What the smart people doing

Unlike Obama, I'll never profess to be the smartest person in the world and, also unlike, Obama I watch what the smart people are doing and emulate them.

What you are not seeing from the smart people in the world right now; investments in dollars.

What you are seeing; investments in gold.....

At the intersection of yellow dog and greenback, it's worth noting that the tiny island of Mauritius became the third central bank to buy gold in the past month -- specifically, 2 metric tons worth $71.7 million from the International Monetary Fund (following in the footsteps of India and Sri Lanka).

I don't know what the fourth central bank will be, but I'm pretty sure there will be one.

Meanwhile, the Buttonwood column in last week's Economist, "Paper promises, golden hordes," cited the small quantity of gold that actually exists: "Two hundred metric tonnes of gold" -- that's what India bought -- "would occupy a cube of a little more than two metres on a side; it would fit into a small bedroom."

(For folks who might not know, all the gold that's ever been found would fit into two Olympic-size swimming pools!)

The column noted the psychological sea change that appears to be taking place at the central-bank level: "For bullion bulls, the implication is clear: central banks no longer trust the creditworthiness of other governments. And if they have lost confidence, private investors should do the same."

I think that pretty much sums up how the groupthink process gets started. Of course, that idea will have cut a wide swath through all levels of asset managers (witness my scenario above) before gold finally becomes too crowded and tops out.

The corollary of folks wanting to buy gold -- i.e., having no faith in dollars and other colored paper -- also has implications for the bond market. It's what I have alluded to with my shorthand nickname "the funding crisis."

That the Buttonwood column took this up for discussion is potentially an early sign that the concept of a funding crisis may now be going mainstream (at least sophisticatedly so):

"Developed-country governments have attempted to control bond yields through quantitative easing and to support stock markets through ultra-low interest rates. But they cannot support their currencies as well without risking problems in the bond and equity markets. Gold's surge may indicate that investors fear the next stage of the crisis will occur in the foreign-exchange markets."

That is a succinct warning of what I believe will likely be next year's serious problem for the xera, where weakness is no longer described as just excess volatility but a genuine cause for concern.

Read the rest and remember to invest in the three "G's" Gold, Guns and Generators.