Has The Gold Mania Finally Arrived?

Gold Mania: Are We There Yet?

By Louis James, Casey International Speculator

It’s understandable that people want to know where the precious metals market is headed next. And not just because big fluctuations can be nerve-wracking, but because it makes a big difference how you’d invest today if, for instance, you think there’s a big correction ahead (save cash to buy cheaper) or not (load up and ride the wave).

But the reality is that I don’t know. Nobody knows what will happen next.

That’s why it’s called speculation.

Further, you can be right about the trend and still get wiped out if your timing is wrong. That’s why it’s easier to say what is likely to happen than what is likely to happen next.

And that, in turn, is why we at Casey Research still have quite a bit of concern and uncertainty about a possible correction in the near term, even though the Casey Consensus is unanimous in projecting rising prices for precious metals for years to come.

Some investors are tiring of our cautioning of a “possible correction,” “waiting until you see the whites of their eyes,” and so forth. Some wish the market would stop dithering and just head north into mania territory. Or wish Casey Research to stop dithering and just start issuing lots of Buy recommendations. But other, more nervous readers seem to wish we’d just admit that the market has topped and issue a Sell on everything – time to cash in our chips and go home!

I am sympathetic, but Mr. Market doesn’t know our desires and wouldn’t care if he did. We would be doing our subscribers a grave disservice if we pretended to know which way he’ll move next, when we don’t. And anyone who claims they do know is likely a former New York bridge salesman.

This is why we’ve been steering a middle course for some time. We’re not out of the market; many of our recent picks have done spectacularly well on gold’s new nominal high. But we’re also not all in.

Let’s look at a simple snapshot of our most fundamental trend, the price of gold. Compare this chart of spot gold over the last year with the one below it, showing the same thing during the months before and after the 1980 spike. Does it appear to you that we’ve hit the same sort of peak? Me neither.

12 month spot gold price in us dollars

 

spot gold price in 1979 to 1980

Of course, history seldom repeats, although it does rhyme. Here’s a 10-year chart of gold during the current bull market.

gold price adjusted for inflation

This chart looks a lot more like, if not a spike, at least a price peak that could now be set to slide downwards for the next 10 years.

But don’t forget gold’s biggest picture, the inflation-adjusted price since it was set free by Nixon in 1971.

gold price adjusted for inflation 1970 to 1980

In nominal terms, gold certainly seems to have scaled its prior peak; in real terms, it’s still got a long way to go to beat the 1980 spike.

All of the economic and financial factors that have contributed to this precious metals bull market remain in force, and many of them have worsened. And if a big and broad market correction hits us again, the precious metals and related stocks will get squeezed, if only temporarily. The 2008 crash proved that such a squeeze can be very sharp and painful – even for groups like ours that did see it coming.

Assuming you agree with me and the Casey Consensus that this metals bull market is going to produce a gargantuan Mania Phase that lies yet ahead, I’d like you to try a mental exercise:

Ask yourself what would happen if the current sharp rise is actually rhyming with the sharp rise in the early 1970s, not the big run-up to the 1980 peak. If so, and if history continued rhyming, that’d put us before the biggest gold correction ahead of the mania.

History may not rhyme that much at all, of course, but just think about it:

  • If you had bought during the 1974 peak, would you have been able to hang on through the ensuing 50% retreat to profit from the eventual mania? Would you be able to shrug off missing the lower prices available the following years and be content with your future profits based on 1974 buying?

If you answered yes, and you are certain you won’t need the cash invested for a year or two (no margin buying), then life becomes simpler for you. Buy the best of the best companies and forget about them until the Mania Phase arrives. If you are this confident – or disagree with us that another steep correction is likely in the next major economic shock – you might just work on building the best portfolio you can, for profit during the coming mania.

  • Or, if you bought the 1974 top, would you kick yourself – hard – for overpaying and not having the cash to buy during the pullback?

If so, then you should take first tranches of only the best plays and keep plenty of powder dry for the time when the economy exits the eye of this most massive economic storm in modern history. Given the number of agonized vs. serene emails I got during the crash of 2008, I suspect that most investors fall into this group, so this is the context for most of our recommendations. If this rough grouping is yours, admit it, embrace it, and hedge your bets on Mr. Market’s erratic behavior accordingly.

Either way, it’s crucial for speculators to be honest with themselves about their own strengths and weaknesses. Happily, either way you still want to focus on the best of the best. The difference is in what you’re willing to pay for them, and when.

