Economic Analysis from John Mauldin
- Wed, 30 Jul 2014 16:54:00 +0000: Big Banks Shift to Lower Gear - Mauldin Newsletters
For today’s Outside the Box, good friend Gary Shilling has sent along a very interesting analysis of the big banks. Gary knows a lot about what went down with the big banks during and after the Great Recession, and he tells the story well. After the bailout of banks during the financial crisis, many wanted too-big-to-fail institutions to be broken up. Big banks resisted and pointed to their rebuilt capital, but regulators are responding with restraints that strip them of proprietary trading...
- Sun, 27 Jul 2014 00:57:00 +0000: Time to Put a New Economic Tool in the Box - Mauldin Newsletters
[E]conomists are at this moment called upon to say how to extricate the free world from the serious threat of accelerating inflation which, it must be admitted, has been brought about by policies which the majority of economists recommended and even urged governments to pursue. We have indeed at the moment little cause for pride: as a profession we have made a mess of things. It seems to me that this failure of the economists to guide policy more successfully is closely connected with their...
- Thu, 24 Jul 2014 20:05:00 +0000: Geopolitics and Markets - Mauldin Newsletters
Growing geopolitical risk is on everyone’s mind right now, but in today’s Outside the Box, Michael Cembalest of J.P. Morgan Asset Management leads off with a helpful reminder: the only time since WWII that a violent conflict has had a medium-term negative effect on markets was in 1973, when the Israeli-Arab war led to a Saudi oil embargo against the US and a quadrupling of oil prices. And he backs up that assertion with an interesting table of facts labeled “War zone countries as a percentage...
- Sun, 20 Jul 2014 15:22:00 +0000: GDP: A Brief But Affectionate History - Mauldin Newsletters
“Measurement theory shows that strong assumptions are required for certain statistics to provide meaningful information about reality. Measurement theory encourages people to think about the meaning of their data. It encourages critical assessment of the assumptions behind the analysis.
- Tue, 15 Jul 2014 23:43:00 +0000: Hoisington Investment Management – Quarterly Review and Outlook, Second Quarter 2014 - Mauldin Newsletters
This week’s Outside the Box is from an old friend to regular readers. It’s time for our Quarterly Review & Outlook from Lacy Hunt of Hoisington Investment Management, who leads off this month with a helpful explanation of the relationship between the US GDP growth rate and 30-year treasury yields. That’s an important relationship, because long-term interest rates above nominal GDP growth (as they are now) tend to retard economic activity and vice versa. The author adds that the average...
Economic Analysis from Casey Research
- Thu, 31 Jul 2014 06:25:00 +0000: Can Measles Cure Cancer? - Casey Research - Research & Analysis
No, not the disease itself, but the live attenuated vaccine against it.
And yes, it just might cure some forms of cancer.
At least, that was the headline-grabbing conclusion that emerged from the Mayo Clinic in mid-May of this year. It came about after an experimental treatment that had previously succeeded only in mice. And the patient population was unfortunately rather small: two. Nevertheless, the result was startling.
Stacy Erholtz was dying of blood cancer, having exhausted all conventional therapies. In a last-ditch effort to save her life, doctors at the clinic injected her with a massive concentration of measles vaccine, which appears to have an affinity for certain kinds of tumors. Erholtz received 100 billion “infectious units” all at once. That’s the equivalent of a standard vaccination for 10 million people.
Result: after that one infusion, the cancer—which had widely metastasized—went into complete remission and has vanished from Erholtz’s body.
Medical scientists have long known that viruses can have cancer-destroying properties. They bind to tumors and use them as labs to manufacture their own genetic material, eventually bursting the host cell and releasing the viral buildup. That would be an undesirable outcome, so researchers have been focusing on antiviral vaccines that have been rendered safe, to see if they can produce the same effects. That could be an adjunct to targeted therapy, where radioactive molecules might be made to piggyback on the vaccines, to destroy cancer cells without causing damage to healthy cells in the vicinity. The body’s immune system also gets involved, going after any cells that carry the vaccine’s genetic imprint.
But the best case would be a vaccine alone knocking tumors out. Now it’s apparently happened and, in the words of Mayo’s lead researcher, Dr. Stephen Russell: “It’s a landmark.”
