Gold has declined from $1,000.00 an ounce to a low of almost $900.00 this week after a massive historical Fed bailout program to assist our illiquid financial institutions. The questions are, 1 -Has the gold bubble burst? 2. Is Inflation now under control? 3. Has faith been restored in the U.S. Dollar?

Lets start with #1 - Has the Gold bubble burst? The news surely would like us to think it has however, let’s step back and take a realistic look at this. The gold sell off was long overdue yet came at a very unlikely time. Now that the dust is settling we can see that most of this sell off was traders taking profits from gold and oil “futures” positions and ETF funds because it was the most profitable portion of the portfolio in order to pay margin calls on highly leveraged stocks as well as to lessen the blow of being eaten alive by the financial institution stocks that plummeted.

The recent Gold run began at $650.00 and stalled at $1,040.00 in the past 6 months now that a top is apparent the question is do we panic or step back and look at the big picture?

I for one choose to let a level head prevail. A 40% correction is in order and should be BOUGHT not sold. A 40% correction would put us at about $880.00 or so, we may be near it today. Why buy it?

That leads to #2 and #3 – Is Inflation now under control? When the Fed bailed out the financial institutions with approximately 1 TRILLION dollars in promised new cash it gave many an apparent sigh of relief that we have been saved. I beg to differ on this view. Where did the Fed get 1 trillion dollars? Printing presses are running overtime at the Federal Reserve today and you can’t simply print massive amounts of cash and put it into circulation without diluting the currency even further thus lessening its value.

"We inflate our paper currency, we repair commerce with unlimited credit, and are presently visited with unlimited bankruptcy."
- R.W. Emerson, The Young American, 1844

The practice and performance of fiat currencies in the past century is a great lesson in what we are doing and what it leads to. What has changed? If anything, the monetary setting today is much worse than that of others in the 20th century,  at least in the earlier part there was still a gold standard. Up until 1971, there was some semblance, however weak, of an international gold standard. The monetary shackles on today's central bankers are, much more lenient. Hence, the threat of inflation is far more lethal. As horrid a performance as the dollar turned in for the 20th century, the 21st could make it look pretty good in comparison. Paper monetary systems have a tendency to blow up, in what is commonly called a hyperinflation. They are really not so rare. looking back at the 20th-century experience, many have heard of the famous German hyperinflation of 1922-23, where price inflation was 3,422% in 1922 alone (and where, in January 1923, one could buy a dollar for 20,000 marks - but by early November it took 630 billion marks to buy that same dollar). The numbers are simply staggering and hard to comprehend. Yet, 's hyperinflation of 1945-46 was even more spectacular, with price inflation of 19,800% per month. Phillip Cagan wrote, in the 1950s, what many consider to be a classic study of hyperinflation, in which he set the definition of the term hyperinflation at an arbitrary inflation rate exceeding 50% per month. Even so, Cagan still manages to find seven hyperinflations meeting his definition, the limiting factor being that these seven were the only ones where monthly price data was available. They include the great German hyperinflation, two in and also hyperinflations in , , and . These all occurred between 1921 and 1946. Witness, then, that the phenomenon was not a rare thing. To update Cagan, the more recent hyperinflations were mostly in emerging markets. According to "The Realities of Modern Hyperinflation") some of the more recent ones occurred in places like Argentina, Bolivia, Brazil, Peru and the Ukraine and that doesn't cover them all. Further searching provided examples of devastating hyperinflations in , , and . Large inflations but not quite Hyperinflations occurred since 1998 in and other far east emerging countries as well as and there are many more but they did not keep records.

In any event, we are not at all convinced that a rate cut here, a smashing of the discount window there, or a new lending facility here AND there will forestall economic reality. We know Ben Bernanke is a student of the Great Depression. Surely he knows bad debts have to be liquidated before an economy can move on. But it doesn't mean he won't keep trying to re-inflate. And some investors-as yesterday shows-are willing to follow his lead.

The Japanese are increasingly unconvinced that Bernanke can turn things around. They are selling the dollar and buying back the Yen. "For financial firms and the economy, the worst is not over,'" said Tetshisa Hayashi, a currency strategist of foreign-exchange trading in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd. He told Bloomberg that, "`Japanese investors think now is a good opportunity to sell the dollar, taking advantage of its big rally yesterday"

How will you know when the greenback is well and truly doomed? Keep an eye on the TIC data. TIC stands for Treasury International Capital report. It's a report published by the U.S. Department of the Treasury showing net foreign purchases of stocks and bonds.

Despite the nominal rise in stock prices, the falling U.S. dollar acts as a huge dis-incentive to buy dollar-denominated financial assets. Last month's TIC data showed no big changes in the overseas consumption of bonds. But watch out for next month. You could also just keep an eye on bond prices and short-term yields in the U.S. Yesterday, short-term bond prices fell. We expect to see a lot more of that.

A falling dollar should also contribute more strength to commodities. But yesterday gold and oil fell quite a bit. What gives?

The dollar had a rare moment of inspiration. It was delusional inspiration, though...it won't last. Besides, commodities have other reasons to go up than dollar weakness

Commodities are negatively correlated with the US dollar, and in the short-term the US dollar is oversold. Many traders feel the Fed has played its hand fully, and see this as a reason to buy back into the dollar…in the short term, that is.

"But with cheaper commodities, there are likely to be bargain-hunting investors looking for a good entry point into the market. Further down the track, strong demand from Asia for real goods is likely to continue. Tangible assets still have the wood over financial assets…so cheaper commodities will generate more buyers, particularly in gold.

A fall in gold gives it buying strength, technically…and it will enjoy fundamental demand from those wishing to hedge against inflation and the long-term dollar weakness.

Do not be deceived by only the most recent experience. Structurally, all the pieces are in place to experience very high levels of price inflation or that it was only 2% last year. Don't forget the magic of compounding. Crystal ball gazing on monetary systems is still extraordinarily difficult. There are lots of things that can happen along the way. It was not that long ago - 1996, to be exact - that economist Steven Hanke wrote a piece titled ", the '' of South America." He meant the of the post-WWII era, where the sturdy mark proved to be one of the world's most stable currencies. His case rested mainly on the passage of tougher laws and a currency board-like system. This prediction, of course, proved very far off the mark, since the of today is trying to recover from its most recent financial meltdown. Far from being the Germany Hanke envisioned, it became more like the of the 1920s. This is not to say hyperinflation is imminent in the , but it does pose the question because the U.S. Dollar is the Worlds only reserve currency. However, with the EU now expanded by ten countries to twenty five, the Euro could now more possibly either take the Dollars place or become a dual reserve currency, just as the British lb was for a while in the early 1900's: That in conjunction with the attempted emergence of the GOLD DINAR, all points to the dangers of men with printing presses. And it points to the weakness of the dollar - or any paper currency - as a long-term investment.

Buy the pullbacks no long term technical or fundamental damage has been done, if anything this is possibly one of the greatest opportunities to re position your portfolio and accumulate more gold.  We most likely will go into consolidation and at prices in the $900.00 range should be bought based on market trends. No market can go straight up like Gold did without corrections, the more dramatic the rise the more painful the correction. But for those in for the long haul this represents a HUGE break and a chance to accumulate our target remains for inflation to reach double digits and for gold to ascend to over $2,000.00 an ounce.

JMC