Questions and Answers

Vol. 2

November 3, 2001

During the course of any given week we receive a good number of questions related to gold, the stock market and economic affairs. Some of these questions are universal and therefore merit broader dissemination than a mere individual correspondence. Therefore, in the interest of answering some of the excellent questions the following questions and answers have been collected in the following article for the benefit and enjoyment of GOLD-EAGLE readers.

Question: Is not there massive Fed pump priming and Federal Pump Priming leading to massive Federal deficits, with more to come next year, coupled with an inflationary war spending spree leading to inevitable hyperinflation rather than massive deflation and depression?

Answer: Will Fed pump priming lead to hyper-inflation? In our opinion, it is doubtful in the highest. Remember, inflation is defined as the excess of the available supply of money over and above underlying demand. Just because the rate of money creation, and for that matter, the rate of change of money creation is increasing at an exponential rate does not necessarily translate to inflation. As long as there is a vociferous demand for that money, it's not inflation. Is there a tremendous demand for money in the financial markets/economy today? I think we both know the answer to that is a resounding YES!!! As long as Wall Street clamors for cash in a futile effort to fill the deflationary vortex it helped create, the Fed will do its best to accommodate. But not even the mighty Fed will succeed in filling this vast cavity. This is why we say inflation is all but impossible in the current economic environment, especially considering where we are in the K-wave cycle.

Question: I have been bothered by the rising real estate valuations and, especially, while the stock market has been showing signs of imminent collapse. Where else can I read about the real estate situation?

Answer: Unfortunately, there have been precious few published appraisals of the growing possibility of a real estate collapse in the U.S. One that comes to mind is an excellent chapter on the U.S. real estate bubble in the 1995 book, "At the Crest of the Tidal Wave" by Robert Prechter. Another, although somewhat outdated work, is "Crisis Investing for the Rest of the '90s" by Douglas Casey. Certain chapters of this book show in graphic detail the real estate cycle and absolute proof that the years ahead will be exceedingly bad ones for real estate.

Question: I am not an economist, but have studied economic history extensively. It appears to me that depressions are caused by bank failures. And, in the US the banks are now guaranteed. I personally do not see how we can have a depression without bank failures. My first question is do you agree with that statement? Assuming you agree with me, my real question is, "In your opinion, how will banks fail, or will the dollar just fall so hard it will not matter that your savings are secure?".

Answer: You have observed that depressions in the past have been caused by bank failures, but another question would be, "Is this a symptom or a cause of depression?" True, bank failures were everywhere back in the 1930s, and they undoubtedly helped intensify and prolong the Great Depression. Also true is the fact that millions in savings among the U.S. public were wiped out, rendering many poverty-stricken. But keep this in mind: the U.S. public no longer has savings; in fact, there is a negative savings rate in this country. Whatever wealth the public owns is primarily in real estate, and to a lesser extent stocks. But even counting all this they are mostly in debt and have little true wealth. So whatever impoverishes the public this time around won't have anything to do with bank and S&L collapses, but with something else, namely credit, equity, and real estate collapse. Has this already begun? Yes. Will it continue? Yes. Will banks fail this time around? Some will, some won't. The past 60 years have gone a long way in wiping out the "little" banks and independents-- and these were the ones that mainly failed in the 1930s. What we have now is a giant, global banking conglomerate comprised of a handful of super-banks. It will take a lot for these to ultimately fail. Maybe they will survive, maybe they won't. But even if they do survive we can guarantee you the U.S. will have depression anyway since the primary store of "wealth" in this country isn't tied up with the banks.

As for gold stocks, my best advice to you is to treat them like any other equity -- trade them and don't hold them as long-term investments. There is money to be made periodically in the mining sector both on the long side and the short side. But it's far too risky to be a "buy and hold" investor in any sector nowadays -- and that includes gold stocks.

