Gold Fever: Still a Long Way Away

Gold rallied strongly again Friday morning and is up 1.5% at $990/oz after consolidating around the $975/oz mark on Thursday. Stock markets were under severe pressure again Friday morning after Thursday's 7 year low close for the Dow Jones.

There is a risk here of a panic sell off in stock markets and the next leg down in the stock bear market looks imminent as the ills of the global financial system virulently infect the global economy. While gold has become overbought in the short term, its medium and long term fundamentals are as sound as ever.

Governments and central banks, in their desperate attempts to avert deflation, are debasing their currencies and risk causing an international monetary crisis where investors and savers flee paper assets and currencies into hard, tangible, finite assets that cannot be printed exponentially.

click to enlarge

Much mainstream media coverage of gold remains uninformed and lukewarm to negative despite the appalling financial and economic conditions challenging us. This is a sign that gold remains in the early to middle stages of its bull market. Talk of "gold fever" or a "gold rush" in the gold market is very misguided as only a tiny fraction of retail investors have any allocation to gold whatsoever – let alone being overweight gold.

There are no accurate statistics, but I would confidently estimate that less than 2% of retail investors have any allocation to gold whatsoever.

The "man in the street" barely knows what the price of gold is in dollars, let alone in sterling or euros. The majority of retail investors (and indeed financial advisors) know little or nothing about why one should invest in gold, nor indeed how one would invest in gold.

Table Above Shows the Slow but Steady Rise of Gold in Recent Years

Gold is featured in the non specialist financial media once in a blue moon (every few months at best) and when it is covered it is nearly always covered in a negative or at least lukewarm fashion.

Factually incorrect statements such as "most analysts warn that gold could be overvalued and there could be a painful correction on the way" are commonplace. The fact is that the majority of analysts are bullish on gold as can be seen in the Reuters Precious Metals Poll and the Bloomberg Gold Survey (both of which we take part in). Most analysts and experts in the precious metal markets remain positive towards gold due to the unprecedented global financial and economic meltdown we are now suffering.

Many of the analysts who are negative are in fact product sellers, stockbrokers and other vested interests who have always been negative on gold and will likely always be as they simply do not understand and have not bothered to inform themselves about the market.

We will have a gold bubble and a gold mania in the coming years. There is no fever like gold fever. However, we are a long way from there yet and gold will have to reach its inflation adjusted 1980 high of $2,400/oz in 1980 before it can be classed as overvalued. It is currently less than half the value that it was in 1980.

There cannot be a bubble in an asset class unless it rises to all time inflation adjusted highs and often times asset bubbles result in prices of multiples of their previous record highs.

In January 1980, just before the Federal Reserve avoided an inflationary catastrophe, the gold price peaked at $875. That is $2,430 in today's dollars. But the pools of speculative capital are much larger now than in 1980. A true gold bubble could well leave this benchmark far behind.

And if the dollar collapses ('Former Bank of England official expects dollar collapse') as some fear and the US suffers virulent stagflation or hyperinflation then we will rise way above the 1980 inflation adjusted high.

Gold rose by more than 2,400% (from $35 to $850 or up X 24 times) in the 1970s . Should a similar bubble form now gold would have to rise from a low of $250 in 2000 to over $6,000/oz.

The Nasdaq rose some 1600% from some 300 in 1990 to over 5000 in 2000 ( up X 16 times). Should a similar bubble form now, gold would have to rise from a low of $250 in 2000 to over $4,000/oz.

Even the Dow Jones went from 1900 in late 1987 (after crash) to over 14,000 (up X 7 times). Should a similar bubble form now, gold would have to rise from a low of $250 in 2000 to over $1,750/oz.

To take an even longer term and classic, archetypal example of a bubble, we only need to look to the South Sea Bubble which saw a nearly 10 fold increase in less than a year (a real proper mania).

Should a similar bubble form now, gold would have to rise from a low of $250 in 2000 to over $2,500/oz (which coincidentally is gold's inflation adjusted high of 28 years ago).

Gold has no fever, rush or mania yet with little or no retail participation and most of the media covering gold semi annually. More importantly, returns have been slow and steady as seen in the performance table above.

Always good to keep a historical perspective especially in these unprecedented and very challenging financial and economic times.

Disclosure: no positions

Comments

[D. McHattie:]

Excellent perspective, Mark.

I think you're right, that we will eventually have a bubble in gold. But until the taxi-driver and the shoe-shine boy tell me to buy gold we are not in bubble territory.

