Daily Dispatch: Weekend Edition – August 14, 2010

August 14, 2010 | www.CaseyResearch.com Weekend Edition

Dear Reader,

Welcome to the weekend edition of Casey’s Daily Dispatch, a compilation of our favorite stories from the week for the time-stressed readers.

Of course, if you want to read all of the Daily Dispatches from the week, you may do so in the archives at CaseyResearch.com.

New York Senate: No More Fracking Around
By Marin Katusa, Chief Energy Strategist

The New York Senate has had a busy week. Not only have they finally passed the New York State Budget, they’ve also voted to enact a one-year moratorium on hydrofracking for natural gas.

Hydraulic fracturing, or hydrofracking, is a drilling technique used to extract gas from shale. Large quantities of highly pressurized water, sand, and chemicals called frac water are injected deep underground to break up rock and release gas to the surface.
This technique has sparked a drilling boom throughout the United States that has allowed companies to tap into enormous reserves of natural gas locked into big rock formations such as the
Marcellus Shale

Marcellus_Formation
.

It’s also stirred up a storm of controversy and anger. Critics and environmentalists are raging that the millions of gallons of used frac water left in the earth are contaminating fresh drinking water supplies.

Liberally helping this along has been the sensationalist TV documentary Gasland by amateur documentarian Josh Fox. Mr. Fox explores communities from Pennsylvania to Wyoming where hydrofracking has left people sick, animals without fur, and tap water so polluted that it can be lit on fire. All to a plaintive tune picked out on Mr. Fox’s banjo.
And after a series of disasters that has left the U.S. energy industry reeling and government officials running around like headless chickens, New York officials are taking no chances.

Both the State Assembly and the governor are expected to sign off on the bill, which would see a halt to any drilling licenses being issued for the Marcellus Shale until May 15, 2011. In the meantime, the Department of Environmental Conservation will be examining the safety issues and environmental concerns.

We’re not terribly surprised about this moratorium. New York has always been the state with the toughest stance on hydrofracking. But while protecting one’s water supply is, after all, a top priority, we feel that this moratorium may be based more on the idea of pleasing voters than on hard facts.

BP’s Past Is Not Shale’s Future

The aftermath of the BP disaster has left the American public acutely aware of environmental issues. It hasn’t helped that a couple of gas explosions and another oil spill followed almost immediately on the heels of the BP spill. Angry rumblings could be heard from all over the country, and for New York, Gasland could well have been the straw that broke the camel’s back.

What both Mr. Fox and the New York Senate have failed to acknowledge, however, is that the risk of contamination of ground water by frac water is almost negligible when the drilling is done properly.

When a gas shale well is drilled, part of the well is, out of necessity, isolated from the rock. A large-diameter steel pipe (the casing) is cemented into place, through which subsequent drilling and fracturing operations take place. Here’s a diagram of a cross-section of a well:

If the casing is done right, there’s no chance that any frac water could infiltrate drinking water supplies. The rocks of interest are buried deep, deep in the ground over 4,000 ft down. So unless there’s some truly bizarre geology going around, neither the frac water nor any fractures created can mix with well water.

The industry isn’t blind to the fact that poisoning well water will only shake investor confidence and lead to their ruin. They’re well aware of the environmental and economic impact, and are investing heavily into recycling and disposal techniques.
While there is a chance that frac water could contaminate drinking water at the surface, or during transport due to accidents, chances are still quite slim. And to give credit where it’s due, the industry, with a drilling history spanning over 50 years, has quite an outstanding safety record. So why the sudden fuss?

It’s also ironic that the people shouting for clean energy alternatives to oil are the ones who are turning their noses up at shale gas. A much cleaner-burning fuel than oil, there is also enough shale gas in North America to last 100 years of demand.
Not to mention the projected revenues and jobs that shale gas could bring to debt-crippled states in the next five years.

So while New York may be throwing away a major opportunity, opting instead for paperwork and debt, America continues to be dependent on other countries for its energy. As for shale gas companies, they will simply move their money and expertise elsewhere. But with 3,000 trillion cubic feet of shale gas underneath American feet, don’t worry… they won’t be moving too far away.

