Investing in Gold
As a Hedge for Y2K
The Year 2000 Problem is already ushering us into a totally new economic
and monetary environment, out of which most computer systems and
investors will not escape unscathed.
In my 40 years in the investment world, 27 were as a securities broker, out of
which 13 (1967-1980) were as a gold stock specialist. During this
period, I have studied precious metal valuations very carefully.
In the mid 70's, I urged my clients to follow me into gold, (then $35/oz)
and got them out in January 1980, when gold was over $700/oz. While
I have no expectation that gold will again multiply 20 times from the
current level of $300, I do believe the Y2K Problem will afford
enormous profits to those who hold a substantial percentage of their
assets in that truly precious metal.
However, capital appreciation is the third best reason to hold gold. The first
two are destitution prevention and financial survival, both of which will be
difficult to maintain during the next two years. The following suggests why:
1. Banks: "That Year-2000 software bugs could cause problems in the
nation's banking system is hardly in doubt... Aside from bank holidays,
additional governmental regulations could involve currency regulations (e.g.,
prohibitions against importing or exporting foreign currencies), daily limits on
cash withdrawals from banks, or restrictions on ownership of gold, thereby
raising its price. We may find ourselves faced with massive inflation, a fearful
population that observes its phones, its cars, its jobs, its banks, and a
government reeling from its Year-2000 bugs which might well decide to use
its cash to purchase tangible goods such as food and clothing. The
phenomenon of large quantities of cash chasing after a fixed amount
of goods could cause massive inflation. And a rise in the price of
gold.
2. Stocks: Authors Edward & Jennifer Yourdon may have said it best in their
book Time Bomb 2000: "...some companies may come through the Year
2000 Crisis in a substantially weakened state, with future prospects
dimmed by expensive lawsuits (already estimated at $1.5 trillion) and
continuing Year 2000 malfunctions within their mission-critical computer
systems. That kind of assessment would almost certainly drive down the
price of a stock; and if such an assessment were made, collectively, about a
majority of the companies comprising the Dow Jones index, it would not be
surprising to see a Year-2000-induced slump that finally brings an end
to the long bull market of the 1990's."
3. Wall Street: Not even so much as hinting at Y2K, international
economist Paul Krugman said in a Reuter's article: "sell US stocks
(they) really look overvalued right now... Wall Street's bull run is
irrational exuberance."
4. Inflation: When money is pumped into the world economy, it causes
inflation. It also causes higher interest rates, higher prices of commodities
(including gold), and lower bond and stock prices. If you haven't heard that
the money supply is on the increase, consider that the monthly figures of the
M1 money supply in the U.S. as reported by the St. Louis Fed as being over
9% for the past six months, M3 has been increasing at over a 10% rate for
the past three years, and when the new $20 bills are issued later this year,
our currency will have been inflated from $127 billion to $574 billion, or an
increase of 351% since the new $100 bills were introduced in 1996! If you
don't believe that inflation is coming, perhaps you might ponder why Mr.
Warren Buffett recently bought and took delivery of 120 million ounces of
silver and sold 5% of his stock holdings.
5. Horrendous Year 2000 expense: Again a quote, this time from Capers
Jones, author of The Year 2000 Software Problem: "As the Year 2000
rapidly approaches, an anxious clock is ticking (less than 500 days) for the
world business community. When the twentieth century ends, many software
applications will either stop working or produce erroneous results because
their logic cannot accept the transition from 1999 to 2000. This problem is
embedded in millions of aging software applications, and the costs of fixing
the Year 2000 software problem may constitute the single greatest expense
in history."
Jack Weber
1 September 1998
Jack Weber's Biography: y2ktimebomb.com
Mr. Weber's article was first published at Westergaard Year 2000, which
graciously granted REPRINT PERMISSION.
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