With so much at stake, the politicians just have to — as the saying goes — “do something.” So they are cobbling together a program to spend $700 billion that the nation does not have. (More on that below.) But don’t be fooled. Much of the Potomac sound and fury is just a smoke screen to hide the malfeasance and corruption of America’s political class from the light of day. And this political spectacle comes on top of the long-term investment incompetence on Wall Street. Really, should we be bailing some people? Or jailing them?

The bottom line is that the U.S. is now at the edge of an economic Tsushima, if you will forgive my mixing a couple of metaphors. Tsushima, as you may know, was the epic battle fought at sea in May 1905, when the Japanese navy annihilated a Russian fleet off the shores of Korea. It was a defining moment of the last century, when the rest of the world realized that Europeans and their weapons and policies could be defeated. Many of the “liberation movements” of the 20th century (from Indochina and the Philippines to Persia and Egypt) trace their roots to the symbolism of Tsushima.

And now we see the U.S. — and, more generally, Western — models of monetary governance and investment going down the tubes. People are talking about a “Greater Depression.” The usually sober Steve Forbes claims that the U.S. economy is “in cardiac arrest.”

The Chinese — no fools, they — are looking for a way out of their ties to the U.S. dollar. The oil-exporting nations of the world are searching for alternatives to the dollar. Even the Russians are talking about setting up a gold-backed ruble. Ask a Russian about Tsushima, by the way.

Stock Market Stalingrad

We began this week with investment carnage. On Monday, the stock market crashed a record-setting 777 points. It was — to use another Russian battle analogy — a stock market Stalingrad on a global scale. It seemed that every kind of stock in every kind of market across the world tumbled.

Yes, the prices of gold and silver rose on Monday. But gold mining shares declined along with all the other stocks. What was that all about? In my view, it was panic selling. In the wake of the failed bailout story out of Washington, D.C., big shareholders dumped everything over the side. Even the good stuff went into Davy Jones’s locker.

Also, Monday was Sept. 29, the next-to-last day of the third quarter. So some last-minute actors were cleaning house. Better late than never? They sold anything that could show a profit (or get rid of a loss).

Golden Lining

But sell the gold and silver? Let’s think this through. Have you tried to buy physical metal lately? Good luck. The U.S. Mint is all but sold out of coins. Indeed, the U.S. Mint has placed its dealers on allocation. The Royal Canadian Mint is working flat out to meet the demand for Maple Leafs. And South Africa’s Rand Refinery — which supplies the world’s most popular gold coin, the Krugerrand — is now running at full capacity seven days a week. Got gold?

Many gold and coin dealers are having trouble keeping bullion materials in stock. For example, I’ve had about 20 or so telephone calls in the past week from “old friends.” These are people from my past (and a few total strangers) who know that I write about gold, energy and resources. The common question is, “Byron, what do I do with my dollars?”

On a purely private basis, I’ve been referring some of my friends to a couple of metal and coin dealers that I’ve used in the past (sorry, no plugs in Penny Sleuth today). I contacted the manager of one firm just to say that I was referring people. He said, “Byron, I appreciate the referrals. But I’m almost out of gold to sell. I’ve got high-end numismatics. But those are gold coins with a serious markup. Further down the price level, I just can’t keep bullion coins or metal ingots in stock.”

So what’s the story for physical gold? There’s strong demand for real metal. According to today’s Financial Times, “Investors in gold are demanding ‘unprecedented’ physical levels of bullion bars and coins and moving them into their own vaults as fears about the global financial system deepen.”

What do these gold investors know? Evidently, the posted price for gold is low. It’s another way of saying that gold is underpriced relative to true demand. In fact, the posted price is clearing the market like a vacuum cleaner.

Bailout Bucks

Now let’s look at the precious metals situation from a different angle. If Congress passes any sort of bailout plan — allegedly to re-energize the world’s credit markets — it will rapidly inject about $700 billion into the world financial system. It looks like almost all of these “bailout bucks” will be new money. Why? It’s not as if Congress is going to tax the American people $700 billion. (Gasoline taxes, anyone?)

And who will loan the U.S. that kind of money? The rest of the world is ready to shut us off. The European and Asian media are just dripping with poison when they discuss the U.S. economic mess.

So $700 billion of new money will dilute the buying power of every other dollar already in circulation. It’s basic economics. And it’s almost the textbook definition of inflation.

