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Bear Market Strategies.
by Professor von Braun
January 26th, 2002
If one is to make the assumption that the year 2002 will be the year that the stock market takes a serious hit, in terms of investor confidence and trust in the wisdom of "long- term" holdings, then one has to ask the question "What exactly is the best strategy one can pursue?"
We at the Rocket School have long been a proponent of accumulating physical metal when it comes to ownership of gold. This concept is based on several potential outcomes of the manipulation of the gold market and a flight to quality when the realization that paper assets can become exactly that, paper, which on its own is worth very little. Enron shares are an obvious example of that.
Taking delivery of ones purchases is key quite simply because you actually have the metal in your possession, as opposed to a piece of paper that says you own "x" at the "abc" depository. Even metal on deposit can disappear, so possession is the wisest choice.
Now there is a small problem
beginning to appear when it comes to owning physical metal and
that is where is one's income going to come from? In a rising
gold market one could sell ones holdings, but once sold they are
gone for good. If the market continues to rise then, to some degree
you have taken a hit, since a rising gold price will be denominated
in the currency you have received as a result of your sale and
that currency has now devalued itself. As your local supermarket
does not accept gold at the checkout and your credit card payment
can't be made with gold coins then you need cash to get by.
Even if that cash gets devalued or debased it is still a requirement of doing business.
If one knew that a bottom was in the gold market then one strategy would be to borrow on your existing holdings and go long the metal, either via the futures market or additional purchases, buying and selling at various points along the way. This way you would keep your core holdings intact, and hopefully receive income for everyday living expenses.
It seems like a simple strategy. However if one is residing in the US perhaps it's not so simple. Now, we all know that it was not until the early 1970's that US citizens were allowed to own physical gold once again after Roosevelt's outlawing gold ownership back in the early thirties. This event followed a period not to dissimilar to what's going on today, a period that led to paper assets being viewed as worthless. Paper assets that had been bid up on US stockmarkets to ridiculous levels and then had fallen rather rapidly, recovered, then had fallen again in 1931, when the much touted recovery was seen for what it was. A joke. Meanwhile the Federal Reserve had of course cut interest rates; sounds familiar, and politicians and senior officials lame statements about economic recovery were exactly that.
Now the "small" problem alluded to earlier in this article, is the issue of being able to borrow on physical metal. It appears that while the good citizens of the US can now own physical gold, someone has instructed the US banking system not to lend on it.
We know of several efforts of holders of gold to attempt to borrow on the metal only to meet with either a point blank refusal, or alternatively, to face conditions in a loan agreement that are best described as attempted robbery, and at worst just outright sinister. 'Yes we will lend on your gold but don't expect to get it back,' appears to be the modus operandi of one bank that professes to lend on gold. Unfortunately finding another bank that will lend on metal has not been all that successful to date.
Banks within the US are instructed it seems not to lend on gold or silver, under any circumstances, and this instruction comes from the banking regulatory agencies who are the same ones that oversee banks' loan portfolios.
So while owning physical metal is a very safe strategy when it comes to protecting ones wealth against currency debasement and consequent devaluation, the issue of ones income still needs to be addressed.
We have even encountered bank presidents who agree that gold is an excellent form of security, even more so when its in their vaults, but they are not able to lend on it. Once again who is responsible for this instruction? As a citizen one would think that being able to borrow on gold should be a simple matter, after all you are legally allowed to own it. So what exactly is the beef that the banking system has with their non lending policy on gold? Are they afraid of it? Or is this part of a wider plan to deter gold ownership and remove the concept of an alternative to paper currencies?
One has to admit that we are puzzled by all of this. Another example is banks in the state of Nevada, which is of course the second largest gold producing district in the world, yet they to have a "no lend" on gold policy. They can lend to casinos, but not on residents gold holdings and rarely, if at all, to gold miners. Now we know that with the low gold price and all the lies attached to current cash costs of gold production, not lending to mining companies may be a prudent move. However lending on unencumbered gold holdings is fairly safe one would have thought, but apparently not.
We would like to hear from anybody that has run into this problem and anybody who has found a solution. Lets face it, serious bear markets tend to deal to all parties and a fail-safe strategy is always going to be difficult to construct.
Yes you can own gold, but you can't borrow on it? Whatever happened to economic freedom and the right to democracy. How undemocratic is it when you have a recognized asset class that is unrecognized by the banking system that supposedly was created with democracy in mind?
The Prof can be contacted by email at firstname.lastname@example.org
Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.
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