Wednesday, March 10, 2010
The Paper Bubble
Talk of a Gold bubble over the past 6-9 months grows louder and louder. It is comical and a sign of desperation among those losing their grip on the levers of power and influence. I have never seen a bubble so heavily recognized and announced by the very institutional participants who are pouring all their money into it! Will Gold become a bubble? I think it may, which is why I own it. The break out over $1000/ounce last fall has certainly cleared the deck and made it a possibility.
But what is happening in Gold and what is going to happen in the near term future is a predictable consequence of fiscal and monetary policy. At this stage in time, Gold is simply a rational, undervalued and conservative investment. Cash is king during an economic depression. The problem is that our transactional currency is not real money, it is an illusion and the real bubble of the current cycle.
Why hold paper debt tickets of an insolvent private banking corporation? The non-federal and unconstitutional federal reserve bank is bankrupt. Their only saving grace is the ability to create more paper debt tickets at will and without supervision. It can be said that such an institution can't become insolvent. Ahh, now you understand what real moral hazard is.
The federal reserve banking cartel will destroy the United States if there is bigger profit in destroying it than saving it. If they have been offered a place in the promised land of the future by the supra-sovereign bank for internal settlements (BIS), the federal reserve would have no need to do the right thing for the people of America. In fact, they would want to do the opposite to ensure the destruction of the U.S. currency and force a one world currency. They would, in this scenario, be incentivized to be as reckless as possible with the value of the Dollar while using current Dollar holdings to buy up the real assets of the country (like, ummmm, perhaps claims on a boatload of real estate?).
Actions over the past decade would suggest that this is exactly what is happening, though it is mere conjecture on my part. If the American currency weren't headed for the dust bin of history, explain why the central banks of the world are turning to their nemesis for protection. In other words, if there is nothing wrong with our monetary system, why are China, India, Russia, Venezuela, Mauritius and Sri Lanka scrambling to buy Gold? If paper money is fine and it's just a U.S. Dollar problem, wouldn't these groups simply buy Euro or Yen?
Central paper fiat bankstaz HATE Gold. It is their nemesis. If there were a viable alternative to the U.S. Dollar, central banks wouldn't be buying Gold. Yes, it is herd behavior and yes, the two traditional most powerful Anglo banks of the world (i.e. UK and U.S.) sell and denigrate Gold whenever they can. But this is because they must, not because they want to! Granted, the hubris of these two banks in particular is awe-inspiring, but you have to protect the franchise, eh? Gold is a monetary reserve on the balance sheets of central banks according to their own accounting standards. Why diversify into a barbarous relic that is no longer important in our "modern" scam - oops, I mean modern monetary system?
Gold is exposing the one thing that the U.S. and UK central banks, particularly the former, can ill afford. That one thing is a lack of confidence. Funny how confidence is required when a monetary system is based on counterfeiting wealth.
Let's say I take on so much debt relative to my income that every investor with a pulse realizes I can't pay the money back. Then let's say that after this point, I quickly and exponentially expand that debt and pretend it's no big deal. What if I do this at a time when my income is declining rapidly? Think the value of my debt notes would increase or decrease to a rational investor?
Keynesian economics is a sick joke that in the end economically destroys the people living under it. When times are good and most asset classes are rising (except paper cash), it's no big deal to those not paying attention. But in the terminal phases of a fiat paper monetary system gone mad, the seams begin to split apart. The social fabric tears and trust disintegrates. Paper money requires trust to function.
Trust will continue to decline. Gold will reflect such a lack of trust during this economic depression. Gold is not in a bubble dynamic, it is a manifestation of rational behavior to protect savings and a conservative investment for the current environment. If Gold gets into a bubble dynamic, it will be multiples of the current price.
The real bubble is in paper and our current monetary system. The insanity coming from every pore of those running our system is beyond what the most potent tranquilizer can manage. It is terminal psychosis that must continue until the train goes over the edge of the cliff. Trying to fight it at this stage is like trying to change some one's mind about abortion or religion. For make no mistake about it, our paper fiat monetary system is a religion. A false one. The only thing new is the global nature of the current paper church, which ensures that any Gold bubble that develops this time around will make the 1970s Gold bull run look boring.
