What If We Had a Bubble and Nobody Came?

By: Jeff Berwick | Tue, Feb 15, 2011
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You could not have written a better script for gold. It is almost as if the US Government and the Federal Reserve are trying to destroy the dollar and demolish the country - and taking most of the western world with it.

At the beginning of this gold bull market, in 2000, no one had ever heard of Barack Obama or Ben Bernanke. But, 11 years later, and an outright socialist profligate spender is President of the US and a College professor who believes in crackpot Keynesian theories about how money printing can save economies is the Chairman of the Federal Reserve.

Yet, it is now 11 years into the most consistent bull market on earth, and hardly anyone owns gold.

The amount of money invested in US Money Market accounts is $2.8 trillion. As comparison, the amount currently invested in Gold ETFs is less than $100 billion.

Talking to the average man on the street is an exercise in futility. Before gold hit $1,000/oz in US dollar terms no one owned gold. Since it has hit $1,000 a few people have become aware of its existence but of those the vast majority will tell you that, "it's too late now to buy gold. We missed the run."

Anyone who has been around for any of the numerous bubbles that have been spawned by the massive amount of monetary inflation over the last few decades knows that this is not what a bubble top looks like. It's not even what a bubble looks like.

Pets.com was just a domain name and a business plan to sell pet accessories online in 1999 and it had a market capitalization of $300 million and people were begging to get a piece of its IPO. "It's the new economy," they said.

Taxi drivers in Las Vegas were buying 4 or 5 houses as speculative properties in 2005. "House prices never go down," they said.

Yet, gold almost always gets pegged by mainstream media as being "in a bubble" despite showing none of the outward signs of being in a bubble. Not to mention the fact that the mainstream media completely missed the fact that tech stocks and the housing market were in a bubble - but somehow managed to spot this one!

Look at Central Gold Trust (NYSE:GTU TSX:GTU.UN). It is a fund that only holds gold bullion. It is currently trading at less than its Net Asset Value (0.3% discount). In most bubbles, publicly traded holding companies in the hot sector normally trade at large premiums to their NAV. Certainly not at a discount.

In a recent poll by Bloomberg of 1,000 of its subscribers they asked where they saw gold prices going one year from now. 35% said higher, 39% lower and 24% said little changed. They also asked if they thought gold was in a bubble. 52% said yes and 43% said no with the rest saying they didn't know.

These are simply not the types of numbers you would ever see in a bubble or near the peak of a bubble!

Bubbles only tend to pop once greater than 90% of the general public think it is a sure thing to go higher and to always go higher. And, as we pointed out in the January issue, you certainly wouldn't expect the producers of an asset that has moved dramatically higher over the last 10 years to be underperforming the asset they produce, which is and has been the case since 2004.

The last time gold stocks traded at the same level compared to gold was in 2003 when gold was $360/oz.

Gold has more than tripled since then and gold stocks have not moved higher as you would expect they would if it were a bubble.

HUI:GOLD

If gold was in a bubble you would certainly expect that annual gold production from mines would have increased dramatically since the price of gold began to rise in 2000. Again, not the case. Gold production peaked out when gold was trading at its lowest levels in 2000 and 2001.

Annual World Gold Production

Some say that gold has been in a bull market and that it must be nearing the end of its bull move.

However, it is only in US dollar terms that gold has been in such a stellar bull market. When looking at gold versus other assets, such as oil, gold was in a bear market from 2001 to 2008 when after the "financial crisis" it began to move dramatically higher.

Gols:WTIC

In fact, this chart of gold versus oil explains many of the other seeming irregularities. One of the reasons gold production hasn't increased over the last ten years is, compared to other assets, gold has been in a bear market until 2008. This also explains why gold stocks have not outperformed gold bullion during that same period.

Gold versus copper shows much the same thing.

Gold:Copper

Lastly, when looking at the past highs in gold and silver in 1980 as adjusted for a more realistic CPI, as calculated by Shadowstats.com, shows that the earlier all-time high for gold of $850.00 on January 21, 1980 would be $7,824 per troy ounce in terms of SGS-Alternate-CPI-adjusted dollars. In like manner, the all-time high price for silver in January 1980 of $49.45 per troy ounce has not been hit since, including in terms of inflation-adjusted dollars. Based on SGS-Alternate-CPI-adjusted dollars the 1980 silver price peak would be $455 per troy ounce.

In other words, hold your gold & silver. This train hasn't even left the station.

 


 

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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