[Ed. Note: Other than death and taxes, one thing is certain; the human race needs energy to survive and thrive, and there will always be profitable opportunities available in this sector. Marin and his team have put an enormous amount of effort into getting positioned in these profitable opportunities and things are getting exciting. If you’re an investor, this is the perfect time to boost your portfolio with some carefully chosen stocks that will make the trend your friend. Try Casey’s Energy Opportunities for only $39 a year and with our 3-month money-back guarantee. Details here.]

Invest in a New Education Trend
By Chris Wood

The subject of today’s issue is education and an important trend in education that’s been taking root over the past few years.

Traditional university degrees have become prohibitively expensive today. Even if students get a loan to pay for school, they find themselves up to their eyeballs in debt when they graduate with no chance of paying off the loan for decades, in some cases (if at all). So students yearning to learn valuable skills for the marketplace have turned to the for-profit private sector in droves to help solve their problem.
Recognizing that this trend toward online and for-profit education will likely accelerate in years to come, I decided to take a look at the companies operating in the space to help you figure out if this might be a good place to invest.

I only had time to look at U.S.-based companies (apologies), but what I’ve come up with is a group of 17 publicly traded companies that comprise what I’m calling the U.S. Education Services Sub-Industry. Some of these companies only operate online, but most provide online services as well as on-ground campuses.

Here’s a breakdown of the “industry.”

Education Services Sub-Industry (U.S. Publicly Traded Companies) Company Ticker Stock
Price Market
Capitalization Sales (TTM) Earnings
(TTM) Basic
EPS P/E
Ratio Earnings
Yield Current
Ratio Apollo Group APOL $42.29 $6,218,913,660 $4,742,162,000 $612,394,000 $3.98 10.6 9.4% 1.3 Career Education CECO $20.48 $1,664,298,803 $2,023,653,000 $209,042,000 $2.54 8.1 12.4% 1.3 DeVry DV $47.40 $3,376,615,409 $1,804,746,000 $245,365,000 $3.45 13.7 7.3% 1.2 Corinthian Colleges COCO $7.82 $689,149,152 $1,634,566,000 $136,783,000 $1.56 5.0 19.9% 0.8 Education Management EDMC $12.57 $1,795,622,401 $2,377,338,000 $141,885,000 $1.04 12.1 8.3% 1.4 ITT Educational Services ESI $71.28 $2,394,301,330 $1,499,827,000 $351,740,000 $9.76 7.3 13.7% 1.3 Strayer Education STRA $214.48 $2,978,627,033 $578,736,000 $120,561,000 $8.87 24.2 4.1% 1.6 Lincoln Educational LINC $14.15 $369,128,404 $611,088,000 $63,645,000 $2.43 5.8 17.2% 0.9 Universal Technical Institute UTI $16.51 $399,913,244 $416,215,000 $29,198,000 $1.22 13.5 7.4% 0.9 K12 LRN $25.64 $780,641,388 $368,315,000 $22,184,000 $0.75 34.2 2.9% 3.7 Capella Education CPLA $79.42 $1,330,018,149 $384,502,000 $54,529,000 $3.26 24.4 4.1% 4.9 Nobel Learning Communities NLCI $7.11 $75,015,484 $225,814,000 $2,354,000 $0.23 30.9 3.2% 0.3 Bridgepoint Education BPI $14.62 $799,533,004 $589,048,000 $107,051,000 $1.98 7.4 13.5% 1.9 Learning Tree International LTRE $10.82 $148,820,704 $124,865,000 $1,874,000 $0.14 77.3 1.3% 1.7 Grand Canyon Education LOPE $18.40 $842,259,356 $295,769,000 $33,709,000 $0.74 24.9 4.0% 1.3 Princeton Review REVU $2.38 $122,327,578 $161,881,000 ($27,792,000) ($0.82) NA NA 0.9 American Public Education APEI $26.82 $495,574,328 $173,689,000 $28,064,000 $1.54 17.4 5.7% 3.5 Total

$24,480,759,426 $18,012,214,000 $2,132,586,000

[Note: In the table above, earnings reflects the net income available to common shareholders before extraordinary items. Basic EPS was calculated using the basic weighted average shares over the previous four quarters.]

