The Michael Fuljenz Metals Market Report: December 2011, Week 2 Edition

Gold fell below $1670 Monday on a stronger dollar, but the dollar index is a warped measure of the U.S. dollar's strength. The dollar index gives about 60% weighting to the weak euro, so when the dollar and euro are both falling, the dollar looks "stronger" when it falls less than the euro is falling. According to Kitco, $20 of gold's $47 decline today comes from a "stronger dollar," based on Europe's woes. Gold is now at its lowest level since October 25, but it is still up 18% for 2011, better than the other alternatives.

• Gold 52 weeks ago (December 13, 2010): $1399
• Gold's average price during 2011: $1570.08
• Gold's London Low for 2011: $1316.00 on January 28
• Gold's London High for 2011: $1896.50 on September 5

Last Week In Metals: Gold fell 2.2% and silver lost 3.5%, while stocks gained about 1%, but gold is still the leader for 2011.

The Media's Double Standard about Investment "Bubbles"

The investment media is often fond of calling gold's recent rise a "bubble," which allegedly "popped" at $1925 per ounce last September. They say that gold is imitating its poor cousin, silver, which popped at $49 per ounce last April. Both of those peak numbers fell just short of some perceived price goal (or "barrier"), i.e., the $2,000 mark for gold, and the elusive 1980 all-time high for silver, at $50. Right now, nothing is more important than understanding what constitutes a "bubble" vs. a sustainable "bull market," so this week's Report will focus on some historical bubbles to determine if gold at $1900 was a "bubble peak."

Investment bubbles usually result from manic buying, fueled by the "madness of crowd behavior." Taken as individuals, investors are usually rational, but put them into a crowd and mob behavior usually ensues. Delusions of grandeur through rapid (and effortless) wealth accumulation motivate millions of investors to pour margined money into a rapidly-rising investment to "get theirs" before the price soars further out of reach. Most of us have taken part in a bubble in our lifetime, since the lure is so great, but there is a pretty easy way to differentiate solid and sustainable bull markets from the spectacular surge of a bubble.

A bubble may be defined as an extremely rapid rise (Rule of thumb: A doubling of prices in less than a year, or a tripling within two years, or a five-fold gain within five years) on high volume buying, with very little selling, amid universal headlines of a "new era," bringing in millions of ignorant first-time buyers into a market they don't understand. There have been several such notorious bubbles in history, including the Dutch Tulip Mania in the 1630s, the South Sea Bubble and Mississippi Bubble in the 1720s and some modern bubbles in the last century. Each of these markets fits the imagery of a popping bubble.

The Dow Jones Industrial Average, 1927-29: The Dow index was born in 1896 at 40. It took 20 years for the index to double to 80 in 1916. Then, it took only 10 years to double again to 160 in 1926. The market stayed level until late 1927, when it began to soar out of control, doubling in less than two years to 381. By 1932, the market returned to its original reading of 40. That was a "bubble" since every working man seemed to be dabbling in stocks, while economists spoke blithely of a "permanently high stock plateau."

Gold, 1979-80: Gold was frozen at $35 for 37 years (1934-1971). Its quick rise to $200 in 1974 was a time of "catching up" from the artificial ban on gold ownership, so that first rise was not really a bubble. There were few private buyers (gold was illegal for Americans to own), but the rise from April 1979 to January 1980 was a nine-month tripling of the price of gold, and that could be considered as a "bubble."

*(+267% gain in nine months)

Japanese stocks in the 1980s: In the 1980s, the Japanese were said to be on their way to ruling the world economically, the way their army and navy attempted to rule the world 50 years earlier. The Japanese were buying up land, art work and businesses in America. Best-selling books praised the Japanese style of management. At one point, a single square mile of real estate in Tokyo was valued at more than all the land in California. Their stock market reflected this bias, quadrupling in the late 1980s from under 10,000 to a peak of 38,915 on the final day of the 1980s, December 31, 1989. It then lost 65% in nine months and has never come close to half its peak in the last 22 years of slow-growth or no-growth recession.

U.S. Tech Stocks (NASDAQ) in 1999-2000: Once again, talk of a "new era" dominated Wall Street in 1998 and 1999. Despite fears of the coming "Y2K crisis," stocks for bellwether technology companies were doubling and tripling within months. The rise began in late 1998, when the tech-dominated NASDAQ index traded at 1344 in October, doubling to 2684 within a year (September, 1999) and then nearly doubling again within six months, reaching a peak of 5132 on March 10, 2000. NASDAQ rose almost 40% from January 31 to March 10, 2000, as nearly "everyone" got on board the tech bandwagon. The index fell 65% within a year and it has not come near 3000 in the decade since its rapid collapse.

