Gold has been quite strong lately.  As of this writing, it is close to $1,750 per ounce.  It had a big down day yesterday and then gained most of it back today.  I am quite bullish on the yellow metal right now, both in the short term and in the longer term.

My short-term bullishness for gold is tempered by the economic outlook.  If the economic outlook remains relatively good, or at least stable, as compared to the last few years, then I think gold will do quite well.  The one scenario I can see where gold would tumble is if the economy slips into another deep recession.  If that happens, then stocks will do horrible and gold will also probably do horrible, although probably not as bad as stocks.  Bonds would be the place to be if that happens, despite the already low interest rates.

I have been saying for the last several months that we might be in the midst of a mini boom cycle.  The Fed pumped in a lot of new money with QE1 and QE2.  Although most of this new money is being held by the banks as excess reserves, it can and will have its effects.  Perhaps it is starting to leak out into the economy.  Some of it may be going in to stocks and some in to gold.  While the government’s measure of price inflation is still relatively low, I can personally attest that food prices at the grocery store are going up at a decent clip.  The one sector that continues to go down in price (besides electronics, which is due to technology) is housing.

If you are waiting for another dip in the gold price to buy some, I wouldn’t wait any longer.  While there is certainly a threat of a deep recession and a strengthening dollar in the short run, that is not where I would put my money right now.  If your portfolio is low in its percentage of gold and other precious metals, then I would not wait.  I recommend a minimum of 15% in gold and gold related investments, just to protect yourself.  You should probably be higher than that though.  If you have about 20% in gold investments and another 5% in silver, platinum, and oil, then that should be a good hedge against inflation and uncertainty.

While I don’t like making predictions, I am going out on a limb on this one.  I think gold is likely to go over $2,000 per ounce in 2012, unless we have a deep recession.

You should be responsible for your own money.  You work hard for your money and you should guard over it.  While I am not completely against the idea of financial advisors, you should be warned of their capabilities.

Most financial advisors are Keynesians.  They believe that spending drives an economy.  While some are more to the left economically than others, even many of those who say they believe in free markets do not really understand free market economics.  By far, the biggest mistake that financial advisors make is that they do not understand inflation.

Inflation is an increase in the money supply, although the definition has been changed through the years by the statists.  Now inflation means a general increase in the price level, which is really the eventual result of an increase in the money supply.  Many financial advisors do not understand how big of a threat inflation is to an investment portfolio.  They think stocks will protect against inflation.  Most do not believe in a substantial holding of gold or gold related investments.

This is why you have to look out for yourself.  Even if you have an honest financial advisor who means well, he may not understand inflation.  He might not understand the possible ramifications from the government spending and debt and the previous monetary inflation that has taken place.  He might not understand just how big of a threat this is to your investment portfolio and to the average American’s standard of living.

Ron Paul has probably changed this slightly.  There are probably a few out there now who do understand this.  Unfortunately, most of these people probably work for a big financial company.  These financial advisors probably do not have much flexibility in devising their own portfolios for their clients. They are probably given formulas and certain criteria to follow.  It is actually a shame.

While most financial advisors may not understand free market economics, they are not necessarily useless either.  A lot of these people are quite intelligent and they may do a good job of analyzing individual stocks and mutual funds.  They may actually have a good track record in comparison to the broad stock market indexes.

If you are someone with a lot of money and you want a financial advisor to help you out, then you might be fine.  But be sure to take your own action in protecting against inflation.  You can be fairly certain that your financial advisor will not be buying a lot of gold investments for you.  Personally, I would just avoid financial advisors completely and manage your own money if you are knowledgeable enough to do so.

The Federal Reserve is engaging in what is nicknamed “operation twist”.  It means that the Fed is reducing its holdings of short-term treasuries and increasing its holdings of longer-term bonds.  The Fed is not claiming to expand its balance sheet with this operation.  It is merely changing the maturity dates of some of its holdings from shorter-term to longer-term.

