October 27, 1997: Stock Market, Gold, & Debt - Andrew Gause & Don McAlvany
Gause traces the crisis beyond the Asian currency collapses, pointing to overinflated price-to-earnings ratios, rampant margin buying by individual investors, and mutual fund managers who leveraged their holdings. He predicts another 1,500 to 2,500 points of decline and issues a strong buy signal on gold coins, arguing that physical gold represents the only reliable store of value. He also describes how insiders likely exited the market weeks before the crash.
Don McAlvany follows in the second half, characterizing the market as a speculative mania rather than a healthy bull run. With 75 million Americans invested in the most overpriced market in history, he warns the correction is far from over. Both guests recommend moving 40 to 60 percent of investment funds into physical gold.
Key Moments
Recapping the day: Dow's 554-point drop, the largest single-day point drop ever: Art opens with the same-day numbers: the Dow Jones fell 554.26 points on October 27, 1997 - the biggest single-day point drop in market history at that time, though not a record percentage drop. Hong Kong, just reopened, was down 16.2% as they spoke, and brokers on Wall Street had been heard cheering when the 350-point circuit breaker hit just so they could take a breath.
Gause: the Fed will work the phones overnight and tell brokerages to buy: Andrew Gause names the specific Fed mechanism he expects: tonight the Federal Reserve is calling the heads of the brokerage houses and ordering them to buy in the morning, and the Fed will provide market liquidity 'up to and including doubling the money supply' if necessary. Brokerage houses pledge stock to the Fed, the Fed creates dollars against it - a textbook description of monetization to support equity markets.
Gause: the IMF, Soros currency raids, and the path to a one-world currency: Gause endorses a fax linking the crisis to IMF pressure on Asian currencies and George Soros's currency raids, and predicts a trilateral architecture - a North American, European, and Asian currency unit - eventually merging into a single IMF-issued world currency. He says it won't come from a position of strength but from extreme economic weakness, the way the New Deal was accepted in the 1930s.
Why the 350-point circuit breaker may have made the panic worse: Art pushes Gause on the new 350-point trip - raised from 250 'just in the nick of time' - that triggered for the first time in history that day. Both argue the psychology backfired: telling small investors they cannot sell their stock is the fastest way to make them want to, so when the breaker hit and the market reopened it dropped another 200 points in 20 minutes. Gause predicts a further 1,500-2,500-point drop and warns that buying these dips will get investors' heads handed to them.
Gause issues an all-out buy on gold; Swiss National Bank had just announced 40% sale: Gause says his firm, on Friday at 2 p.m., put out the first all-out buy signal it has ever issued on gold coins, with gold dipping to $308 an ounce. He frames the price weakness as a setup: on the prior Thursday the Swiss National Bank announced it might sell 40% of its gold reserves, the Netherlands and Australia had been dumping, and big private buyers like Phibro/Salomon Brothers had been the net buyers - a deliberate effort to talk gold down before a crisis flight to it.