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Why Wall Street Hates Gold and Silver
Howard Ruff - May 9 2008 1:28PM

The following is excerpted from Chapter 12 of my new book, How to Prosper in the Coming Bad Years in the 21st Century. It is in book stores now, but not widely circulated. If you have bought a copy, thanks! If not, you can go to www.rufftimes.com and click on “book” or “subscribe.” You can also order from www.amazon.com.

Wall Street ignored gold and silver during most of the 1970’s hyper-profitable bull market. They were either outright hostile, or acted as though the metals didn’t even exist. I got no respect, even though the first edition of this book sold 2.6-million copies and was near or at the top of The New York Times best-seller list in both hard and soft cover for two years, and I was all over the media; Wall street Week, Oprah twice, Regis and Kathy Lee three times, etc, etc. They were usually hostile. Wall Street paid little attention to gold until it passed $650, far too late for them to have much of a chance for their clients to make money. In retrospect, we know that in 1979 the aging bull market was almost over. Soon after it made a brief climactic spurt to $850, and then went into a multi-year decline. They did their usual thing; they bought high, and then held on too long, and sold low.

Why the hostility? Partly because they believed their own rhetoric! Historically, because rising gold always means falling stocks or a troubled world, and they made most of their commissions in the stock market, they had to remain bullish on stocks, and bearish on gold. Investors wouldn’t buy stocks if their advisors were bearish. They sneered at the inflation fears of us gold and silver fans, and derisively called us “gold bugs.” OK because I have lost much of my respect for them also for a lot of reasons. I also didn’t get any apologies from them when inflation rose to 18% and gold to $850 and silver to $50, and didn’t expect any. Unfortunately, most of the young whippersnappers who now control Wall Street were in diapers 25 to 30 years ago, so they haven’t experienced rising gold and inflation. Consequently, another gold bull market is inconceivable.

Studying Psycho-ceramics

I can’t resist telling you about one of the funniest things that ever happened to me which illustrates the skepticism of mainstream media types. In 1978 I was on a national promotion tour for the first edition of this book when I was in Detroit, rushing to a TV station for an interview on a big live morning show. I barely got there in time. The host turned to the camera and said, “Today we’re going to study psycho-ceramics, and with us today is a crackpot from California.” And the interview went downhill from there; with his biggest argument being that silver was an impractical investment for most people, unless you were very rich.

One year later I found myself in the same studio, same host, promoting the mass paperback of my book. But this time, when the light went on, he said, “Today we have with us one of America’s most brilliant financial advisors,” and the interview was terrific from then.

After the show, I asked him what had changed his mind. He very sheepishly said, “I read your book and bought silver from a local coin dealer, and tripled my money.” So the media is not infallible, even though they are usually wrong.

Inside Wall Street

Let me explain to you how Wall Street works. It is a culture, as well as a financial institution.

Most of the young brokers who are the big producers on Wall Street are college graduates who have been trained in the stock market. In order to get the necessary advanced licenses to work there, they are trained in all the conventional investment vehicles and their relevant laws and regulations. Then they build their clientele based on the stock market. Commissions are everything!

But they are human beings, subject to all the habits, behaviors and peer pressures that plague all of us. They are surrounded by “group-think.” They make tons of money on the status quo. I have visited firms on Wall Street with big trading rooms full of twenty-something men and women whose annual income is measured in the millions – all on stock sales commissions.

Few big Wall Street firms sell bullion (right off hand I can’t think of any, although the ETFs will probably change that), so it is only money out of their pockets if hot-shot brokers tell their clients to sell some stock and put the money into bullion or coins. Maturity and client concern are scarce commodities on Wall Street.

When you meet these young brokers, you would be astounded at how money-oriented they are. They talk about their commissions and the things they buy with them. In their parking garage, I never saw so many Porsches, and Lexus’ and Mercedes. Too many of them are bloodless mercenaries. And they are congenitally bullish on stocks, because that’s where their bread is buttered.

