Gold Isn't in a Bubble (the real issue is the future of our monetary system and fiat currency)

On Monday morning Bloomberg issued a report on gold as part of its “The Dark Side of Gold” series. It's important to note this isn’t the first time the news organization has attempted a hit-piece on gold. I wrote about this a year ago and identified the cases and examples of Bloomberg’s gold bashing.

The crux of the series is how gold ETFs are responsible for gold’s rise and are contributing to a bubble. It's insinuated that because the ETFs are easily tradeable, a torrent of sell orders could cause gold to fall sharply, a la 1980.

Gold’s rise actually has very little to do with the gold ETF (GLD). It really is a non-factor when you consider any of the following reasons: Threat of sovereign debt defaults, debt monetization in Europe, Japan and US, 0% to 1% interest rates, commodity bull market, and falling gold production. The gold ETF is an effect of the bull market, not a cause. The same is true with mutual funds during the bull market in the 1980s and 1990s.

In the two-minute preview video, Bloomberg says that prior to the gold ETF, only “conspiracy theorists” were buying gold and it cost a “fortune” because of holding costs and commissions. This is nothing more than failed hyperbole, seeking to demonize gold and gold bulls. I’m not an expert on the exact goings-on of the physical market but I’m sure that at that time it didn’t “cost a fortune” to buy gold. Meanwhile, any conspiracy theorists have clearly made a lot of money.

Mark Williams of Boston University makes the case that gold is in a bubble, but provides zero evidence. He was probably perfect for this series, as he wrote an editorial in November about how the "idea of a gold standard is best relegated to the dustbin of history." The only thing that will be relegated to the dustbin of history is our fiat currency system. It’s happened before and will happen again.

Finally, they trot out the George Soros quote of gold being the "ultimate asset bubble.” There needs to be some clarification of this point. Soros is increasing his gold position, which is already his largest position. In reality, he’s not saying it's the ultimate bubble. Soros believes gold will become the ultimate bubble and that's why gold is his largest position.

In reality, making gold the focus misses and obfuscates the real issues at hand. This is about the future of our monetary system and fiat currency. I can understand that gold could fall $300 at any time and the perception of it lacking utility, but explain to us how the fiat system will survive. No fiat currency has ever survived the “dustbin of history.”

Fiat currencies have value based on the ability of government to meet its obligations. The US’s interest expense is now more than $400 billion and currently 17% of tax revenue. This is with interest rates at historical lows and a national debt of $14 trillion. That doesn’t include agency debt of $3 trillion and an estimated $2.8 trillion from the states.

The situation is going to get worse. The states will likely need support in 2011 and perhaps a bailout by 2013. The continuation of the Bush tax cuts adds another $700 billion to the deficit over the next two years. The most important variable of all, interest rates, is now moving in the wrong direction.

Two years from now, the US government would be dealing with more than $17 trillion in debt and at least a 50% rise in interest payments. Even if interest rates hold around 4%, you're still looking at an interest expense equivalent to 25% of tax revenue. And that accounts for growth in tax revenue.

This speaks to why the Fed is monetizing the debt under the guise of economic stimulus and quantitative easing. It has to, and it's just getting started. In the coming months and years, the Fed will have to monetize more as the debt burden grows larger. Moreover, the Fed will periodically have to buy bonds to try to keep rates down. As rates rise, so does the debt burden. The perception is that rising rates is bearish for gold. While this can be true in the very short run, it's quite the opposite in the larger picture if you have a huge debt burden.

We're in a new era. This isn’t the 1980s or 1990s. The typical stockbroker, financial planner, and mainstream publication don’t get it. They’ve barely figured out that this is a bull market for hard assets. Those who assume gold is a bubble should study monetary history. Governments going broke and the restructuring of debts and monetary systems is nothing new.

Certainly gold is volatile and inherently risky. It can and will have small and large setbacks along the way. However, the greatest risk is being unprepared for the inflation tsunami that lies ahead.

Any assets is NOT in a bubble if the inflation comes soon enough.

Thus had the inflation come soon enough, there would have been no 2005-2007 housing bubble nor a housing market crash. The inflation would have made the housing prices correct. If the inflation comes soon enough, then the current price of gold or maybe even a higher price will be supported.

