Rick's Picks


By Rick Ackerman

Oct 13 2008 11:01AM


If Gold Hits $5K, Would You Sell?

Here’s a question for readers who have been hoarding physical gold: How would you react if the price of bullion were to spike to $5000 an ounce by November? Would you sell some, or all, of your ingots and coins?  And if you did not, would you fall into despair a few days later if bullion were to come plummeting back down to $100?  As farfetched as this scenario might sound, we are warning subscribers to take urgent steps to prepare for it, and other potentially extraordinary events as well, since the unprecedented financial turmoil that we have witnessed in recent weeks suggests that no scenario, no matter how extreme, can be ruled out.

Indeed, the coming economic collapse may not be the slow, black-hole implosion that we have long imagined, but more like a tsunami. As such, it could make the 1920s German hyperinflation, which took nearly two years to play out, seem almost leisurely in comparison. Back then, the financial world wasn’t wired like the ganglions of a central nervous system. It is now, though, and that is why the banking system, along with the global economy, could conceivably short out instantaneously in a shower of sparks.

Reichsmark Inflation

In the days and weeks ahead, Rick‘s Picks will take up this possibility in greater detail, with specific advice concerning how to hedge certain risks that could challenge investors’ imaginations. You can receive this commentary free by e-mail each day as part of a new service we are inaugurating. It is for paying subscribers as well as non-subscribers who read our commentary at Rick’s Picks and at other web sites on an irregular basis. Everyone who signs up will receive the daily commentary via e-mail the instant it is published.  

Wiped Out

So, what of this idea that the financial system could collapse so swiftly that even those who have been preparing for it would not have time to react appropriately? Realize that many stocks have experienced bear markets in mere days, collapsing 50% to 90% before investors knew what hit them. Some of the largest financial institutions in the world have gone belly-up just hours after “problems” surfaced in the news. Even a whole country, Iceland, has gone from being a picture of financial normalcy to bankruptcy in less than a week. It happened in Argentina as well. Could the dollar collapse with equal swiftness, laying waste to the U.S. economy in a  matter of days? You better believe it could.  After all, the dollar is already fundamentally worthless, backed by nothing more than IOUs that have swelled far beyond our ability to repay them.

You say the dollar has been soaring recently? Well, yes, it has. But that doesn’t mean it is worth anything. In fact, the dollar is valueless, and the $1 bills in your wallet are worth no more intrinscially than the $100 bills. Those who do not understand why this is so or who would argue otherwise are simply ignorant or delusional. As we explained here a couple of weeks ago, the dollar is rallying because it is caught in a short squeeze. Short-term borrowers, unable to keep rolling their loans, have been forced to settle up in cash. This has created a made scramble for cash dollars, as opposed to credit dollars. And although the Fed has attempted to keep the system liquid with unprecedented infusions of new cash, the amounts pale in comparison to a global financial deflation that has already caused tens of trillions of dollars worth of financial and real estate assets to vanish from the economy.

Deflation With a Surprise

For more than a decade, we have argued here that a ruinous deflation was the only possible outcome when the credit system finally collapsed. Although we still think that’s where we’re headed ultimately, we now see the possibility of a hyperinflationary spike along the way that would wipe out savers but also challenge the assumptions and investment strategies of gold bugs who have been preparing for the worst.  What would you do with your ingots, krugerrands, Maple Leafs and Pandas if the price of an ounce of gold were to soar in mere days into the thousands of dollars?  Would you continue to hold them?  We think this is a very risky strategy, since the world in which you will emerge from your bullion-lined safe haven will be too broke to pay a king’s ransom for a nugget, an ingot or a coin.

We have never viewed a deflationary collapse as a money-making opportunity, arguing instead that even the financial geniuses would be challenged to hold onto a small fraction of their peak net worth. We still believe this to be true. But that doesn’t mean there are not ways to allocate your portfolio so as to hedge against the risks of various, extreme outcomes. It may turn out that the key variable is not the assets themselves, but time. Many gold bugs who for years have been preparing for a collapse could be caught off guard by a hyperinflation that comes and goes like a tsunami. 


Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company.

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All Contents © 2008, Rick Ackerman. All Rights Reserved.