Dear Reader,

There’s a reason ordinary investors fear market “bubbles”… They simply get their timing wrong! The most carefully kept stock market and investment secret is you can earn fortunes from market bubbles, provided you jump clear before they explode...

A “bubble” is described as an economic cycle characterised by rapid price expansion (imagine blowing up a balloon) followed by an even swifter contraction (hit that balloon with a pin!) If you’ve been watching stock markets for a while you’ve probably traded through a good few bubbles already.

The 2008/9 sub-prime crisis was actually the “popping” end of a US housing bubble. House prices had increased in leaps and bounds thanks largely to unscrupulous lending practices by US banks. The bubble burst with such force it dragged the global economy down with it!

My favourite bubble is undoubtedly the “dotcom” bubble. In a period spanning 11 March 2000 to 9 March 2002 the US-based NASDAQ composite index shed 78% of its value. Having ballooned to 5046.86 points as tech crazy investor chased share prices higher it fizzled out at just 1114.11 points.

What happened? To understand bubbles you need to know a bit about investor behaviour. For the most part we get involved in the market to make money from something new or innovative. I reckon the dotcom bubble developed during a perfect storm for false value.

The Internet was fresh out of bubble wrap and clever marketers could get investors to part with thousands of dollars by simply including the worlds “web”, “internet” and “www” at frequent enough intervals on prospectuses. By 1995 there were already 18 million Internet users, with new users flocking to the technology at rates never seen before. The result was an unprecedented listing boom… Speculators were “betting the farm” on the New Economy!

In one year (1999) there were 457 new listings, mostly in the tech sector. And an unbelievable 117 of these listings doubled in value on listing day. In more normal times (2001) only 76 companies listed, without a single “one day” double.

Why am I telling you this? The magic in bubbles is they speed up the boom and bust cycle. You make money quickly during the expansion phase, and lose it quickly if you don’t get out soon enough. Right now I can think of two new bubbles you can ride to “super” profit...

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Not one, but two bubbles to stake your fortune on…

You see, there are two “bubbles” developing in the post sub-prime world. The first is an emerging market bubble. Countries like the BRICs (Brazil, Russia, India and China) and the so-called “next-11” will dominate world GDP growth tables over the next ten years.

These countries may be poor, but they’ve got enough people and land to grow exponentially. And they’re all hard at work trying to achieve the “holy grail” of economic growth – double-digit GDP!

South Africa and the rest of Africa fall into this emerging market block too. It’s great news for you and me because our retirement funds should grow nicely on the back of renewed Chinese interest in African resources. The equity portion of our long-term investment portfolios should grow nicely as the emerging market bubble inflates.

But if you’re after “super” profits you’ll be more interested in the second bubble – gold is showing signs of entering a “bubble” cycle right now.

Gold is going to go to $7 018 in the next seven years

The first time I heard this “promise” I nearly fell of my chair. I was sitting with a small group of stock market traders listening to one of South Africa’s top technical analysts, who topped his initial “bombshell” by saying gold could go even further, to $8 000 or even $10 000 an ounce!

His advice: “I’m buying up gold whenever the price dips – and keeping it for my retirement – and so should you!” Now I don’t like investing on a single guru’s say-so, so I set about finding out what other market experts thought about the precious metal.

Philip Klapwijk, chairman of metals consultancy GFMS is particularly bullish on the metal. “I think we could easily see gold spike above $1 300 before the year's out,” he said.

David Rosenberg, chief economist at Gluskin Sheff in Canada, said $3 000 an ounce was a conservative estimate – Peter Krauth, CEO at Global Resource Alert, reckoned the metal would hit $5 000 some time between 2012 and 2014 – Alf Field chose an upper target of between $5 000 and $10 000 – and US Gold Corporation chief executive, Rob McEwen, predicted $2 000 by the end of this year. There’s more...

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Invest directly in Gold or a gold miner – you choose

Harry Schultz – a popular US-based investment newsletter publisher – said gold would go to $6 000 an ounce soon. And he’s telling his clients to spread their portfolio equally across gold shares, physical gold and bonds – nothing else! Now I’d never go along with such a crazy plan, but I will do everything in my power to point you to the best possible “gold’ opportunities.

It seems the precious metal’s already on the move. As I type this gold is hungrily eyeing $1 300/ounce, with an outside chance of it surging to $2 000 by Christmas.

The next “trigger” for gold price appreciation is the return of developed-world inflation. The minute inflation begins accelerating in the US and Europe it will be like cutting the last restraining rope on the “gold” hot air balloon.

There are plenty of ways to latch on to this profit opportunity. If you’re the conservative type then I’d suggest adding gold-based exchange traded fund New Gold (JSE: GLD) to your portfolio.

If you prefer the exciting rush of investing in a small cap mining company then something like Pan African Resources (JSE: PAN) should do very nicely indeed. I’ve been punting this “gem” in the Red Hot Penny Shares “millionaire” portfolio for some time, and reckon it’s worth accumulating up to 120c/share, with a target of 200c over the next 24 months.

Let the profits roll,

Gareth Stokes

Analyst, Red Hot Penny Shares

Errors and Ommissions:  In Gary Booysen's MoneyMorning article of 22 September, Yonatan Rom did not in fact make the prediction quoted regarding the Gold price and MoneyMorning would like to apologise for this error.
 
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