OECD Warns Fed, BOJ, ECB of Asset Bubbles, “Risks to Financial Stability,” Pinpoints US Stocks & Real Estate

http://wolfstreet.com/2016/09/21/oecd-warns-fed-boj-ecb-of-asset-bubbles-risks-to-financial-stability-pinpoints-us-stocks-real-estate/

Financial instability risks are rising, including from exceptionally low interest rates and their effects on financial assets and real estate prices.”

Low interest rates underpin widespread and substantial increases in asset prices, both internationally and across asset classes, which increases the likelihood and vulnerability of a sharp correction in asset prices.

A reassessment in financial markets of interest rates could result in substantial re-pricing of assets and heighten financial volatility even if interest rates were to remain below long-term averages.

This is as close to code speak by financial authorities that markets are about to crash.

As Global Asset Bubbles Implode, Synthetic Economies To Enter Monstrous Worldwide Depression

http://kingworldnews.com/as-global-asset-bubbles-implode-synthetic-economies-to-enter-monstrous-worldwide-depression/

Fed Uberdove Admits Policy Causes Asset Bubbles (And They're Here To Stay) - Full Speech

So the blogosphere was demonized for being crackpots when we alleged the Fed was creating asset bubbles and collapses with QE and zero interest rate policies.

Well, now, the Fed itself admits guilt.  Again, to my critics:  too bad for you.

http://www.zerohedge.com/news/2013-09-09/fed-uberdove-admits-policy-causes-asset-bubbles-and-theyre-here-stay

Asset price bubbles: What are the causes, consequences, and public policy options?

The Chicago Fed, led by Charles Evans, is probably the most dovish of the 12 regional Fed branches.  In other words, not only does Evans want QE, he wants much more of it.  Here is their latest full write up on asset bubbles, and I included an excerpt from their summary.

http://chicagofed.org/digital_assets/publications/chicago_fed_letter/2012/cflnovember2012_304.pdf

"We still do not have a good definition of an asset bubble; and we still do not know how to identify them, what causes them to grow or burst, or what their welfare implications are."

 WTF?  They don't know how to identify an asset bubble--yet, they insist perpetual printing money will solve it?  Did it occur to them that endless printing of more dollars CAUSES asset bubbles to form in the first place?  Apparently, a PhD in Economics from the University of Chicago causes brain paralysis.

The Punchline In His Own Words: Bernanke Advocates Blowing Asset Bubbles As The Antidote To Depression

http://www.zerohedge.com/news/punchline-his-own-words-bernanke-advocates-blowing-asset-bubbles-antidote-depression

Are precious metals currently bubble assets?

Gold and silver are asset classes which have been in decade-long secular bull markets.  Currently, gold is approaching $1800 an ounce, approximately 6% below it's all-time high, while silver is approximately $42 an ounce, 20% below it's all-time high.  Here are my opinions on where they are headed.

Mining shares have underperformed the metals themselves for 3 years, but I expect that to change soon--it may already be happening.  In fact, I think the shares may start to slingshot up past gold and silver prices.  A few reasons:

1) operational leverage.  For example, when the cost of digging up gold for a miner is $500, and the price of gold is $900, its profit is $400/oz.  When the price of gold is $1800, holders of physical gold double their returns, as the price has doubled from $900 to $1800.

However, a mining company's profit soars from $400/oz. to $1300/oz. ($1800 - $500).  That's operational leverage.  Of course, when gold declines, the shares of the mining company would theoretically have a steeper decline.  Leverage works both ways.

2) The above calculation assumes input costs are similar (energy prices have actually decreased recently, labor costs are fairly constant in a soft job market, and water costs have stabilized), and therefore profits for the mining company should more than triple, which theoretically should indicate the share price of the company should also triple.  Therefore, as oil prices decline, more top line revenue (from a higher gold price) should flow directly to the bottom line, as input costs decline.  More revenue and reduced input costs are a nice combination for company profits, which should reflect in higher share prices.