On the other hand if the Fed continues to hold the line on inflation and the Congress reins in spending, then there may in fact be a decline in the price of gold. Asset values depend on what will be the price of the asset in the future. Inflation causes future asset prices to rise. If the inflation expectations are met, then the asset price stays about the same. If the inflation expectations are surpassed, the asset price rises further. If the inflation expectations are not met, then the asset price will fall and someone is likely to use the pejorative term crash.

Isn’t it funny how the author of this piece “knows all” and how everyone else is “incompetent” or “unable to get it”?

Sounds like the author is a bit desperate to convince the reader that he is right and everyone else is wrong. Wonder why?

I don’t ever recall seeing George Soros posting here, and yet this author appears to suggest his knowledge is so vastly superior.

Afterall, if someone is that SUCCESSFUL and is so ABSOLUTELY SURE of their superior investment knowledge, they’d have to be enormously wealthy.

Weather gold (or any asset, commodity, tulip bulbs, etc.) is in a bubble or not, or weather it’s undervalued or overvalued, is for the market to determine, not wanna be soothsayers.

People don’t get in trouble chasing hot investments. They get in trouble chasing hot investments with money they can’t afford to lose.

And often, what makes people chase hot ideas is others telling them how they know “ABSOLUTELY” that the price is going up.

I remember the same hot money advisors when real estate was hot. All the arm chair Donald Trumps speculating with money they didn’t have listening to other wanna be Donald Trumps.

My suggestion is read all angles to any idea, pros and cons, and then make your own personal decision as to which way you want to go. But avoid anyone telling you “they know” what no one else does.

That was a one time deal, unless one subscribes the theory that the US government plans on returning to a gold monetary standard. Not anytime soon.

I don't agree that it will be a one time deal. The government is very interested in who is buying bullion. That is not for no reason.

When a nation's government becomes despotic, anything that provides safety and security to its citizens is a threat to that government. The government must control commerce. And that means controlling currency. If gold/silver threaten to become a de facto medium of exchange because of the collapse of fiat currency, then the government has a vested interest in the control of precious metals.

Look, it's all about control. If the people in power believe that confiscation of privately held bullion is in their interest and furthers their control of the populace, they will do it. Doesn't have to be logical to you or me. Only to them.

Yes, agreed - it’s about control, no argument there. But it’s precisely because of that, any hint of outright property confiscation is just an admission that they have lost control. Sort of like the Navy commandeering everybodys canoe.

Forget it. The PR would be atrocious. First thing, somebody better shut down the US Mint, because that’s who is selling in large part. No, there would be many unintended consequences to such a move and would sever any trust that is left. Remember in the 1930s there was a far greater
respect for government, and the gold recall was assumed to be a temporary emergency act. So many things have turned out so badly, that is why the Roosevelt action was a one time deal in practical terms. The government obligations to creditors is so large that even foreign central bank gold payments were reneged upon 40 years ago. Even Social Security trust fund was absconded with into the general fund at that time.

Do the math, and it becomes clear, never mind the rest.

any hint of outright property confiscation is just an admission that they have lost control.

It is also an act that is designed to demonstrate they are asserting control. Arguably much of EPA and federal land regulations are de facto property confiscation. It's simply that much of the people haven't realized that is what it is. And a significant portion of our citizenry is in favor of confiscation. Class warfare is alive, well and still effective.

Nonetheless, there is ample evidence that the government has developed an unhealthy interest in who buys and owns bullion. You and I can argue what the government "intends" to do what that information. But there is no debate what it "can" do with that information, should it choose to do so.

The government's interest in tracking gold and silver purchases is no more benign that its interest in gun purchases. Information is power and they are striving to get as much as possible on each and every one of us.

I'm am becoming convinced that potential unintended consequences is no deterrent to loony fascists. And at crunch time, those in power will probably consider loss of trust to be a worthwhile price to pay for keeping power.

Also, I believe you may be falling into the same logic trap that most of us reasoning people fall into. That is, being rational beings ourselves, we try to ascribe to our adversaries rational thought processes for what is in reality, irrational behavior. You and I aren't interested in controlling every aspect of everyone else's behavior and life. These people are. That's their goal.

If there is a collapse of paper currency, these people may well consider it to their benefit to confiscate gold and silver. And the consequences be damned.

