Daily Dispatch: The End of the Gold Bull Market

May 13, 2010 | www.CaseyResearch.com The End of the Gold Bull Market

Dear Reader,

In communicating with a financial advisor friend of mine this morning, the topic of cash and gold stocks came up. Which got me thinking about a few things I’d like to share with you.

To change things up a bit, I’ll interview… myself.

Q. With gold and gold stocks on a tear, does Casey Research still recommend holding 1/3rd of a portfolio in cash?

A. The answer depends, of course, on what country you are currently sitting in. Were I sitting in the eurozone, I would have already moved much of my safe harbor cash into the “resource” currencies such as Canada and Norway… i.e. countries that are rich in the natural resources that the world needs and will always need.

If my derrière was resting in a seat planted on U.S. soil, as it is, and I didn’t plan on doing any significant overseas spending, then I would feel relatively comfortable for the time being, with a larger than usual allocation to the dollar. But I would have been diversifying into the resource currencies as well.

(One convenient way to do so is with the FDIC-insured EverBank® World currency accounts and CDs details here.)

Q. Hold the fort, dude how can you write frequently about the demise of the dollar and yet be “relatively comfortable” holding the stuff?

A. In a nutshell, the monetary inflation, quantitative easing, and insane spending of the U.S. government, emulated by countries around the globe, have set the table for a large serving of currency depreciation down the road.

Once that depreciation begins to appear in the form of price appreciation, we’ll look to trade our greenbacks for more in the way of tangibles probably more gold… maybe real estate in a good location, location, location… maybe more silver… maybe deep value energy stocks… maybe antiques… maybe some of all of the above.
For the time being because price inflation is not out of control and yields are so low there is little real carrying cost to holding a larger allocation to cash and the flexibility and security of having cash is a big plus.

Q. What about gold and gold stocks today?

A. Gold is sound money. Always has been, probably always will be. In the sort of crisis now underway a crisis that to no small extent is now focused on sovereign fiscal and monetary excesses gold has a particularly important role in protecting wealth.

If you don’t own it, start accumulating it, preferably on the inevitable dips. If you do own it, hold it and consider accumulating it up to somewhere between 20% and 30% of your portfolio, though the exact amount will depend on factors such as your cash flow needs, personal debt obligations, your age and work status, etc. that we can have no way of knowing.

One of the nuances in answering this question has to do with deciding what form of gold to own. While we like physical gold held in a safe place, you don’t want to go overboard because things can happen. For instance, robbery, or even a house fire that melts your wealth back into the dirt. In addition, at some point the gold bull market will end and when it does, the scramble to sell will likely overwhelm the coin dealers to the point where they literally take their phones off the hook. That creates the potential for big gaps down in the price between the time you decide to sell, and are actually able to sell. Mind you, I don’t see that being a concern any time soon but it’s always worth keeping in the back of your mind.

There are a number of other bullion alternatives a big positive being that many are easy to buy, hold, and sell including allocated and unallocated gold accounts, electronic gold, gold ETFs, and so forth. Some are better than others and all are worth understanding before making investments. Our Casey’s Gold & Resource Report is a good source for this sort of info. At just $39 a year, it’s also a real bargain details here.

Generally our recommendation is to hold your gold in a variety of investment vehicles as that will mitigate the risks of having too many eggs in one basket.

Turning to gold stocks, subscribers of some duration will already be well positioned in the best of the best. And will own many positions risk-free, having already recaptured their original investment. If that is the situation you are in, and you really understand the companies you are invested in, then at this point either hanging in for the big upside, or trading the surges and dips, makes sense. If you are new to the sector, I wouldn’t chase the stocks just now but rather put in stink bids i.e. 10% to 20% below the current market, and look to get filled on a correction.

If you are new to the gold stocks, or risk-averse, then look to build a portfolio of large cap gold stocks such as we cover in our Casey’s Gold & Resource Report (more). Those will attract a lot of attention from the public at large, and from institutions, as the bull market gathers steam.

