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How to Tell When the Gold Mania Is About to Blow Up

By Brian Hunt, Editor in Chief, Stansberry Research
Tuesday, April 26, 2011

In the past few years, I've noticed a popular trend in financial TV shows like the kind you see on CNBC...
Folks who bought into this trend have lost out on huge investment gains. Folks who didn't buy into the trend have made huge investment gains.
The trend is for an investment expert to get on television, then spend airtime making a fool out of himself by saying gold and silver are in a "bubble"... one that will pop at any moment. They caution folks against buying gold and silver. And they dismiss anyone who owns the stuff as "on the fringe" or a "survivalist weirdo." After all, gold is an "old idea"... an "antique."
Your DailyWealth team has owned gold for close to 10 years now... We've gotten tens of thousands of readers into the right gold and silver investments. We even published a book on gold. We keep a portion of our wealth in gold – and recommend owning gold – because we study history...
We know when a nation takes on debts and obligations it cannot possibly hope to repay with sound, honest money, the path politicians will take is to debase its paper currency... in order to pay back those debts with devalued money. It's just too tough to get re-elected when you tell folks they have to get off the gravy train... and you're going to reduce government benefits. The path always taken by governments is to debase the currency in order to keep the game lasting as long as possible.
In situations like this, "real money" – gold – retains its value. From the Roman Empire to the British Empire, the lessons are out there for anyone who takes the time to read them. For a recent lesson, gold has increased 150% against the dollar in the past five years... and has climbed higher every year for the past 10 years.
The lessons of bubbles are out there as well. But most of us don't need to open a history book to learn them. We can simply remember the Nasdaq bubble days of 1999... when everyone you came into contact with owned tech stocks like Microsoft and Cisco.
Back then, you could sit next to a random person on an airplane and start a conversation about routers... business-to-business software... and how many "clicks" per day the company they invested in was receiving. Financial magazines were stuffed with stories like "The Best 5 Tech Stocks to Buy Now." Personal trainers, waiters, cab drivers, and kindergarten teachers could all talk about growth rates of their favorite tech companies. That's what a bubble is like... when an asset has the full and unquestioning acceptance of the public.
That's not where we are in gold and silver right now.
Sure... there's plenty more interest in gold and silver than there was in 2002... or 2007. But we're nowhere near bubble levels of interest.
Try starting up a conversation with your neighbor about the best silver stocks in the world... or why the geology of Nevada has made it such a prolific gold producer. Ask your personal trainer what the best places to store physical gold are. Chances are excellent you'll get a bunch of odd looks. They'll want to turn the conversation to baseball or the weather.
We'll know we're in the midst of a real gold and silver bubble when we can have those conversations at will. Or when, as my colleague Jeff Clark of Casey Research has pointed out, Silver Wheaton is a market darling... instead of a stock you occasionally hear about from "fringe" publications like DailyWealth.
In the gold bubble, we'll be able to ask any cab driver which gold stock he likes and get a quick reply. "Goldcorp," one will say. "It has the lowest cash costs and great growth prospects."
We're a lot closer to this sort of "bubble" or "mania" than we were five years ago. Interest in gold and silver is growing. The metals are due for a healthy short-term shakeout. But the gold bull market still has not fully expressed itself. It's still nowhere near a mainstream concern.
When it does become one, the gains will be spectacular. That's why I recommend ignoring the "bubble ignorant" and holding onto your gold and silver for when that day comes. We're years away.
Good investing,
Brian Hunt

Further Reading:

Chris Weber has a simple strategy for the average Joe to determine if gold is in a "bubble" or "mania" phase. All you need to do is have a few quick conversations with your friends. Find what questions to ask here: The Easiest Way to Tell If Gold Is in a Bubble.
"Is the silver trade getting too crowded, meaning we're near the top?" Casey Research's Jeff Clark asks. "Have the masses finally joined the party such that we should consider exiting?" You'll get his answers here: Silver Is Getting Too Popular... Right?

Market Notes


A popular question coming into DailyWealth these days: "Why is gold climbing so much right now?"
While some analysts can go on and on about the gold situation, our short and sweet answer is that the U.S. government has taken on so much debt and so many unfunded obligations, it cannot possibly pay for them all with sound, honest money... it can only pay for it all with debased, devalued currency. People around the world realize the dollar (and many other paper currencies) faces this haircut, and they are buying "real money," gold, in response.
For a picture of this haircut, we present the past 12 months of action in the U.S. dollar index. This index measures the dollar's value against a basket of global currencies like the euro, the British pound, and the Canadian dollar.
As you can see, the dollar index has lost about 11% of its value in just the past eight months. While that might not sound like much to some people, realize it's an enormous decline in value for a major currency. This chart is why our colleague Porter Stansberry likes to say, "We're not 'headed' for a currency crisis, we're in one right now."

The dollar's steady drive lower

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