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We Have Some Bad News

By Justin Spittler

The stock market just finished a brutal third quarter…

The S&P 500 fell 8%...and so did the Dow and the NASDAQ. It was the worst quarter for U.S. stocks since 2011.

Stocks around the world dropped too. The MSCI All-Country World Index, which tracks 85% of global stocks, also had its worst quarter since 2011. The STOXX Europe 600 Index, which tracks 600 of Europe’s largest companies, fell 10%. It was the worst quarter for European stocks since 2011 as well.

China’s Shanghai Composite fell 28% last quarter, its largest quarterly decline in seven years. The MSCI Emerging Markets Index fell 19%. It was the worst quarterly decline for emerging market stocks in four years.

In total, last quarter’s selloff erased nearly $11 trillion in value from stocks around the world.

•  Casey Report readers know this is part of our “script”…

In the latest issue of The Casey Report, E.B. Tucker called the end of the six-year bull market in U.S. stocks that began in 2009:

We believe the era of asset prices soaring on a wave of easy credit is over. Last month’s major stock market decline is the start of a very tough time for stocks and the economy…

Regular readers know the Federal Reserve’s response to the last financial crisis was extraordinary. The Fed cut its key interest rate to effectively zero in December 2008…and it’s left it there ever since.

The Fed made it ridiculously cheap to borrow money. Consumers borrowed to buy homes they would never be able to afford in a “normal” economy. Property developers borrowed to build new houses. And investors borrowed to buy stocks.

Easy money allowed a buying binge that sent prices soaring. Many asset prices have completely lost touch with reality. We recently explained how U.S stocks are roughly 50% more expensive than their long-term average, according to a popular valuation metric called CAPE.

•  Many currencies also had a horrible quarter…

As a group, Asian currencies had their worst quarter since the 1998 financial crisis. The Malaysian ringgit fell 14% against the dollar. And the Indonesian rupiah fell 9%.

On top of that, emerging market currencies as a group hit their lowest level since 2002. The Brazilian real lost 23% during the third quarter…the Russian ruble lost 16%.

Regular readers know commodities have not been spared from the bloodbath…

The Bloomberg Commodity Index, which tracks 22 different commodities, had its worst quarter since 2008. It fell 15% and is now at its lowest level since 1999. Wheat, lumber, and oats each fell more than 17%.

Oil was hit the hardest. It had its worst quarter since 2009. A barrel of oil now costs 26% less than it did three months ago…and 50% less than it did a year ago.

•  Regular readers know China’s slowing economy is a big reason for the commodities selloff…

China is the second largest economy in the world. It’s also the largest commodity consumer. China consumes half of the world’s aluminum, nickel, copper, steel, and coal.

China also consumes 60% of the world’s concrete. Last December, Microsoft founder Bill Gates pointed out that China poured more concrete between 2011 and 2013 than the United States did during the entire 20^th century.

But now, China is growing at its slowest pace in 25 years. That means it’s building fewer buildings, roads, and bridges. So China doesn’t need as much steel, aluminum, concrete or other “building block” commodities.

This is hurting countries that rely heavily on commodity exports to keep their economies going…like Australia, New Zealand, and Canada. The Australian dollar, the New Zealand dollar, and the Canadian dollar have each lost more than 16% against the U.S. dollar since last September.

•  With financial markets around the world looking extremely fragile, “Dr. Doom” says the “U.S. could be on the verge of an economic collapse”…

Marc Faber is one of the world’s most respected contrarian investors. He predicted 1987’s Black Monday, when the Dow lost an incredible 23%. It was the worst day in the history of the U.S. stock market. Faber also predicted the Asian financial crisis of 1997-1998.

Faber’s knack for calling huge crashes has earned him the nickname “Dr. Doom.” Now he thinks the recent selloff in U.S. stocks could be the start of something very dangerous. He’s been warning investors about a coming crash for months.

During a July interview with CNBC’s Trading Nation, Faber said the market was beginning to crack. It was a bold call…at the time, U.S. stocks were still near all-time highs. But Faber predicted U.S. stocks were going to plunge: “In the U.S., the market could easily drop 20 to 40%, easily.”

The next month, the S&P 500 lost 11% in six days. And, for the first time in four years, the U.S stock market entered a correction. (A correction is when an index falls 10% from a previous high.)

Faber also said the U.S stock market was in “a stealth bear market.” And he listed a few reasons stocks could keep falling:

….the valuations, as you know, are relatively high. And we have numerous other problems in the world: [including] excessive debt loads in the most advanced economies; slowing down Chinese economy that, in my opinion, will go into recession; and collapsing commodity prices, especially on the industrial side.

•  Faber had simple advice for investors...

He said it’s time to get defensive. And he urged every investor to have “some money outside the financial market and outside the financial sector.”

Like us, Faber thinks gold is the best defense during a market collapse…the ultimate form of financial wealth insurance.

Later this month, Faber will join us at the 2015 Casey Research Summit. At the Saturday night banquet dinner, attendees will have a chance to eat dinner with Dr. Doom himself. If you sit at Faber’s table, you can pick his brain about where the economy and stock market are headed while sharing a meal and a glass of wine.

And if you don’t sit at Faber’s table, you can sit with one of the other investing legends who will be there…including multi-millionaire entrepreneur James Altucher, famous trend forecaster Gerald Celente, and of course, Doug Casey himself. Not to mention senior Casey Research editors like Louis James, Bud Conrad, and E.B. Tucker.

The Summit is only two weeks away…on October 16-18 at the five-star Loews Ventana Canyon Resort in Tucson, Arizona. We hope you can join us, but you have to act soon…Click here for more information on the 2015 Casey Research Summit.

The article We Have Some Bad News was originally published at caseyresearch.com.

August 31, 2015

Why Stocks Could Fall 50% if the Fed Makes the Wrong Move

By Justin Spittler

One of the most brilliant investors in the world just made a stunning call…

Ray Dalio is the founder of Bridgewater Associates, the world’s largest hedge fund. Dalio manages nearly $170 billion in assets. He has one of the best investing track records in the business. When he speaks, we listen.

Dalio has been saying for a long time that governments and businesses around the world have borrowed far too much money. He thinks their high levels of debt have created an extremely fragile and dangerous situation.

The stats back up Dalio’s view. In the United States, government debt as a percentage of gross domestic product (GDP) is 102%...its highest level since World War II.

Countries around the world are in a similar position. Japan’s debt-to-GDP ratio is at 226% and climbing. In Italy, government debt/GDP jumped from 100% in 2007 to 132% in 2014.

Dalio explained how these extreme debt levels are one reason for the recent market volatility we’ve been telling you about…

These long-term debt cycle forces are clearly having big effects on China, oil producers, and emerging countries which are overly indebted in dollars...

•  In an article published yesterday, Dalio said the Fed should start another round of quantitative easing…

Quantitative easing (QE) is when a central bank buys bonds or other assets to lower interest rates and boost asset prices. It’s mostly just another name for money printing.

The Fed started QE in a desperate attempt to stave off disaster during the 2007-2008 financial crisis. It launched the first round in November 2008…a second round in November 2010…and a third round in September 2012. It stopped its last round of QE last October.

The first three rounds of QE fueled a big bull market in US stocks. The S&P 500 has gained 113% since the Fed started QE in 2008.

Dalio thinks the Fed should bring QE back. It’s a bold call, and one that most economists disagree with. Most economists expect the Fed to raise rates soon. Raising rates would tighten monetary conditions…essentially the opposite of QE.

•  Dalio is worried the Fed won’t get it right…

Dalio thinks the Fed will raise rates, even if it’s just to “save face.” He pointed out that the Fed has threatened to raise rates so many times that not raising rates would hurt its credibility.

Dalio’s big concern is that the world is too indebted to handle a rate hike. He thinks it could cause a financial disaster like a stock market crash, or worse.

In a letter to clients earlier this year, Dalio made a comparison to 1937, when the world was in a similar situation of having way too much debt. He explained that the Fed made a huge mistake by raising rates, and it caused the stock market to plummet 50%.

The danger is that something similar could happen if the Fed raises rates today.

•  We asked Dan Steinhart, executive editor of Casey Research, for his take…

Here’s his response…

I don’t know what the Fed’s going to do. That’s a guessing game. What’s important is Dalio’s point that we’re in an extremely fragile situation. The world has too much debt, and the Fed’s margin for error is tiny. If it takes a wrong step and stocks plummet 50%, it could cause a bigger financial crisis than in 2008.

So the real question is, do you trust the US government and the Fed to manage this dangerous situation?

I don’t. This is the same Fed that blew two huge bubbles in the last twenty years. First the 1999 tech bubble…then the even bigger housing bubble, which almost took down the whole financial system when it popped in 2007.

And keep in mind – this is all a gigantic experiment. The Fed is using tools, like QE, that it had never used before the financial crisis. No one in the Fed, the US government, or anywhere else knows how this is going to work out.

Who knows…maybe the Fed will surprise us and successfully guide the economy through this dangerous period. But that’s not an outcome I’d bet my savings on.

Dan went on to explain two things you can do to prepare for another financial crisis…

One, own physical gold. Unlike stocks, bonds, or cash, it’s the only financial asset that has value no matter what happens to the financial system.

Two, put some of your wealth outside the “blast radius” of a financial crisis. We wrote a new book with all of our best advice on how to do this. And we’ll send it to you today for practically nothing…we just ask you to pay $4.95 to cover our processing costs. Click here to claim your copy.

The article Why Stocks Could Fall 50% if the Fed Makes the Wrong Move was originally published at caseyresearch.com.

August 11, 2015

The Next Financial Disaster Starts Here

By Dan Steinhart

Individual investors take note…

Some of the world’s best money managers are betting on the biggest financial disaster since 2008.

You won’t hear about this from the mainstream media. Networks like NBC or CBS don’t have a clue… just like they didn’t have a clue the US housing market would collapse in 2007.

Carl Icahn, a super successful investor who’s the 31^st richest person in the world, said this investment is in a bubble. He said that it’s “extremely overheated”… and that “there’s going to be a great run to the exits.”

And this investment isn’t some complex derivative that only Wall Street and hedge funds can buy. Millions of investors hold it in their brokerage accounts.

The dangerous investment is junk bonds.

Junk bonds are usually issued by companies with shaky finances. They pay high interest rates to compensate investors for their high risk.

Low interest rates have pushed investors into these risky bonds. Junk bonds are one of few places where investors have been able to get a decent income stream.

In 2008, the Federal Reserve cut interest rates to near zero to fight the financial crisis. It has held rates near zero ever since. Right now, a 10-year US government bond pays just 2.3%. That’s half its historical average, and near its all-time low.

Investors looking for income have turned to junk bonds. This chart shows the growth in junk bonds since 2002. As you can see, junk bonds didn’t grow much from 2002 to 2008. But when the Fed cut rates to zero in 2008, junk bond issuance took off:

JPMorgan reports that the number of junk bond issues soared 483% between 2008 and 2014.

You might be thinking that you don’t own junk bonds… so why should you care?

It’s true that many investors don’t own junk bonds directly. But many do own them through junk bond ETFs.

The Financial Times recently explained why junk bond ETFs are dangerous:

… junk bond ETFs give the illusion of liquidity. Not all that long ago, bankers and asset managers promised to turn subprime mortgages into gold-plated, triple-A rated bonds.

Today, the apparently miraculous transformation is of deeply illiquid credit instruments, such as junk bonds and leveraged loans, into hyper-liquid exchange traded funds.

Junk bonds are not “liquid.” That means there aren’t many investors buying and selling them every day. The Wall Street Journal reported that each of the top 10 bonds in the largest junk bond ETF traded just 13 times a day on average.

That’s not a typo. Investors only buy and sell these junk bonds 13 times per day on average. For comparison, investors buy and sell 47 million shares of Apple (AAPL) on average every day.

Junk bond ETFs are extra dangerous because they make junk bonds appear liquid. HYG, the largest junk bond ETF, trades more than 6.8 million shares per today on average. That’s more than McDonald’s stock.

But as Howard Marks, hedge fund manager and one of the most respected investors in the world recently explained:

No investment vehicle should promise greater liquidity than is afforded by its underlying assets. If one were to do so, what would be the source of the increase in liquidity? Because there is no such source, the incremental liquidity is usually illusory, fleeting, and unreliable, and it works (like a Ponzi scheme) until markets freeze up and the promise of liquidity is tested in tough times.

Because junk bond ETFs create the illusion of liquidity, most investors don’t see the danger. They think they can sell their junk bonds ETFs just as easily as they could sell shares of Apple.

They’re wrong. If too many people sell junk bonds at once, it could overwhelm the market and cause prices to crash.

Now, none of this has been a problem yet because junk bonds have been in a bull market. According to Bank of America, junk bonds have gained 149% since 2009.

But as Howard Marks added, ”Nothing is learned in the investment world in good times.” … “Most of these vehicles haven’t been tested in tough times.”

All bull markets eventually end. When this one ends, junk bonds could cause huge losses to investors who don’t know about these risks. Junk bonds could easily drop 15% or more in one month.

And here’s the craziest part…

Some of the world’s smartest and most successful investors are are betting on this exact outcome. They’re betting that the junk bond market will crash.

They’re calling it “The Next Big Short.”

You probably heard about the few hedge fund managers who made a killing when US housing collapsed in 2007. Dallas-based hedge fund manager Kyle Bass made $500 million by betting against housing. John Paulson made $4.9 billion by betting against mortgages.

Today, one of the largest private equity firms in the world is raising money to bet against junk bonds... just like Bass and Paulson bet against housing in 2007.

The Wall Street Journal reports:

Apollo [one of the world’s largest private equity firms] has been raising money from wealthy investors for a hedge fund that snaps up insurance-like contracts called credit-default swaps that benefit if the junk bonds fall. In marketing materials reviewed by The Wall Street Journal, Apollo predicted: “ETFs and similar vehicles increase ease of access to the high yield [junk] market, leading to the potential for a quick ‘hot money’ exit.”

Other hedge funds like Reef Road Capital and Howard Marks’ Oaktree Capital are also raising money to bet on a junk bond crash.

As you can see from the chart of HYG’s (the largest junk bond ETF) price, junk bonds are down since June:

There’s no way to know if this is the beginning of the end of the junk bond bull market. But if it is, huge losses could come very soon.

If you’ve made money investing in junk bonds, it’s time to cash in. Don’t bet against some of the best investors in the world who expect junk bonds to crash. We recommend selling junk bonds now.

P.S. Because this risk and others have made our financial system a house of cards, we’ve published a groundbreaking step-by-step manual on how to survive, and even prosper, during the next financial crisis. In this book, New York Times best-selling author Doug Casey and his team describe the three ESSENTIAL steps every American should take right now to protect themselves and their family.

These steps are easy and straightforward to implement. You can do all of these from home, with very little effort. Normally, this book retails for $99. But I believe this book is so important, especially right now, that I’ve arranged a way for US residents to get a free copy. Click here to secure your copy.

The article The Next Financial Disaster Starts Here was originally published at caseyresearch.com.

July 21, 2015

It Was the First Time the CIA Overthrew a Government…

By Nick Giambruno

62 years later, the aftermath is still troubling global politics.

Operation Ajax was a pivotal moment in US and world history. It was the first time the CIA overthrew a government.

Yet even today the US government would rather not talk about it. That’s why it remains an unknown story for many Americans.

The year was 1953. The objective was to oust Mohammad Mossadegh, the elected leader of the Majlis, Iran’s parliament.

Mossadegh was not a communist or a radical Islamist. He didn’t follow any objectionable ideology. Instead, he was a secular nationalist. But he was inconvenient.

Like many Iranians, he was proud of his Persian heritage. (Until 1935, Iran was still known as Persia.) Persia once was an imperial civilization, like Rome. Twentieth-century nationalists channeled that glorious past, and they were keen on independence.

So it’s no surprise Mossadegh was earnest about ridding the country’s politics of foreign influence.

At the time, Great Britain was the most active outside power in Iran.

For decades the British had enjoyed a sweetheart oil deal struck with a former, corrupt Iranian leader. It allowed them to control Iran’s petroleum industry and, by extension, the country’s entire economy.

To nationalists like Mossadegh, this was intolerable and infuriating. It would be like China getting a sweetheart deal from President Obama for control of the US auto industry. No red-blooded American would stand for such a thing.

It was the early 1950s. The smoke from World War II, a war that killed over 60 million people, still lingered. The horrors were fresh in everyone’s mind. Access to oil had been a decisive factor in that war. Had Hitler succeeded in securing his supply in 1942, the world might look very different today.

It was a concept not lost on the British. If any country wanted to win a big war, it needed oil. Lots of it. It was a matter of life and death.

Iran was a major source of oil for the British. Access to it was a strategic military asset of the highest order. One the British would not give up for any price.

Mossadegh understood this. He concluded that the only way to claw back the oil industry was to nationalize it. On May 1, 1951, he did just that. Shortly afterward, he stated:

Another important consideration is that by the elimination of the power of the British company, we would also eliminate corruption and intrigue, by means of which the internal affairs of our country have been influenced. Once this tutelage has ceased, Iran will have achieved its economic and political independence.

The British were not about to give up. They hatched a plot to regain their influence in Iran. But they couldn’t do it alone. They would need help from the US. But the US just wasn’t interested. So the British undertook a campaign to paint Mossadegh as a communist.

The Brits played America’s Cold-War fears like a piano. They convinced the US government that the commies were making inroads in Iran. Given that Iran was just south of the expanding Soviet Union, the story was plausible… but not true.

In the end, it worked. The Americans came on board. Operation Ajax was born. The objective: overthrow Mossadegh’s elected government and replace it with something more pliable.

MI6, the UK’s foreign spy agency, and the CIA would organize the coup. Kermit Roosevelt, a grandson of former US President Teddy Roosevelt, was the CIA officer in charge.

The goal was to return the monarchy of Mohammad Reza Shah Pahlavi (also known as “the Shah”) to power. (In Farsi, the Persian language, “shah” means “king.”)

The CIA and MI6 used classic methods of subterfuge. They paid Iranian goons to pose as communists and wreak havoc in Tehran, the Iranian capital, and vandalize its business district. The police couldn’t restrain them, and the violence grew.

The coup plotters knew such events would disgust ordinary Iranians, who were fearful of communism. It would cause them to demand action. That action would include the Iranian military stepping in. As part of the plot, the CIA and MI6 had corrupted key Iranian generals for just this moment.

As if on cue, the generals took charge and deposed Mossadegh’s government. The Iranian people didn’t resist. Instead, they cheered. They thought the military was saving them from a violent communist revolution.

Mossadegh’s government was out of the way. The coup’s operatives in the Iranian military had seized power. The path had been cleared for the Shah.

The Shah knew he owed his position to the US and UK. What they giveth, they could taketh away. The Shah was more than willing to do whatever the US and UK wanted him to do. Operation Ajax was a success… but it would not be an enduring one.

The Iranian people would eventually figure out what really happened. Many of them would come to despise the Shah as a puppet of a foreign power. To maintain his position, the Shah became more despotic… which only fed the opposition.

In 1979, 26 years after Operation Ajax, a popular uprising overthrew the Shah. A power struggle ensued, and Ayatollah Khomeini’s Islamist forces prevailed. The Islamic Republic of Iran was born. This time, it was an anti-American government that came to power. Decades of animosity followed, and it continues to this day.

It’s unthinkable to most that the Islamic Republic of Iran could offer any sort of investment opportunity. Many find the mere mention of the country distasteful.

There’s another country that most would have considered unthinkable to invest in at one time. Many got hot under the collar just at the mention of its name too: the People’s Republic of China.

If you had followed their thinking, you would have missed out on one of recent history’s most powerful economic booms. That’s precisely why you should ditch the conventional wisdom when it comes to thinking about profiting from Iran. If you don’t, you could be letting a once-in-a-generation opportunity pass you by.

Recently, I discussed investing in Iran with legendary investor Jim Rogers. He told us:

I bought Iranian shares in 1993, and over the next few years, [they] went up something like 47 times, so it was an astonishing success.

That was then. Now, additional sanctions make investing directly in Iran off limits to Americans and most Europeans. But that could soon change.

The conclusion of the negotiations on Iran’s nuclear program means the economic floodgates will open. Persia will once again be open for business. It would be a big deal: Iran’s $370 billion economy is by far the largest still excluded from the international financial system.

Iran has the world’s third-largest proven oil reserves (10% of the world’s total) and the second-largest proven natural gas reserves (17% of the world’s total). A tremendous amount of wealth is waiting to be developed.

Iran’s economy is not all about natural resources. The country is home to advanced nanotechnologies and the Middle East’s largest car manufacturer. Its young population of 78 million yearns for iPhones and other Western products, and there’s enormous built-up demand. That demand is getting ready to explode like Mt. St. Helens.

European and Asian companies have been scrambling to Tehran to line up business deals.

In short, the opening of Iran is a massive opportunity.

Even if the West doesn’t lift the sanctions, Iran will simply turn to the East to do business. Either way, the Iranian economy is on course to experience one of the greatest booms in recent history. It’s on a scale the world hasn’t seen since the opening of China. Opportunities like this don’t happen every day, every year, or even every decade.

But for the average American, Iran is at the bottom of the list of potential investment destinations. That’s what more than 30 years of hostility and charter membership in the “Axis of Evil” will do.

The sentiment couldn’t get any worse. As a contrarian, that’s just how I like it. But only if there is a solid reason to believe that the negative sentiment is misplaced. In the case of Iran, I am certain that it is.

In the not-so-distant past, I used to live in the United Arab Emirates… right across the Persian Gulf from Iran. Being there gave me the chance to see the country firsthand.

On the Ground in Iran

Hands down, Iran is the most fascinating country I’ve ever been to.

I’ve been to almost every country in the Middle East. Iran stands out for a number of reasons. Unlike most other states in the Middle East, Persia is not an artificial construct. By race, religion, and social history, it is a nation. And European bureaucrats didn’t dream up Iran by drawing zig-zags on a map. The map reflects the geographic reality of a country with natural, fortress-like, mountain borders.

For an American, getting there isn’t easy. But that’s part of the allure.

You can’t simply hop on a flight to Tehran from New York, like you would to Vancouver or London. You can’t enter the country unless the Iranian government has granted you permission in advance. And they take their careful time.

The US has no diplomatic relations with Iran. There is no Iranian embassy or consulate in the US at which to apply for a visa, but there is an Iranian interests section in the Pakistani embassy in Washington, DC, that can handle such requests. I was living near Dubai at the time, so it was easier for me to go to the Iranian consulate there.

But you can’t just drop in to the Iranian consulate and apply for a tourist visa. You have to work with an authorized service to assist you in the process, which is what I did. After I submitted my paperwork and waited a number of weeks, and then waited another couple of weeks, the Iranian government approved my application.

I immediately noticed that the Iranian visa in my passport was not the kind of cheap stamp you often get from Third-World countries. Instead it carried holograms and other anti-counterfeiting features. Things that are associated with documents from developed countries. It was a clue that Iran, a seemingly isolated and underdeveloped place, was more sophisticated than I had expected.

Sanctions have disconnected Iran from the international financial system. Your ATM and credit cards won’t work there. You need to bring cash (US dollars or euros work best) and exchange it for Iranian rials. Iranians also have increasingly returned to gold as a store of value and medium of exchange. This is no surprise. People in all corners of the globe have used gold this way for thousands of years.

As soon as my flight landed in Tehran, my Iranian “tour guide” greeted me. The Iranian government requires that minders accompany Americans at all times. It’s a result of the Iranian government’s not-necessarily unreasonable paranoia. They’d like to prevent Operation Ajax 2.0.

Having a mandatory tour guide wasn’t all bad. Mine was a dual American-Iranian citizen named Ali. Ali had spent a lot of time in California and spoke perfect American English. He took me everywhere I wanted to go. At the end of some days, Ali would let me go off on my own. This gave me the chance to explore Tehran’s affluent northern suburbs and legendary bazaar.

No matter where I went, everyone was genuinely kind and hospitable… even after figuring out I was American. Not what you would expect for a place known for its “Death to America” chants. It became obvious the average Iranian harbors no hatred for Americans. (For more on what life is really like in Iran, I’d suggest you watch travel writer Rick Steves’ video, Rick Steves’ Iran.)

The trip to Iran helped solidify my belief that the country is the ultimate contrarian opportunity. It revealed the reality hiding behind the frenzied sentiment of conventional thinking. It was just waiting for the right catalyst. And now that catalyst is at hand. The conclusion of the nuclear negotiations and the relaxation of sanctions will release all the massive, built-up economic potential.

The rationale for profiting from the opening of Iran is clear. Finding a practical way to do so is not. There is a way, however… and a good one. One that is easily accessible through any brokerage account to US investors and is completely legal for them. For all the details click here to check out the latest issue of Crisis Speculator.

 

The article was originally published at internationalman.com.

June 26, 2015

The Economic Alamo

By Jeff Thomas

“And it came to pass in those days, that there went out a decree from Caesar Augustus, that all the world should be taxed.” – Luke 2:1, New Testament

“Since the beginning of recorded history, the business of government has been wealth confiscation.” – Ron Holland

It’s a common assumption that governments exist in order to serve the people of a country and that in order to do so, they must be accorded the necessary evils of power and taxation. I believe that the opposite is true, that in the perception of those who rule, power and the ability to exact tax are the very purpose of government, and service to the people is merely a justification for that pursuit.

This condition is perennial. Throughout history, rulers have maximised their power over their minions and, likewise, have exacted as much taxation as they have been able to get away with. Consequently (and quite understandably), it’s always been the norm for people to try to protect their wealth, however large or small, from confiscatory taxation.

Taxation is, of course, legalised theft. It is never collected voluntarily, as it might be with a charity or place of worship; it is taken by force. (If you don’t agree, try refusing to pay.)

Centuries ago, those who had acquired a measure of wealth might have hidden it under the floorboards or buried it in a field. However, over the last century, as long distance travel became increasingly possible, those who have possessed wealth have developed a more reliable method: store it in another country, one where the laws of confiscation are either not so rapacious, or—better still—don’t exist at all.

The Era of the Tax Haven Blossoms

Tax havens are not a new idea, but they didn’t come into their own until the 20^th century—a time when they flourished. Deservedly, they’ve become increasingly sophisticated and serve their clients extremely well. So well, in fact, that they’ve become a threat to those countries (mostly much larger countries) that are oppressive in their tax regimes. Eventually, these countries joined together to form the Organisation for Economic Co-operation and Development (OECD), which, despite its euphemistic name, is charged with the dual goals of ending tax havens and creating forced equalisation of taxation in most of the world’s countries, whilst they allow the primary OECD countries to do as they please (to operate independently of the forced taxation equality).

In recent decades, the OECD have ramped up their campaign. First, they created propaganda describing tax havens as centres of “money laundering,” suggesting that money that had been obtained through criminal means was being transferred to overseas banks to disguise its source. (An excellent treatise on this subject can be found here.)

At the same time, the OECD made a concerted effort to avoid discussing the volume of tax-haven business that actually was caused by the fact that OECD member-countries operated oppressive tax regimes, and that tax-haven clients were merely seeking freedom from economic oppression.

The OECD have made great progress in their effort, with much of the world’s taxpaying public now believing that tax havens are merely for criminals and “tax cheats.” (More recently, the OECD have been working to create the belief that tax havens are linked to terrorism, and I predict that we shall see this effort increase dramatically in the future.)

But now, the OECD have a greater impetus to crush the economic liberty in the world that tax havens provide. Most of the OECD countries have squeezed their populations to the limit and, wanting still more, have turned to massive, unpayable debt as a solution.

Just like an addiction to heroin, this dependency on a level of money that’s beyond what can be taxed has led these countries to a desperate impasse: the economic system itself is on the verge of collapse and nearing the end of their ability to maintain the cost of their overreach. They are redoubling their efforts to limit the activities of the world’s tax havens.

The Last Holdout

In recent years, we’ve seen one law after another passed in the EU, the US and other First World countries, laws that allow for greater capital controls and the confiscation of wealth by banks and governments.

In addition, governments are passing legislation that increasingly limit the ability for an individual to make currency transactions. Whether spending, receiving payment, depositing or withdrawing, the freedom to transact is attracting greater scrutiny. (The ultimate stage will be the need to request permission to make any transaction.)

Since the early 2000s, several associates and I have tracked this development and termed it “The Great Race.” The OECD countries hope to gain total control over tax havens before their over-taxation and debt cause their economies to collapse.

If they fail to gain complete control prior to that time, they may not economically be able to take control after that. Although we’ve watched developments closely over the years, I must confess, we’re no closer to knowing whether they’ll win the race… It will be close.

On the surface, it would seem that the outcome wouldn’t matter much one way or the other. After all, the collapse of these economies, although possibly not imminent, is nevertheless inevitable. Sometime in the next few years, one trigger or another will bring down the economic house of cards. So, if the tax havens are destroyed in the meantime, why could they not simply reinvigorate themselves post-crash?

The problem is that if the OECD nations win the Great Race, the last bastion of economic sanctity—the tax havens—would have fallen, and much of the wealth they now contain might already have been transferred to the dying empires.

Like gold going down in 17^th century Spanish galleons, it would be a long time before that wealth would be likely to resurface in the hands of those who are productive. It would have been squandered by the rulers of the OECD member-nations in their last gasp of world economic domination.

This does not mean that the world would never recover. After all, wealth is never destroyed; it only changes hands from time to time. But it could very well mean that, as in the aftermath of the collapse of the Roman Empire, sufficient wealth was not in the hands of those who are by nature productive. Therefore, a return to a productive free market would likely be slow in developing.

Historically, whenever collectivism has become total, recovery in its aftermath has always been slow.

And so the race is on—in a very big way. The world’s tax havens are, today, the last bastions—the Alamo—for the free ownership of wealth, and no one can say for certain to what degree the OECD nations will succeed in their quest prior to their economic fall.

To be sure, many low-tax and no-tax jurisdictions have been taking the position that “The OECD have the biggest guns. If we can only placate them for a bit longer and remain in business in some form until they collapse, we’ll be poised for recovery once the dust has cleared.”

In the meantime, many residents of OECD countries, who are only now figuring out that their governments are closing in on their wealth, are questioning whether there is any point in moving their money to jurisdictions where the laws are less confiscatory. They tend to say, “But if the OECD are going after the tax havens, what good will it do for me to diversify my wealth? They’ll get it all in the end anyhow.”

There’s certainly logic in that reasoning, but as any long-term investor who is familiar with the benefits of tax havens will say, “There is no guarantee your government won’t strip you of your wealth, but there never was.

The whole point has always been to not be the low-hanging fruit. Get your wealth as far removed from countries whose objective is to take it from you. In doing so, you raise the odds that you’ll retain your wealth… At the very least, you’ll be the last to be victimised and you might escape altogether.”

In essence, the world’s tax havens are the economic Alamo—the last holdout against world economic domination. In a few years, we’ll know whether they’ve succeeded in preserving economic freedom for the future.

Editor’s Note: Naturally, things can change quickly. New options emerge, while others disappear. This is why it’s so important to have the most up-to-date and accurate information possible. That’s where International Man comes in. Be sure to watch this free video to find out our favorite tax havens.

 

The article was originally published at internationalman.com.

June 16, 2015

Here's What the Next Gold Bull Market Will Look Like

By Jeff Clark

We measured every bull cycle of gold stocks and found there have been eight distinct upcycles since 1975.

We also discovered something exciting: Only one was less than a double. (A second was 99.9%.)

Even more enticing is that the biggest one—a 601.5% advance in the early 2000s—occurred just after a prolonged bear market.

And our current bear market is longer than that one.

To get a sense for the potential upside, we applied the percentage gain from each of those upcycles to our recommended BIG GOLD picks.

We can’t show you our entire portfolio out of fairness to paying subscribers. But look what those gains would mean to GDX, the Gold Miners ETF (based on the June 1 price).

Gold ETF	Current Share Price	1976– 1980	1982– 1983	1986– 1987	1989– 1990	1993– 1994	2000– 2003	2005– 2008	2008– 2011
		554.2%	205.1%	141.8%	51.5%	99.9%	601.5%	206.4%	272.5%
GDX	$19.49	$127.51	$59.45	$47.14	$29.53	$38.96	$136.72	$59.72	$72.60

 

Keep two things in mind about this table:

1. The percentage gain from each past bull market is calculated using an index. The stronger companies will perform better than a static ETF.

2. It’s not unreasonable to think that the gains in the next bull market will be similar to some of the higher returns listed above. That’s because stocks will be rising from the depths of one of the more severe bear markets.

Here’s what the price for popular royalty company Royal Gold would look like if it matched past bull markets.

Royalty Company	Current Share Price	1976– 1980	1982– 1983	1986– 1987	1989– 1990	1993– 1994	2000– 2003	2005– 2008	2008– 2011
		554.2%	205.1%	141.8%	51.5%	99.9%	601.5%	206.4%	272.5%
Royal Gold	$64.23	$420.21	$195.93	$155.34	$97.30	$128.38	$450.56	$196.79	$239.26

 

You might think royalty stocks won’t show similar gains going forward. It’s true they’ve already performed well. However, it’s more likely they’ll be wildly popular than anything else. That’s partly because there are only a few of them in this industry.

Now take a look at the prices our top silver pick would hit.

Silver Producer	Current Share Price	1976– 1980	1982– 1983	1986– 1987	1989– 1990	1993– 1994	2000– 2003	2005– 2008	2008– 2011
		554.2%	205.1%	141.8%	51.5%	99.9%	601.5%	206.4%	272.5%
Top BIG GOLD Silver Pick	$3.71	$24.27	$11.32	$8.97	$5.62	$7.42	$26.02	$11.37	$13.82

 

If silver rises along with gold in the next bull market—something we think is extremely likely—this small niche market will absolutely soar.

No other sector is as depressed as the mining sector. A return to anything close to some of the stronger past bull markets will hand us tremendous gains.

The June issue of BIG GOLD focuses on the top silver pick listed in the table. I’m convinced it will at least triple from current levels in the next precious metals bull market.

We have two very specific reasons why it will do so. And these two factors are unmatched by almost any other mid-tier or major producer.

Get our analysis along with the name of this stock in the just-released BIG GOLD.

We also include a special offer on bullion that has numismatic potential. These coins sell at bullion prices, yet will likely return much greater profit than standard bullion. And they come at discounted prices you won’t find elsewhere.

It’s “The Two Best Silver Plays to Buy Today”—a highly actionable issue that tells you exactly what to buy and why. Get it now.

May 29, 2015

The Message from Last Week’s Headlines: Don’t Dare Sell Your Gold!

By Jeff Clark

Have you noticed the trend in mainstream headlines over the past week?

The gold price may be stagnant, but forces behind the scenes signal that something big is gelling.

What conclusion would you draw from this rundown of recent headlines?

China Creates Gold Investment Fund for Central Banks. China announced a new international gold fund. Over 60 member countries have already invested. The fund expects to raise 100 billion yuan ($16 billion). It will develop gold mining projects in the new Silk Road economic region.

China Could Send Gold Up At Least $200. Saxo Bank’s Steen Jakobsen says China’s multibillion-dollar Silk Road Initiative will prompt Beijing to pull money out of Europe and the United States for infrastructure investments elsewhere. This could send commodities higher and push Europe into recession. As a result, his 2015 price for gold is $1,425 to $1,450, more than $200 higher than its current level.

Red Kite Launches New Base and Precious Metals Fund. The fund has already deployed almost $1 billion in equity, loans, and royalty streams into at least 17 junior mining firms. It hired a physical metals trader to handle all the supply. The fund will likely fund underserved juniors that have struggled to get funding.

Texas Senate Passes Bill to Establish Bullion Depository for Gold and Silver Transactions. A bill to make gold and silver legal tender in Texas passed in the state senate by an overwhelming 29–2 vote. The bill essentially creates a way to transact in precious metals. It will allow citizens to deposit precious metals in the state depository and then use the electronic system to make payments to any other business or person who also holds an account.

Gold Smuggling in India at All-Time High. Customs agencies seized over 3,500 kilograms of gold (112,527 ounces) in 2014–15, the largest stash ever confiscated in Indian history. The report says gold smuggling has grown by 900% in just two years. It also estimates that seizures could be less than 10% of actual smuggling.

Russia Boosts Gold Holdings as a Defense Against “Political Risks.” Dmitry Tulin, monetary policy manager at the Russian central bank, said it is increasing its gold holdings because “it is a 100% guarantee from legal and political risks.” Part of the motivation is certainly that their overseas assets could be frozen if sanctions over the Ukraine crisis tighten.

Austria Repatriates 110 Tonnes of Gold from UK. Austria is repatriating 110 tonnes (3.53 million ounces) of gold from the Bank of England. It eventually wants to have 50% of its holdings stored at home. The country has reportedly been transferring its official gold reserves from unallocated to allocated accounts in recent years, and also reduced its leased gold by 60%.

D.E. Shaw Buys $231 million of GLD. D.E. Shaw & Company bought $231.07 million worth of SPDR Gold Trust last quarter. This is a new position for the company.

Canadian Fund Makes $700 Million Bet on GLD. Canadian asset manager CI Investments purchased a whopping 6,117,900 shares of GLD last quarter, worth $703.6 million. GLD is now the single largest holding of the fund—bigger even than its position in Apple.

More Funds Increase Their Shares in GLD… A Swiss investment bank increased its position in GLD by 490%, to over 4 million shares. Lazard Asset Management doubled its holding to over two million shares. Morgan Stanley increased its holding by 8.3%, and Blackrock Group added 167% more to its position.

Traders Buy Gold and Silver at Fastest Pace in Over a Decade. Large speculators haven’t bought silver this aggressively since September 1997. Net speculative longs in gold also added over 45,000 contracts, the most since July 2005.

HSBC Warns Titanic Global Economy May “Collapse.” The chief economist of the world’s third-largest bank, HSBC’s Stephen King, has compared the global economy to the Titanic. “We may not know what will cause the next downswing, but at this stage we can categorically state that in the event we hit an iceberg, there aren’t enough lifeboats to go round. The world economy is like an ocean liner without lifeboats.”

Global debt has soared by 40% since the Great Recession. It’s now $200 trillion, almost three times the size of the global economy. “It would be a truly titanic struggle for policymakers to right the economy,” King said. He doesn’t specifically mention gold, but…

IMF Says China’s Currency Is “No Longer Undervalued.” The International Monetary Fund declared that China’s currency is “no longer undervalued.” The statement is a major vote of confidence for Beijing and the renminbi. Recall that China wants its currency to be included in the IMF Reserve basket.

I predicted China would update its gold holdings to increase the likelihood of getting that acceptance. And that they could surprise the market by announcing a higher amount than the mainstream expects.

It’s one reason I bet Harry Dent that gold won’t fall to his predicted $700 level. I’m so confident I put up my own gold. He did, too.

Check out our 17-page report, where we each argue our case. You can read it free of charge—just enter your email address here, and you can access it immediately.

The report includes eight “proof points,” along with the details of our wager and the date the winner will be announced.

Which headline will you read in early 2017—Jeff Clark Wins Two Ounces of Gold, or Harry Dent Bests Gold Bull Jeff Clark? I invite you to read our debate and decide for yourself. Enter your email address, and see who wins!

May 19, 2015

History Shows A Gold Bull Market Is Fast Approaching

By Jeff Clark

Yearning for sunnier skies for your gold investments? How’s this sound…

• Gold in a decisive bull market, with the price steadily rising

• Silver soaring and outpacing gold’s gains

• Gold stocks rocking, erasing underwater positions and racking up the profits

That’s not pie in the sky wishful thinking—it accurately describes the next stage of the gold market, something that will soon visit your portfolio.

With the price of gold currently stuck in place, like a stain on the front of your best shirt, and the stocks only teasing us like Lucy holding the football for Charlie Brown, how can I be so sure?

Because that’s exactly what happened after every other bear market. For example…

• 1976. Bear market ends, and gold begins a 701% run in less than four years.

• 1985. Bear cycle ends, bull cycle begins. Gold gains 71.8% over the next three years.

• 2001. Monster gold bull cycle delivers a 630% advance over the following 10 years.

As I pointed out last month, markets cycle. The current range-bound price for precious metals won’t last forever, for the simple reason that they never have, especially in the resource market.

If you set your sights on the big picture, you’ll see that in spite of today’s negative emotions, gold’s future prospects will render them a distant memory.

Consider some of the likely changes on the horizon and how they will transform the gold market from flat and listless to exciting and profitable…

• Stock market reversal. The performance of the broader equity markets is probably the biggest reason gold hasn’t attracted the mainstream. But stock markets cycle, too, and a correction is due, perhaps overdue—the S&P is up six straight years and nine consecutive quarters. Margin debt is higher now than it was preceding the 2008 crisis, and corporate profits saw the biggest drop in four years last quarter. Gold will be the benefactor in the reversal, especially since it’s already corrected.

• Recession. The probability of a future recession is 100%. The only question is when and how big. GDP last quarter was barely positive. Any unexpected surprises to the downside for the economy will be especially positive for gold.

• Currency war backfire. This “race to the bottom” being pursued by global central bankers won’t work long term. At best, countries steal growth from their trading partners. At worst, it can disintegrate into inflation, recession, retaliation, and even war. Currency wars have happened before—twice in the last century alone—and they’ve always ended badly. One guess what asset performs well in a crisis.

• Higher interest rates. We’re skeptical that the Fed will actually raise rates, but eventually the market will force rates higher regardless of the Fed. This, in turn, will hurt the real estate market. Meanwhile, those analysts that blindly assume rising rates are negative for gold forget that real rates (nominal interest rate minus inflation) are positive for gold—an almost certain outcome because of…

• Inflation. The emergence of inflation feels far off, but already there are signs it’s picking up. Wages have started to move higher, what is normally the starting point for inflation. Ground beef prices are now at record highs and have more than doubled since 2010—increases like this can’t go unaccounted for indefinitely. Remember, we don’t have to wait for high inflation for gold to move; it’s the onset of inflation, or an unexpected jump in inflation, that will spur gold.

• US dollar reversal. If you’ve grown tired of the dollar’s “strength,” don’t leave the theatre early. Its rise is certainly not sustainable long term, and in time will be forgotten. Nothing stays standard deviations above the norm forever. And eventually the dollar will collapse, because the trajectory of our debt isn’t mathematically sustainable.

• Bond market turmoil. As my colleague Dan Steinhart pointed out in The Casey Report, there are currently $3.6 trillion in negative-yield government bonds outstanding today, mostly in Europe and Japan, giving investors zero chance of making money or even breaking even. The sad outcome here is that inflation will massacre the average bond holder.

My point is that any reasonable big picture view of the political, financial, and economic trends show that virtually all of those changes will be very positive for gold—and aren’t that far off.

It will be a new day for the gold market, one full of rising prices and profitable investment statements.

But despite all this evidence, there are those in our industry still calling for gold to fall.

Among the loudest is my colleague Harry Dent.

He says gold will drop to $700/oz.

Of course, I think he is dead wrong.

And I bet Harry bullion from my private stores that gold will never drop to that level.

He took the bet. And to help you decide who will win (hint: it's me), Harry and I each put all the research we’ve assembled to form our predictions into a special 18-page report titled Gold: Dead or Alive?

For anyone who owns an ounce of gold or single share of mining stock, this is a must-read. And it’s completely free. Click here to get your copy.

May 7, 2015

A Powerful Weapon of Financial Warfare--The US Treasury's Kiss of Death

By Nick Giambruno

It’s an amazingly powerful weapon that only the US government can wield—kicking anyone it doesn’t like out of the world’s US-dollar-based financial system.

It’s a weapon foreign banks fear. A sound institution can be rendered insolvent at the flip of a switch that the US government controls. It would be akin to an economic kiss of death. When applied to entire countries—such as the case with Iran—it’s like a nuclear attack on the country’s financial system.

That is because, thanks to the petrodollar regime, the US dollar is still the world’s reserve currency, and that indirectly gives the US a chokehold on international trade.

For example, if a company in Italy wants to buy products made in India, the Indian seller probably will want to be paid in US dollars. So the company in Italy first needs to purchase those dollars on the foreign exchange market. But it can’t do so without involving a bank that is permitted to operate in the US. And no such bank will cooperate if it finds that the Italian company is on any of Washington’s bad-boy lists.

The US dollar may be just a facilitator for an international transaction unrelated to any product or service tied to the US, but it’s a facilitator most buyers and sellers in world markets want to use. Thus Uncle Sam’s ability to say “no dollars for you” gives it tremendous leverage to pressure other countries.

The BRICS countries have been trying to move toward a more multipolar international financial system, but it’s an arduous process. Any weakening of the US government’s ability to use the dollar as a stick to compel compliance is likely years away.

When the time comes, no country will care about losing access to the US financial system any more than it would worry today about being shut out of the peso-based Mexican financial system. But for a while yet, losing Uncle Sam’s blessing still can be an economic kiss of death, as the recent experience of Banca Privada d’Andorra shows.

Andorra, a Peculiar Country Without a Central Bank

The Principality of Andorra is a tiny jurisdiction sandwiched between Spain and France in the eastern Pyrenees mountains. It hasn’t joined the EU and thus is not burdened by every edict passed down in Brussels. However, as a matter of practice, the euro is in general use. Interestingly, the country does not have a central bank.

Andorra is a renowned offshore banking jurisdiction. Banking is the country’s second-biggest source of income, after tourism. Its five banks had made names for themselves by being particularly well capitalized, welcoming to nonresidents (even Americans), and willing to work with offshore companies and international trusts.

One Andorran bank that had been recommended prominently by others (but not by International Man) is Banca Privada d’Andorra (BPA).

Recently BPA received the financial kiss of death from FinCEN, the US Treasury Department’s financial crimes bureau. FinCEN accused BPA of laundering money for individuals in Russia, China, and Venezuela—interestingly, all geopolitical rivals of the US.

Never mind that unlike murder, robbery and rape, money laundering is a victimless, make-believe crime invented by US politicians.

But let’s set that argument aside and assume that money laundering is indeed a real crime. While FinCEN seems to enjoy pointing the money-laundering finger here and there, it never mentions that New York and London are among of the busiest money laundering centers in the world, which underscores the political, not criminal, nature of their accusations.

And that’s all it takes, a mere accusation from FinCEN to shatter the reputation of a foreign bank and the confidence of its depositors.

The foreign bank has little recourse. There is no adjudication to determine whether the accusation has any merit nor is there any opportunity for the bank to make a defense to stop the damage to its reputation.

And not even the most solvent foreign banks—such as BPA—are immune.

Shortly after FinCEN made its accusation public, BPA’s global correspondent accounts—which allow it to conduct international transactions—were closed. No other bank wants to risk Washington’s ire by doing business with a blacklisted institution. BPA was effectively banned from the international financial system.

This predictably led to an evaporation of confidence by BPA’s depositors. To prevent a run on the bank, the Andorran government took BPA under its administration and imposed a €2,500 per week withdrawal limit on depositors.

However, it’s not just BPA that is feeling the results of Washington’s displeasure. FinCEN’s accusation against BPA is sending a shockwave that is shaking Andorra to its core.

The ordeal has led S&P to downgrade Andorra’s credit rating, noting that “The risk profile of Andorra’s financial sector, which is large relative to the size of the domestic economy, has increased beyond our expectations.”

For comparison, BPA’s assets amount to €3 billion, and the Andorran government’s annual budget is only €400 million. There is no way the government could bail out BPA even if it wanted to.

The last time there was a banking crisis in a European country with an oversized financial sector, many depositors were blindsided with a bail-in and lost most, or in some cases, all of their money over €100,000.

While the damage to BPA’s customers appears to be contained for the moment, it remains to be seen whether Andorra turns into the next Cyprus.

BPA is hardly the only example of a US government attack on a foreign bank. In a similar fashion in 2013, the US effectively shut down Bank Wegelin, Switzerland’s oldest bank, which, like BPA, operated without branches in the US.

To appreciate the brazen overreach that has become routine for FinCEN, it helps to examine matters from an alternative perspective.

Imagine that China was the world’s dominant financial power instead of the US and it had the power to enforce its will and trample over the sovereignty of other countries. Imagine bureaucrats in Beijing having the power to effectively shut down any bank in the world. Imagine those same bureaucrats accusing BNY Mellon (Bank of New York is the oldest bank in the US) of breaking some Chinese financial law and cutting it off from the international financial system, causing a crisis of confidence and effectively shuttering it.

In a world of fiat currencies and fractional reserve banking, that is a power—a financial weapon—that the steward of the international financial system wields.

Currently, that steward is the US. It remains to be seen whether or not the BRICS will learn to be just as overbearing once their parallel international financial system is up and running.

In any case, the new system will give the world an alternative, and that will be a good thing.

But regardless of what the international financial system is going to look like, you should take action now to protect yourself from getting caught in the crossfire when financial weapons are going off.

One way to make sure your savings don’t go poof the next time some bureaucrat at FinCEN decides a bank did something that they didn’t like is to offshore your money into safe jurisdictions. And we've put together an in-depth video presentation to help you do just that. It's called, "Internationalizing Your Assets." 

Our all-star panel of experts, with Doug Casey and Peter Schiff, provide low-cost options for international diversification that anyone can implement - including how to safely set up foreign storage for your gold and silver bullion and how to move your savings abroad without triggering invasive reporting requirements. This is a must watch video for any investor and it's completely free. Click here to watch Internationalizing Your Assets right now. 

 

The article was originally published at internationalman.com.

May 5, 2015

Can You Put Your Brainpower into Overdrive?

By Doug Hornig

Chances are, you haven’t heard about nootropics yet. They’re still pretty far out of the mainstream. But they’re beginning to gather some steam as they head for the public consciousness (pun intended), and it seems likely they’ll be getting increasing press in the near future.

So what are they?

Wikipedia says nootropics are also known as “smart drugs, memory enhancers, neuro enhancers, cognitive enhancers, and intelligence enhancers,” and “are drugs, supplements, nutraceuticals, and functional foods that improve one or more aspects of mental function, such as working memory, motivation, and attention.” The term was coined in 1972 by Romanian psychologist Corneliu Giurgea and is a synthesis of the Greek words for “mind” and “to bend or turn.”

Giurgea synthesized piracetam, the first nootropic, in 1964, and he subsequently established a set of criteria these drugs should meet. For him, nootropics must enhance learning, increase the coupling of the brain’s hemispheres, and improve executive processing (which involves tasks such as planning, paying attention, and spatial awareness). It was also important to him that the drugs be nontoxic and nonaddictive. As he put it in his book Fundamentals to a Pharmacology of the Mind: “Man is not going to wait passively for millions of years before evolution offers him a better brain.”

That seems inarguable. History affirms that there’s a basic human drive to improve ourselves between the ears. But can nootropics actually accomplish this?

Before answering that question, a distinction must be made. Wikipedia’s definition features synonyms such as “cognitive enhancers” and “smart drugs.” This is a source of some confusion, since much of what you may read on the subject of nootropics includes in that category such prescription drugs as Adderall, Ritalin, and the like. These are amphetamines or amphetamine-like substances that were originally intended to treat specific conditions, such as ADHD, sleep apnea, shift-work disorder, chronic fatigue syndrome, and narcolepsy.

But they are increasingly taken these days for off-label purposes. Adderall, for example, is as freely available as pot on college campuses at the moment. It’s the drug of choice as a study aid, especially when deadlines are involved. Amphetamines have the brief but efficient effect of promoting mental clarity and enabling increased focus.

In that sense, they are cognitive enhancers, but they are often erroneously classified as nootropics, which, as Giurgea posited, must be nontoxic and nonaddictive. These medications are neither, plus they carry the risk of serious side effects. A nootropic, on the other hand, is a nutritional supplement designed to improve brainpower in healthy adults over extended periods of time—safely.

Even excluding the aforementioned prescription drugs, the range of potential nootropics is wide. A whole host of naturally occurring foods and herbs—everything from ginseng to krill oil, grapeseed extract, yerba mate, even licorice, and many, many more—are touted as having nootropic properties.

But for our purposes, let’s concentrate on the newer, more exotic compounds that are attracting the most attention. A sampler (with acknowledgments to Nootriment, the most comprehensive website out there):

The “racetams.” As noted above, piracetam was Giurgea’s original creation, but its group now includes many newer arrivals that purport to be stronger and/or better, such as aniracetam, oxiracetam, coluracetam, nefiracetam, and pramiracetam. Racetams work by increasing levels of neurotransmitters and other chemicals required for proper brain function. Tests have shown that they improve cognitive function and increase the communication between the two hemispheres of the brain.

Noopept. The newest kid on the block. Not technically a racetam, though it is derived from this class and has similar mechanisms of action. Said to be over 1,000 times more concentrated than piracetam. Seen as being effective for disorders such as depression and anxiety. It activates receptors for dopamine as well as selective serotonin receptors and increases levels of nerve growth factor, which is a hormone involved in the maintenance and repair of healthy brain cells.

Choline. A compound that naturally occurs in many foods and has been added to the B-complex family of vitamins. It’s the precursor of acetylcholine, a crucial brain chemical necessary for the development and maintenance of healthy brain-cell membranes to ensure effective signaling, structural integrity, and neuronal fluidity. Those heavily involved with nootropics (so-called “noonauts”) usually take a combination of ingredients—a practice called “stacking”—and some form of choline is part of every stack.

Pyritinol. A synthetic derivative of Vitamin B₆, pyritinol is a precursor of dopamine, which it transforms into once it successfully crosses the blood/brain barrier. Pyritinol can improve attention span, facilitate recall, elevate mood, and eliminate hangovers. It also aids in glucose uptake, which can be beneficial during periods of mental strain that diminish the glucose stores on which the brain depends for its energy.

Vinpocetine. A biosynthetic derived from an alkaloid found in the periwinkle plant. It’s a cerebral vasodilator that improves and increases blood flow specifically to the brain; blood pressure in other parts of the body is not affected. It’s been shown to increase the levels of many of the most important brain neurotransmitters, including acetylcholine, noradrenaline, serotonin, and dopamine, as well as ATP, the primary source of intracellular energy.

Adrafinil. The precursor to the prescription medication modafinil. Modafinil—possession of which is a felony without a prescription—belongs to a class of drugs known as “eugeroics,” which promote mental alertness without the side effects of amphetamines, for which they are used as a substitute. It stimulates hormones like epinephrine, norepinephrine, and dopamine. The jury is out on modafinil’s long-term safety and susceptibility to abuse. But committed noonauts take it (or adrafinil) anyway.

All of this leads to some big questions. First, of course, is: do nootropics work? The answer: probably. While the evidence with some is anecdotal, there has been a surprising amount of scientific research done on others. Citations are available on the Nootriment website (although you have to dig around a bit to find them).

Second, are they safe? They seem to be. But since nootropics have only arrived relatively recently, long-term effects are generally unknown… so we can’t be sure. And of course, the consequences are unpredictable if someone mixes up a big stack combination of his or her own devising.

Third, are they legal? Yes. Apart from prescription drugs like Adderall and modafinil, possession of nootropics in any amount is legal for US citizens. However, they cannot be marketed as supplements, but only for purposes of “education and research.” This restriction is the responsibility of the seller and doesn’t apply to the consumer. Note also that other countries may have different laws.

Finally, is there any way to invest in nootropics? Since they’re already very popular in Silicon Valley, it’s likely just a matter of time before acceptance becomes much more widespread. They could develop into very big business indeed.

But it’s not one that many public companies are jumping into. One problem is likely the constraints on vendors’ abilities to market these substances as supplements. But almost certainly, the primary reason is that nootropics are already in the public domain, and exclusivity cannot be had. Most manufacturing is done in China and India. Thus, for example, while a big drug company like Belgium’s UCB does make piracetam, it’s a very small part of UCB’s business.

The only pure play we can find is Optigenex Inc. (OTC Pink: OPGX), makers of AC-11, a patented botanical extract that’s the main ingredient in a nootropic blend called AlphaBrain, from private company Onnit Labs. It trades for about a penny a share with close to zero volume. Not a very good bet.

It’s possible that a way to profit from nootropics will crop up in the future, as (and if) the drugs catch on. And when it does, our Casey Extraordinary Technology subscribers will be among the first to cash in. 

Our premiere technology service is dedicated to getting in extremely early on opportunities in tomorrow's breakthrough technologies and the companies behind them. I'm proud to say, our track record has been exceptional. If you'd like to read the latest issue and look over all our entire portfolio, you can take a risk-free trial here.

April 12, 2015

Should We Really Put Gold in an IRA?

By Jeff Clark, Senior Precious Metals Analyst

“Gold is one of the dumbest things to put in your IRA,” said the slick TV commentator, with his $200 haircut, perfect white teeth, and superior attitude. “Everyone knows income-producing vehicles are best for an IRA.”

It was a prepackaged message from someone that sounded like he hadn’t given any more thought to the topic than what he’d read somewhere. His advice was misleading and incomplete, and I wondered how many viewers might weaken their portfolios by acting on his sound bite.

To be clear, he’s partially correct: the tax-advantaged nature of an IRA makes income-generating assets ideal, especially when you factor in compounding. Gold generates no income.

And there’s another drawback to putting gold in an IRA, one the slick TV journalist probably never even thought of: you lose confidentiality. Gold is one of the last assets in modern society that still offers anonymity—and you’d have to give it up if you stick it in an IRA.

So on a cursory level, one might nod along with the empty suit and conclude that gold should be excluded from a retirement account. But these concerns are only reasons not to hold all your precious metals in an IRA, or have your retirement account be comprised entirely of gold. Indeed, the reasons to put some gold in an IRA have grown—in fact, it might be a major strategic mistake not to have a gold IRA.

Here’s why, along with an offer for six months’ free storage with a new gold IRA…

A Gold IRA Is a Strategic Portfolio Move

There are solid, core reasons why every investor should have some gold in an IRA. See which of these factors apply to you…

Your IRA is one of your biggest—or only—investment accounts. If an IRA is where most of your investment funds are housed, it may be your only chance to add physical metal to your portfolio.

You want to diversify into a non-financial asset. Think about it: if your retirement account consists of just stocks and bonds, then all of your IRA investments are in paper assets. In today’s world, that is the pinnacle of risk.

You’d like tax-advantaged growth. As with any asset, gains can compound tax-deferred inside an IRA (or tax-free in a Roth). The advantage is that you can shift the allocation and not trigger a taxable event—for example, if you wanted to lighten up on gold to buy some silver.

You need a retirement inflation hedge. The big objection to putting gold in an IRA is that it doesn’t generate interest. But to have no inflation hedge in a retirement portfolio seems equally shortsighted, especially in today’s monetary environment. Remember, regardless of what the “profit” column shows on your statement each year, those gains have to be adjusted for inflation—after all, you’re eventually going to spend some of that money. And the further away you are from withdrawing the funds, the longer inflation will eat away at your account value. The answer is to utilize one of the best inflation hedges known to man.

Clearly, most of us can benefit from placing some precious metals in an IRA.

So, we should just contact one of those companies advertising gold IRAs, right?

No! Here’s why…

The Horse-and-Buggy Industry of the 21st Century

The process to set up a gold IRA has traditionally been slow and cumbersome. US law requires that IRA assets be held at a trust company to ensure proper tax reporting and recordkeeping. However, most gold dealers are not trust companies. For them to offer physical gold IRAs, they must partner with a trust company that’s willing to hold physical gold.

So when a gold dealer offers to purchase gold within an IRA, the process for the investor looks like this:

• Open an account with a gold dealer

• Open a separate IRA account with a trust firm (usually done via snail mail)

• Fund your account with the trust

• Request a purchase of metals from your chosen vendor

• Wait for funds to transfer and your order to settle

This procedure takes 30-45 days—it still takes a month even if you already have an IRA or a relationship with a dealer. Further, dealers typically charge high fees when purchasing gold for an IRA. And when you want to sell or take a distribution, get ready for more paperwork, verification checks, and shipping fees, all of which take another 2-3 weeks.

This “manual” process has led to lengthy delays, unexpected costs, and never-ending frustrations. Check out some of the common complaints IRA holders have had with this antiquated system…

• IRA transfers can take up to 30 days to execute, depending on the follow-up procedures of the custodian.

• Deposit confirmations are not always sent to the client in a timely manner and are not automated.

• Clients cannot lock in an order until the custodian verifies the cash balance with the dealer, exposing them to market risk.

• The purchasing process typically takes 8-10 business days to settle.

• Metals must be shipped to the custodian’s vaulting facility, and the IRA holder is responsible for those costs.

• Deliveries to the vaulting location may not be tracked by the custodian, nor are the deliveries compared to the order invoice for accuracy of delivery. This has been a growing concern by investors.

• Limited storage options. Most custodians only offer one or two storage locations, and most of those are in Delaware.

• The sell process is costly, cumbersome, and time consuming.

• Poor customer service is one of the biggest complaints. When the client has questions about his IRA or order, the dealer refers him back to the custodian—and the custodian refers him back to the dealer! The client is often passed around without ever getting his questions answered.

This doesn’t sound fun. Fortunately, the Hard Assets Alliance has completely changed how business is done with gold IRAs…

The New “Gold” Standard in IRAs

HAA’s program has streamlined the entire gold IRA process and greatly reduces the time and hassle to open an account. In most cases, you can do everything online. It’s a breakthrough service, and we want to highlight it now, before the April 15 deadline, so you can still make a 2014 contribution.

The Hard Assets Alliance IRA reduces both time and hassle. The online platform lets you electronically create an IRA account and a trust account simultaneously.

Entrust, a well-known custodian, provides the trust account, and it receives your application in real time. In most cases, it takes only 10-15 minutes to open a traditional or Roth IRA account; SEP and SIMPLE accounts take about one to two weeks to process, and Entrust will work with you to facilitate transfers. The process is straightforward and user-friendly.

Further, there are no additional fees to purchase or sell precious metals within a Hard Assets Alliance IRA. And like all HAA products, all buying and selling can be done online.

As far as we know, this is the only fully automated online IRA to offer physical precious metals.

By way of testimony, it only took me about ten minutes to open a traditional IRA at HAA, and I received my approval five minutes later. And get this: I paid less than 3% above spot for one-ounce gold bars! That’s because HAA bids your order out to a network of dealers, so you’re essentially getting institutional rates.

Also, only permissible bars and coins are displayed for purchase. The rules can get a tad complicated—that’s been another hazard: buy the wrong form of gold for a retirement vehicle and you risk invalidating the entire IRA, triggering an unwelcome taxable event. No worries with HAA.

Store Your IRA Gold in Zurich

Foreign gold storage for IRAs, while available for US investors, has been a very tedious process, with the setup requiring a good deal of time, paperwork, and expense. However, your IRA can now store gold Eagles (only) in Zurich, Switzerland.

This is an offering you won’t find almost elsewhere in the industry. And there’s no minimum for this vault. That means you can start your own international bullion storage program, in one of the strongest jurisdictions, with one, one-ounce gold Eagle.

And you can start a gold IRA with storage in New York City or Salt Lake City with as little as a tenth ounce!

And here’s another sweetener…

Six Months’ Free Gold Storage for New IRA Accounts!

The April BIG GOLD comes with an offer for six months’ free storage for all new IRA accounts, including all four metals and all three storage locations. This discount makes it very inexpensive to start your own gold-backed IRA.

It’s only valid for readers of BIG GOLD, and you can get the link with a risk-free trial subscription. It’s a very attractive offer, and is good whether you make a 2014 or 2015 contribution—yes, if you hustle, you can still reduce your tax liability for 2014.

The reasons to put some gold in an IRA are mounting. And with the Hard Assets Alliance, we can avoid the VHS-tape versions of the industry and jump straight to Blu-ray.

I encourage you to consider what your purchasing power will be by the time you retire, and how a gold IRA might be a very effective way to preserve your standard of living.

April 4, 2015

Doug Casey: Signs of a Resource Sector Bottom

By Doug Casey

Interviewed by Louis James, Editor, International Speculator

L: Well, Doug, we’ve seen another quarter of high volatility and significant world events. What strikes you as most important at present?

Doug: Everything is still held together with chewing gum and baling wire, for which I’m grateful, considering what’s coming. It’s very clear to me that the global economy is in very much the same space as it was in 2007—in other words, on the edge of a precipice.

[…]

L: On the global economy, my question is this: If Obama and Yellen have saved the US and Merkel and Draghi are saving the EU, why are commodities selling off so dramatically? Iron, copper, oil—just about everything is selling off. How can an economy be recovering if it’s not using raw materials?

Doug: That’s another reason why I believe that the Greater Depression started in late 2007. During a depression, people are forced to consume less, and you see that reflected in the price of commodities—at least in real terms. This can be obscured in current price terms, depending on the debasement of the currency in question.

But it’s important to remember that commodities are only a good bet when they’re cycling upward, and that only lasts for a time. The longest trend of all is the downward trend of real commodities prices, as the march of technology makes them and the cost of life itself cheaper over time. Real commodity prices have been going down for at least 2,000 years, but probably 4,000 or 5,000 years—at least since the invention of agriculture. And I think they will continue falling, despite the fact that most large, high-grade, close-to-surface mineral deposits have been discovered.

L: Hubbert was right about “peak oil” in terms of West Texas Intermediate, but oil is still getting cheaper because of the fracking revolution.

Doug: Exactly. Because we’ve made so much money on commodities and because we believe in gold and silver as money, people think of us as commodity bulls. But actually, in the big picture, I’m a commodity bear, and always have been. Nanotech will transform city dumps into high-grade ore bodies. The asteroids will be mined at low cost. Ocean water will be processed economically. It’s simply a matter of technology and energy. The future could be—should be—better than we can even imagine.

L: I understand that—but I have to step in here and remind readers that gold is not a commodity—or at least not a regular commodity, since it’s also the most successful and enduring form of money ever devised.

Doug: Yes. No matter how many times we tell readers that no one can time the market, they still want to know what I think of the timing of the gold market.

