The interwoven complexities of international trade and finance have caught them in all in a spider’s web of systemic collapse. Those who can shall attempt a massive inflationary rescue. While it might appear to work for a few months, eventually all implodes. Please note the following from John Pugsley’s “Common Sense Viewpoint” as printed in “Golden Insights” by James U. Blanchard III 1997.

“Inflation will destroy debt. The end answer to all argument (inflation versus deflation) rests in the Federal Reserve and government. Both are absolutely committed to preventing a financial collapse or deflation. As long as they are willing to print dollars to support any failing creditors, the cycle will go on. What most deflationists fail to consider is that inflation destroys debt.”

“Creditors win through inflation and lenders lose. The deflationists do not see that if inflation of the money supply continues, which it will, there needs to be a deflation. All the debt in the world can be wiped out just by creating purchasing power…and that’s exactly what is happening…the debt problems will be resolved, but they will not be resolved by debt liquidation through bankruptcy and collapse. They will be resolved through debt liquidation via the creation of money. We are in for the greatest wave of inflation in the history of the world. You had better not be on the wrong side of the dollar.” -John Pugsley “Common Sense Viewpoint.”

We agree with Mr. Pugsley but, this was written years ago. We would suggest that this time with most formerly productive nations becoming victims of both inflation-hyperinflation and systemic collapse; the ending could be much worse than supposed. We forecast inflation first then hyper-inflation some time down the road.

What happens between here and there? While in our view, our forecast episodic adventure takes at least 2-3 years but, no one knows for certain. We forecast 2010 to be one of the very worst years of Greater Depression II; the year 2010being the second cycle of several depressionary phases. The fall of Lehman and a surrounding crash was only Phase One. Before Phase Two terrorizes global markets, we suggest a short recovery arrives first.

Debts both public and private have not been paid down to any great extent. To make matters worse, new debts continue to plague central banks, nation’s banks, consumers and commerce. In order to find a basing bottom and enable a recovery, these debts must be paid, repudiated or inflated away. For now all of these solutions are in play but as fast as old problems are resolved even more continue to pile-on aggravating the troubles.

While global governments are busy attempting to inflate away debts through monetization; i.e., printing piles of un-backed dollars, notes and bonds, the load is simply unsustainable on the math. Manipulators have gone past the point of no return. There will be no recovery until after a smashing correction arrives. This smash is the quick and dirty answer to final de-leveraging of all those debts. We think it comes in phases and in fits and spurts.

Japan is in the worst shape with public debt versus GDP now standing at 270%. With an aging population and not nearly enough young workers entering their workplace, deflation arrived again and the Nikkei Stock Market is taking big hits. The U.S. and Europe except for the U.K have 125% of debt versus GDP with the U.K’s at 105%. (Source for percentages Societe Generale).

The U. S. Dollar plays a very important role in these problems. With the Dollar being 85% of the entire world’s reserve currency; as the dollar goes, so goes the global system. Unfortunately, the dollar has much further to fall and for this month of December, 2009, the dollar can sink to an index low of 70.00-72.50 from today’s prices. Look for the dollar’s final support as a minimum low sometime during the next three years ranging from 40-46.

Stocks are peaky and will shorter term correct. We think the nearby correction will be mild and new buying can return in January, 2010 continuing through spring, 2010. The Dow could easily find an 8850 base and then return to a new rally. The S&P’s might base at 950. Meanwhile, we could experience an 11-12% Dow and S&P haircut.

The blow-off top for primary stock markets could be later May through July, 2010. On this cycle, five extremely negative events hit world economies and markets simultaneously.

These are:

(1) $40-$50 billion in U.S. credit card failures are reported;

(2) Housing sales both new and used for the first half of 2010 fail so badly, this market is literally in free-fall. There will be 7-10 million new mortgage defaults with most of those in the prime paying (not sub-prime) category caused by job losses;

(3) First half auto sales are reported. They will be so poor more car-makers file bankruptcy;

(4) Commercial real estate loans bankrupt many developers and their projects among those existing, under construction, and planned.

 (5) Insurance companies are holding so much failing commercial real estate paper, they are in danger of defaulting with some running for government bailouts in TARP II. At one time years ago, the 20 top insurance companies could literally control the United States economy. They are huge asset holders of property and cash investments.

Housing valuations will fall on the average, nationwide in the U.S., another -30%. We figured about one year ago that 1980’s prices would be the bottom. Now we potentially see a bottom at 1970’s prices. More homes were foreclosed in the last 12 months than in an entire decade in the first Great Depression of the 1930’s.

On the Monday morning of 11-23-09, news reported used housing sales were up 10.1%. This is nothing but giveaways prodded by seller financing, government freebie down payment credits, and crash and burn pricing taken by bottom feeders. Housing remains in international collapse. The last great creditor, FHA is hurting badly.

Inflation is now an unreported at 7% and rising. By May, 2010, it begins to bite very hard first on the lower 1/3rd of U.S. wage earners and the jobless. Most of their income is spent on food and energy. They top the inflation pain lists.

