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Gold and Procrastination by Dr. Gary North

Gold And Procrastination
By Gary North

Beginning in late 2001, I began recommending that my readers buy gold. I have continued to make this recommendation every year since then. When I first made it, gold was selling for under $300 per ounce. Today, it is above $1,200 per ounce.

I wonder what percentage of my readers have taken my advice and put a minimum of $10,000 in gold coins. I would like to think 80%. I hope it is at least 4%.

Some people have bought IOU's to gold issued by some firm that promises to pay investors fiat currencies. The payment will be made in digital money, not gold.

The commodity futures market is a system of IOUs. Overall, about 1% of these contracts result in actual delivery of physical commodities. Gold is no different. People who buy IOUs to gold are buying promises to pay fiat money, not gold. Read the contract. See if the company is allowed to substitute fiat money for gold.

There are a few thousand local coin companies in the United States. Most of them deal mainly in stamps and baseball cards, not gold bullion coins. Collectors are their main clients. There are usually people with interests in specific coins, not gold coins as such.

The few American companies that specialize in selling bullion gold coins have a few thousand clients each. This, in a nation of 100 million households.

In a crisis so severe that (say) 10% of these households decide to buy a single one-ounce gold coin, there is no way that they will be able to do this. There will not be enough telephone lines and salesmen to take their orders. There are not enough salesmen to take orders from a million homes.

In other words, there is no way that a gold coin standard could come into existence fast enough to solve the problems created by mass inflation, let alone hyperinflation. When the crisis hits, it will be too late.

There would be no way for the United States Mint to produce enough gold coins to meet demand. Whenever there is a big move in gold's price, the Mint stops delivery of coins to dealers. The Mint says that it does not have enough blanks to produce enough coins to meet demand. This is marginal demand, not a million people trying to buy one coin.

The Mint has no incentive to buy new presses and new blanks -- planchets -- for the coins. The Mint does not pay its employees a commission for coin sales. Most people's jobs there are protected by Civil Service. What if demand is short-term? What happens then to the career of some senior officer who ordered the new presses? In contrast, nothing negative will happen to anyone's career for not buying new equipment.

Think of Europe, Australia, and the Chinese middle class. What if 10% of them wanted to buy just a single one-ounce coin? The same problem exists in every nation. There is no distribution channel large enough to handle what I would call marginal demand. Such demand is marginal in terms of the net worth of buyers. It is marginal in terms of the number of investors in all asset classes. But it is not marginal in terms of the number of new buyers of gold coins. It would short-circuit the distribution system.

I am a believer in owning gold coins. That is to say, I do not trust the IOUs except as speculative vehicles to make fiat money. These IOU's are not IOU's for gold. They are IOU's for digital money. There are vastly more IOU's written for gold than there is gold ready to deliver: probably 100 times more. Here, I am speaking of gold bullion bars. As for bullion gold coins, there might as well be none, as far as the average guy would be concerned in a currency crisis.

If an outfit has a bonded warehouse with segregated gold accounts, fine. But will the firm deliver physical gold? Find out.

This is why procrastination is unwise. The person who procrastinates thinks, "I can always buy some coins." He will not be able to. He thinks, "I can beat the rush." He can't. He will get the urge to buy gold when millions of other people do, too. The panic will hit far more people than there are coins available.

Anyone who knows the gold coin market can tell you this. I have watched it since 1965. I see the same retail sellers today as then . . . and not many more.

Camino Coins in Burlingame, California has been around since about 1960. Investment Rarities in Minneapolis began in the early 1970's, as did Monex. Franklin Sanders (the Moneychanger) began in 1980. Don McAlvany has been selling coins for over 30 years. Then who are the new kids on the block? There aren't many. Of those who sell coins and deliver them, there aren't any. (I am not speaking of companies that say they buy coins and store them for a fee.)

This is a cottage industry. It's not like Wall Street, where hedge funds come and go. This is what we would call a mature industry. "Geriatric" is closer to it.

