Top 10 signs of a precious metals bubble

With so many people beginning to reawaken to the importance of gold, the noise level was bound to increase.  People who hated gold a couple years ago are becoming big fans all of a sudden.  They don’t know why they are fans except that the price is going up.  They are just jumping on the band wagon and so they are dangerous people to listen to about anything.  One way to cut through the noise is to look into the past writings of people who turned out to be correct on the subject and who were telling their story when others were laughing at them.  Peter Schiff is one such individual.  Like any analyst, Peter isn’t always right about everything but like any good analyst he’s right a lot more than he is wrong.  Also, when he is wrong it is generally a matter of timing, not faulty logic or being an agenda-driven con man.  Also, Peter provides sound reasoning to back his views and there is a lot of good old fashioned common sense to be found there.

So here is an article he wrote in 2006 regarding 10 tongue-in-cheek signs to look for so that you can determine if gold is in a bubble.  Of course, the real signs to look for are informally given before the actual top 10 list and the list itself is really just a way to say that metals must again go main steam before there is any chance they can be a bubble.  Note that this was written during a time that he was (correctly) saying both the stock market and real estate markets were bubbles in progress.  It’s not often that you find an analyst whose overarching view of the economy doesn’t affect his view of each of the smaller markets therein. 

http://www.europac.net/commentaries/top_ten_signs_precious_metals_bubble

Gold will have pullbacks during its ascension but I don’t think it is anywhere near a speculative peak simply because I don’t think the dollar is anywhere near its full debasement.  Most people simply have no idea about all the risk factors in our super leveraged global economy that could come crashing down.  And even if it doesn’t crash suddenly, there is zero doubt that the leverage is being systematically and structurally dismantled. 

Take the $300 trillion in derivatives contracts that our government estimates exists.  Other informed estimates have come in as much as 4x higher than this government number but, hey, who really knows because it’s all completely unregulated!  All we do know is that the numbers are beyond huge.  Using the US government numbers, if just 4% of those contracts (they are really a type of insurance policy) go bad (i.e. have to be paid) in aggregate, it represents a wealth loss equivalent to the national debt.  Where is the money going to come from to pay this when government steps in to take on the loss in order to “save our system” at all costs? 

The economic crisis is finally making government wake up to this threat and so they are putting regulations in place to regulate (and thus greatly reduce) these transactions.  Of course, doing so is deflationary.  A derivative is a (Wimpy) promise to pay should contractually defined conditions occur and thus it has to be viewed as a form of conditional credit (this definition assumes that there is not enough cash on hand to pay the promises as was certainly the case for AIG).  However, the real deflationary aspect of reducing them is that they are primarily used as hedging mechanisms for risk taking activities that directly increase the credit supply (and thus the money supply).  In other words, leveraged gamblers buy lots of stocks and other financial assets on credit and use the derivatives to reduce their downside risk in the event that they gambled wrong.  If these insurance contracts are reduced then there must be a corresponding reduction in the risky economic activity which they were designed to support. That is not conditionally deflationary, it’s directly deflationary.

Deflationary activities reduce the money supply and thus slow the economy down.  In response the government will have to debase the currency in order to re-flate everything lest the banking system crash due to housing price reductions that will need to be marked in their books (thus rendering them insolvent).  In other words, the status quo government at this point has little choice but to betray those who thought they could safely save for their long term retirement needs using dollars.  Someone will have to pay for this mess and inflation has always been the easiest way to steal from people.  On the positive side (if you can call it that), inflation steals from everyone, not just US citizens and US taxpayers.  Anyone who holds the currency is a victim so we will spread the pain around.  Of course, the net effect is to make everyone in the world more interested in buying metals for their long term savings given that fiat currencies around the world are being exposed as fraudulent scams.

My current outlook for gold:

- Short term: wait and see.  The chart could be forming a pattern that would signify a short term peak with the possibility of a significant pullback but it has not been confirmed technically yet.  In opposition, silver just broke out to a new high thus confirming gold’s long standing breakout.  Time is needed to get a better view here.

- Long term: gold is very cheap even at current levels given the unfixable structural problems with all fiat currencies globally.  Unlike real estate, gold does not have any carrying costs such as maintenance and property taxes.  Gold is by far the best asset one can have for building up long term retirement savings.  It places your retirement out of reach of government’s greedy reach.  Ideally it should not be viewed as an investment or a way to make money.  It should be viewed as another type of universally fungible money which cannot be debased by corrupt government politicians.  It is a way to keep what you already earned, nothing more.  Dollar cost averaging into gold is going to be a winning strategy for years to come IMVHO.

The WSJ reports on economic propaganda

http://online.wsj.com/article/SB10001424052748703989304575503821229703834.html?mod=e2tw#articleTabs%3Darticle

I call it propaganda.  Some clever spinmeister probably calls it “digital virtual confidence”.  That was Italy.  Given the higher level of tech in the US I wonder how much CGI fakery is being employed in order to make football stadiums appear full at a time when tickets can run into the hundreds of dollars…  Don’t think we are above this sort of thing.  Nothing is beyond our “appearance is everything” economy.  If caught, the con men will probably just call it “clever marketing” and act like there is nothing shady about it hoping that people don’t object.

More of Prechter's insights coming true

Prechter’s 2002 book, Conquer The Crash, predicted that then-current investing legends would be hated or regarded as fools before the crash was over.  Before the crash started in late 2007 Prechter reiterated this in his paid subscription newsletters as one of the things to look for as confirmation of the mood change of the herd. 

