Per Wikipedia, “in a stock market bubble, market participants drive stock prices above their value in relation to some system of stock valuation. Behavioral finance theory attributes stock market bubbles to cognitive biases that lead to groupthink and herd behavior.”
The first sentence appears simple enough, but that pesky word value mucks it up. Estimating “value” is a daunting task, as not only have metrics never been created to define it, but it changes over time. Sure, people can speak confidently of proprietary definitions, but ultimately they reverse engineer, seeking to “back in” to a process by first postulating the result.
I’ve spent 23 years valuing securities, including seven as an Institutional Investor ranked sell-side analyst, but have still not found a “holy grail” of valuation, much less one guaranteeing profits. The fact remains that roughly 75% of an asset’s valuation relates to macro factors – such as economic growth, oil prices, or investor sentiment – and just 25% “company-specific factors.” For stocks, there are dozens of viable “valuation metrics,” utilizing cash flow, earnings, revenues, “growth,” and in the case of the internet bubble, “clicks.” Wall Street is constantly creating metrics to justify stock prices, but once you filter out the hype surrounding them, you’ll see that ALL are both arbitrary and unproven.
Bond metrics are far more defined, but still governed by the 75%/25% rule, in my view. Perhaps slightly less, like 60%/40%, but either way the price of a bond purchased in the secondary market, with no intention of holding to maturity, is governed largely by the macro environment, be it nationwide, industry-wide, geographic, or otherwise.
Of the three “hot asset classes” of the past decade, real estate is by far the hardest to value. Residential real estate generally produces zero cash flow and depreciates over time, so to “make money” on properties, demand for your home must increase, a potentially fleeting, volatile factor. Low interest rates have historically been inversely correlated to home prices, but not anymore, as the cumulative debt bubble created by real estate over-investment has made the Fed’s ZIRP policy moot, if anything harming real estate by preventing savers from building cash flow. As for commercial real estate, cash flows are affected more by macroeconomic factors than anything else, coupled with the double whammy of generally weak liquidity.
Which brings us to gold, which for the past 5,000 years have been universally accepted as MONEY, often as official currencies and always as failsafe inflation protection. Unless you lend gold out for miniscule (often negative) lease rates, gold produces no cash flow, nor will it ever. Annual demand has exceeded production for the past decade and will do so ad infinitum, with the only visible valuation metric being the supply of PRINTED MONEY, which has been growing exponentially for years, set to shift to hyperbolic growth in the near future. Depending on one’s definition of the money supply, the case for extraordinary gold prices can be made, as depicted in my December 21st RANT, “SIMPLE MATH AND $100,000 GOLD.” Of course, such calculations:
1. Only incorporate U.S. dollars in circulation – ignoring the world’s other 181 currencies,
2. Assume money supply does not increase at all, and
3. Do not account for the “groupthink” and “cognitive biases” that could ultimately drive gold prices above their “intrinsic value.”
As for silver, not only is production inexorably declining, but in addition to its long-standing usage as MONEY, silver is the second most utilized commodity on Earth, trailing only crude oil. Silver is indispensible to countless industrial processes due to unique properties such as strength, malleability, and ductility, and is rapidly emerging as a key component to the inelastic medical industry. Thus, unlike gold, silver is consumed.
Consequently, less than a billion ounces of above-ground silver remain on Earth, worth less than what the Federal Reserve prints every few hours. The U.S. Geologic Service (USGS) forecasts silver to be the first extinct element due to its gaping supply/demand gap, but do not account for monetary demand, which in my view will ultimately dwarf industrial demand by a factor of 1,000 or more. As for attempting to calculate silver’s “monetary value,” simply utilize the money supply metrics above and take your best guess.
At a bare minimum, I expect gold to reach $15,000-$20,000/ounce, and the gold/silver ratio to fall to between 5:1 and 15:1 (yielding a silver price projection of $1,000-$4,000/oz), in TODAY’S (non-hyper-inflated) dollars, pounds, Euros, Yen, and Yuan, of course.
The second part of the Wikipedia definition states “behavioral finance attributes stock market bubbles to cognitive biases that lead to groupthink and herd behavior.” In other words, valuation metrics are distorted by incorrect perceptions, yielding delusions of grandeur. This was certainly the case with the internet and real estate bubbles, and will shortly be realized in the biggest bubble market of all, the U.S. dollar.
In the case of internet stocks, residential real estate, and essentially ALL asset bubbles throughout history (i.e. the South Seas Bubble, Tulipmania, etc.), GREED was the primary factor driving extraordinary valuations. The only material exception to this rule is that of the dollar bubble – or better put, fiat currency bubbles in general – which have expanded to unsustainable levels via survival instinct. That is, subconscious “groupthink” that all will be lost if paper currencies fell to their true value. And no greater truism has ever been spoken, as fiat currencies – BY DEFINITION – are worthless, and in fact are not even “assets,” but “liabilities.”
