The Room : Oil

The Room - 01/23/09

David Galland — Tue, 27 Jan 2009 15:39:00 GMT

January 23, 2009

Dear Readers,

Like a runaway train, the crisis is heading at breakneck speed down the hill and towards the next sharp turn.

Though we are reasonably sure about the ultimate destination – an inflationary wreck – we can’t be entirely sure what exactly awaits around the next corner. Is it a reasonably long straightaway that gently slopes upward for a spell, allowing the train to slow to a safer speed? Or is it a broken trestle bridge hanging over a gap a mile wide and a mile deep?

Some typically random thoughts on the topic…

Obama at the Bat

As you don't need me to tell you, Obama's coronation, complete with a full court of princes, princesses, and even a couple of jesters, was greeted by the massive crowd with rousing choruses of God Save Obama... but by the financial markets with a sharp sell-off.

Since then, the market has struggled to do its part in heralding in the new American Era, managing, so far, to muster only a tepid one-day blip. Meanwhile, the economic news just gets worse. And worse.

This has investors keyed up and waiting in a nervous state of anticipation for Team Obama to step up to the home plate.

Given all that is at stake, when Team Obama eventually emerge from their many collaborations and deliberations to make the BIG announcement on their plans to save the world, we suspect they will be carrying a very big bat. As the new Treasury secretary stated, the plan they’ll present will be “dramatic.”

That leads us to conclude that one of two scenarios must almost surely follow...

Scenario One: They announce something that is so large it blows the mind and settles the markets. Evidence of this scenario being the one unfolding would be if, on hearing the details of the New Deal, your reaction were something along the lines of… "Wow, I can't believe they'd go that far, but I guess it's the kind of medicine needed just now."

At which point my guess is that the financial markets would take a deep breath and the Obama rally would start, giving the global economy an early spring break.

Scenario Two: Obama strikes out. They step up to the plate with a flimsy little bat that the next hard pitch shatters into small pieces that fly into the eyes of the crowd. A lot of arm waving occurs as the global economic train rounds the bend and spots the abyss just ahead. Positioned as they are in the engine at the front of the train, Team Obama start to frantically grab for levers, sparks fly, a fire breaks out, smoke, brakes screaming, people ducking for cover… you get the idea.

Which way do I personally think things will break? I quote myself from the July 18, 2008 edition of this column/blog thingy.

So, here we are. As predicted back in July, Obama has been sworn in and he is working on a New Deal. Further, this New Deal will almost certainly be geared entirely toward increasing, not decreasing, the weight of government on the economy.

With that view in mind, one might lean toward Scenario One… yet I have a hard time imagining what the government can do at this point that could be so BIG that they’ll be able to smooth the global waters and mollify the restless masses. Especially with such a steady drumbeat of bad news coming from both the U.S. and overseas… the UK, China, Eurozone, Japan, etc., etc., etc.

That I can’t envision such a plan at this very moment is only because my imagination hasn’t been sufficiently amped up with enough coffee this morning. And so, with the benefit of another shot of espresso, I remember that the U.S. government can do pretty much anything it wants, short of opening up concentration camps, and get away with it… for a time at least.

In fact, with a bit more effort, I do see one plan shaping up that might, just might, do the trick.

And that is for the U.S. government to set up a new operation with a forward-looking title such as “The Economic Recovery Corporation of America.” All of the nation’s banks and any other institution deemed “important” by the administration would earn shares in this new entity by handing over the toxic assets that now pollute their portfolios.

With all its wisdom, the U.S. government would provide management expertise to work the paper out over time, keeping the new “Bad Bank” afloat in the interim with government guarantees. To the extent that the government actually has to make good on any of its guarantees, it would recoup the losses taken prior to the contributing institutions receiving any share of the proceeds from the liquidations. To help get this idea through Congress, the Treasury would set a realistic time table for the workout – say, ten years – and confidently project that the new entity would ultimately make money from its activities.

Of course, there would be a lot of detailed work to make this idea work, but the plan – which has already been hinted at by members of the administration – could be packaged in such a way that it could be deemed acceptable even to members of Congress, despite the hefty price tag.

As to the size of that price tag, the outstanding toxic paper on the books of the banks is currently estimated at somewhere between one and two trillion smackers.

“But Congress would never pass another big bailout to the greedy banks!” some would say.

To which I might reply, “For Bush, you are right. He had burned through all his goodwill. But at this early stage in his administration, provided the thing was properly packaged with an extra big helping of spin, our shiny new president can get pretty much anything he wants.”

So, that is how Scenario One might come to pass; a national Get Out of Jail Free card for banks. Followed, I suspect, by governments around the world quickly following suit. Problem solved, crisis over. The Obama rally starts and the world enjoys several months of respite before the hard reality that this thing is far, far from over smacks the global economy up the side of the head. More on that in a moment.

But what about Scenario Two – Obama strikes out? It could very well happen. People are very skittish just now. If history has repeatedly demonstrated anything, it is that governments are heavily prone to miscalculation. In the current situation, should they propose a plan that leaves people muttering to themselves, “What? That’s it? You must be kidding!” the retribution would come hard and fast.

Unfortunately, until we actually hear the details of “the plan” – which should be announced relatively soon – we simply can’t know which way things are going to break.

There are, however, a couple of things that I think we can be pretty sure of, in either scenario.

Gold soars. In Scenario One, the market will correctly see the fresh wave of new money as inflationary – as it has at virtually every new bailout announcement over the last six months – and send gold spiking upwards. In Scenario Two, the scramble for safety triggered by the looming abyss will likewise send people scrambling for gold. Going out on the limb a bit, I’m going to guess that gold is headed over $1,000 within the next month or three.

There will be a crash, regardless. All Scenario One does is postpone, and for not very long (three months?), the day of reckoning. It does nothing to actually resolve the massive misallocation of capital built up over decades of excessive spending and debt creation. The plan, at least as I envision it, just assures that the government’s debt soars even further. And, should it succeed in actually getting banks to loan and strapped consumers to borrow again… it just exacerbates the situation.

In addition to gold, I also think there are going to be some spectacular trading opportunities coming up, opportunities we are well geared up to take advantage of with our new Casey Trend Trader service.

It is now up and running, but heretofore, only for our Alert subscribers. A broader release on the service will be out soon… it is temporarily hung up in some minor administrative details related to the announcement itself. Watch for it.

Swearengen on the New Administration

Last week I reprinted a rather strongly worded and entirely unflattering farewell to George Bush by my dear friend and business partner, Doug Casey.

In response, I received several strongly worded emails from readers, including one from a Vietnam vet who threatened to beat me up for, I guess, exercising the right of free speech that soldiers are regularly attributed with fighting for. Oh, well.

In that, in the same edition, I expressed some skepticism about the economy’s prospects under the Obama administration, I also received several emails from readers suggesting we get on board with the Obama express… emphatically stating that we owe the guy a decent chance to fix things.

While I think I have tried to be fair in my assessment of what we might expect of Obama, I will accept that, even at this early point in his administration, I am skeptical.

To help explain why, I will take a roundabout approach by stating that Doug and I share a passion for the now canceled HBO series Deadwood.

Deadwood, about the founding and early days of that infamous Wild West town, is not for everyone, due primarily to equal parts sex, violence, and truly obscene language. Yet if you can get past the first couple of episodes – and almost no one I know other than Doug has – the degraded milieu of the show begins to grow on you. Especially when you realize that the writers regularly use iambic pentameter to express their most colorful language.

So, other than being aficionados of violent westerns (Doug's favorite movie of all time is The Wild Bunch, and I cast top ten votes for The Outlaw Josey Wales and The Searchers), what does this have to do with anything?

Stick with me for a minute, because there was a scene in Deadwood that struck me as relevant given this week's inauguration of Mr. Obama.

The set up is that Al Swearengen, the hard case who was instrumental in the founding of Deadwood, finds his turf being cut into by George Hearst, the scion of the Hearst dynasty who is trying to hone in on the nearby Homestake Mine, the biggest of the Black Hills mines, and one of the largest in North America. Hearst is a hard-charging bull who knows what he wants, and what he wants, he gets (in real life, he ended up buying Homestake in 1877 for $70,000... in today's money, that's $1,347,705).

In any event, Hearst sends a flunky over to Al Swearengen's saloon and invites him to his hotel room for a pow wow about the future of Deadwood, a future he very much wants to control. When the meeting doesn't go exactly as Hearst intends, he has his henchmen grab Al, hold his hand down on a table, remove a couple of fingers with a bowie knife, then toss him out on the street.

About a week later, Hearst decides he wants to meet again with Swearengen. And so he sends the same flunky back to Swearengen’s saloon to request that Al, once again, follows the flunky back to a meeting with Hearst.

Upon hearing the request for a second meeting, Swearengen, his hand still swaddled in bandages, raises one eyebrow skeptically and says the immortal words, "Why, the must take me for an optimist."

Well, given my life experience to date, an experience that has involved watching a succession of presidents pursuing policies that have each, in turn, increased both the size of government and its many obligations to the point where we are now on the brink of the worst financial debacle since the nation’s founding, you will excuse me if, when asked by anyone to grab hands around Obama's campfire, my mind returns to Swearengen’s words, "Why, the must take me for an optimist."

But wait, say Obama's many fans, he's different! He really will change things!

To which I reply: Bush’s inauguration, $40 million (a ridiculous amount); Obama's, $170 million (an insane amount). I would have been impressed if he had a modest affair in the Rose Garden, with a modest little wine and cheese served afterward. But $170 million?

It says to me like little else can that the new administration is, at the least, still living in the past – a past marked by excesses in all things.

And so, for the time being, like Al, I am going to have to be convinced by something other than words.

Leaving off on the topic, other than the sheer spectacle and Obama’s seemingly well-practiced, beatific countenance as he walked toward the inaugural podium, the thing that jumped out at me the most was when a camera zoomed in on a T-shirt that was apparently quite popular with the crowd, and that is pictured here.

Skepticism aside, I sincerely do hope that Obama does a better than average job… but yet, I can’t help but find the expectations inherent in the iconography that surrounds the man deeply concerning. The higher the expectations, the harder the fall.

The Continuing Crisis

Item One: Real Estate Still in Real Trouble. I can remember some years ago being shown a fixer-upper selling for $750,000 in a neighborhood near the San Francisco airport where one would have to be stupid or well armed to go out after nightfall. My, what a difference a few years make. This from Bloomberg…

Jan. 21 (Bloomberg) -- Home prices in the San Francisco Bay Area fell 44 percent last month from a year earlier as discounted, foreclosed properties lured buyers, MDA DataQuick said.
In a conversation this week with real estate pro Andy Miller, he shared his view that there is literally nothing, but nothing, that any government body in the world can do about real estate until values fall to the point where equilibrium returns. And we are nowhere near that point. It doesn’t hurt to be looking for that dream property you have always wanted, but the smart money is holding off buying… probably through the end of this year. (As all real estate is local, there will of course be exceptions.)

Item Two: Let's Piss Off China! In his Senate confirmation hearing, Treasury secretary nominee Timothy Geithner went on record that… “President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency.” Adding, “The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current economic environment.”

This audience, more than most, is aware of the fact that foreigners – led by China – were responsible for buying something like 80% of the U.S. Treasury bonds sold over the last couple of years. So, naturally, it makes perfect sense that the likely new Treasury secretary would come out of the starter’s gate with tough words for China, even though buyers will have to be found for record quantities of Treasuries in the months just ahead.

The distinguished New York Congressman Charles Rangel seconded Geithner by warning that, “What they can’t work out diplomatically, we can work out legislatively.”

See my earlier remarks on governments serially making miscalculations.

Item Three: What Price Oil? I recently commented on the fact that the price of many things has either already fallen, or soon will fall, below the cost of production. On that general topic, regular correspondent and über-researcher Marko F. of Canaccord sent along the following item this week.

The IMF recently compiled a list of break-even prices that various oil-producing nations require in order to avoid a budget deficit in 2009. Those figures are as follows: Bahrain $84, Kuwait $34, Oman $78, Qatar $24, Saudi Arabia $54, United Arab Emirates $24, Algeria $60, Azerbaijan $35, Iran $90 (!), Iraq ($94), Kazakhstan $67, and Libya $53.
While there is some internal debate here at Casey Research on the outlook for oil prices, my personal sense is that it is approaching oversold. One of many recent developments in the energy scene supporting that view occurred this week when we learned that the output at PEMEX, Mexico’s state oil company, fell 9 percent in 2008. This is, unfortunately, a trend solidly in motion: from its peak production of 3.8 million barrels per day in 2004, Mexican production is now ringing in at just 2.8 million bbl/d, a startling drop of 1 million bbl/d in just four years.

The consequences of this decline are serious, starting with the simple fact that the already embattled Mexican government derives over 40% of its revenue from PEMEX. As the underlying cause of the production decline is that the giant Cantarell field is well past peak, this is not a situation that will be quickly or easily resolved.

While this heightens the odds that Mexico will become a failed state, it also supports Jeffrey Brown’s time line that by 2014 – if not sooner – Mexico will stop exporting oil.

So, sure, oil and gas might stay under pressure for a bit longer… but the time will come, and probably sooner rather than later, when you’ll want to begin positioning yourself for some exceptional contrarian profits.

Casey Energy Opportunities

The Casey Report

Casey Research Crisis & Opportunity Summit

more info here

Item Four: Car, Anyone? In a recent edition of these weekly musings, I mentioned that, while flying into Newark recently, I could see a sea of unsold cars waiting on the dock of the port. Apparently, this is a growing problem, as you can see for yourself by clicking this link.

Item 5: Credit Denied. Regular correspondent Jeff B. sent this along earlier today.

Item 6: Who’s at Fault? This just in from Casey Research Washington correspondent, Don Grove.

Item 7: Next, It Gets Ugly. There was an interesting article in the Times of London this week on the growing number of violent protests flaring up around the world. Here’s an excerpt.

And here’s a link to the full article.

A sign of times to come? I think the answer is, yes… especially as more and more people hit the unemployment lines.

Item 8: The Unemployment Lines. John Mauldin, who has just signed on as a faculty member for our March 20-22 Crisis & Opportunity Summit, puts out an excellent weekly letter, titled Out of the Box (more here http://www.investorsinsight.com/). In his latest edition, he sheds some useful light on the government’s prettied-up employment statistics. Here’s the quote:

There is much more I could include under the topic “The Continuing Crisis,” but time and space prohibits it.

From the big-picture perspective, while one should practice optimism at every chance in everyday life – life is much happier that way – when it comes time to roll up your sleeves and work on your finances, pessimism remains the word of the day… and likely, the week, month, and year as well.

In time this storm will pass, just not real soon, and not because some government spokesperson – no matter how well spoken – says it has.

Crisis & Opportunity Summit Update – Going, Going…

There are a couple of important developments to share in regards to the upcoming Casey Research Crisis & Opportunity Summit, being held at the beautiful Four Seasons in Las Vegas, March 20-22.

