The Roadmap From A Gold Bottom To A Mania

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/7/21_The_Roadmap_From_A_Gold_Bottom_To_A_Mania.html

Embry: Gold Super-Spike To Be Dwarfed By The Mania In Silver

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/1/22_Embry__Gold_Super-Spike_To_Be_Dwarfed_By_The_Mania_In_Silver.html

James Turk on the "bubble" in gold

According to James Turk, we are entering the 2nd phase of gold's bull market. The mania-driven third phase has not come close to arriving yet.

http://www.fgmr.com/stage-two-of-golds-bull-market.html

Jim Cramer jumping on the gold bandwagon

Jim Cramer of CNBC's Mad Money was praising gold's all-time new highs today, as well as a couple gold mining ETF's. Which caused me to pause, as he's been bashing the shiny metal for a while. To his credit, I believe his trust fund owns Agnico, a gold miner.

Could this about-face be the death knell for gold's ascent? Perhaps a correction is in order, and I did take a little profit off the table yesterday. Cramer has been a good contrarian indicator, as I believe most of his calls are wrong-way bets (sorry, Jim, but your track record is questionable), but that doesn't mean gold will stop climbing in price. A correction is expected after recent surges, but the secular bull market for gold since 2001 is still intact, in my opinion. In which case, I'm with Cramer on this one. Booyah!

As long as central bankers worldwide are accomodative with low interest rates and stimulative monetary policies, gold has nowhere to go but up.

I started buying gold and silver coins and mining shares last November, gradually adding to my holdings ever since on dips. With the exception of one, all the mining shares have appreciated triple digits since then, yet Cramer is only now touting the yellow metal. Curious, but predictable.

Does this mean I will exit all my precious metals holdings? After all, as a contrarian, you want to bet against the extreme majority. When sentiment gets too exuberant, you sell. Likewise, when there's blood in the streets, you buy. In other words, has the trade become too crowded? Absolutely not. Because even though some people are now understanding the logic behind holding precious metals as an inflation hedge and as a reliable store of value, very few have acted on this knowledge. I would argue most people don't understand the value of gold--or just have a distaste for the yellow metal. Most won't jump aboard until the mania phase kicks in at much higher prices, when everyone and their brother will be recommending gold as a speculative bet, without understanding its intrinsic role as a means of preserving purchasing power.

The prudent strategy is to sell into that mania--not buy into it. The parabolic rise in gold and silver prices probably won't occur for a few more years, the normal lag time behind an increase in the money supply. Inflation usually doesn't kick in until these massive liquidity injections eventually flow through the economy via bank lending. But then again, we are in uncharted territory. This is a monetary experiment run by mad scientists at the Fed and US Treasury. No country has ever printed so many trillions of dollars so quickly.

An orderly decline of the dollar will cause a steady climb in gold and silver. But should there be a run on the dollar in a currency crisis, the mania phase in hard assets will go into high gear almost overnight.

See disclaimers on the sidebar.

Disclosure: long gold and silver, and long gold mining shares.

Dissecting a Manic Bubble and Subsequent Crash

I took an on-line course at MIT on Behavioral Economics, and one of the topics was manias and asset bubbles. I'll leave out the higher math equations, and summarize what seems painfully obvious, but illustrative nonetheless.

Every asset bubble has similar characteristics, whether it's the Tulip Mania, the South Seas Bubble, the Internet Bubble, or whatever we experienced in 2008 (let's call it a Subprime Mortgage crisis).

1) First, you have to have a catalyst (tulips, internet, real estate, easy money),
2) Then, smart money insiders quickly claim stakes (railways, gold, securitization, IPO's),
3) Development of infrastructure to sustain the bubble for the mainstream citizens (setting up exchanges, networks, charters, assessors, government subsidies)
4) Authoritative blessing (government approval, official government support, parliamentary passage, AAA credit ratings),
5) The inevitable crash (stock market crash, real estate crash, defaults, bankruptcies, foreclosures),
6) Post-crash political reaction (regulation, litigation, fraudulent activity, accounting reforms, creation of government agencies).

The discomforting fact is that bubbles need an inflow of progressively more naive investors, much like a malignant tumor needs blood to metastasize. Prognosticators who predict these crashes in the midst of a bull market are demonized as heretics. These manias can be back-dated several hundred years, and the similarities are eerily haunting. Let's hope we don't go overboard with step 6 and put a death chokehold on our economy this time around.