If you have experience with gold stocks, and a higher tolerance for risk, then a subscription to our International Speculator, which focuses on the small-cap Canadian explorers and developers, is right for you. Those juniors have amazing volatility and, when the news is good, the upside can be breathtaking. (more here.)

Regardless of the approach you take, don’t chase stocks as they move higher but look to build your portfolio on dips over the next few months.

The idea is to get positioned before the underlying price of gold reaches a level where the public starts to come into the sector in a big way at which point, if history is any guide, the early investors will make stunning returns.

Q. At what price do the gold stocks catch fire?

A. Some years ago, we had someone spend the better part of a week in a musty storeroom full of old Canadian newspapers, paging through past issues and recording the price and volumes of the gold stocks during the last big run-up, in the 1970s. We then compared that data to the gold price in inflation-adjusted dollars in order to determine the price that the broader investment public began piling into the gold. The number worked out to about $1,250 per ounce in today’s dollars. In other words, when gold decisively takes out $1,250 an ounce and holds above that level, if history is a guide, we may start seeing the average guy on the street and the institutions start to pile into the stocks.

Of course, while interesting from an historical perspective, that analysis has no scientific basis. The key point, therefore, is that during the last big gold bull market the public wasn’t involved in the gold stocks when they should have been in the run-up phase but rather only piled in after the price of gold bullion soared, relatively late in the bull market. So far, the average Joe and Jill are just not in this market. But, they will be.

Q. How high do you think gold will rise?

A. At our recent Crisis & Opportunities Summit (more on CDs), an attendee asked how high we thought the dollar price of gold would reach in this bull market.

My response was that there really is no way of actually forecasting that number, for the simple reason that, in a fiat currency regime, the underlying unit of valuation is so intangible. Let’s say you lived in Zimbabwe some years ago, and owned an ounce of gold. One day your ounce might be worth 1,000 of the local currency units. A year later, it might be 1,000,000. Or, even 10,000,000,000.

While the U.S. is no Zimbabwe at least not yet its currency is just as intangible, for the simple reason that the government can print the stuff pretty much at will. To say that gold will go to $5,000 in the current crisis is really just another way of saying that the dollar currency unit will fall by some significant degree. But, given the uncertainty in the economy, and unknown of what actions the government and the Fed might take next, we really can’t know how much purchasing power the currency unit will lose in the months and years just ahead.

To date, the government has been extraordinarily breathtakingly willing to abuse the dollar. They have largely gotten away with it so far, but that certainly doesn’t mean they have gotten away with it. When the time comes for the piper to be paid, we suspect he’ll be paid pennies on the dollar… which could easily result in gold trading for $3,000, $5,000, $10,000 per ounce but, who knows, maybe even $10,000,000,000.

The point is, given the choice between dollars and gold, you are far more likely to preserve your wealth over the duration of this crisis better with gold.

Q. Is the gold bull market getting old? How much longer can it last?

A. Having been around and actively involved in hard assets as the editor of “Gold Newsletter” and the conference director of the New Orleans Conference during the last big gold bull, I hope I can provide some useful perspective.

For instance, I can well recall in late 1979 when all of the many gurus of the day were predicting gold would keep going higher and higher still. Well, as we all know, it didn’t.
What’s interesting about this time around is that there is almost no scenario we can envisage that is going to kick the legs out from under the gold market at least any time soon. In contrast, in the late 1970s, the gold bulls coulda/shoulda seen that the Fed had a lot of room to act i.e. by pushing up interest rates in order to tackle the price inflation that was the key driving force in the soaring gold prices of the time.

Today, the situation is profoundly different. Starting with the fact that this is, at the core, a debt crisis. And the one thing you can’t do in a debt crisis is to encourage interest rates to rise. Look no further than Greece for that lesson.