Real estate, 2003 to 2006: While it's not possible to prove that real estate prices doubled in a year or two, there are plenty of anecdotal stories about neighborhoods in nearly every desirable coastal or resort city where prices more than doubled within a year or two, based (of course) on "location, location, location." This was a bubble fueled by artificially low interest rates and a series of Presidents and Congresses of both Parties who wanted to make sure that every family, regardless of income or risk, owned a home. The prices fell off their pinnacle peaks in 2006 and have been falling to their pre-2004 levels since then.

Silver, 2010-2011?: The jury is still out on silver's recent "bubble," but this is a bubble we warned our investors about in advance. We always said that bull market moves resemble "two steps up, one step back," rather than five giant steps up and no step back. From under $20 per ounce in September 2010, silver rose to $49 at the end of April, 2011, for a 150% rise in less than eight months. Silver nearly doubled in three months, from $26.68 on January 28 to $49.10 on April 29, 2011 before reverting to its January level and then mostly maintaining a price above $30 since then. Call this one a "mini-bubble."

We can deduce some general properties of a bubble from these examples: A rapid doubling or tripling, then a rapid reversion to the pre-bubble price and a long-stretch (usually 20 years) of flat prices after that. Investors are burned so badly by a bubble that they vow to "never make that mistake again," but their resolution only applies to the investment that burned them. Some tech stock victims then bought into real estate with the same blinders on.

Where are the media's current blind spots? They have been warning of gold bubbles forever, but gold has already served its 20 years in purgatory from 1981 to 2001 - and the current bull market has been very consistent and remarkably gradual, with no real blow-off spikes along the way. The August rally was a surprise to most observers, as we have written here, but the sell-off in September quickly found buying support in China, India and then America as gold has stayed well above $1600 since its fall from $1900.

The blind spot in the media has to do with certain individual stocks. Since Steve Jobs' death in October, the "APPLE" story has been overdone in every major publication and on financial TV. Apple stock (symbol: AAPL) has risen from under $100 per share in 2009 to nearly $400 today, much like the Dow Jones average's leap from 100 to 400 in the late 1920s. Yet nobody in the media calls Apple a bubble. It is now the second most highly valued stock in the world (after Exxon-Mobil) at $363 billion market capitalization.

Google (GOOG) is another market and media darling, rising from $260 per share in 2009 to $622 today, with a market cap of $201 billion. We saw something similar in the love affair with China's resource stocks. Petro-China (PTR) went from a start-up in 1998 to becoming the biggest stock in the world, by market capitalization, in 2008. Its bubble has popped. It is half the price it was in October 2008, but Petro-China is another poster boy for people, fed by the media, running to what's hot. In 2008, that was China stocks.

In conclusion, it looks like some of the media has a bias against gold and a bias for selected tech stocks. It's not the 1999 NASDAQ bubble, which featured start-up Internet "dot-bombs," but today's biggest, not discussed, bubble may be the mania for the newest toys by Apple, and the search engines which find facts a micro-second faster.

Meanwhile, price-sensitive gold buyers in China and India are loading up whenever prices correct. We should be wise enough to imitate their centuries-old desire to buy gold on corrections! Gold has not soared and it has not reverted to its pre-"bubble" lows below $1,000. It has barely retreated 15%. We're on record this month for predicting $2,012 gold in 2012. That's only about a 20% rise from today's depressed price.

Mike Fuljenz's 2011 Money Show of the Southwest Predictions

Saturday, December 3, 2011 I was once again a featured speaker at the largest money show held in the southwest United States. I discussed with the audience the prospects for the rare coin and precious metals markets in 2012. Typically, the rare coin market has had one to two bull markets, over 100% index gains, every decade since I started collecting in the 1960's. For many reasons, a rising precious metals market is often a contributing factor to a bull market in rare coins. As I see gold reaching $2012 or more in 2012, I believe that 2012 will also see price increases in select areas of PCGS and NGC certified gold coins. Market activity and prices often begin rising at the first of the year so purchases made now may save you money. The Money Show was again a success and I want to congratulate and thank all of those who made it happen.

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