The first is that the Summit is now more than half sold out, despite almost no marketing on the event (we wanted to hold off until the first draft of the schedule was ready).

Further, the deeply discounted room block at the Four Seasons at $195 a night, versus an amount normally almost twice that – is almost sold out (we are trying to negotiate for more).

And finally, the aforementioned schedule is now finished. While discussions continue with several additional individuals we are determined to land as faculty – including Congressman Ron Paul and former GAO Comptroller David Walker – the line-up as it now stands is, I think, exceptional. By the time the event is over, participants will come away well armed with the hard facts and specific knowledge needed to both persevere and prosper in the crisis now unfolding. While our various services will provide you with most of what you need to know to stay ahead of the crowd, the added advantage of this Summit is that it allows you to get the answers to all your many questions, in a collegial and almost familial setting.

In any event, I’m not going to pitch you hard on attending; rather, I wanted to let you know that if you might be interested in attending, you can now view the schedule by clicking this link.

Then, act quickly if you want to attend… this event will, without question, sell out.

Hope to see you there!

And That’s It for This Week…

As I wrap up this week, I see that the stock market is trying to end the week on a softer note, and the Dow is down only 57 points. But, whoa Nelly! Gold is up strongly, up $37.60 to $896.40. Per above, I am increasingly convinced we’re on our way back over $1,000.

For those of you who appreciate the musical selections I share now and again, I was just listening to Tori Amos’ song Cornflake Girl, a soft classic. I went looking for the song on YouTube to share it with you and came across the following video of her doing a live performance. While I like the song on the original album, until seeing this video I had never seen her perform… which, after watching her cavorting about the stage, I am now fairly sure I never will. But she has musical skills, I’ll give her that. Here’s the (strange) link.

For something entirely different, a couple of you have sent me a link to a fantastic video commentary on the bailout by Fred Thompson. Well worth a watch. Here it is… http://blip.tv/file/1528079

And that, dear readers, is that for this week.

Be of good cheer… why not?

Thanks for reading and for sharing this journey with us.

David Galland
Managing Director
Casey Research, LLC.

The Room - 10/17/2008

David Galland — Mon, 20 Oct 2008 16:31:14 GMT

Dear Reader,

Keeping up with the complex drama now flashing across the global screen is becoming more challenging with each passing day.

In lazier days, a scene might be allowed to unfold at a measured pace, the interactions between major characters developed through subtle nuance and lingering shots and close-ups of, perhaps, the furrowing of a brow or the sly upturning of the corner of a mouth.

These are not those days.

Instead, we are living in the world of 30-second commercials, directed by a speed-addicted music video director, strung together in a nonstop explosion of two-second jump cuts.

One minute stock markets are soaring, the next crashing. Gold jumps $20, then falls $40. Banks fail, banks get bailed out. Politicians elbow each other out of the way to throw billions, trillions even, into deep, dark holes. Oil tumbles, then bounces, then tumbles again.

While the volatility has allowed me to make some fun money through the all-terrain investment vehicles of futures and options, it has also made the task of trying to keep current on the news and, more importantly, on what's important, daunting indeed.

Even so, it is Friday morning and so, cup of coffee at hand and the music turned up on Citizen Cope's Bullet and a Target (the very same position that the Fed now finds itself in), I turn to the task at hand... the task of trying to make some sort of sense out of the chaos.

Given the frenetic nature of the markets, I hope you'll forgive me if my commentary this week is similarly frenetic.

Unintended Consequences

As you likely know, we are not optimistic about the outlook for real estate, that lynchpin of the U.S. economy. This pessimism is evoked by a number of factors, starting with the simple fact that residential housing increased by about 50% between 1992 and 2007, massively outpacing population and income growth over the period. As you absolutely know, much of that excess inventory is in the hands of individuals who simply can't afford to pay the freight.

Then there is our hardened belief that the equivalent of an express train wreck is about to happen in the 4 – 6 trillion dollar U.S. commercial real estate market. There will be a lot less in the way of Ho! Ho! Ho! this holiday shopping season, and a lot more Oh... Oh... Oh's.

And none of it is helped by the inevitable rise in interest rates, which are today at near 50-year lows. While we might not be quite at the bottom, we're close... after which we expect a persistent rise as the government bailouts flow through the inflationary pipeline. Of course, wounded housing markets react about as well to rising interest rates as I do to the prospect of my taxes going up in the next administration.

Unfortunately for the housing market and by extension the U.S. economy, we are already seeing the ghosts of what's to come. This just in from Bud Conrad...

The result is that housing will be further hurt with the higher rates and will continue to fall in price.

On the same topic, the news is out this morning that in September, single-family home starts in the U.S. fell to the lowest level in 26 years. Just 544,000 new homes would be built over the next 12 months (if the trend were to stabilize here, which it won't).

Just so you have the right perspective, at the peak of the bubble, annualized housing starts in the U.S. were running at 2,265,000 units, so we're seeing about a 75% decrease.

By the time this is over, it wouldn't surprise me to see housing starts fall to 10% of the peak.

Of course, housing is far more than just "another" economic stat. In addition to the tragic financial and emotional implications of coming up short on the mortgage on a personal and even societal basis, there are the direct consequence to the broader economy. No more excess equity to borrow against to fund shopping sprees, and none to allow for a comfortable retirement for far too many.

This is, and will continue to be, a big problem for the economy. While there is no soft solution at this point, the best we could hope for is that the damage will be quick to come and quick to pass. But the only real way for that to happen is for house prices to fall to the point where ready buyers are available. And that entails workouts between lenders and borrowers, or outright foreclosures, to clean up the mess and allow the market to function as it certainly can, and will again... if left to its own devices.

Unfortunately, the plans now being bandied about by the government envision pretty much the polar opposite of letting the market clean itself up. Rather, they involve taxpayers buying defaulting mortgages and even the imposition of a moratorium of some duration on foreclosures. Most people read news such as that and shrug it off. It may help to view these ideas through a narrower spectrum.

For example, imagine you are the president of a small bank and you had lent money in good faith to someone in the neighborhood. We'll call him Joe as that seems to be a popular name for these sorts of examples these days.

For reasons only known to him, Joe has stopped paying on his mortgage, leaving your little bank on the hook for $200,000. Following procedure, you have Mrs. Smith down in the lending department send Joe a nice letter asking him what's up, to which she receives no response. So you personally send him another letter, this one offering to have him down to the bank to have a chat and see if you can work things out.

No response, no money.

So, uncomfortable at having to perform the duty, you give Joe a call and he admits he is in over his head. When you offer to help him work out a payment plan, he calls you a blood sucker and hangs up on you.

Pained by the outcome of your loan, because you'd rather be getting paid back on the agreed-upon terms, you call up your lawyer and reluctantly authorize the expense of beginning the foreclosure proceeding. At that point, you know you will likely spend thousands and the better part of a year trying to get back your property (and it is your property). But what choice are you left with?

And then you hear – as does Joe - that Congress is going to pass a moratorium on foreclosures, and you reach into the locked drawer of your desk for the flask you keep there for such occasions. Joe, meantime, heads down to the local deli for a six pack to celebrate free rent for the foreseeable future, perhaps paying for his purchase by selling off the copper pipes he's ripped out of the guest bathroom.

This exercise is, of course, little more than the morning musings of a sleep-deprived mind, and I am well aware that the circumstances surrounding the defaulting on loans are as varied as humanity itself. Even so, the underlying principles are the same. There is a contractual agreement between a lender and a borrower that no one had to be waterboarded to sign. In the event of a failure to perform on the part of either party, it is up to the two parties alone to resolve -- with the help of an impartial judiciary if an impasse occurs. Interjecting an overreaching government run by perfect-worlders into the process can only gum up the works.

And, I would contend, result in just the sort of unintended consequences now being reflected in jumping mortgage rates. Or, for that matter, the entire housing mess in the first place... much of which is the unintended consequence of Greenspan ratcheting down interest rates instead of pouring himself a nice cup of tea and watching as the participants in the dot-com mania received their just desserts.

Personally, I am shocked by the rising cacophony of calls for more, not less, government regulation. Given the widespread chanting now going on in favor of elevated levels of oversight, retribution, taxation, meddling, and outright nationalization, it is clearer than ever that the views I just expressed are in a minority. And the situation is only going to get worse as the next wave of well-intentioned government operators step up to the controls... controls that are being firmly bolted onto the machinery of markets.

We are about to enter a dark period for the free markets. That's the bad news.

The very good news is that, seeing it coming, you can anticipate where the next unintended consequences will occur and position yourself to profit.

Getting Stupid

Despite gold weakening over this week, we remain utterly unconcerned about gold... and I couldn't mean that more sincerely. In fact, I just now paused for a moment to email my broker to sell a $750 put option on gold.

While somewhat off topic, I'll provide some details because I love this kind of trade (which I learned about at our Futures and Options Summit, as an aside).

Selling a $750 put earns me a fat premium – the higher the volatility, the higher the premium -- of $6,300. That money goes straight into my account. While there is a bit of nuance (for example, the potential for an inconvenient margin call), the worst case is that if gold is trading below $750 in March of 2009, when the option settles, I'll be on the hook to buy 100 ounces of gold at $750. Actually, less than that, because of the premium I have received. If at expiration, gold is at or above $750, I will have earned the premium with no money down.

The trick, of course, is to want to own the underlying commodity at option price. And you can use this sort of strategy for stocks, too.

Using futures and options, which I earlier referred to as the all-terrain vehicles of the investment world, gives you a nearly limitless number of opportunities to profit... regardless of the direction of markets. (We'll be launching a trading service soon, but that is a story for another day.)

But there are opportunities outside of futures and options. In fact, the junior resource sector, which has been a big disappointment of late, is now officially reaching stupid levels of valuations.

On that front, this week I was looking at a high-quality junior gold exploration company that is being followed in our International Speculator letter. The company has been advancing a big deposit in a great location in Canada and has just released its first resource estimate. The report confirms that the company has proven up just shy of 5 million ounces in a near-surface deposit, and the deposit is still wide open, so you can expect them to add significantly to the resource in the months ahead.

Generalizing, in an "okay" market, gold in good ground sells for around $50 per ounce. And Ontario, Canada, the ground where this deposit is located, is some of the best (as opposed to, say, the Congo). In a better market, gold in the ground might sell for $80 to $100 per ounce. And in a heated-up market, such as we saw back in 2005, valuations can rise as high as $150 or even $200 (which would be steeply overvalued, at anywhere near today's prices).

So, what value is now being assigned to the 5 million ounces of gold (plus blue sky) this very well-run junior is sitting on? Dividing the market capitalization of the company by the number of ounces of gold gives us a valuation of an unbelievable price of just $5.20 per ounce.

Okay, okay, I can almost hear you saying, "What's the problem with the company? I bet they are low on cash, and so shareholders are going to get hugely diluted when they go back to the market to finance."

To which I reply, "Nope – they have enough cash in the bank to cover an estimated two years of operations." In other words, we have looked at the company in depth, and there is nothing wrong with it – other than the broader market and forced selling by cash-strapped funds and investors.

And, as good as this company is, there are any number of other quality juniors – virtually all of which are now selling for the sorts of prices you might have expected to pay back in 1998, before the gold price took off, and before the companies had even found anything. But in this case, the company has 5 million ounces on the books.

And it is not just in futures and options and junior golds where you can find opportunities now. There are some great businesses that have been as heavily punished by non-discerning selling as bad businesses.

While caution remains the watchword of the day for the majority of your portfolio, if you have the capacity, be vigilant for the sort of stupid values just discussed. No need to rush in, but rather buy in tranches, maybe taking positions in 20% increments over the next six months. It may take awhile for you to realize the big returns -- there is a real threat to the equity markets later this year as aggressive tax-loss selling meets up with the retraction in consumer spending in the traditional holiday shopping season -- but after that, things, for the right businesses, selling at the right valuations, should begin to look up.

Given our view of where the economy is headed, you'll need to pick your battles carefully... and we'll be on your side every step of the way... but the time to begin laying out your plans should begin now, and not after gold is racing for the moon with the gold stocks close behind.

So, no big rush... just some food for thought. Of course, we'll continue to keep our many ears close to the ground on your behalf.

The Greater Repression

In my spare time, I'm working on a separate article titled "The Greater Repression," the theme of which is that one of the outcomes of the current financial crisis will be an acceleration in the growth of the state, and the coercion that that implies.

On that topic, did you read how Henry Paulson got the heads of the nine major banks to sign on to the Treasury's plan to partially nationalize them? He basically called them into a room, put a one-page document in front of them and informed them that they were required to sign it. Some excerpts from a story out of the New York Times from earlier this week...

...by 6:30, all nine chief executives had signed — setting in motion the largest government intervention in the American banking system since the Depression and retreating from the rescue plan Mr. Paulson had fought so hard to get through Congress only two weeks earlier.

What happened during those three and a half hours is a story of high drama and brief conflict, followed by acquiescence by the bankers, who felt they had little choice but to go along with the Treasury plan to inject $250 billion of capital into thousands of banks — starting with theirs.

Mr. Paulson announced the plan Tuesday, saying "we regret having to take these actions."

Pouring billions in public money into the banks, he said, was "objectionable," but unavoidable to restore confidence in the markets and persuade the banks to start lending again.

... All told, the potential cost to the government of the latest bailout package comes to $2.25 trillion, triple the size of the original $700 billion rescue package, which centered on buying distressed assets from banks. The latest show of government firepower is an abrupt about-face for Mr. Paulson, who just days earlier was discouraging the idea of capital injections for banks.

... "It was a take it or take it offer," said one person who was briefed on the meeting, speaking on condition of anonymity because the discussions were private. "Everyone knew there was

only one answer."

(You can read the full New York Times article by clicking here.)

But wait! Thanks to a top-secret Casey Research hidden video cam, you can actually watch a video clip of the meeting itself!

The video segment covers the pivotal point in the meeting when Paulson makes a convincing argument as to why bank presidents should fall in line and get on the team. Watch it by clicking here now.

No question about it, we are not only in uncharted waters economically but politically as well. All the media reports on the crisis have painted the free market as the culprit and called on the government to fix everything, whatever it takes.

It is like inviting a wolf into your house to get rid of a mouse. Sure, the mouse may go away (at least temporarily), but then the real trouble begins.

Bretton Woods II

This week, a number of you brought to my attention a rising call from the heads of some governments for a return to something that resembles the discarded Bretton Woods agreement, an agreement that had as a central tenet the convertibility of paper currencies into gold.

Naturally, we salute the notion of a return to a more disciplined approach to the handling of government finances than that which is now favored, and which might be loosely expressed by imagining a conversation such as "Hey Hank, Bennie here. Listen, I'm running short, can you print up a hundred billion or so and shoot them over when you get a chance? Thanks. No, no rush. Tomorrow afternoon would be fine. Best to the Missus, see you down at the club."

