Commodity Bubble Proponent

Despite Economic Headwinds, Gold Will Outperform

Your chart right there shows that Gold is a bubble. Investors are buying it like candy.

Look out below once the fun ends

U.S. Treasuries Are the Biggest Bubble of All

Gold and treasuries are linked b/c investors are scared. When treasuries decline once the market starts to right itself, Gold will follow suit.

The fact that the Dow to gold ratio is so out of whack should tell you that Gold is overpriced

Peter Schiff: Outlook for the Gold Market

Just to quickly illustrate my points from some of the comments I see up here.

As to point 5, "middle class" in China means that you make more than $2,000 per year. To put that in comparison, even at today's prices, $2,000 per year is the average fuel expenditure for the typical American for the year. Chinese demand is really a big myth if you look at the demographic figures

As to the guy who wants to know whats happening to the money that the fed is printing, it is going to replace the depleted capital from all of the bank writedowns. This is not new money that will lead to new lending.

For the gold bugs, the inflationary spike is OVER. The inflation and big spike in asset values occurred with the total relaxation of credit standards globally. Between 2001-2007, if you take into account subprime loans, derivatives, etc., there was tens of trillions of dollars of new money "created" by banks. The fed is a small party in this game with its 2 trillion in new money. As a result, the inflationary boom that Mr. Schiff preaches about endlessly actually died with the collapse of endless credit where people could spend without any regard for their income.

All the Fed's quantitative easing will do is simply slow down the deflationary forces (i.e. imagine what would have happened to oil prices had Goldman/Morgan been allowed to fail in October).

Peter Schiff: Outlook for the Gold Market

Anyone who buys Schiff's arguments is a moron for a couple of reasons:

1. The deflationary forces from the current de-leveraging are far larger than the quantative easing that the Fed can do. In the last year, we've lost nearly 20 trillion in global equity valuations, not counting the several trillion in global real estate assets, corporate bonds, municipal bonds, etc etc etc. The fed even on its best days may be able to only inject 2-3 trillion/yr into the system. what they are doing is basically trying to fill a bathtub with a squirt gun.

2. Gold investing has been a leveraged activity over the past 18-24 months. Look at all of the Gold ETFs. They basically allow investors who never buy a single ounce of gold to partake in the price action. ETFs are now the fourth largest holder of gold supplies. If there is any serious hiccup in these entities, forced liquidations could cause the ETFs to flood the market with gold.

3. There is no replacement currency for the dollar. The ECB has proven that they are ass backwards in their thinking, the Japanese are still having problems with deflation, the Chinese are corrupt as hell and their banks are burdened with trillions of dollars of non-performing loans from the communist days, and we've all seen what's happened to Russia lately.

4. The Chinese consumer is not powerful enough to rescue the world economy. The average Chinese person earns roughly $2,100/yr and the average American earns $50,000. This means that the Chinese guy must increase his marginal income nearly 24x to hit the same level that the American guy is at. In order to get there, either that guy needs to earn 24x as much or the dollar needs to depreciate 97-99%. None of those things are likely to happen.

5. COMMODITIES were all a bubble and are not likely to reflate anytime soon. I'd expect this to happen only when all of the commodity bulls give up and go play somewhere else (which given the current CNBC offerings of advice will be a while).

Get Out of Commodities - Barron's

Since 2001, accommodative monetary policy and lax regulation on investment banks created five distinctly large bubbles fueled by Goldman Sachs and their Wall St. bretheren.

1. Housing
2. Credit/Investment vehicles
3. Private equity/M&A
4. Emerging Markets
5. Commodity Futures

As each of these bubbles gradually expanded in succession during the early part of the decade, these banks have made ridiculous sums of money on highly leveraged schemes. All five investment bubbles were initially based upon sound economic theses.

However, as each has burst in succession when fundamentals began to reassert themselves, investment banks leaned on the remaining asset bubbles to maintain profit margins. As these margins have begun to erode, the systems requires that these institutions delever themselves

The credit bubble of 2001-8 was the catalyst for the other four bubbles. As the housing bubble burst in 2005, Wall St. saved itself by using M&A/emerging markets/commodities to maintain profitability. These three asset classes continued to rise. Once the M&A/private equity takeover bubble burst in 2006, investors leaned on emerging markets and commodities to maintain profits. Once emerging markets crashed in late 07, commodity future speculation has been the only speculative profit engine left standing.

I'm not sure what will end these ridiculous commodity prices. The majority of the fundamental data points to high prices, high supply, and low demand but it will end. Unfortunately, this will not be pretty just as we have seen with the other 4 bubbles bursting.