What Does A Precious Metals Bubble Look Like? -- Michael Maloney

Before you answer that question, take a minute to think about it. Does demand rise in a calm and orderly way, or is there a mad dash for metal as prices spike over and over again?

A gold and silver rush is unlike a rush into, say, stocks or real estate. The two most powerful emotions of markets are greed and fear.

A bubble in stocks and real estate involves only one of those base feelings—greed—a very powerful emotion. Tulipmania, The South Sea Bubble, The Florida Real Estate Craze, The U.S. stock bubbles of 1929, the ‘60’s “’tronics” bubble, and the tech bubble were all driven by the same emotion—greed.

The word bubble is often associated the word mania­—a word that connotes that the public has lost touch with reality. History is replete with manias of all stripes—canal manias, bridge manias, technology manias, and stock manias—and most of them involve a touch of madness when viewed through the rational passage of time.

But a bubble in precious metals will be unlike those manias because it combines both fear and greed. Profit-seekers will see rising prices as a sign to jump into the fray, and people just looking to preserve their purchasing power will make a mad dash as well. It is one of the very few bubbles that combine the madness of greed with the thrashing of panic.

Most of us are familiar with the greed. We have invested in tech stocks, or flipped homes, or jumped into a stock that was rising to meteoric levels. But do we really know what a panic looks like? 

Michael Maloney loves to show this photograph because it’s one of the precious few examples that vividly shows the panic part of the equation.

 

Here’s the caption, taken from the Met Museum:

“In December 1948, Life magazine sent Cartier-Bresson to China to document the turbulent transition from Kuomintang to Communist rule. This photograph captures the pandemonium incited by the currency crash of that month, when the value of paper money plummeted and the Kuomintang decided to distribute forty grams of gold per person. Thousands waited in line for hours as the police made only a token gesture toward maintaining order, resulting in ten deaths by suffocation. Cartier-Bresson deftly captured the desperation and claustrophobia of the scene by compressing the mass of people within a tight frame as they propelled themselves toward the bank building just beyond the right edge of the picture.”

 

And you might think, “This time is different,”—we have brokers, the internet, and smart phones, after all—people will never stand in line to buy gold and silver. We call it the greatest wealth transfer of all time for exactly that reason—most people aren’t expecting it. 

Greed and fear individually are powerful emotions, but when you combine them, you will be experiencing a completely different type of bull market.