3) Smart hedge funds have been playing the long side of gold and silver (as opposed to the bullion banks who are permanently short selling gold and silver).  The hedge funds have also hedged their long positions in the precious metals by shorting the mining companies.  That's why mining shares have underperformed relative to the metals.  But as with any suppression scheme, the gravy training never lasts forever (e.g. carry trade of foreign currencies like the yen, Swiss franc, Aussie dollars), so the really smart ones exit the trade before it reverses.

Also, as equities overall collapse, and the miners have recently shown resilience by maintaining and even rising against the overall market decline, other institutional investors will soon take notice and play the long side of the mining companies.  Institutional investors are always comparing their performance relative to their peers, quarter by quarter.  Many will notice the few who have outperformed due to their high allocation to precious metals.  They in turn will initiate or add their exposure to the precious metals sector.

This alone will cause mining shares to rise.  The rise will be even more explosive as quarterly earnings reports come in higher than consensus estimates.  In other words, the mining sector will surprise on the upside, which should drive even more institutional and retail investors to shift into the lightly-covered mining equities.  After all, every major bank follows the financials, technology, industrial, consumer, transport, energy sectors, etc., but very few are overweight precious metals coverage.  Gold has had a sustained, but orderly decade-long rally, but the banks still treat that sector as if it just experienced its worst performance, when it tanked between 1980 and 2001.  The financial pundits and mainstream media still treat gold like the black plague, since they all know gold is in a "bubble".

That is slowly changing, as hedge funds and banks in London are beefing up their precious metals analyst teams.  Unless precious metals completely collapse from these levels, initiating or adding to current mining exposure could be a good call heading into the fall and winter--historically a seasonally strong period for the precious metals sector.  The smart money is already in, the BIG money comes next.  The dumb money comes last.

Ask yourself this.  Where were all the bubble callers for Nasdaq stocks in 1999, or in real estate in 2005?  They were few to be found, as the consensus believed high-tech stocks could never plunge, or that US real estate could never decline.  To suggest otherwise made you unpopular and the target for ridicule.  There was a manic rush into internet stocks, and bidding wars on secondary homes in sunshine states.  THAT is a sign of a bubble--a frenzied mania of too many buyers. 

By contrast, the rise in gold and silver has been somewhat orderly, with light media coverage--despite gold climbing in price each and every year since 2001, setting new all-time highs along the way.  Imagine if the Dow Jones achieved that with regularity--there would be headlines splashed across every major media outlet.  The anti-gold media aim to maintain the banking status quo, with sponsorship from the government and central banking cartel.

Gold has not reached its mania stage--yet.  The fact that every analyst on CNBC, Bloomberg or the average Joe on the street thinks gold is in a bubble tells me it's nowhere near a top.  In other words, the "experts" and sheep will be wrong again.  They're just angry they missed this rally for the last 10 years, and are talking their book.

I've been pounding the table for almost 3 years about buying gold and silver, and frankly, I've been on the right side of the trade.  The Ivy League, Nobel Laureate Keynesian economists have been completely wrong.  I started my coin collection as a kid in the 1970's.  I bought gold jewelry as a tourist in Asia in 1998 and 2000--that's just the thing to do when visiting Asia--buying 24 K pure gold.  I could be labeled a gold bug, but that's not entirely accurate.  Between 1980 and 1999, gold was the worst-performing asset class.  Stocks, real estate, and even bonds were the assets to own.  But since 2000, precious metals have far outperformed, on a nominal basis, as well as inflation-adjusted.  Asset classes are cyclical in nature--there's a time to buy them, and there's a time to sell them.  I don't fall in love with any particular asset class.  But when there is financial distress, and when market participants distrust paper currencies, gold and silver will have their place as safe havens and alternative currencies.

