How to spot the top of the gold market

I recently read an article about the famous Aden sisters in BusinessWeek. Something Mary Anne Aden said in it really struck a chord with me.

In the midst of showing the generally fantastic track record of the Adens, they talk about their "biggest goof": how they stayed bullish on gold in the early 1980s. "We were new to the game," said Mary Anne. "We were feeling enormous pressure from our subscribers to stay bullish."

I remember those years well. Even though it was clear to me in early 1980 that the huge precious metals bull market was over, no one and I mean no one wanted to hear this. I didn't have a newsletter in the early 1980s, but I bet you that if I did and if I advised readers to switch from gold and silver into Treasury bills and then bonds, I would have gotten a lot of anger and cancelled subscriptions.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

I'm bringing this up because that's exactly the type of situation where a bull market is actually over, but few realise it. During the early 1970s, it may have been hard to convince people that the precious metals were the place to be. It was particularly hard in 1976, when both silver and gold had big 50% corrections.

But after the astounding performance of both metals in the late '70s, people were simply entranced. They may have come late to the party, and they didn't want it to be over.

Any suggestion the party was over was met with anger. (I think we saw something of that anger around 2000 whenever anyone suggested the high-tech internet boom was over.)

Compare that sentiment to what is going on today. Only a minority of investors even own the two metals. Even some of those who do, I sense, are still a little nervous and don't quite believe what they have seen recently in silver and gold prices. In fact, I have the feeling that if I today advised people to sell their silver and gold and put the money into common stocks or even cash, many would heave a sort of sigh of relief. I bet you I'd get mostly letters of thanks.

That's a long way from the point where people firmly believe that gold and silver prices have only one way to go straight up and anyone who says no to that becomes an object of scorn.

It's a very different tone I read today from that of the early 1980s. Yes, they are happy to see the prices so high, but many seem worried that it will not last. Many big names in the precious metals world have been actually bearish for months. I'm thinking of Jon Nadler, the head of Kitco (a large Canadian metals dealer). But there are many others. To me, this is in fact a great sign that the bull market has much, much farther to run: and in both silver as well as gold.

Believe me, back in 1980 I was not afraid to tell my friends and family what they did not want to hear. Mostly, they didn't hear me. But that didn't bother me too much. By the time the metals started to fall, I was safely out and compounding interest at 18%.

So I'd be even less afraid today to tell people if I thought the bull market was over. I don't think it is. In fact, I believe that even with all the recent rises, we've just begun to see the bull.

Of course, it is entirely possible that we will have a correction first, like we did in the middle of the last bull market in the 1970s. That one lasted for two years and took prices down by half. But after that came the huge rise, from $100 to $850 in gold, and in just 3 years.

There will come a time when fear will be replaced by greed.

Today, and since this bull market began in 2001, fear has been the dominant emotion connected to it. Fear that comes from looking at governments going into massive debt around the world and with no real plans ever to get out of it. Fear that comes from a possible currency collapse, on a global scale. Fear that the only superpower, the US, has lost control of its finances and its future. And fear that we are all going into a dangerous new world.

But at some point, as the prices for gold and silver keep rising, fear will be replaced by greed.

The average person's biggest fear will be that he or she will be left behind if they don't buy. And they'll be buying at prices far higher than those prevailing today. Just you wait and see.

At some point in the future, it'll be those newly minted "true believers" that will be the most angry if and when I share my view that the great bull market may be over. However, to repeat, we are far from that time now.

This article was written by Chris Weber for the free daily investment email DailyWealth