Bubbles, Bubbles Everywhere, Including the One Around You

Dollar Bubble

Lots of bubbles have been developing in recent years, but many investors only see the notable rise in precious metal pricesover the last ten years as a bubble.

Nevertheless, the more astute observers of the modern era will also have perceived the housing bubble, the stock market bubble, the derivatives bubble and the U.S. Dollar bubble. 

The excessive price rises seen in these assets have been accepted, perhaps even celebrated, while precious metal price rises have often been reviewed critically in the mainstream media and by those overwhelmingly influenced by it.

The Mainstream View

The mainstream view typically seems very clear about the bubble in precious metal prices. The remarkable rally they have demonstrated is often characterized as if it is a dangerous speculative event that is foolish for prudent investors to participate in.

Yet, these same commentators will typically celebrate the housing and stock market bubbles, which actually seem far more dangerous than the recent rise in gold and silver prices.

The mainstream view also seems generally Ignorant of not simply the easy data to obtain, but also the fallout potential of the more complex issues, like the explosive growth in the paper derivatives market without sufficient physical metal resources backing it up. This situation has resulted in an 11 trillion dollar shortfall in asset collateral versus derivatives.

Furthermore, the mainstream appears largely oblivious to the level of systemic risk, primarily because it is not included in their calculation. They tend to ignore the ultimate bubble - the U.S. Dollar.

The Dollar Bubble Compared to the Gold and Silver "Bubble"

It seems worthwhile to put the rise in precious metals prices into some sort of perspective, so comparing the PM rally to recent rises in the value of the U.S. Dollar makes sense.

  • Size – The U.S Dollar still remains the world’s primary reserve currency and its liquidity is crucial to the global financial system. More dollars mean more promises to pay, more debt and more promises needed to service this growing debt. The precious metal markets seem tiny in comparison to this bloated paper currency system.
  • Length - The U.S. Dollar bubble has been expanding at least since the Breton Woods treaty was signed in the wake of WWII that made the then gold-backed Dollar that global fixed exchange rate system’s standard of value. The Dollar Bubble has arguably been growing even as far back as 1913, with the creation of the privately owned Federal Reserve Bank. In contrast, the gold and silver bull market is relatively young, and these metals are still priced well below their inflation adjusted highs.
  • Acceptance - Dollar printing without hard asset backing has not only become accepted, but it is actually deemed necessary and current efforts to print enough money seem insufficient.On the other hand, precious metals are often scorned despite the fact that they are hard assets, and they have historically been the basis for the U.S. Dollar’s value.
  • Participation – When it comes to the U.S. Dollar, investor participation is widespread, even outside of the United States. Precious metal participation is comparatively scant, and typically comprises less than one percent of investment portfolio asset allocations - despite their recent acquisition by central banks.
  • Perception-One generally finds virtually zero awareness of the existence of a U.S. Dollar bubble, but investors and market commentators tend to immediately identify sustained precious metal market rallies as a bubble.
  • Ignorance - Most people are unwitting participants in the paper U.S. Dollar bubble, and they seem equally ignorant of why precious metals have traditionally been used to back intrinsically worthless paper currencies and store value.
  • Denial – Rampant Dollar printing and huge economic stimulus packages have been heavily defended in the mainstream media.Furthermore, the manipulation of commodity markets has become accepted and perhaps even encouraged to help keep a lid on resulting prices rises as the available currency pool expands without any assets backing it. Suppressed PM price performance leaves the impression that the big short metal positions are no longer hedged. Despite open and accepted intervention within every major investment sector, it continues to be a mainstream taboo to consider the suppression of PM prices manipulative. 

Nothing Compares to the Dollar/Bond Bubble

The U.S. Dollar bubble may be one of the largest, most pervasive and most denied financial bubble in history. Nevertheless, the identification and awareness of bubbles typically comes only in hindsight. Investors missed the last two great ones, both of which were fueled by intervention. 

Furthermore, despite their recent managed price retreat, the metals have moved generally higher over the last ten years to reflect growing underlying interest in the anti-Dollar trade. 

Of course, the perfectly logical rallies seen in silver and gold prices have often been interrupted by artificial, manipulative and even perhaps covertly encouraged interference. This price management seems just one more attempt to hide the real economic value of these metals from the mainstream-minded investors that could benefit the most from holding them.

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