Alas, currencies are a tricky “market” to assess, as entities don’t generally speculate on them, but accumulate them as savings. Every fiat currency in history has collapsed to its intrinsic value of ZERO, so in some ways it is unfair to call them bubbles. In their quest to build power and control populations, governments have attempted countless times to install worthless paper as a store of value, and each time they have failed.
That is what makes the upcoming “PM bubble” so enigmatic. Gold and silver, too, are MONEY, but have very real intrinsic values based on production costs and the prevalence of “competing” fiat currencies. PLUS, the most unique of all valuation metrics, possessed only by PHYSICAL gold and silver – the “FEAR FACTOR.” Converse to all other asset bubbles, blown up nearly entirely due to GREED, the PM bubble will inflate principally due to FEAR of purchasing power loss. Sure, some people will buy gold and silver (and mining stocks, pre- nationalization fears) to achieve profit, but most will simply be desperate to exchange collapsing scrip into something of REAL, TANGIBLE, HISTORICAL, IMMUTABLE VALUE, meeting ALL the historical, definitional parameters of MONEY.
I don’t even pay attention to dolts proclaiming PMs are in a bubble, as they are either stupid, lying, or beholden to an alternative agenda, such as working for the government. When gold is in a “bubble,” it will not appear anything like previous bubbles, as media focus will instead focus on soaring inflation due to collapsing confidence in the dollar, Euro, and other fiat currencies. Moreover, few will be calculating how much their gold and silver are worth, but how many ounces they own. At this point, I expect to see collapsing economies, political turmoil, and social unrest, each of which will dwarf media coverage given to the price of gold.
Today, we sit at the precipice of the GREATEST FINANCIAL INFLECTION POINT IN HUMAN HISTORY. Four decades of brainwashing have convinced the world that fiat currency is paper, to the point that few living souls have witnessed a gold standard. Governments fear the loss of power – and commencement of chaos – when CONFIDENCE in fiat currencies die, but keep their fears to themselves for fear of creating a panic. Meanwhile, the public at large is largely stuck with fiat-denominated assets, with little understanding of their intrinsic worthlessness, and Wall Street/Washington-led efforts to keep them in the dark rule via PROPAGANDA have kept them largely quiet to this point.
Rising inflation and sovereign financial crises have awakened much of the world’s population to the dangers directly ahead, explaining why gold and silver have performed so well, the increasing level of cultural and political revolutions, and new-age revolutionary movements such as “Occupy Wall Street.” At this point, gold and silver are still largely reviled due to successful PROPAGANDA campaigns, but it won’t be long before reality overwhelms the Matrix.
As a global expert in the field of gold and silver demand, I can confidently say no more than 5% of the world’s population realizes gold and silver bullion are buyable – let alone what they represent – and in my home, the United States, I’d put that percentage at no more than 2% – the ultimate “ANTI-BUBBLE.” Going from 1% to 2% acceptance in the U.S. took eleven years, but I expect the journey from 2% to 100% to be much shorter, perhaps in a year or less.
When the “PM bubble” finally arrives – and it could be any day –our collective minds will NOT be focused on the PRICES of gold and silver, but how many OUNCES can be procured. When “the BIG ONE” shortly hits, only PHYSICAL GOLD and SILVER will enable you to maintain your net worth until the new world currency order commences, at which point your odds of prosperity will be higher than 95% of the world’s population, perhaps more.
PROTECT YOURSELF, and do it NOW!
when will the tsunami hit. I have watched mike montagne’s Mathematically perfected economy so it is easy to see why the QE’s are coming faster and are larger each time but when does it all grind to a halt?
I don’t like to be condescending, but I write for 30+ hours per week about these topics, and answer close to 100 emails per week, aside from my other duties.
Thus, I am not going to repeat myself, but simply your questions briefly:
1. When will it hit? I don’t know, I don’t have a crystal ball
2. How do they beat the price down at will? It was $250 in 2000, it is $1,750 today, and it will be $10,000+ in the future. Sounds like they are losing that war.
I have been following your comments, among others, for many months now and they seem to continue to be able to beat down the price of PM’s when they feel like it.
I think we REALISTS need a MASSIVE Public Relations campaign.
TPTB are turning public recognition of holding gold and precious metals as ANTI AMERICAN. Holders of PMs are no better than the phantom terrorists they want us to believe are behind each hedgerow.
If anti anything, holdings PMs are anti-banking! But bankers own the microphones.
Somehow, we have to get our message out to the public.
hOW… any ideas???
I write five days a week about the topic, and tape two podcasts or radio shows per week on average, including the Future Money Trends interview to be published this weekend.
On Monday, I am hosting a Webinar for 500 people on the topic.
I am doing my part, hopefully others will follow. And I can guarantee this – the higher PM prices go, the more people that will follow!