Someone raised the question about whether it's a good idea to pay down debt before 2000. Surely if the worst does happen, gold prices will go up, probably way up, regardless of whether there's inflation or deflation. Wouldn't it be a good idea to rack up as much debt as possible since you can then pay off the debt which is now in depreciated dollars? Does this make sense?

Steve Francis

-- steve francis (sfrancis@sympatico.ca), April 03, 1998

Answers

Steve, I've asked this question numerous times, mostly of the folks on the chat at www.kitco.com (a site you outta check out if you're interested in gold). With one exception, all who have answered strongly reccomend paying down debt and never buying PMs (or stocks) on credit. I can definately see the blunder of buying into the stock market on credit, but I do believe that buying gold on credit is a great idea. I am personally exercising this option for the exact reasons you mentioned, and some you did not. Lets look at potential pros and cons; Pros 1.The US markets are (arguably) poised for a drastic correction, Y2K notwithstanding. Gold has lamented at an 18 year low now for months while the stockmarkets have balooned to record highs and continue to do so. When this bubble bursts, PMs are gonna skyrocket, some people think into the thousands of $s/oz of gold. Realistically,let's say the price doubles, you sell off a little more than half of your gold to pay off the debt, and walk with the other half. 2.On 1-1-2000, there is a good chance that it absolutely WILL NOT MATTER how much debt you carry, possibly never will matter again. How much gold you posess may very well determine the difference between poverty and powerlessness, and wealth and comfort. Your level of debt connot affect you this way. Think about it, what's the worst thing that can happen to you if you accumulate debt and cannot pay it off? Bankruptcy. Big deal. 3. In the event Y2K does prove to be the meltdown it has the potential of, paper money may become literally worthless. A barter economy could spring forth, in which case PMs will be the only easily portable store of value. This is why their called precious metals. 4. If Y2K turn out to be a benignlittle blip on the screen, you can sell off the gold to repay the debt. Assuming the price of gold remains at todays LOW levels, and assuming that interest levels remain constant, you'll only be out the interest and the dealers premium. But, I am sure beyond any doubt that gold will NOT remain at these prices much longer. 5. Price of gold (POG) is at bargain prices right now, actually below average price of production.

CONS; There are'nt many, the biggest is the possibility of theft. There have been many people killed for their gold over the years. Also, as touched on above, this whole Y@K thing could be a major flop,, POG could drop further (not likely), interest rates could soar, you could lose some money. I've given this thing alot of thought, and for me it's the way to go. It is a little risky, everything is, but the potential benefits are enourmous, possibly even lifesaving. Buy a bunch of little coins, 1/10th and 1/20th oz . They'll cost ya more but when an oz is worth a thousand bucks, and you need to buy a sack of beans, what are you gonna accept as change? Dollar bills? Hope this helps. Feel free to e-mail me.. Grant

-- Grant Blakely (cblakely@htcomp.net), April 05, 1998.

Personally I think it's extremely dangerous to borrow on the assumption that Y2K will bring forth either (hyper)inflation or a new dark age. Because there is another possibility: a vicious DEFLATIONARY recession like the one in the 1930s, in which cash is king and debt is disaster.

If it plays out that way and you're heavily borrowed, you may find yourself bankrupted by your creditors in a financial environment where there's no welfare or any other safety net. In some of the darker scenarios, you might even find that debtor's prisons have been reintroduced!

FWIW, I'd say that if you CAN pay off all your debts with plenty of cash to spare (for your contingency plans), then you should. If you can't, then you are already a hostage to fortune. Best plan then is probably to ignore the long term and make sure you're prepared for more immediate Y2K crises. Provided you don't go to extremes, such preparation isn't likely to make a huge difference to your level of long-term indebtedness which you can't in any case do anything significant about between now and 2000.

Short of a new dark age, it's close to certain that paper records of your debts exist and will be acted on once the immediate panic is over.

-- Nigel Arnot (nra@maxwell.ph.kcl.ac.uk), April 06, 1998.

Hi Steve,

First, I want to echo Nigel's comments. Y2k caused dislocation in the financial community could cause either deflation or inflation. The previous postings covered the effects of either. That's what "diversification" is all about! :-)

A very good reason to be debt free is flexibility; something Ed Yourdon frequently mentions in _Time Bomb 2000_. You will have greater degree of freedom to act during and (hopefully) after Y2K disruptions. You will have the means to purchase/trade what is available. Perhaps you will be in a position to purchase and invest in captial assets afterwards. Your credit rating should be extremely good compared to most other people after the disruptions.

Good luck!

-- Andrew J. Jackson (ajackson@onramp.net), April 13, 1998.