Wednesday, August 31, 2011

Who Would You Pick as Ron Paul's Vice President?

I am not getting ahead of myself here.  I understand that a Ron Paul presidency is still a long shot, although not as much of a long shot as many in the media would suggest.  It will be difficult for Ron Paul to overcome the pro-war faction (the majority) of the Republican Party.  However, if he manages to break through, I think he has a really good chance at beating Obama.  As for this discussion, it doesn't hurt to fantasize, speculate, and strategize.

Walter Block wrote a piece on this very subject the other day.  He suggested several names.  I would like to comment on some of his suggestions and add a few of my own.  If anyone wants to add any more names in the "comments" section, feel free.

Some of Walter Block's names are not realistic and he admits this with many of them.  Bachmann, Daniels, Sowell, and even comedian Jon Stewart can't be Ron Paul's running mate because they are not anti-war.  Even Gary Johnson, who is better than most other Republicans, is still not anti-war enough.  While I like John Stossel, the same goes for him too.

Gary North suggested Walter Williams as a pick.  While I admire Williams for his great economic lessons, he is, again, too pro-war, or at least not strongly against war.

Unfortunately, the same can be said for Ron Paul's son.  Rand Paul is easily the best senator in Washington DC, but he is just not radical like his dad.  I would not trust Rand Paul to end the wars like his dad would.  Not only would ending the wars save many lives and make us safer in the long run, it is also the easiest thing to cut out of the budget that would save a significant amount of money.

I don't know enough about Jim Grant to comment extensively, except with the little I know about him, I get the feeling that he is not as radical as Ron Paul (but I could be wrong).

The only choices I like on Block's list are Judge Andrew Napalitano, Lew Rockwell, and Doug French. I highly doubt that Lew Rockwell would consider this position and he is much more important in running his website.

If Ron Paul did get the Republican nomination, I think it would be very important for him to pick someone at least as radical as him.  This is actually a safety issue.  The establishment hates Ron Paul and I would not want to see anything happen to him.  The best way to protect himself is to have his running mate as someone that the establishment fears just as much or even more.  Plus, if Ron Paul is going to win the presidency, he should have someone as Vice President who would carry out his radical, pro-liberty agenda.  Plus, it would be nice to have someone who he could talk to for advice.

There are several names I could suggest, but who I don't feel are quite radical enough in all areas to serve as his running mate.  For example, both Walter Williams and Peter Schiff are great in economics, but I question their foreign policy.  These guys should be economic advisors to a President Ron Paul or one of them could be in his cabinet as Treasury Secretary.  Again, there are also some who are great in foreign policy yet more questionable in economics.  These people could fill positions like the Secretary of State.

So who are my top choices as a running mate for Ron Paul?  I like radical people who are anti-war and also understand Austrian economics.  They also have to be well-mannered.  I am not saying that any of these people would accept the offer, but here are a few of my choices:

Tom Woods
Robert Murphy
Thomas DiLorenzo
Jeff Tucker

I am not sure about DiLorenzo, only because the media would obsess about his writings against Lincoln, although I'm sure the media would find distractions with anyone.  There are also some other names I could come up with like Anthony Gregory, but I'm not sure if he is old enough to qualify.

If Ron Paul received the nomination, he shouldn't care at that point that the general public would have no idea who these people are.  Ron Paul doesn't need to pick another politician, since there are no other well-known politicians who are anywhere near as good as Ron Paul.  If someone like Tom Woods were being interviewed on the major networks and he were debating Joe Biden, I would have the utmost confidence that he would present himself well and present the libertarian agenda well.

What are your thoughts on a Ron Paul running mate?

Tuesday, August 30, 2011

Numismatics vs. American Gold Eagles

Numismatics is the study or collection of money, coins, and other related things.  When you hear gold advocates talk about numismatics, they are probably talking about rare gold coins.  You can buy coins that are worth more than their actual metal content.  You pay more because of rarity and the condition of the coin.

There are rating systems for rare gold coins.  For example, a gold coin could be rated MS 63, MS 64, etc.  The higher the number is, the better condition the coin is in.  These coins will actually come in a casing with the rating inside the casing.  The MS stands for "mint state".  The numbers range from 60 to 70, with 70 being a perfect coin.

I am not a big advocate of buying rare coins.  It is purely speculative (although what isn't?).  You are paying a premium for the rarity and condition of the coin.

I don't have any specific recommendations as far as owning physical gold vs. other gold investments.  I think it is important to diversify, even here.  Overall, I think it is a good idea to have at least a few ounces of the physical metal, but be sure to store it in a safe place.

If you are going to buy physical gold, I would recommend gold eagles, particularly if you live in the U.S.  You can buy them in different denominations (one ounce, half ounce, quarter ounce, and one-tenth of an ounce).  Aside from physical gold, you can own an ETF such as GLD, you can buy gold certificates, and you can buy gold stocks (although stocks do not necessarily track the price of the metal).

There is one really attractive aspect in speculating in rare coins.  If we hit a gold bubble, you could easily see these coins rise to enormous levels and in multiples of the actual price.  There is, of course, no guarantee, but I feel that I should point out the great possible rewards for buying rare coins.

There are also some major disadvantages.  First, although all value is subjective, it seems to be even more the case with rare coins, if that is possible.  It is the equivalent of buying art, in hopes that the next sucker to come along will pay even more than you did.

Another downside of rare coins is the price spread.  I looked at one gold site and price spreads were in excess of $200 for something that costs just a little more than an ounce of gold.  The price spread on the American eagles were only about $50.  This is the difference between the buy price and the sell price.

If you are going to take a chance and speculate in numismatics, I would recommend you look at the American $20 St. Gaudens gold piece.  The thing I like most about this investment is that you limit your losses.  The actual gold content of this coin is just under an ounce of gold.  Therefore, the value of the coin will never drop below the metal content.  Right now, you should be able to buy one of these coins in MS63 or MS64 for just a few hundred dollars more than a one ounce gold eagle.

If you decide to take a chance and pick up a rare coin or two, don't forget to unload these first if we go into a bubble stage.  You will not want to be holding these if there is a collapse in the gold price in the future.  You can always just convert them to regular American eagles and profit the difference.

Monday, August 29, 2011

Government in Canada

There is an interesting piece today at in which the author discusses the economic situation in Canada.  He points out that the economy is better there than in the U.S. and other wealthy nations.  He traces this to the fact that, in the last couple of decades, the Canadian government has actually reduced its debt by controlling spending.

I certainly think there is a lot to this.  As the U.S. government continues to pile up the national debt, we hear about how we are putting this burden on our grandchildren.  But the bottom line is that government spending and debt are burdening us right here and right now.  It is reducing savings and investment by individuals and businesses.  It is sucking capital out of the voluntary economy.  This is one of the reasons there is unemployment over 9%.

Property rights, in general, is typically what will determine how well an economy does in a given area.  More specifically, regulations, spending, and monetary policy are the major factors.  While taxation is important, I tend to lump this in with spending.  If spending is low and monetary policy is good, then taxation is most likely not a problem.

I generally agree with the author on his analysis of Canada.  He focuses primarily on spending.  I think monetary policy has also played a significant role as the Canadian central bank has been less inflationary than the Fed (which isn't hard right now).