So let me tell you that even I have been feeling a bit abused and unloved by the market over the last couple years. If I’m feeling that way, I’m sure the average person in the sector is feeling it in spades—and that’s actually a strong sign of a bottom.

It’s not as if we’re buying at $35 in 1971 or $250 in 2001—both times when gold was clearly a one-way street. But at $1,200, it’s very reasonable considering how explosive the world situation is.

L: That’s why we call it contrarian investing.

Doug: It’s pretty stark. Most of these crappy little mining stocks have no money, no management, no assets. In bull markets, they’re still crappy companies, but they can raise money, drill some holes in the ground, and hope to get lucky. But now they’re turning into shells, and that’s another sign of a resource sector bottom.

On the other hand, Wall Street has been rising for about seven years now, which is record territory. Several major indices have hit new records. These are signs of a market top. If the market collapses, it can take everything down with it. Mining stocks are also stocks.

L: What about earnings? Don’t higher Es justify higher Ps?

Doug: They do, but earnings can be pumped up by things like sacrificing sustaining capital to maximize near-term profit or buying back shares instead of investing in new growth. As per your question about commodities, I don’t believe the real economy is truly in recovery, and I don’t believe the earnings we’ve seen are sustainable; I expect them to collapse.

That in turn could produce a general stock market crash as happened in 1929 and on into the 1930s. The odds are overwhelming that that’s going to happen to the bond market, and if the bond market crashes, that’s going to devastate the stock market, which will in turn bring down the real estate market.

L: There you go again, Mr. Sunshine.

Doug: You know I’m not trying to be perverse—that’s just the way the world is.

L: So what does that leave?

Doug: Most people would say cash, but as we’ve seen in the last few years, every government in the world—including the US and EU—is more than willing to print unbelievable amounts of money to try to paper their problems over. That’s going to go into hyper-drive in the next round, trashing the value of currencies around the world as it does.

L: But gold is the real cash of the world—always has been.

Doug: Yes. We can’t stress enough that the primary reason for owning gold today isn’t to speculate on its price rising, but for prudence, for wealth preservation. For speculation, that’s what gold stocks are for, especially the kind you follow in the International Speculator.

The good thing about all the money printing is that we can predict that it will create more bubbles. Hopefully these stocks will be among the bubbles.

Currencies come and go, but over the centuries, gold has always held value. About 100 years ago, you could buy a good suit with an ounce of gold, and that’s still true today—and I expect it will still be true for the foreseeable future.

In fact, as unlikely as it may seem to mainstream economic thinkers today, one of the more likely outcomes of the financial turmoil ahead is that some country or another is going to reinstitute the gold standard.

We don’t need a gold standard, of course, or any currencies at all, for that matter. People just need to be free to own and trade in gold. Period. Today, it can be represented by computer bits on your iPhone, of course.

I think it will probably start with China or Russia, or possibly an Islamic country serious about its interpretation of the Koran. You know that the Prophet, peace be upon him, said in the Koran—which everyone knows is the direct and incontrovertible word of Allah himself—that one should only use the dirham and dinar as money. These are units of silver and gold.

L: There have been attempts, but none has gotten very far.

Doug: The new ISIS caliphate says it will operate according to the Koran on all matters, including money. They may make it stick, at least in the lands over which they have sway. Whatever else one might say about them, you have to admit they really are sincere fanatics. If someone says they believe something and they actually try to do what they say they believe, that’s worthy of some respect, even if you don’t share those beliefs. They appear to be not just talking the talk, but walking the walk, in every respect.

L: Just the same, Doug, I wouldn’t go pay my respects in person, if I were you.

Doug: No question. They are clearly… unpleasant people. I’m certain I’d end up in one of those orange jumpsuits if I did go back to Syria or Iraq, and I doubt they’d consider my opinion over whether to behead me or burn me alive in a cage. But that’s got nothing to do with the fact that they appear to be trying to act consistently with their principles, and it’s intellectually dishonest to dismiss that.

L: Well, I’d hate to see gold branded as “the preferred money of theocratic fanatics,” but I do understand your intellectual point. Your remarks about evidence of a bottom are encouraging. I’ve heard it said by veteran investors with more experience than I have that the kind of bumping along the bottom we’ve been suffering through is actually a classic sign of a bottom in a long cycle. Do you agree?

Doug: Yes, I do. I still think that intraday low of around $1,140 last November was likely the actual bottom.

L: Personally, I was very encouraged then, because gold had broken below its December 2013 low, and it seemed that every pundit and blogger in the world was saying that there was nothing to stop the fall short of $1,000, or even $700. It was widely believed that breaching the prior low was the trigger that would take it much lower—but that’s not what happened. Instead, the new low was a buying signal to Russians, Chinese, Indians, and others, and gold shot right back up again.

Doug: Agreed. In absolute terms, gold isn’t as good a value as it was in 2001, when I was telling readers that if I could call their brokers and buy gold for them, I would. On the other hand, the world is far, far less stable, so the prudence of owning precious metals is more paramount than ever.

You’ve got to own gold, because as we’ve often pointed out, it’s the only financial asset that is not simultaneously someone else’s liability. That’s particularly so when you remember that in reality, all of the major banks of the world are bankrupt. Between the fractional reserve system and the preponderance of bad loans and other factors, there isn’t a one of them I’d trust.

Worse, if you have a lot of money in a bank, you may think it’s an asset, but the bank thinks it’s a liability, and it’s subject to seizure, come the bail-ins such as we saw in Cyprus. The EU is already laying the groundwork for that.

***

For more contrarian investing tips, watch this video in which Doug, Louis, and six other industry experts discuss where we are in the gold cycle… why the best gold stocks will go vertical when the gold bull resumes… and how to prepare your portfolio for a shot at the jackpot. Or click here to get Louis’ timely special report, The Top 7 Gold Stocks with Vertical Potential.

March 29, 2015

The Secret of Success in Mineral Exploration

By Louis James, Chief Metals & Mining Investment Strategist

As an investor, I want to bet on the jockeys who win the most races, not just the best-looking horses. So, while I’m no Tom Peters or Stephen Covey, I’ve made a study of success over the last decade. The critical question for a metals investor: what does it takes to be a serially successful mine-finder?

Before I give you the answer, let me give you a little context on just how difficult this is. It’s not as simple as looking for a needle in a haystack; it’s more like looking for a needle in a vast field of steel haystacks, each one of which will give your metal detector false positives. And it’s very expensive to drill holes into them, which is the only way you can test for a needle’s hidden presence.

The odds of any given anomaly actually indicating the presence of a mineable needle are something like one in 300. It typically takes about 10 years to get the needle out of the haystack, and commodity price fluctuations can turn cash-cow operations into money bleeders in the blink of an eye. Pricked by the fickle needle of fate.

So, why would anyone invest in such an uncertain business? Because the world simply cannot function without metals, and the rewards for those who deliver them can be spectacular. Doubling or tripling one’s investment on a successful mineral discovery is routine, and 1000% gains (10-baggers) are common enough that resource speculators have strategies for bagging them. It’s rare, but 50 and even 100 times one’s initial investment do happen in this volatile sector.

This is why it’s so vital to find and back the most successful jockeys, riding the very best horses—all the more so when you consider that most geologists never make a commercial discovery in their entire careers.

So much for theory. In practice, it’s easy for people to claim to have made discoveries, and many do, but their contributions (geological insight, prioritizing drill targets, etc.) are hard to quantify and verify. Solution: focus on those rare few whose names keep popping up in discoveries that actually become profitable mines.

To this end, we created the Explorers’ League, a mine-finders’s hall of fame that documents the most serially successful needle-locators in the world. Check it out; on our Explorers’ League page, you can not only see what these people have done, you can see what they are up to now. It’s a great place to start, and once you’re familiar with what our league honorees are like, you’ll know what to look for whenever you consider investing in a mineral exploration company.

Louis James and legendary Explorers’ League mine-finder Andy Wallace kicking rocks and looking for gold in Nevada.

I promised to tell you the “secret,” however, so I will boil down all I’ve learned from kicking rocks all over the world over the last ten years with these explorers.

Explorers’ League honorees are, without exception, very bright and driven individuals, to be sure, but that’s a given. They are also logically and technically inclined; geologists are scientists, after all, and the good ones are up to speed on all the latest developments in their field, ready to deploy them in deciphering mysteries buried under mountains of stone. (The very best ones are making these developments; you can find them presenting findings at geological societies and in papers or books.)

However, these people are also highly intuitive; they have that rare ability to correctly connect fewer dots than most. It’s widely agreed that there is as much “art” as science to finding economic metals deposits. That may sound metaphorical, but given the need to visualize what’s happening deep inside bedrock that has been moved, tilted, eroded, sheared, melted, bent… Well, it’s no stretch at all to see the importance of such a brain’s artistic attributes. I often joke that if you tie a geologist’s hands, you render him or her mute, because they can’t seem to say anything without doodling on scraps of paper, napkins, or even using stock in first—anything to show you what they are thinking.

Saving the best for last, I have to say that the strongest common thread among the most successful mineral explorers in the world is their application of boot leather to solving problems. That sounds primitive, but what I mean is that the best technology can only give you a theory; you have to get out there, rock hammer in hand, and hike the land in question, comparing what you actually see in the rocks beneath your boots to what the imagery and modeling predicts. You don’t find mines sitting in an office.

When I go on a due-diligence trip to see a project I’m considering investing in, I love it when the geologist is so passionate, I almost have to drag him or her off the rocks before I miss my plane. They just can’t help themselves; they are so intent in figuring out the mystery, they can’t stop hammering on the rocks, looking for the next clue.

In contrast, if the geologist doesn’t even carry a rock hammer, chances are that he or she lacks what it takes, and I’m not going to invest.

This comes close to being the secret of my own success. The Casey Research Explorers’ League was my own starting point for my own network in the industry. That network has grown over the years, giving me an edge in finding and evaluating the very best speculative investments in the resource sector today, some of which have the potential to go truly vertical. 10-baggers in the making. To find out more about the potential in these investments, please watch our free video, Going Vertical.

The article The Secret of Success in Mineral Exploration was originally published at caseyresearch.com.

March 15, 2015

Will Warren Buffett Really Let This Deep Value Slip By?

By Jeff Clark, Senior Precious Metals Analyst

Right now, even the staunchest gold investors are weary of the years-long drubbing the gold price has taken since its $1,921 peak in August 2011. Whether the frustrating experience is the work of a market-rigging conspiracy, government manipulation of data to hide inflation, those blindingly loyal Keynesians who keep pounding us with messages that gold is nothing but a “shiny bitcoin,” or the gullibility of mainstream investors who tell themselves that, gee, since Warren Buffett is a billionaire, his “gold has no utility” mantra must be right, it hasn’t been fun. The nasty downcycle has offered no respite.

That’s all about to change.

If there’s one constant in the resource sector, it’s the boom-bust-repeat cycle that over the past 40 years has been almost predictable. This is particularly the case with gold stocks.

We charted every major cycle for gold stocks (producers) from 1975—when gold again became legal to own in the US—to the present. You can easily see that not only do gold stocks cycle up and down repeatedly, but the percentage gains for buyers at a cycle bottom can be downright mouthwatering.

What’s interesting about where we sit today in early 2015 is that gold stocks have now logged the second-deepest bear market since 1975—rougher even than the selloff following the 1980 mania.

This history teaches three “how to get rich” lessons.

1. For the recent bear market, the bottom for gold stocks is almost certainly in.

2. The next major cycle in gold stocks will be up.

3. The profits could be spectacular, because as the patterns show, triple-digit gains have been common.

Gold stocks have finished the bust that tormented investors for more than three years and are now preparing for another boom. All you have to do is hold on and wait for the next cycle to begin. No timing required.

The only thing we don’t know is if Mr. Buffett will see this chart and jump on the in-your-face deep value that gold stocks are showing right now.

Gold stocks will soon go vertical again—just as they have many times in the past—and investors with just a smidgen of patience will see their gold portfolios driven by a hurricane-force bull market. Virtually all gold stocks will go much higher. As in the past, gains for the strongest juniors will be 10-to-1, and you can expect a few superstars to return 100-to-1.

I talk about this rich opportunity with some of the most successful investors in the gold sector—Pierre Lassaonde, Frank Holmes, Rick Rule, Bob Quartermain, Ron Netolitzky, Doug Casey, and Louis James. Check out our free webcast, Going Vertical, a can’t-miss one-hour event that will show you the life-changing profits waiting just ahead.

And yes, we extend our invitation to Warren Buffett.

The article Will Warren Buffett Really Let This Deep Value Slip By? was originally published at caseyresearch.com.

February 12, 2015

Beware of Bankers Bearing Gifts

By Dennis Miller

Childhood cartoons have programmed us to see bankers as evil, greedy businessmen who delight in preying on the poor. Case in point: Snidely Whiplash.

Snidely Whiplash and Nell

As children we latched onto stories of the evil banker who held the mortgage on poor Nell’s ranch. Somehow a hero, Dudley Do-Right, emerged in the nick of time to save the day, and the banker was foiled again.

Take Your Mortgage to the Grave

Snidely Whiplash is at it again in the United Kingdom; only now he has a new scheme to snatch up the property of the poor: lifetime mortgages. It seems that Snidely has been so successful at lending to people who cannot repay their mortgages that he’s overwhelmed the system.

But beware of bankers bearing gifts. In the UK, interest-only mortgages allow borrowers to repay only interest during the life of the mortgage, usually twenty-five years. While that keeps month-to-month costs low, borrowers still have to repay the balance at the end of loan’s term… You can see where this is headed.

As Dan Hyde, Consumer Affairs Editor of the Telegraph reports,

Around 130,000 interest-only mortgages are due to expire every year until 2020, with half facing a shortfall of £71,000 on average, according to the City watchdog.

Of the 2.8 million interest-only mortgages in Britain, an estimated 1.3 million are ticking time bombs, so to speak. Banks touted interest-only loans when the industry was booming, but as these notes come due, borrowers are faced with losing their homes.

The Poisonous Band-Aid

In order to mitigate the crisis, magnanimous bankers are offering lifetime mortgages to borrowers in their 50s and 60s who are coming up short. How do these Band-Aids work? The borrower continues to pay interest and can remain in the home for life. When the borrower dies, the house reverts to the bank. (Sorry kids, no house to inherit.)

During boom times, buyers on both sides of the Pond bought homes they could not realistically afford. No money to put down? No problem! Just sign here, move in, and start making the payments. It’s as simple as that.

“Don’t worry,” Snidely Whiplash said. “Real estate always increases in value.”

Now those notes are coming due, aging borrowers haven’t saved nearly enough to pay the balance, and many if not most of their homes haven’t increased in value.

If an interest-only borrower’s home had appreciated 10-20% (providing much-needed equity) during the life of the mortgage, which was the longtime norm, the bank would likely convert the original loan to a conventional mortgage. From the bank’s perspective, why not convert if the home’s value still covers the amount of the loan. And of course, it would pocket origination fees again and receive additional interest income.

That’s Not What Happened

Sad to say, for the most part banks offering the lifetime-mortgage Band-Aid hold property that is worth far less than the mortgage. The bank is screwed if it forecloses because it will have to sell at a substantial loss. Oh my!

Enter Snidely Whiplash, eager to let Grandma and Grandpa stay in their home. All they have to do is keep paying the interest. When they die, he’ll then take the home.

Well, any five-year-old can tell you that Dudley Do-Right saves the day, not Snidely Whiplash. So why would he propose such a scheme? It’s pretty simple. If all those borrowers default, the bank is left with unpaid mortgages and homes worth less than the unpaid balances.

Homeowners, wake up! This silly scheme will shackle you in poverty.

The Stateside Equivalent

I have yet to hear of lifetime interest-only mortgages in the US. The closest thing to it stateside is a reverse mortgage. While a reverse mortgage makes sense under very limited circumstances, vigilance is in order.

When TV characters like the Fonz earn big bucks to promote reverse mortgages, you know the scheme must be profitable for the banking industry. I get it, folks. If you’re considering a reverse mortgage you may feel as though you’ve run out of options. That’s why the Miller’s Money Forever team wrote The Reverse Mortgage Guide—to help seniors protect their wealth.

Remember this universal truth: when a banker is concerned about you, it is for his own benefit, not yours. Come to think of it, give the Fonz a top hat, long twisted mustache and… Oh, never mind! Click here to find out more about our must-read special report, The Reverse Mortgage Guide now.

The article Beware of Bankers Bearing Gifts was originally published at millersmoney.com.

February 8, 2015

When Pro Players Fritter Away Millions

By Dennis Miller

How is it possible for one man to burn through $400 million and wind up filing for bankruptcy, $27 million in the hole? Boxer Mike Tyson made it happen, and he’s in good company among professional athletes. Yet other professional athletes parlay their sizable earnings into nest eggs that grow and last.

Why the two divergent paths?

Today I’m speaking with Hank Sargent, who works at one of the top player agencies in the country to answer that very question.

First, a bit of background is in order. Hank was my son’s roommate and teammate on a college national championship baseball team. While he never played professionally, he’s been involved in professional baseball for over 25 years. He’s also the only person I know with a World Series ring from an NCAA championship team and a major league baseball championship team.

Now, let’s jump to it.

Dennis Miller: Hank, will you share a little about your background?

Hank Sargent: As you know I had a wonderful experience during my collegiate career at Florida Southern College. Knowing my playing days were numbered, I focused my energies toward coaching. Upon graduation I was fortunate to secure the Head Assistant position at my alma mater.

At that time, the program was really flourishing and numerous players were entering professional baseball. A lot of scout traffic came through our program. Ultimately, that led me to a 15-year scouting career with the Montreal Expos, Cincinnati, and Anaheim at various levels—from area scout to cross-checker and finally associate scouting director.

In 2004 I was offered an opportunity to move into a different sector of the industry; I partnered with a close friend and now serve as a baseball agent. We have a wide range of clients, including many household names and some that will soon be in the Hall of Fame.

Basically, I’m a life coach for professional baseball players, helping them navigate the journey from amateur to big leaguer.

Dennis: For most people, their peak earning years are during their 50s and 60s, when they’re more mature and understand the pressing need to save. The opposite is mostly true for your clients; their peak earning years are often in their 20s.

I know you work closely with your clients to help them translate early financial success into a lifetime portfolio. How do you convince these young folks to save, invest, and not spend it all?

Hank: First and foremost, a professional athlete typically has a small window of high earnings. Encouraging safe and conservative investments is our approach. We treat athletes almost as if they were elderly because their assets need to last.

With the new agreements in place there is a limit on signing bonuses for top draft picks. A first-round pick, in round numbers, could receive a $3 million contract. Our first challenge is to help them understand that they did not win the lottery. No matter how good they may be, there are no guarantees they will make the major leagues or sign a huge free-agent contract. As a Cub fan, I know you are familiar with Mark Prior, a pitcher that was picked number 2 in the draft. He had huge potential; however, injuries cut short his career and his earnings were a small fraction of what they could have been.

One thing I try to impress upon them is the value of compound interest. It makes a huge difference if they begin saving immediately. If a player signs at age 20 and invests $1 million of his signing bonus, at a compound interest rate of 5%, it will be worth over $7 million when he’s 60. Many say their goal is to be set for life, and part of our job is to show them how to do it.

Throughout a player’s career, we encourage them to budget for a special purpose and then stash the rest away. They have to realize that their peak earning years happen when they’re young, and in less than a decade they may be over; they must start saving immediately.

Dennis: You have clients from all walks of life. Many of the Dominican players sign their first contract at a very young age and have little formal education. I think Sammy Sosa was a 14-year-old shoeshine boy when he signed his first contract, and he made well over $100 million in his career. Then there are college players that are better educated.

One of my son’s high school teammates was an Academic All-American in college football and earned a degree in finance. He played for 14 years in the NFL and has two Super Bowl rings. I know he immediately invested his original signing bonus and has done quite well.

While helping a client build financial security is always your goal, each situation must vary. The pressure from family and friends on these kids with newfound wealth must be tremendous. What are some of the different approaches you use to help the entire spectrum?

Hank: You are absolutely correct. Most people don’t understand how a player agency works. Until the player signs their first major league contract, the agency receives no compensation. We may work for a client for several years while they are in the minor leagues, with no compensation.

We’re very specific with our target recruits. We are regionalized geographically and have strict criteria for the caliber of baseball player we look for. Our focus is typically on the top two to three rounds of the draft each year. We typically stay in the southeast region of the country, and we always directly involve the parents of our recruits.

Understanding an athlete’s family dynamics is critical because it affects your ability to be a good advisor. Each player will be in a different station of life at key junctures of his career. “High school bonus babies” are still connected to their parents. College players may be more independent or have a significant other in the mix. The bottom line is, being familiar with each client’s family dynamic helps us plan a more specific strategy for protecting his assets.

Dennis: You mention involving the entire family. I believe a lot of basic beliefs are set before a young person enters high school. Chicago sportswriters used to joke about Kyle Orton when he was the Bears’ quarterback. They said the team parking lot was fully of fancy cars— Range Rovers, BMWs, Hummers, you name it. In the last parking spot was a Toyota Prius that belonged to the quarterback. His choice of automobiles said something about his values and priorities.

How do you guide clients who may not have had much mentoring at home?

Hank: As a boutique agency we can limit the number of clients and truly get to know them. As for mentoring, it starts with simple direction: stay humble; stay true to who you are; stay within your means; stay within your present contract; and stay on a budget.

This sounds extremely elementary, but at the end of the day, athletes are creatures of habit. They like simple and direct. Most high school signees and many collegiate players have never balanced their checkbook or paid a credit card bill. Starting with simple budgets and life skills can really help. Quite honestly, lots of this is simply parenting.

Dennis: One final question. For every $100 million ballplayer there are a dozen who make a fraction of that. Are there major differences you can spot between those who hold on to their money and those who don’t?

Hank: For me, it starts and stops with three easily recognizable elements. Upbringing is by far the most important. The core values of a player will determine his direction and success in handling money.

Common sense is a close second. Athletes typically get hit from all sides once they’ve accumulated some wealth and stardom. The ability to make sensible decisions and to be secure in those choices has tremendous value in protecting your assets.

The third element combines intellect and integrity. Making good decisions typically requires having all of the information, but the ability to decipher the information correctly is the real key. And to bring this full circle, integrity allows the athlete to stay true to himself and his professional goals.

Dennis: Hank, thank you for your time. I have one final thought… Though a 35 year-old closing out his baseball career isn’t your traditional retiree, the Miller’s Money team has developed a nifty tool that your players might find helpful. We named it the Retirement Income Calculator, but you can use it at any age to project how long your portfolio will last. It’s easy to adjust to your personal circumstances, whether you plan to retire at age 35, 65, or 95. Readers can access a complimentary version here.

Hank: Thanks, Dennis. This was fun, and I’ll pass that along.

The article When Pro Players Fritter Away Millions was originally published at millersmoney.com.

January 13, 2015

The New Normal for Oil?

By Marin Katusa, Chief Energy Investment Strategist

You may have come across the word “contango” in an oil-related news report or article recently and wondered, “What’s contango?”

It isn’t the Chinese version of the tango.

Contango is a condition in a commodity market where the futures price for the commodity is higher than the current spot price. Essentially, the future price of oil is higher than what oil is worth today.

The above forward curve on oil is what contango looks like. There’s more value placed on a barrel of oil tomorrow and in the future than over a barrel today because of the increased value of storage.

I personally believe our resource portfolios are in portfolio contango—but that’s an entirely separate discussion that I’ll get to later. In today’s missive, I want to focus entirely on oil contango.

Crude oil under $50 per barrel may seem to put most of the producers out of business, but many oil and gas exploring and producing (E&P) companies are sheltered from falling prices in the form of hedges. Often, companies will lock in a price for their future production in form of a futures commodity contract. This provides the company with price stability, as it’s sure to realize the price it locked in at some future date when it must deliver its oil.

But the market will always figure out a way to make money—and here’s one opportunity: the current oil contango leads to plenty of demand for storage of that extra oil production.

With US shale being one of the main culprits of excess crude oil production, storage of crude in US markets have risen above seasonally adjusted highs in the last year. This abundance of stored crude has pushed the current spot price of crude oil toward five-year lows, as current demand is just not there to take on more crude production.

When in contango, a guaranteed result is an increase in demand for cheap storage of the commodity, in order to clip the profit between the higher commodity price in the future versus what’s being paid for the commodity at present. This is precisely what’ playing out in oil today.

Contago, Five Years Later

Looking back at the similarities of the 2009 dramatic free-fall in oil prices to $35 per barrel, after a five-year hiatus, crude has returned to a similar price point, and the futures market has returned to contango (green shows oil in contango).

Floating Storage Is Back in Vogue

Oil traders are now taking advantage of the contango curve through floating storage in the form of waterborne oil tankers.

This is what a big oil tanker looks like:

I’m personally reminded of contango whenever I look out my living room window:

Here’s a photo taken out my living room window—and this is non-busy part of the harbor. At times when I do my runs along the seawall, there have been up to 30 large oil tankers just sitting in the harbor. (On a side note, Olivier and I went for a run in July along the Vancouver seawall, and we counted 26 oil tankers.) All that pricey Vancouver waterfront will have an incredible view of even more oil tankers in the years to come when the pipelines are eventually built. I can only imagine what the major import harbors of China and the US look like… never mind the number of oil tankers sitting in the export nations’ harbors and the Strait of Hormuz. Multiply the above by at least 50 red circles.

As the spread between future delivery of oil and the spot price widened, traders looking to profit from the spread would purchase crude at spot prices and store it on oil tanker ships out at sea. The difference between the spread and the cost to store the crude per barrel is referred to as the arbitrage profit taken by traders. Scale is a very important factor in crude storage at sea: therefore, traders used very large crude carriers (VLCC) and Suezmax ships that hold between 1-2 million barrels of crude oil.

In the late summer of 2014, rates charged for crude tankers began to climb to yearly highs because of the lower price that spurred hoarding of crude oil. This encouraged VLCCs to lock in one-year time charter rates close to and above their breakeven costs to operate the ship.

Time charter rates share similarities to the oil futures market, as ships are able to lock in a daily rate for the use of their ships over a fairly long period of time. VLCC spot rates have reached around $51,000 per day; however, these rates tend to be booked for a shorter period of around three months. These higher spot rates tend to reflect the higher cost paid to crew a VLCC currently against locking in crew and operating costs over a longer-term charter that could last a year. Crude oil is often stored on floating VLCCs for periods of six months to a year depending, on the contango spread.

Floating Storage: Economics

Many VLCCs are locking in yearlong time charter rates at or above $30,000-$33,000 per day, as that tends to be the breakeven rate to operate the vessel. If we assume that a VLCCs charge their breakeven charter rate and we include insurance, fuel, and financing costs that would be paid by the charterer, storage on most VLCCs in the 1-2 million barrel ranges are barely economic at best.

However, they’ll soon become profitable across the board once the oil futures and spot price spread widens above $6-$7 per barrel.

The red star depicts the current spread between the six-month futures contract from the futures price in February 2015. Currently companies are losing just under $0.20 per barrel storing crude for delivery in six months. However, once that $6-$7 hurdle spread is achieved, most VLCCs carrying 2 million barrels of crude will be economic to take advantage of the arbitrage in the contango futures curve.

The VLCC and ULCC Market

VLCC= Very Large Crude Carrier

ULCC=Ultra-Large Crude Carrier

VLCCs store 1.25-2 million barrels of oil for each cargo. Globally, there are 634 VLCCs with around 1.2 billion barrels of storage capacity, or over one-third of the US’s total oil production. The VLCC market is fairly fractioned, and the largest fleet of VLCCs by a publicly traded company belongs to Frontline Ltd. with 25 VLCCs. The largest private-company VLCC fleet belongs to Tankers International with 37 VLCCs. In early December, Frontline and Tankers International created a joint venture to control around 10% of the VLCC market. Other smaller VLCC fleets belong to DHT with 16 VLCCS, and Navios Maritime with 8 VLCCs.

The lowest time charter breakeven costs of $24,000 per day are associated with the largest VLCC fleet from Frontline Ltd. and Tankers International. This is followed by the smaller fleets that have time charter breakeven costs of around $29,000 per day. Of course, on average the breakeven costs associated with most VLCCs is around $30,000 per day, and current time charter rates are around $33,000.

Investing in companies with VLCC fleets as the contango trade develops can generate great potential for further profits for investors. The focus of these investments would be between the publicly traded companies DHT Holdings, Frontline Ltd., and Navios Maritime.

But one must consider that investing in these companies can be very volatile because of the forward curve’s ability to quickly change. It isn’t for the faint of heart.

However, if current oil prices stay low, there will be an increase in tanker storage and thus a sustained increase in the spot price of VLCCs. However, eventually low prices cure low prices, and the market goes from contango to backwardation. It always does and always will.

Shipping companies have been burdened by unprofitable spot and charter pricing since the financial crisis, and these rates have only recently started to increase.

Warning!

As I sit here on a Saturday morning writing this missive, I want to remind all investors now betting on this play that they’re actually speculating, not investing.

There’s a lot of risk for one to think playing the tankers is a sure bet. I have a pretty large network of professional traders and resource investors, and I do not want to see the retail crowd get caught on the wrong side of the contango situation.

In the past, spot rates for the VLCCs usually decline into February and have dropped to as low as under $20,000 per day. It is entirely possible that if the day rates of VLCCs go back to 2012-2013 levels, operators will lose money.

Conclusion: this speculation on tankers is entirely dependent on the spot price and the forward curve.

The risk of this short-term trade is that these companies are heavily levered, and some are just hanging on by a thread. Although this seasonal boost to spot rates has been a positive for VLCCs and other crude carriers, the levered nature of these companies could spell financial disaster or bankruptcy if spot rates return to 2012-2013 levels.

What should be stressed are the similarities to the short-lived gas rally in the winter of 2013-‘14, and the effect these prices have had on North American natural gas companies. A specific event similar to the polar vortex has occurred in the oil market, which has spurred a seasonal increase in the spot price tankers charge to move and store oil.

However, much like the North American natural gas market, the VLCC market is oversupplied; a temporary increase in spot prices that have led to increased transport and storage of oil will not be enough to lift these carriers from choppy waters ahead. Future VLCC supplies are expected to rise, with 20 net VLCCs being built and delivered in 2015 and 33 in 2016. This is much more than the 17 net VLCCs added in 2013 and 9 in 2014.

Another looming and very possible threat to these companies is the same debt threat that affected energy debt markets as global oil prices plummeted. If VLCC and other crude carriers experience a fall in spot prices, these companies’ junk debt could be downgraded to some of the lowest debt grades that border a default rating. This will increase financing costs and in turn increase the operating breakeven costs to operate these crude carrying vessels. The supply factor, high debt, and potentially short-lived seasonally high spot market could all affect the long-term appreciation of these VLCC stock prices. Investing in these companies is very risky over the long run, but a possible trade exists if storage and transport of oil continues to increase for these crude carriers.

Portfolio Contango—An Opportunity Not Seen in Decades

If you talk to resource industry titans—the ones who’ve made hundreds of millions of dollars and been in the sector for 40 years—they’re now saying that they’ve never seen the resource share prices this bad.

Brokerage firms focused on the resource sector have not just laid off most of their staffs, but many have shut their doors.

The young talent is the first group to be laid off, and there’s a serious crisis developing in the sector, as many of the smart young guns have left the sector to claim their fortunes in other sectors.

There’s blood in the streets in the resource sector.

Now if you believe that, as I do, to be successful in the resource sector one must be a contrarian to be rich, now is the time to act.

I have invested more money in the junior resource sector in the last six months than I have in the last five years. I believe we’re in contango for resource stocks, meaning that the future price of the best juniors will be worth much more than they are currently.

I have my rules in speculating, and you’ll learn from my experience—and more important, my network of the smartest and most successful resource mentors whom I have shadowed for many years.

So how can we profit from the blood in these markets? Easy.

Take on my “Katusa Challenge.” You’ll get access to every Casey Energy Report newsletter I’ve written in the last decade, and my current recommendations with specific price and timing guidance. There’s no risk to you: if you don’t like the Casey Energy Report or don’t make any money over your first three months, just cancel within that time for a full, prompt refund, no questions asked. Even if you miss the three-month cutoff, cancel anytime for a prorated refund on the unused part of your subscription.

As a subscriber, you’ll receive instant access to our current issue, which details how to protect yourself from falling oil prices, plus our current top recommendations in the oil patch. Do your portfolio a favor and have me on your side to increase your chances of success.

I can’t make the trade for you, but I can help you help yourself. I’m making big bets—are you ready to step up and join me?

The article The New Normal for Oil? was originally published at caseyresearch.com.

January 2, 2015

Where Have All the Statesmen Gone?

By Marin Katusa, Chief Energy Investment Strategist

One of the most striking things about the Colder War—as I explore in my new book of the same name—has been the contrast between the peevish tone of the West’s leaders compared to the more grown-up and statesmanlike approach that Putin is taking in international affairs.

Western leaders and their unquestioning media propagandists appear to believe that diplomatic relations are some kind of reward for good behavior. But it’s actually more important to establish a constructive dialogue with your enemies or rivals than your friends, because that’s where you need to find common ground. Indeed, it’s been the basis for diplomacy since time immemorial.

Reassuringly, despite having been the target of the Ukraine crisis rather than the instigator, Putin still sees the West as a potential partner, not an enemy. Nor does, he says, Russia have any interest in building an empire of its own. In theory, if Putin is sincere, there should be plenty of room for cooperation, especially in the fight against terrorism.

As Putin said in his speech at the Valdai International Discussion Club in Sochi in October—whose theme was “The World Order: New Rules or a Game without Rules”—he hasn’t given up on working with the West on shared risks and common goals, provided it’s based on mutual respect and an agreement not to interfere in one another’s domestic affairs.

Putin has, of course, already shown that he can rise above the fray. By negotiating the destruction of Assad’s chemical weapons arsenal under international supervision, he did Obama a big favor and got him off the hook in Syria.

But his collaboration with Obama went further than that. Putin had helped persuade Iran to consider making concessions on its nuclear program and was working behind the scenes on North Korean issues.

But as we’re discovering, this was precisely the sort of statesmanship that the neoconservative holdouts in Washington could simply not abide, because it would wreck the plan they’d been hatching for decades to bring about US military strikes against Assad and to move beyond sanctions and more aggressively confront Iran.

Determined to drive a wedge between Obama and Putin and punish Putin for interfering with their goal of regime change in the Middle East, these masters of chaos—like National Endowment for Democracy President Carl Gershman, the US Assistant Secretary of State for European and Eurasian Affairs Victoria Nuland, and Senator John McCain—sprang into action.

These crazies first started fantasizing openly about regime change in Russia, and demonizing the “ideology of Russian imperialism that Putin represents,” before helping to topple Ukraine’s constitutionally elected government.

This is hardly the sort of behavior, to put it mildly, that would lead the Russians to trust American motives—especially after two rounds of NATO expansion in Central and Eastern Europe.

And the Russians also really don’t know what to make of the fact that one second Obama is including them on the list of the top global threats, and the next they’re being asked—yet again—to help secure a truly historical rapprochement with Iran. “It’s unseemly for a major and great power to take such a flippant approach toward its partners. When we need you, please help us, and when I want to punish you, obey me,” Russia’s foreign minister Sergei Lavrov said last week.

The West has squandered the opportunity, after its victory in the Cold War, to establish a new stable system of international relations, with checks and balances, said Putin in Sochi. Instead, the US trashed the system to serve its own selfish ends and made the world a more dangerous place.

A particularly disturbing accusation Putin made is that the US has been using “outright blackmail” against a number of world leaders. “It is not for nothing,” he added, “that ‘big brother’ is spending billions of dollars keeping the whole world, including its own allies, under surveillance.” If true, it would put the US beyond the pale of the civilized global diplomatic community.

Last year Putin reminded Americans, in a New York Times op-ed, that the UN was founded on the basis that decisions affecting war and peace should happen only by consensus, and that it’s this profound wisdom that has underpinned the stability of international relations for decades. The UN risked suffering the same fate as the League of Nations, he said, if America continued to bypass it and take military action without Security Council authorization.

What really amazes Putin—and most right-minded people—is that even after 9/11, when the US finally woke up to the common threat of Islamic terrorism and suffered the most epic blowback of all time, it continued to use various jihadist organizations as an instrument, even after getting its fingers burnt every time.

What did toppling Gaddafi achieve? Nothing, except to turn Libya into a total mess and fill it with al-Qaeda training camps. And what is Obama’s present strategy of funding “moderate” rebels in Syria going to achieve, if not more of the same mayhem, as one US-backed group after another joins forces with the Islamic State?

It’s hard to disagree with Putin that America’s neoconservatives have sown geopolitical chaos, by almost routinely meddling in others’ domestic affairs. He lists the many follies the US has committed, from the mountains of Afghanistan, where al-Qaeda had its roots in CIA-funded operations against the Russians, to Iraq and Saddam’s phantom weapons of mass destruction, to modern-day Syria, where the Islamic State appears to have benefited at least indirectly from some serious funding—and weapons smuggled out of Libya by the CIA.

Instead of searching for global solutions, the Russians think the US has started believing its own propaganda: that its policies and views represent the entire international community, even as the world becomes a multipolar one.

It would appear that Putin is in good company. No less a statesman than former US Secretary of State Henry Kissinger agrees with him.

Sanctions against Russia are a huge mistake, says Kissinger: “We have to remember that Russia is an important part of the international system, and therefore useful in solving all sorts of other crises, for example in the agreement on nuclear proliferation with Iran or over Syria.”

Like Putin, Kissinger argues that a new world order is urgently needed. In an interview in Der Spiegel, he adds that the West has to recognize that it should have made the negotiations about Ukraine’s economic relations with the EU a subject of a dialogue with Russia. After all, he says, Ukraine is a special case, because it was once part of Russia and its east has a large Russian population.

So how has the current generation of American leaders responded to Putin’s accusation—shared by his allies Argentina, Brazil, China, India, and South Africa—that the US is riding roughshod over the interests of other nations?

By mocking him with the sort of childishness that was on display at the G20 summit, where Canadian Prime Minister Stephen Harper grabbed headlines when he told Putin: “Well, I guess I’ll shake your hand, but I only have one thing to say to you: you need to get out of Ukraine.”

While Putin is obviously no saint, his presence at the G20 summit shows that far from being isolated, he continues to be treated as respectable company, despite his actions over Ukraine.

At least Germany and the EU now appear to understand that diplomacy, not military action, is going to resolve differences between Russia and the West—even though Russia expelled one of Germany’s diplomats in Moscow last week.

Following up on the four-hour meeting Merkel had with Putin in Melbourne and the call for intensified diplomacy by the EU’s new foreign policy chief, Federica Mogherini, German Foreign Minister Frank-Walter Steinmeier is now engaged in intensive shuttle diplomacy with Moscow.

The world will be better off if we all stop using the language of force and return to the path of civilized diplomatic and political settlement, as Putin says.

That’s what real statesmen would do, rather than trying to provoke Russia into a new Colder War. America is going to have to learn to play nicely. Otherwise, as Putin says, “today’s turmoil will simply serve as a prelude to the collapse of the world order.”

As you can see, there’s no greater force in geopolitics today than Vladimir Putin. But if you understand his role and how it influences the energy sector as Marin Katusa does, you’ll know how to get out in front of the latest moves and profit along the way.

Of course, the situation is fluid, which is why Marin launched a brand-new advisory dedicated to helping investors avoid energy companies that are being left behind and move into ones that will benefit from the tremendous shifts in capital being created by Putin. (In fact, Marin has the very best plays for taking advantage of cheap oil.)

It’s called The Colder War Letter. And it’s the perfect complement to Marin’s New York Times best-seller, The Colder War, and the best way to navigate today’s fast-changing energy sector. When you sign up now, you’ll also receive a FREE copy of Marin’s book. Click here for all the details.

The article Where Have All the Statesmen Gone? was originally published at caseyresearch.com.

December 21, 2014

Why Russia Will Halt the Ruble’s Slide and Keep Pumping Oil

By Marin Katusa, Chief Energy Investment Strategist

The harsh reality is that U.S. shale fields have much more to fear from plummeting oil prices than the Russians, since their costs of production are much higher, says Marin Katusa, author of The Colder War: How the Global Energy Trade Slipped from America’s Grasp.

Russia’s ruble may have strengthened sharply Wednesday, but it’s plunge in recent days has encouraged plenty of talk about the country’s catastrophe, with some even proclaiming that the new Russia is about to go the way of the old USSR.

Don’t believe it. Russia is not the United States, and the effects of a rapidly declining currency over there are much less dramatic than they would be in the U.S.

One important thing to remember is that the fall of the ruble has accompanied a precipitous decline in the per barrel price of oil. But the two are not as intimately connected as might be supposed. Yes, Russia has a resource-based economy that is hurt by oil weakness. However, oil is traded nearly everywhere in U.S. dollars, which are presently enjoying considerable strength.

This means that Russian oil producers can sell their product in these strong dollars but pay their expenses in devalued rubles. Thus, they can make capital improvements, invest in new capacity, or do further explorations for less than it would have cost before the ruble’s value was halved against the dollar. The sector remains healthy, and able to continue contributing the lion’s share of governmental tax revenues.

Nor is ruble volatility going to affect the ability of most Russian companies to service their debt. Most of the dollar-denominated corporate debt that has to be rolled over in the coming months was borrowed by state companies, which have a steady stream of foreign currency revenues from oil and gas exports.

Russian consumers will be hurt, of course, due to the higher costs of imported goods, as well as the squeeze inflation puts on their incomes. But, by the same token, exports become much more attractive to foreign buyers. A cheaper ruble boosts the profit outlook for all Russian companies involved in international trade. Additionally, when the present currency weakness is added to the ban on food imports from the European Union, the two could eventually lead to an import-substitution boom in Russia.

In any event, don’t expect any deprivations to inspire riots in the streets of Moscow. Russian President Vladimir Putin’s popularity has soared since the beginning of the Ukraine crisis. The people trust him. They’ll tighten their belts and there will be no widespread revolt against his policies.

Further, the high price of oil during the commodity supercycle, coupled with a high real exchange rate, led to a serious decline in the Russia’s manufacturing and agricultural sectors over the past 15 years. This correlation—termed by economists “Dutch disease”—lowered the Russian manufacturing sector’s share of its economy to 8% from 21% in 2000.

The longer the ruble remains weak, however, the less Dutch disease will rule the day. A lower currency means investment in Russian manufacturing and agriculture will make good economic sense again. Both should be given a real fillip.

Low oil prices are also good for Russia’s big customers, especially China, with which Putin has been forging ever-stronger ties. If, as expected, Russia and China agree to transactions in rubles and/or yuan, that will push them even closer together and further undermine the dollar’s worldwide hegemony. Putin always thinks decades ahead, and any short-term loss of energy revenues will be far offset by the long-term gains of his economic alliances.

In the most recent development, the Russian central bank has reacted by raising interest rates to 17%. On the one hand, this is meant to curb inflation. On the other, it’s an direct response to the short selling speculators who’ve been attacking the ruble. They now have to pay additional premiums, so the risk/reward ratio has gone up. Speculators are going to be much warier going forward.

The rise in interest rates mirrors how former U.S. Fed Chair Paul Volcker fought inflation in the U.S. in the early ‘80s. It worked for Volcker, as the U.S. stock market embarked on a historic bull run. The Russians — whose market has been beaten down during the oil/currency crisis — are expecting a similar result.

Not that the Russian market is anywhere near as important to that country’s economy as the US’s is to its. Russians don’t play the market like Americans do. There is no Jim Kramerovsky’s Mad Money in Russia.

Russia is not some Zimbabwe-to-be. It’s sitting on a surplus of foreign assets and very healthy foreign exchange reserves of around $375 billion. Moreover, it has a strong debt-to-GDP ratio of just 13% and a large (and steadily growing) stockpile of gold. Why Russia will arrest the ruble’s slide and keep pumping oil

And there is Russia’s energy relationship with the EU, particularly Germany. Putin showed his clout when he axed the South Stream pipeline and announced that he would run a pipeline through Turkey instead. The cancellation barely lasted long enough to speak it before the EU caved and offered Putin what he needed to get South Stream back on line. Germany is never going to let Turkey be a gatekeeper of European energy security. With winter arriving, the EU’s dependence on Russian oil and gas will take center stage, and the union will become a stabilizing influence on Russia once again.

In short, while the current situation is not working in Russia’s favor, the country is far from down for the count. It will arrest the ruble’s slide and keep pumping oil. Its economy will contract but not crumble. The harsh reality is that American shale fields have much more to fear from plummeting oil prices than the Russians (or the Saudis), since their costs of production are much higher. Many US shale wells will become uneconomic if oil falls much further. And it they start shutting down, it’ll be disastrous for the American economy, since the growth of the shale industry has underpinned 100% of US economic growth for the past several years.

Those waving their arms about the ruble might do better to look at countries facing real currency crises, like oil-dependent Venezuela and Nigeria, as well as Ukraine. That’s where the serious trouble is going to come.

The collapse in oil prices is just the opening salvo in a decades-long conflict to control the world’s energy trade. To find out what the future holds, specifically how Vladimir Putin has positioned Russia to come roaring back by leveraging its immense natural resource wealth, click here to get your copy of Marin Katusa’s smash hit New York Times bestseller, The Colder War. Inside, you’ll discover how underestimating Putin will have dire consequences. And you’ll also discover how dangerous the deepening alliance between China, Russia and the emerging markets is to the future of American prosperity. Click here to get your copy.

The article Why Russia Will Halt the Ruble’s Slide and Keep Pumping Oil was originally published at caseyresearch.com.

December 3, 2014

Judge This Country by Its Enemies

By Nick Giambruno

Pop quiz: can you name this free-market jurisdiction in the Western hemisphere?

Here are some of its attributes:

• Personal income tax: NONE

• Corporate income tax: NONE

• Capital gains tax: NONE

• Taxation of dividends: NONE

• Taxation of interest: NONE

• Withholding taxes: NONE

• Payroll tax: NONE

• Social Security tax: NONE

• Wealth tax: NONE

• Inheritance/estate tax: NONE

• Property taxes: NONE

Compared to the levels of taxation in the US, Canada, and Europe, to say the above is a breath of fresh air would be a major understatement.

Now, there are only three jurisdictions in the Western hemisphere that do not levy property taxes, so that should narrow the field. The mere existence of property taxes is a ridiculous notion that should offend anyone with a respect of property rights. I have already covered this topic here in case you’re interested.

Those three jurisdictions are the Cayman Islands, Dominica, and Turks and Caicos Islands.

All three are worthy of discussion, but as I just returned from a speaking engagement at the Grand Cayman Liberty Forum, I want to focus on Cayman today.

(By the way, locals pronounce it like cay-man, not cay-men. It sort of rhymes with the way you would say “hey man.”)

There is one absolutely crucial feature that distinguishes the Cayman Islands from other low-tax jurisdictions: a culture and history that is vehemently opposed to direct taxation—which has never existed in Cayman.

Over the years, every proposal that has had even a whiff of a possibility that it might lead to direct taxation has been driven out of town, along with the foolish politicians who sponsored it. It’s proven to be a great deterrent.

This dynamic has been fostered by the fact that Cayman is a small place where everybody—including the politicians—know each other. The political system in that sense remains very personal. The legislators go to the same restaurants and live in the same neighborhoods as their constituents—they cannot easily hide. This sort of personal accountability is impossible in large countries. It helps keep Caymanian politicians in check.

Give an Inch and They’ll Take a Mile

The aversion to even the concept of direct taxation in Cayman is extremely important. Because once the principle is conceded—and you give politicians an inch—it’s only a matter of time before they’ll take a mile.

You’ll recall that when the federal income tax was introduced in the US in 1913, those making up to $20,000 (equivalent to around $475,000 today) were only taxed at 1%—that’s ONE PERCENT.

The top bracket kicked in at $500,000 (equivalent to around $12 million today), and the tax rate for it was only 7%.

Of course, once the principle was conceded in 1913, the politicians naturally couldn’t resist ramping it up until we have the monstrosity that exists today in the US tax code, which most Americans passively accept as “normal.”

In my view, it’s Cayman’s unique culture and history that’s opposed to the very principle of direct taxation, which is the best guarantor it will continue to be a beacon of light well into the future.

Judge Me by My Enemies

But not everyone is as thrilled about the Caymanians’ love for low taxes as I am.

Spendthrift politicians the world over have long despised Cayman—something that should be taken as a badge of honor, as far as I’m concerned.

This is because productive people and companies gravitate to places where they’re treated best. And it’s hard to find a place where you’ll be treated better with respect to taxation than in Cayman. This healthy dynamic is called tax competition.

Naturally, politicians in countries with uncompetitive tax policies don’t like this because it means fewer productive people to fleece, which helps puts a limit on their wasteful spending.

Consequently, Cayman has long been pressured. A prominent Caymanian professional told me about how the US government used to fax over laws to the Cayman government and demand that they adopt them. Imagine a situation where China arrogantly faxed over a new law to the US Congress and demanded they adopt it and you'll know how the Caymanians felt.

Fortunately, these methods were never really that successful. In fact, they’ve made Cayman stronger. Now the jurisdiction is battle-hardened and knows how to handle the pressure.

Another way Cayman has been pressured is through demonization in the media and popular culture as some sort of shady money-laundering center. Never mind the fact that unlike murder, robbery, and rape, money laundering is a victimless make-believe crime invented by politicians.

Here’s what Lew Rockwell said in a post titled The Totalitarian Notion of ‘Money Laundering’:

Normal people … are outraged and astounded to know that using your own cash, honestly gained and (dishonestly) taxed, can be a major-league federal felony. Spending $10,000 or more of your own cash without filling out a federal form is a crime. But get this: spending smaller amounts can be a crime too, if they add up to more than $10,000. We are told that this police-state measure is necessary to fight terrorism. But when the evil Reagan administration pushed all these laws through, the excuse was to fight the drug war. Of course, neither is true. Such surveillance is part of the federal effort to tax and control every dime you have and spend. Need I mention that only one public official, then and now, fights for our privacy and property rights in this area? Ron Paul battled Reagan, Bush I, Clinton I, and Bush II on the victimless crime of “money laundering.” As Ron says, freedom means governmental transparency and private opacity, not the reverse.

But let’s set that argument aside and assume that money laundering is indeed a real crime. The people who demonize Cayman never mention that New York and London are some of the largest money laundering centers in the world. Cayman is squeaky clean in comparison with tight “know your customer” and other banking controls.

Here’s what the New York Times has said:

A study last year by the Colombian economists Alejandro Gaviria and Daniel Mejía concluded that the vast majority of profits from drug trafficking in Colombia were reaped by criminal syndicates in rich countries and laundered by banks in global financial centers like New York and London.

What this all means is that the popular (mis)conception about Cayman being some sort of unique and illicit jurisdiction is nothing but propaganda from proponents of big government.

The reality is that Cayman is a highly sophisticated and professional financial center that stands out because of its unique history and culture opposed to direct taxation. For people looking to make the most of their personal freedom and financial opportunity, Cayman checks a lot of boxes.

If we judge Cayman by its enemies, I’d say it’s a wonderful place.

Before I sign off, I’d be remiss if I didn’t mention the latest issue of Crisis Speculator. In it, I have an in-depth discussion with the legendary Jim Rogers on investing in productive farmland in a crisis market that both he and I are very excited about. It’s a region that happens to contain some of the most fertile soil in the entire world. Jim recently became a director of a company that operates in the area.

Crucially, I have found a way for US investors to easily access this opportunity with a retail brokerage account. If you’re interested in scooping up productive agricultural real estate in arguably the most fertile area of the world at crisis-driven bargains—and with the ease of buying a stock in your US brokerage account—I’d suggest you check out the investment pick in the latest issue of Crisis Speculator.

 

The article was originally published at internationalman.com.

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November 29, 2014

Akin to Porcupines Mating

By Nick Giambruno

That was how the slow and careful rapprochement between Russia and China has been described by Eric Margolis, one of my favorite geopolitical writers.

US shenanigans in Eastern Europe and the East China Sea—fomenting so-called colored revolutions in Ukraine and Georgia (both on Russia’s periphery) and egging on China’s neighbors to make aggressive territorial claims—have pushed the Russian bear and Chinese dragon together. In May, the two uneasy neighbors reached a de facto alliance represented by a 20-year, $400 billion deal for Russia to supply China with natural gas.

A Russia/China alliance shifts the Earth’s geopolitical axis. Historians may look back at the energy deal as the moment the post-Cold War era and the US’s singular position came to an end. The Russia/China team is now a consequential economic and military counterweight to the US. It will operate as an attractant for every country and every faction that for any reason resents the US’s giant footprint in world affairs.

For example… Russia is making strides in assembling a massive new trading bloc known as the Eurasian Union. When it opens for business on January 1 of next year, Russia, Belarus, and Kazakhstan will be a barrier-free market with 170 million people and a GDP of $2.7 trillion. Armenia, Kyrgyzstan, Tajikistan, and Uzbekistan likely will join in the near future, which would expand the Eurasian Union to 217 million people and a GDP of $2.8 trillion.

In the military and security realm, there’s the Shanghai Cooperation Organization (SCO), an intergovernmental security organization shared by China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan. India, Iran, Mongolia, and Pakistan will join in the near future.

The two organizations add up to exactly what Zbigniew Brzezinski and other American geostrategists feared the most—the emergence of a power bloc in Eurasia that could stand up to the West.

And it’s certainly not for lack of trying that the US failed in preventing this. It was just outplayed and outmaneuvered at every turn by Vladimir Putin.

Love him or love to hate him, Putin is one smart, tough, ruthless SOB. He’s not the kind of opponent I would want to have. The point of all this should be that regardless of Russia’s troubles at the moment, the country is not going to blow away.

Brzezinski’s concern about an emerging Eurasian power is one of the reasons the US has tried to knock Ukraine out of the Russian orbit. Absorbing Ukraine into NATO would further the goal of isolating Russia, and that is exactly what the US attempted to do—however clumsily.

We’re not referees charged with deciding which political players are good guys and which are bad guys. As potential crisis investors, what we want to know about Russia is its staying power, which we rate as high. The portrait of Putin as a Hitler or a crazy man leading his country toward disaster—the picture you get from the mainstream media and from many politicians—is suitable only for propaganda posters.

As things stand now, the effort appears to have backfired on the US. Putin likely will walk away with de facto control of all the militarily and economically strategic parts of eastern Ukraine, while the US/NATO will end up with the bankrupt western parts—like a Greece on steroids. It seems Russia will emerge from the Ukraine crisis stronger.

In the end, Russia’s economic and geopolitical cooperation with China and other non-Western Eurasian powers means that whatever happens in the West, it has real and arguably more attractive alternatives.

This is exactly why the current negative sentiment and cheap valuations of Russian stocks makes them an excellent speculation. This is just what Doug Casey and I are looking for in Crisis Speculator.

Baron Rothschild may have been an unsavory character in many ways, but he was absolutely correct when he stated that, “The time to buy is when blood is in the streets.”

This statement perfectly captures the essence of speculating in crisis markets.

Huge investment returns have been made throughout history where astute investors took advantage of the semi-hidden opportunities wrapped in an outward cloak of apparent danger in crisis markets.

Doug and I aren’t just blindly running toward disasters. We’re looking for hated markets with cheap valuations that, critically, have an identifiable catalyst. Russia fits the bill perfectly, and that leads us to our latest investment recommendation in Crisis Speculator. It’s a solid Russian company selling at a steep discount and is easily accessible to US investors (and no, it’s not Gazprom).

We believe it will be a profitable financial adventure. If you want to join the party, be sure to check out Crisis Speculator.

 

The article was originally published at internationalman.com.

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November 5, 2014

Ron Paul Says: Watch the Petrodollar

By Nick Giambruno, Senior Editor, InternationalMan.com

The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better.—Ron Paul

Dr. Paul is referring to the petrodollar system, one of the main pillars that’s been holding up the US dollar’s status as the world’s premier reserve currency since the breakdown of Bretton Woods.

Want to know when the fiat US dollar will collapse? Watch the petrodollar system and the factors affecting it. This is critically important, because once the dollar loses its coveted reserve status, the consequences will be dire for Americans.

At that moment, I believe Washington will become sufficiently desperate to enforce the radical measures that governments throughout world history have always implemented when their currencies were threatened—overt capital controls, wealth confiscation, people controls, price and wage controls, pension nationalizations, etc.

And there’s more. The destruction of the dollar will wipe out most people’s wealth, leading to political and social consequences that will likely be worse than the financial consequences.

From Bretton Woods to the Petrodollar

The dollar’s role as the world’s reserve currency was first established in 1944, with the Bretton Woods international monetary system. The US—victorious in WWII, and possessing the overwhelmingly largest gold reserves in the world (around 717 million ounces)—could reconstruct the global monetary system with the dollar at its center.

The Bretton Woods arrangement linked another country’s currency to the US dollar at a fixed exchange rate, and the US dollar was tied to gold, also at a fixed exchange rate. Countries accumulated dollars in their reserves to engage in international trade or to exchange them with the US government for gold at $35 an ounce.

By the late 1960s, exuberant spending from welfare and warfare—combined with the Federal Reserve monetizing the deficits—drastically increased the number of dollars in circulation in relation to the gold backing it.

This monetary inflation caused nervous countries to accelerate their exchange of dollars for gold at $35. The result was a serious drain on the US gold supply (from 20,000 tonnes to around 290 million ounces by 1971, an amount it supposedly still holds).

With gold reserves shrinking rapidly, President Nixon officially ended convertibility of the dollar to gold, thus ending the Bretton Woods system on August 15, 1971. It was a default, and it took with it the main reason countries primarily held their reserves in dollars. The buck’s preeminent value in international trade was gone. Demand for dollars by foreign nations was sure to fall, along with its purchasing power.

That hurt OPEC, whose members were the world’s leading suppliers of a commodity even more valuable than gold: oil. OPEC countries needed a way to retain the real value of their earnings in the face of a declining currency, without having to jack the price of oil sky high.

If the dollar was to remain strong, it had to reinvent its status as the world’s reserve currency, and that required a new world financial arrangement, one which would give foreign nations an ironclad reason to hold and use dollars. Nixon dispatched his National Security Advisor Henry Kissinger to Saudi Arabia.

The Petrodollar System

Between 1972 and 1974, the US and Saudi governments created the petrodollar system.

Saudi Arabia was chosen because of its vast petroleum reserves, its dominant influence in OPEC, and the (correct) perception that the Saudi royal family was corruptible.

Under the new petrodollar system, the US guaranteed the survival of the House of Saud by providing a total commitment to its political and military security. In return, Saudi Arabia agreed to:

• Use its dominant influence in OPEC to ensure that all global oil transactions would be conducted only in US dollars.

• Invest a large amount of its oil revenue in US Treasury securities and use the interest income from those securities to pay US companies to modernize the infrastructure of Saudi Arabia.

• Guarantee the price of oil within limits acceptable to the US and act to prevent another oil embargo by other OPEC members.

No dollars, no access to the world’s most important commodity. It’s a very compelling reason to hold your reserves in dollars.

For example, if Italy wants to buy oil from Kuwait, it has to first purchase US dollars on the foreign exchange market to pay for the oil, thus creating an artificial demand for US dollars that wouldn’t exist if Italy could pay in euros.

The US is just a toll collector in a transaction that has nothing to do with a product or service. But that translates into increased purchasing power and a deeper, more liquid market for the dollar and Treasuries.

Additionally, the US has the unique privilege of using its own currency—which it can print at will—to purchase its imports, including oil.

The benefits of the petrodollar system to the US are impossible to overstate.

What to Watch For

Today, the geopolitical sands of the Middle East are rapidly shifting.

The faltering strategic regional position of Saudi Arabia, the rise of Iran (which is not part of the petrodollar system), failed US interventions, Russia’s increasing power as an energy giant, and the emergence of the BRICS nations (which offer the potential of future alternative economic/security arrangements) all affect the sustainability of the petrodollar system.

My colleague Marin Katusa’s mentioned in his book; The Colder War, you need to be aware of what Vladimir Putin is doing. Putin would like nothing more than to sabotage the petrodollar, and he’s forging alliances across the planet that he hopes will help him achieve his goal.

At the same time, you should watch the relationship between the US and Saudi Arabia, which has been deteriorating.

The Saudis are furious at what they perceive to be the US not holding up its end of the petrodollar deal. They believe that as part of the US commitment to keep the region safe for the monarchy, the US should have attacked its regional rivals Syria and Iran by now. And they may feel they are no longer obliged to uphold their part of the deal, namely selling their oil only in US dollars.

They’re already heavily involved with China and could also tilt toward Russia. Oil traded in rubles or yuan could be the future result—a death knell for the petrodollar.

Conclusion

It was evident long before Nixon closed the gold window and ended the Bretton Woods system in 1971 that a paradigm shift in the global monetary system was inevitable.

Now another shift also seems inevitable. Ron Paul’s words alert us as to when a dollar collapse is imminent.

“We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros.”

Someday, perhaps soon, Americans will wake up to a new reality, like they did on August 15, 1971.

To learn more about the coming death of the petrodollar and how it will directly affect you, I recommend you read Marin’s new book, The Colder War.

Dr. Ron Paul has fully endorsed it and inside, you’ll discover the web alliances and deals Putin has forged to break the monopoly of the dollar in the global energy trade and what a flight from the dollar will look like.

Before Putin makes another move against America, get the full story by clicking here to get your copy of this eye-opening book.

The article Ron Paul Says: Watch the Petrodollar was originally published at caseyresearch.com.

October 27, 2014

Afraid Your Money Will Vanish before You Do?

By Andrey Dashkov

Unlike Jack Nicholson’s character in A Few Good Men, we trust that you can handle the truth. No matter your age, securing a comfortable retirement is a huge concern. Folks want the whole truth about their financial outlook, but straight answers are hard to come by.

Both sides of the mainstream media habitually present opinion-tainted partial facts. Case in point: the unemployment numbers announced earlier this month. One side is cheering because unemployment dropped to a six-year low, while the other side is calling it pure fraud.

I found author and libertarian-about-town Wayne Root’s remarks in a recent article for The Blaze particularly telling:

The middle class isn’t getting richer, it’s getting poorer…

The only people being hired are your grandparents. 230,000 of the new jobs went to those in the 55-to-69-year-old age group. In the prime working age group of 24 to 54 years old, 10,000 jobs were lost…

It means grandma and grandpa are desperate and willing to take grandson’s low wage job to survive until Social Security kicks in. The US workforce is now the oldest in history. And if grandpa has to work (out of desperation) until the day he dies, there will never be any decent jobs for the grandkids.

Here’s the part Root gets wrong: Baby boomers are not working until Social Security kicks in. They’re working well past that point, because they feel they must. Smart boomers know they can’t afford to wait until robust interest rates return; they’re taking action to protect themselves now, lest their circumstances become truly dire.

You’re 65—Now What?

The Employee Benefit Research Institute surveys workers each year concerning their retirement confidence. Despite an uptrend, the latest report shows that 82% of workers feel less than “very confident” about having enough money to retire comfortably.

With that statistic in mind, we looked at three different 40-year retirement scenarios. Note that the numbers and charts in this overview are meant to illustrate several scenarios, not provide individual guidance. Every person’s situation differs in terms of taxes, time horizons, and other parameters, and we encourage you to work with a financial planner to manage your savings.

The data exclude other sources of retirement income you may have, such as Social Security or a pension. All of the amounts, including annuity incomes, are pre-tax.

• Scenario 1. At age 65, you decide to retire with $500,000 in personal savings. You anticipate your expenses will rise approximately 3% annually. Thus, with each subsequent year, you will need to withdraw 3% more than the previous year. You estimate that your savings will grow by 5% annually. You are planning for a 40-year retirement, meaning your savings must last until age 105.
  
  How much money can you withdraw each year, using those assumptions?
• Scenario 2. At age 65 you have the same $500,000 in personal savings that you did in Scenario 1; however, you take $100,000 from your account and buy an annuity. Our go-to source for annuity information, Stan The Annuity Man, says that currently, this annuity would pay $527 for the rest of your life. You use the remaining $400,000 as principal for the next 40 years in the same fashion as in the first case: assuming the same 5% rate of return and an annual 3% withdrawal increase.
• Scenario 3. Instead of retiring at age 65, you work for five extra years and buy a 100,000 annuity at age 70. We will assume you did not add to your savings during that time (though it did earn interest). Many boomers use extra working years to eliminate any lingering debt, so they can retire 100% debt-free. (However, note that we encourage a different approach: using extra working years to save as much as possible, including maximizing catch-up contributions to your 401(k) or IRA.)
  
  If your nest egg grew at a 5% compound rate, it will total $638,141 when you are age 70. So, excluding the $100,000 spent on an annuity, you have $538,141 to draw from. As with Scenarios 1 and 2, we’ll assume the withdrawals last for 40 years here, stretching the retirement period until age 110. Buying the annuity at age 70 instead of age 65 raises your monthly annuity payout to $582 per month.

Now, let’s take a closer look at each of these cases.

Scenario 1: He Who Takes It All Is Not the Winner

For your nest egg to last 40 years, in year one, you can withdraw $17,747, or $1,479 per month, from your $500,000 nest egg. Each year you take out 3% more to keep up with rising expenses.

Follow the yellow line representing your nest egg in the chart above. As you can see, after 40 years your $500,000 is gone.

What happens if you stay within your monthly allowance and live past age 105? Here’s hoping you have generous grandchildren. If not, you might be at the mercy of a Social Security system that may or may not be around in its current form.

There’s good reason the Bureau of Labor Statistics projects that workforce participation for people age 75 and over will rise to 10.5% by 2022, up from 7.6% in 2012. For the 65-74 age group, it projects that the rate will jump to 31.9%, up from 26.8% in 2012 and 20.4% in 2002. Better health and a sustained desire to work may be one reason more seniors are working longer, but another is fear.

