ebear, when i said "don't fight the fed" i didn't mean "don't buy gold." it may be a misconception, but the saying "don't fight the fed" refers to not making investments that run counter to the fed's current policy. when the fed is raising interest rates and draining reserves from the system, one should not buy gold. but when the fed is easing, and lowering interest rates to zero, that is the best time to buy gold. the fed is the 800-pound gorilla that controls not only short-term interest rates, but also the printing press. if you stand in its way, you get run over. but right now, the fed's actions are extremely pro-gold.

as far as creating sustainable demand and the unwillingness of borrowers to take on additional debt; that would be a problem if we had to depend on the private sector alone. when you see that consumers are tapped out, and businesses won't borrow, you would expect spending to decline. but in addition to monetary policy, the government also controls fiscal policy. i am confident that we will see a huge increase in government spending to make up for the decline in consumer spending and business investment. as far as whether this will be sustainable, president obama has already said he will do whatver it takes to get the economy moving again, and not to worry about this year's deficit, or the following year's deficit.

so as far as demand being sustainable is concerned, the spending will continue as long as congress is willing to appropriate the money. can anyone remember the last time congress didn't want to spend money? so you and i and everyone else can pay down debt, but the government will make up for the difference by spending money to rebuild bridges, roads, airport, water pipes, and all manner of infrastructure.

the fact that the government doesn't have the money won't stop anything. it will simply create the money, and that is bound to be inflationary, and good for gold, silver, and other commodities. for that matter, one way to play the infrastructure boom is to own commodities. a study from a few years ago said the world would spend $41 trillion on infrastructure over the next 25 years, and most of that was not china and india; a healthy portion is expected to come from developed countries.

we don't need genuine prosperity (which is a good thing because i doubt we will have any) for the economy to grow. the economy will grow by taking on huge amounts of public debt, as next year's us deficit may exceed $1 trillion. i think the market action of the past two months is a sign that investors are recognizing this, not just from physical demand for gold and silver, but also the huge rally in mining shares. the stocks are still well below their highs, but many have already doubled and tripled from their lows.

peak oil is yet another inflationary factor, as higher oil prices inevitably lead to higher everything else prices. just like the 70's, we will have higher prices with a weak economy, only this time around the government will be using every tool it has (fiscal, monetary) to stimulate it. if things get out of control (labor unions demand 25% annual increases, gas rationing) the long term choices will be a deflationary collapse in which everyone defaults on their debts, both public and private, or a hyperinflationary blowoff like argentina. but i think those events are still years away.