Unfortunately, and as the author admits, Canada is certainly no paradise.  It is another welfare state with high taxes and burdensome regulations.  There is free speech there, but less so than in the U.S.  The environmental regulations tend to be awful compared to most places in the U.S.  And of course we know about the healthcare system there.

The healthcare system in Canada is mostly socialist.  The system in the U.S. is mostly fascist, although there is still a tiny remnant of free markets left.  The quality of care in the U.S. tends to be much better.  I think one advantage of the Canadian system is that, because of the lack of quality and high wait times, people avoid doctors more.  This can actually be beneficial as people turn to healthier alternatives for problems instead of just getting a prescription and popping pills.

If you have a small illness, you might be just as well to be in Canada and avoiding the doctors.  If you have an emergency and you need surgery right away, I would much rather be in the U.S.

One other possible advantage of the Canadian healthcare system is that it is easier to start a small business because you don't have to worry about getting health insurance.  In the U.S., health insurance is usually tied to your employer, so many people seek out regular jobs, particularly with bigger companies, just to have the health benefits.  It discourages entrepreneurship.

Of course, the best system is a free market healthcare system.  You could get high quality for low prices and you wouldn't worry about health insurance because it would be so cheap.  Both the U.S. and Canada are very far from this.  The U.S. was a lot closer to this 50 or more years ago.

While it is great for Canada that its government debt has gone down, it is important to remember that spending is still high.  The taxes there are high.  They have to pay income taxes, plus they have a national sales tax (on top of the other sales taxes).

One other thing to note about Canada is that the housing market is out of control in some areas.  I have paid some attention to the housing market in big cities like Toronto and the prices are outrageous.  They might be experiencing a housing boom like the U.S. did, except Canada is five or more years behind.  If that is the case, we can expect a bust soon.

As far as money,  I think the Canadian dollar is a better place to be than the U.S. dollar.  However, we must remember that the Canadian dollar is also a fiat currency, so gold is better than either one.

Regardless of the problems facing Canada, the author of that article has made a great point.  Government spending is not what grows an economy.  The Canadian government has been less reckless, fiscally speaking, and the sky is not falling there.  In fact, things are better there.  The Keynesians should try to explain that.

Saturday, August 27, 2011

Japanese Prime Minister Announces Resignation

The Prime Minister of Japan has announced his plans to resign.  One of the main reasons for his unpopularity is a view that there has been a lack of leadership in the face of the tsunami disaster.  While I'm sure this is correct, we cannot discount the fact that the Japanese economy is still not in great shape.  Obviously the tsunami was very harmful to the Japanese economy (despite what Paul Krugman might say), but it is also obvious that the economy would be in trouble anyway, even if there had never been a tsunami.

I expect politicians around the world to feel more and more heat as time goes on.  With the world economy in trouble, the welfare state is also in trouble.  Politicians are accustomed to being able to offer free lunches.  This buys them votes and keeps voting citizens content.  With tighter budgets coming, it is harder for politicians to offer free lunches as it is becoming more known that they are not actually free.

The areas where it is the most fun to watch are where citizens are demanding the impossible.  Think of Greece.  People there want these great benefits.  They want the government to provide for their retirement at an early age.  The Greek government is on the verge of bankruptcy.  They simply cannot fulfill these previous promises.  Some of the voters there are asking their government to do the impossible.  It doesn't matter who they put in office.  No matter what, Greek citizens will see a cutback of the welfare state.  As Margaret Thatcher said, the problem with socialism is that you run out of other people's money.

California is another place where it should be fun to watch (as long as you don't live there).  If I were an advocate of one of the major political parties, I would not want to win political offices there.  For example, the Republicans should be happy that Jerry Brown (a Democrat) is now the governor there.  Brown is a big government guy.  He loves the welfare state.  And yet he will be the one that presides over a cut in the welfare state.  Who are the Democrats on welfare going to blame for an end to their supposedly free lunches?

The U.S. government can keep the game going longer.  They have a monopoly on the money supply.  The U.S. government can get the central bank to print money (digitally speaking).  This can keep the welfare state going on a little longer.  California has more limits.  They cannot run up their debts too big or they really will face a default.  They will be forced to default or cut back on their welfare state.  Perhaps it will be a combination of both.

The government in DC will eventually be forced to cut back.  There is a limit to how much the Fed can print before there are very serious repercussions.  I don't think the Fed will go to hyperinflation.  They would destroy themselves.  There would be a serious breakdown in the division of labor.  There would be massive poverty and starvation in the U.S.

The more likely scenario is that we see high inflation and the Fed eventually tightens its monetary policy in order to save the dollar.  At that point, Congress will be forced to cut back.  The President will take a lot of blame unless he is very straightforward with the people.  Ron Paul is straightforward and none of the other candidates are.  Both major parties should be hoping that they don't win the presidency in 2012.

Thursday, August 25, 2011

Robert Murphy on Inflation

Robert Murphy has a good piece today, appearing on the Mises Institute's website.  I consider Murphy to be one of the best economists there is in Austrian economics and I consider Austrian economics to be the only major school of economics which gets things right.

Murphy concludes his article with this paragraph: "Austrian economists know to be wary of looking at financial data and drawing conclusions about what 'must' happen.  The future is always uncertain, the result of volitional human action."

This is something that I harp on quite often.  The main theme of Austrian economics is that humans act.  Therefore, knowing this, we should know that it is impossible to accurately predict what the economy will do and what investments will do because it is impossible to predict how each individual on this planet will act.

With that said, it wouldn't make for very exciting commentary if I just repeated that every day and did no more analysis.  What we can do is take the data that is known to us and try to guess at how humans are likely to react.  For example, if the government announces that it is passing a new marginal income tax rate of 99%, we can take a good guess that this is going to discourage people from working beyond a certain income.  We could be wrong, but we can take a good guess that most human beings will react negatively and will not work beyond a certain point just to keep 1% of their earnings.

Moving on from this subject, there is one other specific issue in Murphy's article that I would like to examine.  He talks about the excess reserves held by banks and correctly points out that this has helped in keeping price inflation in check.

He then shows the Fed's latest figures on excess reserves.  He suggests that the reserves might be leaking out and that big price inflation might be around the corner.  While he tempers his comments and says that this might just be a blip, I would like to address it a little further.

I actually see no reason to get excited (or perhaps panicked is a better word) at this point.  The excess reserves are almost the same as they were two months ago.  They are down less than $8 billion from June 15 to August 10, which seems like a lot, except that we are talking about a total of over $1.6 trillion.

This actually makes sense.  The excess reserves have had an almost perfect correlation with the adjusted monetary base, which is the monetary inflation that the Fed directly controls.  QE2 stopped around the end of June, so the monetary base has been basically flat for the last two months.  It would make sense that excess reserves are not increasing and we can always expect small fluctuations.

As Murphy says, we will have to continue to watch this data to see if the trend holds.  I will keep watching, but I am skeptical that these reserves will leak out.  It is slightly interesting to see that the required reserves have been increasing, but again, the amounts are too small at this point to get excited.