Incidentally, if we get another crash-induced bottom, I believe it will be the last before the Mania Phase kicks in – the next and last best chance to really back up the truck and position yourself for truly spectacular gains.

[Month after month, Louis James provides the market’s best investment advice in the junior mining sector… and his amazing track record has proven him right. The hand-selected, small-cap exploration stocks he recommended in 2010 outpaced the S&P 500 by 8.4 times. Find out more here.]

The Gold Mania Is Still Ahead – Are You Positioned To Profit?

Chart of the Month: TSX-V Speaks Volumes – Gold Mania Still Ahead

by Andrey Dashkov, Casey’s International Speculator

With the gold price hitting nominal highs last month, there is a lot of “mania” and “bubble” ranting going on in the gold community. Should we start selling?

A bull market typically progresses through 3 phases: the Stealth Phase, in which early adopters start buying; the Wall of Worry Phase (or Awareness Phase), when institutions begin buying and every significant fluctuation makes investors worry that the bull market is over; and the Mania Phase when the general public piles on, driving prices beyond reason or sustainability.

This is followed by the Blow-off Phase, when the bear takes over from the bull and the herd gets slaughtered. Judging by the volume on the TSX Venture Exchange (TSX-V), where a lot of gold juniors are listed, we conclude that the next phase of our current gold bull market, the Mania, still lies ahead.

Have a look at the chart below:

TSX-V and GLD volume vs HUI and Gold since 2001

If a mania were unveiling now, we would expect to see a sharp increase in investment capital entering the TSX-V, driving its trading volume upward. Over the last few months, the TSX-V daily volume has spiked upward sharply, but as the chart clearly shows, short-term volume is extremely volatile, spikes are common, and equally large drops are just as common.

Stocks of junior exploration companies are leveraged to gold, meaning they rise or fall by a greater percentage than does the yellow metal itself. So a spike in volume should be expected in reaction to an ascending gold price. A more reliable barometer is volume’s 10-period moving average that removes interim market gyrations. Using this measure, the TSX-V’s volume looks like it has returned to a slope of ascent similar to before the 2008 market crash, and the longer-term trend is steadily upward – steady being the key word.

More investors are entering our market, but the pace is not yet accelerating greatly, as we’d expect in a true Mania Phase. In other words, an early indicator of the mania in this bull cycle will be a sustained parabolic move upwards in the TSX-V’s average volume. And that is not happening yet.

Our other volume indicator, the GLD gold ETF, behaves in an interesting manner: it frequently moves counter to the TSX-V. An explanation for this might be that GLD is considered a “blue-chip” stock; a safer haven for investors who actively trade on the TSX-V and park their cash in GLD during periods when they consider juniors overly risky.

The moving average of GLD’s volume remains on a moderate multi-year ascent but has turned down recently. However, its daily volume is up in recent trading. Given the observed correlation between trading volumes of the TSX-V and GLD, this may point to a cooling-down in TSX-V trading activity in the near term.

Finally, the ^HUI gold miners index has tracked TSX-V volume as well, also having resumed a slope of ascent similar to that of the years before the 2008 crash. We see this as another indication that we are in an accumulation phase of the bull market.

We will continue tracking these parameters and updates when we see significant changes. For now, the bottom line is that even with the gold price moving sharply higher, the mania remains an anticipated future event.

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[But when the Mania Phase does hit, there’ll be no stopping it. And the best leverage – beating the S&P 500 by more than 8 times – comes from the little-known “gold nuggets” that International Speculator editor Louis James keeps digging up for his subscribers. For a very limited time, you can save $300 on the annual subscription fee – plus receive Casey’s Energy Report FREE for a year! To learn more, click here now.]

Welcome To The Gold Mania!

Welcome to the Mania

By Jeff Clark, Senior Editor, Casey’s Gold & Resource Report

With gold punching the $1,300 mark, thoughts of what a gold mania will be like crossed my mind. If we’re right about the future of precious metals, a gold rush of historic proportions lies ahead of us. Have you thought about how a mania might affect you? Not like this, you haven’t…

gold-bullion-ingotYou log on to your brokerage account for the third time that day and see your precious metal portfolio has doubled from last week. Gold and silver stocks have been screaming upward for weeks. Everyone around you is panicking from runaway inflation and desperate to get their hands on any form of gold or silver. It’s exhilarating and frightening in the same breath. Welcome to the mania.

