“No one knows when the bull market in gold will end.” Richard Russell
In my last Tuesday memo, I said not owning gold in the current gold bull market is insane. Then I thought, wait, maybe some folks aren’t buying because they’re listening to financial TV that’s telling them gold is in a “bubble.” “Whoa,” say the Wall Street trolls and mavens. Stay away from gold! We’re here to save you.” Yeah, right.
Are these are the same Wall Street idiot-savants who overlooked the tech bubble, failed to notice the credit meltdown, and totally missed the subprime real estate eruption? And now they’ve developed “vision,” and are able to see frothiness in the gold market ... the same gold market they ignored for the past 10 years? And why are you listening to those guys?
Yes, we’re in a gold bull market. We’re in Act two of a three Act gold bull market. The upward price slope is nicely positive. Act II is when institutions buy. Today, mutual funds, insurance companies, foreign money managers and hedgies are wading into gold, and the car and pharma company advertisers at CNBC don’t like that. So CNBC knocks gold.
Every bull market ends with a party mania, and Act III is the bubble finale. Act III soars upwards like the proverbial hockey stick. And the marker for Act III is the entrance of the public into the fray. When the public buys, they buy with abandon, and their money soon does the same to them. There are other recognizable conditions that appear in an Act III bubble. Here are a few:
A Bubble in the Real World of Gold
1. Gold prices will have been driven to real peaks. Shadowstats.com has said gold would have to exceed $7,000 an ounce to be over the real inflation adjusted 1980 number of $850 an ounce. Gold has gone up maybe 400% in the past 10 years, a far cry from the 1,300% NASDAQ bubble, or the 1,500% Dow move from 1982-2000.
2. Gold mining companies will announce a spate of stupid mergers for low-grade projects in dangerous places. Just before the end of an interim oil bubble back in 1985, Chevron (CVX) paid $13 billion silly dollars for Getty Oil. The same crazed behavior affected Cisco (CSCO) when it bought a slew of tech companies back in 1999.
3. Treasury bond interest rates will rise while gold is soaring. Gold and interest rates both respond to inflation pressures. Rates are pitifully and suspiciously low now.
4. Major producing gold miners will trade at 2-300X P/E multiples. Major miners now show reasonable P/E multiples of 20-30X as growth stocks.
5. Closed-end bullion funds like CEF and PHYS will show 50% premiums over their net asset value of gold holdings. Premiums are now less than 10%.
6. A gold IPO will double on the first day. Are we even having gold IPOs? The press is rabid now about HCA was recently belched up by the private equity guys.
7. U.S. brokerage analysts will trumpet bullish forecasts for the price of gold and "Buy" recommendations on all manner of mediocre gold mining outfits. In the past decade, Merrill, Morgan Stanley and Citigroup have fired their gold analysts, and there are few gold company “buys” out there by any U.S. firm. Hint: my brother says, “Wall Street analysts wear tassel loafers because they’re unable to tie shoe laces."
8. Junior mining stocks will get bought out at extraordinary premiums to ounces in the ground. Some of this going on at reasonable prices now, but it always goes on.
9. Gold miner shares will also spike higher suddenly. It will be caused by short covering. But short covering, like the closing of the yen carry trade, won’t be explained by anybody in the media.
10. Institutional ownership of all gold companies will exceed 100% of existing market capitalization. Short sellers of these shares will be very, very, worried. See Dailyfinance.com for institutional ownership of gold shares.
11. Scores of new gold mutual funds will be offered by the mutual fund complex and retail investors will toss money at them wildly. Back in the first quarter of 2000, the Street IPO’d 75 new tech funds, and pocketed almost $115 billion. Prior to 2000, two tech funds were offered per year. Wall Street lore says when the ducks are quacking, feed them. Today, only Charlie Sheen is quacking.
12. As gold rises into the atmosphere, its cousin, silver, will soar into the stratosphere. The historic gold/silver ratio has been 16 to 1. At $1,400 gold and $37 silver, the ratio is now almost 40 to 1. At 16 to 1, if gold goes to $3,000, as Jim Dines and dozens of other newsletter writers believe, silver will approach $200 an ounce. Silver at $37 is hardly bubbly. Silver was $50 in 1980. It would need to exceed $400 to beat the inflation-adjusted 1980 price.
