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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.
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. Click here to
take advantage of this offer as the new weeks begins.
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.
We’ll be discussing this and other possibilities in the days ahead, and
would urge you to sign up for
our new service if you want to keep abreast of events in real time.
Rick Ackerman
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by Rick Ackerman
Rick Ackerman is
the editor of Rick’s Picks, a daily trading newsletter and intraday
advisory packed with detailed strategies, fresh ideas and plain old horse
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