Why the Mania Phase in Gold May Be Upon Us

Vietnam is experiencing every problem that causes a rush into precious metals... inflation is an incredible 27%, interest rates are over 8%, the stock market was down every day in May, and unemployment has more than doubled (from 2% in '07 to 5.1% this year). Household wealth is drastically declining.

Now here's the interesting part: How are the Vietnamese people reacting to all of this? Did they buy stocks? Real estate? Maybe inflation-protected securities? Or did they just sit on cash?

None of the above.

Vietnam's economic and monetary problems have sent its people fleeing to gold. Not gold stocks... but physical gold bullion. They're hoarding it and hiding it from their government. 
 
Hard figures on the size of the local gold trade aren't available, but current estimates are that the public owns 16 million ounces, including 1.3 million ounces imported in the first quarter of 2008. Of this, only about 10% has been deposited into banks (which actually pay 2.5% interest on gold). The remaining 90% is likely under mattresses or hanging around the owner's neck.

The trend toward gold is spilling into other financial areas. After a long period of quoting land prices in Vietnamese dong (the nation's currency), landlords are now setting prices in gold in order to avoid the devaluation. Nguyen Trung Vu, general director of the Ky Moi Real Estate Co, said that while it is complicated, "I think that making transactions with payment in gold will become a trend."

My question to you is, what happens when Americans flee their currency, as the Vietnamese have? What happens when inflation isn't just an annoyance but becomes a lifestyle-altering problem, as in Vietnam? What happens when the dollar loses so much value average citizens scramble for a safe harbor for their money?

I believe a gold mania could happen. Here's why...

• Gold manias begin when investors flee real estate, currencies, bonds, and stocks because their prospects are so bleak. We're close to that right now.
  
  Even TIPS (Treasury Inflation-Protected Securities), according to Morgan Stanley, aren't keeping up with inflation. That's because the official CPI (Consumer Price Index) to which they're tied understates inflation by underweighting, for example, the past year's 40% increase in gasoline and 130% increase in corn. The very investment designed to protect you from inflation is falling short, since its gauge is more cheerful than accurate.

• The central bank of Russia may be buying gold. There is also unconfirmed talk that the central bank of China and other sovereign wealth funds may be buyers. Since these countries have trillions more cash than Western central banks have gold, it is easy to envision a scenario where central banks as a whole become net buyers, even if some countries continue selling.

• The supply/demand picture for gold is getting tighter every month... Older mines are playing out, rising costs threaten the marginal operations, and large new deposits are simply not being discovered. Yet demand in all categories is up – for industrial uses, jewelry, and investment. 
  
  The total of the world's paper financial assets (including equities, bonds, and bank deposits) equals $74.5 trillion. Yet the value of all physical gold held by private investors and central banks is just $1.1 trillion. Just 5% of that paper going into gold would be $3.7 trillion... and it would cause gold to soar.

I think there's a large chance you'll see them chase gold into the $1,000-$1,200 range this year. And I think there's a chance you'll see gold go to $2,000 in the next few years.As you can see, the stage is set. Account statements for the first half of the year are in the mail, and they aren't pretty. What alternatives are left? Where will American investors send their dollars?

When it dawns on the general public that, as in Vietnam, no conventional asset is working – gold will take off. Our flight to quality is just around the corner because it's already happening an airplane ride away. Even a small allocation of your portfolio toward gold – say 5%-15% – will give you tremendous protection and profits if my prediction comes true.

Good investing,

Jeff Clark