On Leverage

Steve Hanke at The Cato Institute has constructed the following picture of worldwide leverage (here), based on dollar denominated activities.

This picture assumes that the leverage of the world is balanced on the financial construct of the United States. In view of the ownership of U.S. sovereign debt and dollar denominated financial derivatives throughout the world, this is very logical.

Use of Leverage

Accepting the concept that the U.S. financial structure is leveraged, as shown in Hanke’s diagram, and the world financial structure is leveraged off the U.S. financial structure, let’s look at how levers are supposed to work. The three types of lever mechanical constructs are shown in the following diagram from The Free Dictionary.com (here).

The world financial system is presumably the fulcrum for increasing the leverage for doing work in the world that depends on financing productive activities. The fulcrum that Hanke has drawn looks nothing like the fulcrum in any of the three stable mechanical systems. In fact, if you place Hanke’s inverted triangle in place of the fulcrum in any of the three lever type diagrams, the existence of even the slightest load or effort tips the fulcrum off its balancing point and the mechanical system collapses.

Over Leverage

I would suggest that the financial system, existing in a vacuum, can remain stable, balanced on the inverted pyramid point. But, when financial leverage becomes extreme, the internally stable structure can not withstand any external force (economic activity) outside the complex interrelationships that are so carefully balanced on the single point.

The situation described in the previous paragraph is called a metastable condition in the physical world. Stability exists only in the absence of a stimulus sufficient to initiate movement to a more stable condition. A metastable condition can be compared to a balancing act.

Systems of fractional reserve banking are utilized to increase the velocity of money. One dollar of money can have the effect of several dollars when credit is created several times the value of the reserve dollar. This works well when the credit is used to increase production of things of utility. It leads to metastable conditions when the credit is used simply to create more credit.

Valueless Money

Credit is surrogate money. Money has no value; only the things it can be exchanged for can have value. If credit is used to do nothing but create more surrogate money, it is valueless. A measure of marginal valuelessness is inflation. It can be argued that 95% of today’s U.S. dollar is valueless. That is the value of the U.S. dollar destroyed by inflation in the past century.

The above argument overstates the loss of value because many things of utility have been created during this century that did not exist at the beginning. But it is certainly true that a significant part of the inflation of the past hundred years represents no value. A Ph.D candidate could do a thesis on an analysis to determine the value obtained and the valuelessness accumulated in the past century.

Limits of Leverage

I expect that such a research project would produce a curve such as the following, which would define the limits of leverage:

This curve could have as much (and as little) value as the famous (infamous) Laffer Curve relating the amount of tax revenue to the level of taxation (

). It has a relationship to the following graph based on real data, which is adapted from what I have published earlier this year in “the Declining Usefulness of Debt” (here). Go to that article for details and acknowledgements regarding the origin of the relationship graphed.

The above graph shows that the added improvement in GDP per dollar of debt has been declining for the past 40 years and is approaching only ten cents of increased GDP for every added dollar of debt. The debt referred to here is total debt: all public and private debt.


Archimedes famously said, “Give me a place to stand and with a lever I will move the whole world.” He didn’t mention the fulcrum; that was simply implied. Today, in finance, the fulcrum is the crux of the matter and it has been neglected. In addition, if the lever becomes long enough to have a very large mechanical (or financial advantage), destabilizing forces can cause the slightest deviation from equilibrium to produce loss of control and a crash.

Archimedes may have been able to move the world with a big enough lever, but it would be quite another matter for him to have controlled the movement.

Another All-Time High Gold Close/GATA Bloomberg TV Interview

By: Bill Murphy, Le Metropole Cafe, Inc., LemetropoleCafe.com

November 20 Gold $1146.40 up $5 – Silver $18.43 down 2 cents
Another All-Time High Gold Close/GATA Bloomberg TV Interview

“You can’t give the government the power to do good without also giving it the power to do bad – in fact, to do anything it wants. It is not so much the abuse of power which is a concern. It is the power to abuse” … Harry Browne

Another fabulous day for gold. Despite a strong dollar and a weak stock market, gold managed a solid close into new all-time high ground, coming back from a PLAN A Gold Cartel assault. The positive gold action stood out most of the Comex trading session, but was particularly radiant on the Comex bell. It popped $2+ as a number of shorts panicked to get out of their positions going into the weekend.

The investment world is beginning to comprehend what the GATA camp has been saying for YEARS AND YEARS. The key to the gold price is the ability of the physical market to overpower The Gold Cartel, which is just what we are seeing at the moment. Up until recently, the commonly held notion was that the key to gold was the dollar. NOT SO! Numerous concerns are fueling demand for physical gold which is making life miserable for the cabal forces, irrespective to what the dollar does on the downside.

Silver did well also, coming back from a new low for the week of $18.12. Three times it approached key support at $18 this week and each time it rejected that price level. A huge technical positive.

The AM Fix of $1142.50 and PM Fix of $1140 were routine.

The gold open interest shot up 11,750 contracts to 538,709. Hello Gold Cartel. The silver open interest gained 1470 contracts to 141,208. Must be JP Morgan going shorter and shorter. I mentioned JP Morgan’s 40,000 contract short position in my Bloomberg interview with Bernie Lo.

All-time high gold close…

December gold
http://futures.tradingcharts.com/chart/GD/C9 A glance at the weekly gold chart reveals a momentum building pattern…

Weekly gold
http://futures.tradingcharts.com/chart/GD/W Think parabolic!

Points of note…

*What else is new? There is an option expiry Monday. The Gold Cartel’s drill over the years has been to take gold down into and on the option expiration day. The Gold Cartel does so to protect their massive short positions. In essence this is the US Government ripping off the general public, through their surrogates like JP Morgan Chase, in an attempt to thwart the free market system. The problem is the sheriff sworn to protect the law … in this case is the US Government and the CFTC. How do they get punished when they are the ones who are supposed to enforce the law?

What was stunning today was how The Gold Cartel got stuffed yet again with one of their standard planned attacks. We are seeing this “stuff” pattern time and time again of late.

*The Gold Cartel’s traders don’t realize, or don’t know how to handle, the “new buyers.” In days of old they would suck in the spec longs, getting shorter and shorter as the price went higher and higher. Then they would pull the plug by dumping physical gold into the market and bombing the derivatives paper market. Eventually fund longs would sell as the technicals turned bearish. The market would cascade down with a number of funds eventually going short. The Gold Cartel would cover and up we would go again.

This time the buyers are the biggest of money … countries, largest hedge funds, etc. They are competing against each other and want to buy more gold on any dips The Gold Cartel hands to them. It shows in the price action.
*At the Silver Summit this past September, the CPM Group’s Jeff Christian stood up to contest some of the statements I made as a speaker on behalf of GATA. He talked a bunch of nonsense, especially when he said he foresaw central banks buying gold and then predicted the price of gold would average $912 over the next decade. HUH?

Well, yesterday he was on CNBC and was asked about the Paulson move to open up his own gold fund in January. He extolled Paulson saying it was a good move. What a hypocritical turd! Why is that a good move if the price of gold is going to drop nearly $250 in the years to come? This guy is a joke like his counterpart, Kitco’s Nitwit Nadler.

*The leaders in the gold industry are the most clueless bunch in history … of any industry. Christian is one of them, along with the usually wrong and bearish GFMS, the official gold statisticians. A few weeks ago they told a very respected dean of the industry they couldn’t imagine gold staying up at these prices. Gold was about $1,000 at the time.

Then you have the World Gold Council who rebuffed GATA this past decade and who, until recently, was pitching high fashion jewelry and ignoring gold’s investment value. That brainchild pitch while gold has been in a nine year historic bull market run.

Then, how about the leading gold producers like AngloGold and Barrick. Talk about lightweights! While decrying GATA, mocking us, and calling us nuts from 1999 on, they hedge years of forward production at $300, plus or minus. Can you imagine an oil producer hedging at $10 or $15 per barrel?

GATA ranted to whomever that would listen about what fools they were and of their complicity with The Gold Cartel. Fast-forward nine or ten years later. Barrick has to raise nearly $6 billion to close out hedges they still have on their books, compounding other billions of hedge losses already taken. Who knows how many billions AngloGold has lost and will lose?

Then last week at a London gold conference, the newer CEO’s of each those companies told reporters they were looking for gold to retreat to $900 per ounce in a correction mode. Talking their debilitating hedge book maybe, wouldn’t you say? That’s what they get for listening to bullion bankers Goldman Sachs, JP Morgan Chase, GFMS and the CPM Group instead of GATA. That’s what they deserve for not dealing with the ramifications of the gold price suppression scheme which were so obvious so long ago now.

And talk about this irony. If it weren’t for GATA. Barrick would have blown up by now. The logic…

GATA’s Reg Howe sued The Gold Cartel … including the BIS, Fed, and Treasury in Boston District Court. The judge dismissed the case without making one negative comment regarding what Reg presented, only declaring Reg did not have the correct legal standing to bring such a case, but a gold company would.

So, Blanchard Coin sued JP Morgan Chase and Barrick Gold in New Orleans Federal Court for rigging the gold price. Months later Barrick Chairman Peter Munk and his CEO were in London extolling the value of their hedging policy and their “Evergreen Clauses” in which their bullion bankers would rollover these hedges forever.

The next day at this gold conference, they renounced putting on any new hedges. It was part of an out of court settlement with Blanchard Coin. Munk had to sit in for his CEO who immediately flew to New Orleans.

If it weren’t for GATA and then Blanchard, the Barrick fools probably would have kept on hedging. At their zenith Barrick had on 20 million ounces worth of hedge positions. Think of what their losses would be today. They probably would have blown up by now.

You would think they would at least send us a thank you note.

*Gold has become the talk of the town with the Muppets and their guests on CNBC. All of a sudden gold is a reasonable, sound investment and they offer reasons of the day why. Most of their explanations were valid $500 ago. Where have they been?

*Gold’s time has come in terms of acceptance. It has only just begun with the general public. It is the BIG MONEY who is onboard. The little guy is afraid to buy at these levels because the price has run so much. That is all to come.

*Suddenly there is a building understanding that gold can move higher without the dollar moving lower. How long has the GATA camp been pounding away on that one? Had to bring that up one more time.

*The gold price has been affected by the DOW of late. Markets trade in sync with other markets until they don’t. At some point the DOW is going to get battered as financial crisis concerns re-emerge. This will effect a “crisis bid” for gold and the two will part company in terms of trading together … which appears to have started already.

*Should this be true, gold will go ballistic an any sort of confirmation …
Max Keiser and Germany buying Gold

Hi Bill,

The ‘K Man’ reported yesterday on his new show The Keiser Report (from 7.30mins) his contacts at the Bundesbank have told him that Germany will announce they are buying gold!