61% of older Americans fear outliving their money more than they fear death. This is a fear we hope no one encounters as they near the end of the line. Other than the late George Burns, I doubt many centenarians are holding down a job.

Running out of money and having Social Security as your final safety net is a legitimate concern. Every politician, regardless of party, acknowledges the US government cannot make good on all of its promises. No one knows what the future will bring.

With that in mind, let’s move on to Scenario 2.

Scenario 2: Spreading Out Risk

Insurance companies have a range of annuities that will pay you for the rest of your life, which our team covered in detail in Annuities De-Mystified. In essence, holding an annuity as part of your overall retirement plan is one way to reduce the risk of running out of money. Since going back to work at 105 is both unappealing and impractical, let’s look at how Scenario 2—the same $500,000 nest egg with $100,000 used to purchase an annuity at age 65—plays out.

Your annuity will provide monthly payouts of $527. Using the same 40-year time frame, your monthly income from the remaining $400,000 will be approximately $1,183 per month in first year, or a total of $1,710.

You start out with a bit more money; however, the annuity payment will remain constant, with no adjustment for inflation. At the end of 40 years, your nest egg will be gone, but you will still receive the annuity payments.

There is no way to know how long you will live. Today, a man who reaches age 65 can expect, on average, to live to age 84.3; a woman, 86.6. One in ten 65-year-olds, however, can expect to live past age 95. Medical advancements are pushing those numbers up, making life after age 105 seem not too far fetched. An annuity is just one way to hedge against running out of money too soon.

One big disadvantage of an annuity is that it doesn’t offer real inflation protection. Even annuities with inflation riders usually yield marginal results.

If you receive Social Security, you can hope the annual inflation adjustments make up some of the difference, but it’s unlikely to be enough to maintain your current lifestyle. That brings us to Scenario 3.

Scenario 3: Delayed Gratification

Congratulations! You made it to age 70. The $500,000 in savings you had at age 65 has grown to $638,141 (at an annual rate of 5%). You buy an annuity for $100,000 that will pay you $582 every month until death and draw down the remaining $538,141 over the next 40 years—again assuming 5% growth rate and 3% annual withdrawal increase.

The lump sum of $538,141 will provide approximately $1,592 per month during the first year. Add the annuity payouts and your total monthly income comes to $2,174, before taxes.

In the first year, your total income, including withdrawals and annuity income, will be $26,085 compared to $17,747 in Scenario 1 and $20,516 in Scenario 2.

And although your savings will still run out after 40 years, you will be 110. By working an additional 5 years and deferring the start date you get an additional five years before you have to rely on the annuity only.

The Takeaways

This is all a reminder that the best way to enjoy retirement is to build a portfolio that can generate enough capital gains and dividend income to satisfy your spending needs, while leaving the principal intact as long as possible. If you want to end up in the 18% of people who are very confident about having enough money to retire, you may want to keep working after age 65, if possible, and invest part of your savings in an annuity to ensure you have at least some income if you outlive the rest of your nest egg.

To determine if an annuity is right for your retirement portfolio, read your free copy of our special report, Annuities De-Mystified. It includes tips for uncovering hidden fees and a frank look at the risks associated with annuities. Plus, it’s the only such report we know of written by financial educators who do not sell annuities. Access your free copy of Annuities De-Mystified here.

The article Afraid Your Money Will Vanish before You Do? was originally published at millersmoney.com.

October 24, 2014

Blood in the Streets to Create the Opportunity of the Decade

By Laurynas Vegys, Research Analyst

Gold stocks staged spring and summer rallies this year, but haven’t able to sustain the momentum. Many have sold off sharply in recent weeks, along with gold. That makes this a good time to examine the book value of gold equities; are they objectively cheap now, or not?

By way of reminder, a price-to-book-value ratio (P/BV) shows the stock price in relation to the company’s book value, which is the theoretical value of a company’s assets minus liabilities. A stock is considered cheap when it’s trading at a historically low P/BV, and undervalued when it’s trading below book value. From the perspective of an investor, low price-to-book multiples imply opportunity and a margin of safety from potential declines in price.

We analyzed the book values of all publicly traded primary gold producers with a market cap of $1 billion or more. The final list comprised 32 companies. We then charted book values from January 2, 2007 through last Thursday, October 15. Here’s what we found.

At the current 1.20 times book value, gold stocks aren’t as cheap as they were when we ran the numbers in June, 2013, successfully pinpointing the all-time low of 0.91 (the turning point before the period in gray). Of course, that P/BV is hard to beat: it was one of the lowest values ever. And while the stocks not quite as cheap now, the valuation multiple still lingers close to its historical bottom. Remember, we’re talking about senior mining companies here—producers with real assets and cash flow selling for close to their book values.

In short, yes, gold stocks are objectively selling cheaply.

The juniors, of course, have been hit harder. It’s hard to put a meaningful book value on many of these “burning matches” with little more than hopes and geologists’ dreams, but valuations on many are scraping the bottom, making them even better bargains, albeit substantially riskier ones.

What does this mean for us investors?

It’s no surprise to see that every contraction in the ratio was followed by a major rally. In other words, the cure for low prices is low prices:

• The August, 2007 bottom (2.2) and the momentary downtrend that preceded it were quickly erased by a swift price rally leading to a January, 2008 peak (3.8).

• The bull also made a comeback in 2009-2010, fighting its way up out of what seemed at the time to be the deepest hole (1.04) in October, 2008.

Stocks have been on a long slide since the ratio last peaked at 3.24 in October, 2010, with the downturn in 2013 pushing multiples to previously unseen lows.

No one—us included—has a crystal ball, and so it’s impossible to tell if the bottom is behind us. We can, however, gauge with certainty when an asset is cheap—and cash-generating companies selling for little more than book value are extraordinary values for big-picture investors.

Now let’s see how these valuations look against the S&P 500.

Stocks listed in the S&P500 are currently more than twice as expensive as the gold producers. That’s not surprising given how volatile metals prices can be and how unloved mining is—but is it rational? Note that despite the downtrend in the last month, the multiple for the S&P500 remains close to a multiyear high.

In other words, yes, the S&P 500 is expensive.

This contrast points to an obvious opportunity in our sector.

So is now the time to buy gold stocks? Answer: our stocks are good values now, and, if there is a larger correction ahead, they may well become fantastic values, briefly. Either way, value is value, on sale.

As the most successful resource speculators have repeatedly said: you have to be a contrarian in this sector to be successful, buying low and selling high, and that takes courage based on solid convictions. Yes, it’s possible that valuations could fall further. However:

The difference between prices and clear-cut value argue for going long and staying that way until multiples return to lofty levels again—which they’ve done every time, as the historical record shows.

With a long-term time frame in mind, whatever happens in the short term is less of a concern. Building substantial positions at good prices in great companies in advance of what must transpire sooner or later is what successful speculation is all about. This is how Doug Casey, Rick Rule, and others have made their fortunes, and it’s why they’re buying in the market now, seeing market capitulation as one of the prime opportunities of the decade.

That’s worth remembering, especially during a downturn that has even die-hard gold bugs giving up.

Bottom line: “Blood in the streets” isn't pretty, but it’s a good thing for those with the liquidity and courage to act.

What to buy? That’s what we cover in BIG GOLD. Thanks to our 3-month full money-back guarantee, you have nothing to lose and the potential for gains that only a true contrarian can expect.

 

The article Blood in the Streets to Create the Opportunity of the Decade was originally published at caseyresearch.com.

 

October 11, 2014

The Broken State and How to Fix It

By Casey Research

The United States of America is not what it used to be. Unsustainable mountains of debt, continuous meddling by the government and Fed to “stimulate the economy,” and the US dollar’s dwindling status as the world’s reserve currency are very real threats to Americans’ standard of living. Here are some opinions from the recently concluded Casey Research Fall Summit on the state of the state and how to fix it.

Marc Victor, a criminal defense attorney from Arizona and a staunch liberty advocate, says there’s really no such thing as “the state”—“it’s just some people bossing other people around.”

Not everyone wants to fix things, he says; the bosses like the status quo. For example, aside from drug lords, DEA agents are the ones benefiting most from the “War on Drugs.”

Victor believes that democracy and freedom are incompatible, since “democracy is majority rule, and freedom is self-rule.” If you want to bring true freedom to America, he says, winning hearts and minds is the only way to reboot this country and create a free society.

Paul Rosenberg, adventure capitalist, Casey Research contributor, and editor of “A Free Man’s Take,” views America’s future similarly. He thinks the United States is in a state of entropy.

The bad news, says Rosenberg, is that there will be no revolution. The good news is that the peak of citizens’ obedience to the state is behind us, and people are getting fed up with the government’s shenanigans.

Real change is slow, he says, so we must work persistently to create a better world.

Stephen Moore, chief economist at the Heritage Foundation, says the problem is liberal economic policy: Red states in the US, he says, have blown away blue states in job creation since 1990. Texas alone accounts for the entire net growth of the US economy over the past five years.

As another proof point in favor of a free-market economy, Moore emphasizes that both Obama and Reagan took office during terrible economic times. While Obama has raised taxes and instituted Obamacare, Reagan cut taxes and regulation. As a result, the Reagan economic recovery was almost twice as robust as the Obama “recovery.”

One of the US’s biggest problems, says Moore, is that companies can’t reinvest profits because dividend, capital gains, and income taxes all have increased under Obama. Corporate taxes in the rest of the world have dramatically declined in the last 25 years, but in the US, they haven’t budged. The average corporate tax rate around the world is 24%—in the US, it’s 38%.

Overall, though, Moore is bullish on the US economy. American companies, he says, are the best-run in the world, if only the US government would adopt less economically destructive policies.

Doug Casey, chairman of Casey Research, legendary speculator, and best-selling financial author, isn’t so optimistic. First of all, he says, we’re in the Greater Depression right now, which began in 2008. He fears it’s too late to repair America, but says if anyone would attempt to do so, the following seven-step program would help:

• Allow the collapse of “zombie companies” (companies that are only being held up by government handouts and other cash infusions).

• Abolish all regulatory agencies.

• Abolish the Federal Reserve.

• Cut the size of the military by at least 90%.

• Sell all US government assets.

• Eliminate the income tax.

• Default on the national debt.

Of course, says Casey, that’s not going to happen, so individual investors shouldn’t hope for a political solution or waste their time and money trying to stop the inevitable collapse of the US economy. The only way to save yourself and your assets is to internationalize.

He recommends owning significant assets outside your home country: for example, by buying foreign real estate. You should also buy and store gold, “the only financial asset that’s not simultaneously someone else’s liability.”

Casey’s suggestions include going short bubbles that are about to burst (like Japanese bonds denominated in yen), selling expensive assets like collectible cars and expensive real estate in major cities, as well as looking toward places like Africa as contrarian investment opportunities.

Nick Giambruno, senior editor of International Man, agrees that internationalizing your wealth—and yourself—is the most prudent way to go for today’s high-net-worth investors. It ensures that “no single government can control your destiny,” and that you put your money, business, and yourself where they are treated best.

You should internationalize each of these six aspects of your life, says Giambruno: our assets; your citizenship; your income/business; your legal residency; your lifestyle residency; and your digital presence.

Regarding your assets, you can find better capitalized, more liquid banks abroad, and using international brokerage accounts can provide you access to new investment markets.

To hear all of Nick Giambruno’s detailed tips on how to go global, as well as every single presentation of the Summit, order your 26+-hour Summit Audio Collection now. It’s available in CD and/or MP3 format. Learn more here.

The article The Broken State and How to Fix It was originally published at caseyresearch.com.

September 17, 2014

Property Rights and Property Taxes—and Countries That Don’t Have Them

By Nick Giambruno, Senior Editor, InternationalMan.com

Do you really own something that you are forced to perpetually make payments on and which can be seized from you if you don’t pay?

I would say that you don’t.

You would possess such an item, but you wouldn’t own it—an important distinction

A ridiculous perversion of the concept of ownership and property rights has infected most of the world like a virus: something that most people unquestioningly accept as a normal part of life—like it’s a part of the eternal fabric of the cosmos.

I am talking about property taxes, of course.

You know, the annual tax you pay that is based not on whether any income was generated, but rather on the underlying value of real estate you supposedly “own.” There is no way to pay off this obligation in one fell swoop; it stays with you for as long as you “own” the property.

In actuality, you don’t own anything which you must pay property taxes on—you are merely renting it from the government.

Suppose you bought a sofa set and coffee table for your living room for $5,000 cash, and then had the obligation to pay $100—or a percentage of the furniture’s value—in tax each year for as long as you “owned” it. Then suppose that for whatever reason you’re unable or unwilling to pay your furniture’s property tax. It won’t take long for the government to swoop in and confiscate it to pay off your delinquent taxes. You get to “own” it as long as you pay the never-ending annual fee—stop paying and you’ll find out who really owns it.

While many people would correctly find a furniture property tax absurd, they also illogically find it acceptable for the government to levy an insatiable tax on different assets—namely their homes, offices, and raw land.

But to me at least, the type of asset being taxed is not what makes it absurd, it’s the concept of property taxes that is absurd.

Respect for property rights and property taxes are mutually exclusive concepts. What’s yours is yours, and you shouldn’t need to pay the government for permission to keep it.

It’s not uncommon for people in North America and Europe to pay tens of thousands of dollars per year in property taxes… just to live in their own homes. And this burden will almost certainly continue to rise. Property taxes are constantly being raised in most places, especially in places with poor fiscal health.

It’s very possible that over a lifetime, the total amount of property taxes extracted will exceed what was paid for the underlying property in the first place.

And, just like the furniture example above, if you don’t pay your property tax (AKA government rent) on the home you thought you owned, it will be confiscated. This is not as uncommon as some would believe. It was estimated that 10,000 people in Pennsylvania alone lose their homes annually because they aren’t able to keep up with the property taxes.

Using the word “own” and “ownership” in these contexts is the sloppy use of the word—which always leads to sloppy thinking.

Speaking of sloppy thinking, expect Boobus Americanus to say things like “how would we pay for local services like public schools if it weren’t for property taxes?” Of course, these services could be funded in many different ways—or better, they could be provided for in the free market. But don’t expect that to happen. In fact, given the social, political, and economic dynamics in the US and most of the rest of the West, expect the opposite—property taxes have nowhere to go but north.

It doesn’t have to be this way. You can own real estate in certain countries and can skip the annual property-tax harvest.

I have previously written that I view real estate in foreign countries—along with physical gold held abroad—as superior vehicles for long-term savings.

However, foreign real estate has its drawbacks. It’s illiquid and has carrying costs like maintenance expenses and, of course, property taxes. To diminish these costs that eat away at your real estate investment, it is essential to minimize or eliminate them.

Here’s a list of countries that do not levy any property taxes:

That’s it. If you want to escape the rapacious and ridiculous property tax, these are your options.

Ireland would have been on this list, but it recently adopted a property tax. This does not bode well for other EU countries that conceivably could face fiscal troubles and turn to property taxes as a solution—like Malta and Croatia.

Colombia, Costa Rica, Ecuador, and Nicaragua have property taxes, but the obligations are generally negligible.

The risk, of course, is that since a property tax is already in place in these countries it can easily be increased whenever the government decides it needs more revenue. Case in point: the bankrupt government of Greece. Consider the excerpt below from an article in The Guardian.

"The joke now doing the rounds is: if you want to punish your child, you threaten to pass on property to them… Greeks traditionally have always regarded property as a secure investment. But now it has become a huge millstone, given that the tax burden has increased sevenfold in the past two years alone."

The country on the list above that most interests me is the Cayman Islands, but to each his own. This is because most Caymanians are vehemently opposed to all forms of direct taxation and have never had it in their history. That attitude and history is a good guarantor that it will be very unlikely for a property tax to be imposed sometime in the future.

In any case, buying foreign real estate is a very individualized and often complex decision—but one that provides huge diversification benefits. Property taxes are but one consideration.

You should look at foreign real estate less as a vehicle for a quick return and more as a diversified long-term store of wealth. Wherever you decide to buy, it should also be in a place that you would actually want to spend some significant time in. That way, the property has value to you, regardless of whether it proves to be a good investment.

One expert on foreign real estate whom I’d highly recommend is none other than Doug Casey, the original International Man and my mentor. Doug’s been to over 175 countries and invested in real estate in a number them. He wrote a thick and detailed chapter on foreign real estate, including his favorite markets, for our Going Global publication, which is a must-read for those interested in this extremely important topic.

The article Property Rights and Property Taxes—and Countries That Don’t Have Them was originally published at caseyresearch.com.

September 4, 2014

How is Doug Casey Preparing for a Crisis Worse than 2008?

By Doug Casey, Chairman

He and His Fellow Millionaires Are Getting Back to Basics

Trillions of dollars of debt, a bond bubble on the verge of bursting and economic distortions that make it difficult for investors to know what is going on behind the curtain have created what author Doug Casey calls a crisis economy. But he is not one to be beaten down. He is planning to make the most of this coming financial disaster by buying equities with real value—silver, gold, uranium, even coal. And, in this interview with The Mining Report, he shares his formula for determining which of the 1,500 "so-called mining stocks" on the TSX actually have value.

The Mining Report: This year's Casey Research Summit is titled "Thriving in a Crisis Economy." What is the most pressing crisis for investors today?

Doug Casey: We are exiting the eye of the giant financial hurricane that we entered in 2007, and we're going into its trailing edge. It's going to be much more severe, different and longer lasting than what we saw in 2008 and 2009. Investors should be preparing for some really stormy weather by the end of this year, certainly in 2015.

TMR: The 2008 stock market embodied a great deal of volatility. Now, the indexes seem to be rising steadily. Why do you think we are headed for something worse again?

DC: The U.S. created trillions of dollars to fight the financial crisis of 2008 and 2009. Most of those dollars are still sitting in the banking system and aren't in the economy. Some have found their way into the stock markets and the bond markets, creating a stock bubble and a bond superbubble. The higher stocks and bonds go, the harder they're going to fall.

TMR: When Streetwise President Karen Roche interviewed you last year, you predicted a devastating crash. Are we getting closer to that crash? What are the signs that a bond bubble is about to burst?

Warning Missing the 2014 Casey Research Summit (Thriving in a Crisis Economy) could be hazardous to your portfolio. Sept. 19-21 in San Antonio, Texas. REGISTER NOW

DC: One indicator is that so-called junk bonds are yielding on average less than 5% today. That's a big difference from the bottom of the bond market in the early 1980s, when even government paper was yielding 15%.

TMR: Isn't that a function of low interest rates?

DC: Yes, it is. Central banks all around the world have attempted to revive their economies by lowering interest rates to all-time lows. It's discouraging people from saving and encouraging people to borrow and consume more. The distortions that is causing in the economy are huge, and they're all going to have to be liquidated at some point, probably in the next six months to a year. The timing of these things is really quite impossible to predict. But it feels like 2007 except much worse, and it's likely to be inflationary in nature this time. The certainty is financial chaos, but the exact character of the chaos is, by its very nature, unpredictable.

TMR: Casey Research precious metals expert Jeff Clark recently wrote in Metals and Mining that he's investing in silver to protect himself from an advance of what he calls "government financial heroin addicts having to go cold turkey and shifting to precious metals." Do you agree or are you more of a buy-gold-for-financial-protection kind of guy?

DC: I certainly agree with him. Gold and silver are two totally different elements. Silver has more industrial uses. It is also quite cheap in real terms; the problem is storing a considerable quantity—the stuff is bulky. It's a poor man's gold. We mine about 800 million ounces (800 Moz)/year of silver as opposed to about 80 Moz/year of gold. Unlike gold, most of silver is consumed rather than stored. That is positive.

On the other hand, the fact that silver is mainly an industrial metal, rather than a monetary metal, is a big negative in this environment. Still, as a speculation, silver has more upside just because it's a much smaller market. If a billion dollars panics into silver and a billion dollars panics into gold, silver is going to move much more rapidly and much higher.

TMR: Are you are saying that because silver is more volatile generally, that is good news when the trend is to the upside?

DC: That's exactly correct. All the volatility from this point is going to be on the upside. It's not the giveaway it was back in 2001. In real terms, silver is trading at about the same levels that it was in the mid-1960s. So it's an excellent value again.

TMR: In another recent interview, you called shorting Japanese bonds a sure thing for speculators and said most of the mining companies on the Toronto Stock Exchange (TSX) weren't worth the paper their stocks were written on, but that some have been priced so low, they could increase 100 times. What are some examples of some sure things in the mining sector?

DC: Of the roughly 1,500 so-called mining stocks traded in Vancouver, most of them don't have any economic mineral deposits. Many that do don't have any money in the bank with which to extract them. The companies that I think are worth buying now are well-funded, underpriced—some selling for just the cash they have in the bank—and sitting on economic deposits with proven management teams. There aren't many of them; I would guess perhaps 50 worth buying. In the next year, many of them are likely to move radically.

TMR: Are there some specific geographic areas that you like to focus on?

DC: The problem is that the whole world has become harder to do business in. Governments around the world are bankrupt so they are looking for a bigger carried interest, bigger royalties and more taxes. At the same time, they have more regulations and more requirements. So the costs of mining have risen hugely. Political risks have risen hugely. There really is no ideal location to mine in the world today. It's not like 100 years ago when almost every place was quick, easy and profitable. Now, every project is a decade-long maneuver. Mining has never been an easy business, but now it's a horrible business, worse than it's ever been. It's all a question of risk/reward and what you pay for the stocks. That said, right now, they're very cheap.

TMR: Let's talk about the U.S. Are we in better or worse shape as a country politically and economically than we were last year? At the Casey Research Summit last year, I interviewed you the morning after former Congressman Ron Paul's keynote, and you said that you hoped that the IRS would be shut down instead of the national parks. There's no such shutdown going on today, so does that mean the country is more functional than it was a year ago?

DC: It's in worse shape now. The direction the country is going in is more decisively negative. Perhaps what's happening in Ferguson, Missouri, with the militarized police is a shade of things to come. So, no, things are not better. They've actually deteriorated. We're that much closer to a really millennial crisis.

TMR: Your conferences are always thought provoking. I always enjoy meeting the other attendees—it's always great to talk to people from all over the world who are interested in these topics. But you also bring in interesting speakers. In addition to your Casey Research team, the speakers at the conference this year include radio personality Alex Jones and author and self-described conservative paleo-libertarian Justin Raimondo. What do you hope attendees will take away from the conference?

DC: This is a chance for me and the attendees to sit down and have a drink with people like Justin Raimondo and author Paul Rosenberg. I'm looking forward to it because it is always an education.

Another highlight is that instead of staging hundreds of booths of desperate companies that ought to be put out of their misery, we limit the presenting mining companies in the map room to the best in the business with the most upside potential. That makes this a rare opportunity to talk to these selected companies about their projects.

TMR: We recently interviewed Marin Katusa, who was also excited about the companies that are going to be at the conference. He was bullish on European oil and gas and U.S. uranium. What's your favorite way to play energy right now?

DC: Uranium is about as cheap now in real terms as it was back in 2000, when a huge boom started in uranium and billions of speculative dollars were made. So, once again, cyclically, the clock on the wall says buy uranium with both hands. I think you can make the same argument for coal at this point.

TMR: You recently released a series of videos called the "Upturn Millionaires." It featured you, Rick Rule, Frank Giustra and others talking about how you're playing the turning tides of a precious metals market. What are some common moves you are all making right now?

DC: All of us are moving into precious metals stocks and precious metals themselves because in the years to come, gold and silver are money in its most basic form and the only financial assets that aren't simultaneously somebody else's liability.

TMR: Thanks for your time and insights.

You can see Doug LIVE September 19-21 in San Antonio, TX during the Casey Research Summit, Thriving in a Crisis Economy. He'll be joined on stage by Jim Rickards, Grant Williams, Charles Biderman, Stephen Moore, Mark Yusko, Justin Raimondo, and many, many more of the world's brightest minds and smartest investors. To RSVP and get all the details, click here.

The article How is Doug Casey Preparing for a Crisis Worse than 2008? was originally published at caseyresearch.com.

August 26, 2014

65,000 Marines Hold up a Mirror to the Economy

By Dennis Miller

I was 18 years old when I left boot camp for Camp Lejeune, North Carolina, where the Marine Corps stationed 65,000 troops. When my unit got our first weekend pass and could actually leave the base in civilian clothes, something I hadn’t worn in several months, I put on a brand new pair of Levis, no belt, penny loafers, white socks, and a collared, buttoned shirt. I had no hair to comb—the Marine Corps saw to that.

My take home pay was less than $50/month, so my entertainment options were limited. My friends and I got on a bus headed for the nearest town: Jacksonville, North Carolina. We soon realized Jacksonville was full of the same people we saw on base all week. We weren’t old enough to drink, so the local bar was out. My high school friend Paul and I had enlisted together and proclaimed, “We’re 65,000 marines all dressed up with no place to go!”

It’s funny how some memories are still vivid 55 years later. This summer a friend asked why the stock market was doing so well while the economy is doing so poorly. Without thinking, I answered, “We’re all dressed up with no place to go.”

Are we in a bull market or a bear market?

Let’s start with basic definitions, courtesy of my online dictionary:

• Bull market—A period of generally rising prices. The start of a bull market is marked by widespread pessimism. This is the point when the crowd is the most bearish. The feeling of despondency then changes to hope, optimism, and eventually euphoria.
• Bear market—A general decline in the stock market over a period of time. It is a transition from high investor optimism to widespread investor fear and pessimism.

Take a look at the chart below tracking the S&P 500 from January 2006 to July 2014.

The chart makes it seem as though the pessimism of the 2008 crash is behind us. Stock prices are now at an all-time high (unadjusted for inflation).

So, is it a bull or a bear? The bull markets of the past coincided with boom times: employment was high and there was that feeling of optimism and euphoria. But where’s the hope, optimism, and euphoria now?

Yes, we see some characteristics of a bull market, but look at real gross domestic product from 1950 onward in the chart below and a growling bear may appear in your mind’s eye.

That’s right: we’ve never been at -2.9% outside of a recession. In other words, it’s neither a bull nor a bear, as market performance isn’t synchronizing with real gross domestic product.

Bud Conrad, one of my colleagues at Casey Research, offered a grim analysis of the chart above immediately after the Q1 data was published:

The above is based on the annual change in GDP; quarterly readings are more sensitive and volatile. Still, it’s worth noting that Q1 GDP growth came in at -2.9%—an awful number that suggests we’re dangerously close to a recession (the official definition of a recession is two consecutive quarters of GDP contraction).

First-quarter numbers have since been revised to -2.1% year-on-year, and Q2 came in at +4% year-on-year. That’s good, but it’s difficult to see an uptrend yet, given the negative shift over the first quarter.

Frightening Unemployment

Part of the Federal Reserve’s mandate is to promote maximum employment. How well is that going?

The Bureau of Labor Statistics (BLS) reports a national, seasonally adjusted unemployment rate of 6.1% for June 2014. 6.1% isn’t the whole story, though. As James Rickards noted in a post for the Darien Times, although 288,000 jobs were created in June, the number of full-time jobs dropped by 523,000. The widely reported increase is the result of 800,000 new part-time jobs.

As Rickards notes, the increase in part-time employment will likely continue, driven in part by Obamacare’s coverage requirements for full-time employees. This statistics charade is not breeding optimism and euphoria.

Meanwhile, unemployment inched up to 6.2% in July.

Why Are We Seeing Horns?

If the economy is struggling, why does the stock market look bullish?

Bud Conrad shared a telling graphic with my team to help answer that question.

The Fed is flooding the system with money. That money is propping up the stock market. When the Fed tries to put the brakes on the stimulus, the stock market abruptly turns down. What happens if the Fed decides to change course and stop buying government debt and/or raises interest rates? Will the bubble burst?

A New Breed of Problem

If a correction is inevitable, why not pull out of the market and wait? The short story is, there’s nowhere else to go. There are no solid fixed-income investments.

The chart below sums up the story neatly. It shows 6-month CDs and 6-month Treasuries, but the trend is the same for all fixed-income investments over this 30-year period. We enlarged the final period shown in the chart so that you wouldn’t have to strain your eyes to see the yellow line representing new series 6-month CDs.

The stock market may look good on paper, but prices are generally higher than the fundamentals justify. Eventually a correction will occur. Here’s what I see happening:

• The economy is sending mixed signals. We may be in a recession already; however, no official will say that until after the election.
• Consumers are not spending despite some of the good incentives to do so. Baby boomers are concerned about their retirement and holding their wallets tight. When pessimistic about the economy, spenders cut back on wherever they can.
• Government-reported data is questionable at best—massaged for political purposes. Use it accordingly.
• There are no safe fixed-income investments available that will keep up with inflation. A decade ago you could have sold your stocks and upped your positions in inflation-beating, high-quality bonds. Not today. The Fed has indicated they are going to keep interest rates low for quite some time.

We have a bull-like market because of government policies, not because of solid fundamentals. I am not the guy standing on the street corner holding a sign saying, “Repent, the end is nigh.” But I don’t know how much longer things can continue in limbo.

Waiting for the Return of Fundamentals

As we wait for the market to start trading on fundamentals again, be nimble. That means avoiding long-term commitments. Make sure you can get out of any position quickly.

US investors also need to step a bit further out of their comfort zone. The market capitalization of public companies incorporated in the US is approximately 34% of the world’s total market capitalization, but US investors have 72% of their assets invested in their home country on average.

I shudder when readers mention how many eggs they have in their home country’s basket. I encourage all investors to review their holdings and diversify internationally.

As we wait for things to shake out, keep yourself current on economic change and the best investment strategies for retiring rich in any environment by signing up for my free weekly e-letter, Miller’s Money Weekly.

The article 65,000 Marines Hold up a Mirror to the Economy was originally published at millersmoney.com.

August 15, 2014

The Biggest Lesson from Microsoft’s Recent Battle with the US Government

By Nick Giambruno, Senior Editor, InternationalMan.com

A court ruling involving Microsoft’s offshore data storage offers an instructive lesson on the long reach of the US government—and what you can do to mitigate this political risk.

A federal judge recently agreed with the US government that Microsoft must turn over its customer data that it holds offshore if requested in a search warrant. Microsoft had refused because the digital content being requested physically was located on servers in Ireland.

Microsoft said in a statement that “a US prosecutor cannot obtain a US warrant to search someone’s home located in another country, just as another country’s prosecutor cannot obtain a court order in her home country to conduct a search in the United States.”

The judge disagreed. She ruled that it’s a matter of where the control of that data is being exercised, not of where the data is physically located.

This ruling is not at all surprising. It’s long been crystal clear that the US will aggressively claim jurisdiction if the situation in question has even the slightest, vaguest, or most indirect connection. Worse yet, as we’ve seen with the extraterritorial FATCA law, the US is not afraid to impose its own laws on foreign countries.

One of the favorite pretexts for a US connection is the use of the US dollar. The US government claims that just using the US dollar—which nearly every bank in the world does—gives it jurisdiction, even if there were no other connections to the US. It’s quite obviously a flimsy pretext, but it works.

Recently the US government fined (i.e., extorted) over $8 billion from BNP Paribas for doing business with countries it doesn’t like. The transactions were totally legal under EU and French law, but illegal under US law. The US successfully claimed jurisdiction because the transactions were denominated in US dollars—there was no other US connection.

This is not typical of how most governments conduct themselves. Not because they don’t want to, but because they couldn’t get away with it. The US, on the other hand—as the world’s sole financial and military superpower (for now at least)—can get away with it.

This of course translates into a uniquely acute amount of political risk for anyone who might fall under US jurisdiction somehow, especially American citizens. A prudent person will look to mitigate this risk through international diversification.

So let’s see what kinds of lessons this recent court ruling offers for those formulating their diversification strategies.

The Biggest Lesson

The most important lesson of the Microsoft case is that any connection to the US government —no matter how small—exposes you to big risks.

If there’s anything connected to the US, you can count on the US government using that vulnerability as a pressure point. Microsoft, being a US company with a huge US presence, is of course exposed to having its arms easily twisted by the US government—regardless if the data it stores is physically offshore.

Now let’s assume the company in question was a non-US company, with no US presence whatsoever (not incorporated in the US, no employees in the US, no servers or computer infrastructure in the US, no bank accounts in the US): then the US government would have a much more difficult time accessing the data and putting pressure on the company to comply with its demands.

It’s important to remember that even if a company or person is more immune to traditional pressures, there are plenty of unconventional ways the US can respond.

The US government could always resort to hacking, blackmail, or other acts of subterfuge to access foreign data that is seemingly out of its reach. This is where encryption comes in. We know from the Edward Snowden revelations that when properly executed, encryption works. For all practical purposes as things are today, strong and proper encryption places data beyond the reach of any government or anyone without the encryption keys.

Of course, there is no such thing as 100% protection, and there never will be. But using encryption in combination with a company that—unlike Microsoft—is 100% offshore is the best protection you can currently get for your digital assets.

Once you get the hang of it, encryption is actually easy to use. Be sure to check out the Easy Email Encryption guide; it’s free and located in the Guides and Resources section of the IM site.

How easily the US can access your offshore digital data will also come down to the politics and relationship between the US and the country in question. You can count on the UK, Canada, Australia, and others to easily roll over for anything the US wants. On the other hand, you can bet that a country with frosty relations with the US—like China or Russia—will toss most US requests in the garbage. This political arbitrage is what international diversification is all about.

The lessons of the Microsoft case extend to offshore banking.

It’s much better to do your offshore banking with a bank that has no branch in the US. For example, if you open an HSBC account in Hong Kong, the US government can simply pressure HSBC’s large presence in the US to get at your Hong Kong account—much like how the US government pressured Microsoft’s US presence to get at its data physically stored in Ireland.

Obtaining the Most Diversification Benefits

Most of us know about the benefits of holding uncorrelated assets in an investment portfolio to reduce overall risk. In a similar fashion, you can reduce your political risk—the risk that comes from governments. You do this by spreading various aspects of your life—banking, citizenship, residency, business, digital presence, and tax domicile—across politically uncorrelated countries to obtain the most diversification benefits. The optimal outcome is to totally eliminate your dependence on any one country.

This means you’ll want to diversify into countries that won’t necessarily roll over easily for other countries. This is of course just one consideration, and it needs to be balanced with other factors. For example, Russia isn’t going to be easily pressured by the US government. But that doesn’t mean it’s a good idea to bank there.

Personally, I’m a fan of jurisdictions that are friendly with China—which helps insulate them from US pressure—but have a degree of independence and are competently run, like Hong Kong and Singapore.

Naturally, things can change quickly. New options emerge, while others disappear. This is why it’s so important to have the most up-to-date and accurate information possible. That’s where International Man comes in. Be sure to check out our Going Global publication, where we discuss the latest and best international diversification strategies in great, actionable detail.

The article The Biggest Lesson from Microsoft’s Recent Battle with the US Government was originally published at caseyresearch.com.

August 6, 2014

The Single Most Important Strategy Most Investors Ignore

By Jeff Clark, Senior Precious Metals Analyst

“If I scare you this morning, and as a result you take action, then I will have accomplished my goal.” That’s what I told the audience at the Sprott Natural Resource Symposium in Vancouver two weeks ago.

But the reality is that I didn’t need to try to scare anyone. The evidence is overwhelming and has already alarmed most investors; our greatest risk is not a bad investment but our political exposure.

And yet most of these same investors do not see any need to stash bullion outside their home countries. They view international diversification as an extreme move. Many don’t even care if capital controls are instituted.

I’m convinced that this is the most common—and important—strategic investment error made today. So let me share a few key points from my Sprott presentation and let you decide for yourself if you need to reconsider your own strategy. (Bolding for emphasis is mine.)

1: IMF Endorses Capital Controls

Bloomberg reported in December 2012 that the “IMF has endorsed the use of capital controls in certain circumstances.“

This is particularly important because the IMF, arguably an even more prominent institution since the global financial crisis started, has always had an official stance against capital controls. “In a reversal of its historic support for unrestricted flows of money across borders, the IMF said controls can be useful...”

Will individual governments jump on this bandwagon? “It will be tacitly endorsed by a lot of central banks,” says Boston University professor Kevin Gallagher. If so, it could be more than just your home government that will clamp down on storing assets elsewhere.

2: There Is Academic Support for Capital Controls

Many mainstream economists support capital controls. For example, famed Harvard Economists Carmen Reinhart and Ken Rogoff wrote the following earlier this year:

Governments should consider taking a more eclectic range of economic measures than have been the norm over the past generation or two. The policies put in place so far, such as budgetary austerity, are little match for the size of the problem, and may make things worse. Instead, governments should take stronger action, much as rich economies did in past crises.

Aside from the dangerously foolish idea that reining in excessive government spending is a bad thing, Reinhart and Rogoff are saying that even more massive government intervention should be pursued. This opens the door to all kinds of dubious actions on the part of politicians, including—to my point today—capital controls.

“Ms. Reinhart and Mr. Rogoff suggest debt write-downs and ‘financial repression’, meaning the use of a combination of moderate inflation and constraints on the flow of capital to reduce debt burdens.”

The Reinhart and Rogoff report basically signals to politicians that it’s not only acceptable but desirable to reduce their debts by restricting the flow of capital across borders. Such action would keep funds locked inside countries where said politicians can plunder them as they see fit.

3: Confiscation of Savings on the Rise

“So, what’s the big deal?” Some might think. “I live here, work here, shop here, spend here, and invest here. I don’t really need funds outside my country anyway!”

Well, it’s self-evident that putting all of one’s eggs in any single basket, no matter how safe and sound that basket may seem, is risky—extremely risky in today’s financial climate.

In addition, when it comes to capital controls, storing a little gold outside one’s home jurisdiction can help avoid one major calamity, a danger that is growing virtually everywhere in the world: the outright confiscation of people’s savings.

The IMF, in a report entitled “Taxing Times,” published in October of 2013, on page 49, states:

“The sharp deterioration of the public finances in many countries has revived interest in a capital levy—a one-off tax on private wealth—as an exceptional measure to restore debt sustainability.”

The problem is debt. And now countries with higher debt levels are seeking to justify a tax on the wealth of private citizens.

So, to skeptics regarding the value of international diversification, I would ask: Does the country you live in have a lot of debt? Is it unsustainable?

If debt levels are dangerously high, the IMF says your politicians could repay it by taking some of your wealth.

The following quote sent shivers down my spine…

The appeal is that such a task, if implemented before avoidance is possible and there is a belief that is will never be repeated, does not distort behavior, and may be seen by some as fair. The conditions for success are strong, but also need to be weighed against the risks of the alternatives, which include repudiating public debt or inflating it away.

The IMF has made it clear that invoking a levy on your assets would have to be done before you have time to make other arrangements. There will be no advance notice. It will be fast, cold, and cruel.

Notice also that one option is to simply inflate debt away. Given the amount of indebtedness in much of the world, inflation will certainly be part of the “solution,” with or without outright confiscation of your savings. (So make sure you own enough gold, and avoid government bonds like the plague.)

Further, the IMF has already studied how much the tax would have to be:

The tax rates needed to bring down public debt to pre-crisis levels are sizable: reducing debt ratios to 2007 levels would require, for a sample of 15 euro area countries, a tax rate of about 10% on households with a positive net worth.

Note that the criterion is not billionaire status, nor millionaire, nor even “comfortably well off.” The tax would apply to anyone with a positive net worth. And the 10% wealth-grab would, of course, be on top of regular income taxes, sales taxes, property taxes, etc.

4: We Like Pension Funds

Unfortunately, it’s not just savings. Carmen Reinhart (again) and M. Belén Sbrancia made the following suggestions in a 2011 paper:

Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of ‘financial repression.’ Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks.

Yes, your retirement account is now a “captive domestic audience.” Are you ready to “lend” it to the government? “Directed” means “compulsory” in the above statement, and you may not have a choice if “regulation of cross-border capital movements”—capital controls—are instituted.

5: The Eurozone Sanctions Money-Grabs

Germany’s Bundesbank weighed in on this subject last January:

“Countries about to go bankrupt should draw on the private wealth of their citizens through a one-off capital levy before asking other states for help.”

The context here is that of Germans not wanting to have to pay for the mistakes of Italians, Greeks, Cypriots, or whatnot. Fair enough, but the “capital levy” prescription is still a confiscation of funds from individuals’ banks or brokerage accounts.

Here’s another statement that sent shivers down my spine:

A capital levy corresponds to the principle of national responsibility, according to which tax payers are responsible for their government’s obligations before solidarity of other states is required.

The central bank of the strongest economy in the European Union has explicitly stated that you are responsible for your country’s fiscal obligations—and would be even if you voted against them! No matter how financially reckless politicians have been, it is your duty to meet your country’s financial needs.

This view effectively nullifies all objections. It’s a clear warning.

And it’s not just the Germans. On February 12, 2014, Reuters reported on an EU commission document that states:

The savings of the European Union’s 500 million citizens could be used to fund long-term investments to boost the economy and help plug the gap left by banks since the financial crisis.

Reuters reported that the Commission plans to request a draft law, “to mobilize more personal pension savings for long-term financing.”

EU officials are explicitly telling us that the pensions and savings of its citizens are fair game to meet the union’s financial needs. If you live in Europe, the writing is on the wall.

Actually, it’s already under way… Reuters recently reported that Spain has

…introduced a blanket taxation rate of .03% on all bank account deposits, in a move aimed at… generating revenues for the country’s cash-strapped autonomous communities.

The regulation, which could bring around 400 million euros ($546 million) to the state coffers based on total deposits worth 1.4 trillion euros, had been tipped as a possible sweetener for the regions days after tough deficit limits for this year and next were set by the central government.

Some may counter that since Spain has relatively low tax rates and the bail-in rate is small, this development is no big deal. I disagree: it establishes the principle, sets the precedent, and opens the door for other countries to pursue similar policies.

6: Canada Jumps on the Confiscation Bandwagon

You may recall this text from last year’s budget in Canada:

“The Government proposes to implement a bail-in regime for systemically important banks.”

A bail-in is what they call it when a government takes depositors’ money to plug a bank’s financial holes—just as was done in Cyprus last year.

This regime will be designed to ensure that, in the unlikely event a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital.

What’s a “bank liability”? Your deposits. How quickly could they do such a thing? They just told us: fast enough that you won’t have time to react.

By the way, the Canadian bail-in was approved on a national level just one week after the final decision was made for the Cyprus bail-in.

7: FATCA

Have you considered why the Foreign Account Tax Compliance Act was passed into law? It was supposed to crack down on tax evaders and collect unpaid tax revenue. However, it’s estimated that it will only generate $8.7 billion over 10 years, which equates to 0.18% of the current budget deficit. And that’s based on rosy government projections.

FATCA was snuck into the HIRE Act of 2010, with little notice or discussion. Since the law will raise negligible revenue, I think something else must be going on here. If you ask me, it’s about control.

In my opinion, the goal of FATCA is to keep US savers trapped in US banks and in the US dollar, in case the US wants to implement a Cyprus-like bail-in. Given the debt load in the US and given statements made by government officials, this seems like a reasonable conclusion to draw.

This is why I think that the institution of capital controls is a “when” question, not an “if” one. The momentum is clearly gaining steam for some form of capital controls being instituted in the near future. If you don’t internationalize, you must accept the risk that your assets will be confiscated, taxed, regulated, and/or inflated away.

What to Expect Going Forward

• First, any announcement will probably not use the words “capital controls.” It will be couched positively, for the “greater good,” and words like “patriotic duty” will likely feature prominently in mainstream press and government press releases. If you try to transfer assets outside your country, you could be branded as a traitor or an enemy of the state, even among some in your own social circles.

• Controls will likely occur suddenly and with no warning. When did Cyprus implement their bail-in scheme? On a Friday night after banks were closed. By the way, prior to the bail-in, citizens were told the Cypriot banks had “government guarantees” and were “well-regulated.” Those assurances were nothing but a cruel joke when lightning-fast confiscation was enacted.

• Restrictions could last a long time. While many capital controls have been lifted in Cyprus, money transfers outside the country still require approval from the Central Bank—over a year after the bail-in.

• They’ll probably be retroactive. Actually, remove the word “probably.” Plenty of laws in response to prior financial crises have been enacted retroactively. Any new fiscal or monetary emergency would provide easy justification to do so again. If capital controls or savings confiscations were instituted later this year, for example, they would likely be retroactive to January 1. For those who have not yet taken action, it could already be too late.

• Social environment will be chaotic. If capital controls are instituted, it will be because we’re in some kind of economic crisis, which implies the social atmosphere will be rocky and perhaps even dangerous. We shouldn’t be surprised to see riots, as there would be great uncertainty and fear. That’s dangerous in its own right, but it’s also not the kind of environment in which to begin making arrangements.

• Ban vs. levy. Imposing capital controls is a risky move for a government to make; even the most reckless politicians understand this. That won’t stop them, but it could make them act more subtly. For instance, they might not impose actual bans on moving money across borders, but instead place a levy on doing so. Say, a 50% levy? That would “encourage” funds to remain inside a given country. Why not 100%? You could be permitted to transfer $10,000 outside the country—but if the fee for doing so is $10,000, few will do it. Such verbal games allow politicians to claim they have not enacted capital controls and yet achieve the same effect. There are plenty of historical examples of countries doing this very thing.

Keep in mind: Who will you complain to? If the government takes a portion of your assets, legally, who will you sue? You will have no recourse. And don’t expect anyone below your tax bracket to feel sorry for you.

No, once the door is closed, your wealth is trapped inside your country. It cannot move, escape, or flee. Capital controls allow politicians to do anything to your wealth they deem necessary.

Fortunately, you don’t have to be a target. Our Going Global report provides all the vital information you need to build a personal financial base outside your home country. It covers gold ownership and storage options, foreign bank accounts, currency diversification, foreign annuities, reporting requirements, and much more. It’s a complete A to Z guide on how to diversify internationally.

Discover what solutions are right for you—whether you’re a big investor or small, novice or veteran, many options are available. I encourage you to pursue what steps are most appropriate for you now, before the door is closed. Learn more here…

The article The Single Most Important Strategy Most Investors Ignore was originally published at caseyresearch.com.

July 15, 2014

Kill Peter Pan: How to Make “Home” Unwelcoming In a World Where 26 Equals 18

By Dennis Miller

My youngest son, who is now in his 50s, asked me what it felt like when all the children left the nest. I thought for a moment and said:

For my entire adult life, I’d driven a boat down a clearly marked narrow channel. I had to stay between the markers in order to provide for my family. Then, when you and your siblings left, I came to a vast ocean with no markers and no land in sight. It was exciting and overwhelming; I had all these options, and I wasn’t sure what to do. But it sure was nice my money was finally freed up to make that last push toward retirement.

He told me that was exactly how he felt after graduating college—minus that bit about retirement: flat broke with no real job on the horizon.

He had the option of living with us in Florida or moving to Atlanta, where he’d gone to high school and most of his friends lived. He did not ask for, nor did we give him any financial support—and he opted for Atlanta. He lived with a high-school friend and worked in a restaurant until, several months later, he got his first and only “real job.” He’s been with the same employer for over 25 years and is doing just fine.

Nothing can screw up retirement plans like supporting adult children after you’ve shelled out tens of thousands of dollars in college tuition, shuttled them back and forth for Thanksgiving and Christmas breaks, and maybe purchased a new computer for all that research and writing they did (or maybe didn’t) do over four-plus years. And yet some 85% of parents plan to provide some sort of post-graduation financial assistance.

Emerging Adulthood

So, what has changed since my son graduated a few decades ago? Sure, new graduates are entering a much more difficult job market than he did, and even those who do secure jobs are unlikely to have the job stability he’s enjoyed. But a difficult job market is only part of the story. Social norms have shifted so that accepting help from Mom and Dad well into your 20s is “OK.”

Since the 1960s psychologists have used Erik Erikson’s eight stages of psychosocial development to chart personal growth from birth to death. In the paper How 18 Became 26: The Changing Concept of Adulthood, Eileen and Jon Gallo note that in the late 1980s, young people began transitioning from Erikson’s fifth stage, adolescence, to his sixth stage, young adulthood—where a person’s main job is to find intimacy, usually through marriage and friendship, and to become self-supporting—nearly a decade after they reached legal adult status. Psychologists call this trend “emerging adulthood.”

As Gallo and Gallo mention, for a certain socioeconomic set, growing up and moving out—permanently—means downgrading your lifestyle. The authors quote sociologists Allan Schnaiberg and Sheldon Goldenberg as stating:

The supportive environment of a middle-class professional family makes movement toward independent adulthood relatively less attractive than maintenance of the [extended adolescence] status quo. Many of the social gains of adult roles can be achieved with higher benefits and generally lower costs by sharing parental resources rather than by moving out on one’s own!

The War Factor and “Kennedy Fathers”

I came of age between the Korean and Vietnam Wars, when society’s message was crystal clear: when a young man graduates from high school, he either enrolls in college or joins the military. Any young man who didn’t go straight to college felt serious pressure to enlist because Uncle Sam would likely draft him anyway—better to just get it over with. However it happened, the bond between a young man and his childhood home was broken, swiftly and completely.

By the time my peers were 22 or so—graduating from college or leaving the military—they didn’t even consider returning “home” an option. And although it’s not something I’d encourage today, most women of my generation married and started families soon after high school or college.

Draft deferment was another reason to marry and have kids. Beginning in 1948, various executive orders altered the precise rules on Class III-A paternity deferments, and in 1963 President Kennedy broadened the scope of who could qualify, giving young men another incentive to have children pronto. Enter the “Kennedy father.”

By the time my son graduated from high school, a much larger percentage of his classmates went to college. Still, post college, society’s expectations remained clear: stand on your own and build your own life.

Making Sure Your Young Adult Emerges on Time

So, what can parents do today to make “home” a lot less welcoming and complete financial independence look like the brass ring it should be? Turns out, quite a bit.

#1—Be honest with yourself. Ask yourself: is my financial assistance helping or hindering my child’s emotional and financial growth? Well-meaning, soft-hearted parents can do a lot of harm without realizing it. Who wouldn’t enjoy having most all the privileges of adulthood without the responsibilities?

I get it, folks. Most parents don’t want their children to struggle like they may have as young adults. But balancing that pull with the understanding that those struggles—and successes—is critical if your child is to emerge an independent adult with a solid self-image.

#2—Set realistic expectations early. Clarifying what you expect of your children financially sooner rather than later helps you and your kids. They need to know when you’re cutting the cord so they can prepare (hopefully with your guidance) well in advance. Whether you expect them to handle their own finances step by step or all at once, at 18 or 22, after high school or after graduate school, spell it out.

Moreover, make sure those expectations jive with your retirement plans. If your youngest child won’t graduate from high school until you’re 63, be honest with everyone about how much you can contribute to higher education.

#3—Mom and Dad must be on the same page. One parent slipping the son or daughter money while the other fumes does little for a marriage or the emotional and financial well-being of the child.

Some years ago a friend of ours was really struggling with her 23-year-old son. After counseling, the soft-hearted parent realized the damage she was doing and sent her son packing. 25 years later, both parents and their son say it was a major milestone in their lives. He finally got a good job, became very responsible, and has raised two wonderful children. Now he’s actually thankful for the day both Mom and Dad said, “Enough is enough.”

Most parents understand what the right thing to do is; however, it can be difficult. That said, making the same accommodations for your child over and over will only produce the same result.

#4—Be a parent and a coach. Offer emotional support and financial mentoring. Saying “no” to financial assistance does not mean you can’t help with budgeting, résumé writing, professional networking, interview preparation—heck, whatever it takes! If you’re lucky enough to have a 20-something kid who will actually talk you about this stuff, jump on each and every opportunity to teach and listen.

The job market may be tough for new graduates, but forcing your child to navigate it anyway might just be the best way to help.

When Your Bedroom Isn’t Yours Anymore

Within months of my oldest daughter, Dawn, marrying and moving out of our house, one of my son’s high-school teammates, Mark, moved in for his senior year of high school. Mark’s parents had been transferred out of town, and he wanted to finish high school where he’d started. We offered to put him up for the year.

When Dawn came over and saw how we’d transformed her feminine bedroom into Mark’s room, she started to cry. That was her bedroom!

Her mother and I looked at each other, and Mom said, “Now it’s Mark’s room. Your bedroom is in your own home.” It was a very special moment. I found it quite amusing how quickly Dawn turned her own daughter’s bedroom into an office when she moved out.

Retiring rich is hard enough without paying for your child’s extended adolescence. Anyone in or planning for retirement today faces an unprecedented set of hurdles: from stubbornly low interest rates, to vulnerable pensions and an unstable Social Security system, to frightening and confusing changes in our healthcare system. That’s why every Thursday I share cutting-edge solutions to these challenges in my free weekly e-letter, Miller’s Money Weekly. Sign up here and start receiving your free copy of Miller’s Money Weekly now.

The article Kill Peter Pan: How to Make “Home” Unwelcoming In a World Where 26 Equals 18 was originally published at millersmoney.com.

June 26, 2014

A Guy Leans on a Lamppost… and You Make a Buck

By Dennis Miller

To paraphrase Scottish novelist Andrew Lang, some people use statistics like a drunk uses lampposts—for support rather than illumination. Numbers can be twisted and abused to support false claims, and even correct data is sometimes misinterpreted.

For example, you may often see claims like “an expert opinion poll showed that inflation next year will be 2.65%.” Looks legitimate, right? We have experts and a precise number; what else do we need? Well, there are at least three potential biases at work in this short statement:

• Who are the experts? Are they economists and/or statisticians with robust methods and a good track record, or are they just the ones who had the time to reply to this survey? There is a potential selection bias here.
• How large was the sample? There is a rule of thumb in statistics that for an average to even start having any weight at least 30 experts (assuming their track records are solid) should have replied. If only 5 or 10 did the average tells us nothing.
• And what’s with the two digits after the decimal point? It sure looks precise, better than, say a range of 2-4%. However, such precision is often an illusion, or what’s called “over-precision bias.” Imagine a recipe that tells you to take two tablespoons of flour, half a cup of sugar and other things and then says the pie you’re baking will have 512 kcal. I’d bet that pie would never have exactly 512 kcal even if you follow the instructions to the tee. Same with inflation predictions: when working with complex systems such as the economy adding extra digits after the decimal point is a cheap shortcut to achieving the appearance of precision. In reality a (rough) ballpark figure is the best we can get.

With that in mind I want to clear the fog around two critical statistical measures, beta and correlation, and explain how they can help you invest smarter. There are many other statistical measures out there, but these two are critical for a well-diversified retirement portfolio.

Correlation-Based Diversification: When “Weak” Offers Better Protection

Let’s start with correlation.

Correlation tells us how closely related two datasets are. The correlation coefficient ranges from -1 to +1. A correlation coefficient of -1 means the two measures are perfectly negatively correlated. If one goes up, the other always goes down. Plus, they do so simultaneously. If the correlation coefficient is +1, they move together in the same direction 100% of the time.

The three most important points about correlation are:

• Correlation only shows how two variables move in relation to one another over time;
• Correlation changes over time; and
• Correlation tells us nothing about cause and effect.

The old adage “correlation doesn’t imply causation” is popular because it’s true. Even if the correlation between two sets of observations is strong, one still might not cause the other. Other statistical measures try to estimate causation, but correlation is not one of them. It only tells us that when “A” happens, “B” is likely to happen too.

Here’s a scholarly example.

Source: Dilbert

Correlation is important for diversification. The weaker the correlation between two assets in our portfolio, the better protected we are from negative movements in any one of them.

Bear in mind that correlation changes over time. The following chart shows the correlation of monthly returns between gold and the S&P 500. Each point on the line shows the correlation over the previous three years.

For example, the first number in the chart, -0.29, tells us that the correlation of monthly returns during the period of March 1975–March 1978 is -0.29. This tells us that for the preceding three years the relationship between gold and the S&P 500 was negative and quite weak. Thus, a portfolio of gold and the S&P 500 was well diversified before and at that date.

But as you see, this correlation fluctuated. It peaked at about 0.53 in 1983 and dropped to -0.43 in 1990.

The 1978 -0.30 correlation of a portfolio of gold and the S&P would not last. Gold’s returns followed the S&P much more closely in 1982, 1983, and 2006-2007. These relationships are not set in stone.

For retirement investors, the take-home wisdom about correlation is:

• Again, correlation changes over time. When you invest, try to pick assets with low (preferably negative) correlation to what you already hold;
• When you purchase an asset, consider how long you plan to hold it and how correlation may change during that time; and
• Most importantly, when the correlation does change, rebalance your portfolio to make sure it remains properly diversified.

For the Money Forever portfolio—a pioneer retirement portfolio built to safeguard your nest egg against its threat de jour, no matter what that is—we are using correlation to look for assets that are not strongly related to the US market right now. For example, the two latest additions to the Money Forever portfolio are: an international fund with an underlying index that includes companies located outside the United States whose income is denominated in foreign currencies; and, a high-yield dividend-paying energy play that is fantastic contrarian opportunity and a true global citizen—born in Norway, based in Bermuda and managed from London.  

We are concerned about inflation, and holding these types of asset is one way to protect ourselves. For the international fund, we expect its value to rise if the value of the US dollar declines, and a correlation lower than that of another dividend-oriented fund we hold should protect us against a US market downturn even further.

Plus, the energy play I mentioned has income in a host of foreign currencies, providing an additional shield against the decline in the US dollar—and a 10% yield that’s well ahead in inflation to boot.

We also hold a certain household name whose products you likely have in your home right now. However, 70% of its business comes from outside North America. While it’s part of the S&P 500, its operating income denominated in foreign currencies should provide some inflation protection too.

“Is this a good hedge against inflation?” is part of the Five-Point Balancing Test we use to analyze investments. In effect, selecting holdings that should perform well when the US dollar loses value and that tend to move in opposite directions from the US market helps balance our portfolio.

Beta Measures Systematic Risk, Not Volatility

Now, let’s turn to beta. Chances are your online broker shows a beta number on the summary page of any stock you look at. What does it mean?

Beta measures an investment’s risk in relation to the market, or its “systematic” risk. Note that correlation measures the relationship between any two assets, but with beta one of them always represents “the market” or a benchmark. While correlation between the asset and the market shows us if they move in the same direction, beta also shows the magnitude of the relationship.

Historically, if a stock rose 2% when the market was up 1%, the correlation would be 1. They moved in the same direction all of the time, so the relationship is obvious.

Beta adds another dimension. If a stock gains 2% while the market gains only 1%, the beta will be 2. It not only shows the relationship (positive) but also its magnitude (x2). But there is a caveat.

A very common misconception about beta is that it measures volatility. This is inaccurate. Let me share a simplified beta formula to quickly illustrate this point.

The formula suggests that an asset with low correlation to the market and high volatility has the same beta as one with high correlation and low volatility. The bottom line is that high beta alone does not tell us how risky an asset is.

The key takeaways are:

• Beta is not an all-encompassing measure of a stock’s risk.
• Beta depends on what you consider “the market.” Usually broad market indices like the S&P 500 are used to measure asset betas, but they are not the only option. If another benchmark is used, the beta of a particular investment will change.
• Like correlation, beta changes over time.

Unlike the drunk who uses the proverbial lamppost for support, we use statistics to test our premises. They help guide our thinking, but we don’t let them dominate it. Used correctly, they enrich our understanding and guide us to better investment decisions.

You can access our portfolio online right now and find out just what those decisions are by giving our monthly newsletter, Miller’s Money Forever, a risk-free try. Sign up today, and if our brand of “high-yield meets ultra-safe retirement investing” isn’t for you, just call or drop us a note and we’ll give you a 100% refund of every penny you paid, no questions asked.

Truth be told, the only way we could make it any easier is by sharing our entire portfolio right here, but we value our relationship with our paid subscribers too much to do that. So, sign up today and start counting yourself among them.

The article A Guy Leans on a Lamppost… and You Make a Buck was originally published at millersmoney.com.

June 3, 2014

Mining and Environment—Facts vs. Fear

By Laurynas Vegys, Research Analyst

“I would NEVER invest in a mining company—they destroy land, pollute our water and air, and wreck the habitat of plants and animals.”

These were the points made to me by a woman at a social gathering after I told her what I do for living. She prided herself on her moral high ground and looked upon me with obvious disdain. It was clear that as a mining researcher, I was partly responsible for destroying the environment.

I knew a reasonable discussion with her wouldn’t be possible, so I opted out of trying. (As Winston Churchill said, “A fanatic is one who can’t change his mind and won’t change the subject.”) She left the party convinced her position was indisputably correct. But was she?

Not at all.

In fact, with few exceptions, today’s mining operations are designed, developed, operated, and ultimately closed in an environmentally sound manner. On top of that, considerable effort goes into the continued improvement of environmental standards.

My environmentalist acquaintance, of course, would loudly disagree with those statements. Many people may feel uncomfortable investing in an industry that’s so closely scrutinized and vehemently criticized by the public and mainstream media—whether there’s good reason for that criticism or not. This actually is to the benefit of those who dare to think for themselves.

So let’s examine what mining REALLY does to the environment. As Doug Casey always says, we should start by defining our terms…

How Do You Define “Environment”?

In modern mining, the term “environment” is broader than just air, water, land, and plant and animal life. It also encompasses the social, economic, and cultural environment and, ultimately, the health and safety conditions of anyone involved with or affected by a given mining activity.

Armed with this more comprehensive view of the industry’s impact on the environment, we can evaluate the effects of mining and its benefits in a more holistic fashion.

Impact on the Economy

According to a study commissioned by the World Gold Council, to take an example from mining of our favorite metal, the gold mines in the world’s top 15 producing countries generated about US$78.4 billion of direct gross value added (GVA) in 2012. (GVA measures the contribution to the economy of each individual producer, industry, or sector in a country.) That sum is roughly the annual GDP of Ecuador or Azerbaijan, or 30% of the estimated GDP of Shanghai, China. Here’s a look at the GVA for each of these countries.

Keep in mind that this doesn’t include the indirect effects of gold mining that come from spending in the supply chain and by employees on goods and services. If this impact were reflected in the numbers, the overall economic contribution of gold mining would be significantly larger.

Also, it’s evident that gold mining’s imprint on national economies varies considerably. For countries like Papua New Guinea, Ghana, Tanzania, and Uzbekistan, gold mining is one of the principal sources of prosperity.

Another measure of economic contribution is the jobs created and supported by businesses. The chart below shows the share of jobs created of each major gold-producing country.

The four countries with the highest numbers of gold mining employees are South Africa (145,000), Russia (138,000), China (98,200), and Australia (32,300). The industry also employs 18,600 in Indonesia, 17,100 in Tanzania, and 16,100 in Papua New Guinea. (As an aside, it’s quite telling that South Africa employs more gold miners than China, but China produces more gold than South Africa.)

Note that these employment figures don’t include jobs in the artisanal and small-scale production mining fields, nor any type of indirect employment attributable to gold mining—so they understate the actual figures

For many countries, gold mining accounts for a significant share of exports. As an example, gold merchandise comprised 36% of Tanzanian and 26% of Ghana’s and Papua New Guinea’s exports in 2012. Below, you see a more comprehensive picture of gold exports by 15 major gold-producing countries.

Other, often-overlooked ways in which the mining industry supports the economy include:

• Foreign direct investment (FDI). The three mining giants—Canada, the United States, and Australia—have been dominating this category for a number of years, both as the primary destinations for investment and as the main investor countries.

• Government revenue. All mining businesses, regardless of jurisdiction, have to pay certain levies on their revenue and earnings, including license fees, resource rents, withholding and sales taxes, export duties, corporate income taxes, and various royalties. Taken all together, these payments make up a large portion of overall mining costs. For example, estimates suggest that the total of mining royalty payments in 2012 across the top gold-producing countries worked out to the tune of US$4.1 billion. This, of course, doesn’t account for other types of tax normally applied to the mining industry.

• Gold products. Gold as a symbol of prosperity and the ultimate “wealth insurance” is very important to many nations around the globe—especially in Asia and Africa. Gold jewelry is given as a dowry to brides and as gifts at major holidays. In India, the government’s ban on gold purchases by the public led to so much smuggling that the incoming prime minister is considering removing it. Chinese, Vietnamese, and peoples of India and Africa may all be divided across linguistic lines, but they all share the view of gold being a symbol of prosperity and ultimate insurance against life’s uncertainties.

It’s also important to note that jobs with modern mining companies are usually the most desirable options for poverty-stricken people in the remote areas where many mines are built. These jobs not only pay more than anything else in such regions, they provide training and health benefits simply not available anywhere else.

Mining provides work with dignity and a chance at a better future for hundreds of thousands of struggling families all around the world.

Let’s now have a look at the most debated and contentious side to mining.

Impact on the (Physical) Environment

In previous millennia, humans labored with little concern for the environment. Resources seemed infinite, and the land vast and adaptable to our needs. An older acquaintance of ours who grew up in 1930s Pittsburgh remembers the constant coal soot hanging in the air: “Every day, it got dark around noon time.” Victorian London was famous for its noxious, smoky, sulfurous fog, year-round.

Initially, the mining industry followed the same trend. Early mine operations had little, if any, regard for the environment, and were usually abandoned with no thought given to cleaning up the mess once an ore body was depleted.

In the second half of the 20^th century, however, the situation turned around, as the mining industry realized the need to better understand and mitigate its impact on the environment.

The force of law, it must be admitted, had a lot to do with this change, but today, what is sometimes called “social permitting” frequently has an even more powerful regulatory effect than government mandates. Today’s executives understand that good environmental stewardship is good business—and many have strong personal environmental ethics.

That said, mining is an extractive industry, and it’s always going to have an impact. Here’s a quick look at some of the biggest environmental scares associated with gold mining and how they are confronted today.

Mercury

Symbol: Hg

Occurrence in the earth’s crust: Rare

Toxicity: High

 

Mercury, also known as quicksilver, has been used to process gold and silver since the Roman era. Mercury doesn’t break down in the environment and is highly toxic for both humans and animals. Today, the use of mercury is largely limited to artisanal and illegal mining. Industrial mining companies have switched to more efficient and less environmentally damaging techniques (e.g., cyanide leaching).

