Gold: What’s REALLY Behind the Record Rise, Bull or Bubble?

When prices in a financial market go from Sea Level to Outer Space in a relatively brief time, two scenarios are at work — and they both start with the letters “B-U.”

When a precious metal goes from being a popular long-term investment of buy-and-holders to the quick, get-away “vehicle” of day-traders, two scenarios are at work — and they both start with letters “B-U.”

And when the majority of mainstream pundits see a “new paradigm” in which prices continue to rise indefinitely, two scenarios are at work – and, you guessed it, they both start with the letters “B-U.”

Enter: the recent Gold Rush of 2009, when ALL of the above conditions apply. Everyone from hedge funds to housewives now hustle to hitch their asset wagon to the rising gold star. Which begs this question: Which of the possible two scenarios are at work: B-U-ll
— Or B-U-bble?

Here’s the difference: A genuine bull market is driven by a self-sustaining internal dynamic that’s reflected by a host of technical indicators. A Bubble, on the other hand, is the result of untenable psychology that could shift at any moment and bring prices plummeting down.

It goes without saying into which category the mainstream experts put Gold: namely, a new bull market that has years, if not decades more to soar. “Gold Will Hit $2,000 an ounce,” reads an October 8 Market Watch. And — “Gold Has More Upside… The metal’s bull run is just getting started,” adds a same day Barron’s.

I found hundreds of news items which agree about the long-term potential for gold’s uptrend. But not a single one could tell me why the rally would continue, other than because the experts say so.
To know whether a diamond is real, it must cut glass. And, to know whether the bull market in gold is real, it must encompass at least one of these FOUR traits:

A surge in demand that outpaces supply
A falling stock market, which raises the “safe haven” appeal of precious metals.
A real (not imagined) threat of inflation
An increase in value relative to major foreign currencies
Right now, the Gold market can NOT check off a single one of these items. Case in point:

Supply: Demand for gold from jewelry makers – which comprises 60%-70% of the market – has plummeted to its lowest level in 20 years.

“Safe haven” appeal: From its March 2009 bottom, the U.S. stock market has soared 50% right alongside rallying gold prices.

Inflation: As the October 2009 Elliott Wave Financial Forecast (EWFF) notes: An increase in money supply is only inflationary if it is used to RAISE the total amount of credit. This is NOT happening, as both bank credit and consumer credit levels are contracting for the first time since World War II.

A gold rally in other currencies: Again, the October 2009 EWFF presents the following close-up of Spot Gold prices VERSUS Gold denominated in foreign currencies such as the Canadian dollar, the Australian dollar, the euro, franc, pound, and yen since 2007.

gold chart

The major non-confirmation between these two markets is clear, as is the overlying message: IF demand for gold truly outweighed supply, then its value as measured in other currencies would increase.

The rise in gold is primarily the result of speculation and a falling U.S. dollar. These are exactly the “untenable” forces that contribute to a Bubble, not a genuine Bull market. The difference is only a matter of time.


4 Responses to “Gold: What’s REALLY Behind the Record Rise, Bull or Bubble?”

  1. Red Baron on November 11th, 2009 4:38 pm

    It is dollar collapse fear that is fueling the gold surge.

  2. cheyenne on March 17th, 2010 9:34 am

    are the commercials on tv true about gold being at its highest peak?

  3. critical thinking on April 2nd, 2010 8:29 am

    Bob Prechter has never been bullish on gold in the last 6 years after gold passed the $400 mark.

    Anybody should shut his f**g mouth up if he has been consistently wrong for so long and so much, if he has any sense of shame at all.

    He also said fundamentals do not matter as all factors have been factored in the price actions. It’s either hypocrite or moronic for a Elliot Wave guy to talk about fundamentals, especially in gold.

    On the other hand, gold investors should be thankful to articles like this, this is what makes the secular bull market possible.

  4. Rich Henry on December 19th, 2010 12:18 am

    in 6 months you are going to see the gold prices plummet and a lot of people buying in at these high prices are going to get burned big time. Same thing was said about housing when it was a big bubble and it ended badly. Gold is a true bubble and is is so obvious it is not even funny.

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