Consumers with newer bought and leased autos will do “jingle mail.” They will return newer unexpired leased cars and trucks back to dealers’ lots, give them the keys and quit paying. We saw this with houses over the past 1-2 years. Auto lots will overflow with new-used cars and trucks. Values will plummet. Many of these “returns” will be from the “Cash for Clunkers” program by those who got stuck with unaffordable car and truck payments.

Auto-maker GM projected total U.S. industry sales for 2010 of 11mm with a new recovery. There will be no recovery and sales could skid for the whole industry group down to 7mm or less in 2010. In 2011 it gets even worse.

Auto layoffs will escalate and unions will scream for help to president Obama. He will financially band-aid a dying industry. Consumers have no buying power, credit or cash to make any difference. Those with cash will save it and hunker down and wait out the troubles. Auto union membership declines rapidly. Most vehicle lending dries-up to a trickle.

The crude oil and energy sector has fundamentals pulling in both directions. Today we see oil price resistance at $80 with a trading range slightly lower in the $70’s. Fundamentals show an over-supply on recession-depression lower demands. On the other hand, inflation of prices is rising on a weaker dollar and will escalate. Look for crude oil to visit the $50’s and then turn-around on inflation rising to $100. Gasoline will follow as some refineries are closing on operating losses and no new ones are being built. Inflation ultimately wins on price escalation. Eventually, scarcity of product returns.

Depressions normally and historically last ten years. It could take consumers that long to pay down all of their debts before a return to normal conditions. Savings rates are up but with so much debt and few or zero salary raises in the face of new and rabid inflation, consumers will be economically slaughtered.

Credit and banks go through the wringer again. There are few bank ideas left to earn lender income except for trading. While Goldman Sachs makes millions weekly doing this, most banks are not set-up for it and there are only so many good traders available for the work. Since Obama’s compensation guy is rankling big traders with income limits this makes things worse as these people leave for unrestricted pay in overseas trading positions.

The bond market is so huge it takes time for it to roll over and slide off a cliff. Asia and the U.S Federal Reserve have been our larger paper buyers. While they still buy some to keep markets glued together they are: (1) exiting the longer term paper for shorter terms and, (2) buying less of it turning to other ideas in the commodity markets.

With the higher Yen, Japan is increasingly engaged in hard asset shopping trips as is South Korea. They are both looking for grain, gold, oil, natural gas and other commodities they lack internally.

Junk bonds could lose 1/3rd of today’s value just next year. Treasury bond and note buying continues until “full faith and credit” is repudiated on distrust. Eventually they crash but in slow-motion over years due to the magnitude of these markets. We think no bond is a safe bond. Municipal bonds are viewed as some of the safest. What happens when cities, towns, counties and states are so broke they cannot pay the interest? Their tax revenue is going off a cliff. Some are safer than others for awhile but for how long? Who can finger a top? It can’t be done as it’s too political.

Various states within the United States have or, will be failing financially. Someone reported 1/3rd of the TARP money spent so far was used to bail-out bankrupt states. This will escalate as federal TARP money cannot help them fast enough and in large enough amounts to keep it all glued together. Watch for fire and police employment to get as thin as too be very dangerous in various communities. Ten states are going financially critical and 47 are on the watch lists.

New York, New Jersey, Connecticut, Michigan, Ohio, Florida, Arizona, Nevada and California are among the financially worst, hurting from falling tax revenue on broken businesses and consumers. Watch California as they could go out of control first within this group. They continue to contrive new taxes and not work on spending reduction. When some states face total collapse it will get very ugly very quickly. Michigan is among the worst of the worst. Most all of the states are spending themselves into the ground. They refuse to cut back as its political suicide. They will spend until there is nothing left to spend and then scream for help to the Federal Government.

China is in very serious trouble as the U.S. consumers have stopped buying their stuff. Their TARP for early this year exceeded that of the United States in both amount and rapidity of spending. It is estimated they spent in four months from January, 2009 to May, roughly $600 Billion with most of it going into projects now at over-capacity. The U.S.’ lack of buying cut China’s entire year of exports by -25%. Also, note the Chinese economy is 1/4th the size of the United States’ economy.

There are hundreds of idle Chinese factories and millions of laid-off workers with no new factory employment and not much work of any kind. Further, millions sold subsistence farms to work in the city. Now that work is gone and so are the farms that would have fed them. Watch for a slow motion or, faster collapse of China with a descent into riots and other social problems in 2010. China need 24mm new jobs each year just to stay even and are remain far behind that job generation power curve; never mind new job growth gains.

If the worry of China not buying our treasury paper suddenly became real, the U.S. government could stop most all Chinese exports into the U.S with crushing tariffs. China would then have skyrocketing joblessness, goods piled-up with no sales and be stuck with a trillion dollars in crappy U. S. bond and currency paper having little or no value and no way to sell it. They would take a $1 U.S. Trillion paper hit and be stuck with mountains of un-saleable merchandise. The social fallout would be catastrophic. China shall continue to buy U.S. Bonds to keep exports moving; albeit at a reduced level.