As you can see in the table, these 17 companies reflect a combined market capitalization of $24.5 billion and generate $18 billion in annual sales and $2.1 billion in earnings. The three most attractively priced companies in the space, based on a multiple-of-earnings approach, are Corinthian Colleges (COCO), ITT Educational Services (ESI), and Lincoln Educational (LINC).

Even though COCO and LINC have higher earnings yields than ESI and have shown stronger growth in the recent past (and have much smaller market caps and the capacity to grow faster in percentage terms in the near future), their balance sheets indicate some short-term liquidity problems and greater risk than ESI.

If I were to invest in the education services sub-industry at this point (which I haven’t yet but may in the near future), my pick would be ITT Educational Services (ESI). The company’s TTM sales of $1.5 billion reflect an increase of 47.7% from 2008 results. And TTM basic EPS of $9.76 is an 88.4% jump from 2008’s figure of $5.18.
What’s more, the company generates close to $9 per share in free cash flow and has a pretty good-looking balance sheet with no short-term liquidity issues. The capital structure appears a little risky for my taste, but I could probably get over that, given the 54.4% return on assets and 229% return on equity. Add all that to the fact that ESI is trading just about at its 52-week low, and the company definitely has potential as an investment, in my view.

Remember, I’m not saying you should load up on shares of ESI, but I would recommend taking a closer look at it if you are thinking about getting positioned in a solid company that should benefit from the larger trend of a growing market in for-profit education.

Time to Bid Farewell to Oil But What Will Take Its Place?
By Marin Katusa, Chief Energy Strategist, Casey Research

The International Energy Association (IEA) has spoken. What the world needs now is a clean energy technology revolution.

June saw the 2010 launch of IEA’s biannual report, Energy Technology Perspectives. Speaking at the launch was Nobuo Tanaka, executive director for IEA. The Gulf oil spill, he said, could prove to be a tipping point in the world’s energy consumption habits. He added that the disaster serves as a tragic reminder that our current path is not sustainable.

As far as the IEA is concerned, this is probably a very important moment to start looking at alternative energy sources. If we, as a collective group of consumers, continue on the business-as-usual path, the scenario for 2050 is looking grim.

This baseline scenario sees carbon emissions rising by 130%, with power generation accounting for 44% of total global emissions in 2050. Oil demand will be up by 70% that’s five times the oil production in Saudi Arabia today. I’ll leave you to imagine what this means from an energy security perspective.

The other scenario offered by the publication, known as BLUE Map, is the “target” scenario. It assumes that all carbon emissions will be reduced by 50% by 2050 and suggests the least costly way to get there. This 50% reduction, the IEA insists, is the absolute minimum, should we want to keep climate change within the more acceptable 2-3 degree change.

The main focus of this scenario is, of course, weaning the world off fossil fuels. Carbon intensity of energy use would have fallen by 64% by 2050. Demand for coal would drop by 36%, gas by 12%, and oil demand by 4%. Renewable energy would be providing a hefty 40% of primary energy supply and 48% of the electricity generated. As for cars, 80% will be electric, hybrid, or hydrogen-fueled.

And while the world is expected to reduce emissions by 50% by 2050 in the BLUE scenario, it is the OECD that will bear the real burden. Non-OECD countries can get away with just a 50% reduction; OECD countries are looking at cutting 70-80% of their 2007 emissions. This would mean that the electricity sector for these 32 countries would have be “almost completely decarbonized” by 2050.

A portfolio of technologies needed to achieve the carbon emissions under the BLUE Map scenario

So what needs to be done to make this work? Well, gird your loins the “top priority” will be to increase energy efficiency, reduce energy consumption, and lower energy intensity.
But there’s also some exciting news. The revolution is already under way.
On a global scale, total investment into technology and its deployment between now and 2050 would be about US$45 trillion 1.1% of average annual global GDP over the period. The good news is that investment has already begun all around the world.
Even as China grudgingly accepts the mantle of the biggest energy consumer, investment dollars are being poured into renewable energy research. China has already surpassed the United States as the largest producer of clean energy, whether it be hydro, wind, solar, or nuclear.