The video is at www.maxkeiser.com

Best wishes

Simon *Legendary hedge fund traders David Einhorn, Paul Tudor Jones, and John Paulson have recently made moves into gold. Our camp has ridden the gold ride up for the last nine years. It has been very rewarding, yet a grind. My bet is more money will be made with bullion and the shares in the coming year than was made during the last decade.

This money will be made by the likes of those traders mentioned and momentum traders. Many veteran gold and silver investors will be out of the market and will not make the “easy money.”

The yield on the 10 yr T note is 3.36%. The dollar rose .39 to 75.68. The euro fell .0052 to 1.4861 and the pound lost .0157 to 1.6424.

Crude oil fell 74 cents per barrel to $76.72.

The CRB rose .31 to 274.58.

More gold goodies:

Thursday, November 19, 2009
Year end gold melt-up coming?

Wednesday’s erosion of NY session gold from a high up some $13 to an up $1.80 close for Dec gold at $1,141.20, as expected involved huge volume 222,574 lots, 15.4% above estimate. Days above 200,000 are quite rare at a glance, only 15 this year. This is the second this week, and today was likely another. Things are heating up.

Open interest only rose 340 lots (1.05 tonnes). A standoff, apparently.
If Wednesday was, as I suggested, a tactical victory for the bears, today was one for the Bulls and possibly a strategic one. Under pressure from the European open, gold attempted a rally going into the floor session start, which was strongly opposed. Estimated volume at 9AM NY was a very heavy 65,684 lots, the move peaked at 9-15 AM, and estimated volume at 10AM was a very unusually heavy 97,924 contracts.

This peak was followed by a brutal attack. By 11-05 AM some $11 had been sliced off (to down $11.20 on the day).

At this point, with European influence fading, an immensely powerful rally began, such that by the floor close gold was back to the session high.

Subsequently it added another $3 by the stock market close. Dec gold closed up 70c at $1,141.90. Estimated volume was an enormous 203,378 actual will probably be one of the highest of the year. Conspicuously, over 30,000 lots traded in the last 30 minutes, with gold losing $1.

A huge battle is being fought here. Long time observers of gold will recognize that post-European NY strength, and particularly the ability to reject a final sell-off, is something very new. Traditionally later NY hours are Bear country.
For once, the gold shares were somewhat appreciative. Having troughed down 3.3% and 2.8% on the day, the HUI and the XAU closed up 0.72% and 0.63% respectively. The CEF bullion vehicle almost doubled its premium to NAV to 8.2%.

MarketVane’s Bullish Consensus for gold, the HGNSI and the GLD ETF were all unchanged at 86%, 68% and 1,117.49266 tonnes respectively.
In a fine discussion posted on the JSMineset site, Dan Norcini analyses what he has previously called the “Swiss Stair” formation observable in the gold price:


Local Vietnam gold stood at a $26.58 premium to world gold of $1,140.20 early on Friday morning (late Thursday $30.75/$1,142.11). Vietnam wants more gold.
Clearly, there are powerful forces in NY long gold. Given the year-end market grooming habits of this community, a gold price melt up into the end of the year is looking increasingly possible. A call for delivery of the Dec $1,200 options (expiring Monday) is possible. This is certainly no time to be short.

Friday, November 20, 2009 Bears have a problem
Indian ex-duty premiums: AM $2.56, PM $2.61, with world gold at $1,144.30 and $1,142.60. Adequate for legal imports. The rupee firmed slightly, closing at $1= R46.6 (Thursday R46.685). The stock market gained 1.41%, a third week of gains.

As noted last night, Vietnam local gold stood at a $26.58 premium to world gold of $1,140.20 early this morning (late Thursday $30.75/$1,142.11).

Although the TOCOM public shaved a further 0.89 tonnes from its long, open interest rose 0.72 tonnes (232 Comex) on day session volume equivalent to 11,564 Comex lots. The active contract lost 8 yen but world gold went out some $5.20 above the NY floor close having gained some $2.80 during the session. Japan will be closed on Monday.

The Russian Central Bank has reported adding 15.5 tonnes (500,000 ozs) to its reserves in October, bringing them to 19.5Mm 0zs (606.6 tonnes). Most likely the purchases were from domestic producers and from Gokhran, the state agency reported to be intending to sell some time ago.

The preliminary CME report for Thursday indicates that volume was 253,364 lots, at a glance the 6th highest this year and 24.6% above estimate. Admittedly this is swollen by switches but so were the other month ends. At a glance this is the 6th highest this year (a revision is possible).Serious forces are at play.

Today gold gave ground on the Asian open from the late NY high, but then rallied into the European start to peak up $6.20. Downward pressure (closely matched in Euro terms) produced a low of down $9.40 just before the Comex floor open and an interesting rally is now underway. Estimated volume at 9AM is again gigantic 96,527 contracts.

With the physical markets in the posture they are, the bears have a problem.


The recovered from early losses to only close down 14 to 10,318. The DOG fell 11 to 2146. Early market news…

07:47 Market update: SPZ moves lower on rumors of Ukraine default on sovereign debt

Unconfirmed, Ukranian Railway has defaulted on on a Barclays bond, and also has another government-guaranteed obligation with Deutsche. If Deutsche were to accelerate the payment, and were the obligation not to be paid, it would be considered a government default. None of this information is confirmed, but it is being circulated and contributing to the aformentioned Ukraine concerns

* * * * *
•Europe indices have also moved to session lows
The moves appear attributable to comments from Zhang Ping, chairman of the National Development and Reform Commission which crossed just after 7 ET. Zhang says domestic demand growth is not strong enough, that China’s economic recovery is not solid, and that China still has an industrial overcapacity problem. Zhang says China’s external and domestic situation is complicated

* * * * *

U.S. Q3 seen revised down on widening trade deficit
WASHINGTON (Reuters) – The U.S. economy’s return to growth in the third quarter was less brisk than previously thought as the trade deficit worsened and companies still aggressively cut inventories, a Reuters survey predicted.
The poll of 66 economists forecast real gross domestic product growth would be revised down to an annualized rate of 2.9 percent from the 3.5 percent pace reported by the government last month.

It will still be the first expansion after four quarters of decline. Recent data, ranging from the trade balance to business inventories, have suggested the government’s initial estimates on output were a bit on the optimistic side.

“Among the components, we look for the revisions to show a wider trade deficit, a bigger decline in nonresidential structures investment, slightly softer consumer spending growth, and a bigger contraction in inventories,” wrote economists at Barclays Capital.

“Despite the likely downward revision, we still believe that the third quarter will prove to be the first quarter of recovery and that it demonstrates a decisive turn in the economy.”

The U.S. trade deficit widened to $36.5 billion in September from $30.8 billion the previous month. Both exports and imports recorded their best month since December 2008.

The Commerce Department will release its second estimate of third-quarter GDP on Tuesday. The revisions have already been priced by the market and are unlikely to generate too much interest in a holiday-shortened trading week.
However, traders will keep on eye on the advance estimates on corporate profits to be released together with the GDP report. Aggressive cost cutting, mostly head count reduction, has seen companies reporting strong earnings.
The survey forecast after tax corporate profits surging 6.2 percent in the third quarter after rising 0.9 percent in the April-June period.


Fed Audit Shield Takes Blow After Ron Paul Proposal Advances
By Scott Lanman
Bloomberg News
Friday, November 20, 2009

WASHINGTON — The Federal Reserve’s shield from congressional audits of interest-rate decisions took a blow from lawmakers who want to open the central bank’s books to greater congressional scrutiny.

The House Financial Services Committee yesterday advanced a proposal to remove a three-decade ban on audits of monetary policy and carry out an examination of the central bank. The plan was offered by U.S. Rep. Ron Paul, a Republican from Texas who has called for the abolition of the Fed, and based on a bill with more than 300 co-sponsors…

Yesterday’s vote is “probably not going to be helpful in terms of keeping inflation expectations low and supporting the dollar,” said Michael Feroli, a JPMorgan Chase & Co. economist in New York and former Fed researcher. The central bank “should do whatever it takes to stop this from going forward and eroding confidence in the Fed’s independence,” he said.



Bill H:
“The day the Dollar died” MUST READ

To all; the above link is a fictional account by John Galt about “the day the Dollar died”. This is a MUST READ as I believe this “fictional” account is very very close to what will actually happen. I have written many times about the “many pieces” that this essay puts together so well. Market and bank closures, ATM’s and credit cards not functioning, store shelves being stripped bare, precious metals becoming unnatainable, the unacceptance of the Dollar by foreigners and of course social unrest, I think it is all coming and very soon.

You can believe this is “doom and gloom” and/or laugh at it. The ultimate collapse of the Dollar in my opinion is a certainty and a mathematical one at that. Can we get one last “short covering rally” in the Dollar? Yes, I believe we can. Is it worth trying to trade? I don’t believe the risk reward is worth it because if you are wrong and the “day” arrives when you are “out” of your precious metals, it will spell long term financial disaster. Call me a “doom and gloomer” or whatever you like, those of you who know me or have read my past ramblings know that though I haven’t been 100% correct or my timing has been early, I have generally been on the right track with my “smeller”.

I see this fictional piece by Mr. Galt as correct in both substance and timing. Between Chinese/U.S. financial tensions, fake Gold turning up, massive paper claims to a very finite precious metal supply, the looting of the U.S. Treasury and Congressional idiocy, over $1 Quadrillion of derivatives globally, foreclosures, bankruptcies, teetering balance sheets from Joe Blow to the U.S. Treasury, massive fraud, and of course no paper currency on Earth having any real backing of any substance, it all adds up to the perfect financial storm! Please read the above link and act accordingly! The raw math not to mention common sense says the storm is coming! Regards, Bill H.

U.S. Economy
U.S. Stock Market
Echo Bubble Risks
A Mendacious Fed Playing With Fire?
From: Frank Veneroso
November 20, 2009
Executive Summary

The Fed denies there are bubbles. It refuses to share in any of the concerns of officials around the world that there are emerging bubbles.

On the day of the last Fed meeting Pimco’s El Erian said the markets do not want the Fed to talk about bubbles. The Fed accommodated the market’s desires, and has since accommodated in repeated public statements.

Nonetheless, there is a storm of controversy over whether the Fed is blowing bubbles.

I think the market does not believe the Fed, and market participants are buying risk assets as a consequence.

I am beginning to think that market participants think the Fed and its ministrations are like the doctors of Anna Nicole Smith and Michael Jackson.

If this is true I think the stock market is a dangerous place indeed. Maybe the Fed’s efforts to lift asset prices and thereby the economy will work. Maybe via rising equity market wealth the well-to-do will pull the economy up by its bootstraps.

But to count on the cooperation of the leveraged speculators of the bubble era to overcome debt deflation dynamics posed by a sky-high ratio of private non financial debt to GDP is playing with fire. It is like the dying Roman Empire trying to enlist Attila the Hun as a mercenary.