I expect more inflation (monetary and price), but I am skeptical that it will be huge any time soon.  People are afraid and the bankers are afraid to lend money out.  I don't see this changing right now.  We will continue to monitor this data to see if there are any significant changes.  If excess reserves drop by a few hundred billion dollars without a drop in the monetary base, then I will start to sound the alarm of imminent price inflation.

Wednesday, August 24, 2011

Gold Gets Hammered

Gold was down big today.  You will get different quotes depending on where you look, but some quotes show it was down over $100 today.  That is really incredible if you think about it.  The yellow metal was only trading at $300 a decade ago and now we are seeing 100 point swings in one day.  I won't be surprised to see 100 point swings going the other way in the somewhat near future.

Today's action is actually good news for gold investors.  I know that sounds crazy, but this is actually very bullish.  Gold is still up for the month and it needed a pullback.  A few months ago, silver went up huge in the matter of weeks and it came crashing back down in the matter of days.  It is still about 25% off of its high now.

I am expecting gold to go parabolic at some point.  This didn't happen now.  It will go parabolic when it is in bubble territory and I think we are a long way off from that.  Right now, it is two steps forward and one step back for gold.  We shouldn't be surprised at all to see a big retreat after the run we just had.  It is always impossible to accurately time the pullbacks and it is just as hard to predict how big of a drop there will be, but it shouldn't surprise us.

While I am not making any short-term predictions on the price of gold, I do expect the price to continue its climb in the next several years.  The fundamentals are all there.  The economy is still struggling, unemployment is still high, the deficit and debt are huge, and price inflation is relatively low.  On this last point, you may think that that is bearish for gold, but I am not seeing it that way.  With price inflation still relatively low (especially as compared to the 1970's), it might encourage the Fed to start QE3 (more digital money printing).  The Fed is more likely to continue its policy of monetary inflation if it doesn't see price inflation as an immediate threat.

Expect more and bigger volatility in the gold market.  I would expect to see silver get in on the action soon.  Silver is usually the more volatile metal, but that hasn't been the case in the last few months.  It is also a good time to eye some gold stocks for speculation purposes.  Just be prepared for a roller coaster ride.

Tuesday, August 23, 2011

535 Congressmen

Yesterday, I wrote about how the establishment controls things more than any particular individuals.  Today, I would like to discuss this topic as it relates to Congress.

There are 535 congressional seats.  There are 435 in the House of Representatives and 100 (2 for each state) in the Senate.  I have often heard that everyone should simply vote against the incumbent (the current office holder) and then we would have a whole new congress (although it would take 6 years to clean out the Senate).

I would certainly be happy to see everyone in congress fired, especially since Ron Paul is leaving anyway. This would certainly signal a change and it would tell the politicians that Americans are fed up.  It actually baffles me how some of these clowns keep getting re-elected, especially Republicans who supported all of the bailouts.

If all of the incumbents lost their seats, it would obviously show a change in public opinion.  However, it wouldn't necessarily mean that public opinion had gone completely libertarian.  Perhaps we could see a scenario where the government is on the verge of bankruptcy (which it is) and it has to enact deep spending cuts in order to avoid hyperinflation or default.  Perhaps we could see the politicians practically being forced in to making severe cuts in Social Security and Medicare.  We could see a revolt that resembles Greece more than the Tea Party.

Here is my point.  If all of the members of Congress were to lose their job without a change in public opinion towards liberty, then it would do us no good.  This is why it is not important to get the "right" people elected.  It is far more important to change people's opinions in favor of more liberty and less government.

As Hayek said, the worst rise to the top.  The federal government holds a lot of power over a lot of people.  It is this massive power that attracts the worst elements of society.  The only way to get rid of corrupt politicians is to dramatically reduce the power they have.  As long as there is power, it will attract some of the most evil people you can find who wear nice clothes.  If that power is taken away, then you don't really have to worry too much about who is in office.

In conclusion, the reason that Congress has so many corrupt politicians is because of the power they wield.  If you take that power away, then it takes away the corruption.  As Harry Browne liked to quote Michael Cloud, "the problem isn't the abuse of power, it is the power to abuse."

Only the American people can take that power away by withdrawing their consent.  We don't need to elect the right people.  We need to convince the American populace that their lives would be much better off with smaller government.

Monday, August 22, 2011

Individuals in Government

One of the biggest mistakes that people make in blaming government is thinking that things would be different if a particular individual weren't involved.  Let me explain further.

There are many Republicans who think that things would be much better if only Obama weren't in office.  But if you really look at it, Obama has carried on the policies of Bush.  He has continued the wars (and started new ones) and he has continued to bail out failed companies and he has continued to run huge deficits.  Even Obamacare is not much worse than Bush's Medicare prescription drug program.

Even with other things, if you look at them close enough, it doesn't really matter what individual is supposedly in charge.  I like to blame Bernanke when I'm talking about the Fed and monetary policy.  But the reality is that it wouldn't matter if someone else were chairman of the Fed.  It matters far more what the general establishment's position is on the issue.  If the big bankers and elite in government want the Fed to buy more government debt, then that is what will happen.

Bernanke is not really a decision maker.  He is a face for the establishment.  It is the same way with the presidency.  There are a few little differences between what Obama has done when compared to what Hillary Clinton or John McCain would have done.  But regardless, they were all vetted by the establishment and they were all acceptable to the establishment.

Sometimes the establishment does not favor a particular person, but they still may be acceptable.  Reagan is a good example.  They didn't want him in office, but he was acceptable, particularly when he picked Bush as his VP.  Reagan did not shake things up that much.  He is not the hero that conservatives make him out to be.

If you look at the current group of Republican presidential candidates, most of them are acceptable.  The establishment's first choice is Romney.  The establishment's second choice (of the major contenders) is Rick Perry.  The third choice is Michele Bachmann.  They really don't like Bachmann and they don't want her to win, but she would still be acceptable, much like Reagan.

The establishment is afraid of Ron Paul.  He is completely unacceptable.  He would not be a face.  He is an individual that could actually make a difference and change things dramatically.  He is a major threat to the establishment and they know it.

This whole concept is important when viewing politics.  I believe that Kennedy was taken out because he was a threat to the establishment.  While he was certainly no libertarian, he was not playing along with the crowd.

We should even remember this when going back further into history.  I've heard people blame Keynes for the economic problems that we have today.  But Keynes was just a convenient excuse for the establishment during the 1930's when the government wanted to vastly expand.  He is still used as an excuse today.  But if Keynes had never existed, the establishment would have found some other "economist" to promote their big spending policies.

I'm also not sure how much Paul Volcker was in charge of tightening monetary policy in the late 1970's and early 1980's when he was Fed chairman.  He may have been instructed to do so by the banking elites and foreign elites in order to save the dollar.

While I like to criticize Ben Bernanke and his Keynesian views, he is just a face of the establishment.  If the major players tell him to stop his digital money printing, then he will stop.  This is why there is hope for avoiding hyperinflation and a total destruction of the dollar.

Saturday, August 20, 2011

Unemployment Differences in the States

There was an article on Yahoo describing the unemployment situation and comparing some of the statistics between the different states.  Some of the states with the highest unemployment rates include Nevada, California, and Florida.  The state with the lowest unemployment rate is North Dakota.  Can you figure out why this is?

