In order for bubbles to burst, bubbles must first form. This has not happened yet with gold and silver.

Bubbles end in a huge runaway vertical bull spike -- as the public, last minute buyers, bid the price up higher and higher. There has not yet been a runaway vertical bull spike for gold or silver -- though certainly their prices have been increasing. The public is not very much involved in the latest rise in gold and silver. It has been institutional buyers bidding the prices up.

We may be at the end of the first leg in gold and silver's major bull move that will probably last another three or four years or longer. In 2010 or so, when the public is buying like crazy and the newspapers are screaming about how gold and silver are going up up up -- and everyone (including at last you, Fissile) believes gold and silver will go up forever (just as the public believed about the stock market a few years ago) -- and gold spikes enormously to $1,500/oz. or higher and silver to $50/oz. or higher -- THEN the bubble will have formed -- and will burst. And down it will come -- for another 20 years.

But, yeah, an intermediate top for gold and silver may be at hand. I expect the correction to last six months or so. This will allow people to buy into the gold and silver bull move at bargain prices -- perhaps the last bargain prices.

On the other hand -- and this is unlikely but possible -- given all that's happening in the world, gold and silver may pause here for a short time and then continue on up.

Those are my opinions. (I can be wrong.) (So can we all.)

Here are a couple of excellent articles -- the first is by Richard Russell, a well respected investment analyst among investors; the second is an article he recommends we read. (Unfortunately, the charts are not showing up on this copy -- and I don't have links.)

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Richard Russell's article:

March 16, 2006 -- Below you see them, the three Dow musketeers. We see the Dow breaking out to new highs for the move but still below its year 2000 bull market high of 11722.98. Next we see the D-J Transports busting out to a new record high. And finally, we see the D-J Utility Average struggling a bit, having carved out three declining tops.

"Pretty exciting," I say to myself, "but not my cup of tea." Well Russell, why the hell not? "Too pricey, too much hype, too easy to buy."

But don't mind me. Let the show go on. However, I think I'll just sit on the sidelines and watch for a while, if that's OK with you.

I've seldom seen a time when almost everything and everybody appeared bullish. Bullish on the stock market bullish on emerging markets, bullish on commodities, bullish on the dollar, bullish on housing, bullish on the economy.

But there's a problem. You see, the great buys, the great profits, are made when we're loading up on stocks in the face of universal bearishness.

When were stocks and houses a great buy? The answer is during 1942 and 1949 and 1958 and 1974 and 1980. Those were major stock market lows, and stocks bought during those times ended up providing their buyers big profits. Conversely, stocks bought in 1966 or 1971 or 2000 when stock were popular ended up giving their buyers headaches and losses.

Today bullishness is in the air, people are spending with abandonment, mergers and acquisitions are a daily event, volatility is low and no one is buying put, price/earnings are high and dividend yield is low, and mutual fund cash is at record lows. Stocks bought in this kind of atmosphere generally do not end up providing investor with profits.

When this kind of sentiment appeared in the past, I would tend to move to the sidelines and "hide" in T-bills. The only trouble today is that I have concerns about the dollar itself. Along these lines, please read James Turk's great piece at the end of today's site. Read the Turk piece, and I think you'll understand the rationale for placing a portion of your assets in gold.

And yes, I understand the sacrifice entailed in owning gold. The sacrifice, of course, is that gold pays no interest, and as interest rates rise, the "cost" in owning gold becomes even greater. Nevertheless, the first law in investing is akin to the first law of animal existence -- before everything else comes the basic problem of -- survival.

I"m asked whether the US government will ever default on the dollar. The answer is -- no. The government won't default on the dollar, it will simply continue to do what it's been doing -- create more dollars to pay off its rising debts and deficits. It will continue to created dollars until the dollar becomes close to worthless. At that point, either a new acceptable currency will come to the fore -- or a whole new monetary system will be installed.

What is big money doing in the current situation? As I see it, big money continues to operate within the system, making money where they can, acquiring, merging, trying to produce profits as usual. And I guess "as usual" is the theme song. After all, what can anyone do under these circumstances. You are forced to go along with the system AS USUAL, and you hope the system holds together and stretches out for years.

