by Gary North: Wealth
If you did
what Bill Bonner and I have been recommending for a decade, you
own gold. Bonner began promoting the purchase of gold in the year
2000. I strongly promoted this for my subscribers after September
11, 2001, when the Federal Reserve began pumping up the monetary
base in earnest. Neither of us has ever stopped recommending holding
money in gold.
I have stressed
holding coins, especially tenth-ounce American gold eagles.
I am writing
this for those readers who did what I recommended, have quadrupled
their money (on paper and in digits), but who may be getting cold
There are good
reasons for buying gold. But you should have an exit strategy in
mind. You need
to consider this.
We are told
by the mainstream financial media, which never told investors to
buy gold over the last decade, that gold is in the final phase of
a bubble market. But how can any market be a bubble market when
the mainstream financial media are not running report after report
on the bubble, telling readers and viewers about how much money
people are making.
financial outlet warned investors loud and clear, issue after issue,
in 1999 that the dot.com market was a bubble? I told my subscribers
in February and March of 2000 that it was, and that they should
get out. But I published a newsletter. I was not mainstream.
outlet warned people in 2006-2007 that the real estate market was
a bubble, that wise investors were getting out? I did in November
continue for months or even years after old timers say they will
pop. Old timers have trouble estimating the fear of the buyers
at being left out and the fear of lenders at being left out. The
two sides debtors and lenders keep the dance of
doom going much longer than old timers can imagine possible. But
eventually the dance ends.
I spoke at
Lew Rockwell's conference. One of the speakers is a banker. He
lives in Las Vegas. He was taught by Austrian School economist
Murray Rothbard. He earned a masters degree in economics. Then
he went into banking.
As an Austrian
School economist, he understands the business cycle. He understands
that the Federal Reserve system has pumped money into the economy,
creating a housing bubble since 1996. He knows this boom will
He has no
illusions about this housing market. Compared to him, I have been
Pollyanna. He spoke of the mental outlook of the builders in Las
Vegas. They all know it can't go on, but they are determined to
party until it does. "Then they will declare bankruptcy and start
over," he said. This is their exit strategy.
He was correct.
It happened. He lost his job as a Las Vegas banker. He is now the
president at the Mises Institute.
I went on to
think a squeeze is coming that will affect the entire banking system.
The madness of bankers has become unprecedented. They have forgotten
about loan diversification. They have been caught up in Greenspan's
counter-cyclical policy of lowering the federal funds rate. Now
this policy is being reversed. Rates are climbing. This will contract
the loan market. Banks will wind up sitting on top of bad loans
of all kinds because the American economy is now housing-sale driven.
But I was on
the fringes of the investment community. The bubble was about to
burst, but the media attracted viewers and readers by staying on
the bandwagon. To call attention to what should have been obvious
would have reduced the audience. The editors knew better.
So, when I
read articles about gold in a true bubble market, I know it isn't.
The salaried reporters with no savings, underwater in their homes,
and in a dying industry are merely writing what their editors think
Articles that confirm what conventional viewers and readers want
to hear, namely, that they were not really losers by staying out
of the gold market (they were), and that those who buy good now
will lose everything (they won't), and that now is a good time to
buy stocks and bonds (it hasn't been ever since March 2000).
who recommends owning gold as a hedge against a declining dollar,
wrote this: "In my opinion the Fed funds rate should be at 5%
. . . That will provide real interest rates. I don't think the Fed
will increase interest rates to a positive real rate. So, I'd say
to an investor, he should have at least 20 to 30 percent of his
money in precious metals."
about his opinion about renewed fears of a bubble forming in the
gold market, the student of the Austrian School of economics theory
scoffed at the pundits who say the gold trade has become crowded.
he routinely sees less than 5% of attendees at his speaking engagements
raise their hands during his casual sentiment polls regarding the
precious metals. Sometimes he sees no hands raised, he said.
There are many
ways to own gold. The ones that most investors choose, and which
most investors will rush into during the final phase of the bubble,
is in fact not gold. It is a promise to invest in gold. It could
be an ETF, which is a form of derivative. It may be a commodity
futures contract another promise.
But what about
gold, in contrast to a promise "cross my leveraged heart
and hope to die" to invest in gold on your behalf?
with today's economy is that it is built on promises and trust.
It is therefore built on debt.
In the United
States, the financial promises always come back to these:
- The Federal
Reserve System will remain the lender of last resort.
- The Federal
Deposit Insurance Corporation (FDIC) will pay off all bank accounts
up to $250,000.
- The U.S
government stands behind the FDIC's promise with a $600 billion
line of credit.
