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binve's Gold Foil Hat Zone: More Thoughts on Gold's Massive Bull Market

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June 07, 2010 – Comments (36)

WARNING!! binv's Tin Gold Foil Hat Zone !!



.... Just call me a Gold Bug. (In case you didn't notice, I am being sarcastic. Because anybody who is bearish on gold labels anybody who is bullish on gold a Gold Bug. But that's fine, I will take it).

I am very bullish on gold. This is no surprise. I have written on the subject of gold many times.

The main reason why I am bullish on gold is that it is in a massive bull market in comparison to fiat money. Gold is a currency. Like any currency, you don't own it because it has intrinsic value, you hold it because it is a store of wealth. So when I say gold is in a massive bull market in comparison to fiat money, I mean exactly that. Gold will hold its value while fiat money is devalued in comparison.

As Gary says: Gold is not about price, gold is about value

We have one of the final possible bubbles at it's apex: A Sovereign Debt Bubble. Economies all over the world are suffering and are trying to solve a debt related crisis with more debt. It was *never* going to work and will end badly.

So when ranking currencies relative to each other, and all the major currencies are engaging in some form of Devaluation / Quantitative Easing, they are all fighting debt with more debt.

The problem is debt.

And the Fed has made it very clear that monetizing as much debt as is necessary to keep the system going, at the direct expense to the Dollar, is not only a course of action that is open to them, but THE course of action that they are taking and will take. This plan will continue until there is no longer a Federal Reserve.

Yet the market is trying to purge excesses, and the Fed and the Treasury is not allowing it to happen.

This makes the outcome both simultaneously deflationary and inflationary. The market wants to, and desperately desires to save, but the Fed is directly hurting savers behind the backdrop of *extreme* monetary inflation.

I have been hammering on the topic because it is the critical issue to understand how all of the advanced economies government's action will not only fail to produce the desired effects, but will more importantly make matters worse. The main issue is  Debt Saturation - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=357428. It is critical to understand that an increasing debt load has decreasing marginal utility and there comes a point due to servicing requirements that all new debt has a negative economic impact. This is why we were NEVER going to be able to borrow and spend our way out of a crisis that was caused by too much debt to begin with.

This sets up an extreme deflationary environment (this debt load is unsustainable) within which the Federal Reserve will monetize unprecedented amounts of debt at unprecedented rates. Which will result in a simultaneous deflationary and inflationary outcome: stagflation. There is NEVER anything in economics and especially macroeconomics that has only one cause and one effect. There are always multiple effects with varying degrees of influence (both in absolute value and transience). There will be deflationary impulses and there will be extreme monetary inflation, the Fed will see to that. Which means that I think the most likely outcome will be a combination of the two: stagflation. Economically correlated assets go down in value (like your home and equities as a general asset class) and things you need to buy/consume (such as real assets / commodities) cost more. Really the worst of all possible outcomes.

I do think that most inflationists discount the amount of debt that is collapsing (even though most deflationists use measures like M2 and M3, which have a lot of non-monetary components to prove their point) while at the same time most deflationists discount the amount of monetary inflation the Fed can generate (they argue that the Fed creating base money is like pushing on a string because the banks don't have to lend, even though I am many others have pointed out that the Fed has gone around the banking system and has started monetizing private sector debt directly, which is a trend that is likely to increase not decrease). Most people on either side of the debate is not considering strong evidence that both forces are significant.

The result is and will be stagflation. It is really the worst of all possible outcomes. The economy needs savers and the Fed will not allow savers to be compensated for their risks. This will ultimately result in the collapse of the bond bubble as there is no longer any faith in Sovereign Debt. And the world will turn to real assets as a store of value.

And this sets up the final bubble ... the Gold Bubble.

Now I don't mean this pejoratively. And I am not casting a negative connotation on it. Bubbles are what they are. When Central Bank monetary policy forces all of us to become speculators by not rewarding savers, then bubbles are formed.

Gold doesn't care that it is in a bubble. It is quietly and quiescently preserving wealth. Again Gold is NOT about price, gold is about value.