 

Developing countries with a heavy illegal mining presence, on the other hand, have seen mercury pollution increase. The United Nations Industrial Development Organization (UNIDO) estimates that 1,000 tons of mercury are annually released into the air, soil, and water as a result of illegal mining activity.

To help combat the problem, the mining industry, through the members of the International Council on Mining and Metals (ICMM), has partnered with governments of those nations to transfer low- or no-mercury processing technologies to the artisanal mining sector.

Sodium Cyanide

Mining compound employed: NaCN

Occurrence in nature: Common

Toxicity: High

 

This is one of the widely used chemicals in the industry that can make people’s emotions run high. Historically considered a deadly poison, cyanide has been implicated in events such as the Holocaust, Middle Eastern wars, and the Jonestown suicides. Given such associations, it’s no wonder that the public perceives it with alarm, without even adding mining to the equation.

 

It is important, however, to understand that cyanide:

• is a naturally occurring chemical;
• is not toxic in all forms or all concentrations;
• has a wide range of industrial uses and is safely manufactured, stored, and transported every day;
• is biodegradable and doesn’t build up in fish populations;
• is not cumulative in humans and is metabolized at low exposure levels;
• should not be confused with acid rock drainage (ARD; see below); and
• is not a heavy metal.

Cyanide is one of only a few chemical reagents that dissolves gold in water and has been used to leach gold from various ores for over a hundred years. This technique—known as cyanidation—is considered a much safer alternative to extraction with liquid mercury, which was previously the main method used. Cyanidation has been the dominant gold-extraction technology since the 1970s; in Canada, more than 90% of gold mined is processed with cyanide.

Despite its many advantages for industrial uses, cyanide remains acutely toxic to humans and obviously is a concern on the environmental front. There are two primary environmental risks from gold cyanidation:

• Cyanide might leach into the soil and ground water at toxic concentrations.
• A catastrophic spill could contaminate the ecosystem with toxic levels of cyanide.

In response to these concerns, gold mining companies around the world have developed precautionary systems to prevent the escape of cyanide into the environment—for example, special leach pads lined with a plastic membrane to prevent the cyanide from invading the soil. The cyanide is subsequently captured and recycled.

Further, to minimize the environmental impact of any cyanide that is not recycled, mine facilities treat cyanide waste through several processes that allow it to degrade naturally through sunlight, hydrolysis, and oxidation.

Acid Rock Drainage (ARD)

Target chemical: Sulfuric acid

ARD occurrence in nature: Common

Toxicity: Varies

 

Contrary to popular belief, ARD is the natural oxidation of sulfide minerals such as pyrite when these are exposed to air and water. The result of this oxidation is an increase in the acidity of the water, sometimes to dangerous levels. The problem intensifies when the acid comes into contact with high levels of metals and thereby dissolves them, which adds to the water contamination.

 

Once again, ARD is a natural process that can happen whenever such rocks are exposed on the surface of the earth, even when no mining was involved at all. Possible sources of ARD at a mine site can include waste-rock piles, tailings storage facilities, and mine openings. However, since many mineral deposits contain little or no pyrite, ARD is a potential issue only at mines with specific rock types.

Part of a mining company’s environmental assessment is to conduct technical studies to evaluate the ARD potential of the rocks that may be disturbed. Once ARD has developed, the company may employ measures to prevent its spread or reduce the migration of ARD waters and perhaps even treat the water to reduce acidity and remove dissolved metals.

In some places where exposed sulfide minerals are already causing ARD, a clean, modern mine that treats all outflowing water can actually improve water quality.

Arsenic

Symbol: As

Occurrence in the earth’s crust: Moderate

Toxicity: High

 

Similar to mercury, arsenic is a naturally occurring element that is commonly found as an impurity in metal ores. Arsenic is toxic in large doses.

 

The largest contribution of arsenic from the mining industry comes from atmospheric emissions from copper smelting. It can also, however, leach out of some metal ores through ARD and, when present, needs to be removed as an impurity to produce a saleable product.

Several pollution-control technologies have been successful at capturing and removing arsenic from smelting stacks and mine tailings. As a result, between 1993 and 2009, the release of arsenic from mining activities in Canada fell by 79%. Similar figures have been reported in other countries.

Mythbusters

Now, here’s our quick stab at dispelling the three most widespread myths environmentalists commonly bring up in their rants against the mining industry.

Myth 1: Mining Uses Excessive Amounts of Land

Reality: Less than 1% of the total land area in any given jurisdiction is allotted for mining operations (normally far less than that). Even a modest forestry project affects far more trees than the largest open-pit mine. Mining activities must also meet stringent environmental standards before a company can even get a permit to operate.

The assessment process applied to mining operations is very detailed and based on a long string of policies and regulations (e.g., the National Environmental Policy Act in the US). Environmentalists may claim that the mining industry is rife with greedy land barons, but there’s more than enough evidence to the contrary.

Myth 2: Mining Is Always Detrimental to the Water Supply

Reality: Quite the opposite, actually. Before mine operations start, a mining company must submit a project proposal that includes detailed water utility studies (which are then evaluated by scientists and government agencies). Many companies even install water supply systems in local communities that lack easy access to this basic resource. It’s also common for the rocks to be mined to be naturally acid generating—a problem the mine cleans up, by its very nature.

Some die-hard zealots blame the mining industry for consuming huge amounts of water, but in fact it normally only uses +1% of the total water supplied to a given community, and 80% of that water is recycled continuously.

Myth 3: Mining Is Invasive to the Natural Environment

Reality: Yes, mining activity in certain countries has led to negative outcomes for certain plants and animals—not to mention the rocks themselves, which are blasted and hauled away. However, the industry has progressed a long way in the last few decades and, apart from rare accidents, the worst is behind us now.

The key determinant here is compliance. All mining activity must comply with strict environmental guidelines, leading up to and during operations and also following mine closure. After mining activity ends, the company is required to rehabilitate the land. In some cases, the land is remediated into forests, parks, or farmland—and left in better condition than before.

It’s worth reiterating that in some cases—where there’s naturally occurring ARD or where hundreds of years of irresponsible mining have led to environmental disasters—a modern mine is a solution to the problem that pays for itself.

Can You Be Pro-Mining and an Environmentalist? Absolutely.

Gold mining (and mining in general) is extractive and will always leave some mark on our planet. Over time, however, the risks have been mitigated by modern mining technologies. This is an ongoing process; even mining asteroids instead of planet Earth is now the subject of serious consideration among today’s most visionary entrepreneurs.

Meanwhile, the (vastly diminished) risks associated with mining are far outweighed by the economic contribution and positive effects on local communities and the greater society. This net-positive contribution is here to stay—unless our civilization opts for collective suicide by sending us all back to the Stone Age.

Right now, gold and gold stocks are so undervalued that you can build a sizable portfolio at a fraction of what you would have had to spend just a few years ago. To discover the best ways to invest in gold, read Casey Research’s 2014 Gold Investor’s Guide—get it for free here.

The article Mining and Environment—Facts vs. Fear was originally published at caseyresearch.com.

June 2, 2014

Healing the Blind… and Boosting Your Portfolio

By Chris Wood, Senior Analyst

Vision is one of the most important elements of our life, if not the most important one. A 2010 survey by Surge Research found that 60% of Americans are more afraid of blindness than of heart disease, the primary killer of both men and women in the United States.

For a massive 79% of the surveyed, other than their own death or the death of a loved one, losing their eyesight is “the worst thing that could happen to me.”

Unfortunately, this is a scenario that is all too real for a growing number of people, due to macular degeneration, a progressive eye condition that affects as many as 16 million people in the US and millions more around the world.

The fastest-growing form of the disease is age-related macular degeneration, or AMD. It is the number-one cause of severe vision loss and legal blindness in adults over 60 in the United States; and as baby boomers advance into their sixties and seventies, we will see a virtual epidemic of the disease.

Current estimates show that AMD affects between 14% and 24% of the US population aged 65 to 74 years and as much as 35% of people over 75.

AMD itself can be separated into two types: the wet form and the dry form. Wet AMD is the more severe type of the disease; and while only 10% of AMD patients suffer from it, it accounts for 90% of the severe vision loss caused by macular degeneration.

According to the NIH's National Eye Institute, more than 1.6 million Americans suffer from wet AMD—a figure that’s expected to climb to just under 3 million by 2020.

Wet AMD involves the growth of an abnormal bundle of blood vessels (called a “lesion”) behind the macula, the central part of the retina at the back of the eye that allows us to see fine details clearly. When the macula doesn’t function correctly, we experience blurriness or darkness in the center of our vision. In wet AMD, the abnormal blood vessels that have grown behind the macula tend to be very fragile and often leak blood and fluid into the region, raising the macula from its normal place and distorting vision.

There’s No Cure, and Current Therapies All Suffer from the Same Drawbacks

Today, the condition is treated primarily with one of three macromolecular drugs: Lucentis, Eylea, and off-label Avastin. All of them work by directly inhibiting vascular endothelial growth factor (VEGF), and all of them have been shown to be essentially clinically equivalent (meaning each of them works as well as the others).

Annual worldwide revenue for Lucentis and Eylea is about $5.3 billion, though off-label use of the much cheaper Avastin (estimated at 60% by volume) has severely eaten into their market share. This global market is expected to grow to $8.2 billion by 2016.

The current treatments are somewhat effective, but they only address part of the problem. According to Dr. Peter Kaiser, the editor-in-chief of the Retinal Physician journal and one of the thought leaders in the industry:

“For the past 7 years, we focused our attention on blocking VEGF in order to reduce angiogenesis in wet-AMD patients. But as more and more data appeared, it seemed that the VEGF inhibitors largely worked by reducing the leakage, not by eliminating choroidal neovascularization. It is this neovascularization, otherwise known as the lesion, that causes the leakiness. Therefore, we have been patching leaks all these years and not fixing the problem.”

What's more, a substantial number of patients with wet AMD do not respond well to anti-VEGF treatment, and more than 10% of patients don’t respond at all. Plus, the therapy, which involves frequent injections in the eye, holds associated risks such as retinal tear or detachment.

Thus, there's a clear need for a wet-AMD drug that gets to the actual source of the leakiness (i.e., the lesion itself)—and does so with fewer injections at a comparable cost.

Lpath Inc. (LPTN)—Savior from Blindness?

That's where San Diego, California-based Lpath Inc. (LPTN) and its lead drug candidate iSONEP come in. iSONEP is a genetically engineered protein that acts as an antibody against the bioactive lipid called sphingosine-1-phosphate (S1P).

Bioactive lipids in general make for interesting drug targets. S1P in particular is a well-validated target that plays a key role as a signaling mechanism in many pathologic conditions. A growing body of evidence suggests that inhibiting the action of S1P could be an effective therapeutic treatment for wet AMD that may offer distinct advantages over the anti-VEGF drugs currently on the market.

The data so far seems to bear this out. In 2009, Lpath completed a Phase I trial of iSONEP in patients with wet AMD. The results showed that patients tolerated the drug well in various doses, with no serious side effects. It also showed lesion regression in a number of patients.

Of the five patients in the study who had occult-type disease— an earlier-stage wet AMD that affects about 80% of the newly diagnosed patients worldwide—four of them showed a 30%-plus reduction in lesion size from a single injection of iSONEP.

Over the course of the treatment, scientists observed an average 76% reduction in lesion size, with two of the patients showing complete (100%) regression of their lesion. What's more, neither of those patients required any more injections for the entire 12-month follow-up period. (In contrast, Lucentis and Eylea are typically administered once a month and once every other month, respectively.)

Is there risk? Of course. Trying to assess efficacy from a phase I trial always has its dangers—but the limited data we have on iSONEP so far are intriguing. More data are coming soon, too: the results from the Phase II Nexus trial are expected in the second half of 2014.

Positive results from the trial will no doubt send the company’s stock price higher—maybe much higher. If the trial is unsuccessful, however, LPTN could lose much of its value.

This is not a play for the faint of heart, but if you are looking to add to the speculative portion of your portfolio, LPTN might be a great place to start.

To see our full analysis of Lpath Inc. and get our ongoing, up-to-date guidance on this and our other promising stocks, try Casey Extraordinary Technology risk-free today. Right now, we’re offering it for  25% off and with an extended, 6-month money-back guarantee. But hurry, this offer ends on May 26. Click here to get started now.

The article Healing the Blind… and Boosting Your Portfolio was originally published at caseyresearch.com.

May 30, 2014

The Rise of Africa… and How To Play It

By Adam J. Crawford, Analyst

Sub-Saharan Africa (SSA).

Say the words and most people think of poverty… famine… epidemics… political strife… sectarian violence. Yet, just recently, Microsoft announced a new investment on the continent, calling Africa a “game changer in the global economy.” So what gives?

Game Changer?

For starters, we concede SSA faces challenges… relatively low per-capita GDP, relatively low life expectancy, and more than its fair share of military conflict. Nevertheless, considerable progress is being made.

Politically, things have changed dramatically over the last two decades. In a recent report from financial advisory service firm KPMG titled “African Emergence—The Rise of the Phoenix,” researchers explained why…

The end of the Cold War more than two decades ago brought new freedom to Africa. People started to demand political representation and called on governments to be more transparent. Democratic features were introduced and a vibrant civil society emerged.

Influenced by this political renaissance, governments began to act more responsibly. Several ended hostilities with neighboring countries.

With political change came economic change.

Beginning in the 1990s, fledgling African democracies increasingly accommodated private enterprise by reducing trade barriers, cutting corporate taxes, and privatizing state-run industries. By the time the 2000s rolled around, these reforms started to gain traction. In 2000, GDP for all of SSA was a meager $331 billion. By 2012, it had quadrupled to $1.3 trillion.

As far as the future is concerned, with more stable political and economic environments and the unleashing of market forces, SSA will reap the benefits of two megatrends:

1) growing demand for natural resources;

2) increasing consumer spending by an expanding middle class.

Let me explain…

As the world’s population grows and per-capita consumption rises in emerging economies, the demand for natural resources will increase... and SSA has plenty of natural resources, such as gold, oil, chromium, and platinum. But as important as natural resource exports will be, they aren’t the region’s only engine for economic growth.

Consumerism is also a powerful factor, and it’s being driven by an emerging middle class. More and more SSA citizens are moving from subsistence farming to higher-paying urban jobs. In 2000, about 59 million African households were earning discretionary income; by 2020, discretionary income will be available to 128 million households.

All of this points to the expectation of continued economic growth. Economists at the International Monetary Fund estimate that by 2018, GDP for SSA will reach $1.9 trillion. That amounts to a compounded annual growth rate of 7%, which compares favorably with estimates for Latin America and developing Asia of 4.7% and 8.1% respectively.

Leapfrogging to the Tech Frontier

Microsoft is not the only big tech company betting on growth opportunities in SSA. Intel, Google, Hewlett-Packard, and IBM have also invested heavily in the region. But are these companies a little early? Won’t the benefits to tech come after the buildup of roads, power grids, and healthcare systems?

Not really.

Whereas in developed countries, high tech has been “bolted onto” existing infrastructures years after they have been created, in developing regions high tech can be integrated in as the infrastructure is constructed. For example, as the US struggles to mesh electronic health records with the healthcare system and smart-grid technology with the power grid, developing economies can build these features right into their nascent systems at the outset. In the words of John Kelly, head of research at IBM, Africa “can leapfrog straight to the tech frontier, without worrying about adapting old systems...”

In addition, the Cloud is adaptable to and quite useful in the early stages of an economy’s development. According to The Economist, “The ability to use software, computing power, and storage online ‘as a service,’ paying only for what you need and only when you need it, may put the cost of information technology within the budget of many small African businesses.”

The point is: the time for tech in SSA is now… not a decade from now. That’s why so many big tech firms are setting up shop in the region. Research firm IDC predicts that IT spending across Africa will increase from $30 billion in 2012 to $40 billion in 2016, and if telecom is included, spending will increase from $103 billion in 2012 to $130 billion by 2016.

But here’s the thing: Africa won’t significantly move the revenue needle for the global tech giants, so investors should look elsewhere for opportunities. Our advice? An African telecom.

The Gains Down in Africa

As mentioned before, over the next few years, millions of SSA households will be acquiring discretionary income for the first time. That means millions more in the region will have more money to purchase necessities, and they’ll begin to purchase things like mobile phones and mobile services.

According to GSMA, a global trade organization for mobile phone operators, there will be 250 million mobile phone connections in Africa over the next five years. That bodes well for African telecoms. But it’s a hotly contested space. So which telecom is the best bet?

We like MTN Group Limited (MTNOY). The company is on solid financial ground. It pays a nice dividend. Its network is superior to the competition’s, which is why MTNOY is the market share leader in SSA. Oh, and the stock is cheap—even after the 12% run the stock has gone on since we recommended it in the December issue of BIG TECH. If you want access to our comprehensive report on MTNOY as well as access to our other buy recommendations, which include a networking equipment provider with 90% near-term upside potential, then sign up for a risk-free trial of BIG TECH.

The article The Rise of Africa… and How To Play It was originally published at caseyresearch.com.

May 28, 2014

You Can’t Shoot Fish in a Barrel Without Ammunition

By Dan Steinhart, Managing Editor, The Casey Report

FOMO.

I heard this acronym on a podcast last week. Having no clue what it meant, I consulted Google.

Turns out it stands for “Fear of Missing Out.” Kids use it to describe their anxiety about missing a social event that all of their friends are attending.

It struck me that investors experience FOMO too. And it usually leads to bad decisions.

From Prudent to FOMO

In the comfort of your home office, investing rationally is pretty easy. You think a bull market might be emerging, so you invest in the S&P 500.

But you’re not stupid. No one really knows where the stock market is headed, so you keep a healthy allocation of cash on the side to deploy the next time stocks trade at bargain prices. A prudent, rational plan.

But leave the house and things start to change. You notice that others seem to be making more money than you. First it’s the “smart money” raking in the dough—those who had the foresight and fortitude to buy during the last panic, when everyone else was retreating. You’re OK with that. Investing is their full-time job. You can’t expect to compete with them.

But as the bull market charges higher, the caliber of people making more money than you sinks lower. The mailman starts giving you stock tips. And your gardener’s brand-new Mustang, parked in your driveway just behind your sensible, 2011 Toyota Corolla, starts to irritate you.

Your brother-in-law is the last straw. He thinks he’s so smart, but he’s really just lucky to somehow always be in the right place at the right time. I mean, just last month you had to pick him up from a NASCAR tailgate after security kicked him out for lewd behavior—and now he’s taking the family to Europe with his stock market winnings?

If that guy can make $30,000 in the market in six months, you should be a millionaire.

Now you feel like a sucker for holding so much cash. Why earn a pitiful 0.5% interest when you could be making… hang on, how much did the S&P 500 gain last year? 29.6%?

Some quick extrapolation shows that if you invest all of your cash right now, you can retire by 2023. Factor in a couple family trips to Europe, and we’ll call it 2024 to be safe.

Cash Is Trash… Until It’s King

Such is the (slightly exaggerated) psychology of a bull market. FOMO is a powerful motivator and causes smart investors to do stupid things, like go all-in at the worst possible moment. Which is no small concern, since it undermines one of the most powerful investment strategies: keeping liquid cash in reserve to invest during market panics.

Take the roaring ‘20s as a long-ago but pertinent example. The surging stock market of that era caused a whole lot of FOMO. Seeing their friends get rich, people who had never invested before piled into stocks.

Of course, we know how that ended.

But there’s a fascinating angle that you may not have given much thought. I hadn’t until yesterday, when I finished reading The Great Depression: A Diary. It’s a firsthand, anecdotal account written by attorney Benjamin Roth.

Roth emphasized that during the Great Depression, everyone knew financial assets were great bargains. The problem was hardly anyone had cash to take advantage of them.

Here are a few quotes from the book:

August 1931: I see now how very important it is for the professional man to build up a surplus in normal times. A surplus capital of $2,500 wisely invested during the depression might have meant financial security for the rest of his life. Without it he is at the mercy of the economic winds.

December 1931: It is generally believed that good stocks and bonds can now be bought at very attractive prices. The difficulty is that nobody has the cash to buy.

September 1932: I believe it can be truly said that the man who has money during this depression to invest in the highest grade investment stocks and can hold on for 2 or 3 years will be the rich man of 1935.

June 1933: I am afraid the opportunity to buy a fortune in stocks at about 10¢ on the dollar is past and so far I have been unable to take advantage of it.

July 1933: Again and again during this depression it is driven home to me that opportunity is a stern goddess who passes up those who are unprepared with liquid capital.

May 1937: The greatest chance in a lifetime to build a fortune has gone and will probably not come again soon. Very few people had any surplus to invest—it was a matter of earning enough to buy the necessaries of life.

In short, by succumbing to FOMO and investing all your cash, you might be giving up the opportunity to make a literal fortune. You can’t shoot fish in a barrel without ammunition.

Of course, the parallels from the Great Depression to present-day crises aren’t exact. The US was on the gold standard back then, meaning the Fed couldn’t conjure money out of thin air to reflate stock prices. Such a nationwide shortage of cash is unthinkable today, as Yellen & Friends would create however many dollars necessary to prevent stocks from plummeting 90%, as they did during the Great Depression.

That’s exactly what happened during the 2008 financial crisis, as you can see below. The Fed injected liquidity, and stocks rebounded rapidly. Compared to the Great Depression, the stock market crash of 2008 was short and sweet:

What does that mean for modern investors?

When the next crisis comes—and it will—there will be bargains. But because of the Fed’s quick trigger, investors will have to act decisively to get a piece of them.

What’s more, now that the US government has demonstrated beyond the shadow of a doubt that it will prop up the economy, bargains should dissipate even quicker next time around. After all, the hardest part of buying stocks in a crisis is overcoming fear. But that fear isn’t much of a detriment when Uncle Sam is standing by with his hand on the lever of the money-printing machine, ready to rescue the market.

Crises can creep up on you faster than you think. You may never know what hit you--unless you knew what to look for ahead of time. Watch Meltdown America, the eye-opening 30-minute documentary on how to recognize (and survive) an economic crisis—with top experts including Sovereign Society Director Jeff Opdyke, investing legend Doug Casey, and Canadian National Security Council member Dr. Andre Gerolymatos.

Be prepared… it can (and will) happen here. Click here to watch Meltdown America now.

The article You Can’t Shoot Fish in a Barrel Without Ammunition was originally published at caseyresearch.com.

May 7, 2014

How a Big Cat Started Europe’s Addiction to Oil

By Marin Katusa, Chief Energy Investment Strategist

On July 1, 1911, a German gunboat named Panther sailed into the port of Agadir, Morocco, and changed history.

For the previous two decades, a faction within the British Admiralty had called for the navy to switch from coal-fired ships to ones powered by a new fuel. Admiral John Fisher, First Sea Lord, led the charge, trumpeting oil’s numerous advantages: It had nearly twice the thermal content of coal, required less manpower to use, allowed refueling at sea, and burned with less telltale smoke.

Doesn’t matter, replied naval tradition: Britain lacks oil, and she has lots of coal. The switch would put the greatest navy in the world at the mercy of burgeoning oil-rich countries and the oil trusts that operate in them. (It didn’t help that the navy’s first test of oil-firing in 1903 engulfed the ship in a cloud of black smoke.)

It wasn’t common knowledge at the time, but Germany had surpassed the mighty British Empire in manufacturing in the late 1800s, most notably in the production of steel. Britain’s manufacturing base had largely moved abroad, taking investment along with it. Germany, meanwhile, was determined to build up the quality as well as quantity of its goods. That included its military technology and capacity, especially its navy. Has a familiar ring, doesn’t it?

Then came the Panther. Germany said she was there to protect German businessmen in restive Morocco, a reason more credible had there actually been German businessmen in Morocco. Britain read it as a challenge to its supremacy, a maneuver toward expansionism, and a threat to trade routes west out of the Mediterranean.

Britain’s young, up-and-coming home secretary wondered what specifications would be required to outmaneuver the ships of Germany’s growing navy. The war college gave a deceptively simple answer: a speed of at least 25 knots.

Coal couldn’t do it—too many boilers, too much weight, too long to build up a head of steam, too short a range. But oil could.

With the Panther’s arrival in Morocco, Admiral Fisher’s faction gained a new and eloquent advocate for converting the British Navy to oil, and it wasn’t long before Home Secretary Winston Churchill became First Lord of the Admiralty and the fellow whom history often credits with guiding the British Empire’s destiny with oil.

Germany’s Great Game

If Britain were to switch its navy to oil, it would need a secure supply of the stuff. Churchill saw that the struggling Anglo-Persian Oil Co. had the resources, but lacked the cash.

With Germany setting its cap for control of Middle Eastern oil—building a railroad between Berlin and Baghdad was the last straw—it wasn’t hard for Churchill to convince the Parliament that cutting a deal with Anglo-Persian Oil Co. was a good idea.

In exchange for an infusion of cash, the British government got 51% of the company’s stock. A hush-hush rider on that deal was a contract for Anglo-Persian to supply oil to the Royal Navy, with very favorable terms, for the next 20 years.

All this happened just in time for the spark that finally ignited the Great War, or as we call it today, World War I. Because of Churchill’s preparations, among them a new class of oil-fired ships, Allied naval forces were able to restrict the flow of essential supplies to Germany.

By war’s end, every country realized the strategic importance of a secure supply of oil. The players have been maneuvering ever since.

Fast-Forward 100 Years—the Rise of Mother Russia

The fortunes of the various players may change, but the scrimmage remains the same. Oil does everything from power vehicles on land and sea to supply manufacturers with the building blocks of medicines, plastics, and a host of other products.

The Soviet Union was a global powerhouse and a major oil producer until its disintegration in 1991, and Russia then had to shop hat in hand for loans to keep its economy afloat. It was largely its oil and gas resources that have enabled Vladimir Putin, Russia’s canny and forceful president, to wrest his country back onto the world stage of heavyweights in recent years. The European Union is currently Russia’s largest customer.

Indeed, Europe is feeling the squeeze from Russia, which has gunned hard to make it easy to get its oil and gas, but not so easy to keep getting them. Putin will happily play hardball with any country that won’t meet his terms—just ask Ukraine—and doesn’t mind if others down the line feel the sting of his stick.

The EU-28 imports over 50% of all the energy consumed. Russia provides about one-third of all the oil and natural gas imported by EU-28. Germany is the largest importer of Russian oil and natural gas.

The member countries of the European Union may be cheering Belarus on, but they’re also taking the hint from Russia. And they’d better: Between growing demand in Asia and instability in the Middle East, the European Union faces some serious energy challenges.

Slowly but surely, Europe is waking up to its situation. Alternative energies are a noble goal, but the hard truth is that the technology isn’t there yet to replace hydrocarbon fuels. For energy security, there’s little choice for EU countries but to back the oil and gas companies that call Europe home.

“We must get on and explore our resources in order to understand the potential,” declared Britain’s energy minister in July. Other countries, such as Germany, are taking on this pursuit as well. We believe that governments and oil giants in other European countries will follow their lead.

This article is from the Casey Daily Dispatch, a free daily e-letter written by renowned investment experts in the fields of precious metals, energy, technology, and crisis investing. Click here to get it your inbox every day.

The article How a Big Cat Started Europe’s Addiction to Oil was originally published at caseyresearch.com.

April 24, 2014

Meltdown America – Are You Prepared For the Coming Collapse?

By Casey Research

“I think we are in the early stages of the end of the West,” says Jeff Opdyke of The Sovereign Investor in an eye-opening new documentary from Casey Research called, “Meltdown America.” This free, 28-minute video gives you a sober look at the coming collapse of the United States, the most indebted nation in the history of the world. You'll see why stock market crashes, rampant unemployment, and widespread poverty are only the beginning. Your comfortable way of life could be taken from you in an instant. Here’s a sneak peek of what awaits:

To watch the full documentary and hear the harrowing and true stories of three people who survived economic and political collapse in Zimbabwe, Yugoslavia, and Argentina, simply click here. You’ll discover how their powerful stories of hardship foreshadow what's happening in the U.S. Best of all, this stunning video is completely free to watch.

Click here to watch this full-length documentary right now.

The article Meltdown America – Are You Prepared For the Coming Collapse? was originally published at caseyresearch.com.

February 20, 2014

Outside the Box: Notes to the FOMC

By John Mauldin

 

Janet Yellen, the new Fed chair, has her admirers and her detractors. One unabashed admirer is my good friend David Zervos, Jefferies' chief market strategist, who during the past several months has taken to hollering "Dammit Janet, I love you!" He was at it again yesterday:

Last week was certainly a week for the lovers. Q's broke to new cyclical highs, spoos moved to within just a few points of all time record highs, and Friday was St. Valentine's day! It was all about LOVE, LOVE and LOVE! But for those folks still hiding out in the HATER camp – those who probably spent Friday evening watching Blue Valentine, War of the Roses or Scenes from Marriage – last week must have felt more like a St Valentine's day massacre. These folks, and their econometrically deceitful overlay charts of 1927-1929 vs 2012-2014, were shredded by our new goddess of pleasure, beauty, love and of course easy money – Janet "Aphrodite" Yellen. She gave the haters a taste of the Hippolyos treatment!! And once again it was a triumph of love over hate!!

Janet delivered the perfect message for markets. Her focus on underemployment was unquestionable. Her commitment to eradicate joblessness via the power of monetary policy was also unwavering. And for anyone who thought she would be hawkish, or even middle of the road, this speech was a wake up call. The reality is that we are dealing with a die-hard Keynesian dove! It's really not that complicated.

That said some folks seem to think the rally was mostly a function of the data. Weak ISM, payrolls, retail sales and IP were apparently the drivers of a 5 percent rally off the lows. Pullease!! That is preposterous. The reality is the market was jittery (and downright freaky) into the Fed chairmanship transition. Risk was pared back by folks who began to incorrectly price in a surprise from Janet! And leverage induced illiquidity created an overshoot to the downside. Weak hands sold, and all the usual haters came out of their bunkers to once again warn of impending doom. But as per the norm, their day in the sun was short-lived. The dust has settled and the haters lost again! Love is in the air my friends, and we owe a great deal of thanks to our new goddess of easy money. Dammit Janet, I love you! Good luck trading.

Take note of this phrase: "the new Goddess of Easy Money." It is now in the lexicon. I wonder how many virgins will be sacrificed to this new deity. (Just kidding, Janet!)

Now, David is not above having a bit of fun in his always-entertaining commentaries, but for a somewhat more substantial take on the opening of the Yellen era, I suggest we turn to John Hussman. I wouldn't call John a Yellen detractor, exactly, but he is certainly inclined to take the Fed down a notch or three. Check out these zingers:

While we all would like to see greater job creation and economic growth, there is little demonstrated cause-and-effect relationship between the Fed's actions and the outcomes it seeks, other than provoking speculation in risk-assets by depriving investors of safe yield….

[T]he "dual mandate" of the Federal Reserve is much like charging the National Weather Service to balance the frequency of sunshine versus rainfall….

The FOMC should be slow to conclude that monetary policy is what ended the credit crisis…. The philosophy seems to be "If an unprecedented amount of ineffective intervention is not sufficient, one must always do more."

At present, U.S. equity valuations are about double their norms, based on historically reliable measures.

The primary beneficiary of QE has been equity prices, where valuations are strenuously elevated. QE essentially robs the elderly and risk-averse of income, and encourages a speculative reach for yield.

I think John would agree with me that the current economic theory driving our monetary policy is both inadequate and outdated. Is it any wonder that he concludes that monetary policy as it is practiced today is simply part of the problem? It is as if we are trying to fly a 747 using the knowledge and skills we learned while driving a car, and all the while looking in the rearview mirror. (Do those things have rearview mirrors?)

You can find John's "Weekly Market Comment" and other valuable analysis at the Hussman Funds website.

This weekend I will be writing about some of the recent analysis concerning income inequality. I've actually been thinking a lot about it in conjunction with the rise of the Age of Transformation. I think about it a lot, most personally in terms of my own seven kids. I'm not so concerned about income inequality as I am about income opportunity. It seems to me that we have an education system that was designed to meet the needs of the US and the Second Industrial Revolution that was grown atop the industrial British Empire.

We are simply not preparing most of our children for the challenges that lie ahead. Many of course are going to do quite well, but that will be in spite of the educational process, not because of it. The complete higher-academic and bureaucratic capture of the educational process is as much at the root of income inequality as the other usual suspects are. There is more than one cause, and another root is the manipulation of capitalism and free markets by vested interests.

But that's all too serious, because now it's time to hit the send button and think hard about an Italian dinner and the Miami Heat being in town. Even if Lebron James is on the other team, he is simply a pleasure to watch. Lebron, you should've come to Dallas to play with Dirk!

Your getting ready to sit courtside analyst,

John Mauldin, Editor
Outside the Boxsubscribers@mauldineconomics.com

 

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Notes to the FOMC

John P. Hussman, Ph.D.

The following are a few observations regarding Dr. Yellen’s testimony to Congress. The objective is to broaden the discourse with alternative views and evidence, not to disparage FOMC members. We should all hope that Dr. Yellen does well in what can be expected to be a challenging position in the coming years.

1. While we all would like to see greater job creation and economic growth, there is little demonstrated cause-and-effect relationship between the Fed’s actions and the outcomes it seeks, other than provoking speculation in risk-assets by depriving investors of safe yield. That’s essentially the same M.O. that got us into the housing crisis: yield-starved investors plowing money into mortgage-backed securities, and Wall Street scrambling to create “product” by lending to anyone with a pulse. To suggest that fresh economic weakness might justify further efforts at quantitative easing is to assume a cause-and-effect link that is unreliable, if evident at all, and to overlook the already elevated risks.

2. In this context, the “dual mandate” of the Federal Reserve is much like charging the National Weather Service to balance the frequency of sunshine versus rainfall. If Congress was to require the Federal Reserve to change itself into a butterfly, it would not be the fault of the Federal Reserve to miss that objective. Moreover, what is absent from nearly every reference to the dual mandate is the phrase “long run” that is repeatedly included in that mandate. It seems probable that the cyclical response to economic weakness following the 2000-2001 recession – suppressing safe yields in a way that encouraged yield-seeking and housing speculation – was largely responsible for present, much longer-term difficulties.

3. The FOMC should be slow to conclude that monetary policy is what ended the credit crisis. The main concern during that period was the risk of widespread bank insolvency, resulting from asset losses that were wiping out the razor-thin capital levels at banks. In the first weeks of March 2009, in response to Congressional pressure, the Financial Accounting Standards Board changed accounting standards (FAS 157) to allow “significant judgment” in the valuation of assets, instead of valuing them at market prices. That change coincided precisely with the low in the financial markets and the turn in leading economic measures. By overestimating the impact of its actions, the FOMC may underestimate the risks. The philosophy seems to be “If an unprecedented amount of ineffective intervention is not sufficient, one must always do more.”

4. At present, excess reserves in the U.S. banking system amount to $2.4 trillion – more than double the total amount of demand deposits in the U.S. banking system, far more than all commercial and industrial loans combined, and 25% of total deposits in U.S. banks. Short term interest rates have averaged less than 10 basis points since late-2009, when the Fed’s balance sheet $2 trillion smaller. Based on the tight relationship between monetary base / nominal GDP and short-term interest rates, it is evident that even an immediate and persistent reduction in the Federal Reserve’s balance sheet of $20-25 billion per month would be unlikely to result in even 1% Treasury bill rates until 2020, absent much higher interest on reserves. The FOMC has done what it can – probably too much. A focus on the potential risks of equity leverage (where NYSE margin debt has surged to a record and the highest ratio of GDP in history aside from the March 2000 market peak), covenant lite lending, and other speculative outcomes should be high on the priorities of the FOMC.

5. Dr. Yellen suggests that equity valuations are not “in bubble territory, or outside of normal historical ranges.” The historical record begs to differ on this. The first chart below reviews a variety of reliable valuation measures relative to their historical norms. The second shows the relationship of these measures with actual subsequent 10-year equity returns. With regard to alternate measures of valuation such as price/unadjusted forward operating earnings, or various “equity risk premium” models, it would be appropriate for the FOMC to estimate the relationship between those measures and actual subsequent market returns. Having done this, the spoiler alert is that these methods do not perform very well. In contrast, the correlation between the measures below and actual subsequent 7-10 year equity returns approaches 90%. At present, U.S. equity valuations are about double their norms, based on historically reliable measures.

The chart below shows how these measures are related with actual subsequent 10-year total returns in the S&P 500. The specific calculations are detailed in a variety of prior weekly comments (the price / revenue and Tobin’s Q models are straightforward variants of the others).

6. Finally, when confronted with the difficulties that quantitative easing has posed for individuals on fixed incomes, Dr. Yellen asserted that interest rates are low not only because of Fed policy, but because of generally lackluster economic conditions. This argument is difficult to support, because there is an extraordinarily close relationship between the level of short-term interest rates and quantity of monetary base per dollar of nominal GDP (see the chart below). With regard to long-term interest rates, it’s notable that the 10-year Treasury yield is actually higher than when QE2 was initiated in 2010, and is also higher than the weighted average yield at which the Federal Reserve has accumulated its holdings. In order to restore even 1% Treasury bill yields without paying enormous interest on reserves, the Fed would not only have to taper its purchases, but actively contract its balance sheet by more than $1.5 trillion.

 

The primary beneficiary of QE has been equity prices, where valuations are strenuously elevated. QE essentially robs the elderly and risk-averse of income, and encourages a speculative reach for yield. Importantly, one should not equate elevated stock prices with aggregate “wealth” (as higher current prices are associated with lower future returns, but little change in long-term cash flows or final purchasing power). Rather, the effect of QE is to give investors the illusion that they are wealthier than they really are. It is certainly possible for any individual investor to realize wealth from an overvalued security by selling it, but this requires another investor to buy that overvalued security. The wealth of the seller is obtained by redistributing that wealth from the buyer. The constant hope is to encourage a trickle-down effect on spending that, in any event, is unsupported by a century of economic evidence.

The risks of continuing the recent policy course have accelerated far beyond the potential for benefit. The Fed is right to wind it down, and as it does so, the FOMC should focus on addressing the potential fallout from speculative losses that to a large degree are now unavoidable. Ultimately, the U.S. economy will be best served by a return to capital markets that allocate scarce savings toward productive investment rather than speculative activity. The transition to that environment will pose cyclical challenges, but is well worth achieving if the U.S. economy is to escape the grip of what is now more than 15 years of Fed-enabled capital misallocation.

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PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor’s interest in alternative investments, and none is expected to develop.

The article Outside the Box: Notes to the FOMC was originally published at mauldineconomics.com.

February 3, 2014

Now Is the Time to Buy Gold By Bud Conrad, Chief Economist Gold has been in a downturn for more than two years now, resulting in the lowest investor sentiment in many years. Hardcore goldbugs find no explanation in the big picture financial numbers of government deficits and money creation, which should be supportive to gold. I have an explanation for why gold has been down—and why that is about to reverse itself. I'm convinced that now is the best time to invest in gold again.

Gold Is the Alternative to Non-Convertible Paper Money

If you've been a Casey reader for any length of time, you know why gold is a good long-term investment: central banks are expanding paper money to accommodate the deficits of profligate governments—but they can't print gold. Since the beginning of the credit crisis, the world's central banks have "invented" $10 trillion worth of new currencies. They are buying up government debt to drive interest rates down, to keep countries afloat. The best they can do is buy time, however, because creating even more debt does not solve a credit crisis.

Asia Is Accumulating Gold for Good Reason

Since 2010, China has been buying gold and not buying US Treasuries. China's plan seems to be to acquire a total of 6,000 tonnes of gold to put its holdings on a par with developed countries and to elevate the international appeal of the renminbi.

In 2013, China imported over 1,000 tonnes of gold through Hong Kong alone, and it's likely that as much gold came through other sources. For example, last year the UK shipped 1,400 tonnes of gold to Swiss refiners to recast London bars into forms appropriate for the Asian market.

China mines around 430 tonnes of gold per year, so the combination could be 2,430 tonnes of gold snatched up by China in 2013, or 85% of world output.

India was expected to import 900 tonnes of gold in 2013, but it may have fallen short because the Indian government has been taxing and restricting imports in a foolish attempt to support its weakening currency. Smugglers are having a field day with the hundred-dollar-per-ounce premiums.

Other central banks around the world are estimated to have bought at least 300 tonnes last year, and investors are buying bullion, coins, and jewelry in record numbers. Where is all that gold coming from?

COMEX and GLD ETF Inventories Are Down from the Demand

The COMEX futures market warehouses dropped 4 million ounces (over 100 tonnes) in 2013. The COMEX uses two classes of inventories: the narrower is called "registered" and is available for delivery on the exchange. There are other inventories that are not available for trading but are called "eligible." I don't think it's as easy to get holders of eligible gold to allow for its conversion to registered to meet delivery as the name implies. Yes, that might occur, but only with a big jump in the price.

The chart below shows the record-low supply of registered COMEX gold.

Meanwhile, SPDR Gold Shares (GLD), the largest gold ETF, lost over 800 tonnes of gold to redemptions. At the same time, central banks have provided gold through leasing programs (but figures are not made public).

Why Has Gold Fallen $700 Since 2011?

In our distorted world of debt-ridden governments and demand from Asia, gold should continue rising. What's going on?

The gold price quoted all day long comes from the futures exchanges. These exchanges provide leverage, so modest amounts can be used to make big profits. Big players can move markets—and the biggest player by far is JPMorgan (JPM).

For the first 11 months of 2013, JPM and its customers delivered 60% of all gold to the COMEX futures market exchange; that, surely, is a dominant position that could affect the market. By supplying so much gold, they are able to keep the price lower than it would otherwise be.

A key question is why a big bank would take positions that could drive gold lower. Answer: Banks gain by borrowing at zero rates. But the Federal Reserve can only continue its large quantitative easing programs that bring rates to zero if gold is not soaring, which would indicate weakness in the dollar and the need to tighten monetary policy. Voilà—we have a motive. Also, suppressing the price of gold supports the dollar as a reserve currency.

The chart below shows the month-by-month number of contracts that were either provided to the exchange or taken from the exchange by JPM. For a single firm, the numbers are large, but the effect across all gold markets is greater because so many gold transactions follow the price set in the paper futures market.

What jumps out from the chart above is the fact that while JPM had been selling gold into the futures market for most of the year, it made a major shift in December, absorbing 96% of all gold delivered.

That is a radical shift and, I believe, an indicator that JPM's policy has shifted. In my opinion, their deliveries of gold were suppressing the price during 2013, but now their policy has shifted in a way that will support gold going forward.

This leaves a vital question unanswered: Why? Has the motivation to suppress the price of gold gone away? Not likely, and we may never know the full truth of what is happening, but I suspect the main reason for the shift is that they have done their damage. The $740 drop from top to bottom, a 39% decline, has shaken confidence in gold as a financial "safe haven" among many investors, especially those new to precious metals. At the same time, continuing to lean on gold at this point could become very costly. JPM delivered $3 billion (about 2 million ounces of gold) into the market up to December in 2013, and may not have ready sources of gold to keep that up. It is dangerous to put on big short positions unless you have gold or some future gold deliveries as a hedge.

By now, everyone knows of the shortages in the gold market; JPM has to be as aware of that as the rest of us. It just isn't safe for them to continue to lean on the market. Being aware, it looks like they are taking the bet that gold will rebound, so they could do well on the other side of the trade.

Another confirmation of the shift by big banks comes from data provided by the US Commodity Futures Trading Commission (CFTC) that shows the net positions of the four biggest US banks in the futures market. There has been a dramatic change from being short the market to now being long.

Crisis Brewing in the Gold Market

Germany claims to hold 3,390.6 tonnes of gold, about half of which is held by foreign central banks. Over a year ago, they announced a plan to repatriate 674 tonnes of gold from France and the United States. The US said it would comply, but told the German government that it would have to wait seven years for all the gold to be delivered. The news out last week was that after a year, Germany had only obtained 37 tonnes of its gold—and only five of them were from the US. That is a trivial amount (only 160,000 ounces).

So why can't Germany get its gold? Explanations of having to melt down existing gold and recast it just don't make sense. The most logical conclusion, and the one I've come to, is that the United States simply doesn't have the gold it says it has—neither Germany's nor its own.

Of course, the US government isn't going to admit that there's a problem, but I say there is.

More evidence: JPMorgan's COMEX warehouse contained 3.0 million ounces of gold in 2012, but that had dropped to 0.5 million ounces by mid-2013. Its registered inventories are a razor-thin 87,000 ounces. These kinds of swings are indicative of shortages and instability.

Further, JPMorgan sold its gold vault in New York City—located next to the Federal Reserve's vault—to the Chinese. The banking giant also just announced the sale of its commodities trading business (although it may not have sold the precious metals part of that business). Perhaps they were concerned about new regulations of banks with deposit insurance from the government.

In another relevant development, Deutsche Bank recently surprised the gold community by quitting its position on the committee that sets the London a.m. and p.m. fixings. This came a few weeks after a German regulatory body called BaFin started investigating how these prices were set. BaFin also gave an indication that the process appeared worse than the LIBOR fixing scandal, which resulted in billions in fines.

Putting Inventories and Traders Together

The futures market looks fragile to me. The basic problem is that there are many more transactions that could put a claim on gold than there is gold registered for delivery in the COMEX warehouses.

The chart below gives a dramatic picture by simply dividing the open interest of all futures contracts by the registered inventories. The black line at the bottom shows the big jump in the ratio as the registered inventories declined. There are 107 times more open-interest positions than there is registered gold.

The futures markets operate on the expectation that only a few big traders will demand delivery. JPMorgan has shown that it is in a position to demand almost all (96%) of the gold for delivery. They are big enough that they could cause a collapse of the market, if they were to force delivery of more than is available. They know better than to do so, though, and I would guess that they will just manage to try to gain back what gold they have been delivering over the last several years. That should support the price of gold.

Gold Will Rise, and It's on Sale Now

Now is the time to stake your claim in gold. In the long term, we know that paper money will become worthless; in the short term, the biggest seller has just shifted its actions to becoming a buyer. That makes this a good time to accumulate gold and gold mining stocks before a major shift upward in price.

Speaking of gold mining stocks: My Casey Report co-editor Doug Casey, as well as other famous gold speculators, are also convinced that a turnaround in the gold market may be upon us. If you haven't yet, do yourself a favor and watch "Upturn Millionaires," Casey's online video event with eight well-known resource speculators and investment experts that premieres Tuesday at 2:00 p.m. EST. It's free, so you just have to sign up to register.

January 31, 2014

A Turning Point in Junior Gold Stocks?

By Doug Hornig, Senior Editor

It's not exactly news that gold mining stocks have been in a slump for more than two years. Many investors who owned them have thrown in the towel by now, or are holding simply because a paper loss isn't a realized loss until you sell.

For contrarian speculators like Doug Casey and Rick Rule, though, it's the best of all scenarios. "Buy when blood is in the streets," investor Nathan Rothschild allegedly said. And buy they do, with both hands—because, they assert, there are definitive signs that things may be turning around.

So what's the deal with junior mining stocks, and who should invest in them? I'll give you several good reasons not to touch them with a 10-foot pole… and one why you maybe should.

First, you need to understand that junior gold miners are not buy-and-forget stocks. They are the most volatile securities in the world—"burning matches," as Doug calls them. To speculate in those stocks requires nerves of steel.

Let's take a look at the performance of the juniors since 2011. The ETF that tracks a basket of such stocks—Market Vectors Junior Gold Miners (GDXJ)—took a savage beating. In early April of 2011, a share would have cost you $170. Today, you can pick one up for about $36… that's a decline of nearly 80%.

There are something like 3,000 small mining companies in the world today, and the vast majority of them are worthless, sitting on a few hundred acres of moose pasture and a pipe dream.

It's a very tough business. Small-cap exploration companies (the "juniors") are working year round looking for viable deposits. The question is not just if the gold is there, but if it can be extracted economically—and the probability is low. Even the ones that manage to find the goods and build a mine aren't in the clear yet: before they can pour the first bar, there are regulatory hurdles, rising costs of labor and machinery, and often vehement opposition from natives to deal with.

As the performance of junior mining stocks is closely correlated to that of gold, when the physical metal goes into a tailspin, gold mining shares follow suit. Only they tend to drop off faster and more deeply than physical gold.

Then why invest in them at all?

Because, as Casey Chief Metals & Mining Strategist Louis James likes to say, the downside is limited—all you can lose is 100% of your investment. The upside, on the other hand, is infinite.

In the rebound periods after downturns such as the one we're in, literal fortunes can be made; gains of 400-1,000% (and sometimes more) are not a rarity. It's a speculator's dream.

When speculating in junior miners, timing is crucial. Bear runs in the gold sector can last a long time—some of them will go on until the last faint-hearted investor has been flushed away and there's no one left to sell.

At that point they come roaring back. It happened in the late '70s, it happened several times in the '80s when gold itself pretty much went to sleep, and again in 2002 after a four-year retreat.

The most recent rally of 2009-'10 was breathtaking: Louis' International Speculator stocks, which had gotten hammered with the rest of the market, handed subscribers average gains of 401.8%—a level of return Joe the Investor never gets to see in his lifetime.

So where are we now in the cycle?

The present downturn, as noted, kicked off in the spring of 2011, and despite several mini-rallies, the overall trend has been down. Recently, though, the natural resource experts here at Casey Research and elsewhere have seen clear signs of an imminent turnaround.

For one thing, the price of gold itself has stabilized. After hitting its peak of $1,921.50 in September of 2011, it fell back below $1,190 twice last December. Since then, it hasn't tested those lows again and is trading about 6.5% higher today.

The demand for physical gold, especially from China, has been insatiable. The Austrian mint had to hire more employees and add a third eight-hour shift to the day in an attempt to keep up in its production of Philharmonic coins. "The market is very busy," a mint spokesperson said. "We can't meet the demand, even if we work overtime." Sales jumped 36% in 2013, compared to the year before.

Finally, the junior mining stocks have perked up again. In fact, for the first month of 2014, they turned in the best performance of any asset, as you can see here:

(Source: Zero Hedge)

The writing's on the wall, say the pros, that the downturn won't last much longer—and when the junior miners start taking off again, there's no telling how high they could go.

To present the evidence and to discuss how to play the turning tides in the precious metals market, Casey Research is hosting a timely online video event titled Upturn Millionaires next Wednesday, February 5, at 2:00 p.m. Eastern.

 

register here for free

 

January 8, 2014

23 Reasons to Be Bullish on Gold

By Laurynas Vegys, Research Analyst

It's been one of the worst years for gold in a generation. A flood of outflows from gold ETFs, endless tax increases on gold imports in India, and the mirage (albeit a convincing one in the eyes of many) of a supposedly improving economy in the US have all contributed to the constant hammering gold took in 2013.

Perhaps worse has been the onslaught of negative press our favorite metal has suffered. It's felt overwhelming at times and has pushed even some die-hard goldbugs to question their beliefs… not a bad thing, by the way.

To me, a lot of it felt like piling on, especially as the negative rhetoric ratcheted up. Last year's winner was probably Goldman Sachs, calling gold a "slam-dunk sale" for 2014 (this, of course, after it's already fallen by nearly a third over a period of more than two and a half years—how daring they are).

This is why it's important to balance the one-sided message typically heard in the mainstream media with other views. Here are some of those contrarian voices, all of which have put their money where their mouth is…

• Marc Faber is quick to stand up to the gold bears. "We have a lot of bearish sentiment, [and] a lot of bearish commentaries about gold, but the fact is that some countries are actually accumulating gold, notably China. They will buy this year at a rate of something like 2,600 tons, which is more than the annual production of gold. So I think that prices are probably in the process of bottoming out here, and that we will see again higher prices in the future."

• Brent Johnson, CEO of Santiago Capital, told CNBC viewers to "buy gold if they believe in math… Longer term, I think gold goes to $5,000 over a number of years. If they continue to print money at the current rate, I think it could be multiples of that. I see a slow steady rise punctuated with some sharp upward moves."

• Jim Rogers, billionaire and cofounder of the Soros Quantum Fund, publicly stated in November that he has never sold any gold and can't imagine ever selling gold in his life because he sees it as an insurance policy. "With all this staggering amount of currency debasement, gold has got to be a good place to be down the road once we get through this correction."

• George Soros seems to be getting back into the gold miners: he recently acquired a substantial stake in the large-cap Market Vectors Gold Miners ETF (GDX) and kept his calls on Barrick Gold (ABX).

• Don Coxe, a highly respected global commodities strategist, says we can expect gold to rise with an improving economy, the opposite of what many in the mainstream expect. "You need gold for insurance, but this time the payoff will come when the economy improves. In the past when everything was falling all around you, commodity prices were soaring out of sight. We had three recessions in the 1970s and gold went from $35 an ounce to $850. But this time, gold is going to appreciate when we start getting 3% GDP growth."

• Jeffrey Gundlach, bond guru and not historically known for being a big fan of gold, came out with a candid endorsement of the yellow metal: "Now, I kind of like gold. It's definitely very non-correlated to other assets you may have in your portfolio, and it does seem sort of cheap. I also like the GDX."

• Steve Forbes, publishing magnate and chief executive officer of Forbes magazine, publicly predicted an impending return to the gold standard in a speech in Las Vegas. "A new gold standard is crucial. The disasters that the Federal Reserve and other central banks are inflicting on us with their funny-money policies are enormous and underappreciated."

• Rob McEwen, CEO of McEwen Mining and founder of Goldcorp, reiterated his bullish call for gold to someday top $5,000. "We now have governments willing to seize their citizens' assets. We now have currency controls on the table, which we haven't seen since the late 1960s/early '70s. We have continued debasement of currencies. And the economies of the Western world remain stagnant despite enormous monetary stimulation. All these facts to me are bullish for gold and make me believe the price will bounce back relatively soon."

• Doug Casey says that while gold is not the giveaway it was at $250 back in 2001, it is nonetheless a bargain at current prices. "I've been buying gold for years and I continue to buy it because it is the way you save. I'm very happy to be able to buy gold at this price. All the so-called quantitative easing—money printing—by governments around the world has created a glut of freshly printed money. This glut has yet to work its way through the global economic system. As it does, it will create a bubble in gold and a super-bubble in gold stocks."

And then there's the people who should know most about how sound the world's various types of paper money are: central banks. As a group, they have added tonnes of bullion to their reserves last year…

• Turkey added 13 tonnes (417,959 troy ounces) of gold in November 2013. Overall, it has added 143.6 tonnes (4,616,847 troy ounces) so far this year, up 22.5% from a year ago, in part thanks to the adoption of a new policy to accept gold in its reserve requirements from commercial banks.

• Russia bought 19.1 tonnes (614,079 troy ounces) in July and August alone. With the year-to-date addition of 57.37 tonnes—second only to Turkey—Russia's gold reserves now total 1,015 tonnes. It now holds the eighth-largest national stash in the world.

• South Korea added a whopping 20 tonnes (643,014 troy ounces) of gold in February, and now carries 23.7% more gold on its balance sheet than at the end of 2012."Gold is a real safe asset that can help (us) respond to tail risks from global financial situations effectively and boosts the reliability of our foreign reserves holdings," said central bank officials.

• Kazakhstan has been buying gold every month, at an average of 2.4 tonnes (77,161 troy ounces) through October. As a result, the country's reserves have seen a 21% increase to 139.5 tonnes from a year ago.

• Azerbaijan has taken advantage of a slump in gold prices and has gone from having virtually no gold to 16 tonnes (514,411 ounces).

• Sri Lanka and Ukraine added 5.5 (176,829 troy ounces) and 6.22 tonnes (199,977 troy ounces) respectively over the past year.

• China, of course, is the 800-pound gorilla that mainstream analysts seem determined to ignore. Though nothing official has been announced by China's central bank, the chart below provides some perspective into the country's consumer buying habits.

China ended 2013 officially as the largest gold consumer in the world. Chinese sentiment towards gold is well echoed in a statement made by Liu Zhongbo of the Agricultural Bank of China: "Because gold has capabilities to absorb external economic shocks, growth of its use in the international monetary system will be imminent."

And those commercial banks that have been verbally slamming gold—it turns out many are not as negative as it might seem…

• Goldman Sachs proved itself to be one of the biggest hypocrites: while advising clients to sell gold and buy Treasuries in Q2 2013, it bought a stunning (and record) 3.7 million shares of GLD. And when Venezuela decided to raise cash by pawning its gold, guess who jumped in to handle the transaction? Yes, they claim the price will fall this year, but with such a slippery track record, it's important to watch what they do and not what they say.

• Société Générale Strategist Albert Edwards says gold will top $10,000 per ounce (with the S&P 500 Index tumbling to 450 and Treasuries yielding less than 1%).

• JPMorgan Chase went on record in August recommending clients "position for a short-term bounce in gold." Gold's price resistance to Paulson & Co. cutting its gold exposure, along with growing physical gold demand in Asia, were cited among the main reasons.

• ScotiaMocatta's Sunil Kashyap said that despite the selloff, there's still significant physical demand for gold, especially from India and China, which "supports prices."

• Commerzbank calls for the gold price to enter a boom period this year. Based on investment demand from Asian countries—China and India in particular—the bank predicted the yellow metal will rise to $1,400 by the end of 2014.

• Bank of America Merrill Lynch, in spite of lower price forecasts for gold this year, reiterated they remain "longer-term bulls."

• Citibank's top technical analyst Tom Fitzpatrick stated gold could head to $3,500. "We believe we are back into that track where gold is the hard currency of choice, and we expect for this trend to accelerate going forward."

None of these parties thinks the gold bull market is over. What they care about is safety in this uncertain environment, as well as what they see as enormous potential upside.

In the end, the much ridiculed goldbugs will have had the last laugh.

We can speculate about when the next uptrend in gold will set in, but the action for today is to take advantage of price weakness. Learn about the best gold producers to invest in—now at bargain-basement prices. Try BIG GOLD for 3 months, risk-free, with 100% money-back guarantee. Click here to get started.

January 2, 2014 (reprint)

New Trend Guarantees Higher Gold Prices

By Jeff Clark, Senior Precious Metals Analyst

If you're like me, you've bought gold due to the money printing policies of most developed countries and the effect those policies will have on the future purchasing power of our paper money. Probably also because there's no viable way for governments to escape the consequences of all the debt they've piled up. And maybe because politicians can't be trusted to formulate a realistic strategy to avoid any number of monetary, fiscal, or economic crises going forward.

These are valid, core reasons to hold gold in a portfolio at this point in time. But a new trend is under way, and someday soon it will be just as much a driving force for gold prices as anything else: a good old-fashioned supply crunch.

A few metals analysts have mentioned it, but it escapes many and certainly is off the radar of the mainstream financial media. But unless several critical factors reverse course, a supply shortage is on the way with clear implications for the price of gold.

The following four factors are combining to diminish gold supply. While we've touched on some of them before, put together they're creating a perfect storm that will, sooner or later, impact the gold market in several powerful ways. As these forces gather steam, you'll want to make sure you've already built a substantial position in physical bullion.

Factor #1: Production Pullbacks, Development Delays, Exploration Cancelations

Gold producers don't operate in a vacuum. If the price of their product falls by 30% over a two-year period, they've got to make some adjustments. And those adjustments, more often than not, result in lower production, delayed mine development plans, and cuts in exploration budgets. The response is industrywide, and even low-cost producers are not immune.

The drop in metals prices means some mines can't operate profitably, and if the losses exceed the cost of closure (and possibly, restart in the future), these mines will be shut down. As operations come offline, global output falls.

While lower metals prices are not what any of us want, they're long-term bullish because, as they say, the cure for low prices is low prices. If prices drop further, a greater number of projects will be unable to maintain production levels. For example, we know of several operating mines that, in spite of large reserves, will be forced offline if the gold price falls to the $1,100 level.

The impact on development and exploration projects is even greater—it's easy to postpone construction on tomorrow's new mine when you're worried about cash flow today. As a result, many companies have cut drilling projects and laid off geologists.

The chart below shows the precipitous decline in the number of drilling projects around the world.

Through the first nine months of 2013, 52% fewer drills have been turning compared to the same period last year. And it's not just fewer holes being poked in the ground—ore grades are declining too.

As of last year, ore grades of the ten largest gold operations are less than a third of what they were just five years ago, and less than a quarter of what they were 14 years ago.

Here's the troubling aspect: This trend cannot be easily reversed.

It takes about a decade to bring new projects on line, and even shuttered, recently producing mines held on "care and maintenance" take time and money to get going again.

In other words, even when gold prices start rising again, new mine supply will take years to rebuild. Many companies will find themselves with a lack of readily available ore, and the market with fewer ounces.

Lower metals prices obviously have an impact on how much metal gets dug up. This alone is bad enough for supply, but unfortunately it's not the only factor…

Factor #2: Now You See 'Em, Now You Don't

Many mining projects have both low-grade and high-grade zones. When prices fall, a company can mine the richer ore and still make money. It may sound shortsighted, but it can be the right thing to do to stay profitable and be able to survive in a temporarily weak price environment.

But high-grading, as it's called, can make low-grade ore part of a disappearing act. Here's how:

When metals prices are low and companies focus on high-grade ore, the low-grade material is temporarily bypassed. It's still physically there, so one might assume the company will come back at a later time to mine it. But not only is it not economic at lower metals prices, it may never get mined at all.

That's because some low-grade ore only "works" when it's mixed with high-grade ore. Even when gold moves back up, it doesn't matter, because the high-grade ore is gone. So it's not just gone legally, as per regulatory definitions of mining reserves—it may be economically gone for good.

Miners could return to some of these zones in a very high gold price environment (something well north of $2,000), but that's a concern for another day. The point for now is that many of today's low-grade zones would be written off if the high-grade they need to work is gone.

Critical point: You may read reports early next year that global production is rising. However, to the degree that's due to high-grading, it virtually guarantees lower production is around the corner.

Factor #3: Greed Is Good—Says the Politician

It's become increasingly difficult for mining companies to navigate the political minefield. Many governments have become so rapacious that supply is already suffering.

We've mentioned this issue before, but take a look at how governments and NGOs (nongovernment organizations) put an effective halt to some of the biggest precious metals discoveries seen this cycle…

Pebble Project in Alaska. Anglo American (AAUKY) spent $540 million on one of the biggest copper/gold discoveries ever, but recently announced that it will walk away from it. The company said it wants to focus on lower-risk projects and is undoubtedly tired of putting up with ongoing environmental scares and regulatory delays.

Fruta del Norte in Ecuador. Kinross Gold (KGC) bought Aurelian shortly after what many called the discovery of the decade, but the politicos demanded such a big slice of the pie that Kinross stopped developing the project.

New Prosperity Mine in British Columbia. Taseko Mines (TGB) has been relentlessly challenged by environmental activists at the world's tenth-largest undeveloped gold/copper deposit and pushed politicians to continually delay permitting.

Pascua-Lama in Argentina & Chile. This giant deposit has been postponed for several years, largely due to environmental issues and unmet regulatory requirements. Some analysts think it may never enter production.

Navidad in Argentina. Pan American Silver (PAAS) was forced to admit that the Navidad silver deposit—one of the world's biggest silver-primary deposits—was "uneconomic at any reasonable estimate of long-term silver prices" when the local governor announced he wanted "greater state ownership" and increased royalties from 3% to 8%.

Minas Conga in Peru. Newmont's (NEM) multibillion-dollar project was put on the back burner last year when the government gave the company two years to develop a way to guarantee water supplies for residents of the Cajamarca region.

Certainly bigger projects attract greater attention and scrutiny, but as it stands now, none of the above projects are in operation.

This list is by no means exhaustive; large numbers of smaller projects all around the world face similar challenges.

The bottom line is that finding economic gold deposits in pro-mining jurisdictions is getting increasingly difficult. The result? The metal stays in the ground.

Factor #4: Implosion Explosion

As you've likely read, the gold mining industry in South Africa is imploding.

• Labor strife: Strikes are common, and layoffs have numbered in the thousands this year.
• Rising costs: Labor and power costs have doubled since 2009. Some projects have been taken off line due to the one-two punch of higher costs and lower metals prices.
• Maturing assets: Many mines in South Africa are past their heyday and have forced companies to dig deeper. The deepest mine is now 2.4 miles below surface and takes workers a full hour to reach the bottom.
• Power inefficiencies: Electricity shortages are at their worst in five years. Poor power supply has led to blackouts and mining stoppages, and has made expansion difficult.
• Political interference: The industry has faced frequent calls for nationalization. Miners were told earlier this year they can stay private, though in exchange they were forced to pay higher taxes. How gracious of the politicians.

The breakdown in South Africa is important because as recently as 2006, it was the world's top producing country; it's now #5. Unfortunately, there's every reason to expect this trend to continue, in many countries around the world.

The result is—you guessed it—fewer ounces come to market.

These four factors are already affecting gold supply. Gold production in the US was already 8% lower in the first half of 2013 vs. the first half of 2012. Through June of each year, output dropped from 655,875 ounces last year to 623,724 in 2013.

The net result of this perfect storm is that we should expect gold supply to decline until prices are much higher. Even when prices do rise, management teams will be reluctant to expand operations, reopen mines, or buy new projects until they feel the new price level is sustainable. As a result, this trend will almost certainly last several years.

Based on the research we've done, it is my opinion that after a bump in output early in 2014, the shortfall will become increasingly evident by the end of the year and reach fractious levels by 2015.

If demand remains at current levels, or even if it falls by less than the decrease in supply, gold and silver prices will be forced up. And in an environment of currency depreciation, we should see more demand, not less. We have the makings of a classic supply squeeze.

Higher metals prices are not the only ramification, however: Investors will be required to pay higher premiums on bullion. Further, we can expect a lack of available product, most likely resulting in delivery delays or even rationing.

