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Newsletter 05/2015

Finance | Gold and Silver - the next bubble?

 

The art of investment is arguably about spotting the next asset class that will go into a bubble phase. It’s not about spotting the bubbles that we already have, be that US bonds and equities, Chinese stocks, global bonds, London houses or Rolex watches.

Hedge fund multi-billionaire George Soros once characterized gold as the ‘ultimate bubble’. By that he meant the last of a string of bubbles. The bubble that you get when all the others have blown up and blown up. Are we not now close to that position?

Bond crash

The long US stock market rally just has to be close to the end of its rise by any rational analysis of market timing, let alone valuation and leverage. The bond market has driven yields to historic lows and is now beginning to crack up as the Federal Reserve’s raising of key rates gets closer and the threat of defaults is rising in China and Greece, not to forget the Ukraine and Russia or Nigeria or Venezuela.

Both global bonds and equities are the home for the vast majority of global savings. As these markets breakdown will investors just sit and wait for their money to become worth less?

No they will look to a traditional safe haven without third party risk. As they begin to buy precious metals so this will become a self-fulfilling prophesy as the supply is limited and the price will rise with increased demand.Why is this not happening just yet as the bond market begins its epic sell-off?

Well don’t forget how the Bank of International Settlements put its finger in the dyke just over a week ago as the bond market started to weaken. But nobody in the world can hold back this sort of deluge when it really get going. Price manipulation always breaks down eventually. And the longer it has been going on then the greater the distortion of prices and the bigger the increase to the upside.

Price spike

Early gold and silver investors will see the value of their hard assets rise in a huge bubble and enter an exponential spike. That will eventually subside too but gold and silver prices will still remain at much higher levels than they are today.Historically the breakdown of bond markets has always been good news for precious metals. Perhaps that’s why Sprott launched its new exchange traded fund for junior miners yesterday. They traditionally also offer the maximum leverage to a rising gold price.If you don’t own any assets linked to precious metals then you are going to regret it very soon.

Opinion provided by Arabian Money - members of the ABCD

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