If at some point those leveraged speculators think you might not succeed or cannot succeed they will start to sell. Given downside price action they will increasingly question the Fed’s ability to resuscitate bubbles. The consequent loss of Fed credibility as Master Bubble Blower could lead to panic selling and an onslaught by the shorts that will leave the stock market and aggregate wealth in a much worse condition than if the Fed had not engaged in its dangerous game.


What could be more gold friendly? From The King Report late last night…
On Thursday, January and February T-Bills went negative (-0.03% yield) and the six-month Bill fell to.12 (.175 on Tuesday), the lowest six-month yield since 1958. A tad worse Initial Jobless Claims couldnot produce this havoc. Conventional wisdom says it’s yearend window dressing…But why Bills?
If you want to park cash, why not place it in some short-term paper with a positive yield? So also thosepundits that exclaim there is no problem are not correct. If there were no concerns, the cash would noteagerly run to a negative yield vehicle.

The FT on negative T-Bill rates: Short-term US interest rates turned negative on Thursday as banksfrantically stockpiled government securities in order to polish their balance sheets for the end of the year.

The development highlighted the continuing distortions in the financial system more than a year afterLehman Brothers’ failure triggered a global crisis.
The growing appetite for short-term government debt reflects an effort by banks to present pristineyear-end balance sheets to regulators and investors…



China gold BLOWOUT: Demand for the metal surging
Friday, November 20, 2009By Daily Crux Editor Justin Brill:

Chinese consumer demand for gold continues to grow. It reached record levels in the third quarter of the year, as demand for jewelry and other items celebrating the 60th anniversary of the founding of the communist state added to already high investment demand.

In all, Chinese consumers bought up an astonishing 120 tons of gold, up over 12% compared to last year, even as total world demand fell.

The Chinese continue to buy up the world’s gold as much of the western world sits idle. You’d be wise to consider buying gold now, before the rest of world wakes up and joins China…


COMEX Warehouse Stocks November 20, 2009

ZERO ozs withdrawn from the dealer’s (registered) inventory
181,763 ozs withdrawn from the customer (eligible) inventory
Total dealer inventory 52.72 Mozs
Total customer inventory 59.20 Mozs
Combined Total 111.92 Mozs

ZERO ozs withdrawn from the dealers (registered) category
52,346 ozs deposited in the customer (eligible) category
Total dealer inventory 2.14 Mozs
Total customer inventory 7.44 Mozs
Combined Total 9.58 Mozs

Just one day after having the first movement in silver in the dealer inventory in many days we are back to zero movement! The movement in gold was quite significant, but NOT in the dealer inventory which saw no movement, it was 52Kozs were deposited in the customer inventory.

There were 2 delivery notices issued in the NOV gold contract. The NOV contract total for the month is 956 contracts or 95,600 ozs. Bank of Nova Scotia stopped 2 of the notices today.

There were no delivery notices issued in the NOV silver contract. The total delivery notices for the month in silver stand at 146 or 0.73 Mozs
There is only 0.7 cent of contango in silver NOV/DEC contracts and only 2.1 cents NOV/JAN contracts. The contango in gold NOV/DEC is at only $0.4 and $1.2 for NOV/JAN

The Cartel tried to instigate yet another sell off and failed yet again. Yesterday I said “The Cavalry didn’t come today either! How stupid can the shorts be? This market is NOT going down. There are no limits on the COMEX for price moves. The cartel groupies have been making money with the same old formula for 15 years…just follow the Cartel. That works fine until the day it doesn’t. They could lose 15 years of profits in a heartbeat, not to mention part of their anatomy to boot”

One more time again the Cavalry didn’t come. General Custer’s Cartel is looking very lonely.

As I have said for many weeks this is a Commercial Signal Failure of epic proportions. It will be something to tell your grandchildren about. Of course, your grandchildren will be much more impressed when you tell the story if you were on the long side!

My Bloomberg interview with Bernie Lo was much fun last night. He really is a class act and a wonderful host. There is little doubt in my mind he knows how right GATA has been.

I would like to thank the Caf� members who took the time to get us some archived copy of the interview. The volume on each needs to be turned WAY UP to your highest level. Cary Coutelas of Sydney…

Dear Chris and Bill,
I have succeeded in recording Bill’s interview with Bernie Lo to my computer and I have edited the show, cutting out all the irrelevant parts that have nothing to do with Bill. The recording then became about 21 minutes in length. I have made it into three parts each about 7 minutes in length for uploading to YouTube. Right now the files are being uploaded and it will take about an hour and a half for the files to finish uploading as I have produced them in a reasonably good quality. Each file is about 80 megabytes in size and even though I have high speed broadband, the files are uploading quite slowly.
It is 12.36 am here right now so I am going to bed as it is past midnight.
I will check in the morning if everything went alright with the uploads.

I have given the titles of the videos: Bernie Lo Interviews Bill Murphy Nov 2009 Part1, Part2, Part3
Hope all goes well.
Hi Chris and Bill,
Here are the links to the youtube videos:
Asia Confidential – Bernie Lo interviews Bill Murphy, Chairman of GATA November 2009

Part 1:

You Tube

Part 2:

You Tube

Part 3:

You Tube


Mike Mauriello also sent us…
Some of the feedback for you (thanks for the kind words)…
Dave from Denver…

that was awesome. you were articulate, full of facts and did a great job clearly and forcefully laying out the GATA story. it seems like Bernie understands the story.

Just wanted you to know that the interview, which was GREAT by the way, did not come on until 11:00 PM CST here in Kansas City. It was well worth it !
What struck me while watching was the CONSISTENCY of the message. It has not changed.

What has changed is the amount of overwhelming EVIDENCE that has emerged in the last 10 years (and is now accelerating) to support the GATA viewpoint !
No sincere journalist can disavow this viewpoint any longer.
Great work ! Tom G

They are going to go after us tomorrow! Ha ha!

That was THE FIRST Interview I’ve ever heard where they actually listened to what you said.

Definitely not CNBC stuff.
Sleep Well my friend


I watched your interview on Bloomberg with the greatest of pleasure. There are so many positives that it is hard not to go on and on about them. But I will pick one in particular: your clear explanation of why you cannot have a “bubble” in something that is undervalued by AT LEAST 50% on a fundamental basis.

Hey Bill, fanfunkintastic interview last night. Still waiting for links to the interview and began searching and found it here in parts in case you haven’t got it yet.

Also exchanged a few emails with Bernie early today, nice guy and a breath of fresh air compared to the rest of the main stream and I told him so. I also wanted him to mention the GATA story to someone like Tudor or Jim Rogers next time he talks to someone like that. He seemed open to it but who knows. I told him he will make history breaking this story and that he’s a lone voice basically.

Keep up the good work!
Best Regards,
Warren Bevan

Make sure that Bernie Lo, (a good Canadian boy from my neck of the woods), gets a GATA T-shirt to wear for his next interview with you.
You talk on MSM … gold bounces right back to $1150.
The cabal must hate you more than ever.
Salmon Arm, BC

Hey Bill
Just finished watching the Bernie Lo interview on U Tube. I watched it with the background of POG hitting $1150 and then skipping back a few pennies. YOU’RE THE LANCE ARMSTRONG OF THE GOLD WORLD! Gutsy and never say die always wanting to throw yourself at the finishingline. In this case the finishing line being the full exposure of criminal intent and actions in suppressing the gold and silver price. The interview you did on Bloomberg was erudite and in laymen’s language. Maybe at some time when everyboard’s on board and can actually spell GOLD…that’s s-i-l-v-e-r (LOL), then you can wear a tin foil party hat onto CNBC. Stuff em!
Go GATA, Go Gold, Go HiHo Silver
Gold Coast

At the Dallas Bloomberg studio…

My friend Lori Hughes, my friend and GATA supporter Jim Smith and me frowningPutting on a happier face…

Jim and I

There is a fair shot, based on market developments, GATA’s time is here. I urge Caf� members to take a little time and send the Bloomberg interview to various media outlets, especially to the producers of the major financial TV shows and financial print journalists. Ask them if they want to really make some news and get the real gold story out there, to take a few minutes and review the Bloomberg GATA interview.

The GATA gang has put more than a decade of effort into exposing The Gold Cartel. It is time they get their due.

How many times have we seen silver and the shares under pressure when The Gold Cartel is having trouble containing the gold price? Chalk up another one today. At the same time, it proved to be another tactic that failed. Silver is now up 9 cents on the day in the Access Market and the HUI has come back from a 464 low to close at 472.64, down 4.60. The XAU lost 1.57 to 184.28.
ONCE AGAIN, for something like the last 20 out 21 days, gold is up in the Access Market, going $1050 bid. Can you feel The Gold Cartel and other shorts squirming? Can our serious Commercial Signal Failure be far off? What fun! GATA BE IN IT TO WIN IT!
Reflation and Stocks

“Never underestimate the replacement power of equities within the REFLATIONARY SPIRAL”
Read the Investment Outlook by Pimco’s Bill Gross where he makes the following comment:

“The Fed is trying to reflate the U.S. economy. The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks. Once your cash has recapitalized and revitalized corporate America and homeowners, well, then the Fed will start to be concerned about inflation not until.”

The full text is found here…
http://www.pimco.com/LeftNav/Featured+Market+Commentary/ IO/2009/Dec+Gross+Anything+but+01.htm

With options expiration coming up. the dollar rallying, and the Dow down, watching gold climb up and over the wall of worry is a thing of beauty. For the muppets and their ilk it will be like trying to explain water running uphill.
Best wishes,
Peter R.


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Doug Casey on Real Estate – November 18, 2009

Conversations With Casey
November 18, 2009 | Visit Online Version | www.CaseyResearch.com • About Casey

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Doug Casey on Real Estate
(Interviewed by Louis James, Editor, International Speculator)

L: So, Doug, it’s well known that in addition to investing in resource stocks, especially gold juniors, you also have a passion for playing the real estate market. What can you tell us about real estate in today’s world?

Doug: Real estate has been very, very good to me. The reason that’s true is that I buy only things that I like myself. I don’t try to second-guess what other people may want. If you do that, you’re guaranteed to wind up with mediocre stuff that nobody really wants. I have an inclination to buy unique properties, as opposed to commodity-type stuff. That approach is not for everyone, but it’s worked for me.

But let’s start with the big picture. I’ve bought real estate in many countries, all around the world, and I find that it helps to have an international view.

L: We’d expect no less from the original International Man.

