Best of the Week
Most Popular
1.Putin’s World: Why Russia’s Showdown with the West Will Worsen - John_Mauldin
2. Stocks Bull Market Grinds Bears into Dust, Is Santa Rally Sustainable? - Nadeem_Walayat
3. Gold and Silver 2015 Trend Forecasts, Prices to Go BOOM - Austin_Galt
4.Gold Price Golden Bottom? - Toby_Connor
5.Gold Price and Miners Soar on Huge Volume - P_Radomski_CFA
6.Stock Market and the Jaws of Life or Death? - Rambus_Chartology
7.Gold Price 2015 - EWI
8.Manipulated Stock Market Short Squeezes to Another All Time High - The China Syndrome - Nadeem_Walayat
9.Gold, Silver, Crude and S&P Ending Wedge Patterns - DeviantInvestor
10.Is the Gold And Silver Golden Rule Broken? - Michael_Noonan
Last 5 days
Why It's Way Too Early to Count Out Putin - and Russia - 22nd Dec 14
Stock Market At Minor Top - 22nd Dec 14
UK Christmas Sales 2014 High Street Start Dates List - 22nd Dec 14
Ruble Takedown Exposes Cracks in Putin’s Defense - 20th Dec 14
Oil Drilling Our Way Into Oblivion - 20th Dec 14
Stocks Bull Market Resumes - 20th Dec 14
Gold And Silver Nothing Is Ever As It Seems And No Respite For PMs - 20th Dec 14
What Are Technical Indicators Saying About the Stock Market? - 20th Dec 14
Here’s How You Can Still Make 27% With Apple Even if You Buy Now - 20th Dec 14
Gold Stocks to Shine in 2015 - 19th Dec 14
Why Alibaba Stock Shares Are a Screaming Buy - 19th Dec 14
China, Dollar, Japan, Europe Burning Questions for 2015 - 19th Dec 14
U.S. Economy is in a Sweet Spot! - 19th Dec 14
US Dollar and the Gold Fairy Tale - 19th Dec 14
Show Me The Money (Flow)! Tracking Money-Flow Through Value Shifts In Stock Markets - 19th Dec 14
The Commodities Market Is Not Dying, It’s Just Hibernating - 19th Dec 14
The Price Of Gold And The Art Of War - 18th Dec 14
Euro Succumbs to ECB QE Expectations and FOMC - 18th Dec 14
John Williams: A Downhill Run for the U.S. Dollar in 2015 - 18th Dec 14
Outrage at Taliban Islamic Fundamentalists Massacre of 132 Pakistani School Children in the Name of God - 18th Dec 14
How Inflation Changes Retirement Benefit Choices - 17th Dec 14
The Real Reason It's Tough to Beat the Stock Market - 17th Dec 14
Russian Currency Crisis and Debt Defaults Could Create Contagion in West - 17th Dec 14
How to Profit From Russia's Stock Market Crash - 17th Dec 14
Russia Crisis - If You Put Your Money in the Bank Will You Get it Back? - 17th Dec 14
Crude Oil Price Crash, U.S. Employment and Economic Growth - 17th Dec 14
Opposing Forces At Play In Gold and Silver Precious Metals Complex - 17th Dec 14
Wall Street Will Always Find An Excuse For Not Raising U.S. Interest Rates - 17th Dec 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Dramatic Stock Market Selloff

When Will the Gold Bull Market Turn Into a Mania?

Commodities / Gold and Silver 2011 Jul 19, 2011 - 09:03 AM GMT

By: Aftab_Singh

Commodities

Best Financial Markets Analysis ArticleAs our readers may know, we’re suckers for the theory that markets move in generational cycles. The basic idea is that the knee-jerk reaction is often the strongest one and that investors have a tendency to ‘stick to what they know’. The length of the prime of one generation’s career seems to be a suitable period of time for such ‘things that people know’ to become firmly lodged. Ironically, such lodging is a dire circumstance in a business that amounts to pseudo-futurology. 


More specifically we might say that investors often become convinced that strong and persistent price trends of the past are a matter of permanence (particularly if the entirety of their career confirms that intellectual conviction). Extrapolation is the name of the consensual speculator’s game, and so, anti-extrapolation must be the name of ours! Timing, as we all know, is incredibly difficult when it comes to the speculative financial markets. However, here I’ll endeavor to speculate as to when the gold bull market might go into ‘mania mode’.

[NOTE: If you already believe that we've reached this 'mania mode' with respect to gold, I invite you to read this (and this) and to listen to this interview with Marc Faber.]

Who’s In Charge?

Ok, so if we’re to deal with timing in terms of generations, then let’s quickly think about whom we’re dealing with. With the assumption that the prime of a person’s career spans from around 25 years old to 60 years old, we can assume that the majority of people in the investment business were born between the years 1950 and 1985. Moreover, most of the guys that are managing portfolios of assets (35-55 year olds) probably began their careers between the years of 1975 and 1995.

The Parabolic Price Rise of the Late-70s and Early-80s:

And so it is revealed that the older proportion of today’s investment community witnessed and probably got caught up in the mania of the late-1970s to early 1980s! As can be seen from the charts below, the price of gold went parabolic during that period:

Gold Price Since the Early 1930s

Source: World Gold Council

The Implications of the Price Spike – Rationalizations for Avoiding Gold:

Moreover, combine that early folly with the fact that gold took out its 1980 high only a few years ago. For a long time, there has been a supposedly practical ‘justification’ for avoiding gold. Gold – they say – ‘does nothing‘. In 1990, the investment community could have said that ‘gold has collapsed for a decade’, in 2000 the investment community could have said that ‘gold is useless, and always goes down’, and in 2010 the investment community could have said that ‘gold – the supposed inflation hedge – has declined in real terms over the past 30 years’.

The Platform to Repeat the Mistakes of the Generation Above…

The assumption that we put forward is that the older proportion of the investment community is unlikely to repeat the mistakes of its early-years. So, as a matter of timing, the gold mania may only arrive once their collegial descendants have the platform to repeat their mistakes. That is, once the guys who lived through the gold bubble have stepped down from managing the major investment portfolios of the world. So, if the older proportion of the investment community began the primes of their careers in 1975, then perhaps we need another 5-10 years to see another epic mania in gold!

If you’re skeptical about this notion, then I urge you to consider the following: After the epic housing bubble experienced in the US in the past decade, and the subsequent collapses of illusory fortunes, do you really expect the same people to make the same mistakes in the primes of their lives? I would suspect not. I would suspect that the wounds from that epic fall from grace would remain for years and years to come. [That's not to say that house prices won't rise, but rather that they're probably not going rise parabolically for at least another generation.]

Gold represented a similar folly. As Marc Faber said in a recent interview, (paraphrasing) ‘During the gold mania of the late 1970s, the whole world was watching gold day and night‘.

Conclusion:

Seemingly, nothing is more compelling than experiences of the past. Here in 2011, this brings about a peculiar scenario where the investment community is divided between people who’ve ‘seen the follies of gold’ and people who have not. In order to relive a 1970s-style adventure in the gold market, we might have to wait another 5-10 years. Only then will the investment community consist of people who had not been burnt by the events of the late-1970s and early-1980s.

In the meanwhile, we should be patient, observant and vigilant to the progression of our valuation methods. Hopefully, if we remain contrary in our thought, we’ll be able to spot the opportune times to sell.

Aftab Singh is an independent analyst. He writes about markets & political economy at http://greshams-law.com .

© 2011 Copyright Aftab Singh - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014