The experiment was a proof of concept that was important not only for the cure, but also for answering another critical question. Researchers have been searching hard for the threshold level of virus that’s required to defeat the defense mechanisms in cancerous tumors. The Mayo study helps set that bar, notes Dr. John C. Bell of the Centre for Innovative Cancer Research in Ottawa.
Clinicians had started with doses of 1 million infectious units and worked their way up before finally achieving efficacy at the 100-billion level. Bad luck for those who received the lower dosages, because this is a one-shot deal. Once the vaccine has been introduced, the body’s immune system will recognize it and attack any future incursions.
That would also seem to be true of people who have already received the vaccine as a measles preventative. Yet there might still be hope. Patients with myeloma-type cancer (bone marrow and blood plasma) often have suppressed immune systems, which could be enough to allow the virus to slip by and do the job. In addition, Dr. Russell says that breaking down the immune system prior to treatment will be part of another upcoming clinical trial.
The immune system might also be tricked by taking a patient’s own cells, loading them up with the virus, and injecting them back into the blood. “That way it doesn’t get destroyed before it reaches its target,” Russell says.
Unfortunately, the second patient who received the same treatment did not respond as well. Her tumors were in her leg muscles. That may mean that measles is attracted only to myelomas, but Russell hopes not. He says that researchers will study how various types of tumors affect the lethality of the virus. “I think if we had been able to give bigger dose, we might have gotten a better outcome in that second patient,” he adds.
Dr. Bell, who wrote an editorial to accompany publication of the experiment in the journal Mayo Clinic Proceedings, is obviously encouraged. “Without trying to hype it too much, it is a very significant discovery,” Bell says.
Significant enough that the clinic is enrolling patients now for a larger-scale trial to see if the same result can be duplicated across a range of cases. Mayo expects to launch the trial no later than September.
Of course, finding a cure for cancer that’s simple, preferably “natural,” and free of gruesome side effects is everybody’s goal. No one is happy with the current triumvirate of surgery, radiation, and chemotherapy—AKA “slash, burn, and poison.”
Thus it’s no surprise that people will try anything that holds out even a glimmer of hope. Many such “cures” have been trumpeted over the years.
Remember Laetrile? A synthetic compound that’s chemically related to amygdalin—a substance found naturally in the pits of apricots and other fruits—it enjoyed brief notoriety in the 1950s when its discoverer touted it as a cancer treatment. It was never approved for use in the US, but many desperate people made the trip to Mexico, where it could be legally obtained. They were disappointed. Scientists eventually tested it in more than 20 animal tumor models, as well as in humans, and found no benefit either alone or in combination with other substances.
Perhaps chocolate lovers should rejoice… or not. One clinical trial found that dark chocolate reduces some kinds of DNA changes that can lead to cancer, and a few others have noticed improvements in other chemical changes related to aspects of the disease. All of this is preventative, not curative (though if real, that would be most welcome). But researchers have yet to isolate the beneficial compounds in chocolate and prepare higher doses to test out. No double-blind human studies of any kind have yet been done.
There are endless further examples. Juice regimens, enemas, Vitamin D, wheatgrass, selenium, green tea, shiitake mushrooms, cruciferous vegetables, on and on—you name it and chances are pretty good that someone claims it has cancer-fighting properties. I typed “natural cancer cures” into Google and got over 250,000 hits.
Some of them may even work. We don’t know, because few have been subjected to the kind of rigorous clinical trials the FDA requires before releasing a new drug for public consumption.
Is it possible, as alternative medicine promoters would have it, that there’s a conspiracy afoot? That nobody tests potential natural cancer cures because they couldn’t profit from something that’s cheap and freely available? Sure. In fact, the latter statement is a certainty. But a conspiracy isn’t needed. No pharmaceutical company is going to push broccoli through even minimal Phase I trials. You can’t patent broccoli. (Although, since the courts have begun allowing patents on other naturally occurring substances, fruits and vegetables may someday be branded like football stadiums.)