Doug: You wouldn’t, I know. But most people still think like medieval serfs, tied to the land of their birth. People say that real estate is a local market, and of course that’s true. Location, location, location – you have to know enough to pick good locations, so you should deal in an area you know well. But at the same time, if you take a global view, with over 200 countries in the world to look at, you have 200 times the chances of finding an anomaly – either on the buy or the sell side. Those anomalies make for exceptional deals, exactly what you want to capitalize on. It also gives you a better idea of what the market likes, what works, what doesn’t, and so forth. If you’re isolated and insulated in just your little community, you’ll never get one up on the rest of the crowd.

L: That makes sense, but let’s start with the U.S. real estate market, because that’s where most of our readers are.

Doug: It’s also the epicenter of the financial quakes spreading around the world today.

L: A lot of people have to be looking at what seems like a degree of economic recovery, and wondering if real estate has bottomed in the U.S.

Doug: Real estate has definitely not bottomed in the U.S., and probably not anywhere else either. You have to take a long-term view of this. Remember that through most of U.S. history, residential real estate was not viewed as an investment. You didn’t buy a house to make yourself wealthy selling it to someone else. It was viewed as an expensive consumer good that depreciated – you bought or built a house to live in it, just as you bought clothes to wear or a horse to ride. It was just a part of life – a necessity, a convenience, but an expense.

But then, especially just after World War II, the government started to institutionalize mortgages, which is to say, add huge leverage to the housing market. That’s what has transformed houses into speculative vehicles. That trend has been building momentum over the decades, as more and more debt was centered on real estate. Mortgages turned into commodities futures contracts. It was a huge change from the days where you knew your banker, he knew you, and he was lending his own money.

The result has been a huge amount of overbuilding, in residential, office and retail commercial real estate. It’s going to take years and years to work this off. In addition, the entire psychology of the market has changed.

I don’t believe this recession is going to end the way all the other post-WWII recessions have – with a new and bigger boom. This is a major, secular turning point. It’s not just another cyclical low to use to load up for the next run up.

L: Okay, so, U.S. real estate is still headed down, and maybe headed much farther down if this recession turns into the Greater Depression you’ve been calling for. But at some point, it will have to hit bottom. How will anyone who wants to own real estate in the U.S. know when it’s time to buy?

Doug: I think the economic depression we’re embarking on now – a depression being a period of time in which the average person’s standard of living drops significantly – will be much worse than the one in the 1930s. So we can look at how bad things got then, as a minimum guideline for when to start looking for a bottom. For example, Greenwich, Connecticut, was one of the hottest, glitziest real estate markets back in the late 1920s. A look at comparable prices in the newspaper ads from the period indicates that residential property fell 90% over a period of about five to ten years. There’s no reason that couldn’t happen today, especially in overbuilt markets like Florida, California, etc., but it could easily be much worse.

L: Why do you say that?

Doug: Because in those days, most people paid cash, to start with. If you had a mortgage, you usually put at least 20% down, and the length of the mortgage was generally five years. Today, with even prime mortgages having much less money down, lasting 30 years, and floating rates, there’s much more leverage.

But there’s another reason. The bottom back in the 1930s was famous for people being able to buy properties for just back taxes. Today, you can buy square miles of some cities, like Detroit, for back taxes alone – but nobody’s doing it. No one sees the $500 minimum bid as worth it, partly because the properties are likely to simply remain tax liabilities well into the future.

I’ve got to say that this is the big elephant in the room that no one is talking about. To me, more important than the overbuilding, more important than the amount of mortgage debt, is that real estate taxes are completely out of control in the U.S. Nobody talks about this, for some reason, but the fact is that in many parts of the U.S., you’ll pay 2% of the assessed value of your house to the government, just to live in it. There are people across the U.S. paying $10,000, $20,000, and even $50,000 a year in taxes on what are actually quite normal houses.

L: You think you own your house, but you have to pay rent to the government, or else.

Doug: Exactly; if you don’t pay rent to the government, you’ll find out who really does own your house very shortly.

This is cash money that has to be coughed up, whether you have a job or not. And a lot of people are still going to be losing their jobs in the years ahead. We aren’t anywhere near the bottom of the employment situation. So, I think there are going to be large numbers of places – and I mean all over, not just places like Detroit and Flint, Michigan – where you’re going to be able to buy whole tracts of McMansions for past taxes. But you’ll think twice before doing it, because those taxes are going to continue.

L: They’ll get worse, won’t they? With government revenue from other sources falling through the floor, they’ll squeeze wherever they can, and your house is an easy target.

Doug: That’s precisely right. It will get uglier for that reason, and I’ll give you another reason why it will get even uglier; interest rates are being suppressed to insanely low levels. This is an artificial rate set by the government in a truly stupid and doomed effort to stimulate the economy into renewing unsustainable patterns of production and consumption. Eventually interest rates are going much higher – because they must, for reasons we’ve discussed in past conversations. Real interest rates are going to ten or fifteen percent, or more, as they did in the early 1980s. That’s going to put the final nail in the coffin of U.S. real estate.

But there’s more…

L: Wait! Don’t order now! We’ll throw in a free garage!

Doug: [Laughs] That’s right, except that people are more likely to throw in the towel when they see what happens to their utility bills in the coming years. Water, garbage, but especially electricity, gas, heating oil – energy prices, for reasons we’ve also discussed, are going way up. That means more cash money that needs to be paid whether you have a job or not, if you want the air conditioner to run in the summer and the heat to work in the winter.

And it gets even worse; most of the overbuilding is way out in the suburbs. Bedroom communities. People moved out of downtown areas because they became expensive, and transportation was cheap. Many people are not going to be able to afford to drive their gas guzzlers 100 miles per day, round trip, to a job that won’t have any prospects for a pay raise, since most people will be thankful just to have a job at all.

I think we’ll find significant tracts of suburbs that will be literally abandoned in the not-too-distant future. Just as mansions were abandoned in the ’30s or sometimes turned into flop houses – nothing wrong with the houses, except people just couldn’t afford to live in them. All that construction was a misallocation of capital, making the country poorer, even while – paradoxically – people thought it was a sign of wealth.

So, no, U.S. real estate hasn’t bottomed yet at all. And it’s not just going to be just in residential real estate, which is where the little guy is going to get killed. It’s going to happen in office space and other commercial real estate as well. This is very ugly, and it’s just gotten started.

L: So, even when it does bottom, not everything selling cheap will be worth buying? I can imagine that an office building picked up for pennies on the dollar should work out okay at some point, unless the entire city it’s in is abandoned. But huge swaths of bedroom community houses far from shrinking cities might have to wait generations before there’s demand for them again – and you’d need to spend money maintaining them the whole time.

Doug: Agreed. U.S. housing stock will suffer from years of deferred maintenance by the time the final bottom comes. Although, right now, you can already buy a 30-story office building in downtown Detroit for a few million bucks. As I mentioned above, one of the reasons I’ve done well in real estate is that I tend to buy things that I like personally and can see using myself. Why? Because I understand these things, and you shouldn’t invest in things you don’t understand.

L: And if you ended up having to keep these properties, you wouldn’t shed a tear, because you like them anyway.

Doug: Yes. I think these bedroom communities of ticky-tacky houses way out in the desert, or in places that should still be cornfields, are dead ducks. They’ll end up being torn down or becoming new ghost towns. People forget that there are lots of ghost towns and always have been – and not just in the U.S.; it’s happened in Europe too, where the land has been highly populated for over two thousand years.

And as far as commercial real estate, fuhgeddaboudit. As we keep pointing out, a big part of the problem in the West is that we’ve been consuming more than we’ve been producing. That means that all these stores catering to unsustainable patterns of consumption and production are not going to have customers. They’re going to go out of business. Their buildings will be empty.

Now, at some point, there will be a bottom, when buying such commercial property will make sense, but I can’t tell you when that will be. We’ll have to keep tabs on the situation and look for a confluence of a number of factors, including interest rates, taxes, demographics, energy prices, and politics.

It will happen, but I don’t know when, so at this point, I’m completely uninterested in speculating in U.S. real estate – and I don’t foresee being interested for at least five years. I reserve the right to change my mind, but I think it’ll be at least five years.

Now, that doesn’t mean that if I wanted a house, I wouldn’t buy it now. You can get a fixed-rate mortgage now with an artificially low interest rate on houses below the jumbo level (I think it’s about $550,000). Given where interest rates and the value of the dollars you borrow are going, that’s going to be a gift in the future.

L: But that’s not a speculation. You’re saying that if I wanted to buy a house I like, to live in, the near term might be a good time to buy.

Doug: Yes, that would make sense, if only because that fixed-rate mortgage could be practically wiped out by the inflation to come. You’re looking at what could be a very large gift. Too bad for the entity that lends you the money, but that’s what they get for playing this government-rigged game.

There’s a true story I tell to remind people of how cheap real estate can get under crazy circumstances. I was in Rhodesia at the tail-end of the war, in 1979 – I must have been the only foreign tourist in the whole damned country. I took a bus from Salisbury to Umtali (they’ve renamed both of them: Salisbury is now Harare, and Umtali is now Mutare). There were no other cars on the road at all – I guess it was actually rather risky.

Anyway, I got to Umtali and found that it had become an armed military camp. I looked around and asked people what I should go see, and was told to check out the Leopard Rock Hotel. It was a fantastic place on 200 acres, with a nine-hole golf course and 50 acres in coffee. Very beautiful. The hotel had about 15 suites and was built like a castle. It was huge.

I could have bought that place – silverware, linen, food in the fridge, everything, the whole shooting match – for $85,000, cash. When I went back to Rhodesia (now Zimbabwe) after the war, in 1985 or 1986, the same place had just changed hands for $13 million – about 150 times the price I was offered. Of course, if I’d done it, I would have had to live there and run the place, or it would have turned into a looted derelict within a week. My whole life would have changed course. But that can be true every day, depending on whether you turn right or left at any street corner.

Opportunities like this really do pop up from time to time around the world – if you’re willing to go look for them.

L: That leads naturally to the question of where you do like real estate now, if not the U.S. Where in the world are you buying today?

Doug: Let’s look at the various regions of the world. For people in the U.S., Canada is the easiest place to move to, and I do think Canada will fare much better than the U.S. in the Greater Depression. But that doesn’t mean I want anything to do with Canadian real estate now. It’s far from cheap – in fact, Vancouver real estate has become some of the most expensive in the world today. If I owned anything in Vancouver right now, I’d be hitting the bid.

I do have property in Hong Kong, which may be the most volatile major real estate market in the world. Right now, it appears to be at a manic top. I’m looking to sell my apartment there. This may be hard to believe, but I think I’ll get something on the order of about 25 times what I paid for it. Of course, I bought it very cheap, during a China crisis….

L: Could today’s high prices be the result of a bubble caused by the Chinese stimulus spending?

Doug: I suspect that’s a major element, but frankly, I don’t know. I have to visit and find out why these prices have risen to such crazy levels. But it doesn’t matter; I’m hitting the bid.

