Montreal, Canada

Gold is heading the way of the NASDAQ in the 1990s and the Nikkei in the 1980s.

The chief institutional strategist at Canada’s biggest bank, Royal Bank of Canada (RBC), believes gold prices are probably heading into mania territory on the road to $3,800 an ounce.

Quoted in The Globe & Mail (my favorite Canadian business daily), Myles Zyblock at RBC projects big moves lie ahead for the gold price, possibly a super-spike. “Gold is morphing into a ‘no lose’ asset class, setting the stage for another bubble. The real fireworks might still be several quarters away.”

According to Zyblock, three characteristics of a mania apply to gold currently. They include an asset that’s hard to value; a sense that potential gains are unlimited and an opportunity for large and small investors alike to be buyers.

The only roadblocks to his forecast are higher U.S. interest rates, which remains an unlikely event in an ongoing environment of debt retrenchment at the consumer level, an ongoing bear market in housing coupled by a foreclosures fiasco, and weak employment growth. Historically, the Fed has never hiked lending rates amid a weak jobs market.

I would have to agree with Mr. Zyblock about gold heading into “bubble” territory at some stage.

Since 2000, the gold bull market has been one of tempered enthusiasm with sizable calendar year gains in every year but nothing spectacular compared to palladium or tin over the last 12 months – more than doubling in value. This has not been a mind-blowing bull market; instead, it’s been a quiet or stealth secular rally within the confines of a steadily appreciating trend.

Yet it would seem plausible that by the time gold fetches prices far and above anyone’s imagination, which I believe is the possible outcome, the Fed and other governments will have already worked on introducing some sort of new exchange rate mechanism to stabilize the U.S. dollar. This might also coincide with a fully convertible Chinese currency, which would be bearish for the dollar. At that point, investors should start unloading bullion. That’s tomorrow’s story and tomorrow is a long way off.

I suspect that as we continue to rally on the road to $2,500, or $3,800 for that matter, the Chinese will morph into the biggest single source of demand for bullion as they build their reserves the same way previous great global powers did in the 20th and 19th centuries.

China doesn’t need all of these crummy dollars and EUR. China is following the same path to economic prowess as her predecessors. The events played out in the United States from 1913 to 1971 and Great Britain from approximately 1750 to 1900 serve as a strong model for global investors. China will accumulate much more gold.

I’ll be en route to The Sovereign Society’s Offshore Academy in Cabo San Lucas, Mexico on Monday. I’ll be back on Monday, November 8.