What about the declining purchasing power of the dollar? From the government's standpoint, you lie about it, and you remove evidence of it -- for instance, you kill M-3 and stay with that absurd "core inflation" numbers. From the consumer's standpoint -- make as much money as you can in order to offset the decline in the dollar's purchasing power. Which is why people are still in this overpriced stock market -- it's the desperate need to produce profits.

So where are we now? Stocks are expensive, dollars are suspect but necessary for every day living, and gold pays no interest.

My answer -- hold the safest items that pay interest along with as much gold as you can afford. Stay out of debt, live within your means, and exercise patience. Interesting opportunities will emerge in due time. But right now, I don't see them.

Today -- Forget all those little well-publicized interest rates boosts by the Fed. Real rates are almost surely still negative. Fed funds are at 4.5%, but monetary inflation is probably running at 6-8%. Subscribers know what I think -- it's LIQUIDITY, not rates, that this market is feeding off of.

Today was a rarity. When was the last time you saw stocks, bonds, commodities, oil, gold, copper ALL UP on the same day. And today, the bonds and notes were up BIG TIME. The only item down hard today was the US dollar.

My bet is that Bernanke is pressing the pedal to the metal. M-3 was up $54 billion on the latest reading. We'll see what M-3 is on Friday. March 23 will be the last day in which the Fed will release the M-3 figures.

TODAY'S MARKET ACTION -- My PTI was up 4 to 5703. Moving average was 5688 so my PTI is bullish again (I'm getting dizzy).

The Dow was up 43.39 to 11253.16. No movers in the Dow today.

April crude was up 1.41 to 63.58.

Transports were down 36.66 to 4553.10.

Utilities were up 2.88 to 410.07.

There were 2084 advances and 1131 declines. Up volume was 58% of up + down volume.

There were 290 new highs and 20 new lows. My 5-day high-low differentials improved from Wednesday's plus 601 to today's plus 826.

Total NYSE volume was 2.21 billion shares.

S&P was up 2.34 to 1305.36.

Nasdaq was down 12.28 to 2299.56 on 2.34 billion shares.

My Big Money Breadth Index was up 4 to 687.

June Dollar Index was down a large .60 to 88.66. June euro was up 1.03 to 122.47. June yen was up .32 to 86.66. Is the dollar finally topping out?

Bonds were sharply higher. Yield on the 10 year T-note was 4.69%. Yield on the long T-bond was 4.64%.

April gold was up 1.00 to 555.40. May silver was down 1 to 10.34. April platinum was up 1.60 to 1030.60.

HUI was down 3.73 to 301.00.

ABX down .05, RGLD down .71, GLG down .14, NEM down .10, SIL down .59.

More consolidation but really not much going on.

STOCKS -- My Most Active Stocks Index was up 3 to 431.

The five most active stocks on the NYSE were -- Q up .22, LU down .05, GE down .04, MOT up. 22, CAG down .92.

The VIX was up .63 to 11.95.

McClellan Oscillator was up 34 to plus 101.

CONCLUSION -- Some hesitation today as the Transports and Nasdaq were both down and upside volume was weak. Aside from extreme overvaluation, the upside looks OK. Strange but my PTI has really been in a trading range the entire year 2006.

Lowry's Buying Power classically LEADS the Dow on the upside. But on this rally the Buying Power Index has been lagging far behind. I have a lot of trouble getting "with" this advance. I can't seem to get with the program. For shame, Russell, for shame.

See you tomorrow -- sun's out, ocean is beautiful, surf is up. I'm probably the only male in La Jolla who doesn't surf. The reason -- if you're over 80 you're not allowed in the Pacific Ocean -- new Homeland Anti-Terrorist rules.