The obvious correlation that I see is that the states with the highest unemployment rates are the ones that experienced the biggest boom and bust with the housing market.  When housing prices were going up at huge rates about 5 to 10 years ago, it was states like California and Nevada that saw the biggest housing boom.  Now that the housing boom has gone bust, these states have the worst unemployment.

A state like North Dakota, with the lowest unemployment rate, did not see a big housing boom in the last decade.  While prices were going up 20%, 30%, or even more in some areas, the price of housing in North Dakota was going up very little.  There was a minimal boom which meant a minimal bust also.

With my study of Austrian economics, along with just plain common sense, it is easy to see that the Federal Reserve was the primary cause of the housing boom.  The Fed artificially lowered interest rates and kept a relatively loose monetary policy.  Monetary inflation then translates into price inflation, but it gets directed into certain hot spots.  Housing was a natural place for this newly created money to go.

Low interest rates made borrowing cheaper.  In addition, a house is a hard asset and is therefore usually a good purchase in an easy-money environment.  In addition, the housing market is subsidized by the government in so many other ways, particularly when it comes to mortgages.  There are also other little things like the mortgage interest deduction on taxes that encourages home buying instead of renting.

The states with high unemployment actually show a real life example of the Austrian business cycle.  The Fed created an unsustainable boom that eventually went bust.  These were misallocated resources.  These resources, which included human labor, must now readjust.  This is the correction process.  This can take time, particularly when the government is interfering and trying to prevent the market from correcting the situation.

In conclusion, the Fed causes a lot of problems.  Libertarians particularly like to look at inflation and how it makes us poorer by making things more expensive.  But high unemployment in states that had a big housing boom and bust also illustrates the horrible effects of central bank policies.  The previous malinvestment that was caused by the Fed (mostly under Greenspan) is the primary reason that the employment situation is so bad right now.  It will continue to be bad in the future if the government doesn't step out of the way and allow the correction to take place.

Thursday, August 18, 2011

Stocks Get Rocked Again, Gold Up

The volatility continues.  The Dow closed down over 400 points today.  Gold was up above $1,820 and is up again in after market trading.  With gold going up, stocks going down, and unemployment remaining high, it is an indication that the government's policies are failing, which of course is no surprise to libertarians.

Meanwhile, Obama is going to announce his plans for another stimulus.  There is probably only one good thing that may come out of it.  He may propose to extend the payroll tax cut that will expire at the end of the year.  This is a good thing.  The government is running massive deficits and is headed for default anyway, so we may as well keep what we can now.

If Obama really wanted to help unemployment, he would propose the same payroll tax cut for employers.  A payroll tax cut for employees helps those who are working.  It lets people keep a little extra.  But in order to help unemployment, you have to decrease the cost of labor.  By reducing the employer portion of the payroll tax, it would make it cheaper for companies to hire people.  This would actually do something to help unemployment.  Of course, the politicians, particularly the Democrats, could never just "give away" money to big corporations.

I expect the rest of Obama's "stimulus" to be horrible.  It will contain mostly welfare and government programs that will only make things worse.

The economy needs more savings and investment.  The economy needs a liquidation of the bad debt and previous malinvestments.  The economy needs less regulation.  While Americans try to pay down debt and increase savings, the government is ruining this by spending money and running up more debt.  This is making it almost impossible for any kind of real recovery.

Expect more volatility.  Day traders should be happy.  The stock market will continue its roller coaster as the market is not sure if there will be recession, price inflation, or both.  The bond market and the gold market are telling us two different things.  My guess right now is that bonds are correct for the short term and gold is correct for the longer term.  In other words, we will see a continued recession and then we will see significant price inflation.

Wednesday, August 17, 2011

When Will the China Bubble Pop?

It seems that China is in a boom that may go bust.  I was talking to people about this years ago.  I remember 4 or 5 years ago hearing some people say that China may go into a recession after the 2008 Olympics.

China has a reported price inflation rate above 6% right now.  I would not be surprised if that number were understated significantly.  Of course, this is price inflation.  Monetary inflation in China has been much higher in the last several years.

I am hearing more people today talk about the possibility that China is "overheated".  This is absolutely true, but I just want to be clear on something.  The only reason that China is "overheated" is because of the previous monetary inflation.  There is absolutely nothing wrong if an economy grows 8 or 10 percent per year, as long as it is not part of an artificial boom.  In a free market economy with stable money, a huge growth rate of 8 or 10 percent does not mean that things have to slow down or go bust.  If the growth is built on real savings and investment, then the growth is real.

Unfortunately for China, much of its growth has been artificial.  There is no doubt that the Chinese people are far better off now than they were 3 decades ago or even 1 decade ago.  Some of this growth is real due to the semi-liberalization of the economy by the communist rulers.  However, as I mentioned, China has had significant monetary inflation over the last several years.

The Austrian Business Cycle Theory applies to China just as it would apply anywhere else.  The easy money policies of the Chinese central bank have created an artificial boom that is misallocating resources. This is why we see these new cities being built that are practically empty.  If China keeps increasing its rate of monetary inflation, then eventually they will go to hyperinflation.  The more likely scenario is that the Chinese central bank will slow down monetary inflation and there will be a severe correction.

For anyone who studies and understands Austrian free market economics, there should be little doubt that there will be a bust in China.  It will be China's first major recession, since this is the first time that China has had any kind of significant economy.

The interesting thing to learn from the Chinese boom is just how long it has been able to continue.  Again, there were people five years ago predicting a bust.  While Austrian economics can help us in predicting that a bust will occur, it is almost useless as to the timing.

Remember this lesson when the price of gold goes through the roof.  A bubble can last a lot longer than people think.  When the day comes that it does go bust, be prepared and step out of the way the best you can.

Tuesday, August 16, 2011

Is Gold Set To Move Higher?

Gold finished up today, closing above $1,780 per ounce.  After its big run in the last few weeks, it pulled back a little and now seems to be resuming its up trend.

A couple of weeks ago, I wrote that I don't think gold is in a bubble.  With the movement this week, not only is gold not in a bubble, but it doesn't even look like it is going to have a significant pullback any time soon.

My analysis of the economy and investments usually comes from a libertarian/ Austrian point of view.  I like to look at the facts and make judgements based on the fundamentals.  For this reason, I have been bullish on gold.  The Fed has tripled the adjusted monetary base in the last three years and the federal government is running a yearly deficit of $1.5 trillion.  These are enough reasons alone to be bullish on gold.

I am not usually a chart guy.  I don't like to look at breakout points or moving averages.  With that said, even if we look at gold from this perspective, you still can't help but be bullish.  Gold made a significant move during the recent stock market turmoil.  After hitting new highs (several times), it had a slight pullback.  The price has been consolidating and looks ready for another possible move.

Compare gold in the last few weeks with silver this past spring.  A few months ago, silver went parabolic.  It went up about 50% in a very short time span.  It went all the way to near $50 and then the bottom fell out.  Silver managed to lose 30% in the matter of days.  It snapped back to below $35 in an incredibly short time frame.