Germany, Europe’s powerhouse, is lining up renewable energy to compete with nuclear. Currently getting 10% of its energy from renewable energy, Germany’s renewable numbers for 2020 are projected at 38.6% electricity, 15.5% heating and cooling, and 13.2% of the transport sector.

And in the United States, the Obama Administration has been pushing for, and encouraging, clean energy research and development since it came into power. On display are a variety of subsidies and loans guaranteed to tempt even the most conservative producer.

Whether it’s the 30% cash up-front that the government is willing to give renewable energy projects or the vast amounts of cash injections into various energy technologies programs, renewable energy is set to take off in America.

For those investment portfolios that have taken a hit from the BP and Enbridge oil disasters, the IEA report is only going to spur up greater interest in the renewables game. Knowing which companies are enjoying political favor from Washington to Berlin and are at the receiving end of substantial grants is a sure-fire way to repair the damage.
Find out which renewable energy company poised to take a moon shot is Marin’s personal favorite right now. Read more here.

Finding the Next Oil Spill
By Joe Hung, Energy Division

More than four months later, the damaged pipe in the Gulf has finally been sealed. Almost three-quarters of the oil has been cleaned up, burned off, or evaporated, and everyone from Obama to the coffee guy at BP is breathing a huge sigh of relief.
It is, unfortunately, only a matter of time before the next oil disaster happens.
This isn’t a sensationalist statement. Take a good look around the world, and you’ll see what we mean.

While BP has been throwing everything it’s got at the Gulf, China has been battling its own oil spill. Since it is China we’re dealing with here, no one is actually sure how big the oil spill is or even what caused it: theories are ranging from an exploding pipeline to accusations of a government cover-up. And depending on whether you believe the Chinese officials or Greenpeace, anywhere between 10,833 barrels to 650,000 barrels of crude oil may have poured into the Yellow Sea.

Looking closer to home, drilling for oil in the United States is moving offshore, into deeper waters and more dangerous reservoirs. As we’ve learnt from the BP disaster, while we’ve cracked the code on how to drill that deep, we haven’t quite figured out what to do if something goes wrong.

Now imagine that sort of disaster up in the Arctic, maybe even an oil leak under the thick winter ice. By the time cleanup operations could begin in the springtime, the oil could reach as far away as Russia, even Norway.

Even onshore production for North America seems to be doomed lately. On July 26, Enbridge’s 293-mile-long old and corroded pipeline that carries most of the oil imported by the U.S. from Canada began leaking oil into the Kalamazoo River, a major waterway to Lake Michigan. Only 13,000 barrels of the 19,500 barrels leaked has been recovered so far, with the oil 80 miles away from Lake Michigan.

In Nigeria, it’s not just the threat of accidents on offshore oilrigs. The biggest threats to oil production for Africa’s biggest energy producer are militant attacks on its pipelines and saboteurs siphoning off oil. However, in light of the Gulf disaster, Nigerian authorities are giving foreign companies a light warning about any oil spills in the Niger Delta.
And to put the final tarnish on this dismal picture, let’s not forget that oil-carrying tankers are crisscrossing the ocean every day. Tanker spills might not be as common now as they were in the 1970s, but the ships are sitting targets for pirates, who aren’t exactly known for passing health and safety tests.

But before giving up completely and returning to the good old cave-living days, consider this fact. Many of these accidents have happened not because something is fundamentally wrong with producing oil, but due to gross negligence by the oil companies.
It’s no secret now that BP did not adhere to all the safety codes before the Deepwater Horizon rig exploded and sank. Enbridge, the company that owns the pipeline leaking oil into the Kalamazoo River, had been warned repeatedly about the condition of the pipeline weeks before the rupture. In China, the “biggest oil spill in history” was cleaned up in only nine days.

