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Buy gold after it crashes

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By Patrick Wood, Editor

Why buy gold (and silver) now when you can wait for the coming crash and buy it for pen­nies on the dollar?

On 09/09/2009 I wrote,

“… the scramble for cash is on. For three years, I have fre­quently said that “cash is king” in a defla­tionary economy. In con­trast, debt is anathema.”

I first sounded this alarm in 2006, stating that defla­tion would destroy wealth faster than infla­tion could ever imagine. Six years later, this has proven to be exactly the case. Most people equate price declines with defla­tion rather than the destruc­tion of credit. Price declines come as a result of shrinking avail­ability of credit and cash, resulting in forced liq­ui­da­tions of assets that can drive prices down.

In other words, the forced liq­ui­da­tion of debt depresses its under­lying assets, regard­less of what those assets are. Bank­rupt­cies, car repos­ses­sions, home fore­clo­sures, defaults and write-downs are the means of debt destruc­tion. When col­lat­eral assets are reclaimed during the liq­ui­da­tion phase, they are sold at public auc­tion to recoup some money.

Most loans made, but not all, have col­lat­eral pledged against the debt. In a normal economy, a few liq­ui­da­tions are easily absorbed by the local market. In a more gen­er­ally defla­tionary economy, liq­ui­da­tions increase and cannot be absorbed without affecting market prices. Making this sce­nario much worse is the fact that the entire global economy is melting down at the same time, meaning that there is no one to stem the freefall.

In the midst of this, investors of all stripes in every part of the world, including banks, are stam­peding out of equi­ties and risky debt instru­ments and into short-term gov­ern­ment secu­ri­ties. The net effect of this is to a) shrink avail­able cash avail­able for eco­nomic devel­op­ment and b) drive interest rates down. The first part of this vir­tu­ally guar­an­tees that the global eco­nomic con­trac­tion will accel­erate, exac­er­bating the defla­tionary spiral. The second part serves to wipe out invest­ment income for hun­dreds of mil­lions of fixed-income depen­dents, like retirees, retire­ment funds, trust funds, etc.

How­ever, there is another more omi­nous impli­ca­tion when banks buy sov­er­eign debt. This is point­edly defla­tionary because the investors are handing cash back to the trea­sury in return for a paper IOU. This has the oppo­site effect of any quan­ti­ta­tive easing pro­gram, shrinking the cash in cir­cu­la­tion faster than the Trea­sury or Cen­tral Bank can dish it out.

National Trea­suries, on the other hand, are severely lim­ited by an aus­terity mind-set and are reluc­tant or politically-constrained from spending the cash to prop up or expand gov­ern­ment programs.

You can prop­erly view this as two freight trains accel­er­ating toward each other on the same track.

The typ­ical gov­ern­ment argu­ment against a train wreck is that eco­nomic growth will bail them out. Um, which eco­nomic growth are they talking about? The entire globe is spi­raling toward depression.

We see what hap­pens to a national gov­ern­ment when global dis­trust shuts them out of cap­ital mar­kets. Both Greece and Spain are in eco­nomic and polit­ical chaos because they are iso­lated and shunned by the global finan­cial com­mu­nity. Both are at risk of com­plete gov­ern­mental melt­down and national bankruptcy.

In my opinion, the global finan­cial system is the Titanic and Greece and Spain are merely the tip of the ice­berg that has been struck. The ship is taking on water, but the crew still believes that the Titanic is unsink­able. Like the Titanic, there is every cer­tainty that today’s global finan­cial system will be resting at the bottom of the ocean before the struggle is over.

My “titanic” fore­cast is that when investors ulti­mately turn in their Trea­suries and demand return of their cash, gov­ern­ments will resort to dumping their gold reserves to raise cash to pay debt holders. This will be the last act of the defla­tionary spiral, causing a major crash in the price of gold.

Eco­nomic and polit­ical times will cer­tainly be extremely dif­fi­cult at that stage but this is where you will want to take all the cash you can get your hands on and sell it back to them for gold! For those who have such cash, it will be poetic jus­tice to buy back the pre­cious asset from those who stole it in the first place.

When will gov­ern­ment Trea­suries and Cen­tral Banks ulti­mately abandon their gold? When investors ulti­mately demand a return of cash. What will happen to gold when the col­lapse is over? It will go up in price, regard­less of the which cur­rency you deal with.

This is one more reason why I con­tinue to say, “Cash is king.”

