Gold Mania: Are We There Yet?

By: Louis James | Fri, Apr 8, 2011
Print Email

It's understandable that people want to know where the precious metals market is headed next. And not just because big fluctuations can be nerve-wracking, but because it makes a big difference how you'd invest today if, for instance, you think there's a big correction ahead (save cash to buy cheaper) or not (load up and ride the wave).

But the reality is that I don't know. Nobody knows what will happen next.

That's why it's called speculation.

Further, you can be right about the trend and still get wiped out if your timing is wrong. That's why it's easier to say what is likely to happen than what is likely to happen next.

And that, in turn, is why we at Casey Research still have quite a bit of concern and uncertainty about a possible correction in the near term, even though the Casey Consensus is unanimous in projecting rising prices for precious metals for years to come.

Some investors are tiring of our cautioning of a "possible correction," "waiting until you see the whites of their eyes," and so forth. Some wish the market would stop dithering and just head north into mania territory. Or wish Casey Research to stop dithering and just start issuing lots of Buy recommendations. But other, more nervous readers seem to wish we'd just admit that the market has topped and issue a Sell on everything - time to cash in our chips and go home!

I am sympathetic, but Mr. Market doesn't know our desires and wouldn't care if he did. We would be doing our subscribers a grave disservice if we pretended to know which way he'll move next, when we don't. And anyone who claims they do know is likely a former New York bridge salesman.

This is why we've been steering a middle course for some time. We're not out of the market; many of our recent picks have done spectacularly well on gold's new nominal high. But we're also not all in.

Let's look at a simple snapshot of our most fundamental trend, the price of gold. Compare this chart of spot gold over the last year with the one below it, showing the same thing during the months before and after the 1980 spike. Does it appear to you that we've hit the same sort of peak? Me neither.

12-Month Spot Gold Price

Spot Gold Price in 1979-1980

Of course, history seldom repeats, although it does rhyme. Here's a 10-year chart of gold during the current bull market.

Gold Price: Nominal and Adjusted for Inflation

This chart looks a lot more like, if not a spike, at least a price peak that could now be set to slide downwards for the next 10 years.

But don't forget gold's biggest picture, the inflation-adjusted price since it was set free by Nixon in 1971.

Gold Price: Nominal and Adjusted for Inflation

In nominal terms, gold certainly seems to have scaled its prior peak; in real terms, it's still got a long way to go to beat the 1980 spike.

All of the economic and financial factors that have contributed to this precious metals bull market remain in force, and many of them have worsened. And if a big and broad market correction hits us again, the precious metals and related stocks will get squeezed, if only temporarily. The 2008 crash proved that such a squeeze can be very sharp and painful - even for groups like ours that did see it coming.

Assuming you agree with me and the Casey Consensus that this metals bull market is going to produce a gargantuan Mania Phase that lies yet ahead, I'd like you to try a mental exercise:

Ask yourself what would happen if the current sharp rise is actually rhyming with the sharp rise in the early 1970s, not the big run-up to the 1980 peak. If so, and if history continued rhyming, that'd put us before the biggest gold correction ahead of the mania.

History may not rhyme that much at all, of course, but just think about it:

If you answered yes, and you are certain you won't need the cash invested for a year or two (no margin buying), then life becomes simpler for you. Buy the best of the best companies and forget about them until the Mania Phase arrives. If you are this confident - or disagree with us that another steep correction is likely in the next major economic shock - you might just work on building the best portfolio you can, for profit during the coming mania.

If so, then you should take first tranches of only the best plays and keep plenty of powder dry for the time when the economy exits the eye of this most massive economic storm in modern history. Given the number of agonized vs. serene emails I got during the crash of 2008, I suspect that most investors fall into this group, so this is the context for most of our recommendations. If this rough grouping is yours, admit it, embrace it, and hedge your bets on Mr. Market's erratic behavior accordingly.

Either way, it's crucial for speculators to be honest with themselves about their own strengths and weaknesses. Happily, either way you still want to focus on the best of the best. The difference is in what you're willing to pay for them, and when.

Incidentally, if we get another crash-induced bottom, I believe it will be the last before the Mania Phase kicks in - the next and last best chance to really back up the truck and position yourself for truly spectacular gains.

Month after month, Louis James provides the market's best investment advice in the junior mining sector... and his amazing track record has proven him right. The hand-selected, small-cap exploration stocks he recommended in 2010 outpaced the S&P 500 by 8.4 times. Find out more here.

 


 

Louis James

Author: Louis James

Louis James
Senior Editor Metals Division
Casey Research, LLC.

Louis James

Louis James' background in physics, economics, and technical writing prepared him well for his role as senior editor of the International Speculator and Casey Investment Alert. Like Doug Casey, Louis constantly travels the world, visiting highly prospective geological targets, grilling management and company geologists, and interviewing natives in a variety of languages to find out what they really think (he's fluent in French and Spanish, and speaks a little German and Russian).

Whether it's days of back-to-back meetings with mining company executives in Vancouver, pounding on rocks in the Democratic Republic of the Congo, examining drill core in Argentina, or eating food with names he can't pronounce with local miners in China, Louis is constantly looking for the next double-your-money winner.

He evaluates dozens of companies every month, conducts due diligence of only the best, and then compares notes with Doug in order to bring only those most likely to provide rapid high returns to our subscribers' attention. Louis also reads all the press releases, financial statements, and an enormous quantity of related information to keep track of all of our mineral companies and has become something of a walking database on same.

Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained herein is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed herein are those of the publisher and are subject to change without notice. The information herein may become outdated and there is no obligation to update any such information. Doug Casey, entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications. Corporate policies are in effect that attempt to avoid potential conflicts of interest, and resolve conflicts of interest that do arise in a timely fashion. No portion of this web site may be extracted or reproduced without permission of the publisher.

Copyright © 2006-2013 Casey Research, LLC.

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com

SEARCH





TRUE MONEY SUPPLY

Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/