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April
7, 2006
By:
Tom Szabo
SILVERAXIS.com
A
common argument says that silver, gold and commodities
are not yet in the spotlight and consequently
the public
knows little about this bull market that
is already several years old.
Yet for several months now, I have been seeing discussions
and news topics--heretofore limited to resource
and precious
metal websites and newsletters--show up in the popular press with
increasing frequency. Even topics as esoteric
as the Iranian oil bourse, predicted by
some to signal the death of the U.S. dollar
and the ascendancy of gold and silver as
money,
have seen coverage in a number of newspapers
and mainstream online media, most recently
in the San Francisco Chronicle.
In
fact, rising
precious metal and commodity prices seem
to have
become an area of focus within certain corners
of the financial
media in recent months. CBS MarketWatch,
Forbes and TheStreet.com regularly feature articles
by staff and contributors focusing on gold,
silver, oil or commodities as well
as "conservative" stocks that are expected to benefit
from the continuing bull trend. Whereas
Thom Calandra, before being defrocked, used
to be a lone voice in the realm of
mainstream journalism, today I could
probably name a dozen or more commentators
who cover precious metals and commodities
for the financial press.
And while I don't
regularly watch CNBC or its ilk, I do know that
even Jim
Cramer, the notorious Wall Street performance
artist, has
become a (frothing) bull of late when it
comes to oil, natural gas, gold, silver
and commodities in general. Recall the $25 natural gas call he
recently made for the winter of 2005. Mind you,
Cramer is clearly no expert on the
fundamentals of commodities or mining in
general, but he sure is good at spotting
momentum plays and jumping on them.
More
on the momentum idea later, but first let
me explain what got me to writing this piece.
A couple of days ago, I read in Yahoo!
Finance that Gold
Futures Top $600 an Ounce as reported by the Associated Press (the article has
since been revised in true journalistic
fashion, leaving little trace of the
original). Looking around, I was surprised
to see the sheer number of places that this
or a similar headline showed up. Frequently
it was also mentioned in the headline that
silver topped $12 (hurray!). All of a sudden,
I came to the realization that the mainstream financial press
is suddenly covering the resource bull market
about as widely as any other important story.
And
yet here I was questioning whether or not the investing public is
aware
at all of what is going on. Well, the answer is:
of course they are when gold headlines as
a top story in Yahoo Finance!
Whether the public cares or not is a different story.
As we will see, it is also a separate consideration whether
or not the press has the story right.
Regardless,
I believe it is time to review just exactly where we are in this precious
metal and commodities bull market. The commonly
advanced position, which has almost reached
a level of indoctrination as a result of
constant repetition, is that we are in a
three stage bull market and this is just
the beginning of the second stage where
institutions and the smart money are increasingly
deploying capital in advance of the third
wave which is a mad rush by the general
populace. The usual conclusion is
that there remains many years to this bull
market as the investing public slowly
catches on. We are allegedly closer to the
beginning than to the end.
Yet
some smart
people not burdened by a stage-based approach
to market cycles are studying the situation
and coming up
with answers at the polar extremes
and everywhere in between. And even then
many of their outlooks have flip-flopped as this
market has unfolded. I still remember the 2003
San Francisco Gold Show where the panel
of experts, all respected newsletter writers
or commentators,
were almost unanimous in agreement that
the gold bull market was then getting long
in the tooth. More
recently, there is growing consensus within
the community that in fact
we have many years left in this bull market.
If we look at the popular media
though, a quite skeptical case seems to be advanced
most often.
The storyline from Yahoo Finance illustrates
this as we find out that the featured viewpoint
is from a guy who thinks "commodities across the board, from copper to zinc to sugar, have seen big
increases without any fundamental reason". And
so we discover that while the mainstream press is
increasingly paying attention to rising
gold, silver and commodity prices, the chorus
of disbelief and amateur
top-calling is getting louder. Yet another
headline, appearing in CNNMoney, confirms this
trend: $600
Gold: Want in? Think twice.
Clearly,
the media is wrong to portray that there are
no, or only a few, fundamental reasons for what is happening
in natural resources, especially silver
and gold. Much of the underlying story has
not been reported or even investigated.
Financial journalists who do their homework
usually discover that there are many factors
pointing to even higher future prices.
In fact, the reasons have been
retold in the gold and resource circles
so many times that there is no point wasting
space by repeating them here.
But
is there an aspect to this mainstream disbelief
that contains elements of the truth?
Let's look at another line from the Yahoo
Finance piece for a moment: "Money is pouring into them [commodities]
simultaneously, without cause or concern or interest
in what the values are, or what it's going to be used for. It's all momentum --
it's the flavor of the year." This
statement seems to be at strong odds with what many believers of "we are
in early stage two of a three stage bull
market in commodities which will last for
many more years since momentum is just
starting to grow" have been saying
all this time. And the contrary "momentum
is here, right now"
argument is being offered ever more frequently
to the general public as
a warning to stay away. But I question how
long this out of tune song will stay
the same.
Upon
reflection, even my
own theories
about the silver ETF rely in part on the
expectation
that unchecked speculation could ruin what
otherwise would be a good thing.
Perhaps
I am missing something, but it has become
increasingly clear to me that one of the great unanswered
questions of this commodities bull market
is just how much of the ultimate participation
level and money flow into commodities has
already taken place. We need more of
an answer here than the parable which goes something
like: "it will be time to sell when
housewives are discussing the hottest gold
stocks at cocktail parties". I'm afraid
that is just wishful thinking. Cramer is
already talking up the resource stocks
and since housewives make up a sizeable
portion of his audience, we might not be
that far away from the eruption of the predicted
discussions at
cocktail parties. What then?
Until
recently, I too believed
the assertion that this bull market,
especially in gold and silver,
could last for a generation. But the apparent readiness
of momentum players and the popular media
to embrace commodities as the next big thing
have made me question this commonly-held
belief. Yet there remain many macro risks
and uncertainties in the gold, silver and
commodity markets, a few of which are
not likely to be resolved soon or even during
the next decade, including a dollar
showdown, relentless twin deficit accumulation,
exploding money supply, busted housing markets,
debt and derivatives time bombs, the Iranian
nuclear bomb, bird flu, China, Latin American
social revolutionaries, inflation, deflation,
immigration, Iraq, Hamas, Osama and natural
disasters, just to name a few.
But
assuming none of these situations play out
in an extreme fashion, throwing water or
gas on the commodity fire, perhaps
the sign that the punchbowl is about to
be taken away, at least temporarily, will appear when the
press starts to accurately and consistently
recite the
bullish case for gold, silver and commodities.
The true contrarian position will then become
that the media has it wrong once again because
the real story is now such and such.
Realizing this, we are still left with the
question: when will this take place? To
which I answer: who cares when, just be
ready for it!
Please
don't get me wrong, I am not saying
that the bull market is almost over or even
that most of the gains are behind us. What
I am saying is that we are seeing the first
signs of popularity. And since we generally
hold sacred the belief that too much popularity
is not consistent with a healthy bull market,
this trend bears watching.
The final
days of the bull market in which "irrational
exuberance" comes to roost will surely
follow the almost ubiquitous endorsement
of commodities as suitable for the average
investor. The resulting euphoric-manic stage
may last for years of course but there is good
reason to suspect that it might be
very brief and violent. I would place blame
for such an early bust on the global
appetite for speculation epitomized by aggressive
hedge funds, over-the-counter derivatives,
carry trades, hot money, complex portfolio
strategies and a quest for real returns
at a time when finding them is no longer
an easy task. Face it, we now live in a
world of asset bubbles where commodities
are likely to end up being the next
one.
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