Tonight is a Republican presidential primary debate.  It will air on Fox News.  On Saturday, the Ames Straw Poll takes place.  Do not mistake this as a regular poll with a random sample.  The Ames Straw Poll is a better indication of a campaign’s organization and the loyalty of its followers.  For this reason, Ron Paul will likely do well.

It is impossible to predict what will happen tonight, but I expect the economy will be the big topic.  I’m sure Fox News will find a way to ask Ron Paul some bizarre question, but he will get his points across as usual.

I see the whole race for the Republican nominee coming down to four people at this point.  I never expected John McCain to get the nomination in 2008, but I do believe we are in a different era now, just 4 years later.

I expect the 4 main contenders to be Mitt Romney, Michele Bachmann, Rick Perry, and Ron Paul.  I do expect Perry to enter the race and to be a contender.  Even if Sarah Palin enters the race, I think it is unlikely she will get the nomination, although it would certainly make things interesting.

Romney and Perry are the establishment candidates.  Romney is out of favor with the Tea Party.  He has to defend Romneycare in Massachusetts.  Romney passed Obamacare in his state before Obamacare actually existed.  If there is one thing that unites the Republicans, it is their hatred of Obama and Obamacare.  How could Romney possibly be the nominee given this fact?

Perry is trickier.  He sometimes talks a good game.  He sometimes sounds libertarian.  He said he was open to the suggestion of Texas seceding from the U.S.  He was pandering to his audience at that time.  If conservatives look closely at his record (most won’t), then they would see that he has been horrible on some issues.  He has an advantage being the governor of a large state that is not struggling as much economically.  His rhetoric will fool a lot of people.  Just remember that this is the man who wanted, essentially, a forced vaccination program for young girls.

Bachmann is not favored by the establishment, but she would still be acceptable.  She would continue the U.S. empire.  She says she favors ending the Department of Education.  It is hard to say if she is telling the truth.  Besides that, she doesn’t offer much in the way of specifics.  I would be a little more impressed with her if she did.  She says she wants lower taxes and less spending, but she doesn’t really say what she would cut.  I fear Bachmann in the way that Reagan was bad for libertarianism.  She will espouse all of these free market principles, but her policies will not reflect her rhetoric.  Then the hacks in the media will say that her free market principles have failed.

Then we are left with Ron Paul.  The establishment hates him and his ideas.  They fear him.  They fear he is correct in what he says.  They fear the following that he has accumulated.  It is really unbelievable that he is polling in the double digits in many national polls.  For anyone in the libertarian movement prior to 2007, this should be really impressive.  This is the first time in modern day America that libertarian views are being heard by millions and millions of people.

The Ames Straw Poll is rather important.  If any one of the big candidates, excluding Perry, finishes less than third, then I think their chances will be low of getting the nomination.  It is very important, for those campaigning and participating, to finish in the top three.  I expect Ron Paul will be in the top three.

The stock market has been on a roller coaster ride in the last week.  The drops have been more than the ups.  This is very bearish news for the stock market and the economy in general.  Of course, if you have been paying attention and you understand Austrian free market economics, then none of this comes as a shock to you.

Even less shocking, although notable, is the huge run in the price of gold.  It topped over $1,800 per ounce today.  People are buying gold due to economic uncertainty and fiat currency uncertainty.  The interesting thing is that the other metals have not been on this same run.  Even gold’s cousin, silver, has not done that well.  If silver is the poor man’s gold, then I guess rich people are buying right now.

The other notable thing is that, as of closing today, an ounce of gold is worth more than an ounce of platinum.  I discussed this in a blog post last month.  Platinum is typically more expensive than gold.

In today’s environment, it is easy to see why gold is doing so much better.  Gold has a history of being money.  Platinum is more of an industrial metal, often used for cars.  Gold is primarily used for jewelry and investment.

Another factor right now is the fact that many foreign central banks are buying gold.  They are certainly not buying platinum.  Bernanke says that central banks hold gold because of tradition.  But the reason it is tradition is because gold acted as money for thousands of years.  Central bank buying is probably helping in this gold explosion.