That's why it's so important to buy bullion now, before the storm. Even if you need to sell a little to maintain your standard of living, the effects on you will be all positive. The product you sell will…

• Fetch much higher prices
• Return the premium you paid—perhaps more than you paid
• Have a steady stream of ready customers

All it takes to capitalize on this opportunity is to recognize the supply shortage that's on the way and act accordingly.

Critical point: Buy the physical gold and silver you think you'll need for the future NOW.

One of the best places I know has among the lowest premiums available in the industry, and also offers several international storage locations in case things get bad in your home country. This breakthrough program is as liquid as GLD and offers greater safety than storing bullion at home. Click here to find out more.

December 19, 2013

A Fed Policy Change That Will Increase the Gold Price

By Doug French, Contributing Editor

For investors having a rooting interest in the price of gold, the catalyst for a recovery may be in sight. "Buy gold if you believe in math," Brent Johnson, CEO of Santiago Capital, recently told CNBC viewers.

Johnson says central banks are printing money faster than gold is being pulled from the ground, so the gold price must go up. Johnson is on the right track, but central banks have partners in the money creation business—commercial banks. And while the FFed has been huffing and puffing and blowing up its balance sheet, banks have been licking their wounds and laying low. Money has been cheap on Wall Street the last five years, but hard to find on Main Street.

Professor Steve Hanke, professor of Applied Economics at Johns Hopkins University, explains that the Fed creates roughly 15% of the money supply (what he calls "state money"), while the banks create "bank money," which is the remaining 85% of the money supply.

Higher interest rates actually provide banks the incentive to lend. So while investors worry about a Fed taper and higher rates, it is exactly what is needed to spur lending, employment, and money creation.

The Fed has pumped itself up, but not much has happened outside of Wall Street. However, the Federal Open Market Committee (FOMC), during their October meeting, talked of making a significant policy change that might unleash a torrent of liquidity through the commercial banking system.

Alan Blinder pointed out in a Wall Street Journal op-ed that the meeting minutes included a discussion of excess reserves and "[M]ost participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage."

Blinder was once the vice chairman at the Fed, so when he interprets the minutes' tea leaves to mean the voting members "love the idea," he's probably right. Of course "at some stage" could mean anytime, and there's plenty of room in the word "reduction"—25 basis points worth anyway. Maybe more if you subscribe to Blinder's idea of banks paying a fee to keep excess reserves at the central bank.

Commercial banks are required a keep a certain amount of money on deposit at the Fed based upon how much they hold in customer deposits. Banking being a leveraged business, bankers don't normally keep any more money than they have to at the Fed so they can use the money to make loans or buy securities and earn interest. Anything extra they keep at the Fed is called excess reserves.

Up until when Lehman Brothers failed in September of 2008, excess reserves were essentially zero. A month later, the central bank began paying banks 25 basis points on these reserves  and five years later banks—mostly the huge mega-banks—have $2.5 trillion parked in excess reserves.

I heard a bank stock analyst tell an investment crowd this past summer the banks don't really benefit from the 25 basis points, but we're talking $6.25 billion a year in income the banks have been receiving courtesy of a change made during the panicked heart of bailout season 2008. This has been a pure government subsidy to the banking industry, and one the public has been blissfully ignorant of.

But now everything looks rosy in Bankland again. The banks collectively made $36 billion in the third quarter after earning over $42 billion the previous quarter—showing big profits by reserving a fraction of what they had previously for loan losses.

The primary regulator for many banks—the FDIC—is even cutting its operating budget 11%, citing the recovery of the industry. The deposit insurer will have one short of 7,200 employees on the job in 2014.

That's a third of the number it had in 1991 after the S&L crisis, but almost 3,000 more than it had in 2007 just before the financial crisis.

So with all of this good news, the Fed may indeed be thinking they can pull out the 25bp lifeline and the banks will be just fine. What Blinder thinks and hopes is the banks will use that $2.5 trillion to make loans. After all, one-year Treasury notes yield just 13 basis points, while the two-year only kicks off 31bps. Institutional money market rates are even lower.

Up until recently, banks haven't been active lenders. The industry loan-to-deposit ratio reflects a tepid loan environment. During the boom, this ratio was over 100%. Now it hovers near 75%. It turns out that what the Fed has been paying—25 basis points—has been the best source of income for that $2.5 trillion.

However, banks won't be able to cut their loan loss reserves to significant profits for much longer. Loan balances have grown at the nation's banks the last two quarters and this will have to continue. If the Fed stopped paying interest on excess reserves and bank lending continues to increase, those $2.5 trillion in excess reserves could turn into multiples of that in money creation.

Banks create money when they lend. As Blinder explains, Fed-injected reserves are lent "creating multiple expansions of the money supply and credit. Bank reserves were called 'high-powered money' because each new dollar of reserves led to several additional dollars of money and credit."

Fans of the yellow metal, like Mr. Johnson who sees the price going to $5,000 per ounce, have likely been too focused on the Fed's balance sheet when it's the banks that create most of the money.

When the Fed announces it won't pay any more interest on excess reserves, and banks start lending in earnest again, the price of gold will be very interesting to watch.

And when that happens, you'll want to be prepared. Find out all you need to know about the best ways to invest in gold—in the FREE 2014 Gold Investor's Guide. Click here to read it now.

December 2, 2013

Zombies Make Dangerous Neighbors

By Doug French, Contributing Editor

On March 16, 2009, the Financial Accounting Standards Board (FASB), a private-sector organization that establishes financial accounting and reporting standards in the US, turned the stock market around and at the same time motivated banks to become the worst slumlords and neighbors imaginable.

Most people believe accounting is conservative, the rules cut and dried. Accountants make economists look frivolous. But accountants are people too, and FASB succumbed to pressure from Capitol Hill in the wake of the 2008 financial crash.

How It All Started

The S&P 500 hit a devilish low of 666 on March 6, 2009. More major bank failures seemed a certainty. Somebody had to do something—and in stepped the accounting board prodded by the House Committee on Financial Services.

The board changed financial accounting standards 157, 124, and 115, allowing banks more discretion in reporting the value of mortgage-backed securities (MBS) held in their portfolios and losses on those securities. Floyd Norris reported at the time for the New York Times,

The change seems likely to allow banks to report higher profits by assuming that the securities are worth more than anyone is now willing to pay for them. But critics objected that the change could further damage the credibility of financial institutions by enabling them to avoid recognizing losses from bad loans they have made.

"With that discretion," fund manager John Hussman writes, "banks could use cash-flow models ("mark-to-model") or other methods ("mark-to-unicorn")."                                                                   

And author James Kwak wrote on his blog "The Baseline Scenario" just after FASB amended their rules: "The new rules were sought by the American Bankers Association, and not surprisingly will allow banks to increase their reported profits and strengthen their balance sheets by allowing them to increase the reported values of their toxic assets."

Banks were loaded with securities containing subprime home loans. When borrowers stopped paying en masse, the value of these securities plunged. Until the change in March 2009, these losses had to be recognized. With financial institutions leveraged at upwards of 30-1 at the time, the sinking valuations made much of the industry insolvent… until March 16, 2009. Since then the S&P has nearly tripled.

Bad-Neighbor Banks

Nobody has more friends on Capitol Hill than bankers, who are not wild about free-market capitalism when it works against them.

"Bankers bitterly complained that the current market prices were the result of distressed sales and that they should be allowed to ignore those prices and value the securities instead at their value in a normal market," Norris wrote for the New York Times on April 2, 2009. 

The change in the rules first of all allowed banks to remain in business. Second, with banks having wide discretion in valuing mortgage-backed securities, they had little incentive to care for the collateral of the loans contained in those MBSs. It may even be in a bank's best interest to leave houses in what the Sun Sentinel newspaper called "legal limbo."

Last year the Florida paper devoted a three-part series to "Bad-Neighbor Banks." When homeowners walk away, one would think it would be in the banks' best interests to gain legal possession as soon as possible and either sell as is, or repair and sell quickly.

Apparently that's not the case. All across Florida, banks "have halted foreclosure proceedings because the remaining equity in the properties is deemed inadequate to cover the banks' costs to reclaim title and maintain, refurbish and sell them," Megan O'Matz and John Maines wrote for the Sun Sentinel.

When pressed about weed- and rodent-infested abandoned properties, banks often pointed the finger at mortgage servicers. South Florida attorney Ben Solomon, who represents condos and community associations in foreclosure cases, stated, "We see bank delays every day. They really continually have been getting worse. More and more time is going by."

As banks sit on assets indefinitely without having to recognize a loss, homes get lost in vast bank bureaucracies. When the banks finally figure out what they have, "lenders also have been walking away from foreclosure actions involving homes with low market values, after their cool-headed calculation that the homes cannot resell for enough to offset the costs of foreclosing, repairing, maintaining and marketing them," O'Matz and Maines wrote.

Now banks have rebuilt their balance sheets and are able to withstand losses from bad property loans. Enough banks are walking away from properties that the Treasury Department issued "guidance" in 2011, advising to do so cautiously.

Banks that do foreclose with tenants living in a property are notorious for not maintaining their newly acquired properties. "Some banks are failing to follow local and state housing codes, leaving tenants to live in squalor—without even a number to call in the most dire situations," writes Aarti Shahani for NPR.  

I'm not sure why anyone would expect banks to be good property managers. "Banks don't want to take your home and own it," Paul Leonard, senior vice president of the Housing Policy Council, told NPR. "They're stuck with plumbing and electrical maintenance that is well beyond their mission. They have to hire a property manager to take care of the property."

Global banking behemoth Deutsche Bank foreclosed on 2,000 houses in the Los Angeles area between 2007 and 2011. The big bank was such a bad landlord, the city filed suit and the bank recently settled the case by paying $10 million—which the bank didn't even have to pay itself. According to Deutsche Bank officials, "The settlement will be paid by the servicers responsible for the Los Angeles properties at issue and by the securitization trusts that hold the properties."

If banks, not to mention Fannie Mae, Freddie Mac, and FHA, had been allowed to fail, the housing market would have cleared and stories like these would be a thing of the past. However, one intervention begets another, and the market is held stagnate.

Auctions: Bids Coming Up Short

While there are housing booms popping up in various cities, Bloomberg just reported a failed auction by the US Department of Housing and Urban Development (HUD).

After successfully selling 50,000 non-performing, single-family FHA-insured loans since 2010, HUD deemed the bids for $450 million too low to accept at their October 30 sale.

(As an interesting aside, the FHA was a product of Roosevelt's administration during the Great Depression and hasn't required the help of taxpayers until this September when the agency asked for a $1.7 billion bailout to keep operating… a piece of news that got drowned out by the looming government shutdown, the slowly developing Obamacare train wreck, and the Breaking Bad series finale.)

HUD has another $5 billion auction scheduled and is currently qualifying bidders. The auctions run through the website DebtX, which has compiled a Bid-Ask Index to compare recent years' buyers' bid performance versus seller expectations. For the last three years, bids have come up short of sellers' ask prices. The index prior to the failed auction was -5.7%.

Meanwhile, the banking industry purrs right along earning a record $42.2 billion in the second quarter.

The Banks Are the Only Ones Profiting

For the banks, this was the 16th consecutive quarter of year-over-year increases. A primary driver of the record earnings is less money being socked away in loan-loss reserves. Banks put away the lowest loss provision since the third quarter of 2006. The banking industry's coverage ratio of reserves to noncurrent loans is still only 62.3%, far below what was once the standard of greater than 100%.       

Remember when President Obama and the Treasury Department claimed the bank bailouts were generating a profit? Special Inspector General Christy Romero overseeing TARP said, "It is a widely held misconception that TARP will make a profit. The most recent cost estimate for TARP is a loss of $60 billion. Taxpayers are still owed $118.5 billion (including $14 billion written off or otherwise lost)."

Fannie Mae and Freddie Mac have turned things around and are generating huge profits, you say?

Not so fast.

According to bank analyst Chris Whalen, "If we were to implement the guidance from FHFA today, it is pretty clear that the profits of the GSEs [government-sponsored enterprises] would have been largely offset by the allocations needed to replenish the reserves." GSE profits would disappear, and $10 to $20 billion would need to be added to reserves.

"Not only does FNM [Fannie Mae] seem to be unprofitable under the new FHFA guidance, but payments made to Treasury might need to be reversed," writes Whalen.

A zombie government armed with accounting tricks has bailed out a zombie banking industry using even more financial phoniness. A few numbers pushed here and there, and the industry is earning record profits. But out in the real world where people live and work, things aren't so rosy. Zombies make negligent landlords and dangerous neighbors.

Read more from Doug French, former president of the Ludwig von Mises Institute, in the Casey Daily Dispatch—different writers, different topics, different investment sectors each day of the week. Get it free of charge in your inbox, Monday through Friday—click here.

October 20, 2013

The Greatest Opportunity in 30 Years

By Jeff Clark, Senior Precious Metals Analyst

I caught myself daydreaming last week…

It's October 27, 2008, and Silver Wheaton (SLW) just hit $3 per share. I buy 10,000 shares, more than I've ever devoted to any one stock. I sell half when it hits $33 per share and pocket $150,000 after a 1,000% gain. I pay off the mortgage, and my wife quits work—and I still have 5,000 shares…

Not a bad daydream, eh? I don't know how many investors actually had the intestinal fortitude to plunk down a big lump of cash on a stock at that time—but Silver Wheaton did indeed offer that 1,000% return, and more.

When you look back at the investments that have made the most money over the past few decades, they've always been assets that had reached an extreme—an extreme low or an extreme high. Buying gold at $250 per ounce in 2001… buying tech stocks in the early '90s or Apple Computer at $8 per share in 2003… shorting real estate in 2007 or the stock market in 2008… the list goes on.

Each of those speculations led to massive returns only because the price of the respective asset was either dramatically undervalued and poised to take off or, in the case of the short sales, a bubble ready to pop.

Paradoxically, such opportunities aren't that hard to find—the truth is, they sprout up all the time. What is hard to find is the type of investor who has the guts to take advantage of those opportunities.

Fact is, most people run from assets that are at an all-time low… and happily buy into stocks that are reaching their peak. As legendary resource investor Rick Rule likes to say, "You're either a contrarian or you're a victim."

When you think about it, the strategy for getting rich—a strategy regularly applied by the Doug Caseys and Rick Rules of the world—is deceptively simple:

• Find an asset at an extreme (low or high) and determine if it's headed in the other direction anytime soon;
• Take a significant position and hold the fort while market forces play out.

That's all. The difficult part is to muster the courage to hold on when all your senses are screaming that it's a huge mistake, that your investment will never pan out, that today's fool (you) is tomorrow's loser.

If, on the other hand, you don't mind going where others fear to tread, opportunities practically jump into your outstretched hands.

Here's the best one I know of right now: gold stocks.

Actually, to say they're a "good opportunity" is a laughable understatement: Gold stocks are at an extreme low we haven't seen in over 30 years in this industry.

Let me prove it to you.

An effective way to measure the true value of gold stocks is to compare them to the gold price. Other things being equal, a gold producer selling for $20 per share at a $1,500 gold price is a heck of a lot cheaper than when gold's at $1,000. (When the price of a product is higher, the stock is more valuable, and vice versa.)

The XAU (Philadelphia Gold and Silver Index) consists of 30 gold and silver stocks and began trading in December 1983. Here are the first 23 years of the Index's ratio to gold.

Any time the ratio reached 0.20 or below, gold stocks were undervalued in relation to gold, and investors who bought at those inflection points made a profit. Conversely, once the ratio reached 0.34 or above, stocks were overvalued and due for a pullback.

For 23 years, from its inception through 2007, the XAU/gold ratio provided fairly reliable feedback for investors.

Now let's add the rest of the data.

Today, the XAU/gold ratio is at a historic low of 0.07.

To fully appreciate what this means, look at these former lows for comparison:

• It's lower than the 2008 gold stock selloff;
• It's lower than the "nuclear winter" of the mid-'90s;
• It's lower than the very beginning of the gold bull market in 2001.

Right now, gold stocks are like a rubber band that's being stretched to an extreme. As all rubber bands do, it will snap back. And not just that; based on how extreme the undervaluation has become, they're bound to be among the most profitable investments of this generation.

A year ago, I pointed out how cheap gold stocks were—and yes, they managed to get cheaper still. But that fact only underscores how vast this opportunity really is.

Current sentiment in the precious metals sector, especially the stocks, is beyond dreary: it's pitiful. At the Toronto Stock Exchange, where most mining stocks are traded, security guards are now doubling as suicide watchmen. (OK, I made that up.)

What I didn't make up is that your chances of following in Doug Casey's or Rick Rule's footsteps—and making similar breathtaking returns—have never been higher. Upside is at its greatest when even the cab driver laughs at the thought of buying a gold stock.

As conditions return to normal, huge profits will be made… by those who didn't listen to the investing herd and its mouthpieces in the mainstream financial media.

Is there a guarantee gold stocks will rebound and deliver life-changing profits? I'm sure you've heard the "death and taxes" thing, so I don't have to answer that question.

And there are some scenarios that could conceivably prevent gold and silver from rebounding—possibly killing off the miners for a generation:

• If billions of Chinese, Indians, and other Asians finally realize that unbacked paper currencies are much more desirable to hold than physical gold and silver…
• If Ben Bernanke vows never to print another bloody greenback again, and neither does his successor…
• If Congress unanimously agrees to lower, instead of raise, the debt ceiling and drastically cut all but core spending, for the health of the country and its citizens (I know, don't make me laugh)…
• If solar panel manufacturers and dozens of other industries find a valid replacement for silver in their products…
• If the insane amount of $700 trillion in derivatives circling the world like a cloud of toxic particles suddenly evaporates…
• If Beijing calls a press conference and proclaims they were mistaken and now feel no need to diversify out of the US dollar, that it's the one and only reserve currency the world will ever need…

… then we might see that happen. But I'm not holding my breath on any of these. (A phrase about snowballs and hot places comes to mind.)

In the meantime, I bought another gold Eagle last month.

Gold investing comes in many forms—bullion coins, paper proxies like gold ETFs, gold accumulation programs, large- and small-cap gold stocks. Find out which one is right for you, in my 2014 Gold Investor's Guide that you can read free of charge by clicking here.

Learn when is the best time to buy gold and where to get it… the 3 best ways to invest… and how to pick the right gold stocks. Click here to get your free report now.

October 10, 2013

How to Avoid a Devastating Retirement Planning Mistake

By Dennis Miller

Think you have reached the holy grail of retirement? Good financial planners use sophisticated computer programs to help us set retirement savings goals. They input dozens of variables based on assumptions about how the world works, and out pops a number telling us how much we should save during our working years. That number, combined with Social Security and any pension we're lucky enough to have, is supposed to be the holy grail of retirement. Reach it and you're set for life.

Not so fast! That thinking can spell disaster. The assumptions that go into those programs are just that, assumptions. They are educated guesses at best, but they could be plain wrong. Your math isn't the problem, and neither is your financial planner… it's the faulty assumption that Social Security, your government pension, or even your "guaranteed" private pension is guaranteed.

In a recent online event, David Walker, former Comptroller General of the United States, dropped the term "fiscal cancer" and said, "If you point out [the federal government's] total liabilities and unfunded promises for Medicare, Social Security, and a range of other things, it is actually over 70 trillion dollars now, and growing by about six million a minute."

Those are big numbers, but what do they really mean? David continued:

"If we have a debt crisis, you will end up having much higher interest rates, much higher inflation …[and a] dramatic decline in the stock market. The dollar would probably be hit very hard, and those are not positive things… Those are not conditions that we ever want to see in this country.

"Where do you start? You need a plan. You need a budget. You need performance metrics. We have been in business since 1789 as a republic, and we still do not have those three basic things. No plan, no budget, no performance metrics. No wonder we have a problem."

The problem isn't just Social Security or the federal government. It's cities like Detroit, and even large private companies. I have friends who retired from the private sector with nice pensions. Their former employers went bankrupt and drastically cut their pensions. These friends had hit their retirement savings goals and thought they were set. What was their biggest mistake? Assuming their guaranteed pensions would last forever.

Social Security has changed quite a bit just in the last few decades. Up until the 1980s, benefits were not taxed. Now, some of them are. Can anyone guarantee there won't be additional changes? No.

When I started working, full retirement age for Social Security was 65. Now it is 67 for most folks. Can anyone guarantee it won't rise even more? No.

There are many ideas for "fixing" Social Security:

• Amend the method of calculating inflation to a "chained CPI" which will reduce inflation increases for retirees.

• Means testing Social Security, which amounts to benefit reductions for many.

• Moving back the retirement age even further.

• Increasing Social Security taxes, and perhaps eliminating the wage cap altogether.

These ideas are all speculation. We don't know what our government will do when faced with a debt crisis. David Walker made it clear:

"Look, the fact is that the government has grown too big, promised too much. It is going to have to restructure. The question is, is it going to restructure prudently and preemptively, or is it going to wait until we have a debt crisis and have to do dramatic and draconian things?"

As individual retirees or investors planning for retirement, so much of this is out of our control. Nevertheless, there are steps we can take to protect ourselves even if the assumptions we take for granted turn out to be false. David prescribed the same cure for individuals as he did for the government: a plan; a budget; and performance metrics. Of course, those three tools should leave wiggle room for assumptions that may be erroneous.

Assuming that Social Security or a private or government pension will be waiting for us in its current form is foolhardy. Whether we are working with a financial planner or doing the work ourselves, we need to set savings targets much higher than our "magic retirement number." I have never heard one retiree complain about saving too much money.

You can hear all of David Walker's thoughts on this topic, as well as other experts including popular news personality John Stossel, in a very recent and timely online event called America's Broken Promise: Strategies for a Retirement Worth Living. This free event’s all-star cast explains the unique challenges retirees face today—challenges far different from what we were raised to expect.

The presentation is hosted by my colleague, David Galland of Casey Research, and features John Stossel, formerly on ABC's 20/20 and now with Fox Business Network, David Walker, former Comptroller General of the United States, Jeff White, President of American Financial Group, and me, Dennis Miller, of course.

This is the one event you must see to ensure you retire on your own terms. Use this link to find out more and watch right now.

October 9, 2013

When the Offense Changes, the Defense Needs to Adapt

By Dennis Miller

When it comes to just about any sport, you don’t blindly use a strategy without considering your opponent’s next move, his strengths, and his weaknesses. To win, you have to adapt.

While the investment world can seem like the same old game with the same old rules, it’s always changing around the edges. If you don’t adapt, you won’t win this game either. With the ten-year US Treasury recently closing as high as 2.98%, we face new threats, and the definition of a good defensive stock has changed accordingly. Now they must be defensive and immune to higher rates.

High-yielding stocks are often the most interest-rate sensitive, which makes the game even more challenging for retirees. So, how do you stay defensive while still receiving yield? I turned to our crackerjack team of analysts for some answers.

Let’s start with where defensive stocks stood prior to the rapid rate increase. With yields near record lows, investors piled in to dividend stocks in search of income. But they didn’t pick just any stocks. With 2008 still fresh in investors’ minds, they specifically chose defensive stocks with a beta of less than 1. For a quick review, a beta of one means a 10% move in the stock market should theoretically move the stock 10%. A beta of 0.5 means a 10% move in the market should move the stock only 5%.

But it wasn’t just retail investors choosing defensive stocks with a beta of less than 1. More sophisticated analysts suggested moving into these stocks as well. One of the most common Wall Street valuation models examines three primary factors: dividends; beta; and the US Treasury rate. When the beta and Treasury rates are low and the dividend is high, a stock is considered to be more valuable. This model worked quite well. In fact, a number of stocks in the Money Forever portfolio that are well in the green were partially evaluated this way.

When Treasury rates rose, every stock evaluated by that Wall Street model was necessarily worth less. When risk-free Treasury yields are a little higher, risk in the market for yield necessarily looks worse. With that said, some dividend stocks were hit much harder than others. In particular, utilities and REITs took the biggest dives, but they weren’t the only ones. Even our dividend stocks were a bit shaken up, but not nearly as bad as some others.

Why did some dividend stocks get hit while others stayed afloat? It goes back to that Wall Street valuation model. Some of our stocks were partially evaluated using the same approach. The very key word here is “partially.” We had other great reasons for investing in them. The beta and dividends were nice, but they weren’t the only worthwhile qualities. Our Five-Point Balancing Test is a big reason for this difference. We were specifically searching for stocks with some appreciation potential.

In contrast, utility stocks don’t fit that bill. Their main purpose was a safe dividend. For many years, utility stocks were referred to as “widow’s stocks.” They were a safe investment with a decent yield. Many investment counselors put a lot of their clients’ money into these types of investments. Because they were considered safe, those counselors were unlikely to be accused of mismanagement.

When interest rates tumbled, many additional billions of dollars were poured into utility stocks, and their prices rose. In a sense, they began to act like bonds. And since rising interest rates hurt bond prices, the same was true for dividend stocks. The most defensive companies with the least growth and the highest dividends were the hardest hit. While many investors felt safe because their money was invested in solid companies, they were not protected from interest-rate risk.

Unfortunately, that was common wisdom for lots of investors: find the biggest yield and the most defensive stock. There are two solutions to this problem:

1. Find stocks where the growth outweighs the interest-rate sensitivity. If a stock’s primary value driver isn’t the dividend, it will be less affected by rising rates. Similarly, if a company has good growth prospects and a high dividend, it will be minimally affected.

2. Find defensive stocks without a large dividend. As investors sought yield, they piled into defensive, high-yielding stocks. If an investor just wanted a defensive stock, he often found himself piled on the same heap as the yield-seekers. One way to avoid the problem of rate sensitivity and overvalued defensive yield stocks is to search for places where yield-seekers aren’t looking, i.e., defensive stocks with a small dividend. These stocks don’t necessarily have tiny dividends—just not enough to catch the eye of yield-starved investors.

However, note that there is a caveat to the first solution I just mentioned. You still need to concentrate on defensive industries. A company can have good dividends with growth and appreciation, but it might be a terrible investment in a downturn. The financial sector is a perfect example of this. The dividends are good and a strengthening economy can give the sector growth, but those dividends won’t pay off should another 2008 be just around the corner.

With that in mind, our team produced The Cash Book, a comprehensive guide that reveals how to protect your wealth in this new age of finance. It’s a handy guide filled with ideas you won’t hear about from your financial advisor, like how to legally get around the FDIC’s $250,000 cap on insurance, the 10 safest states to do your banking, and how the average person can open an account in Switzerland without attracting extra scrutiny from the IRS.

Normally The Cash Book is only available to Money Forever subscribers, but because it’s now more important than ever to diversify our retirement nest egg away from traditionally "safe" investments, we’ve made it available on its own. Get these easy-to-use strategies for protecting your wealth from the many threats facing us today: click here for your copy.

October 4, 2013

The Ultimate Layer of Financial Protection

By Dennis Miller, Senior Editor, "Miller's Money Forever"

Recently I spoke with the always-insightful Dennis Miller about the critical importance of internationalizing your retirement savings. It's an uncomfortable fact of life that governments that are desperate for cash inevitably find ways to siphon off the purchasing power of their citizen's retirement savings. Poland, which recently partially nationalized private retirement savings, is just the latest example of this disturbing trend, one that will likely spread to other countries that are in fiscal trouble.

This interview appeared in a recent issue of Miller's Money Forever, where you will find top-notch guidance on how to ensure that your retirement savings survive longer than you do—no matter what the economy does. 

Nick Giambruno, Senior Editor
InternationalMan.com

I am delighted to have Nick Giambruno, the senior editor of International Man, in our hot seat this month. As you might have guessed, Nick is a real expert on all things international. From international real estate to international government regulation to international business, Nick is the go-to guy. While my passport is good for another eight years, I'm sure he has to replace his annually. So, without further ado…

Dennis Miller: Nick, welcome to Money Forever. Please tell us about your last trip. Cyprus, I believe?

Nick Giambruno: Thanks, Dennis. It's great to be here. Yes, it was Cyprus, with the original "International Man" himself—Doug Casey. Cyprus is the best recent example of how a desperate government acts and how internationalization can protect us.

As you are no doubt aware, on a seemingly ordinary Saturday in March when people least suspected it, the government of Cyprus quickly closed the banks, imposed capital controls, and announced the confiscation of customer deposits. Doug and I went to see the fallout firsthand. The in-person perspective was helpful for learning when and how the next Cyprus will occur.

Political Diversification Is a Universal Need

Dennis: Today I want to focus on the financial issues of seniors and savers. For the most part, our subscribers are staying put geographically. So why should they invest in international companies? Why use a broker outside of their home country? These ideas make folks in my generation squirm a bit. So tell us why seniors—even seniors with modest portfolios—should internationalize some of their assets.

Nick: Seniors, savers, and others depending on fixed, nominal incomes should definitely consider internationalizing a portion of their assets. They often suffer the most from the predictable actions any desperate government may take as its fiscal health deteriorates. That includes capital controls, wealth confiscation through currency devaluations, one-off emergency "taxes" on financial accounts—which occurred in Cyprus—nationalizing retirement accounts, and various other means.

It is incorrect to assume this couldn't happen in your home country. If history shows us anything, it's that it could happen in any country. That's why taking practical measures to protect yourself and your family is prudent.

These risks are particularly high under most Western governments, including the US. They have current debt loads and future spending commitments that all but guarantee that eventually they will try to unscrupulously grab as much wealth as they can.

This is why Doug Casey has said over and over that diversifying your political risk through internationalization is his single most important recommendation today.

Through internationalization, you place your money outside the immediate grasp of your home government. This diversifies your political risk. When wealth is outside of its immediate reach, it is much more difficult, if not practically impossible, for a desperate government to confiscate it on a whim.

For example, some Cypriots did their homework and concluded that their home country was not a safe place to store a lot of cash. These people moved their savings to different countries, and avoided the so-called one-off emergency levy.

The need for political diversification is universal. It does not just apply to Americans or Europeans, but to everyone in the world. Of course, there are varying degrees of protection. People with modest means can internationalize, often without leaving their own home. Whether it's purchasing a foreign public company with your US brokerage account, purchasing real estate in a foreign country, or anything else in between, everyone can internationalize their assets to some degree.

Also—and this critical—as long as you follow the reporting and other legal requirements, internationalizing your assets is completely legal. There are a lot of popular misconceptions about that, so it's important to emphasize.

Retirement Accounts Are a Common Target

Dennis: So, when a desperate government can't pay its bills, it just takes money from people who have it?

Nick: Yes, that is exactly correct. The methods and the rhetoric may vary, but the end result is always the same. Any government that gets sufficiently desperate will siphon off as much of people's real purchasing power as it can.

Take IRAs and other retirement accounts, for example. They are often the next targets after a desperate government imposes capital controls and implements other broad wealth-confiscation measures, such as official currency devaluation.

Here's how it usually happens. A government will forcibly convert assets held in retirement accounts into "safer" assets, such as government bonds. Naturally, politicians will slickly sell the idea to the public as "for their own good." In reality, it's a way for a government to finance itself—by forcefully dumping its unwanted debt onto seniors and savers.

Dennis: How can internationalizing your retirement account protect you?

Nick: It's much more difficult for the government to convert your retirement assets if they are outside of its immediate reach. If you have a standard IRA from a large US financial institution, it would only take a phone call from the US government and poof, your dividend-paying stocks and corporate bonds could instantly be transformed into government paper.

It's happened in Argentina and numerous other countries, and it is certainly an option on the table in the US. Heck, there are already whispers about the US government assuming some risk for US retirement accounts. That's code for forced conversion of assets into government bonds.

Obviously, this is much harder for the government to do if your retirement assets are sufficiently internationalized. It is pragmatic and prudent to structure your IRA and retirement savings in an internationally diversified way. As a practical matter, international assets are not as easy confiscate.

For example, you can structure your IRA to invest in foreign real estate or certain types of physical gold stored abroad. If and when there is some sort of decree to convert or otherwise confiscate the assets in your retirement account, your internationalized assets ensure that your savings won't vanish at the stroke of a pen.

A Multistep Strategy

Dennis: Does this really apply here in the US? What about Europe and Japan?

Nick: Absolutely. Political diversification makes sense for everyone on the planet. For people in debt-ridden countries, it's doubly important.

At the very least, you can diversify into a foreign currency or foreign company—steps you can take using most US brokerage accounts. However, these steps only internationalize your savings to a small degree. If your foreign investments are in a US brokerage account, they are still within the immediate reach of the US government.

Holding assets in a foreign brokerage account—say, in Singapore or Hong Kong—creates a much higher level of protection. Plus, if some of your cash and savings are in a foreign brokerage account, they won't be trapped if your home country institutes capital controls.

Again, think about Cyprus. Doug Casey and I met with several Cypriot business people who said they were unaffected by the capital controls and confiscation because they kept cash in banks outside of Cyprus. Had they kept their money in Cyprus, it would have been subject to strict limitations on withdrawals and sending money abroad.

By holding their cash in Switzerland, for example, Cypriot companies diversified some of the political risk associated with their home country. Internationalizing part of your assets is like an insurance policy—one you are no worse off holding.

Dennis: OK, you've sold me. Keeping all of your money in your home currency and in your home country is risky. You could lose a lot, either through high inflation, heavy taxation, or outright confiscation.

At the same time, many folks with more modest portfolios want their money close by. What can they do to protect themselves?

Nick: Storing some physical gold in a foreign country is one of the best ways people with modest means can internationalize their savings. A number of service providers can help you do this from your own home. In some cases, you can also open foreign bank and brokerage accounts remotely without meeting high minimum-balance requirements.

A private, non-bank vaulting company is perhaps the best way to hold gold abroad. They allow you to rent a small safety deposit box in places like Singapore, Switzerland, Dubai, or Hong Kong.

Dennis: Our regular readers know that part of my Roth IRA is offshore. Many readers were surprised to learn that was legal. Are there easy ways to internationalize part of your IRA?

Nick: Yes, there are turnkey ways to do it. I touched on some of the details above. With a couple of important exceptions and limitations, it is possible and practical to structure your IRA so that it can open offshore bank and brokerage accounts denominated in foreign currencies, and invest in assets like foreign real estate and certain types of physical gold held abroad.

Success Demands Immediate Action

Dennis: Nick, I know you are a boots-on-the-ground type of guy. You've traveled to countries like Cyprus to learn how people have protected their money. Is there any common thread among those who successfully protect themselves?

Nick: Smart people who live in countries like Cyprus and Argentina took action before it was too late. They saw the writing on the wall and didn't wait. When you're trying to protect yourself from the destructive actions of a desperate government, internationalizing a year early is always better than one day too late. When the window of opportunity closes, it shuts tight.

In order for these destructive measures to be effective, they have to be sudden, surprise attacks. That was the case in Cyprus. On a seemingly ordinary Saturday morning, Cypriots awoke to find that the banks had been indefinitely closed and capital controls had been put into place. Their savings were no longer safe, and it was a surprise to most.

The critical lesson here is: act before it is too late. To me, the financial direction of the US government and its implications are crystal clear. The window of opportunity to internationalize and insulate yourself is still open, but it gets verifiably smaller with each passing week. Now is the time to start developing and implementing your strategies.

Dennis: Nick, beyond protection from a desperate government, I think of internationalizing your assets as the ultimate investment diversification. Even if a Cyprus-type event never happens to us, it's still the best way to hedge against inflation or deflation. Am I overstating my case here?

Nick: No, not at all. If one country is suffering an economic downturn, others are growing. If one currency is going down in value, others are rising. We used to credit air travel with making the world a much smaller place. The Internet has facilitated that ten times over. While Americans are used to investing in American companies, many people, even those with smaller portfolios, are now looking for the best investments in the world. If protecting your portfolio through diversification is important to you, then looking at worldwide opportunities is the way to go.

Dennis: Any final ideas you want to share with our subscribers?

Nick: I urge all of your subscribers to look at the worst-case scenario. No one knows for sure how far our government will go to confiscate wealth. At the same time, even if our government does not go to extremes, we are still ahead. If an investor diversifies internationally and takes advantage of worldwide opportunities, he will still be better off financially, and his portfolio will be much better protected.

Dennis: Nick, it's been a pleasure. On behalf of all our subscribers, thank you for taking the time to share your thoughts.

Nick: My pleasure, Dennis; thank you for asking me.

In Retirement Reboot, I discussed how easy the decision to go international was for Jo and me. On the one hand, the thought of sending part of our hard-earned money to a country we had never visited to be looked after by a highly recommended person we had never met, sounded absurd.

But on the other hand, we looked at the direction our country was headed. The annual deficit had doubled, and it was about to double again. We could see that sooner or later, this could destroy our wealth through high inflation. For us, going international was portfolio insurance, plain and simple.

Then I attended When Money Dies in the fall of 2011, where I spoke with people who had lived through economic collapse. Their stories doubled my confidence in our decision.

If you want to learn more, Nick and his team have published an inexpensive special report, Going Global 2013. It is the best, most comprehensive report on internationalization I have ever read. Unlike most of the material on internationalization, which is written for ultra-wealthy investors (by someone who is trying to garner their business), this report is written for folks like you and me.

October 1, 2013

Getting Your Hands on Real Research

By Dennis Miller

When my father-in-law died, my wife and I took over the responsibility of looking after her mother, who I affectionately called "grandma." We quickly connected with a very nice lady who was a broker at one of the top brokerage firms in the country.

Over time she became a mentor, advisor, and friend. Although she's been retired for quite some time, we're still in contact and are very close. If I were to pick one attribute that sets her apart, it would be honesty. Ask her a tough question and she'll give you a straight answer, even though it may cost her some money.

Around the time that many of the online discount brokerage firms were emerging, our broker put in a trade where we sold 1,000 shares of a stock at $24/share, so the trade was $24,000.00. When we got the transaction sheet in the mail, there were some small fees, but her firm took a $240 commission just for handling the transaction. I called and asked her how the firm justified those fees to its clients. We were being bombarded with television commercials, letters, and flyers from discount brokers who would handle the transaction for only $19.95. Basically, I asked her what the extra $220 in commissions bought us.

She was very straightforward, and it was apparent I was not the first client to ask. She said that she cut the commission to rock bottom, meaning there was no lower fee structure available, and then went on to explain that discount brokers were merely transactional brokers with no research departments and no advice. They just processed transactions. By contrast, her firm had all these high-priced folks in New York who did tons of research and analysis and provided advice and guidance.

I then (with her help) wrote a letter stating that I was toying with making an investment in a particular market but wasn't quite sure if the sector made sense – and if it did, what particular stock would be the best choice? She took my letter, put her cover letter on top of it, and sent it to her firm's gurus in New York.

A short time later, we got back a 2-3 page report discussing the sector and recommending a particular company to invest in. They recommended it as a "strong buy" simply because 8 of 10 major firms recommended the company as a "buy or strong buy." Other than the standard information about growth, P/E ratios etc., there was really not a whole lot of support behind why the particular stock was supposedly so appealing.

Honestly, I went nuts when I read the report, because simply saying that 8 of 10 major firms recommended something was not research. Actually, it was an admission of delegating the research to some other firm and then hoping it did it right. Perhaps that was why the P/E ratio was so ridiculously high; the investing guru Benjamin Graham would have been telling his clients to sell the same stock.

So I asked our broker, "What happens if some researcher gets a tip from his barber on a stock, then he goes to the office and recommends it as a 'buy.' Then another firm picks up on it and also recommends it, and pretty soon 8 of 10 recommend it. That alone would drive up the price of the stock, but who actually did any research?" She grinned and mentioned something about the integrity of the individual doing the job.

When I wrote the letter, I'd wanted someone to do the type of research Benjamin Graham discussed in The Intelligent Investor. I wanted them to find a stock that's not on anyone else's list with a P/E that was within reasonable guidelines. Heck, by the time 8 of 10 major firms have rated it as a "buy or strong buy," it's too late. At that point Graham and his clients would be taking their profits. In today's lingo, the Casey group would have recommended you sell at least half of it and perhaps retain some of the investment as a "free ride."

Not long after that, our friend retired, and I switched the family accounts to a discount online broker. As I was surfing its website, I noticed a "Research" tab. I clicked on it and typed in the symbol of the stock, and up popped several available reports and a one-page summary. I realized then that what we got from the high-priced, old-line brokerage firm was not much different than the summary that had just popped up on my computer screen.

Sad to say, some of the things that I've seen passed off as research are like sugar-free Jell-O topped with fat-free Cool Whip; it has the illusion of substance… but not much else.

For the next several years, what little I had for research I did through the search engine of my online broker. It was boring, tedious, and time-consuming. Perhaps like some other investors, I wanted to find an easy way out.

At that time I was subscribing to several investment newsletters that all touted their research and weren't shy about making specific investment recommendations, something the discount brokers stayed away from at the time. Some did their job better than others.

For close to a decade I didn't use investment services because we had most of our portfolio in CDs. It wasn't until my wife and I began to actively self-manage our portfolio that we started subscribing to highly-specialized newsletters. These newsletters had true experts in a particular sector or investment type doing the research and making the recommendations. This isn't meant to be a shameless plug, but I read a couple of the Casey newsletters like BIG GOLD, where there are folks on the ground, photos of the various mines, backgrounds, and where the author had known the principals for a couple decades. I was impressed. I'd never read any of this kind of stuff sifting through information from my discount broker, nor had I seen this level of detail from the so-called "full-service" brokers.

By comparison, I saw recommendations for companies I had never heard of and never saw references to any other firm or service making those recommendations.

In an edition of The Intelligent Investor, there's an article in the appendix  in which the author tracked the career of five folks trained by Benjamin Graham. Each went out on his own, applied the techniques he was taught and over time put together a portfolio that made him and his clients very wealthy. However, there was almost zero overlap between those portfolios. Each had used the Graham criteria – but found his own recommendations. If 8 of 10 major firms recommended a given stock as a "buy or strong buy," they all would have passed it over and moved on.

It makes sense to do your due diligence on the companies you invest in. But you should also understand the motivations and incentives driving your gurus, your subscription financial-services providers, and your newsletter authors. Some financial research involves picks that are paid for by the companies being recommended. That's not the case at Money Forever, but for a long time I was naïve enough to believe that all subscription-based financial newsletters were only compensated by their subscribers. How silly of me! Now I read the small print at the end of the newsletters very closely.

It's easy to go along with the crowd, but true research can keep us ahead of the curve. This is where my newsletter, Miller's Money Forever, can help you.

Miller's Money benefits from a proven team of analysts who carefully review and consider hundreds of stocks and choose only those suited for a safe, healthy return. We track all of the stocks in our portfolio and tell you when it's the right time to buy, sell or hold. And we will NEVER recommend a stock because we've been paid to. It's simply not how we do things here.

Learn more about Money Forever and how we ensure our recommendations are made solely with you, the investor, in mind.

September 26, 2013

Will Russia Lose Its Oily Grip on Europe?

By Marin Katusa, Chief Energy Investment Strategist

Vladimir Putin is on a roll. Ever since the Russian president-turned-prime-minister-turned-president got into office 13 years ago, he's been deftly maneuvering Russia back into the ranks of global heavyweights. These days, he's averting cruise missiles from Syria before breakfast.

For a strategy to return Russia to superpower status, Putin had to look no farther than his own doctoral thesis, Mineral Natural Resources in the Development Strategy for the Russian Economy.

To say that Russia is rich in natural resources would be an understatement. In 2009, the former heart of the Soviet Union surpassed Saudi Arabia as the world's top oil producer—largely because Putin put reviving Russia's aging, neglected oil industry at the top of his priorities list.

The chart below shows proven oil reserves from the pre-Putin era to now. In just 16 years, they have risen by more than 30 billion barrels—which may still be too low, because it's not yet clear how much of the 90-odd billion barrels of undiscovered oil in the Arctic is actually recoverable. And in addition to new discoveries, the rising price of oil has made many formerly uneconomical deposits worth a second look.

As a result, about half of the more than 10 million barrels of oil per day (bopd) that Russia produces are exported… only to return as cash and, increasingly, a fistful of clout.

With Putin's monster deposits being the closest and most conveniently accessible,  many European nations rely heavily on oil and gas imports from Russia and the former Soviet states:

 

In a world where "he who has the energy wields the power," Russia's European customers find themselves in a very uncomfortable situation. How fragile their position is became clear in January 2009, when Putin, enraged over a price and debt dispute with Ukraine, shut off the natural-gas spigot, leaving customers in 18  European countries literally out in the cold.

Now the Russian vise grip on Europe is about to tighten even more as new energy markets are opening up to Moscow.

In January of this year, Russia's pipeline company, Transneft, completed the $25 billion, 4,700-kilometer-long East Siberia-Pacific Ocean (ESPO) pipeline, and in June, Putin signed one of the world's biggest oil deals ever.

For the next 25 years, Rosneft, Russia's state-controlled oil company, will deliver about 300,000 barrels per day to China—raising Russian oil exports to the Chinese by 75%. Besides China, the pipeline is also conveniently located for Japan, South Korea, and even the US West Coast.

This advantageous situation allows Putin to play hardball with Europe: If its customers there don't ante up what Moscow wants in price or pound of flesh, its income from ESPO customers could enable the country to twist the EU's taps closed.

It comes as no surprise that Europe is desperately trying to find a reasonably priced replacement for Russian oil. And in the very near future, it might just get its wish.

Hidden deep below Central European soil may be one of the largest oil deposits in the world, comparable in size to the legendary Bakken formation in North America. I call it the "next Bakken."

The full extent of this oil colossus is still unknown, but the final result could be one for the record books.  And a small company with 2 million acres of land in the "next Bakken" is hard at work to prove up the reserves and make itself and its shareholders rich in the process.

This is not a stab in the dark; there's no doubt that the oil is there. In the past, 93 million barrels of oil have been produced on the land the company owns now. But thanks to the company's state-of-the-art technology, management expects to be able to unlock many more millions or billions of barrels of to date inaccessible or uneconomical oil.

In fact, all of management is invested heavily in the company, which is always a good sign—one of its directors, for example, owns more than 1.2 million shares.

(By the way, the country where this deposit is located is forced to import more than 700,000 barrels of oil per day from Russia, a balance of power that could shift dramatically with this new windfall—so chances are good that the government will enthusiastically support the new oil production.)

Since our initial recommendation, Casey Energy Report subscribers already made gains of up to 66.4% from this company—but this is not a one-hit wonder whose fame fades as fast as it started. If the deposit indeed has what we think it does in recoverable reserves, the company could generate exceptional profits for years on end.

You can get my comprehensive special report "The Next Bakken… and the Small Company Best Positioned to Take Advantage" free if you try the Casey Energy Report today, for 3 months, with full money-back guarantee. Click here for more details on the "Next Bakken."

September 24, 2013

Chinese Housewives vs. Goldman Sachs: No Contest

By Jeff Clark, Senior Precious Metals Analyst

Goldman Sachs is once again predicting that gold will fall, setting a new near-term target of $1,050.

 

Never mind the schizophrenic gene that would be required to follow the constantly fluctuating predictions of all these big banks; it's amazing to me that anyone continues to listen to them after their abysmal record and long-standing anti-gold stance.

Sure, the too-big-to-fails can move markets—but they say things that are good for them, not us. As an example, while Goldman Sachs was telling clients and the public to sell gold in the second quarter, they bought 3.7 million shares of GLD and became the ETF's 7th largest holder.

When I visited China two years ago, guess who no one was talking about? Goldman Sachs. There was news about the US, of course, but the regular diet of journalistic intake consisted of Chinese activity, not North American. And surprise, surprise, the view from that side of the big blue ball was materially different than what we hear and read here—and in some cases, the opposite.

Not only has the average Chinese housewife, perhaps the most frugal and cautious species of savers in the world, probably never heard of Goldman Sachs and their call for $1,000 gold—if she had, she would think: 垃圾! (Rubbish!)

Here's some evidence. Since January 1, gold ETF holdings have fallen by roughly a quarter (26%, according to GFMS). But Chinese housewives aren't refraining from buying and certainly aren’t selling:

The red dotted line represents the total outflows of GLD through last Tuesday. The gold bars are cumulative monthly imports of gold to China, through Hong Kong. You can see that China has absorbed roughly twice what most North American ETF holders have sold. It's actually more than that, because we only have Hong Kong import data up to the end of July.

But it's even more dramatic than this.

If you dig down into the data further, you find that cumulative gold imports through July surpassed the 26.7 million ounces (831 tonnes) that was imported to China for the whole of 2012.

That means rather than being deterred from buying gold when its price was declining this year, the Chinese were snapping up the yellow metal as fast as they could. Further, last year Chinese miners produced 12.9 million ounces (403 tonnes) of gold, all of which stayed in the country.

When you look at physical deliveries from the Shanghai Gold Exchange (SGE) vs. the COMEX and global mine production, you can see a clear trend this year:

Deliveries at the SGE are significantly greater than those at the COMEX. Delivery ratios on the Comex have consistently been under 10%, in contrast to more than 30% on the SGE. Through June, the SGE has nearly matched all of last year's total.

What's even more astonishing: year-to-date deliveries on the SGE are close to global mine production. In the first six months, delivery reached 35.3 million ounces (1,098 tonnes), just 20% less than what all gold companies mined last year.

It is headlines like these that the Chinese read—not what Goldman Sachs writes.

It's not just the Chinese, of course. India, for now, is still the largest gold market. Despite relentless restrictions from her government, Mrs. Singh bought more gold jewelry and bullion last quarter than any other country.

China and India accounted for almost 60% of the global gold jewelry sector last quarter, and roughly half of total bar and coin demand. Further, both countries saw almost 50% more consumer demand in the first half of the year compared to the same period in 2012.

The two countries are again setting records…

• China purchased 8.8 million ounces (275 tonnes), 87% more than last year
• India bought 9.9 million ounces (310 tonnes), 71% more than 2012

It's true that official Indian gold imports dropped in August, to just 0.08 million ounces (2.5 tonnes), a 95% plunge from July’s volume of 1.5 million ounces (47.5 tonnes). It's not yet clear, however, that Indian authorities have managed to subdue gold imports as they have been desperately trying to do; keep in mind the widespread reports of gold smuggling. Meanwhile, the wedding season is just ahead, so demand is likely to bounce back up.

Physical demand also soared in Thailand, Indonesia, and Vietnam last quarter, with increases ranging from 20% to 40% being reported. Add it all up and the Asian/emerging countries comprise the lion's share of consumer demand for gold, about 70%.

It begs the question, are Asians just smarter than Goldman Sachs?

If you find yourself agreeing more with Mrs. Chang than Goldman Sachs, you can snag two silver bullion products at a discounted premium in the current issue of BIG GOLD. You won't find these prices elsewhere, and the savings could pay for your subscription. Product is still available, so join the Chinese gold rush and stock up while prices are down with a risk-free subscription to BIG GOLD.

 

What does this mean to us as investors?

 

The structure of the gold market is changing. Gold is moving from the so-called "weak hands"—those who saw gold as a "trade" and/or were seeking quick profits—to "strong hands," who see the big picure and are buying for the long term.

Gold is moving west to east. You've heard this before, but the above data irrefutably points to this fact—and the trend shows no signs of letting up.

The East will have an increasingly greater impact on price. As Asian countries take over more and more of the market, their influence on the price will only grow.

The gold bull market is not over, regardless of what GS says. When I read their comments on the precious metals market, I sometimes wonder if they really understand it. But then again, do any of their analysts even own any gold?

Mrs. Chang, I'm with you.

September 19, 2013

Tortoises Win the Retirement Race

By Dennis Miller

The race to the finish line—the time between an empty nest and retirement—is tightening. A major generational shift has taken place, and it's having a huge impact on when and how we save and plan.

Most older baby boomers like myself had children in their 20s and empty nests by age 50. They used that time to accumulate enough money to retire. When my children were in high school, their friends' parents were in their late 30s or early 40s. It was unusual to run across 50-somethings at a PTA meeting or high school basketball game.

I don't need a bunch of expensive research to confirm what I see with my own eyes: Couples are marrying later in life, having children later, and even spacing them out more. My own unscientific survey confirmed this. My oldest son just turned 50, and his two children are 14 and 12. My stepdaughter is 36, and she has a nine-year-old and four-year-old. They're right in line with their peer group.

So, assuming our grandchildren go to college, my children could easily be in their early 60s before their kids are off their payroll. Even if they push retirement back to 68, the time allotted for their race to the finish line has been cut by about 50%. If they had followed in their parents' footsteps and waited until the nest was empty to get serious about retirement, they'd damn sure have to be world-class sprinters.

On top of that, two-income households have become a virtual necessity just to make ends meet. Among folks my age, many mothers reentered the work force as their children went off to high school. The second income was a luxury, and the extra money could be used to jump-start capital accumulation for retirement. Today, a second income seems to be necessary just to meet current expenses.

Then there's that pesky issue of debt. For many of us, there's some lag time between both spouses committing to a debt-free life and wealth accumulation. It can easily take 3-5 years to pay off debt, and only then can one actually start socking away money. I remember wishing I had money to invest when I was younger. However, while I could have had $10,000 in my brokerage account, I would have also had a $10,000 credit-card balance with 18% annual interest. Simple math told me I was better off getting out of debt and staying that way.

So, let's imagine a couple whose nest is finally empty at age 62. At that point, they get serious about paying off debt and accumulating wealth. If it takes three years to become debt-free, that leaves just three years to stockpile money for retirement, if they retire at 68. This couple could save 100% of their salary for those three years, and they still would not have nearly enough to retire.

The Long Jog to the Finish Line

You might be thinking something like, "Well, Dennis, I'm 50. There's not much I can do about marrying and having had kids at 35 now." And you'd be right. Frankly, there are many advantages to marrying and having children at a later age, and I certainly don't want to harp on folks who made that decision. It does, however, mean you have to plan differently than the generation immediately before you.

So what can younger baby boomers do?

Get on with the job. I know I've said it before, and I'll say it again: the time to start planning for retirement is today. Younger boomers have to run a different race than I did, but they still need to start, regardless of other drains on their resources.

Reprioritize wealth accumulation. It's easy to give yourself a nice reward every time you get a raise, but it's much tougher to save a portion of that raise or use it to pay off debt. For me, that meant acknowledging that I had survived before I got a raise, so I didn't really need the extra money. I don't recommend being a scrooge; go ahead and reward yourself with a small portion of any raise, but you know where the rest goes: your 401(k), IRA, or other retirement savings account. If you're not contributing the maximum amount to tax-deferred retirement accounts, start now.

Don't buy the biggest house on the block. I have noticed that younger boomers are becoming more attuned to needs versus wants. Up until 2008, folks were buying the biggest house they could afford because real estate was an "investment." Houses weren't just homes, they were moneymakers—or so we thought. If you've opened a newspaper in the last five years, you know that's no longer true.

My son and his wife just bought a new house—a nice home that meets their needs well. They really liked another model that cost $25,000 more because it had one more bedroom. A spare bedroom would have been convenient when grandparents visited, but then again the house would have been too big in ten years or so.

They made the right decision. They saved the $25,000 as well as the interest on a higher mortgage, as they had already made the maximum down payment they could afford. They'll be just fine without the spare bedroom; that's what air mattresses and hotels are for.

Use some common sense. I've made this same mistake more than once: I'd decide to get serious about diet and exercise and go way overboard. On day one, I'd exercise to the point of exhaustion and cut my caloric intake in half. By the second day, I could hardly move, and I was starving to death (at least it felt that way). By the third day, my commitment would vanish. Had I paced myself, I would have been a lot more successful.

The same principle holds true for paying off debt and saving. For most folks, the best way to start is by withholding incremental amounts from their paychecks. Many employers will do this automatically and put the money in your 401(k) or IRA. Tackle debt the same way: cut up your credit cards and start paying a little extra on your regular payments. It is amazing how quickly you can make progress.

Become an educated investor now. It is easy to think, "Why do I need to learn about investing when I don't have any money to invest?" There are two responses to that question. First, you don't want to wait, because from day one you want to take what little capital you can start with and invest it wisely. And second, I found that the more I read about investing, the more motivated I became to have money to invest. The thought of my money working for me instead of the other way around sounded quite appealing. After all, isn't the goal to accumulate enough money and invest it wisely so we don't need to work at all?

One of the fun parts about being a grandparent is reading bedtime stories to the little ones. It is wonderful one-on-one time, and the little guy always gets to pick the book from the stack. Darned if one of my grandkids didn't pick The Tortoise and the Hare for me to read during a recent visit. As I read him the book, I realized how much the fable applies to us. Both the Tortoise and Hare want to get to their goal, but their approaches are quite different. It looks like a lot of baby boomers who became parents later in life will have to start slowly and steadily plod along. We all know who wins the race in the end.

Some of my regular readers are already retired, and some are a few years out. The retirees look to us to help them make their money outlast their lives. One of the quickest ways to learn how is by watching our timely video event—America's Broken Promise: Strategies for a Retirement Worth Living.

Some of today's top minds discuss how to make sense of the challenges facing savers and seniors alike. They also give you actionable recommendations on how to make your retirement about thriving, and not just surviving… no matter how old you—or your kids—are.

The presentation is hosted by my colleague, David Galland of Casey Research, and features John Stossel, formerly on ABC's 20/20 and now with Fox Business Network, David Walker, former Comptroller General of the United States, Jeff White, President of American Financial Group, and me of course.

This is the one event you must see to ensure you retire on your own terms. Use this link to find out more and to sign-up.

September 12, 2013

Doug Casey: 3 Stocks to Own When Gold Recovers

By Louis James, Chief Metals & Mining Investment Strategist

Doug Casey believes the current gold correction has bottomed. Speaking to me a few days ago, he said: "With rare exceptions—that are mainly luck—only liars buy at the exact bottom and sell at the exact top. Purchase of precious metals remains the most prudent thing you can do to protect your wealth, and a very reasonable speculation at this point. Gold is not the giveaway it was at $250 back in 2001, but it's very reasonable near $1,400 now.

"I think mining stocks have also bottomed at this point, and there are several great speculations available today. All the so-called quantitative easing—money printing—by governments around the world has created a glut of freshly printed money. This glut has yet to work its way through the global economic system. As it does, it will create a bubble in gold and a super-bubble in gold stocks. This remains in the future; what we've seen so far is just foreshadowing."

Note that in Doug's view, it doesn't really matter whether gold has bottomed or not; what matters is that opportunities now exist to buy low in order to later sell high.

Consider this chart of the price of gold and a junior gold miners ETF, over the last year:

Several things are evident in this chart. The first is that—as has been well established over decades of observation—gold stocks are much more volatile than gold itself. Note that this is true on the upside as well as on the downside. It reinforces Doug's edict that while the reason to own gold is prudence, the way to speculate for profit on upward movements in gold is to buy stock in the right gold companies.

This also highlights the second compelling thing about this chart: Gold stocks have lost much more ground than gold itself and now offer much more imminent upside, if Doug is right about where gold is going next.

There's no need to reiterate all that we've said about the runaway global money printing and its inevitable consequences for gold. Assuming you're on board with the premise, the question is what to do if Doug is right about the market bottoming.

The answer is obvious: It's time to buy.

However, as Doug likes to say, speculation is not a synonym for gambling; you want a good speculation to be as safe a bet as possible.

While we do expect gold to rise in the near term, it may dip again before jumping up to new highs and exploding into the Mania Phase of this bull cycle—so right now we're focusing on companies that have major deliverables in the near term.

Imminent Push, as we call it, dictates where we place our chips today.

In the current issue of the International Speculator, we're summarizing Doug Casey's current top 3 junior gold stock picks, all of which have major news pending.

#1: The Explorer-Turned-Producer

Normally, we're skeptical when an explorer aspires to become a producer, as exploration and production are two completely different businesses requiring two completely different skill sets. However, this company was founded and is run by a mining engineer, and its two current projects have an unusually short path to production.

The first project is relatively small but high grade, and required very little capital to build the mine and plant. Production is scheduled to start by the end of this month. The question at this point is not whether it can be done or will be done, but whether operations will be as profitable as projected.

Those projections were exceptional: The company should be able to pay back the initial $6 million investment within two months, followed by another $40 million or so in free cash flow.

Since publication of these projections, the company has drilled into more high-grade gold beside and below the current deposits being worked. This gives us two ways to win on this play in the near term: If the cash starts flowing next quarter (as we think it will), the shares should soar; and if the company keeps making this little project bigger, that can only add to the upside.

However, the best part of this story is the company's second project, which is already much larger and high grade—this one is showing world-class potential. And with cash flowing from the first project, the value in the second one could be brought to market with little or no dilution for shareholders.

That gives the stock what we call "ten-bagger" potential (meaning share prices could rise 1,000% or more), and it'll start happening in the weeks and months ahead.

#2: The Takeover Candidate

Doug Casey's second top pick for today is a company that is almost certainly on the verge of being bought out by a larger company, at a hefty premium for current shareholders.

The story may not have ten-bagger potential, as larger companies rarely offer more than a 100% premium—that is to say, more than double the average of recent share prices. But such rapid gains overnight, combined with the very high probability of their occurring in the near term, make the stock an outstanding speculation.

How can we be so sure this will happen?

Pick #2 owns the mineral rights to a property that is completely surrounded by the property of another company that has made a multimillion-ounce gold discovery in one of Canada's best mining jurisdictions. It's not just a matter of location, either—our little company has already demonstrated that the gold mineralization continues onto its neighbor's land, including some exceptionally thick and high-grade intersections.

The only reason this opportunity even exists is that many mining executives were nervous about making acquisitions during gold's recent downturn, so the larger neighbor's management probably thought that they had all the time in the world to take over our pick. And they were right; no one else has bought it yet.

However, an intermediate producer has just bought our little company's neighbor, and there's no reason to believe that this larger buyer will leave our company's gold in the ground, just across the property line.

There are no sure things in junior mining speculation, but this takeover is as close as it gets—and we expect it to happen before the end of this year.

#3: The Holy Grail of Exploration

Doug's third pick for today's market is a relatively straightforward value-adding proposition.

One can make money mining gold, even on a small scale, if the grade is high enough. One can also make money mining low-grade gold, if its characteristics are amenable to low-cost production methods and the deposit is large enough to allow economies of scale.

The best of both worlds, obviously, is to find a deposit that is both large and high grade.

That's extremely rare, of course. Many of those discoveries are in basket-case countries that are either too dangerous to work in or where the government is likely to steal your mine if you build it. Large, high-grade discoveries with little political risk are the holy grail of mineral exploration.

This company has just such a deposit in one of the more pro-business jurisdictions of Latin America, and its current drilling campaign will both upgrade the current resource estimate and make it larger—potentially much larger.

The drilling now under way has already returned spectacular results of the sort that move share prices sharply upward, especially when the sector itself is up. So if Doug is right about where gold is headed, we should see these shares rise faster than gold in the months ahead—and a big leap is likely when the company issues a new resource estimate calculation.

We're confident this one's getting bigger and better, and it has a short fuse.

All three of these stocks are poised for substantial gains in the very near future. You'll find the names, stories, and detailed instructions how much to buy and at what price of all 3 of our "recovery picks" in the just-released September issue of Casey International Speculator.

I suggest you take full advantage of Casey's 100% satisfaction guarantee and try the International Speculator  for three months, at no risk at all. If you're not fully satisfied, you cancel any time within those three months and get all your money back, promptly and no questions asked. It's really that simple. Just click here to get started. And don't wait; if we're right, these deals won’t be around for long.

September 6, 2013

Syria and Second Passports

By Nick Giambruno, Editor, International Man

All of us by now have seen the latest sales pitch from the Obama administration for yet another so-called "humanitarian intervention" in the Middle East. It is not hard to see that the case for war is a bunch of rubbish and will likely end in disaster for both Syria and the US.

I am not diminishing the tragedy that is going on in Syria. The events there touch me on a personal level. I have good friends who live in Damascus and have been there myself several times when the situation wasn't so hot.

As some of you may know, I used to live in neighboring Beirut while I was cutting my teeth in finance at a regional investment bank. Due to its rich history and importance today, I have long been interested in the Middle East and sought ways to combine it with my professional background in finance.

I know it may be hard to fathom given what is put forth 24/7 on the mainstream media and if you have never been there, but Damascus is actually an amazing city on many levels—that is when it is not an active warzone of course. It is arguably the oldest continuously inhabited city in the world. The Christian quarter of the old city is one of the most enchanting places I have ever visited. And it's tough to beat the pistachio encrusted sweets from the legendary 100+ year old Bakdash ice cream parlor in the souk el Hamidiyeh.

Anyway, my purpose today is not give travel tips or to debunk the case for US intervention in Syria as hokum—David Galland did an excellent job of doing that in his latest piece here.

Instead I want to talk about Syria in terms of the lessons it provides us in internationalization.

It is human nature for people all around the world to have the "that can't happen here" mentality. And prior to the deterioration of the situation, many Syrians believed the same.

As Doug Casey has eloquently stated "The problem—your problem—is that any country can turn into a 1970s Rhodesia. Or a Russia in the '20s, Germany in the '30s, China in the '40s, Cuba in the '50s, the Congo in the '60s, Vietnam in the '70s, Afghanistan in the '80s, Bosnia in the '90s. These are just examples off the top of my head. Only a fool tries to survive by acting like a vegetable, staying rooted to one place, when the political and economic climate changes for the worse."

The uncomfortable truth is that, as history shows, no country is immune—especially one that has a deteriorating fiscal health—and internationalization is the ultimate insurance policy.

You won't be any worse off by moving some of your savings into multiple friendly jurisdictions and into things that are hard to confiscate, such as physical precious metals and foreign real estate. Obtaining a second passport is also an important ingredient in the mix.

Once you have taken these steps you will have insulated yourself and your family to a high degree from the uncertainty and sovereign risk emanating from your home country.

Developing your internationalization game plan takes time, and you must take action before it is too late. For Syrians, it would obviously have been optimal to have developed internationalization options many years ago.

Having a second passport and a financial account abroad denominated in a currency other than the Syrian pound, which has suffered from hyperinflation, would have gone a long way for the average Syrian today. The Syrian passport is not a great travel document; it requires a visa for most countries outside of the Middle East.

