Commodities Bubble

I'm just brainstorming myself below, and know I'm probably missing a few things... but

I recently caught myself thinking that maybe I really do need to increase my clients Gold position or buy other commodities to hedge the risk of turmoil created by sovereign debts escalating.

But if I think out 10 years from now and ask myself :

How much will these commodities have returned and also what will their outlook be?

I come to the conclusion that they will likely have returned nothing.

Equities on the other hand, companies will still be around and earning dividends.

The only way the commodities prices can be justified at these lofty levels is:

1. the world runs out of them

2. companies traded publicly go bust en masse in a Bear Stearns/ Lehman fashion

I can imagine number two if debt restructuring by the US involved a haircut. I don't think the system can support a haircut.

It's very possible that number 2 happens. Not today, not tomorrow, but the direction is so, that rational people can nearly only come to such a conclusion. But those people have been buying Gold for years. (They'll probably sell the day panic breaks out, equities crash. They'll invest the paper money in new or merged companies, private equity placements etc, where they know there's no risk from a debt point of view)

So number 2 happens and new currencies and dominant players come to power. Paper money will still be around, and you'll invest as during the last 200 years in companies/equities and their debt.

And that's why Gold will go out of fashion. You just don't want to be holding Gold the day the debt situation is cleared and new&growing companies appear.

Might only be in 2-5 years though. But if you're not speculating, but investing for the future, I think Gold must be overvalued. And I've thought that since before USD 1200. Probably wont stop us going to 2-3'000 though. Especially if margin trading Gold is made easier.