Dear James:
A recent headline asked: Gold is glittering again. But why? I can give you my opinion why gold is “glittering”:
* Tax law will change with respect to gold purchases on 1/1/2011
* Taxes are going up dramatically in 2011; that will kill the economy. Look for 15-20% unemployment. (I think they are lying through their teeth about the unemployment rate. If you look at the unemployed, underemployed, discouraged — and even ignore the disgruntled, left the workforce, women becoming pregnant, “frozen in place” workers I think the current rate is presently around 20%.)
* Taxes are going to impact the profitable small businesses and kill the unprofitable or marginal ones in 2011.
* Obamacare has frozen employers; they don’t know how much benefits are going to cost in 2011. (Insurance companies have jumped the gun and are preemptively raising rates. Small companies are figuring how to slim down under the size bar. Big companies, like AT&T and Verizon, have put disclaimers in their financial reports about the benefit costs. Verizon is actually considering dropping benefits and pay the fine on the theory that it’s cheaper. I’m hearing rumors that large enterprises are considering how to reorganize their business units so that they would slip in under the bar. Think Comcast of South Brunswick with out sourcing contracts for all sorts of stuff and it’s a wholly owned by the stockholders who also own Comcast of North Brunswick, Comcast of Mt. Holly, etc, etc. Think Baby Bells and that’s the model. All to get under the size requirements.
* Inflation is right now being artificially suppressed by the Federal Reserve printing press and they’re buying Treasury long bonds. At some point, this is going through the roof. (I’d suggest that 5-10% of everyone’s portfolio should be in silver bullion coins kept in one’s basement.)
My prediction is that it depends totally on the 2010 election.
* If it looks like the Democrats are swept out of congress, things will continue in a Japanese style lost decades.
* If it looks like the Democrats are not going to be convincingly swept, this is going to get very ugly very fast.
Remember that the Great Depression was triggered by Smoot Hawley being passed and signed into law, it wasn’t due to go into effect for months. Now, the flow of data, information, knowledge, and wisdom is such that as soon as the “tipping point” is reached, the blood bath will ensue. It’ll make 1929 look tame.
In the hyperinflation scenario, I’d expect real interest rates to be double the Carter years’ 21%. I’d expect oil to be priced in gold rather quickly (i.e., remember that it was Saddam’s proposed golden Dinar exchange for Iraqi oil that got him in the USA dog house.) I’d expect food prices to quickly go up 50%. Business would lock up; Government would be stalled.
The lack of funds to spend would quickly result in:
* End of the Federal Reserve, replaced by some type of commodity money
* Default on Government debt; States’ debts; Social Security; Medicare; Medicaid
* End of the drug war and begin to tax it.
* End of the foreign military adventures and bring the troops home.
* End of the “public education” of Dewey, Mann, and the teachers’ unions.
Any economic restart would probably be led by the oil producing states such as Alaska, Texas, Pennsylvania. And the breadbasket states: Kansas, California, Florida, Nebraska. To restart: Taxes would have to go down. Obamacare nuked. Flat or near flat tariffs and excise taxes. Corporate taxes to zero. Capital gains taxes to zero.
If it has to go worst case (i.e., the Government doesn’t slim down to save itself in time), you might see secession. (Hey, it worked for the USSR!) I’d look for Texas, Alaska, and Vermont to be first out. Followed quickly by: Hawaii; Montana / Idaho aka Jeffersonia; New Hampshire / Maine; and South Carolina. It would be politically very ugly. What does the District of Corruption do? Roll tanks into the secession states? Remember the American Revolution was fought by the 10% hot heads, where a third supported them, a third hated them staying loyal to England, and the remainder could not have cared less.
Very ugly.
I predict in scenario #1 — Democrats swept, gold goes to $2,00 per ounce by June of 2011 and in scenario #2 — Democrats are not swept, gold goes to $2,000 before the end of 2010.
Then, a similar “cliff” event appears with the 2014 presidential election. As long as the markets perceive BHO as a one term president, we get the calm lost decade scenario. If a reasonable Republican takes the lead — Ron Paul like fellow, calm. Even if there was a reasonable Democrat, (although I can’t think of one who fill the bill), calm. However, if it looks like BHO might be reelected, or Hillary, or any of the wackaloons, it’s “Katie Bar The Door” time again. Look for the markets to crash big time, as folks try and hit the exits at the same time.
In the calm lost decade scenario, I’d predict that gold would be at $3,500 in December of 2014. In the BHO reelected or any wackloon election, the “gold bugs” would be right and a $5,000 gold price would be well within reason. If you could buy any gold with dollars. (Think German WW1 hyperinflation or Zimbabwe!)
So, now you have my reasoning about gold. IMHO there is nothing but upside.
I’d try and be a little like a Mormon or the Amish. Beans, Band-Aids, and Bullets. A year’s worth of food, sufficient medical supplies to minimize the trips to the drug store which won’t be open, and sufficient firepower to keep your beans. I’d put 10% of my capital in silver bullion 1-ounce rounds in a “basement”. And, watch very carefully how the winds blow. – FJohn