- The government
can get this money from the Federal Reserve System, if necessary.
with these promises is this: the ultimate insurer the FED
can fulfill its obligations in a deflationary crisis only
by hyperinflation. That means that the only sure guarantee against
the systemic failure of the American banking system is the destruction
of the dollar.
If we get the
latter, do you want promises to pay gold, which can be settled legally
by the payment of digital dollars? Or do you want coins where you
can get your hands on them?
On the other
hand, if the FED ever refuses to create money, and if the banking
system then begins to implode, do you want promises to pay that
were issued by a limited liability corporation, such as a futures
hyperinflation and a deflationary banking collapse, people can buy
and sell promises to pay gold. They can pay 28% on all profits (no
capital gains protection). They can become self-conscious speculators.
There is nothing wrong with this.
But what if
you are speculating against long-term price deflation? Then you
want paper money. But paper money leaves you at the mercy of the
Federal Reserve System and the commercial banking system. Mass inflation
could appear rapidly (up to 20% price increases), followed by hyperinflation
(anything from 20% to infinity).
What if you
want an asset that will do well in mass inflation or hyperinflation,
but which will not do as badly as most other leveraged capital assets
in a banking collapse?
I keep getting
this answer: gold coins.
WHICH GOLD COINS?
on what you are trying to hedge against.
If you are
a national living in a country whose mint produces gold coins, buy
those gold coins. If you are ever in an emergency situation where
you need gold fast, and you want to barter it for something you
really need, the person on the other side of the transaction will
recognize the mint's stamp. He will be more likely to barter.
Do you want
a one-ounce coin? Not if you are bartering for small items. You
want the smallest-weight coin that your national mint produces.
On the other
hand, if you want gold as an investment, for which you plan to exchange
your coins for digits in a bank, you should buy the most common
one-ounce coin with the lowest premium: the Krugerrand. This low
premium is consistent. You buy low; you sell low.
If you want
something in between, buy a one-ounce coin from your national mint.
American eagle commands a premium above the one-ounce eagle these
days. This could go away in a selling panic. Be aware of this investment
not have a true free market with coins produced by the U.S. Mint.
Ron Paul held hearings on this issue recently. The Mint keeps getting
back-logged with orders during panic-driven periods. It sells only
to coin dealers. This creates a premium for coins when these logjams
can read about the problems here.
listen to a story for years before taking action. This has surely
been true of the story of gold. When Gordon Brown, as Chancellor
of the Exchequer, sold off half of Britain's gold, 1999-2002, he
depressed the world price. He sold it at an average price of
$276 per ounce.
This was a
massive transfer of wealth from the British government to other
central banks, which bought most of the gold. This kept down the
market price, as central banks shifted demand from the private markets
to the Bank of England's bars of gold.
This was the
last chance for gold speculators to get in on the deal cheap. Not
many people did, of course, because not many people ever buy close
to the bottom of any market.
So, gold has
steadily moved higher over the last decade. Still, the procrastinators
I don't mean
Joe Lunchbucket and Tom Temp. The vast majority of Americans have
no liquid savings above a few thousand dollars in the bank. Fewer
than 50% have pensions of any size, and the money in these tax-deferred
accounts are not at their disposal. The funds they can invest in
are not related to gold. They are categories that will keep the
fund managers from a lawsuit when markets collapse: American stocks,
American bonds, and Treasury debt.
Gold is an
investment asset. It therefore will not become popular short of
an economic collapse hyperinflation followed by a depression.
The average person owns no gold coins, nor will he anytime soon.
he buy them? How could 100 million households buy a single gold
coin per household? This would be impossible. There are only a few
small coin stores in any community. They are mostly mom-and-pop
outfits. The U.S. Mint could not meet the demand.
has a gold coin section in the jewelry department, then we can start
talking about a possible bubble in gold. Not until then.
As more people
on the fringe of the Tea Party find out about American gold eagles,
they will start buying. This will force up the coins' premiums.
As word gets
out about the scarcity of small-weight gold coins, there will be
more interest in owning them.
As word gets
out that the Federal Reserve's exit plan is a myth, they will start
looking for hedges. Gold is a hedge against serious price inflation.
government is working hard for existing gold coin owners. The government
clearly cannot bring the budget deficit under control. Congress
has no intention of doing so. When the government can borrow $1.6
trillion a year at rates as low as four-one-hundredths of a percent
(90-day) to under 3% (7 years), why should we expect Congress to
If you have
yet to buy a single gold coin, buy a tenth-ounce American eagle
to get started. That will not bankrupt you. It will get you over
will never take this initial step. Those who procrastinate will
pay a high premium when they at last think: "Maybe I really do need
some gold." If you don't know where to start looking, start
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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