That the prime minister of Britain and the head of the European Central Bank have both referenced Bretton Woods this week can only be taken as encouraging. In time, we are convinced, circumstances will force a return to such discipline, with a system based on gold, or at least a mix of tangibles, including gold.

But I wouldn't start holding my breath. For starters, Bretton Woods was almost unilaterally shaped by the U.S. government to take unto itself the keys to a global monetary hegemony. It would border on delusional to think the U.S. will hand those keys off to anyone else until forced to it by events out of its control. Thus, while we might see a sit-down of top finance ministers at some point in the next year (in a six-star seaside resort, one might assume), the actual business of crafting a new monetary order will drag on and on and on.

The potential game changer will be if the currency crisis we foresee as inevitable reaches the point where no one wants any unbacked currency almost at any price. You'll know when that point is approaching when the price of gold blows through $5,000.

Burn, Baby, Burn

Last week, I shared my new basement digs for a day with Brian the electrician, who was putting in a fan and upgrading some fixtures. In addition to being a fine judge of music, commenting as he was putting away his tools at the end of the day that "The music here was the best of any job I've ever been on," our conversations revealed that he is also a financial analyst of no small potential.

"Early last year when I saw all the building going on and the prices of houses going up, I told myself that this couldn't last. So I let go of my employees and sold my new pick-up truck back to the dealer and bought a used one. I've been putting money aside ever since."

Smart guy. Of course, I asked him how business is now.

"Real slow," he answered in the cautious patois that marks a native New Englander. "Except for this one company that deals with fire and damage," he added. "They've been real busy, and they expect to be a lot busier."

"Oh, why?" I inquired.

"Well, apparently, it's because so many people have been putting in wood-burning stoves, trying to save on energy costs and all that."

"I wonder if it could also be because sometimes a fire can solve a problem," I asked. "You know, like a mortgage you can't afford or a business that is failing, if you get my drift."

"Yep," he said with a knowing nod, "and there's that, too."

I was reminded of that conversation the following day as I was watching cable television while laboring down at the gym on the stairway to good health, otherwise known as the cursed StairMaster (it's the only time I watch cable, because I refuse to have it at home).

Through sweat-stung eyes, I watched video coverage by the ScareMasters – CNN, in this case -- of a wildfire somewhere in California. From the bird's-eye perspective of a helicopter cameraman, I watched as flames jumped a road and began doing their worst to what looked to be a dealership specializing in large pick-up trucks.

"Why," I panted to myself silently, "didn't the dealer, who surely knew the fire was approaching, gather around some folks and drive those nice trucks out of harm's way?"

Then I remembered my conversation with Brian the electrician and nodded knowingly to no one, imagining in my mind's eye the owner of the dealership watching the same broadcast and dreaming of a fat insurance check and a nice, long holiday followed by a fresh start. Who knows, perhaps he'll turn to selling the new fuel-efficient cars that U.S. car companies, freshly cashed up themselves with a nice $25 billion handout, will soon be producing with the aid of their five million new employees (I think that was the number bandied about by Obama in the debate).

But I digress. Because in addition to the economic motives for the pending wave of mysterious fires that are likely to descend on the nation, I fear a social motive.

In that regard, I have read and even heard on talk radio (which I occasionally listen to in order to keep my blood heated to the point where I won't fall asleep behind the wheel, a particular problem I have on any drive of more than about 30 minutes) that the Republicrats are all steamed up about the purported voter fraud being perpetuated by the lefties of Acorn.

Now, I can't say, because I can't know, whether or not Acorn and the Demopublicans are actually in the process of stealing votes, but I will say that that particular line of attack is one that has the potential to result in serious consequences.

Think it through.

Let's say that the drumbeat about Acorn really takes hold and fires up the imagination of McCain loyalists, as it certainly seems to be. Okay, now let's say that Obama wins, maybe thanks to a couple of squeakers in states such as Ohio. Could we perhaps see some serious civil disturbance, and maybe even worse, as good, patriotic Americans pick up their rifles and decide that their country has been taken over, unjustly, by terrorist lovers?

Could happen.

Okay, now let your mind swing the other way. That the Republicrats manage to challenge voter registrations in said key states and McCain actually wins? At that point, might the dashed aspirations of Obama's many admirers spill over into the streets? Certainly not out of the question.

Now, I am not saying that people shouldn't be vigilant about vote fraud... but it strikes me as the sort of issue that one wants to tread very carefully on – to double- and even triple-check the facts on the ground – before starting with a lot of arm waving.

Especially in an environment as politically charged and economically challenged as we are currently living in.

It has been a long time since I watched, as a teenager, the cities of America burn. And if I can make it all the way through to my long nap without seeing it again, that would be just fine.

In the final analysis, it won't really matter who wins – and I know that grates with many of you – but it's true. The economic stage has been set and the furniture cemented into place. The leading actors in the next act will be, as if marionettes controlled by the hands of a god, made to follow, not lead, the events that are now both inevitable and imminent.

The only question now is, will the transition to what's next be calm and orderly, or will the old war cry "Burn, Baby, Burn" be heard again?

I really don't know what makes the idea of the presidency so appealing that people would go through such personal trauma to attain the station. If you could, and did, walk in tomorrow and offer me the office, I would politely thank you for the offer and escort you as quickly as socially acceptable to the front door.

Laughing Between the Tears

On any given day, I swear I am going to delete all my email accounts, put the boots to my cell phone, and retreat to a nice, quiet cave. But then I get an email from a friend with a whopping good joke, and I forgive Mr. Email from stealing so much of my time.

This week, I received a few at least somewhat related to the current crisis and so thought I'd pass them along. This might become an occasional feature.

The first three came to me via Hugo in London...

For Geography students only: What's the capital of Iceland? Answer: About Three Pounds Fifty...

Quote of the day (from a trader): "This is worse than a divorce. I've lost half my net worth and I still have a wife."

Here's another one, from subscriber and correspondent Ronin...

Now we are trusting the economy of our country to a pack of nit-wits who couldn't make money running a brothel and selling booze?

Today, I received the following from the hard-working researcher/editor Shannara Johnson.

As the topic is Sarah Palin, those of you who are Obama fans will especially appreciate it... but so will anyone with a sense of humor or an appreciation for creativity and technology. Click the link here: http://www.palinaspresident.us/. After you click, an interactive photo will load. Clicking on the items in the room and on the desk makes fun things happen!

Joke of the Week

This came to me via Clyde Harrison, one of the smartest (and funniest) guys working in the commodities sector today...

Chuck replied, 'Well, then just give me my money back."

The farmer said, "Can't do that. I went and spent it already."

Chuck said, "Ok, then, just bring me the dead donkey."

The farmer asked, "What ya gonna do with him?"

Chuck said, "I'm going to raffle him off."

The farmer said, "You can't raffle off a dead donkey!"

Chuck said, "Sure I can. Watch me. I just won't tell anybody he's dead."

A month later, the farmer met up with Chuck and asked, "What happened with that dead donkey?"

Chuck said, "I raffled him off. I sold 500 tickets at two dollars apiece and made a profit of $998."

The farmer said, "Didn't anyone complain?"

Chuck said, "Just the guy who won. So I gave him his two dollars back."

Chuck now works for Goldman Sachs.

Miscellany

Phyles. Herb in Jacksonville is looking for additional phyle members. Ditto, Ron in Southern British Columbia is going to try to start one. And I have had some correspondence with Vermonters interested in getting together. Not sure when or where, but if you contact us, we'll try to set something up with some of the Casey crew. As always, if you are interested in meeting up with other Casey subscribers, drop Kristen a note at phyle@CaseyResearch.com.
Bud in New Zealand. Bud Conrad will be the keynote speaker at the CFA Society of New Zealand's Fourth Annual Forecast Dinner in Auckland, Thursday, November 6. I am sure that he'd be happy to take time during his trip to meet up with subscribers in the area. Drop us a note at info@CaseyResearch.com and we'll try to set something up.

And that, dear readers, is it for this week.

As is my habit, I turn (with no small sense of suspense) to the screens to see how the day is going for things financial. I see that the DJIA is up 166 points on news that consumer confidence has fallen the most on record. Now, there's a reason for a stock market rally!

And gold is down, again, to $784 in spot markets, while oil has come back a bit... to just a touch over $70 per barrel. And that gold stock that just announced a 5-million-ounce deposit? I just took a glance at the portfolio page of the International Speculator, on our web site, and see that it is down another 11% today!

My next task after signing off is to call my broker. I could, and probably will, take a loss over the short term, but I don't care, because I would kick myself if I missed the bounce on that particular stock.

(As an aside, I am not being coy by not sharing the name of the stock with you... I have mentioned it to provide a real-life example of how stupid valuations are getting in the resource sector. It would be unfair to existing International Speculator subscribers to share the name here, in the open. They are entitled to buy their fill without any added competition. I hope you understand.)

And with that, I must sign off by thanking you sincerely for spending some time with me this week, and for being a subscriber to a Casey Research publication.

Hang in there – and hang on tight – because who knows where this joy ride is heading next.

David Galland

Managing Director

Casey Research, LLC.

The World as We See It

David Galland — Thu, 04 Sep 2008 16:51:10 GMT

4 reasons why this may be the worst crisis since the 1930s – and 4 projections for what’s going to happen

by Bud Conrad

The Casey Report Webinar– Casey Research

I identify the foundational forces now driving our economy to establish a basis for the investment recommendations you’ll read in this advisory in the months to come.

The role of the U.S. as the world's dominant economic superpower is now challenged by an out-of-control growth in debt and a deterioration in its reputation as a financial haven. The dollar is losing its special status as the global "reserve currency," is leading, in turn, to higher inflation, higher interest rates, weakening financial assets (stocks and bonds) and runaway prices for commodities.

Let the data and let them speak for themselves, with some interpretation along the way:

1. U.S. Government Deficits: From Bad to Worse

Government deficits are the root source of the creation of money... and its eventual debasement. Simply, when the federal government spends more than it raises in taxes, it eventually has to create more money (in complicity with the Fed) in order to pay the bills.

Of course, it can borrow the money, but that often includes borrowing newly created money from the Fed. The deficits remain and they accumulate and in time. They must be resolved, either by payment or default, either overtly or covertly through the mechanism of inflation.

While some level of government deficits may be acceptable over modest periods of time, the U.S. deficit is now well past the point of being acceptable. The deficit will soon grow to monster proportions as the baby boomer retirement obligations exceed the ability to tax the declining number of workers contributing to the Social Security and Medicare funds.

Projections of the likely deficit compared to GDP growth make it clear that the government is faced with hard choices. The easy path of just letting the dollar fall is the most likely.

2. The Expanding U.S. Trade Deficit

It is consumers who primarily receive the money provided by U.S. government deficits. In this globally interconnected world, they then spend a portion of that money on foreign goods. An unintended consequence of the ballooning government deficits, therefore, is a large and growing trade deficit.

The foreign recipients of those dollars – whether Chinese manufacturers or Middle Eastern oil sheiks – have, in recent years, turned around and reinvested those dollars in U.S. Treasuries. They have done so because of the perceived safety of those instruments, and because of the sheer volume of the dollars they have to invest. In addition, it has been in their commercial interest to help finance the U.S. deficit.

With the trade deficit now running at $750 billion per year, and much of that money coming back into U.S. Treasuries, the U.S. government has grown dependent on foreigners to sustain the continuing deficits.

That level of debt would normally cause extreme weakness in a currency – just as it would in the value of debt owed by a deeply indebted individual. However, the sheer magnitude of the foreign holdings provides something of a bastion against a total collapse in the dollar.

Even so, some foreign holders are easing toward the exits... through the purchase of an operating company or resource deposit here, or a landmark New York building there. They might make a billion-dollar equity investment in a brand name company, or exchange some dollars for a basket of currencies or a ton or two of gold. It's a delicate balancing act, because if they get too aggressive, they risk triggering a mad dash for the exits, a nightmare scenario where the value of their trillions of dollars in holdings would be devastated almost overnight.

3. Rising Oil Prices Affect... Everything

The growing global demand for oil, coming as it is against a backdrop of limits being hit in production growth, is a major contributor to today's big price rises.

The clear and present danger is that we are now using several times more oil than we are discovering. The world currently produces about 310 billion barrels of oil per decade. That amounts to about three times the current discovery rate of 100 billion barrels per decade.

According to the Peak Oil calculations, we have already used about half of the energy stored over the last 100 million years. Against that, we have a steady increase in demand emanating from population growth and economic development, especially in Asia. This, coupled with the dearth of major new discoveries, assures that energy markets will remain at high prices, for the foreseeable future. The current big drop from almost $150 to $110 has happened from a slowing economy and from some conservation at the extreme high gas pump prices, but the long term view is that the lack of reasonable alternative to petroleum argues for continued higher prices returning to the previous peak in the year ahead.

As energy is a component in the manufacture of all goods and services, this is of no small consequence. Energy has been the basis of the abundance of our current existence and has allowed human population to grow from 1.5 billion to 6 billion over the last century.

4. War Affects the Deficits and Hurts the Dollar

The war in the Middle East adds unwanted pressure on oil and ratchets up government spending. Less obvious is the damage to U.S. prestige that is important in the ability of the U.S. to attract much-needed foreign investment.

The Congressional Budget Office estimates the war will cost 3 to 4 trillion dollars, an amount of sufficient size that it will affect the U.S. financial system.

Regardless of the short term political ups and downs or even a new administration, the pressures from war for big deficits and for dollar depreciation are inescapable.

Where Is the Economy Going in the Next Six Months?

Projections

1. The housing decline is not yet done, because we will need another year to unwind foreclosures in the pipeline. The housing bubble still has another 10% to 20% to go to fully deflate.

2. Consumers in the U.S. are not able to expand credit and are increasingly concerned about the outlook for the economy, so they will slow spending both at home and on imports, which means we are in a recession or about to confirm one.

3. The financial/banking system is weaker than understood. The global system and literally trillions of dollars in derivatives has left the world's banks teetering on the edge. Don't jump back into financials.

4. A slowing economy – recession – coupled with inflation, creates a condition referred to as stagflation, as the simulative bailouts compete with the debt implosion of overleveraged financial institutions and real estate, to leave us with stagnation and still high costs.

The result of this is that the inflation rate, interest rate, food, energy and precious metals are heading higher as the dollar is debased.

Higher rates are not good for housing and stocks.

Finally, it is important to recognize that the world remains in the throes of a deep and serious crisis. While many analysts will express the view that the worst is over or that, after a modest downturn, things will bounce back just like they always have, our view is that what we will actually witness going forward is a fairly steady erosion of paper currency purchasing power and sluggish economic growth. The crisis will accelerate, moving faster, even, than in previous major shifts such as that witnessed in the 1970s.

While history may find we are too pessimistic at this point in time, in our view it is far better to prepare for a worsening crisis and hope that it does not materialize, than to expect business as usual.