Having a second passport ensures that you will always have another place to potentially call home, another place where you will always have the legal right to live and work. In worst case scenarios, a second passport guarantees that once you get out of dodge, you won't have to live like a refugee.

A second passport can also come in handy when a government decides to starting treating its own citizens as beef cows instead of milking cows (i.e. when they need more soldiers for war) or if passport restrictions and other types of people controls are implemented.

The Syrian government, for example, previously refused to renew the passports of Syrians abroad it suspected of being associated with the opposition. This is not surprising and should have been completely predictable—any government could and would behave in a similar manner. Any government has the ability to revoke the citizenship and/or passport of its citizens at a moment's notice under any pretext that it finds convenient. Look at how the US cancelled Edward Snowden's passport by fiat.

It is not inconceivable that the US government would, for example, make it more difficult for Ron Paul supporters to travel internationally one day in the future. Heck, they have already taken the first step and labeled them potential domestic terrorists.

The bottom line is that if you hold political views that the establishment of your home government does not like, don't be surprised when they decide to restrict your travel options. In this case, having the political diversification that comes from having a second passport is even more important.

Unfortunately, getting a second passport, while necessary, is not easy. There are no solutions that are at the same time cheap, easy, fast, and legitimate. There is a lot of misinformation and bad advice out there regarding black and grey market passports that could likely end up causing you significant problems. It is essential to have a trusted resource to guide you through the process. There are definitely some options that are better than others. You can find our top picks for the best countries to obtain a second passport in and how to do it in Going Global 2013, a comprehensive guide to internationalization from Casey Research.

August 21, 2013

How to Marry a Millionaire… And Not Die a Pauper

By Dennis Miller

A recent article penned by Jeff Sommer for The New York Times noted that in 1953, when How to Marry a Millionaire – one of Marilyn Monroe's more endearing comedic performances – debuted, $1 million was worth much more than it is now. It was the equivalent of $8.7 million in today's dollars.

Much like the old gray mare who is past her prime, a million dollars sure ain't what it used to be. In 1953, a family with a net worth of $1 million easily resided in the top 1% of all US households; now they're just in the top 10%.

For many decades, folks imagined that being a millionaire meant never having to worry about money again. Millionaires were living on easy street, or so people thought. Sommer and I agree – that idea is an illusion. For retirees, $1 million certainly does not make one wealthy, especially if a large part of that money is wrapped up in one's home.

There's a Good Chance You Will Outlive Your Money

Sommer goes on to write:

"[C]onsider this bleak picture: A typical 65-year-old couple with $1 million in tax-free municipal bonds want to retire. They plan to withdraw 4 percent of their savings a year – a common, rule-of-thumb drawdown. But under current conditions, if they spend that $40,000 a year, adjusted for inflation, there is a 72 percent probability that they will run through their bond portfolio before they die. …

f they withdrew 3 percent, or $30,000, a year, rather than that standard rate of 4 percent, inflation-adjusted, there is still a one-in-three chance that they will outlive their money, under current market conditions."

As an aging stallion who has spent many years pulling the load with his wonderful mare, I know that the solution to our predicament is more complicated than simply changing a number in a computer projection. Retirees need to look beyond the old retirement formulas if they want their money to last.

The old formula was simple: Retirees could expect a 6% return on their portfolios, factor in a 2% rate of inflation, and still net a 4% return to live off of without touching their principal. That was easy when CDs and high-quality bonds could be counted on for at least 6%.

The foundation of that formula was the adage, "live off the interest and never touch the principal." For several generations it was nothing short of gospel. If your principal remained intact, you never had to worry about running out of money. I do not know anyone who would be comfortable watching their nest egg dwindle away every year. It is terrifying!

A Retirement Formula for 2013 and Beyond

Consider the three variables in the old formula: expected return; rate of inflation; and the percentage one can withdraw each year. These days the numbers we can safely assign to those variables are all moving at the same time.

To begin with, retirees can no longer expect a 6% return on ultra-safe investments like CDs and top-rated bonds. Not anymore; the yields are not even close. That means retirees have to put much more of their money at risk.

Then there's that ridiculous 2% inflation rate. Regular Miller’s Money Weekly readers will recall our inflation survey, in which 98.6% of the thousands of folks who participated thought inflation was much higher than the government-reported rate of 2%. At the end of the day, we each have to plan for increases to the goods and services we actually spend our money on. For seniors, that means paying particular attention to health care and long-term care costs – and if we're lucky, greens fees and baseball tickets too. Whatever your personal inflation rate is, I highly doubt it's only 2%.

Planning becomes difficult when we don't know which numbers to plug in. If we believe inflation is 5% and we still want to withdraw 4% from our portfolio each year, we must earn 9% to keep our buying power intact. Even if our inflation estimate is correct, a 9% return from conservative investments is an ambitious goal.

Don't Plan Your Retirement Around Expectations

The Times article also points out the recent increase in the yield of 10-year Treasury notes and states:

"Rates are expected to rise... Yet yields remain extraordinarily low on a historical basis. The yield on the benchmark 10-year Treasury note is just under 2.2 percent, compared with more than 6.5 percent, on average, since 1962, according to quarterly Bloomberg data."

While guaranteed yields may be rising, are they rising fast enough to make a difference in our retirement plans? With the government creating $1 trillion a year in new money, we can't start thinking "happy days are here again" until we are comfortable that these yields are – and will remain – well above the inflation rate.

If the inflation rate is higher than the return on our investments, then we have several uncomfortable choices:

• Put more money in moderate-risk investments in hope of a higher return.
• Move money already in moderate-risk investments into high-risk investments.
• Take out less money from one's portfolio each year to supplement Social Security, and adjust one's lifestyle accordingly.
• Tap into principal and watch the nest egg dwindle.
• Continue to work.

As my colleague John Mauldin likes to say, the technical term for any of the choices is "screwed."

Is It Still Possible to Enjoy Retirement?

Sure it is! If you're in the top 1% in terms of net worth, you probably have enough money to last a lifetime, even if you do tap into the principal. For the rest of us mere mortals, the retirement game has changed, but it's still playable.

On a side note, I caution anyone working with a financial planner not to be lulled to sleep by their projections. Their calculations may be mathematically accurate, but the variables they plug in to their fancy computer programs may not match the ever-changing real world, and those projections certainly have a short shelf life. Financial projections should be regularly revised; otherwise they become stale very quickly.

Nevertheless, no matter where we fall in terms of net worth – top 1%, top 10%, or top 50% – we want to maintain our lifestyle during retirement without having to constantly worry. That is a common thread we all share.

In my opinion, the key is becoming self-educated. At Money Forever, we offer a library of educational resources for our subscribers. Even folks who have professional help need to learn as much as possible about investing. The more we know, the less we worry.

While this old grey stallion ain't what he used to be, my mind is still intact (thank goodness). The government bailed out banks at the expense of an entire generation. But we can still adjust our investment strategies and enjoy retirement. We cannot, however, allow ourselves to be fooled by the illusion of wealth.

If you’ve got about a half hour to spare on Thursday, September 5th I suggest you mark your calendar to join me in an exclusive premiere of America’s Broken Promise: Strategies for a Retirement Worth Living. I'm bringing together some of today's top minds to help make sense of the challenges facing savers and seniors alike and to give you actionable recommendations on how you can make sure your retirement is about thriving, and not just surviving.

The presentation will be hosted by my colleague, David Galland of Casey Research, and will feature John Stossel, formerly on ABC's 20/20 and now with Fox Business Network, David Walker, former Comptroller General of the United States, Jeff White, President of American Financial Group, and me of course.

This is the one event you won't want to miss. Use this link to find out more and to sign-up. I look forward to you joining us on the 5th. Good ahead and reserve your spot here.

August 21, 2013

Write-Downs: Death Sentence or Opportunity?

By Jeff Clark, Senior Precious Metals Analyst

For many primary gold producers, Q213 was a breathtakingly bad quarter. It wasn't so much the massive drop in earnings many reported—those had been, for the most part, expected—but the so-called "impairment charges" announced.

 

(Impairment is the opposite of appreciation, that is, the reduction in quality, strength, amount, or value of an asset. "Impairment charges" means that a company reduces or "writes down" the value of the assets on its books.)

The gold price averaged $1,630.45 in Q1 this year, falling to $1,413.64 in Q2. The downturn squeezed profit margins, obviously, but it did the greatest damage to the value of many company assets that are based on gold.

But what will happen to those same assets if the gold price is on the rise again? What does it mean for us as investors? I'll answer these and more questions below.

First, here's a look at the amount of write-downs the six largest primary gold producers announced last quarter.

The explanation the companies gave for these impairment charges was essentially the same in every case: short- and long-term gold price assumptions that hadn't panned out. Total losses for just these six producers were $23.1 billion. That's a lot of dough to send to money heaven, for a relatively small industry. Food for thought.

Here's what you need to know as an investor in this sector.

How does an impairment charge occur?

In public companies, management must report a reasonable value of company assets to shareholders and the public. If labor or other production costs rise, they may have to reassess the value of the company's assets.

In this case, the price of gold—the product many of our companies sell—dropped 13.3% in just three months, and did not seem likely to rebound immediately. Of course, that changed the amount of earnings investors could expect from a gold mine. Companies had to revise the net present value of projects in development, or the book value of mines in production, with the new reality for gold in mind.

But isn't gold always fluctuating?

Yes, but the accounting is (meant to be) conservative. The last thing any management team wants is to be forced to tell the market that its projections were wrong and profits are much less than anticipated—or worse, nonexistent. Shares would plummet, management would have a major credibility problem (perhaps a legal one as well), and heads would roll.

What companies are supposed to do is look out to the horizon and project the lowest (safest) reasonable price assumptions they can, for the foreseeable future. Some are better at it than others, and some mining companies that used too aggressive price assumptions in their economic studies ended up, in the worst-case scenario, abandoning projects.

On the other hand, it's just as bad if management overreacts to temporary price swings. A long-term view should position the company so that short-term price fluctuations—up or down—don't seriously affect the value of a project. In other words, they try to allow for normal volatility.

How do they know how much to write down?

If management believes prices have changed so much that it affects the value of company assets, they conduct a formal "impairment test." If an asset doesn't pass, the amount of the charge is the difference between the old book value and the recoverable value, or the fair market value for the asset at that point in time.

So the companies that had no write-downs are more conservative?

The better ones are—others may simply be refusing to face the fact that gold is still below the three-year trailing average that was typically used as a price assumption. A cautious gold company that, say, valued an asset assuming $1,100 gold should not have needed to file an impairment charge last quarter (all other things being equal). Gold has averaged $1,303.33 so far in Q3, well above the price that returns were projected from.

For example, major gold producers Yamana and Agnico-Eagle were able to avoid impairment charges last quarter. As the chart above shows, all producers currently rated a Best Buy in BIG GOLD had no write-downs. As an owner of these stocks, I was glad to see this. It also confirmed that we've selected management teams that are both shrewd and conservative.

What happens when a write-down turns into a write-off?

While a write-down is a mere reduction in value, a write-off eliminates that value altogether. For some companies, a project may not just be less profitable, but completely uneconomic at lower gold prices. If total production costs were $1,400 per ounce, for example, that project would have zero value at today's prices. This sometimes happens with low-grade mines.

This is the reason so many projects have been suspended or moved to the back burner over the last few months—and rightly so. We believe gold will move back up and hit new highs, but that's not the conservative stance corporate management should take, especially when deciding to invest billions of dollars building a large new mine.

These projects can be revived when gold prices go up again, but they will need to be reevaluated when things change, particularly regulatory and cost factors.

What happens if the price of gold goes back up?

In the past, companies were stuck. Until very recently, impairment charges were a one-way street. Once you took the charge, you lived with it. But there are some new rules that permit the accounting to go both ways.

These new international rules were instituted in 2011 and haven't yet been tested for higher values in the resource sector. But if the gold price recovers and there are strong reasons to believe it will stay there (something we see as highly likely), it's possible we could see some of these impairments reversed. That's what you might call a "write-up."

Here's an interesting consequence for speculators: Once a company has written down an asset, that loss no longer trickles down to the bottom line in the form of depreciation expense.

Suppose you have a mine written down to zero, because operations provide effectively zero return at lower prices, but the company keeps mining because management believes prices will go up, and mine closure would be both expensive and hard to reverse. Then prices do rise, and the mine starts making money hand over fist, with no depreciation to impact net income.

That's why it's so important to separate still-viable assets that are written down from those that really were based on foolish assumptions and are never likely to be profitable.

Should I sell my companies that reported write-downs?

Not necessarily. As I said above, it's not the end of the world if a company is forced to write down an asset. The question is whether the company will be able to survive the current price environment and have a shot at better profits in the future.

To know when to hold, fold, or be bold, sign up for a three-month trial to BIG GOLD, with full money-back guarantee.

Even with gold's steep correction, a handful of Best Buy companies in our portfolio had very impressive Q2 results—but despite their above-average performance, they are still severely undervalued. I expect them to do so well that I've added some of them to my own mother's portfolio (and she only allows for the safest bets).

Find out which stocks Doug Casey and his team see as the top performers in the recovery. You have nothing to lose—click here to try BIG GOLD for just $129 per year. If you don't absolutely love it, cancel within the first three months for a full refund.

August 21, 2013

What’s the Point of Owning All This Stuff?

By Dennis Miller

When my wife Jo and I decided to sell our home in Illinois, the first question we asked ourselves was, "What are we going to do with all our stuff?" Somehow our children, neighbors, friends, the Salvation Army, and a moving van would have to magically make it disappear sometime before we closed escrow at the end of the month.

My many theories about stuff have proven to be true over the dozen or more homes I've lived in during the last 73 years. First off, no matter the size of the home, it's always full of stuff within five years. When we sold our home in Pensacola along with all of its furnishings, we managed to fill the next one to the brim in no time flat.

When we pack up a house, we often pause and hold up nostalgic items, fondly remembering a trip or event. Souvenirs are supposed to remind us of good times, but not everything fits that bill. We have everything from the newest TVs right on down to outdated technology hidden somewhere near the treadmill or in a guest bedroom. We even have a spare refrigerator in the garage. We use most of this stuff, other than the television in the family room, for less than ten hours each year. It's no wonder the damn things never wear out.

Most of the stuff that is important to us means very little to our children. Having cleaned out three homes that belonged to older family members, I can safely say that everything worth saving can usually fit into a Ford Explorer. The rest ends up at the Salvation Army or Goodwill, and a small amount of furniture is quickly dispersed among family members. For most folks, their children are well situated by the time their last home is cleaned out. There may be a few things the kids want, but little they need.

Jo and I have friends who've considered downsizing, but the thought of having to deal with decades of accumulated stuff is downright scary for them. Some of our friends have off-limits basements or storage areas where guests are not allowed. They're simply too embarrassed by the endless boxes and piles of stuff.

That's why I've come up with a "stuff grading system," to help us all rank the goods accumulated over a lifetime. A similar outlook holds true for our investments as well.

Really Good Stuff

This category includes anything appreciating in value. One may not have bought it as an investment, but it turned into one. It could be a coin collection, gold jewelry, artwork, Matchbox cars, or other type of collectible. Take good care of these items; one may need to sell them down the road. But for now, hang on to them, these are like the investments that Warren Buffett says he will never sell. You want to have a few of these in your portfolio to give you income and share price appreciation so that when the time comes—and you’ll know when that is—you have something of value that will fetch a substantial sum of money.

Good Stuff

Good stuff includes anything we use regularly or still need. The TV in the family room, the good silverware we pull out when family comes at Christmas, and tools in our workshop all fit the bill. At the same time, I should confess that I don't need six socket wrenches or three electric power drills. Too much good stuff can quickly turn into bad stuff.

In my portfolio this tends to be stocks that are making me money for the moment, either through gains in share price or dividend payments. I won’t hold them forever, but for now they are tools to increase my assets. You probably have some in your portfolio, too. They're not the "next locked-in 1,000% winner," rather the more modest double-digit gainers that you'll cash out of when you've fully maximized their value. For me, very often dividend and income investments fit this bill.

Bad Stuff

Bad stuff includes all those possessions we never really use or need. When I pulled the radio out of my truck and replaced it with an in-dash navigation unit, I stuffed the old radio in a garage cabinet, and it's been there for the last three years. My wife has a wonderful vacuum cleaner, yet whenever she goes into the closet, she has to move the old one to get to it. You get the picture; we all have stuff that simply gets in the way.

Would we be better off selling a lot of it at a garage sale? Probably. A neighborhood garage sale is a fantastic stuff transfer station. They work well as long as you're a seller and not a buyer. Otherwise, the Goodwill or the Salvation Army is your best bet for bad stuff.

Any investor who has held a portfolio for a number of years has had his or her share of "bad stuff" stocks. These are the ones that we held too long and watched all our gains evaporate, the hot tip from our brother-in-law who turned out to know nothing at all about investing, or even the mutual funds we bought when we were young because we saw the previous year’s gains and thought past performance indicated future results. No matter how we got the stocks, eventually we shoved them into the garage cabinet of our portfolio hoping to one day they’d come back to life and we could move on.

Really Bad Stuff

Really bad stuff is anything that keeps on costing money. We had a model train layout that was a lot of fun to build. When we had a new home built, we actually added an additional room to the house so we could display it. Five years later, the only time we ran the train (after I would crawl under the table to fiddle with it) was when the grandchildren came. After about fifteen minutes, they would usually get bored and go back to their computer games.

We had to heat, cool and pay taxes on that damn train display room. We eventually tried to sell the layout, but ended up calling the Salvation Army to haul it away. As I watched it go out the door I thought to myself, "Was it really worth all that time and money?" Over the years we invested several thousands of dollars in that train system, but wouldn't we have been better off investing that money? We could have even used some of it for a cruise or trip with our grandkids.

We have many friends with vintage automobiles or some other collection of depreciating assets who actually rent storage facilities to store their stuff. A few have even sheepishly admitted to not visiting their stuff in storage for the last few years. In most cases, it started out as fun stuff and turned into really bad stuff – stuff that costs money and chips away at retirement funds.

It is all too easy to become a slave to one's stuff. If something is eating away at your nest egg and not enhancing your life, it's time to let it go.

The Times, They Are A-Changin'

I saw a sign nailed to a post that makes my next point quite succinctly.

No, I'm not telling you to say five Hail Marys. However, it is time for us all to take stock as we move toward or through retirement. Retirement has many perks: free time, an empty nest, and kids who have moved off of the family payroll – which usually frees up some cash. But far too often folks end up spending that money on stuff, stuff… and more stuff.

Unfortunately, retirement also means we're producing less income than we were during our peak earning years. Retirement changes our financial situation, and our priorities need to change along with it. Capital, not an accumulation of stuff, is what will provide the income one needs to pay the bills during retirement.

Seniors Need Money More than Stuff

Numerous studies indicate that seniors are not generating enough income; they are working longer or taking part-time jobs to make up the difference. Many are also selling off assets (commonly known as stuff). How and when that happens can have a major effect on one's retirement lifestyle. If we wait until we really need the money, we are at the mercy of the market. Sellers never get the best price under those circumstances and we have to take what we can get.

Or people end up selling assets in the wrong order. They need money and sell their really good stuff first because it's the most valuable. Once the really good stuff is gone, they move down the ladder. But wouldn't we be better selling the other stuff first and hanging onto appreciating assets as long as possible?

On the other hand, even if one doesn't need the money now, maybe it's time to be proactive. Why not sell everything other than "really good" and "good" stuff, and invest the profits? Turning a liability into an asset is always a good thing. It’s almost like free money. Almost.

Senior Garage Sale Day

Like it or not, we are in the midst of a generational war. The government is stealing massive amounts of wealth through taxes and stagnant Social Security payments to seniors. They’re holding down rates so you can’t even sanely contemplate opening a CD account, while an ever increasing share of the rise of health care costs is being shifted onto the shoulders of seniors. It is time for us to throw off our "stuff shackles" and strike back.

I propose a national Senior Garage Sale Day. Seniors can sell all their non-appreciating stuff and invest the cash they receive to help fund their retirements. The day should include a reverse-carding rule: buyers over age 50 should be refused entry. It would be a generational win-win. The younger generation would get a lot of stuff at a discounted price, while their parents and grandparents would receive much-needed cash for their retirement accounts.

It is time for us all to repent and change our ways. Which would we rather have: money in our retirement accounts or stuff?

---

All kidding aside it’s time for us to make sure we’re not bogged down with junk and missing out on income for our retirement years. It’s gotten a lot harder these days to get by.

If you’re interested in not only surviving, but thriving during retirement then you should check out our upcoming online presentation, America’s Broken Promise: Strategies for a Retirement Worth Living, premiering on September 5^th.

This event features John Stossel from Fox Business News and formerly ABC’s 20/20, David Walker, former Comptroller of the United States of America, Jeff White, president of American Financial Group, and me, Dennis Miller.  Click here to find out more. (We expect response to be overwhelming, so you should sign up now—it’s free—to make sure you’re not left out.)

August 21, 2013

Peak Gold

By Andrey Dashkov, Research Analyst

 

In the mining business, it is said that grade is king. A high-grade project attracts attention and money. High-grade drill intercepts can send an exploration company's stock price higher by an order of magnitude. As a project moves to the development stage, the higher the grade, the more robust the projected economics of a project. And for a mine in production, the higher the grade, the more technical sins and price fluctuations it can survive.

 

It is also said that the "low-hanging fruit" of high-grade deposits has all been picked, forcing miners to put lower-grade material into production.

You could call it Peak Gold—and argue that the peak is already behind us. Let's test that claim and give it some context.

One of the ways to look at grades is to compare today's highest-grade gold mines to those from the past. We pulled grade data from the world's ten highest-grade gold mines for the following chart.

As of last year, grades at the richest mines have fallen an average of 20% since 1998. However, except for 2003, when the numbers were influenced by the Natividad gold/silver project (average grade 317.6 g/t Au) and Jerritt Canyon (245.2 g/t Au), the fourteen-year trend is relatively stable and not so steeply declining. The spike in 2003 looks more like an outlier than Peak Gold.

However, these results don't provide much insight into the resource sector as a whole, one reason being that the highest-grade mines have vastly different production profiles.

For example, Natividad—owned by Compañía Minera Natividad y Anexas—produced over 1 million ounces in 2003 from ore grading over 300 g/t gold, while the San Pablo mine owned by DynaResource de Mexico produced only 5,000 ounces of gold from 25 g/t Au ore in the same year.

This made San Pablo one of the world's ten highest-grade operations in 2003, but its impact on global gold supply was minimal. In short, the group is too diverse to draw any solid conclusions.

We then turned to the world's top 10 largest operations, a more representative operation, and tallied their grades since 1998.

The picture here is more telling. Since 1998, gold grades of the world's top ten operations have fallen from 4.6 g/t gold in 1998 to 1.1 g/t gold in 2012.

This does indeed look like Peak Gold, in terms of the easier-to-find, higher-grade production having already peaked, but it's not as concerning as you might think. As gold prices increased from $302 per ounce at the end of 1998 to the latest price of $1,377, both low-grade areas of existing operations and new projects whose grades were previously unprofitable became potential winners.

Expanding existing operations into lower-grade zones near an existing operation is the cheapest way to increase revenue in a rising gold price environment. So many companies did just that.

Indeed, the largest gold operations—the type we included in the above chart—would be the first ones to drop their gold grades when prices are higher, simply due to the fact that what they lose in grade they can make up in tonnage run through existing processing facilities. Larger size allows lower-grade material to be profitable because of economies of scale. New technologies have helped to make lower-grade deposits economic as well.

So, at least until 2011, the conventional wisdom of "grade is king" was being replaced by "size is king."

However, production costs have been increasing as well—and have continued increasing even as metals prices have retreated in recent years. Rising operating costs and capital misallocations (growth for growth's sake, for example) are at least partly to blame for miners' underperformance this year.

Suddenly, grade seems to be recovering its crown. It remains to be seen whether more high-grade discoveries can actually be made, or whether Peak Gold is actually behind us.

The Takeaway

Truth is, there is no king. Grade and size, although among the most important variables in the mining business, tell only part of the story. Neither higher grades nor monster size prove profitability by themselves—the margin they generate at a given point in time is what matters most. And then what the company does with its income matters, too.

Now that the industry has moved on from a period of reckless expansion, we expect investors to become more demanding of the economic characteristics of new projects coming online. Existing mines that processed low-grade ore in a rising gold price environment are now judged by the flexibility they have to cut costs, increase margins, and persevere through gold price fluctuations.

It's true that high enough grade can trump all other factors in a mining project, but it's the task of a company's management to navigate the changing environment, control operating costs, and oversee the company's growth strategy so that it creates shareholder value.

The resource sector has had a sober awakening, and now we see many companies changing their priorities from expansion to profitability, which depends on many parameters in addition to grade. This is a good thing.

As for Peak Gold, if that does indeed turn out to be behind us, the big, bulk-tonnage low-grade deposits that are falling out of favor today will become prime assets in the future. It'll either be that or go without.

Times may be tough, but the story of the current gold bull cycle isn't done being written. The better companies will survive the downturn and thrive in the next chapter. Identifying these is the ongoing focus of our work.

How about a project that's high grade and big? We recommended a new producer that has such an asset, and it hasn't been this cheap since its IPO. Find out who it is in the August issue of Casey International Speculator. Start your risk-free trial with 100% money-back guarantee here.

 

August 20, 2013

Four Benchmarks to Keep Your Retirement Finances on Track

By Dennis Miller

When I was still a young buck out in the workplace, financial magazines periodically published worksheets for calculating when you had enough money to retire. The process became much easier when we got our first PC. Programs like Microsoft Money had a retirement planner tab where you entered your personal data, and the program did the calculations for you.

For many years, financial planners considered four basic numbers to be conservative estimates:

• Return on your portfolio: 6%
• Inflation: 2%
• Age your money needed to last to: 120 years old
• Percentage of your portfolio to invest in the stock market: 100 minus your age at retirement

Once you stopped working, you could live off of your nest egg, plus any retirement pension, for the rest of your life. If the computer program said your money would last until your 120^th birthday or longer, you were home free. The first time I plugged in my information, it said I could retire immediately – as long as I died before I turned 72. That was when we started seriously socking money away for retirement.

The final number on the list was part of a conservative investment formula. If you retired at age 65, then 65% of your nest egg went into CDs and high-quality bonds, with a locked-in 6% return. The other 35% went into the market. The formula worked well for my first few years of retirement.

That all blew up in the fall of 2008, when the first TARP bill was approved. The banks took their newfound money, paid off debt, and called in their CDs. At the time, our CDs yielded 6% on average, a rate right in line with our overall retirement plan. Today, the best rate for a five-year CD is around 1.8%.

Had we continued to follow the old paradigm and kept 65% of our portfolio in these traditionally safe investments, the income from that portion of our portfolio would have dropped by 80%. Moreover, interest rates are not budging. The Federal Reserve has made it quite clear that it intends to keep interest rates this low for years to come.

The burden of low interest is only made worse by inflation. Planning around a 2% inflation rate simply won't work anymore. Frankly, the federal government is lying to us about inflation, which is an issue I've addressed before. Shadow Government Statistics reports a current, 1990-based alternate inflation rate of just under 6%. Of over 3,000 responses to our recent inflation poll, 34% believed that inflation is 6%-8%.

You may think these figures are high, but they are much closer to reality than the government would have us think, based on the sad little 1.7% boost our Social Security checks received this year. If you're going to plan for 2% inflation, you should also plan to sell your home and move into your kid's guest bedroom, because that's where that plan will get you.

In a nutshell, since 2008 the yield and inflation estimates for retirement planning have reversed. Yields on traditionally safe investments are actually below 2%, while inflation is much closer to 6%, depending on whom we choose to believe (when in doubt, check your credit card statements).

But frankly, it is the fourth figure – "100 minus your age" – that will guarantee too many retirees run out of money much too soon. Keeping a major portion of your portfolio outside of the market in investments that do not even keep up with inflation is foolhardy. Our golden years can quickly become a nightmare of poverty if we are not careful.

The only number that still makes sense is the age your money needs to last to – 120 years old. As life expectancies increase, it's becoming more and more important to plan for a long life. But if you run out at 119, the hell with it.

Thriving under the New Retirement Paradigm

Unfortunately, the new retirement paradigm is more complicated and harder to define. Let's start with yield on your portfolio.

The government is printing money at lightning speed. The rate of inflation is increasing, turning the rate of return sufficient for retirement into a moving target best described as "enough to keep up with inflation and provide income to supplement Social Security." If it does not, you will become poorer every day, and eventually your nest egg will be gone.

How about inflation? Read inflation predictions from 10 years ago. Almost everyone said it would be around 2%. Personally, I am not a psychic; I have no prediction, only a commonsense suggestion: Err on the side of caution. If you end up with a little more money than planned, that is not a bad thing. Keep an eye on your inflation estimate, consider sources other than the Bureau of Labor and Statistics (BLS), and adjust it when necessary.

What about "about 100 minus your age?" Most savvy retirees are accepting that traditionally safe, high-interest-bearing investments have left the building and are not coming back. We must be all in to survive.

But by "all in," I do not mean all in the stock market. I would not recommend that any more than I would recommend spending your entire nest egg on an annuity or any other one investment. "Don't put all of your eggs in one basket" is a famous proverb for a reason.

By "all in," I mean fully committed to learning and understanding what options are still available for reaching your retirement objectives. This may include options like an annuity or reverse mortgage, in addition to other, more traditional investments.

And we must be all in for diversification. We cannot risk losing our nest egg once we have stopped working. That means looking for many opportunities that provide safety, yield, growth, and inflation protection.

There is no one vehicle to get the job done. It takes a combination, each contributing to your financial health in its own unique way. Dividend-paying stocks are one good example. If you own a stock paying a 3% dividend, it's not beating what I believe to be the true rate of inflation. If that stock appreciates another 6% on top of the dividend, you have inflation beat and some left over to supplement your Social Security checks, without tapping into your principal.

Hitting a Moving Target

Folks on either side of the cusp of retirement have to adapt to a changed world. We are trying to hit a moving target, but it can be done. Let's review the new benchmarks for staying on track:

1. Our portfolio needs to grow at a rate sufficient to beat inflation and provide supplemental income.
2. We should monitor inflation regularly. Take the BLS's official rate with a grain of salt, and consider alternative rates. Only you know your personal inflation rate, so monitor your costs from year to year and plan for increases in sectors like health care. Make sure part of your portfolio is allocated in investments that have a history of keeping up with inflation, such as precious metals.
3. Plan for a long life. 120 years is still a good rule of thumb.
4. Right now, I see no reason to own CDs, TIPS, or any other fixed-income investment. Their abysmal rates will destroy your portfolio. That leaves 100% of your portfolio to achieve your goal. If targets are moving, we must be able to move with them.

On a positive note, I know a good number of folks who have accumulated a decent nest egg. One old-fashioned rule of thumb that will never change is to work hard and work smart. Folks who had the skill and foresight to build a sizeable retirement portfolio have the qualities necessary to learn how to make it last. It's simply a matter of learning a new skill set.

I am reminded of the line from the old Mission Impossible television series: "This is your mission, should you choose to accept it." Baby boomers and retirees, however, have no choice. We must accept it. Now it's time to get on with the job.

To help us get started I’ve brought together leading experts to explore the problems we face and present real, actionable solutions that you can put in place starting today, regardless of whether you’re already retired or have some years to go.

These experts include John Stossel, formerly co-anchor on ABC’s 20/20 and now on Fox Business Network’s Stossel, David Walker, former Comptroller General of the United States, and Jeff White, president of American Financial Group. The discussion will be moderated by Casey Research’s own David Galland.

The online event is called America’s Broken Promise: Strategies for a Retirement Worth Living, and it premieres on Thursday, September 5^th. Response has been overwhelming so if you want to reserve a spot then just click here to find out more.

August 8, 2013

A Monetary Master Explains Inflation

By Terry Coxon, Senior Economist

[Ed. note: One of the best things about being a partner in a research firm employing about 40 analysts is that I have unfettered access to really smart people. While we have a great team with expertise across the spectrum, when it comes to monetary matters, my go-to guy is Terry Coxon, a senior editor for our flagship publication, The Casey Report.

Terry cut his teeth working side by side for years with the late Harry Browne, the economist and prolific author of a number of groundbreaking books, including the 1970 classic, How You Can Profit from the Coming Devaluation. The timing of Harry's book should catch your eye, because his analysis that the dollar was headed for a big fall was spot on. Anyone paying attention made a lot of money.

As coeditors of Harry Browne's Special Reports, Terry and Harry made a formidable team for over 23 years. During this period, the two deeply researched the operating levers of the global economy, with a focus on the nature of money and impact of monetary policy. They also looked for ways to apply what they learned about macroeconomics into practical investment strategies, coauthoring Inflation-Proofing Your Investments. On his own, Terry wrote Keep What You Earn and Using Warrants.

Putting his expertise into action, Terry founded—and for 22 years served as the president of—the Permanent Portfolio Fund, one of the top-performing funds in history.

Having Terry on the Casey Research team as a senior economist has been a huge personal boon. By the time you finish reading my brief interview with him, I suspect you'll understand why.—David Galland]

David: Let's start by defining terms. What exactly is inflation? Most people view inflation as a noticeable increase in the prices of everyday things. How do you define inflation?

Terry: The original use of the term in financial matters referred to money, not to prices. It meant an increase in the total amount of money held by the public. Such a monetary inflation can be engineered by government printing or, under a gold standard, by increasing the official price of gold, as in 1933.

Monetary inflation can also be engineered by inventing a new category of legal tender, as in the case of the silver dollars minted in the 19^th century. And inflation of the money supply can happen without government tinkering, such as through the discovery and development of new gold deposits (as in the cases of the California and Klondike gold rushes), or through decisions by commercial banks to operate with thinner cash reserves in order to issue more deposits.

Today "inflation" usually refers to price inflation, which is a rise in the general level of consumer prices. That second use grew out of the public's experience of episodes of monetary inflation being followed by periods of rising prices.

Notice that with either use of the word, there is a little mushiness. During some periods, depending on what you include as "money," you may find either an increase or a decrease in the supply of the stuff. Suppose that the supply of hand-to-hand currency goes up while the quantity of bank deposits goes down by a larger amount. Is that monetary inflation or monetary deflation? And what exactly does an increase in the "general level of consumer prices" mean? There's more than one way to define an index of prices, and there are many ways to tinker with it.

David: In your view, have the US government and the Fed been following an inflationary policy?

Terry: Yes. Since the Lehman swoon in 2008, the M1 money supply (hand-to-hand currency plus checkable bank deposits) has increased by 72%, so the policy is clearly one of monetary inflation. And the Fed is avowedly committed to avoiding price deflation at all costs. They'll do whatever it takes to prevent price deflation, up to and including sacrificing virgins. That deflation phobia is necessarily a commitment to price inflation, and Mr. Bernanke has indicated that consumer prices rising at a rate of 2% per year would be ideal. So either way you define inflation, the Fed is all for it.

David: Based upon your studies, just how extreme or extraordinary has inflation been since the beginning of this financial crisis?

Terry: A 72% growth in the money supply over a period of five-plus years is a gigantic increase. Take a look at the chart. It shows the annual growth rate in M1 over all five-year periods from 1959 to the present (dates on the chart indicate the end of a five-year period). As you can see, the only episode of monetary inflation that comes close to what is happening now is the money-printing spree of the high-price-inflation 1970s and early 1980s.

David: How certain are you that the monetary inflation here in the US is going to ultimately manifest as price inflation?

Terry: You're asking for a lot when you say "certain"—certainly more than you're going to get from me. But here's why price inflation seems inevitable. The Federal Reserve can easily create more money. There's no limit to that power, as they've already demonstrated. At any hint of deflation, they will produce more cash. They can never know how much new cash would be enough, but because they see deflation as a vastly more serious problem than price inflation, they always will err on the side of too much new money. That attitude is a guarantee of price inflation.

David: When price inflation begins, how significant do you think it will be? A little inflation? A lot? Hyperinflation?

Terry: Mr. Bernanke will get to visit his ideal world of 2% price inflation, but it will only be a whistle stop. The price inflation that lies ahead will be at least as bad as what happened in the 1970s episode, when the annual inflation rate approached 15%. The money that's already been printed so far may be enough to produce such a 1970s-size problem. And more new dollars are coming, because the Fed won't stop printing until price inflation becomes obvious.

Making matters worse is that the devices for paring down the amount of cash that you need for the sake of convenience—such as credit cards, ATMs, and online banks—are now far more widely available and cheaper to use than they were in the 1970s. When price inflation becomes noticeable, people will turn more and more to those devices to reduce their holdings of value-leaking cash. That drop in the demand for money will reinforce the price inflation that originated in the Federal Reserve's increase in the supply of money.

David: I know it can only be a wild guess, but based on your observations, how long do you think it will take for price inflation to become obvious?

Terry: Within twelve months after you hear that the economy has at last fully recovered from the recession.

David: What is the biggest flaw with the deflation argument?

Terry: Whatever process someone might have in mind as a driver of price deflation, no matter how powerful that process might be, the Federal Reserve has the power and the will to carpet-bomb it with more new money. What the deflationists overlook is that if deflation ever seems to be winning, the Fed will simply extend the game for as many innings as it takes for inflation to win. In a fiat-money system, inflation always gets another chance.

David: What would make you change your view that price inflation is inevitable?

Terry: Brain surgery.

A time-tested way of protecting wealth is to move it out of one's native currency and into a location that's more economically sound. But is that even possible for US citizens these days? If so, what are the best places to explore for moving wealth offshore—and how is that best accomplished? Should you and your family follow your money and expatriate your home country?

All these questions—and many more—are answered in a new, free report by legendary speculator Doug Casey. Titled Getting Out of Dodge, it offers specific, actionable advice for moving your wealth and your life safely offshore. Get started while you still can: governments around the world are beginning to tighten their nooses.

July 23, 2013

Should You Borrow Money to Make Investments?

By Dennis Miller

It’s high time investors heed the yellow caution flags waving in front of their margin accounts. Much like the NASCAR driver who pumps his brakes to avoid disaster when he sees the caution flag, it's time for us to slow down. My friend and colleague Ed Steer, editor of Ed Steer's Gold & Silver Daily, recently highlighted a must-read Wall Street Journal blog post focusing on the record-high levels of margin debt, and it sure made me pause to think.

For those unfamiliar with margin accounts, here's an explanation in a nutshell: margin debt is money you borrow from your brokerage based on your investments and the balance in your account. In the US, one can legally only borrow up to a 50% margin. For the sake of illustration, assume a hypothetical investor (let's call him "John") buys $100,000 of a stock. If John has a signed margin agreement with his broker, he can borrow 50% of that amount from the brokerage. That means that John only needs $50,000 to purchase the full $100,000 of stock. Of course, he also pays interest on his loan.

If the stock increases 10%, John has $110,000, earning a $10,000 profit. Based on his original balance of $50,000, that's a 20% return on his initial capital. This is the way in which margin leverages an account. Furthermore, John could use his new equity to leverage himself even more – the more the stock increases, the more debt he can pile on for yet more risk and leverage.

But what happens when the price of one of John's stocks drops? The losses are similarly doubled as well. Furthermore, if John's equity reaches the maintenance margin, his broker will issue a margin call, and he will have to come up with the cash immediately to meet the minimum level of the maintenance margin. The maintenance margin is also a percentage and varies from broker to broker. If John can't come up with the money, his broker has the right to sell part or all of his stock at its current price to bring his account back within the margin requirements.

Margin debt is a unique sort of loan:

• The interest rate is changed by the lender (in this case the broker), and fluctuates with the current cost of money.
• The amount one can borrow fluctuates minute by minute as stock prices rise and fall.
• The broker can take an investor out of his equity position at its discretion, and sell his stock at the worst possible time if he goes outside of the agreed-upon margin requirements.
• The Securities and Exchange Commission sets the maximum margin requirements and can change them at will. Brokers and their customers must comply immediately.
• Investors can pay off the loan by selling their stock. Their broker will deduct whatever amount was owed at the time of sale.

Now, why are more investors borrowing increasing amounts against their investment accounts? The author of the WSJ post had one suggestion: "Some see the increase as a sign of speculation, particularly if the borrowed money is reinvested in stocks."

If investing in stocks is not speculative enough for you, you can add to the excitement (and your blood pressure) by speculating with borrowed money. The time to do that is when you have a "sure thing" – an investment that you just know is going to skyrocket. I've been there before and learned my lesson the hard way.

The Sure Thing: Don't Bet the Farm

In 1977, I moved to Atlanta. One of the coaches of my son's baseball team worked for Scientific Atlanta, a hot new technology company at the time. He kept touting the company's stock, and we watched it go from $16 to $32 per share and split twice in a fairly short time period. He convinced me it was a great opportunity.

I took out a second mortgage on my house, borrowed $32,000, and bought 1,000 shares. I figured it would split and double, and I could quickly pay off the mortgage. I would be playing on the house's money, so to speak.

I was right about one thing: the stock was soon selling for $16 per share, but not because it had split. The price dropped in half because they were having serious production problems with one of their main products. Eventually, I sold it off, paid off part of the second mortgage, and cussed at myself for being greedy and stupid for the next several years as I wrote checks to pay off the balance of the loan. I was playing on the house's money all right – my house!

I'm sure we have all heard the stock market described as a house of cards. The increasing level of margin debt is certainly a prime example. Retirees are pouring money into the market because really, there are few other options left for finding decent yield. Now we're learning that the number of stocks bought on margin is at a record high, meaning a lot of those stocks were purchased with borrowed money. In turn, this has helped push the stock market to all-time highs.

Hello! Does anyone remember the Internet boom… and bust? How about the market crash when real estate prices plummeted?

A sudden dip in the stock market would mean an awful lot of margin calls. More than likely, few folks would have enough spare cash to put up the additional capital requirements. Brokerage firms would then enter sell orders, at market price, to bring their clients' accounts back in balance. Those massive sell orders would drive prices down further, causing more sell orders, and soon it would be a full-blown crash. Boom! Just like a house of cards tumbling to the ground.

And what happens to the retiree who had invested his life savings, hoping to watch it appreciate while collecting dividends in the process? You know, we old people who bought our stocks with real money, the kind we earned and saved – not the borrowed kind. Our account balances will plummet right along with those of the market speculators. The only difference is that we won't have the opportunity to recover.

The Solution for Conservative Investors

Retirees and other conservative investors can protect themselves with a multipronged approach. First, diversification – a topic Vedran Vuk, senior analyst, and I covered at length in the April 2013 issue of Miller's Money Forever – will help prevent a total wipeout. And while the market may crash, there are still many solid companies making plenty of money and paying fine dividends. Those companies usually rebound much more quickly from a crash or downturn than speculative investments do.

Second, stop losses can limit the damage. Stocks don't all fall at the same rate when the market drops. Many big-name companies owned by pension funds pay good dividends and are less likely to be sold, even in a rapid down cycle.

In addition, the Money Forever team also recommends having at least 30-35% of your portfolio in cash and short-term, near-cash instruments. Those contrarians with the courage to buy good companies when others are selling may find themselves in the buying opportunity of a lifetime. If you're one of these folks and you have the cash to buy, you can profit in a down market.

In short, survival comes down to limiting exposure, allocating capital properly, and controlling our emotions. Panic is our worst enemy when times get tough.

I was 37 when I gambled with that second mortgage, and I have had 35 years to recover from it. Investors near the retirement cusp cannot afford to borrow money to speculate; the risks are just too high. At this point in life, we have learned the hard lessons. For seniors and folks approaching retirement, preservation and return of capital always trumps return on capital.

At Money Forever, we cover almost every topic under the sun when it comes to the financial risks facing retirees and those planning for retirement. Whether it's margin debt, annuities, reverse mortgages, peer-to-peer lending, under-the-radar income investments, or just finding some good, high-dividend-paying stocks, we leave no stone unturned. Our unique monthly income strategy is being used by thousands of investors and is a good way to start adding to your income stream almost immediately. Click here to find out how you can start it today with as little or as much as you want to put into it.

July 18, 2013

Timing the Bottom

By Louis James, Chief Metals & Mining Investment Strategist

An interesting thing about the uptick in gold prices over the last couple days is the number of people asking me if I think gold has bottomed. This is somewhat amusing, since we all know that no one can time a market, and the questions are coming from my peers—professionals who should know better.

This reminds me of Doug Casey's famous story about how he bottom-ticked the market in the 1970s: He was a broker at the time and put together an order for a client named Elmer who later reneged on the purchases. So Doug followed his own advice and bought the shares for himself. This happened to be the very day the market bottomed.

Note that Doug did not know that it was the bottom of the market when he made those purchases. He did know that they were good stocks at great prices—the ingredients of any smart speculation.

Another story: Rick Rule of Sprott Global fame formed a partnership to invest in junior resource stocks in 1998 and, undeterred by the "nuclear winter" that gripped the sector for two more years, formed another in 2000. Gold would eventually bottom in 2001, so Rick was clearly early.

Note that being early did not matter; both ventures ended up returning roughly 20:1, and investors made a killing. Rather than fretting about timing the market, Rick simply focused on "buying low."

Key takeaway: not only can nobody time the market, those who have made fantastic amounts of money speculating in this sector didn't even try. They made money buying when valuations were ridiculously low… and simply waiting to be right.

Most people only have the courage to do this with money they can afford to lose—which explains why we call my newsletter the Casey International Speculator and not Casey Safe Investments.

What would we do if safety was our top investment priority? Well, as I wrote after Bernanke's mere suggestion that the Fed might scale back a little on its money printing, it is now plain as day to anyone with their eyes open that "the emperor has no clothes." Gold may take some time to consolidate and rally, but that doesn't make Wall Street a safe bet. We think the safest portfolio allocation under present circumstances would be 50% gold, 50% cash.

But preserving wealth is not our only goal here at Casey Research. For many of us, readers and colleagues alike, it's not even our top priority: we want to make money—lots of money. And it is our view that the recent market volatility is evidence that our projections of more economic trouble ahead were and are correct. That means our overall strategy is correct and remains intact, which in turn implies that the current selloff is a buying opportunity. Hence, we still recommend our basic allocation model of 33% cash, 33% gold, and 33% equities that should do well in times of crisis.

So, while no one can say when the bottom for gold will be—not until it's obvious to all in our rearview mirrors—I can tell you that there are great speculative picks available now that offer the same potential as Doug's picks back in the mid-'70s correction and Rick's back during mining's nuclear winter.

I for one plan to make the most of what will follow the bottom, as surely as day follows night. I have bought shares on the previous downturn, so I bought bullion in response to the most recent selloff. As an anecdotal aside, I found that premiums are up and supply remains an issue in my local market.

Some of my fellow editors here at Casey Research have been placing stink bids on good companies. It's a nice way to redeploy profits from those GLD "gold insurance" puts that worked out so well for us when gold dropped. Note that this does not mean prices can't or won't go even lower in the near term. All I'm saying is that some of us here at CR are happy to add to holdings at today's prices.

But if this is the bottom, won't we miss the best prices in ten years? Absolutely. The questions I'm getting about this suggest a shift in the risk-reward perception in the industry—perhaps a new willingness among professionals to get back in to the market. That could become a self-fulfilling prophecy for the next leg up.

Or gold could just get whacked again the next time Bernanke opens his mouth and pretends the government has the courage to do any of the right things.

This brings us full circle. We don't need to tick the exact bottom of the market; the second-best prices in ten years will still be pretty darned cheap—and much lower-risk. It will take time for such a skittish market to believe the bottom is in. There should be plenty of time to take advantage of good deals.

So let me be clear here:

• I am not calling a bottom.
   
• I am saying that we have opportunities worth taking advantage of now, regardless of exactly where the bottom is—just as Doug has done many times over the years.

That is not a prediction, but an assessment of the situation.

If you have cash to speculate with—if you're still building your portfolio during this correction—don't be afraid to "buy low."

Of course, there's more to earning outsized profits from precious metals investing than just buying low. Knowing which of the juniors are most likely to have a solid resource and a team capable of developing it—or to score big by being bought by a major company—is a vitally important element of successful speculation. You can do the research and due diligence yourself... or you can give Casey International Speculator a risk-free, 90-day trial. Not only will you learn our recent recommendations—including "best buys" and price guidance—but you'll have access to every back issue, as well as free reports for subscribers and our resource dictionary. Learn more and sign up today... before this opportunity of a lifetime slips away.

July 12, 2013

Market Moves Ahead Should be Good for Gold, Bad for the US Dollar

By John Williams, Shadowstats

Nothing is normal: not the economy, not the financial system, not the financial markets and not the political system. The financial system still remains in the throes and aftershocks of the 2008 panic. A number of underlying problems of that time, tied to the risks of a near-systemic collapse and the related, extreme economic downturn, were pushed into the future—not resolved—by the extraordinary liquidity and systemic-intervention actions taken by the Federal Reserve and federal government. Further panic is possible, and severe US dollar debasement and inflation remain inevitable.

Nonetheless, several major misperceptions appear to have developed in the last month or two concerning an end to the Federal Reserve's quantitative easing, the level of crisis posed by US fiscal imbalances, and an unfolding recovery in the US economy.

Contrary to currently hyped expectations in the popular financial media, chances are negligible for any serious, near-term reduction in the Federal Reserve's purchases of US Treasury securities. The Fed has locked itself into ongoing quantitative easing, with fair prospects of expanded, not reduced accommodation in the year ahead. Separately, the long-term solvency issues of the United States should return to the center of attention for the global financial markets by early September 2013. At present, prospects of the US government meaningfully addressing its extreme fiscal imbalances are nonexistent.

Exacerbating financial-system solvency concerns for the Fed and intensifying US fiscal instabilities, the US economy never recovered from its 2008 plunge, and now it is slowing anew. Increasing recognition of these factors, complicated by the potential of a domestic political scandal taking on Watergate-style status, promise difficult times ahead for the US dollar, with resulting domestic inflation problems and significant upside pressure on the prices of gold and silver.

Federal Reserve's Primary Function Is to Preserve Banking-System Solvency

Despite a Congressional mandate that the Federal Reserve pursue policies to foster sustainable US economic growth in an environment of contained inflation, those issues are secondary to the Federal Reserve's primary mission, which is to preserve the stability of the banking system. While Fed Chairman Ben Bernanke has acknowledged that there is little the Fed can do at present to boost economic activity, the weak economy remains the foil for banking-system difficulties, serving as justification for more easing by the Fed.

Accordingly, since the breaking of 2008 crisis, the Fed's accommodation, liquidity actions, and direct systemic interventions have been aimed at maintaining the stability and liquidity of the banking and financial-market systems. As bank bailouts became politically unpopular, the Fed increasingly used the weakness in the economy as political cover for its systemic-liquidity actions.

In response to critics of excessive accommodation, the US central bank recently put forth several rounds of jawboning on exiting quantitative easing, in an effort to quell inflation fears. Those efforts have been a factor in recent gold selling.

Comments from the June 19 Federal Open Market Committee meeting and Mr. Bernanke's subsequent press conference were clear but largely ignored by the markets. The shutdown of quantitative easing—specifically the bond buying of QE3—would not happen until such time as the economy had recovered in line with the relatively rosy economic projections of the Fed. As the stock market began to sell off in response to the Fed chairman's initial press-conference comments, he sputtered something along the lines of, "No, you don't understand me. If the economy is weaker, we'll have to increase the easing." The economy is going to be weaker; banking problems will persist, and the Fed will continue to ease.

Nonetheless, the consensus perception appears to be that QE3 will be gone by the middle of 2014, despite the stated economic preconditions. As will be discussed, though, intensifying economic deterioration should become obvious to the markets in the next several months, and that should help to shift perceptions. The harsh reality remains that the Fed is locked into its extraordinary easing by ongoing solvency issues in the banking system (only hinted at in Bernanke's post-FOMC press conference), and by the political cover provided by a weakening economy.

In the latest version of quantitative easing (QE3), the Fed has been buying US Treasury securities at a pace that is suggestive of fears that the US government otherwise might have some trouble in selling its debt. Through July 3, 2013 and since the expansion of QE3 at the beginning of 2013, the Fed's net purchases of Treasury securities has absorbed 90.5% of the coincident net issuance of gross federal debt. That circumstance is exacerbated somewhat by gross federal debt currently being contained at its official debt ceiling.

Still, in the pre-crisis environment of 2008, the St. Louis Fed's measure of the monetary base (bank reserves plus cash in circulation) was holding around $850 billion, with roughly $40 billion in bank reserves. As a result of intervening Fed actions, today's monetary base is around $3.2 trillion, with more than $2.0 trillion in bank reserves (primarily excess reserves). Under normal conditions, the money supply would expand based on the increase in bank reserves, but banks have not been lending normally into the regular flow of commerce, due largely to their impaired balance sheets.

While there has been no significant flow-through to the broad money supply from the expanded monetary base, there still appears to have been impact. As shown in the accompanying graph, there is some correlation between annual growth in the St. Louis Fed's monetary base estimate and annual growth in M3, as measured by the ShadowStats-Ongoing M3 Estimate. The correlations between the growth rates are 58.1% for M3, 39.9% for M2, and 36.7% for M1, all on a coincident basis versus growth in the monetary base. The June 2013 annual growth estimates are based on four weeks of data.

The ShadowStats contention, again, remains that the Fed's easing activity has been aimed primarily at supporting banking-system solvency and liquidity, not at propping the economy. When the Fed boosts its easing but money growth slows, as seen at present, there is a suggestion of mounting financial stress within the banking system.

Further, underlying US economic reality is weak enough to challenge domestic banking stress tests. In this environment, the Fed most likely will have to continue to provide banking-system liquidity, while again, still taking political cover for its accommodation activity from the weakening economy.

 

Renewed Fiscal Crisis by Early September

At present, the US Treasury is playing daily accounting games in order keep its borrowings—subject to the debt ceiling—from exceeding the ceiling. The July 3, 2013 Daily Treasury Statement showed those borrowings to be just $25 million shy of the roughly $16,999.421 billion ceiling. The US Treasury estimates that the ability to play games will end, and the debt limit will have to be raised, sometime early in September 2013.

The long-postponed and unresolved budget-deficit conflicts within the Congress and with the White House are likely to surface anew at that time. What is being played out here is still part of the fiscal-crisis confrontation of July and August 2011, which almost collapsed the US dollar and brought about a downgrade in the sovereign credit rating of the United States. The issues never were resolved. They were put off until after the 2012 election, and other than for minimal sequestration, they remain in play, going into a post-Labor Day 2013 showdown.

The global markets, which broke into brief but extreme turmoil with the unresolved crisis in 2011, await a resolution. The markets have been patient with the US dollar through the ensuing sequestration, and continued postponements of serious negotiations that have accompanied successive displays of the political inability of the US government to address its long-range solvency issues. Further efforts at delay and/or obfuscation not only should invite an intensifying crisis of global confidence in the US dollar, but also will invite a further downgrade to the sovereign credit rating of the United States.

The crux of the dollar-debasement and ultimate, severe-inflation/hyperinflation issues indeed is this political inability of the United States to cover its long-range obligations, other than by printing the money it needs. Based on the US Treasury's financial accounting of the federal government using generally accepted accounting principles (GAAP), the GAAP-based federal budget deficit was $6.6 trillion in fiscal-year 2012 (year ended September 30). Well beyond the simple cash-based deficit of $1.1 trillion in fiscal 2012, the GAAP-based annual deficits have been in the range of $4 to $5 trillion for the six years leading up to 2012. The largest difference here is that the GAAP numbers include annual deterioration in the net present value of unfunded liabilities for programs such as Social Security and Medicare.

Those GAAP levels are not sustainable or containable. Beyond the likelihood that the economy is at the tipping point on taxes, where higher taxes actually would increase the deficit due to resulting slower economic growth, the government cannot raise taxes enough to cover the actual deficit in any given year. The annual shortfalls also are so large that every penny of government spending (including defense) could be cut to zero except for the social programs, and the fiscal circumstance still would be in deficit.

The options open to those running the government are limited in terms of new taxes and have to include significant spending cuts and restructurings of Social Security, Medicare, etc., so that those programs are solvent over the long haul. Such actions are a political impossibility at the moment. Given continued political contentiousness and the use of overly optimistic economic assumptions to help ten-year budget projections along, little but gimmicked numbers and further smoke and mirrors are likely to come out of pending negotiations or confrontations.

Economic Plunge and Recovery versus Plunge and Stagnation

The official version of recent economy activity is that a deep recession began in December 2007, hit bottom in June 2009, and that business activity has been in recovery since. That pattern is reflected in the accompany graph of headline, real (inflation-adjusted) gross domestic product (GDP). The economy regained its pre-recession high in fourth-quarter 2011 and has been expanding ever since. Unfortunately, no other major economic series has shown the full and expanded recovery suggested by GDP reporting. Those "errant" series include payroll employment, industrial production, consumer confidence, and housing starts, among others.

 

Closer to common experience, there never was a recovery following the economic downturn that began in 2006 and collapsed into 2008 and 2009. What followed was a protracted period of business stagnation that began to turn down anew in second- and third-quarter 2012. The "recovery" seen in headline GDP reporting was a statistical illusion generated by the use of understated inflation in calculating the inflation-adjusted series.

During the last three decades, a number of methodological changes were made to inflation-estimation techniques that have had the effect of artificially reducing annual inflation rates. Of particular relevance to GDP estimation has been the introduction of hedonic quality adjustments, which adjust inflation rates for the effects of nebulous quality changes. These changes—ranging from new features with computers and washing machines to the use of colored pictures in college textbooks—cannot be measured directly, only estimated by econometric models, with the usual effect of reducing related inflation.

The lower the inflation rate that is used in adjusting a series, such as GDP, for inflation impact, the stronger will be the resulting inflation-adjusted growth. When the US first used this process in its GDP reporting, countries such as Japan and Germany did not follow. Hence, stronger relative US versus Japanese GDP growth at the time reflected the difference of use in inflation gimmicks, more so than actual differences in economic activity. The hedonic changes used in US GDP estimates never have been applied consistently and do not reflect common experience.

The following graph of corrected real GDP is adjusted for the removal of roughly two percentage points of aggregate, hedonically understated annual inflation. It shows a pattern of economic plunge and stagnation, as opposed to the official pattern of plunge and recovery.

 

Not only do a number of large, consumer-oriented companies find that the "corrected" pattern of activity more closely resembles their business activity, but this same pattern also is reflected in underlying fundamentals that drive broad activity, such as household income.

The primary issues facing the economy are structural liquidity problems for the consumer, who generates more than 70% of GDP activity. Without real income growth, the consumer cannot sustain growth in real consumption, except for the possible use of short-lived credit expansion. Yet, credit availability has been limited. Without credit expansion (all growth in post-debt-crisis consumer credit outstanding remains in federally owned student loans), the consumer is unable to borrow in order to cover the shortfall in living standards.

The next graph shows median household income through May 2013, deflated by the CPI-U (data courtesy of Sentier Research). Monthly median household income plunged as the economy purportedly began its strong recovery in June 2009. Further, in the last two years, income has been bottom-bouncing near its cycle low, consistent with the "corrected" GDP series. The numbers here are based on monthly surveying by the US Census Bureau.

So long as consumer liquidity remains constrained, the economy has not and cannot recover. Accordingly, any near-term hype from an occasional "good" economic statistic most likely is no more than hype. Economic reality will continue to surprise on the downside, and that is a negative for the US dollar, as well as for budget-deficit and Treasury-funding projections. The US economic weakness is long-term and structural, and increasing global recognition of that in the months ahead will contribute to eventual pummeling of the US dollar in the global markets.

 

Other Factors Impacting the US Dollar, Inflation, and Precious Metals

Highlighted here have been several issues where recent shifts in market sentiment have neutralized or reversed the impact or otherwise had been significant, negative elements for the outlook of the US dollar, and supportive elements of the outlook for domestic inflation and the prices of gold and silver. Market sentiments should shift again, both as the economy shows an intensifying downturn and as the clock runs out on fiscal-crisis delaying tactics.

A new factor—not yet widely anticipated in the markets—is that still-developing political scandals tied to the Obama administration could threaten global perceptions of political stability in the United States, placing significant downside pressure on the value of the US currency. The popular press generally has been highly sympathetic to the political needs of the administration, so increasingly negative press in these areas suggests that recognition of the "scandals" has gained some momentum.

In the event that a Watergate-type circumstance evolves from the current hubbub of touted misdeeds, it could become a seriously negative factor for the US dollar. After Nixon floated the US dollar in March 1973, the Watergate scandal began to break open with Congressional hearings. Despite other turmoil of the time, including an Arab-Israeli war and an Arab oil embargo, the day-to-day developments in the Watergate scandal dominated day-to-day trading in the US currency.

When the US dollar again comes under heavy selling pressure, oil prices will spike anew, separate from the effects of political crises in the Middle East. The inflation, so driven, should reflect dollar weakness from Federal Reserve policies that Mr. Bernanke will find he cannot escape, and from dollar weakness reflecting the inability of the US government to address its long-term sovereign-solvency issues. Ongoing economic weakness will exacerbate the dollar-negative circumstances, intensifying the problems with Fed easing and US fiscal deterioration. The inflation will be driven by US dollar weakness, not by strong domestic demand for goods and services.

As fundamental dollar selling kicks in, full-fledged dollar dumping along with heavy sales of dollar-denominated paper assets are likely to unfold. Preceding, or coincident with that, the global reserve status of the US dollar should be challenged. As the rest of the world moves out of the dollar, domestic confidence in the US currency will falter as well, eventually fueling severe domestic inflation, and setting the early base of a likely hyperinflation. Such an environment is one for which physical gold and silver would serve as primary hedges against the ultimate debasement of, and loss of purchasing power in the US dollar.

Gold and silver will not only continue to serve in their timeless role as a store of wealth while fiat currencies flail and ultimately fail—right now, market conditions are ripe for a once-in-a-lifetime profit opportunity to take shape. The current gloom in the mining-stock sector has stock prices at astounding lows... but those who know which companies are best positioned to ride out this temporary collapse and have the fortitude to invest in them now can make a fortune.

This isn't exaggeration—this scenario has played out before in the US. When you watch the Downturn Millionaires: How to Make a Fortune in Beaten-Down Markets, you'll not only learn when it happened, but why global economy signals that gold and silver will not stay in the current slump for long... and how to start positioning your portfolio to maximize its profit potential. Get the details and watch the video now.

Economist Walter J. "John" Williams publishes www.shadowstats.com. ShadowStats specializes in assessing the reliability of government economic data and in looking at alternative economic measures from the standpoint of common experience, net of heavily politicized methodological changes of recent decades (inflation, unemployment and GDP). Other analyses include estimates of ongoing money supply M3, which the Fed ceased publication in 2006, or less-commonly followed series such as the federal government's GAAP-based financial statements. Articles related to the accompanying comments on the understatement of official inflation and federal-deficit reality, and an article outlining risks of a US hyperinflation, are available to the public in the upper right-hand column of the ShadowStats home page.

June 24, 2013

Nuclear Winter? Not Yet!

By Andrey Dashkov, Research Analyst

The late 1990s for the resource sector was so challenging that it is now often referred to as the "nuclear winter" of the industry. Some analysts are comparing our current circumstances to that period, while others purport we haven't hit bottom yet.

In its Business Risks in Mining and Metals 2013-2014 report, Ernst and Young states  that capital allocation and access is now the number-one challenge the resource sector is facing. While production-stage companies are rationing capital expenditures to meet long-term goals, the juniors don't have this luxury; they need to raise money just to keep the lights on.

The report says the current situation is the worst market in ten years. Since International Speculator deals mostly with the early-stage companies, we set out to see exactly how bad it is.

To do that, we pulled data on 10,521 private placements (PPs) closed by TSX-V-listed metals and mining companies since January 1, 1999 and compared the financing market now to the infamous "nuclear winter." Here's what we found.

The data show that metals and mining companies closed only 36 private placements in Q2 2003, raising C$17.6 million. By comparison, so far in the second quarter of 2013, metals and mining companies closed 150 financings for a total of C$192.6 million. This clearly shows that the current market, while definitely under pressure, is not as bad as it was ten years ago.

The market is also stronger now than in 1999-2001, when little financing activity took place. That period indeed was a desert for a metals and mining company.

For a clearer picture, let's zoom in on that period.

Before things picked up at the end of 2002, the junior metals and mining sector was in a miserable state for at least two years, as the chart shows. Further, a few large deals skewed the data; for example, Mazarin Inc. and Regency Gold Corp. raised about C$10 million each in Q4 2000. These financings were huge compared to their peers, but wouldn't be considered that big today.

Conclusion

While the current state of the junior market couldn't be described as strong, these data show we haven't reached a nuclear-winter phase, at least not yet. Juniors still can finance, though clearly investors are much less generous now.

Keep that 1999-2001 period in mind the next time someone tries to convince you the bull market is over. That is what a nuclear winter looks like.

Our situation is much better than ten years ago. The best companies are still able to raise funds to explore and develop. This is where investment dollars should be focused, because when the market does turn around, it is the better-managed and better-capitalized companies that will be the first to deliver the tremendous returns this volatile sector is known for.

Despite the spectacular fall in gold prices in recent weeks, sales of the physical metal are going through the roof. Is the gold market dying, or is it getting ready to rebound with a vengeance? To answer these questions, Casey Research has partnered with TheStreet to produce an exclusive video event to help investors sort out the complex world of the gold market – Gold: Dead Cat or Raging Bull? This must-see webinar premiers tomorrow at 2 p.m. EDT and features investment guru Jim Cramer, our own Doug Casey, Sprott Inc. founder and chairman Eric Sprott, and a number of other renowned precious-metals experts. Click here to learn more and to register.

 

June 21, 2013

What Are Reasonable Gold Market Expectations?