I am even more adamant now that platinum might be a good speculation at this point.  The gold to platinum ratio is now over 1 to 1.  While ratios don’t always mean anything, it can be useful for speculative purposes.

I think the last week has confirmed my overall strategy of investing in a permanent portfolio setup, as described in Fail Safe Investing.  I am also an advocate of holding far more gold than silver.  I am not against silver as a speculation, but gold should be a rock in your portfolio.  It is there for more stability and a hedge against inflation.  Silver is much more volatile.

So while I am still advocating that a majority of your portfolio be in the permanent portfolio and that most of your precious metal holdings remain in gold, I think there are opportunities for speculation.  If you want take a very small portion of your investments and buy platinum, I think now would be as good of a time as any.

After my last post on platinum, there was an anonymous comment listing ETFs and ETNs.  If you don’t want to buy and take possession of the actual metal, then PPLT looks like a good alternative that you can easily trade through a brokerage account.

After yesterday’s huge drop in the stock market, the Fed met today and released its statement regarding the economy and its policies going forward.  You can read the transcript here.  It is a short read.

The Fed announced that the current conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”  I have written about the federal funds rate before.  The Fed is not really controlling this rate right now, at least through the money supply.  The banks have piled up massive excess reserves and most of them don’t need overnight loans.  This has kept the rate near zero.

This statement didn’t mean all that much.  If anything, it should really be a bearish sign that the Fed expects to maintain this policy for at least 2 more years.

The transcript does say that the Fed “will maintain its existing policy of reinvesting principal payments from its securities holdings.”  This is an indication that they plan to have a stable money policy.  As usual, they leave open the possibility of adjusting their strategy as things progress (or regress).

The market had a slightly negative reaction after this release, but then the stock market exploded in the last hour of trading.  The Dow went up about 600 points in the last hour, closing up more than 400 points for the day.  Of course, this still did not erase all of the losses from yesterday.

Interest rates went down.  It is ironic that rates on government bonds have gone down since being downgraded from AAA status from S&P.  If you want to refinance a mortgage and you procrastinated last year when rates were way down, you have another opportunity.  If you can get a 30 year loan for about 4%, why not take it?  If you stay in your house for a long time, your last payment in 30 years will be practically nothing.  Make inflation your friend, even though it is not.

It is impossible to predict where the market will go from here.  I expect a lot more volatility in the short term.  Ultimately, it is going to depend on government policies and, even more so, Fed policies.  It is important to keep an eye on the adjusted monetary base.  This is far more meaningful than the federal funds rate.  The Fed actually controls the monetary base right now.

The bottom fell out of the stock market today, with the Dow falling more than 600 points.  It was even more brutal for the Nasdaq and S&P 500, which were both down over 6 and a half percent.  This came after news from late last Friday that the S&P was lowering the U.S. government’s AAA rating.  Today, the S&P announced more downgrades, including some municipal debt.  The news keeps getting worse and worse.  Meanwhile, gold exploded today, hitting new highs above $1,700 per ounce.

For anyone who has followed my speculation strategy of going long in gold and silver and shorting the stock market, you have done very well these last few trading days.  If you have a lot riding on market shorts, you might consider taking a small amount off the table.  While I expect the stock market to continue down for now, you never know if the Fed comes out with an announcement of QE3 that could drive the market right back up.

Of course, if the Fed does announce another massive round of quantitative easing (money creation), then this will be even more bullish for gold.  The Dow to gold ratio is now less than 6.5 to 1.  In other words, you need a little less than 6.5 ounces of gold to buy one share of the Dow.  I have no magic ratio of what would make a good buy on the Dow or a sell on gold.  There will continue to be roller coasters, but I think a Dow to gold ratio of 4 to 1 or less might be a good indicator.  I would be very surprised to see it hit 1 to 1 any time soon, but we really are in unknown territory.

I think the S&P downgrade was largely symbolic.  The U.S. government should have been downgraded a long time ago.  The three major agencies (S&P, Moody’s, and Fitch) are basically granted a monopoly by the government.  They are part of the establishment.  I’m not sure what this tells us here.  Perhaps the government will use this downgrade as an excuse for more taxes or more so-called stimulus.  Or perhaps things are so bad that even the S&P could not ignore it.  Whether the government will ever officially default is unknown, but it defaults almost every day by devaluing our money.

