A warning to all gold investors – don’t fall in love

If we were to idealise the anatomy of a bull market, it would have three phases.

There's the first (or 'stealth' phase) when the canny few get on board, but most are uninterested.

Then there's the middle phase. This is when institutions and other sophisticated players wake up to it, but many continue to ignore it, because 'prices have already gone up so much'. This is when you're climbingyour proverbial wall of worry.

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Finally, there's the euphoric mania, when the world and his wife simply can't get enough.

So when it comes to gold, where are we now?

Where are we in gold's bull market?

One feature of the second phase of a bull market, is that the mainstream media, albeit guardedly, start mentioning said bull market.

There have been phases in this current gold bull market where radio and newspapers - I'd say less so television - have got interested in gold. This interest usually seems to come when gold has broken to new highs and is going on one of its mini-exponential runs. I'm thinking in particular about last August-September, but also about April to May 2006 and February 2008.

When those in the mainstream - who, ironically, are often on the outside - do get interested, one of the questions they keep coming back to is: "Is gold in a bubble?" In other words, there is doubt. Prices have already gone up so much, that they're sceptical, and so stay out of the market.

This would suggest that when it comes to gold - we are somewhere in phase two of our idealised bull market model. There is no guarantee, of course, that phase three will ever happen - I wonder if too many people are waiting for it - but wouldn't it be nice if it did?

Don't fall in love with gold

The fact is, gold is in a historic bull market. It has risen by an average of just under 20% per annum over the last 11 years, outperforming every other asset class. But there is much more to this bull market than meets the eye.

It's not just about an asset class rising in price. It's about the breakdown of our financial and monetary systems. It's about incompetence and perhaps even corruption in our bloated governments and central banks. It's about, believe it or not, freedom and integrity.

Gold - to many - is so much more than just an asset that is rising in price. Look at the fervour it generates. Look how passionately people feel about it - myself included.

Look, for example, at how angry and aggressive those who are long gold can become when someone dismisses it. I'm thinking, in particular, about the slagging off Nouriel Roubini receives on Twitter when he baits gold bugs. (I knocked him myself in one article). Certain pro-gold websites have become almost cultish.

I happen to think the world would be a better place if the free market were to choose which money we use - whether that be gold, pounds, dollars,or Bitcoins - rather than have a government money forced on it. Hayek outlines this idea of competing currencies in his essay The Denationalisation Of Money.

Competition would force better practice onto money issuers - and probably, though by no means certainly, most market participants would prefer to use gold or silver as money, at least until other forms of money pay sufficiently high interest to lure them away from the hard stuff.

Gold, as you can't print it, is a great regulator. It forces discipline onto governments and banks. They have to rein in their spending. They can't simply expand the supply of money and inflate their debts away.

But this is just an economic ideal. Gold may well prove to be the route to it, but it is still just an ideal. And it's one that many have fallen in love with. Falling in love is fun. Falling in love with an investment, however, or confusing an investment with an ideal, can be very dangerous. Your judgement is bound to get clouded.

So this Money Morning is a kind of note to self, a warning. I have come to, I suppose, love gold - or at least the idea of it, and the glorious, free society it offers at the end of the rainbow.

But I shouldn't. It's just an investment. So be warned and take note: should we ever see that exponential final euphoric bull market phase, then come back and read this, sober up and sell.

Having a thrown a wet blanket over you all, I should say that my big picture view for gold is that the end of this bull market is still not within sight. All the main drivers - monetary stress, deficit spending, debt, currency debasement, ballooning money supply, negative real rates and so on - are still in place.

In the shorter term, I feel we are still in consolidation mode after the run up to $1,920 last August-September and remain of the mind that we won't see new highs before next autumn at the earliest, though I'll be glad to be wrong on that. And in the very short term, I think we put in a low last week around $1,625 and that we should see a nice run up to the $1,800 mark over the next few weeks.

This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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