By Jeff Clark, Senior Precious Metals Analyst

The historical record shows that those who get washed out during big corrections miss the greatest buying opportunities of a bull market.
With that as context, what can we expect from gold moving forward? Let's start with the short term…
Full market capitulation is underway. Headlines about gold are almost universally negative today, and all about selling. This feeds on itself, and the process may not be over. In this kind of environment, prices will overshoot to the downside. In other words, the bottom may not be in.
What if we get more short-term pain?
Differentiate between short-term sentiment and long-term reality. It's not deleveraging and fear that has hit our sector like it did in 2008, but renewed confidence in the broader markets and lack of higher inflation rates that many expected by now. The current thinking by sellers is that crisis has been averted and therefore there's no need to own gold.
Contrast the selling by these short-sighted investors against record levels of buying by central banks, China and India gobbling up 20% of global annual production, and runaway demand at mints.
Fundamentals dictate long-term trends – and fundamentals don't lie. The longer our fiscal problems are allowed to fester, the greater the eventual structural damage to global economies and standards of living. These forces will sooner or later come to a head, and will play out for several years.
The broader investment community does not yet see a compelling reason to invest in gold – but when inflation starts pinching pocketbooks and budgets, a sea change will take place. Remember, roughly 98% of US investors don't own gold – that will change when higher rates of price inflation begin making headlines.
Should gold end the year down , it will not mean the bull market is over. It will mean that inflation remains contained and that we have a longer-than-expected buying opportunity. My suspicion is that it will also mean the turnaround will be stronger and longer than we've seen before.
Let the sea change come when it comes.
In the meantime…
Prepare yourself psychologically and financially to act. Emotional investment decisions rarely pay off, so don't succumb. Easy to say, hard to do, I know. We at Casey Research understand the fear – but giving up and selling is the worst thing to do right now. It locks in a loss and leaves one wondering when to buy back in – if at all. We heard emotional outbursts in late 2008, too – and that was the best time to buy in years, precisely because so many people were giving up.
The bottom line is that we're looking for onramps, not exits.
The best onramps, profit-wise, come when most other investors are heading out of a sector. Is that what's happening with gold right now? Is it a dead cat? Or is this a protracted lull... just giving the bull time to catch its breath?
Only time will tell for sure – but investors who wait for the answer will likely miss a once-in-a-lifetime profit opportunity that could be life changing. Don't be among those investors. Casey Research and TheStreet have teamed up to bring you an online webinar that will help you position yourself properly in the precious metals.
GOLD: Dead Cat or Raging Bull? features experts including Eric Sprott, Steven Feldman, Jim Cramer, and Doug Casey. They'll address what's going on with gold today and what investors need to do to be well-positioned for tomorrow, including specific, actionable advice.
This free webinar is a must-see event. Clear your calendar for Tuesday, June 25 at 2:00 p.m. EDT – you can't afford to miss it. Get the details and register now.



June 19, 2013

What Lies Ahead for Gold?

By Jeff Clark, Senior Precious Metals Analyst

First, the bad news…
The selling is likely not over. The capitulation process may not be completed. Overall momentum remains down.
How low can gold and silver go? One can view all sorts of chart patterns and technical signals, and while a few will eventually be correct at calling the bottom, we prefer not to base our decisions on this type of strategy, starting with the fact that there are many different interpretations and too much variance in the predictions. What we do know is that given that capitulation is under way, the selling will overshoot to the downside, just like surges can overshoot to the upside. Our response should be to prepare to take advantage of that situation.
Sentiment has shifted to negative. All the headlines and stories about gold are negative and bearish. It will take a while for these investors to reenter the market, especially those who just sold for a loss. This won't be a years-long process in the making, but it likely won't happen in a month, either. The implication here is that patience will be required on the part of committed precious-metals investors.
Now the good news…
We've seen this before. Remember the autumn of 2008, when gold fell 28%? In the spring of 2006, the price dropped 22%. And as we've pointed out before, many proclaimed in 1976 that gold was over when it fell a dramatic 47%.
None of these selloffs dictated the end of the gold bull market. That won't be the case this time around, either. A panicked shakeout is just that.
The fundamental case for gold is growing, not diminishing. In spite of the downtrend in the price, the conditions that support the long-term bull market are increasing in importance. The US and Japan alone will flood the world with almost $2 trillion over the next 12 months. Europe's problems have not been solved, and the Eurozone teeters on the edge of a recession. And did you know that not one G20 country currently has a balanced budget? The current fiscal and monetary path of many major countries remains unsustainable, and no amount of selling by traders and hedge fund managers has changed that.
One might argue that these issues now have a diminished effect on the gold market. Regardless of whether that's true, the effects of these actions have not played out. There is no easy way out of the corner our political leaders have painted themselves into. In other words, the damage has already been done to our fiscal and monetary state. The endgame to our debt situation hasn't changed. When the ramifications begin setting in, it will be imperative that we all have meaningful exposure to gold.
In the end, fundamentals always win. In spite of the selloff, the long-term trend is still intact. Keep your eye on the big picture.
A lifetime buying opportunity is shaping up. We're not exaggerating by stating that. Given the waterfall decline in both precious metals and equities, investors with the courage to act and the cash to deploy will not just be rewarded, but could very well change their financial futures. The chance for enormous gains will be remarkable.
As a result, some of you reading this will, frankly, get rich, especially those who have exposure to the best junior gold stocks. Sadly, not all will realize this level of profit; while there are a lot of reasons for that, the biggest is because they won't have the two Cs – cash and courage. I hope you will be among those in the first camp.
I'll leave you with a quote from one of the most successful fund managers in the US, which was made while gold was in the midst of its dramatic selloff. It captures exactly how we feel about the current situation – and I hope yours:

"You should love this if you're a long-term holder of gold, or a believer in gold as a currency – you can buy your insurance cheaper," said Mark Fisher, CEO of MBF Clearing Corp. "A long-term buying opportunity is near."

Recent market actions have left many staunch gold advocates uncertain about what's ahead... not to mention how to invest wisely for both the short and long term. What gold assets are the best to buy? Should investors be buying today or holding for further drops?
These questions and others will be addressed in a free online webinar from Casey Research and TheStreet. Featuring legendary contrarian speculator Doug Casey, Sprott Chairman and founder Eric Sprott, TheStreet founder Jim Cramer, and others, GOLD: Dead Cat or Raging Bull? will give you information you need to set your portfolio up for life-changing gains.
Conditions are setting up for a rare opportunity to reap astonishing profits. Don't miss out: register today for the webinar, which premiers Tuesday, June 25 at 2:00 p.m. Eastern Time.



June 17, 2013

The Hidden Costs of Precious-Metals Miners’ Optimism

By Andrey Dashkov, Research Analyst

The junior resource sector is struggling financially, something most investors seem to agree on – and rightly be wary of. Here at Casey Research, we've analyzed both producers and explorers to see how profitable (or value-adding) they may be under current market conditions. The rather obvious conclusion, shared by many company executives, is that now is the time to be frugal.>
Producers have started to focus on cutting costs and pulling back from development projects that have diminished prospective returns or otherwise unacceptable risk profiles.
Developers have sinned in their own way, too: as gold prices rose year after year, the price assumptions used in economic studies likewise went higher and higher. Some used assumptions that were too optimistic. And now that trend is coming back to bite them – as well as any investor who buys into those assumptions.
Naturally, when the gold price continued rising, it seemed to justify using a higher gold price when calculating how profitable a mine might be. This worked well to persuade banks to loan money and investors to buy stock, and some mines were built without enough consideration of a protracted price reversal, which has caught less prepared companies and investors off guard.
We believe gold will rebound and head higher, as you know, but that hasn't happened yet, and some mines that went into construction or production based on unrealistic assumptions are facing greater costs and lower revenues, resulting in net incomes far below investors' expectations.
All of this is fairly predictable, but that doesn't prevent many executives from making bad decisions, and it only adds to the overarching skepticism about the future of the industry.
Some of this could have been avoided during the feasibility stage.
For the following chart, we pulled data on 86 Canadian economic studies filed on gold (and multi-metal projects containing gold) from 2011 onward. The studies cover projects in scoping, prefeasibility, feasibility, and expansion stages.

Consider: if the gold price is significantly lower now than, say, a year ago, the internal rate of return (IRRs) of these projects should be lower, too (given similar cost structures and interest rates). But that's not the case. There was a drop in 2012, but so far in 2013, companies are on average projecting almost the same rates of return they were in 2011.
IRRs will probably continue to look good despite the current correction in the gold price, simply due to the fact that a project is only attractive to potential investors and financiers if it provides an IRR greater than 20%, preferably 30%, on an after-tax basis. Anything below that is difficult to finance under normal market conditions, let alone during the present weak metals environment.
To achieve such high IRR numbers, management teams have to carefully think through multiple ways to optimize project economics, including cost control, allocation of capital resources, optimal production capacity, life of the mine, and other issues. That's fine, but one has to wonder why things weren't as optimized before – we can only conclude that some companies continue to use unrealistic assumptions. Whether that's misplaced optimism or malfeasance has to be determined on a case-by-case basis.
This means that IRRs alone may be misleading benchmarks. Investors doing their due diligence need to look past the flashy economic numbers and consider the inputs that went into producing the IRR – and that includes gold price assumptions, which are one of the simplest and easiest-to-spot signs of excessive optimism.
Now, almost any economic study includes several scenarios to test how sensitive the resulting IRR (or net present value) is to the underlying premises. In most cases, however, there is a "base case" scenario that serves as a benchmark. The problem arises when the gold price drops below it, even if temporarily, as the investment community becomes confused and surprised.
That's why we sometimes evaluate economic studies with lower gold price assumptions than what is used as a base case. The next chart shows why this is important.

Our sample of Canadian economic studies filed since 2011 shows that while the annual gold price is 1.8% lower than this year's average price (so far), the gold price assumptions used in economic studies have increased by almost 24% – not in relative terms, but in absolute terms: from $1,170 to $1,450. Worse, some of the projects in the sample hardly worked at a gold price below $1,700.
What does this tell us? First, base-case scenarios outlined in economic studies published over the past three years should be viewed with caution. What looks like a reasonable price projection for a rising market does not work too well during a falling or stagnant one. Again, we do see our market sector resuming its northward march, but until that happens, developers with such high assumptions are simply not going to get the money they need to build their mines.
Second, using aggressive gold price scenarios is very risky. In the short term, current lower price levels will produce quarters of weak income and operating cash flow, all to the detriment of the shareholders. Projects with assumptions currently above spot will not get financed. Conservative price assumptions and economic robustness are what preserves shareholder value in the long term.
Third, many development-stage properties will never reach production.

What to Do

First, realize that this is not the end of the sector. It's normal for some development-stage properties to never become mines, for reasons beyond gold price assumptions.
Second, gold supply won't decline in the short term due to aggressive price assumptions. Remember that there is a significant time lag between development and production; there are mines coming onstream now whose economic studies from several years ago were based on lower gold prices. Most of those projects should continue contributing to new mine supply. In fact, some analysts predict that although the gold price may remain flat for a while, mine production will rise in 2013. CPM Group estimates gross additions to reach 5.2 million ounces, 53% of them from new operations.
It's worth repeating that in the current market, it's better to be flexible than large. Mining higher-grade areas in a flat gold price environment should help sustain both costs and margins, while the developers should be more conservative when it comes to forecasts. In our opinion, flexibility and prudence are the ways to win in a weak metals price environment.
The best way for precious-metals investors to win in such an environment is to seize the opportunity and buy the best mining stocks while they're deeply discounted. Such a contrarian play is the way many fortunes have been made... and you can do it, too. Casey Research has created a unique, free webinar focusing on the insights of investing legends like Doug Casey and Rick Rule; Downturn Millionaires: How to Make a Fortune in Beaten-Down Markets will show you how it's done. Watch it now and get started on your fortune.



June 14, 2013

Are the Gold Bugs Wrong?

By Jeff Clark, Senior Precious Metals Analyst

What a ride the precious metals have been on recently. Gold and silver prices have fallen off a cliff, while gold stocks were thrown on the rocks and left for dead. GLD has seen record outflows.
Popular financial news shows featured guest after guest who proclaimed gold is now "officially" in a bear market, emboldened by the fact that in spite of its recent bounce, the price has languished below its September 2011 peak for 20 months. As a group, gold stocks are down an abysmal 54% over that same period. The capitulation process has been brutal.
So, were we wrong? Is it time to admit defeat, sell our positions, slink into a cave, and lick our wounds?
Absolutely not.
The only thing that changed over the past 60 days was the price of gold, and perhaps the mainstream's perception of our industry. The realities of the fiscal and monetary state of the world, however, did not.
What has struck our industry was not the consequence of a shift in fundamentals, but rather a number of transient factors, including: (i) growing belief in the general investment community that inflation will not result from global money-printing efforts; (ii) claims the global economy is improving; (iii) Europeans fleeing their economic troubles buying US dollars (which makes the dollar look strong and hence gold less appealing to some); and (iv) a very large gold sale that caused the gold price to breach "technical support levels" and trigger a cascade of further selling. All of this – and a lot of commentary based more on opinion than fact – has led to the misguided conclusion that gold is a has-been asset.
Casey Research readers know we think inflation is inevitable, but even if deflation were more likely, it is the fallout from a world living beyond its means in which most major central banks are massively debasing their currencies in an attempt to prop up ailing economies that worries me.
These stimulus policies are unprecedented in scale, entirely unsustainable, and induce financial-system instability. And somehow, it is widely believed that the same policymakers who concocted this mess can get us out of it. Our views haven't changed – yet suddenly, we're contrarians again.
It takes patience and courage to stay the course amid a groundswell of proclamations that the "gold trade is dead," but our positive outlook isn't based on stubbornness. The evidence from history is very clear: you cannot solve debt problems with more debt, nor strengthen an economy by destroying your currency. Eventually, these sins catch up to you.
Today's ongoing economic and fiscal crises cannot end smoothly or without unpleasant consequences. Since none of the excesses that precipitated the 2008 financial crisis have been fixed, another round of crisis is baked in the cake and will likely inflict even greater damage. When that happens, gold will again be seen as the refuge it is, regardless of current popular opinion.
We're not alone in this thinking. As you've undoubtedly read, in response to the crash, global demand for physical metal soared at both the retail and wholesale levels. This reaction is extremely important: we can't identify a single crash, collapse, or crisis that ended with retail investors stampeding to buy the asset that had just been crushed. Not one.
In our view, the gold story is not over. Far from it. The reasons for owning it are just as important now as they've ever been since the bull market started in 2001. I can't be sure the price is done falling – but I'm sure it's not done climbing.
What is going on with gold? Was it overvalued before the recent drop? Or is the price being manipulated? Is now the time to get in, and if so, how? These are just a few of the questions investors want answered. And while no one has a crystal ball that issues definitive answers, some people have been around long enough to have keen insights on what's happening and what's likely to happen from here.
People like Doug Casey, legendary speculative investor... Eric Sprott, founder and chairman of Sprott Inc... and Steve Feldman, former Goldman Sachs partner and cofounder of Gold Bullion International. Casey Research and TheStreet have teamed up to bring these great minds together, along with others, to discuss the questions asked above, and many more. You can hear their answers – and more important, get their actionable advice on what to do now to best position yourself for what's ahead with gold – in an exclusive video event titled Gold: Dead Cat or Raging Bull? The webinar will be held Tuesday, June 25 at 2:00 p.m. EDT. Reserve your spot now.



June 12, 2013

Time to Stress Test Your Resolve in the Gold Markets

By Jeff Clark, Senior Precious Metals Analyst

The Casey Research Metals and Mining team has received a number of worried and angry emails about gold's recent rollercoaster ride. I'd like to respond to them.
First, I understand. I'm an investor, too, and I also manage money for family members. We have positions that are underwater, a few dramatically so. Worse, in many cases a full position had been built, seemingly leaving no room to average down and lower our cost basis. This predicament isn't fun, and there are a limited number of options.
However, instead of responding emotionally, let's look at some facts and consider their implications.

The drop in stock prices came with no drop in the quality of the companies' assets. This is important to recognize, because it highlights the difference between value and price, and points to opportunity. Even at lower gold and silver prices, the value of these companies is higher than they're currently priced. This will eventually correct, as all mispriced markets do.

Investors must be willing to hold through down or sideways markets to realize profits. The trend we're betting on took an unusually large detour, but it has not changed in any material way. It may take some time for the market to stabilize before it makes a significant move up, and with summer knocking on the door (often gold's low season), we could easily see the gold market remain weak for a few months. A huge rally in the immediate future is unlikely unless a black swan hits (for example, a deterioration in European sovereign debt, a sharply lower US dollar, bank failures, etc.). The message is that, like any market with favorable fundamentals, you must have the mental wherewithal to stay in the game, however painful, in order to seize a big profit.

A lifetime buying opportunity is shaping up. By any analysis, gold stocks are about as cheap as they've ever been. Therefore, focus on positioning yourself ahead of what we think will be an extraordinary reversal. The more spectacular the selloff, the more spectacular the opportunity – and this selloff has been one for the record books. We're witnessing a setup that only comes along a few times in an investor's life. Our goal is to prepare for it, not lament an unexpected trend interruption.

Be honest with yourself about risk and volatility. Investment decisions based on emotions rather than facts rarely work out. I know it's not easy, but look ahead and not behind. Stock prices don't care how you feel – and they still won't when the market reverses to the upside with you on the sidelines looking on.

The bottom line is that you've got to hang in there and let the big-picture forces guide your gold investing decisions.
It's only natural that investors who haven't experienced this kind of situation before might be wondering exactly what the big-picture forces are indicating today. To address that issue, along with the many other questions surrounding gold investments today, Casey Research and TheStreet have brought together some of the sharpest gold-investing minds around. They include: Doug Casey, legendary contrarian and speculator; Jim Cramer, founder of TheStreet and host of CNBC's Mad Money; and Steve Feldman, cofounder and CEO of Gold Bullion International.
You'll hear their thoughts on what's happened in the gold markets over the past two months... what is likely to be ahead in them... and how gold investors should position themselves. You'll get specific, actionable advice in this free webinar, so reserve your spot now. Gold: Dead Cat or Raging Bull? will premier on Tuesday, June 25 at 2:00 p.m. EDT. You don't want to miss it – learn more and register today.



June 11, 2013

Wedding a Part of Your Portfolio to an Annuity… with Little Hope of a Quickie Divorce

By Dennis Miller

Are annuities the greatest thing since sliced bread?
Well, no, but they do make sense for some investors as part of their portfolio. However, we have to shop wisely and not allow sales agents to push us into the wrong products just to fatten their own wallets. Unfortunately, that makes some folks shy away from something that could help them make their money really last a lifetime… or longer.
After we published both a Money Forever premium issue on annuities and a special report (The Annuity Guide) last November, our team received an outpouring of emails, some sharing happy stories and others with sad tales; but most folks were just thankful for our objectivity and eager for more information.
So I decided to go back to Stan the Annuity Man, who helped us with the issue, for more input. We have no financial arrangement with Stan; he is just a really smart guy with years of experience in the industry, but I guess his name probably gives that away. We appreciate Stan taking the time to make sure we all understand annuities and how to shop smart.
Take it away, Stan…

Use Portion Control with Annuities

By Stan the Annuity Man
Assuming that an annuity is appropriate for you (more on that in a bit), the first question you should ask yourself is: How much should I allocate to any one, specific annuity? A word of advice: "how much" is not a question you want to ask an agent, because most live in a fantasy world of "one size fits all" and "let's put it all in the annuity." Common sense would tell you that, like every other investment, annuities should only be a portion of your portfolio.
As Dennis has mentioned before, if it sounds too good to be true, it is. Annuities are no exception to this rule, and you should own or consider owning an annuity for its contractual guarantees only. Do not let an agent show you hypothetical or projected returns and try to sell you a dream.
I created an easy to remember acronym – "PILL" – that tells you if an annuity might be right for you. In my world, if you don't need to find solutions for the issues below, then you probably don't need an annuity.

• P is for principal protection
• I is for income for life
• L is for legacy
• L is for long-term care

Notice that growth is not one of the issues an annuity addresses. Even though 75% of all annuities sold annually (over $200 billion worth) are high-fee variable annuities, I am a firm believer that annuities are not growth products. Indexed or hybrid annuities offer such limited growth that it's comical. Load variable annuities offer limited investment choices in most cases, with an average annual fee of over 3%. No load, no fee variable annuities are growing in popularity because of tax-deferred growth, but you have to be able to properly manage the funds yourself… or hire someone to do it for you.

"P" Is for Principal Protection

The majority of annuities I recommend address the risk of outliving your money. No one wants to outlive their money, and annuities are the only product that will pay you regardless of how long you live. Most people I talk to think that if you die early, the insurance company will keep the balance. That is not true, and it is not how you should structure a policy. I always recommend the contract pay for life and leave 100% of any unused money to your listed beneficiaries.
With this lifetime income plan, you have no money at risk, and you are literally making a bet with the insurance carrier that you will live longer than they project you will. If you live to 125, the carrier will have to pay you. If you die early in the contract, all of the money will go to your family, and the insurance company doesn't keep a penny. It's really that simple.

"I" Is for Income for Life

I can give the insurance company the premium, and it will pay me for the rest of my life. Should I die before my monthly payments have exceeded the premium, the balance is returned to my beneficiaries. As Dennis mentioned in The Annuity Guide, in the worst-case scenario you end up lending your money to the insurance company interest-free for the period over which you collect payments. That is the tradeoff for knowing you have income for the rest of your life.
There are two ways to use annuities for lifetime income: You either need income now or income later. Income now is only solved with a single premium immediate annuity. Don't let an agent try to convince you otherwise by recommending a variable annuity or indexed annuity, because they are factually and mathematically incorrect and only thinking about the commission.
Immediate annuities provide the highest contractual payout of all annuities, and can be set up jointly with your spouse. You also can add an annual cost-of-living percentage increase to the policy as well, even though this decreases the initial payout. If your family has a history of longevity, this contractual cost of living increase might be worth considering.
Immediate annuities used within your IRA can provide a lifetime income stream while offsetting your required minimum distributions (RMDs). When used outside of an IRA, an immediate annuity will provide tax advantages because a portion of your income stream will be excluded from taxes. Single premium immediate annuities have no annual fees and pay the lowest commission to the agent. That combination translates into "good for the client."
If you need income later, there are two strategies to consider: longevity annuities; and income riders that are attached to deferred annuities. Longevity annuities are actually deferred immediate annuities with an enhanced payout at the time you declare the income to start. Longevity annuities can be structured exactly like an immediate annuity as described in the paragraphs above.
Income riders provide the same type of income later, but with a little more flexibility. This attached benefit provides a guaranteed percentage of growth during the deferral years that you can use for lifetime income down the road. The key point to remember with an income rider is that you can only use it for income, and you cannot access the money and that high percentage of growth in a lump sum. Agents tend to blur the line with this fact in the hope that you will believe you are receiving yield that just isn't there.
These strategies for income now and income later – in conjunction with your other sources of income – should solve your basic overhead and expense problems. I call this "stacking income." Along with Social Security payments, pension payments (if you are so lucky), dividends, rental income, and/or RMDs, etc., annuities can help fill in the gap right now or down the road.
For example, if your monthly expenses are $7,000 and your current income can only cover $5,000, then you can make up the $2,000 difference for the rest of your life with a single premium immediate annuity. Or you could project rising costs in the future and allocate money to a longevity annuity and have the income start at a specific date down the road. Because these strategies for income now and income later are contractual, you can plan to the penny how much your lifetime income stream will be.
Because interest rates are at historically low levels, you do have to factor this in to any current allocation decision involving annuities. Just like you probably have done with bonds or CDs, consider laddering your annuities – what I call "lifetime income laddering." For example, if you wanted to allocate $500,000 to a lifetime income strategy, it might make sense to buy an immediate annuity in $100,000 increments over a five-year time period. Even if rates don't move, the contractually guaranteed payouts will be higher each year because you will be older and your life expectancy will be shorter. If interest rates rise as you age, you will get even more bang for your buck and a higher payout.

"L" Is for Legacy, and Long-Term Care

The "transfer of risk" aspect of annuities works the same if you're planning for long-term care or to leave legacy gifts to your beneficiaries. Long-term care annuities should only be used as a supplement to – not a replacement for – traditional long-term care policies. Legacy annuities provide protection of principal while guaranteeing an annual growth (5-6%) that can be left to your listed beneficiaries. Remember that annuities should always solve specific problems.
There are a few important questions you need to ask when considering annuities as part of your portfolio:

• How much risk am I willing to shoulder myself?
• How much risk do I want to transfer?
• What specific problem am I trying to solve? Lifetime income? Legacy giving? Long-term care?
• What is the specific dollar amount that I want contractually guaranteed?

When I worked with Dennis' team on the November issue of Miller's Money Forever and The Annuity Guide, we put together great tools for smart annuity shopping. A prudent buyer will always read the fine print, do the math, and understand exactly what he's buying before he signs on the dotted line.
A good agent will help you run the numbers and understand the exact costs of what you are buying. Don't let any agent push you into a buying something you don't understand. I am a strong believer that an investor is better off with no annuity than with one not specifically tailored to his needs.
As Dennis mentioned earlier, annuities are not the greatest thing since sliced bread, so to speak. They are, however, pure transfer-of-risk contracts. Adding the right annuity to your portfolio can be a good step toward achieving your retirement goals.
Annuities, when allocated properly, can be just that simple.
----
Hi, Dennis here again. Before you start asking for quotes on annuity products, you’ll want to do some homework. As you can see from Stan, you don’t want to enter into an annuity contract without fully understanding why you want an annuity and which might be best for you.
To help you get started we’ve put together an easy-to-read report called Annuities De-Mystified. You’ll find our 8-point checklist to find out if an annuity is even right for you, our 9-point plan showing you what to look for when buying an annuity, and an important overview of the risks associated with annuities all within the pages of this timely, must-read report. Click here for your free copy today.



June 7, 2013

How to Protect Your Cash in Times of Crisis

By Dennis Miller

The large depositors at Cypriot banks are shouldering a heavy burden. You’ll recall what happened back in March when the Eurozone financial wizards forced average citizens to participate in what was called a “bail-in.” It seems downright unfair for depositors with more than 100,000 euros to suffer a levy on up to 60% of their deposits. That’s about $140,000, give or take, at current exchange rates. And if you’re a retiree, having the government swipe $84,000 from your $140,000 account just to bail out feckless bankers is a pretty big deal.
The dangers inherent in the Cypriot crisis may seem foreign to us, but US bank and brokerage accounts are not as safe as we might think. The federal government may imply that we are preferred customers of the FDIC and the SIPC, but that does not mean we will get the royal treatment should our bank or brokerage firm go belly-up.
Years ago Braniff International Airways, which had a large hub in Dallas, was on the verge of bankruptcy. In an effort to support one of their own, many local businesses booked flights and paid for airfares in advance. But ultimately, the airline did file for bankruptcy, and they shut down operations. One of my clients at the time complained that everyone who had paid for their airfare in advance was considered a general creditor in the bankruptcy proceeding. After the IRS and preferred creditors received their due, the general creditors got pennies on the dollar.
Whether it’s an airline, bank, or brokerage firm, when a company goes under, its customers quickly morph into creditors. It is one thing to lose a couple hundred dollars on a flight when an airline bellies-up. But it’s a much more frightening story when our life savings is in jeopardy. The Madoff and MF Global debacles certainly made that point clear.
While we may think of ourselves as customers of our bank and brokerage firms, our money is at risk if they fail. Although the FDIC steps in quickly when a bank fails, there are limits to its coverage for individual depositors. Meanwhile, when a brokerage fails, the SIPC operates at a snail’s pace. MF Global filed for bankruptcy in late 2011, and some of those claims have still not been settled.
Most of us know the FDIC limit by heart, but how many of us stop to think about the limits of SIPC insurance on our brokerage accounts?
According to the results of an Employee Benefit Research Institute study published in the Wall Street Journal, only 3% of workers retiring from the private sector have a defined benefit program. Unless you work for the government, there is a good chance you will retire with a 401(k), IRA, lump-sum payout, or some combination thereof. When I found myself in that very situation many years ago, the first thing I did was consolidate my retirement portfolio with a single brokerage firm. I had finally mastered its online trading platform, and it just seemed easier to have everything in one place. But at the time, I sure didn’t stop to think about the SIPC insurance limits and the potentially disastrous effect on my nest egg should my brokerage firm have failed.
Do we really want the bulk of our life savings sitting with one company? What if they go belly-up? Can we afford to have a major portion of our nest egg tied up for months while the SIPC tries to sort things out? We may take comfort in knowing that our government insures our accounts, but it is foolhardy to take unnecessary risks. There are ways to protect our money, like diversifying across banks and brokerage houses, and wise investors do just that.
Diversification means protection. What if the government decides to change the rules in the blink of an eye and confiscate some of our money? It could happen, although I’m sure they’d use a more euphemistic word than “confiscate” – like “tax” or “fair share.” Some politicians grumble that folks who invest offshore are not patriotic. Whether that’s true or not, it may just be simple, prudent self-protection. Investors in Cypriot banks received little warning. We still have time.
Not long after starting Money Forever we decided that part of our mission was not only to help my peers with their retirement investing, but also to share new ideas for protecting our money. Many of us got clobbered in 2008 and watching events unfold over the past couple of years in places like Iceland, Greece, and Cyprus should give any saver pause about putting all of his or her money with one bank.
I have to admit that before I started this journey, having any of my money overseas was the last thing on my mind, Now, I’ll be the first to tell you that I’m not some jet-setting world traveler dipping my toes in this and that country. I don’t have accounts spread all over the place, but I can tell that I sleep more soundly at night knowing that not all of my portfolio is tied up in US “too big to fail” banks.
With that in mind I worked with the team at Casey Research on The Cash Book, a comprehensive guide that reveals how to protect your wealth with global diversification and more. It’s a handy guide filled with ideas you won’t hear about from your financial advisor, like how to legally get around the FDIC’s $250,000 cap on insurance, the 10 safest states to do your banking, and how the average person can open an account in Switzerland without attracting extra scrutiny from the IRS.
Normally The Cash Book is only available to Money Forever subscribers, but because it’s now more important than ever that we globally diversify our retirement nest egg, we’ve made it available on its own. Get the easy-to-use strategies for protecting your wealth from the many threats facing us today: click here for your copy.



June 5, 2013

Lessons from Economic Crises in Argentina

By David Galland, Managing Director

Nick Giambruno: Joining me now is David Galland, the managing director of Casey Research. His internationalization story, which involved moving his life and his family from the US to Argentina, was recently featured in Internationalize Your Assets, a free online video from Casey Research. He is perfectly suited to help us better understand some of the important lessons in internationalization that Argentina offers. Welcome, David.
David Galland: Nice to be here.
Nick: First, why don't you give us a little background about the Argentine people and how they have learned to deal with their government and recurring financial crises?
David: A good way to think about Argentina is that it is an immigrant society, very much like the US, except that the dominating culture emerging from the melting pot was Italian. This is why Argentines tend to be famous for their dark good looks, vibrant culture, and excellent food. Unfortunately, they also inherited "Italian style" politics. I think that's a useful context for understanding the consistent dysfunctioning of the Argentine government.
This at least partially explains Argentina's long love affair with the Peróns. The country had one of the most successful economies in the world until Juan Perón came into power and destroyed it. And, with some rare bright spots, it's gone through long periods of financial crisis ever since. Despite that, the Perónistas are still very much in charge.
If you look at the history of financial crises in Argentina, you will see there is almost no 10-year period when there isn't a financial crisis. As a result, the population has become extremely resilient in the face of financial crises. When you mention the faltering state of the economy, every Argentine you talk to will shrug and make a comment along the lines of, "No problem; this is Argentina, we're used to it." In other words, they have become fatalistic about such things.
But that doesn't mean they are complacent, because thanks to their long experiences with financial crises Argentines have become masters at dealing with things like inflation and ridiculous government policies. For the most part, the government is highly ineffective, and so the Argentines just ignore it. Reasonably intelligent people always figure out ways to work around whatever the latest decree the government comes up with, then they tell their family members and friends. The word spreads so that in no time at all, the populace at large has figured out how to deal with the government's latest misstep, as often as not turning it to their personal advantage. As a consequence, there is a very robust underground economy; if people can do business off the books, they do. Argentines pride themselves on their ability to outsmart the government.
Nick: How can the actions of the Argentine government give us insight into what a desperate government is capable of and what might be in store for the United States?
David: The current Argentine government is dominated by true believers – young people who have that idealistic notion of equality for all, and who believe that government mandates can fix anything that ails. They are hardcore socialists, leaning towards communism. But, as is the case in the United States, they really don't know what they are doing and so pursue policies that are incredibly shortsighted. They are uninformed as far as history and economics are concerned and blunder from one harebrained policy to another. There is literally nothing that they will not try.
It is like a textbook case in government gone mad.
They have stolen the retirement accounts, devalued the currency, and put capital controls in place. There are trade controls so that people can't import necessities into the country, but instead, have to manufacture them locally, with the government giving monopolies to their friends. They have price controls, which force the local supermarkets to not raise their prices. This will ultimately lead to shortages. And there are already shortages of certain items. They didn't like an opposition newspaper, so they nationalized the newsprint manufacturing industry. In fact, just about every single thing that you could do to screw up a country, they have done. It is comical to see the extremes they have gone to. For example, in Argentina, if you publish an inflation statistic that differs from of the official government numbers, you could be hit with a $100,000 fine. I had never heard of this anywhere else – except maybe in communist Russia. They are really completely out of control and the country is spinning off into la-la-land. Frankly, I love living right in the midst of all of it.
There is a lesson to be learned from all of this, and I think it is a very important one. When it comes right down to it, any government – not just the Argentine government, but the US government as well – will simply do whatever it thinks it needs to do to keep the status quo intact, with no moral or ethical considerations.
In the case of Argentina, and the United States as well, it is a testament to the legacy strengths of the country – minerals, an educated population, agricultural land in abundance, energy resources – that despite a history of bad governance, the economy is still remarkably robust. People living outside of the country would be forgiven, based on the media reporting, for thinking the place is a basket case – but, against all odds, it isn't. To a large extent that is because the government's policies have chased much of the economic activity underground.
Nick: I think something that exemplifies some of the points you've just made was the recent debacle with the minister of the economy. During an interview he was asked a very straightforward question on the Argentine inflation rate. He uncomfortably stumbled through his answer and cut the interview short [Editor's note: You can read more about that here]. How was that received in the country?
David: It was widely reported. At this point, the Argentines have a great sense of humor about their government, as in the majority of them think it's a joke. That said, people are fed up too. In the seven months that we have lived down here, there have been two massive, countrywide protests totaling around two million people. That's about 5% of the country's population. In most countries that would be enough to send a dictator and the government scrambling for their private jets to get out of town.
The Kirchner government, however, has basically said, "Let the people protest. We don't care; it's just a bunch of noise." To a certain extent, that is true. But it's getting to the point where one of these days it's going to boil over. In addition to the middle class, the unions – which have traditionally been a bastion of support for the Perónistas – are starting to show up in the streets as well. If the government's purported friends are starting to protest against them, then you have to wonder how much longer the current regime can last.
Nick: Given the situation you just described, what's it like for you personally to be living on the ground in a country that is going through all this? Does the inflation work to your advantage if your money is not denominated in pesos and not located in the country?
David: Yes, absolutely. Argentina is really two different countries. First, there is Buenos Aires [BA], which is a big city and contains by far the largest percentage of the country's population. In BA there is a bit of crime, and in certain parts of the city you are going to have more crime, but generally speaking, you would be surprised to know that you were in the beating heart of a crisis. Restaurants are full; the stores are open and full of very nice stuff. Second, there are the provinces, which are mostly rural and agriculturally oriented. Here the central government's authority is weak, and the people are relaxed. The quality of life is tremendous. This is not just the case for Americans, or people who are non-peso based; it's pretty much for everyone. Food in a place like Cafayate, where we live, is so cheap it's almost free. You can walk out of a store with a huge bag of fresh produce and it's going to set you back only a few bucks. A kilo of fine tenderloin will cost you maybe five dollars. Back here in the US a couple of days ago I paid $22 for less than a pound of steak. Then there's the cost of labor. In Argentina, we have an extremely competent maid who comes in for five hours a day, five days a week and does all the cleaning and laundry – drudge work that people in the Western world have learned to view as an unavoidable part of life – and the cost is all of about $40 a week.
So, despite the overarching reality that the government is dysfunctional and that this is currently being evidenced in the inflation, the quality of life in Argentina for anyone with a few bucks is very, very high.
When I first arrived in the country, I was expressing bewilderment about how screwed up the government was and all of their stupid policies to a friend of mine who owns a local café. After listening patiently, my friend looked at me and said, "David, is the sun not shining, is the wine not plentiful, and is the food not good? So what are you worried about?" It's a fatalism, but it's also a realism that the people don't worry about the government. And because the government is so inefficient, people can, for the most part, ignore it with impunity. That's not the case in the Western countries where the government has become very adept at using the latest technologies to keep an eye on the populace.
Another friend of mine, a retired successful businessman said, "You know, Argentina is the best country in the world. We just need a little better government." And I looked at him and I said, "Just a little better?" And he said, "Yeah, just a little better. We don't want them to become too efficient, then we wouldn't be able to get away with everything we are able to get away with."
That said, there are obviously middle-class and lower-class people who are struggling under the inflation. Again, this is especially the case in the big city where the social safety net of friends and family is not quite as tightly knit, and where ready access to the straight-from-the-farm produce is not as easy.
For anyone whose net worth isn't tied up in pesos and who keeps most of their money out of the country, the current inflation has been a real boon.
You can go to the best restaurant in town and your entrée is going to cost you five to seven dollars, and this is a very good restaurant. A bottle of wine that would cost you $40, $50, $60 in the States, costs you maybe $5-6. The quality of life is incredible. A lot of that has to do with the exchange rate, which has been as much as ten pesos to the dollar recently. When we first started coming down here, it was like three and a half. In short, the inflation is a real benefit if you don't have your savings and income tied up in the peso.
Nick: From what it sounds like, despite having capital controls, those measures are mostly aimed at people trying to take so-called hard currency, like US dollars, out of the country. For those bringing them into the country, it doesn't appear that there is much of a problem. Is that the case?
David: You would think they would want more US dollars to flow into the country, but the government policy is so balled up they have put up some barriers to bringing money into the country. That said, there are simple mechanisms you can use to get around the restrictions that are completely legal. One of which involves buying Argentine bonds on the international market and selling them back in Argentina. As for the Argentines who want to get their money out of the country, they have to be extra clever, but they are very good at this kind of stuff. For me, dealing with this situation has been a great experience. Unlike in the US, where everything is straightforward and the rules generally make sense, in Argentina it's a very fluid situation. I love the fact that I feel like I'm getting a degree in economic crises and how to operate in one.
Nick: Do Argentines favor gold? What about getting gold in and out of the country and buying or selling it in the country?
David: This is a very interesting question. I've asked that question in the context of economic crises around the world and throughout history. Gold only comes in as sort of the asset of last resort. We did a crisis panel at one of our conferences a couple of years ago, and we had people who had been through the hyperinflation in Zimbabwe and Serbia, and we also had someone from Argentina. I was moderating the panel and asked them all what factor gold played in preserving their wealth. Everyone said it was not a factor. Instead, they all used whatever strong currency they could get their hands on. In the case of Serbia it was the deutschemark. In the case of the Zimbabwe it was the South African rand, and in the case of Argentina it was, and still is, the US dollar.
In Argentina, the whole country revolves around US dollars; it's their medium of exchange and how they preserve their cash. For now at least, the US dollar is king in Argentina. Personally, I exchange my dollars in a coffee shop where I slip behind the cashier's counter and this very cute girl does the exchange from stacks of pesos and thousands of dollars. At some point, if the dollar starts to really collapse and there isn't a suitable regional or local currency to take its place, I think you will see more transactions in gold.
As far as gold transactions in the country, there are dealers in Salta City, which is the nearest big city to us. Private transactions can also be arranged. In Buenos Aires, of course, you can buy and sell gold easier, but it's just not part of the culture at this time.
Nick: Turning to real estate, there are many people who are potentially interested in Argentine real estate as we approach what appears to be the bottom of the current crisis. What are your thoughts?
David: I'm a big fan. We own a lot of real estate in Argentina, most of bought when it was a lot cheaper. If you are a dollar-based investor and you can get your money into the country at a good exchange rate, then the real estate prices are very reasonable. That said, I would add that the biggest market for Argentine real estate currently is for Argentinians, because they have to find a place to put their currency before its purchasing power erodes further. Right now it is depreciating probably at 30% to 45% a year. My general sense is that people who have their money outside of the country aren't in a rush to bring it into Argentina. I can't fault them for that.
As far as I'm concerned, if you can afford to live in La Estancia de Cafayate and you don't, you are a fool. But that's a lifestyle decision, not a pure investment decision. Cafayate is a really beautiful place, with all the amenities and a great community of people. It's like the Napa Valley 80 years ago. Most people who are looking to make a pure investment right now should probably wait a bit longer. I don't think the current crisis is over yet.
Nick: Last year the government made it illegal for people to use US dollars in real estate transactions. Now, as you mentioned, not everybody follows these types of rules. Is this something that's adhered to? It could actually work to your significant advantage, if you are foreign investor or someone who is looking to make a lifestyle decision to buy property in Argentina, if there is a further significant decline in the peso and you are forced to use pesos in real estate transactions.
David: Absolutely. Provided you can get your money into the country and get a good exchange rate, which you can, using that bond trade method I mentioned previously. Cafayate is a small valley with a limited amount of real estate available. It is very much on the upswing, and prices are definitely going higher in dollar as well as peso terms. In terms of putting your money into a pure investment or real estate speculation, I don't think you could go wrong buying in Cafayate at this point, especially if you get in at the right exchange rate. You have to have the right mentality though, as it is not a traditional investment.
Nick: What is the endgame with this current crisis? Do you think there will be devaluation of the official exchange rate or some other wealth-confiscation measures? What do you think will signal that we're at the bottom?
David: I don't think you are going to see wealth confiscation. The foreign percentage of ownership of the Argentine economy is pretty small, so I don't think they would go after wealthy foreigners. Could they go after the wealthy Argentines? It's possible, but Argentina is not a big country and everybody knows each other. Most of these government officials have managed to steal themselves enough money to become part of the elite they would potentially be targeting. So I don't see wealth confiscation coming. I think the endgame will come when you get three or four million people in the streets and the government realizes it has to do something. Maybe they would give into the pressure for a devaluation of the peso.
Regardless, in the next election this October, I think there is a good chance the current government will get voted out. If the new government isn't completely stupid, then I think you could end up with a real economic boom. That's the history of Argentina, a crisis followed by a boom. I don't think we are at the bottom of the current crisis yet, but I think we are getting there.
Nick: All right David, thanks for your time and insight into the situation. There are indeed many lessons that Argentina can teach for those wise enough to absorb them.
David: My pleasure.
Argentina is one of several strong candidates for internationalizing your wealth, as well as your life. In addition to the things David mentioned, there's much more to consider in taking this very important step... such as how and from where to get a second passport... the best ways to move wealth out of your home country... opening an offshore bank account... investing in foreign stock markets... and much more. Fortunately, the Casey Research team has put together a fact-filled, comprehensive report that is an invaluable resource for anyone developing an internationalization plan. Learn more about Going Global 2013 and start your internationalization adventure today.



June 4, 2013

Seller’s Remorse

By Jeff Clark, Senior Precious Metals Analyst

I know an investor who is feeling some regret. He's come to the sinking conclusion that he may have made a mistake selling his gold stocks.

He recognizes now that he reacted emotionally to the crash, panicking at the plummet and dumping everything regardless of quality. He's kicking himself for doing so, because he succumbed to an impulsive move, locked in a loss, and realizes that the core reasons for owning gold haven't really changed.
Obviously some investors believe they made the correct move by exiting the sector; they're convinced gold is a dead trade and will be a losing investment going forward. My investor friend thought so too for a time, but now thinks he may have acted too hastily.
I think sellers abandoned gold equities prematurely on weak grounds, and will be back when that becomes obvious, joined by even bigger numbers of new investors.
The ultimate issue with gold stocks is whether gold itself will rise or fall. If it rises, gold stocks will get pulled up by the metal – and then deliver the leverage they have so many times in the past. If it falls, even today's profitable producers will suffer.
There are key reasons why I think gold's trend will resume its upward course, and why sellers should've paid a little more attention to the "advertising" before dumping their shares…
Misleading Advertising. A report issued by the Congressional Budget Office says that President Obama vastly overstated the spending cuts and deficit reduction his budget plan would produce, while considerably undercounting the level of tax hikes the program would require. Obama claimed the program would reduce deficits by almost $2 trillion; however, the CBO states that Obama's budget will reduce deficits by only $1.1 trillion in the short term, and forecasts annual deficits would start to rise again after 2017. And this only if you believe government numbers.
On the debt side, Brent Johnson, founder of the Santiago Gold Fund, shows just how unsustainable this path has become.

The gap between GDP and debt is widening at an untenable pace. While we think this leads to inflation, it is the fallout from this unsustainable path that we're convinced will lead to a widespread flight into gold.
Subliminal Advertising. Unbeknown to many investors, central bank buying represents roughly 12% of all gold demand. How they reacted to the April selloff would provide insight into whether this important trend is slowing or growing…

• Russia bought 269,000 troy ounces last month.
• Kazakhstan added 85,000 ounces.
• The Republic of Azerbaijan bought 32,000 ounces. It was the fourth consecutive month of purchases by the former Soviet republic, which had no gold Reserves in December.
• Turkey's central bank bought 586,000 ounces.
• Belarus and Greece also bought gold in April, though amounts have not yet been reported.
• Altogether, the IMF says of those that have reported thus far, central banks bought almost a million ounces of gold last month.

Despite the drop in price, demand from the central banks of emerging countries isn't slowing. You don't have to be Nostradamus to see the writing on the wall with debt and currency dilution. As Grant Williams points out in this video (gold comments begin at the 33:30 mark), if emerging-market countries raised their gold Reserves from the current average of 2.6% to 15%, it would require 17,359 tonnes of gold (558.1 million ounces). This is roughly seven years of global production – which is almost certainly a low estimate given the fact that China and Russia don't export metal.
Guerrilla Advertising. There's been a lot of data about how the crash in gold was met with a rush by physical buyers. This data point may top them all.

When the gold price fell off a cliff in April, volume on the Shanghai Gold Exchange quadrupled.
Clearly many investors around the world saw gold's unexpected decline as a sale. This is not the behavior associated with a trend that is over – just the opposite, in fact.
Data-Driven Advertising. Naturally, if the gold price is down, the assets of producers are worth less than they are at higher prices. But as with all crashes, stock prices overshoot, and gold equities have been no exception. In fact, we demonstrated in the May BIG GOLD that gold stocks are cheaper than dirt.
We compared the price of a tonne of gold and silver ore from each of our companies to the price of Professional Blend Topsoil, EverBlack Premium Mulch, and ComTil Compost. After totaling each company's tonnage of proven and probable gold and silver ore Reserves and dividing it by their respective market cap, we got a price per tonne. To compare apples to apples, we converted dirt, compost, and mulch from yards (how it's usually sold) to tonnes, also getting a price per tonne.
Here's one example of what we found (calculation done on April 22).

	Goldcorp (GG)	Topsoil	Compost	Mulch
Ore Reserves (tonnes)	2,269,972,310
Market Cap	$23,298,800,000
Price per tonne	$10.26	$31.74	$49.59	$88.16

It's amazing, but Goldcorp is literally priced lower than top-quality dirt, compost, and mulch.
As Rick Rule told us three weeks ago, sometimes things get cheap enough, even if you worry there might be another "sale" two weeks from now: "When goods that you want to own are attractively priced, you buy them."
I think it's safe to say gold stocks are attractively priced. And in today's BIG GOLD, we'll tell you exactly what we're buying, and if we think the low is in for gold.
The bottom line for us is that while the Fed's efforts may seem to have some positive effects on certain aspects of the economy, there is no free lunch. Concluding that there will be no negative fallout from decades of government profligacy around the world is short-sighted.
The market is trying to flush out weak and hasty investors. Don't fall for it. Someday, perhaps not too long from now, I think we'll have reason to celebrate that buyer's glee beats seller's remorse.



May 31, 2013

Rick Rule’s Reasons to Buy Gold and Select Gold Stocks

By Jeff Clark, Senior Precious Metals Analyst

Interviewed by Jeff Clark, Casey Research
Jeff Clark: First, Rick, what's your basic explanation as to why gold crashed a few weeks ago?
Rick Rule: I think there are two parts to the answer, maybe three. First, the gold market was technically weak. The second thing is that there were a lot of institutional players long gold on leverage, using capital that was borrowed rather than their own, so when the price crashed they had to unwind very rapidly.
The fact that there was a very large futures player who attempted to come out of the market all at once during a period in time when the market was extremely illiquid is, of course, also very suspect. I know that most Internet articles are focused on the one large 400-tonne sale at a very odd point in time, and I would certainly agree with the suspicion that if I were a holder of that size and I was looking to sell or had to sell, I probably wouldn't have chosen to do it all at once or in a very illiquid time in the market.
I think that one of the things you have to look at in the gold market is that we are changing the nature of ownership, from institutional momentum holders who are leveraged, which is a long way of saying "weak hands," to physical individual buyers on a global basis, which is a different way of saying "strong hands." So one of the things that happened in the gold smackdown is that gold did what many things do in bear markets: it went from weak hands to strong hands.
Jeff: I saw a BNN video where you said the capitulation process isn't over. What makes you say that?
Rick: I don't know if I have an opinion regarding the capitulation process in gold and silver, but I certainly think that the lows are yet to come for the junior mining equities. My experience in 35 years in junior equity markets is that bull markets end in an upside blowout, and bear markets end in a downside puke. I think we were partway through that a couple weeks ago, but I think it got interrupted. I haven't seen the sort of cataclysmic capitulation selling that usually marks a bear market bottom. It doesn't mean that just because it has always happened that way that it will happen this way again, but I haven't seen the capitulation selling. What I have seen, for example, is mutual funds being forced to sell to meet redemptions – but I haven't seen the no-bid market that usually marks the cataclysmic bear market bottom.
Jeff: And the point is that you expect that.
Rick: I do.
Jeff: That was a record selloff a few weeks back.
Rick: It didn't have the duration that one would have expected. These things are usually two or three week long sell-fests. I forget what month it was in the year 2000, but there was an absolutely comical selloff. People who were on margin didn't find it funny at all, but because I was cashed up and I was extremely experienced, it was just an absurd theater that I took advantage of. There were a bunch of people who didn't know much about these stocks that bought them in 1996, and that same group of morons that knew nothing about what they owned or why they owned them and so puked them out in 2000. Your job as a speculator is to be on the other side of both of those trades.
Jeff: This implies that gold returning to the $1,900 level and going higher could be a couple of years away.
Rick: I have no opinion on that. It's important to note that most of the juniors are nonviable at any gold price. When people ask me what would happen to the price of Amalgamated Moose Pasture if gold went to $2,000, I'm forced to say to them, "Well, it really shouldn't matter. Amalgamated Moose Pasture doesn't have any gold. They are looking for gold, and if the price of something that you don't have any of goes up, it shouldn't make any intrinsic difference."
The truth is, we need to unwind the excesses of the last decade in the junior market. We've done a pretty good job of that, but we need to finish it.
Don't get me wrong, I'm a gold bug. But if you think gold is going higher, buy gold. If you are going to buy gold stocks, buy them because there is some internal reason to own that company and why it is becoming more valuable. Never confuse the two.
Jeff: Good point. What do you make of the record insider buying in the junior market?
Rick: I think there are two things to consider there. The first is that the high-quality gold juniors are very cheap. We believe, statistically, that the high-quality gold juniors are the cheapest they've ever been since 1992. So you are seeing very sophisticated buying of the gold juniors to match the selling from other places.
The other thing you're seeing with insider buying are financings where they issue God knows how many millions of shares at a nickel to raise $300-400K, which are basically going to pay insiders' salaries. These people are basically putting the money from one pocket into another pocket, and issuing themselves 10 or 11 million shares in the process. There are hopefully 500 or 600 companies headed to extinction.
Both of those things are happening. One of them is bullish, and the other is just the way these junior markets work.
Jeff: A lot of analysts, especially the CNBC types, claim the gold bull market is over, that we've entered a bear market and it's time to get out.
Rick: I disagree with that on many levels. The narrative associated with gold and the narrative associated with the resource story hasn't changed. How many of your readers – in fact, how many listeners to CNBC or CNN – believe that the Western world's financial crisis is over? How many believe that any of the G20 nations can balance their budget? How many believe that central bank liquidity is a substitute for solvency, owing more than you can pay back? How many people would deny that physical gold demand has been strong?
The point is that the narrative that drove the gold market in 2006 and 2010 is very much intact. Nothing, in fact, has changed. The only thing that has changed is the perception and the price, both of which are lower, which is better. So yes, I am absolutely a gold bug, particularly when you compare it with the alternative, the US 10- or 30-year Treasury, which Jim Grant famously describes as "return-free risk." Does return-free risk sound attractive to you? It doesn't to me.
Jeff: Right.
Rick: I also need to say that my 30-year track record and Eric Sprott's 30-year track record are a function of being extremely aggressive buyers in very bad markets. The $10 billion business that is now Sprott, Inc., is really a consequence of aggressive investing during bear markets. In periods like the 1990 bear market and the year 2000 bear market, it is precisely markets like these, when we have taken pain but have also taken aggressive action. And the rebound coming back out of markets like these can be very violent. You don't have the ability to reap the rewards of those upturns if you are not an aggressive investor in downturns like these.
Jeff: I've heard you say that you've made the biggest part of your wealth during big selloffs. This has been one for the record books, so are you viewing this as being another one of those opportunities?
Rick: Absolutely, Jeff. Let's face it, I'm 60 years old. This is probably my last major market cycle. I'm going to make the most of it. I can tell you that I'm having the most fun I've had in my career for 13 years. I have spent all my life honing my skills, building up the capital, building up the client base – this is tailor-made for me. I realize this period is unpleasant for some people, but the market doesn't care if it's unpleasant. The market doesn't care if it's inconvenient. You take what the market gives you – and this market is giving me a gigantic sale on assets I want to own.
Jeff: It's very exciting from that perspective. It begs the question, though: how do investors know when to reenter the market? How do we know when to buy?
Rick: You know, Jeff, I'm always early. Your friend Doug Casey will tell you that about me. I have a very logical mind. I believe if A is true, B is true, and C is true, then X will be the result. And when I reach that conclusion, I often confuse imminent with inevitable. So I don't know the answer to that.
What I do know is that my own net worth seems to go up fivefold coming out of a bear market and going into a bull market. Suppose it took 18 months longer than I had hoped; does that really matter, given the magnitude of the outcome? When there is a sale at a store for goods that you want, do you really worry too much about the fact that there might be another sale two weeks from now? I don't think you do. When goods that you want to own are attractively priced, you buy them.
Jeff: What about the investor who has already built a full position in a high-quality company; how does someone take advantage of what you're essentially calling a lifetime buying opportunity?
Rick: I think a key part of the answer has to do with "high-quality company." Most investors, particularly in the junior sector, are very bad at stock selection, and they don't have a good sense of what constitutes a high-quality company. If, in fact, I am to answer the question precisely as you asked it – what does a person do if they already have a full position in a high-quality company – then the answer is easy: relax. But if the question goes to somebody who has a laundry list of 20 companies and doesn't really remember why he or she bought the companies and is not aware of the fundamentals of the company and hasn't bothered to benchmark those companies against other companies that exhibit similar characteristics, that's a very different question.
In bull markets and in bear markets, one must continue to high-grade one's portfolio. One must make oneself at least once a year sell at least 20% of the portfolio. If you have 20 names in the portfolio, you have to make yourself sell four or five of them, and increase your positions in your best names. And you don't just do that in bull markets, you do it in bear markets, too.
Jeff: It's critical to be selective with stock picking.
Rick: It is absolutely critical. You've heard me say this before: if you merged every junior exploration company in the world into one company, that company would lose somewhere between $2 billion and $5 billion a year. So how do you price the industry… do you price it at five times losses? Ten times losses? The question, of course, is apocryphal.
What you need to remember is that all of the performance that gives the sector its occasional luster is concentrated in the top 10% of companies. People who are going to participate in the sector need to either spend the time or spend the money to have their portfolio selectively high-graded on a consistent basis. It's all about stock selection. If you want the extra leverage inherent in equities, do securities analysis and pay attention to those equities.
Jeff: Someone wrote to me recently saying, "I thought I was going to get rich in gold stocks, and here they are plummeting." What is your response to the investor who makes that kind of comment?
Rick: That's easy. Natural resource businesses and precious metals businesses are capital intensive and extraordinarily cyclical. Somebody in the sector must always remember, you are either a contrarian or you will be a victim. It's funny; people only want to be contrarians when it's popular. The fact that the narrative hasn't changed, the fact that the facts haven’t changed, the fact that nothing has changed except the TSX.V being off by 60%, means that the same goods that appeared attractive to people at twice current prices must be more attractive now.
The gentleman or the lady who wrote to you is probably somebody who only believed in the narrative when it was being reinforced by the market. That's not being a contrarian, that's being a victim. If you came into a market when it was popular in 2010 and then you exit the market when it's unpopular in 2013, that's a classic example of buying high and selling low, a silly thing to do.
Remember the take-home phrase: you are either a contrarian or you are a victim. To buy low, you have to buy in markets that don't have competition. To sell high, you have to be a seller in markets where other people are greedy. It's that simple.
Jeff: Are there any specific catalysts you're looking for to turn the gold market around, as well as gold stocks?
Rick: There are three catalysts in every market. First, markets work, and the cure for low prices is simple: low prices. Bear market pricing causes bull market pricing. And the overvaluations of bull markets cause bear markets.
With regard to gold itself, I think the real catalyst will be the fact that on a global basis, people are mistaking liquidity – counterfeiting, if you will – with solvency. The truth is that the Western world has lived beyond its means for some substantial period of time, and they are attempting to engineer a default by depreciating the purchasing power of the denominator – the currency – so I think that's the ultimate catalyst for gold.
With regard to the stocks, which are a very different set of circumstances, I would suggest that one catalyst may be an increase in the gold price, but a much more important catalyst is the fact that high-quality gold companies, in our opinion, are selling at the best price they have sold at for 20 years. They are simply too cheap. It won't be immediate, but it will cause some of the higher-quality names to be taken over, because it's cheaper to buy gold than it is to go find gold.
And the third thing that's really going to surprise people in the juniors is that we are slowly coming into a discovery cycle. There is nothing that adds hope and liquidity like a discovery. People talk about what a pathetic market we had last year, but if you happened to own Reservoir Minerals before its discovery, the stock went from $0.26 to $3.50. Africa Oil went from $0.80 to $10. This is a market that will reward performance, but it's a market that has been starved for performance, too.
Jeff: Okay, last question. I'm a planner, so I want to write down in my calendar what year I'm going to be sitting on a beach sipping a mai tai with you after we've sold our junior stocks for 10 or maybe even 100 times our original investment. What year should I write in my calendar?
Rick: I suspect it will be in the epicenter of a bull market five years from now. It might be sooner, frankly, but I've found that these cycles take four or five years, and we're sort of two and half years into the cycle.
First, though, we need a cataclysmic selloff to mark the bottom. Then we'll go sideways for a while. I certainly think that people who are involved in the gold stocks that don't have a two- or three-year time horizon are delusional.
Jeff: Okay, it's in my calendar. Thanks for the insights, Rick.
Rick: It's an enormous pleasure for us, Jeff. We have done this for 30 years in the Sprott organization, and this is our third big decline. And as I said, the fact that we manage $10 billion is due to bear markets, and your speculative readers need to remember that.
Jeff: Good point. Where can readers go if they want to learn more about Sprott?
Rick: We would love for people to come visit us at Sprott Global. We encourage them to sign up for our daily Sprott commentary by hitting the subscribe button at Sprott's Thoughts on the website.
Jeff: Very good. Thanks again, Rick.
Rick: Always a pleasure, Jeff.
As Rick pointed out, knowing the timing of a cycle is only one part of profiting: a successful investor also needs to differentiate winning companies from failures. He, Doug Casey, John Mauldin, and others discussed these issues and much more in the recent Downtown Millionaires webinar. If you want to be positioned for maximum profits in the junior metals sector, you need to see this video today.



May 29, 2013

The Real Reason Governments Are Killing Financial Privacy

By Nick Giambruno, Editor, International Man

At the latest G-20 meeting, central bankers, finance ministers, and an assortment of other central planners touted what they hoped would be a new "global standard" of the automatic sharing of financial information.
The US has taken the lead with the odious FATCA law, and the EU has followed suit with its own version. Through FATCA and other measures, both governments are aggressively seeking new ways to undermine financial privacy.
Financial privacy should not be viewed in a negative light, as it is often portrayed. The Swiss view it as a fundamental human right to preserve dignity, akin to medical privacy. How would you feel if the government snooped into your medical records and automatically shared those records with foreign governments?
While it would appear that the primary objective of this new "global standard" is to rake in more money for bankrupt governments, it seems another motive is at play here.
The optimistic estimate for FATCA is that it will bring in around $9 billion over 10 years or $900 million on average per year.
With the deficit in 2012 for the US federal government at $1.1 trillion, the expected $900 million from FATCA is not even a drop in the bucket (actually around one-tenth of one percent). Even in the unlikely event that the US will moderately reduce its deficit in the future, the revenue from FATCA will remain a pittance in comparison.
So, it begs the question: Why would the US government go through all the enormous trouble of implementing FATCA if it's going to bring in such a meager amount of money?
If it's not money, it appears the primary motivation here is control. The new "global standard" is a path that will put governments around the world one step closer to being able to track and control every penny you earn and every penny you spend. It dovetails nicely with the global war on cash.
The time is short, but there is still an opportunity for you to legally avoid getting boxed in by desperate and out-of-control governments by internationalizing your savings, your income, yourself, and your digital presence out of their immediate reach.
While governments around the world – particularly in the US – are making it increasingly difficult to internationally diversify your assets, there are still many legal strategies available to you. You'll find the latest information on the best of these in the brand-new special report Going Global 2013, a comprehensive, 114-page guide packed with actionable advice from renowned experts in international gold storage… opening foreign bank accounts and IRAs… second passports and living abroad… the best foreign currencies to invest in…. and much, much more. Simply put, there's no better resource available on international diversification than Going Global 2013. Learn more here.



May 25, 2013

Why a Uranium Renaissance Looks Inevitable

By The Energy Report

Casey Research's Chief Energy Investment Strategist, Marin Katusa, whose portfolio profited nicely the last time the uranium bull broke loose a decade ago, recently interviewed a group of world-renowned energy experts to discuss the prospects for the sector that some considered doomed by the Fukushima disaster. Anti-nuclear power sentiment has by no means evaporated, but Katusa sees clear signals that the bulls are ready to run, not least of which is the recent attack on the Somair uranium mine in Niger.
Why? First, the 20-year Highly Enriched Uranium (HEU) Program agreement between the U.S. and Russia, aka "Megatons to Megawatts," expires this year.
Second, the end of that program will allow Russia to sell its coveted uranium, which currently powers one of every 10 homes in the U.S., to the highest bidder. With 200 nuclear power plants under construction or on the drawing boards, China is likely to be first in line, with India and even oil-rich Saudi Arabia on its heels.
Third, the increase in nuclear plants being built around the world will stimulate huge demand while supply inevitably dwindles. Because it can take a decade to bring a uranium mine on-line, new mining production can't grow fast enough to meet the demand.
Fourth, like it or not, nuclear energy is clean—while the average coal-fired power plant in the U.S. emits nearly 4 million metric tons of CO2 each year, nuclear power plants emit no carbon dioxide, sulfur dioxide, nitrogen oxides, mercury or other toxic gases.
Finally, last Thursday, an Al-Qaeda splinter group attacked the Somair uranium mine in Niger—owned by French uranium giant Areva. This will further disrupt global uranium supplies and emphasizes what the energy experts have been saying: Uranium is prime for price increases.
Casey Research agreed to share Katusa's segment with Sprott U.S. Holdings Chairman Rick Rule with The Energy Report readers and invites you to listen to the rest.
Marin Katusa: We first met 10 years ago, when you were begging people to buy uranium companies, and the market boomed. Those of us who followed your advice made a lot of money. Are you expecting a replay in that market?
Rick Rule: I think so. The similarities are interesting. At that time, the price of uranium on the market was less than what it cost to produce it, which meant that one of two things would happen: Either the uranium price would go up, or the lights would go out. Those were the only two choices. We're in a situation now where the uranium price on world markets is lower than what's required to bring online the supplies needed to keep the lights on around the world. So once again, either the uranium price goes up, or the lights go out. I think the price will go up.
MK: What can you tell investors who are nervous about uranium? Nuclear power is unpopular. Why should investors expect its feedstock to have this massive bull market?
RR: You make money in financial markets by buying low and selling high, and you can't buy low when something is universally loved and every investor is competing with you. You have to buy things when they are unloved. In natural resources, you can be a contrarian or a victim. You had the good sense of getting into the market when uranium was cheap, and you also had the good sense to get out when everybody else was flocking in. You did what you were supposed to—buy it when it was out of favor and sell it when it came into favor. It's out of favor again. You will make money buying it now and selling again when it returns to favor, because it will.
MK: Are you currently investing in companies that are exploring for and producing uranium in the junior resource sector?
RR: We are. We are investing in the broader junior resource sector because it is universally unloved, and we are specifically investing in the uranium sector. We invest in any commodity where the selling price on global markets is less than the cost of production and where we see ongoing demand. The price has to rise to meet demand.
MK: Considering that China is on its way to building twice as many nuclear reactors as America, India is building theirs and Saudi Arabia—which is so rich in oil and gas—is planning on building 16 nuclear reactors, does that make the argument for uranium better today than it was 10 years ago?
RR: I wouldn't argue that it's better, because the situation 10 years ago was superb. But it doesn't have to be better. A lot of people added a zero to their net worth as a consequence of that market. If they increase their net worth only five times, would that be sufficient?
MK: I think it would. Like uranium, the junior resource sector is not popular. How would you advise people to invest in that sector today?
RR: They have to invest in themselves before they invest in the sector. They have to get educated about natural resources and you don't get educated about natural resources in The Wall Street Journal. These businesses differ from other businesses. You need the courage and the common sense to invest in contrarian fashion. You need to buy out-of-favor sectors and once your thesis has been vindicated and you're feeling smart, you need to sell those sectors. It's very important that you both buy low and sell high. Industry cycles in natural resources are very predictable, and after you discipline yourself, find information sources you can trust and figure out how to use those information sources, you will find the sector extremely generous.
MK: What is the most important factor when you look at a company? When Rick Rule and Sprott write a check with their own money into a company, what's the most important element of that investment decision?
RR: If it's a speculative, junior company, the three most important factors are people, people and people. In the uranium sector for example, when the resource became popular in the middle part of the last decade, there were 500 junior uranium companies but only 20 competent teams.
MK: And of those 500 companies, about 480 disappeared.
RR: Another thing that argues in your favor today is that you're now able to come in and buy companies with $50M market caps that spent $250–300M they raised cheaply during the boom. Those are very attractive propositions.
MK: Can anything derail this nuclear renaissance?
RR: If there's a black swan on the nuclear side, it would be another event like Fukushima, Chernobyl or Three Mile Island. On the financial side, it would be another 2008-style psychotic break. But if that happened, your uranium portfolio would be probably the least of your concerns.
MK: As always, Rick, it was a pleasure. Thank you.
Uranium prices have nowhere to go but up. Rick confirmed that, as do the other experts in the videocast. Listen for the insights from:

• Spencer Abraham, who served as the 10th U.S. Secretary of Energy (2001-2005) during the George W. Bush Administration.
• Lady Barbara Thomas Judge, chairman emeritus of the U.K. Atomic Energy Authority, chairman of the Pension Protection Fund, and U.K. business ambassador on behalf of U.K. Trade and Investment, and is an appointed member of the TEPCO Nuclear Reform Monitoring Committee.
• Herb Dhaliwal, former Canadian minister of natural resources and senior regional minister for British Columbia.
• Amir Adnani, co-founder and CEO of Uranium Energy Corp. (UEC:NYSE.MKT), which operates North America's newest uranium mine; located in South Texas, it's the first new uranium production in the U.S. in seven years.