If there were widespread interest in buying gold coins, there would by now be a developed supply chain. As gold has risen from $257 in 2000 to today's price, companies would have come into existence to meet demand. There has been no increased demand. Gold goes higher and higher. People read about it, but they do not take action.
An American waits to buy gold until his brother-in-law buys gold. Few people are early buyers in any market. But, in the case of gold, almost no one ever becomes an early buyer. To buy gold is to short the dollar. To buy gold is to conclude that Congress will eventually ruin the currency. This means that the promises of Congress are not reliable. Very few Americans can bring themselves to believe this. So, they remain on the sidelines.

The amazing fact is that tens of millions of Americans know about gold. They have seen the price rise, and they have sat on the sidelines. They have not connected the rising price of gold with a profit opportunity. They have not thought, "I really ought to get in on this." Higher and higher gold's price goes, but emotionally, this fact does not register.

This is equally true in Great Britain. A decade ago, as Great Britain was selling half of its gold hoard at under $300, gold got a lot of attention. It was the end for gold in the world's monetary system, the experts said. The Chancellor of the Exchequer, Gordon Brown, issued the order to sell. This was big financial news. Brown's decision has cost the Bank of England something in the range of $10 billion, but nobody in Great Britain has cared. The issue is not on anyone's radar screen, despite the fact that the British electorate goes to the polls this week to decide Brown's political future. His recorded comment about some woman's supposed bigotry has cost him millions of votes. But his liquidation of half of the nation's gold is a non-starter, and has been for a decade.

Here is a unique situation. An investment asset keeps rising, but investors pay no attention.
What is the problem? There is a war on gold, and the government and central banks are behind it. They tell people that gold is a loser's investment, that there is no shortage of gold at yesterday's price, that gold will soon fall. Worst of all, it doesn't pay interest -- rather like excess reserves at the Federal Reserve these days. But that has not kept commercial banks from piling up $1.2 trillion of excess reserves.

People do not mentally connect their lives with gold's price. If they had bought gold in 2000, they would be buying more today. Why? Because they would understand that gold's price is important for their future. But they did not buy gold in 2000, so its price is a kind of curiosity for most people. People do not invest in curiosities.

In India, gold is not a curiosity. It is an integral part of the culture. Gold jewelry serves as a dowry gift. Fathers begin saving money to buy their daughters gold from the time the daughters are born. This makes the price of gold a topic of intense personal interest in India. The price of gold impacts millions of families' net worth. It does so far more than the price of stocks impacts American families' net worth.

An Indian in a village may not be literate, but he knows about gold. He may not have any idea how the futures market works, but he knows how the gold market works. He does not accept an IOU for gold as a substitute for gold. He does not provide his daughter with an Exchange Traded Fund (ETF) certificate for gold on her wedding day. He could not be fooled into thinking that an ETF in gold is the same as gold. He would regard such an assumption as ludicrous -- something that Americans might believe in, but not anyone with common sense. What is common sense in India? "He gets my money when I get the gold."
The poor villager did not attend Harvard Business School. He does not work for Goldman Sachs. He imagines that businessmen might write IOU's for gold when they don't own any gold. Then they might take the money obtained from the IOU and use it to buy something else. When presented with the IOU, the debtor might plead poverty. He might declare bankruptcy. He might disappear. He might pull a Lehman Brothers routine. The villager, not being a sophisticated man, is not taken in by Harvard Business School grads, with their computer models.

So, the villager is protected by centuries of tradition. He learned from his father what stupid people do with their money. His wife still has her dowry, unless the family had to sell it in an emergency. There is no FDIC in India. There is no line of fiat money credit to India's non-existent FDIC from Congress. The Indian understands that a dowry in gold, not an IOU from a bank, is reliable in good times and bad.

The Indian has an emotional commitment to gold. So did his father. So did his grandfather. The American does not.

The American trusts the promises of the Federal government. He is emotionally committed to the Federal government. He is convinced that a political promise from Congress is better than gold. He believes in his heart of hearts that the Federal government would never break its word. Social Security will be there in his old age. So will Medicare.