Should Chinese imports cease, American workers might find some lower paying employment in re-opened U.S. factories with the return of manufacturing to the states from Asia. After all, where would Wal-mart get all their goods to sell in U. S. stores?

We hope for the best and would prefer China keep it all glued together and endure only a mild recession. With global financials and markets so fragile and wrecked we give them a one in five of pulling it off. Rather, in a Chinese communist command economy, forthcoming dislocations could be legendary.

Ambrose-Evan Pritchard, the esteemed writer for The London Telegraph says, “The world economy is still skating on thin ice. The west is sated with debt, the East with (too much) plant. The crisis has been contained (masked) by zero rates and a fiscal (credit) blast, trashing sovereign balance sheets. But the core problem remains. The Anglo-sphere and Club Med are tightening belts, yet Asia is not adding enough (internal) demand to compensate. It is adding supply.” (Editor: organic Chinese demand is barely beginning).

“My view is that the markets are still in denial about structural wreckage of the credit bubble. There are two more boils to lance. China’s investment bubble; and Europe’s banking cover-up. I fear that only then can we clear the rubble and, very slowly, start a fresh cycle.” 

We agree with Mr. Pritchard but contend China has other bubbles in autos, real estate, their stock market and major water shortages and pollution as well. If these bubbles pop one at a time, it goes easier. But, we might see multiple bubble-popping instead. In that instance, China might take-down the entire global system. Note the effects of the recent scare from Dubai on their $80mm default.

Education, particularly among colleges and universities, has hit the money wall as students now debate if a $40,000 to $80,000 expenditure is worth it in this economy. Newly graduated kids with good degrees but no experience go to the end of the line for jobs.

Experienced people get what few jobs remain as employers have a wider range of choices and can be super picky. Further, employers have no time or money for training. Many kids are schooling on the internet and with on-the-job training while taking menial work for any kind of a pay check.

Public school teachers with longer years of experience, working in grades K-12 are being thinned out for some cheaper new grads. Foreign language teachers along with those in math and science are still preferred over the others. Watch for an increase in home schooling as laid-off teachers with their own children work at home and take in other peoples’ kids for instruction-pay. The big public school systems are in trouble. They can no longer be afforded. Since the U.S. Government layered on piles of bureaurat red tape some years ago, fully 1/3rd of public school budgets must be devoted to stupid, expensive politically correct type work. It’s all a big waste as students and teachers must suffer for it.

Watch for more traffic accidents due to postponed road work and repairs. Bridges can fall and broken paving causes more wrecks. Higher tax communities will be abandoned especially by seniors with educated kids out of the house. New York City has lost over $6 Billion in income taxes from those fleeing the city and the state.

This trend goes even faster. We see retired folks selling out as local real estate taxes are unaffordable. They are migrating to lower tax states and smaller communities offering fewer services. Much of the big city service stuff is not required and consumers cannot pay for it. Think of Detroit’s city wasteland on steroids.

Gold And Silver Trading Is The Place To Be

Fund managers and traders are not married to markets and move to ideas that produce. Gold and silver shares can top and correct in the near term but then take-off in new 2010 rallies. Bigger funds have invested in long-only commodities baskets including gold, silver, grain, copper, platinum and others. They regularly buy the whole cycle from Labor Day to May, endure the dips and trade on 50 and 200 day averages. With a falling dollar these managers forecast stronger gains in these markets. December gold futures were trading near $1,200 this morning of December 1. We see a near-term mild correction followed by more buying.

Administration’s Politics Mostly Fail

The Obama left wing liberal agenda designed to transfer wealth is not working. The president’s popularity is sinking along with his agenda. The primary problem is the administrations inability to claw out of the employment depression. Instead, they will continue to keep digging while installing the wrong ideas, creating more and deeper messes. This advances the desirability of precious metals, and other hard assets of all kinds. Joblessness is the primary economic problem.

Dollar is the key to several markets. For December, dollar sinks lower.

Never mind the angled line support. Look at the lower box momentum.

Personally, I can see unbelievable opportunities to trade that we would never see again for many years. Turn these problems into opportunities. Those on the right side of the trade might get rich. Those on the other side are just victims. Stay Alert

AP – Federal Reserve Chairman Ben Bernanke waits to speak during a discussion hosted by The Economic Club of Washington, …

“We still have some way to go before we can be assured that the recovery will be self sustaining,” Bernanke said in remarks to the Economic Club of Washington.

The Fed chief repeated his belief that the recovery will continue at least into next year. But he cautioned that the economy is confronting some “formidable headwinds” — including a weak job market, cautious consumers and still-tight credit.

Those forces “seem likely to keep the pace of expansion moderate,” he said.

Some private forecasters continue to worry that the recovery could fizzle late next year as government stimulus fades.

A cautiously optimistic Bernanke said he expects “modest” economic growth next year. That should help push down the nation’s unemployment rate — now at 10 percent — “but at a pace slower than we would like,” he acknowledged.

