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A friend of mine recently told me he was thinking of loading up his credit cards to use the money to buy silver. My friend isn’t a professional speculator, nor does he really have very much experience in speculation of any kind. I told him I thought such a move would be wildly risky. I reminded him that when the little fish like us start thinking about pushing all our chips into the pot, it usually means that we are close to a top, and that the mushy nature of the U.S. dollar gives signals that are less than accurate.

Here’s an opinion from a pro.

Gold: What’s REALLY Behind the Record Rise, Bull or Bubble?

October 20, 2009

By Nico Isaac

When prices in a financial market go from Sea Level to Outer Space in a relatively brief time, two scenarios are at work
— and they both start with the letters “B-U.”

When a precious metal goes from being a popular long-term investment
of buy-and-holders to the quick, get-away “vehicle” of
day-traders, two scenarios are at work — and they both start with letters “B-U.”

And when the majority of mainstream
pundits see a “new paradigm” in which prices continue to rise indefinitely, two
scenarios are at work – and, you guessed it, they both start with the letters “B-U.”

Enter: the recent
Gold Rush of 2009, when ALL of the above conditions apply. Everyone from hedge funds to housewives now hustle
to hitch their asset wagon to the rising gold star. Which begs this question: Which of the possible two scenarios are at
work: B-U-ll
— Or B-U-bble?

the difference: A genuine bull market is driven by a self-sustaining
internal dynamic that’s reflected by a host of technical indicators. A
Bubble, on the other hand, is the result of untenable psychology that
could shift at any moment and bring prices plummeting down.

For long-term forecasts and more in-depth, historical analysis for precious metals, download
Prechter’s FREE 40-page eBook on Gold and Silver

It goes without saying into which category the mainstream experts put Gold: namely, a new bull market that has years,
if not decades more to soar. “Gold Will Hit $2,000 an ounce,” reads an October 8 Market Watch. And
“Gold Has More Upside… The metal’s bull run is just getting started,” adds a same
day Barron’s.

I found hundreds of news items which agree about the long-term potential for gold’s uptrend.
But not a single one could tell me why the rally would continue, other than because the experts say so.
To know whether a diamond is real, it must cut glass. And, to know whether the bull market in gold is real,
it must encompass at least one of these FOUR traits: 

  1. A surge in demand that outpaces supply
  2. A falling stock market, which raises the “safe haven” appeal of precious metals.
  3. A real (not imagined) threat of inflation
  4. An increase in value relative to major foreign currencies

Right now, the Gold market can NOT check off a single one of these items. Case in point:

Supply: Demand for gold from jewelry makers – which comprises 60%-70% of the market – has
plummeted to its lowest level in 20 years.

“Safe haven” appeal: From its March 2009 bottom, the U.S. stock market has
soared 50% right alongside rallying gold prices.

Inflation: As the October 2009 Elliott Wave Financial Forecast
(EWFF) notes: An increase in money supply is only inflationary if it is
used to RAISE the total amount of credit. This is NOT happening, as
both bank credit and consumer credit levels are contracting for the
first time since World War II.

A gold rally in other currencies: Again, the October 2009 EWFF presents
the following close-up of Spot Gold prices VERSUS Gold denominated in
foreign currencies such as the Canadian dollar, the Australian dollar,
the euro, franc, pound, and yen since 2007.

The major non-confirmation
between these two markets is clear, as is the overlying message: IF demand for gold truly outweighed supply,
then its value as measured in other currencies would increase.

The rise in gold is primarily the result of speculation
and a falling U.S. dollar. These are exactly the “untenable” forces
that contribute to a Bubble, not a genuine Bull market. The difference is only a matter of time.
For long-term forecasts and more in-depth, historical analysis for precious metals, download
Prechter’s FREE 40-page eBook on Gold and Silver

Robert Prechter, Chartered Market Technician, is the world’s foremost expert on and proponent of the deflationary
scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the
Crash and Elliott
Wave Principle
and editor of The
Elliott Wave Theorist
monthly market letter since 1979.