Gold And Barrick: Why We Had Better Buy Physical Gold Or Unhedged Miners Of Physical Gold

Politics and money usually gets into social equity issues, but it doesn’t have to. Last evening’s nationally televised heathcare reform speech to Congress by President Obama is a case in point.

I must admit, I didn’t watch it. Yes it was on in the TV in the room, but the volume was turned off and I was looking the other way, talking to friends at the Marley Resort bar in Nassau, enjoying AÑEJO and Coke. This wasn’t a matter of lounging around, this was a meeting of traders. We were discussing the events of the day, not the fight that is going on in Washington.

When I returned to my residence, I did tune in to the replays for about as long as it took me to hear the word “deficit-neutral” and not being brain-dead I tuned out. Yes, for social equity if anything, we need healthcare reform, but how can anybody in their right mind believe a politician who says he has a near trillion dollar budgetary expense but there will be cut-backs elsewhere to fully compensate, and read his lips, there will not be a single penny of additional cost to the taxpayer.

But isn’t that the problem? The taxpayer will have healthcare but no job, hence no taxes to pay or, to put it another way, no revenues by government to continue to pay their workers healthcare or even their pay.

If big government continues to get bigger, I foresee bigger lines at foodbanks and obviously lineups for healthcare. Does the US deficit not concern these politicians who jumped to their feet in support of the President last evening?

Debt, deficit, denial, discouraging, depression. I don’t like the trend.

As traders, as long as we have the right to sell as well as buy, which is a right that we may not have for long if the nonsense in Washington keeps up, we can continue shorting the US Dollar and buying gold (and silver). But, we had better buy physical gold or unhedged miners of physical gold, because we don’t want a piece of paper that says its gold, but is really wooden nickels.

Take the case of Barrick (NYSE:ABX). Yesterday they sold $3.5 billion in stock to raise cash to buy back their gold shorts (called hedges) because they cannot deliver physical gold. They cannot buy it in the physical market because the owners would only sell it for $1200, $1500, $2000, and much higher.

http://www.bloomberg.com/apps/news?pid=20601082&sid=aOtemPIX8MVk

So what’s Barrick going to do with the cash? They realize it has little value (the treasury rate is 0.1% return), so they are going to deliver this $3.5 billion stack of wooden nickels to the holders of their gold contracts, waiting for their gold. Even the world’s oldest profession won’t take wooden nickels, so, burn me once, shame on you; burn me twice, shame on me, now the gold futures market is going to die. Contract buyers will no longer trust sellers. And other than Barrick and a few other desperate mining companies, who are the sellers of these contracts anyway? Well, guess what, it’s Humungous Bank & Broker (HB&B), led by none other than Jamie Dimon, the JP Morgan (NYSE:JPM) CEO who, on behalf of his HB&B colleagues is Ben Bernanke’s puppeteer.

So this all comes full circle. Is it any wonder that a once powerful US Dollar is now just a pile of wooden nickels, costing a banker nothing to borrow from their banker, the one that has a phony balance sheet.

And yes the swan dive of the US Dollar is going to pump up share prices for a while, but as an officer of the Bank of China remarked today, it’s creating an asset bubble everywhere he looks, whether it’s stocks, bonds, commodities, whatever.

Forewarned is forearmed. Prepare yourself. Every time you see a dip in the gold price, buy the physical or the physical backed stocks of companies like Central Fund (CEF) and Silver Wheaton (NYSE:SLW). This could be the 1930’s all over again, where gold was the leading asset class and the old Homestake Mining was the leading stock.

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