I don't hold gold because I like shiny objects. I don't hold it because it makes the world go round. I hold it because it will be the last currency standing that preserves wealth as the world's economy goes through this painful deleveraging process.

No fiat currency will preserve wealth. Certainly not when this crisis has run its course. Some will fare better than others (many will fare much better than the US Dollar), but all will pale in comparison to gold.

The current trend of piling debt on top of debt is unsustainable: Debt Saturation - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=357428. And neo-economists and politicians have to get their collective heads out of their collective asses and not allow a vampire industry (financials) hijack the real economy. But since that won't happen willingly, then the market will force a crisis that will fundamentally change how we view politics and the economy. Crony capitalism will go away. Good laws like Glass-Steagall will become reinstated. Too big to fail will be abolished. Grass roots companies will grow like a new forest. The Mittelstand companies of Germany (small/medium firms, mostly family owned) is exactly the economic model that most of the western world should be following, and I believe will in the future.

And when the crisis nears a real bottom, I will be the first person to dump my gold and invest in the new world economy. One that produces goods, and solves problems, and increases the quality of life for humanity.

Gold is not an end in and of itself. It is a means to an end, a way to preserve value as the economy purges excesses so that the new economy can be invested in.

It is a way to save. And since the Fed is not allowing us to save in the Dollar or Treasury debt, people will turn to saving in real money.

I don't care if you don't agree with me. I don't care if you think gold is a useless shiny rock (it is, just like the Dollar is a useless piece of green paper). I am not here to convince anybody of anything. I am just stating my opinions and why I have them.

I have complied a long list of posts that I have written discussing my macroeconomic views on the Dollar, Inflation/Deflation/Stagflation, and Gold. These might be useful in understanding why I have come to these opinions:

--- Debt Saturation - LINK
--- Moving Some Macroeconomic Deck Chairs: The Dollar, Dollar Swaps, Bonds and LIBOR - LINK
--- What the Bond Market is Trying to Tell the Stock Market: A Look at the Yield Curve and Expectations - LINK
--- Thoughts on the Euro, the Dollar, and a Long Term EUR/USD Count - LINK
--- Something Very Strange Is Happening With Treasuries - LINK
--- The Long View - LINK
--- The Gold Blog. Gold/Silver/GSMs (and a little Oil for good measure) - LINK
--- Thoughts on the US Dollar, Analysis of the USDX Long Term, Follow up on the Gold Blog - LINK
--- The Dow / Gold Ratio - LINK
--- The Gold / Silver Ratio - LINK
--- Gold Miner Performance Relative to Gold - LINK
--- Gold Miner Performance: A Look At Miner Cost Inputs vs. Gold Price - LINK

US Dollar



ENLARGE


ENLARGE


ENLARGE


ENLARGE

Bonds



ENLARGE

Gold

Monthly Chart - tune out the noise



ENLARGE

Elliott Wave Counts



ENLARGE




ENLARGE


ENLARGE


ENLARGE


ENLARGE


ENLARGE

.... at least that all makes sense if you are crazy like me :)

Thank You for visiting binv's Tin (and Gold) Foil Hat Zone

36 Comments – Post Your Own

#1) On June 07, 2010 at 4:30 PM, obsoleteaccount (< 20) wrote:

Nice post and couldnt agree more, but I dont like PHYS, so whats the best vehicle for gold?

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#2) On June 07, 2010 at 4:30 PM, outoffocus (23.49) wrote:

Gold is a shiny rock that is consistently going up in price and I think thats the part that many gold detractors are forgetting.  Just like the bulls ridiculed the bears for not participating in the humungous runup (even though we believed it to be phony), doesn't the same argument go for the people who ridicule gold bugs?  Yes, in the coming years the eventual gold "bubble" will pop.  But we've seen enough bubbles in the last 2 decades to know when a bubble has reached ridiculous proportions.  So why not hop on enjoy the ride while you can? While the keynesians, deflationists, or simple gold skeptics are holding onto their dividends and bonds, they are missing out on monstrous gains in PM stocks.  Just like the bears who didn't participate in the rally missed on junk stock and junk bond gains (lol).