Russell

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The outstanding and highly informative article below should be read and read carefully. James Turk is one of the most knowledgeable people in the business -- Russell

"Economic Suicide"
By James Turk

Anybody who has been lending money to the US federal government by buying T-Bills and its other debt instruments received a brutal one-two punch last week. It was hopefully a sobering experience, causing them to question why they would want to hold any US government paper.
The Washington Post landed the first punch with the following report on March 6th. "WASHINGTON -- Treasury Secretary John Snow notified Congress on Monday that the administration has now taken "all prudent and legal actions," including tapping certain government retirement funds, to keep from hitting the $8.2 trillion national debt limit…Treasury officials, briefing congressional aides last week, said that the government will run out of maneuvering room to keep from exceeding the current limit sometime during the week of March 20."

The second punch was delivered a couple of days later by this Dow Jones Newswires dispatch: "WASHINGTON (Dow Jones) -- The U.S. government ran a monthly budget deficit of $119.20 billion in February, an all-time monthly record that was still slightly less than forecast, according to a Treasury report Friday. The February federal government deficit was 5% greater than a year earlier, according to the Treasury Department's monthly budget statement."

These two reports make clear the dire financial straits the federal government is facing, but its financial position is even worse than it appears. The $8.2 trillion debt limit -- that has proven inadequate to meet the federal government's borrowing needs -- covers only its direct liabilities. In other words, this $8.2 trillion is the total amount of dollars owed to all the holders of US government debt instruments. Excluded from this total debt are all of the federal government's other liabilities, which total another $38 trillion. In "The 2005 Financial Report of the United States Government", US Comptroller General David Walker reported that "the federal government's fiscal exposures now total more than $46 trillion, up from $20 trillion in 2000."

Yes, it's insane. But it's even more insane that people buy the US government's T-Bonds and T-Bills thinking that they are a safe, low-risk investment. Maybe they used to be that, but things change. US government debt instruments are no longer a safe place to park your dollars. To substantiate this assertion, here are some shocking facts to mull over.

1) REVENUE -- Federal revenue peaked at $2.03 trillion in 2000, and then declined for three years, bottoming in 2003 at $1.78 trillion. That's never happened before. Revenue typically declines during a recession, but the most it has ever declined before was two years in a row, during the severe recession of 1958 and 1959. Revenue has rebounded the last two years and reached $2.15 trillion in 2005, but in constant 2000-dollars (i.e., adjusted for inflation), revenue remains 6.3% below that received in 2000.

2) EXPENDITURES -- While the federal government's revenue has been constrained, not so with expenditures, which have continued to soar. They were $2.47 trillion in 2005, an alarming 38.2% above the federal government's expenditures in 2000. Expenditures soared even in constant 2000-dollars, scoring a shocking 21.8% increase over the five years from 2000 to 2005.

3) RELIANCE UPON DEBT -- As a consequence of constrained revenue and uncontrolled spending, the federal government has come to increasingly rely upon debt in order to obtain the dollars it spends with gay abandon. In 2000, 1.1% of the federal government's cash flow (revenue plus the annual increase in debt) came from new debt. This reliance on debt grew to 20.4% in 2005. In other words, for every $100 spent by the federal government in 2005, $20.40 came from borrowed money, compared to only $1.10 in 2000.

4) INTEREST RATES -- Of all the major expenditure categories of the federal government, only one declined from 2000 to 2005 -- interest expense. It paid $361.9 billion in interest in 2000, and its interest expense burden fell to $352.3 billion in 2005. During this period, the federal debt climbed 40.5% from $5.63 trillion to $7.91 trillion. So given this increase in debt, it is obvious that the federal government's interest expense burden declined for only one reason -- interest rates fell. In fact, the average interest rate paid by the federal government on its debt in 2000 was 6.4%; it was only 4.6% in both 2004 and 2005.

5) INTEREST EXPENSE BURDEN -- During the 1990's, 24.0% of the federal government's revenue on average was used to pay interest on its debt. During the Bush administration that burden has declined to only 17.5% on average. The reason is that the 5.2% average interest rate paid by the federal government during the Bush administration so far is significantly less than the 7.2% rate it paid on average in the 1990's. It is clear that the lower interest rates engineered by the Federal Reserve after the 2000 stock market peak have favorably impacted the federal government's budget. Lower interest rates reduced its interest expense burden, thereby making the deficits incurred so far during the Bush administration much smaller than they would have been if higher interest rates prevailed.

