A money manager we follow recently declared that gold was not in a bull market. He had also declared some time ago that gold would never see $500. Now that we are through $500 he declared that it might go a bit over $500 but that it wouldn't hold. On that note he might be right for at least a short term top and trade to the downside but longer term we firmly believe that he will have to eat his words several times over. Of course he is not the only one who has been a gold bear over the course of the last few years. We were surprised in the recent issue of The Economist that they believe that gold "even at $500, it's still a barbarous relic" (The Economist - The little yellow god, December 3^rd-9^th, 2005).

But it is not only some money and pension fund managers along with The Economist that believes gold is a lost cause or at least not worthy of their attention . Short interest on the key Gold Bugs Index (HUI) stocks has been rising in recent months as the market has moved higher. As well the commercial long position reported on the Commitments of Traders (COT) was most recently at 22% off of major lows that are usually closer to 15% but above the previous reporting period of 19%.

Of course on the other side positive news abounds and headlines are hitting the papers and it is a constant topic on both ROBTV and CNBC. The HUI is currently 24% above its 200 day moving average and gold itself is 16% above its 200 day moving average. These spreads are not huge (the NASDAQ at its peak in 2000 was 54% above its 200 day moving average) but they are starting to get up there. So there is some fear that we are nearing a top or at least a temporary top.

First on performance we thought we would create a little table similar to what one sees for mutual fund performance. Periods covered are 1 month, 6 months, one year, three years, five years and ten years. We have compared Gold, Silver, HUI, S&P 500 and the NASDAQ. And let the chips fall where they may.

While clearly gold and gold stocks have not been the place to be on a buy and hold basis over the past decade (although silver has performed well) gold/silver and gold stocks emerge as clear overwhelming winners over the broader market over the past five years. And they are clear winners as well over the past month, six months, one year and three years. We are not quite sure what to tell the analyst that believes that gold/silver are not in bull markets. Still he is not alone as numerous money and pension fund managers are grossly underweight in gold/silver bullion and the precious metals stocks.

The recent surge in prices is, however, attracting considerable attention (and the articles and headlines). The funds, especially the hedge funds, are undoubtedly pouring in. But the major problem with the hedge funds is that they will leave at the first sign of trouble and exacerbate a downside move. As we noted above the short interest on the major HUI stocks has been rising steadily with the price rise over the past few months. This rising short interest in the HUI stocks is undoubtedly acting as a drag on the market as many wonder why the stocks are not soaring even as the gold prices hit 25 year highs.

Helping push gold higher is a surge in demand. An article on the front page of the Globe and Mail (This year, gold is the new green, Globe and Mail, December 8, 2005) outlines how Kitco Inc. the precious metals dealer was busy fielding a huge surge in calls. Kitco notes that gold is now emerging as the "fourth global currency". Indeed as we have noted over the past several weeks in numerous articles gold has broken out against the Euro, the Yen, the Pound, the Cdn$, the Aus$ and now gold has been rising even as the US$ is going up. In this kind of situation which currency would you rather hold?

Demand has surged globally particularly in India and China. In India jewellery demand has surged 50% in the first half of the year. Demand is also surging for gold as an investment as holdings in the Millennium BullionFund (www.bmsinc.ca, 905-474-1001) have surged upwards of 50% in recent months (Note: I am a director of BMS Inc. the manager of MBF Canada's only open ended mutual trust that invests solely in gold, silver and platinum bullion). As well the popularity of ETF's such as the NYSE traded GLD is increasing demand. On the other side mining production has fallen some 5% in the past year following years of small percentage cuts in production. With demand soaring and no new significant supply coming on the market it is making for the potential perfect storm. It won't come from the Central Banks as even if some European central banks sold gold it would be bought by Asian central banks (particularly China) who are trying to increase their reserves.

But it is not only gold that has been making new multi year highs. Silver has doubled from its lows some 5 years or so ago and we continue to see $10-$12 as the next major target. Copper and other commodities are also hitting record highs so it is no surprise to see the recent strong performance of the TSX Metals & Mining sub index. In the late 1990's we saw a bubble in the high tech/internet sector, the early part of the new century saw a housing bubble so we may be now seeing the beginning of the third and final leg the commodities bubble.

Are we approaching a top? Or do we still have much further to go. An excellent chart of the London PM Fixing for Gold on a monthly chart sent to me by my friend Dagmar suggests we have considerable to go in this rally. Indeed we are still in the early stages of a potential move to $1500 a few years out. We have taken out important resistance levels dating from the 1987 and 1981 highs and the triangle formed using the all-time highs near $850 in 1980. Targets are now visible in the current wave up that should take us to $850 and eventually to $1500 or higher.

Rising gold prices are, however, problematic for the monetary authorities. Since the world came off of the gold standard in 1971 and particularly since the current monetary inflation got underway in 1995 the world has been flooded with money. The intention of course was to end forever depressions and to have fiat currencies supplant gold as a currency. Trouble is it has caused all sorts of dislocations and dysfunctions that will have a period of reckoning. First all the money has to go somewhere (a world awash in liquidity) and it winds up creating the aforementioned bubbles. A commodity bubble at the end of the cycle therefore should not come as a surprise. But it is a bubble that still has considerable time to run just as we saw with the high tech/internet bubble and the housing bubble.

It also gives a false sense of security. With monetary inflation it has allowed debt to accumulate at an enormous rate. Your security financed by debt is an illusion that will for many have an ugly ending. When prices of the previous bubble collapses as we saw with the high tech/internet bubble and we will see with the housing bubble it leaves a lot of stranded debt. In the past year alone foreclosures in the US are up 35% and are sure to rise further in the coming year as we are firmly seeing signs that the housing bubble has topped out. Debt collapse is deflationary and that is the real problem for the monetary authorities as they try to stem the collapse. Inevitably they will be forced to flood the system with even more liquidity to stem any collapse. The longer you do this the bigger the dislocations and the more dysfunctional the market becomes.

There are dislocations in the global debt markets where the US racks up huge trade and budget deficits and has them financed by the rest of the world particularly Japan and China and their savings. But Japan with a stock market that is coming out of a long slumber and itself has been flooding its system with money over the years could see a shift as they decide it is better to invest their money at home rather than sending it to the US to finance their profligacy. The US has accumulated upwards of $5 trillion in debt from their annual trade deficits with the rest of the world. The US has done an excellent job of exporting their jobs to lower cost countries resulting in a gutted out manufacturing sector and the goods come back to the US cheaper creating the trade deficits. This also helps make the US's productivity growth look better as they slash jobs. There has been job growth but it is not necessarily all good jobs and much of it is going to low paying service industry jobs.

The monetary authorities focus on inflation and while the broader CPI has been rising they believe as long as the core rate is not growing they are keeping inflation under control. Trouble is the calculation of CPI itself is flawed using such things as owner's equivalent of rent to determine housing prices. It ignores the reality of sharply rising housing prices. With high paying jobs increasingly going over to low wage countries including IT jobs (recently I called the help desk for Norton (Symantec) and the assistance was provided by an IT help desk in India) that also helps keep the core rate of inflation down even as energy prices soar and the spill out from rising energy prices impacts the consumer.

Gold through $500 represents a challenge to the monetary authorities. It says to all that inflation is happening and that the economy and the potential for debt deflation are a problem. With the FOMC coming up next week we would not be surprised if they try to push gold down. The key for investors is to remember that the bullion market is now telling us that we are going to go higher and that any setback is temporary and a buying opportunity.