Personally I dont care to "pick sides". I just want to make money.  I didnt really get to participate in the previous "bubbles". So for once I'd like to be on the winners side rather than be blindsided by the resulting crash.

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#3) On June 07, 2010 at 4:38 PM, binve (< 20) wrote:

Valyoo,

Thanks!

>>but I dont like PHYS

Interesting, why not?

>>so whats the best vehicle for gold?

I don't think there is any one. I like physical, I also like firms like GoldMoney and BullionVault ("almost"-physical), I like both CEF and PHYS, and I like quality miners (producers). I like to spread out my risk among several.

outoffocus ,

I totally agree.

>> Yes, in the coming years the eventual gold "bubble" will pop.  But we've seen enough bubbles in the last 2 decades to know when a bubble has reached ridiculous proportions.

Exactly. And what is good about this bubble is that the end of it is a *good thing*!! When the gold bubble ends, it means that monetary policy will be on the right track, the economy will have begun its serious transition from consumption to production. I want the gold bubble to end as soon as possible!!, because I want to trade in my gold to get in on the ground floor of the new economy. I have no interest in support the current phony consumption-heavy economy.

>>Personally I dont care to "pick sides". I just want to make money.  I didnt really get to participate in the previous "bubbles". So for once I'd like to be on the winners side rather than be blindsided by the resulting crash.

Amen to that! :) Thanks..

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#4) On June 07, 2010 at 5:26 PM, Starfirenv (< 20) wrote:

Thanks Binve. +1 Rec. At THIS moment, (things change fast) I would add that silver is about 70% below its all-time high. Gold is making all-time highs. Often, one is better off investing in things that are down 70%, rather than things that are making all-time highs. Just sayin'. Hope nobody gets mad. I'm long both and "holding" PM and some miners. Personally, I like my silver hat better. Regards.

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#5) On June 07, 2010 at 5:32 PM, obsoleteaccount (< 20) wrote:

Doesnt PHYS have a 14% premium or something priced in?  Sorry I know little about that matter.  What makes PHYS so much better than GLD?

Also maybe one day in the future when we both have free time you could teach me about charts since you seem to be the expert on here :)

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#6) On June 07, 2010 at 5:33 PM, binve (< 20) wrote:

Starfirenv ,

Thanks man!!

>>Often, one is better off investing in things that are down 70%, rather than things that are making all-time highs. Just sayin'. Hope nobody gets mad.

Not at all!! Being bullish on gold certainly does not preclude being bullish on silver. Gold is my biggest real life holding and silver is a close second. In fact the biggest single weighted issue in my portfolio is CEF (50% gold / 50% silver). If silver gets a slingshot effect because gold takes off (which I think is likely) then I am positioned for that too :)

Thanks man!!..

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#7) On June 07, 2010 at 6:05 PM, binve (< 20) wrote:

Valyoo,

>>Doesnt PHYS have a 14% premium or something priced in?  Sorry I know little about that matter.  What makes PHYS so much better than GLD?

Very good questions, and here is the logic.

PHYS has rigorous auditing (just like CEF). It has every ounce of gold that it says it has. It is also managed by Sprott, the biggest hedge fund gold holder in the world. On top of that, PHYS is the only issue that allows you to trade in shares for physical gold (I believe the minimum is 100oz bars). This is a fund with serious links to physical.

The physical market and paper market in gold is not at all similar and is getting much worse over time. The amount of leverage in the paper gold market is insane, not even remotely backed by physical.

Enter GLD. GLD has *terrible* auditing and more than a little bit of dubious evidence exists that they have loaned out some portion of its gold, like a bullion bank. Except GLD is not a bullion bank! Many of us who follow the market expect the paper and physical market to break further away, especially if there is a currency crisis or sovereign debt crisis.

