The Gold Bubble Pops Yet Again

Big picture.  10-year chart of gold.



Green line is simple 200 day moving average.  Buy on that line for that last 10 years at any point for lowest risk entry points.  This is such a beautiful chart for studying primary bull market psychology.

First 4 years of this 10 year chart were a slow grind, from $250 area to $425.  Don't forget, for the previous 20 years gold went from $850 to $250.  Any gains here are long and hard because only the contrarians were piling in, being happy with the fact that they would most likely have to wait 17-20 years for the payday.  But paydays of these kinds are worth the wait because of enormous payoffs at the end.  People who bought in this range are already up 4x-6x and are not selling. 

Dec. 05 to May of 06, gold shoots from $450 to $720.  Naysayers were saying gold had tripled, blow off top, the bubble has burst, let's flip houses.  The absolute peak of the housing market, by the way, was about 10-06.  This is when I bought at $565.  My only question now is why didn't I buy more.

So it grinds along agonizingly for a year and a half doing nothing but sideways, and I bought more at $680.  Mind you $680 was near the highest gold had been for the last 27 years.  It was a bubble.  My only question again now is why didn't I buy more.

So the naysayers were wrong once again as the bubble burst in reverse and went from $680 to $1000 in a few short months.  Oh, all time highs, blow off top, bubble soon to burst.  Yet look at the 200 day moving average.  As Forest Gump said, "Keep your eye on the ball." 

So, OH MY GOD, gold shoots down for a minute to the $850 area, whoa, 15% pull back, end times and Armageddon, then Wall St. crashes and gold comes back and tests the $750 area again for a minute.  With the only serious but short breach of the 200 day moving average, gold still ends the year up 5% while the DOW gets ripped in half.

Since the last bubble has burst, gold has rebounded 133% in 3 years, and just look at the 200 day moving average.  As long as the trend continues up, that is the true gauge of whether gold is cheap in dollars or not.  Notice the angle of ascent of the 200-day moving average is increasing but is far from hyperbolic.  Volatility is increasing as is the rate of ascent.  This is big time classic bull behavior, in my humble opinion. 

These major bulls, for psychological reasons, often run for 17 to 20 years.  If they truly run in the 3 phases of 1. Contrarian, 2. Institutional, 3. Public, the question is where are we at now?

The price of gold has gone from $250 to $1900 and now $1740 per ounce with next to zero public involvement.  The public has been selling their gold, not buying it.  Just ask yourself how many individuals you know who own gold or silver.  I would guess the first phase of contrarians were buying from 2001 to 2008.  You could argue that the March, 2009 purchase by India of 200 metric tonnes of gold from the IMF at $1050/ounce signified the first serious involvement of central banks net buying of gold for the first time in 20 years.  Now the list of central banks buying gold is growing all the time.  Bet against the banksters if you think the public is outsmarting them.  I won't try to stop you.

Check out the latest chart from the St. Louis Fed Bank of the Adjusted Monetary Supply.  Is it any wonder that gold and everything else is going up when the money supply is exploding?



The rise in volatility and price would suggest to me that the smart money has been getting in for awhile now, 2 or 3 years.  From my trading experience I can tell you there is one thing traders need like blood to a vampire, and that is volatility.  Volatility has certainly increased in the last 3 years.  You can't make any money, even if you are right, if a stock or commodity isn't moving one way or the other.  Increased volatility draws traders like a virgin's blood draws Count Dracula.

So by the looks of the chart I would say we are likely in the 2nd phase of smart money/institutional involvement and will be there for some time yet to come.  There will be years of nominal price inflation of gold and everything else except real estate.  The real estate trend of down has not changed yet.

Yet the public remains on the sidelines, convinced they missed the move because gold is up 6x from the bottom.  Do you know how many times I have heard this argument?  Psychologically, gold struggled going over $500 because it was a double.  When it broke through $500 it hit $720 in no time.  Then sideways for a year and a half, then it had to psychologically break through the old high of $850.  Then $1000.  Now it is in uncharted territory.  Just 2 weeks ago I overheard a conversation where the consensus was gold was cooked and on the way to $1200 if not $800.  The public is yet to get interested.  Why should they?  The bubble has popped, no?  But of course the public always gets investing right, we know that from history.

And get this, the whole thing is an illusion.  Gold has not increased in value at all.  Gold is still gold.  What has happened is the devaluation of the dollar, period.  It takes more of the devalued money to buy the same amount of gold, period, end of story.  And everybody thinks gold is in a bubble.  This is the obvious mathematical and physical answer the to the problem.....gold nor anything else is in a bubble right now except US Treasury Bonds, and I guess as well you could say the remainder of the paper currencies of the world, but the US Treasury Bonds take the proverbial cake.  Gold is simply the canary in the mine.  The jig comes closer to being up day by day, and every day of our lives has seen lost purchasing power of our money.  They are printing money, and more of it all the time.  Gold is a distraction, nothing more.  But you ain't seen nothing yet.  Wait until the public gets interested.

The public's decision on gold must be emotional and based on protecting their ego because they missed out on the obvious best investment of the last decade.  The logical conclusion from the chart and all the evidence has been that gold has been and remains in a massive bull market.

Ask yourself, at the peak of the housing bubble, were people afraid of the price of houses and talking about their values getting ripped in half?  At the peak of the bubble, was the public calling it a bubble?  In the mean time I am buying more gold.  I have seen this movie before. The trend remains and the 200-day moving average is intact.  Could it go sideways for awhile?  Of course.  What will happen tomorrow or next week?  I am no psychic.  But a trend remains a trend until proven otherwise.  The last 10 years is proof of that obvious truism.  (Edwards & Magee, Technical Anaylisis).

But to tell you the truth, it's not the gold I crave so much as it is I know congress and the Fed are destroying my paper and I can't stand to hold it.  That is what will drive the public when the day comes.  Nobody want's to be a bag holder.