With FDA approval of a new therapy now costing a billion dollars or more and often taking a decade, companies can’t afford to take a flier on wheatgrass. They have to shoot for blockbusters that can earn back high multiples of the investment if they want to remain in business.
As of now, evidence of natural cures is purely anecdotal. And so it must remain for the foreseeable future, until anecdotal material about one particular cure piles up so much it can’t be ignored. Even then, some nonprofit, academic lab, or government agency has to be willing to step up and do the necessary testing without a profit incentive.
Meanwhile, though, actual clinical research is proceeding on a number of alternative cancer treatment fronts besides the measles vaccine. Hormone therapy, immunotherapy, angiogenesis inhibitors, high-intensity focused ultrasound, photodynamic therapy, radiofrequency ablation, telomerase therapy, nanobubbles, bacterial treatments—all are either here now, in trials, or on the near horizon.
We’ve reported on all of them in Casey Extraordinary Technology. We also monitor this ongoing cancer research closely in order to identify companies we think will provide the high level of returns that we’ve achieved with cancer drugs and other medicine-related investments. Our screening process is rigorous. And more often than not, we’ve scored big. We’ve booked winners on 14 out of 17 closed positions in the biotech and medical device sectors. That includes 305% gains on Isis Pharmaceuticals, 127% on Alnylam Pharmaceuticals, 108% on Seattle Genetics—plus 197% on MannKind Corp. and 167% on Celsion in just 6.5 and 7 months respectively. Want to examine our complete track record? Want to find out which biotech stocks are our current best bets? You can, when you sign up for a risk-free 90-day trial…
- Wed, 30 Jul 2014 05:52:00 +0000: Why the Fed’s Taper Hasn’t Hurt the Stock Market… Yet - Casey Research - Research & Analysis
I have a treat for you today: an original piece of analysis by Casey Research Chief Economist Bud Conrad.
It’s a must-read… especially if you’ve been wondering how the Fed has managed to ease its foot off the money-printing pedal without interrupting the bull market in stocks.
Managing Editor of The Casey Report
Why the Fed’s Taper Hasn’t Hurt the Stock Market… YetBud Conrad, Chief Economist
Today (Wednesday, July 30) at 2 p.m. Eastern time, the Fed will issue a statement on monetary policy. I don’t expect it to contain any surprises. The Fed will continue to taper by reducing its quantitative easing (QE) purchases by another $10 billion/month, bringing total purchases to just $25 billion per month.
Further, I think the Fed will stick to its plan to end QE purchases altogether by October:
Expected monthly QE purchases FOMC QE in $B June 17-18 35 July 29-30 25 September 16-17 15 October 28-29 0 December 16-17
The Fed simply has no reason to deviate from its tapering plan. Normally, monetary tightening produces undesirable effects. But none of those effects has shown up yet. Stocks continue to rise. Long-term interest rates remain ultra-low. The unemployment rate is improving. And inflation—at least as the government reports it—is rising only modestly.
Naturally, the question is: how has the Fed managed to taper without roiling markets?
The answer: the Fed has printed so much money in the past few years that it can afford to take a breather. Since 2013, the Fed has been growing its balance sheet (by buying Treasuries and mortgage-backed securities) faster than the government debt has grown.
As you can see in this chart, the growth of US government debt (gold line) and total Fed assets (gray line) both exploded as part of programs to stimulate the economy after the credit crisis of 2008. The basic mechanics were that the US government borrowed money by selling Treasuries, and the Fed bought a large portion of those Treasuries with freshly printed money.
But look closely and you can see that since 2013, the Fed’s balance sheet has grown faster than government borrowing:
In essence, the Fed printed enough money to meet the demand for credit and then some—which has afforded it some leeway to taper for a little while.
All that new money creates side effects, of course. The Fed’s liquidity kept interest rates low and drove asset prices, including the stock market, higher. As you can see here, it’s crystal clear that the Fed has driven the stock market higher since the financial crisis:
Now that it’s slightly ahead of the game, the Fed can ease its foot off the gas without causing the immediate reversal of those effects.
So what’s next? The government is still borrowing hundreds of billions of dollars per year, so the Fed can’t nix QE forever. Not to mention that the accumulated “surplus” of printed money will only last a couple of months. Sooner or later (probably sooner), the stock market will start to feel the pain of this monetary tightening.
