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If The System Collapses, Who Will Bid Up Gold?Rick Ackerman [Editor's note: Thank you to Jim T. who alerted me to the fact that I'd originally given this page link a 2004 URL. I'm fired.]
I've been a dollar bull for quite some time, a position that puts me sharply at odds with the likes of Buffett and Soros. Of course, anyone who owes lots of dollar - mortgagors, to name just one class of debtors - should be rooting for these guys, since a dollar cheapened by inflation would effectively reduce the burden of debt for all of us. And extreme inflation - hyperinflation, that is -- would be a godsend for financially strapped households, since they could pay off their mortgages with what by then would be just pocket change. A good cigar might cost $500,000 dollars, but the good news is that one's mortgage will have remained frozen at perhaps half that amount. Not that a mortgagee would cotton to the idea of retiring a homeowner's loan in exchange for a fat Cohiba. In fact, it is logical to infer that lenders are hoping to be paid back in stronger dollars, although presumably not so much stronger as to push borrowers to the wall. Even though the new bankruptcy law will make it much harder for borrowers to renege, and easier for lenders to collect, a true deflation - one in which wages, prices and asset values are falling relative to cash - could tip the law against collection agencies. As the saying goes, you can't squeeze blood from a stone. Although gold is all but certain to retain its purchasing power no matter what happens to the economy, deflation would probably prevent bullion's rise into the stratosphere. It's something to consider if you've been hoarding precious metals in expectation of a big score. There could well be a huge payoff somewhere down the road, since the dollar, yen and euro are already intrinsically worthless. There could also be a hyperinflation at some point, perhaps ten years from now when creditors have thrown in the towel, and that would send the price of gold to levels almost beyond imagining. But first, I am strongly convinced, deflation will runs its course, shrinking asset values across-the-board. 'Unusual Signal' The foregoing was prompted by a note I received recently from a subscriber, Chuck C., who writes as follows: "I think you're on the right path, but since these markets have been hand-held for so long, my belief is that there will be an unusual signal prior to a major and dramatic shift. As apocalyptic as I am, I view the breakout in gold as an early warning, but an explosive jump will be the confirming signal. This has not yet happened, but the tea leaves are pointing that way. It is instructive that the last move up came against the backdrop of a rising dollar. This event has left most of the lukewarm gold bulls scratching their collective heads. But if you view what is coming as the eventual destruction of the paper currency system (caused by factors you have written about), then there must be a systematic detachment of every currency from the safety and value of gold. The Euro has been the latest casualty of this. I would expect a roiling from one currency to the other as gold inexorably moves up. Selling into a Vacuum "At some point -- and I still believe that it might happen in this quarter -- the market will shudder and panic will ensue. The stock market has not seen a real selling squall since 1987, so most of the players cannot envision a time when they will compulsively sell into a vacuum. Contrarily, if you follow the gold shares closely, there almost isn't a day when the shares don't sell off 1-2% quickly. That is the sign of a bull market, when no one has any real confidence or conviction. "I believe we will see a move in [mining] shares that will dwarf even the tech-stock mania of the '90s. The fact that the little exploration companies are still sitting on their lows while stocks like Goldcorp have made new all-time highs indicates that we are at the absolute low end of this move. The fundamentals of a declining reserve and production will soon propel the companies that have found sizeable deposits to the outer limits. Personally, I have taken some recent positions in the warrants of several of them. There is great leverage in these, and the warrants go out almost three years. These are more desirable and safer than options. Time to Buy Puts? "But I think that if the stock market breaks this year, puts could go up very dramatically. I am still waiting for something unusual before I jump on them. In the past, I have had very little success, but I am on the prowl here. It might come as early as next week. Perhaps if we see a sudden sharp reversal in copper or oil, and stocks start to decline, that might be the signal. Anyway, sorry for the rambling, but we are in amazing times. Perhaps, we can discuss the biblical implications one day. Stay on the case. Your stuff is very worthwhile." Below is my response. I don't intend for it to be the final word on the subject, only a strong cautionary note. My argument stems from a simple question, to wit: If the financial system collapses in mere hours as I believe is possible, what asset will investors sell to raise cash for the purchase of bullion? Here we go: No Winners "I won't try to predict the day, week, or even the month of the impending disaster, Charles, but I'm quite confident that it will happen with such stunning speed as to all but preclude escape, never mind windfall profits, for the would-be prescient. When Wall Street awakens that day, the avalanche already will have begun in European and Asian markets. In the ensuing panic the dollar will strengthen -- and so will gold, initially, albeit to a much lesser degree. But gold will not hold onto its gains, for one reason: all other classes of liquid assets that might readily be exchanged for gold will have been deflated precipitously to the point of worthlessness. The implosion of a $250 Trillion debt edifice will swallow all assets, subsuming our fictitious net worth and illusory savings. Absent savings, there will be no fuel to power gold prices higher. "Bottom line: In a deflationary collapse, only hard cash - something few of us possess in any quantity - will provide a safe haven. Meanwhile, debtors who are counting on the felicity of inflation to bail them out face a painful day of reckoning. A strong dollar is ordained from this point on simply because the world has implicitly bet everything on a weak dollar." *** Taming the Mini-Futures Trading the S&P futures with a stop-loss of one point or less? Come visit our archives to see how it's done. You can get a free one-day pass to visit the site, or a two-week trial subscription with no risk, by clicking here. Rick Ackerman *** 321gold Inc |