When you look at gold in the last few weeks, it looks much stronger.  It looked like it could go parabolic, but then it stopped and made a slight retreat.  It is not going to the moon in the matter of days, as silver did a few months ago.

Perhaps foreign central banks are putting a floor under the gold price and buying on dips.  There are also a lot of scared investors out there looking at gold.  Most people do not own gold, except for small amounts in jewelry.  Most don't even own much in the way of stocks.

I know a couple of people who are looking to sell some gold (mostly jewelry).  Again, if we were in a bubble, people wouldn't be looking to sell now.  I expect gold to go parabolic at some point, but we are not even close to the final run yet.  I think at some point, gold stocks will get hot.  I am not making a prediction as to the timing, but I am making a prediction (which I usually don't like to do) that gold stocks will catch fire as investors look for alternatives.

Monday, August 15, 2011

Warren Buffett on Taxing and Donating

Warren Buffett, one of the world's richest individuals, wrote an opinion piece in the New York Times in which he called for higher taxes on the mega-rich.  This has been a standard line of his for years.  Buffett is an Obama lover and he is a statist (or do I repeat myself).

Today, Pat Buchanan challenged Buffett to send a check for $5 billion to the federal government, since the man has about $40 billion in net worth (link via Drudge).

We'll have to see if Buffett responds, but he has actually been challenged on this before.  In an interview a few years back, Becky Quick of CNBC questioned Buffett on this exact thing.

Buffett responded, "Well, that's a choice and it's an option that... If I had to give it to a single individual, or make some young Buffett a multi-billionaire, or give it to the government, I'd absolutely give it to the government.  I think that on balance the Gates Foundation, my daughter's foundation, my two sons' foundations, will do a better job with lower administrative costs and better selection of beneficiaries than the government."

So there you have it.  Buffett thinks he can spend his money better than his government.  He thinks that his donations to his charities of choice are smarter than having the government use it for charity.  But why doesn't he think everyone else is capable of this?  Does he think that only he is smart enough to pick good charities?  Or perhaps he is concerned that some people might not donate enough to charity?

In his editorial, Buffett actually uses the term "mega-rich".  So he is not just talking about he rich, but the mega-rich.  So when he is concerned about charitable giving, he is really targeting people like his buddy, Bill Gates.

Buffett is trying to play the class warfare card in a different way.  He is trying to look heroic by calling for higher taxes because he is in this elite few.  It is the same thing as many Hollywood celebrities do.  They are either trying to relieve their guilt or look good in the eyes of their audience.

Buffett's tactics won't work with most people.  Many people will ask the same question that Pat Buchanan asked.  Unless Buffett actually puts his money where his mouth is, he will look like a fool and a hypocrite.

It is a shame that Warren Buffett is such a cheerleader for big government.  His father, Howard Buffett, was one of the greatest politicians of the 20th century from everything that I've read.  I can only think of one congressman who has been any better.

Saturday, August 13, 2011

Ames Straw Poll Results and Debate Comments

The results are in for the Ames Straw Poll.  Michele Bachmann won, while Ron Paul took a close second.  The spread between the two was less than 200 votes.  Tim Pawlenty came in third, but it was a distant third.  I think this just about puts him out of contention.  Although Romney finished 7th, he was not competitively trying to win.  You can see the results here.

As I blogged on Thursday, I think the race for the Republican nomination comes down to four people.  Those four are Mitt Romney, Rick Perry (who just announced), Michele Bachmann, and Ron Paul.  I think my prediction has become stronger based on the straw poll results.

If Sarah Palin enters the race, I don't think she will win the nomination.  If anything, she will probably just take votes away from Bachmann.  They are both women and they are favorites amongst Tea Party conservatives.  I don't think her entering the race would be damaging to Ron Paul, as his supporters are more libertarian than conservative.

As for the debate, I watched most of it on Thursday and it was a bit more interesting than past ones.  Pawlenty and Bachmann went at it and I thought that Bachmann got the best of him.  I think this was his last chance to perform well and he basically failed.  He had a few funny one-liners, but this is not enough to be successful.

Newt Gingrich came across fairly well, although I still think he is a fake.  He does not stand a chance because most people sense (rightly) that he can't win against Obama.  So even those who like him realize that others don't.

Rick Santorum has never stood a chance and that will continue.  He claims to be a wonderful Christian, yet he wants to bomb the Middle East back to the stone age.

Herman Cain occasionally sounds good when he is speaking libertarian rhetoric.  The rest of the time he comes across as vague and, quite frankly, stupid.

Jon Huntsman just comes across as creepy and he is another establishment favorite, except he has little chance.

Ron Paul had an interesting night at the debate.  I thought he would shine more with economics.  We are in an economic crisis and he has predicted much of what has happened.  He did not shine as much as I thought (or hoped) he would.  He nailed it when they were talking about Romneycare and the 10th Amendment.  He said that while it may be bad policy, the federal government should not go in with their guns to overturn state law.  Bachmann got this completely wrong, which should show libertarians that she is not a libertarian.

I thought Ron Paul shined the most when it came to foreign policy.  Of course, people who disagree with him will see things differently.  This is where he really distinguishes himself from the field.  When Santorum challenged him on Iran, Paul really showed off his intelligence when he pointed out that the Iranian conflict goes back to at least 1953 when the U.S. government overthrew their leader.

When it comes to the economy and fiscal policy, I think Ron Paul needs to challenge the other candidates more.  It was actually Santorum who pointed out that a majority of the budget is made up of Medicare, Medicaid, Social Security, and the military.  This makes it almost impossible to balance the budget unless you make huge cuts to one or more of these things.  But Ron Paul actually could cut enough to balance the budget.  It would be difficult for Michele Bachmann to explain how she would balance the budget.  She emphasized that she voted against raising the debt ceiling, but it is unclear what she would specifically cut to balance the budget.

In conclusion, I think we are down to four: Romney, Perry, Bachmann, and Paul.  This is great news for libertarians as we have a spokesman in the national spotlight.  Even if he doesn't win, the country will be better off as more people move towards true liberty.

Thursday, August 11, 2011

Republican Debate and Straw Poll

Tonight is a Republican presidential primary debate.  It will air on Fox News.  On Saturday, the Ames Straw Poll takes place.  Do not mistake this as a regular poll with a random sample.  The Ames Straw Poll is a better indication of a campaign's organization and the loyalty of its followers.  For this reason, Ron Paul will likely do well.

It is impossible to predict what will happen tonight, but I expect the economy will be the big topic.  I'm sure Fox News will find a way to ask Ron Paul some bizarre question, but he will get his points across as usual.

I see the whole race for the Republican nominee coming down to four people at this point.  I never expected John McCain to get the nomination in 2008, but I do believe we are in a different era now, just 4 years later.

I expect the 4 main contenders to be Mitt Romney, Michele Bachmann, Rick Perry, and Ron Paul.  I do expect Perry to enter the race and to be a contender.  Even if Sarah Palin enters the race, I think it is unlikely she will get the nomination, although it would certainly make things interesting.