L: Any time you see something go way above what the market fundamentals justify, it’s time to take profits. We do that all the time with stocks.

Doug: That’s right. I’m going to shoot first and ask questions later, in this case.

The question now is: Where are the nice places in the world today that are still cheap?

It’s most unfortunate that governments all around the globe are increasingly rapacious and virulent. The institution of the nation-state as we know it is actually the biggest problem – other than the cosmic one of Life and Death itself – to living on this planet. Governments all over the planet are getting truly out of control, and that makes it less pleasant to live under their jurisdictions.

L: The number of nice places is shrinking.

Doug: It is. So, back to the regions to look for speculative opportunities. Forget Canada. Forget Hong Kong. And definitely forget about all of Africa. The continent is a basket case that’s not going to change for a long, long time.

L: Why?

Doug: It’s primarily because of the arbitrary lines the Europeans drew on the map when they divided it up into all these stupid nation-states. That divided tribes and turned each country into a vehicle for theft for whichever group got in control.

You can also forget about Central Asia and the Middle East, partly for the same reason; but also because it’s the epicenter of the War Against Islam. You can forget about most of Europe for the same reason – the demographics in Europe are going totally the wrong way, and those governments are among the most voracious. I wouldn’t even think about Europe now.

L: Does that include Eastern Europe, where there’s been a trend towards liberalization since the collapse of the Soviet Union?

Doug: Good point. Actually, with the corrections those markets have seen, especially in the Baltics, they could be interesting. Some highly profitable anomalies could be shaping up. I was talking about Western Europe when I said it was going the wrong way. Eastern Europe deserves a closer look.

L: I’ve seen charts showing large drops in some of those markets.

Doug: I would expect so. Back in the Far East, places like Thailand, Laos, Cambodia, and Malaysia are very interesting. Especially Burma. I like them a lot, but as much as I do, assuming you’re a person of European descent, they are not places where you will ever be accepted as a member of society.

That brings me back to South America – I think it’s going to have its day in the sun. I think Argentina, Chile, and Uruguay are the places to be in South America. Brazil has gotten too expensive. Bolivia and Paraguay are too screwed up. I like the “southern cone” countries, and among them, for reasons we’ve discussed at length in the International Speculator I think Argentina offers the best speculative opportunities. And I think it’s the nicest place to be as well, even though Chile has become the most advanced and forward-looking of these countries.

Among the reasons I think Argentina is the best place to own real estate is that real estate taxes are basically nonexistent. And there’s no credit. It’s a completely cash market, which means that the prices are real. I don’t think the political situation is likely to get any worse, and it’s quite possible it could get better.

L: In the last Argentine crisis, a huge economic and fiscal crisis in which the Argentine peso lost three-quarters of its value overnight, as crazy as things got, the government never touched land titles.

Doug: No, they didn’t. And, in fact, while land prices in Argentina are up since the bottom of the last crisis, they haven’t exploded upwards. I see a lot of European immigration headed to Argentina. Europeans that come to Argentina, or Uruguay, for that matter, are going to realize that real estate costs a tenth of what it does in Europe, the cost of living is a quarter of what it is in Europe, and they’d have much more freedom, because the governments are much smaller and much less effective – it’s like they’re still back in the 1950s. They’ll realize that this is the place to be for real estate, and lifestyle in general.

If we were having this conversation 60 years ago, if I’d looked over the world then, I believe I would have said that the United States was absolutely the place to be. But it’s not anymore. Everything changes. And it’s way too early, as a speculation, to even think about buying U.S. real estate.

I can’t stress this too much. You know, back in the 1930s, co-op apartments in Manhattan that today sell for millions of dollars – you literally couldn’t give them away. The co-op fees were more than anyone wanted to pay. Residential units worth millions of dollars today were literally free. Could it happen again? I’m not going to say that it will, but prices of residential or commercial real estate in the U.S. should not be of any interest to a speculator today.

L: What about Spain? It’s basically Europe, but cheaper.

Doug: Yes, well, I put my finger on Spain’s Costa del Sol in my Crisis Investing for the Rest of the ’90s, and I was absolutely right.

L: It was a ten-bagger for you, wasn’t it?

Doug: Yes, it absolutely boomed. And now it’s going into reverse, it’s in freefall. That’s because every European who wanted a place in the sun went to the Costa del Sol. It got hugely overbuilt with a tremendous amount of debt used to finance it. Now it’s time to pay the piper. I don’t know when the bottom will be in Spain, but I’m in no hurry to go back there. All the overbuilding has actually made it less desirable, from my personal aesthetic point of view.

I’d rather look at Portugal, which is still the backwater of Western Europe. If I had to live in Western Europe for some reason, Portugal would be my first choice. I have to say that I haven’t been there for several years, so I can’t say much about it from a price point of view, but from an ambiance point of view, it’d definitely be my first choice.

L: What about Down Under?

Doug: Australia and New Zealand are going to do relatively well in the Greater Depression. Prices, certainly in New Zealand, where I have property, are down considerably from their peak. The trouble with New Zealand, as much as I like it, is that it’s… at the end of the road.

L: It’s a long way from anywhere.

Doug: It is. It’s a nice place to hang out, but while prices have come down a lot, the currency has come up a lot. The kiwi dollar has doubled since I was recommending that people buy real estate in New Zealand ten years ago. So it’s not a bargain anymore.

If you want a bargain, I’ve got to tell you, Argentina is it. Lifestyle, costs, benefits, freedom – even with all of the problems every country has, including Argentina, the place is without a doubt my best pick at the moment.

L: I know you’re sincere in that, so I’ll go ahead and play along with a “shameless plug” question, as David Galland might say: are you still selling lots at your Cafayate project in Salta province?

Doug: Yep. I suggest that people go to www.CafayateLiving.com and check it out. It really is becoming a bit of a Galt’s Gulch because of the kind of people who are showing up there. It’s an oasis in the desert, next to a fantastic little town where you can get whatever you want and have every amenity known to man, at very reasonable prices. That’s where I’m going to be spending a great deal of my time, and I suggest that others who see the world the way we do at least take a look at it.

L: As far as amenities on the project site, what’s completed? Is the golf course done? The clubhouse? What can people actually do there, besides sit and watch the grapes grow?

Doug: Well, the 1,500 acres the project occupies are right adjacent to the town, so you can ride your horse into town, if you’re of a mind to do so. We do have 200 acres of vineyards, and you can watch the grapes grow if you like, while drinking some of last year’s harvest. The first clubhouse, the golf clubhouse, is built. The 18-hole golf course is built and the first nine holes are playable. The second nine will be playable by March. The first polo field is under construction. Forty kilometers of horse riding, biking, and jogging trails are being completed. Two lakes are built and being stocked with fish, so you can catch fish for dinner if you want a break from great beef. We’re planting just about every kind of fruit tree, berry bush, nut tree, and vegetable variety you can imagine, and raising organically nurtured animals so the food we eat will be of the highest quality possible.

Within a year, about 30 houses will be completed, and the spa, the gym, and the social club will be done. You’ll be able to play go, chess, bocce ball, or read in the library. You could play billiards with your neighbors, or maybe just sit and smoke a cigar. I can’t think of a more civilized place to hang out.

L: Very good – that was indeed pretty shameless. Thanks for your time, Doug.

Doug: I enjoy these chats. Whether you agree with me about Argentina or not, just remember: it’s too early to buy a place in the U.S., unless you want it for personal use and get it with a big mortgage you can afford.

Whether it’s buying inexpensive real estate in Argentina or investing in corn while the market was at a bottom – which made subscribers up to 5,000% gains – finding budding trends and profiting from them is what The Casey Report is all about. Doug and his team of experts have been right so many times that some people find it uncanny. Read how you can invest alongside the “trend hunters” by clicking here.

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Why Silver will be a Better Investment than Gold

(And Both are Better than Dollars)

Silver Stock Report

by Jason Hommel, November 17th, 2009

Recently many of my readers have been asking, “Why is silver lagging gold?”
After all, in March, 2008, gold hit $1020, and silver exceeded $20, yet here we are now, with gold now above $1145, and silver at $18.33, not even at $19!
The really funny thing is the way the popular media spin the price relations.
When silver underperforms gold, they say, “Silver is not confirming gold’s rise, therefore, gold prices are due for a fall.”

And when silver outperforms gold, they say, “Silver is exceeding gold’s rise, therefore, this bull run is overdone, and thus, gold prices are due for a fall.”
In other words, we have a manipulated market. Not only is the price manipulated, but so is the news coverage!

Of course, the media could give opinions the other way, and say, “With silver lagging gold, it shows that gold has much further to run, and also silver is due to catch up and exceed gold’s pace, thus making silver the much better buy now.” Or, after silver outperforms, they could say, “Silver’s outperformance has confirmed everything the silver bulls have been saying for the last ten years.” But they never do that, do they?!

As it is, the price ratio changed from 64 on Friday to 62 on Monday, so silver far outperformed gold on Nov. 16th.

Gold moved from $1118.50 on Friday to $1139.80, a rise of $21.3/oz., or a 1.9% increase.
Silver moved from $17.42 on Friday to $18.40, a rise of $.98/oz., or 5.6% increase.

Silver sure didn’t lag behind gold on that day!

So, is all news that is bearish on silver evidence of “manipulation?” Of course not. Some commentators are not colluding on purpose, they are simply willfully ignorant.

For example, here is an independent Christian newsletter writer named Gary North who writes:

Why Silver Is a Poorer Investment Than Gold (Nov. 14th)

You’d think he could have timed his article better. He published on Nov. 14th, and was proven wrong in less than 48 hours!

Nearly everything Gary writes in that article is not really the whole truth. I’m shocked to read his take on silver. After all, he has written perhaps the most thorough economic commentary on the Bible that exists (very long, quite good, but could use a bit of improvement).


So I don’t think he’s an agent of the banks, so I think it must be ignorance that is distorting his judgment, or perhaps his age. I’ve tried to answer his questions on silver over the years, but he has not replied with reason, but rather with emotion, so there must be something more at work here, but I don’t know what it could be. He wrote last year:

Jason Hommel Tells Me Off: I Do Not Understand Commodities, Silver, and Especially the Bible. He Demands That I Answer Him.

So, this and his other essays go to show he is not unfamiliar with my work, but rather, he has some sort of emotional rage against it. This is why I cannot excuse Gary as simply being ignorant of the statistics that he mocks, but rather, he is willingly ignorant.

But that’s in the past. I want to refute his recent article, and get to the recent ten year relative performance of silver vs. gold. All we need is a gold/silver ratio price chart.

A quick search on google reveals a source. I trust Gold-Eagle: Here it is:

The silver to gold ratio is the red line. You can see it topped out at 100 in 1990, when it took 100 oz. of silver to buy 1 oz. of gold. This ratio dropped to nearly 50 in 1997. It went back up to 80 both in 2003, and 2009, and now has gone back down to about 64, and now 62 today.

