Why it isn’t a time to sell gold or silver, but continue to buy.
Posted by A.B. Dada on 6th August 2007
A friend of the family called me 2 weeks ago asking me where she can sell all her gold jewelry and coins that she’s inherited over the years. Upon glancing over her collection, I’d say that she has somewhere in the realm of 31 ounces of gold, or the current dollar equivalent of US$20,000. Bookmark this page and visit it in 2 years and see what it is worth then.
Another friend of mine also called me last week to ask about selling his gold that he’s been buying and “hoarding” over the past 3 years. He has approximately 9 ounces.
Why are they looking to sell? They’re tight for money — adjustable rate mortgages have reset 2 points higher, causing a 20-30% jump in their monthly payments. Food prices are higher, entertainment costs are higher, gasoline and utilities are higher, and people want to liquidate in hopes they can “catch up.” Here’s a hint about savings: when you have to liquidate savings to pay for monthly costs, you will end up without your savings, and without the need to pay those monthly costs when you lose that house, the car is repossessed, and your credit card bills go into collections. Savings, in cash, 401K, or hard money form are great to sell when you have a one-time emergency (sickness, accident, etc), not to pay for an ongoing cost.
Gold hasn’t skyrocketed as we hoped, and there’s a good chance gold and silver will fall significantly as homedebtors find themselves needing to make a mortgage payment or two by liquidating assets. It is likely that a vast majority of new gold owners (last 5 years) will liquidate in order to try to save what can’t be saved. This could cause the price to fall.
Yet I still see gold, and silver, as excellent hedges against hyperinflation. Lately, the massive credit the Federal Reserve has expanded has hit various places in the past decade: the housing boom of the 90s, the dotcom boom around Y2K, and the new housing boom that is currently busting at record speeds. Remember, though, that for every homedebtor who is losing their home to foreclosure, there is a previous home seller who likely made a big profit. Those profits, in dollars, is still out there, waiting to be reinvested in other markets. I know 2 people my age (33) who have over $500,000 in dollars in a money market, not going into the stock market, the housing market, or the consumer goods market. Money market investments aren’t generally used by the banks to invest in long term loans, so they don’t create as much price inflation as Federal Reserve expansion does. But when those investments are moved out of savings accounts and into buying other investments, they may rear their ugly heads as price inflation very quickly. Gold hasn’t gone up more than 120% since bottom because it is still an ugly, useless metal to most investors and savers. This will change when yet another investment bubble comes and goes, or maybe through two cycles.
Right now, the Chinese banking industry is looking for help from the United States’ own FDIC. This is because the Chinese banking industry is in as much pain as the US industry is, and the Chinese government is worried of mass liquidation of savings accounts, causing runs on the banks. Most of the Chinese common man’s meager savings are repackaged and loaned to US consumers to buy Chinese goods — those savings aren’t readily available to cash out. We’re already seeing investment runs on international banks, and it won’t be long until we’re seeing similar problems in the U.S. and China. Imagine if those few US savers all wanted to extract dollars from their money market accounts at once? Total collapse.
If the average Chinese saver loses their savings due to China’s malinvestment in the United States consumers, they will look for a truly strong savings mechanism. For 6000 years, that mechanism was gold, and later silver. It isn’t a question of “if” any more, it is a question of when.
The money is out there — all of the money created by all the various central banks over the years. It hasn’t disappeared, even if your home is in the process of foreclosure, or your job is lost, or you can’t afford the food you bought just 3 years ago without thinking twice. It still exists, and it will flood into markets again as the value falls. When that happens, the investment of last resort, gold and silver, will skyrocket, and you’ll wish why you sold a dozen ounces of metal to try to save a mortgage that is long gone from your mind.
If you’re having problems paying your mortgage, get a boarder — someone to rent a room from you. We did it ourselves, finding a great young guy from our local church who also helps me with jobs when I get too busy, and we don’t have a problem paying our housing costs. If you have extra rooms, rent to a few local church kids who just moved out of their parents’ house. That helps.
Before you work on your mortgage, work on your spending. Even those on the verge of bankruptcy still spend like there is no tomorrow. Do you really need new clothes? Thrift store. Do you really need steak and eggs? Hot dogs and American cheese is fine. It might not be a great way to live, but you have to learn sacrifice when you make 30-year investments without thinking. Selling your gold or silver to make that mortgage payment, credit card payment, or car payment will not stop the inevitable. If you’re really that tight, get a second job. Get a third job — they’re out there. There is no reason to liquidate an investment that will overcome any market scare like gold and silver has historically overcome for thousands of years.
Just remember this: gold and silver will likely fall only because there are hundreds of thousands, if not millions, of people in financial trouble who will sell what little they have to stave off losing their excessive consumerism for a month or two. I’ll be the guy buying that excess, at the lower prices, and once that excess is gone, the real value of the metal will show itself as it always has.
Posted in Uncategorized | No Comments »