And no, a Gold standard is not the answer over the longer term despite it being much preferable to our current system. Why? Because the government promise inherent in a Gold standard will be broken at the first sign of major trouble, just as the Gold standard promises of the world were broken in the 1930s. This is a replay of the secular credit contraction of the 1930s, but no two periods in history are identical. A deflationary collapse is being fought with the only weapon that has a chance of succeeding - intentional hyperinflation of the money supply.
The natural and expected deflationary collapse in our economy and the intentional hyperinflation of the money supply to offset it create two powerful and opposing economic forces. But both forces have one important construct in common - they create and foster a lack of confidence. A lack of confidence in the economy due to asset price deflation and a lack of confidence in the anti-common sense policies of the governments and central bankstaz to revive the economy with exponential public debt creation and monetization of that debt.
Gold is a vote of no confidence. It is a recognition of the real bubble - the paper bubble. When debt tickets rain from the Washington sky in biblical proportions, what does their value become? Deflationists argue their value increases because the money doesn't reach the people who need it but rather is given to bankers to hoard and politicians to waste and line their pockets. This is actually quite true in a relative sense and exposes how rapidly our asset bubbles are collapsing . Dollars can buy more real estate and more common stock than they could a few years ago. Funny how market crashes work that way.
But Gold is at all-time highs over $1000/ounce and the deflationary collapse has already begun. Gold can buy more U.S. Dollars than it could a few years ago. Those calling for Gold's imminent collapse unfortunately have been so wrong for so long that there is no point in them trying to save face at this point. Gold will of course outperform paper U.S. Dollars since there is a lack of confidence in the Dollar worldwide.
But are the inflationists really correct since most commodities are well off their highs of 2008? Suffice it to say I have come to realize that the inflation-deflation debate is like the democrat-republican debate. Full of idealogical demagoguery but of little utility in its "pick a side" form to the average voter/investor. Inflation and deflation co-exist in our current environment.
There is almost always monetary inflation in a paper fiat money system. But where does that monetary inflation go? This is the real question for investors. We are in a secular Gold bull cycle that has just now reached the institutional tipping point but hasn't yet reached the public tipping point. In other words, the biggest and easiest gains lie ahead for the Gold price, not behind.
It is true that the U.S. Dollar and government bonds could outperform the stock market over the next few years. Is this really a stretch to believe when the economy is in shambles? But holding U.S. Dollars and government bonds is like holding a hot potato. Because if you hold them even one day too long, they may have their value cut in half (or more) overnight.
What do I mean? Well, I suppose nothing is certain in life, but the U.S. government devalued the currency by 69% in 1934 and by who knows how much in 1971. In other words, the last two times debt overwhelmed the system. It's been about 40 years and here we are again, so "it's just time" for another intentional devaluation as Martin Armstrong would say. Gold is real money that cannot be defiled by apparatchik decree. Trust me when I tell you that this is an important characteristic of a cash equivalent holding during the current portion of our economic cycle! Those who think we cannot devalue the Dollar because everyone else in the world uses paper currency are naive and lack creativity. Not that I expect paperbugs to get it...
The lack of confidence in our Dollar is nurtured by our fiscal and monetary policies. These policies are designed to destroy the value of our currency so that a new inflationary boom can begin and bad bank debts can be bailed out. These policies are reckless, callous and designed to benefit the few at the expense of the many, but such policies will be continued whether you like them or not and whether they work or not. When there are no more asset classes left to inflate due to economic weakness and debt overload, people in aggregate simply look to hunker down and protect the value of what they've got left. This is why Gold will outperform all major asset classes including paper cash over the next few years regardless of whether you think we are headed for deflation, hyperinflation, or an intermediate mix of Goldilocks-like muddle through.
This is also why the Dow to Gold ratio will reach 2 before the Gold bull market is over and why this ratio may well go below 1 this cycle. And as long as we allow a private bank corporation to control the issue of our currency and artificially influence interest rates, the real bubble will be in paper money, not Gold. Those who get burned by the U.S. Dollar will rightly curse themselves, as they will have been worrying about a phantom bubble in Gold while acting as the retail suckers at the peak of the real bubble - paper.