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Friday, April 22, 2011


Is gold in a bubble?

To even ask this question you have to understand the nature of currency. Gold is a currency. People are trading dollars for gold right now. They are trading a currency that is rapidly depreciating due to massive printing to service tremendous debt, for a currency that has been stable for 2500 years and has no debt. If that sounds like a bubble to you, then sell gold and buy dollars.

Since the dollar has no intrinsic value, how can you tell how many dollars it should take to trade for an ounce of gold?

Mary Meeker, analyst at Morgan Stanley, analyzes it thus: “By the standards of any public corporation, USA Inc.’s financials are discouraging. Cash flow is deep in the red (by almost $1.3 trillion last year, or ~$11,000 per household) and USA Inc.’s net worth is negative and deteriorating."

Granted, that's just one way of valuing the dollar.

Another way would be to analyze the balance sheet of the US Federal Reserve Bank - which according to John Mauldin is currently leverage at 50-1 - worse than Bear Stearns balance sheet before it went bust, and since the Fed only holds 2% in capital against all of its liabilities - a tiny 100 basis point rise in rates would wipe out all the Feds' capital.

Gee, be careful when you sell your gold for dollars.

In a recent report, economist John Williams of contends a declining U.S. currency is reflected in spiking gas prices. Williams’ said, “. . . the primary problem behind higher oil and gasoline prices is the Fed’s efforts at dollar debasement, but few in the media are willing to blame the Fed . . . Also hitting the dollar, though, are increasing instabilities in and ineffectiveness of political Washington, D.C., as viewed by the rest of the world.”

Williams says gold and silver are nowhere near their former inflation adjusted highs of 1980. Back then, gold hit $850 per ounce and silver $49.45 per ounce. To truly equal that price in today’s inflated money, gold would have to be “$8,331 per troy ounce” and silver would have to be priced at “$485 per troy ounce,” according to Williams’ recent calculations.

In a related story, researchers at Bill Gross’s firm, PIMCO - the largest bond fund in the world, estimate that in the last quarter, the Fed purchased 70 percent of all new Treasury debt. This is a disaster in the making. By printing new money to buy debt, the Fed is both holding interest rates artificially low and flooding the world with dollars.

More crazy billionaires buying bullion:

The University of Texas Investment Management Co. recently announced it bought almost $1 billion in gold bullion. According to a Bloomberg story this week, “The decision to turn the fund’s investment into gold bars was influenced by Kyle Bass, a Dallas hedge fund manager and member of the endowment’s board . . . ‘Central banks are printing more money than they ever have, so what’s the value of money in terms of purchases of goods and services,’ Bass said yesterday in a telephone interview. “I look at gold as just another currency that they can’t print any more of.”

But, don't despair, in case you think the debt problem is unsolvable:

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