"Greenspan: U.S. Economy Moving Upwards."

Here is our old Fed chief, the Maestro himself, Alan Greenspan, back in the news. The man can't seem to help himself.

"'The U.S. economy is, overall, moving upward and showing signs of accelerating again,' former Federal Reserve Chairman Alan Greenspan told Japanese Finance Minister Koji Omi, a Japanese Finance Ministry official said on Monday," runs the report by Reuters.

Well, that's good enough for us. If Alan Greenspan says the economy is strengthening, it must be so.

And apparently, it is!

The news today is surprisingly good...at least, it is surprising to us.

"Mortgage applications skyrocket last week," is another Reuters report.

Builders report a drop in cancellations too.

And here, look at this: Oil fell another $1 yesterday - to close at just $54. Boone Pickens famously remarked that we would never see oil below $50 in our lifetimes. Maybe he was right...but, "Never Say Never," is good advice for almost everyone.

We remarked that we may 'never see gold below $600 - ever.' We could come to regret that too...but for the moment, at least, gold is doing better than the industrial commodities, such as copper and lead.

What is going on? How come oil and copper are deflating...while gold remains at $613? A guess: gold is only useful as jewelry...and money. It is most useful as money precisely when paper, and other forms of money, become less useful. When does paper money lose its usefulness? When you can't trust it. When can't you trust it? When there is so much of it that it loses its value.

Readers will be quick to think of 'inflation', but currency can lose its value in other ways. What we have now is a huge burst of 'liquidity' - buying power that is not focused on consumer items. This liquidity is used to buy financial assets, not soap. As a result, consumers do not rush into gold to protect their purchasing power. Instead, investors rush into gold to protect their capital.

The Treasury Department has stopped reporting M3 - which would tell us how much currency is in circulation. Other sources, though, keep tabs on it. Shadowstats.com tells us that M3 is increasing at an annual rate between 10% and 11% - or about three times as fast as the economy itself. But M3 is not the only source of liquidity. Foreign governments need to try to keep up with the dollar, by issuing more of their own paper. And derivatives, leveraged debt and other gimmicks in the financial industry have the effect of adding billions of extra sops to the system. The Economist estimates that liquidity itself has been on the rise at 18% annually for the past four years.

The question we pose: Why is gold doing better than other commodities? Our guess is that investors are a little nervous. Liquidity comes and liquidity goes, they know. The arrival of it is greeted with cheers and smiles. The going tends to be a sad affair, like leaving a lover at the train station. The investor wants to have something to turn to, just in case she doesn't come back.

MarketWatch wonders: Is the commodity boom over? For their answer, they turn our own Kevin Kerr:

"Outstanding Investments co-editor Kevin Kerr seemed to be hinting at this in a hotline recently: 'As I step over the bodies on the trading floor in the gold and oil pits, it becomes clear that 2007 is going to be a rough year for commodities traders. Commodities started out the New Year on a rather aggressive note, with investors sinking prices for gold and oil in a move that actually makes sense, given all the issues the market will be forced to contemplate this year.'

"Meanwhile, co-editor Kerr is excited about another g commodity: cocoa, which he thinks will be up 20%-30% this year."

*** We had a recent reminder of just how risky the world can be. You wouldn't know it from reading the financial news...or checking on the latest prices. Investors seem to think that nothing can go wrong.

But something went wrong in Venezuela this week. Hugo Chavez announced that he would nationalize phones and utilities. This news hit hard. The Caracas stock exchange doubled last year. This year, it was already up 19%. But on Tuesday, it suffered its biggest drop ever. The currency, meanwhile, lost 54% in the last six months.

And another little something went wrong in Thailand, too. There, a military coup replaced the elected government a month ago. No one seemed to care about that, but the generals didn't seem to know what they were doing. First, they imposed capital controls...then, when the stock market crashed, they reversed themselves. Yesterday came more of the same - new limits on foreign ownership, apparently meant as a punishment to the former president.

These two little incidents probably mean nothing on their own. So, we'll wait for something bigger. Trillions of dollars worth of bets are on the table - derivatives, credit default swaps, securitized debt in various forms, equities, bonds, leveraged this and borrowed that...even works of 'art.' We can't wait to see what happens to these bets when something really goes wrong.

*** "Of course, no one knows what will happen," said an Irish fund manager at lunch yesterday. "But we look at the long run. And over the long run what we see is that the world's population is expanding...people in Asia are getting richer...and millions of people - mainly in Asia - want to eat better. They want to eat more like westerners. There is, for example, a big difference between the way people eat in China and the way they eat in Taiwan. In Taiwan they get nine times as many of their calories from meat as they do in China. In China, people don't eat much meat. They just don't have the resources for it. But, the experience of Taiwan shows what the Chinese are likely to do when they are able. They will want more meat.

"The problem with meat is that it takes more resources...more land, more water...per calorie. That's why poor countries typically stick to rice and grains, while in rich countries they eat steak.

"As they get richer, people in Asia will want to increase meat production. But in China, for example, it won't be easy. They just don't have the available land or water. Water is a big problem in China. Most of the country is very dry. And the water resources they do have are not used very well. So, they find that they have to use their water for producing food with a relatively high nutritional value per gallon of water used - mainly fresh vegetables.

"What this means is that they will have to buy their grains...and their meat. And since meat relies on grain...at a time when more and more of the world's grain crops are being eyed for their energy production...it is a fair bet that over the very long term, and in fact, not such a long term, you can expect grain prices to go up. And we think they are going to go up a lot.

"But how can an investor take advantage of this insight? Ah, that is the problem with soft commodities. We studied it at some length. What we found was that there are very few companies that are in the business of producing soft commodities. Farmers tend to be private holdings. And farmers don't tend to think about their businesses as though they were publicly traded vehicles. Ask a farmer in England what his return on capital is and you will get a blank stare. He makes a living. But he doesn't think about it as a business. And he doesn't think of the farm as a capital asset, which is probably a good thing, because his actual return on capital is probably very low. And now in England - and probably much of the rest of the world - the buyers of these big farms are not agro-businesses, they're just rich people who want to have a place where they can go for relaxation...or something solid to hang onto if the financial economy falls apart. This is probably less so in America than it is in England and Ireland, where we have a culture of wanting to own land. In America, people don't seem to care about owning land so much.

"You could try to take advantage of the rise in soft commodity prices by using the futures market. But the cost of storing grains and other foodstuffs for the future is just too high. Mice get in the bins...things rot...the containers are expensive...it's really not a very practical way to invest in this trend.

"We eventually realized that we had to buy the farms. So, we looked around the world to try to find the best buys in farmland...that is, we wanted to get the most production per dollar invested. What we found was that Argentina gave us the best returns. We've invested $50 million in Argentina farmland. So far, it seems to be working out for us."

Bill Bonner is the President of Agora Publishing.  For more on Bill Bonner, visit The Daily Reckoning.