So that’s why people are buying gold. And that’s also why — in a volatile market — it’s probably a safe long-term bet to pick up precious metal mining shares now. Could the shares still go lower? Sure, anything can happen. But will the U.S. dollar keep on losing purchasing power? As surely as night follows day.

Until we meet again…
Byron King
October 2, 2008

The Bailout Should Benefit Precious Metals was originally featured in the Penny Sleuth.

Yes, there are a few other asset and income plays as well in the market. After all, there’s still an economy to run out there. There are 303 million Americans, and 6.2 billion other people in this world, who want to eat every day. But much of the stock market is a crapshoot. If you love pain, then the broad stock market is the place for you. While gold and silver represent the flight to safety and quality.

The U.K. Telegraph put it nicely: “As investors scrambled to make sense of last week’s events, already one conclusion was all but irrefutable — the U.S. dollar will have to take another major fall. The dollar rally that began in July and pushed the pound’s value against the greenback significantly lower has come to an abrupt end as markets face up to the fact that the currency will have to absorb the effects of a sudden shocking increase in America’s budget deficit.”

So we see lots of bad news for the dollar. But when you own gold, it’s your asset. With a specific gravity of 19.3, gold is dense, non-reactive and otherwise immutable. Gold is nobody’s liability. As one of my old professors at Harvard used to say, “That’s physics.”

Gloomy News from Wall Street

Speaking of physics, I’ve looked east of the sun and west of the moon. I can’t see much good news for the U.S. dollar on any horizon. Really, what’s gloomier than the news from Wall Street? The investment model of the modern era (borrow short, lend long, pay big bonuses) is dying before our eyes. “And it’s about time,” some might say. But it’s happening on our watch. So we had better suit up in battle-rattle.

Wall Street’s losses are in the range of hundreds of billions, maybe trillions. Which prompts me to inquire, where are Bonnie and Clyde when you need them? At least the Barrow couple knew who they were and what they did for a living. To their credit, on their last foray the dynamic duet had the guts to shoot it out with the cops and go out in tragic style.

But now the modern bank robbers are talking about how they should get big bonuses for all the good work they put in up until things blew up. Really, I’m serious. Lehman Brothers wants to pay $2.5 billion in bonuses to 10,000 employees. That’s an average of $250,000 per person. (Except I think the office runners and secretaries will get less than $250K and a select few will rake in a lot more.) What has anyone there done to deserve $250,000? Did I miss the news about somebody at Lehman discovering a cure for cancer? It’s all just so…Baby Boomer.

At the end of the day — and the clock is ticking fast — it’s too bad that the wrong people are going to get paid. And bonuses? Oh, if only I could be a bankruptcy judge for just one hour.

The War on Risk

Do you recall the $700 billion of borrowed money that the U.S. paid over the past seven years to fight the so-called “War on Terror?” Well now, with the stroke of a pen the U.S. taxpayers will pay another $700 billion (and probably more) for the “War on Risk” in the next year or so.

War on risk? It seems that way to me. Let’s back up. In the past few years — seven or so, coincidentally — a lot of people gambled and lost. People bought houses they couldn’t afford. Brokers arranged the loans. Bankers lent the money. Other bankers bundled-up the mortgages and sold them as “asset-backed securities.” Rating agencies sprinkled their holy water on the transaction. Insurance companies insured everything against default and loss.

A lot of people were making a darn good living for a while. But it was all a farce based on cheap credit and an abiding faith in a “something-for-nothing” way of life. And it’s too bad that a lot of people bought — as the saying goes — “as much house as they could afford.” Except they couldn’t afford it.

So now the whole mess is falling apart. And in true Baby Boomer fashion, the key perps on Wall Street want to change the rules and stick the house with the bill. That is, the White House and the House of Representatives, and your household as well.

The advertised number of $700 billion for the Wall Street bailout is just the posted price — the “loss leader” to get the American people into the store, so to speak. But get set for a bad case of sticker shock as events unfold. A group of business reporters at Bloomberg tallied up the raw numbers and came up with their own number of $1.8 trillion.

$700 billion? $1.8 trillion? When the numbers are that big, does it even matter? It’s the inflation-adjusted equivalent of fighting World War II again. Except who is the enemy?

Whatever the final tally may be, it cannot be good for the U.S. dollar. So buy gold and silver. If you can’t acquire the metal in the form of coins or bars, then buy precious metal stocks of companies with ore in the ground.

Until we meet again…
Byron W. King
September 24, 2008

Gloomy Dollar News Strengthens Precious Metals was originally featured in the Penny Sleuth.