Bubbles burst when everybody and his stockbroker brother-in-law owns a certain asset--everybody is "all in", so there are no more bullish buyers left.  This never ends well, as the bubble asset has become extremely "overbought"--there are no buyers left and only potential sellers.  In other words, you'll know a bubble is about to crash when your shoeshine boy gives you stock advice, or the bartender gives advice on internet stocks (true story, it happened to me in a bar in Portland in 1999), or all your friends tell you how to flip desert condos.  Those are signs you need to exit before everybody else does.

But when everybody says we're in a bubble, we are not in a bubble.  This rally in gold still has legs--lots of it.  You want evidence?

I had read last year that only 3% of Americans own gold.  Which means it's an under-appreciated asset--at least among Americans (it is not under-appreciated among Asians, middle eastern oil sheiks, the drug cartel, or Swiss bankers.  They are all accumulating).

But since we live in America, and due to my incessant curiosity, I decided to take my own ad hoc survey, which is continuing.  I have asked friends, family, colleagues, total strangers at airports, restaurants, hotels, etc.  Of the 217 people (and counting) I have asked, exactly 9 Americans own gold.  Most give me a blank stare, and have no idea why I would ask them that, much less what form the gold comes in, how or where to buy it, etc. (like many of you who have asked me).  Many can't even begin to ask me cogent questions, like "should I buy mining shares, bars, coins, where do I store it," etc.  When prompted, the average person thinks I'm odd, or at least off-center for even asking them about something that has no relevance in their lives.  As usual, and they will find out the hard way; their action or inaction may end up having THE most relevance in their lives.

Having said that, it's the older crowd that is the most clueless, as we've been brainwashed for so long that gold is a barbaric relic, and that the only way to build wealth and prosperity is through accumulating USDollars.  Fair enough, it's worked very well for many, but then one has to explain why the USDollar has lost 90% of its value in the last 40 years.  Much of that wealth is and will be proven to be illusory when real rates of inflation are factored in (as opposed to fictitious CPI data).

It's been the younger generation that is finally opening up to the concept that the USDollar is being destroyed, and that to maintain purchasing power, one needs to hold tangible assets.  Problem is, most young people have no savings to speak of, so even if they are open to buying gold and silver as protection against devaluation, most don't own any, either.  That's why I don't ask if they think gold and silver are good hedges against currency devaluation.  I specifically ask people if they OWN any.  That usually thins the herd out considerably.

Conclusion?  Gold and silver's advances still have a long way to go.  When there is a mad dash by the masses lining up around the block of the local coin dealer, then I would rethink my investment thesis.  And those in line will be looking to BUY gold and silver, not selling it.  In a mania, buyers usually buy out of fear or greed.  With gold, buyers will be driven by BOTH fear and greed.  That's why it will be the mother of all manias, in my opinion.

Unfortunately for the average person, that's when the bubble will burst, because by then, prices will be much higher than they are today.  And that's the best-case scenario--that the bubble in gold will burst! I WANT gold prices to decline, because that would mean trust in our global financial system has returned, that trade imbalances are mitigated, and fiscal deficits are vanquished.  The gold bubble will burst if/when all developed countries in Asia, Europe and the US will get their fiscal house in order, when stocks and real estate return to levels where they make economic sense...when the concept of sound money returns, and austerity, savings, and investment are rewarded--not punished by artificially low yields.  This also means letting zombie banks and reckless countries collapse.  Bad loans must be written down, with both borrowers and creditors taking a hit instead of being bailed out.  Of course, this will never happen because politicians have to answer to their entitled constituents, who demand something for nothing.  Which means the bailout mentality will continue until it can't continue anymore.  Bailouts entail ginning up the printing press, which is by definition, inflationary--despite denials by the Keynesians who only point to their sacred, but utterly fictitious CPI data.  And of course bad debtors will default anyway, only later and under much worse conditions.

Where does this lead us?  If that's the best-case scenario, what's my worst-case scenario?  The answer is gold and silver will be SPENT in barter, not sold for a profit.  Because in that financial Armageddon scenario, the USDollar would have collapsed and we'd be in an apocalyptic hyperinflation, at which point, you'd be suicidal to exchange your gold and silver for USDollars (or more correctly, Federal Reserve Notes--read the wording).  Why would you trade in a tangible asset for worthless paper?