Under one Fed forecast released last month, the jobless rate would remain stubbornly high next year — ranging from 9.3 to 9.7 percent. The Fed has warned that it could take five or six years for the job market to return to normal.

To nurture the recovery, the Fed has kept rates at record low near zero for a year. The central bank is widely expected to leave rates at those super-low levels at its meeting on Dec. 15-16. By doing so, the Fed hopes to entice people and businesses to boost spending, which would aid the recovery.

Fielding questions after his speech, Bernanke repeated the Fed’s pledge to hold rates at extra-low levels for an “extended period” and said the outlook for rates would be discussed at the closed door meeting next week. The central bank has leeway to keep rates low because inflation is under control and is expected to stay that way because of all the weakness in the economy.

Asked about the prospects of a “double dip” recession, Bernanke said he could not guarantee that it won’t happen. He stuck with his forecast for a moderate recovery and said a “vigorous snapback” is less likely.

Despite all the negative forces, consumers recently have shown their resilience and kept spending. Home sales have firmed helped by the government’s tax buyer credit. Car sales were aided by the government’s now-defunct Cash for Clunkers rebates.

Business spending on new equipment and software also showed signs of stabilizing, and better economic conditions abroad have boosted U.S. exports.

The speech, which outlined the most frequently asked questions put to the central bank, comes as Bernanke seeks another four-year term.

Some lawmakers skewered Bernanke at his Senate confirmation hearing last week about high unemployment, regulatory lapses that contributed to the financial crisis and the Wall Street bailouts that followed.

Even as some senators vowed to block his confirmation, it appears Bernanke will be able to secure the votes necessary to be approved to another term.

As he did last week, Bernanke said he has the tools and the political will to reverse course and start boosting interest rates and tightening monetary policy when the time is right. He didn’t say when that would be, although many economists think it will be later next year.

On other matters, Bernanke predicted taxpayers will get all their money back from the financial bailouts as well as some “fairly significant extra income” from the investments. “I think we’re in very good shape,” he said.

He also voiced his opposition again to congressional efforts to audit the Fed. His concern is that the legislation will affect the Fed’s setting of interest rates.

“Reducing the independence of the Fed … would be bad for markets, bad for the Fed’s credibility, bad for inflation expectations and bad for the dollar,” he said.

Asked what he likes best about being Fed chief, Bernanke struck a lighthearted tone.

“I get to go through the security lines at the airport much more quickly and I can take along even three ounces of fluid if I want to,” Bernanke said, causing the audience to erupt in laughter.

The cost of protecting against Dubai’s government reneging on obligations doubled last week after state company Dubai World, with $59 billion of liabilities, sought a “standstill” agreement from creditors. Investors demand $647,000 a year to insure $10 million of Dubai debt, less than the price of $1 million, or 1,000 basis points, associated with borrowers considered distressed.

Dubai triggered the biggest stock market slump in three months in Asia and Europe’s worst rout since April as the proposal for Dubai World risked adding to the $1.7 trillion of losses and writedowns suffered by banks in the global credit crisis. Commerzbank AG, Bank of America Merrill Lynch and Banque Saudi Fransi, the Saudi lender partly owned by Credit Agricole SA, say Abu Dhabi is likely to bail out Dubai rather than risk driving investors from the region because of a default.

“I’m not desperately worried that we’re going to go into some death spiral,” said Nicholas Field, who helps manage about $11 billion in emerging-market stocks at Schroders Plc in London. “This is not going to turn into some sort of major prolonged move downward.”

The price of Dubai credit-default swaps implies a 24 percent chance the emirate will default on its debt by December 2014, according to JPMorgan Chase & Co. data compiled by Bloomberg.

Central Bank

The United Arab Emirates’ central bank said yesterday it “stands behind” the country’s local and foreign banks and offered them access to more money under a new facility. The Royal Bank of Scotland Group Plc was the biggest underwriter of loans to Dubai World while HSBC Holdings Plc has the most at risk in the U.A.E., according to JPMorgan.

The announcement “is a step in the right direction, but this is a bare minimum,” John Sfakianakis, the chief economist at Banque Saudi Fransi in Riyadh, said in an interview yesterday. “This is only dealing with the domestic banking system and they have not yet made any announcement dealing with the debt of Dubai Inc.”

$10 Billion

The central bank, which has its headquarters in Abu Dhabi, the wealthiest of the seven sheikhdoms that make up the U.A.E., bought $10 billion of Dubai bonds in February in a private sale to support the emirate’s state companies. Abu Dhabi-controlled banks added a further $5 billion last week. The assistance is short of the $20 billion Sheikh Mohammed Bin Rashid Al-Maktoum, Dubai’s ruler, said he planned to raise by yearend.

Sheikh Ahmed Bin Saeed Al-Maktoum, who chairs the Supreme Fiscal Committee in charge of apportioning financial support to ailing companies, said last week that Dubai’s government announced the Dubai World debt plan in the “full knowledge of how the markets would react” and will provide more information “early” this week, after the Islamic Eid Al Adha holiday.

“There is a strong incentive for Dubai to support its investment companies to ensure an eventual, if not necessarily timely, repayment of its debts,” Luis Costa, an emerging-market debt strategist at Commerzbank in London, said in research report Nov. 27.

Tourist Center

Sheikh Mohammed transformed Dubai from a desert emirate to a financial and tourist center with iconic building projects that included a real-snow ski slope and the world’s tallest tower and biggest man-made islands.

Dubai has a total $4.3 billion of government and corporate debt due next month and $4.9 billion in the first quarter of 2010, Deutsche Bank AG data show.

Dubai World had $59.3 billion in liabilities and $99.6 billion in assets at the end of 2008, subsidiary Nakheel Development Ltd. said in an August statement. The government sought a “standstill” agreement from creditors last week on debt that includes $3.52 billion of bonds due Dec. 14 from Dubai World’s property unit Nakheel PJSC.

Moody’s Investors Service and Standard & Poor’s cut their ratings on Dubai state companies, saying they may consider Dubai World’s plan to delay payments a default.

Creditors

Dubai World’s biggest creditors outside the emirate include Abu Dhabi Commercial Bank, which is owed about $1.9 billion, according to two people familiar with the situation who declined to be identified because the information isn’t publicly available. British banks have the most to lose among international lenders from a crisis in the U.A.E., with a combined $49.5 billion of loans outstanding, according to a report from Royal Bank of Scotland Group that cites Bank for International Settlements data in June.

Sheikh Mohammed said Nov. 9 that those who doubt the unity of Dubai and Abu Dhabi, which holds 8 percent of the world’s oil reserves, should “shut up.”

The cost of protecting Dubai bonds against default is the fifth-highest worldwide after Pakistan and Argentina, and exceeds Iceland’s and Latvia’s, according to CMA Datavision prices. Default swaps on Dubai World unit DP World Ltd., the Middle East’s biggest port operator, jumped by a record to 744 basis points last week.

The contracts, which increase as perceptions of credit quality deteriorate, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. One basis point, or 0.01 percentage point, is equivalent to $1,000 a year on a contract protecting $10 million of debt.

While volatility is likely to “dissipate fairly quickly,” Commerzbank said there’s a higher likelihood of spreads widening over the next four weeks than tightening.

Bonds Fall

Dubai’s dollar-denominated Islamic bonds due 2014 dropped to 89 cents on the dollar yesterday from 101 cents a week earlier, according to Royal Bank of Scotland data on Bloomberg. The decline pushed yields on the debt to 9.226 percent, below the 10 percent level considered distressed by investors. The government sold the bonds last month, raising $1.93 billion.

The price of Nakheel’s bonds fell to 50 cents on the dollar on Nov. 27 from 110.5 cents a week earlier, according to Citigroup Inc. prices on Bloomberg.

“Will the U.A.E. allow Dubai to default? For Dubai World, the answer seems absolutely yes,” said David Lewis, an emerging-market credit analyst in global research at Bank of America Merrill Lynch in London. “For the Dubai sovereign itself, we would think that Abu Dhabi would be very reluctant to see it default.”

‘Burden Sharing’

Sheikh Mohammed earlier this month removed the chairmen of Dubai Holding LLC and Dubai World, two state- owned business groups, as well as the head of the U.A.E.’s biggest developer Emaar Properties PJSC from the board of the Investment Corp. of Dubai, the emirate’s main holding company. He also ejected the governor of the Dubai International Financial Centre, Omar Bin Sulaiman, who had led efforts to transform Dubai into the Middle East finance hub.

“A fairly high degree of ‘burden sharing’ might be required from the investor base,” Commerzbank’s Costa said. “Given the levels of haircut in other recent emerging-market restructuring deals, a 40 to 50 percent destruction of principal would not be absurd at all.”

Sergio Trigo Paz, chief investment officer for emerging markets at Fortis Investments, the asset management unit of Fortis Bank SA/NV, which oversees $244 million globally, said he’s considering buying Nakheel’s bonds. Fortis bought bonds of Kazakhstan’s biggest lender BTA Bank, which is seeking to restructure as much as $13.3 billion of debt, Trigo Paz said. He also holds Qatar and Kuwait bonds.

“Some people are betting that buying Nakheel under 50 is a very good six-month trade,” Trigo Paz said in an interview. “We are actually doing some shopping on the collateral damage with very good sovereigns. We are starting to look at Nakheel.”

By yesterday, gold had hit a record $1,185 (U.S.) an ounce, up 13 per cent this month alone, on reports that India is open to buying another gold pile from the International Monetary Fund. India recently relieved the IMF of 200 tonnes.

In January, gold was in the low to mid-$800s. The gold bugs – the ultimate I-told-you-so crowd, even though they’ve been dead wrong for almost 30 years – say the price will double, and possibly double again. There is no shortage of less intoxicated forecasters who argue that $1,500 or $2,000 is inevitable. HSBC is one bank cashing in on the gold mania. This week it banished the gold pebbles held by lowly retail investors in its Wall Street vaults to make room for the great hunks of gold owned by institutional investors.

You could argue that nothing special is going on, that the average gold investor is slow off the mark. Gold’s previous historic high was about $850, set in 1980. Since then, it has climbed 39 per cent – far less than the U.S. consumer price index (177 per cent) and the S&P (900 per cent). By comparison, gold is a relative bargain.

But that explanation doesn’t tell us why prices might be on a high-speed elevator ride to the 100th floor of the investment tower.

To make sense of gold’s rise, a good place to start is figuring out whether gold is money or a commodity. To be sure, it has elements of both at any given time, though one or the other can dominate for years, even decades, depending on the state of the global economy, gold supply, investors’ whims, Latin lovers’ penchant for tacky gold chains and the like.

Starting in 1981, shortly after gold went into the basement, the metal entered a long commodity phase, it appears. How do we know? The best clue comes from the jewellery market, which probably accounted for 70 to 80 per cent of purchases between 1981 and the middle part of this decade, when prices began to take off in earnest.

Today, the balance has flipped – gold this year is being bought as an investment, that is, it has reverted to money. As money, gold can act as insurance against general price inflation. Or it can act as insurance against inflation of another sort – the global money supply and the currency devaluations that come with it. Gold may also be insurance against the risk of sovereign default as fiscal deficits and debts swell at alarming rates.

The dollar printing presses are running flat out, increasing the buck glut like never before. The so-called M1 supply – cash in circulation and banks’ transaction deposits – is almost $2-trillion, about double the level of early 2008. A graph comparing gold prices with M1 would show the two roughly track each other and both have gone nearly straight up this year. If you think the money supply in the United States, Europe, Russia, China and Japan will soon contract, gold might not be the best investment. There is no indication this will happen in the near future.

Gold buyers seem convinced that the soaring levels of debt in the United States, the record fiscal and monetary stimulus, the rock-bottom interest rates and the tsunami waves of government bond sales will help to push the dollar ever lower, making gold increasingly attractive. In the United States, total gross public debt as a percentage of GDP will exceed 97 per cent next year, up from about 61 per cent in 2006. Total consolidated debt (government, corporate and personal), excluding the liabilities of the financial sector, are 350 per cent. This is not a healthy balance sheet.

Deficits are more likely to rise than fall, because politicians are under pressure to keep the stimulus taps open as unemployment rates rise. Low bond yields make the spending all the more attractive. The big industrialized countries will need to sell more than $12-trillion worth of government bonds this year and next to fund the fiscal spending, the Financial Times reported.

Governments may try to inflate the debt away. If it doesn’t work, they will have only two choices – service the debt or default. The chances of a default are very slim, of course. But note that the volume of credit default swaps linked to the United States, Japan and Britain, which measure the cost of insuring against bond defaults in those countries, has doubled in the past year.

Defaults, real or potential, are not kind to currencies. The rise in gold prices may be just getting started.

AP – FILE – In this May 10, 2006 file photo, a one euro coin is posed on top an …

Against a basket of six currencies including the euro, yen and franc, the dollar fell as low as 74.245, its weakest point since August 2008 and its steepest one-day drop since July 31, said Joseph Trevisani, chief market analyst at FXSolutions.

The 16-nation euro climbed as high as $1.5142 Wednesday, its strongest level since August 2008. In late New York trading, it read $1.5139 from $1.4975 late Tuesday.

The break above $1.51 sets the dollar up for possible steep drops this weekend.

Stuart Bennett, senior foreign exchange strategist at Calyon Credit Agricole, said there’s now a chance that the euro’s breakthrough opens the way for a “rapid” move higher, especially if stocks remain well-bid — for much of the past year, the dollar has moved in opposite direction to stocks.

“The market is completely onboard for this,” said Trevisani. The jump above $1.51 ahead of the thin trading of the Thanksgiving weekend set the dollar up for some big potential losses, he said.

The dollar also fell to 87.40 Japanese yen from 88.56 yen, after earlier falling to 87.19 yen, its weakest level since January and close to 14-year lows.

Meanwhile, the dollar fell to 99.66 Swiss francs from 1.0082 francs, dropping below parity for only the second time ever.

It dropped below 1 franc for the first time on March 14, 2008.

The renewed slump in the dollar was driven largely by the publication Tuesday of the minutes to the Fed’s last rate-setting meeting on Nov. 3-4.

The Fed said at the time that it plans to keep interest rates at “exceptionally low levels” for an “extended period” — currently the Fed funds rate stands at a range between zero and 0.25 percent — and that the fall in the dollar had been “orderly.”

Currency traders seized on the reference to the dollar as the Fed is usually wary of talking about changes in currency values.

Traditional interest rate differences are likely to underpin further dollar losses, analysts say. The U.S. interest rate is among the lowest in the world.

“Risk remains the key driver for foreign exchange markets, but rate differentials are becoming more relevant,” said Bennett.

