First Post

As the title of this blog indicates, I believe that gold is now entering a bubble. Gold bullion's been in a bull market since 2001, and has gone up quite a bit. Until the financial crisis, this bull market has taken place in a background of rising inflation.

Last year, gold took a pounding like almost all other investment classes - but, unlike all other investment classes save one, it ended with a gain for the calendar year 2008. The other class was Treasury securities, or comparable government bonds.

As of now, gold is the only asset class to sport a gain for the calendar year 2008 and a large gain for 2009 year-to-date. The approximately 27% gain in gold YTD has been in a low-inflation environment.

Central to my belief in an emerging gold bubble is a "New Era" assumption. Gold's been going up in large part because the U.S. dollar has been falling, but it's been rising in other currencies as well. Central banks are buying gold too; the Peoples' Republic of China government has been urging Chinese people to buy gold. The "New Era" assumption, I believe, will claim that the U.S. dollar is losing its status as a world reserve currency, and that gold will (at least partially) fill the gap.

I also believe that inflation is coming back. Since the crisis, several central banks have been pumping new money into the respective economies. It's only a matter of time before this money-pumping translates into higher prices - particularly, in the United States. Despite excess reserves piling up and the money multiplier plummeting, M1 money supply growth in the United States has been at double-digit levels for almost a year now. (M2 has grown more modestly.) The Federal Reserve has all-but committed to keep interest rates near zero until 2011. They'll have to, because the residential real-estate crisis is being followed by a commercial real-estate crisis and will likely be followed by an option-ARM mortgage refunding crisis. The last is due to hit its peak in 2011. Given that the residential-real-estate bubble burst came close to wrecking the financial system, the Fed will err on the side of inflationary bias for the time being. To paraphrase H.G. Wells, the U.S. economy is in a race between inflation and catastrophe.

This (politically) necessary bias will add a double-whammy to the "greenback sunset" story, and will amplify it. Given both, conditions are well ripe for a gold bubble.

This blog will track news stories on gold, post items of interest from the goldbug world, mention gold stocks from time to time, and sometimes pass on some wilder items from the hardcore goldbug scene. Special notice will be made of ultra-bullish predictions that rate mention in the business media.

Unless the gold bubble gets pinpricked early, it'll be a wild ride over the next few years. Thanks for stopping by.