Besides gold, the other investment that did well today was bonds.  The 10 year yield was down to about 2.34%.  There is a tug-of-war going on between gold and government bonds.  Investors are seeking both for safety, but for different reasons.  Investors in bonds fear a major recession.  Investors in gold fear major price inflation.  Both sides may be right.

The Keynesian policies of this administration and the one before have put us in this situation, along with Congress and the Fed.  The Fed has tripled the monetary base since 2008 and we have seen deficits of around $1.5 trillion.  All of this and the economy is already going back in the toilet.  This is what happens when the government does not allow the correction to take place.  With all of the spending, debt, and money creation, things are only going to get worse.

My biggest fear right now is that these politicians will take a page out of Paul Krugman’s playbook and say that the only reason the economy is not recovering is because the previous stimulus was not big enough. If the government spends even more and the Fed goes crazy with QE3, then we could get hit really hard with price inflation.  Ron Paul and Peter Schiff may be proven right sooner than we could have imagined as both have warned of severe consequences for the U.S. dollar.

Just remember that the name of the game right now is to keep what you have.  If you can make any extra profits while maintaining your purchasing power, then consider yourself lucky or really good.

The velocity of money is a topic that I find even many libertarians do not understand.  Although it is impossible to accurately measure, it is a subject that is very important when looking at the economy.  I have discussed this topic before, but I think it is important enough to warrant more discussion as it relates to the current economy.

The velocity of money is the speed at which money changes hands.  If the velocity is high, then money is changing hands quickly.  Another way to say this is that there is a low demand for money.  Going the other way, low velocity means that money is slow to change hands.  It means that there is a higher demand for money.  In this case of low velocity, people are holding the equivalent of cash, usually in a bank.  It means people are not spending as much.

When more people are paying down debt, I consider this almost equivalent to low velocity.  People have a higher demand for money.  But if someone has credit card debt with a high interest rate, it makes sense for that person to pay down the debt instead of holding cash that is earning little or no interest.

I believe there are two main reasons that we are not experiencing high price inflation, in spite of the fact that the Fed has tripled the adjusted monetary base since 2008.  One reason is that the commercial banks have piled up this new money into excess reserves.  This has prohibited the fractional reserve banking process.  The other reason for a lack of massive price inflation is, I strongly suspect, a high demand for money.

People are not spending money as they were before the fall of 2008.  Although the national government debt is growing exponentially, the average American has actually reduced debt from a few years ago.  Americans (as well as others throughout the globe) are fearful of the future.  There is high unemployment and high deficits.  Future tax rates are uncertain and government regulations are causing huge uncertainty for individuals and businesses.  Many companies are sitting on big piles of money, but they are not investing it right now.  Excessive regulations (think Obamacare) and other uncertainties are causing Americans and American businesses to be conservative, fiscally speaking.

Since Americans are spending less, I believe this has helped keep a lid on price inflation.  If the economy falls back into recession, which seems likely, I would predict that the velocity of money stays low.  Of course, I don’t think we’ve ever really been out of the recession.

It is important to remember that just because there is high monetary inflation, it does not automatically translate into high price inflation, especially in the short term.  On the other hand, velocity can go the other way too.  If the Fed starts up a QE3 program (more money creation) and more Americans start to fear future price inflation, then the velocity of money can turn up quickly.  You can have a scenario where prices are going up even faster than the money supply, especially if people think that the central bank is not going to stop creating new money in the future.

This is actually what can happen in a hyperinflation, or as Mises called it, the crack up boom.  If the Fed keeps creating new money like crazy and people doubt whether it will ever stop, the dollar could actually become worthless rather quickly.  I do not think this scenario is likely as I think the Fed would tighten up its monetary policy before it allowed hyperinflation to occur, although I will admit that anything is possible these days.

In conclusion, while velocity is hard to measure, you should at least know of its importance.  Consumer prices will not always directly correlate to the money supply, at least in the short run.  This is due to the demand for money.  If consumers remain tight with their money, expect price inflation to remain much lower in comparison to the new money in circulation.

