Gary North

March 19, 2008

Written on March 18

Every loss is a loss. It does not matter if you admit this. It does not matter if you decide not to sell. Every loss is a loss.

If you own an asset, and it falls in price by 50%, you lose 50%. Yes, even if you never sold, and it goes back up. If you sell the asset at the top and buy it back at the bottom (50% decline), and it goes back up to where it began, you make 100%. You own twice as much. Not owning twice as much as you would have is an economic loss.

If you sell the asset, then short the market, and it falls 50%, and you cover your short and repurchase, and it goes back up, you quadruple your investment. You own four times as much.

If an asset goes down in price, and you refused to sell at the top, you lost.

Of course, if you sell, and it goes up, you lose. There are no free lunches. There are no risk-free decisions.

Look at the chart of the S&P 500 over the last decade.

I told my subscribers to sell in February and March, 2000. Maybe some did. Think of the millions who didn't. Did they suffer a loss, 2000-2003? Yes. It was a loss of almost 50%.

If they had sold at the top, when the NASDAQ had a P/E ratio of 206 (insane, as I said at the time), and had bought at the bottom, they would now be worth twice as much, not counting a 21% loss from price inflation.

Those who held on are 21% poorer today than they were in 2000.

What did I recommend rather than stocks? Gold. I began pushing this in October, 2001. What if they had shorted the stock market and bought gold coins with the profits every year? What if they had covered their short position and put all their money in gold in 2003?

This is true of every asset. No market goes up forever. If it falls and then recovers, and you never sold, you still took a loss. Buy low, sell high. Pay your taxes. Then wait to buy low again.

Do not fool yourself. If your coins fall in a recession by 50% or more, you will suffer a loss. While they were down, you could have bought more.

Of course, the precious metals may not be a bubble. Commodities may not be a bubble. They may recover tomorrow and soar, despite Federal Reserve deflation and 0% CPI price inflation.

But commodities have been sold as hedges against inflation. There is no inflation. There is recession. It may be a long recession. In recession, cash is king.

Gold could fall. I expect it to fall. So, you may pay a price for owning gold coins. I expect to.

If you are not willing to pay the price, you should sell all or part of them, or short gold bullion to compensate you for the loss. In short, count the cost. This is a universal rule (Luke 14:28-30).

I think the precious metals are a bubble market today. It is ending. Here is a crucial sign that it is ending. India is not buying. When Indians stop buying gold, they must be replaced by new buyers. Who might they be?

If you're not sure what to do, set target prices for selling a percentage of your gold stocks, gold bullion, and even some gold coins (if your percentage of coin holdings is above 15% of your investment portfolio). But do this in order to do something profitable with your money, such as selling stocks short. With respect to coins, consider shorting gold bullion as a hedge against losses in your coin portfolio. This way, you can keep the coins.

If you double your money on the way down by shorting stocks, and if gold also falls, you can buy three times more gold at the bottom. Maybe more.

But do you trust yourself to get back in at the bottom? If not, sit tight and suffer the loss. But do not kid yourself. It is a loss. It keeps you from buying even more.

On March 7, I published an article on commodities in a recession.

On March 15, I issued a warning on the fact that inflation has ended and the precious metals were not rising because of inflation.

On March 17, I ran an article on how to short gold.

On March 18, I ran an article on falling base metals prices and how they had turned bearish. I warned that gold was likely to be next.

On that day, gold fell briefly below $980. The 5-day move indicates resistance above $1,000.

One day's move should not be regarded as a definitive turning point -- not after a seven-year run. But there are signs that the run is over for now. It is time to think about recession and even price deflation. As I have said for months, the FED is deflating. We should expect prices to follow.

Silver and platinum also fell on March 18. They are moving together in lock-step, up and down, yet the economic fundamentals for the three are completely different. So, something is driving them that cuts across individual markets. But what? I think it is the last of Greenspan's bubbles: the commodity bubble. I think the bubble is about to end.

But what about oil? Yes, even oil. But the rate of declining price will be less than with other industrial commodities. I think this will also be true of gold.

I believe in the Austrian School's theory of money, including the business cycle. I have written a short book on this. I am not so committed to a position proclaiming the ever-rising price of gold that I am willing to abandon Mises' theory of the boom-bust cycle in order to hold such a position.

Gold is ideal for Mises' inflationary crack-up boom, although not as good as a home with a garden in the country and a few thousand gallons of diesel. This is not the crack-up boom. There has to be monetary inflation for a crack-up boom to occur. Today, there isn't any.

The main counter-indication is the falling dollar. But you can hedge against this by purchasing foreign currency accounts. Everbank offers them. So does the Merk Fund. You do not need to own gold to hedge your position.

Your hesitation may be the tax consequences of selling, or the reporting consequences. Fair enough. You may not want to short the stock market with your after-tax profits in gold. But then you should be prepared for a decline that could last as long as the recession. With the T-bill rate at 0.92% on March 18, that tells me that fear is rampant -- that this will be a severe recession.

I do not recommend selling gold coins unless you think you will need cash in the recession or unless you are doing so to buy more coins in a downturn. Sell other gold assets first and then short gold to hedge your position in gold coins. Consider shorting bullion at $949 if you own only gold coins. This is a wash: what you lose in one account, you gain in the other.

I recommend selling in stages. If gold goes below $950 or above $1050, sell 10% of your non-coin gold. Sell 10% for every $50 drop or increase of the closing price, down to your core holdings of emergency coins.

Economists and psychologists have for two decades studied a phenomenon known as the endowment effect. People grow attached to property within minutes of having taken ownership of it. Once this attachment occurs, they do not want to sell it, even at a price considerably higher than they would have paid before they owned it. For an investing strategy, this is utterly irrational, but it is nearly universal. Be aware of this. Do not hold onto anything marketable just because you own it. The question is this: "What can I do with it that I could not do if I owned something else?" And this: "What could I do with something else that I cannot do if I hang onto this?"


Conclusion

I could have kept quiet on this. That would be the safe thing to do. Other gold bugs are saying gold will rise. If they are correct for another $200 or $500, I will look prematurely cautious. I could keep quiet and melt into the pack. That is not my style.

When an investment moves up by 4 to 1, and when the reason offered for this move -- inflation -- no longer exists in the near term, then I say it's time to begin to form an exit strategy. Remember this law of life: "Things are easier to get into than out of."

Ask yourself this. Do you think it is more likely that gold will double in a time of deflation or that the stock market will fall by 50%? Invest accordingly.

I recommend shorting gold below $950 as a way to hedge coins, which you may not want to sell. I do not recommend shorting gold as a stand-alone speculation. It is safer to short stocks. That is my view of this recession.

Finally, for those of you who think that M3 points to enormous price inflation, let me prove to you that M3 was totally misleading from day one and deserved to be discontinued years ago. MZM is not much better, and neither is M2. Click here:

Until you read a cogent response to this article, forget about M3. It has indicated the coming of severe price inflation every year for two decades. It was wrong every year.

Through all this, I have not mentioned a war in Iran. I have not mentioned a terrorist attack on a major city with something like airborne anthrax. Both are possible. That is when you want gold coins, not gold stocks or bullion across the ocean.

So, in conclusion, let me remind you about the reality of losses. My wife has paid life insurance premiums on me for 36 years. That money is gone. I could have invested it. (Of course, I might have lost it in bad investments.) That money is a dead loss. But I'm not.