Are we in a gold bubble? Well, since gold is moving virtually unstoppably towards its previous nominal high at $ 1,030 – the question is valid. But the answer is: NO. If an asset class is in the stage of a bubble it has completely different characteristics:

1. Everybody from the taxi driver to the mutual fund manager owns gold and gold stocks and tells you that gold can only go up in price (poised to rise)
2. The price has reached a new high in real terms and shows some kind of a vertical chart

As for gold: most people have no interest in gold or gold stocks and gold has not even closely reached a new high in real terms. Gold in real price terms would mark a new high at approx. $2,400 per ounce (based on the official CPI numbers). Taking the real inflation into account $2,400 is far too low. So, are we near a top? No, not at all. Most bull markets end if an asset class reaches a new high in real terms.

It was, for many investors, confusing not to see gold surge to multiples of its current price. I mean, shouldn’t gold have dramatically surged in this financial tsunami? Most investors, including myself, forgot that gold was a playground to some deep pocket investors from the hedge fund industry that got hit tremendously by redemptions and massive forced deleveraging because of a domino collapse of prime brokers such as Lehman (LEHMQ.PK) or Bear Stearns. The result was a fire sale in COMEX gold futures and paper products with gold as underlying.

The physical market was different, particularly in the third and fourth quarter of 2008. Even though physical demand was very strong and supply reached its upper limits, the price of gold even declined. This was only a short lived market distortion triggered from the paper gold market. In the last couple of weeks, the market already rebalanced the price as gold went from sub $700/oz to roughly $900/oz. The pressure from forced sellers and fund liquidation sales is more or less over and this should pave the road for much higher gold prices in the future.

So what’s wrong with gold? Why has the price not skyrocketed? Do you remember the day when Bear Stearns failed? Do you remember what happened on that day with gold? It spiked up to $1032 per ounce and marked its highest intraday price ever (in nominal price terms – remember, the inflation adjusted high would be in the $2300 per ounce range). Now in retrospect, doesn’t the Bear Stearns event look like some kindergarten party? Yes, the financial system has been under much more stress recently. What we have experienced in the last days was the biggest effort ever made to rescue the global financial system and it is still not clear if we are out of the storm. But nevertheless gold has even retreated to the $850 range. Does it looks strange or not?

In times where the entire financial system is on the edge, you would expect gold to soar because of its safe haven attributes. Obviously something is seriously wrong. Right now, we are experiencing two forces to fight with each other: the physical market and the paper market. To understand what’s going on you have to know that the paper market is the short term market and the physical market is the long term market.

During the current blow off in commodities, and particularly in gold, talk is again getting stronger that the gold price is manipulated. That’s a hot topic and something GATA (www.gata.org) has been saying for years. Conspiracy theories often contain some truth. Nevertheless, I would not call it manipulation, but definitely mismanagement.

It is a known fact that central banks as the most powerful organized group in the gold market with holdings of approximately 30,000 t use gold lending as a tool to manage their assets more efficiently. The USA as the biggest holder of gold with approximately 8,000 t has always been in the line of fire regarding the gold manipulation conspiracy. I think that gold lending has nothing to do with more efficient asset management as central banks most likely believe. Many investors who don’t accept gold as an asset class are always coming up with the argument that gold does not pay dividends or interest. It’s kind of a dead investment from a cash flow perspective.

The last few weeks brought lots of losses in the commodity sector and probably  caught most investors by surprise. There was even talk that the commodity bull market has finally found its end.

Really? I don't think so. The only thing that has changed now is the demand for commodity related stocks and some profit taking in the metal and energy market.

Why not start with the most important question. Is it already too late to buy precious metals or commodities in general?

Not at all. Gold and metals generally have very long cycles; ups and downs tend to be for typically 15 to 20 year periods. We are now seven-eight years into the cycle. So depending on which way you look at it, you could be in the one-third or a mid-cycle. In nominal terms (at $900 odd dollars an ounce now) the previous high was $850 in the 1980s. If you take into account inflation then the equivalent price of that now is over $ 2,300. So if you look at where you are in a cycle then it also in some sense reaffirms the direction in which or the potential to where gold can go.

How can I say mining stocks are over- or undervalued? I’d have to do the math for all the listed companies, which is more or less impossible.

But there is a more convenient and possibly even more accurate way to argue that a market sector is trading with a significant discount.

The previous months have been a challenging time for mining stock investors, at least for these who invest in the junior sector. Since the credit crisis stroke, junior stocks suffered a great deal.

In retrospect, there are some reasons behind this underperformance of junior mining stocks, as they had attributes which most investors were avoiding since early August 2007: big appetite for capital, high beta, comparably low trading volume, very long development time and high dependency on investors’ ability to take risks. The far more important question for now is, will the junior sector recover and is the story still the same? The answer is: yes, but the game will be different this time.