Jim Dines is a case in point. At one time he was Wall Street’s fair-haired boy. He had written the book on technical investment analysis which is still a classic, and his studies told him that we were moving into a giant gold bull market. Not being very reticent by nature, he made no secret of what he had concluded, and he went from fair-haired boy to outcast. It wasn’t long until he and Wall Street had to part ways. But Jim is the very definition of “maverick,” so he started perhaps one of the first gold newsletters and called himself “The Original Gold Bug.” He was there before me. Jim and I became friends, and he was even a guest on my TV show, Ruffhou$e. I honor him as a real pioneer, and thank Wall Street for firing him. The newsletter business would be poorer without him, and he is still publishing, and he is well-worth reading (see the Appendix). He has a quirky life and is one of the bigger egos in a business that is loaded with big egos (like me), but he is a true professional, and an example of how Wall Street is so anti-gold.

Financial Shows

Many of you watch financial shows, populated with guests who are typical examples of main-stream Wall Street thinking. The hosts and hostesses of the shows are steeped in the same traditions and attitudes. On the rare occasions when I am asked to be on such a show, I know that they are either ignorant of my real financial views, or they are spoiling for a fight. Until gold and silver have risen so far they can’t ignore them any longer, they will not be interested in me. Until then, we gold and silver investors will be operating in an open underground movement, operating below the radar.

If your broker’s opinion is important to you, you may be uncomfortable here. If you aren’t a maverick, you had better become one, and be quiet about it. You will have to leave the herd, and for a while, the herd is all on Wall Street.

Gold, Silver and the Perfect Storm

Gold and silver can be profitable in both a Best Case and a Worst Case. Both will be immensely profitable in very different ways, and the outlook is very different. First let’s investigate …

The Worst Cases: Terrorism and Other Things

The worst case is easy to describe. It means that terrible things have happened. Let’s consider just a few of the possible scenarios.

Remember that 95% of the dollars in existence are in cyberspace – in the computers of banks. The terrorists have enough money to hire the best hackers in the world, and there is no computer system in the world that can’t be hacked into, given enough time, money and talent. Where could Osama Bin Laden get the most bang for the buck? By destroying or corrupting the computers that run the monetary system of the Western World.

He already attempted to do just that when he brought down the World Trade Center. Fortunately, his intelligence was out of date. Until about a year earlier many of those computers that control the monetary system of the world were in the World Trade Center, but they had recently been moved across the Hudson River to New Jersey, as well as to Panama. Consequently, rather than the dollar and the Western (Christian) World’s currency and bond markets being destroyed by the hideous blow; the markets were up and running in a very few days with hardly a burp. But there is an even more-deadly and less-risky alternative for Bin Laden.

Panama and the Dollar

When we negotiated away the Panama Canal to Torrijos, the Panamanian Dictator, our chief negotiator was Sol Linowitz, a member of the board of Chemical Bank in New York. He was appointed for one day less than six months, so his appointment would not be subject to Congressional approval, and sure enough, the giveaway deal was signed one day before Linowitz’s term was up.

One key part of Linowitz’s banker-inspired mission was that the Canal Zone would be a “Free-banking Zone,” not subject to regulations or oversight. Even before the deal was signed, bank buildings were going up all over the Zone. Every multi-national bank was there, and it appears that they moved many of their international money systems there, with no oversight or regulation. Who is to determine their safety or vulnerability? No one!

If terrorist hackers were to hack into those computers and infect them with a destructive virus, the entire dollar-based monetary system could disappear in a nanosecond. In that case, for all practical purposes, the only spendable money left would be gold or silver coins or barter in a disrupted world.

And what if they were able to sneak a nuke onto a ship and detonate it while in the canal? It’s already bad enough that the Chinese are in control of the ports on both ends of the canal. Imagine the chaos with the banks obliterated and commerce fatally crippled.

Or maybe they would only hack into the Air Traffic Control system, indefinitely grounding every commercial plane in America, or into the North American power grid, and your ATM or the electronically operated cash registers at the Super Market wouldn’t work and the stores couldn’t open, and food in the freezers would slowly thaw and spoil. Wouldn’t it be ironic if the monetary system of the world was brought down by some left-wing idiot/savant of a 17-year-old Al Quaeda-paid genius or hacker, driven by money, ego and political ignorance?