Bernanke, Geithner, Paulson, Lloyd Blankfein, William Dudley, Gary Cohn, Jamie Dimon, Kenneth Chenault, John Mack and others represent a graver threat to our freedoms, to the sovereignty of our nation, and to the viability of our republic than the combined forces of ChiComs, Russians, and Iranians. The fractional reserve lending system

There is a permanent solution that will put an end to the bankers hegemony and control over our government and economy:

The immediate and total abolition of the Federal Reserve system and a return to a legal, transparent and sound monetary policy.

And a cautionary reminder for the Jeffersonian in all of us these days -

"Banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations will grow up around them, banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." - Thomas Jefferson in the debate over The Re-charter of the Bank Bill (1809).

"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.

I agree they are not rational, and anyone who has been paying attention knows what they are up to. I suppose they can try, but if “paper money collapses” as you describe it, then by definition they (and everyone else) will have far greater things to worry about.

They may not be rational, but they aren’t complete idiots either. At this point, it’s obvious to even the feeble minded that certain types of politician are determined to crash what’s left of the system, and are no longer representatives of their alleged constituencies. This has been going on for a long time, except that, while you correctly point out the politicians don’t care, the difference today compared with the 1930s is the citizenry doesn’t either.

They can’t effect their nonsense without money, and lots of it. Gold isn’t the answer, it’s part of the question. Whether or not the government confiscates my land, my home, means of self-defense, freedom of religion, peaceable assembly - there I go again, getting all radical!

What about my savings bonds? My 401k? Do they want to criminalize those too? At some point we just gotta dust ourselves off and start over, so in some ways this kind of talk is very welcome.

I suppose we could boil it down to a simple, but unanswerable question. I honestly believe they are capable of trying anything they think they can get away with. So the question is, just what do they think they can get away with?

It is (more or less) openly admitted they want to “nationalize” your 401K. Which is confiscation. Do they think they can get away with it? Mmmm, they aren’t yet sure, still waiting for the right circumstances to fall into place.

And while we speculate, we really have no true idea of how bad a worst case scenario could actually be, should it come to that.

This I am certain of, in a severe depression, we can expect a lot more lawlessness on the part of citizens (and don’t forget the 15-20 million illegals). We do not have the morals and values of 1930 that can be counted upon to maintain civilized behavior to the degree of that time. And a lot of us do not have the naive faith and trust in government that our grandparents had at that time. I for one don’t intend to rely on any government institution to protect my family or property.

I think we’re on the same page. Many things the government does (and esp. doesn’t do) makes no sense unless one is willing to accept some very difficult conclusions.

My view is that the rule of law, sanctity of contracts, human rights of property, self-defenses, etc - these are what count. The loss of an objective standard of money replaced by whatever is just one aspect of a continual erosion of the republic, none of this was haphazard or built out of expediency but by conscious design and malice aforethought. It is ironic that the US fought a horrible war to end slavery, and while it may sound like hyperbole, it seems the inescapable conclusion is that we are headed that way again, it’s just so obvious. I am at least encouraged that there are many such as yourself that are aware of this, albeit it wasn’t really that long ago I was still laboring under the illusion things would work out OK, but generally speaking the level of awareness is much greater than just a few years ago. Don’t get me wrong I love our country but there are major problems (that were foisted on everyone for exactly the reasons outlined) and there is no ignoring them. In fact they will be used as intended, to extract the desired outcome. People will be begging for the government to “do something” - and, well you know the rest. God speed.

It's not about "being on a gold standard", we are ALWAYS on a gold standard. You may not be using it to back your money, but "money" isn't money, GOLD is money. The dollar may collapse, but your gold will always be worth something to somebody while you use $100 bills to start your campfire.

I have reminded several people about FDR taking the gold, but people just don't seem to understand when you are about to devalue the dollar, you go where the money is. Remember the reason robbers rob banks is that's where the money is. FDR knew he was about to print money for 10 years so he took the gold. If you are smart and buy gold as it increases in value, then you have become EVIL in today's terms, so we can take money from the rich and give it to the unions. The Fed is printing $600 billion in 6 months to buy debt. That is multiples worse than FDR did. When gold hits $3k-$5k an ounce, can Obama resist the commie juices that must be flowing? As you said, Hitler, Lenin, and Mussolini couldn't, it just too tempting a target. You evil speculators owe it to the "working" people.

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