The Metals Bubble "Quantified"

While talking heads and economic pundits scream that somehow precious metals are bubbling, the markets are saying the opposite. When investors break out the calculator and look to decipher the data, they'll find that there is no bubble at all. In fact, investors are largely underweighted in gold and silver in their own portfolios.

Metals are Mainstream

Prior to the four-bagger returns that began at the turn of the millennium, gold and silver were seen as fringe investments for "paranoid" investors. Dot coms and tech stocks, the world thought, would rise forever, and following the deep recessions throughout the world in the 1990s, economists reported that we would never again see another deep recession or depression.

Of course, as we all know, the recessions have continued, deepening with each slowdown. And today investors are waking up, albeit slowly, to the huge benefits inherent with metals ownership.

The Power of the Consensus

Throughout history, the investing consensus has proven to be a valuable forecasting tool. When investors reach consensus, as they have most recently with gold and silver, it is generally considered to be time to sell.

During the early 1990s, it was first localized real estate. Las Vegas and the rest of the West were booming, credit was expanding, and the money supply exploded, creating instant millionaires among what were first time homeowners. Pundits declared housing to be the investment of a lifetime, and in the months following the bubble burst, Asia went into crisis, and the economy entered into a recession.

Just a few years later, the tech sector emerged, and investors wanted to own anything that ended in dot com. All types of unprofitable businesses hit Wall Street with incredible IPO valuations, and yet still rose 10% to 25% on IPO day. It was during that time that pundits again opened their loud mouths, declaring that the days of recession were over, and there was even a book written forecasting these projections. Remember Dow 36,000? Investors were so bullish many thought the Dow would again quadruple in a decade. It never happened, and the tech bubble burst. What could be so different about precious metals?

Behind the Scenes

If you take the news at face value, it is easy to see why investors are scared about a potential bubble in precious metals. However, when the numbers are published and people start pounding numbers in a calculator, it is found that the "bubble" in gold has been spawned with very little capital.

First things first, the gold "bubble" began in one of the worst periods in economic history, at the height of the dot com bubble. Second, many other bubbles were starting to emerge, namely the housing bubble. When you boil it down, there was very little capital to fuel any "bubble" in gold. "Why would anyone buy a negative-carry investment when real estate provides income and capital appreciation?" investors pondered.

Fast Forward

Today gold and silver dominate headlines and investing talking points, but they've still yet to capture even 5% of the investment market. In fact, all the world's gold and certainly all of the world's silver are worth less than 3% of the total amount of global financial instruments currently totaling a whopping $170 trillion.

Contrarians screamed bubble as the consensus spread into the Texas Teacher Retirement fund, which purchased a hefty $250 million stake in metals. All told, however, the position was practically nothing when compared to the total size of the fund at $95 billion. Less than 2% ($2 billion) is invested in commodities in general, and only .3% is invested in gold and silver.

Still Room to Run

In just one decade, precious metals have earned incredible returns, all while growing to just 3% of the total value of all the financial instruments trading hands on a daily basis. Gold and silver are not yet mainstream, and the average investor is still overweighed stocks, bonds and other fixed income, while incredibly underweight in commodities, namely gold and silver.

If the price of gold and silver can rally by 400% while absorbing a tiny fraction of assets, just wait until investors demand 5% - 10% of their portfolio in gold and silver, not just 3%. Perhaps then gold and silver may have topped, but even then, they will have not yet bubbled.

Dr. Jeffrey Lewis

About the Author
Dr. Jeffrey Lewis

In addition to running a busy medical practice, Dr. Jeffrey Lewis is the editor and publisher of, where he provides practical guidance for precious metals investors.

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