Or what if terrorists manage to smuggle a nuclear weapon into the U.S. and detonate it, taking out the government, the Pentagon, or a few million people, throwing America into chaos, and driving gold and silver into the stratosphere. Or exploding nuclear weapons in the stratosphere, destroying every transistor within hundreds of miles with an EMP (Electro-magnetic Pulse).

These and innumerable other scenarios may seem beyond the edges of credibility, but I dare you to say they are not possible. And I am sure there are other scenarios I haven’t thought of yet.

This is not a forecast, only a speculation about a possible worst-case, we-hope-not scenario.

The Hyperinflation Scenario: We Do It to Ourselves The Most Likely Scenario?

What if monetary inflation rose as a result of soaring demands on government with the soaring deficits and unfunded liabilities and the subsequent inevitable consumer inflation rose until defensive consumer buying broke out into a real hyperinflation, with the modern money machine running night and day, like Germany during the 1920s. This would make money increasingly worthless and the precious metals increasingly precious. History tells us that this has happened over and over again, and we are repeating most of the same deadly mistakes.

Let’s pretend we are transported into a future where America is devastated by hyperinflation, and see what it looks like.

The world will be in terrible trouble, and the prosperity and comfort that now surround you will be in tatters. You will be surrounded by people struggling to survive, let alone to prosper, as in the 1930s. That’s what happened in Germany after the hyperinflation of the deutschmark, and the general suffering was the fertile ground which gave birth to Adolph Hitler. If you have prospered by holding gold and silver, you can buy a lot of safety and security while the country is being mended.

These are only a few of the possibilities. You can probably come up with better ones than I did. Share them with me, but don’t give up hope. There is still …

The Best Case

Even if none of the worst-case scenarios ever happen and we wipe out or neutralize al Qaeda and the currency system hangs together, monetary inflation has already been cooked into the economic cake by the Federal Reserve and industry, and so is the silver supply/demand situation. It is inconceivable to me, given 31 years of studying and monitoring the economics of inflation that the flood of “money” being poured into the economy of the world will not result in inflation. If that doesn’t happen, we will be making history; that will be the first time that the money machines have run out of control that the result was not a ruinous, big-time inflation. Even in this “best-case” situation, you will make a bundle on this monetary-inflation-sensitive investment, even in a still-orderly world.

If all else fails, you can count on the $50 trillion in the unfunded liabilities of Social Security, Medicare and the prescription-drug program to trigger a flood of “money printing,” and the subsequent monetary inflation, follows as night follows day with soaring price inflation. As it becomes obvious to the public that these programs are plummeting into insolvency, the consumer inflation rate will soar, and so will gold and silver.

When the dire facts become obvious, Congress will start desperately searching for solutions, but which ones?

Will they raise taxes and watch FICA soar and young taxpayers revolt in a war between the generations? I doubt it. Will they cut benefits or raise the Social Security retirement age? Maybe a bit, but not much. Will they memorialize the current dysfunctional system by simply printing money? You bet! This will lay the groundwork for more ruinous inflation, and soaring gold and silver.

In this best case (the most likely – I think, I hope?), we will at least see, at the very least, rising inflation and an inflationary recession or depression (which is already written in cement), and the metals and their mining stocks will go up – perhaps five to ten times, perhaps a lot more.

There is no best-case – or worst-case – scenario in which I can conceive of gold and silver being losers. You can mortgage the kids and bet the farm! We can keep the odds decisively on our side!

By Howard Ruff
The Ruff Times

*****

Howard J. Ruff, the legendary author and financial advisor, has re-edited and will re-issue his 1978 mega best seller, How to Prosper During the Coming Bad Years, still the biggest-selling financial book in history, with 2.6 million copies in print. He is founder and editor of The Ruff Times Financial Newsletter. This article appeared in the May 9, 2008 issue of The Ruff Times. The newsletter is much more comprehensive and deals with a broad spectrum of middle-class financial issues and includes an Investment Menu from which you can build your portfolio.

Numismaster


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