The point being that PHYS is really a physical subsititue and GLD absolutely is not. This is why investors place a higher premium on it.

>>Also maybe one day in the future when we both have free time you could teach me about charts since you seem to be the expert on here :)

No problem! More than happen to!

In the meantime, my other blog is focused more on TA, so you might find it interesting: http://marketthoughtsandanalysis.blogspot.com/.

Thanks!..

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#8) On June 07, 2010 at 6:09 PM, Entrepreneur58 (37.01) wrote:

I have some disagreement with your comments about savers not being compensated.  When you save, you want to save something which maintains or improves your ability to aquire labor in the future.  Very low or even zero interest rates on savings are reasonable if wages are not rising.  In the US, wages are not rising right now and I suspect that they aren't going to rise in the near term future.  I will be happy getting my zero percent as long as workers are getting laid off and are not getting raises.

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#9) On June 07, 2010 at 6:13 PM, binve (< 20) wrote:

Entrepreneur58,

Fair enough, but I think there is more to the picture

>> Very low or even zero interest rates on savings are reasonable if wages are not rising.

The problem is that while nominal rates are zero, real rates are negative. The Fed wants us all to *spend*. It is not accidental at all the government has stopped labelling us as citizens and started referring to us as consumers.

The Fed and the Treasury are doing everything in their power (short of actual/nominal negative interest rates) to get everybody to spend and not to save..

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#10) On June 07, 2010 at 8:02 PM, silverminer (30.49) wrote:

binve

Phenomenal work! I love how many aspects of the story you are able to cover under one roof. Would that I had more spare time, I would like to craft similarly comprehensive posts. :P Luckily I can live vacariously through yours.

Sinch

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#11) On June 07, 2010 at 8:23 PM, binve (< 20) wrote:

silverminer,

Thanks Sinch! I appreciate that man!!

>>I love how many aspects of the story you are able to cover under one roof.

Right on man, thanks :)

>>Would that I had more spare time, I would like to craft similarly comprehensive posts. :P Luckily I can live vacariously through yours.

If my posts contained even a tenth of the information and usefulness that yours do I would be a happy man :)

Thank you again!!..

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#12) On June 07, 2010 at 8:31 PM, Beorn10 (30.05) wrote:

I'm a little surprised that the gold miners have not done better given the depressed energy prices and rising metal prices.  Curious to know if you feel that this pattern will continue or do you think the mining stocks will shoot past the metals later on this summer?

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#13) On June 07, 2010 at 8:40 PM, binve (< 20) wrote:

Beorn10 ,

GSMs will definitely get their due. Their top lines are getting better as well as their bottom lines. I wrote two posts that talk about exactly that:

1. Gold Miner Performance: A Look At Miner Cost Inputs vs. Gold Price - Dec 30, 2009
2. Gold Miner Performance Relative to Gold - Jan 11, 2010

So I am with you, I think think this is the market being unsure about gold and viewing GSMs as equities (which they are) and selling them off with other equities

>>Curious to know if you feel that this pattern will continue or do you think the mining stocks will shoot past the metals later on this summer?

Honestly, I think GSMs will underperform raw metals. As I state above, I think the next crisis is a debt crisis whos main cause is a sovereign debt crisis. The problem is too much debt. I think a currency crisis is very likely in the dollar. So I think real money (gold and silver) will do the best. Money substitues (real assets like GSMs, Oil, commodites, oil producers, CANROYs, etc.) will do better, but not as well. In the case of GSMs, they are leveraged plays on gold (I discuss this is the 2nd link above). As such GSMs outperform gold when times are "good" and gold will outperform GSMs when times are "bad". And in a debt crisis, I think gold will definitely outperform GSMs.

I am still very bullish on GSMs, and there will be a few lucky ones with some nice discoveries that will in fact outperform gold. But as a sector I think GSMs will slightly underperfom gold. There is no other asset class that I am more bullish on.

Thanks!..

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#14) On June 07, 2010 at 8:41 PM, kstarich (30.67) wrote:

binve

Great charts!!

