mania? what mania?

Many will remember my posting on this thorny subject some while ago. How can I be so foolhardy as to do so again, with the world writhing in economic turmoil. Well, you be the judge.

Gold Manias are born in times of ballooning Government debt, deficit spending and money printing. If we accept the inevitability of further massive monetary stimulation to keep European banks afloat, as well as their American cousins, then we must be facing stagflation followed by inflation on a grand scale. I don't see any other possibility, unless politicians wish to face the chasm of deflation, despair, anarchy and war.

Assuming, then, the near certainty of further monetary stimulation then consider where all that Cash has to go.

At present, the total cash and short term investments of just the U.S. S&P 500 companies is 5.8 trillion dollars. The total market Cap of all the primary Gold producers is a mere .797 trillion, with a further .122 trillion for all Gold ETF's. If only 20% of the above companies shifted only 5% of these investments into (e.g.) Gold ETF's, their value would double.

The same proportion into Gold stocks would push up the value of each stock by 20%. This is merely the S&P 500. We have not considered other major companies, hedge funds, pension funds, mutual funds, banks, sovereign funds and insurance companies.

Alternatively, if a mere 1% of the money supply went to buy physical Gold, demand would rise 13 times over last year. Think what would happen to the price as supply dried up.

With the inflationary consequences of a sea of money plain for all to see, why would a sector of the financial market not want to secure its position in the only time honoured Golden hedge against inflationary loss? What impact must this have on Gold's price?

Finally, let me leave you with this little nugget. At present, Gold is considered a bank Tier 3 asset with a 50% weighting. Back in 1974, the Central Banks of the Group of Ten countries set up the Basel Committee for Bank Supervision (BCBS) as a bank supervisory authority. This committee currently has a proposal on its agenda to promote Gold to a Tier 1 asset with 100% weighting. Hardly surprising with so much default around the globe.

Should this happen, average analyst predictions are that commercial banks might buy nearly 60 million ounces of physical Gold. Work out for yourself the implications for the Gold price.

As you can tell, I think a mania is not far away, next year or two. Hopefully, MYG will be a producer by then.