Gold & Silver: A bubble ready to burst?

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Introduction
Gold and Silver are in a strong secular bull market. Gold awoke at the start of the Millennium and the bursting of the dot-com bubble. Investors became wary of the shortcomings of our monetary system and started buying more gold and silver.

Central bankers, headed by the Fed, tried to inflate the monetarys system bubble again which resulted in a real estate bubble. We all know how this ended…

After a 20 year bear market for gold and silver the last 10 years have been particularly good for gold and silver investors. The main question for every investor is: how much further can this bull market go?

We believe gold's current secular bull market probably has much further to go. And since bull market corrections are buying opportunities you should use them as such.

That might sound easier than it is to do. Buying into nerve wrenching corrections can be a tough pill to swallow. But it's much easier if you have some strong arguments at hand that make the case for this rush.

Dow/Gold Ratio
We know that the Dow/Gold ratio is a perfect indicator for a secular gold bull market. The top was formed at 1 – meaning the Dow value equals Gold value in US Dollar terms. Even today after the last 10 years sprint the ratio is still at 8!

Gold would increase 800 % in value versus the Dow before they are on par again. As Ben Bernanke ensures the Dow is not coming down but only going up, gold should increase in value. We currently believe the Dow will be trading in a range of 8,000 to 12,000 which means gold will go up to 8,000 USD. Today's rate is 1,350 USD only.

For silver the Ratio is even better. The gold/silver ratio is historically 16 while the current ratio peaks at 47.5! This means we foresee a silver price of 500 USD.

Where are we in the bubble?
Picture by Jean-Paul Rodrigue

Phase I:
In the early years a rising gold price is greeted with suspicion, doubt and often complete disbelief. The market is dominated by speculators and traders seeking relatively quick short-term profits. Although gold may double or even triple in price during this phase the price is subject to periodic violent sell-offs of 20%-30% as short-term traders are easily routed by the bullion banks. During this period gold bullion dramatically outperforms gold mining stocks as the market is disciplined to distrust the rise and avoid buying assets in the ground. Indeed, most investors completely avoid gold during this period.

Sounds familiar? Yes indeed, not too long ago we ended Phase I and entered Phase II.

Phase II
The rising pattern of gold will begin to accelerate. However, gold mining stocks will experience rising relative strength versus the metal as explosive quarterly earnings reports bring attention to the sector. Sometime before the end of this phase the major Wall Street brokerage firms will scramble to rebuild a research presence and recommendation lists in an area they have long proselytized against. All of a sudden the smaller companies will successfully be able to come to market and new funds will flood into the exploration area. Very quickly a drilling equipment shortage will emerge and all participants in the industry will experience labor shortages.

Large institutional buyers like John Paulson and David Einhorn publicly announced they had entered the gold market when the price crossed the 1,000 USD mark. The large public however, is not yet there.

Phase III
Now the fun begins. This is the shortest but most explosive phase of the secular bull market in gold. This is the phase when all the sleepy financial institutions and the public finally wake up. This is the inflection point when the public clamors to get aboard in true "gold rush" fashion and Wall Street is more than happy to accommodate with a constant flow of recommendations. Prices will continue to climb considerably beyond all prior fundamental benchmarks. Abrupt corrections will still occur as the COMEX will progressively raise futures margin requirements and so called pundits repeatedly try to foolishly call the top. But no top will be reached until the final excessive quantitative easing of fiat currencies (printed by the U.S. Federal Reserve, the European Central Bank and the Japanese Central Bank) finds its way into the gold market.....

Our primary focus has been owning bullion through an account (we have a GoldMoney account) because we believe phase III of the current bull market may be able to yield a speculative exploration crop superior to the 1975-80 list below:

An investment in Lion Mines of $700 (10,000 shares) in 1975 would have netted a total profit of around $3,799,300 if held for the five years.

Final Comments:
We have purposely left out any comments on silver. Suffice it to say that we believe silver will outperform gold in the current environment and is a major focus of our investment activities.
In case you missed it, we believe Phase II has only just begun. Get in before it is too late - especially as prices are off their heighs.

Our Conclusions: You ain't seen nothing yet!

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