Precious Metals and Internet Stocks

Lately, I have been having flashbacks to a time when Yahoo and Amazon were the idols of the stock market. The daytrader favorites that went to heights that no one could imagine. There are many stages in a bubble. The first stage is recognition of fundamentals. When the time is right and the cultural buzz is atune with that group, there will be pin action. The internet bubble started in 1998, with Yahoo and Amazon leading the group. It was something new to investors with fundamental underpinnings. These companies were growing wildly, and it was hard to project the limits these companies could achieve. Imagination. These stocks had it. You could imagine tremendous growth and unlimited possibilities. Precious metals have it. Imagination. You have a stagnant economy but with fears of inflation due to money printing. What is a more fitting asset class for that environment than gold and silver? The imagination runs wild with QEx and Bernank printing more money than Zimbabwe.  Precious metals represent the current zeitgeist of investors worried about rampant money printing in the face of a weak economy. 

The second stage is parabolic price movements. You saw that in early 1999 and then again in early 2000 in internet stocks. There was a mini parabolic stage in summer of 1998 but that was just as precursor to what was coming up. You saw the summer of 1998 portion of the precious metals rally in the fall of 2010 with QE2. The past month has been the early 1999 portion of the precious metals rally. Recognition and howls of a bubble. If you look at a chart of YHOO in 1999, you see a kind of road map for gold and silver in 2011. The parabolic rise in early 2009 followed by a resting period and then the final blowoff top in 2000 when everyone was in the game and the noise was loudest about anything internet.

One of the important things to remember is that as a bubble matures, periphery plays come in favor. For example, B2B was not even on the radar in early 1999 but by early 2000, stocks like ICGE and ARBA were the flavor du jour and favored over the old internet stocks like YHOO and AMZN. We have yet to see that stage in the precious metals bubble. All the attention is focused on gold and silver. When you get platinum and palladium in the spotlight, you know that the bubble is near the final stages.  You also get the mining stocks in play, especially penny stocks and we are no where near that activity.  Just look at PAAS and SLW over the past 3 months, it has not moved up with silver.   We have not arrived at that stage.

The Fed can't stop this bubble unless it raises Fed Funds to at least 3% and gets tough with action not words.  Aggressive rate hikes.  Do you think that will happen with Bernank at the helm?  There is no opportunity cost to holding precious metals and no effort to tighten by the Fed. 

We haven't got enough excitement and fever in the precious metals market to call a top.  This is the early 1999 stage.  In the chart it looks like a small rise, but YHOO went from under 200 to 450 in about 3 weeks in December 98-January 99 before splits.  We still have about a year left in this bubble.  And yes, it is a bubble.  Gold and silver values are mostly perception, and they have no intrinsic value other than their industrial uses.  When you get gold acting wildly along with silver and platinum and palladium joining the action, we are close to the early 2000 stage of the IT bubble and the top is imminent.  For now, let this bubble simmer for a while longer, I believe we are just in the thick of things and more upside is yet to come.