By zooming in to look at the monthly changes of the Fed balance sheet vs. the stock market, we can see that the lack of QE will be a major headwind for the stock market:
My guess is that if the stock market drops 20-30% by 2015, the Fed will be back with more QE.
Notice what we’re not talking about here: an exit strategy. The Fed is merely reducing its asset purchases; it’s not even considering selling the $3.5+ trillion in assets that it has accumulated since the financial crisis. That’s no surprise; there's zero political will for anything that might slow the economy, cause stocks to fall, or cause rates to spike—especially in an election year.
I don’t see any “Exit Ahead” for the Fed.
What I’m More Worried About…
I find it amazing that most economists still don’t recognize the importance of political conflict on economies. Economists love anything expressed in numbers: they’ll analyze Fed minutes, GDP, interest rates, and unemployment to death. But because political conflicts aren’t quantifiable, economists largely ignore the crucial impact of wars.
I admit that we have no way of predicting wars, so the analytical tools are inadequate. But the simple fact is that history is defined more by war more than by economic theory. For that reason, I’m much more worried about the wars brewing in Ukraine, Iraq, Gaza, and Africa than Fed actions.
Just a quick look at the redrawn borders of Iraq shows how dire the situation has already become:
These conflicts look like they’re only going to get worse. In the case of Iraq, it’s likely that the world will lose access to Iraq’s oil supply for at least a while.
I analyzed the implications of losing Iraq’s oil in If Iraq Implodes, Stocks Will Plummet. In a nutshell, energy prices would spike… and energy price spikes have historically been very bad for the US stock market. Of course, there’s much more to the story; you can get my full analysis in the latest edition of The Casey Report. If you’re not yet a subscriber, I encourage you to take us up on our generous 90-day risk-free trial by clicking here.
Overall, my conclusion is that while the Fed’s actions are important, world geopolitics are more important. I think economists who fret over the wording of the most recent FOMC release are missing the big picture. Geopolitics drive markets… even more so than Ben Bernanke’s—and now Janet Yellen’s—proclamations.
- Tue, 29 Jul 2014 06:34:00 +0000: Arctic Oil Spill Kills Santa Claus - Casey Research - Research & Analysis
Bad news, kids. A massive oil spill just devastated the North Pole. And it’s all Royal Dutch Shell’s fault.
So says Greenpeace in an apocalyptic ad that accuses the oil conglomerate of “polluting our kids’ imaginations” because of their partnership with Lego to make Shell-branded toys.
If you haven’t seen it, the video opens in an Arctic wonderland constructed entirely in Legos (à la The Lego Movie).
The sun is shining, Inuit are fishing, and polar bears are playing in the snow… until tragedy strikes.
One of Shell’s offshore rigs begins spilling oil—drowning everything and everyone in its path, even poor ol’ Santa.
It’s a gruesome scene, followed by a plea for the viewer to sign a petition asking Lego to cut its ties with Shell.
It makes you wonder: how did those evil oil barons at Shell manage to corrupt something as innocent and pure as Legos?
Well, there’s a problem here. As much as Greenpeace would like us to believe it, Legos aren’t made from recyclable fairy dust…
Legos are made out of oil.
Not to get too technical, but one of the key ingredients in the manufacture of ABS plastics is propylene, a petrochemical refined from crude oil. ABS plastics are used to make thousands of products, including the device you’re using to read this now… and Legos.
And who is a major supplier of propylene? You guessed it: Shell!
You have to marvel at the hypocrisy here.
Yet this is just another in a long line of campaigns out to make us feel guilty for consuming petroleum products. Extreme environmentalists must be among the angriest people on the planet. They just drowned Santa Claus in a sea of crude, for Pete’s sake!
They fixate on the negative with suffocating myopia. They never offer market solutions or policies for improving the environment—they only propose more regulations and controls for reducing our carbon footprint.
It almost sounds as though groups like Greenpeace want us to dramatically reduce our standard of living and trade in all the benefits of the Industrial Revolution for living in communal Paleolithic huts.
Like most special interest groups in America right now, these environmentalists have a voice in Washington. (The Anti-Shell Lego video has nearly 5 million views already.) Any liberal candidate seeking election must pander to the green movement. Case in point—here’s another Greenpeace directive:
“Tell President Obama to reject the Keystone XL pipeline.”
The Keystone XL project is front-page news because environmentalists have turned it into the defining issue of the movement… almost a referendum on climate change. The reason is, the proposed pipeline crosses an international border and requires approval from the State Department and President Obama. That makes it a national issue… a newsworthy cause that suddenly makes bloggers in Brooklyn care about a pipeline being built in Montana.
The flurry of petitions and protests are a boon to environmental groups. In fact, the Sierra Club raised over $1 million in just six weeks for an anti-pipeline rally.
Yet, even though he’s the “environmental president,” Obama’s in a sticky spot here. He knows the importance of the pipeline. But if he approves it, he risks alienating an important part of his base at a time when his party is barely winning elections.
So, like any seasoned waffler, he doesn’t veto the pipeline outright—he merely delays approval. Meanwhile, we have a North American oil boom underway, and suppliers need to get their oil to refiners.
Enter the rise of transporting oil via rail. Volumes of oil being shipped by rail are at a record high—and so are accidents.
The most catastrophic to date was in Lac Mégantic, Quebec, where parts of the town were leveled and 47 people lost their lives. Despite this disaster, oil trains must roll on in the absence of pipelines if producers are to meet demand.
Accidents are becoming more frequent. There were four derailments in six months in North Dakota alone. And just this past April, an oil train burst into flames in Lynchburg, VA.
So, by environmentalists holding up the build-out of the Keystone XL that would stretch through rural, unpopulated areas, they’re essentially making it mandatory for more 75-car-long oil trains to rumble through cities and towns, just inches from Main Street.
Again, it’s absurd… even more so when you compare the safety record of pipelines to trains.
Of the 474.6 billion gallons of crude and petroleum products shipped by pipe in 2012, just 0.0005% were spilled. Number of casualties: 0. Among the safest is none other than the existing Keystone pipeline.
If you weren’t aware, Keystone XL represents Phase 4 of the project, an “express line” extension. Phase 1 of the Keystone pipeline has been operating since 2010 and has safely moved over 600 million barrels of oil through the Western states without incident.
Pipelines are the fastest, safest way to get oil to market. And President Obama knows this. Before the Keystone XL debacle, he made it a campaign promise to build more pipelines. And say what you will about the man, aside from the XL project, he’s quietly kept that promise. In fact, he greenlighted an 800-mile-long pipeline that’s 17% larger in diameter than Keystone XL and runs right through some of the most sensitive ecosystems on the planet.
On this, he’s not blowing smoke. Obama’s personal attorney and former White House counsel is on the case, representing the company building it. Yet there hasn’t been a peep from Greenpeace and company on the issue. Except for being buried deep in the business section, it’s barely been mentioned in the press.
That’s why we call it:
Obama’s Secret Pipeline.
The reason this pipeline was rubberstamped—and why protests have been undetectable—is that it’s all part of the president’s green-energy agenda. You see, this pipeline will be shipping natural gas, not oil.
Though still a fossil fuel, in the eyes of both environmentalists and the White House gas is “green” because it’s efficient, burns cleaner than oil, and isn’t prone to damaging spills.
A federal blessing on this pipeline backed by the president’s former lawyer is good news, but what makes it exciting for investors right now is the deal that was just brokered to build it. As you may have guessed, this massive pipeline is being built in Alaska; it links the North Slope—a reserve of 35 trillion cubic feet of conventional natural gas—to an off-load point near Anchorage.
The man at the center of the project, Alaska Governor Sean Parnell, virtually guarantees a successful completion of the pipeline. Governor Parnell is a former employee and lobbyist for ConocoPhillips, a major producer of gas in the North Slope. (His ties to the industry run so deep that the Alaska Dispatch News called him the “Manchurian Governor.”)
Parnell brought ConocoPhillips to the table along with BP and ExxonMobil to create a key partnership with the State of Alaska to transport 500 million cubic feet of gas a day through this pipeline. Then, as a savvy former industry insider, the governor cut an amazing deal for the state. He signed into law a bill that requires Alaska to be paid “in kind”—meaning the state will be taking its share of the royalty and tax revenue in the form of natural gas, not cash.
This gives Alaska a 25% stake in the project, sufficient capacity for the state to ship part of its own share of the gas. (The goal is for Alaskans to fulfill their needs first, then export the surplus.) It’s the first time a US state has participated in a deal of this kind.
But what does the state know about gas infrastructure and transportation? They’re bureaucrats, not engineers. That’s why the bill further provides for the state to separately negotiate a deal with the pipeline builder to invest in the state’s 25% share of the proposed pipeline project. This company provides up to $8 billion in funding to finance Alaska’s part of the construction of the project; and once it’s built, it becomes the sole transporter of the state’s share of the North Slope gas reserves, collecting fees in the process for decades to come.
This is truly a sweetheart deal for this company. And it’s just one of the many reasons why we recently recommended it in Casey Energy Dividends, our newsletter dedicated to finding safe, high-yield opportunities.
You see, this new Alaskan pipeline, Obama’s Secret Pipeline, is another in a long line of cash-generating projects for this pipeline company. It already operates 35,500 miles of pipelines and 407 billion cubic feet of natural gas storage. It’s a well-established firm with a long track record of rewarding shareholders with dividends. And even though the Alaskan deal gives it more value, shares are still cheap, making now the best time to get in.
If you’d like to invest in the ultimate winner of this just-approved 800-mile-long natural gas pipeline, you can get our full research on this company—including its name and ticker symbol—in a new report titled The Cash-Cranking Company Building Obama’s Secret Pipeline.
Inside, you’ll get a full analysis of this company and see exactly why it has twofold potential of capital appreciation and safe, increasing dividends (it currently yields 3.64%). All you have to do to get this report is agree to give Casey Energy Dividends a try. When you click here and start a free trial, you can grab a copy of this report and test-drive the newsletter free for 90 days. If at any time during your trial you aren’t satisfied, you can call or email us to cancel, receive a full refund. Your special report, The Cash-Cranking Company Building Obama’s Secret Pipeline, is yours to keep with our compliments.
It’s a win-win proposition entirely in your favor, much like the incredible deal our pipeline company cut with the State of Alaska. If you want in too, click here to get your special report and start a risk-free 90-day trial to Casey Energy Dividends.
- Mon, 28 Jul 2014 11:26:00 +0000: Seeing Rallies and Corrections for What They Are—And Profiting Either Way - Casey Research - Research & Analysis
I’m on my way home from the just-concluded, first-ever Sprott Natural Resource Symposium. The show was well attended, which I expected, given the stature of the Sprott organization, but what really struck me was the very upbeat mood of most of the attendees.
Given that gold’s two rallies thus far this year have fizzled, and there’s much uncertainty about the next near-term move—and given how bearish so many gold investors have become over the last three years—this was a very pleasant surprise.
You can see the same bullishness in our stock prices, many of which are up over 100% from their December 2013 lows, while gold is currently up less than 10% over the same time period.
That’s important because, in our sector, the stocks often lead the metals.
But for a more fundamental look at what makes our investments tick, Casey Research Analyst Laurynas Vegys has a look at the rallies and corrections thus far in this metals cycle. The “so what?” of it all is quite compelling.
Before I turn the show over to Laurynas, however, I want to remind readers that it's not too late to sign up for our Casey Summit coming up in September, in San Antonio, Texas. These things really are a lot of fun, and the amount of knowledge and insight transmitted is huge. I look forward to seeing many of you there.
Senior Metals Investment Strategist
Rock & Stock StatsLastOne Month AgoOne Year Ago Gold 1,306.73 1,322.60 1,328.80 Silver 20.72 21.12 20.15 Copper 3.23 3.17 3.19 Oil 102.09 106.50 105.49 Gold Producers (GDX) 26.82 25.76 27.21 Gold Junior Stocks (GDXJ) 42.89 41.19 42.68 Silver Stocks (SIL) 14.13 13.91 13.53 TSX (Toronto Stock Exchange) 15,455.00 14,974.65 12,669.14 TSX Venture 1,017.24 1,015.04 924.17
Seeing Rallies and Corrections for What They Are—And Profiting Either WayLaurynas Vegys, Research Analyst
Sometimes I see an important economic or geopolitical event in screaming headlines and think: “That’s bullish for gold.” Or: “That’s bad news for copper.” But then metals prices move in the opposite direction from the one I was expecting. Doug Casey always tells us not to worry about the short-term fluctuations, but it’s still frustrating, and I find myself wondering why the price moved the way it did.
