When Gold's Bubble Arrives

Paris, France

Oil edged up towards $80 a barrel yesterday. And the latest numbers for producer prices showed more inflation than was expected.

Meanwhile, jobless claims were up. And the Dow rose 86 points...

What do investors see that we don’t? A mirage... the shimmering of hot money... money that comes from the feds. And they can’t believe it’s not real.

But that’s the problem. No one can tell the difference between real money and the counterfeit stuff. Nor can they tell the difference between real prosperity and the phony variety. And who can really know whether the feds are doing some good... or just up to their usual tricks?

Oh my... it’s Friday... and we’re too tired to dig very deeply into these issues. We’re going to keep it simple… even superficial…

Yesterday, gold rose $4. Is it too expensive... or too late... to buy in now?

What we’re looking at is a huge, systemic failure. Instead of ‘keeping it real,’ the financial system has been so phonied up that you can’t tell what’s what.

And then, when prices move... you have to figure out what’s really moving. Is the world spinning? Or just you?

We’ve been following the gold market for years. Gold has gone up about 300% over the last 10 years. But what does that mean? Does it mean gold has gone up? Or that the dollar has gone down?

We raise the question because we’re wondering how to keep score... Richard Russell suggests that you should keep score in ounces of gold, not in dollars. He’s right. Gold is not a perfect way of measuring wealth... it’s just the best way.

Over the long pull of history, gold is more reliable a measure of wealth than just about anything else. Whether you had 100 ounces of gold at the time of Caesar or 100 ounces at the time of Charlemagne... or 100 ounces during the Jimmy Carter years – you were well off.

Note that we said gold is a ‘measure of wealth’ not means to wealth. Gold is inert. Lifeless. Incorruptible. But inherently shiftless. It never gets out of bed in the morning. It has never earned a penny in its entire life.

Gold won’t make you rich. It toils not; neither does it spin. Since it doesn’t hustle, it won’t increase your wealth. That’s why, in the Bible, the slave who kept his master’s wealth safe in gold got beaten. Gold won’t earn a profit. It won’t pay you a salary or give you a company car. All it will do is help keep you from getting poor. We’ve never heard of a man who had 100 ounces of gold who was poor. On the other hand, we’ve read about millions of people with stacks of paper money who couldn’t afford a cup of coffee. In our wallet, for example, is a 10 Trillion Dollar bill from Zimbabwe. A dear reader gave it to us. You could have a stack of those a foot high. You still wouldn’t be able to buy a latte at Starbucks. On the other hand, imagine you had a stack of kruggerands or maple leafs. Well, you still couldn’t buy a cup of coffee at Starbucks. Because the dumb clerk wouldn’t know what it was. And if he did take the gold coin in exchange for coffee, he’d probably rush over to the mall where some sharp dealer offered to take it off his hands in exchange for PAPER MONEY!

You see, the average person has no idea what real money is. One dollar bill looks the same as another to him. And gold? He’s probably never seen gold, unless it was wrapped around his finger.

Gold is real money. At least, it’s as real as money ever gets. Gold represents wealth. It can be exchanged for wealth. And since the above-ground supply of gold grows about as fast as the economy itself, gold tends to hold its value over centuries. Today, gold is worth about the same as it was worth 2000 years ago.

But you’ve heard us make that point before, haven’t you? Well, the point we’re making today is different. If gold holds its value, more or less, year after year... how can you expect to make any real profit by holding gold? Won’t it hold its value in the future too?

Yes, dear reader, it probably will. As inflation increases, you’ll watch your gold shoot up in price... along with other prices!

BUT... gold is subject to manias and bubbles... just like everything else. Though, it can be expected to hold its value in the long run, in the short run, it could become very over-valued. Why? Because the paper money system is doomed. It is doomed because we can’t tell the difference between a real dollar... and a phony one. And it is doomed because the people in charge of dollars find it more convenient to introduce new counterfeit dollars than to strictly control the quantity and quality of the US currency.

Little by little, average people will come to see gold as a way to protect themselves. Then, suddenly, they will begin talking about gold. Cab drivers will have opinions about which gold coins are the best one to own. Hair stylists will want to convert their savings into gold rings and bracelets. Investors will talk about how much they made by trading in and out of mining stocks.

Gold will soar. Gold’s bubble will have finally arrived. Then, it will be time to sell.

More thoughts… after another bubble opportunity in the making…

Bubbles are OK if you can get out without being too greedy. Bubbles are created by manias. People find out there’s a good thing going on… and they want a part of it.

It happened with the Dutch tulip mania in the 1600s. It happened with the South Sea Company mania in 1711. It happened with the dot.com mania in the late 1990s.

Of course, the stories are all ones with sad endings. These manias led to bubbles. Bubbles always pop. Anyone left holding shares or tulips when these bubbles popped got burned. They lost a lot of money as the hyped up assets became worthless.

But that was the people who arrived to the part too late. Plenty of people made money in these manias. They just had to realize when to get out… before the bubble popped.

We wonder whether there will be a bubble in Falkland oil shares. You may know the story already. There are estimates of 60 billion barrels of oil under the ground off the Falkland Islands. There are four main companies after that oil:

Falklands Oil & Gas (ticker: FOGL), Desire Petroleum (ticker: DES), Rockhopper (ticker: RKH) and Borders & Southern (ticker: BOR).