Romney and Perry are the establishment candidates.  Romney is out of favor with the Tea Party.  He has to defend Romneycare in Massachusetts.  Romney passed Obamacare in his state before Obamacare actually existed.  If there is one thing that unites the Republicans, it is their hatred of Obama and Obamacare.  How could Romney possibly be the nominee given this fact?

Perry is trickier.  He sometimes talks a good game.  He sometimes sounds libertarian.  He said he was open to the suggestion of Texas seceding from the U.S.  He was pandering to his audience at that time.  If conservatives look closely at his record (most won't), then they would see that he has been horrible on some issues.  He has an advantage being the governor of a large state that is not struggling as much economically.  His rhetoric will fool a lot of people.  Just remember that this is the man who wanted, essentially, a forced vaccination program for young girls.

Bachmann is not favored by the establishment, but she would still be acceptable.  She would continue the U.S. empire.  She says she favors ending the Department of Education.  It is hard to say if she is telling the truth.  Besides that, she doesn't offer much in the way of specifics.  I would be a little more impressed with her if she did.  She says she wants lower taxes and less spending, but she doesn't really say what she would cut.  I fear Bachmann in the way that Reagan was bad for libertarianism.  She will espouse all of these free market principles, but her policies will not reflect her rhetoric.  Then the hacks in the media will say that her free market principles have failed.

Then we are left with Ron Paul.  The establishment hates him and his ideas.  They fear him.  They fear he is correct in what he says.  They fear the following that he has accumulated.  It is really unbelievable that he is polling in the double digits in many national polls.  For anyone in the libertarian movement prior to 2007, this should be really impressive.  This is the first time in modern day America that libertarian views are being heard by millions and millions of people.

The Ames Straw Poll is rather important.  If any one of the big candidates, excluding Perry, finishes less than third, then I think their chances will be low of getting the nomination.  It is very important, for those campaigning and participating, to finish in the top three.  I expect Ron Paul will be in the top three.

Wednesday, August 10, 2011

Gold vs. Platinum

The stock market has been on a roller coaster ride in the last week.  The drops have been more than the ups.  This is very bearish news for the stock market and the economy in general.  Of course, if you have been paying attention and you understand Austrian free market economics, then none of this comes as a shock to you.

Even less shocking, although notable, is the huge run in the price of gold.  It topped over $1,800 per ounce today.  People are buying gold due to economic uncertainty and fiat currency uncertainty.  The interesting thing is that the other metals have not been on this same run.  Even gold's cousin, silver, has not done that well.  If silver is the poor man's gold, then I guess rich people are buying right now.

The other notable thing is that, as of closing today, an ounce of gold is worth more than an ounce of platinum.  I discussed this in a blog post last month.  Platinum is typically more expensive than gold.

In today's environment, it is easy to see why gold is doing so much better.  Gold has a history of being money.  Platinum is more of an industrial metal, often used for cars.  Gold is primarily used for jewelry and investment.

Another factor right now is the fact that many foreign central banks are buying gold.  They are certainly not buying platinum.  Bernanke says that central banks hold gold because of tradition.  But the reason it is tradition is because gold acted as money for thousands of years.  Central bank buying is probably helping in this gold explosion.

I am even more adamant now that platinum might be a good speculation at this point.  The gold to platinum ratio is now over 1 to 1.  While ratios don't always mean anything, it can be useful for speculative purposes.

I think the last week has confirmed my overall strategy of investing in a permanent portfolio setup, as described in Fail Safe Investing.  I am also an advocate of holding far more gold than silver.  I am not against silver as a speculation, but gold should be a rock in your portfolio.  It is there for more stability and a hedge against inflation.  Silver is much more volatile.

So while I am still advocating that a majority of your portfolio be in the permanent portfolio and that most of your precious metal holdings remain in gold, I think there are opportunities for speculation.  If you want take a very small portion of your investments and buy platinum, I think now would be as good of a time as any.

After my last post on platinum, there was an anonymous comment listing ETFs and ETNs.  If you don't want to buy and take possession of the actual metal, then PPLT looks like a good alternative that you can easily trade through a brokerage account.

Tuesday, August 9, 2011

The Fed Statement of August 9, 2011

After yesterday's huge drop in the stock market, the Fed met today and released its statement regarding the economy and its policies going forward.  You can read the transcript here.  It is a short read.

The Fed announced that the current conditions "are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013."  I have written about the federal funds rate before.  The Fed is not really controlling this rate right now, at least through the money supply.  The banks have piled up massive excess reserves and most of them don't need overnight loans.  This has kept the rate near zero.

This statement didn't mean all that much.  If anything, it should really be a bearish sign that the Fed expects to maintain this policy for at least 2 more years.

The transcript does say that the Fed "will maintain its existing policy of reinvesting principal payments from its securities holdings."  This is an indication that they plan to have a stable money policy.  As usual, they leave open the possibility of adjusting their strategy as things progress (or regress).

The market had a slightly negative reaction after this release, but then the stock market exploded in the last hour of trading.  The Dow went up about 600 points in the last hour, closing up more than 400 points for the day.  Of course, this still did not erase all of the losses from yesterday.

Interest rates went down.  It is ironic that rates on government bonds have gone down since being downgraded from AAA status from S&P.  If you want to refinance a mortgage and you procrastinated last year when rates were way down, you have another opportunity.  If you can get a 30 year loan for about 4%, why not take it?  If you stay in your house for a long time, your last payment in 30 years will be practically nothing.  Make inflation your friend, even though it is not.

It is impossible to predict where the market will go from here.  I expect a lot more volatility in the short term.  Ultimately, it is going to depend on government policies and, even more so, Fed policies.  It is important to keep an eye on the adjusted monetary base.  This is far more meaningful than the federal funds rate.  The Fed actually controls the monetary base right now.

Monday, August 8, 2011

Stock Market Crashes, Gold Up

The bottom fell out of the stock market today, with the Dow falling more than 600 points.  It was even more brutal for the Nasdaq and S&P 500, which were both down over 6 and a half percent.  This came after news from late last Friday that the S&P was lowering the U.S. government's AAA rating.  Today, the S&P announced more downgrades, including some municipal debt.  The news keeps getting worse and worse.  Meanwhile, gold exploded today, hitting new highs above $1,700 per ounce.

For anyone who has followed my speculation strategy of going long in gold and silver and shorting the stock market, you have done very well these last few trading days.  If you have a lot riding on market shorts, you might consider taking a small amount off the table.  While I expect the stock market to continue down for now, you never know if the Fed comes out with an announcement of QE3 that could drive the market right back up.

Of course, if the Fed does announce another massive round of quantitative easing (money creation), then this will be even more bullish for gold.  The Dow to gold ratio is now less than 6.5 to 1.  In other words, you need a little less than 6.5 ounces of gold to buy one share of the Dow.  I have no magic ratio of what would make a good buy on the Dow or a sell on gold.  There will continue to be roller coasters, but I think a Dow to gold ratio of 4 to 1 or less might be a good indicator.  I would be very surprised to see it hit 1 to 1 any time soon, but we really are in unknown territory.