The primary reason given by the Fed and by analysts for this move is to keep down long-term interest rates.  This will help keep down or even lower mortgage rates, as mortgage rates are highly correlated to the 10-year yield.  The Fed sees this as a way to incentivize buying in the weak housing market.  It will also encourage more people to refinance (for the few who actually can) so that their monthly payments are reduced.

I see another potential reason for the Fed doing this.  If interest rates were to rise, then it could be less harmful for the government’s debt.  Whenever a U.S. treasury reaches maturity, the Fed has to buy a new one in order to roll it over.  If its holdings are longer-term, then there will be fewer to roll over in the shorter term.  This means that the government would not have to find as many buyers for its debt, whether it is private investors, central banks (like China), or the Fed itself.

In the last FOMC meeting, it was indicated that the Fed will continue this operation twist.  I discussed the FOMC’s meeting and some of Bernanke’s comments here.

Here is the problem.  There ain’t no such thing as a free lunch (TANSTAAFL).  Maybe Bernanke and the Fed think they are being smart here and doing things that can only help, but there are potential consequences.

The main bad consequence that I see coming from this policy is that it increases the likelihood of severe inflation.  If interest rates were to start rising, then the value of bonds would go down.  That means that the Fed’s holdings would go down.

If the Fed held shorter-term treasuries and interest rates were to rise while price inflation started getting out of control, then the Fed could just simply reduce its balance sheet by not rolling over its maturing assets.  Of course, this would serve notice to Congress that government spending needed to be cut quickly as the Fed would no longer be funding the big deficits, but at least the Fed would be capable of having an “exit strategy”.

If the Fed has longer-term bonds in its holdings and interest rates go up while price inflation is getting out of control, what is the Fed going to do then?  If it sells its bonds, they will be worth much less.  This will drive up interest rates even more as it is forced to sell even more.  Also, because the values will be down so much with the higher interest rates, who knows if the Fed can even sell enough to reduce its balance sheet significantly enough to stop the price inflation.

Back in 2008, the Fed bailed out the banks by buying their bad assets.  These assets can’t be sold today for what the Fed bought them.  These were mortgage-backed securities and many of these mortgages have gone into default.  These securities are worth much less now than they were before the financial crisis showed up.

In conclusion, maybe Bernanke and the Fed think they are being smart with their operation twist.  But they really are just adding fuel for the fire that will be coming.  They are putting everyone at risk by increasing the likelihood that it will not be able to control price inflation when it shows up in a big way.  It will also make for a harder crash for the federal government when it can no longer rely on the Fed to fund its massive deficits.

I have been particularly interested in the Republican primaries in this election cycle, just as I was 4 years ago.  The main reason is Ron Paul and his message of liberty.  It has been both really exciting and frustrating at the same time.

I am optimistic for the long-term future.  I think that a combination of technology, open communication, and a sense of individualism in America will be strong enough to overcome big government and usher in a new era of liberty.

My hopes for the near-term future are not as bright.  There are wars going on in several countries (some bigger than others), the U.S. government is trying to run an empire on the planet, the spending is out of control, and the debt is a ticking time bomb.  There is going to be some serious economic pain in the near future.

I also don’t have much hope in politics, particularly in the near future.  I have been a big supporter of Ron Paul’s campaign, only because he is spreading the message of liberty and turning more people into libertarians with each passing day.

Unless something big happens in the next few months, Mitt Romney will probably be the Republican nominee.  Even with third party runs, Obama or Romney is highly likely to win the general election in November.  The American people, while starting to awaken, are unlikely to awaken enough and fast enough to back Ron Paul in large numbers like Romney is getting today.

It is frustrating to watch.  Ron Paul didn’t really campaign in Florida and I thought it was a good decision, but it would have been nice to see him at least get into double digits.  He received about 7% of the vote, which means that 93% of the voters on that day weren’t ready for serious change.  They may vent a lot to friends and family and they may say they are fed up with the system and the politicians, but their actions didn’t reflect their words.  They haven’t felt enough pain or had enough self-education to really want something different than the status quo.