Bud Conrad is Chief Economist with Casey Research, specialists in natural resource and precious metals investing. And now, you can have the opportunity to sit in on a round-table discussion of the economy, the market, and the best ways to profit from this crisis – free and online. The Crisis and Opportunity Summit is the first-of-its-kind event by Casey Research.. giving investors exceptional information and analysis for over a quarter century. Simply click here now to sign up for this free event.

The Battle for $900 Gold

David Galland — Tue, 06 May 2008 15:23:36 GMT

by David Galland Casey Research- International Speculator

The current "battle" in the gold market is around the $900 level, a fairly steep retrenchment from the recent highs of $1,011.

Some investors, their hopes dashed that $1,000 would be quickly and decisively overrun, are seeing disaster in this correction and dropping their gold as they run for cover.

So... do we at Casey Research think we're now seeing a reversal in gold's fortunes?

In a word, no.

I'm not going to go into meticulous detail here, because that sort of coverage is found in our Casey Research paid publications. But I do want to share some thoughts with you that may be of some use... if for nothing more than playing them back to me in sarcastic emails several months down the road if we're proven wrong.

A few key things to ponder as the battle for $900 gold rages...

1. The current correction is not yet exceptional: Since the current bull market began in earnest in 2001, there have been 9 corrections in excess of 8%.

During the three worst pullbacks, gold fell 15.98%, 18.27%, and 27.7%, respectively. And the average of those corrections is 13.6%, so the latest, which touched 18% at its worst, is only marginally worse than average.

Put another way, for the current pullback to match the sharpest correction to date, a drop of 27.7%, gold would have to fall to about $730. Could it happen, again? Sure, why not?

And if it does, rest assured that, just as they did when gold moved down by that percentage in May of 2006 - falling from $725 to $567 - analysts will line up to say that the back of the gold bull has been broken. But if you had listened to the naysayers back then and bailed out at the bottom of that correction, you would have missed a rebound of close to 100%.

I mention this to stress that the fits and starts we are currently experiencing are nothing unusual. Quite the opposite, they're the norm for any sustained bull market. In the 1970s' sustained gold bull market, a similar pattern occurred.

The bottom line is that if you are going to invest in the resource sector, you need to take a long view. And, I would stress once again, you have to be invested with money that you can afford to lose a substantial portion of and not be overly concerned. Otherwise you'll invariably become shell shocked during periods of volatility and be prone to breaking ranks and selling at the worst possible time.

2. The big gold companies are delivering: One of the largest mining companies in the world, Newmont Mining, just released its first-quarter 2008 financials, the first of the big gold producers to do so.

As we have been forecasting, they had record sales of $1.94 billion, realized a record price of $933 per ounce sold, and saw their cash operating margin soar by 119% from the same period last year. Further, net income was up 444% from Q1 last year. And the company's cash operating margin rose to a record $537 million in Q108 over the prior record $419 million earned in the previous quarter.

Over the next couple of weeks, we'll see a string of similar results from the other major producers, offering a stark contrast to the billions upon billions in losses being suffered by the banks, investment houses, housing industry, airlines, etc.

So, what happened to Newmont's shares on releasing its financials? They fell, albeit modestly, victim to this week's softening gold price and a dumb remark by the minister of mines of Ghana - where Newmont has significant projects - about the need for mining reform in that country. More on that latter topic momentarily.

The key point is that the increase in the profitability of the gold miners, a prerequisite for the entire gold share complex to get moving, is now materializing.

3. Oil is stubbornly holding on over $100 and food prices are on the rise everywhere. This is simply the most visible evidence of the inflation now gripping the world.

We've said for years that there is a very tight correlation between rising oil prices and rising gold prices. While oil prices may moderate at some point - because, again, no market goes straight up or down - the trend is clearly for sustained high prices. This is additional support for gold in our view.

So... given gold's correction, you might go right ahead and sell your gold. I'm hanging on to mine. And if I'm hanging on to my gold, I'm hanging on to my gold stocks, because that's where the real juice will be.

When I look at the alternatives and the amount of risk I have to take to get even a 10% return right now, I am comfortable biding my time, continuing to buy gold and gold share bargains with the expectation that the 100%, 200%, 500% gains down the road will catch me up in a hurry.

Good investing,

David Galland

David Galland is the Managing Director of Casey Research, publishers of the Daily Resource PLUS, a free e-letter offering a concise recap of the 24 hour action in gold, silver, energy, base metals, currencies and more... as well as Doug Casey's monthly International Speculator advisory, presenting comprehensive, unbiased research on undervalued gold and other resource stocks.

A three-month 100% money-back trial is available that allows you to view all current recommendations and decide for yourself whether the International Speculator is right for you. Learn more.

The Room 4/29/08

David Galland — Tue, 29 Apr 2008 14:56:33 GMT

Written: April 25, 2008

Dear Reader,

What an interesting week!

Having been a single parent for two weeks, with the kids on spring break for the second of those, I have attained a whole new level of appreciation, yes, I think that's the word, for the difficulty associated with holding down the home front.

I'll have some more thoughts on the topic of domestic servitude in a bit, but first I want to turn to this week's even more interesting developments in the gold markets.

The Battle for $900 Gold

With few exceptions, as gold has approached each new psychological price barrier in the unfolding bull market, it has gingerly touched the barrier, fallen back and then traded in a fairly narrow range before decisively taking it out and moving on. Not unlike, perhaps, Napoleon's army, with small skirmishes leading up to a full-scale assault and crushing victory.

The current battle is around the $900 level, a fairly steep retrenchment from the recent highs of $1,011. Some investors, their hopes dashed that $1,000 would be quickly and decisively overrun, are seeing Waterloo in this correction and dropping their gold as they run for cover.

So let's get to the nub of it.

Do we think we are now seeing a reversal in gold's fortunes? That, rather than cheering gold on as it defeats the fiat army and breaks through one whole number barrier after another... we'll now be playing a dirge as gold retreats down through those same whole numbers on its way toward lonely exile as a broken footnote of history?

In a word, no.

I'm not going to go into meticulous detail here, because that sort of coverage is found in our paid letters. But I do want to share some thoughts that may be of some use... if for nothing more than playing them back to me in sarcastic emails several months down the road if we're proven wrong.

A few things to ponder as the battle for $900 gold rages...

Current Correction Not Yet Exceptional. Since the current bull market began in earnest in 2001, there have been 9 corrections in excess of 8%. During the three worst pullbacks, gold fell 15.98%, 18.27%, and 27.7%, respectively. And the average of those corrections is 13.6%, so the latest, which touched 13.9% at its worst (so far), is only fractionally worse than average.

Put another way, for the current pullback to match the sharpest correction to date, a drop of 27.7%, gold would have to fall to about $730. Could it happen, again? Sure, why not?

And if it does, rest assured that, just as they did when gold moved down by that percentage in May of 2006 - falling from $725 to $567 -- analysts will line up to say that the back of the gold bull has been broken. But if you had listened to the naysayers back then and bailed out at the bottom of that correction, you would have subsequently missed a rebound of close to 100%.

I mention this to stress that the fits and starts we are currently experiencing are nothing unusual. Quite the opposite, they're the norm for any sustained bull market. In the 1970s' sustained gold bull market, a very similar pattern occurred.

The bottom line is that if you are going to invest in the resource sector, you need to take a long view. And, I would stress once again, you have to be invested with money that you can afford to lose a substantial portion of and not be overly concerned. Otherwise you'll invariably become shell shocked during periods of volatility and be prone to breaking ranks and selling at the worst possible time.
Big Gold Companies Delivering. Newmont just released its first-quarter 2008 financials, the first of the big gold producers to do so. As we have been forecasting, they had record sales of $1.94 billion, realized a record price of $933 per ounce sold, and saw their cash operating margin soar by 119% from the same period last year. Further, net income was up 444% from Q1 last year. And the company's cash operating margin rose to a record $537 million in Q108 over the prior record $419 million earned in the previous quarter.

Over the next couple of weeks, we'll see a string of similar results from the other major producers, offering a stark contrast to the billions upon billions in losses being suffered by the banks, investment houses, housing industry, airlines, etc.

So, what happened to Newmont's shares on releasing its financials? They fell, albeit modestly, victim to this week's softening gold price and a dumb remark by the minister of mines of Ghana -- where Newmont has significant projects -- about the need for mining reform in that country. More on that latter topic momentarily.

The key point is that the increase in the profitability of the gold miners, a prerequisite for the entire gold share complex to get moving, is now materializing.
Oil is stubbornly holding on over $100 and food prices are on the rise everywhere. This is simply the most visible evidence of the inflation now gripping the world. As we have discussed in our various publications, there is a very tight correlation between rising oil prices and rising gold prices. While oil prices may moderate at some point - because, again, no market goes straight up or down - the trend is clearly for sustained high prices. Gold is well supported, in our view.

So, What's Going On?

This week Dennis Gartman, who I am told is a fairly widely followed guru, announced he was exiting gold because, as he expressed it, the yellow metal had failed to rally last Friday to the extent he thought it should. But the final straw, according to his letter, was that the following day he saw some TV commercials that called for people to sell their scrap gold.

"What caught our eye over the weekend was a déjà vu moment when watching national television here in the US Saturday morning. We saw a brief show regarding the massive selling of gold jewellery on the part of the public to cash in on gold's sharp rise. The public is selling its old wedding bands; high school and college rings; necklaces; write bands "bling," [sic] et al, and it is doing so aggressively."

Now, he didn't provide any hard data to actually prove anything -- for instance, is the ratio of scrap coming on the market now running at extraordinary levels versus demand. But for the sake of argument, I'll assume he is right and that an extraordinary number of American consumers, strapped for cash thanks to the unfolding financial crisis, will dump their gold.

Will their heirlooms heading for high heat and then back onto the market as bullion overwhelm the bull market? Could that be the cannon barrage that ends the charge of the golden bull? Will that be what it takes for people to turn their back on gold in favor of the bottomless dollar?

I'm sorry, but I just don't see it. What I do see, as mentioned, are the facts on the ground. And those facts include rapidly rising global inflation and more bad news on top of bad news for the financial sector, housing, banks, etc.

In just the last couple of days, there has been hard data showing that -- per the comments of real estate expert Andy Miller, which I have recently related here -- the commercial real estate sector is now heading into serious problems. A report by the Office of Thrift Supervision this week has it that non-performing commercial loans rose by a factor of five last year, and now represent 4.6% of the total.

And the fuse on that very big barrel of powder is still freshly lit. How big? At this writing, there are well over $3 trillion in outstanding commercial real estate loans. So, 4.6% of that is not a small number. But it will be viewed as such when commercial defaults head for 10% or even 20%.

[Ed. Note: Andy also points to a pending bloodbath in the condo market. Providing support to that contention, I had a conversation this week with a top realtor in the small resort town that serves as global headquarters for Casey Research. She told me that of the 112 condos put up for sale in this town last year, only 12 sold.]

Credit card debt is also starting to go south, fast. You don't need me to tell you, but I will anyway, that a reasonably well-maintained fence post could have gotten a credit card between 2000 and 2007. And so it is no surprise that this week we heard that the Target discount stores were writing off over 8% of their outstanding credit card balances. A straw in a tornado, if you ask me.

I could go on, and on, and on... but won't. I will say, however, that faced with these far-from-resolved challenges, there is only one certainty: the government will mount a massive artillery barrage. But instead of grape shot, it will be greenbacks they'll be firing as fast and as furious as they can.

Technical, Shmechnical

More than once in the past I have blown a passing raspberry in the general direction of the technical analysis that Mr. Gartman relies on, in addition to his television programming, for his investment recommendations.

After a long career in this business, I think I have some basis for my general disdain for the art of technical analysis. Note I didn't say "art and science" because as far as I can tell, other than some scientific-sounding parlance, there is nothing scientific to it.

Am I being too hard on technical analysis? Maybe. But I think I have a legitimate gripe when I point out that technical analysis is so subjective that two analysts can look at exactly the same wiggly lines and draw two completely different conclusions... and they can still both be wrong.

And an analyst can, using the same methodology month after month, readily explain with a straight face how it was that the results predicted in the previous month but which came out differently than expected, are actually consistent with their previous forecast.

Consider this paragraph I received from a well-known technical analyst this week (who will go unnamed because I actually like him a lot). Commenting on the U.S. dollar, his service writes...

The USD appears as an ending diagonal triangle pattern, currently in wave 4 of wave (5). The last update indicated that the USD was possibly in a (contracting) triangle but it will likely complete as an (ending diagonal) triangle.

Contracting triangles and ending diagonal triangles are both very corrective patterns. The previous newsletter indicated that a possible triangle was in play and the pattern appears to have evolved into an ending diagonal triangle pattern. We have both possibilities illustrated in the animated chart below. The contracting triangle pattern would suggest the downside is complete, while the ending diagonal triangle indicates that one more wave down is expected to complete the pattern. A move above the green horizontal line would indicate that the contracting triangle is complete. We are expecting one more choppy wave down to the recent lows and this would indicate the ending diagonal pattern is completing. Ending diagonal patterns always end with sharp reversals to where the pattern began, so once it is complete, we can expect a sharp rally above 73.

Hold on a couple of seconds while my head stops spinning. Okay, that's better, I'm back.

Now, could the U.S. dollar, which has been beat mercilessly these many months, make a rally? Of course. It would be extraordinary in the extreme if it did not. But to actually try to manage one's portfolio based on the tangled technical entrails such as those splattered on the page just above is, at least for my money, a non-starter.

Instead, I have to look at the bigger picture. And the bigger picture is a serious financial crisis getting worse, and rising inflation and even trade protectionism now sweeping the world.

You go right ahead and sell your gold. I'm hanging on to mine. And if I'm hanging on to my gold, I'm hanging on to my gold stocks, because that's where the real juice will be.

Maybe not this month, or next... or maybe not until this fall, or even beyond. But when I look at the alternatives and the amount of risk I would have to take to get even a 10% return right now, I am very, very comfortable biding my time, continuing to buy gold and gold share bargains with the expectation that the 100%, 200%, 500% gains down the road will catch me up in a hurry.

Other Views

Casey Research Chief Economist Bud Conrad dropped me an email in response to a call made by one technician to sell gold. His comment...

The reasons provided here are technical, looking at the moving averages, "moving average crossover," etc. To trade this, you need to know when to get out and when to get back in; which requires two timing decisions. I don't know that many famous, rich technical traders. Soros, Rogers, Buffett are all fundamental investors.

My view is still long-term bullish, and I am even more convinced after looking at the actions of the Fed to debase the dollar, and the world food shortages and Peak Oil energy shortage that drove crude to $120.

My $1,200 gold prognosis for the end of the year is intact.

I also spoke to Doug Casey, who is currently working out of an apartment in Buenos Aires. His basic take is that while he is concerned that we'll see more weakness in the gold shares, based on the old adage "Sell in May and go away," he remains entirely bullish on gold and it is where all his loose cash goes.

Clyde Harrison, the creator of the Rogers International Commodities Index and now the Brookshire Raw Materials Fund (www.brookshirerawmaterials.com), and one of the smartest guys in the commodity business, sees most commodities trading in a range for the next few months. The exceptions are copper, which he is a screaming bull on... and rice, which he thinks is a great shorting opportunity.