Daily gains of 20% in gold and silver producers become common, even expected. Valuations have been thrown out the window – this is no time for models and charts and analysis. It’s not greed; it’s survival. Get what you can, while you can. Investors clamor to buy any stock with the word “gold” in its title. Fear of being left behind is palpable.

The shares of junior exploration companies have gone ballistic. They double and triple in days, then double and triple again. Many have already risen ten-fold. You have several up 10,000%. No end is in sight. Your portfolio swells bigger every day. Your life is changing right in front of you at warp speed.

Every business program touts the latest hot gold or silver stock. It’s all they can talk about.

Headlines blare anything about precious metals, no matter how trivial. Weekly news magazines and talk-radio hosts dispense free stock picks. CNBC and Bloomberg battle to be first with the latest news. Each tick in the price of gold and silver flashes on screen, and interruptions offering the latest prediction seem to happen every fifteen minutes. Breathy reporters yell above the noise on the trade floor about insane volume, and computers that can’t keep up. Entire programs are devoted to predicting the next winner. You watch to see if some of your stocks are named. You can’t help it.

The only thing growing faster than your portfolio is the number of new “gold experts.” It’s a bull market in bull.

You can feel the crazed mass psychology all around you. Your co-workers know you bought gold some time ago and pepper you with questions seemingly every hour, interrupting your work. They ask if you heard about the latest pick from Fox Business. They want to know where you buy gold, who has the best price, and, by the way, how do I know if my gold is real? They all look at you differently now. Women smile at you in the hallway. You worry someone may follow you home.

Your relatives once teased you but now hound you with questions at family get-togethers – what stocks do you own? What’s that gold newsletter telling you? Where can I keep my bullion? You don’t want to be the life of the party, but they force it – it’s all anyone wants to talk about. Your brother tells you he dumped his broker and is trading full-time. Another relative shoves his account statement in front of you and wants advice. You sense someone will ask for a loan. You don’t know what to tell people. The attention is discomforting, and you feel the urge to escape.

At first it was exciting, then breathtaking. Now it’s scary. You’re drowning in obscene profits but are becoming increasingly anxious about how long it can last. Worry replaces excitement. You don’t know if you should sell or hold on. Nobody knows what to do. But the next day, your portfolio screams higher and you feel overwhelmed once again.

You grab the local paper and read the town’s bullion shop had a break-in last night. They hired a security company and have posted several guards outside and inside the store. Premiums have skyrocketed, but lines still form every day. The proprietor hands out tickets when locals arrive: your number will be called when it’s your turn… the wait will be long… please have your order ready… yesterday we ran out of stock at 11am.

You begin to worry about the security of your own stash of bullion – those clever hiding spots don’t feel quite as secure as you first thought they’d be. Is the bank safe deposit box really secure? Shouldn’t they hire a security guard? Should I move some of it elsewhere? Is there anywhere truly safe? You find yourself checking gun prices online.

And it’s all happening because the dollar is crashing and inflation has scourged every part of life. You curse at those who said this couldn’t happen and mock past assurances from government. Cash is a hot potato, and spending it before it loses more purchasing power is a daily priority. Everyone is clamoring to get something that can’t lose value, but mostly gold and silver.

Your wife calls and says the $100 you gave her that morning isn’t enough to buy groceries for dinner. Prices change often on everything. She urges you to get some bread and milk before the stores raises the price again. You suddenly remember you’re low on gas and make plans to leave work early to beat others to the filling station. Restaurants and small businesses post prices on a chalkboard and update them throughout the day. Employers scramble to work out an “inflation adjustment” for salaries.

On your way home, the radio broadcaster reports the government has convened an emergency summit of all heads of state. They’re working urgently on the problem, and all other agendas have been tabled. Outside experts have been called in. We’re going to solve this rampant flood of inflation for the American people, they say. In your gut you know there’s nothing they can do.

You change the channel and hear about the spike in arrests of U.S. citizens at the Canadian border. Scads of people are caught trying to sneak bullion and stock certificates out of the country – from airports to rail stations. Violence at borders has escalated, and stories of bloodshed are getting common. The White House ordered heightened security at all U.S. borders, with the media reporting it can take days to cross. Foreign governments offer meaningless help, others mock U.S. leaders for their shortsightedness. Their countries are suffering, too.