Let’s face it – all of the candidates in the two major parties are part of the status quo, except for Ron Paul.  Their language may differ a little here and there, but their overall policies would keep the establishment in place.

Donald Trump, the media whore that he is, called a press conference for a big announcement.  People thought he was going to endorse Newt Gingrich.  Instead, Trump endorsed Romney.  I’m not saying this because it will have much of an effect, but it tells you that he could have gone either way.  He jumped on the Romney bandwagon because he can now see the writing on the wall.  But there really isn’t much difference between Gingrich and Romney when it comes to their politics.

When Ron Paul ran 4 years ago, I was very active.  I was making signs, mailing letters, making calls, etc.  I have not really been active in the last year, except to write about him and talk to friends about him.  I guess you could say that Ron Paul has made me apathetic.  4 years ago, I thought it was important to get his name out there and expose people to the man and his philosophy.  If there is someone out there today who doesn’t know who Ron Paul is, then they just aren’t paying attention at all and don’t really care and will probably never care.  Everyone else should know Ron Paul and at least be vaguely familiar with his message.  There is not much of a point for me to hold signs.  I will be more than willing to talk to people and explain his philosophy for those who are interested.

It is really up to the American people now.  It is their choice.  The libertarians have done their job in exposing the message of liberty.  It is now our job to explain it as well as we can when people ask.  It is important for us to write and speak so that people who want to learn more have a place to turn.  But there is no sign waving for me now.  We have led the horse to water.  We can’t force the horse to drink it.

The American people are going to regret not getting behind Ron Paul, although some will always be too oblivious even when the problems become more evident.  The ones who supported Paul, or at least didn’t support any of the others, can hold their heads high.  We have done what we can.  We will continue to work hard in spreading liberty, but it is ultimately up to the American people to decide.  It is not too late, even after the elections are over.  Americans must withdraw their consent.  They must realize that more liberty and less government are the answers to so many of our problems.  They must drink the water or suffer the consequences.

Ron Paul is most likely having an effect on the price of gold.  This doesn’t mean that Ron Paul is driving the price up or down by buying or selling.  It means that, because of his message that has reached millions of people, it has probably affected their decision of whether to buy gold, even if it is just a fraction of his supporters.

It is impossible to prove the answer to this question and it is impossible to know exactly how much of an effect that Ron Paul has had on the price of gold.  However, with his warnings about the Federal Reserve and the debt and his discussions about gold, it is hard to imagine that this hasn’t had at least some kind of influence on some of his supporters.

If there are a million people who would consider themselves Ron Paul supporters and 10% of these people have bought gold or are considering buying gold because of their recent exposure to Paul’s message, then that is potentially 100,000 people who could drive up the price of gold.  This isn’t a lot of people, except that buying actual physical gold is a fairly thin market.  It doesn’t trade like Google or Apple stock.  On the margin, this could have a slight impact on the price of the metal.

Ron Paul supporters tend to be younger and they tend to have lower incomes (partially because of their age).  Most rich people are not Paul supporters (although they should be).  There are certainly some older people who are Paul supporters, but many of them were already libertarians before 2007 (Paul’s first run for president as a Republican).  These people probably already bought gold if they wanted it.

So the demographics of the Paul supporters do not point to a lot of people that would be able to buy several ounces of gold.  Most wouldn’t be able to afford one ounce in this economy.  But again, it doesn’t take that much to move a market like gold, particularly if people buy the actual metal (instead of an ETF or mutual fund).

There are millions of people who now have a decent understanding of the Federal Reserve.  Five years ago, most of these people couldn’t have told you what the Fed was or what it did.  These people understand that the economy is in trouble and they understand that the Fed is going to try to inflate its way out of it.  A good portion of these people may start buying a little gold, if they haven’t already.  They may only buy half ounce coins or one-tenth ounce coins.  Perhaps they will buy silver, which is the poor man’s gold.  The point is, because there are so many people aware of the Fed and what it does and what the potential harmful effects are, a lot of these people are going to be looking to protect themselves.