It is still amazing to me that the miners have not rallied though.

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#15) On June 07, 2010 at 8:42 PM, binve (< 20) wrote:

kstarich,

Thanks kstar!!

>>It is still amazing to me that the miners have not rallied though.

LOL! Beorn and I were just discussing. See my comment #13 right above yours. Thanks!!..

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#16) On June 07, 2010 at 8:51 PM, Robuh (23.71) wrote:

Gold is NOT about price, gold is about value

I swear, I keep on reading this and I have no clue what it means. I think I need to go drink some beer and try again later.

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#17) On June 07, 2010 at 8:52 PM, 100ozRound (29.42) wrote:

If binve was a stock ticker, I'd green thumb it with a time frame of forever...

 

Good stuff!

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#18) On June 07, 2010 at 8:56 PM, binve (< 20) wrote:

Robuh ,

>>I swear, I keep on reading this and I have no clue what it means.

You need a double secret decoder ring :)

>>I think I need to go drink some beer and try again later.

Have two on me!

100ozRound ,

>>If binve was a stock ticker, I'd green thumb it with a time frame of forever...

LOL! That's awesome man, thanks!! :)..

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#19) On June 07, 2010 at 9:08 PM, Griffin416 (99.98) wrote:

I might be late on this blog, but IMHO, the best way to own gold is 1) physical bullion (I buy from apmex.com) no tax consequences for selling. I own a bunch.

2nd is GLD the biggest and widely held ETF (especially since Paulson owns a ton of this ETF)

The GDX would be ok but only for short term swings, it really sucks over a longer term versus real gold.

Additionally, I own UGL, the double long gold, it seems to perform really well and barely looses anything in the rebalancing.

For silver, AGQ, SLW or actual silver.

Binve, needless to say, you provide great charts, in the very short term gold looks a little too high...above the trend lines. So I know a $150 drop is coming soon, but who cares, just another chance to back up the truck

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#20) On June 07, 2010 at 9:17 PM, binve (< 20) wrote:

Griffin416 ,

>>I might be late on this blog

Not at all!

>>but IMHO, the best way to own gold is 1) physical bullion (I buy from apmex.com) no tax consequences for selling. I own a bunch.

I totally agree.

>>2nd is GLD the biggest and widely held ETF (especially since Paulson owns a ton of this ETF)

I differ with you a bit here. My physical proxy ETFs of choice are CEF and PHYS. I am not a fan of GLD. Valyoo and I were discussing this very point in comment #7 above

>>The GDX would be ok but only for short term swings, it really sucks over a longer term versus real gold.

I agree. I do not own GDX. I like choosing my own basket of high quality producers

>>Additionally, I own UGL, the double long gold, it seems to perform really well and barely looses anything in the rebalancing.

As a trading vehicle, I have used UGL and DGP, mostly for fun. All my swing trading is done in general equities, and all my investing is done in Gold. So I almost never trade gold, but maybe a little 'for fun'

>>For silver, AGQ, SLW or actual silver.

I like physical silver and SLW is my favorite Silver Miner. Also a fan of EXK but more speculative.

>>Binve, needless to say, you provide great charts,

Thanks man! I appreciate that!

>>in the very short term gold looks a little too high...above the trend lines. So I know a $150 drop is coming soon,

Actually I am watching that cup and handle and I believe we might get a run up to $1400 before the next major correction. Could be a fakeout, but maybe not :)

>>but who cares, just another chance to back up the truck

Amen to that!!

Thanks for the comment!..

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#21) On June 07, 2010 at 10:49 PM, gman444 (29.03) wrote:

Binve-wow, man.  You have outdone yourself.  Great contribution...

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#22) On June 07, 2010 at 11:00 PM, binve (< 20) wrote:

gman444 ,

Thanks man!..

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#23) On June 07, 2010 at 11:43 PM, Tastylunch (29.40) wrote:

yeah I kinda laugh at people who call Gold a Bubble already.

Gold has done very well true but the way it's shaping up the real bubble is about ready to begin.