There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.

– Ludwig von Mises

“The few who understand the system will either be so interested in its profits or be so dependent upon its favors that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.” - The Rothschild brothers of London writing to associates in New York, 1863.

“Let me issue and control a nation’s money and I care not who writes the laws.” - Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild.

Let's talk bubbles

Many pundits and experts completely missed the decade-long bull market in gold and silver, so they are now declaring a bubble in precious metals (it's interesting that they now consider themselves experts in asset bubbles, considering they completely missed the bubbles in internet stocks and real estate).

Let's talk bubbles.  The US national debt ceiling has already been raised 92 times, on the eve of it being raised again.  It is baked in.  The first debt ceiling was $45 billion.  It is now $14.277 trillion, an INCREASE OF 31,627%!

Gold and silver are not in bubble territory, in my opinion.  The bubble is forming in US Treasury debt--and the USDollar.  Hold on to cash, and you're losing purchasing power with each additional dollar the US Treasury prints.  And they are printing trillions, there's no mistaking that.

Ben Bernanke on 60 Minutes: Doesn't rule out QE3

http://finance.yahoo.com/news/Ben-Bernanke-on-60-Minutes-cnnm-1490415534.html?x=0

Federal Reserve Chairman Ben Bernanke this Sunday will make his second appearance on 60 Minutes, defending the central bank's controversial $600 billion bond buying program.

And he doesn't rule out the possibility that more could be on the way.

"He explains why the Fed announced its intention to buy $600 billion in Treasury securities, defending against charges the move will lead to inflation and not ruling out the purchase of more," CBS said Friday.

The Fed's latest move would mark the central bank's second round of quantitative easing since the financial crisis in the fall of 2008. Nicknamed QE2, it is meant to stimulate the economy by keeping interest rates low and encouraging consumers to spend more and businesses to create jobs.

The plan has drawn a major backlash from both conservatives and global leaders. Critics argue the policy of low interest rates will artificially devalue the dollar, and feed long-term inflation and asset bubbles.

Keynesian policies are dooming the world economy

...and causing asset bubbles in emerging countries and commodity markets.



http://www.youtube.com/watch?v=qa3BiujaI3M&feature=player_embedded

'Gold is the best asset class to be in'

I generally agree with this article, with the exception of the last sentence, although as usual, the mainstream investment analysts have the price targets all wrong. They will be proven to be conservative--again, in my humble opinion.

Regarding the last sentence in the article, there are absolutely counterparty risks with owning gold and silver ETF's, specifically GLD and SLV. Read the documents before investing.

http://www.telegraph.co.uk/finance/personalfinance/investing/gold/7995084/Gold-is-the-best-asset-class-to-be-in.html

The trouble with chasing performance is that you often join the party too late. Yet gold continues to defy the odds and if the great and the good of the investment world are to be believed, the gold price has further to go.

Last week, the analyst rated the most accurate forecaster of the gold price said the precious metal would keep rising.

"You can't mine gold," say nervous investors who fear that the massive printing of money by central banks under the guise of quantitative easing can only lead to runaway inflation. Sceptics of gold as an investment point to the costs of owning it and the fact that it produces no income.

Finding an analyst who is bearish on gold is a tough task; most appear to believe that gold is a worthy asset, not least because of the continued economic uncertainty. But four years ago The Sunday Telegraph found one. Nick Goodwin, a much quoted South African mining analyst, warned people against jumping on the bandwagon when the price stood at $600 an ounce.

He said: "I have been following gold for 30 years and gold is a bitch. Why weren't people buying gold when it was $250 but want to buy it at $600? Gold has had a hell of run and it needs to take a breather." Mr Goodwin was proved mightily wrong and today the rationale for investing on gold stands firm.