The Dow fell more than 500 points today.  The Nasdaq was down over 5%.  Oil was down 6%.  The silver ETF fell more than 7%.  Gold hit new highs and then fell back, although not as violently as silver.  There were two good investments to be in today: U.S. bonds and the U.S. dollar.

I am an advocate of the permanent portfolio.  Part of that portfolio is to put approximately 25% into long-term government bonds.  Some people think this is stupid.  They wonder how anyone could possibly invest in bonds when interest rates are sure to go up.  Well, today is your reason why.  Although interest rates are at near historic lows, they can still go lower.  For some reason, investors still flock to bonds for safety.

Today was also a good lesson on why the permanent portfolio invests in gold and not silver (although the mutual fund PRPFX puts a small percentage in silver).  I am not against owning silver, but I do favor a much higher percentage in gold.  Today was a perfect example as silver was off more than 7%.  While silver has the potential for bigger gains, it also has the potential for bigger losses.

Today should not be a big surprise for readers of this blog.  It should not be a surprise to libertarians and followers of Austrian economics.  When the government’s solution to a recession is more spending, more money creation, and more debt, it is not a surprise that the economy remains weak.  Today revealed to many people that we are going into another recession.  I think a better description is that it is a continuation of the recession.

The government and the Federal Reserve have pumped in massive amounts of money and “stimulus”.  It made things appear a little better over the last year and a half.  The stock market was going up.  But the so-called recovery was an illusion.  It was not built on stable foundations.  A recovery needs savings.  A recovery needs for the correction to have taken place to correct all of the malinvestments.  The government would not allow this to happen with all of the bailouts and spending.

This economy is in major trouble and it will continue to be until the government gets out of the way.  Obama and his Keynesian advisors are morons.  The Republicans rightly blame Obama for making the economy worse.  But they lack specifics.  Most of them also fail to mention that Obama is a continuation of the bailout and spending policies of Bush and the Republicans.

The trouble in Europe is also getting worse.  There is now talk of Spain and Italy needing help.  Greece is a drop in the bucket compared to these two countries.  We are either going to see massive inflation from the European Central Bank or we are going to see a breakup of the European Union.

Meanwhile, the Bank of Japan is going to create more yen out of thin air because its currency has been too strong.  This is more mercantilism.  They are morons too.  The Swiss have also announced a looser monetary policy for the franc.  In other words, two of the strongest fiat currencies will also be inflated.  This is why you should own gold and other hard assets.  All fiat currencies are risky at this point.

This whole thing sets us up for more quantitative easing (QE3) from the Fed.  This will eventually drive the dollar back down and will drive gold up even higher.  Bernanke is a student of the Great Depression.  He thinks that the Great Depression happened because there was not enough money printed.  This is his only solution to the down economy.  I expect more and more inflation.  Prices will rise.  I think “leaders” from other countries will tell him to stop.  If he doesn’t listen, then the U.S. dollar will no longer be the reserve currency of the world.  It will lose this status quicker than most imagined.

Hold on to your hat.  This will be another wild ride.  I recommend keeping your money as safe as you can.  I recommend the permanent portfolio.  I recommend holding some extra cash (in the bank) and gold.  I recommend getting out of debt.  I recommend that you sit back and watch Obama and Bernanke continue to squirm.  These clowns are absolutely clueless as to what to do next.  Their only solution is to spend more and print more.  This has not worked so far.  It has made the problem worse.

Before my recommendation today, I need to preface it with something I often say.  I am a fan of setting up a permanent portfolio as described in Harry Browne’s book, Fail Safe Investing.  I believe that you should have at least half of your investment portfolio in a permanent portfolio setup.  For more conservative investors, it should be even more.

Going beyond this, I think it is acceptable for more aggressive investors to speculate with money that they can afford to lose.  It is to these people that I speak today.  My recommendations are not meant to be part of your permanent portfolio.

Gold has had an outstanding run, particularly this week.  It keeps hitting new all-time highs (in nominal terms).  While I wouldn’t be surprised to see a pullback, there are a lot of reasons to be bullish on gold going forward.