Until now, there has been no rig available to actually find out whether there really is oil there. But this note from Tom Bulford say’s that’s about to change:

“The Ocean Guardian rig is expected to arrive at Desire’s Liz prospect on Friday (ed: that’s today).

“And according to Upstreamonline.com, the Ocean Guardian could ‘spud’ as soon as two days later. That’s when the drill bit actually hits the ground.

“We should know pretty soon after that what sort of oil discovery Desire has (or otherwise). If it’s good news, the Falklands oil frenzy will begin in earnest.

“And with Rockhopper and Falkland Oil & Gas booked in to use the Ocean Guardian, too, this story has plenty of room to run.”

Tom Bulford has been following this story for years. So he and his readers will be watching developments in the Falklands carefully. If this turns into a mania… with everyone wanting shares in these companies… and taxi drivers tipping Falklands stocks… then Tom’s readers could be laughing.

Just so long as they remember to get out in good time… and not get too greedy.

Meantime, Tom believes he’s uncovered the next great small cap oil explorer. This isn’t the Falklands. This is somewhere you’re even less likely to think of as an oil-rich place. But Tom reckons that could change.

Have you seen Tom’s new report on this? Exciting stuff if you’re looking for high-risk/high potential reward plays. If Tom’s right, every small cap speculator is going to want a piece of this. It’s a classic penny share oil play.

See the report here: 11bn barrels of untapped oil?

Red Hot Penny Shares is a regulated product issued by Fleet Street Publications ltd. Forecasts are not a reliable indicator of future results. Commissions, fees and other charges can reduce returns from investments. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Penny shares can be relatively illiquid and hard to trade. There can be a large bid/offer spread so if you need to sell soon after you’ve bought, you might get less back than you paid. This can make them riskier than other investments. Please seek advice if necessary. 0207 633 3600.

And more thoughts…

*** Poor Francis Fukayama.

In 1992, he looked at what communism had wrought and proclaimed “the end of history.” The commies had capitulated. The Berlin Wall had come down. Even the ‘red’ Chinese had turned a shade of maroon or mauve.

It seemed like history had come to an end... with the indisputable triumph of US-style democracy.

He wasn’t the first to think history had come to a halt. Hegel and the early Marxists were convinced that the last chapter was the one in which the proletariat took command of the government – which they supposedly did after the Bolsheviks came to power in Russia.

But the trouble with history is that it just keeps rolling along. Since 1992, we’ve probably seen as much history as in any other 18-year stretch... save perhaps the war years of the last century. There was the communications revolution... the rise of the internet... the dot.com bubble... 9/11... the bubble in residential real estate... the Iraq War... the “Great Recession”... the banking crisis... the rise of China...

Even the things that Fukayama cited as proof that history had come to an end have made history. The former soviet republics – Russia, Georgia, Ukraine, Belarus, Kyrgystan – did not progress towards the perfection of liberal democracy. All have retrogressed into various forms of autocracy, petro-nationalism... and authoritarian centralism.

What lessons does Fukayama take from this? How about the obvious one: that he was a fool... and that history doesn’t come to a stop just because an American intellectual can’t imagine it going forward?

Nope.

“As we move forward, it is important to keep in mind the simple power of the idea of a government by, for, and of the people. We need to match those high ideals with unglamorous but steady investments in institution-building if liberal democracy is to deliver on its promises...”

What? What is wrong with these people...? David Brooks, Thomas Friedman, Francis Fukayama... here are people who are paid to have opinions, ideas, thoughts. Why can’t they come up with anything better than this sugary puff claptrap? His conclusion is as weak and empty as a congressman’s head... with not a single, solid idea in it.

Who is ‘we?’? Who knows? And what is the promise of democracy? We never knew it made any promises to anyone. People use democratic governments just like they use any other form of government – that is, like a thief uses a crowbar... to try to get something. Otherwise, why would the democrat bother to vote? The cripple expects someone to pay for his wheelchair. The imperialist wants someone to pay for his foreign wars. The social worker wants one of her métier stationed in every school room and household – ready to make sure every adult wears his seatbelt and every child is treated with Ritalin.

Democracy starts off well enough. In small units it even works passably well. A town meeting is a fairly decent forum for discussing where to locate the new dump. But as it grows bigger and older the town meeting inevitably degrades until it dominated by mobs, lobbyists and lunkheads.

Even if we believed democracy was the final and most perfect form of government we would still have no idea what Fukayama is talking about when he mentions investing in “institution-building.” You have a suspicion that he doesn’t know what he is talking about either.

He doesn’t say so, but we imagine he means American-style institutions in foreign countries... as if that were possible. The US Congress, for example?

We rest our case.

Until Monday,

Bill Bonner
For The Daily Reckoning

Editor’s note: Make sure you read Tom Bulford’s Abandoned Oil report. Tom is editor of Red Hot Penny Shares, the UK’s leading penny share investment advisory newsletter.

Please take three minutes to read Tom’s new report. You’ll see what all the fuss is about. When these small cap oil plays work out, they soon turn into manias. You’ll see what we mean in Tom’s report. And when they turn into manias, early investors can make great returns. This is a chance to get into one stock that could go this way. You can jump straight to Tom’s report by clicking here.

Your capital is at risk when you invest in shares; never risk more than you can afford to lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. 0207 633 3600.

P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.

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