What 300 years of history say about Buying Gold amid today's turmoil...
LAST WEEK I had to run and catch a flight to Zürich, Switzerland, writes Randolph Buss of DINL.
On Tuesday, it was then announced that AIG – the American insurance giant – would be saved by Hank Paulson & Ben Bernanke.
This was a "classic" flip-flop if ever there was one, having just said on the Sunday prior, that saving Lehman Brothers was "not on" and the issue of moral hazard was mentioned.
On Wednesday morning, the streets of Zürich were very somber and many more smokers stood out on the pavement, huddled in groups, especially in front of the main UBS building.
The AIG office just down the street was empty. They had already been told.
That evening while we had dinner we were constantly checking the Blackberry. Gold was up $90 an ounce, its highest one-day advance in near history, and the red wine was flowing. Silver was up about $1.30. And that night, the steak simply tasted better.
The reason I mention this is that, as I have already hammered home to my readers, VOLATILITY is here to stay and the US authorities are obviously VERY scared. As a former executive in German industry, I once paid for classes to learn the nuances of body language and human behavior, better to prepare myself for business negotiations – and in this week's Capitol Hill testimony to Congress, both Paulson and Bernanke were exhibiting dire frustration, urgency, and fear.
Obviously, they know more than they are willing to say. Dick Cheney, who was absent, is noted to have said "Things are bad. Do something."
Meanwhile, I went to a local gold-coin dealer to exchange some Gold Coins – and I was given MORE than the spot price, rather than less. The spread between prices to buy and prices to sell has been totally whacked out of alignment, at least in the retail market for Gold Bullion.
Overall, nobody currently knows where this massive US bailout is going and if the government puts a $700 billion price tag on it, we can likely assume the REAL price is either unknown or shall exceed to the upside. I consider that a safe assumption.
The markets will likely take years to recover and the biggest financial institutions are, as I have previously said, the only key to growth going forward.
To get a perspective on what the low-end cost of $700 billion means, the ongoing cost of the Iraq War – now running for five years – is estimated at $555 billion. The economist Joseph Stiglitz says that with all collateral costs, it is likely to be nearer $3 trillion. The United States' endless War on Drugs, meantime, is costing $37 billion per year; total cost now stands at $592 billion.
So the Wall Street banking bail-out is so massive by itself, that for all intents and purposes, such a bailout – plus war, plus drug wars, plus a 50-year old infrastructure, plus Medicare – marks the de-facto bankruptcy of the US when we include ongoing expenditures and future obligations into the sums.
In further thought (and I have thought about this long and hard), the bailout dynamics are horrible. Should the massive bailout be approved, then the US Dollar and confidence in the US economy will likely plummet as massive debt and deficits will be piled on. But if no bailout is approved (this seems unlikely) then the US economy could tailspin into a massive recession-depression.
That is what Paulson and Bernanke were alluding to in their body language and rather straightforward testimony. The US taxpayer is already "on the hook", Paulson kept saying. "Do something," as Dick Cheney apparently demands.
The authorities in the US, UK and Europe have also started to bully and ban short-selling. The US has rescued its horrendous auto-industry with a $50 billion injection on top. So it must be obvious to all that they will do ANYTHING to save the system, or at least prolong its death.
This is not necessarily wrong, but it is being done in dictatorial fashion. The government can outlaw anything, including non-fungible gold instruments. They could even ban going LONG on gold stocks – but I doubt it.
My market thoughts are to accumulate more Gold. A Swiss banker (now retired) I met last week has put in a standing order with his bank to Buy Gold every week; price is of no consequence.
Remember: We are currently in a real no-mans land as Paulson and Bernanke stated. Nobody knows where the markets are headed, nor what the REAL underlying debt of these derivatives is and what instruments the government can or plan to use in "cleansing" them.
We are in unprecedented times; I have talked about a massive hyperinflationary bust in past newsletters and blog entries and also of a Kondratieff Winter. We may be witnessing this soon in more gore and detail. But if the last 300 years of European history is any guide, we can assume that any US bailout will be bloated, negative for the taxpayer and consumer, murky rather than transparent, and bad for your personal wealth and well being.
I know of no historical guideline whereby holding Gold has been detrimental to one's well-being in times of crisis.