A Word About Political Risk and Gold Stocks

This week, the Ecuadorian government committed economic suicide on behalf of its struggling population. It did so by passing a six-month moratorium on all exploration and mining development.

As a consequence, as you read this, the technical staffs of the many good companies working in Ecuador are draining their last beers in Quito before climbing onto planes for their new jobs in more mining-friendly corners of the world. Rest assured they will not go unemployed, given the massive shortage of skilled help in the sector. And they won't be returning to Ecuador anytime soon.

This end of mining in Ecuador has cheered the very active NGOs working there, which make their daily bread by interfering with any extractive industry (that is not an exaggeration - we have met with them there).

In fairly short order, however, this draconian move will backfire on the politicians, and the Ecuadorian people, in a big way. For the simple reason that money goes where it is treated best. Certainly not the case in a country where existing contracts can be nullified literally overnight based on nothing more than a light breeze.

Soon, once the last of the disgruntled miners throws up his hands and stomps out, the hallways of the country's ministry of finance will grow silent enough to hear a beetle crawl.

And it will stay quiet until the ranks of the poor, swollen by the unemployed former staffs of the many resource companies previously doing work in the country (and their many dependents), make their voices heard outside of the windows of government. Punctuated, we hope, by the occasional attention-getting rock being delivered through said windows.

At which point the staffs of the NGOs will retie their ponytails, quickly pack their L.L. Bean distressed-washed backpacks (equipped, no doubt, with the latest personal rehydration units) and follow the geologists out of the country, leaving the Ecuadorian people to their own devices.

Unfortunately, this sort of idiocy is not a trait of Ecuadorian politicians alone. The fact is that resource bull markets inevitably lead the locals to put aside any form of rational thought and reach instead for masks and guns. All in the name of the "good of the people," of course.

In recent months, the Democratic Republic of Congo, a misnomer if there ever was one, pushed the reset button on all current mineral concessions. And this week, per above, the Ghanaian minister of mines commented that that formerly steadfast bastion of mining and sound contract law was going to do a rethink with an eye towards grabbing a bigger share of the mining pie.

And it is not just the third world where this sort of thing goes on; how many energy companies (and their investors) were blindsided by the penurious new royalty regime heralded by the brights running Canada's Alberta province? And how many will likewise be affected if the U.S. moves ahead with mining reform, as appears now to be likely?

The fact is that the extractive industry has few friends and many detractors. And so you can get everything right when picking a good company to invest in (Aurelian in Ecuador, for example), but still get cut off at the knees by the politicians.

I mention this because it is near the top of my mind as I write. And because here at Casey Research, we will be redoubling our efforts to stay in even closer touch with the countries where our recommended companies have important projects. (We had been watching Ecuador closely, including receiving and reading regular local reports written in Spanish, but we were still surprised - along with the companies working there - that the Ecuadorian legislature moved so quickly, and in such a negative direction.)

To help us in our efforts, we are in the process of setting up correspondent offices in all of the major mining jurisdictions, establishing an even more highly tuned early-warning network, if you will. This will still be no guarantee that we can't get blindsided, but it certainly can't hurt.

Regrettably, as with pretty much every investment you make, politics looms large. In fact, it now towers above all other inputs by a very wide margin. And on that topic...

Food & Politics

Lately, there has been a tremendous amount of media coverage about rising food prices. In fact, it has risen to "OJ" status. Not as in Orange Juice, the healthful breakfast beverage, but as in the affair of "OJ Simpson," a media-created frenzy designed to assure avid readership by a citizenry suffering from wholesale attention-deficit disorder.

While there are certainly structural issues that are putting pressure on food, and likely will for some time, this week one of my regular correspondents, Steve Henningsen of The Wealth Conservancy, forwarded a link to an excellent article on the food crisis that appeared on mises.org. You can read it here.

http://www.mises.org/story/2952

I find it very interesting to watch the actions being taken by governments in response to the rising food prices. The Indian government, which retains the programming received at the end of a swagger stick while part of the British Raj, announced this week it will be prohibiting certain food exports.

The less hidebound Thai government, by contrast, said this week that they have no intention of stopping the export of rice, but rather are viewing higher prices as a commercial opportunity for their farmers.

Meanwhile, the Canadian government announced that it was going to pay pork producers $50 million to kill their hogs, 150,000 of them. I don't have time to go into the long-term problems caused by this sort of meddling, but I will report the news from a hog farmer friend of ours in the U.S. that, even without subsidies, he and his cohorts in that business are now killing their male baby hogs and using them for compost.

And there are increasing calls in the U.S. for the regulators to change the rules on commodities contracts in an attempt to stop speculation.

But, other than the laissez faire Thais, none of these actions will plant another ear of corn or another stalk of grain. Instead, killing exports will only hurt farmers, assuring that the food shortage becomes a real food crisis.

What to do? Personally, I have recently been acting on Doug Casey's recommendation to buy beef... with hogs as well. While the cost of feeding them may cause a flood of meat on the market in the near term, as the farmers cull their herds... in time, and probably sooner rather than later, there will be a meat shortage.

[Ed. Note: Our own Bud Conrad was early into agriculture as an investment, and has been doing a lot of analysis on the topic. We'll continue to update you on his recommendations in the International Speculator. If you are interested in staying up-to-date on agricultural investments, details about our three-month, no-risk trial can be found here.]

Junk By Any Other Name

This week Moody's announced they were downgrading 32 different tranches of previously AAA-rated "Alt-A" mortgages. These are popularly referred to as "liar loans" - by the very same people who sold them in the first place -- because these loans don't require the applicant to provide proof of income or assets.

Given the previously staid reputation of the industry, one would expect that when down-grading bonds, the rating agencies would review their paperwork and realize that, perhaps, Mr. Jones in the cubicle down the hall made a slight oversight when initially appraising the bond portfolio. And so, after a quick admonishment to be more careful in the future, the rating agency would drop the portfolio down a notch or two.

Oh, if it was only so. Instead, what is going on is akin to learning that Mr. Jones has been indulging in a daily dose of hallucinogens. And so the latest Moody's downgrades are seeing many of the bonds knocked back from AAA, which is supposed to be above reproach, to junk status overnight. And Moody's is far from done; they have put another 254 Alt-A bond tranches on their negative ratings watch list.

The lame-stream media may want you to believe that the credit crisis is over, but quite the opposite is true - it's accelerating.

And so, for your further reference in the weeks and months ahead, I provide just below a guide to the Moody's rating scale, lifted wholesale from the AARP website. (Try not to giggle as you read the description of Aaa-rated debt...)

Moody's Bond Ratings

Aaa -- Best quality, with the smallest degree of investment risk.

Aa -- High quality by all standards; together with the Aaa group they comprise what are generally known as high-grade bonds.

A -- Possess many favorable investment attributes; considered upper-medium-grade bonds.

Baa -- Medium-grade bonds (neither highly protected nor poorly secured). Bonds rated Baa and above are considered investment grade.

Ba -- Have speculative elements; futures are not as well assured. Bonds rated Ba and below are generally considered speculative.

B -- Generally lack characteristics of a desirable investment.

Caa -- Bonds of poor standing.

C - Lowest-rated class of bonds, with extremely poor prospects of ever attaining any real investment standing.

Of course, downgrading a bond from AAA to junk overnight is not unlike pulling it out of the drawer and setting a match to it. I can tell you one thing. If I were a conservative buyer of AAA bonds, I would be none too happy. It's a good time to be a lawyer.

I Am Womyn!

Laundry, cooking, tidying up, promoting basic hygiene and healthful activities, all while trying to keep up with my regular duties at Casey Research... for a day or two at the beginning of my wife's European vacation, it was something of a personal challenge. Sort of like seeing a mountain and, strapping on the boots, striding forth indomitably, chin up and eyes flashing with the goal of reaching the distant top.

But the difference between mountain climbing and a steady course of single-parenting is that the mountains of daily duties are as if on a moving sidewalk, coming at you one after another, no end in sight.

For one shining moment this week, I pushed what I thought was the final load of laundry into the basket, but no longer than 15 minutes later uncovered a new stash of the stuff, tucked into a forgotten hamper. Then I realized the sheets on the beds needed changing, then the kids had a particularly muddy play session and next thing you know, the vanquished pile had returned with reinforcements.

Summing up the experience: while many and maybe even most members of the male gender have long paid polite lip service in acknowledging the challenging task their wives have in keeping up with domestic chores -- lip service usually accompanied with an understanding though insincere smile and maybe a gentle pat on the derriere -- the time has come to admit that women are tough. Far tougher than men, in fact.

Forget this whole, "Woe is me, I have to work at the office all day" nonsense. Many women have to work all day, but only after working all morning to get the kids out the door to school. Then, on return from their day jobs, they are greeted with yet more work, providing sustenance to the crowing beaks of their broods before rolling up the sleeves to get the laundry done, the pets fed, the kids to bed, etc. ,etc. -- ad infinitum.

While I have always tried to chip in and do my fair share of the daily chores, I realize now that what I consider "my fair share" is probably a tenth of what has to go on to keep the household from regressing to a level on par with that experienced in the Dark Ages: dirt-covered floors, filthy, rag-clothed children and mangy dogs fighting each other for the underprepared table scraps.

And so, speaking only for myself, I hereby apologize to all womynhood for my personal lack of true understanding these many years. And I'll go one step further and swear that, should they allow me into their club, I shall from this point forward be a card-carrying feminist. Let my people go! I say.

Furthermore, I will throw my wholehearted support behind Hillary. Compared to any of her gender, Obama and McCain are wimps that she could take with one hand while the other was flipping the morning pancakes!

Manhunt Report: Diamonds Are a Girl's Best Friend?

Last week I promised an update on "Manhunt." Well, true to her word, the subject in our experiment in matchmaking has sent her first report, which follows...

Inquiring minds want to know an update to Manhunt, an ad which ran in this Casey Research publication a few weeks ago. The response has been overwhelming. I've never experienced so many quality emails -- and quality males -- all in one place, courting me, all at the same time. I'm quite overwhelmed and am at a loss for words at the moment. To best illustrate what it has been like to be me ever since Manhunt was published, I present to you Marilyn Monroe's performance in Gentlemen Prefer Blondes:

Marilyn Monroe vocalized:

The French were bred to die for love they delight in fighting duels
but I prefer a man who lives
and gives expensive jewels.

A kiss on the hand may be quite continental
but diamonds are a girl's best friend . . .

Are diamonds really a girl's best friend? No, no. Oh, no, no, no, no, no, Marilyn Monroe. Nay, I say. Diamonds are not a girl's best friend, at least not in this day and age of the New Diamond Age. The song of myself I sing:

The French were bred to die for love they delight in fighting duels
but I prefer a man who gives
and lives to break the rules.

A kiss on the hand should be intercontinental
Casey Research Subscribers are a girl's best friend . . .

I happily excuse Marilyn's perspective. To each her own. Not to mention Marilyn's performance was in 1953. That was then, and this is now. The world transforms. Values change. Courtship e-volves. An "anti-suitor" sent me an email, implying that I was a gold-digger. I clarified to him:

I'm not a gold digger. Should I be? But I'm a libertarian-digger. More precisely, a security-digger. Meeting a man well invested in metals would provide me with a greater sense of security. I'd like to be optimistic, but realistically, I don't see the dollar just dropping -- I see it altogether imploding. My lifestyle is extraordinarily simple, and I like it that way. I detest shopping, especially for shoes. And diamonds really bore me. A dog is a girl's best friend.

As for gentlemen, some still prefer blondes, but others turn their heads for brunettes. In fact, some even say that blondes are becoming an extinct species. Nevertheless, I digress.

The Manhunt has practically become a full-time job for me. What's a woman to do when she has handfuls of wonderful men at her fingertips? Proceed slowly. Set up a spreadsheet. Track and filter accordingly, for, more valuable than diamonds or gold, is the ability to connect with like-minded people. Or, in my case, to ultimately find a compatible long-term mate. The Project Manhunt men who've contact me are gems -- individuals of great value. If someone gets filtered out due to partner incompatibility, I still keep him on record for friendship-ability.

Two weeks into Project Manhunt, the content/experiences I've already encountered are worthy of being written into a book. (Suitors: Don't worry, I won't use your names. Nor will I send your contact data to marketers. I'm pro-privacy.)

I don't want to waste much more of David Galland's newsletter space, so before I go, I'll provide you with tidbits of Project Manhunt tabloid gossip. One man has proposed marriage to me via email. Another is a kind widower with children, and his family sounds quite dandy. A different suitor wants me to be his co-pilot -- seriously -- and is eager to teach me how to fly his plane.

Matches aren't made overnight and I'm certain Project Manhunt e-courtship shall continue for quite some time. So keep the emails coming, boys. Stay tuned for Project Manhunt Report #2 titled "Material Girl."

Miscellany

The philosopher/poet George Santayana is credited with the words, "Those who cannot remember the past are condemned to repeat it." I wonder what he would say, then, about White House Press Secretary Dana Perino. According to an article my friend Brian Hunt read in Playboy (which I am sure he reads only for the articles) and quoted to me, she admitted on a radio program that she didn't know what the Cuban Missile Crisis was.

"I was panicked a bit because I really don't know about the Cuban Missile Crisis," Perino said of the time during a White House briefing when she was asked a question that referred to the confrontation. "It had to do with Cuba and missiles, I'm pretty sure."

It is always remarkable to me how it is that people labor under the impression that those in positions of power possess a superior intellect, sharpened by years of study.

And so I'd like to thank Ms. Perino for doing her part to help correct that wrong impression. (Just for the heck of it, this week I am going to survey every adult I meet on their awareness of the Cuban Missile Crisis and see whether Ms. Perino's ignorance on the topic is, rather than an indictment of political class, a commentary on the failure of American education.)

Also in the Miscellany category this week....

Dallas Phyle. Maria W., who has taken it upon herself to organize a get-together of Casey subscribers in the Dallas/Ft. Worth area has written in that the first meeting will be held Friday, May 2nd at 6:30 pm at Beau's at the Crescent Court Hotel. If you'd like to attend and share views with other members of the Casey family, then drop us a note at phyle@caseyresearch.com and we'll get you connected.
Bud Conrad in the Big Apple. Casey Research Chief Economist Bud Conrad will be speaking on the topic of "Peak Everything" and doing a workshop at the upcoming Hard Assets Conference at the Marriott Marquis in New York. You can learn more about the conference by visiting this website. http://www.iiconf.com/pebble.asp?relid=62254
Save the Witches! Some people have suggested that the massively undeveloped and fertile lands of Africa might hold the solution to world hunger. Based on many business trips to Africa over the years, I'm not so optimistic. You may better understand my skepticism if I relate an experience I had with a driver I once used to take me here and there in South Africa and Bophuthatswana.

