Smart money

I keep seeing "bubble talk" on the price of gold, and perhaps we're due for a correction, but the bullish trend in precious metals will continue, imo. I'm not fighting the trend, even tho I took a little off the table.

John Paulson, David Einhorn, Paul Tudor Jones, Jim Rogers, and George Soros are all loading up on gold and gold equities. What's the common element? They're all billionaire hedge fund managers, who put their book where their mouths are.

The suckers in this play are selling grandma's jewelry to "Gold4Cash" outfits for 50 cents on the dollar, thinking they're getting a good deal. Scrap selling will eventually run dry, even as gold prices keep appreciating.

Staying with the supply side part of the equation, gold production peaked in 2000 and has steadily declined since. South Africa, once the world's largest producer (China is now the #1 producer), is now #4, and reserves are vastly over-reported.

Gold increases in price because supply growth is not keeping up with the increase in money supply. Gold's supply grows 2% a year, while the monetary base of dollars is growing at a much faster pace (15+%). The double-edged sword is that monetary easing also debases the USDollar, making gold even more attractive.

Let's be honest: gold and silver compete against the USDollar--and against every other major currency. A bet on gold is a bet against every central bank in the world with the ability to print currency. That's why they hoard it and that's why they hate gold bugs.

The downside of gold is that it doesn't earn interest or pay a dividend--it earns 0% interest. When interest rates are high, the demand for gold is low. But when interest rates are suppressed to near 0%, the flight to gold is justified, as no one wants to hold paper that is not earning a meaningful rate of return. To make matters worth, that same paper is losing value very week.

Do I think we are due for a correction? Perhaps, but the smart money (and more importantly, central banks themselves) are lining up on the long side of the trade, despite higher prices. As long as Congress and Obama continue to spend money they don't have (e.g. healthcare reform), I don't see any other alternative than Bernanke and Geithner stepping up the printing presses.

Just my opinion. See the normal disclaimers in the side bar.

Disclosure: Long gold mining shares.