You think about the gains in your portfolio and wince at the taxes you’ll pay when you sell. Nothing has been indexed to inflation, so everyone has been pushed into higher tax brackets. Citizens are furious with government. Agencies have been swarmed with bitter taxpayers and revolting benefit recipients. One government office was set on fire. A riot erupted in Washington, D.C. last week and martial law was temporarily declared. It’s too dangerous to travel anywhere.

As crazy as things are, it’s hard not to smile. You’re in the middle of a mania. Your life has changed permanently. You’re part of the new rich. You can quit work, live off your investments. Your wife is ecstatic, and you both feel as if it’s your second honeymoon. Your kids are amazed and gaze at you with the same awe they did when they were children.

You’re thankful you bought gold and silver before the mania, along with precious metal stocks. You daydream of where you might go, what you might buy. New options open up daily. You realize you’ll need to meet with your accountant, maybe hire a second one to protect your sudden wealth. You wonder what you’ll invest in next. You ponder what charities are worthwhile. Better meet with the attorney to redraft the will.

As night settles and your house quiets, you log on to your brokerage account one last time. Even though you’re ready for it, your mouth drops when you see your account balance. It is truly overwhelming. You think of others who own gold and silver stocks and wonder if any have sold yet.

Has Doug Casey exited?

You stare at the blinking screen, hand on the mouse, the cursor hovering on the sell button…

[We can’t promise the gold mania will be exactly like Jeff outlines, but we’re convinced one is coming for all things gold and silver. And to be prepared for the coming events, you’d do well to listen to those experts who have predicted the quagmire the financial system now finds itself in long before it happened. An all-star cast including John Hathaway of Tocqueville Gold Fund fame… Eric Sprott, Sprott Asset Management… Richard Russell of the Dow Theory Letters… and many more.

All those experts will gather at Casey’s Gold & Resource Summit from Oct. 1 to 3. But even though the summit is sold out, you can still hear every presentation and stock recommendation… on more than 17 hours of audio on CD. If you order now, you’ll save $100 off the retail price. Details here.]

Price of Gold – Meltdown or Mania?

If a panic in the broader markets put liquidity-crunch-induced pressure on the gold price, the meltdown should be less severe than in 2008 and the eventual rebound could be dramatic, possibly triggering the mania we’ve been calling for. Remember: the market crash drove gold almost down to $700 in October ’08, but the same fear drove it almost back to $1,000 by February ’09. Silver topped that with a 60% rebound over the same period.
As the debt-glue holding everything together continues to lose its grip, the ride will only get rougher. As bad as 2008 was, if the Crisis Creature appears to be coming back when everyone on Main Street thought it was dead, the fear should be much worse – and that should drive gold way, way north. It’s possible the fear, coupled with the lack of any safer alternatives, could prevent gold from melting down at all, sending it instead straight through the roof into the clear blue Mania Phase sky.

Gold Meltdown or Mania – Batten Down the Hatches

by Louis James, Senior Editor, Casey’s International Speculator

As Doug Casey said recently, we expect things to come unglued soon. With the ongoing madness in Europe, it seems to me that things are starting to look visibly less well glued already.

In contemplating the possibility of another stock market meltdown, it seems important to me that in spite of the exuberance with which investors rushed back into the market over the last year, the memory of 2008 remains vivid, tempering enthusiasm with caution. For example, the market still has relatively little appetite for early-stage, grassroots exploration projects; by our latest estimates, Mr. Market is willing to pay on the order of ten times more for Proven & Probable ounces in the ground than for less certain resource categories. With this evidence of caution in mind, and the great unwinding of the broader credit markets well underway, it seems likely that our sector is less leveraged than it was before the crash of 2008.

If a panic in the broader markets put liquidity-crunch-induced pressure on the gold price, the meltdown should be less severe than in 2008 and the eventual rebound could be dramatic, possibly triggering the mania we’ve been calling for. Remember: the market crash drove gold almost down to $700 in October ’08, but the same fear drove it almost back to $1,000 by February ’09. Silver topped that with a 60% rebound over the same period.

As the debt-glue holding everything together continues to lose its grip, the ride will only get rougher. As bad as 2008 was, if the Crisis Creature appears to be coming back when everyone on Main Street thought it was dead, the fear should be much worse – and that should drive gold way, way north. It’s possible the fear, coupled with the lack of any safer alternatives, could prevent gold from melting down at all, sending it instead straight through the roof into the clear blue Mania Phase sky.