He was, I can assure you, a very elegant and well-spoken man. After spending much of a week in his company, I thought I knew him fairly well. Until one morning, while reading the morning paper, I came across an item describing how some local villagers had become convinced that three young women had sold lightning to the devil who then hurled it back in the vicinity of the village. To assure it wouldn't happen again, said villagers rounded the women up, locked them in the trunk of an abandoned car and set it on fire.

When I asked my driver about this unfortunate incident, he went on a diatribe - not against the barbaric ritual, but soundly in favor of it, claiming that the presence in Africa of the white man had erroneously deprived the locals of their magic. We didn't speak a lot after that.

Of course, while this sort of ignorance will only be put to rest with economic success and the educational opportunities that accompany such success, there is nothing to say that Africa can't, or won't, someday be a more successful continent. But I fear it may be many decades away. I mention this because this week, someone sent me a link to a rather humorous example of the superstitions that continue to plague Africa... a widespread panic over the theft of men's private parts, to use a delicate term. If you have nothing better to do, click here to give it a read...
China's Coal. Just last week in these musings, we discussed the outlook for coal. Which, depending on how you view these things, is either helped or hurt by the news that China is down to just 12 days' supply. For a country that is largely run by coal, this is no small thing and should provide a lot of support to coal for some time to come.

(Coal is, of course, one of the areas we follow in our Casey Energy Speculator, an exceptional value in our admittedly biased opinion. Checking it out is easy with our risk-free three-month trial. Don't like it, cancel within 3 months and you get all your money back... what could be more fair than that? Learn more by clicking here.)

And That, Dear Readers, Is That for This Week

As always, I sincerely appreciate you taking the time to read and to subscribe to a Casey Research publication. If you have written me in the last ten days and I have not responded, I apologize as the household tasks, on top of my duties with Casey Research, have vaporized any spare time. I will endeavor to respond early next week (my wife returns tonight... big party!).

As I sign off, gold is battling back toward $900 and the DJIA is off a fair bit based on the news that U.S. consumer confidence has plummeted to the lowest levels in 26 years (no surprise there).

A couple of weeks ago, I closed with a guess-the-gold price competition. We'll do it again this week. The parameters are that you have to have your bet in by midnight (EST) Monday, April 28. The person closest to the intraday spot price high for the week, as of noon on Friday, May 2, wins a one-year subscription to BIG GOLD, our publication dedicated to providing profitable analysis on large-cap, gold and silver-producing and near-production companies. Send your entries to David@caseyresearch.com.

My bet for next week's high? $927.

See you next week!

David Galland
Managing Director
Casey Research, LLC.

The Room 3/3/08

David Galland — Mon, 03 Mar 2008 17:52:08 GMT

Dear Readers,

It's getting to the point where even the most determined optimist is having a hard time finding a good reason to roll out of bed.

Among just the smattering of news that crossed the lens this week...

Producer prices rose 7.4 percent in January from a year ago, coming on the heels of the news last week that the Comedic Politicized Inflation (CPI) index has risen over the last 12 months at the highest year-over-year rate in decades.
The National Association of Purchasing Management's business barometer has fallen to the lowest level since 2001, beginning to reflect a knock-on slowdown in consumer spending.
And, according to the U.S. Commerce Department today, what modest growth in spending there is, is now coming from inflation and not from confident consumers mobbing local electronics shops to load up on the latest and greatest.
On that latter point, consumer confidence in the U.S. is reliably reported to have grabbed its chest and slumped to the ground, or at least to levels last seen only in 1992.

And no wonder, given that housing prices, the single most important component of the net worth of so many people, are crashing; in December they fell by the most on record, off 9.1% from the year before.

(During a cross-country ski slog over the weekend, a friend who is a housing contractor by trade told me he has not seen a slowdown like this in his 20 years in the business. He knows of only one new house on the flight path to be built in these parts. The property holder has six different contractors scraping it out in a bidding war to get the job, assuring that the victor ultimately receives as a reward a dry and meatless bone at best.)

If the housing sector slowdown with its rising foreclosures and defaults isn't enough to keep our optimist abed, he would have to do no more than flick on the morning news to learn of soaring food prices, a crashing dollar and a tumbling stock market.

No sooner had a trembling hand secured a double dose of Advil, topped off with a cold compress, then he would hear a report of hundreds of millions and maybe even billions of dollars worth of new and unexpected losses being suffered by municipalities, banks, and sundry financial institutions on purportedly "safe" instruments concocted in earlier, more positive times. This week, for instance, we hear that the supposedly invincible Goldman Sachs may take it in the chops for as much as $11 billion due to "variable interest entities," a form of conduit, our faltering optimist learns as he falls back on his pillow in a fatalistic swoon, that holds close to $800 billion in assets, some significant percentage of which are now considered suspect.

At this point, the only folks able to view the unfolding carnage with any casualness are the super-rich for whom almost any conceivable loss would still leave them the requisite funds to live like the royalty of old... and the relatively small handful of investors who've been smart enough to have moved assets out of harm's way and into gold and other commodities early on (a group that I continue to hope includes you, with the help of our various services).

Interestingly, this week it was revealed that the California Public Employees' Retirement System can be counted among the few that have been seeing the nature of the unfolding crisis in the right light, and has at least begun to act appropriately. Calpers, according to Bloomberg...

...the largest U.S. pension fund, may increase its commodities investments 16-fold to $7.2 billion through 2010 as raw materials prices surge to records.

Calpers, which has about $240 billion in assets, agreed at a Feb. 19 board meeting to hold between 0.5 percent and 3 percent of its assets in commodities, spokesman Clark McKinley said. The Sacramento, California-based fund last year put $450 million into commodities, its first such investment.

The agreement is the fruit of Chief Investment Officer Russell Read's efforts since joining in 2006 to boost returns by shifting funds into raw materials and markets such as China and India. Oil has soared above $100 a barrel, wheat breached $13 a bushel for the first time, and gold and platinum climbed to the highest ever since Calpers began investing in commodities.

"We plan on ramping up the program by hiring additional staff," McKinley said by phone yesterday. "We are excited about commodities, which have performed exceptionally well for us."

To which we say, welcome aboard! Better late than never, so hats off to the obviously competent Mr. Read.

Of course, as the pension funds, like the hedge funds, mutual funds and institutional funds in general tend to run in packs, this news can only help solidify the base under our current favorite investments.

Listen and you can almost hear the chat around the polished-wood-encased water coolers strategically positioned around finely appointed pension managers' offices worldwide.

"Did you hear, Calpers got into commodities last year?"

"Yeah, smart buggers. And here we are with our bonuses slashed -- slashed, I say! -- to only $2 million, just because we invested in AAA bonds!"

"Well, if commodities are good enough for Calpers, who are we to argue, eh?"

"Race you to the trading desk!"

Pile on in, we shout enthusiastically, daydreaming about selling our appreciated resource stocks to the stampeding herd a ways down the road.

But that, fellow travelers, is about the only golden lining to be found in the chaos now gripping the world. And while a good investment brings a warmth not unlike a crackling fire and a hot toddy on a cold day, the toddy loses much of its flavor when one considers the impact that the unfolding crisis will have on our less well-prepared friends, family and fellow countrymen (and women, as the case may be).

Commenting on the news in an email exchange from New Zealand this morning, Doug Casey had this to say...

"My own feeling is that by the time this cycle is over, people are going to be shocked by how high gold goes. But it will be a sideshow compared to the circus the Greater Depression will put on."

Unfortunately, however, the news for the unprepared gets much, much worse. There are two areas that I would like to comment on in a bit more depth, starting with Bernanke's testimony.

Bernanke Pushes the Button

Yesterday, while engaged in my periodic physical exertions, or more specifically, while I was clinging to the handles of a medieval masochistic device sternly labeled the "Stair Master" down at the local facility for such things, I managed to snake out a finger to the television monitor to tune into Chairman Ben's testimony in front the House Financial Services Committee.

It was, I noticed when the camera pulled back from Bernanke's oddly detached countenance, a sparsely attended affair. In fact, it seemed to my sweat-filled eyes as if there were no more than five or so members of elected officialdom in the gilded chamber.

(But, hey, why should members of Congress be interested in anything to do with the economy? It's not like there's anything going on these days. Whether or not Roger Clemens is doping - now THAT is worth packing the chambers for!)

In all seriousness, however, Bernanke's testimony yesterday was far more important than most people understand, least of all those now doing "service" in government. Far be it from me to be critical of the pandering class, but I was appalled at how unbelievably, well, stupid the questions were that were pushed toward Bernanke by the handful of Congressmorons who bothered skipping the brunch put on by the American Lawyers Association down the hall in order to be present.

Bernanke's testimony was important because in it he made it abundantly clear that the Fed - and by extension the U.S. government - was coming down firmly on the side of inflation.

Those of you who have been with us for any length of time know that we have been calling for things to arrive at a location loosely identified as "between a rock and a hard place." It has been our consistent belief that the Fed would inevitably be forced to make a decision between letting the economy collapse under the weight of its many debts and obligations, or letting the dollar collapse by shifting into default mode. Which is to say, trying to inflate the country out of trouble.

The specific quote from Bernanke's testimony you want to pay attention to was this...

"The Federal Open Market Committee will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks."

Note the lack of reference to run-away-inflation that is already making itself known here, there and everywhere.

The news that the Fed is again opting for inflation, while coming as no surprise to us, caught the gold bears flat-footed by sending gold sharply higher, to over $970 as I write.

Speaking from an entirely personal basis, I am, of course, cheered by the rise in gold, thanks to a long-held position in a gold ETF and a portfolio stuffed to the gills with the higher-quality gold exploration and energy stocks of the sort followed in our International Speculator and Casey Energy Speculator services. But there is a real risk arising... a true tipping point... that I am not so sure I'll be happy to see.

While there are many factors that might push the economy over the edge, the one to watch closely now are the foreign holders of the U.S. dollar. As we have mentioned more than once, the amount of U.S. dollars in the hands of foreign holders is at historic levels. In fact, the level of holdings, estimated at as much as $16 trillion, is unprecedented by an order of magnitude.

At this point in the game, we would expect to see wealthy foreign individuals cashing in their dollars for all manner of alternatives, including other currencies, tangible property and, of course, gold and other tangible assets. Given the price of tangibles at this point, that trend is likely well underway.

Diversification out of the dollar by institutional holders is likely also underway. But after that, if pushed to it, will come the big kahunas: the foreign governments and their many trillions.

Up until this point, that they have been reluctant sellers can be understood in much the same way you can understand the concept of Mutually Assured Destruction when discussing the pros and cons of launching nuclear strikes against your similarly armed adversaries. At what point, however, do the foreign governments come to the conclusion that the other side has already "pushed the button"?

Watching Ben Bernanke, there is a reasonable chance, were I a foreign holder, that I might come to the conclusion that he has done the equivalent of just that.

Regardless, the pressure is growing daily on the economies of the Middle East and Asia, which have to date helpfully reinvested the money they have received in exchange for their goods into U.S. Treasury securities. And, by doing so, effectively imported our inflation back home. Even if they wish to continue avoiding the nuclear option, they will at some point be forced to it by the U.S. pursuing a monetary policy one could correctly term "Everyone for themselves!"

Make no mistake that once the tipping point is reached -- and if the Fed makes yet another steep cut at its next meeting on March 18, that could do it -- then things have the potential to shift from crisis to catastrophe almost overnight.

What impact would a true collapse in the dollar have on the global economy? It is a topic we'll continue to poke at here and in our various publications. But for now, keep your eyes wide open and your head down.

I'll touch on the second serious development this week, but the lunch bell has just rung, so I'm going to pass the baton over to Bud Conrad, who has sent over a couple of items he thought you'd find of interest...

Bud on Bernanke

In alarming testimony to the House Financial Services Committee, this week Fed Chairman Ben Bernanke declared: "We have a problem ... the spreads between the Treasury rates and lending rates are widening, and our policy is essentially, in some cases, just offsetting the widening of the spreads, which are associated with signs of illiquidity."

I said at the Denver Summit, and since in articles, to watch out when the Fed cuts and long-term rates don't drop.

It means that the rate-cutting process of printing money to buy Treasuries in an attempt to provide liquidity to lower rates is failing. The confidence in the ability of Bernanke, or anyone else, to stop the collapse is lost when people become aware that printing money makes it worth less. The Fed action becomes the fear, rather than the solution. At this point further cuts won't help the economy, because long-term and riskier rates will reflect that loss of confidence.

(Ed. Note: Bud Conrad recently gave a wide-ranging interview for the Gold Report on where the economy, gold, energy, food and interest rates may be headed. You can view it by clicking here.)

A Trip Down Memory Lane

Our own Terry Coxon sent along a link to a video of Richard Nixon announcing the end of gold convertibility, pointing out that I would especially enjoy the reference to "international speculators."

You can see Nixon make the announcement by clicking here.

The canceling of convertibility was, of course, a seminal event as it left the world with a pure fiat monetary system, an experiment which has subsequently resulted in the steady deterioration of all paper currencies, among other ill effects (including unchecked growth in government, thanks to the removal of any real obstacles to spending).

Will the whole house of cards implodes some day, forcing a return to a gold standard or some other system that forces fiscal restraint? If I was a betting man, I would place large sums that the answer is "yes"... it is inevitable.

In fact, the collapse may have already begun.

Energy Chart of the Week

By Chris Gilpin, Contributing Editor, Casey Energy Speculator

[click to enlarge]

Gasoline prices are comprised of several costs: transportation of oil (usual from some distant corner of the globe), refining costs and profits, more transportation of gasoline (to get it from the refinery to the gas station), taxes from every level of government, and the cost of buying the crude it all started from. This last cost has mounted, and now oil prices hold a greater and greater influence over gasoline prices.

In 2004, oil prices rose 50% from $30 to $45 roughly, and this created a corresponding 26% rise in gasoline prices. In other words, gasoline prices increased half as fast as oil prices did.

As oil prices have risen, the oil cost of gasoline has begun to dwarf all other components. Now when oil prices go up, it will cause a much steeper rise in gas prices. If oil were to make another 50% jump from $100 to $150 - which we think is quite possible in the next year or two - gasoline prices would rise at a rate closer to 35%. The U.S. average for regular-grade gasoline hovers around 310 cents per gallon right now with oil near $100; a 35% increase would lift it to 419 cents per gallon.

The rogue factor in all these calculations is refining capacity. Last spring, a spree of unplanned refinery outages pushed gasoline prices higher when oil had retreated to $60. By the time refining capacity came back online, oil was marching to $100. By having one major cost replace the other, gasoline prices have stayed between 280 and 310 cents per gallon since April 2007.

This may have created a false sense of security among motorists, who saw oil move up twenty or thirty dollars without much of a corresponding rise in gasoline prices. This spring refineries have scheduled their normal outages to switch from winter to summer-grade gasoline, but how many unplanned outages will occur? The U.S. oil-refining infrastructure is outdated and badly in need of replacement, but permitting a new refinery in the Lower 48 has proven to be a near impossible task. It's reasonable to expect a growing number of unplanned outages at refineries in the years ahead, and if any of these correspond with another jump in oil prices, then prices at the pump would roar to new heights.