Of course, it could just be that the number of oil spills hasn’t gone up and it is only that the media is playing on the hype of the BP oil disaster. A hype that is being fueled by oil companies setting up shop in more environmentally fragile areas.
But the truth is that oil spills today are far less frequent than back in the day. Oil companies don’t want to lose oil to spills or to have to shell out billions to pay for cleanup and fines. Not to forget that oil spills mean higher insurance premiums and tougher regulatory hurdles for everyone in the industry. So, if anything, it makes sense for oil companies to invest in better safety procedures.

That said, not every oil company thinks that way. To save a few pennies now, cutting corners to cut costs, especially in these troubled times, seems like a smart option. That it is these cost-saving measures that ultimately leave them on the rocks financially is quite ironic.

So what’s next? No matter which way you look at it, the world needs oil. Demand is rising, with China and India leading the developing countries. For America, oil is still a lifeline, and this won’t change overnight. The real crux of the matter then is not just where our oil should come from, but from whom.
There are many oil companies operating across the world who do conduct themselves with integrity. While accidents may still befall them, it is less likely that it would be due to bad business behavior.
And whether it’s for the sake of your portfolio or just for your conscience, knowing who is up-to-date with all the safety codes and procedures could make a world of a difference.
[Ed. Note: The new edition of Casey’s Energy Opportunities was just released, and it’s truly a must-read. Chief Investment Strategist Marin Katusa puts boots on the ground in northern Iraq to search for potential oil investments. Spoiler alert: he found one. You can read all about Marin’s trip and the investment recommendation by signing up for a 3-month risk-free trial of Casey’s Energy Opportunities, complete with our 100% money-back guarantee. Subscribe today for only $39, and save 50% off the regular price. Details here.]

The Best Gold Interview of 2010
Jeff Clark, Casey’s Gold & Resource Report

Much of what passes for “insider” information these days is often conspiracy-edged or largely conjecture. True inside information is actually hard to come by. So what follows is the refreshingly candid and uncut version of my talk with a first-hand participant in the murky and little-understood world of gold bullion, mints, and bullion dealers.

Customarily, when considering a company for a potential recommendation, I hold a series of discussions with management. It was during one of these vetting procedures that I spoke with Andy Schectman of Miles Franklin and heard some disturbing reports about supply that every investor should know. Andy is a bullion seller, so you’re welcome to take his comments with a grain of salt. On the other hand, what he sees week after week and what he hears from his high-level industry contacts might just make you pull back on that salt shaker and re-inventory the number of ounces you own…

Jeff Clark: Andy, tell us about the kinds of contacts you have in the industry and where you get your information.

Andy: I’m associated with two of the six primary mint distributors in the United States. There are only six primary precious metal distributors here because the qualifications are very difficult to meet. Aside from having $100 million in annual sales, you have to extend a $50 million line of credit to the U.S. Mint, and very few companies can do that. So in working with these companies, I’m privy to information that many others aren’t.

Jeff: So, what have you been hearing from them about supply for physical gold and silver?

Andy: I think in order to properly characterize what’s happening in the industry, it’s important to start from a big-picture perspective, which is that by and large the masses in this country are not involved in precious metals. In my experience, the move we’ve seen in gold over the last decade has primarily been from international investment sovereign wealth funds in the Orient, petrodollars in the Middle East, India buying from the IMF, Russia and Japan accumulating, etc.

Most U.S. investors have lived through nothing but prosperity and good times, where they perhaps didn’t think they needed to own gold but I think the rest of the world isn’t as optimistic about the future. So when you talk about supply, it’s important to acknowledge that most people in this country don’t own any gold and silver. To me, that’s what should really alarm people.

Jeff: Tell us how you would characterize supply right now.

Andy: Fragile. Availability of product changes almost weekly.
But it’s worse than that. When the market plunged 1,000 points in one day last month, two German banks bought about 35,000 or 40,000 one-ounce coins and cleaned out the Royal Canadian Mint overnight. Think about that: two banks cleaned out one of the world’s preeminent mints in one day.