Feb 22 07:57 AM

[Truefire:]

Nice job Mark, the market analyst boys are continuing the tired "paper shill" Are they freakin kidding us, gold overbought?

People, you all need to think for yourself. Currencies (all of them) are in their death dance and you know it. Big sell off coming & where is all that cash going, Treasuries? Not bloody likely.

Gold & silver will reign supreme. Long Gold & silver, bigtime!!!!!!

Feb 22 08:17 AM

[5142152-337:]

Sir, you have NO POSITIONS?????????????...

Whistling in the graveyard?

Feb 22 09:31 AM

[5142152-337:]

Mark, you have a ton of common sense and information in this article. (I forgot to mention that in my above question about you not having ANY positions in PMs.

Feb 22 09:38 AM

[Mark McBride:]

Hey Mark....does no positions mean that you don't have any physical gold as well as no paper positions? I would think if you were this bullish on gold that you would have some positions yourself. I have been buying all I can afford of physical gold and silver ounces for about 4 years now, as well as mining stocks. So, as you can see, I also believe what you are saying and there is much profit ahead for precious metal investors.

Good Luck....
Mark

Feb 22 09:39 AM

[highlarche:]

Just wait till the jobs report comes out for Feb. It will be well over a million. Gold will most likely break 1200 in march.

Feb 22 09:49 AM

[ZardozZ:]

Here is one likely scenario to consider... Netenyahu rolls tanks into Gaza,,, Hamas gets their expected aid from Hezboulah and Iran... Israel is forced to confront Syria on the Golan Heights or even attack Damascus stronghold of Hamas and Hezboulah. Iran takes a page out of Sadam's war plans and lauches missle attacks not directly at Israel but the oil fields in Iraq, Kuwait, and the House of Saud.... Oil soars and along with the price of Gold.

If there is one thing that you can almost go to the bank on is that there will be a full confrontation with Hamas by the new administration in Israel.

Feb 22 10:11 AM

[ROLEXDAYTONA:]

I am clown who made 350,000$ in 2008 shorting Hatties like you.
Gold will not be able to break even through 1030$, there are big hand watching this market that knows when to punch a knock out.
Except all, nobody including Hattie made money buying Gold as all you buy is Gold/Silver/Palladium stocks that when compared to SP500 have identical correlation.
Gold coins collectors and bullion investors also didn't made anything, why?
Look at the bid/ask price for Gold coins or bullion, it is about 10-20%, it's like you buy a 1oz. coin for 1150$ an oz., sell it back for 900$ when price of GC is 1000$.
Few transactions like this, and you are done.

www.commerzbank.de/de/...

The only real Gold is futures, with 0.10$ bid/ask, but who of you ever took 100oz. delivery?

Feb 22 10:17 AM

[T.Stamps:]

Excellent article. I'm waiting for gold to consolidate to add to my position.
You get people like CNBC(who have an agenda)they want to support the
new administration. So gold is a bad investment. Three years ago
they were talking down the economy because they didn't like that
particular administration. They think it's time to get back into the
market. Again to support there agenda.

Feb 22 10:53 AM

[Mad Hedge F...:]

GOLD! GOLD! GOLD! This is the cry being heard worldwide by investors in the Great Gold rush of 2009, looking for a generic “short America” trade. Where in the past gold seekers used sluices, shovels, and jackhammers to extract the glittery stuff in California’s Sierras, Alaska’s Klondike, and South Africa’s Rand, today the instrument of choice is the mouse. Online traders are unleashing clicks by the millions to buy ETF’s, American Eagles, mining shares, and futures contracts. With stock traders sitting on their haunches, wondering if the Dow will hold 7,000, this is the only thing that is working right now. Gold is no longer just catastrophe insurance. Traders are buying gold more for what it isn’t, than what it is. It isn’t made of paper, made in the US, or held in custody by Bernie Madoff or Stanford Financial. The yellow metal hit a new high for the year of $999 overnight, and the risk of a “melt up” is increasing. The Street Tracks Gold Trust ETF (GLD) is now the seventh largest holder of the barbaric relic in the world. For the newly aggressive, look at the DB Gold Double Long ETF (DGP), which gives you a 200% long exposure to gold, and is up 54% in a month. Who says there is nothing to buy out there?

Feb 22 11:09 AM

[5142152-337:]

D McHattie: I believe you need to be corrected (smile). Rolexdaytona isn't a clown. Oh, no. He's a shrewd investor. Just ask him! See, he made 350K. And you, I, and the rest of us stupid Americans just continue to lose money investing in gold/silver bullion...even though gold has been averaging double digit gains for eight years running! We're just stupid Americans, right?