As a motorist, it's all very annoying. The best tactic is to hedge your rising fuel costs with energy stocks that will benefit from higher oil prices - or trade in your car for one of those Flintstone vehicles. But I hear they can be rather hard on the feet.

[Ed. Note: If you are looking to profit from energy, you owe it to yourself to check out the Casey Energy Speculator. And it couldn't be easier, given that subscriptions come with a 3-month, no-questions-asked, 100% money-back guarantee. Check out the current profit-packed edition by clicking here now.)

The Other Important News of the Week

Last week I pointed to the breaking news Fitzroy MacLean of our Without Borders publication tipped me to, about German intelligence officers paying a Liechtenstein bank employee US$5.9 million to steal a disk containing the names of all the German account holders.

In writing this news up, I posited that the Germans likely also got the account names of non-Germans, "...giving the German government a very nice trading card."

It didn't take long for my intuition to be proved right, as it was announced this week that the Germans were now cooperating with friendly governments around the world so they, too, could corner tax miscreants.

Confirming the point, one of our subscribers sent along a news item from New Zealand about how that country's Internal Revenue Department is offering anyone with an offshore account, especially of the Liechtenstein variety to, in essence, come out with your hands up or else. If you are a New Zealander with assets in the pilfered bank, I have no doubt you are sweating bullets.

Here in the U.S. of A., the Internal Revenue Service is also working hand in glove with the Germans to hunt down the tax cheats.

This is a trend firmly in motion, with serious implications.

First, now that executives and even lower-level employees of banks in tax havens with the right levels of access have seen the going market price for client names, and that rather than being brought up on criminal charges for breaking confidentiality agreements, they will be saluted by officialdom around the world, there will be a rush to capitalize. All that the person needs to do is to grab the list, download the file, or whatever, and make it past the front door to collect on the waiting riches.

In addition to the considerable personal problems this will cause the account holders, it effectively spells an end to the idea of financial privacy.

And that is an important battle to be lost by anyone who values individual freedom. Look at it this way, until recently countries knew that if they squeezed too hard, money would begin slipping across the borders to undeclared safety. With that escape route closed, they can now squeeze ever harder.

Even so, human nature being what it is, you can expect the same people - at least those not in jail following the global witch hunt that will soon extend to the Caymans, Andorra, or any other jurisdictions where the bankers have been accommodative to privacy seekers - to look for other ways of hiding wealth.

Of course, gold, diamonds and other readily portable and fungible assets will find favor. Setting the stage for the battle in the war of the state against the individual: a new round of government confiscations of gold and other such assets, "in the public interest."

I can't see this happening imminently, and we should be able to see it coming, but the threat that it could happen in the next decade, along with foreign exchange controls and similar acts of desperation by the tax farmers, is real.

Now let me be clear. I am not in favor of tax cheating. Per the fresh example from Liechtenstein, the risks are too high and, in my view, always have been. But that doesn't mean that I can't lament the fact that the system is moving closer and closer to the point where you won't be able to enjoy any level of privacy in relation to your financial affairs.

Visa's $19 Billion IPO a Scam?

During the course of dinner with a highly positioned financial services executive the other night, he told me that Visa and MasterCard had lost a major lawsuit related to hidden charges, and that it will cost them a lot of money and force them to change their business in a number of detrimental ways.

Almost immediately thereafter I read that Visa was planning a $19 billion IPO. Coincidence, I wondered?

Curious, I decided to dig a bit. I hadn't gotten very far when I came across a very coherent analysis on the situation by Mish Shedlock. You can read it by clicking here.

Could the broader investment community catch on to the true intent of the IPO, dooming it and by doing so, maybe, lead to yet another giant stumbling? While that remains an outside possibility, it is by no means out of the question given the impact of the lost lawsuit, and that the credit card companies are almost certain to be next to feel the pain of consumer belt tightening.

I suspect most people wouldn't be unhappy if the credit card companies took it in the neck.

On that theme, years ago I interviewed a senior credit card company executive and over the course of our meeting, I mentioned to him that I had recently caught a charge for "lost credit card insurance" on my bill. It was for something like $46 a year - for nothing, as far as I could tell. Indignant, because I hadn't approved the charge, I called the service center and no sooner were the words of complaint out of my mouth than the representative said, "No problem, sir. That charge will be removed." In other words, no questions or pushback at all.

"Oh, that!" my new acquaintance, the credit card executive, commented, a smirk on his face. "That was the idea of the guy in the office next to me. We were running behind on the quarterly numbers and he came up with the idea to bump the revenue."

"You mean," I asked, a somewhat stunned look on my face, "that you simply hit all the credit cards with a $46 charge?" (And we're talking about hundreds of thousands of accounts.)

"Yep. It was a big winner, because most people don't look very hard at their bills."

"But that must be illegal," I said dismayed.

"Probably," he said with a dismissive shrug.

He didn't get the job.

Of course, the flip side of Visa running into trouble will be yet another form of credit that gets tighter... and more costly.

Miscellany

Lines of Lawyers. As predicted, lawyers armed with thick briefcases and high-digit display calculators are increasingly jostling each other in the long lines that are starting to form at the doorsteps of the wounded financial service industry behemoths.

This week, HSH Nordbank, a German sector public bank (translation, they have clout), announced it was going after UBS bank for "hundreds of millions" in subprime losses. As the piling on grows, we'll start to see the major bank failures that our own Bud Conrad has been forecasting these past months. Followed, natch, by the helicopters' worth of bailouts, courtesy of taxpayers.
High-Stakes Shell Game. In a classic shell game, the banks are trying to prop up the AAA ratings of the insurers standing behind the hundreds of billions of dollars of toxic waste now eating away at their portfolios. While cost effective -- $3 to $5 billion is a lot cheaper than the carnage that will follow a downgrade -- the odds are high that they'll invest the money, the insurers will get downgraded anyway, costing them their investments and the value of their portfolios. Unless, of course, the same helicopters show up with yet more taxpayer largess to keep the insurers intact. It would not surprise me in the slightest to see, even, the de facto nationalization of a failing rating agency.
In the "Remember, We're All Only Human" Department ... I came across another anecdote about another of the esteemed members of the judiciary, one Robert Somma, a federal bankruptcy judge appointed by President Bush in 2004. It appears he has stepped down from the bench after police found that he had crashed his Mercedes into another car while drunk and wearing a dress, fishnet stockings and heels, and carrying a purse. "He's a highly respected member of the bar," said a fellow judge, "and remains so." I don't care about his dress code, live and let live, I say... but next time, take a cab.
Look Before You Leap. There was news out this week that Norilsk, the Russian mining giant, was ordering a fleet of super icebreakers to take advantage of the melting of Arctic ice, opening up new routes across the top of the world. Someone might want to tell them not to place their deposit yet, because the Arctic ice hasn't just re-formed, it's thicker than ever. Here's the reference.

That's It for This Week

Major developments are afoot, with the term "We live in interesting times" barely covering it.

While we expect things to continue in a similar vein, and to likely grow steadily worse for some months and maybe even years to come, the best approach at this point is to assure that you and your family come out okay.

It's like the warnings that the flight attendants give during their briefings on the topic of what one should do should yellow oxygen masks start falling on your head while in flight. If you don't first take care of yourself, before turning your attention to the less well positioned, you could find yourself wiped out and of no use to anyone.

As I close my weekly musings, I see that gold is solidly planted at $971, oil is parked over $101 and the long-suffering DJIA is off yet another 295 points.

Wall Street types like to look down their nose at people who invest in gold, silver and other commodities... but they may have to revisit their prejudice, given that the broader U.S. stock markets have been essentially flat over the last 5 years... which means, adjusted for inflation, their favorite sector has been a loser for half a decade now. Decidedly not the case for the precious metals, energy and other commodities.

Until next week, thanks for reading and for subscribing...

David Galland
Managing Director
Casey Research, LLC

The Room 2/25/08

David Galland — Mon, 25 Feb 2008 20:20:26 GMT

Dear Readers,

Much to talk about this week. Too much, I fear.

I shall, therefore, endeavor to be succinct, a trait, unfortunately, that I seemed to have misplaced in my formative years.

Even so, as I like to believe that humankind possesses an innate ability to better themselves, I shall buckle down post haste and give it the old school try.

Hey, How 'Bout That Gold?

While it's nice to see things going along so swimmingly for our favorite form of money, even I am a little breathless after gold's surge to yet another record this week. And its kissing cousin, silver, has been no slouch either.

But I am not surprised, given that the precious metals are doing what they are supposed to do. Namely, reacting to the rising tide of inflation now beginning to make itself known here in the U.S. and around the world. This past week, we learned that even the Comedic Politicized Inflation index (CPI) is beginning to slip the leash. As you can see in the chart below from Shadow Government Statistics (shadowstats.com), which tracks inflation the good old-fashioned way -- i.e., the way it was done before all the jiggering - the actual rate of inflation is in a steady upward trend. It is only going to get worse from here.

[click to enlarge]

On that front, we have been surveying global inflation and finding that, with only few exceptions, the trend I brought to your attention last week holds true... the inflation the U.S. is experiencing is, indeed, worldwide.

That is not to say that there are no deflationary pressures, there clearly are. Much of which is related to the declining net worth of homeowners whose inflated real estate values are headed in the wrong direction.

The result, we believe, will be akin to one of those television commercials where you have, say, a truck carrying chocolates colliding with another carrying peanuts... followed by a smiling bystander, covered in the accidental mix, licking his lips and finding the formula entirely to his liking.

Except that the stagflationary sludge which is coming next - faltering economies concurrent with higher prices -- will be to almost nobody's liking. Unless, of course, you are smart enough to take the necessary precautions and position yourself to profit. That you are reading this is highly suggestive that you belong in that category.

Here Comes the Gold Stocks

While there are a number of reasonable explanations as to why gold stocks have been lagging, I have come to believe that the single most important reason has to do with the fact that the price of gold was still under $280 as recently as January 28, 2002.

Against that number was a cash cost of around $250 per ounce, which was about as low as it could go, on the average, indicating an industry doing everything it could just to survive. Put another way, as a result of the 20-year bear market up to that point, the industry had been beaten down about as far as possible. Therefore, as gold began its upward move, it did so against the backdrop of an industry in mothballs, running on a skeleton staff and highly optimized operations.

This is important on a number of fronts.

Having been trained in the acid bath of razor-thin margins, gold company management teams were intensely skeptical about gold's rising price. They assumed it would be just another bear market trap, ready to punish unwary optimists who went out on a limb by spending money to ramp up production.
I used the phrase above "highly optimized operations." By that I mean the mines were focusing only on the easy-to-mine, higher-grade material that would allow them to produce a return... maybe. It also meant they were extremely frugal, reluctant to buy new equipment, or hire the bare minimum of employees.
Another survival technique was the selling of future production at a set price, a perfectly rational exercise in a bear market, because it at least assured a price that would cover the known costs.

When you add all that together, especially the inherent skepticism of management, it becomes easier to understand why it was that the industry was slow to act even as the gold price started moving up. In fact, it was only in February 2003, with gold trending over $350, that Barrick Gold Corp., the world's largest, began the expensive process of unwinding its hedges. And it wasn't until November of that year that the company announced it was foregoing forward sales altogether and would work to bring its hedge book back to zero.

At the point that the industry realized that the bull market in gold was for real, it started to scramble to play catch up. Which, in a choo-choo industry like mining, means hiring and training lots of people, buying and refurbishing the equipment needed to reestablish production on more marginal deposits, upgrading facilities, building expensive new mills, etc., etc. And, of course, dealing with the cost of unwinding hundreds of millions of forward hedge contracts.

The rebuilding of the gold mining industry, in short, really only began in earnest over the past few years. As would be expected, the costs associated with this rebuilding required big hits to the financial metrics that institutional investors look at before making an investment decision.

The metrics were not helped by the shift away from high-grade ore (the lower the grade, the more the material you have to process)or generally rising inflation and a falling dollar. The end result was that the cash cost of production rose by as much as twice what it had been during the mothball years, keeping the margins tight and the miners unattractive as investments.

By contrast, the base metals companies bottomed much earlier, in late 1998 and the first quarter of 1999, thanks to increasing demand out of China and elsewhere. As a result, they were well on the road to recovery when the big price increases for base metals began in 2004, positioning them to make free cash flow hand over fist. Thus, while the gold miners have been largely shunned in recent years, the base metals sector has been enjoying salad days, reflected in multi-billion mergers and acquisitions and, of course, sharply higher share prices.

Here at Casey Research, we are of the firm opinion that now that the worst financial aspects of restarting their industry are behind them, the big gold companies are poised to take off. Proof of this point should come in rapidly improving margins which, lo and behold, we have begun to see in the quarterly reports now being released. Just this week we have learned that Goldcorp's profits almost quadrupled last quarter, Barrick's net profit rose by 28% last year and is expected to build rapidly from here and Kinross has just posted a record quarter, with profits up almost three-fold over the same quarter a year before.

The exception to the pack was an announcement that Newmont lost $933 million in the last quarter. But even there we find confirmation, because the loss was mainly associated with a one-time write-down of costs associated with acquiring new reserves and closing down an unprofitable merchant banking operation. In sum, Newmont took the write down because they could afford to, and because the high price of gold would help mute any investor disappointment. In essence, they have effectively cleaned up the books in order to join the profit party.

We will not long be alone in noting the pending improvements to the bottom line of the big gold companies... the investment herd is coming and, we expect, coming soon.

Now, I am going to dig down one more layer to make a couple of points you may consider blatantly commercial. Be that as it may, I'm not going to shy away from making these points simply because Casey Research will benefit if you take the action I'm going to recommend.

The first point I want to make is that if you don't already have a subscription to BIG GOLD, now is the time to take one. Our number-one pick, Kinross Gold, has already bucked the trend by moving up over 68% in the last 9 months, but the show is just beginning. The underperforming big gold companies and the new producers we are following, are going to catch up in a big way and soon. If you haven't yet subscribed, do yourself a favor and do so today. You can subscribe today for just $79 a year, and your subscription comes with a 3-month, 100% money-back guarantee, so you have less than zero to lose.

Click here to learn more about BIG GOLD and to subscribe.

The second point I need to make has to do with the junior exploration companies.

History has proven that, other than discovery stories, the big gold stocks need to get in gear before the investor sentiment reaches the critical mass needed to spill over into the junior sector. History also shows that, as profitable as the big gold companies are in a bull market, the returns offered by the juniors can blow those away. Exponentially. This upside, of course, comes with a greater degree of risk.

As the existing subscribers to the International Speculator will attest, these stocks can move down just as fast as they can move up... but if you have the tolerance for volatility and invest only with money you can afford to take a 50% (or more) haircut on, then you absolutely have to take a subscription today, while the bargains are still available. Again, we offer a discounted new subscriber rate and a 3-month guarantee... meaning you lose nothing by giving it a try.

