Recently, various and sundry commentators have claimed that gold is in a bubble. Every bull market does its best to remove as many participants as possible on its way to “exuberant investing”. However, this is not yet the case for gold or gold equities. Junior gold stocks are still relatively unknown to the investing public. Central governments in the Far East are woefully deficient in gold reserves relative to times of historical highs in gold. Institutional investors have little or no exposure to gold or its related stocks. The following chart located on U.S. Gold’s website provides a perspective of the bubble potential of gold:
Gold remains a currency barometer for all the fiat money around the world. The U.S.Dollar, a fiat currency, is based solely on the perception of strength of the United States. This perception of strength has been sustained for decades but we must be careful to be too short-sided in our view. Our manufacturing based economy has been replaced by a services based economy. Manufacturing jobs left the U.S. in favor of cheaper blue collar labor. The same is now happening with research & development (R&D). The erosion of the U.S. infrastructure will surely come back to haunt us.
In 2010, it is expected that state governments will incur a $125 Billion deficit. In Oklahoma, state workers have already been given notice of staffing cuts of 10%. Tax revenues declined by 28.5% versus last year. 40 other states are in worse shape. County and Local governments are seeing declines in tax revenues which will translate into further unemployment. The Federal Government is attempting to slow the decline with stimulus dollars but with only some positive effect.
The U.S. consumer is holding the answer to the near future. I find more and more people are jumping on to “simplification” message. Who needs fifty tee shirts in their armoire? The personal surplus of “stuff” is starting to leave the household. Unneeded clothing, furniture, and “boy’s toys” are leaving the garage. This will all translate to lower retail sales. The “stuff” is now deemed to have no lasting fulfillment and people will start waking up to that fact soon. The days of the sloppy look will soon leave as well. The ultra casual look of pajamas and low crotch jeans will be replaced by a more formal look as people compete for jobs which are becoming scarce.
Painful times are ahead for the global economy. There is no indication that the Fed will be able to slow the quantitative easing (printing excess money) even though they give lip service to it. In recent days they further opened the checkbook to beleaguered mortgage giants Fannie Mae and Freddie Mac. The FDIC has required 3 years’ premiums in advance from banks and it still virtually broke. Banks sold securitized investments to clients such as Pension Funds then bet against the performance of those investments. You cannot have all these complex problems and think that there will be no suffering. The day of reckoning will occur, the only question is “when”.