You see, D Mc, there's nothing worse than a hater, except maybe a foreigner telling Americans about how captialism works.

Feb 22 02:34 PM

[silverwood:]

Yes, as the saying goes...There is no fever like gold fever!
I agree with the author we are no where near the mania stage, but gold is gaining more main street media attention now that the psycological number of $1000 is here.

But will gold be the big news getter and the winner of the go to asset in the near future? I think we will all be surprised who will be the winner of that horse race. It will be a stunning come from behind victory for SILVER!

Yes silver, hardly ever talked about in the media and written off as a Hunt brothers scheme. But these facts remain;
1. Silver has a long monetary history just like gold. But a very important industial component which cause silver to be consumed.
2. Silver can act as a long term protector of wealth and when gold price climbs it will be viewed by middle class as too expensive so silver will be the "poor man's gold"
3. Base metal miners who are cutting back activity account for silver's main supply, so supply will decrease as this environment persists.

So the cry of there is no fever like gold fever will be heard, what may be the louder cry is...

HI HO SILVER AWAY!

Feb 22 03:16 PM

[schminkie:]

2% of retail investors? i'll need to see some facts on that not that i dispute it but if this is the basis of the thesis, well let's see why how what where.

would this include etf's? the current gold sell off / reluctance to buy at 1000.00 in india? institutional sized buyers?

buy the way [get it? arf arf arf] i'll take that 1030.00 any day rolexdaytona even though i'd only be making 66%.

now that bullion is a major story among cnbc hacks et al one thinks the profit taking is imminent. however it'll be followed by another bigger run-up as panic grows.

my advice, buy silver bullion tomorrow. and remember gold and silver are expensive and talk is cheap.

Feb 22 04:13 PM

[5142152-337:]

silverwood: Amen to that brother!

Feb 22 06:01 PM

[Mad Hedge F...:]

Gold continues to move from strength to strength, hitting a new high for the year of $1,007 today. In January, gold ETF’s bought a record 104 tonnes of the yellow metal. Last week alone, purchases soared to an astonishing 110 tonnes. There has also been huge buying of December, 2009 1,000 calls, suggesting that some players are hoping for a melt up if we break the old highs at $1,050. Looks like we have found our new bubble. Let the games begin! If you have been regularly reading my letter you should by now have sacks of gold American Eagles stacked up against the walls, your portfolio is brimming with gold mining stocks like Barrick (ABX), Freeport McMoran (FCX), and Rangold Resources (GOLD), and your safety deposit box is groaning from the weight of the gold bars it is holding. Gold has since become the trade of the first quarter, with the open interest on call options on the Street Tracks Gold Shares ETF (GLD) exploding from 445,000 to 1.1 million in just the past few weeks. Options implied volatilities are suggesting that gold could hit $1,115/ounce by June. Oops, you forgot to buy the yellow metal? Use $50 pullbacks to get long. Investors will continue to pour into the sector, since it is one of the few things the government can’t create more of with a printing press.

Feb 22 09:48 PM

[mr freddo:]

A very informative article that puts the current gold rush into perspective. Gold will no doubt correct and a gold bubble will burst but the question is when and at what price? My own estimate is in line with this article. I will be selling gold when it hits $4000 an ounce. probably in less than 24 months.

Feb 23 01:07 AM

[Kaleb22:]

Rolex, you crack me up, I would like you to correlate the S&P with gold, see what happened, I bet all your gains were wiped out in the last 6 months. Oh ya, keep shorting gold you idiot.

Feb 23 01:56 PM

[Pepyn:]

dear Mark O'Byrne,

you estimate appr. 2% of retail investors invest in gold. Well, you are spot on. At least concerning Europe.

A European financial newspaper held a readers poll on its website asking people where they invest now. 2% of respondents selected gold. Vs more then 30% stocks, +40% savings account etc.

Given these are readers of a financial newspaper, I would guess this is not a representative group for society as a whole, and amongst the general public that number will be even lower.

Feb 23 06:17 PM

[Socialist R...:]

"Freddo, I knew it was you!"

Don't gets your hopes too high, kiddo, $4000 in 24-months?? LOL

I will give you $3000 by 2014.

Be good Freddo, be good. And take some downers until then; I will wake you up when it's time to sell... LOL

Feb 24 07:00 PM