So, we have an unprecedented monetary inflation, truly out-of-control sovereign spending and debt, unprecedented levels of private debt, unprecedented trade deficits, a massively overbuilt and overpriced post-bubble real estate market and, importantly, near historically low interest rates.

So, we have to ask ourselves other than continuing to exercise its powers of fiat money creation what ammunition does the government have at its disposal to address the structural problems of today’s economy? And, of course, actually creating more money and more debt isn’t addressing the structural problems, it is compounding them.

Of course, the government can default on their sovereign obligations an option I think we’ll see Greece and others of the PIIGS take, and probably fairly soon.

They can also continue to inflate, which we expect them all to do.
And they can… no, actually, I think that about sums it up: default or inflate. In either scenario, gold is going to be seen as the ultimate safe harbor.

Q. Won’t the government see gold as a threat to its fiat currency and try to do something about it?

A. Of course, governments might try any number of stunts that could affect gold. For example, raising margin requirements to curb playing the markets with leverage, or even attempting outright confiscation.

All we can do is to monitor the situation closely and try to anticipate their next moves in order to get out of the way. A number of people I know have opened safety-deposit accounts in other countries as one way to hedge their bets against confiscation. Others have bought numismatics but be careful on that front, because that can increase illiquidity.

It is not out of the question, in my view, that before this is over we could see a revaluation of gold in order to relink the U.S. dollar to it because sooner or later, as the crisis reaches its climax, something is going to replace the fiat currencies but at this stage it’s impossible to guess what that will look like. If we did see a return to a gold standard, then the government could actually be responsible for sending gold up by many multiples.

Back to the present, at this point I can’t see anything that is going to derail this bull market but I do see a whole lot of things with the potential to send it into the stratosphere.

Q. Thank you for your time.

A. My pleasure. Always happy to be of help.

Q. You’re kind of strange, talking to yourself and everything. You know that, right?

A. Sometimes I wonder.

Speaking of Gold

While we don’t use technical indicators in our analysis, a lot of active traders do. As such, the tripping of key technical supports can serve as something of a self-fulfilling prophecy. Which is why we do like to keep at least one eye on it.

The chart here shows one of the technical views of gold’s breakout, and an analysis that expects gold stocks to move strongly higher from here. As the chart is too small for most to read, you can hit the link here to view a larger version.

A Hung Parliament
By General Watson from the Algarve

While a long-term expat from his native Britain, friend and correspondent General Watson makes it a point to keep up with the happenings in the land of his birth. In this installment, he sheds some light on the turnabout in British politics thanks to the recent election.

There are 650 constituency seats in the British Parliament. This means that to form a new government, one party has to win a majority of 326 seats. Last week’s general election result was that the Tory (conservative) party won 306, Labour (socialist) won 258, the Liberal/Democrats (centrist) party won 57 seats, and Others won 28. This means that no one scored an overall majority. This is referred to as a ‘hung parliament.’

The British system is ‘first past the post’ in each constituency. As a result, the names of the leaders standing for election do not even appear on the ballot paper, except in their own constituency. For the first time ever there were three live, 90-minute TV debates featuring the three party leaders: David Cameron of the Conservatives, Gordon Brown from Labour, and Nick Clegg from the Liberal/Democrats. The big surprise was that Nick Clegg, who was not well known to voters, performed very well.

The election result was that someone had to put together a coalition of two parties. This gave Clegg an opportunity to horse-trade his seats between the Conservative and Labour parties. They also must agree on their potential common policies. This took five days of negotiations. Even though Brown had obviously lost, tradition has it that Brown should remain as prime minister until a new one is appointed by the Queen. So Führer Brown hunched down in his 10 Downing Street bunker, until the war was over.

The end result was that, eventually, the Conservatives did a deal with the Lib/Dems to form a coalition government with David Cameron as prime minister and Nick Clegg as deputy prime minister. This meant that Gordon Brown had to go down to Buckingham Palace to see the ‘Head Mistress’ and resign his premiership. The ‘Boss’ then appointed David Cameron as the new prime minister.

