currently going on in the world and enticed them to come aboard TDV and provide their own brand of analysis.

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Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
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