by David Andrews
Fabulous Wealth In Paper Money
Just this weekend, all the talk around my office centered on the record $365 million Powerball lottery jackpot, the largest in history. And who would not jump at the chance to become a multi-millionaire? It seems to be everyone's dream. What occurred to me was that this was also the dream of most gold and silver bulls. Sure, we all know that gold is real money, has been for 6,000 years, and when it takes its moon-shot, it will make us fabulously wealthy. Our chances are much better than the 1 in 146 million odds for Powerball. Then we will all live like kings!
Or will we? In order to realize those profits in the millions (should we be so fortunate), we believe that we will have to trade our precious metals back into paper money. Federal Reserve Notes are not what has been real money for 6,000 years. That distinction belongs to gold and silver. There seem to be some assumptions here that don't make a lot of sense. One of them is that precious metals are just an investment, to be cashed in - if one is nimble enough - as close to the blow-off top as possible. Another is that large gains in paper dollars are the ultimate objective. Throw in the uncertainty that paper money will even be around in another five years, or that the US dollar will remain the world's reserve currency.
In financial matters, one is best advised to deal with reality, not idealism. All the talk about gold being "real money" means nothing, if it isn't backed up by facts. It is clear that most people don't really care which is the real money, as long as they have plenty of it.
Too Late For Paul Volcker
The situation with the US dollar is much more precarious now than it was in 1980, when the price of gold rose to $850, and silver to $50 per ounce. Paul Volcker was brought in as Fed chairman in 1979 to deal with the last real dollar crisis, when the US economy was still strong. Exports were vigorous, there was full employment, and the consumer was flush with savings. However, inflation was out of control. Volcker rolled up his sleeves to manage the money spigots while letting the interest rates rise north of 20%. He later expressed regret that he did not control the price of gold.
Could Ben Bernanke do the same today? Not without collapsing the system. There is too much debt in the US now. The economy is far more fragile. Employment is not as strong, the consumer has negative savings, and the yield curve is about to invert. Gold has been sold short, loaned, swapped, and heaped on a mountain of derivatives that threaten to unwind if hit with so much as a strong breeze. It is far too late for Volcker's strategies.
Given the fundamentals of the US dollar today, who would want to trade precious metals for this paper? Apparently, even the most ardent "gold-is-real-money" advocate would do just that. It is also one reason why so many are so willing to invest in the various forms of "paper gold", and to take their profits in paper. This implies a return of confidence to fiat money. Is someone expecting the dollar to turn around and become strong? Too much liquidity has flowed under the bridge for that outcome.
"Nervous Nellies" and The Great Speculation
While pondering this seemingly contradictory state of affairs, it dawned on me that Hugo Salinas Price of Mexico had addressed many of these concerns recently in a presentation for GATA's Gold Rush 21 symposium. A DVD of that historic Dawson City, Yukon conference is now available on-line for a modest fee and is well worth the time spent viewing the speeches given by some of the most prominent international advocates of sound money.
Silver and gold, argued Salinas Price, must be monetized from commodities to legal tender status before they will cease to be a speculation. "Money" cannot be something that can go down in value. Yet, gold and silver have done just that, after the last top in 1980. Altogether too many investors were burned the last time, and are determined to get out before the same thing happens again. Nobody wants to be left holding the gold bag next time. This type of thinking leads to many analysts and gold commentators jumping the gun to call a "blow-off top" before the bull even gets started. Utilizing such warning calls, investors hope to return to the "safety" of paper dollars before the gold bear market resumes.
This trigger-happy mentality causing investors to leap in and out at the slightest sign of market volatility - or the other bane of precious metals bulls, long range-bound behavior - leads to the very real possibility of missing the boat altogether. What the precious metals investor needs to understand is that jumping back into paper dollars is no longer a return to safety. There is no safety in paper currencies. We are truly on the threshold of a world where, if you don't have some physical precious metal, you won't have any money.
How High Is The Moon?
Adam Hamilton of ZealLLC.com has recently provided us with two excellent analyses of the real 1980 tops in gold and silver prices, in terms of 2006 dollars. His inflation-adjusted charts (five in each article) reveal that all is not what it seems. According to Adam, gold has reached only a 13-year high, and has not retraced its 50% price level. In 2006 dollars, gold would have to rise to $2,176 per ounce, and silver to $122 per ounce, just to reach their 1980 highs! We can't be certain that the precious metals will exactly match their 1980 highs. It is likely that they will rise much higher, for reasons outlined above, and due to their lower stockpiles now than in 1980.
A primary driver of this current bull has been the willingness of western central banks to sell their gold into the market to depress its price, only to watch with chagrin as the Russians, South Africans, Asians, and Arabs buy it hand over fist. Americans have seen their jobs exported to China and India. Now, our real wealth is following those jobs, in the form of our gold.
The possibility exists, then, that the height of the moon will never be determined. When (not if) the US dollar reverts to its intrinsic value - zero - how can we measure the price of gold? We can't. We either will have it, or we won't. It is likely that the wealth of the Powerball jackpot winner(s) will be short-lived. Why invest in gold, when you are already a multi-millionaire?
Paper To Paper: To Dust It Shalt Return
Of all the ways to invest in precious metals, paper is the most common. Futures, ETFs, certificates of ownership in pool accounts, derivatives, loans and swaps...what the imagination can conceive, paper dollars can buy. Why would an investor care that his gold or silver is no longer in a pool account - that it has been lent out to be sold into the market and used against him? He may still make a profit on it when prices rise. He doesn't worry about taking physical delivery. Who needs the expense and hassle of storage fees and moving heavy bars of metal from one place to another?
It is perhaps this aspect of gold and silver investment that is most disturbing. The ease and speed with which paper is traded today can be a blessing or a curse. It goes right back to the idea that the whole purpose of trading in markets - any market - is to bag a quick dollar profit. Nothing wrong with that, if that's all you want. You take the risk that your paper will end up worthless.
But for those who claim that gold is real money, that silver is real money, that honest money is the only way to build a truly strong and enduring economy, this is not the way to invest. This is not the way to prepare for an uncertain future. We are dealing with bankers and thieves here, with crooked politicians who would sell their souls down the river for re-election. We are up against collectivists who would tax us to oblivion to further their socialist agenda.
The true Patriot always fights with strong weapons. Time is running out. Buy some physical, and never give it away for paper.
And the cat's in the cradle with the silver pool,