The Indian peasant has no comparable faith in civil government. He has seen it in action for too long. He does not trust the Indian currency. The currency is useful for buying gold.

An Indian father makes his purchases when he can. He pays attention to price. He may think, "I will buy gold when the price falls." Then he does exactly that. The American thinks, "I will buy gold when the price falls." He thinks this again and again. He never buys any gold.

The Tea Party movement is not yet serious. How do I know this? Because most of the members of the Tea Party movement refuse to buy gold coins. How do I know this? Because I can call a coin store and get through. I can order coins. If the Tea Party people were buying coins, the coins would sell for a big premium over the bullion price.

Anyone who says he is a member of the Tea Party movement who does not have at least a one-ounce gold coin is not serious about the threat of Congress to his future. He believes that Congress will come to its senses. He believes that politics will roll back Federal spending. But the killer Federal expenditures are Medicare and Social Security. They, all by themselves, will bankrupt the U.S. government. The Tea Party movement has not demanded the abolition of Medicare and Social Security. Thus, it is still living in fantasy land, deficit-wise.

Tea Party members think their efforts will be successful in rolling back government spending, yet Medicare and Social Security are sacred cows, to use a concept imported from India. Tea Party members are supposedly at least 10% of the voting population, with another 15% sympathetic to it.
Until these people finally realize that Congress will not change, that the Federal deficit will escalate, that this Federal debt will absorb more of the nation's capital, they will not call a coin dealer and order gold or silver coins.

They have faith in the political system. But the size of the deficit testifies against such faith. Until these people face reality and buy some coins, they will remain sheep to be sheared.

They will wake up at some point. When they do, they will try to contact a coin dealer. Unless it is a local dealer that makes its money selling baseball cards, they will get busy signals.

The Mint will declare a holiday. The coin premiums above spot (billion) price will go to 30% or higher.
There is no way that every member of the Tea Party movement can buy just one one-ounce gold coin.

The coins are not there.

In a panic run-up of the gold coin premium, existing holders will be buying more. They will call a dealer. The dealer will get back to them . . . maybe. Who do you think a dealer will call back? A new buyer who may only want one coin, or an old client who is ready to buy 10 coins, 20 coins, or more?

The newcomers will want in, and they will not be able to get in. What effect will this have? Mania.

It's when people are told, "You cannot buy" that they get frantic.For as long as they can buy, they don't buy.

Then, when they are told they cannot buy, they will pay anything. That is when you do not want to buy. Only you will.

You must prepare yourself for this. The only self- defense strategy I know of is to buy when you can and sit tight (or even sell) when you can't buy.

From the S&GS Mailbox

There are some inquiries that we receive repeatedly from our customers. We respond to these questions individually, but we felt that some of the answers might be informative for everyone.

Investment Paradigms
One of the first hurdles you will encounter as an investor in physical precious metals is that of trying to decide 'which product should I buy?'

To decide this question, you need to answer the question, "Why am I investing in precious metals?"

Some common answers:
1) To preserve my wealth
2) To grow my investment
3) To collect as a hobby
4) To have an alternative 'currency' in the event of economic disaster
5) To hedge against inflation
There are no 'wrong' answers, but your objective will determine what product(s) you select.

Precious Metals as a Store of Wealth & Hedge against Inflation

Generally speaking, all precious metals, regardless of size, shape, form, etc. have been a traditional store of wealth throughout history. Gold, silver, palladium, etc. all have high intrinsic worth. Silver, more than gold, has high industrial value, which has grown exponentially in recent years due to the application in clothing, technology, medicine, and other uses. (see Many Uses of Silver) Also, during period of fiat currency devaluation and inflation, precious metals provide a 'safe haven' against the volatility of paper money.

Products - all types suitable, driven only by investor preference, and price points.

Precious Metals as an Investment

Depending upon the market at any given time, they have not always been a means of growing an investment. We are currently experiencing a bull market in precious metals, however; one whose end no one can predict with 100% accuracy. Most experts agree, however, the likelihood of it continuing for several years.
With the ongoing printing of excessive amounts of paper money, many economists believe this will cause currency devaluation and hyper-inflation, both of which will cause investors to lose money in one way or another. During these periods, silver and gold increase in value - which is really only a reflection of the devaluation of paper fiat currency.