If you took all of the gold above the ground and distributed it evenly to every human inhabitant on the earth, everyone would have less than a troy ounce of gold each.  That is not very much gold to go around.  All of that gold above the ground includes the gold used for jewelry.  In addition, a good portion is held by various central banks.  It doesn’t leave a lot left for investors.

This indicates that there is a potential for a real spike in the price of gold, particularly if the Fed goes into QE3 (more money creation).  As more people become aware of the situation, the more there will be demand for gold.  Do you at least have your individual share of the world’s gold?  It seems expensive now, but it may seem really cheap in five years.

Mitt Romney is the winner of the Florida presidential preference primary vote.  This is not all that surprising considering that his campaign and backers most likely spent in excess of $15 million in just one state, mostly to attack Newt Gingrich.

Florida also has a lot of old people.  Wisdom is supposed to come with age, but not necessarily when it comes to politics.  Romney does especially well with senior citizens, while it is the worst group for Ron Paul.

Speaking of Ron Paul, he took about 7% of the vote.  I was hoping for 10%, but it was to be expected given that he did not campaign (other than the debates) and he did not spend advertising money in Florida. In addition, the demographics do not favor him as just mentioned.  Florida is a huge market without the delegates to match the population due to being penalized for holding its primary early.  Plus, Florida is a take-all state, where the winner gets all of the delegates.  Even without trying, Paul more than doubled his percentage from 4 years ago.

Ron Paul is wisely spending his time and money in caucus states where he can likely win, or at least take delegates.  He is campaigning in Maine, Minnesota, Colorado, and Nevada.

There is no indication that Santorum or Gingrich will drop out, but you never know what might happen in the next few days.  The demographics in Florida favored Romney, so there really is no reason for the other candidates to drop out, unless they are just plain tired or completely out of money.  Florida is not really a “southern state” (culturally, not geographically).  It is not like South Carolina where Gingrich won.

One thing that surprises me, although it shouldn’t, is how many people are saying that the number one thing they are looking for in the Republican nominee is whether they can beat Obama.  I guess that is why the Republican Party may nominate the founder of Obamacare, although it is called Romneycare for those living in Massachusetts.

By this logic of the Republican voters, if Hillary Clinton were to change party registration and run on the Republican ticket, then I guess all of these Republican voters should support Hillary Clinton since she has the best chance of beating Obama, particularly with the Republican vote solidly behind her.  It just shows the absurd thinking of so many voters out there.

This race is not over yet.  I am not naive though.  I realize that Romney is the strong favorite at this point.  Intrade agrees with me on this (or do I agree with Intrade).  Intrade has Romney’s chances at close to 90% of being the nominee, as of this writing.

The longer this thing drags out, the better.  It is more of an opportunity for people to learn about Ron Paul and his message of peace and liberty.

It is hard to fathom what life would be like without a monopolistic central bank and fiat money.  We live in a world of inflation.  This started in 1913 with the start of the Federal Reserve.  It sped up quite a bit in 1971 when Nixon closed the gold window and broke the last links that the U.S. dollar had to gold.  Since then, it has been a world of total inflation.  Of course, some years have been worse than others.

If there was no monetary inflation, or perhaps minimal monetary inflation with a gold coin standard, then things would work much differently now.  You would not see massive swings in stocks.  The price of the general stock market would not go up significantly over time.  This doesn’t mean it would be a bad investment.

Housing prices would not continually go up.  The prices might actually decline very gradually (not like a housing bust).  Houses are like cars in that they depreciate.  They just don’t depreciate as fast and the land that they sit on doesn’t depreciate.  The reason that housing prices go up over time is because of monetary inflation.

For politicians who say that we need to grow our way out of the debt, they only understand a portion of their own argument.  If the GDP grows and the additional tax “revenue” is used to pay down the debt or even if the debt remains the same while the economy grows, then the debt situation improves.  But we can also credit monetary inflation for this happening.  The only way that the national income can increase in nominal terms is through monetary inflation.