The above facts are indeed shocking as they clearly highlight that both the runaway growth in federal spending during the Bush administration and the resulting deterioration in the financial position of the federal government have been cloaked and little noticed because interest rates have been falling in recent years. So the above facts therefore make the immediate future frightening because as we all know, the Federal Reserve has been raising interest rates.

What will happen to the federal government's financial condition now that the Federal Reserve is raising rates in order to try suppressing the growing inflationary pressures in the economy? The federal government faces a potentially toxic mix of constrained revenue, soaring expenditures, ballooning debt and rising interest rates.

The federal government desperately needs strong economic activity in order to generate the highest possible tax revenue to decrease its reliance on debt. But rising interest rates work against this objective. Rising interest rates dampen economic activity. We have already seen what has happened to the housing market since the Federal Reserve began raising interest rates.

In addition to adversely impacting revenue, rising interest rates also have an unfavorable impact on expenditures. This impact is purely mathematical. A 6% average interest rate on $8.2 trillion of debt results in a higher interest expense burden than a 4.6% rate.

Thus, higher interest rates restrain tax revenue while increasing the level of expenditures. Together these factors worsen the budget deficit, which then causes the federal government to borrow even more money. The resulting higher level of debt leads to a greater interest expense burden, further worsening the deficit. Consequently, the federal government is rapidly moving to the point where its borrowing becomes an increasingly important source of the dollars that it needs to meet its interest expense obligations.

It is clear that these circumstances create a vicious circle where the federal government borrows money to obtain the dollars needed to meet its debt obligations. This condition is not sustainable, and it will end in one of two alternatives -- either the dollar is saved or it isn't. If the vicious circle is not addressed and corrected, it will turn into a death spiral in which the dollar is destroyed.

To explain this point, the federal government will never default on its debt. With the ever-helping hand of the Federal Reserve and the banking system, the federal government will always come up with the dollars it needs to meet its interest expense and other debt obligations. But if the vicious circle described above is not addressed, the federal government will repay its debt obligations with dollars that are worth less and less until they become worthless when the death spiral occurs.

The vicious circle does two things. First, it increases the supply of dollars by creating 'out of thin air' the dollars needed by the federal government to meet its debt obligations. The second point is less obvious but just as pernicious. The vicious circle lessens the demand for the dollar as people over time come to understand the ruinous, underlying dynamics of what's happening to the currency. Higher supply and lower demand mean only one thing -- the purchasing power of the dollar is being inflated away.

These circumstances are not new. They are experienced by every fiat currency sooner or later when the discipline of the gold standard is removed. The discipline of the gold standard is needed to constrain government spending. In the absence of that discipline, a fiat currency inevitably reaches the vicious circle. In fact, it's even happened before with the dollar.

The dollar was in a vicious circle during the waning years of the Carter administration. Paul Volcker was appointed Federal Reserve chairman to break the vicious circle, and he did it by raising interest rates. He kept raising interest rates until real rates (nominal interest rates less the inflation rate) soared to greater than 6%, historically a phenomenally high rate. It was not surprising therefore that the demand for the dollar started rising, thereby breaking the vicious circle and saving the dollar from a death spiral. But Mr. Volcker had an advantage not available today to Mr. Bernanke.

Back then the federal debt was not the burden it is today. Recall that the US was the largest creditor nation in the world back then. The total level of dollar debt was not only much less, but manageable in the environment of rapidly rising interest rates and the high real interest rates ushered in by Mr. Volcker.

Today the US is the world's largest debtor. The US savings rate is negative. American home owners have consumed most of the equity in their houses. In short, the federal government and many consumers are borrowing just to try keeping their head above water. What's worse, there is all the uncertainty arising from trillions of dollars of outstanding financial derivatives, essentially none of which existed during Mr. Volcker's era.

