Think Gold Is High? You Ain’t Seen Nothing Yet…

Think Gold Is High? You Ain’t Seen Nothing Yet…

Dear Reader,

It appears the mainstream are invading my turf.

Or perhaps I’ve become terrifyingly mainstream.

It seems gold is the investment on everyone’s minds at the moment.

Just last week The Sydney Morning Herald told us: ‘The world’s wealthy are flocking to gold.’

Pointing out that prior to the pandemic ‘most private banks recommended their clients hold none or just a tiny amount of gold.’

(Although if my work is anything to go by, the wealthy have been talking to the wrong people up until now.)

Heck, a financial planner contact I know has for years argued in favour of the precious metals being recommended to his clients. Something his co-workers haven’t supported. They’ve been dismissive of the relic.

However, only a couple of weeks ago, he got the go ahead to start putting a business case together to show clients…

Even Mining.com noted that gold exchange traded funds are increasing their exposure to gold at a rate of knots…

With all this interest on gold, does this mean the price is about to explode?

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Surely if the mainstream is putting the spotlight on the metal, it must be close to peaking, right?

Nope. Not even close.

This gold bull market has years left to run…

Three key phases

If you want to know where gold is going, you need to know where it’s been.

I’m not talking about spending hours going over technical price charts either.

To understand this gold bull market, you don’t need to learn tricky methods of charting. There’ll be no lessons on Ichimoku Clouds or Fibonacci retracements today.

And even though gold has been used as money for thousands of years, it’s only the yellow metal’s price moves from the past 50 years we need to look at.

In other words, we only need to analyse the bull markets from the 1970s and 2000s to see what gold is doing now, and most importantly, so we know where it’s going.

Once you start analysing not just the price movements in gold, but the surrounding economic conditions, you’ll notice something. Which is that a gold bull market moves in three key stages. Currency devaluation, investor phase, and the mania phase.

Let’s start with currency devaluation.

This is where the value of the US dollar slowly declines against the price of gold. In other words, the US dollar gold price starts making very small gains over the months. However, other countries see their local currencies when measured in gold increase at a faster rate than the US dollar gold price.

This takes about three to four years to play out.

Then comes the investor phase.

That’s when all sorts of people start piling into the gold market.

Generally, the investor phase is defined by big buying. Not just people like you and me — we tend to jump on at the end of the investor phase. Instead the beginning of the investor phase is marked by the sort of people who buy gold by the tonnes.

Around now, the papers can no longer ignore the price rises, they start talking about it.

Wall Street gets creative and starts coming out with clever ways to bet on a rising gold price. That way, more people can access the market…

And more retail investors come out of the woodwork and start buying.

Again, this stage lasts for about three to four years.

But when the investor phase starts to wind up, well, that’s when the real fun starts.

‘Cause after that, comes the mania phase.

The nuts and bolts…

Let’s take it back a notch.

I like said before, the very first stage of a gold bull market begins with currency devaluation. As the US dollar is the lynchpin of the financial system, it begins with the weakening greenback.

The gold price in US dollars rises a little, but not a lot. It’s a subtle increase.

Because from here, it’s emerging market unstable economics that start to wobble. Within months they start reaching all-time highs when measured in gold. These are the sort of countries with questionable governments. Think Turkey, Argentina, Russia.

The next currencies to chart a new high in the gold price are the more developed economies, like South Africa, Australia, and Canada. They’ll start seeing their local money making bigger gains when compared in gold.

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And yet, all this time the purchasing power of the US dollar is slowly withering. But almost no one notices because the gains in the US dollar gold price are small…

After a few years of this, the odd Wall Street hotshot or two will come up with a genius way to bet on a rising gold price.

In 1974, gold futures were created. In 2003, gold backed exchange traded funds (ETFs) were created.

And both of these financially engineered products kicked off investors’ ability to access the precious metal. Firmly establishing the investor phase.

Suddenly banks and hedges found a way in the mid-70s to bet on gold. And in the mid-2000s, ordinary people like you and me didn’t have to buy the physical stuff if we didn’t want to. We could now be civilised folk, paper trading the yellow metal in our digital portfolios…

This surge of investor interest hangs around for a few more years. It generally starts with institutional interest or central bank buying…and then slowly the yellow metal picks up and more and more interest.

The thing is, this isn’t what drives gold higher.

The final thing that pushes it into the mania phase is some sort of trauma to the financial system.

Something that can no longer be masked.

Something that says we have lost faith in the fiat currency system…

Gold to go ballistic…but not yet

Hang on, what? I hear you say. Isn’t that what’s happening now?

Nope.

Don’t get me wrong. The stage has been set. The currency devaluation phase has passed us. All currencies bar the yuan, Swiss Franc, and US dollar have hit all-time highs when measured in gold.

That’s how we know that phase is done.

And yes, there’s more and more interest in owning physical precious metals. So much so, that it was almost impossible to get your hands on back in March.

But we are still only a year or two into the investor phase.

And in spite of the unprecedented liquidity chucked into the financial system on the back of the virus, people still have faith in paper money.

But not for much longer.

In less than two years, the mania phase will begin.

And the value of the yellow metal will climb to dizzying heights.

Quite frankly, you ain’t seen nothing yet.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia