The gold bull keeps charging up a 10-year long hill and there are many who are currently riding it, including, to a degree, this writer. Recently I wrote an article on this site titled, "Gold does not have a price, gold is the price." My intention was to acknowledge the current investor sentiment in the perceived stability of gold and silver and bring attention to the fact that many people now (and in the immediate future) believe that most, if not all, paper or "fiat" currencies are being priced in gold (as opposed to gold as a commodity). It was the general sentiment that I was targetting, not particularly the bull run itself.

Does the bull still have steam? Yeas, I believe so. At least in the short term. I have been one of the bulls preaching the benefits of owning physical gold and silver for the past 3 years, and, in the aforementioned article, owning gold miners as well. My reasoning being that valuations in gold mining stocks are still based on $800 gold as opposed to the $1814 price tag of Tuesday afternoon's futures contract for December.

Tuesday I watched a video presented by Casey Research on Youtube titled, "The American Debt Crisis." Presentations such as this one, and there is a growing corus, will scare the daylights out of anyone trying to "save" for retirement. To paraphrase in simple terms, 1) U.S. debt is completely unmanageable 2) The debt "cannot" be paid off 3) Default, either outright or via hyper-inflating the currency, is a fait accompli! 4) Your portfolio, and your safe deposit box, should be stuffed with gold and silver etc.

You get the point. If you are reading this, you probably have already read many similiar views. After reviewing many similiar articles, from some very smart people (as no doubt, the Casey Research people are), I decided to do some very basic math, using the idea from my article that, gold is the price. I simply compared the price of a home I had built in 1996, sold in 2003, and re-priced this month. I used gold as my purchase currency.

In 1996, I built my house for $181,000 and moved in on Sept 15th. The gold price that day was $380, so, in gold ounces, I paid 473 oz for my house.

I sold that house in 2003 for $251,000, moving out on Sept 1st. That day the gold price was $375 per oz. I sold my house for 616 oz of gold, or a profit of 143 oz of gold ($51,000).

Today, that same house is valued at $300,000 and the price of gold is $1814 per oz. That means, if I bought it in ounces of gold today, I would pay exactly 143 oz for it. That is the exact same amount as my profit was in 2003 when I sold it! In fiat currency terms, $51,000.00.

Here is a chart of the gold price since 1997:

The moral of this story is twofold.

1. If you are in the market to buy a home today, then, do it. Do it especially if you have some gold saved to help pay for it.
2. When you hear the eurphoric laughter coming from those owning gold over $2500 per oz, make sure you are standing well clear of the bubble.

Hopefully, by that time, you will hear it from the comfort of your new home.

Apparently, 1 in 5 people in the world are Chinese. And there are 5 people in my family, so it must be one of them. It's either mom or my dad, or maybe my older brother Colin. Or my younger brother Ho-Cha Chu. But I'm pretty sure it's Colin.  

August housing starts were somewhat weaker than expected (571K vs. 590K), but building permits (which point to future housing starts were a bit stronger than expected (620K vs. 590K), so on balance there's no news here. The larger story is told in the charts above. Housing starts have been bouncing along the bottom of their worst nightmare collapse, and this has been going on for over two and a half years. One chapter of the big story is that housing starts have hit bottom; if they were going to go lower, they would have done so by now. The other chapter is that housing starts are going to have to increase by leaps and bounds over the next several years, if only just to catch up to the demands of a growing population.

The longer starts remain at current levels, in fact, the higher the probability that we could be experiencing a general housing shortage within a few years, since the rate of family formations is running well above the current level of starts. That future housing shortage might collide with an abundance of money (if the Fed is slow to mop up the massive amounts of excess bank reserves it has created) to produce another major rise in housing prices. We can't know the timing of the next upturn in the housing cycle, but increasingly, the question is not whether housing prices will rise, but by how much.

When you can borrow at historically low, long-term fixed rates of 4-4.5% to buy into what could be an impressive runup in housing prices, it matters little whether prices have reached their lows or whether they might drift somewhat lower before heading higher.

Bank of America is ramping up its foreclosure processing again, having sent out far more notices of default to borrowers in August than in previous months. Delays in processing artificially lowered foreclosure numbers over the past year due to the "robo-signing" scandal; the new surge likely addresses loans that have been long delinquent. Analysts believe that this will tend to keep values down in many markets for 6+ months. This comes to us from robo-crap loans ala Countrywide now B.O.A., whatever!

After weeks of market speculation, "Operation Twist" got introduced this week. However, real market twisters came in the form of a bleak assessment of economic conditions, and a surprise announcement that the Fed is getting back into the mortgage-backed securities game, just a little over a year after it formally announced it was getting out of it. Add this to the ever-present potential for a Greek (and possibly other) sovereign debt default, ratings downgrades for the three largest US banks and a worldwide stock market rout and you'll find yourself with new record low interest rates, mortgages among them.

The Fed's message was twofold: First, they are changing their investment holdings by selling up to $400 billion of holdings with maturities of less than three years, and will use those proceeds to purchase US Treasury debt with maturities of six years or longer. This will lower interest rates for everything from Treasuries to corporate bonds, with mortgages among them. The problem is that, in the present environment, mortgages are low yielding investments which have a fairly high risk profile, and investors are unlikely to want to snap up new MBS with even lower yields. In fact, over the past few weeks, the often-tenuous relationship between treasury yields and mortgage rates has grown more distant, with spreads widening appreciably as new Fed action became more likely. Underlying interest rates have gone down considerably more than their mortgage counterparts, muting some of the beneficial effects that low rates can provide to some borrowers.

Thus, the second component of the Fed's plan: The Fed announced that they will now start to use money coming in from their still-massive holdings of mortgages -- prepayments from refinancing, maturing loans and regular principal payments -- to purchase MBS coming into the market. Essentially, the Fed has stated that they will be lowering rates, that mortgages are directly targeted, and if the investor market doesn't want to buy them for whatever reason, the Fed will be there to pick up the slack. A ready buyer in the market means that mortgage rates will decline, since the investor who is buying them cares more about beneficial economic consequence than yield or threat of loss.

Driving down interest rates is one way the Fed hopes to crowd out investors from parking their money in the safe-haven of Treasuries. If 100% guaranteed yields for Treasury offerings get low enough, investors will have strong incentive to look elsewhere for productive places to put their cash to work, and that would ultimately benefit the economy as a whole. One of the successes (if short-lived) of QE2 was the reflation of equity prices; one of the drawbacks was the ballooning of commodity prices, including metals and oil and the inflationary kick those increases left. Unlike QE2, the twist doesn't push more money into the economy and so doesn't carry an explicit inflation threat along with it.