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The madness of markets – US Treasuries vs. gold

Memoirs of Extraordinary Popular Delusions and the Madness of Crowds is the classic text from 1841 by Charles Mackay that addresses the mass psychology that enables financial bubbles and their inevitable collapses.  The entire book is available here as a free pdf in the Essential Readings section of the site.  Grant Williams follows this theme in his excellent presentation below on past financial bubbles and the characteristic behavior they follow.  He then applies this analysis to two current markets: US treasuries and gold.  I don’t think I’m giving away too much by revealing that he finds a current bubble in the former and a future bubble in the latter.

Williams divides the process by which bubbles form into three separate regions of behavior.  The first stage is the “smart money” phase where the market remains completely off the radar of the investing public as a whole.  The second stage is the “awareness” phase where the price starts to climb gradually.  He notes that this is also the phase where many early participants become frustrated with the absence of huge gains and leave, causing a temporary downturn before the final explosive move up.  The third stage is the mania phase in which the general investing public discovers the investment meme and becomes convinced that, for whatever reason, “this time is different”.

Williams concludes that gold is currently in the final downturn of Stage 2 just prior to entering the mania phase.  While I won’t be unhappy if this turns out to be a correct prediction, my personal feeling is that the unwinding of the global fiat money experiment and sovereign deleveraging process is going to take far longer than most seem to think.  We are a couple of years into the Greek crisis and nowhere near any kind of resolution.  How long will it take for the whole EU experiment to play out?  Then it’s on to Japan whose real crisis hasn’t even begun yet.  All of which are just the opening acts to the end of the dollar hegemony.  The more I think about it, the more I can’t help but wonder if we aren’t really just late stage 1 or early stage 2 in the future gold bubble.

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