Peter Schiff on the Institutional Gold Rush – And my Thoughts on Implications for the Coming Gold and Silver Bubbles

I tend to think these days in terms of bubbles: where is funny money going these days to create a bubble? Hence, where are the “bangs” going to come from?

So, i was quite intrigued with this article of Peter Schiff’s at the Daily Bell, particularly in light of one of my current favourite charts, and the article’s implications for Gold, and its “soon-to-be” (IMHO) bubble (though i am still, for the time being, a gold bug with Austrian sympathies!)

In this article, Schiff is discussing an important part of the bubble psychology that i had considered, but, after reading this article, i had not considered in sufficient detail nor depth: Institutional Investors – Rodrigue’s (the chart’s original author) key label for “Phase 2 – Institutional Investors”.

The way Schiff describes things, it seems that SOME institutionals are getting on the “gold is money” OR “gold is in a bull run” bandwagon, but it is not yet characteristic to have any significant weighting in one’s portfolio (assuming the normal 1% or so is not really “significant”). But, the way Schiff is speaking in this article, things seem to be changing, as a way to hedge performance risk against US Fed “money printing” (and the like).

I have been thinking that gold was on the cusp of the 3rd bubble phase (the Mania phase), but reading this article has made me re-think that somewhat.

I am now inclining myself towards thinking that Gold is still in the second stage of the bubble psychology chart.

But how to balance this against all my previous conceptions of it being in the 3rd phase – with historically heavy retail buying in the US, India and parts of Asia (eg. China, Vietnam).

Well, firstly i would redefine such buying – but only somewhat: are they in it for the mania? For the potential of making money without work? The expectation of significant gains? Well, not so much, perhaps, from what i can glean – attitudes seem more conservative than that, IMHO, for the time being; it seems more about actions taken to preserve against currency debasement and inflation (both present and expected) than it does about capital gains, getting ahead, getting on-board, etc.

I have to grant some urgency to the current climate in many places around the world with regards to gold acquisition; but I am not so sure now that this is the semi-rational leading to irrational buying attitudes we would normally expect to see in the 3rd stage of an asset bubble.

Hence, I am going to regress my opinions on where the Gold bubble is at, from the beginning of the 3rd stage, to somewhere in the latter half of the second stage, possible some three-quarters the way through, give or take.

And this is interesting, too, for silver, as I have also figured that to be somewhat further through the 3rd stage of the bubble chart; and perhaps it is fair to assert that it is further through the bubble progression than is gold.

But then again, perhaps not, to consider another point of view? Not that I think we should be dogmatic about the Rodrigue chart, but where should gold and silver’s respective “Bear Traps” be said to have occurred, if one wants to place them in the 3rd phase?

Gold: did it happen with the 30%-odd drop during the GFC? Or is it still to come?

Silver: did it just happen (and is it still happening at the time of writing this article?). Did it happen several years ago? Is it still to happen?

In conclusion: My personal hunches are, at this point in time, as follows:

Gold: the GFC was gold’s “Bear Trap”; Gold is in the latter half of the 2nd stage, awaiting “more significant” (whatever that is!) Institutional buying to really push the price into the 3rd mania stage. Gold still has a long way to go in nominal terms (but not sure what to say about real (inflation-adjusted) terms).

Silver: May 2011 is silver’s Bear Trap – currently about a 35% drop/”flash-crash”; even though gold’s Bear Trap occurred, IMHO, before silver’s, and thus could be said to be “ahead” of silver on the bubble progression, my thoughts are that the reverse is true, due in part, to silver’s relative accessibility, price-wise, to the general public (ie. it’s heaps cheaper than gold and there is more of it…but is still a money-metal). Silver also seems to have experienced far more institutional involvement (mainly speculation, it seems), than gold, predominantly in the form of highly liquid ETF financial instruments.

Hence, I assert that Silver is also in the late 2nd stage of the Bubble Chart, having just had its Bear Trap (IMHO), but is just ahead of Gold. I also expect significant further institutional involvement in the short to medium term.

I must admit, also, that I think more rampant speculation will occur with Silver (compared to Gold), that the bubble will form more quickly, go relatively higher, and bust earlier, than the Gold bubble; in fact, the silver bubble burst could see a flight, even partially, into Gold and spell Gold’s last “Bull Trap” before its bubble also bursts, eventually. Just a thought.

So, in my opinion, both Gold and Silver are in the later 2nd stage of the Rodrigue bubble chart, having both, now, had their Bear Traps. More institutional interest and buying will push them into the beginning of the third stage (and is needed to do so, IMHO), and once word gets out that even the Investment Funds are performing “well” (relatively speaking) due to their Gold and Silver holdings, then the public will also want the metals for both wealth preservation AND speculative purposes, and relatively quickly (a few years??) will top, and probably be ultimately burst by Central Banks either raising interest rates relatively quickly amidst high inflation, and/or shrinking the fiat money supply.

I hope that was informative and enjoyable!



One Response to Peter Schiff on the Institutional Gold Rush – And my Thoughts on Implications for the Coming Gold and Silver Bubbles

  1. Pingback: Peter Schiff on the Institutional Gold Rush - And my Thought on Implications for the Coming Gold and Silver Bubbles

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