Of course, Alan Greenspan has since met with public disgrace during congressional hearings.  People now make fun of “The Maestro” and they recognize that he is the main architect of the credit problems we now face not only as a nation but globally. 

The latest financial luminary to draw fire is now Charlie Munger, investing legend, long time friend of Warren Buffett and vice chairman of Berkshire Hathaway:

http://globaleconomicanalysis.blogspot.com/2010/09/amazing-arrogance-gall-chutzpa-and.html

Charlie should keep his trap tightly shut because history shows that when the “little people” get stepped on too hard by the elitists who never worked a real job in their lives, crazy things have been known to happen.  Many people are out there wondering where their lives went and what they are going to do next.  Their homes are gone, their careers are gone and in probably more than a few cases their families have broken up as a result.  For them the American Dream has morphed into a nightmare.  I suspect that Jim Morrison’s immortal lyrics from “Riders On The Storm” perhaps describe more than a few “little people” out there right now:

There’s a killer on the road

His brain is squirming like a toad

~~~~

Great summary of where we are and what needs to be done

Many of Mish’s suggestions should sound familiar by now if you have been reading my emails.

http://globaleconomicanalysis.blogspot.com/2010/09/response-to-nouriel-roubini-on-america.html

Bottom line: the credit con job is over and the faster we come to grips with it the faster we can begin the healing process.  Trying to kick this problem down the road to the next generation is not only unconscionable to the point of just being evil, it also won’t work.  Government attempts to fight against the healing process which is de-leveraging and credit deflation will simply rack up the debt and eventually create a currency crisis (massive inflation or even eventual hyperinflation) that will make today’s problems look like a walk in the park. 

Make no mistake: EVERYHING they are doing is being done to protect the status quo, not to fix the problems.  They, both dem and GOP, are in it for them, not you.  They are just trying to protect their own power structure.  The best way to shut them down is to vote Tea Party wherever possible in the coming elections.   The one thing that politicians fear more than anything is being voted out because these con men have no real skills to offer society.  Forget dem vs. GOP party voting.  That is just another control mechanism in the con.  Let’s bring the fear with us to the coming elections.  They have been scaring us with threats of “bail us and our buddies out or the economy will collapse”.  Turning the tables on these con men is as simple as voting them out and, just as importantly, spreading the word to family and friends to do the same.

• If they want to promise something for nothing, vote them out.  Enough unkeepable Wimpy Promises have been made, why the heck do we want to hear more fairy tales?
• If they want to maintain the size of government, vote them out.
• If they want to increase taxes, vote them out.
• If they don’t want to return to constitutional mandates, vote them out.
• If they want to use debt to fix ANY future problems, vote them out.
• If they try to distract you with talk about abortion or prayer in school or all the other things that, while important, are not part of the constitution, vote them out.  We can handle those issues at the state and local levels.
• If they want to rattle sabers against China and others, if they want to increase the warmonger budget, if they won’t promise to end the war and close down all the unneeded foreign military bases, vote them out.
• If they want to restrict our freedoms, or vote for RealID or otherwise track or brand us as if we were chattel, vote them out.

Government getting desperate for tax revenue

Ebay sellers that sell more than 200 items per year now have to file income tax paperwork on it:

http://globaleconomicanalysis.blogspot.com/2010/09/new-irs-reporting-rules-to-hit-ebay-and.html

I suspect that government will continue looking for spare change in the couch cushions to the detriment of the economy.  I also suspect that it will drive more people towards things like Craig’s list and other person-person transactions that attempt to cut the government out of the deal.  And if government starts using computers to monitor Craigslist transactions, how long will it take for someone to come up with some new model that allows buyers and sellers to remain anonymous to government?

As Mish says, corporations are experts at evading tax so it is pretty sad when government tries to crack down on the small guys like this.  At what point does all this paperwork simply cost more than the extra amounts collected?

We all need to stand up in unison and tell government to get smaller.  We are simply tired of paying for government gone wild.

NJ Governor speaks plainly to retirees

A long time ago I coined the phrase “Wimpy Promises” to refer to the many types of obviously unkeepable promises that were running rampant in our economy not the least of which was government pension programs.  NJ Gov Christie was one of the first sitting governors to dispense with sugar coated verbiage and other forms of fake political correctness so it makes sense that he is also one of the first to start seriously whacking away at the unkeepable promises made by his vote buying predecessors.

His name for them is “fairy tale promises”:

http://finance.yahoo.com/news/States-cutting-benefits-for-apf-1110812685.html?x=0&sec=topStories&pos=7&asset=&ccode

The is still a big awakening to happen in this country as more and more people figure out that unkeepable promises must eventually be broken.  While this is going to be very painful for many people I still see it as a form of healing.   We need to count more on ourselves and less on the promises of someone else.  It leads to a more honest existence overall where big talkers are pushed aside by big doers.

Greenspan's recent remarks about gold

My fav Greenspan quote from the article:

“If all currencies are moving up or down together, the question is: relative to what? Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central banks should pay attention to it.”

http://www.nysun.com/editorials/greenspans-warning-on-gold/87080

Now here is what he didn’t say: central banks have been paying attention to gold for a long time.  GATA has piles of evidence and even public admissions that governments attempt to manipulate gold prices so that their funny money doesn’t appear to be fraudulent.  What Greeny is really saying is that gold price is getting away from them regardless of their best efforts to contain it.  He’s really saying that those people that you can’t fool all the time are getting more and more numerous and figuring out that fiat currency is not a safe and sound long term storage of wealth but gold always has been and always will be (at least until governments figure out a way to do real alchemy).