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By now you have plenty of reason to congratulate
yourself for having boarded the gold bandwagon. The early tickets are the
cheap ones, and you’ve already had quite a ride. The best of the ride,
I believe, is yet to come, and it should be very good indeed. It should be so
much fun that your wallet may start to feel a bit giddy – which can be
dangerous. So it would be wise to consider, now, how things will be and how
they will feel when the current bull market in gold reaches its “end of
days.” Because it will end.
Buying at the right time is the key to building profits. Selling at the right
time is the key to collecting them.
The 1980 Peak
In 1980, gold briefly touched the then record price of $850 per ounce. In
terms of purchasing power, that would be $2,400 in today’s dollars. And
for the value of the world’s entire gold stockpile to attain the same
share of the world’s total wealth that it represented at the 1980 peak,
the price would need to reach $5,800 per ounce.
But so what? Before you can look to those numbers for guidance about what the
peak in gold’s bull market will look like, you need to consider how the
process that drove the earlier bull market compares with what is happening
today.
The earlier bull market was driven by price inflation in the world’s
reserve currency, the dollar, that reached an annual
rate of 14%. The more expensive it became to use dollars as a store of value
(i.e., the more rapidly the dollar’s purchasing power was declining),
the more attractive gold became as an alternative way to store value.
The dollar is still the world’s reserve currency. (And not just for
central banks. Among individuals and private businesses that want to
diversify out of their home currency, the dollar is still Number One.) And
the force driving the bull market in gold is once again price inflation. But
this time it isn’t actual price inflation that is on the mind of
gold buyers around the world. It is the potential for price inflation
that is building up. That build-up is coming from:
- Rapid expansion in
the U.S. monetary base through the Federal Reserve’s asset
purchases. Most of that expansion has yet to be reflected in a growth in
the U.S. money supply. It is still sitting, like a charge in a
capacitor, waiting for something to set it off. There was no similar
liquidity bomb stored in the U.S. economy's closet during the years
leading up to 1980.
- Unprecedented
growth in federal government debt, which adds to the political
attractiveness of price inflation. There were federal deficits during
the 1970s, but nothing like today's –
just enough to give the party out of power at any time something to talk
about.
- The accumulation of
U.S. Treasury debt and privately issued dollar debt in the hands of
foreign investors. U.S. debt to foreigners wasn't a factor in the years
leading up to gold's 1980 peak. This time around, it could be a powerful
force for accelerating inflation. Even moderate inflation could spook
foreign investors. Their sales of Treasuries and other
dollar-denominated IOUs would push down the foreign exchange value of
the dollar, which would raise the cost of imports coming into the U.S.,
which would further stimulate price inflation. A nasty feedback.
And foreign holdings of U.S. debt operate as a second vector feeding the
political attractiveness of dollar price inflation. Depreciation of the
dollar can be framed as a clever way to shortchange foreign creditors.
"It hurts THEM, not US" would
be the slogan.
All those factors are working to make price inflation distinctly more severe
than it was in the 1970s, which argues for a higher peak price for gold. When
the metal does surpass its 1980 peak in purchasing power, the event is likely
to be widely reported in the press. I suggest that you not attach any
significance to the event. It won't be time to sell.
Sell Signals
But the time to sell will come. Here are the signs I'll be looking for.
Gold and gold-related financial products will be commonplace.
Even today, most financial institutions still hold the "barbarous
relic" attitude toward gold. Yes, you can get GLD through any
stockbroker, but with a few exceptions, the brokerage firm's heart isn't in
it. They offer GLD for the same reason even the best seafood restaurants have
a steak on the menu – they know someone will ask for one, even though
that's not what they are in business to serve.
Before the bull market is over, that attitude will change. Mainline brokerage
firms won't just have gold-related products available, they will advertise
them. They will boast about them. They'll claim to specialize in them. And it
won't be just the brokers. Your local bank will offer gold-related CDs. Your
insurance company may be offering life insurance denominated in ounces.
Gold going mainstream won't mean that the bull
market is over, but it will be a sign that it's getting long in the tooth. An
early warning signal.
You'll be hearing gold chatter wherever people talk about investing.
The inhabitants of Financial News TV Land will be talking about gold
approvingly, and each of them will be trying to suggest he was early in
recognizing the gold bull market. You won't be able to get through a golf
game or a cocktail party without someone talking about gold. Even your
brother-in-law will want to explain it to you.
The gold standard will become respectable.
Today advocates of the gold standard are seen as standing to the good side of
whacko, but not by a big margin. But as gold attracts more converts in the
investment world, the politicians will want to associate themselves with it
by proposing some brand or other of gold convertibility for the dollar.
Respectability for the gold standard will be a sign that a
majority of the people who are going to buy gold already have.
Other things will look cheap to you.
When gold nears its peak, even if you suspect that that's what's happening,
you won't feel certain about it. But when you start seeing investments
– probably conventional stocks – that look like strong bargains,
treat those sightings as a sign it's time to start selling gold. You know the
reasons that led you to buy gold. If you are tempted to sell part of your
holdings to buy something whose low price seems to give it better prospects,
then you probably will be selling at the right time. You could be selling to
the last new buyer.
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With gold now over $1,400 an ounce,
where do we go from here? To stay updated on the gold bull market and the
strongest gold stocks… and find out how high gold might go… and
be alerted when it’s time to sell and collect your profits… check
out BIG GOLD
– Casey’s monthly advisory on all things precious metals and
large-cap gold stocks. At only $79 per year, it’s by far the best
investment you can make. Click here
for a risk-free 3-month trial
with money-back guarantee.
Terry Coxon
The Casey Report
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