With its industrial metal aspect, however, another big economic meltdown could hit silver harder than gold, and it might take longer to recover, especially if base metals don’t rebound the way they did in 2009. That said, silver has always tracked gold, so when gold heads for the moon, we expect silver will as well. It could reach even higher, if supply is cut by reduced base metal demand, as most silver production is as a by-product of base metal mines.

Either way, I don’t care if gold drops in the weeks and months ahead; the overall trend is for widespread economic fear and uncertainty to continue, holding gold prices up and eventually driving them higher. That makes the current retreat look like a great buying opportunity. In fact, putting my money where my mouth is, I picked up some more gold buffaloes just yesterday, when gold dropped to $1158. As I type, it has rebounded to $1181. I plan to buy more every time I see a sharp drop like this over the summer.
So, in addition to our multiple recent calls to take profits and go to cash, I want to reiterate that gold is cash. And it’s a whole lot more attractive than the dollar, the euro, or any paper money at present – not just as a speculation but for security as well.

What about the stocks?

Unfortunately, the stampede to safety that drives investors to gold is not likely to drive them immediately to junior exploration stocks. “The most volatile stocks on earth” is not what fearful people will be looking for – not until the panic sufficiently recedes and greed joins fear in equal measure in the marketplace…or in greater measure, come the Mania Phase.

If I’m right about fear being the driving force in the markets in 2010, whereas greed drove them in 2009, gold will have to deliver a serious wake-up call – perhaps holding over $1,500 – to really get the show on the road again for the gold stocks. If that happens while fear of a global economic slowdown continues to push oil prices lower, gold producers should be able to report extraordinary profit increases, even as other industries are tanking, and finally penetrate deeply into the awareness of broader pools of investors.

Cashed-up majors won’t have to wait for that to benefit; they may seize the opportunity created by market weakness to buy successful explorers, with significant discoveries in hand, while they are on sale. Well, some of the more nimble ones, like Kinross or Agnico-Eagle, might. The bigger companies, like Newmont and Barrick, didn’t lift a finger to pick up any bargains after the crash of 2008 and may be too cautious to act the next time around as well.

Be that as it may, acquisitions will increase the demand for quality exploration projects – the pipeline from exploration to development must be kept full – and good prospectors should at last get their day in the sun.

Punctuating this sequence will be the occasional big win on a new discovery. There haven’t been that many this cycle – not enough to replace all the gold the majors are depleting every year – but there have been some, and the market always loves a discovery.

After the first quarter of ‘09, greed outpaced fear and great development stories did phenomenally well; we saw better gains on large and growing gold stories than we did on the big producers. If fear retakes predominance in 2010, it’s profitable production that should do best, and I’d expect the biggest winners overall to be new, emerging, and highly profitable precious metals production stories. Spectacular discoveries should also do spectacularly well, but those are harder to predict. New and rapidly expanding production should be the sweet spots.

Generally, I think we’ll see our markets trading largely sideways over the next few months, with great volatility, until the debt-fueled “growth” in the global economy is exposed for the sugar high that it is. We’ve been forecasting that scenario for long enough here at Casey Research.

I expect this to play out by the end of this year, or 2011 at the latest, depending on how fast fear returns to the broader markets.

What to do

If I’m right about this, the strategy called for is a more cash-focused version of our “Buy only the Best of the Best” program. Buy nothing new unless you’re offered a great bargain in a solid company that can deliver significant new or expanding production. Nothing less than 50,000 ounces gold-equivalent per year in production will get much notice, and anything less than 100,000 ounces per year AuEq will have to struggle for respect. A solid company, of course, has great people, lots of cash, and the goods in hand.

If you want to speculate on a discovery, make sure you have very good reason to believe the project has much better than average odds of delivering a discovery – and it has to have world-class potential. That’s not hundreds of thousands of ounces but millions of ounces of gold, or equivalent.

If things do come truly unglued this year, we may well see 2008-style bargains on great companies with the staying power to recover and go on to new highs. Watch for it. Prepare for it.
Buy Low, Sell High – it’s a formula that requires patience but is the only way to go.

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Louis James has been guiding his subscribers through the ups and downs of the market with a steady hand. It’s no coincidence that every single one of his 2009 picks was a winner. Learn more about Louis’ hands-on approach and the profit opportunities Casey’s International Speculator offers – details here.