Legendary gold bug Dennis Gartman turned heads when he wrote in this week’s Gartman Letter that gold “is now entering that stage when prices go parabolic.” This came just days after Wells Fargo analysts said the gold bubble is “poised to burst.”
Asset bubbles tend to follow a pattern. Typically, after bumping along a bottom for many years they begin to climb a “wall of worry” (still-valid counterarguments to the price rise). As the price rises consistently, though, the asset and the rationale for its rise gains acceptance with a wider and wider group of buyers. Finally, it enters a stage of euphoria or panic—more likely in the case of gold—when everybody buys in, before the fundamentals that led to its rise change and the price crashes.
With fears rising over sovereign debt, Gartman and others suggest we’re on the cusp of euphoria. Canadian fund manager Eric Sprott this week predicted that Canadian gold stocks, the next best thing when bullion itself gets too pricey, would see a Nortel-esque spike within the next five years.
This brings me back to a conversation I had last fall with Frank Giustra, who 10 years ago recognized the problems paper money is now facing and in response helped start Wheaton River Minerals, now Goldcorp, the world’s number two gold miner by market cap. At that time gold prices were just coming down from a new peak of US$1,400, but he was still predicting new highs to come. “We’ve just seen one of the first of what will be many crises that will continue to rear their ugly heads,” he said of the initial default fears around the peripheral eurozone economies in summer 2010. “The remedies being applied are only making the problem worse. The problems are structural. They can’t be fixed with monetary or fiscal policy. The end result will be a much worse blow-up than we’ve already seen.”
OK, so did that blow-up finally happen this month? No, not by Giustra’s definition. Austerity has taken hold, but that’s just fiscal policy again. And the price of gold itself has risen, what, 30% peak to peak over 11 months—something any good blue-chip stock might achieve and hardly parabolic. Gold’s been doing that for years. Here’s Giustra’s guide for spotting the real peak: “At some point an event will trigger that euphoric rise in gold that always happens at the end of every bubble,” he told me. “The behaviour of gold and the behaviour of gold investors will change. Bubble behaviour has not taken hold yet. It will at some point.”
True then, true now. But regardless of whether we’re at the start of euphoria or still stuck in acceptance, the best buying opportunities are past and loading up on gold now would be a risky strategy. If you do have gold in your portfolio, hold it, and be ready to sell when prices accelerate at an entirely different pace.