|
|
Per
Wikipedia, “in a stock market bubble, market participants drive stock prices
above their value in relation to some system of stock
valuation. Behavioral finance theory attributes
stock market bubbles to cognitive
biases that lead to groupthink
and herd behavior.”
The first
sentence appears simple enough, but that pesky word value mucks it up.
Estimating “value” is a daunting task, as not only have metrics
never been created to define it, but it changes over
time. Sure, people can speak confidently of proprietary definitions,
but ultimately they reverse engineer, seeking to “back in”
to a process by first postulating the result.
I’ve
spent 23 years valuing securities, including seven as an Institutional
Investor ranked sell-side analyst, but have still not found a “holy
grail” of valuation, much less one guaranteeing profits.
The fact remains that roughly 75% of an asset’s valuation relates to
macro factors – such as economic growth, oil prices, or investor
sentiment – and just 25% “company-specific factors.”
For stocks, there are dozens of viable “valuation metrics,”
utilizing cash flow, earnings, revenues, “growth,” and in the
case of the internet bubble, “clicks.” Wall Street is
constantly creating metrics to justify stock prices, but once you filter out
the hype surrounding them, you’ll see that ALL are both arbitrary
and unproven.
Bond
metrics are far more defined, but still governed by the 75%/25% rule, in my
view. Perhaps slightly less, like 60%/40%, but either way the price of
a bond purchased in the secondary market, with no intention of holding to
maturity, is governed largely by the macro environment, be it nationwide,
industry-wide, geographic, or otherwise.
Of the
three “hot asset classes” of the past decade, real estate is by
far the hardest to value. Residential real estate generally produces
zero cash flow and depreciates over time, so to “make money” on
properties, demand for your home must increase, a potentially
fleeting, volatile factor. Low interest rates have historically been
inversely correlated to home prices, but not anymore, as the cumulative debt
bubble created by real estate over-investment has made the Fed’s ZIRP
policy moot, if anything harming real estate by preventing savers from
building cash flow. As for commercial real estate, cash flows are
affected more by macroeconomic factors than anything else, coupled with the
double whammy of generally weak liquidity.
Which
brings us to gold, which for the past 5,000 years have been universally
accepted as MONEY, often as official currencies and always as
failsafe inflation protection. Unless you lend gold out for miniscule
(often negative) lease rates, gold produces no cash flow, nor
will it ever. Annual demand has exceeded production for the past decade
and will do so ad infinitum, with the only visible valuation metric
being the supply of PRINTED MONEY, which has been growing exponentially
for years, set to shift to hyperbolic growth in the near future.
Depending on one’s definition of the money supply, the case for extraordinary
gold prices can be made, as depicted in my December 21st RANT,
“SIMPLE
MATH AND $100,000 GOLD.” Of course, such calculations:
1. Only
incorporate U.S. dollars in circulation – ignoring the
world’s other 181 currencies,
2. Assume
money supply does not increase at all, and
3. Do not account for the “groupthink” and
“cognitive biases” that could ultimately drive gold prices above
their “intrinsic value.”
As for
silver, not only is production inexorably declining, but in addition to its
long-standing usage as MONEY, silver is the second most utilized commodity on
Earth, trailing only crude oil. Silver is indispensible to countless
industrial processes due to unique properties such as strength, malleability,
and ductility, and is rapidly emerging as a key component to the inelastic
medical industry. Thus, unlike gold, silver is consumed.
Consequently,
less than a billion ounces of above-ground silver remain on Earth,
worth less than what the Federal Reserve prints every few hours. The
U.S. Geologic Service (USGS) forecasts silver to be the first extinct element
due to its gaping supply/demand gap, but do not account for monetary
demand, which in my view will ultimately dwarf industrial demand by a factor
of 1,000 or more. As for attempting to calculate silver’s
“monetary value,” simply utilize the money supply metrics above
and take your best guess.
At a bare
minimum, I expect gold to reach $15,000-$20,000/ounce, and the
gold/silver ratio to fall to between 5:1 and 15:1 (yielding a silver price
projection of $1,000-$4,000/oz), in TODAY’S (non-hyper-inflated)
dollars, pounds, Euros, Yen, and Yuan, of course.