Then you have the Austrian Mint recently announcing they were running into supply issues. And the U.S. Mint has been the model of inefficiency for the last several years. They have been either reluctant or unable to meet demand when it comes to Gold Buffalos, Platinum Eagles, and fractional Gold Eagles. They issue dribs and drabs of them, but certainly not enough to meet demand.

Jeff: And they frequently run out.

Andy: They frequently run out, they frequently have delivery delays, and it’s a situation where very quickly we could see major disruption in the supply chain.

Jeff: We saw supply constraint in 2008, where dealers were running out of product. Do you think we’re headed there again?

Andy: I do. In 2008, when gold dropped from $1,000 to $700 very quickly, all product worldwide disappeared. Within weeks the U.S. Mint was shut down. The Canadian, Austrian, and Australian Mints were all eight to 12 weeks back-ordered or shut down. The Australian Mint stopped taking any new orders in July or August for the rest of the year. The Rand Mint, for the first time ever, sold out of all its product. One wealthy Swiss businessman flew his own 747 there and cleaned them out.

So product was impossible to get, but not just from the primary mints; even the refiners that made 100-ounce silver bars couldn’t get them. No one could get anything, and it was a very scary time if you owned a gold company. There were many days I sat at my desk wondering how I was going to get product tomorrow, and there were times we couldn’t take orders whatsoever. And that comes from a company that’s done over $100 million in sales, is a member of the certified exchange, and that has contacts that run very deep in the industry and I couldn’t get anything.

A friend of mine who owns a very prominent gold and silver company in Colorado has a store front, and back then he told me, “I want to put a sign on my window that says, ‘All we do is buy, we don’t sell,’ because one person will come in there and clean me out and there’s nothing to be had.”

So what I think is ahead comes from that experience. If you factor in that very, very few people in this country have even held a gold coin let alone own any gold, or understand the reasons to own it, or will even accept the arguments for owning it I think the primary distinguishing characteristic of this market will be that people won’t be able to get product when they want it. The rising price in and of itself will not be the main hurdle. For the most part, people will overcome price, because they’ll want to own it. The real issue will be getting product in a timely fashion, and that will become difficult for the average American.

Jeff: What about supply from those selling coins and bars who bought at lower levels? Doesn’t that increase the available supply?

Andy: This is what I believe is a distinguishing feature of this market: there is a total absence of a secondary market. There isn’t one. Period. In years past, we used to do a lot of business with people wanting to sell. Today, virtually no one is selling their coins back to us. In fact, for every 100 transactions we have, maybe one is a seller the other 99 are buyers. Our largest supplier, who provides over 60% of all bullion to the U.S. market, told me earlier this month they have days without one single buy back. And this is from the largest supplier in the U.S.

Jeff: Why do you think no one’s selling?

Andy: People are afraid. They’re afraid of what’s happening geopolitically, economically, fiscally, and want to hold on to their gold. As they should, because this is exactly the kind of circumstance gold is for.

So I would argue that as gold and silver creep higher, there will be more and more buying and less and less selling. And less selling means less product for buyers.
When you look at the fact that there is no secondary market, and then you throw into the mix that the mints are already running into production problems, and then add the troubles in Europe, which could easily spread, I think it’s easy to see how demand could outstrip supply. I assure you, there’s an awful lot of gold acquisition going on in other countries the Swiss and Germans, for example, see the handwriting on the wall. They were buying everything up when the European crisis broke. It was bedlam for awhile.
And if all of a sudden people here wake up and feel they really need to own gold but can’t get it, we’ll be right back where we were in 2008.

But to your point, yes, nobody is selling anything right now and almost anything you buy will be dated 2010. That’s because there are no backdatedcoins to be had virtually anywhere. Maybe 20 here or 50 there, but nothing on a meaningful basis.

Jeff: It sounds like regardless of what’s going on in America, global supply could be in jeopardy if this trend continues.