Casey Research has identified the top three undervalued uranium stocks that you should invest in right now to be well positioned for the coming uranium bull market. Compiled into a special report, Three Must-Own Uranium Stocks, Casey is making this time-sensitive special report available exclusively for viewers of this webinar.



May 23, 2013

Platinum and Palladium: A Fundamental Shift

By Jeff Clark, Senior Precious Metals Analyst

Platinum is a precious metal, as is palladium, though to a lesser degree. However, like silver, both are also industrial metals. Unlike silver, it's their industrial use that is the primary price driver for both platinum and palladium – and that use is undergoing a fundamental shift.
The largest source of demand for platinum and palladium is the automotive industry, for use in autocatalysts. In turn, the fortunes of the auto industry are sensitive to the health of the world's major economies. We've been bearish on platinum-group metals for years, primarily because we weren't convinced a healthy – much less roaring – world economy could be sustained when so many governments continue spending beyond their means.
We reconsidered the market last year, when strikes in South Africa – home to 75% of global platinum production and 95% of known reserves – threatened supplies. But as we wrote last December, the strikes ended without great impact on long-term supply.
Since then, however, the fundamentals of this market have changed. Others may disagree with our economic outlook, which is still bearish, but it's due to supply issues – not demand – that our interest is now drawn to these metals, and particularly to palladium.
Here's a look at global supply against auto-industry demand for both metals.

Approximately 55% of platinum and the bulk of palladium supply was used in catalytic systems last year. The shrinking supply that's under way with both metals is obvious, and palladium is approaching a supply/demand crunch.
Here's what's going on…

Platinum

The fall in platinum supply has been so great that it moved from a surplus in 2011 to a deficit in 2012, with Johnson Matthey estimating that deficit to hit 400,000 ounces, the highest level since 2003.
Why the shift?

• Labor strife and power outages. The mining industry in South Africa is, frankly, a mess. Labor strikes continue to haunt the platinum mining companies. The largest mining union in South Africa, AMCU, recently refused to sign a collective bargaining agreement on worker compensation, and CNBC is predicting a massive strike. Amplats, the world's largest platinum producer, is threatening to cut 14,000 jobs and mothball two operating mines due to various issues. Meanwhile, power outages, a longstanding problem, continue unresolved; they have already forced the closure of some mines and are widely expected to cause further cuts in production. As a result, supply from mining is expected to decline another 10% this year.

• Recycling. This important source of supply is falling in reaction to lower metals prices. It is estimated that recycling fell by 11% in 2012.

• Emission systems. Demand for platinum in autocatalysts dropped by 1% in 2012, mostly due to lower vehicle production in Europe and lower market share of diesel engines. However, emission-system demand from Japan and India is expected to increase, and diesel-emission controls recently introduced in Beijing will also support industrial demand for both metals. Auto sales in China rose a whopping 19.5% in the first two months of the year and are 6.5% higher in the US than a year ago.

• Jewelry. Worldwide demand for platinum jewelry rose last year, with strong demand coming from China and growth in India, and is mainly the consequence of lower prices. Jewelry accounts for 30% of total platinum demand.

• Investment. Although it represents just 6% of total demand for the metal, investor demand nonetheless grew 6.5% last year, adding to pressure on supplies.

Given these factors – primarily the first one – a supply deficit stretching into 2014 seems almost certain. Until South Africa can resolve its labor and power issues, pressure on platinum supply will remain, producing a favorable environment for rising prices.

Palladium

Palladium, platinum's "little brother," also faces a market imbalance. In 2012, the deficit totaled 915,000 ounces, the highest level since 2001.

• Supply. Russia is the second-largest producer of palladium, and some analysts report that rumors of its stockpile being close to depletion are true. Recycling is also falling, and production disruptions in South Africa – the largest producer of palladium – are the same as outlined for platinum. Overall supply of the metal is falling.

• Demand. Autocatalytic demand rose by 7% in 2012, as palladium can be easily substituted for platinum in emission-control systems for gas-powered motors (but not diesel-powered ones), such as are favored in China and India. In fact, several experts we consulted were more bullish on palladium than platinum due to this "substitution factor" – and China just mandated catalytic systems for all cars in the country.

Palladium investment demand was positive last year, though palladium jewelry has yet to gain traction in China, one of the world's biggest jewelry markets. Total jewelry demand for palladium was 11% lower in 2012. However, we expect a greater shift to palladium in the expanding Asian automotive market, which in turn will boost palladium prices.
The fundamental drivers of the palladium market are similar to those for platinum, which makes the palladium market an equally attractive investment.
If this all weren't bad enough, most companies' production costs are now above current platinum and palladium prices. This can only be solved one way: higher metals prices.

Bottom Line

The supply disruptions in South Africa combined with secondary factors have led to deficits in both metals that won't be erased overnight. Such imbalances, together with mainstream expectations of global economic growth, create a favorable environment for PGM price appreciation.
This much seems like a safe bet. There is, however, a great deal of speculative upside in the not-inconceivable case of South Africa going off the rails in a major way. Massive – not marginal – supply disruptions in the world's main source of both metals would send their prices through the roof. You get this speculative potential "for free" when you bet on the more conservative projections that call for rising prices regardless.
While we wait for our gold positions to rebound, an investment in platinum and palladium could be very profitable. How to invest? You can learn which company is our #1 pick for this space with a risk-free trial subscription to BIG GOLD.
Note: our longer-term outlook remains in place: most G7 economies are not fundamentally sound and continue to print money. Gold is still our priority asset class, so we don't recommend that investors replace their gold holdings with platinum and palladium investment vehicles. This PGM trend is simply an addition to and diversification of our current investment strategy.



May 20, 2013

The Resurgence of the Nuclear Reactor

By Casey Research

In August 1956, the Calder Hall Power Plant in Seascale, England began generating electricity and earned the distinction of being the world's first commercial nuclear power plant. It was a humble beginning for nuclear power; the plant only had a 50-megawatt (MW) output capacity, whereas the smallest US plant today has a 478 MW capacity. Nonetheless, Calder Hall represented the launch of a new era in energy that promised to bring electricity too cheap to meter.
But early on, the promising power source had its detractors. They objected to the high initial cost of constructing nuclear plants, the problems of radioactive waste disposal, and the risks of nuclear accidents and nuclear proliferation.
The detractors had an impact. The heavy regulation they pushed for and the litigation they initiated extended construction times and drove up construction costs. But despite their efforts, over 100 reactors had been placed in service in the United States by 1974.
Then came 1979 and a landmark event – the nuclear accident at Three Mile Island. In the aftermath, public opinion turned solidly in favor of the anti-nuclear movement, several construction projects were canceled, and no new US building permits for nuclear power plants were issued for the next 33 years.
Though the US abandoned nuclear expansion in the 1980s, other countries forged ahead. Worldwide startups peaked in 1984 and 1985, as over 30 plants were brought online in each of those years. However, escalating regulatory and litigation costs and pressure groups were not unique to the US. By the 1980s, it was becoming difficult to cost-justify new projects. On top of all that, the Chernobyl accident occurred in 1986, and the world had its own Three Mile Island moment.
In the 1990s, global startups fell to an annual average of less than six per year; in the first decade of the new century, average annual startups were just over three per year. In fact, since 1990 there have barely been enough startups to offset shutdowns.
The recent flurry of closures was caused to a great extent by yet another accident. After the earthquake and tsunami in Japan on March 11, 2011 and the ensuing catastrophe at the Fukushima Nuclear Power Plant, several countries began to rethink their nuclear energy policies. In May 2011, Germany announced that it would abandon nuclear energy entirely, shutting down all 17 of its plants by 2022. In June 2011, Italian citizens voted overwhelmingly in favor of a referendum to cancel plans for new reactors. The Japanese Cabinet, though unclear about a specific plan, has issued a white paper calling for less reliance on nuclear power.
So is nuclear on its last legs? It would appear so... but before we make the funeral arrangements, let's take a closer look.

A Nuclear Renaissance

In the wake of the Fukushima disaster, much of the attention in the Western world has been on the nuclear power debate, plant shutdowns, and project cancelations. Meanwhile, those in developing countries recognize the harsh reality that something has to be done to produce more power. Driven by population growth and increasing standards of living, future demand for energy in those countries will be strong, if not overwhelming.
The International Energy Agency forecasts that global demand for electricity will grow by a staggering 70% between 2012 and 2035. The increase will come predominantly from developing countries – over half is expected from China and India alone.
Serious pollution problems mean that those developing countries cannot produce all that electricity by burning coal. Amir Adnani, Uranium Energy Corporation's CEO, says, "The plans to develop nuclear power in China and other countries are very much driven by a set of realities that is very different and very acute. People are dying every year in China, literally choking to death, because of all the toxins that are being put into the environment by burning coal."
This explains why China, India, and the Russian Federation are quietly forging ahead with nuclear energy expansion while the West and Japan fret over it. As you can see in the table below, those developing countries are dominant leaders in the construction of nuclear facilities.

Country	Nuclear Plants in Operation	Nuclear Plants Under Construction
Argentina	2	1
Armenia	1	0
Belgium	7	0
Brazil	2	1
Bulgaria	2	0
Canada	19	0
China, Mainland	17	29
China, Taiwan	6	2
Czech Republic	6	0
Finland	4	1
France	58	1
Germany	9	0
Hungary	4	0
India	20	7
Iran	1	0
Japan	50	3
Korea	23	3
México	2	0
Netherlands	1	0
Pakistan	3	2
Romania	2	0
Russian Federation	33	11
Slovakian Federation	4	2
Slovenia	1	0
South Africa	2	0
Spain	8	0
Sweden	10	0
Switzerland	5	0
Ukraine	15	2
UAE	0	1
United Kingdom	16	0
United States	104	1
Total	437	67

Source: European Nuclear Society

It typically takes about six years to complete a plant once it is under construction, so the 67 facilities shown above should be producing electricity soon. In addition, over 100 reactors are at various stages of planning and permitting.
So it looks like the needs of developing countries will be more than enough to revitalize and sustain the nuclear-power industry. As for the developed countries, many still heavily rely on nuclear energy, and that won't change anytime soon. In fact, the reliance may only increase in the coming years.
Though many developed countries have been cool at best and hostile at worst toward nuclear energy expansion, a more conciliatory approach may be required in the future. That's because many of the same people who are concerned about the risks and costs of nuclear power are even more concerned about global warming. That means fossil fuels and the carbon dioxide they emit must be limited.
But what will be used other than fossil fuels? The hope was wind and solar, but the inefficiencies, high costs, and intermittent nature of these two energy sources make them unlikely candidates for widespread use. What's left is nuclear.
On February 9, 2012, the US Nuclear Regulatory Commission approved a license for two new nuclear reactors in Georgia, the first in over 30 years. This could be a sign of more approvals to come. But what could eventually really ignite a nuclear expansion are the promising technology advancements that are being developed.

Nuclear Technological Developments

Small Modular Reactors:
You've heard of the mini-brewery and the mini-steel mill; now meet the mini-nuclear reactor. Commonly known as "small modular reactors" or SMRs, these reactors are tiny compared to conventional ones. However, with capacities reaching up to 300 MW (power sufficient to supply 45,000 homes) they pack plenty of punch to have practical commercial application. Here are some advantages that SMRs offer:

• They are cheaper to construct and operate than conventional reactors.
• They can be standardized and factory built, a much more efficient process than on-site construction.
• They can be set up in groups to provide however much power an area needs. Grouping would allow for a unit to be taken offline for repairs, maintenance, or replacement without an interruption of service. On the flip side, more units can be easily added if an area's power needs increase.
• They can basically run themselves with little on-site supervision.
• They can be stored underground, which enhances security.

Most important, because they are small and use less fuel, they are easier to cool, which greatly reduces the risk of a meltdown.

Small Modular Reactor

Some SMRs can even run on what was once considered nuclear waste. For example, a Bill Gates-backed company, TerraPower, is developing a reactor that burns depleted uranium. Depleted uranium burns very slowly, so TerraPower's reactor could theoretically run for decades without the need for a fill-up. This is an exciting development. Unfortunately, the TerraPower reactor only exists as a prototype on a PC. This means that it will take several years before it could possibly make its debut on the power grid.
In fact, most SMRs are still in the very early stages of development, with many challenges to be met and many questions to be answered. However, the concept has enough promise to induce the US government to invest in its pursuit. If it proves to be viable, this technology could really shake up the energy scene.
Thorium Reactors:
Imagine a cheap, plentiful atomic fuel that could provide safe, emissions-free power for hundreds of years without refueling and without any risk of nuclear proliferation. That fuel is thorium, and proponents claim it eludes many of the pitfalls of today's nuclear energy.
Robert Rapier, chief technology officer and executive vice president at Merica International, says:

"Longer term, commercialization of thorium reactors would dramatically reduce (although not totally eliminate) the risk of nuclear-weapon proliferation. Thorium is abundant relative to uranium, and thorium does not have to undergo the enrichment process that uranium requires. Further, thorium reactors have little risk of melting down because climbing temperatures will decrease the power output, eliminating the runaway reaction possibility present in a uranium-fueled reactor. Thus, these reactors would naturally tend toward the fail-safe state. The primary disadvantage is that thorium reactors are still mainly at the experimental stage, and therefore commercial viability has not yet been clearly demonstrated."

Pebble-Bed Reactors:
The pebble-bed reactor concept was first introduced way back in the 1940s. The US, Germany, and South Africa have experimented with the technology over the years, but it is the Chinese who have persisted in the experiment and plan to implement the technology in two reactors near the Yellow Sea.
Under the pebble-bed design, uranium fuel rods are replaced with tennis-ball-sized graphite spheres that contain tiny beads of uranium, and helium (instead of water) is used as a coolant. A New York Times piece provides a simple explanation of how the technology works:

"Rather than using conventional fuel rod assemblies…(pebble-bed reactors) use hundreds of thousands of billiard-ball-size fuel elements, each cloaked in its own protective layer of graphite.

"The coating moderates the pace of nuclear reactions and is meant to ensure that if the plant had to be shut down in an emergency, the reaction would slowly stop on its own and not lead to a meltdown.

"The reactors (are) cooled by non-explosive helium gas instead of depending on a steady source of water – a critical problem with the damaged reactors at Japan's Fukushima Daiichi power plant. And unlike those reactors, (pebble-bed) reactors are designed to gradually dissipate heat on their own, even if the coolant is lost."

Challenges remain for pebble-bed reactors, and some environmentalists oppose the technology. They point to the fact that the volume of radioactive waste increases under the pebble-bed design, but do concede that pebble-bed waste is far less radioactive per ton than spent uranium fuel rods.
These technological developments in the nuclear-reactor space are promising and certainly worth keeping an eye on... but it's unlikely that anything disruptive will hit the mainstream anytime soon.
So from an investment standpoint, this means that the best and most immediate way to play the nuclear trend is not the companies that make the reactors, but the companies that mine the fuel for the reactors.

The Coming Uranium Bull Market

There are a number of supply and demand circumstances that appear to be forming a perfect storm for bullish uranium prices. From the demand side, the 67 new reactors that we discussed earlier will be coming online in the near future.
On the supply side, there isn't enough uranium being mined to meet current reactor requirements, let alone new facility requirements. According to the World Nuclear Association, there was a 40-million-pound uranium production gap in 2011. It is unlikely that that gap will be closed at current prices; miners claim that their production costs average $85 per pound. With spot prices at about $40 per pound, miners have no incentive to bring new capacity online.
Another factor affecting the supply side is the coming end of the Megatons to Megawatts program. Under this arrangement, the US and Russia agreed to convert high-enriched uranium from Russia's dismantled weapons arsenal into low-enriched uranium for use in power plants. This secondary source provides about 15% of the US's annual supply of uranium. However, the program will expire later this year and when it does, the production gap will widen. Guess what will happen to uranium prices. That's right: they'll skyrocket.
Intrigued yet? Want some more specific investment advice? Help is on the way. Marin Katusa and the Casey Research Energy Team are on top of the emerging opportunity in uranium and have assembled a panel of world-renowned energy experts to discuss it in further depth in an upcoming webinar titled The Myth of American Energy Independence: Is Nuclear the Ultimate Contrarian Investment? The webinar premiers at 2:00 p.m. Eastern on Tuesday May 21, 2013 and is free of charge. In addition, all attendees will receive a free copy of our new Global Resource Intelligence Report on uranium (a $29 value). I urge you to reserve your seat today.



May 16, 2013

Putin’s Power Play – How It Will Change the Uranium Sector

By Casey Research

The last time Vladimir Putin was president, he laid the foundation to pull Mother Russia from the wreck of economic chaos to a world power once again. This time, he's ready to extend that influence to counter the West. His tools: Russia's abundant resources of energy, including uranium.
There's a new war developing on the continent, and the weapons this time will be oil wells, gas fields, and uranium mines, pipelines and ports, processing facilities, and supply deals.
Led by Russia's vast resource wealth and China's massive bank account, the countries of Asia and those along the Eurasian divide are realizing they do not want or need help from the West to achieve their goals. They are settling their differences, negotiating closer relations, and advancing their plans without as much as a phone call to Washington or Brussels.
After years of Western dominance in world affairs, they've had enough. And with Vladimir Putin back in as Russia's president, this emerging bloc has its leader.
Vladimir Vladimirovich is a man of remarkable intelligence, determination, and ruthlessness. In many Russian eyes, that last attribute is far from a fault – they see him as a man's man who restored their country's pride, economy, and position of influence after a humiliating period they'd rather forget. If that has required trampling some citizen rights along with much of the country's new capitalist class… well, nothing comes for free.
From the chaos of financial collapse and political turmoil in 1998, Putin increased GDP by an average 7% annually, cut in half the number of Russians living below the poverty line, grew industry by 75%, and doubled real incomes.
He's achieved these accomplishments largely though development of energy resources. Under his guidance, Russia became a global energy superpower. Today, with a much-strengthened country under his feet, Putin will use his control over natural resources to pull leverage away from the United States and Europe.
It's no secret that Putin disdains America's self-appointed role as global policeman and holds Europe in equal contempt for generally supporting US foreign policy. The NATO campaign in Libya was perhaps a final straw: After Russia vetoed a UN motion to intervene in the civil war there, the US and its European allies turned to their military club NATO to further the regime change they desired. To Russia, at least, it was a snub intended to suggest that Russian opinion still doesn't matter.
Now Putin's primary goal is to prove that view wrong.
And he has the tools to do so. Among other things, he's working to corner the uranium market – his country already controls 40% of global uranium enrichment capacity, the lion's share of the world's downblending facilities, and a fair chunk of the world's uranium resources.
On top of that, the country's nuclear power giant, Rosatom, builds more nuclear power plants than any other company in the world, with deals for 21 international reactors currently on the books.
The era of Putinization is about to begin, and we investors need to understand where it's coming from and what it means. What's on the table are investment trends and profits along with the balance of world influence.

Russia: Key Player in the Uranium Market

Russia is bestowed with immense resource wealth, in large part because Mother Russia is simply the biggest country in the world. The nation covers 17 million square kilometers, upwards of twice the size of the next largest country, Canada. Even if its lands and waters were only moderately imbued with resources, Russia would have a lot of natural wealth.
Russia was the sixth-largest uranium producer in the world in 2010, behind Kazakhstan, Canada, Australia, Namibia, and Niger. But that ranking only includes uranium produced from mining operations. When we include production from the downblending of its decommissioned nuclear weapons, Russia jumps to second.
It's hard to overstate Russia's dominance of the world's capacity to process uranium. Australia, Kazakhstan, and Canada rely on Russia to enrich the uranium they mine, while for the last 18 years the United States has relied on Russia's downblending capability. The Megatons-to-Megawatts agreement provides fully half of the uranium fueling America's nuclear reactors, or 10% of its electricity.
The agreement is scheduled to end in December 2013, at the same time as global demand for uranium is rising. The US will have to go on the hunt for new uranium suppliers just as the race to secure those supplies heats up… and Putin knows it.
Not only will he not renew Megatons, he will encourage the world's uranium-needy nations – China, India, the US, France, South Korea, and Japan – to outbid each other for the opportunity to secure stable supplies of Russian uranium.
We've said it before: Putin is working to corner the global uranium market. He already has a strong grip over Europe's gas needs and holds considerable sway over the continent's oil supply. Why wouldn't he want to also control the world's supply of nuclear reactor fuel?

Uranium – a Hot Commodity

Today there are no fewer than 60 nuclear plants under construction in 14 countries, with another 163 planned and 329 proposed.
Many countries without nuclear power are on the cusp of building their first reactors, including Vietnam, Turkey, Indonesia, Egypt, Kazakhstan, and several among the Gulf emirates. And while many countries with nuclear reactors took a moment to pause and reassess safety standards in light of the Fukushima disaster, almost all have reasserted their support for nuclear power as a major component of their energy strategies.

Uranium is simply the only fuel right now that can reliably produce large amounts of electricity without the release of greenhouse gases and other hydrocarbon pollutants.
Demand is clearly ramping up, and the world is already short on uranium. In 2011, world industry consumed 165 million pounds of U₃O₈ but produced only 143 million pounds.
Indeed, the world hasn't produced enough uranium to meet demand for some two decades.
Secondary supplies have been filling the gap to date. For example, since 1993 the Megatons-to-Megawatts agreement between Russia and the United States has been working toward the goal to recycle 500 tonnes of highly enriched uranium (HEU) from Russian nuclear weapons into the LEU that reactors use to produce electricity. But remember, that deal is set to end next year.
The end of Megatons-to-Megawatts will eliminate 24 million pounds of uranium supply just as demand starts surging. The World Nuclear Association predicted global uranium demand will have increased 33% by 2020, and will then climb almost that much again in the next 10 years.
Those are huge increases. In 2011, the world consumed about 70,000 tonnes of uranium. By 2024, we are expected to need 100,000 tonnes. Can production keep up? Not likely.
If every potential uranium mine on the horizon were approved, built, and commissioned on schedule, supplies might just keep up with demand. But current uranium prices are rendering many potential mines uneconomic, and global economic uncertainty is making it very difficult for uranium companies to obtain the cash they need to build mines. It all adds up to one conclusion: a supply gap is looming.

A Near-Monopoly on Downblending

The global race to secure uranium resources is on. Russia already produces a fair bit of uranium; on top of that, Putin carries a lot of clout in neighboring Kazakhstan, the world's top primary uranium producer. So Russia already controls a lot of primary production.
But that's just the start. Since primary production won't be able to meet demand, secondary sources will become extra important. And there is only one significant secondary source: downblended Russian warheads.
One American company, WesDyne International, has facilities in the US to downblend HEU, but its capacity is limited to roughly 8 tonnes a year. Russia can churn through 30 tonnes annually. It means the US has little choice but to send its old warheads to Russia for downblending.
So Russia has that secondary production well in hand, too.
And Russia isn't just the world leader in downblending – the country also operates 40% of the world's enrichment capacity, giving the Russian leader another avenue of control over the nuclear fuel market.
Control over so much LEU production capacity gives Putin the ability to ink supply deals with countries desperate to secure nuclear fuel for the future. For example, a new bilateral agreement between Russia and Japan is about to take effect, paving the way for Japanese utilities to secure uranium enrichment services from Russia.
Putin also finds long-term uranium customers in the countries that have asked Russia's state nuclear utility, Rosatom, to build their reactors.
Rosatom is an absolute giant in the global nuclear sector. The company builds more nuclear power plants worldwide than anyone else, with builds currently underway in China, Vietnam, India, Iran, and Turkey. The 21 new builds in Rosatom's order book are worth US$50 billion.
And how handy is it that many of those new builds include a lifetime fuel supply contract, such as the contract Rosatom signed with Bangladesh to build and fuel that country's first nuclear reactor.
Rosatom is also the conduit through which Russia exports uranium, a trade currently valued at US$3 billion per year. One-fifth of those exports go to the Asia-Pacific region, a market growing so quickly that Rosatom is building a new Vostok complex for uranium-products transportation and logistics to better serve the region.
Nuclear power has been the world's fastest-growing major source of energy every decade since 1960. That's not going to change. Putin is acutely aware that uranium will be one of the most closely contested battlegrounds in the global race for resources.
Unfortunately for everyone else, he's given Russia a significant head start.
The coming uranium supply crunch will lead to a bull market for the history books… with spectacular profit potential for early investors. To discuss uranium's future, and the investment implications, some of the world's foremost energy experts – among them a former US secretary of energy and the chairman emeritus of the UK Atomic Energy Authority – will gather for an unparalleled Webinar on May 21, 2013. Registration is free – click here to learn more.



May 13, 2013

America’s Addiction to Foreign Uranium

By Casey Research,

What most Americans don't realize is that dependence on foreign oil isn't the main obstacle to US energy autonomy. If you think America's energy supply issues begin and end with the Middle East, think again. One of the most critical sources of foreign energy is due to dry up this year, and the results could mean spiking electricity prices across the country.
In 2011, the US used 4,128 billion kilowatt hours (kWh) of electricity. Nuclear power provided 790.2 billion kWh, or 19% of the total electrical output in the US. Few people know that one in five US households is powered by nuclear energy, and that the price of that nuclear power has been artificially stabilized. Unfortunately for us, the vast majority of the fuel used for powering our homes must be imported.
In the chart below, you see where most of our uranium comes from:

The overwhelming majority of that Russian uranium comes from a 20-year-old agreement called "Megatons to Megawatts" that allows weapons-grade, highly enriched uranium (HEU) to be converted to reactor-grade, low-enriched uranium (LEU).
By December 2012, "Megatons to Megawatts" had produced 13,603 metric tons of LEU for US consumption and provided the fuel for nearly half of the US electricity generated from nuclear power.
In December 2013, that agreement expires, and Russia will be free to put its uranium out on the open market and demand higher prices. With 17 nuclear reactors in China and 20 in India – not to mention Japan, France, Germany, and others all vying for nuclear fuel – competitive bids are poised to drive prices higher, and early investors stand to make spectacular gains.
If this information is news to you, you are not alone. While the mainstream media focus on the US's "Middle Eastern energy dependence," the real story remains unnoticed. That's why Casey Research invited the field's top experts – including former US Secretary of Energy Spencer Abraham and Chairman Emeritus of the UK Atomic Energy Authority Lady Barbara Judge – for a frank discussion of what we think is America's greatest energy challenge.
Join us on Tuesday, May 21 at 2 p.m. EDT for the premiere of The Myth of American Energy Independence: Is Nuclear the Ultimate Contrarian Investment? to learn how the end of "Megatons to "Megawatts" will affect the US energy sector and how you can position yourself for outsized profits. Attendance is free – click here to register.



May 10, 2013

If Cyprus Is the Bellwether, then Canada Is the Red Flag

By Jeff Thomas, International Man

An intriguing article titled "Canada Includes Depositor Haircut Bail-In Provision for Systemically Important Banks in 2013 Budget" was recently published in SD Bullion.
The somewhat lengthy title offers all the information necessary, but for those who – quite understandably – may not be able to accept that they have just watched Canada tumble down the Cypriot rabbit hole, here is a bit more detail from the approved budget itself:

"The Government proposes to implement a bail-in regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital."

Customer deposits could certainly fall under the label of "certain bank liabilities," and converting them into "regulatory capital" without permission is just a gentle way of describing confiscation. Though Canadian officials have denied that the term "certain bank liabilities" includes customer deposits, we must note that the government in Cyprus also promised that customer deposits would not be touched, only to renege on that promise at the onset of the crisis. Remember lesson #1 of the Cyprus debacle: "Do Not Trust Politicians."
As the recent events in Cyprus have been unfolding, each iteration has seemed to me to be not only logical, but almost predictable. As Jim Sinclair has recently been stating frequently, the EU has run out of options… The next step is confiscation.
There will, of course, be endless rhetoric and debate, followed by minor adjustments in method and percentage taken, but, ultimately, the powers-that-be have reached the confiscation stage. That is now carved in stone.
But at this point, if we are watching the horizon, we will spend less of our time mourning the fall of Cyprus and more of it anticipating which countries will be next in line.
Here, I confess, I have been surprised. There were quite a few countries that, logically speaking, might have been next. Canada was not even on my personal radar. This is not to say that it would not also be in the queue – only that I would have predicted its position in the queue to be quite a bit further back.
Those observing recent developments may have understandably been saying to themselves, "I realize that we live in difficult times and that, if I am to look after my family's future, I need to face up to the fact that we may be seeing dramatic change. But there are some things I can't accept, and one of those is the possibility that my savings could be confiscated by my bank. My government would never allow it!"
For those who very understandably may find this latest realization to simply be beyond the pale, it would be well to take a moment out to rise above the clouds for a bit of an overview at this juncture.
In most countries of what we grew up calling the "Free World," there has been a steady deterioration, particularly with regard to corporatism (the merger of state and corporate powers). One facet of that deterioration has been increasing legislation that allowed financial institutions to create Ponzi schemes with regard to lending, in which the bank goes broke in the end but the cost for the failure is passed to the taxpayer in the form of a bailout.
Put more simply, this means that after the fox has raided the henhouse, the government advises the public that the only way to save the situation is for the government to confiscate more hens from the farmers and give them to the foxes.
The public, desperate to return to "normal," will accept whatever the government says at this point, in the hope that it will all somehow turn out all right. Only a tiny percentage will be prepared to say, "We've been systematically raped and robbed by both our government and our banks, in full complicity with each other. It's high time I put what I have left in a sack and find a way to protect it on my own."
Those few who do so will turn to safe havens for wealth (however much or little that wealth may be). They may invest in overseas properties that cannot be confiscated by their own governments, buy precious metals and store them privately, and so on.
The objective will be simply to make it as difficult as possible for their governments to confiscate their wealth.
While there may be no guarantee that they will succeed, they would know that at the very least, they will not be the low-hanging fruit when their government enters the orchard to begin the picking.
However, as history shows, the great majority of the people of all countries will fail to act. They will watch in confusion as events unfold, as the banks continue to come up with schemes to further bilk the public of their wealth, while the governments assure the public that, "It's an emergency situation. We have to be willing to sacrifice a bit more to save the system, or we'll really be sorry." In the end, the majority of people will comply.
Cyprus is a bellwether of what is next for the world in general. A term has even already been coined for what is coming – a "bail-in." An event in which the public must accept that, in order to save the banks from collapse (which they have been told since 2008 is the absolute worst possible outcome), they must accept that they must make their "contribution" – confiscation of their deposits by the banks. First, it will be, say, 5%, then it will be announced that 5% didn't solve the problem and another transfusion will be needed. Then another.
Some people will figure out along the way that they are being robbed by both their government and the banks, working in concert, but most will regard that reality as impossible, as it has never happened before and surely can't happen now.
If Cyprus is the bellwether, then Canada is the red flag, showing that Cyprus is not an isolated situation. The damage wreaked by monumental debt is systemic, and it has taken place throughout the First World and beyond.
This latter statement will very likely be the most difficult to accept as reality. If so, here is something to consider: Canada has approved its bail-in on a national level just one week after a final decision was made in Cyprus. As we all know, the wheels of governments worldwide move slowly. The reader might ask himself whether he believes that the Canadian government has, in short order, approved its own bail-in, in reaction to the events in Cyprus. If this possibility is simply too far-fetched, he must accept that the plan for Cyprus has been known to the Canadian government for some time and that a similar bail-in for Canada has been in the works for a while. It was simply agreed that Cyprus would go first – to act as the litmus test.
If the reader finds himself agreeing that it is likely that the Canadian government had foreknowledge of the events in Cyprus, his next logical conclusion would be that other nations had the same foreknowledge and have very likely been getting their own ducks in a row.
Most countries in the First World have gone down the same road of monumental debt and have found that that road has led to a precipice. At this point, they have no other option left in their bag of tricks. They are all in the same boat and will play their last option – confiscation of wealth.
While many First World citizens think that events like those unfolding in Cyprus could never happen in their home country, the truth is precisely the opposite – and actions like the Canadian government's send a strong signal that the time to protect your wealth from governmental grabs is running out.
There are a number of diverse steps you can take to protect yourself and your wealth from being milked by your home government. Whether you're looking to stash some cash or precious metals in another country, interested in setting up an offshore LLC, or wanting to go completely international with your life and your assets, the comprehensive information in Going Global 2013 will provide you with sound strategies and trusted options for securing your financial future. Learn more and get started protecting your wealth today.



May 8, 2013

How to Profit from Risk

By Dennis Miller

Live off the interest, and never touch the principal. Today's retirees had this drummed into their minds long ago. It is, after all, a laudable goal, and something every retiree and person approaching retirement should aspire to. But how in the heck are we supposed to do it?
A friend recently told me he rolled over a five-year CD paying 1.2% because his banker said it was a good rate. Ah! I nearly fell out of my chair when I heard that. A 1.2% interest rate won't even keep up with inflation, let alone allow someone to live off the interest. He may think he's investing conservatively by keeping his money in FDIC-insured CDs, but his buying power is quickly slipping through his fingers.
So, what interest rate does it take? About 12%, that's all. According to over 3,000 readers of my regular weekly column, our cost of living has risen about 8% in the last year. If that number is anywhere close to accurate — and I'm inclined to believe it is — our portfolios need to earn 8% to cover rising costs and 4% to supplement those measly Social Security checks.
My CD-investing friend is taking the biggest risk of all: ignoring the reality of the times we live in. Maybe he's too paralyzed by fear to step away from the familiar. Maybe he doesn't know where to find better options. And maybe he's like so many of us who just want to bury our heads in the sand. Doing nothing, however, is a decision, and a particularly poor one during times of high inflation.
Like an ostrich pulling his head out of the sand
I advised my friend to start doing his homework. He can still take a conservative approach to his overall portfolio, but he should also consider putting up to 10% of it into a mix of speculative investments. Retirees certainly shouldn't go overboard and risk more than that, but he won't be wiped out if something goes wrong with a small portion of his nest egg. In reality, he's already taking a much bigger risk without the chance of reward that speculative investments offer.
So where should we put our 10%? First, do not put it all into one company. Slice it up into smaller pieces; the exact number varies according to the size of your portfolio and your personal risk tolerance. Then, pinpoint a few well-researched speculative investments, and get your toes wet. There are many specialty, sector-focused newsletters out there to help.
One newsletter I subscribe to focuses on the extraordinary profit potential in the technology sector. Many of the investments it recommends have one of two outcomes: investors see windfall gains, or they lose a little money. I'm excited about one recommendation in particular, a small pharmaceutical company that's developing cutting-edge medical tests. Companies like this one function as research and development for the whole industry. Once the tests receive FDA approval, they will likely be purchased by a much larger company, and investors may see life-changing profits.
But before you start decorating your new beach house, remember, we must do our homework. High-quality newsletters have several pages of research explaining each of their recommendations. Read them carefully and be very selective.
And start slowly. Limit any one investment to no more than 5% of your portfolio. If it gains 50%, that's a 2.5% gain for your entire portfolio. If it doubles, that's a 5% gain. That takes a lot of pressure off the other 95%, and puts you a few steps closer to truly living off the interest.
Also, read the updates and constantly monitor your positions. Yes, retirees must take risks, but only educated and extensively researched risks with a small portion of your nest egg.
One final tip: mutual funds and exchange-traded funds stress diversification. That works for the low-risk portion of your portfolio, but their spreadsheet analyses won't do the trick for speculative investing. I prefer to invest my speculation capital strategically, where I have a thorough understanding of the company, product, industry, and profit potential.
So how do you get from where you are today to where you need to be?
A good way to start is to build a portfolio based on dividend income. Speculative stocks are great (and fun if they’re giving you good returns), but the core of your portfolio needs to be stocks you can rely on for stability; and a little extra cash through dividend payments is a bonus. To that I end I’ve put together a new report called Money Every Month outlining for you exactly how to build a portfolio that pays out each and every month and even tells you which stocks you should consider owning. If you want a copy just click here.

April 30, 2013

Buy Gold NOW

By Jeff Clark, Senior Precious Metals Analyst

You've undoubtedly read about the dramatic increase in demand for gold and silver bullion products since the big correction two weeks ago. Supply has gotten tight, premiums are rising, and inventory is hard to come by, especially for certain silver products.

But it's worse than you may know. Many of these reports come from the retail side of the business, including those from sovereign mints. This information is indicative, but more important is the activity among the wholesalers. It's possible the retail trade is just experiencing a giant bottleneck, which would come with a different set of conclusions than if behind the scenes the wholesale industry is seeing net sales.
So we decided to talk to the wholesalers directly: the bullion banks, traders, and refiners. These entities typically deal in wholesale trades only, exclusively in large amounts, and solely with major entities that include dealers and investment funds.
There was a catch, however. In speaking with these entities, we realized one thing: they won't publicly reveal themselves. So we can't tell you who they are, and in fact, they wouldn't speak by phone, only in person. This means you have to take our report on trust – or not – as you wish; we simply don't have permission to reveal names (we did ask). We can say this, though: we spoke with almost all the major ones.
Here's a summary of what they told us occurred during the week of April 15-19 (the 15^th was gold's 9.3% selloff)…

• Bullion Banks. As a group, there were roughly four times as many buy orders as normal. Generally speaking, the buy/sell ratio was nine to one. Inflows (buying vs. selling) were net positive across the board.
   
• Bullion Traders: There were twice as many trades placed as usual – and the buy/sell ratio was a whopping 95:1. One anonymous dealer told us it had 995 buy orders that week and just five sell orders. Reports like this were consistent among the group. What's interesting is that all traders reported higher volume. That the increased buying occurred on large volume instead of small volume means the buying was not a fluke. It also confirms the bull market isn't over.
   
• Precious Metals Refiners: These entities deal in large trades only. None would reveal the quantity of their orders, but two stated they had no sell orders. A third told us they had one sell order out of 100 transactions.

What we learned from these big players is that no one was a net seller. There was across-the-board purchasing, and on significantly increased volumes. We heard more than once that "We've never seen anything like this." And that includes the 2008-2009 period.
While some of this may sound familiar to what we've heard on the retail side, keep in mind that these are the entities that supply your local dealer. So if your favorite shop found it difficult to access product last week, their woes are unlikely to let up.
What we conclude from this research is that the availability of bullion is likely to get worse before it gets better. If so, it also means premiums will continue to rise. Remember that in early 2009, at the peak of the last big supply deficit, premiums for silver Eagles reached as high as 90-100% before coming back down. In that light, a 25% premium for a silver Eagle today doesn't look so bad.
The disconnect between the paper price of gold and the demand for physical metal is so great that we want to bring this to your attention so that you can make an informed decision about whether or not to buy gold now. You should know that supply among wholesalers is as every bit as tight as the retail side, that dealers will probably continue having difficulty meeting demand, that premiums will likely continue to rise, and that delivery times aren't going to shorten right away. If you're a bullion buyer, purchasing now could save you some money and hassle over waiting.
The catch is, where do you go? Delays are commonplace; we're hearing five to six weeks from some dealers, and a few websites show certain products are "out of stock." Further, premiums are still climbing, in some cases daily.
Because of its extensive network, bullion is still available at the Hard Assets Alliance for a reasonable premium with minimal delays. Access to a greater number of dealers has increased the Alliance's ability to continue accessing metal (when one dealer is low it can turn to another one) as well as maintain low premiums, since there's competition for your order. You can check out premiums by opening an account, which only takes about five minutes. You'll probably be pleasantly surprised.
HAA is seeing record demand, too, but so far, it's been able to meet it. As of Friday, orders are being filled in about a week, and about two weeks on the more popular products. Premiums remain among the lowest in the industry. Note that some dealers are using the supply crunch to raise their fees, so be careful of anyone who's charging more than the rest of the industry. I can tell you that HAA's markup is from the wholesaler only. And news flash: HAA lowered the minimum to $5,000 (from $10,000) for US vaults or delivery.
The important thing to realize that if gold and silver were to see another leg down, we fully expect buying physical metals to get more difficult and expensive, not better. At this point, there is no evidence that supply is easing up. Even – or perhaps especially – at lower spot "paper gold" prices, it could become very difficult to get your hands on bullion. And you'll pay even higher premiums on items with the tightest supply. We don't care to predict how long delivery times could get.
Don't be fooled by what happened in the futures market. The retreat is a buying opportunity for physical metal. If you wish you'd bought tech stocks in 1990 or real estate in 2000, you now have a moment like that in gold.
So yes, we are buying right now, and recommend it to our readers, too.
We also recommend storing some of your gold and other assets outside of your home country. To help you get started, Casey Research has produced Internationalizing Your Assets, a timely web-based investors' summit that features Doug Casey, Peter Schiff, and other experts in international diversification. The event premiers tomorrow – April 30 – at 2 p.m. Eastern time. Registration is free. For more information, please visit this web page.


April 23, 2013

Physical Gold vs. Paper Gold: The Ultimate Disconnect

By Bud Conrad, Chief Economist

How can we explain gold dropping into the $1,300 level in less than a week?
Here are some of the factors:

• George Soros cut his fund holdings in the biggest gold ETF by 55% in the fourth quarter of 2012.
• He was not alone: the gold holdings of GLD have contracted all year, down about 12.2% at present.
• On April 9, the FOMC minutes were leaked a day early and revealed that some members were discussing slowing the Fed $85 billion per month buying of Treasuries and MBS. If the money stimulus might not last as long as thought before, the "printing" may not cause as much dollar debasement.
• On April 10, Goldman Sachs warned that gold could go lower and lowered its target price. It even recommended getting out of gold.
• COT Reports showed a decrease in the bullishness of large speculators this year (much more on this technical point below).
• The lackluster price movement since September 2011 fatigued some speculators and trend followers.
• Cyprus was rumored to need to sell some 400 million euros' worth of its gold to cover its bank bailouts. While small at only about 350,000 ounces, there was a fear that other weak European countries with too much debt and sizable gold holdings could be forced into the same action. Cyprus officials have denied the sale, so the question is still in debate, even though the market has already moved. Doug Casey believes that if weak European countries were forced to sell, the gold would mostly be absorbed by China and other sovereign Asian buyers, rather than flood the physical markets.

My opinion, looking at the list of items above, is that they are not big enough by themselves to have created such a large disruption in the gold market.
The Paper Gold Market
The paper gold market is best embodied in the futures exchanges. The prices we see quoted all day long moving up and down are taken from the latest trades of futures contracts. The CME (the old Chicago Mercantile Exchange) has a large flow of orders and provides the public with an indication of the price of gold.
The futures markets are special because very little physical commodity is exchanged; most of the trading is between buyers taking long positions against sellers taking short positions, with most contracts liquidated before final settlement and delivery. These contracts require very small amounts of margin – as little as 5% of the value of the commodity – to gain potentially large swings in the outcome of profit or loss. Thus, futures markets appear to be a speculator's paradise. But the statistics show just the opposite: 90% of traders lose their shirts. The other 10% take all the profits from the losers. More on this below.
On April 13, there were big sell orders of 400 tonnes that moved the futures market lower. Once the futures market makes a big move like that, stops can be triggered, causing it to move even more on its own. It can become a panic, where markets react more to fear than fundamentals.
Having traded in futures for over two decades, I want to provide some detail on how these leveraged markets operate. It's important to understand that the structure of the futures market allows brokers to sell positions if fluctuations cause customers to exceed their margin limits and they don't immediately deposit more money to restore their margins. When a position goes against a trader, brokers can demand that funds be deposited within 24 hours (or even sooner at the broker's discretion). If the funds don't appear, the broker can sell the position and liquidate the speculator's account. This structure can force prices to fall more than would be indicated by supply and demand fundamentals.
When I first signed up to trade futures, I was appalled at the powers the broker wrote into the contract, which included them having the power to immediately liquidate my positions at their discretion. I was also surprised at how little screening they did to ensure that I was good for whatever positions I put in place, considering the high levels of leverage they allowed me. Let me tell you that I had many cases where I was told to put up more margin or lose my positions. Those times resulted in me selling at the worst level because the market had gone against me.
The point of this is that once a market moves dramatically, there are usually stops taken out, positions liquidated, margin calls issued, and little guys like me get taken to the cleaners. Debates rage about the structure of the futures market, but my personal opinion is that a big hammer to the market by a well-heeled big player can force liquidations, increase losses, and push the momentum of the market much lower than the initial impetus would have. Thus, after a huge impact like we saw on April 13, the market will continue with enough momentum that a well-timed exit of a huge set of short positions can provide profits to the well-heeled market mover.
Moving from theory to practice, one of the most important things to keep your eye on is the Commitment of Traders (COT) report, which is issued every Friday. It details the long and the short positions of three categories of traders. The first category is called "commercials." They are dealers in the physical precious metals – for example, gold miners. The second category is called "non-commercials." They include hedge funds and large commercial banks like JP Morgan. Non-commercials are sometimes called "large speculators." The rest are the small traders, called "non-reporting" since they are not required to identify themselves. The ones to watch are the large speculators (non-commercials), as they tend to move with the direction of the market. Individual entities could be long or short, but in combination the net position of the group is a key indicator.
The following chart shows the price of gold as a blue line at the top, and the next panel down shows the net position of these large speculators as a black line. You can see that over the long term, they move together. When the net speculative position is above zero, this group is betting on rising gold prices. Of course, the reverse is true when it's below zero. In this 20-year view, the large speculators were holding net negative positions during the lowest point of the gold price, around the year 2000. As the price of gold rose, their positions went net long, and they profited.

An interesting thing about the chart above is that the increasing amount of net longs reversed itself before gold peaked in 2011, suggesting that these large speculators became slightly less bullish all the way back in 2010. The balance remains net long, but it remains to be seen how long that lasts.
What is not so obvious is that these large speculators are so big that they can affect the market as well as profit from it; when they initiate massive positions in a bull market, they drive the price of the futures contracts even higher. Similarly, when they remove their positions or actually go short, they can push the market lower.
So what happened a week ago was that a massive order to sell 400 tons of gold all at once hit the market. Within minutes the price plummeted, and over a two-day period resulted in the largest drop of the price for futures delivery of gold in 33 years: down $200 per ounce.
We don't have the name of the entity that did this. However, the way the gold was sold all at once suggests that the goal was not to get the best price. An investor with a position of this size should have been smart enough to use sensible trading tactics, issuing much smaller sell orders over a period of time. This would avoid swamping the market; and some of the orders would be filled at higher prices and thus generate more profit. Placing a sell order big enough to affect the overall market price suggests that someone with powerful backing wanted to drive the price of gold down.
Such an entity could have been a large speculator who already had a sizable short position and could gain by unloading some of its short position once the market momentum had driven the price even yet lower. Or it could be a central bank – one that might be happy to have the gold price move lower, as it would provide cover for its printing of more new money. Of course, it could be some entity that owned long contracts and wanted to get out of the position all at once. We don't know, but this kind of activity, resulting in the biggest drop in 30 years, raises more than just suspicion when we consider how important the price of gold is to many markets around the globe.
Can markets really be influenced by big players? Well, was the LIBOR rate accurately reported by huge banks? Have players ever tried to corner markets? The answer to all the above, unfortunately, is yes.
There's an even bigger problem with the legal structure of the futures market: even the segregated funds on deposit can be pilfered by the broker for the brokerage's other obligations. That is what happened to MF Global customers under Mr. Corzine. (I had an account with a predecessor company called Man Financial – the "MF" in the name. I also had an account with Refco, which is now defunct. Fortunately, the daggers did not hit my account, since I was not a holder when the catastrophes occurred.) My take: the futures market is dangerous, and not a place for beginners.
One last note: after the Bankruptcy Act of 2005, the regulations support the brokers, not the investors, when there are questions of legality about losses in individual investment accounts. Casey Research will be producing a report with much more detail on this subject in the near future.
So, what now? We aren't going to see a secret memo – no smoking gun to confirm that what happened on April 13 was an attempt to affect the market. Still, the evidence is suspicious. When big entities can gain from putting on big positions, the incentives are big enough for them to try – LIBOR, Plunge Protection Team, Whale Trade, etc., all support this view.

The Physical Gold Market

Previously, there was little difference between the physical and paper markets for gold. Yes, there were premiums and delivery charges, but everybody regarded the futures market as the base quote. I believe this is changing; people don't trust the paper market as they used to.
Instead of capitulating to fear of greater losses, the demand for physical gold has hit new records. The US Mint sold a record 63,500 ounces – a whopping 2 tonnes – of gold on April 17 alone, bringing the total sales for the month to 147,000 ounces; that's more than the previous two months combined. Indian markets, which are more oriented to physical metal, now have a premium of US$150 over the futures price in Chicago. Demand at coin dealers has increased as the price has dropped. And premiums are much bigger than they were as recently as a week ago.
Here is a vendor page that quotes purchase prices and calculates the premiums on an ongoing basis. It shows premiums of 50% and more in many cases. On eBay, prices for one-ounce silver coins are $33 to $35, where the futures price is quoted as $23. A look on Friday April 19 shows one vendor out of stock on most items:

Buy - Sell On Silver Bullion
2013 Sealed Mint Boxes Of 1 Oz. Silver American Eagles - Brand New Coins	500 Coin Min. (1 Sealed Box)	Buy @ Spot + $1.80	Sold Out
2013 Sealed Mint Boxes Of 1 Oz. Silver American Eagles "San Francisco Mint" Brand New Coins	500 Coin Min. (1 Sealed Box)	Buy @ Spot + $2.00	Sold Out
90% Silver Coin Bags (Our Choice Dimes Or Quarters) $1,000 Face Value Figured at 715 Ozs Per $1,000 Face	$1,000 Face Value Min.	We Buy @ Spot + $1.70 Per Oz (Spot + $1.70 X 715)	Spot + $4.99 Per Oz (Spot + $4.99 X 715)
90% Silver Coin Bags 50¢ Half Dollars $1,000 Face Value We Ship in 2 $500 Face Bags	$1,000 Face Value Min.	We Buy @ Spot + $1.90 Per Oz (Spot + $1.90 X 715)	Sold Out
90% Silver Coin Bags Walking Liberty Half Dollars $1,000 Face Value We Ship in 2 $500 Face Bags	$1,000 Face Value Min.	We Buy @ Spot + $2.10 Per Oz (Spot + $2.10 X 715)	Sold Out
Amark 1 Oz. Silver Rounds ( Made By Sunshine ) Pure .999 BU	500 Coin Min.	Buy @ Spot -15c	Sold Out

Clearly, the physical gold market today is sending different signals than the paper market.
The Case for Gold Is Still with Us
The long-term fundamental reasons to hold gold are undeniably still with us. The central banks of the world are acting in concert in "currency wars" or "the race to debase." As they print more money, the purchasing power of each unit declines. They are caught between the rock of having to keep interest rates low to support their governments' huge deficits and the hard place of the long-term effect of diluting their currency. If rates rise, even First World governments will be forced to pay higher interest fees, leading to loss of confidence in their ability to pay back their debt, which will bring on a sovereign debt crisis like what we have seen in the PIIGS or Argentina recently.
The following chart shows the rapid growth in the balance sheets as a ratio to GDP for the three largest central banks. I've extrapolated the expected growth into the future based on the rate at which they propose to buy up assets. One could argue about how long these growth rates will continue, but the incentives are all there for all central banks to bail out their governments and their commercial banks. I fully expect the printing game to continue to provide the fuel for hard-asset investments like gold and silver to increase in price in the years to come.

Buying Opportunity or Time to Flee?
So what does it all mean? The paper price of gold crashed to $1,325 in the wake of this huge trade. It is now hovering around $1,400. My first reaction is to suggest that this is only an aberration, and that the fundamentals of the depreciating value of paper currencies will eventually take the price of gold much higher, making it a buying opportunity. But what I can't predict is whether big players might again deliver short-term downturns to the market. The momentum in the futures market can make swings surprisingly larger than the fundamentals of currency valuation would suggest.
Traders will be looking for a significant turnaround to the upside in price before entering long positions. However, a long-term, fundamentals-based trader has to look at the low price as a buying opportunity. I can't prove it, but I think the fundamentals will drive the long-term market more than these short-term events. The fight between pricing from the physical market for bullion and that from the "paper market" of futures is showing signs of discrimination and disagreement, as the physical market is booming, while prices set by futures are seemingly pressured to go nowhere.
In short, I think this is a strong buying opportunity.

What would you do if the government outlawed gold ownership? If you had taken the steps outlined in Internationalizing Your Assets, you'd have little to worry about, as much of your gold – indeed, most of your assets – would be protected. Internationalizing Your Assets is a must-see web video for anyone concerned about losing wealth to increasingly desperate politicians. The event premiers at 2 p.m. EDT on April 20 and features some of the world's foremost experts on international asset protection, including Casey Research Chairman Doug Casey and Euro Pacific Capital CEO Peter Schiff. Attending Internationalizing Your Assets is free. To register or for more information, please visit this web page.

April 17, 2013

Doug Casey Refutes Common Hesitations to Internationalize

By Doug Casey, Chairman

Tell a person that it's a big beautiful world, full of fresh opportunities and a sense of freedom that is just not available by staying put and you will inevitably be treated to a litany of reasons why expanding your life into more than one country just isn't practical.
Let's consider some of those commonly stated reasons, and why they might be unjustified. While largely directed at Americans, these are also applicable to pretty much anyone from any country.
"America is the best country in the world. I'd be a fool to leave."
That was absolutely true, not so very long ago. America certainly was the best – and it was unique. But it no longer exists, except as an ideal. The geography it occupied has been co-opted by the United States, which today is just another nation-state. And, most unfortunately, one that's become especially predatory toward its citizens.
"My parents and grandparents were born here; I have roots in this country."
An understandable emotion; everyone has an atavistic affinity for his place of birth, including your most distant relatives born long, long ago, and far, far away. I suppose if Lucy, apparently the first more-or-less human we know of, had been able to speak, she might have pled roots if you'd asked her to leave her valley in East Africa. If you buy this argument, then it's clear your forefathers, who came from Europe, Asia, or Africa, were made of sterner stuff than you are.
"I'm not going to be unpatriotic."
Patriotism is one of those things very few even question and even fewer examine closely. I'm a patriot, you're a nationalist, he's a jingoist. But let's put such a tendentious and emotion-laden subject aside. Today a true patriot – an effective patriot–- would be accumulating capital elsewhere, to have assets he can repatriate and use for rebuilding when the time is right. And a real patriot understands that America is not a place; it's an idea. It deserves to be spread.
"I can't leave my aging mother behind."
Not to sound callous, but your aging parent will soon leave you behind. Why not offer her the chance to come along, though? She might enjoy a good live-in maid in your own house (which I challenge you to get in the US) more than a sterile, dismal, and overpriced old people's home, where she's likely to wind up.
"I might not be able to earn a living."
Spoken like a person with little imagination and even less self-confidence. And likely little experience or knowledge of economics. Everyone, everywhere, has to produce at least as much as he consumes – that won't change whether you stay in your living room or go to Timbuktu. In point of fact, though, it tends to be easier to earn big money in a foreign country, because you will have knowledge, experience, skills, and connections the locals don't.
"I don't have enough capital to make a move."
Well, that was one thing that kept serfs down on the farm. Capital gives you freedom. On the other hand, a certain amount of poverty can underwrite your freedom, since possessions act as chains for many.
"I'm afraid I won't fit in."
The real danger that's headed your way is not fitting in at home. This objection is often proffered by people who've never traveled abroad. Here's a suggestion. If you don't have a valid passport, apply for one tomorrow morning. Then, at the next opportunity, book a trip to somewhere that seems interesting. Make an effort to meet people. Find out if you're really as abject a wallflower as you fear.
"I don't speak the language."
It's said that Sir Richard Burton, the 19^th-century explorer, spoke 10 languages fluently and 15 more "reasonably well." I've always liked that distinction although, personally, I'm not a good linguist. And it gets harder to learn a language as you get older – although it's also true that learning a new language actually keeps your brain limber. In point of fact, though, English is the world's language. Almost anyone who is anyone, and the typical school kid, has some grasp of it.
"I'm too old to make such a big change."
Yes, I guess it makes more sense to just take a seat and await the arrival of the Grim Reaper. Or perhaps, is your life already so exciting and wonderful that you can't handle a little change? Better, I think, that you might adopt the attitude of the 85-year-old woman who has just transplanted herself to Argentina from the frozen north. Even after many years of adventure, she simply feels ready for a change and was getting tired of the same old people with the same old stories and habits.
"I've got to wait until the kids are out of school. It would disrupt their lives."
This is actually one of the lamest excuses in the book. I'm sympathetic to the view that kids ought to live with wolves for a couple of years to get a proper grounding in life – although I'm not advocating anything that radical. It's one of the greatest gifts you can give your kids: to live in another culture, learn a new language, and associate with a better class of people (as an expat, you'll almost automatically move to the upper rungs – arguably a big plus). After a little whining, the kids will love it. When they're grown, if they discover you passed up the opportunity, they won't forgive you.
"I don't want to give up my US citizenship."
There's no need to. Anyway, if you have a lot of deferred income and untaxed gains, it can be punitive to do so; the US government wants to keep you as a milk cow. But then, you may cotton to the idea of living free of any taxing government, while having the travel documents offered by several. And you may want to save your children from becoming cannon fodder or indentured servants, should the US re-institute the draft or start a program of "national service" – which is not unlikely.
But these arguments are unimportant. The real problem is one of psychology. In that regard, I like to point to my old friend Paul Terhorst, who 30 years ago was the youngest partner at a national accounting firm. He and his wife Vicki decided that "keeping up with the Joneses" for the rest of their lives just wasn't for them. They sold everything – cars, house, clothes, artwork, the works – and decided to live around the world. Paul then had the time to read books, play chess, and generally enjoy himself. He wrote about it in Cashing In on the American Dream: How to Retire at 35. As a bonus, the advantages of not being a tax resident anywhere and having time to scope out proper investments has put Paul way ahead in the money game. He typically spends about half his year in Argentina; we usually have lunch every week when in residence.
I could go on. But perhaps it's pointless to offer rational counters to irrational fears and preconceptions. As Gibbon noted with his signature brand of irony, "The power of instruction is seldom of much efficacy, except in those happy dispositions where it is almost superfluous."
Let me be clear: in my view the time to internationally diversify your life is getting short. And the reasons for looking abroad are changing.
In the past, the best argument for expatriation was an automatic increase in one's standard of living. In the '50s and '60s, a book called Europe on $5 a Day accurately reflected all-in costs for a tourist. In those days a middle-class American could live like a king in Europe; but those days are long gone. Now it's the rare American who can afford to visit Europe except on a cheesy package tour. That situation may actually improve soon, if only because the standard of living in Europe is likely to fall even faster than in the US. But the improvement will be temporary. One thing you can plan your life around is that, for the average American, foreign travel is going to become much more expensive in the next few years as the dollar loses value at an accelerating rate.
Affordability is going to be a real problem for Americans, who've long been used to being the world's "rich guys." But an even bigger problem will be presented by foreign exchange controls of some nature, which the government will impose in its efforts to "do something." FX controls – perhaps in the form of taxes on money that goes abroad, perhaps restrictions on amounts and reasons, perhaps the requirement of official approval, perhaps all of these things – are a natural progression during the next stage of the crisis. After all, only rich people can afford to send money abroad, and only the unpatriotic would think of doing so.
The most important first step is to get out of the danger zone.
Let's list the steps, in order of importance.

1. Establish a financial account in a second country and transfer assets to it, immediately.


2. Purchase a crib in a suitable third country, somewhere you might enjoy whether in good times or bad.


3. Get moving toward an alternative citizenship in a fourth country; you don't want to be stuck geographically, and you don't want to live like a refugee.


4. Keep your eyes open for business and investment opportunities in those four countries, plus the other 225; you'll greatly increase your perspective and your chances of success.

Where to go? In general, I would suggest you look most seriously at countries whose governments aren't overly cozy with the US and whose people maintain an inbred suspicion of the police, the military, and the fiscal authorities. These criteria tilt the scales against past favorites like Australia, New Zealand, Canada, and the UK.
And one more piece of sage advice: stop thinking like your neighbors, which is to say stop thinking and acting like a serf. Most people – although they can be perfectly affable and even seem sensible – have the attitudes of medieval peasants that objected to going further than a day's round-trip from their hut, for fear the stories of dragons that live over the hill might be true. We covered the modern versions of that objection a bit earlier.
I'm not saying that you'll make your fortune and find happiness by venturing out. But you'll greatly increase your odds of doing so, greatly increase your security, and, I suspect, have a much more interesting time.
Let me end by reminding you what Rick Blaine, Bogart's character in Casablanca, had to say in only a slightly different context. Appropriately, Rick was an early but also an archetypical international man. Let's just imagine he's talking about what will happen if you don't effectively internationalize yourself, now. He said: "You may not regret it now, but you'll regret it soon. And for the rest of your life."
Spreading your wealth to different countries is like giving it diplomatic immunity – it protects what's rightfully yours from the shenanigans of your home government. That's the subject of a must-see video from Casey Research: Internationalize Your Assets. This timely event features five financial luminaries who will show you how to legally transfer assets abroad: Casey Research Chairman Doug Casey; Euro Pacific Capital Chief Global Strategist and CEO Peter Schiff; GoldSilver.com founder and owner Michael Maloney; World Money Analyst Editor Kevin Brekke; and Casey Research Managing Director David Galland. Internationalize Your Assets premiers at 2 p.m. Eastern Time on Tuesday, April 30. Details and signup information here.


April 5, 2013

The Time is Now for Your Income Plan

Dennis Miller

The Time is Now for Your Income Plan

By Dennis Miller

I have a friend who says, “Why make a decision today if it can be put off until tomorrow?”
While that might sound cute, waiting until the transmission on your car is totally broken and having the vehicle towed to a dealer for a trade-in certainly isn’t the optimal way to negotiate the price of a new vehicle. You can’t drive around and shop at other dealers to get a decent price.
Unfortunately, this is the way he has lived his life. The more difficult the decision is financially or emotionally, the longer he drags his feet. What he has yet to understand is that doing nothing is also a decision and can turn out to be very, very expensive.
If you don’t want to follow in my friend’s footsteps, I have three suggestions:

1.       When you see storm clouds on the investment horizon, don’t ignore them and hope they will go away. Ask any Floridian who has walked outside during the calm of the eye of a hurricane, and they will tell you it is quite peaceful, yet the storm clouds are clearly in sight. In a matter of minutes it can go from calm to absolutely terrifying, since the strongest winds are closest to the eye.

2.    Many decisions in life are difficult both financially and emotionally. I have come to believe one is better off by “fighting the panic and trying to draw a realistic perspective.”

3.       There is an old saying, “When the student is ready to learn, the teacher shall appear.” It is unrealistic to think that when we see there is a problem (certainly protecting our life savings would fall into that category), we should immediately have all the answers. Seek help from folks who may have been down the road before you. Don’t be shy about contacting a number of people you respect. You will likely find – as I did – that many folks are glad to share their knowledge. I learned a lot, I was ready to listen, and indeed, more than one teacher magically appeared.

The biggest challenge faced by retirees and those soon to retire is how to generate income during retirement. It’s not like we can work extra hours or ask the boss for a raise. And given that the Fed is committed to near-zero interest rates until at least 2015 and our three most recent COLAs for Social Security were 0%, 0%, and 1.7% we’re not getting a raise any time soon. So the question you have to address right now is, “how are you going to produce enough income during retirement so that you don’t have to draw down your savings and potentially live out your final years poor and reliant on someone else?” You may have your own plan, but if you don’t then I suggest you get a copy of my Money Every Month income plan. You can get a free copy here.

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