Will There be Enough Gold When the Gold Rush Really Hits?

By Kevin A. Demeritt

It's that old supply-and-demand issue.

When everyone wants something-say, Hanna Montana tickets-its price can go right through the roof. And though Ms. Montana's glittering performance may not exactly thrill you, the fact that it thrills about 10 billion young girls has, in many cases, actually sent the price of her otherwise $60 tickets to upwards of $2,000.

That may soon be gold's story.

Like Hannah Montana, gold certainly isn't everyone's favorite. For a good number of traditional stock-and-bond investors, the precious metal may as well be radioactive. "Gold? It's a barbarian's relic. Why on earth would I want anything to do with that?" is what you might overhear one of these stuffy investors mutter.

But with the dollar unable to raise itself from record lows, it's not out of the question to, one morning, find our economic world turned upside down...and, with it, those investors who've looked down their noses at gold all their lives.

If that happened, it could motivate these people to become official card-carrying gold bugs virtually overnight...not that there'd be an abundance of gold to buy at that point.

WILL THE LAST ONE HOLDING DOLLARS PLEASE SHUT OFF THE LIGHTS?

It's already an exhausted cliché to say that the dollar is in freefall-that's how much of a given this dollar dropping phenomenon has become (underlined by the fact that even McDonald's has run ads making a joke of the dollar's woes).

Even so, most people remain under the impression that the current plunge merely falls within the acceptable range of the dollar's broad scale of flexibility and that, once it's gotten this bout of weakness out of its system, the greenback will simply revert to its normally indestructible self.

Ho hum. End of story.

But, this time, the story may be different.

The dollar could literally descend so low against the euro (it's now at a record $1.58), could fall so far on the Dollar Index (it's at an unheard of 72), that nations could ultimately feel backed into a corner. And, once there, they could make some irrevocable, once-in-our-lifetime decisions.

For example, Saudi, assorted Middle East nations and China have nearly $3 trillion in cash reserves. With no dollar bottom in the foreseeable future, China has threatened to use the nuclear option-dumping dollars in favor of the euro and a basket of other currencies.

As it is, the idea of "dollar-divesting" appears dangerously contagious. If enough nations adopt the idea-and many are now mulling it over-it could, as unbelievable as it sounds, demote America's currency to almost third-world status.

If and when that happens, where would investors fly in a flight from the dollar?

Well, they'd fly to gold of course. But that's just where the story gets interesting.

MODELING THE PRICE OF GOLD IN A FLIGHT FROM THE DOLLAR

The trouble here is that gold has a notoriously inelastic supply. You'll never hear, "Sure, go ahead, buy that 1,000 ounces of gold. We'll dig more up tomorrow."

Uh uh. While people are mining the precious metal all the time, worldwide production has stagnated these last five years and is now running at a relative snail's pace. A flight from the dollar to gold would quickly eat up its current inventory, and, like those Hannah Montana tickets, send the price of the metal to the moon.

Analyst Doug Dillon, in his article, "There's Just Not Enough Gold; Modeling A Dollar Flight To Gold" gave us a picture of what this might look like. If there were just a 1% shift of the assets of US households (now in stocks, bonds and funds) into gold, maybe representing an "I'm worried about the dollar" attitude (but still falling far short of a panic), Dillon's model points to inelastic gold hitting $4,769 an ounce.

On the other hand, if there were a flight from the dollar that amounted to, as Dillon put it, a "minor panic," his model literally has gold ascending the $10,000 an ounce throne.

As astonishing as all this sounds, without enough gold around to satisfy panicky investors, these kinds of unreal prices are not out of the question.

LINED UP AT MIDNIGHT FOR GOLD

Although it never fell under Dillon's "minor panic" category, the last time we had anything resembling a run on gold was back in 1980. Oil prices were way up, Inflation was out of control, the Russians were invading Afghanistan and smiling Jimmy Carter had no answer for any of it.

As a result, gold and silver both reached record territory. At one tiny Woonsocket, Rhode Island coin shop, people were lined up around the block at midnight, no less, looking to either sell their gold and silver stuff-like silver tea sets-at those record prices or else buy precious metals as an antidote for the inflation that swirled all around them.

At the height of it, the precious metal market began having problems getting people in and out. Dealers actually ran out of gold coins, bars and bags of "junk silver" to sell. Values moved so fast it was hard to put price tags on precious metal products. Gold liquidity, which is usually excellent, became sporadic in the face of such urgent buying and selling. It was all an example of what happens when a whole lot of people suddenly want something of increasingly limited availability.

Was that midnight line around the block a preview of coming events? Will we see a full-blown flight from the dollar in our lifetime? Will Doug Dillon's $4,000 or $10,000 gold come to pass?

Think about all that the next time your daughter or granddaughter asks you to cough up $2,000 so she can go see Hannah.•

YOU'VE SEEN HIM on Fox News Television and heard him on the Rush Limbaugh Show. He's a published author, writer and an expert guest on more than 1000 radio programs discussing today's economy and gold.

Kevin DeMeritt, President of Lear Capital, is a nationally renowned analyst whose insight into the future of domestic and global economies is unmatched.

His book, The Bulls The Bears and the Bust, reviewed by the Associated Press, predicted the market crash of 2001 and the ensuing rise of gold to the status of best investment.

At the helm of Lear Capital, Kevin DeMeritt has made Lear one of the most highly endorsed gold companies in the country. Relying on his insightful recommendations, uncanny market and trading skills and 20 years of experience in investment quality gold, Kevin has navigated thousands of portfolios to profitability through boom and bust times.

And, now more than ever, his insights are welcome by nervous investors. Visit LearCapital.com for all the help you need.
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