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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).
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