This is the first coalition government in the UK since World War Two. And Cameron, at 43, is the youngest prime minister in 200 years. As the price for coalition, the Lib/Dems also get five members of their team appointed to cabinet posts. The key Conservative appointments are that 38-year old George Osborne will become chancellor of the exchequer (treasury secretary) and William Hague will be the new foreign secretary. In the meantime, Gordon Brown has also resigned as the leader of the Labour party and the deputy leader Harriet Harman will take over on a temporary basis, until Labour has a new leadership election in the next few weeks. The most likely winner of that is David Miliband, the previous foreign secretary, who is reported as being a great favorite of Hillary Clinton’s.

The new government is facing an annual deficit of 163 billion pounds, which represents about 12% of GDP and is nearly as bad as Greece. They have promised that they will tackle the deficit with a new emergency budget within 50 days, which will cut government expenditures and no doubt increase some taxes. Sounds familiar, but seeing is believing.
David, again. The initial word out of the new government is that they will soon propose a cut in spending of 8 billion pounds. Not much of a dent, though it wouldn’t surprise if the public reacted negatively to even that amount. Speaking of the public acting badly, click here for a just-released video of protestors trying to storm a bank in Greece… I mean, Ireland.

Plain Insane

Since we’re in video watching mode, check out this video from the state of Pennsylvania in which they overtly use the latest in Big Brother technology along with the added threat one would associate with drone warfare to threaten delinquent taxpayers.
When I first watched it, I thought it was a joke… a spoof. It’s not. And the worst part is they don’t even know how wrong this is.

Watch it here


(Thanks Jeff, for sending that along.)
MiscellanyBye Bye BP? In NYC, I had a beer with an old college chum who is now a partner in a law firm that has been retained by one of the litigants in the Deeper Horizon rig accident. He figures that the case will provide a good ten-year annuity for his firm. And he also thought, as have others I’ve spoken to, that this could ultimately take BP down.

This whole litigation thing is just getting started. The trend for looking to harvest cash with more and bigger litigation in the U.S. won’t stop with a deep-pocketed, oil-spilling, foreign conglomerate (translation: BIG target), but will expand to Wall Street banks and the rating agencies whose primary function during the mortgage crisis was to put lipsticks on the portfolios of pigs.
The lawsuits will come from governments, from the pension plans that thought they were buying safe bonds, from folks in the fishing industry… hell, from everyone, about everything. In the end, the biggest winner will be the U.S. government that will have its hand out at every turn, and the biggest loser the American public, who will find itself scratching its collective head in the dark and wondering why no foreigners want to do business over here.

Report from the Sacramento Phyle. If you want to know what other readers are thinking, check out this recap of the recent Casey Phyle meeting in Sacramento. For those of you new to Casey Research, these “phyles” a term from sci-fi writer Neal Stephenson meaning a group of individuals who affiliate with each other based on shared views are informal meet-up groups of Casey readers. To find out if there is a Phyle near you, drop us a note at phyles@CaseyResearch.com.

Coming Monday a Return of the Deutsche Mark? Okay, this is way out there but one of our researchers came across an online posting from a person who purports to work at Deutsche Bank who claims to have been working for months on a surprise reintroduction of the Deutsche Mark… this coming Monday. While I have to take this information with a large bag of salt it sure would shake things up in the eurozone if it were true.
And that, dear reader, is that for the day. Until tomorrow, thanks for reading, and for subscribing to a Casey Research service.

For those of you new to our services, don’t miss this opportunity to “dip your toe” into gold and gold stocks with our Casey’s Gold & Resource Report. At just $39 a year with a 3-month unconditional money-back guarantee, you literally can’t go wrong. Here’s the link.

David Galland
Managing Director
Casey Research