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 1970s hyper-profitable bull market. They
were either outright hostile, or acted as though the metals
didnt 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 wouldnt
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 didnt
get any apologies from them when inflation rose to 18% and
gold to $850 and silver to $50, and didnt expect any.
Unfortunately, most of the young whippersnappers who now control
Wall Street were in diapers 25 to 30 years ago, so they havent
experienced rising gold and inflation. Consequently, another
gold bull market is inconceivable.
Studying Psycho-ceramics
I cant 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 were
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 Americas 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 cant 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 thats
where their bread is buttered.
Jim Dines is a case in point. At one time
he was Wall Streets 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 wasnt 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
cant 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 brokers opinion is important
to you, you may be uncomfortable here. If you arent
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 lets investigate
The Worst Cases: Terrorism and Other Things
The worst case is easy to describe. It means
that terrible things have happened. Lets 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 cant 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)
Worlds 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
Linowitzs term was up.
One key part of Linowitzs 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? Its
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 wouldnt work and the stores couldnt
open, and food in the freezers would slowly thaw and spoil.
Wouldnt 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 havent 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.
Lets 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. Thats 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 dont 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 doesnt 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.