Mr Hitzfeld said further increases in the price were "preprogrammed". He said factors exerting upward pressure were renewed fears among investors sparked by recent loosening of monetary policy by the US Federal Reserve and reforms in the Chinese market that gave investors there greater access to the metal.

"The Chinese government has encouraged consumers to invest in gold, and with great success. Chinese demand will now increasingly be felt on the global markets," Mr Hitzfeld said.

Although China is now the world's largest gold producer, this production would be insufficient to meet domestic demand, so China would increasingly import gold, draining supply from the rest of the world and putting upward pressure on the price.

The Chinese government's gold reserves have also risen sharply and there is scope for further increases, as they account for just 1.7pc of foreign exchange reserves, Mr Hitzfeld said.

Analysts from ANZ, the Australia and New Zealand banking group, agreed. Describing gold as "the best asset class to be in", the analysts, Mark Pervan, Natalie Robertson and Andrew McManus, said: "Gold has been the strongest performing and least volatile major commodity and financial asset class in the past 10 years – we expect this trend to continue.

"We see more upside for gold prices as the key drivers of a safe-haven and currency-hedge demand are joined by the emergence of strong demand from China and India.

The issue for investors who have yet to invest in gold is whether it is too late. Mr Soros may be a gold bull at the moment, but he still has his reservations. He said in January: "When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold."

I left out analyst price targets by design, as they are meaningless. I also left out the vehicles on how to own gold--I highly recommend reading the whole article. The article doesn't mention gold- and silver-related assets like mining shares.

And this is the last sentence I disagree with. Under normal market conditions, ETF's are good for tracking physical spot prices. But when markets aren't properly functioning in an orderly manner (which is one of the primary reasons for possessing physical bullion in the first place), the paper contracts of futures markets and ETF's could decouple from the spot price if there is a run on physical inventory. In other words, there are multiple claims on the same ounce of gold as they are not 100% backed by inventory.

Alternatively, follow Mr Soros and invest via an ETF – "physically backed" ones that own actual gold should be the safest.

See disclaimers in the side bar.

Disclosure: long gold and silver, long gold and silver mining shares.

The last hope

http://thedailygold.com/chartstechnicals/gold-gold-stocks-are-the-last-hope-for-most/?p=3799/

Tell this to a baby boomer or a middle aged person and they would be quite skeptical. Their neighborhood financial advisor or planner doesn’t advocate Gold. It is too dangerous. It could drop to $500. Gold stocks? Hell no! After failing to get you out of stocks not once but twice in the last ten years, your advisor tells you its time to play it safe. You need to save more.

As we should know by now, when it comes to the capital markets, conventional advice is eventually deadly. It identifies trends too late and fails to warn when risk increases and reward diminishes. However, most people would rather feel more comfortable than be a contrarian. Most people are too weak minded to find the answers, which usually oppose the herd.

Look at the capital markets today and the trends are clear. With global growth likely to remain low to stagnant for quite some time, stocks and commodities will not help your portfolio. Treasury bonds are performing well but the threat of severe inflation and sovereign bankruptcy looms. Precious metals are the only winner, yet the herd doesn’t see it that way. To them, the bull market in precious metals isn’t even a bull market. It is an aberration. It is a mistake.

The vast majority looks at the 1980s and 1990s as the norm. This is especially true of the financial industry. They don’t make any money from Gold and Silver so they don’t pay attention to it. It is only a nuisance.

It is interesting how much has changed. Fifty or sixty years ago you were supposed to have 10% invested in Gold and that was regardless of market conditions. Today, the mainstream advisors and analysts that like and recommend Gold, own less than 10%. They like it but they are afraid of it. It reminds me of a quote: The philosophies of one age have become the absurdities of the next.