One interesting thing about this latest run in gold is that gold stocks have not managed to keep up.  While the price of the metal is hitting new highs, most gold stocks are off of their all-time highs.  While this trend could continue for a while, I can’t imagine it continuing forever.

Gold stocks are a difficult play.  They are far more volatile than the price of gold.  You are also taking on the risk of owning a company, just as when you buy any company’s stock.  You are at risk that the government of whatever country the company operates in could violate property rights and destroy the company’s investment.  You are at risk of bad management.  You are at risk that the company will not find new gold.  You are also at risk of a stock market crash, as a market crash could drag down gold stocks with it.

With all of that said, I still think this scenario presents a golden opportunity.  If gold goes into a mania phase (which it isn’t yet), then gold stocks could go up exponentially.  There is no guarantee, but holding gold stocks can be like having leverage in the gold market.  If gold doubles in price over the next couple of years, gold stocks could easily go up 3 or 4 times that.  Again, there are no guarantees, but I am just pointing out the possibilities.

Owning single gold stocks is usually too risky for me.  If you are going to try this, don’t put a lot of your money at risk, particularly if it is a small company operating in a risky country.

My recommendation today is to buy either GDX or GDXJ.  These are exchange traded funds (ETFs).  GDX invests primarily in stocks of companies in the gold mining industry.  GDXJ invests in smaller companies in the gold mining industry.  Both are well off of their 52 week highs.

If you are looking for a good gold speculation while wanting to avoid the risk of owning any one stock, these might be worth a look.  You can buy these through a typical online brokerage account.  While I’m not making any predictions in the short term here, I do think these two ETFs have potential for big gains over the next couple of years.

There was an announcement today that the central bank of South Korea recently bought more than one billion dollars worth of gold.  This was supposedly the first time in more than a decade that the Bank of Korea has been a buyer of gold.

This news has driven the price up about 2% today.  It is currently over $1,650 per ounce.  This happened on a day in which the dollar was up slightly and the stock market plummeted.  For anyone who has employed my speculation strategy of shorting the stock market and going long on gold and gold stocks, today was a banner day.  Of course, one day does not make a trend.

There are more and more signs that the economy is getting worse.  The trouble in Europe keeps getting worse, or at least it is becoming more well known.  And we know the U.S. is in major trouble when the establishment rating companies are threatening a downgrade of U.S. debt.  There are two things that did well today in the investment world.  Treasuries went up and gold went up.  This tells me that investors are flocking to safety.

I don’t think I’ve ever seen so many bullish signs for gold.  Perhaps this means that there will be a correction (being a contrarian), but any dips in the price should just be a buying opportunity.  As we saw today with South Korea, central banks are buying gold.  This is putting a floor on the price of gold.  We have seen pullbacks, but there has been nothing extreme since 2008.

With all of the trouble in the U.S. economy and around the world, I am a pessimist in the short term.  I see either a major recession/ depression or major price inflation.  Let’s just hope that we don’t get both at the same time.

The federal government and the Federal Reserve are in a jam.  I really don’t think they know what to do. They are Keynesians and they are either deliberately lying to the American people or they don’t understand that their own reckless spending and monetary inflation is the cause of all of this.

I am still recommending that you keep at least half or more of your investments in a setup like the permanent portfolio as outlined in Harry Browne’s book Fail Safe Investing.  For speculation, I like a combination of gold, gold stocks, and stock market short positions.  I still would not bet against bonds at this point.  We saw what happened today as interest rates went down again.

Tomorrow I will recommend a good gold speculation for your portfolio.

As I predicted, it looks like the politicians in DC have “compromised”.  Although it isn’t yet official as I write this, it looks as though the Republicans are set to once again throw their constituents under the bus.

The “plan” that will be passed will have less than $1 trillion in cuts with possibly another $1.2 to $1.5 trillion determined later.  The current budget deficit is around $1.5 trillion per year.  But there is a problem.  The 1 trillion dollars in cuts is over 10 years.  That works out to just $100 billion per year in cuts, which is less than 10% of just the yearly deficit.  Even if there is a total of $2.5 trillion in cuts, that still works out to an average of just $250 billion per year.

Then there is another problem.  Most of the projected cuts take place in the future.  I heard that there is really only about $30 billion worth of cuts for the next budget.  The Congress cannot control what is actually spent in 2 years or 10 years.