In short, Mr. Bernanke cannot raise interest rates the way Volcker did, which I believe is well understood by both Mr. Bernanke and Mr. Greenspan. After all, look at what happened during the last year of so of Mr. Greenspan's tenure at the Fed. He raised interest rates, but throughout this period, real interest rates remained close to zero and at times were negative, which is a condition that creates a highly inflationary framework for the dollar. In other words, there was a lot of jawboning from Mr. Greenspan to save the dollar from inflation by raising interest rates, but he did not even come close to following in the footsteps of Mr. Volcker. Mr. Bernanke won't either.

Today's monetary system is not only broken, it's completely crazy. For this reason I found the following quote in the current issue of Barron's to be of interest. It's by Richard Daughty, from the March 8th issue of his newsletter, The Mogambo Guru (9241 54th St. N., Pinellas Park, Fla. 33782):

"What a scam! The week [before last], the Fed snaps its fingers and creates $2.2 billion, and then uses it to buy $2.2 billion in government debt! What in the hell can you do but laugh at the sheer audacity! Somehow, a government creating more and more money and spending it is not, for the first time in history, going to turn out to be a bad thing? And especially one where the money is just paper and computer blips that they can create on a whim? Of course, I sigh wearily as I note that the banks themselves are in on the scam, and they bought up another $13 billion in government debt [the week before last]. Foreign central banks continue to soak up government debt, and they swallowed another $7.6 billion [that] week, too. The government sells debt to get money to spend on its deficits, and the bank creates the money to buy the debt. Debt and money supply both expand, and it expands to create a bigger and more expensive government! And higher prices. This is economic suicide!"

Indeed, it truly is "economic suicide", but it's even worse than that. It's also monetary homicide. The dollar as we know it is being killed, poisoned by debt from the hand of the federal government with its accomplices in the Federal Reserve and the banking system. So far it's been a slow death, with few people watching, but that's about to change. With the horrific new amounts of debt being injected into the dollar's weary remains, its death is not far off.

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Published by GoldMoney
Copyright © 2006. All rights reserved.
Edited by James Turk, alert@goldmoney.com

I bought a gold coin and a tube of silver (20 coins) a year until 2000. When the world did not end I stopped buying. If there is a drop in prices to below $500 I may pick up some more. I view this as catastrophy money rather than an investment. Mutual funds are for the latter.

The Warlord

Gary North's title threw me off track regarding his thesis. He is NOT saying that gold and silver are a bubble market. In fact, he specifically says, in the conclusion to his article, that they are NOT:

The gold and silver markets, unlike the housing markets, are not driven by long-term government-subsidized mortgage money. So, I do not call them bubble markets.

What he is saying is that we are likely to experience a RELATIVE recession -- not a full blown recession -- and that during this relative recession, both gold and silver will probably lose value.

I have, in my previous post, said the same thing. There is likely, for the next six months or so, to be a correction in the gold and silver markets -- probably a significant one. It will be an opportunity to BUY gold and silver. Why? Because the bull market will not be over. It will only pause. Why only pause? Because the world central banks must continue to inflate or face a REAL RECESSION. The Central Banks were created in order to prevent a real 1930's style Depression from ever happening again. A real depression will not be allowed to happen. It can be prevented by the government continuing to inflate the dollar -- which they will do. Because they will do that, the long term gold and silver bull market trend will continue -- probably until the dollar dies in ten to twenty years.

Gary North is warning us that gold and silver have apparently reached or are reaching an intermediate trend top and will now experience a downward move for an intermediate term. I too believe this is likely -- as I've said in other posts.

Gary North was being a little melodramatic in talking about a bursting bubble for gold and silver -- for all the reasons stated. This would be a good time to save up some cash and, when and if gold and silver go down significantly in price, BUY.

Note: While gold appears to have reached its intermediate term top, silver has not. Silver is continuing to make new highs. Assuming nothing dramatic happening -- like a silver ETF being approved or Iran being nuked -- silver will probably reach an intermediate term top within a few weeks. If you're trading, this would be a reasonable time to sell some of your silver position and hold it in cash for lower prices. If you're in for the long term, don't worry about it. But save up your cash to add to your position later.