Friday, December 30, 2011

How To Spot A Bubble

There is much discussion as to the bubble nature of gold these days.  Many headlines have been propagated by the tightly controlled press in order to trick unknowing citizens.  Remember, most of the amateur bubble spotters who own not one ounce of physical gold or silver were fried in the tech bubble and the real estate bubble.  But, now they are experts and will not be burned again.

Consider what is actually happening.  Put down the propaganda, turn off the television and use your brain.  Take a survey or groups you find yourself in.  Ask how many own even one ounce of gold.

Remember, during the recent housing bubble that Taco Bell worker would have purchased one condo to live in and another one as a speculation.

Let's take a look at a real asset bubble forming before our very eyes.  This one is showing stretch marks as it has grown to a size once thought impossible.

How do we know this is a bubble?  Well, the article states that bond funds received record inflows this year.  These types of funds are fed by asset managers and retail investors.  They are the easiest to fleece as they fall for the same trick every time.  Perceived safety, misguided blame and blind faith in media creates the perfect trifecta producing the same fleecing opportunity over and over again.

Most of these investors have no idea that bonds trade in price form.  Listen to them as they discuss the subject, "I don't care I will hold it until it matures."  Really?  They probably told you that speculative condo purchase was a no lose scenario because they could always use it as a vacation home.  Once the price fell by 50% they were in a frenzied panic.

Generally speaking, the price of government and municipal debt instruments are the highest in recorded history.  Buyers are knowingly or unknowingly loaning money at minuscule rates of interest to government organizations that are terribly overextended and cash flow negative.  No sane broker would allow you to purchase a debt instrument issued by a company what was borrowing 50% of its annual cash needs.  But, the US government is currently borrowing nearly 50% of its cash needs and issuing debt at less than 2% for 10 years.

When you observe this set of conditions in a market there is only one reasonable course of action, do not participate.  Shorting the funding mechanism of an overextended government is totally different from that of a corporation.  The government will not go down easy.  As interest rates rise (bond prices decline) the cost of servicing this massive debt rises eating even more of the annual budget.  Austerity will be attempted but GDP will slow dramatically causing public backlash.  Considering the average US resident owns nothing and is underemployed, it is probably a good idea to avoid the debt based financing that has allowed this set of conditions to fester.

So, when you hear someone explaining how gold is in a bubble, ask him or her how much of it they own.  Next ask them what they suggest you purchase to avoid the gold bubble.  Do not be surprised when they tell you cash or government debt.  Also, do not tell them that you have purchased gold as they will be desperate when their paper wealth is priced at its intrinsic value and could present real danger to you and your family.

Editor's Note:
This has been a wonderful year and we are grateful for your attention to the nearly 125 articles posted here.  As we enter 2012 your editor is attempting to launch a very innovative investment fund targeting early production gold and silver mining companies.  The incredible regulatory and procedural hurdles created by your elected representatives will be taking a greater share of our time.  This could have a deleterious effect on our writing efforts.  If you have interest in discussing the above mentioned pursuit please email

Make it a profitable 2012 by using your God given ability to objectively apply reason and logic when making decisions.  After all, this is what has secured your place at the top of the food chain and even though your educators tried to squelch it entirely, dust it off and trust it.  You will like the results.