Then there is still yet another problem.  These supposed cuts are not actually cuts.  It is based on the projected baseline budgets for the next 10 years.  The budget is projected to increase substantially over the next 10 years.  So this “cut” of 1 trillion dollars is really not a cut at all.  It is simply a reduction in the increase that was projected to take place.

I heard Rush Limbaugh on the radio last week.  I am not usually a fan, but he made an interesting point.  He said that if a deal was reached to just hold spending the same over the next 10 years, then according to the Congressional Budget Office (CBO), this would be considered a cut of $9.5 trillion.  If this is true, this just points to the absurdity of this latest deal.  I am not sure of the accuracy of his figure, but the amount is certainly several trillion dollars.  Again, the Republican politicians in DC have once again proven to be absolutely horrible.

As for gold, the price fell a little on the news, but it is still holding well above the $1,600 mark.  Peter Schiff has written a piece about the prospects for gold given different scenarios.  You really only need to pay attention to his “bullish gold case #2”.  This is the scenario of having the debt ceiling raised with symbolic cuts in spending.  He is right that this is bullish for gold.

I am actually baffled that investors could see the latest deal making in DC as bad news for gold.  It should be quite the opposite.  With a massive increase in the debt ceiling, it means there are no immediate plans to cut any significant spending.  It means that the debt will continue to grow.  It means that the Fed will continue to buy government debt.  It means that the monetary base will continue to go up.  It means that the dollar will get weaker and gold will go higher.

I have mentioned this before, but I thought I would share some more thoughts on this subject.  Gold is at an all-time nominal high.  As of this writing, it is near $1,630 an ounce.

There are some who are saying that gold is a bubble that will pop.  They are trying to say that gold right now is like real estate was in 2005 or 2006, or like technology stocks were in 1999.

While gold has made a consistent run for the last 10 years, I do not think it is in a bubble.  I think this may be the case in the future, but we are not there yet.  I am not making any predictions on how high gold will go, but I think a more reasonable analogy is to say that gold right now is like real estate in 2002 or technology stocks in 1997.  Again, this is not a prediction that gold will peak in 2 years.  It is a prediction that gold will go higher.

During a mania or bubble, people are trying to buy.  Because there are so many interested buyers, it drives the price higher.  When people expect higher prices in the future, nearly everyone wants to buy in the hopes of selling later on for a profit.  In 2005, you didn’t see a lot of recommendations for selling houses.  Most of the stories in the press talked about buying houses as an investment.

I do not see the same situation for gold yet.  There is a lot more advertising than in the past.  In fact, if you listen to conservative talk radio or if you watch some of the cable news channels, you may hear advertising for gold.  These ads are telling you that you should have gold as part of your portfolio.  I have to admit that these ads have become far more common than they were just 5 years ago.

At the same time though, there seem to be just as many ads telling people to sell gold.  I have heard commercials on the radio saying that gold is at an all-time high and that now is a great time to sell.  There are also ads telling people to take their jewelry and scrap gold and mail it in.  In return, they will send you a check based on the weight of the gold.  This does not sound like a bubble.

There is still a very small minority of the population who own gold, outside of small amounts of jewelry. It is becoming a little more common for investors to put a small portion in their portfolios, but even here it is still a minority of investors.  Again, this does not sound like a mania to me.

Gold has gone up in the last 10 years for good reason.  There have been multiple wars.  The national debt is over $14 trillion now.  The Fed has more than tripled the adjusted monetary base in the last 3 years.  If the banks decide to lend out their new reserves and the Fed does nothing to stop them, we could see serious price inflation quickly.

The dollar has done very poorly compared to the other major currencies, even though gold has gone up against all of the currencies of the world.  Or perhaps more accurately, the currencies have gone down against gold, due to central banks inflating.

I think we may see a gold bubble before it’s all over, but we are not there yet.  There are good fundamental reasons for gold going higher and I don’t see the mania there right now.  The other point to remember about bubbles too is that they always seem to go on longer than they should.  We are going to see big ups and downs over the next several years, but I expect the overall trend for gold to be higher.