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The first question you have to answer is – do you want to invest for profit or are you trying to preserve the wealth that you already have?

It’s a safe bet that most of our readers are at that stage in life where their primary concern is “return of principal, not return on principal.”  If that definition describes you, then what are your alternatives?

The choices are as follows:  stocks, bonds, real estate, cash or precious metals.  Now if you listen to your money manager or your stock broker or if you are still under the spell of the good folks at CNBC, you will keep your money in stocks and bonds.  No one is touting real estate anymore.  That leaves cash and precious metals out in the cold.

By now, it should be clear to you that we favor cash and gold (and silver too).  We are the “contrarians.”  That’s really not such a bad thing, since our advice has been very profitable, racking up gains of 400% in the past decade in gold and 300% in silver.

Who should you believe – your money managers and Wall Street cheerleaders who insist that the economy is turning around and the stock market is safe, or our camp that says cash and gold only?  It’s easy to fool yourself.  Restaurants are full, and people are spending again, but is that enough to signal a recovery?   What kind of improvement do we really have when job losses are slowing, but still there are hundreds of thousands of newly unemployed looking for work each month?  There is NO growth!  Take away the temporary census jobs and the fabricated Birth/Death model job growth and it is clear than the economy is not recovering enough to create new jobs.

The banks are reluctant to lend and prefer to invest “safely” in government bonds.  The economy that is not recovering.  I’ll grant you that we are bumping along the bottom and no longer falling, but that is hardly the same as a recovery.

Take away the Plunge Protection Team’s daily intervention and the stock market would fall.

The Fed is sending hundreds of billions to European banks to prop up the Euro and then the banks use the Fed dollars to buy US bonds which supports our bond market and low interest rates.  It’s a giant Ponzi scheme that is designed to buy more time, not to fix the problems.  The Fed cannot save both the dollar and the bond market.  I suspect that they will focus on the bond market and let inflation fall where it may.

There is no safety out there – other than cash and gold.  Cash will lose to inflation, currently running 9.22% that’s right, 9.22%.  So holding cash, paying you less than one percent with inflation running over 9% is not very prudent advice, but at least you get your shrinking dollars back and that may not be the case if you stay invested in stocks.

As for gold, it is up over 35% in the last 12 months.  The case for $2,000 gold by early next year grows by the day.  I look for $23 silver in the months ahead – on the way to $30.  As certain as I am of the prices mentioned here, I am equally certain that there will be shortages and delays and huge premiums tacked onto gold and silver.  The demand for physical metals is on the rise and the available inventory is insufficient to meet it.  Saudi Arabia, Russia and the Philippines were all buyers of gold in the first quarter of 2010.  Russia added 27.6 tonnes.  Venezuela added 3.1 tonnes, and the Philippines added 10.3 tonnes.  Saudi Arabia’s official holdings shot up from 143 tonnes to 323 tonnes.

Member European central banks sold a mere 1.8 tonnes of gold over during the first quarter of 2010.  Soon, they will become buyers of the same gold that they sold in the last few years at far lower prices.

What about those who warn you that gold is in a bubble?

Tyler Durden, of Zero Hedge has the answer.  He wrote, “As to the question whether gold is in a bubble, we cannot claim to know the answer at this point.  Please ask us again when gold trades at $5,000.”

The following graphs, courtesy of Nick Laird (sharelynx.com), shows the 1979/1980 gold “bubble” compared to our current “gold bubble.”  As you can see, the current “bubble” hasn’t even gotten started yet.

You will know when gold is in a bubble when all of your friends tell you to buy gold.  When you get tips from your barber and gold is the hot topic around the water cooler at work.  Who knows, even your money manager might be telling you he has a great new idea for you – to buy gold and silver.  Then, for sure we will know that gold is in a bubble.

Add another hedge fund manager who’s coming around to gold.

Joining John Paulson and David Einhorn is Daniel Arbess, who manages the $2 billion-plus Xerion Fund for Perella Weinberg.

“Indebted countries may soon be forced to choose among three politically difficult alternatives: sharp cuts in expenditures, debt default or printing money to pay off debt,” he tells The New York Times, and he sees protection in gold — an asset he says he didn’t give a second thought a few years ago.

If you’re looking for a powerful new catalyst that could drive gold higher, here it is.

You know all that talk we’ve heard for more than a year about how US banks are sitting on their reserves, instead of lending them out? How it’s been safer to borrow from the Fed at next to nothing and buy Treasuries?

Check out this latest chart, courtesy of James Turk…

“After many months of sitting on their hands while trying to repair their overleveraged balance sheets,” says James, “banks are making new loans. They also continue to buy US government paper, though those purchases tapered off over the past month.”

That’s a whole lot of new money starting to flood into the “real economy”… and it’s a whole lot of potential for the inflation Daniel Arbess sees — if not now, then down the road.

Sums up John Hathaway, manager of the Tocqueville Gold Fund: “I just think you’re in a world where a lot of chickens are coming home to roost. Gold is an escape hatch.”