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Top Ten Signs of a Precious Metals Bubble

By: 
Peter Schiff
Tuesday, April 25, 2006
Recent price spikes and increased volatility in gold and silver markets have many observers predicting a dramatic popping to what they claim to be a precious metals bubble. However, after having sold physical precious metals to the public for the past five years, I can attest that none of the characteristic signs that have typified bubbles in the past are visible in today’s market.

Though metals prices have indeed risen strongly, those gains have come from ridiculously low prices reached at the end of a twenty-year bear market. To consider metals prices too high in this market makes as much sense as saying current technology stock valuations are too low relative to their 2000 peaks. In fact, despite the current run-up, precious metals prices remain well below normal levels when measured against other asset classes.

I have owned mining shares in my personal account for years, yet not a single share has split. Despite significant appreciation, the total capitalization of the mining sector remains tiny when compared to the overall market. There are many individual S&P 500 stocks with market capitalizations greater than the combined capitalization of all the gold stocks in the world. In fact, Newmont mining remains the lone gold stock in the S&P 500.

I am certain that if we were in the final stages of a speculative blow-off, my gold stocks would have split many times over; gold stocks in general would be far better represented in the S& P 500 Index and would constitute a far greater percentage of its capitalization. In addition, a much higher percentage of our nation’s wealth would be concentrated among mining tycoons and precious metals investors (hopefully myself included), much as was the case with dot com billionaires and today’s real estate moguls.

In addition, while it is also true that the financial media has increased its coverage of metals and mining shares recently, what else are we to expect? After all, such performance cannot be completely ignored indefinitely. With the broad markets flat and uninspiring, would you not expect the media to focus attention on where the action is? Certainly the mere fact that they do is not de facto evidence of a bubble.

As part of our full-service brokerage business, Euro Pacific launched a precious metals division about five years ago. Until this week that division consisted of a single employee, comprising less than 5% of my total workforce. This week I finally added a part-time employee to help with the increased business, which is up about three fold over the past two years (with about half that gain occurring during the past several months). Brisk business no doubt, but a real bubble would have required staff increases of a much greater magnitude. Business would not just be up three fold, but one hundred fold. In addition, a bubble would have brought on new legions of competitors (perhaps bankrupt mortgage lenders reorganized as precious metals dealers.) This has not occurred.

As I am on record as having accurately recognized both the stock market and real estate bubbles while each was still forming, my track record on bubble spotting is strong. In contrast, most pundits who claim the precious metal market has crossed into bubble territory were blindsided by these prior bubbles. Since many of these doubters do not even understand why the believers are buying, their natural conclusion is that a speculative bubble must be underway. After all, if buying gold was a smart investment, they would be doing it themselves.

As has been the case for all real manias, if metals investing were a speculative bubble, it would have migrated from the financial and commodities spheres to make an impact on the broader culture. In other words, taxi drivers would be offering tips on mining shares.

As an experiment why not do the following: Stand on a busy street corner and ask those passing by the following question -- Excuse me, but I want to buy some gold coins, would you mind telling me where you buy yours? My guess is the answers would be something like; “I do not buy gold,” “Why would I want to buy gold?” or “Why do you want to buy gold?” Now, ask the same individuals where they buy stocks, or which real estate broker they use, and I am sure you will receive a much different response. Are you starting to get the picture?

For now, the precious metals bull market climbs a classic “wall of worry.” Once fear gives way to greed, there is no doubt in my mind that this major precious metals bull market will ultimately produce a speculative bubble. However, such a development is years from unfolding. To help identify when a precious metals bubble might actually be about to pop, I have composed my list of the top ten signs to watch out for.

Top ten signs that a precious metals bubble is actually forming

10. Commodities trading jackets are the best selling items at Abercrombie & Fitch

9. George Foreman is the pitchman for an infomercial featuring a "Home Panning Kit"

8. The most popular major at Chico State is Geology

7. Due to high prices, Olympic metals are replaced by ribbons

6. Monster Park in San Francisco is re-named Glamis Field

5. Analysts upgrade shares of McDonald’s based on mineral rights to its real estate holdings, bringing new meaning to its “golden arches.”

4. Snoop Dogg introduces the "Bling Mutual Fund."

3. Hustle and Flow wins another Oscar for their single “It’s Hard out Here for a Miner”

2. The WB has a new hit show about teenage prospectors called “Dawson’s Claim”

1. Tom Cruise and Katie Holmes name their newborn son Newmont.