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Debt Bubbles and the Commodities Bull Market

Commodities / Liquidity Bubble Oct 29, 2010 - 02:01 PM GMT

By: Frank_Holmes

Commodities

Best Financial Markets Analysis ArticleThe “World’s Greatest Investment Event,” the 2010 New Orleans Investment Conference kicked off on Wednesday as gold and natural resources investors descended on the Crescent City for answers to today’s market questions.

The list of speakers for this year’s conference reads like a who’s who of the natural resources and commodity world—Dr. Marc Faber, Newt Gingrich, Dennis Gartman, Dick Armey, Peter Schiff and others.


We know everyone can’t make it down to the conference this year, so we’re going to be sharing some of the highlights with you over the next couple of days.

Rick Rule, chairman of Global Resource Investments, Ltd., was first to speak Thursday morning and he had a clear message for the audience: We’re in a bull market for commodities and natural resources. Rule said that the easy money, what he called “riskless” money, has been made, but the “big” money is still out there.

Rule cautioned that this bull market in natural resources comes with a hefty amount of volatility; however, he told the audience of several hundred to use the volatility to their advantage. Rule said “volatility means items are continually being sold at 30, 40 and 50 percent off.”

One big reason Rule cites for the bull market in commodities and resources are supply-side constraints. A severe bear market in the 1980s and 1990s kept many companies and governments from investing in exploration and today’s consumers are living off reserves discovered in the 1960s and 1970s. With per capita consumption growing in places like China, new discoveries will need to be large and fruitful to prevent supply shocks.

Next up on the stage was Brien Lundin, editor of the Gold Newsletter and host of the New Orleans Investment Conference. Lundin began his presentation on gold showing that the current rally—which he says began in August 2009—has taken longer and appreciated less than recent run-ups in 2006 and 2008.

Lundin says he has been expecting a correction in gold prices that has not come to fruition. This could likely come when the Federal Reserve institutes their second edition of quantitative easing because market expectations have just gotten too high.

Lundin is also positive on copper, saying that analysts have been trying to kill off copper for years but the Chinese have refused to play along. Lundin thinks we’ll see $4 a pound copper sooner rather than later.

Although Lundin thinks a pullback in gold prices is coming, he believes this is the time for investors to reload. His long-term bullish view on gold is based on unprecedented debt levels by the Fed and the oncoming devaluation of nearly every major currency in the world.

Bubble-spotter Peter Schiff led off the mid-day session with a discussion of bubbles and excessive government spending. Schiff says we’re currently experiencing one of the biggest bubbles in history; it’s not a bubble in equities, not in gold or commodities, but a bubble in government. The rest of his half hour speech laid out the case supporting this argument. Schiff says that the 2008 housing bubble was the overture to a much greater debt opera that is nowhere complete.

While Schiff spent his time at the podium explaining where a bubble is, newsletter mavens Pamela and Mary Ann Aden spent their time onstage explaining where there isn’t one—in gold. Mary Ann Aden began by laying out the history of gold’s trip from $200 in the 1990s to more than $1,300 today. One of the biggest drivers has been the explosion of government debt. Mary Ann said that if the government paid $1 million a day on its debt, it would take nearly 2,000 years to pay it off.

Mary Ann said that gold is far from a bubble because of the world’s reliance on paper currency and “there’s not one paper currency in the history of the world that has survived.” Mary Ann says that central banks have seen the writing on the wall and that’s why you’ve seen a pickup in central bank buying of gold this year. Mary Ann’s sister Pamela Aden proclaimed in her speech that gold is currently in a “once in a lifetime” megabull market.

We’ll have more updates from other speakers tomorrow.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor

Frank Holmes is CEO and chief investment officer at U.S. Global Investors , a Texas-based investment adviser that specializes in natural resources, emerging markets and global infrastructure. The company's 13 mutual funds include the Global Resources Fund (PSPFX) , Gold and Precious Metals Fund (USERX) and Global MegaTrends Fund (MEGAX) .

More timely commentary from Frank Holmes is available in his investment blog, “Frank Talk”: www.usfunds.com/franktalk .

Please consider carefully the fund's investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Gold funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The price of gold is subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in gold or gold stocks. The following securities mentioned in the article were held by one or more of U.S. Global Investors family of funds as of 12-31-07 : streetTRACKS Gold Trust.

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