Gold: What's REALLY Behind the Record Rise, Bull or Bubble?
October 20, 2009
By Nico Isaac
When prices in a financial market go from Sea Level to Outer Space in a relatively brief time, two scenarios are
at work -- and they both start with the letters “B-U.”
When a precious metal goes from being a popular long-term investment of buy-and-holders to the quick, get-away “vehicle” of
day-traders, two scenarios are at work -- and they both start with letters “B-U.”
And when the majority of mainstream pundits see a "new paradigm" in which prices continue to rise indefinitely,
two scenarios are at work – and, you guessed it, they both start with the letters “B-U.”
Enter: the recent Gold Rush of 2009, when ALL of the above conditions apply. Everyone from hedge funds to housewives
now hustle to hitch their asset wagon to the rising gold star. Which begs this question: Which of the possible two
scenarios are at work: B-U-ll
--- Or B-U-bble?
Here’s the difference: A genuine bull market is driven by a self-sustaining internal dynamic that's reflected
by a host of technical indicators. A Bubble, on the other hand, is the result of untenable psychology that could
shift at any moment and bring prices plummeting down.
For long-term forecasts and more in-depth, historical analysis
for precious metals, download
Prechter’s FREE 40-page eBook on Gold and Silver.
It goes without saying into which category the mainstream experts put Gold: namely, a new bull market that has years,
if not decades more to soar. “Gold Will Hit $2,000 an ounce,” reads an October 8 Market
Watch. And -- “Gold Has More Upside… The metal’s bull run is just getting started,” adds
a same day Barron’s.
I found hundreds of news items which agree about the long-term potential for gold’s uptrend. But not a single
one could tell me why the rally would continue, other than because the experts say so.
To know whether a diamond is real, it must cut glass. And, to know whether the bull
market in gold is real, it must encompass at least one of these FOUR traits:
- A surge in demand that outpaces supply
- A falling stock market, which raises the “safe haven” appeal of precious metals.
- A real (not imagined) threat of inflation
- An increase in value relative to major foreign currencies
Right now, the Gold market can NOT check off a single one of these items. Case in point:
Supply: Demand for gold from jewelry makers – which comprises 60%-70% of the market – has
plummeted to its lowest level in 20 years.
“Safe haven” appeal: From its March 2009 bottom, the U.S. stock market has soared 50%
right alongside rallying gold prices.
Inflation: As the October 2009 Elliott Wave Financial Forecast (EWFF) notes: An increase
in money supply is only inflationary if it is used to RAISE the total amount of credit. This is NOT happening, as
both bank credit and consumer credit levels are contracting for the first time since World War II.
A gold rally in other currencies: Again, the October 2009 EWFF presents the following
close-up of Spot Gold prices VERSUS Gold denominated in foreign currencies such as the Canadian dollar, the Australian
dollar, the euro, franc, pound, and yen since 2007.
The major non-confirmation between these two markets is clear, as is the overlying message: IF demand for gold truly
outweighed supply, then its value as measured in other currencies would increase.
The rise in gold is primarily the result of speculation and a falling U.S. dollar. These are exactly the “untenable” forces
that contribute to a Bubble, not a genuine Bull market. The difference is only a matter of time.
For long-term forecasts and more in-depth, historical analysis for precious metals, download
Prechter’s FREE 40-page eBook on Gold and Silver.
Robert Prechter, Chartered Market Technician, is the world’s foremost
expert on and proponent of the deflationary scenario. Prechter is the founder
and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer
the Crash and Elliott
Wave Principle and editor of The
Elliott Wave Theorist monthly market letter since 1979.