Most people look at the last 30 years as the norm, when the norm was the 170 years before that. Monetary systems are restructured several times per century. It’s nothing new. A monetary system without an anchor will ultimately fail. The greatest generation and their forefathers knew this and owned Gold. It paid off in their time. Those with a long view of history know that the real risk is the current monetary system and not Gold/Silver. Every fiat currency in history has failed. Is it doom and gloom to expect the current monetary system to fail? No, its just prudence and foresight.

Now that we’ve established this let’s refute the bubble calls. Because of the recent collapse in so many markets and industries (technology, internet, homebuilding, mortgage finance, banking, oil) investing professionals and the public are now quite wary of any market that rises materially. Most will miss the coming explosion in precious metals because they are too scared of an eventual collapse. Yet, they don’t even realize that precious metals are not even close to bubble territory.

As of last year Gold and gold shares were 0.8% of global assets. If we are in a bubble then what was 1981? A volcano?

The reality is that too many investors will continue to make terrible decisions either on their own or through a mainstream advisor. They are convinced that precious metals are risky. You can’t even get them to put 5-10% of their assets in precious metals.

Going forward, it is a near certainty that precious metals will outperform. Why? This is what happens in a major credit contraction. There is a run for real money. It doesn’t matter if there is hyperinflation or deflation. Since the crisis began we’ve had strengthening deflationary forces. Gold has advanced to a new all-time high and even higher against most currencies. Quality gold stocks have surged to all-time highs. Silver has outperformed nearly everything except Gold.

The Last Gasp Bubble of Government.com

http://www.minyanville.com/businessmarkets/articles/todd-harrison-crude-oil-homebuilders-stocks/7/28/2010/id/29324

Soros and gold revisited

I had blogged about George Soros' head fake on gold earlier. Here is another article on his comments regarding "gold as the ultimate asset bubble," and how his message was misconstrued.

http://www.commodityonline.com/news/George-Soros%27-gold-ownership-is-a-classic-hedge-30426-3-1.html

Bull market charts

Click on chart to enlarge.

http://www.businessinsider.com/chart-of-the-day-putting-the-gold-rally-in-context-with-prior-secular-bull-markets-2010-5

German article on bubbles

This is one of the best articles I've seen on sovereign debt. It's longish, but I highly recommend reading it if you have been stuck in a cave the last two years.

http://www.spiegel.de/international/europe/0,1518,692666,00.html

Ben Bernanke, TIME's Person of the Year

In a sign that the end is near, Federal Reserve Bank Chairman Ben Bernanke was voted "Person of the Year" by Time Magazine. This is ironically similar to President Obama winning the Nobel Peace Prize--and then ordering 30,000 more American troops into Afghanistan.

http://www.time.com/time/specials/packages/article/0,28804,1946375_1947251,00.html

Bernanke, along with former Fed Chairman Alan Greenspan, have done more harm to the US economy than is fathomable. He may have temporarily thwarted a financial meltdown in 2008, but has only kicked the can down the road, creating the greatest financial bubble in the history of mankind--the US Treasury bond market. This bubble will also eventually burst, as the Fed funds rate can't drop below zero. Instead of preventing such a crisis, he is now credited with saving us. Here is a truer picture of his missteps and missed calls:



Person of the year? I don't think so. This guy missed the call on the biggest real estate and stock market bubble in 80 years--destroying trillions of dollars of wealth in the process. Americans and citizens worldwide are jobless as a result, subject to a reduced standard of living. Yet Bernanke is a hero?

Gold bull market: a bubble?

Skeptics claim the decade-long bull market in gold is a bubble waiting burst. The reasoning is that the rally in gold lacks fundamentals. Here is a counter argument given by Jim Willie.

One must suppose that skyrocketing gold investment demand and rush to diversify out of a collapsing dollar do not qualify as fundamental. And the absence of metals exchange gold inventory also does not qualify as fundamental. And the Chinese pledge to lift their gold reserves 10-fold to 10 thousand metric tonnes in eight to ten years, that is not fundamental either. And the G-20 pledges to formally move toward an IMF basket of currencies, known as the Special Drawing Rights, and away from the USDollar, that is not fundamental either. And the Saudi announcement of a phase-out of sales for crude oil in US$ terms over the next few years, neither is that a fundamental. And the grossly insolvent banks in the Untied States, England, and Europe, which are simultaneously struggling, unable to extend loans, desperately suckling from government teats, that is not fundamental either. Burnedstein plainly fails to recognize that the entire world is grasping for something tangible within the global monetary system overrun by toxic paper, and that anchor reached for is gold.

