G&D?

Gloom and Doom? Maybe. I have heard it and felt it before. Allow me to remember…possibly for everyone's benefit. Remember, I have been doing this since 1977, so I have seen and felt them both before. Take 1979-1980 as an example, and see what happened.

In that period Bunker Hunt decided to try to corner the world's silver supply. He bought and bought and bought physical and futures contracts, running the price of silver up to over $50 per ounce eventually. Gold followed, because of the troubles we were having, till it reached $850. While all of this was going on, Paul Volker was screwing with the money supply, and we had a prime rate of 13%, and mortgages with 21% interest. I can still remember the quandary in which we found ourselves. We all hated the one Arizona Senator who cast the deciding vote which got rid of the Panama Canal. We watched gold and silver go up very fast, as all of the above unfolded.

Now just think of it for a minute. Haven't we had at least 400% inflation since 1980? At least, if not more, so let's compare those prices of metals with today's. Gold at $650 times 400% would make it priced at $2600 per ounce, and the same comparison to silver would be $56? No! The ratio between gold and silver then was a healthy 16 to 1, not its current 47 to 1, so we have to correct our figures to make it 16 to 1. Silver at $14.00, then, would be about $56, and then multiply by 400%, which would make it $224 per ounce. This is if gold and silver were to equal 1980 prices per ounce. Gold at $2600, and silver at $216, or if you divide $2600 by 16 it is $162.50 per ounce. Impossible? Once again, think about it and compare it to today's prices of everything else. It seems highly probable to me.

I don't have a 1980 newspaper, but I can assure you that everything from butter to cars, lumber, air conditioners, pork chops, etc. is just about four times as expensive in paper dollars as they were in 1980. Gold and silver aren't. Shouldn't they? Real estate is far more than four times the 1980 price and is rapidly headed downward till it will probably reach 1980 prices times four. And since 1980, our manufacturing has been sent everywhere, and virtually no longer exists here, with a few exceptions of course.

In 1980, Wal Marts still bragged about selling only US made merchandise, and Jap cars were barely on the scene. Those which were, were certainly not of the quality they now are. Ford, Chrysler, and GM were in pretty good shape. Please remember that myself as well as others have long predicted that real estate was a huge bubble which had to pop.

From the November 26th Denver Post comes the enormous front page headline, which reads, "SHUTTERED HOMES, BLIGHTED BLOCKS." The story goes into an examination of two Denver neighborhoods which are certainly not inner city slums. (As a matter of fact, inner city Denver is undergoing a resurgence and restoration). These two neighborhoods are full of ranch style homes on tree lined streets, the dream of most Americans. The lawns are manicured, and well landscaped. The homes are all less than 20 years old. One in ten have been foreclosed upon, and for sale signs are everywhere. When some haven't sold, and the "owners" (who don't really own anything, but owed more than they were worth), burned them to collect insurance, which money went to the mortgage holder. Do arsoned homes collect insurance? I don't know, but these two neighborhoods are perfect illustrations of what went wrong. No money down, inflated appraisals, ARM mortgages and job losses, all have ruined these two neighborhoods, and the blight is spreading.

All over America, the real estate bubble is bursting, and there is no way to stop it till it reaches the bottom. When will that be? How many millions of ruined credit ratings will there be? How many foreclosures, arsons, ruined neighborhoods, fleeing homeowners, and bankruptcies will there be? I haven't the slightest idea, but real estate will undoubtedly return to four times its 1980 prices, just to make it even with the rest of the nation. That level will be a lot lower than it is now. Then we have the strength of the dollar to consider. The "buck" is sliding. Sliding precipitously, as a matter if fact. The 'strength' of the dollar has nothing to do with inflation, but is a comparison with a 'basket' of other currencies. In 1980, the euro didn't exist, but the dollar was very strong compared to Canadian Dollars, British Pounds, and Swiss Francs, as well as other currencies. Today, the dollar is plunging against other currencies. They're all inflating and printing, but not nearly as fast as the dollar presses are running.

The dollar has to be printed and inflated, because there are obligations to be met. Tens of trillions of dollars of obligations to be met, as a matter of fact. The Germans had obligations which had to be met after WW I as well. Eventually the Germans took their old money and imprinted it with "millions," and it soon became good only for a trip to the bathroom. Zimbabwe has obligations to meet also with their printing presses, which they are now doing, and the result will be the same. When there are obligations and promises made, they have to be fulfilled, usually in currencies with which they are contracted or owed. The Germans were made to pay for the damage they did, which was a first in history and has never been repeated. After WW II, we paid our former enemies, and especially the Japanese. We rebuilt their industry, wrote their Constitution, and made them whole, which I have never been able to understand. The Marshall Plan rebuilt Europe, and I could never understand that either. This killed our steel industry, and as a long term result, America has become a nation which buys elsewhere what it consumes. We have rebuilt our enemies, and they are eating us alive. The descendents of Sam Walton weren't happy being the richest kids in the world. They had to start a process which would be copied by every other big box chain in America, and result in our eventual bankruptcy. China and India grow and America shrinks. Maybe one should never leave anything to their kids, but should spend it all before they die? Inherited wealth mostly goes un-appreciated, but that's another story.

Compared to 1980, we aren't nearly as bad off in some respects as we were then, and in other areas I suppose, we are far worse off. Our dollar is far weaker and on a path of becoming no longer a 'reserve currency.' Real estate is in big trouble, and it wasn't in 1980. The Panama Canal is long gone, and I'll never forgive the Democrats and Dennis DiConcini's vote for that one. No one is attempting to corner the world's silver supply as Bunker Hunt did in 1980. He might have made it if he hadn't been betrayed by the futures brokers. In 1980, Ronnie Reagan was elected, and he brought the nation together by spending, spending, and more spending, mostly on the military, which broke the Soviets. He quadrupled the national debt in the process, but succeeded in making us whole again.

Iraq and Afghanistan are very similar to Vietnam, and are debasing the buck very quickly. How does this affect us? Simple. It means that as conditions get worse, bankruptcies will increase wildly, foreclosures will multiply in the millions, the dollar will go down, and the stock market will do the same. Ford Just hocked every building and piece of land and machinery they own, to get an $18 billion loan. This is only twice what they lost the first nine months this year! Can they survive? Wal Mart's Chinese goods don't seem to be selling too well. We are in for a depression, I really believe. It's not a pleasant prediction. Gloom and doom? I guess, but what happened to gold and silver in 1980? Why not now? I can see no reason why not. They are the same gold and silver. They will only cost more in depreciating dollars, which logic most Americans cannot understand, because they are unable to think. They, like the savers in all unbacked paper currencies in history, will be ruined. There is nothing we can do about that other than to protect ourselves. Don't buy a home till the bottom has fallen out. There will be some bargains then. Meantime, of course…protect yourself.

December 4, 2006

Don Stott has been a precious metals dealer since 1977, has written five books, hundreds of columns, and his web site is www.coloradogold.com