Click here to learn more and to sign up for a subscription to the International Speculator now.

If you have the means, you really should have both.

While that may be the most blatant pitch I have ever made in this missive, I hope you can appreciate that I believe every word.

In fact, I have never been more bullish on the gold stocks in my life. That doesn't mean I'm right, but you can rest assured that I am completely, entirely sincere. We have a great team here, all of whom work very, very hard to get things right. Which, generally speaking, we do. Right now, the single best recommendation I can give you is to get very serious about your gold stock portfolio. Know why you own each stock you do, and don't bet the family farm, but be bold and the payoff should be truly extraordinary.

I don't think we are going to have long to wait for the show to really get on the road.

Spy vs. I

An outraged instant message from Fitzroy MacLean of Without Borders, our international investment and lifestyle letter, popped up on my screen earlier this week. Now, given that Fitzroy used to earn his porridge by engaging in covert and overt operations where a failure in risk management could lead to a bullet in the head (he is former CIA and an Army Ranger), he is not easily flapped, so his strident message caught my attention.

He was writing me from Germany where the news had just broken that German intelligence officers had paid on the order of US$5.9 million to a Liechtenstein bank employee to steal a disk containing the names of all the German account holders of the bank (and, I suspect, everyone else... giving the German government a very nice trading card). The purpose, of course, was to crack down on anyone who had been trying to avoid taxes by stashing funds in that tax haven.

Now, unlike Fitz who was appalled that the country's intelligence services were being put to work spying for the tax department, some of you may think that it is good and proper that the tax cheats are being rounded up and hauled off to the cells. If so, then you'll have much to cheer you in the months and years just ahead.

The fact is that governments in all their many permutations are themselves starting to feel the pinch from their overspending and overcommitting to spend more. The pinch will turn to a vice grip as the flaws of the fiat monetary systems they uniformly deploy begin to collapse as they futilely try to keep the *** from bursting.

In the United Kingdom, for example, the government has made the decision to nationalize the failed Northern Rock bank at a cost of almost US$7,000 per citizen. And in Germany, you have a bailout now approaching US$2 billion underway for the 1KB bank.

But this is only so much kinder-play when compared to the U.S., where the banks have been lining up around the block to take advantage of the Fed's Term Auction Facility (TAF). Which is to say, the banks are handing the Fed a bunch of toxic waste as collateral and receiving, in return, tens of billions of freshly minted dollars at a very agreeable interest rate.

And even that doesn't begin to measure up against the $170 billion of handouts contained in the stimulus package.

Which pales in comparison to the larger 2008 budget deficit, now estimated to be over $400 billion.

But all of that is only a splash on the rim of the bucket against the tens of trillions of bills now coming due for the benefits due the retiring baby boomers, a number sure to go higher when President Obama rolls up his well-pressed sleeves to implement universal healthcare... and... and...

The pressure is beginning to be felt all the way down the chain. In California, Governor Schwarzenegger attracted a lot of unhappy attention by suggesting the state start letting criminals out of jail, cutting welfare and closing down public parks and other facilities because that once golden state could no longer afford the bills. Here in Vermont, the governor has proposed selling the state's lottery to raise some pocket cash.

Make no mistake, we are still in the early, more friendly phase of this process. Once the state really starts to come under pressure, it will do whatever it takes to keep afloat.

A relevant comparison, sadly, comes from ancient Rome. During his unhappy term in office, Roman Emperor Caligula first spent the treasury dry, then, after it was depleted, turned to doing whatever it took to keep the state afloat. Which, at that time, involved - among other activities - accusing the wealthier citizens with treason followed by a speedy trial ("Hail Gaius! You're guilty, off to the lions with you. Have a nice day!") and the confiscation of all their property. As things slipped further down the slope, he passed into law incentives whereby friends, relatives and fellow countrymen of said property owners could rat them out, for which they would receive a cut of everything confiscated. And, one would imagine, as a bonus get a front-row box seat to watch the lions eat.

Expect to see more and more of the sort of covert activity engaged in by the Germans spread around the globe. We are at the beginning of the trend, not the end.

Watch yourself.

And Now for Something Entirely Different

As you know, at this point we are avoiding traditional equities (except to short some), and have no interest in fixed income. But we are birds of a different color than most investors, being determined contrarians with a solid speculative bent.

For those of you who skew a bit more toward the traditional, you might appreciate reading some of the material put out by Fidelity Independent Advisors. Olivier Garret, our CEO, and I met Fidelity's Don Dion at a conference last year and were impressed. While I personally wouldn't rush into some of the sectors they follow, you might be more inclined in that direction. If so, check out their free Hotline e-letter by clicking here...

Energy Chart of the Week

By Chris Gilpin
Contributing Editor, Casey Energy Speculator

[click to enlarge]

For the past three years, there's been an unusual divergence between the prices of oil and natural gas. Historically, the price per unit of energy between the two fuels is roughly equal. It might swing apart during cold winters when natural gas prices sometimes spike, or during times when political tensions in the Middle East put a "terror premium" on crude prices, but all things considered, they usually fall back into alignment.

That's because several large industries, and some power plants, have the capacity to switch back and forth between the two fuels. With crude costing twice as much per million British thermal units (MMBtu) as natural gas, you can rest assured that no one is burning petroleum products to power their operations or feed the electricity grid, not if they can possibly help it.

This widening price gap poses a pressing question: is oil overvalued, or natural gas undervalued? Both, is the most likely answer.

What's most fascinating is that this graph also clearly shows that the price of energy per unit - no matter what the fuel source - is rising sharply, proof that the global energy boom is in full swing.

(Ed. Note: If you are looking to get in on the energy boom, that is a sector we follow. You can learn more about the Casey Energy Speculator by clicking here.)

The Mailbag

I had any number of interesting reader emails this week. Here are excerpts from a few I thought you'd find of interest...

"You recommend highly speculative stocks. Given the respect you carry in the industry and the size of your readership, I am concerned about the timing of when you believe it is time to get out of the precious metals. I wouldn't think your exit would have much of an effect on gold or silver, per se, but I would like your honest and transparent belief over how much your "sell signal" will affect those small and highly speculative precious metal mining companies. I think it will be substantial, and frankly, I believe this precious metals bull market may last a lot longer than you seem to think from your writings. I don't want to be caught holding the bag, waiting for a small company to come back from carnage that could ensue when you guys recommend getting out.

Bottom line: How big of an effect do you think your sell signal will have on those stocks?

An excellent question and a welcome sign of a heads-up investor paying close attention to their personal knitting.

The answer, generally speaking, is that we expect the serious Mania phase in the gold stocks to last at least a year. At some point in the run up, likely six months or so into it, we are going to come to the conclusion that the Mania is headed toward its apex and recommend our subscribers begin looking to lock in profits by selling into volume.

Remember, this is pure conjecture, because it is impossible to say with any certainty what market conditions will be like at the time that we begin to feel the Mania is reaching full stride.

However, as the subscriber just quoted so aptly points out, inherent in the discussion above is the fact that, yes, we are likely to put out the sell signal well before the bull market run is over. That should, we would hope, allow for an orderly exit, over a leisurely period of time. Will our recommendation to take profits at that point cause the stocks we follow to take a big hit?

Impossible to say - as much will depend on whether you, the subscribers, decide to rush to the exits, and what the level of the volume is coming into the stocks at that time. I don't think there is much chance of a mass exodus, however, because it is human nature to hang on longer than is prudent. With markets being in full bloom at that point, the odds are that most of you will want to hang around in the hopes of yet another double.

The best way, as always, of viewing our services are as a source of unbiased, deeply considered research on investments to potentially include in your portfolio. But how you manage your portfolio has to remain an entirely personal activity. When you get a 3- or 4-to-1 shot, we would suggest you do yourself a huge favor and, no matter how exciting the party, don't wait for us to tell you to scrape your original investment and a handsome profit off the table.

This is, of course, a topic we will continue to address over time. For now, however, we are still very much in the portfolio-building phase.

Hi David,

I wanted to share a story with you that I found quite shocking and relevant to many of the topics surrounding the current financial predicament this country now finds itself in.

Since I travel just about every week all over the country, visiting and working with our various customers, I try to get a gauge on how the current financial situation is affecting average working Americans. As part of the general IT strategy work we do, we typically do a great deal of process re-engineering work as well. As I have been recently working with a client in a very rural area, we have focused a lot of our efforts trying to eliminate many HR-related inefficiencies in their organization.

As a result of some of the preliminary workshops we ran the first week, I was shocked to find out that at the current client, their 401(k) plan has witnessed a dramatic drop in the number of participants in the plan over the past 3 years, from a high around 59% participation back in 1998. At present they have about 28% of their employees who opt in to the plan. However, only 23% of the employees contribute the full 100% tax-deductible contribution which the company matches at an average rate. On top of this, their HR department has recently added money management classes due to the number of their employees that now find themselves in an ever-increasing pile of credit card-related debt and in a few cases, bankruptcies.

This is just one example of the plight of Americans and the current negative savings rate which we are witnessing now. Given that this is the second-largest employer here in the area, in my mind this is probably a fairly good representation of the overall community at large. Oddly enough, the local Super Wal-Mart was jam packed with local shoppers purchasing everything from flat screen TVs, to groceries and iPods.

So as much as I would like to think that most of these folks who choose not to participate in their companies' 401(k) plan was out of sheer financial hardship and necessity, I am driven to conclude that there are a lot of people out there who simply do not know how to manage their money properly and just make stupid decisions? It would be interesting to see what these averages look like on a national basis?

Just thought I would share that with you.

Human psychology is very complex. You would think, given that their employers were willing to match funds, and that the money saved has tax advantages, people would happily contribute to their 401(k) plans. It is, however, a well-documented fact that people make financial decisions that don't make any sense.

I also believe that decades of intonations by politicians that the citizenry will be looked after has, in my opinion, led people to an unrealistic view of their future, and a naïve belief in the ability of the government's safety net to hold up when they are ready to plop into it. In fact, I think the biggest problem this country will ever face will be the problem of the indigent elderly... 20 or 30 years down the road.

Regardless, there is a new book out on behavioral economics - i.e., what people actually do with their money, rather than what the economists think they should do. It's entitled Predictably Irrational by MIT professor Dan Ariel. While I haven't yet read it, I heard Ariel interviewed yesterday and found his experiments about how people make financial decisions very interesting. He used as an example the decision making that goes into deciding how much to pay for a piece of chocolate. You put the chocolate in your mouth and it melts, creating an enjoyable taste sensation. But what process determines how much you are willing to pay for that sensation? I plan on reading the book.

A unique site. When you click on the website link below, a world map comes up showing what strange & dangerous things are happening right now in every country in the entire world & is updated every few minutes. You can move the map around, zero in on any area & actually upload the story of what is going on. This "map" updates every 300 seconds... constantly 24/7.

http://www.globalincidentmap.com/home.php

Click on any icon on the map for text update information. It's not just about terrorism - it's about everything happening every minute some place in the world of terrorism threats, explosions, airline incidents, etc.

Pretty cool, if accurate. For instance, you would have thought we would have heard something in the main street media (or "lame street media," as some like to call it) about the Indians being arrested while smuggling uranium. I just googled it, and sure enough, there it is. In fact, if media reports are right, this is the second such incident in India in recent years. As if Pakistan doesn't have enough trouble...

MISCELLANY

Think Your Laptop is Small? In a recent edition of these ramblings, I shared my general optimism about the future of humanity, thanks to steady technological progress. That is, of course, a theme often referenced by Doug Casey, the chairman of this organization and my favorite partner of all times. Doug is looking forward, especially, to the era of nanotech, when all things will be possible. While waiting, we can entertain ourselves with a steady stream of cool new stuff. Here is a link to one of the coolest I have seen of late...

Speaking of Laptops... if you are traveling internationally, you may want to give consideration to the idea that the local border clerks - you know, the ones with the warm smiles and hand guns - may take an unhealthy interest in your laptop and decide they should have a poke around, or just confiscate it outright. Some words to the wise here...

The Stella Awards for 2007 are out (www.stellaawards.com). These are the prizes awarded for the most frivolous lawsuits, named after the woman who sued after burning herself on a cup of MacDonald's coffee. Here's the 2007 winner...

Roy L. Pearson Jr. The 57-year-old Administrative Law Judge from Washington DC claims that a dry cleaner lost a pair of his pants, so he sued the mom-and-pop business for $65,462,500. That's right: more than $65 million for one pair of pants. Representing himself, Judge Pearson cried in court over the loss of his pants, whining that there certainly isn't a more compelling case in the District archives. But the Superior Court judge wasn't moved: he called the case "vexatious litigation," scolded Judge Pearson for his "bad faith," and awarded damages to the dry cleaners. But Pearson didn't take no for an answer: he's appealing the decision. And he has plenty of time on his hands, since he was dismissed from his job. Last we heard, Pearson's appeal is still pending.

This is not a new story, but it is instructive, nonetheless... I knew a judge once who was crazy as a rabid rabbit. Eventually, he too was dismissed after getting caught climbing into the window of his ex-wife's house, gun in hand.

About that Ethanol Stuff. We have made derisive noises about the etha-not boondoggle that is costing you a lot of tax dollars and helping to drive up the global cost of food (33% of all the corn grown in the U.S. is expected to be used for the stuff over the next decade). Well, recent news has it that the demand for ethanol not only pushed up the price of food by 4.9% last year, but that it will double the level of greenhouse gases produced over the next 30 years. Okay, now let's see how long it takes before the politicians pass a law which, in principle, explains, "Oh, about that ethanol stuff... well, hmm, never mind." I'm betting it will take a decade, at least.

Protectionism Watch. The last thing the world needs right now is a trade war. But, as I have commented on previously, it may soon get one. The latest sign comes from the Australian government, which is looking to pass legislation that requires that sovereign wealth funds are "independent from the relevant foreign governments." I wonder what part of the term "sovereign" our friends down under don't understand? Meanwhile, Beijing is none too happy following a decision by a U.S. government panel to disallow a Chinese state company, in conjunction with Bain Capital Partners, to buy 3Com Corp. This sort of thing is happening fairly frequently now, and the pace should only accelerate as people get more nationalistic, urged along by politicians looking to assign blame for economic woes anywhere but where it actually belongs.

That's It For This Week!

There is much, much more one could comment on... the failure of auction debt markets (yesterday 395 out of 641 auctions failed. To get a sense of what that means, consider that since the auction debt market was established in 1984, there had been a total of just 44 failures); the shooting down of errant satellites; the burning of embassies; the invasion of our friends the Kurds by our friends the Turks... but there is only so much time in the day, and other responsibilities call.

A quick check of the screens show that gold is holding strong at $944, oil is $96 and the U.S. stock market is, again, down almost 100 points. Business as usual, I'd say.

Until next week, thank you for reading!

David Galland
Managing Director
Casey Research, LLC