Upside-Downside Potentials

August 23, 2001

Whenever one makes an investment, it is smart to look at the upside and downside possibilities. To explain, look at the NASDAQ at 5,000. A quick look at the stocks that drove it to 5,000, indicated their potential was pretty meager, if the P/E (price earnings) ratios were checked. Many had zero ratios, and many more had ratios in the hundreds. Historically, a P/E ratio of under ten, would have indicated a fair buy, and would show a nice return on an investment. The upside potential of the NASDAQ at 5,000 wasn't too great. It did go up for another 500 or so points before it topped, and the Larry Kudlows and other 'expert' forecasters were saying there was no limit to upwards price climbs. We were reaching for Nirvana! Oh Sure!

In reality though, the stocks were showing tiny or no profits, and the grand upwards panic march was being fueled by the CNBC gang, Owens Mills, Md., and thousands of stock brokers and financial planners who were making big bucks in commissions. The day traders had quit their jobs, and were just coining dollars…they thought. Turns out that most were losing their shirts. I personally had a shaggy guy from Telluride trying to buy a 1951 Ford from me, who claimed to be a day trader. He really was, I suspect, because he knew all the lingo, and quoted a few prices of trades he had made. Turns out he didn't know how to shift gears, but learned to drive on an automatic transmission, so I wouldn't sell it to him after a turn around the block almost ruined the transmission. He was a day trader-trust fund kid from the home of the trust funders, Telluride, and he never learned to drive a standard shift car. I am sure he blew a wad of the old man's largess with day trading.

Turn the clock back 300 years, and look at the upsides of the tulip craze. The higher and more ridiculous prices went, the smaller the upside possibility and the larger the downside. You can buy tulip bulbs for a dollar so at any garden shop, but during the tulip craze, people hocked their property, and became day traders for silly tulip bulbs. What was the upside, when the tulip mania was in full bloom? (excuse the pun) The upside became smaller and smaller, until it popped. All the while, as the upside shrank, the downside grew. The same was true with the NASDAQ. The higher it got, the smaller was the upside potential, and larger the downside. Readers and investigators knew it had no profits, and little upside potential. The problem was when to get off? No one knew. Smart people got off when the upside risk proved to be so great, that further gambling might cost one the entire bowl of goodies, and it was becoming more difficult to get a decent night's sleep. The NASDAQ at 5000 may have been a good time to get out, even though it wasn't the peak, and millions wish they had bailed out at that point! Thousands also wished they had never seen a tulip bulb, 300 years ago. Hind sight is always 20-20, but foresight can be pretty good if you can think and are logical.

What is happening now in the stock market, is almost a carbon copy of 1929-1932. The stock market's actions can be traced today as if it were 1929. Remember, the absolute bottom wasn't reached until 2 years after the initial crash, and by then the depression had really gotten into overdrive. In 1929, radio was but 4 years old, and hadn't spread throughout the width and breadth of America, so the stock market mavens couldn't broadcast their assurances to the unwary and unread. Today, we have the benefit of CNBC and other assorted harems of howlers, telling the great unwashed that we are on the "verge of recession." My, oh my! To say that we are on the "verge of recession," is like telling a man who has jumped off of a bridge, and is halfway to the bottom, to "be careful, or you may fall." Well over a million jobless, several trillion dollars lost, and gloom by the buckets full. If we are on the verge of recession O.K., and termites don't live in Phoenix.

The upside of the NASDAQ 5,000 was minimal, and the downside was horrific. The horrific came true. If one had bailed at 5,000, rather than being stuck at 2,000, there would have been a nice profit. Of course the majority are NEVER right, so they kept buying till Armageddon came, and the downside came true.

Look at precious metals, now that we have dissected the past. I won't rehearse with you the facts of manipulation, as we have been through that already, both here and at other places, and a phonograph record eventually gets scratchy, even if it is Beethoven's 9th. The GATA suit is progressing, and we all will look with keen eyes to the result and the eventual collapse of the manipulators. No market can be manipulated forever.

The upside potential of gold and silver is magnificent, just as was the downside of platinum a month ago, as I warned. The Ruskies withheld their platinum, driving it to well over $600, and now it is back to where it belongs, at about $450. Gold is right about its cost to produce in some places, and well below the cost of production in many others, resulting in mine closures, thereby diminishing future supplies. Some mines, once closed, can never re-open again, because they fill with water almost instantly, and it would never be economically possible to reclaim them. In America, probably 85% of mines which still assay ample veins of gold, are gone forever, thanks to the EPA, and tree huggers. Gold at $280, is so close to cost of production, that the differential is microscopic. Silver is so far below cost of production, as to be ridiculous. One wag, who writes somewhere else, says he knows where he can get silver mined for $3.50, but he doesn't say where. I know where you can get gasoline for 35 cents a gallon. Just don't ask me where. Uncle Sam has none left, and to make his beautiful Silver Eagles, he buys the blanks and stamps them, 'cause he has none left. The price of silver is so low, that one major player has already bit the dust.

The upside of silver and gold at current prices, are probably larger than the downside of the NASDAQ at 5,000 was. Just as the NASDAQ didn't peak at 5,000, gold and silver (gold especially) may go down and wallow around here before it goes up. I don't know. No one knows what will happen tomorrow, and if anyone says they do, they lie. Don't ask me if gold will go up tomorrow, or if silver will go to $5 next month, because I don't know. I didn't know WHEN platinum would plunge, because I didn't know when the Ruskies would need some cash. I just knew that eventually, it would happen. I know that EVENTUALLY, gold and silver will go way, way up in all currencies, not just dollars. That I will stake my life on, but not the date or time.

You with those CD's, savings accounts, and cash stuffed in your mattresses, beware. Hoarding and saving bucks may have been cute with no inflation, but the huge amount of pieces of paper with ink on them that are turned out by the million each day at good old GPO (government printing office) makes butter now at about $3 a pound, and new homes cost over $100 per square foot. Inflation makes prices go higher in the currency one deals with. Get out of dollars! They are a lost cause. I have a real confederate hundred dollar bill that is worth more than $100 in current dollars. Antiques do well in inflationary times, as do gold and silver. Gold and silver are fungible, and antiques are not. Gold and silver can be carried and stored easily, and an 800 pound antique buffet can't. When we were kids, the saying was, "Save your confederate dollars boys, the South will rise again." I hope the South does rise again, because the cause was not slavery, but states rights and the right to govern ones self. But the South's money has risen, just like other antiques, and gold and silver will also.

And for you cynics out there, remember that gold, in the last few months, has gone up 8%. In 25 years, gold has gone up almost 700%. Did your savings account or CD do that for you? Protect yourself, because no one else will. You are responsible for your own future. The bank, Greenspan, Bush, or your mother is not responsible for your future. You are responsible for the well being of yourself and your family. Think about what the dollar has done for you. Remember that the $600 cars 40 years ago, now cost $25,000, if you are lucky. The house your Dad and Mom bought for $10,000 is now worth $150,000 or more, and it is the same house, somewhat the worse for wear. Nickel Cokes are now fifteen times that, or twenty or more in vending machines. Doesn't speak too well for the dollar does it?

(As I finish writing this, Greenspan lowered the rate by a quarter point, and immediately the stock market fell out of bed. Looks pretty grim to me fellow speculators. Better get out of dollars!)

A one-ounce gold nugget is rarer than a five-carat diamond.

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