Dennis Gartman on CNBC

Dennis Gartman, the respected commodities expert who pens the widely read "The Gartman Letter", and who can been seen on CNBC every day, called a top on gold at $930. When gold surged to $1050, he said he was still bearish on gold, yet he had reversed course on his own trade, and had gone long due to technical momentum (presumably after losing a ton of money shorting gold at $930). He also declared gold was in a "bubble"--even as he confessed he had gone long--and that he just didn't understand why gold had rallied so high and so fast. Today, in overseas trading, while America gluttons on turkey and dressing, gold is threatening $1200.

So this is a guy who can barely admit he was totally wrong on gold, costing followers millions of dollars, and now he can glibly declare gold is in "bubble" status--without even looking at the fundamentals of not just the recent rally, but of a DECADE-LONG BULL MARKET IN GOLD?

What about US Treasury bonds? The trillions of IOU's being issued by an insolvent government will come due at some point, and that is not a bubble? What if the creditors of that debt reject taking on that risk at yields of 3%, and demand 15% before even considering buying more Treasuries? What about that bubble? Rising interest rates will tank bond values, much like they did in the early 80's when inflation and deficit spending were out of control. Deficits are much worse today--in the trillions, with a "t".

And what if the US government itself defaults on its borrowings, unable to fund even the interest on that debt? What will happen to the asset values of hard commodities? How high could gold or oil climb in dollars?

Yes, the Fed's quantitative easing will yet again create asset bubbles. But as usual, the investing public will get fleeced again because the bankers are pointing at the wrong "bubble."

Are precious metals reaching bubble status?

This question has been raised by inflationists and deflationists alike. Most people believe the prices of gold and silver have increased too far, too fast. In my opinion, they are wrong.

Without forecasting specific targets, let's look at facts. The US government national debt has climbed above $12 trillion. The 2009 budget deficit was $1.4 trillion--and rising going forward. Entitlement programs including social security, Medicare, Medicaid, and two ongoing wars bring our unfunded liabilities to over $100 trillion. There are only a few ways to cut the deficits and pay down some of that debt: raising taxes, reducing government spending, increasing productivity and economic growth, and inflating the money supply. We should expect all four. Inflation devalues the USDollar, reducing the burden of those huge debts. But savers and creditors are punished by artificially suppressed interest rates and a debased currency.

To provide personal context, I've been long gold and silver since November 2008--and have been ridiculed the whole way up by almost everyone. For those who believe we are in bubble territory for precious metals, I will offer the following counter arguments.

Many Americans are becoming aware of gold as an asset class, but MOST AMERICANS HAVE NOT ACTED UPON THIS AWARENESS. Furthermore, financial planners don't earn fees when clients buy gold and silver bullion or coins, so they haven't been endorsing owning precious metals as a hedge against inflation and financial crises. Despite foreign governments encouraging citizens to own physical gold and silver, the US government downplays the fact that precious metals prices have soared over the last decade.

Americans have seen Cash4Gold commercials ad nauseum, but these television commercials entice people to SELL grandma's gold jewelry, allowing the general public to gladly pocket an extra few hundred dollars. The problem is they are only getting 50 cents on the dollar--selling into a bull market. In any case, the scrap market is dwindling, as consumers aren't selling as much as in previous rallies.

The smart money is taking the opposite side of the trade: hedge funds led by billionaires John Paulson, Jim Rogers, George Soros, Paul Tudor Jones, and David Einhorn are BUYING gold and gold-related vehicles. So are central banks worldwide, who have been net sellers in the past. They are now buying.

