For the stock market to rebound, the economy has to rebound.  Seventy percent of GDP is consumer spending.  It is easier for consumers to spend when they have a job.  And if they do, they also want to feel secure that they will have a job next week and next month.  Week after week after week the economy is shedding at least 600,000 jobs.  I bet a large majority of them are high-paying, middle class jobs too.  Real unemployment (check out John Williams and his eye-opening newsletter, Shadowfacts) according to John Williams is running at 19%.  If I had to make an educated guess I would look for 30% unemployment before things settle down. 

I can’t speak for you, but I certainly do not expect to see things turn around any time soon – not enough new high- paying jobs in the offing and a psychology of fear permeating the minds of almost everyone.  Retail, the industry, is in shambles.  Stores and restaurants are closing down in every city.  It’s even affected the untouchable, the Targets and Best Buys and Costcos of the world.  Today I received a call from the salesman who sold my wife her Lexus.  The car salesmen are out soliciting business because no one is visiting the showroom.  Nieman Marcus sends us discount coupons – this has never happened before.  You see, the faucet has shut down on both ends of the scale.  The poor, unemployed and frightened are not buying anything that they don’t NEED.  The rich are cutting also cutting back because most of the rich are LESS rich now than they were a year ago.  This is one nasssssty bear market.  It takes no prisoners. 

Almost all the bright-experienced money managers and financial advisors helped their clients lose a lot of money last year.  It will be worse this year.  The old strategies and rules don’t work anymore.  Do you doubt me?  Is there a more successful investor than Warren Buffet?  Hell, old foxy Warren sold his silver (estimated at 130 million ounces) around $6.00 an ounce, less than half of current price.  He held it for six or seven years and broke even on the sale.  His timing in silver was horrible.  Berkshire Hathaway has lost around half its value in the past year.  Friends, if Warren Buffet is having trouble playing by the old rules, what chance do you have following the advice of your financial advisors who are also playing by the old rules?  Buy the dips.  Diversify.  Hold for the long term. This is great advice in bull markets (which usually last for decades).  But we are no longer in a bull market.  If you are currently buying the dips, you are buying way too soon for way too much.  What good did diversification do you?  All sectors, all markets, everything took a huge hit.  My God, when you can lose most of your money on the biggest US corporations like GM, GE, AIG, Wells Fargo, JPMorgan, Bank of America and all the rest, where can you go for safety?  Safety!  Now that’s a word we should discuss too.

Who emerged from the last 12-month debacle in good shape?  Only two asset classes escaped the carnage.  Gold and cash (or bonds).  So what are the masses (with money to invest) doing now?  They are in cash or Government Bonds or Munis.  Witness the next great bubble to burst!  The bond market will hold up only as long as foreigners feed our insatiable appetite for their investment dollars.  The current administration will need to borrow a couple of trillion in the next year, if not more.  Are you willing to bet your hard earned money (what is left of it) that interest rates will remain low and the dollar strong in the vortex of all of the funding requirements?  Not me.  Bond holders will be badly beaten up when interest rates rise, as they must. 

They got or will get just about everyone.  Stocks, real estate and then bonds.  This bear is a beast!  But he doesn’t faze gold.  Gold is in a long-term bull market, one that started quietly in 2002.  Check out this chart and then compare it to stocks or real estate.

Adjusted for inflation, gold will have to top $2,200 to equal the previous bull market high, reached in January 1980.  I expect to see gold at that price or higher in the next two years.  That won’t be the top.  Jim Sinclair, perhaps the most insightful of anyone in the gold industry is now pointing to an initial top of $3,500 followed by a fall back to $2,500 followed by the big move up to $10,000.  He got it right in 1980 and I have confidence that he will be right this time too.

It’s confusing if you look at just the Dow or just the price of gold.  The way to view these two asset classes is to compare their performance to each other.  Let’s see what happened since 2001, when the bear market in stocks commenced and the bull market in gold was re-ignited.  In 2001 the Dow topped out at 10,021.  Gold bottomed out that year at 253.  It took 39.6 ounces of gold to “buy the Dow”.  Today, after a long overdue bounce off of an “oversold” condition, the Dow is 6850.  Gold is holding around 900.  Today it takes 7.6 ounces of gold to “buy” the Dow.   Now I ask you, which portfolio did better in the past 8 years – the stock portfolio or the gold portfolio?  Gold outperformed stocks by a whopping 520% in this decade.  And – the stock market is in super bear mode and gold is in a once in a generation bull mode.  Where will the ratio end up?  Richard Russell says probably one to one.  Think of gold at $3,000 and the Dow at 3000.  Does that sound improbable to you?  It shouldn’t.  In 1980 the Dow was 850 and gold was $850, a one to one ratio.  History does have a way of repeating itself.