Andy: Absolutely, especially with the fact that there is no secondary market. Really, the people who enter the game late are going to be at the mercy of the mints. And if the mints run out of supply, or just stopped selling for whatever reason, it’s “game over” for those who want to accumulate. Right now there’s as good a supply as I’ve seen in a couple years, and that’s at a time when we’ve already witnessed the Royal Canadian Mint running out of gold for a week or so, the Austrian Mint also running out of product, and the U.S. Mint rationing Silver Eagles for a short time.

Jeff: And you’re calling this a good supply market?

Andy: Yes. It’s as good as we’ve seen in a couple years.

Jeff: That’s scary.

Andy: I don’t think you’re exaggerating by saying that. And the message is, “Buy now while it’s still available.” I know it may sound like I’m trying to sensationalize it, but I’m really not. Based on what I know, it’s my opinion that if 5% of this country put 5% of their money into gold, there would be nothing left tomorrow morning. Supply is that small compared to the tremendous amount of money that’s out there.

Here’s another example. I had a meeting with a money management company here in Minneapolis that manages some of the oldest money in the entire country, literally billions of dollars. And when I spoke with them, I discovered the principals of the firm had never held a gold coin. They asked me questions that were as rudimentary as what I would get from a complete novice. By the end of the conversation, they said they would start with a $5 million order. I later learned this was a small order for just one of their clients. It was just dipping a toe in the water for these people.

Well, it won’t take too many of these kinds of people waking up to gold to drain the supply chain. Most of the wealth in this country is driven through money managers, and at some point these people will tell their managers, “I don’t care what the price or premium is, get me gold.” When they come knocking in large numbers like that, the supply chain will dry up overnight. I know this to be true. If we see an event that drives money managers to buy physical gold, the supply will be gone.

Jeff: Some of that money is already going into the ETFs.

Andy: Yes, but not when you consider the total capital that’s available. And keep in mind that the prospectus for GLD and SLV state that, more or less, you can’t take possession of the metal. So, do you “own” gold if you have shares in GLD or SLV, or any ETF, for that matter? If you can’t put the coin or bar in the palm of your hand, the answer is no.

Jeff: Are you seeing any difference between gold and silver? Is one more difficult to come by than the other?

Andy: We’ve seen a lot of demand for silver, probably more so than gold, and the U.S. Mint has already rationed Silver Eagles once this year. Junk silver bags are becoming much harder to get. And I think the higher gold goes, the faster silver will disappear. At some point the American public will realize they should have some gold and silver, and we could see a situation where the gold price could get out of reach for some investors. Those people will turn to silver and, as a result, it will probably be tougher to get than gold.

Jeff: If supply gets scarce, do you expect premiums to shoot up?

Andy: Absolutely. In 2008 the premiums were astronomical. Silver Eagles were $5.50 to $6 over spot. Gold Eagles were $100 to $150 over spot. The premiums went parabolic. That could easily happen again.

Jeff: And that was due to constrained supply.

Andy: Yes. When the price fell off the table, everything disappeared quickly. That’s counterintuitive, I know, because logic would dictate that as the price of something falls, demand is waning. But as the price fell, I think it became more attractive to large interests around the world, and everything got gobbled up fast.
Looking ahead, I can tell you that the only way you’ll see premiums stay where they are is if the mints are able to keep up with demand, and based on what I see I would argue there is no way they can. They can’t even keep up now. On top of that, as I stated, people aren’t going to sell their gold this time unless they absolutely have to, so there won’t be any supply coming from sales.

Jeff: So your message to someone who owns little or no physical metal now is what?

Andy: Acquire as many gold and silver ounces as you can. In the end it’s not about price paid, it’s about number of ounces. View the supply issue as critically as you would the price, because I believe that more than anything else, the lack of available supply will mark this industry.

Jeff: Excellent advice, Andy. Thanks for your input.

Do you own enough gold and silver? We made special arrangements with our new recommended dealer for some seriously discounted bullion, enough that the savings will cover your first year’s subscription to Casey’s Gold & Resource Report. The discounted price, available only to our readers, will remain open for only a short time. Check it out risk-free here.

And that, dear reader, is that for this week. Until next week, thank you for reading and for subscribing to a Casey Research service!

Chris Wood
Casey Research, LLC