Question: With the FED apparently willing to create as many dollars as it wishes at the drop of any deflationary hat, how will we experience a widespread deflation like the 1930s? Do you expect the dollar to survive and actually become more valuable in terms of prices in the US for most products and services., i.e., food, housing, cars, etc.?

Answer: Do we think the dollar will survive and actually appreciate in value over the next few years of runaway deflation? Sure. And it should actually do quite well in the initial stages of deflation...that is, until things really get out of hand and the entire debt system implodes. As for Fed money creation, keep in mind that in terms of actual dollars very few of these will actually reach the hands of those who really need them, namely, the general public. The Fed can turn up its spigots as much as they want, but it will only serve to liquefy the downside for the sellers. Also, much of this money is "emergency" money used to try to salvage disastrous situations on the part of financial institutions, corporations, etc., many of whom are in deep trouble. As long as there is a giant hole to fill (a deflationary vortex in the financial/economic system) it can't be called inflation until the hole actually gets filled - and then over-filled. We aren't anywhere near that happening yet.

Question: If your scenario for a massive collapse in U.S. real estate comes to fruition, will it spread globally? I am living down here in Australia and am wondering if Australian housing prices will be immune to any such decline.

Answer: We should think that global real estate prices will unilaterally be affected by runaway deflation in the months and years ahead, so yes, we would imagine that Australian real estate prices will collapse as well.

Question: In your most recent article that evolved around "Answers and Questions," you answered a question from a reader that raised another question in my mind, namely: How would you sell your gold or silver if it sky-rocketed in price as it did during the 80's, and in this case some were not able to liquidate?

Answer: Those that were not able to liquidate and realize a profit from their physical gold and silver holdings during the precious metals run-up of the '70s/'80s were, in most cases, speculators who held on too long looking for that proverbial "last tenth" (which incidentally never comes!) True, there may have been some isolated cases of those living out in the "middle of nowhere" where coin shops or bullion exchanges were few and far between. There may have been some disreputable dealers who took advantage of this virtual market monopoly - not to mention the general ignorance and lack of sophistication of some of their customers - in the way of buying gold and silver at prices lower than what the general market was dictating at that time. But as long as there is a liquid market for metals, and the demand is "hot," this should not be a problem, and in our experience the dealers we have encountered always pay the going market rate -- to do anything less would undermine their trade and credibility. There are so many dealers/brokers in this country that can be easily accessed via telephone or Internet that finding a ready market to cash-out one's metal holdings should never be a problem in this day and age. As for demand, never has there been nor will there ever be a greater demand for precious metals than in the months and years to come, so finding a liquid market should not be a problem in these times.

Question: Once the bull market in precious metals gets underway, can silver be expected to follow gold or the other way around?

Answer: There is no such thing as a fixed correlation among the precious metals (or any other commodity for that matter) as to which one "leads" or "follows". The phenomenon of one asset leading another in price and trend is purely a function of market cycles, which more or less overlap and sometimes lead or lag others of a similar asset class. Sometimes silver leads gold and sometimes the opposite is the case. It all depends on how the cycles are configured for the respective metals at any given time.

Question: Do you think we'll see a plunge in gold like the Elliott Wave guys predict before the bull takes off?"

Answer: There's an old saying in financial circles that goes something like "nothing is heavier than gold when it drags you down." This will almost surely be the case for any investment counselor or newsletter writer who has publicly predicted a major decline in the price of gold in the near future.We would direct your attention to the chart: look and see for yourself if gold hasn't established a solid base of support above $250/oz. Having done this, do you honestly believe a plunge below this level is even a remote possibility? Those who stubbornly and foolishly cling to the bearish gold opinions of yesteryear will be mauled by the gold bull when he begins charging.

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including “2014: America’s Date With Destiny.” You can view all of Clif's books here. For more information visit www.clifdroke.com.

The California Gold Rush began on January 24, 1848 when gold was found by James W. Marshall at Sutter's Mill in Coloma.

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