For example, if an ounce of gold is worth $1000 in fiat currency today, and tomorrow the value of fiat currency decreases, the value of gold must rise just to maintain its value in relation to the fiat currency. This is, essentially, what happens during inflation. It's the paper fiat currency that is fluctuating in value, NOT the precious metal. This is also why governments are anxious to suppress the price of precious metals; because they are a canary in the coal mine reflecting the truth of what is happening with fiat currencies and the confidence of investors.

Products - all types suitable, driven only by investor preference, and price points.

Precious Metals for Collectors

Those who collect coins as a hobby do so with the anticipation that their value will rise due to the various market factors that are involved. This is known as 'numismatic' value and is driven by year of minting and how many coins were produced, condition, quality (proof or burnished), popularity and other factors. Numismatics is the study or collection of currencies… So this type of investor would prefer legal tender as opposed to bullion. These coins carry higher price points than bullion; and in an economic crisis could be used, like bullion, for barter. Their 'numismatic' value, however, in such a situation may become a moot point, and the investor will have paid more up-front to obtain them.

Products - Silver and Gold American Eagles, Canadian Maples, African Krugerrands, French and Swiss Francs, etc. according to investor preference.

Precious Metals as Alternate Currency

Depending upon the circumstances and situations, most precious metals can be used in barter. Larger denominations are just more difficult to use due to their higher value and challenges making 'change'. They are also heavier to carry around. Some rounds or bars are more recognizable due to their popularity, some are more popular due to their attractive design work. All reputable pieces should carry the assay value and denomination (e.g. 1 troy oz, .999 fine silver)

Products - 1 troy oz & fractional pieces, divisible bars & rounds will do best.



Pros: Varying Sizes from 5 oz - 1000+ oz bars.Lower cost

Cons: Less attractive, harder to liquidate or use in barter situations. Can be made into coin/bars by a mint, but subject to minimums.

Minted Bars

Pros: Varying sizes from 1 oz - 1000+ oz. More attractive, more usable in barter due to recognizability. Divisible designs more usable in barter.
Cons: Not as commonly used or as recognizable for currency as rounds. Slightly higher cost over ingots.

Minted Rounds

Pros: Varying sizes from 1/10-5 oz. More attractive, more usable in barter due to recognizability. Fractional pieces & divisible rounds good for barter. Prices are competitive in the marketplace. Lower priced than Legal Tender Rounds. Many designs available for investor preferences. Most common, recognizable.
Cons: Slightly higher priced than ingots. Fractional pieces higher cost due to strike fees

Strike Fees

Denominations of less than 1 oz are known as 'fractional' pieces. When a mint makes a coin or round, they strike a blank round of silver or gold with a die. Mints generally charge a fee per strike to make a coin. If they are making 1/2 or 1/4 or 1/10 rounds, they are striking 2, 4, & 10 blanks (respectively) per ounce instead of 1 blank per ounce. Therefore, the cost of production of fractional pieces is higher.

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Quote of the Day

A government which robs Peter to pay Paul can always depend on the support of Paul.

George Bernard Shaw (1856-1950)


This Week's Video

The National Inflation Association

Affiliate of the Week

I am preaching to the choir. What I have found over the years is that the choir pays less attention to the sermon than the walk-in does.

The walk-in has a reason for walking in. He has a problem he is grappling with. He wants a solution. He walks in to hear if the pastor has a solution.

The choir has heard it all. "Nothing new here!" The choir is content. Things are going great for the choir.

Then disaster hits. The choir thinks, "I had better go to the pastor to talk about my problem." At that point, there are no openings. People have to schedule an appointment.
Being in the choir lets people find out about problems. It does not usually lead them to begin to solve these problems. "I've heard that before" is the great producer of procrastination, until the day the crisis hits. Then it is the great motivator. "I knew! I knew!"

Too late . . . at 2% above spot price, anyway.