What a week! Gold prices soared to their highest levels in 26 years, and the dollar collapse verses just about every other currency on the planet. Despite the fanfare, the Dow Jones dropped below 17 ounces of gold, off 18% thus far this year. The break outs in gold and silver and simultaneous break-downs in bonds and the dollar indicate trouble on the horizon.
With the recent launch of Barclays’ silver ETF, both physical gold and silver can now be bought by individuals and institutions alike through the mere click of a mouse. As a result investor demand, virtually nonexistent for twenty years, could reemerge with a vengeance. Similar ETFs will likely begin trading on other major exchanges thought out the world, reintroducing an entire generation to an asset class recently thought as dead as disco. Combine soaring demand with decades of under-investment and exploration by mining companies, central bank divestment and producer hedging, and precious metal’s price appreciation could be explosive.
The fact that this bull market has basically proceeded in utter obscurity for six years, with recent price rises causing many to cry “bubble??? or “blow-off,??? provides further evidence of just how much further this bull has to run. As an example, one self-professed metal’s expert, who has urged caution since late 2004, was so convinced that silver’s recent rise constituted a speculative “blow-off??? that he publicly promised to “eat his hat??? were that not the case. In addition, in the aftermath of silver’s sharp one-day drop he subsequently advised investors to sell declaring that a significant correction in both gold and silver had begun. In retrospect the correction ended before the ink on his quotation marks even had a chance to dry.
As a reminder of just how large bubbles can grow before popping, during the 1990s the NASDQ rose from 300 to 5,000. If the NASDAQ could do it why can’t gold? Sure gold does not pay any dividends, but than neither did the NASQAQ. Plus during the entire NASDAQ rally new shares of stock were constantly being issued, either as a result of IPOs, secondary offerings and option grants. However, the growth in the supply of gold and silver will be far more constrained, creating the potential for far greater appreciation.
It seems fitting that on the first day of trading for the silver ETF, shares of Microsoft, once the quintessential “new era??? stock, plunged by 11%. Trading as high as $60 per share in December of 1999, Microsoft shares now trade below $24. During that same time period the price of gold has risen from $290 to $680. Imagine if one had survived typical investors on New Year’s Eve 1999, asking each to predict which would perform better in the first decade of the new millennium, Microsoft or gold. Do you think even one in one hundred would have chosen gold? How many would chose gold today or even realize the extent of its put performance?
For those who feel precious metals are in a bubble now, they ain’t seen nothing yet. At the moment prices are merely adjusting to where they should have been all along. For years gold languished in obscurity as investors instead placed their faith in the wisdom, independence, and integrity of central bankers. That misplaced confidence will soon shatter and investors will once again embrace gold, as they discover nothing more than politicians with printing presses lurking behind the curtains.