I think the S&P downgrade was largely symbolic.  The U.S. government should have been downgraded a long time ago.  The three major agencies (S&P, Moody's, and Fitch) are basically granted a monopoly by the government.  They are part of the establishment.  I'm not sure what this tells us here.  Perhaps the government will use this downgrade as an excuse for more taxes or more so-called stimulus.  Or perhaps things are so bad that even the S&P could not ignore it.  Whether the government will ever officially default is unknown, but it defaults almost every day by devaluing our money.

Besides gold, the other investment that did well today was bonds.  The 10 year yield was down to about 2.34%.  There is a tug-of-war going on between gold and government bonds.  Investors are seeking both for safety, but for different reasons.  Investors in bonds fear a major recession.  Investors in gold fear major price inflation.  Both sides may be right.

The Keynesian policies of this administration and the one before have put us in this situation, along with Congress and the Fed.  The Fed has tripled the monetary base since 2008 and we have seen deficits of around $1.5 trillion.  All of this and the economy is already going back in the toilet.  This is what happens when the government does not allow the correction to take place.  With all of the spending, debt, and money creation, things are only going to get worse.

My biggest fear right now is that these politicians will take a page out of Paul Krugman's playbook and say that the only reason the economy is not recovering is because the previous stimulus was not big enough. If the government spends even more and the Fed goes crazy with QE3, then we could get hit really hard with price inflation.  Ron Paul and Peter Schiff may be proven right sooner than we could have imagined as both have warned of severe consequences for the U.S. dollar.

Just remember that the name of the game right now is to keep what you have.  If you can make any extra profits while maintaining your purchasing power, then consider yourself lucky or really good.

Saturday, August 6, 2011

What is the Velocity of Money?

The velocity of money is a topic that I find even many libertarians do not understand.  Although it is impossible to accurately measure, it is a subject that is very important when looking at the economy.  I have discussed this topic before, but I think it is important enough to warrant more discussion as it relates to the current economy.

The velocity of money is the speed at which money changes hands.  If the velocity is high, then money is changing hands quickly.  Another way to say this is that there is a low demand for money.  Going the other way, low velocity means that money is slow to change hands.  It means that there is a higher demand for money.  In this case of low velocity, people are holding the equivalent of cash, usually in a bank.  It means people are not spending as much.

When more people are paying down debt, I consider this almost equivalent to low velocity.  People have a higher demand for money.  But if someone has credit card debt with a high interest rate, it makes sense for that person to pay down the debt instead of holding cash that is earning little or no interest.

I believe there are two main reasons that we are not experiencing high price inflation, in spite of the fact that the Fed has tripled the adjusted monetary base since 2008.  One reason is that the commercial banks have piled up this new money into excess reserves.  This has prohibited the fractional reserve banking process.  The other reason for a lack of massive price inflation is, I strongly suspect, a high demand for money.

People are not spending money as they were before the fall of 2008.  Although the national government debt is growing exponentially, the average American has actually reduced debt from a few years ago.  Americans (as well as others throughout the globe) are fearful of the future.  There is high unemployment and high deficits.  Future tax rates are uncertain and government regulations are causing huge uncertainty for individuals and businesses.  Many companies are sitting on big piles of money, but they are not investing it right now.  Excessive regulations (think Obamacare) and other uncertainties are causing Americans and American businesses to be conservative, fiscally speaking.

Since Americans are spending less, I believe this has helped keep a lid on price inflation.  If the economy falls back into recession, which seems likely, I would predict that the velocity of money stays low.  Of course, I don't think we've ever really been out of the recession.

It is important to remember that just because there is high monetary inflation, it does not automatically translate into high price inflation, especially in the short term.  On the other hand, velocity can go the other way too.  If the Fed starts up a QE3 program (more money creation) and more Americans start to fear future price inflation, then the velocity of money can turn up quickly.  You can have a scenario where prices are going up even faster than the money supply, especially if people think that the central bank is not going to stop creating new money in the future.

This is actually what can happen in a hyperinflation, or as Mises called it, the crack up boom.  If the Fed keeps creating new money like crazy and people doubt whether it will ever stop, the dollar could actually become worthless rather quickly.  I do not think this scenario is likely as I think the Fed would tighten up its monetary policy before it allowed hyperinflation to occur, although I will admit that anything is possible these days.

In conclusion, while velocity is hard to measure, you should at least know of its importance.  Consumer prices will not always directly correlate to the money supply, at least in the short run.  This is due to the demand for money.  If consumers remain tight with their money, expect price inflation to remain much lower in comparison to the new money in circulation.

Thursday, August 4, 2011

Panic on Wall Street

The Dow fell more than 500 points today.  The Nasdaq was down over 5%.  Oil was down 6%.  The silver ETF fell more than 7%.  Gold hit new highs and then fell back, although not as violently as silver.  There were two good investments to be in today: U.S. bonds and the U.S. dollar.

I am an advocate of the permanent portfolio.  Part of that portfolio is to put approximately 25% into long-term government bonds.  Some people think this is stupid.  They wonder how anyone could possibly invest in bonds when interest rates are sure to go up.  Well, today is your reason why.  Although interest rates are at near historic lows, they can still go lower.  For some reason, investors still flock to bonds for safety.

Today was also a good lesson on why the permanent portfolio invests in gold and not silver (although the mutual fund PRPFX puts a small percentage in silver).  I am not against owning silver, but I do favor a much higher percentage in gold.  Today was a perfect example as silver was off more than 7%.  While silver has the potential for bigger gains, it also has the potential for bigger losses.

Today should not be a big surprise for readers of this blog.  It should not be a surprise to libertarians and followers of Austrian economics.  When the government's solution to a recession is more spending, more money creation, and more debt, it is not a surprise that the economy remains weak.  Today revealed to many people that we are going into another recession.  I think a better description is that it is a continuation of the recession.

The government and the Federal Reserve have pumped in massive amounts of money and "stimulus".  It made things appear a little better over the last year and a half.  The stock market was going up.  But the so-called recovery was an illusion.  It was not built on stable foundations.  A recovery needs savings.  A recovery needs for the correction to have taken place to correct all of the malinvestments.  The government would not allow this to happen with all of the bailouts and spending.

This economy is in major trouble and it will continue to be until the government gets out of the way.  Obama and his Keynesian advisors are morons.  The Republicans rightly blame Obama for making the economy worse.  But they lack specifics.  Most of them also fail to mention that Obama is a continuation of the bailout and spending policies of Bush and the Republicans.

The trouble in Europe is also getting worse.  There is now talk of Spain and Italy needing help.  Greece is a drop in the bucket compared to these two countries.  We are either going to see massive inflation from the European Central Bank or we are going to see a breakup of the European Union.

Meanwhile, the Bank of Japan is going to create more yen out of thin air because its currency has been too strong.  This is more mercantilism.  They are morons too.  The Swiss have also announced a looser monetary policy for the franc.  In other words, two of the strongest fiat currencies will also be inflated.  This is why you should own gold and other hard assets.  All fiat currencies are risky at this point.

This whole thing sets us up for more quantitative easing (QE3) from the Fed.  This will eventually drive the dollar back down and will drive gold up even higher.  Bernanke is a student of the Great Depression.  He thinks that the Great Depression happened because there was not enough money printed.  This is his only solution to the down economy.  I expect more and more inflation.  Prices will rise.  I think "leaders" from other countries will tell him to stop.  If he doesn't listen, then the U.S. dollar will no longer be the reserve currency of the world.  It will lose this status quicker than most imagined.