If we lived in a world without inflation (or with minimal inflation), then salaries would not rise by much, if at all.  Certain individuals would make more from one year to the next, but the average would stay about the same.

So why is inflation a bad thing then?

Inflation really plays tricks on you.  For even the best Austrian school economist, inflation will distort things.

If you get a raise for your current job for 2%, but price inflation is currently at 3%, then you are actually taking about a 1% loss.  Your income is going down by 1% in real terms, even though it is going up in nominal terms.

In a world with minimal inflation, your income wouldn’t rise, but neither would consumer prices.  In fact, in a free market economy, we would see something similar to what we see now with electronics like computers, televisions, and cell phones.  The quality would get better or the prices would go down or perhaps both.  In a relatively free market environment with minimal monetary inflation, you would see prices go down for education, healthcare, cars, vacations, food, etc., while your income would likely remain the same (in the same job).

In a world without inflation, stock investors would buy stocks for dividends.  It would certainly be possible to have capital gains for individual stocks, but the overall stock market would be unlikely to fluctuate too much.

Again, this is all hard to imagine because we live in an inflationary world.

The way to grow the economy isn’t through more monetary inflation that results in higher prices.  This is just a distortion.  The way to grow the economy is through a stable free market monetary system and minimal government interference.

The 19th century in America was a time of relative peace and prosperity (not counting the war time of the 1860’s).  Prices actually went down slightly over this time.  It was really the most prosperous time in history (unless you want to argue for England during that time).  The technology and capital investment that was built up in the 19th century really laid the groundwork for all of the new great things that came out of the 20th century.

It really is hard to imagine a world without monetary inflation.  Most people think that the world we live in today is the way things are supposed to be.  They don’t understand that prices are not supposed to go up continually, year after year.  They don’t understand how much they are being robbed from the debasing of their money.  They don’t understand how much better their standard of living could be.

There is somewhat of a myth out there that you need money to make money.  If you are investing your money in stocks or real estate and you want to retire off of the dividends and interest, then you will need a lot of money.  Just for an example, if you have $2 million and you can earn an annual return of 4%, then you will have $80,000 per year without depleting your principal amount of $2 million.

However, most people do not become rich investing.  Most people become rich by having a high income and saving a good amount of it.  For people who do not make a high income, then being frugal becomes that much more important.  To have a high income though, you don’t necessarily need a lot of money to start off.

Let’s look at a few billionaires.  Bill Gates and Steve Jobs both made their fortunes through their own work and effort.  They needed some help along the way, but they both basically started their businesses from nothing.  They used their brains and natural talents and took advantage of the situations around them.  They may have even had some luck along the way.  But the point is, they both made it big without much money to start.

Warren Buffett has made many billions through investing in companies.  He did not exactly start from nothing.  His father, the libertarian Congressman Howard Buffett, was obviously not poor.  But Warren Buffett still used his talents to make billions.  There are a lot of people who start off with a lot more and don’t amount to much.

The Walton family has inherited a fortune.  There are Walmarts almost everywhere now.  This was basically a self-made franchise and now the heirs are reaping the rewards.

The point is, most rich people are not like the Rockefellers.  They are more likely people who are mostly self-made in a generation.  It is a big advantage to grow up in a decent household that teaches good values and provides a decent education.  After that, it really depends on each individual.  There are not many people who grow up in an inner city neighborhood in the slums who grow up to be rich.  But even here, there are exceptions.  Some people are strong enough to fight through their environment and control their own destiny.

If you want to make money and become rich, don’t worry about not having money.  This is usually a benefit.  You can start from scratch.  Some people have more natural talents than others.  But there is no substitute for hard work and discipline.  If you work hard and you try to grab opportunities when they present themselves, then you can be reasonably successful.  Then you have to make sure that you live below your means and save money.  If you do this, then maybe you can reach a scenario as described above where you can have enough principal money that you can just live off of the interest.

You don’t have to have money to make money.  But it definitely helps when it comes to investing and retirement.

The last debate has finished up before the Florida primary voting.  It may be the last debate we see for almost another month.