The Dow Jones Industrial Average

December 31 1974 - February 27, 2009

Significant Levels On The Dow
December 6, 1974	577	The last Bear Market bottom
July 12, 1976	1011	Highest point between Jan '73 and Oct. '82
August 12, 1982	776	The start of the "Reagan Bull"
August 25, 1987	2722	The 1987 high
October 19, 1987	1738	The (508 point) crash of 1987
February 2, 1994	3975	The top of the post 1987 crash recovery
November 23, 1994	3674	The start of the Clinton "super bull"
March 29, 1999	10006	The first Dow close above 10000
January 14, 2000	11723	The "Clinton bull" high

Getting back to the person who said “I can’t sell my stocks now, I’ve lost too much and I have to wait for the market to come back.”  To that I say – “I hope you plan to live for a very long time.”  Look, just for fun let’s say that you own $100,000 worth of high-quality stocks now.  Let’s say I own $100,000 worth of Gold Eagles.  Let’s follow my predictions of the Dow losing half.  The stocks are now worth $50,000.  Let’s follow my prediction that gold at least doubles in the next two years (the stock market should have bottomed by then).  The gold is worth $200,000.  You sell your stocks to buy gold.  You will only be able to buy ¼ the ounces of gold that you could buy today with the proceeds from your stocks.  Not only that, but you would have made back ALL the losses on your stocks that cut their value from $200,000 down to $100,000 or the starting point of this discussion. 

It’s not hard to understand all of this, in fact I am making it very basic and easy to grasp.  If I sound certain in my views it’s because I am certain.  Being certain is not the same thing as “guaranteeing” you that my views will play out like I write.  You have to base your financial decisions on your feelings, not someone else’s. 

A friend of mine, a very successful money manager who actually does believe strongly in gold, sent me an email today.  It said, “There is an old saying that we should keep in the back of our thought process...it goes as follows:...when you have a hammer, everything looks like a nail...the people you refer to for substance seem to be one dimensional...maybe I am incorrect, but if not, one dimension can be unproductive.”  We had a long discussion yesterday on the merits of owning stocks and gold and he sees things in a more traditional way.  He still owns a lot of gold and so do his clients, but he sees opportunity in the stock market NOW and wonders if gold is really in a long-term bull market.   I told him that “If I am one dimensional that doesn’t mean I’m wrong.”  It’s never easy – we all have to make tough choices and live with them.  Frankly, I hope I’m wrong.  The world I am preparing for is not a nice place, certainly not as nice and cozy as the one that I have known as an adult.  They are burning Porsche’s and Mercedes on the streets in Berlin now.  Those of us who survive this mess will find a lot of the anger and envy directed at US just because we did survive.  It won’t be civil like the 1930s!  In fact, it won’t be like the 1930s.  That period was a deflationary depression.  This beast is a hyperinflationary predator.  Hyperinflation spares no one – no one who has their assets in dollars.  Whether it be 1922 Weimar Germany or 1990 Argentina, only those who switched out of paper currency into gold, silver or diamonds were able to keep their wealth intact.  Governments that resort to the printing press to keep the economy from falling into a depression destroy their own currencies in the process. 

A friend of mine, Ken Coleman, who wrote The Fed Tracker in the 1980s and 1990s used to tell me “Don’t fight the Fed.”  I’m not.  The Fed is making me rich.  The Fed is the reason that gold and silver are going off the charts UP.  The Fed is not set up to fight inflation.  The Fed creates inflation.  That’s why a dollar today is only worth 3 cents of its 1913 value.  And the Fed (Ben Bernanke) tells us that they will do anything and everything in their power to turn the economy around.  That means they will inflate like never before.  Hear what they are saying.  They are singing the song of inflation.  They mean what they say.  Don’t fight the Fed.  In periods of inflation, you better have a lot of gold. 

Jim Sinclair says the dollar will fall to 71, then 61 and eventually to around 40.  The dollar is currently around (USDX) 89.  Does this confuse you?  Think of it like this – your $89,000 in the bank is now worth $40,000.  That’s what will happen to bond holders and people who fled, for safety, to cash.  Don’t be led into a third Fed-induced bubble.  They got you in 2001 in the stock market, a bubble created by Alan Greenspan.  They got you again in real estate in a bubble created by Alan Greenspan.  What a legacy old Greenspan left behind.  The worst of all the Fed heads.  Bernanke is pumping up a monster of a bubble, the biggest of them all in fact, in the bond market.  Fool me once, shame on you.  Fool me twice, shame on me.  Fool me three times and I’m toast – finished.  Don’t be dumb about this.

