DeepValueLover's  Instablog

There is no such thing as a commodity bubble.

There is, however, a dollar bubble.

You can't print commodities with the stroke of a keyboard.

You can't feed your family with dollar bills or build a building with dollar bills or power your vehicle with dollar bills.

The dollar is not a store of wealth. If it were, then a house or a car would cost roughly the same in real terms as it did in, say, 1940 (gold, in dollar terms, is roughly the same price as 40 years ago).

With BILLIONS of people in China, India, Brazil and the "Asian Tiger" nations moving from abject poverty to the working class they are going to desire more cars, beef, steel structure buildings, modern appliances and the other products that demand use of more and more commodities.

Meanwhile, Mr. Bernanke is pouring TRILLIONS of new dollar bills onto the heads of people around the world. Each new dollar undermines the value of each old dollar.

Commodities in a bubble?

Hardly.

Our recent real estate bubble then crash was not due to the fact that land area remains constant.

It was due to easy money property speculation, banks who loaned money to people who never should have been allowed in the lobby (as poor as their credit was) and, most of all, banks who wrote loans then sold them off to investment banks and insurance companies so that they could be "securitized" then passed along to other suckers and so on.

The real estate boom was built on a house of sand and fog.

The value of gold, silver and other precious metals remains constant. It is the value of the dollars that they are priced in that fluctuates.

When you make more of something the already existing units of that something are worth less (dollars, for example).

If a miner found a deposit of gold equal to the amount that has already been mined all over the globe, then the price of gold would be cut in half immediately. It is a simple matter of supply and demand.

What you are seeing with the precious metals is not a bubble or a boom...it is merely a reaction to the intense money printing done by central banks around the world.

Here is an experiment for you:

Go out to the street and offer someone a choice between $1374 or the amount of cash (in dollars) of one ounce of gold as it was priced in 1998 (only 12 years ago).

People who understand the relationship between gold prices and inflation may counter by giving you a one ounce gold coin as an even trade. ;)

Cheers!

Disclosure: Long Real, Sound Currency

People who understand basic economics know that prices in a free market simply want to find the accurate equilibrium between what a party will pay and what another party will sell for.

Politicians who really have no concern or care for the free market simply want a voting populace that are happy and content (and full of "hope") when they enter the voting booth.

To keep rather ignorant voters happy a professional politician must "prop" up the free market so that prices for assets (stocks and houses) rise while prices for consumables (food, electronics) fall.

Since you can only manipulate economic physics for so long the market will begin to fight the politicians.

This push back usually comes in the form of deflation or inflation.

To allow our economy to get back to its non-manipulated normal zone we must allow prices to fall or rise on their own.

Buyers and sellers will then be able to see the value in products and investments and act accordingly.

Screw the politicians and let the free market guide us to a prosperous future.