Are precious metals going to fly higher or are they in a bubble?

Are Precious metals going to fly higher or are they in a bubble that Will pop?

In our financial research, we search far and wide for data that helps to understand the investment world and beyond. In fact, since we launched our first website in 1999, we have always tried to educate our customers and give them useful information – in an effort to help them understand the world of bullion investments.  

Most recently, our CEO, Lawrence Chard, highlighted an interesting chart he had found about transportation. While this may seem far removed from gold investment, further research into its meaning, illustrated a potential angle on the current price rises seen across gold, silver and platinum. And it seems while the world often cites geo-political turmoil and inflation as key influencers on the gold price, human behaviours and the psychology of business markets is also something to seriously consider when investing.   

In this article, we attempt to explain this idea further and perhaps, consider an important question. Are the precious metals prices going to fly much higher – or are they in a bubble that will crash?  

To further understand and apply some theory t the current demand for gold and other precious metals, we need to try and educate ourselves on a term called ‘financial mania’.  We will need this as we move through this article. 

The Anatomy of Excess: Understanding Financial Mania 

Finance – like precious metal investments - is often presented as a rational field, driven by supply, demand, and intrinsic value. Yet, history has shown us time and again that when human psychology takes the wheel, markets can lose all semblance of logic. People buy while the price is rising and keep buying. This is seen on the stock market regularly, particularly with novice investors.  

These periods of intense, herd-driven speculation are known as financial manias, or asset bubbles. They are characterised by explosive price growth fuelled by emotion rather than fundamentals, and they inevitably end in spectacular collapse. 

But if you want to really understand why markets occasionally behave wildly—from tulip bulbs in the 17th century to technology stocks in the 1990s—you must understand the dynamics of financial mania, to consider whether gold and silver is in a bubble right now, awaiting a pop!   

What is a Financial Mania? 

A financial mania is an extreme deviation from rational market behaviour, where investors pile into a specific asset, driving prices to unsustainable, sky-high levels.  

Recently, silver has seen major interest from investors, and it has literally sold out. Whether this could be considered a bubble is open to discussion. However, with recent queues to get to the Royal Mint website, apparently to purchase silver, it does merit some thought.  

What is a mania in simple terms? 

At its core, a mania is an emotional phenomenon. It requires two main psychological ingredients to thrive: 

1. Greed: The intense desire for quick, outsized returns. 
2. Fear of Missing Out (FOMO): The powerful psychological pressure to participate because everyone else seems to be getting rich. 

In a true mania, the price of an asset becomes completely decoupled from its underlying value. Valuation metrics—like earnings, revenue, or utility—are ignored, replaced by the belief that prices will simply keep going up forever. Economists often refer to this phenomenon as "irrational exuberance." 

The Four Stages of a Classic Bubble 

While every mania is unique in its specific asset and time period, they almost always follow a recognisable four-stage psychological progression: 

1. Displacement (The Seed) 

Every bubble starts with a "displacement"—a fundamental change or even an innovation that creates new economic opportunities. This could be a new technology (like internet many years ago), a shift in monetary policy, or the discovery of a new market, or in this case, global uncertainty amongst other elements for gold! This initial interest (and market factors) offers genuinely high returns, justifying the initial rise in asset prices. This is the seed.  

2. The Boom (The Influx) 

As the initial returns prove spectacular, the market enters the boom phase. More and more investors initially the rational ones, jump in. Credit expands rapidly, and banks and financial institutions become willing to lend money for speculative purposes (when applied to investments for innovation). Prices climb steadily, reinforcing the belief that the asset is a guaranteed winner. In recent months, we have seen gold hitting high after high and increased demand – one of the reasons we have got so busy!  

3. Euphoria (The Peak) 

This is the phase of peak irrationality. The public, often including people who have never invested before, joins the fray. Market news dominates dinner-table conversations. Skeptics are dismissed as ignorant. Martin Lewis recommends gold! The $4,000 price is hit by gold and reported by the BBC. And so it goes on. 

During euphoria: 

• The phrase "This time is different" becomes the stance people take when rationalising the price rise.  
• The price can rise quickly, sometimes in a day or two and it continues to rise.  
• Speculation replaces investment—people buy simply because they believe they can sell later at a profit. They are not looking at live precious metals price charts, beyond the point of the line moving upwards! 

However, this phase is unsustainable, as the asset's price begins existing purely on the expectation of further price increases. Look out for our next article on backwardation and silver to explain this point in more detail.  

4. Panic and Crash (The Burst) 

The mania ends when something, often a small, unexpected trigger, causes a few investors to lose confidence. They begin to sell, and the price dips. This small dip shatters the fragile confidence of the market. 