So, depending on the time frame, silver has out paced gold, or gold has out paced silver. As the red line goes down, silver is better. As the red line goes up, gold is better.

But if you use a selective time frame, only 10 years, you can see that the silver to gold ratio was about 60 ten years ago, and is 62 today, showing that gold slightly outperformed during that selective time period in question. But what is the main thrust of Gary’s argument? That the future must be like the past? And that the past only consists of the last ten years? Clearly, neither premise is not even remotely true, and the entire argument would deny the reality of economic cycles. Clearly, Gary is not ignorant of the economic cycle, so why did he forget that his argument would not be valid? Did emotionalism get the best of Gary?

As we can see from the big picture, Gold would have been a better investment than silver until 1990, the key turning point. Gary’s claim to the foundation of his “correctness” is being good at making interim market calls, and that he is old. Did he tell his subscribers to load up on silver in 1990? I have no idea. Did Gary tell his subscribers to load up on silver when it hit $8.50/oz. in the last year? No. I know. I’ve been a paying subscriber of his since he tried to discredit me. In his own words, “His “market calls” were utterly useless when it mattered.”

Furthermore, the dollar/gold price charts, and dollar/silver price charts do not “tell all” as he claims. Such charts contain zero information about how many dollars have been printed up in the past, and have yet to show up in futures prices of the metals. Such charts contain zero information about how much silver has been consumed and lost in the age of electronics that have ended up in landfills at concentrations too low to economically recover. It is only bad theory that the price charts contain “all the information” you need to know to make a future prediction on prices.

The charts Gary chose to present are not even “objective facts”. All gold/dollar and silver/dollar price charts are misleading, as the dollar is not a constant measuring tool, but a varying one. What if I showed you a growth chart of my 15 month old boy, but used a ruler made out of silly putty and stretched it at different rates at varying intervals? Certainly, nobody would call such a chart an “objective fact”. Charts are also not “objective facts” when you can produce them over select time frames to distort the overall picture. Gary’s price charts from the year 2000 are not as useful as the long term ratio chart above, if you want to try to use a chart to make long term predictions.

Is anyone here planning on living for longer than a time frame of the next ten years? (Well, Gary might not, he’s old, remember.) If you plan to live longer, you might want to consider longer time frames. I know I want to. After all, I’m only 39, and if I live to be 90, I can use an investment that might not pay off in 10 years, or even 20, but should come to fruition within my time frame of up to the next 50 years. For me, silver is it.

After Gary claims that non-facts are facts, he then tells his readers to beware of statistics, because the long term statistics that the silver bulls have been presenting for the last 10 to 40 years have not yet shown up in relative price performance (even though they have).

But the facts from the ratio chart prove that silver has been outperforming gold for 19 years now, and thus, perhaps Gary should have been paying attention to both the facts and statistics for silver.

In fact, it might be considered somewhat of a miracle that silver has outperformed gold for the last 19 years, while no nation on earth has yet returned to using silver as money! Think about that!

Since Gary seems to not want to be bothered with either facts or statistics, I’ll just paint the broad picture, with limited numbers, so that maybe he can wrap his mind around the major changes that have happened during his lifetime.

Nearly 300 years ago, back in 1717, the Bank of England started devaluing silver, in favor of a “gold standard”.

This was really a change to a paper standard, since gold was valued in terms of paper money, no longer valued in terms of real silver, but only “token” silver. This continued until Germany left silver in the late 1800’s. This created a glut of silver, which continued to devalue silver, until all nations on earth stopped using silver as money, and as each one left silver, it created a glut of silver on the world marketplace. This reduced monetary demand has continued to make silver a bargain for the last 100 years. The last great mintage of silver coins was in the US in 1964. After that, the US only made 40% half dollars for a few years, (we have three $1000 face value bags of 40% silver for sale at 6% over spot, that’s 295 oz/bag x spot x 1.06). Call us at (530) 273-8175 to own a true “abomination”, a real life example of an “unjust weight and measure” from our own nation’s recent history, today!

You can see the declining value for silver over a 600 year inflation adjusted silver chart:


You may note that this chart is in stark contrast to the flatline chart showed by Gary North.

But something interesting happened towards the end of this multi hundred year long trend of demonetizing silver.

At the end of World War II, the age of electronics began. Prior to WWII, most families in the US did not have many electrical devices. After the second great war, homes began buying things like refrigerators, washing machines and dryers, dishwashers, blenders, toaster ovens, electric can openers, TV sets, air conditioners, and much more, of course.

If you look at the “statistics” you can see that the per capita consumption of silver in the USA increased by about ten times in about a 3 year period, and it has stayed rather high at about 6 tenths of an ounce per person per year ever since.

Another funny thing happened. The age of electronics was not limited to the USA, but went out to many nations, even our former enemies in WWII, and even other nations around the world began to industrialize, and they, too, began consuming silver in electronic gadgets.

Gary has written a lot of crazy things like “you can safely ignore” arguments because it would show up in the price if true. Well, it already has, and it probably continue to do so, even more so, in the future! Trends well established for over 100 years that get hit by another major counter trend that began over 60 years ago might take a bit of time to show up, and it appears it began to, 19 years ago. It did show up rather spectacularly in the 1980 spike, where a tiny bit of money from one man who tried to buy some silver on leverage was smashed by the paper money powers. That was merely the foreshadow warning of what will happen when many billionaires or tens of thousands of millionaires demand real money (silver).

But Gary ignores all that, saying that the only thing that matters is recent price performance over 10 years as measured by a bad measure, the dollar. Wow.

He also has the gall to claim that men like myself issued no warnings about the decline in the silver price. Again, another example of his willful ignorance.

I have been warning that the gold and silver markets are manipulated by the selling of paper futures contracts for at least 8 years now.

In fact, I specifically warned about the manipulation when silver hit $16/oz., on the way down from $20 from early 2008. The article is very easy to understand, even for an old man, even though it does include a few numbers.

A Tribute to 7th Grade Math August 31, 2008

In that article, I pointed out that two banks sold 40 times as much paper silver as physical investors buy silver, in one month, which crashed the price. What followed was other paper longs selling out of their positions that continued to crash the price. This real world market action utterly refutes the textbook lie that futures contracts are supposed to help smooth out market prices. No, they do not. In actual fact, and truth, futures markets manipulate prices to great exaggeration, in both directions.

The manipulation of the markets by selling too much “paper gold and silver” is one of my main themes as a writer. See here:

Controlling Gold with Paper June 10, 2002
The Moral Failures of the Paper Longs Jan 22, 2003
Major Frauds of the U.S. Monetary System Feb 26, 2004
Silverstockreport.com: Silver Users Fear Silver Shortage Oct 27, 2005
The Silver ETF: What’s the Deal? Feb 23, 2006
The Money Chart: The Fundamentals of Gold & Silver Feb 25, 2006
No Excitement by $800 gold November 2, 2007
Silver: There’s Never Enough! January 15, 2008
I Don’t Trade Futures April 4, 2008

Here’s another good one for Gary:
Silver Keeping Pace with Gold; Set to Outpace Gold January 9, 2008

The last article, from Jan 2008, makes a good point:

The dollar, as a measuring stick, is broken. Gold at $850 in 1980 is not a valid price number as a reference, because a dollar in 1980 was worth more than today. We must adjust for inflation. And there are two ways to do that, first with lying government “consumer price index” statistics, which would give a price of about $2500/oz., or you can measure by money creation, which gives a price of about $7000 to $14,000. The $14,000 figure is if you include the recent $11 trillion in government bail out promises. By the time those prices are hit, adjusting for future inflation might give us even higher numbers. and a higher level of public participation in the gold and silver markets, and thus, higher relative silver prices to gold.

After all, let’s remember that most Americans are trend investors, and gold and silver are putting down a nice, safe, solid, trend!

I’d also like to point out what I was saying in nearly every article I wrote in 2003-4:

“Long before 1% of U.S. paper dollars tries to buy gold, gold will be going up well over $1000/oz., and silver will be headed up over $50/oz.”

Now that we are well over $1000/oz. for gold, we can easily measure how much US money is flowing into gold, and, in fact, I just measured that in my recent essays:

Grass Valley Buys 12 Times more Gold than National Average November 9th, 2009
Historic Gold Mine Area Residents Know Gold Prices are Too Low November 6th, 2009

America spends 00.013% of annual wealth (GDP) on less than 2% of the world’s annual gold production.!!!

America needs to buy about 77 times more gold than at current rates, to exceed the spending of 1% of U.S. paper dollars on gold!!!

“One percent of $14.4 trillion is $144 billion. In a gold market that sees annual production of 80 million oz., such buying could double or quadruple the price, depending on how tight the market gets from competition from other nations buying.”

Yes, I see, silver is not over $50/oz.!

But neither has 1% of the money in the USA started to buy gold, we are not even close! So just wait.

I did not buy silver to wait for the day that 0.013% of USA money would be flowing into gold. Did you?

No! I bought silver for the day when the dollar would become like toilet paper, and this implies that well over 50% of dollars will try to buy gold and silver at some point.

In actual fact, gold investors are buying silver. I know. We sell silver for gold! Furthermore, no customers have given us silver asking for gold. But we have had many customers trade their gold for silver!

I suppose i should not have tried to “tell it to Gary North” as he seems to suggest his retort will be to “tell it Jerome Smith”. I know, I know, Jerome Smith was a silver bull who died. Maybe Gary is brain dead, too.

Gary is also such a fool that he has no idea that his own recommendation to buy 80% gold, and 20% silver, would cause silver to move up far more than gold. After all, the gold investment market is a $92 billion market. (80 million oz. x $1145/oz.). The silver market is 600 million oz. produced per year, which, at $18.50, is an $11 billion market. If you spent 1/4 of $92 billion on silver, (20/80), that would be $23 billion.

Please Gary, please tell us all how $23 billion will fit into the $11 billion silver market without the price moving up far more than for gold? And let’s remember now, that the statistics show that most silver is consumed by industry, so if investors bought $23 billion worth of silver and consumed all new mining production, then no new mining production could go towards any industrial consumption!

The silver investment market is a much tinier $2 billion market (100 million oz. out of 600 million oz. produced x $18.50/oz.). Gary is suggesting that more than ten times as much money should go into silver as currently does! If everyone followed Gary’s advice, silver would probably have to move up at least five to maybe ten times higher than gold, just to accomodate the 80/20 investment that Gary suggests! Of couse, that’s mine production. But if we consider above ground supplies, well, I’ll let Gary try to research that. He may well find that above ground supplies for silver are more rare than gold, and I did say I was going to try to stay away from such statistics.

