SliderOnTheBlack.com

It’s become a broken record for gold…

Another new high.

Another new high.

Another new high.

Why?

Because this isn’t Howard Ruff’s, Jim Sinclair’s, and Doug Casey’s gold bull any more. It’s John Paulson’s, Paul Tudor Jones’, and David Einhorn’s gold bull.

The gold bugs driving this bull run don’t own fallout shelters and basements full of MRE’s, they own Penthouses on the upper East side, and weekend homes in the Hampton’s.

And John Paulson isn’t pitching 1 ounce Silver Eagles on late night TV, he’s pitching a new fund of gold mining shares with a minimum buy in of $10 million. Yes, you read that right…

A minimum buy in of $10,000,000.00

Last week John Paulson, he of the single most profitable thematic trade in Wall Street history, (making $15 billion shorting subprime mortgage bonds), announced the formation of a new gold oriented fund, this one devoted to the higher leverage of gold mining stocks, in which he will personally invest between $200-$250 million of his own money.

While Paulson’s hedge funds already hold $3 billion dollars worth of positions in the GLD ETF, and gold mining shares such as AngloGold Ashanti and Kinross Gold, Paulson told the Wall Street Journal he was looking to increase his personal exposure to gold, and that his new fund was aimed at outperforming the metal.

http://online.wsj.com/article/SB10001424052748704533904574543713428787876.html

“The gold fund will invest in gold-related shares and gold derivatives and will aim to outperform gold prices. Mr. Paulson at Tuesday’s investor meeting countered that the bull run was only beginning for gold.

He noted that central banks around the globe have gone from sellers of gold to buyers, and that the global supply of gold is constrained.

While harmful inflation isn’t on the horizon, he said, Mr. Paulson argued that there is a risk of a burst of inflation down the road. That’s because in the past there’s been a lag between a surge in money supply and higher inflation. Gold often does well when inflation rises.

Mr. Paulson told investors that the Federal Reserve will prove reluctant to raise interest rates, given the weakness in the economy, which also could pave the way for higher inflation, at least at some point, another reason for his growing conviction about gold.

Worth about $6 billion, Mr. Paulson said he was starting the new fund in part to give himself more personal exposure to gold, according to an investor at the meeting.

The embrace of gold is relatively new for Mr. Paulson. The hedge-fund manager, who mostly invested in merger deals until detecting a housing bubble in 2006, had done no gold investing as of a year ago.”

Gold Bug Sentiment: An Anchor, Or a Rudder?

But not everyone in goldbugdom is as optimistic as John Paulson. Gold bugs themselves have been selling gold mining shares into every rally, with the HUI Gold Bugs Index of gold mining shares still nearly 10% below their March, 2008 highs, even as gold surges to new all time highs.

And market sentiment tracker Mark Hulbert has noted that “the average gold timer is now more bullish than on each of the past four occasions in which the gold market has topped out.”

http://www.marketwatch.com/story/bullishness-among-gold-timers-very-high-2009-11-20?link=kiosk

The Hulbert Gold Newsletter Sentiment Index (HGNSI) reflects the average recommended gold market exposure among gold timing newsletters tracked by The Hulbert Financial Digest. And as of Thursday night, the HGNSI stood at 68%, which exceeds the prior high of 65% registered on the four previous assaults on $1,000 gold, all of which proceeded corrections in the gold price.

So who’s right?

Are the new highs in sentiment toward gold justified, merely reflective of an ongoing environment where central banks are flooding the global landscape with a sea of liquidity, are engaged in quantitative easing, and a war of competitive currency devaluations?

Or, are Central Banks about to come to their senses, and remove the punch bowl before their massive liquidity injections begin to work their way into the consumer economy and ignite the inflation engine?

Consider inflation the icing on the cake. The primary driver of this gold bull is competitive currency devaluation. And the country with the greatest need for currency devaluation is the United States.

Two Options: Default, or Devalue

I’ve pounded the table on this for nearly a year on my forum at Silicon Investor. The Congressional Budget Office/CBO numbers tell you everything you need to know…

From the CBO/Congressional Budget Office:

http://www.heritage.org/research/budget/bg2153.cfm

“Tax rates would need to be raised by “sub­stantial” amounts to finance projected spending.

Specifically, “the tax rate for the lowest bracket would have to be increased from 10 per­cent to 25 percent; the tax rate on incomes in the current 25 percent bracket would have to be increased to 63 percent; and the tax rate of the highest bracket would have to be raised from 35 percent to 88 percent.”

“The top corporate income tax rate would also increase from 35 percent to 88 percent.”[4]

“Such tax rates would significantly reduce economic activity and would create serious problems with tax avoidance and tax eva­sion. Revenues would probably fall signifi­cantly short of the amount needed to finance the growth of spending; therefore, tax rates at such levels would probably not be economically feasible.”[5]

The CBO just spelled it out in plain and simple english: America is bankrupt. There is no way the United States can either grow, or tax it’s way out from under this massive debt obligation, it can only inflate it away. And those CBO numbers were before last fall’s market meltdown and an additional $23.7 trillion dollars in debt, bailouts, and backstops.

America has only two options: Default, or Devalue.

And it’s not just the CBO saying so. Former U.S. Comptroller General David Walker has been lobbying Congress and Main Street America about the same reality. Here’s what David Walker had to say about the U.S. debt problem nearly two years ago on “60 Minutes.”

If you’re a gold bug, here’s the single most valuable 6 minutes and 34 seconds of advice that you may have ever received concerning gold…

Reality vs. Jack Bauer and “24″

What’s attracted John Paulson, Paul Tudor Jones and David Einhorn to gold, nine years into the cycle, and after it’s quadrupled in price, is this…

– America can not grow, or tax it’s way out from under it’s mountain of debt.

– We can only repay approximately half of America’s debt and unfunded liabilities through growth and taxes.

– There are only two choices for the remaining $30 trillion+ that we can not repay, default on the debt, or inflate it away by devaluing the U.S. Dollar.

James Rickards is not a Wall Street cheerleader.

He’s the Senior Managing Director for Market Intelligence at Omnis, Inc. and co-head of the firm’s practice in “Threat Finance & Market Intelligence,” advising investment firms, governments, and national security agencies on global finance.

Forget the rumors about bank holidays, Comex defaults, and Tungsten filled gold bars. This is about default vs. devaluation of the dollar. The numbers from both the CBO and former Comptroller General David Walker tell you everything you need to know about gold and the dollar.

I know cliffhanger stories about imminent bank holidays, U.S. embassy’s stockpiling foreign currencies and the Chinese hurriedly drilling 4 hole assays into their tungsten filled gold bars are almost as exciting as Jack Bauer’s week to week adventures of “24″… but if you really want to know what’s driving gold, and why John Paulson, David Einhorn, and Paul Tudor Jones are now carrying the gold bull ball, now you know.

SliderOnTheBlack