First, I thought Wolf Blitzer did a decent job.  Of course, it is all relatively speaking.  There could still be much better questions, but at least he was reasonably fair in giving time to all of the candidates.

Second, I have a little factoid to present to Mitt Romney.  English is not the official language of the United States.  There is no official language.  Obviously, English is the most widely spoken.  There is no need to have an official language, unless there is just something that states that all federal legislation will be written in English, but there is really no need for that even.  Just like everything else, the free market has a way of handling these things.  If English is that important for someone in getting a job, then they will have motivation to learn it.  It won’t be because a bunch of politicians got together and declared English to be the official language.

Third, I thought Ron Paul had a great debate.  He was more relaxed and had a few funny lines that the audience appreciated.  He made many strong points and was quite clear that he is the candidate who believes that the role of government should be severely limited.  This particularly came through when he talked about the space program and saying that government has no role except possibly for national defense reasons.

Fourth, I thought it was interesting that Newt Gingrich was echoing Paul so much.  I think part of that was because Paul was making so much sense and resonating with the audience.  I think another part of that is that Gingrich did not want to pick a fight with him.  He is hoping that if he becomes the nominee that he can get at least a few Paul supporters to vote for him.

Fifth, I liked Rick Santorum’s presence in the debate.  I don’t particularly like Santorum and what he stands for.  In fact, he probably scares me more than anyone, including Obama.  However, he did a great job of exposing Gingrich and Santorum on their support of government-run healthcare.  The ironic thing in all of that though, is that Santorum supported the massive Medicare prescription drug program started under Bush.  That program is the epitome of top-down government-run healthcare.

In conclusion, I thought it was a good night for Ron Paul.  Gingrich and Romney beat up on each other. While they focus on Florida, Paul is focusing on Maine and other caucus states where he can win and pick up delegates.  The longer he stays competitive in this whole thing, the more of a chance that people will have to see the light.

The Federal Open Market Committee (FOMC) released its statement today saying that it is likely to leave rates near zero until late 2014.  If this ends up happening, that means that the overnight rate for borrowing will have been near zero for 6 years.  The Fed dropped the rate below .25% after the economic fall of 2008.

As I have said before, the Federal Reserve is not really controlling this rate right now.  This is the rate that banks are charged to borrow money overnight in order to meet reserve requirements.  However, since the Fed has more than tripled the adjusted monetary base, the excess reserves held by commercial banks have skyrocketed with the monetary base.  Since banks have huge excess reserves, they don’t need to borrow from the overnight window because they are not falling below the reserve requirements.

These low interest rates are not without a cost.  Overall low interest rates hurt savers.  This discourages saving, which is required for capital investment, which is required for future economic growth.  People who are saving money in a bank account right now are losing in a major way.  They are earning a fraction of a percent in interest.  They are not even keeping up with inflation.

In Bernanke’s press conference this afternoon, he suggested that QE3 (more money creation) is possible if economic conditions warrant it.  This should come as no surprise.  He did not earn the nickname Helicopter Ben for nothing.

In the FOMC statement, it was also stated that the Fed would continue its program of extending the average maturity of its holdings.  This means that it will be swapping shorter-term bonds for longer-term bonds.  I suspect this is an attempt to keep mortgage rates down, along with borrowing costs for Congress.

As Gary North has said, the Fed is in Goldilocks mode right now: not too hot, not too cold.  It does not want to tip the scales to recession or high price inflation.  If and when the Fed faces a situation of high price inflation, it will be in major trouble.

The stock market, the bond market, and gold, all reacted positively to this news today.  The dollar fell.  This is not surprising.  Stock market investors like to hear news of low interest rates and the possibility of more money creation.

Bernanke and his cohorts really don’t know what they are doing.  They are playing politics and they are hurting the economy.  There will be a day of reckoning.  We can’t know when that day will be.  There will be a day when the Fed has to make a big decision.  It will have to stop creating money and let interest rates rise and severe recession hit, or it will keep creating money and go to hyperinflation.  Let’s hope they choose the former and not that latter.