I Told You!

November 16, 2002

This'll be a pity party probably, because of the intense grief out there in gold futures land. I haven't seen gold take a dump of $6 within a couple of hours in many years. Horrible for those of you out there who have invested savings in the gold futures market. The long term prospects for gold and silver are absolutely amazing, and will not be denied. There will be the usual backtracking, re-tracing etc, but this time, all of it can't be blamed on the cabal or manipulators. Some of it, but not all. What happened on Wednesday, was that Sir Greenspan appeared before the Congress and uttered more fairy tales about how everything is coming up roses, and almost at the same time, Saddam decided he'd rather allow in the inspectors than turn his land into a holocaust. Both of these put together, sent gold down $6, almost as fast as I could change my web site!

True, gold will go back up, and since Dubya has three battleships in place, and heaven only knows how many hundred thousand troops on the ready, he'll undoubtedly go into Iraq for a couple of weeks, deserved or not. This will bring gold up even higher I suppose, and silver too, but the poor futures holders are the ones I really feel for. Margin calls galore, and they have nothing to do with metals prices a year from now, or even next week. When the prices go down, the margins must be paid NOW! In other words, those of you who bought futures contracts to be well leveraged, have paid through the nose to stay alive in your bets. Many of you just sold off and paid the difference, and others may have sold physical to meet the calls. None of my clients did, that I know of, but I'll bet many did.

All the while, myself as well as thousands of you sat pat, realizing that our holdings are paid for, and the $6 drop in gold merely meant a huge buying opportunity, with no margin calls. Sure, my safe went down in value a bit, but so what? It's PAID FOR, and NOT LEVERAGED. Maybe I am getting too old to gamble on futures, but I took a real bath on them a few years ago, and I'll just never do that again. Las Vegas is far more fun. It seems as though the whole world runs on leverage. After all, in 1950, there was a total of $150 billion in dollars in circulation, and now there are $8.3 trillion, and growing very fast. All created out of nothing. That's leverage.

Sir Alan, in a speech in Europe said, "The federal reserve is ready to create money without limit." He said it five times in one speech. He must mean it. The head of the IMF said in July, that the chance of the entire world's economic system melting down, is one in five. There are hundreds of millions of ounces of gold and silver traded every day on the futures markets. This gold and silver does not exist. You futures gamblers are gambling on non existent stuff. At Las Vegas, the dollars might be worthless because they are backed by nothing, but the physical dollars are there anyway. Your silver and gold do not exist. A dollar slot will not work unless a physical dollar is inserted. Your futures gambling, is pure paper gold and silver. The gold and silver futures are as unbacked as are the dollars you play them with, or are forced to come up with; as in margin calls.

Sir Alan says the fed is the lender of last resort. I'm so happy about that. It gives me a warm, full feeling. I'll bet you wish you could lend, while not having any money. I'll bet you'd like to write a check for a new Mercedes, and not have a cent in the bank. The fed can do it. As "lender of last resort," the fed does it with electronic transfers and "money" created out of thin air. Of the huge increase in the currency supply, from 1950 till now, $600 billion was created by the fed, and the rest by the banks. The local banker can loan you money, by simply placing that amount in your account. It doesn't have to have that much on deposit. Of course not! This is what is known as "fractional reserve banking," and has made bankers rich as the Gurneys. Recently, if you read the NY Times, the story is told of four bankers who had a $62,000 lunch. Four $15,000 bottles of wine, plus wonderful cuisine. Where did they get the money? Simple! They pay themselves huge salaries, and I am certain the lunches were deductible. All this means is that Joe Sixpack is transferring his hard work to the banking industry…who loans it back to him with interest…while it only has about 10% of that amount on deposit. They have a million on deposit, and they can loan $10 million effortlessly…by merely writing figures on a ledger sheet or entering the figures into their computer.

Ain't it grand? The futures outfits trade gold and silver and haven't got any, and the bankers loan without sufficient deposits. And then there is the FDIC, which has maybe a nickel on deposit for every $100 worth of insurance. According to their bylaws, they can pay out a mere 5% a year for claims. So, if a bank goes down, and a hundred others do the same, and exhaust the FDIC's resources, technically, they can pay out only 5% a year for depositors' losses. Of course Sir Alan has said that the fed, "will create money without limit," if push comes to shove. It will.

Money is supposed to be valuable, isn't it? If you trade your week's work for groceries, gasoline, and a few beers, isn't that trading like for like? Your effort and labor for tangible goods, is a nice trade, isn't it? You get paid in dollars, and use the dollars to buy things. Shouldn't the vehicle used in trade, have value, in case you wished to save a few each week? Dollars used to have value. They were backed by gold, and the coinage was silver. Gold and silver require capital, exploration, labor, transportation, machinery, and risk to produce. Paper money requires only pushing a button on a press.

We know that gold and silver are real money. We know that at some point in the future, all paper monies become worthless. They always have, and always will. Examples are not hard to find.

On PBS the other night was a story about volcanoes, and the extreme difficulty in predicting when they will erupt. Earthquakes are the same. They will erupt, and smoke and rumblings make it certain, but when? When do we evacuate homes and cities to save ourselves, if we are near a smoking volcano? When will the next earthquake hit? Should we move to an area where there are no earthquakes? Or should we stay near the faults because of wonderful weather, and take a chance? Isn't futures gambling doing the same thing? We see the smoke from the volcano, and know it will spew death and destruction eventually. Buy futures on gold and silver to leverage yourself, hoping you can get way ahead and buy a lot of physical with your profits. I know the story. The dangers of that are two. (1) It may come down quickly, before you have time to act, and (2) you may get wiped out with margin calls before you have a chance to get any profit. If you have plenty of dollars to back up a $6 drop of gold in two hours, enjoy the ride. I think the plunges and rocket climbs may escalate in intensity and duration as time passes, but only time will tell.

Doesn't it make more sense, to hold the beautiful gold and silver? Every week I get calls from new clients who have received their first shipment. They are amazed at how beautiful it is. The security of holding, looking at, touching, and knowing it is there, beats the hell out of the continual insecurity of futures. The fact is that over 90% of futures buyers do not make money. I pooh poohed that figure when I began in the early 90's. First year I made $4,000 profit. Second year I lost a bit. Third year, I figured silver would never go below $5.11, and paid the margin calls, and moved the contracts forward, till I had lost $20,000, and I vowed I'd never do that again. I think it is rare in the industry, but if you bought it from me and paid me a 1.5% commission, which includes shipping, when you sell, I don't charge anything. Know what a round trip in a futures contract is? About $50, as I remember. It's so easy to get wiped out when you gamble. I thought I had it figured out with the dollar slots in Las Vegas. Put a hundred dollar bill in, and it seems that you can always get out ahead. Take the profits and walk away was my theory. It worked a few times, but the last time it didn't. I lost the hundred. I may do it again, but a hundred bucks is far less than the bath one takes on a gold contract, when it goes down $6 in two hours. As the title of this says, ""I Told You." Protect yourself!

The Federal Reserve Bank of New York holds the world's largest accumulation of monetary gold.

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