Like a handful of others a decade ago, I believed that the damage that governments were doing to their economies at that time would end in disaster. I also believed that one biproduct of these actions would be a dramatic rise in the price of precious metals. I wasn't at all certain how long this trend would last (at the time, I guessed at roughly ten years), but I felt that it would end with a gold “mania” – a time when everybody and his dog was trying to get his hands on a few Maple Leafs.
Back then, almost no one that I talked to agreed with me on this concept, although some felt that gold would rise somewhat, then decline again. I thought this to be incorrect, as major bull markets tend not to end with a whimper. They end with a major upside spike.
Even today, after ten years of rises in the price of gold, the term “mania” is not in general use in the media. It is not being discussed because, even now, fewer than 5% of investors are presently in the gold market in any significant way. However, I am more convinced than ever of a greater rise in the price of gold, just as I am more convinced than ever that there will be a mania stage that has not even begun yet.
Recently, some who have been predicting a mania have begun to speculate on what the price of gold will be when the mania hits. Just today, I read speculations of $1800 and $2100, but there are many more.
Whilst I understand the thinking of those making such speculations, I am disinclined to place a number of any kind on the “beginning of the mania.” The reason is that, for the average investor, for whom gold is still slightly off the radar, focusing on any number tends to distort an understanding of the mania itself.
To understand what is on the way, the price of gold is, effectually, a side issue. (I just know I'll be receiving some hate-mail for that statement.) Rather than “chase” the gold price, investors would be better advised to watch the warning signs that cause gold to rise. There are many, and they are growing in number.
The present bull market for gold has been supported, in part, by those investors who are far-sighted, who recognise that the political-economic changes that are taking place in the world will drive up gold dramatically. As countries deepen their debt and put the printing presses into overdrive, gold will rise against paper currencies, as those paper currencies reveal their true worth.
However, the mania itself will be very different from the present rise in gold price. The events that create it will not merely be the existing destructive conditions. The mania will be driven by more catastrophic events. Here are a few:
- Creditors dump US debt back into the US market
- European countries default on their debt
- A second crash in the stock market
- Dramatic inflation in commodities, without a concurrent rise in wages
- Major tariffs imposed by one major player, causing other players to impose their own tariffs, resulting in a tariff war
- The US ceases to be the currency used internationally to purchase oil
- A second default currency is created for world trade (I anticipate that this will be instituted in stages, beginning between China and Japan and possibly including a second SWIFT system)
- The US continues its zeal to be the world's policeman, causing other powers to align themselves with those the US attacks, resulting in dramatic retaliations on a worldwide basis
- Collapse of the paper gold market, revealing that non-physical gold has been dramatically oversold
Any of the above is capable, on its own, of creating panic in the market. How many of these events will actually take place? In what order will they occur? It is interesting to speculate, but, in the end, it is unimportant. We are presently exiting the eye of the economic hurricane, and, regardless of what the triggers may be, they are so numerous and so precarious that, in the near future, the dominoes will begin to fall.
When this occurs, the mania will begin in earnest – first with investors realising that precious metals represent a greater safety than whatever else they had previously had faith in. Second, once the mania kicks in, it will become headline news. This will cause another wave of buyers – the average guy who doesn't really think of himself as an investor, but has now become scared and decides to chase the runaway gold train.
Black swans take people by surprise. As the above list attests, a flock of black swans is on the way.
At this point we will be in for the roller-coaster ride of our lives. Since 2003, daily fluctuations of 5% or more in the gold price have been notable, but there have been many such occasions. Back in the bull market of the 70's, as gold neared its peak, daily fluctuations of over 5% became common, and, just before the peak, fluctuations occurred that reached over 13%.
Could this happen again? I believe that it not only can happen again, but that these percentages are very likely to be exceeded. After all, the world was a far more stable place, both economically and politically, in 1979. Today, we are facing the actual economic collapse of some of the world's leading nations.
I wouldn't want to speculate on what percentages we will see, but, recently, we have seen occasional fluctuations of $100 or more. In the not-too-distant future, we may see fluctuations of $1000 or more in a single day. If and when this day comes, gold investment will not be for the faint-hearted.
But why should such dramatic fluctuations occur?
The reason will be that, while existing investors are likely to maintain their positions (and even buy, as corrections occur), the second wave of buyers and, more so, the third wave, will be investing blindly, chasing the gold price as it rises and panicking each time it falls. This will unquestionably exacerbate the fluctuations, causing both rises and falls to be more extreme.
In mid-1929, it was said that every shoeshine boy on Wall Street was offering stock tips to their customers, who, by that time, had become so convinced that the stock market would go ever-upwards, that they were buying on margin, with borrowed money, making a crash inevitable. The times may change, but human nature does not. Before long, I believe we will be seeing average people making the very same mistake, ultimately driving the price of gold up beyond reason.
But all manias come to end. When will the end come for the gold mania? When the day comes that you get in a taxi and the driver asks you where he can buy a few gold coins because the coin shops have been out of them for months, it will be time to quietly diminish your gold position to the level that you feel is prudent as a reserve fund. At that point, the mania will be in its last days.