Is there a sense of urgency to buy gold now?

Yes, actually there is.  If you wait, there are two things working against you.  First, the price will continue to rise this year, topping out anywhere from $1,100 to $1,250, my best estimate.  On top of that, the premium, the cost from the wholesaler to the dealer, (us) is rising.  The premium could easily jump to $100 an ounce or higher on gold bullion at the wholesale level.  That on top of the rise in the price of gold.  The cold hard facts are that on a global basis there are more buyers moving into gold than the mints can supply with product.  Last year we ran out of coins and bars to sell by mid-fall.  This year I expect the same thing to happen but earlier, by late spring or summer.  Then you will have to wait weeks to get your metal and pay a lot more for it.

If a dealer sells a lot of product, he can mark it up a small amount.  If the dealer can only get a small amount of product, he must mark it up much higher.  The tighter the market gets the higher the premiums go.  It’s a fact of life. 

Yesterday, I read an excellent article on this very subject on the LeMetropole Café by Michael Kosares.  Here are excerpts from his article:

Gold coin shortage likely to become chronic

By Michael J. Kosares
Author, the ABCs of Gold Investing: How to Build and Protect Your Wealth with Gold

Is the U.S. Mint's production problem long-term or short-term?

What will be the effect on gold coin prices?

In 1999, at the height of the Y2K crisis and under the strain of record gold demand, the U.S. Mint produced 2,055,000 1-ounce gold American eagles.

In 2008, with the world embroiled in an unprecedented economic crisis and once again under the strain of record gold demand, the U.S. Mint produced only 710,000 1-ounce American eagles and 189,500 1-ounce American gold buffaloes -- just under half its 1999 production.

The Mint's ability to keep up with demand in the ramp-up to Y2K played a key role in suppressing premiums on bullion gold coins. The Mint's inability to keep up with demand in 2008 drove premiums to the double digits at one point and helped add 2 percent to the baseline cost of gold coin acquisitions in 2009.

When the American eagle shortages first cropped up in August 2008, the Mint blamed the problem on its vendors, saying they were "not able to supply enough 1-ounce gold bullion blanks to meet the unprecedented demand we are experiencing." The Mint promptly thereafter suspended all sales of the popular 1-ounce coins.

To understand the full implications of the Mint's production problems, two important pieces of information need to be taken into consideration.

First, all the 1-ounce gold blanks purchased by the Mint now come from one refiner in the western United States.

Second, with global refiners already running at capacity, Mint officials' attempts to line up additional blank manufacturers are likely to be rebuffed.

The prognosis under the circumstance is not a good one: The problem appears chronic and unlikely to resolve itself any time soon.

Unlike the Y2K event, which resolved itself as soon as New Year's Day 2000 came and went, the current strong demand is the result of a secular gold bull market deepened by the worldwide economic crisis. As such this is a whole new ball game for the gold market. Typically, in past bull markets the principal market driver was supply and demand for the metal itself. In the current bull market, it looks like there will be an additional driver to the price paid by those acquiring gold -- the premiums added to the price because of the combination of burgeoning demand and the diminishing supply of gold coins.

The role played by gold premiums -- the add-on paid over the melt value of a gold coin -- is little understood and frequently overlooked by gold investors. Usually, premiums remain relatively constant and cover the costs of minting and marketing the coins. When coin supply and demand get out of kilter, rising premiums are the mechanism that restores balance.

The bad news is that rising premiums can add significantly to acquisition costs for gold consumers. The good news is that rising premiums can add to the profits for those who already own gold coins and for those who were farsighted enough to buy early in the process.

A historical precedent can be found in the gold market of the late 1960s. At that time gold was pegged at $35. As the dollar crisis of the late 1960s and early 1970s unfolded, investors globally began moving into gold coins like the U.S. $20 gold piece, the British sovereign, the German 20 mark, Swiss 20 franc, et al. Though the gold price itself was fixed, premiums on gold coins were not. The demand drove premiums on these coins to unimaginable levels -- in some case four to five times melt value.

We got a whiff of that sort of thing when contemporary gold coins briefly reached premiums of 12 to 15 percent at the height of the gold rush in 2008. (Pre-1933 gold coins went to premiums in excess of 20 percent.) Once the market settled down, though, a base premium 2 percentage points above normal remained.

If the mints are indeed boxed in by the blanks problem, and it appears they are, there will be no easy way to keep those base premiums in check over the long run. It appears that the bullion gold coin shortage has become a chronic problem and something gold owners and accumulators will need to keep an eye on in the months to come.