Of course, gold and silver will eventually reach bubble status--every asset experiences peaks and valleys over time. But the secular peaks aren't $1150 or $18 per ounce, respectively. As a reference point, $2400 and $140 represent inflation-adjusted peak values of $850 and $50 in year 1980 for gold and silver, respectively. With the world awash with more trillions of dollars today than in 1980, the true value of gold is $6300, according to French investment bank Societe Generale. Divide that by 15, the historical gold/silver ratio, and one derives a peak value of $420 for silver.

Again, these are not forecasts, but valuation models based on historical precedent. One could argue gold will fall to $250, or silver back to single digits--back to year 2001 levels. No one has a crystal ball, but all we can do is make educated calculations, based on economic fundamentals and previous history. The commodities markets, specifically precious metals, are a very volatile asset class. Equity shares in resource companies producing said commodities can be even more volatile. Hence, the disclaimers. A long bet on commodities is a bet against central banks worldwide, which by extension is a vote of skepticism against sovereign governments' inability to keep their fiscal house in order. Some will accuse these trades to be unpatriotic. I view them as protection against the abuses of central bankers gone wild--a means to preserve the diminishing purchasing power of an impaired currency--the USDollar.

This is one potential scenario, but one that is becoming increasingly apparent, despite skepticism from our government economists, academia, banks, and the general public. I admittedly swim upstream when it comes to populist Keynesian economics. On the other hand, mainstream financial models haven't exactly worked like clockwork, either. Look at the carnage of collapsed banks and government agencies guaranteeing home mortgages, for instance. And look at equities and real estate. It hasn't been pretty...

Whether one chooses past performance, or money supply vs. above-ground gold supply dynamics, the prices of precious metals appear to be headed higher--much higher. With any bullish trend, it won't run straight up, so the corrections will be painful, but the spikes will be breath-taking--and unpredictable. Trading the tops and bottoms will be difficult to time due to high price volatility. Buying and holding, while averaging in on dips may be prudent. When and if the gold mania kicks in, I'll know it when the headlines are splashed across the major media outlets. I will probably average out at that point. And when bartenders and cab drivers recommend obscure gold mining companies, giving advice on "how to make a killing" on the next hot trading tip, I will be heading for the exits. We are not even close to that mania phase yet.

These are my opinions only, and not specific recommendations. No specific targets or position sizes are implied. Past performance does not guarantee future results. Do your own due diligence. Investing is risky and investors can lose most or all their capital. Holding US dollars could be just as risky.

Disclosure: long gold and silver mining shares.

von Mises vs. Keynes

John Maynard Keynes has more followers (inside the US government and its banking cartel), and has an economic theory named after him. Ludwig von Mises is largely forgotten by the mainstream financial press, even though his track record of predictions has been much better. A disciple of the Austrian School of Economics, von Mises was a libertarian who predicted in the 1920's that government intervention created distortions in credit and financial markets, causing asset bubbles that would eventually burst. Does that sound familiar?

In any case, his prediction came true in 1929, yet he was marginalized yet again with the emergence of Keynes in 1936, who espoused printing currency and running deficits in order to escape the throes of a Great Depression. Again, does that sound familiar?

Many from the intelligentsia mistakenly believe we are in the midst of a war of ideaologies, i.e., GOP vs. Democrats, conservatives vs. liberals, etc. In regards to financial policies, it's partially true, but not completely, because Administrations and legislators from both sides of the aisle have run up enormous budget deficits, while resorting to printing currency to fund the deficits. They have borrowed trillions from foreign sovereign funds, and contributed to the insolvency of entitlement programs such as Social Security and Medicare. We are simply a country that spends money we don't have.

In short, our government's fiscal and monetary policies have been reckless and irresponsible. President Obama and Congress are following the wrong playbook.

http://online.wsj.com/article/SB10001424052748704471504574443600711779692.html (you may need a subscription to read this article)