13. The Dow/Gold ratio will hit 1/1, where it was in 1932 and 1980. The ratio is now 8 to1.
14. The major gold share index, the XAU, will rise 100% in a year ... or less.
15. PM share volumes will be humungous. A few trade big now, but not many.
16. PM company stock options will show big premiums. And the gold and silver futures pits at the COMEX will be frantic and totally chaotic. The pits are only busy now on expiration days when Da Boyz crash the prices to keep premiums.
17. You will see dozens of ads in your spam-file about the scorching new microcap gold stock that YOU should buy, now, in order to make 43,000.5550% on your money. (Be very afraid when your profits are calculated to four decimal places.) Some of this happens now, but crooks are always with us.
18. CNBC and the other anti-gold head cases will actually become bullish on gold. Maria Bartiromo will broadcast from the Comex gold pit hourly. (And years from now, the top callers will claim they told you so.)
19. Gold mining executives will appear on the covers of major financial magazines like Forbes, Fortune or Business Week. Barron’s will put a gold company on the cover and actually recommend it. Warren Buffett will say he was misinformed about gold earlier. (Money Magazine will spit on gold forever.)
20. Gold newsletters will top the Hulbert performance charts. A Tom Calandra gold newsletter type guy will achieve rock-star status, and be seen with Lindsay Lohan ... after she gets out of jail.
21. The AAII gold sentiment indicator will exceed 100% bullish. Gold bears will be sprayed for.
22. At the peak of the bubble, Lady Gaga will appear in an ad for Monex, or hawk her new gold coin nipple-ring jewelry line on the shopping channel. Celebs are hawking gold now, but the ones that are ... well ... are old.
23. Morningstar will expand its newsletter coverage of gold mutual funds beyond the three funds they cover now. (The other 50 gold funds aren’t currently deemed “worthy” by the U of Chicago monetarists.)
24. Gold heist shows will replace sex-crime shows on TV. MGM will announce a remake of Goldfinger, and include a conspiracy theme – claiming the gold in Fort Knox is gone. (At least they’ll get that part right.) Movies today feature aliens, not economics.
25. The most obvious and definitive sign of any bubble is widespread public ownership, as we saw with tech and telecom shares back in 1999 and real estate speculation in 2006. Yes, today, investors have finally heard of gold, but it has taken a decade. Fewer than 5% of investors today actually own coins or shares. (I teach CE classes to CPAs and lawyers and count gold-owners in my classes.) The public is mostly clueless, and is actually still selling gold to guys like Cash4gold.
26. And gold buyers in an Act III bubble buy with conviction, not skepticism. As John Templeton said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on Euphoria.” Yes, 2011 is hardly euphoria.
27. During the last gold mania ending in 1980, there were lines. Lines of customers waited outside coin stores to buy gold. Do you see gold-buying lines in your town? Nobody else in the world does either.
28. Crooks, fresh from their previous escapades in velvet Elvis paintings, dot.coms, subprime real estate, and Iraqi currency, will flood the gold space, fleecing newbie gold buyers. Law enforcement will unfortunately do zilch about stopping them.
29. Maybe a decade from now, after a true, but relatively brief mania, smart newsletter writers, like Jim Dines and Jim Sinclair, and actual gold portfolio managers like John Embry, John Hathaway or their successors, will correctly declare that the long secular gold bull is finally over. The gold bull will end because real interest rates have turned positive, or hyperinflation will have run its course, or a new gold standard has been adopted, or gold prices have gone beyond silly. At the top, most retail investors won’t believe the real experts.
Like Richard Russell, I don’t know when the gold bull market will end, but I DO know it’s not now. As John Maynard Keynes said, “I’d rather be vaguely right than wrong to four decimal places.”
Lawrence Welk can stay dead. There is no bubble machine to turn off. And if there were a bubble, Wall Street guys inside the bubble wouldn’t be able to see it anyway.
Gold and silver are, however, in a bull market, and are good things to own. They’re in our Constitution, and as American as the flag and apple pie.
Not so apple pie-like are our banks. The banksters haven’t begun to repair any of the bad debt and derivatives problems they’ve been hiding on their balance sheets since 2008. So, at the end of whatever day you chose, you might want to hunker down with gold coins, or PM funds like GDX or SIL. Act III of the gold bull is still ahead of us where rising cash flow, rising gold prices and/or mergers will make serious money for gold owners. That’s gold owners. Are you going to get into the gold club before the dumb partyiers get here?
(FF believes in gold investing. These days, it still feels like nobody else does. He owns CEF, GDX and SIL. He was licensed in the securities business for 18 years, but isn’t today. He sells books and investor education.)