After­note

Former hedge fund man­ager Raoul Pal is fore­casting the “biggest banking crisis in world his­tory.” I strongly sug­gest that you view the entire slide pre­sen­ta­tion. He con­cludes that the entire global finan­cial system will col­lapse (as early as 6 months from now) and require a “reset” from scratch. Banks will col­lapse and sov­er­eign gov­ern­ments will default, thus com­pletely vapor­izing the frac­tional banking system.

This would also be the end of defla­tion and leave the world in a trade­less state.

During the process of gov­ern­ment defaults, all gov­ern­ment assets will be thrown over­board to cred­i­tors. This includes gold that has been lit­er­ally locked up for decades with no expo­sure to the free market. The short-term poten­tial for gold to be “cheap as dirt” is very high.

Another con­clu­sion is that holding an increasing amount of actual cash may be desirable.

Unfor­tu­nately, any direc­tion we take is fraught with risk, and even if we “make it through” the col­lapse, the eco­nomic land­scape will be charred and smol­dering for years afterward.

[Invi­ta­tion: If you want to follow my eco­nomic and market fore­casts on a weekly basis, I invite you to accept my offer of a FREE 30-day trial to my pre­mium newsletter, Find­ings & Fore­casts, avail­able through this site. Simply click here to sub­scribe.]

10 Responses to “Buy gold after it crashes”

  1. Dale says:

    I see the mech­a­nism of defla­tion a little dif­fer­ently, but ulti­mately with a sim­ilar effect.

    What I believe we will be seeing (fairly soon) is a defla­tionary spiral in Europe as people pull their money from the banks. Cur­rently, this is hap­pening in some of the PIIGS, where ordi­nary cit­i­zens are pulling all of their money from the banks in Euros and stuffing it under mat­tresses or opening for­eign bank accounts. This will accel­erate and exac­er­bate the crisis.

    As the crisis widens to Spain, Italy and France; more and more people will sense the impending demise of the Euro and they will exchange the Euro for Dol­lars. The response of the ECB will be to crank up the presses. This twin attack will cause the destruc­tion of the Euro and will strengthen the Dollar. When this hap­pens, the price of gold (in dol­lars) will plunge. This will be the great buying oppor­tu­nity. It may not be tremen­dously lower prices than we are cur­rently seeing, because, with all of the tur­moil, some people will use gold as a safe haven. If even a smat­tering of investors choose gold over the Dollar, it will prop up the price somewhat.

    With all of the tur­moil in Europe, many US banks will be at risk due to Credit Default Swaps and other deriv­a­tives. This will most likely have a sim­ilar effect as the failure of Lehman Brothers. When this occurs the tur­moil will be trans­planted to this country. This may be nearly simul­ta­neous with the Euro­pean trou­bles or be felt as a later echo, but will have a defla­tionary effect here as well, which could drag down the price of gold as the strength of the Dollar collapses.

    Both the FED and the ECB only have one tool that they can employ, which is to print money. As they try to lift the domestic economies, this will result in infla­tion. They believe that they can con­trol infla­tion, so that it remains under 10%, but if they fail, the result will be hyper­in­fla­tion. If hyper­in­fla­tion occurs then gold, silver and pre­cious metals related stocks will skyrocket.

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  2. Jim says:

    I’ve got cash and gold/silver bul­lion in a bolted down safe that is well hidden. Would it be a good idea to get lots of gen­uine Chi­nese Yuan to put in my safe?

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  3. Patrick Wood says:

    Per­son­ally, I don’t think the yuan will do well in future years, unless per­haps you live in China. If you want more cash, get greenbacks.

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  4. Dale says:

    I do not under­stand the idea of cen­tral banks dumping gold. As far as they are offi­cially con­cerned gold has no value, so they have no ‘offi­cial’ reason to keep it in their port­fo­lios, how­ever, they have done just the oppo­site in recent years. Today cen­tral banks are net buyers of gold.

    There has been a lot of talk about cre­ating a world-wide cur­rency which uses a basket of cur­ren­cies including gold as it’s basis. Any cen­tral bank dumping gold would lose out if gold is part of that cur­rency. There is even a serious move­ment afoot to rec­og­nize gold as a tier-1 asset, which means that any bank holding it could count it on it’s books as an asset. This is because banks are redis­cov­ering the value of holding an asset which has no other claims against it, unlike fiat currencies.

    No cen­tral bank would dump gold to create more cash, they would simply print it and deal with the infla­tion later. Instead, those that have large amounts of gold might lease it to the bul­lion banks, allowing the bul­lion banks to short it, thus dri­ving the price of gold down. That way, they can count it on their books and ben­efit from a low­ered gold price simul­ta­ne­ously. The folks at GATA think they’ve been doing this for years.