Once selling begins, the boom turns into a panic. Everyone tries to exit simultaneously, but there are no buyers left. The liquidity evaporates, and prices plummet back toward their intrinsic value (or often, far below it). Fortunes are destroyed, institutions collapse, and the regulatory reaction begins. 

This is of course the dystopian version, but it is something to consider. And while gold is not likely to suddenly be worth zero, it is something to think about when you invest in more volatile markets like silver.  

Historical Examples of Financial Mania 

History is littered with examples of manias, proving that human psychology is the greatest constant in market cycles. 

1. The Dutch Tulip Mania (1634–1637) 

Often cited as the first major financial bubble, this mania centred on the trading of tulip bulbs in the Netherlands. Certain rare bulbs became status symbols, and prices soared. At the peak, the rarest Semper Augustus tulip could trade for more than the cost of a house. 

The Crash: In February 1637, the sudden price drop triggered widespread panic. Within weeks, the value of tulip contracts fell to a fraction of their peak, leaving many investors bankrupt and the Dutch government struggling to stabilise the economy. 

2. The South Sea Bubble (1720) 

Centred in England, this involved the South Sea Company, which was granted a monopoly on trade with South America. The company took on a massive amount of British national debt in exchange for stock. The hype surrounding future profits drove the stock price up tenfold in less than a year. 

The Crash: When the reality of the company's meagre trading profits became known, the stock price collapsed. The fallout ruined thousands of investors and severely damaged the credibility of the London financial establishment. 

3. The Dot-Com Bubble (Late 1990s) 

Fuelled by the promise of the internet, investors poured money into any company with a ".com" attached to its name, regardless of whether it had profits, revenue, or even a viable business model. Companies were valued in the billions based purely on "eyeballs" and potential. 

The Crash: Beginning in 2000, investors realised that many of these tech companies would never earn the revenues necessary to justify their valuations. The Nasdaq index lost nearly 78% of its value over the next two years. 

The Lessons for Today's Investor 

While the assets change—from tulips to railway stocks to cryptocurrencies—the engine driving the mania remains the same: human nature. And that is a factor that no gold or silver investor can ignore.  

In an era of instant communication and social media-driven investment, the speed and intensity of modern manias can be amplified dramatically. Events like the 2008 housing bubble or the extreme volatility seen in certain "meme stocks" demonstrate that the classic cycle is alive and well. 

How to Protect Yourself from Mania 

The antidote to mania is disciplined, rational thinking. As an investor, the key is to understand that you cannot profit indefinitely from irrationality. 

1. Know the Fundamentals: Always base your investment decisions on the intrinsic value of an asset (its ability to generate future returns), not on the momentum of its price.  
2. Beware of Leverage: Manias thrive on borrowed money. If you are using excessive debt to participate in a rapidly rising market, you risk liquidation when the inevitable correction occurs. 
3. Ignore the Noise: When the media, friends, and strangers online are all convinced that an instant fortune is available, it is usually time to step back. True long-term wealth is built slowly, not overnight. 

Financial manias are a powerful reminder that while markets may be driven by logic over the long term, they are ruled by psychology in the short term. The smartest investors are those who recognise the cycle and avoid getting swept up in the crowd's destructive enthusiasm. 

Arguments for a Potential "Bubble" or Overheated Trend in Gold 

When discussing trend bubbles, certain characteristics often emerge that warrant caution.  

Arguments for a Sustainable Surge (Not a Bubble) 

On the flip side, there are compelling arguments suggesting that the current price of gold is a rational response to prevailing global conditions: 

Conclusion: A Blend of Factors, Not a Clear-Cut Bubble (Yet) 

Ultimately, determining whether the current price of gold represents a bubble is complex. It's rarely a black-and-white situation in real-time. 

While there are elements of rapid appreciation and potential momentum trading that could give pause, the surge is also underpinned by fundamental and persistent global realities: entrenched geopolitical risks, ongoing inflation concerns, and significant institutional buying. 

Instead of a pure speculative bubble, the current trend appears to be a robust rally driven by a confluence of legitimate concerns and strategic demand. However, all assets, including gold, are subject to corrections, and a temporary pullback after such a strong run would not be unexpected or necessarily indicative of a burst bubble. 

For investors, the key is to understand your own reasons for holding gold and silver. Is it for diversification, as an inflation hedge, or as a safe haven against specific risks? Informed decision-making, rather than succumbing to FOMO, remains paramount in navigating the intriguing trends of the gold market. 

What are your thoughts? Do you see a future that’s full of gold and silver or is the bubble going to burst at any point? 

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