I’ll leave out the numbers, and I’ll note that all the gold ever mined in all of human history would fit into two Olympic sized swimming pools. And probably less silver than that is remaining!

So ironic. Gary’s analysis is so poor. But if it were any better, would silver prices remain so low? When men like him continually mock silver, while speaking out of their own ignorance, is it any wonder the price remains low?

But since I’m a silver investor who has 3 times as much silver as gold, I really can’t complain. After all, if the world knew what I knew, silver would already be several thousand dollars per ounce, or much higher!


I strongly advise you to get real gold and silver, at anywhere near today’s prices, while you still can.

See the JH MINT, and some of our gold inventory, at Youtube here (we also now have Gold Buffalo 24k coins):

You Tube

Call us today.

Yes, we sell silver, and gold at the JH MINT!
Buy it now! Buy Silver or Gold Now!
Inventory & Price List
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Active, live price quotes list:


Jason Hommel

In case you miss an email, check the archives:

Or visit www.momsilvershop.com
(Mom will ship in lots of more or less than 100 ounces, and overseas, and take credit cards or pay pal.)

If you are in Northern California, see:
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4870 Granite Drive, Rocklin, CA 95677

Daily Dispatch: Weekend Edition – Nov 14, 2009

November 14, 2009 | 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.

Reign of Error

As you can see in the chart below, the employment situation in these United States is unlike anything seen in many decades. In fact, were you to calculate things as they did, “back in the day,” you’d have to look to the Great Depression to find a proper comparison.
Back then, unemployment reached approximately 25%. Today, when you include those who have given up looking for work, or who have been forced to work part-time, the total comes to 17.5%. The chart clearly shows the trajectory of the trend is not going in the right direction.

In response, El Presidente told us last Friday that he and his minions are pulling out all the stops to assure that “Americans who want to find work can find work and all Americans can earn enough to raise their families and keep their businesses open.”
Under consideration, we are further told, is a tax break for companies to hire new employees.

While I certainly am in favor of tax breaks of any and all description, I have to wonder just how much of a tax incentive the government would have to offer before businesses would want to run out and hire new employees?

Especially given that virtually every business survey indicates that corporate executives remain concerned about the economic outlook. As such, human nature beckons the executive team to cut all non-essential expenses, shrink inventories, raise cash, and otherwise hunker down. Survival of the fittest pretty well sums it up.

Hiring new employees runs contrary to that mindset. Especially given that, in these United States, hiring an employee requires not just paying the wages but entails a multitude of costs, from those associated with training to a myriad of employment-related payroll taxes, including unemployment taxes, Social Security taxes, Medicare, to sundry benefits, furniture, hand soap and tissue in the corporate facilities, periodic outbreaks of employee litigation, and ongoing compliance training for anyone involved in any work involving regulated activities. Also to be paid, of course, are the HR personnel necessary to keep track of the whole tangled ball. And that’s just for starters.

Soon, costs associated with mandatory health care will be demanded and, most likely, a levy to offset your new worker’s “carbon footprint.”

Speaking broadly, the cost of the average employee in the U.S. private sector comes to $29.31 per hour. Whipping out the calculator, we soon discover that the annual tab for having the next desk occupied comes in at $60,964.80.

(The wages and benefits of federal employees tally in at about 50% higher, but in honor of their tireless service to the public, we’ll leave them out of the discussion. They are worth every darn penny in lifetime pension benefits, paid holidays, and free insurance they earn! Right?)

At the moment, using the government’s own, somewhat optimistic calculations, there are on the order of 15.7 million Americans unemployed. Of course, no economy enjoys full employment, so we’ll turn the dial only back to December of 2007, the month that the recession officially began. At the time, the unemployment rate was 4.9%, versus 10.2% today. Since that momentous month, 7.3 million jobs have been lost.
Replacing the calculator with a spreadsheet and plugging in the numbers tells us that giving all those folks a job at average wage levels, either through private employers or government work projects, would amount to $445 billion a year.

Which, when considering the planned trillion dollars plus annual deficits contemplated by the administration, seems almost reasonable.

Of course, this overlooks the reality that the money used to pay all those workers would ultimately have to come from taxpayers, including the companies themselves, making it essentially a zero-sum game. Worse, it would be a game played against a backdrop of ballooning government debts.

There is, of course, a much simpler and more sustainable approach. Namely, stop the madness and get out of the way of wealth creation. Or, put another way, it is time to stop asking what the government can do for the people, but rather what the government can do to stop tripping up the people.

Make no mistake, the U.S. is in a bare-knuckle competition with the rest of the world, starting with China where, according to Bureau of Labor Statistics estimates, the average worker earns on the order of $0.67 an hour, or $1,393 per annum. Which is to say, the average Chinese worker earns less in a week than the average Yankee earns in an hour.
Sure, we could look to Uncle Sam to do our competing for us. Say, by starting a trade war and slapping tariffs of up to 99% on Chinese goods, but that’s a sure-fire way to create an entry in future editions of the history texts titled “Smoot-Hawley Redux, 2010-2011.”
Instead, given the remaining good, albeit somewhat ragged, reputation of these United States as a reasonable place to do business, the government could simply step back out of the limelight it has so eagerly sought these many decades and especially in the recent months and strip away most if not all of the disincentives to starting operating businesses. One-off tax incentives are fine and all that, but what is desperately needed is a 180-degree change in the bureaucratic mindset.

Were such a change of thinking to materialize, the list of options available to encourage the economy to get out of its slump would expand exponentially.

Put another way, the alternatives being contemplated under the current regime are, loosely speaking, to (a) destroy the dollar, (b) start a trade war, (c) tax the productive into penury, and (d) beggar the next ten generations.

Adopting a fresh new mindset that reduces the government’s role in the economy to that of an extra — instead of it being the director, producer, and all leading actors, as is the situation today — would vastly expand the options available to stimulate the economy.
Here they are:

(a) cut personal and corporate taxes to a level that would have entrepreneurs the world over clamoring to open up shop and do business here,

(b) slash government spending to the bone, further requiring,

(c) a sharp reduction in the expensive and time-draining bureaucratic meddling that hinders virtually every economic activity, and

(d) the end of funding for foreign adventures, subsidies, and overseas bases, therefore kicking off a new Pax Americana, all of which would quickly

(e) reestablish the country’s fading status as the bastion of free enterprise in an increasingly statist world.

Truly, setting the right example today could have as much of an impact on the world as did the group of visionaries that launched America, Version 1776.

Call me Pollyanna, but I cannot help but think as I look down the path we are on, versus the path just described, that the latter is clearly the better of the two. Because the first, this Reign of Error, can only lead to an economic guillotine.

Unfortunately, I can’t see how we are going to get off the current path, not without first letting it run its insane course.
Speaking of which…“President Obama has increased funding for staffing at the U.S. Equal Employment Opportunity Commission, and is adding labor economists who will be looking for [trends that indicate] systemic discrimination patterns,” said Judy Keenan, a trial attorney with the New York District office of the EEOC who served as a panelist at the LeClairRyan conference. “So companies that use credit checks or even criminal background searches as part of the employment process may be reviewed to see if their investigative actions have a disparate negative racial or gender-based impact.”

The EEOC is also looking into alleged cases of wage discrimination, where employees who engage in similar work are paid differently according to their nationality, Keenan said.

The EEOC is also looking carefully at severance or separation agreements — where a company provides an involuntarily terminated employee with cash or other benefits in return for the employee’s agreement not to sue over the layoff, Keenan said.

(NJBiz, “Employers will face increased workplace scrutiny”, Nov 9 2009)
And people wonder why so many American companies have outsourced overseas? It’s a trend that will continue until, of course, the government passes new tax legislation to penalize it. That cannot be far away.

While hoping for the best, it is imperative to prepare for what’s coming. That people are doing just that can be seen in the gold price, which hit a new record level as I wrote this.

The 138th Reason We Like Gold
Jeff Clark, Casey’s Gold & Resource Report

There are so many reasons every investor should hold gold that it’s a chore just to track them all. Here’s one you don’t see much press about, and yet it begs for higher gold prices in and of itself.

The list of mega gold deposits waiting in the wings for production is getting shorter. And of the 15 largest developments in the world, most are in politically risky countries, and in that list we now have to include the U.S.

Gold Reserves (million ounces) Location
90 Alaska
Sukhoi Log
61 Russia
60.5 Russia
45 British Columbia
Oyu Tolgoi
44 Mongolia
Reko Diq
43 Pakistan
Donlin Creek
40 Alaska
Pueblo Viejo
31 Dominican Republic
Cerro Casale
28 Chile
25 Mexico
Las Cristinas
23 Venezuela
22 Chile/Argentina
21 DRC
Detour Gold
21 Canada
20 Russia

As with oil, much of the easy gold has already been found and dug up. And, per above, of what remains in the earth’s crust, an increasing number of those ounces are in countries with substantial levels of political risk. A couple more on this list have development challenges so extreme that they may never pour a doré bar or could at least see extensive delays.

World gold production is already in decline, falling from 81 million ounces in 2005 to 75.7 million last year, despite the clear financial incentive to produce more. And the dearth of remaining big deposits doesn’t provide much hope that the production decline will turn around anytime soon.

[For more information about gold and gold stocks, including a must-read article on the reasons why Jiao Sixpack the Chinese equivalent of Joe is about to flood into gold, silver, and the related stocks, try a 3-month subscription with 100% money-back guarantee to Casey’s Gold and Resource Report. That’s $39 per year that’s more than worth it.]

Follow the Gold

Louis James, another of the always moving senior members of the Casey Research team, is currently in Chile, chasing up a major new deposit being developed by a highly prospective and very well-run Canadian-listed junior exploration company. Here’s a flash report…I’m in Copiapo, northern Chile, on the edge of the Atacama desert. But I’m not here to taste Atacama wines, I’m here for the Maricunga Gold Belt. That’s because this is one of the few places in the world where companies are making new elephant-size gold discoveries (up to 10 million ounces of gold, some larger) in a politically stable, pro-mining jurisdiction, and I wanted to gather local intel on a couple of particularly promising plays.

I’m very encouraged. This place is really booming. Global economic crisis? Not here. I’m writing from a brand-new hotel that wasn’t even a hole in the ground last time I was here. From my window, I can see mine dumps on the mountainsides outside of town. Are people upset about the environment? Not any I can find. And because I am fluent in Spanish, I can and do ask just about everyone I come into contact with. They’ve got jobs and are building new homes. On the way into town, I saw that one enterprising local entrepreneur had converted what had been a vacant lot into a sales lot for haul trucks and other mining equipment, ready for the highest bidder.

