Paying subscribers get to see quite a bit more of Rick’s Picks than lurkers might infer from reading the free commentaries that go out each day to many thousands of readers. A headline that will have caught the eye of the latter was this one, from the May 2 edition: Gold’s Nastiness Hints of a Major Bottom. Comex June Gold subsequently fell $76, and we were therefore unsurprised to receive e-mails from lurkers who evidently had been caught flat-footed by this supposedly unforeseen (by us, anyway) bout of weakness. In fact, the daily “trading touts” that lie behind the Rick’s Picks subscriber wall have been far more cautious than outsiders would likely know. Just yesterday, in fact, we offered a projection for GDXJ, a proxy for junior mining stocks, that may have caused some subscribers’ scalps to crawl. (Click here for a free trial subscription if you want to see just how low we think this favorite of gold bulls could conceivably go.)
So which is it: Are we bullish on gold, as our headlines would seem to imply? Or do we privately shrink from the risk of owning bullion? The answer is that, although we are bullish on gold and silver for the long-term and have been socking away bullion coins for years, we are not so certain that it will achieve the stratospheric heights that some gurus have predicted. However, what we are most confident in saying is that, come hell or high water, gold’s purchasing power will more than hold its own relative to all other classes of investable assets. We would concede, however, that the fantastic price targets of some bullion superbulls have a few things going for them. For one, the U.S. dollar is already intrinsically worthless, and that implies that real money – i.e., gold – will someday soar on the epiphany. And for two, in a true global financial crisis, if commodity regulators were to allow individual holders of paper gold to press their claims for delivery against the likes of Goldman, J.P. Morgan, Morgan Stanley at al., the resulting short squeeze could in theory spike gold to unimaginable heights. However, we did not emerge a while back from an ugly brawl with the hyperinflationists without learning from it. In that regard, speaking as charter members of the hardcore deflationist camp (footnote: we were writing articles about the coming deflation for Barron’s and the San Francisco Examiner nearly 20 years ago, when it was looney-bin talk), we do not share the certitude of some that hyperinflation is inevitable. That is not withstanding the fact that Peter Schiff and blogger FOFOA have laid out quite plausible scenarios for hyperinflation.
When Dollars Are Golden
But here’s a scenario of our own in which the global economy collapses and goes straight to deflation with no hyperinflationary phase: You wake up one morning and, for reasons of something awful that has occurred in Europe, the financial markets are in chaos. By 10 a.m., there are lines outside most U.S. banks. Unfortunately, all depositors will go home empty handed, since, as we have noted here many times before, banks keep very little cash in their vaults. By then, it seems entirely likely that credit cards and ATMs will have ceased to function and that credit limits will have been “temporarily” capped. So how will you pay for your groceries, or gas, or…anything? Will vendors take your Krugerrands, Maple Leafs and silver rounds? Will they value your Morgan silver dollars at $35, as dealers do? Or will they give you just a dollar’s worth of merchandise in exchange for your silver dollar? Put yourself in the vendor’s place and you can probably see that he’ll be most comfortable taking the traditional ones, fives and twenties. But how many of them do you have lying around? A couple of hundred dollar’s worth, right? Scarce but infinitely fungible in the aftermath of a global collapse, cash money would not likely cede much ground to gold as money. And that is how a fundamentally worthless, debt-encumbered dollar could become as precious as gold. At least for a while, that is. Sooner or later, the $150 trillion that we “owe ourselves” now and in the future (a conservative estimate, as far as we’re concerned) will have to be discharged, either through hyperinflation; or by deflation (i.e., universal bankruptcy).
Which is more likely? If politics or history apply, the hyperinflationists will hold the edge at that point. But anyone who professes certitude about how the collapse of the global financial system will play out is just blowing smoke. As for gold superbulls, even if they are right, which they quite possibly will be, we doubt it will be easy in a severe crisis, or even its aftermath, for hoarders to exchange Krugerrands ostensibly worth $10,000 apiece for, say, Canadian farm land (our favorite investable asset, by the way).
Cam: Mark, sorry to disagree here but neither the faith in our currency nor in government has been destroyed. Have you not noticed we all still spend it to meet our needs? People use it every single day. They buy groceries and gas and houses with that paper you disparage. Little has really changed across time. I would agree that value has been lost through inflation but please also consider that we have a lot more paper dollars than our grandparents ever did.
Cam, you seem to be confused; can you explain to me how any of this contradicts a single thing that I’ve said?
Indeed, we have gotten wealthier.
Much, much wealthier than those who came before us actually. Better medical care, heaps of technology, vastly improved quality foods from 4 corners of the globe, cheaper transportation,
Again, this doesn’t seem to be a reply to anything I’ve said.
Could it be that you’re saying that we owe to fiat currency and to the severing of the FRNs last link to gold by Nixon all the bounties of trade, technology and industry that would have been impossible without the welfare/warfare state? Please say you don’t mean that…I mean, “How many Paul Krugmans can there be?”
agencies that work to protect our health and safety and better means by which to travel, study, work and grow.
Wow! If you can’t see that these state agencies work so hard to destroy all these values as failure, like war, is the health of the state, then maybe you are a Paul Krugman.
What the hell is the complaint? You really want to throw it all that away because of a beef over the devaluative process that everyone works with as a routine function? Inflation is a fact of life and has been for 100 years. So what? It works in most peoples favor.
It’s a transfer of wealth from the creators/producers to the profligate spenders and parasites, the thieving plutocrats and oligarchs, the bureaucracies and their police state and the war mongers and their domestic and international wars; fiat money has always been the fundamental prerequisite to the creation of tyrannical empires.
So reality is not suspended as you suggest. Ask anyone. They understand the influence of inflation on thier daily lives. They know they need to keep their money working for them. That is the society we live in. What else is new?
It cannot be a fraud if we all know it exists, now can it? I cannot accept your blanket assertion that people have lost faith in government either. That is simply not the case and quizzing anyone on their relationship with a stable system will confirm that.
It is only the dollar-bears and the handful of lunatics who adhere to gold and metals extremism that feel so strongly but I assure you I will never take your side.
It must be very comfortable for you living there in your suspended reality.
“Fundamentally, I think it is a selfish position that gives no care or consideration for weaker members of society nor even for justice and equity amongst all members. Just dog-eat-dog thinking where all real power is vested in metal and anyone who holds none is an outsider.” said the iron fist to the invisible hand.
This could have been said by Mao, Kim, Stalin, Hitler, Lenin or Marx; I’m sure it correctly paraphrases something or other that each of them has said.
When it comes right down to it I believe it is in the public interest to defeat the gold trade and silence the clowns who keep suggesting revolution over common sense and solutions. The adherants to metals (the same folk who disparage our currency and constantly talk it down while talking guns instead of cooperation and meaningful solutions) should understand that their anti-social tendencies are attracting all the wrong kind of attention now.
With talk like that I can understand why fringe groups might develop with their conspiracy theories and talk of FEMA concentration camps. Why don’t you add some more fuel to the fire.
The simple truth that has been discovered is that almost every anti-society lunatic on the continent is coincidentally also a buyer and hoarder of physical precious metals.
And that is why they need to be monitored.