    It is sus­pected that some of the biggest share­holders of the biggest cen­tral banks are actu­ally pri­vate par­ties. If those banks fail, I sus­pect that the gold that they hold will go to settle spe­cific debts held by those pri­vate owners. Thus, the gold will be qui­etly trans­ferred to those pri­vate par­ties rather than end up on the open market. I think the finan­cial elite rec­og­nize the value of gold, even if they sing the praises of fiat cur­ren­cies by day.

    When the dust clears, this world­wide finan­cial crisis will achieve two objec­tives: Most of the pub­licly owned gold will find it’s way into pri­vate hands and the crisis will be the excuse used to create an even bigger, world-wide cen­tral bank system, which will be used to con­cen­trate all the world’s remaining wealth into the hands of that same elite.

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  5. Rich says:

    It seems to me that everyone here is neglecting the fact that the printing presses in the U.S. are turning out dol­lars and will con­tinue to do so at an excel­er­ating pace for years of come. Yes, we may ini­tially see some asset defla­tion but the falling value of the dol­lars will hide this and cause a slowing in the rise of the apparent gold price, but I would think that actual price will con­tinue up as long as the printing presses are pumping out worth­less paper dollars.

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  6. mr. sunset says:

    “IF” Spain, Italy, & Greece have Gold reserves. Why wouldn’t the ECB, or the Ger­mans require them to use the Gold to pay their debts, rather than giving those coun­tries a loan???

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  7. mr. sunset says:

    “IF” Spain, Italy, & Greece have Gold reserves. Why wouldn’t the ECB, or the Ger mans require them to use the Gold to pay their debts, rather than giving those coun tries a loan???

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  8. Billie says:

    Why don’t they demand pay­ment in gold? They don’t want the gold; they want all the other hard assets; infra­struc­ture, busi­nesses, homes, prop­erty and pos­ses­sions of the people.

    The “debt” everyone is “drowning in” is all owed to the cen­tral banking system which pro­duces paper “money” at vir­tu­ally zero cost but holds it as a “loan” PLUS interest “owed” by the people; the tax­payers; gov­ern­ments have hap­pily sold the People into bondage and raped them of all their wealth. Gold in the bank is already gold in their pockets; they don’t need it to be trans­ferred to them.

    Eco­nomic col­lapse never, ever hap­pens by acci­dent. This sit­u­a­tion is no dif­ferent. This has been care­fully orches­trated and so far so “good” as the People remain igno­rant of the facts.

    I would not buy gold. I would buy silver. Unlike gold silver is not con­trol­lable; it is both a mon­e­tary and indus­trial metal making it unique in all the world. The silver stock­piles are gone; silver is more rare then gold and more valu­able; gold is con­tin­u­ously recy­cled but silver is used up and gone for­ever; silver will dra­mat­i­cally out­per­form gold once the People and indus­trial users realize what has hap­pened and jump into the market to secure sup­plies. The USGS has already told us silver is dis­ap­pearing from the earth itself and will be the first major metal to go extinct… but investor igno­rance is not far beyond the Sheeple. Silver will dra­mat­i­cally out­per­form gold making it a far more desir­able conversion.

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  9. nana says:

    Dear Sir/Madam,

    We are local miners from Accra-Western Region of Ghana. we are reli­able and depend­able sup­plier for long term con­tract agree­ment with you, to enable us have a look to get a modern mining equip­ment with your help and advice.

    Here is the spec­i­fi­ca­tion below:-

    PRODUCTS: .….….….….… GOLD DUST/ BAR

    QUANTITY:.….….….….… ..50KGS (TO BE SUPPLIED AS FIRST TRIAL)

    PURITY.….….….….….… .92.5% (Pure Gold)

    QUALITY:.….….….….….. 23.69k

    ORIGIN:.….….….….…… … GHANA.

    PRICE PER KG.….….……$42,500 USD

    Pay­ment Terms:

    The Buyer will pay 10% value of the of the Gold for the ship­ment and export doc­u­men­ta­tion cost of the total value of the goods that will be deliv­ered to his/her refinery, then seller will make all the local transit cost to agent office for the doc­u­men­ta­tion before shipment.

    Mean­while I have to inform you that the mine site belong to our royal family which I think you will meet every of my family mem­bers on the date and time of your arrival here in my country or you can let us to ship the number of quan­tity you may ask us to have the con­tract with.

    Kindly Resend to me your mobile number the first one is not cor­rect or you can call me too.email:nanagold91@yahoo.com

    Thanks.
    Koffi Mensah

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