Barrick and Kinross are reported to have completed a final feasibility study on their nearby 25.4-million-ounce Cerro Casale gold project, but have not yet published the results. As you might imagine, lot of people here are waiting eagerly to see if the partners will go ahead with the project, as the initial capex for the mine’s construction in the pre-feasibility study weighed in at $3.65 billion. There are literally thousands of jobs in the balance.

For us, a green light on Cerro Casale will mean even more and better infrastructure in this already active mining area. And it will mean a lot of attention drawn towards the juniors operating in this area, especially the best of the best we are now completing our due diligence on for Casey’s International Speculator.

It’s as close to a certainty as you can have in this business that early investors make big money any time a micro-cap junior explorer can develop a serious new deposit in a mining-friendly jurisdiction with existing infrastructure. That’s what we’re looking for, and finding, here in the Atacama.
(Don’t miss Louis’ final findings on the latest chapter in his quest to find triple-digit profits from well-positioned junior exploration companies including a brand-new company recommendation, a gold producer operating in Mexico whose shares look ready to take a moonshot. Getting started with a fully guaranteed 3-month trial to Casey’s International Speculator is as easy as clicking here.)

The Complex Energy Complex
Dave Hightower, November 2009

In the energy complex, a combination of surging, inelastic global demand, an ineffective global refining industry, and periodic supply setbacks are setting the table for a move to $140 per barrel crude oil prices.

While the groundwork for the historic 2008 price spike could be attributed to the double hurricane strike on the U.S. Gulf Coast’s refinery industry in 2005, the real seed of the rally probably started in 1995, when Chinese petroleum demand first began to exceed domestic supply. Now in 2010, Chinese crude oil demand is expected to be almost twice their domestic supply.

This growth in Chinese demand alone has required another 4 million barrels per day of world oil production. While this increase in world demand grew gradually over the course of a decade, and did so against a background of oil prices not really showing a significant premium until well into 2004, it was not surprising that global supply was outstripped by consumption. In other words, low prices did nothing to encourage exploration or to restrict demand.

Those who think speculation was responsible for the 2008 spike in oil prices need to realize that the best-case forecast for the daily world oil surplus fell below 1 million barrels per day in the months ahead of the peak. Just meeting world demand required almost flawless oil production, unhindered transportation, and, perhaps the hardest element of all, a fully functioning refining effort.

While no one expects U.S. refiners to operate at a loss to ensure the U.S. maintains an adequate supply of fuel products, the refinery industry can to a certain degree influence its own profit margins. Simply, the processing of too much crude oil into end products usually results in a product glut, while processing too little crude oil into end products results in a shortage.

By our calculations, processing too little was the source of four major energy bull market moves from 2000 to 2009. At the end of 2009, the U.S. refinery operating rate dipped down to just 80% of capacity, leaving 20% idled. Poor refinery margins certainly encouraged and possibly justified the slowdown, but if these facilities are left idle for too long, the oversupply of gasoline and distillates will quickly turn into another shortage.

The “Oil Market Manipulation” Argument Is Flawed

The argument that speculators caused the 2008 rally in oil prices is highly suspect, considering that the peak of speculative interest in crude oil futures took place four months ahead of the peak in prices.

Specifically, the Commitments of Traders (COT ) reports show that the net long positions in crude held by speculators fell from 149,000 net long in March 2008 to 83,945 by July 15th, four days after the August 2008 contract peaked at 147.27.
Furthermore, the spec long position peak in 2008 was not even as high as the previous spec long record of 152,000, posted July 31, 2007. If the specs caused the spike in oil prices, why didn’t oil hit the $140 per barrel level in 2007? Apparently it is an “inconvenient truth” that the world petroleum rally was the result of massive annual deficit readings in 2006 and 2007.

Another inconvenient truth is that U.S. EIA weekly motor gasoline stocks were falling to a modern-day record low in the lead-up to the peak in prices. And that U.S. heating oil stocks in early 2008 fell to a modern-day low of just above 20 million barrels!

The subsequent decline in prices, while welcomed in the short term, is likely only temporary. At the 2009 summer lows, nearby crude oil futures fell to within $4 of cost of production for Canadian tar sands oil. This further suggests that it is unrealistic to pine away for a return to $35 per barrel crude oil. Clearly, the world now depends on more expensive sources of oil. Cheaper oil prices will mean less oil supply.

An Important Time for Market Signals

The world is facing an extremely critical junction. We can attempt to regulate commodity trading, as the government is now contemplating, and limit the necessary “investment” required to feed, power, and clothe the world and in turn suffer the ravages of starvation, conflict, and commodity inflation or we can facilitate “investment” and allow the world the ability to cope with the massive changes wrought by globalization.(David again. Who’s talking about oil these days? Answer: Almost no one even though prices have doubled from the recent bottom. And it is going far, far higher. If you do nothing else, do yourself a favor and sign up for a year of

Casey’s Energy Opportunities.
For just $39 a year, you’ll put the entire Casey Research energy team on your side, alerting you to the latest important developments in energy and the undervalued companies that make it easy to profit. Do it now, before oil returns to the headlines, and it soon will. Everything you need to get started can be found by clicking here.

For active traders only, Dave Hightower and his team offer a full-contact trading service, Casey’s Trend Trader, that uses a strategic combination of futures and options to take advantage of fast-moving opportunities in any and all of the major commodities markets. This service is for high-net worth, sophisticated investors. If that’s you then learn more by clicking here.)

Don’t Do It

Looking up Afghanistan in the CIA Fact Book reveals the nation’s official population tally at some 28 million.

But that number is totally, dangerously wrong.

Dangerous because the erroneous population count sets the stage for a certain failure of the United States military’s efforts in Afghanistan, and even raises the possibility of a nuclear conflagration.

I will attempt to quickly explain.

The story begins with an Englishman by the name of Mortimer Durand who, in 1893, was tasked with drawing a border separating Afghanistan from British conquests in India. Other than dictates from the Raj to assure the Brits kept the strategic parts, Durand’s line was arbitrary.

In this way was divided the population of Afghani Pashtuns, the region’s dominant ethnic group.

On one side of the invisible line, in modern-day Afghanistan, live about 12 million Pashtuns (out of a total population of 28 million). Tucked up against the other side of the line, in what now constitutes Pakistan, live another 25 million Pashtuns.
Simply, they are members of the same large family a family with a long and colorful history of putting aside their internecine shoot-ups in order to come together to wear down and ultimately defeat far stronger and better equipped invaders.
Now, look at the map here.

As you can’t miss, there is very long and uninterrupted border between the countries of Afghanistan and Pakistan. A border no more substantial than the ink Durand used to draw it over a century ago.

Across that border, in a region of incredibly hard terrain, flows an almost uninterrupted exchange of relatives, food, guns, refugees, and warriors in need of rest and sustenance, donkeys, RPGs, and any other thing the Pashtuns and other Afghani insurgent groups want to move in one direction or the other.

In the past, I have referenced (and recommended) David Galula’s excellent manual Counter Terrorist Warfare: Theory and Practice, the very same manual that General Petraeus, on taking the reins in Iraq, purchased in bulk for his officers. In his book, Galula lays out the required conditions for success in fighting a guerilla war. At the top of the list is that the insurgents can have no safe sanctuary to which they can retreat to for rest and resupply.

Simply, the Pakistani Pashtun problem alone makes sending more troops into Afghanistan a non-starter. The border separating the Pashtun populations is too long and too rough to control. And so the insurgency will never want for supplies, sanctuary, or fresh soldiers for its struggle. That gives it a staying power well beyond that the latest crop of invaders will be able to manage as the months and years string out and the casualties rise.

Of course, the U.S. could decide to take the war to the Pakistani Pashtuns, using more than just drone strikes. But such an invasion would necessitate pacifying a large, well-armed, and hostile population. It would also likely result in the toppling of our allies in the fragile Pakistani regime. That could then require an even broader action or risk Pakistan’s nukes falling under the radicals’ control. And that would quickly bring India into the picture.

In other words, should the U.S. decide to invade nuclear-armed Pakistan, the whole situation would quickly get so wiggly that there’s no telling where it could lead, but it’s doubtful it would lead anywhere good.

Which leaves the U.S. and its allies with only two alternatives. Get out or continue trying to pacify the Pashtuns (among others) in Afghanistan, while a huge number of their brethren are actively are cheering them on and providing material support from just across Durand’s line. While I am no expert, I have read enough history and Galula’s manual to form the strong opinion that such an effort will end poorly.

Maybe we can get tougher? Really take off the gloves and all that stuff?

Well, it’s hard to imagine how we could get tougher than the Soviets, or Genghis Khan, or Alexander the Great, or all the other invaders that didn’t just capture the region but actively tried to exterminate the population. The Soviets, much to their discredit, actually went so far as to drop bombs designed to look like toys, in order to blow off the arms of the next generation of mujahedeen.

The Afghans are still standing.

Then there’s the all-important question, what exactly is it we are fighting for? On that topic, I’ll have to defer to someone who purportedly knows — or should know: Ambassador Richard Holbrooke, the U.S. special envoy to Afghanistan and Pakistan. Two months ago, he was asked which benchmark the U.S. was using to measure its success and progress in Afghanistan. His response, “We’ll know it when we see it.”

So, why am I writing this article, knowing that it will offend pro-war readers?
First and foremost, because of my distain for foreign adventures and my hope that a pushback from an increasing number of Americans will keep Obama from going deeper into Afghanistan. Secondly, there is a moral issue here. We can’t very well call ourselves the land of the free if we are fighting wars here, there, and everywhere for objectives that even our senior diplomat in the area is unable to enunciate.

And then there is the less important, but still important, question of finances.
Namely, the U.S. is already broke. Thus, the idea of spending trillions of dollars on a war with no clear objective and no clear enemy is not just stupid, it is madness. I read recently that the U.S. spends $350 million a day on fuel alone in Afghanistan and Iraq. Money that is ultimately being spent to support a fraudulent regime that condones the sort of religious intolerance you’d expect to be championed by a mullah from the Middle Ages.

Finally, there is the truth inherent in the old saying, “War is the health of the state.” This war, like so many others, opens the door for the government not only to rationalize the sort of fiscal irresponsibility just discussed, but also to exert more and more control over the populace, all in the name of “national security.” Over the last 100 years, the U.S., despite its high-road self-image, has engaged in more wars, in more countries, than all of the other Western powers combined. Of course, some have made more sense than others. But this one makes no sense at all.

In my opinion, having fired off some shots that cost far too many lives, it’s time for the U.S. to end this madness and head home. Sticking our face ever deeper into the dark hole that is Afghanistan is not just futile, it’s crazy.

Don’t do it.

(And, should Obama opt for an escalation in Afghanistan, run, don’t walk, to the nearest gold window. Because there’s only one way to pay for the massive ongoing operational costs and that’s inflation.)

And that, dear reader, is that for this week. See you on Monday!

David Galland
Managing Director
Casey Research