Seeking Alpha
Gold, commodities, contrarian, newsletter provider
Profile| Send Message|
( followers)  

I think it is laughable when analysts go on television and claim that precious metals are in a bubble that is about to pop: "Get out of this barbarous relic while you still can!"

These same people claimed that gold at $800, $1,000 and $1,500 were tops as well. If these sages keep at it, they will get it right eventually, but I suspect it will be another three to four years before this occurs. In my view, the precious metals bull market still has a long way to go and the current consolidation is offering an excellent opportunity to load up the boat.

There are many ways to judge if an asset class is in a bubble. One of the key measures is investor participation, or in our case, the percentage of global assets invested in gold or gold mining shares. While this percentage has historically been above 20%, it is currently estimated to be around 2%. There is no widespread public participation in the gold market, and plenty of naysayers that argue against gold as an investment at every opportunity. I’d be upset too if I was sitting on negative real gains in the stock market over the past decade while the gold price has quadrupled! The bottom line is that with participation this thin, any talk of gold being in a bubble is premature. For those of you that are more visual in nature, this graph should help:

Another easy way to demonstrate that gold is not in a bubble is to look at the inflation-adjusted highs. The nominal highs for gold and silver occurred during January of 1980, when gold topped out at $850 and silver at $49.45. Official government inflation statistics tell us that in today’s dollar terms, gold would need to reach $2,500 and silver $150 before matching their true 1980 highs. But it is well known that the government significantly understates the inflation rate in order to mask the impact of their fiscal policies.

John Williams, the economist behind the website Shadow Stats, has done us the favor of stripping out the government gimmicks in order to derive the true inflation rate over the past thirty years. Using his SGS-Alternate Consumer Inflation Measure, gold would need to reach $8,890 per troy ounce and silver would need to reach $517 per troy ounce to match the highs from January of 1980.

Bubble?

When considering that the conditions which propelled gold and silver to their 1980 highs are much worse today, I predict both metals will easily eclipse those previous highs. That means $2,500 gold and $150 silver at the very minimum, but more likely a parabolic ascent to $8,890 gold and $517 silver before all is said and done.

It seems rather absurd then to talk about the precious metals bull market being over at this juncture. Gold is trading at just $1,750, still needing to advance 43% to reach $2,500 and more than 400% to reach the true inflation-adjusted high of $8,890.

Even more dramatic is the potential return for silver between now and the final parabolic top. With silver trading at just $33, it would need to climb 355% to reach its official inflation-adjusted high and a whopping 1467% to reach its true inflation-adjusted high!

Unless you believe that governments worldwide are suddenly going to get their debt situations under control and immediately return to being fiscally prudent, investing in precious metals seem as close as you can get to a sure thing. A huge amount of wealth is going to be transferred from those holding fiat paper to those holding real money. It has already been an immensely profitable ride over the past 10 years, but I am convinced it is not too late to jump on board for the next major upleg.

If gold reaching $8,890 is still a difficult pill for you to swallow, consider that gold expert Mike Maloney has run calculations showing that if history repeats and gold covers the same portion of the currency supply that it did in 1934 and 1980, we should see prices of at least $15,000 per ounce. Furthermore, he believes this will occur within the next 3 to 5 years, suddenly making the inflation-adjusted target of $8,890 seem rather tame.

No matter which measure you use, it is easy to conclude that gold and silver have much higher to go before their bubble is fully inflated and ready to pop. When your family, your neighbors, the coffee barista, the taxi driver and most financial advisors are suddenly talking about the premium to spot price for silver eagles or the high grade intercepts of their favorite Canadian junior, it might be time to consider exiting your position. But until then, it is nothing more than hot air when these so called analysts get on CNBC and claim the bull market in gold and silver is over.

While I advocate owning physical metal in your possession first, some of the greatest gains can often be realized by investing in undervalued mining companies. Their profit margins shoot dramatically higher as the prices of gold and silver climb, often providing excellent leverage to the advance of the underlying metal. In particular, I believe that junior miners are significantly undervalued at the current moment and will produce some truly astronomical gains going forward.

Source: Gold And Silver Way Off Inflation-Adjusted Highs