The second
part of the Wikipedia definition states “behavioral finance
attributes stock market bubbles to cognitive
biases that lead to groupthink
and herd behavior.” In other words,
valuation metrics are distorted by incorrect perceptions, yielding delusions
of grandeur. This was certainly the case with the internet and real
estate bubbles, and will shortly be realized in the biggest bubble market of
all, the U.S. dollar.
In the
case of internet stocks, residential real estate, and essentially ALL asset
bubbles throughout history (i.e. the South Seas Bubble, Tulipmania, etc.),
GREED was the primary factor driving extraordinary valuations. The only
material exception to this rule is that of the dollar bubble – or better
put, fiat currency bubbles in general – which have expanded to
unsustainable levels via survival instinct. That is,
subconscious “groupthink” that all will be lost if paper
currencies fell to their true value. And no greater truism has ever
been spoken, as fiat currencies – BY DEFINITION – are worthless,
and in fact are not even “assets,” but “liabilities.”
Alas,
currencies are a tricky “market” to assess, as entities
don’t generally speculate on them, but accumulate them as
savings. Every fiat currency in history has collapsed to its intrinsic
value of ZERO, so in some ways it is unfair to call them bubbles. In
their quest to build power and control populations, governments
have attempted countless times to install worthless paper as a store of
value, and each time they have failed.
That is
what makes the upcoming “PM bubble” so enigmatic. Gold and
silver, too, are MONEY, but have very real intrinsic values based on
production costs and the prevalence of “competing” fiat
currencies. PLUS, the most unique of all valuation metrics, possessed only
by PHYSICAL gold and silver – the “FEAR FACTOR.”
Converse to all other asset bubbles, blown up nearly entirely due to GREED,
the PM bubble will inflate principally due to FEAR of purchasing power
loss. Sure, some people will buy gold and silver (and mining stocks,
pre- nationalization fears) to achieve profit, but most will simply be
desperate to exchange collapsing scrip into something of REAL,
TANGIBLE, HISTORICAL, IMMUTABLE VALUE, meeting ALL the historical, definitional
parameters of MONEY.
I
don’t even pay attention to dolts proclaiming PMs are in a bubble, as
they are either stupid, lying, or beholden to an alternative agenda, such as
working for the government. When gold is in a “bubble,” it
will not appear anything like previous bubbles, as media focus will
instead focus on soaring inflation due to collapsing confidence in the
dollar, Euro, and other fiat currencies. Moreover, few will be
calculating how much their gold and silver are worth, but how many
ounces they own. At this point, I expect to see collapsing
economies, political turmoil, and social unrest, each of which will dwarf
media coverage given to the price of gold.
Today, we
sit at the precipice of the GREATEST FINANCIAL INFLECTION POINT IN HUMAN
HISTORY. Four decades of brainwashing have convinced the world that
fiat currency is paper, to the point that few living souls have witnessed a
gold standard. Governments fear the loss of power – and
commencement of chaos - when CONFIDENCE in fiat currencies die, but
keep their fears to themselves for fear of creating a panic. Meanwhile,
the public at large is largely stuck with fiat-denominated assets,
with little understanding of their intrinsic worthlessness, and Wall
Street/Washington-led efforts to keep them in the dark rule via PROPAGANDA
have kept them largely quiet to this point.
Rising
inflation and sovereign financial crises have awakened much of the
world’s population to the dangers directly ahead, explaining why gold
and silver have performed so well, the increasing level of cultural and
political revolutions, and new-age revolutionary movements such as
“Occupy Wall Street.” At this point, gold and silver are
still largely reviled due to successful PROPAGANDA campaigns, but it
won’t be long before reality overwhelms the Matrix.
As a
global expert in the field of gold and silver demand, I can confidently say
no more than 5% of the world’s population realizes gold and silver
bullion are buyable – let alone what they represent - and
in my home, the United States, I’d put that percentage at no more than
2% – the ultimate “ANTI-BUBBLE.” Going from 1% to 2%
acceptance in the U.S. took eleven years, but I expect the journey from 2% to
100% to be much shorter, perhaps in a year or less.
When the
“PM bubble” finally arrives – and it could be any day
–our collective minds will NOT be focused on the PRICES of gold and
silver, but how many OUNCES can be procured. When “the BIG
ONE” shortly hits, only PHYSICAL GOLD and SILVER will enable you to
maintain your net worth until the new world currency order commences, at
which point your odds of prosperity will be higher than 95% of the
world’s population, perhaps more.
PROTECT
YOURSELF, and do it NOW!
|
|