Wouldn't surprise me if we go parabolic real soon (meaning before 2012)

don't really know what else to add Binve. We've been down this road many many times before. Feels kinda like Housing in late 2003, the engine is getting revved up but it isn't roaaring yet.

you did a bangup job of laying it out as usual. You spoil the CAPS community dude!

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#24) On June 07, 2010 at 11:51 PM, binve (< 20) wrote:

Tastylunch ,

>>yeah I kinda laugh at people who call Gold a Bubble already.

I know exactly what you mean :)

>>Wouldn't surprise me if we go parabolic real soon (meaning before 2012)

If my count of the waves is even remotely close to correct, that is a very real possibility

>>don't really know what else to add Binve. We've been down this road many many times before. Feels kinda like Housing in late 2003, the engine is getting revved up but it isn't roaaring yet.

I totally agree man

>>you did a bangup job of laying it out as usual. You spoil the CAPS community dude!

Thanks my man!! I appreciate that!..

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#25) On June 08, 2010 at 12:01 AM, topsecret09 (44.31) wrote:

 Great work Binve...   I really appreciate all of the time and thought that you put Into your work. Very Informative stuff !!  :)  TS     

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#26) On June 08, 2010 at 12:07 AM, binve (< 20) wrote:

topsecret09 ,

Thanks man! Absolutely!..

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#27) On June 08, 2010 at 3:10 AM, uclayoda87 (29.35) wrote:


Fat Happy Laughing Buddha

The golden fat man brings sanity back to the financial world.

"For centuries, Buddhist notions of happiness have been based on self-mastery, a happy demeanor, purposeful endeavor, a deep commitment to the welfare of others and enlightened awareness. As a result, today his hemp sack is interpreted as filled with gold, happiness, health, and other aspects of abundance."

Note:  The sack is filled with gold not fiat currencies.

 

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#28) On June 08, 2010 at 6:48 AM, outoffocus (23.49) wrote:

Gold just hit an all time high in USD @ 1249 this morning. O.O

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#29) On June 08, 2010 at 7:34 AM, MoneyWorksforMe (< 20) wrote:

Yep! This is going to be a very interesting week!

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#30) On June 08, 2010 at 8:38 AM, binve (< 20) wrote:

uclayoda87 ,

Nice man :) Have you ever read Autobiography of a Yogi? There is definitely a nice parallel there.

outoffocus,

Can I get a boo-yahh :)

MoneyWorksforMe ,

Yessir!!..

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#31) On June 08, 2010 at 10:46 AM, uclayoda87 (29.35) wrote:

  binve

 No I had not read that book.  I just remembered the statue and did a little Google search.  It seemed to fit well with the discussion.  A predecessor of Benjamin Franklin and the Austrian School.

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#32) On June 08, 2010 at 11:41 AM, outoffocus (23.49) wrote:

I thought this article was perfect for your blog

Pimco's Crescenzi Sees `Keynesian Endpoint' With Balance Sheets Exhausted

June 8 (Bloomberg) -- Nations have reached a “Keynesian endpoint” as exhausted balance sheets leave policy makers with few options to bolster economic growth, according to Anthony Crescenzi, an investor at Pacific Investment Management Co., the world’s largest bond-fund manager.

“Time, devaluations, and debt restructurings might be the only way out for many nations,” Crescenzi wrote in an e-mailed note titled “Keynesian Endpoint” that referenced the Great Depression era economist John Maynard Keynes.

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#33) On June 08, 2010 at 11:51 PM, binve (< 20) wrote:

uclayoda87 ,

Gotcha man, I agree.

outoffocus ,

Very nice thanks!..

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#34) On June 18, 2010 at 9:52 AM, binve (< 20) wrote:

1260, another new all time high in gold.

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#35) On June 18, 2010 at 10:04 AM, outoffocus (23.49) wrote:

*pops champagne*

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#36) On June 18, 2010 at 2:38 PM, binve (< 20) wrote:

outoffocus,

Yes indeed! :)..

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