What happens toward the end of the year isn’t necessarily indicative of how traders will view the dollar next year, however, as banks wind down trades and investors book profits. And in thin holiday trading, that means steep swings can easily occur in either direction.

“December could end up being quite wild on a day to day basis,” said David Watt, senior currency strategist at RBC Capital in Toronto. The dollar could jump “from one polar extreme to the other.”

Also on Wednesday, some economic reports pointed to a recovery in the U.S., helping send stocks higher and the dollar lower. The Standard & Poor’s 500 was up 0.4 in afternoon trading.

The safe-haven dollar tends to trade inversely to more risky equities, as well as commodities and emerging-market currencies whose countries have maintained higher interest rates.

On Wednesday, the Labor Department reported a drop in unemployment claims to the lowest level of the year last week. The Commerce Department, meanwhile, said sales of new homes rose last month to the highest level in more than a year, and consumer spending rose a brisk 0.7 percent last month — after a 0.6 percent drop in September.

Orders for expensive manufactured goods, however, dropped for the first time since August.

In other trading, the dollar fell to 1.0457 Canadian dollars from 1.0577, while the Australian dollar jumped to 93.18 U.S. cents from 92.04 U.S. cents and the New Zealand dollar gained to 73.09 U.S. cents from 72.60 U.S. cents.

The greenback also notched big drops against Scandinavian currencies and the Hungarian forint.

Spot gold was bid at $1,178.30 an ounce at 1022 GMT, against $1,168.90 late in New York on Tuesday.

U.S. gold futures for December delivery on the COMEX division of the New York Mercantile Exchange also hit a record $1,180.40 an ounce and were later up $12.80 to $1,178.60.

India’s Financial Chronicle newspaper said on Wednesday that India is open to buying more gold from the IMF, which is thought to have around another 200 tons to sell.

“This, and the weaker U.S. dollar, are enough in these markets to push gold further up,” said Commerzbank trader Michael Kempinski. “It should be time for a consolidation, but it doesn’t come… (we are) just making new highs.”

“We see $1,200 earlier than expected,” he added.

The market is sensitive to speculation of further official sector buying after news in early November that India’s central bank had bought 200 tons of gold from the IMF sparked a rally.

Russia, Sri Lanka and Mauritius have since also announced gold acquisitions, and traders speculate that more central banks, particularly in Asia, could be open to gold acquisitions to diversify their foreign exchange reserves.

“We have had relatively supportive news from the central banks, particularly in Asia, confirming that there is demand for gold as a means of diversifying their large foreign exchange reserves,” RBS Global Banking & Markets analyst Daniel Major said.

“There is plenty more potential for central banks to buy either IMF gold or other gold in the market to try and boost their reserves.”

Expectations for further reserve diversification, as well as prospects for further dollar weakness and fears over inflation in 2010 have all fueled investment demand for the precious metal, and could lead to further sharp prices gains.

“Central bank and other investor demand could see gold move to $1,500/oz in the next 3-6 months,” said Fairfax in a note.

Weakness in the dollar remains a major support of the gold market, with the U.S. currency dropping 0.49% against a basket of six others on Wednesday.

Traders cited several factors contributing to the dollar’s fall, including talk of a large fund selling, rebalancing of the MSCI Japan share index favoring the yen, and the prospect of low U.S. rates after Federal Reserve meeting minutes.

Dollar weakness helped lift other commodities, with oil prices ticking up 0.5% and industrial metals prices climbing.

Elsewhere, holdings of the world’s largest gold exchange-traded fund, the SPDR Gold Trust, rose nearly 1 ton on Tuesday to their highest since late June.

Indian gold traders meanwhile continued to stock up for weddings in anticipation of a further price rise, but the flow of scrap sales eased.

Silver was bid at $18.59 an ounce versus $18.49. Holdings of the world’s main silver ETF rose 136 tons to a record 9,252 tons on Tuesday, while ETF Securities’ silver exchange-traded product also hit record levels.

Platinum was at $1,464.50 an ounce against $1,444.50, while palladium was at $372 against $366.35. Holdings of ETF Securities’ palladium-backed ETP rose to a record 620,359 ounces on Tuesday, and are up 11% month-on-month.

Gold has been acting very strongly. Depending on whether a gold bug or traditional financial writer is telling it, agreement is wide that we are due for a correction, minor or sharp. The more I hear that, the more convinced I am that the correction is further out, and will be smaller than we expect. Central banks are now holding back or even buying gold to replace their rotting dollar reserves. For years they’ve been dumping their gold to buy dollars. They’ve wised up.

There have been numerous gut-wrenching corrections on gold’s journey in price from a low of $256 back in early 2001 through its recent run past $1,100, but gold has continued to rise inexorably. Each time it pulls back, the media give reasons why it was just a bubble and it’s deflating. They’re wrong.

Look at the strength in gold just this year.