I have read that it is impossible to find any British Sovereigns in England.  And they were minted by the hundreds of millions.   Whether in France or Switzerland or Vietnam, finding gold on dealers’ shelves is nearly impossible.  The demand is fierce and not just domestic – it’s global.  People all over the planet are scared and markets are tumbling everywhere.  People will go to gold during unsettling times and during times of inflation.  Both are at the doorstep now. 

How much gold is enough?

Here is the way I look at it.  I assume that gold will quickly reach the $2,000 per ounce level and at least hold that value in purchasing power no matter how bad inflation gets.  This is a conservative number at that.  How old are you?  How long do you expect to live?  If you are 60 and expect to live to 85, then a good goal to shoot for is enough gold to last you for the next 25 years.  Can you survive on $50,000 a year (today’s dollars) plus your Social Security, which we will call $1,800 a month, or $22.000 a year.  Can you make it on $72,000 a year?  At $50,000 a year you would have to sell about two ounces of gold a month for a period of 300 months.   You would need 600 ounces of gold.  Call that the ultimate insurance policy.  Hopefully, you won’t have to sell any or all of it.  What is left is what you leave to your kids and grandchildren knowing it will not default, not go broke, not lose value.  If you can only come up with enough cash or dollars from a liquidated stock portfolio or an IRA roll over to buy 300 ounces, then that’s what you do.  Your lifetime annuity in gold will now pay you back $2,000 a month for the rest of your life.  That should be the minimum “constant-dollar, inflation-adjusted” value of gold within the next two years.  Remember, this is an insurance policy or annuity that costs you nothing if you don’t use it.  Then you can give all of it to your heirs. 

Let’s not leave silver out of this discussion

Silver is often called “the poor man’s gold.”  That’s accurate.  Silver is currently quite cheap relative to gold.  For centuries it took 16 ounces of silver to buy one ounce of gold.  Recent history finds the ration closer to 40 to one.  Currently, silver is selling at a ratio to gold of over 71 to one.  Silver could easily outperform gold by a ratio of two to one in the future.  At 40 to one, with gold at $2,000 silver would sell for $50 an ounce, its 1980 high.  Every family should have at least one “bag of junk silver per family member.”  What’s a bag of junk silver?  It is $1,000 face value of dimes, quarters, half dollars or any combination thereof of coins minted in 1964 or earlier.  That was when our coinage contained 90% silver by weight.  So, $1,000 worth of pre-1965 silver coins melts down to about 715 ounces of silver and is priced accordingly.  The benefit of owning silver in this form is that in a worst case scenario it can be bartered.  In 1980 a silver dime would fetch a gallon of gasoline in service stations all over the country.  I know, I did it at a station near my house.  If we have a banking holiday a silver dime will be worth the same as a $10 bill.  And one bag has 10,000 dimes in it.  A great insurance policy that God forbid we ever have to use and it, and a cheap way to own silver.  We have bags for sale in the $11,000 range.  Everyone needs this product.

Our good friend David Morgan, who speaks at the financial seminars with Andy Schectman and Miles Franklin expects silver to hit at least $125 an ounce.  David is one of the industry’s three shining lights (along with Jason Hommel and Ted Butler).  I trust David’s numbers totally.  He is a real student of the industry and a true expert if there is such a thing.  That’s around ten times the current price.  What else can we possibly buy with that kind of upside?  Silver is heavy, bulky and not easy to find storage for, but the effort is worth it.  If bags of junk aren’t your cup of tea, go for the mint boxes from the US Mint, Canadian Mint or Austrian Mint.  They contain 500 one ounce coins, packed neatly in plastic tubes and then sealed in a plastic container slightly larger than a shoe box.

Final thoughts

I have presented some unsettling concepts to you, but things are that bad.  Just yesterday I heard that tent cities are springing up in California (aka the Great Depression) and there are food lines in Japan where unemployment is the highest it’s been since the end of WWII.  This is not just another “recession.”  This time we will flush out the excess of the past few decades and it will be painful.  Be warned.  The worst that can happen is that I’m wrong and gold and silver rose marginally and the economy recovered along with the stock market.  Oh well, just a small gain and a no-cost insurance policy that protected me against a catastrophic hyperinflation.   Frankly, I don’t think anyone who really looks at the facts can come up with a reason not to own gold now.  It’s only a matter of how much to own.

Andy Schectman, Miles Franklin 1-800-255-1129

-- Posted Wednesday, 11 March 2009 | Digg This Article