Hold on to your hat.  This will be another wild ride.  I recommend keeping your money as safe as you can.  I recommend the permanent portfolio.  I recommend holding some extra cash (in the bank) and gold.  I recommend getting out of debt.  I recommend that you sit back and watch Obama and Bernanke continue to squirm.  These clowns are absolutely clueless as to what to do next.  Their only solution is to spend more and print more.  This has not worked so far.  It has made the problem worse.

Wednesday, August 3, 2011

Gold Speculation

Before my recommendation today, I need to preface it with something I often say.  I am a fan of setting up a permanent portfolio as described in Harry Browne's book, Fail Safe Investing.  I believe that you should have at least half of your investment portfolio in a permanent portfolio setup.  For more conservative investors, it should be even more.

Going beyond this, I think it is acceptable for more aggressive investors to speculate with money that they can afford to lose.  It is to these people that I speak today.  My recommendations are not meant to be part of your permanent portfolio.

Gold has had an outstanding run, particularly this week.  It keeps hitting new all-time highs (in nominal terms).  While I wouldn't be surprised to see a pullback, there are a lot of reasons to be bullish on gold going forward.

One interesting thing about this latest run in gold is that gold stocks have not managed to keep up.  While the price of the metal is hitting new highs, most gold stocks are off of their all-time highs.  While this trend could continue for a while, I can't imagine it continuing forever.

Gold stocks are a difficult play.  They are far more volatile than the price of gold.  You are also taking on the risk of owning a company, just as when you buy any company's stock.  You are at risk that the government of whatever country the company operates in could violate property rights and destroy the company's investment.  You are at risk of bad management.  You are at risk that the company will not find new gold.  You are also at risk of a stock market crash, as a market crash could drag down gold stocks with it.

With all of that said, I still think this scenario presents a golden opportunity.  If gold goes into a mania phase (which it isn't yet), then gold stocks could go up exponentially.  There is no guarantee, but holding gold stocks can be like having leverage in the gold market.  If gold doubles in price over the next couple of years, gold stocks could easily go up 3 or 4 times that.  Again, there are no guarantees, but I am just pointing out the possibilities.

Owning single gold stocks is usually too risky for me.  If you are going to try this, don't put a lot of your money at risk, particularly if it is a small company operating in a risky country.

My recommendation today is to buy either GDX or GDXJ.  These are exchange traded funds (ETFs).  GDX invests primarily in stocks of companies in the gold mining industry.  GDXJ invests in smaller companies in the gold mining industry.  Both are well off of their 52 week highs.

If you are looking for a good gold speculation while wanting to avoid the risk of owning any one stock, these might be worth a look.  You can buy these through a typical online brokerage account.  While I'm not making any predictions in the short term here, I do think these two ETFs have potential for big gains over the next couple of years.

Tuesday, August 2, 2011

South Korea Buys Gold

There was an announcement today that the central bank of South Korea recently bought more than one billion dollars worth of gold.  This was supposedly the first time in more than a decade that the Bank of Korea has been a buyer of gold.

This news has driven the price up about 2% today.  It is currently over $1,650 per ounce.  This happened on a day in which the dollar was up slightly and the stock market plummeted.  For anyone who has employed my speculation strategy of shorting the stock market and going long on gold and gold stocks, today was a banner day.  Of course, one day does not make a trend.

There are more and more signs that the economy is getting worse.  The trouble in Europe keeps getting worse, or at least it is becoming more well known.  And we know the U.S. is in major trouble when the establishment rating companies are threatening a downgrade of U.S. debt.  There are two things that did well today in the investment world.  Treasuries went up and gold went up.  This tells me that investors are flocking to safety.

I don't think I've ever seen so many bullish signs for gold.  Perhaps this means that there will be a correction (being a contrarian), but any dips in the price should just be a buying opportunity.  As we saw today with South Korea, central banks are buying gold.  This is putting a floor on the price of gold.  We have seen pullbacks, but there has been nothing extreme since 2008.

With all of the trouble in the U.S. economy and around the world, I am a pessimist in the short term.  I see either a major recession/ depression or major price inflation.  Let's just hope that we don't get both at the same time.

The federal government and the Federal Reserve are in a jam.  I really don't think they know what to do. They are Keynesians and they are either deliberately lying to the American people or they don't understand that their own reckless spending and monetary inflation is the cause of all of this.

I am still recommending that you keep at least half or more of your investments in a setup like the permanent portfolio as outlined in Harry Browne's book Fail Safe Investing.  For speculation, I like a combination of gold, gold stocks, and stock market short positions.  I still would not bet against bonds at this point.  We saw what happened today as interest rates went down again.

Tomorrow I will recommend a good gold speculation for your portfolio.

Monday, August 1, 2011

The Debt Ceiling and the Price of Gold

As I predicted, it looks like the politicians in DC have "compromised".  Although it isn't yet official as I write this, it looks as though the Republicans are set to once again throw their constituents under the bus.

The "plan" that will be passed will have less than $1 trillion in cuts with possibly another $1.2 to $1.5 trillion determined later.  The current budget deficit is around $1.5 trillion per year.  But there is a problem.  The 1 trillion dollars in cuts is over 10 years.  That works out to just $100 billion per year in cuts, which is less than 10% of just the yearly deficit.  Even if there is a total of $2.5 trillion in cuts, that still works out to an average of just $250 billion per year.

Then there is another problem.  Most of the projected cuts take place in the future.  I heard that there is really only about $30 billion worth of cuts for the next budget.  The Congress cannot control what is actually spent in 2 years or 10 years.

Then there is still yet another problem.  These supposed cuts are not actually cuts.  It is based on the projected baseline budgets for the next 10 years.  The budget is projected to increase substantially over the next 10 years.  So this "cut" of 1 trillion dollars is really not a cut at all.  It is simply a reduction in the increase that was projected to take place.

I heard Rush Limbaugh on the radio last week.  I am not usually a fan, but he made an interesting point.  He said that if a deal was reached to just hold spending the same over the next 10 years, then according to the Congressional Budget Office (CBO), this would be considered a cut of $9.5 trillion.  If this is true, this just points to the absurdity of this latest deal.  I am not sure of the accuracy of his figure, but the amount is certainly several trillion dollars.  Again, the Republican politicians in DC have once again proven to be absolutely horrible.

As for gold, the price fell a little on the news, but it is still holding well above the $1,600 mark.  Peter Schiff has written a piece about the prospects for gold given different scenarios.  You really only need to pay attention to his "bullish gold case #2".  This is the scenario of having the debt ceiling raised with symbolic cuts in spending.  He is right that this is bullish for gold.

I am actually baffled that investors could see the latest deal making in DC as bad news for gold.  It should be quite the opposite.  With a massive increase in the debt ceiling, it means there are no immediate plans to cut any significant spending.  It means that the debt will continue to grow.  It means that the Fed will continue to buy government debt.  It means that the monetary base will continue to go up.  It means that the dollar will get weaker and gold will go higher.