What is the top for gold? I don’t know. But I know it isn’t there yet. How do I know? Because the vast majority of the public still doesn’t take the metal’s rise seriously. What happened to tech stocks will happen to gold. What happened to oil will happen to gold. What happened to housing will happen to gold. It will have a parabolic move. And since it’s a much more liquid asset than housing, the move will be more like oil in 2007–08 when it jumped from $80 to almost $150 a barrel, or tech stocks in 1999–2000, when the Nasdaq 100 jumped 88%.

When gold is near a top, it will be all over the mainstream media, not just the financial media. People will say that buying gold is a no-brainer, and we’ll probably hear numbers like $8,000 an ounce or more. Miniature gold bullion will be sold in fancy department stores here, as it is now in England, or even in vending machines, as it is in Germany. We’re nowhere near the end yet. So, I’m going to bite the bullet on any corrections, and increase our gold positions now. They will be for the long haul, until and unless I see one of my own indicators say it’s time to get out for a while–or for good. I don’t expect that to happen soon.

Is gold heading to $2,200? That would be in line with the 1976–80 gold bull market gains. How do you play it? Click here for six mining stocks to buy now in Forbes’ Gold Stock Strategist newsletter.

We’re buying two 4% positions in ETFS Physical Swiss Gold Shares ( SGOL – news – people ), the same ETF we bought last month. The ETFS Physical Swiss Gold Shares are a buy up to $114. You may also buy the more well-known street TRACKS Gold Shares (nyse: GLD) as an alternative to the ETFS Physical Swiss Gold Shares. I prefer the Swiss shares because custody is outside of the U.S. The U.S. forbade private citizens to own gold back in 1933. It’s not likely, but in case that ever happens again, I’d rather have my gold in Switzerland.

We recently sold one of our mining positions, Barrick Gold Corp. ( ABX – news – people ), not because it has underperformed its brethren lately, but because it deserved to. After saying it was eliminating all its “nonproject” hedges (agreements to sell future gold production at agreed-upon prices) a few years ago, it went and increased them again–by a lot. Now the company is buying the hedges back again. Barrick management can’t seem to make up its mind. Barrick took a $5.6 billion charge in the third quarter for its dehedging program, and the program will continue into next year. On top of that, the share count will be expanded by 12.5% to pay for it all, diluting current shareholders.

We will replace Barrick with a 4% position in the Market Vectors Gold Miners ( GDX – news – people ). The ETF does have Barrick as its largest holding, but the rise in the other components, particularly the number two and three weightings,Goldcorp. ( GG – news – people ) and [org]Newmont Mining[/org], as an alternative to the ETFS Physical Swiss Gold Shares. I prefer the Swiss shares because custody is outside of the U.S. The U.S. forbade private citizens to own gold back in 1933. It’s not likely, but in case that ever happens again, I’d rather have my gold in Switzerland.

The GDX is not the ideal way to invest in the gold miners in terms of fundamental values. For that, we have two positions already in the best gold stock there is, but the GDX does provide us with greater diversification, and I do believe that the ETF is where the money will flow when the gold miners finally go parabolic in their ascent. The Market Vectors Gold Miners ETF is a buy up to $52.

Many metals, including silver, copper and platinum will thrive as the dollar falls. Tom Lydon, head of Global Trends Investments, says a weaker dollar will make commodities prices cheaper for foreign buyers using stronger currencies and that demand will increase from companies overseas.

Almost 10.7 million U.S. mortgages were “underwater” as of September, said research firm First American CoreLogic.

Another 2.3 million homeowners are within 5% of negative territory, the report said. The two figures combined comprise almost 28% of all residential properties with mortgages.

Negative equity, also called an “underwater” or “upside down” mortgage, has become more common as home values plummet. The report is closely watched because borrowers who are underwater are more likely to be foreclosed.

Foreclosures have been rampant for some time, but lately the tide of decay had seemed to be slowing — so Tuesday’s report could dent optimism for the housing market over the next few months.

On the other hand, the trend that turned so many mortgages upside-down — falling home prices — has reversed the past six months. The S&P/Case-Shiller HomePrice Index has reported two consecutive quarters of increasing prices.

If home prices continue to go up or, at least stabilize, fewer mortgage borrowers will find themselves underwater in the coming months.

CoreLogic changed its methodology for the third quarter — now it accounts for payments that reduce principal, and it no longer assumes home equity credit lines have been maxed out. Using the old method, 33.8% of borrowers would have been underwater in the third quarter compared with 32.2% in the previous quarter, according to a CoreLogic spokeswoman.

State totals: The majority of underwater mortgages are heavily concentrated in five states that have particularly suffered from the housing bust: Nevada, at 65%; Arizona, at 48%; Florida, at 45%; Michigan, at 37%; and California, at 35%.

These five states have been especially beleaguered because of a high rate of prime loans that went bad. Many of those loans were option-adjustable rate mortgages, in which borrowers could choose to make minimum payments that were so low they did not even offset the interest being accumulated.

When that accumulated debt reaches a certain point — usually 10% to 25% more than the original principal — the option-ARMs loans are recast into fixed-rate mortgages. When that happens, many borrowers cannot afford the new payments.