Precious Metal’s Bailout Bonus
By Byron King
October 2, 2008
We’ve been witnessing utter political bumbling in Washington, D.C. — beyond the scale of a mere $400 million “Bridge to Nowhere.” Here’s the central fact: Congress spent years enabling the crooked dealings of Fannie Mae, Freddie Mac and the like. Now some of the key political perps are writing the alleged “solution” to the problems they directly caused.
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.
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