As investors we’re all affected by surges and sell-offs in the investments that we own, so I want to understand. Take gold, for example. Oftentimes we find that it seems to tease us with a nice run-up, only to give a big chunk of the gains back the next week. And so it goes, up and down…
The truth is—and it really is this simple, but so obvious that people forget—that there are always rallies and corrections. The timing is rarely predictable, but big market swings within the longer-term megatrends we’re speculating on are normal in our sector.
Since 2001, the gold price had 20 surges of 12% or greater, including the one that kick-started 2014. Even with last year’s seemingly endless “devil’s decline,” we got one surge. If we were to lower the threshold to 8%, there’d be a dozen more and an average of three per year, including two this year.
Here at Casey Research, we actually look forward to corrections. Why? We know we’ll pay less for our purchases—they’re great for new subscribers who missed the ground-floor opportunities years ago.
This confidence, of course, is the product of decades of cumulative experience and due diligence. We’re as certain as any investor can ever be that today’s data and the facts of history back our speculations on the likely outcomes of government actions, including the future direction of the gold price.
When you keep your eye firmly on the ball of the major trends that guide us, you can see rallies and corrections for what they are: roller-coaster rides that give us opportunities to buy and take profits. This volatility is the engine of “buy low, sell high.” Understanding this empowers the contrarian psychology necessary to buy when prices on valuable assets tank, and to sell when they soar.
There have been plenty of opportunities to buy during the corrections in the current secular gold bull market. The following chart shows every correction of 6% or more since 2001.
As you can see, there have been 28 such corrections over the past 13 years—two per year, on average. Note that the corrections only outnumber surges because we used a lower threshold (6%). At the 12% threshold we used for surges, there wouldn’t be enough to show the somewhat periodic pattern we can see above. It’s also worth noting that our recent corrections fall well short of the sharp sell-off in the crash of 2008.
Of course, there are periods when the gold price is flat, but the point is that these kinds of surges and corrections are common.
Now the question becomes: what exactly drives these fluctuations (and the price of gold in general)?
In tackling this, we need to recognize the fact that not all “drivers” are created equal. Some transient events, such as military conflicts, political crises, quarterly GDP reports, etc., trigger short-lived upswings or downturns (like some of those illustrated in the charts above). Others relate to the underlying trends that determine the direction of prices long term. Hint: the latter are much more predictable and reliable. Major financial, economic, and political trends don’t occur in a vacuum, so when they seem to become apparent overnight, it’s the people watching the fundamentals who tend to be least surprised.
Here are some of the essential trends we are tracking…
The Demise of the US Dollar
Gold is priced around the world in United States dollars, so a stronger US dollar tends to push gold lower and a weaker US dollar usually drives gold higher. With the Fed’s money-printing machine (“quantitative easing”) having been left on full throttle for years, a weaker dollar ahead is a virtual certainty.
At the same time, the US dollar’s status as reserve currency of the world is being pushed ever closer to the brink by the likes of Russia and China. Both have been making moves that threaten to dethrone the already-precarious USD. In fact, a yuan-ruble swap facility that excludes the greenback as well as a joint ratings agency have already been set up between China and Russia.
The end of the USD’s reign as reserve currency of the world won’t end overnight, but the process has been set in motion. Its days are all but numbered.
The consequences are not favorable for the US and those living there, but they can be mitigated—or even turned into opportunities to profit—for those who see what’s coming. Specifically, this big-league trend is extremely bullish for real, tangible assets, especially gold.
Out-of-Control Government Debt and Deficits
Readers who’ve been with us for a while know that another major trend destined for some sort of cataclysmic endgame can be seen in government fiscal policy: profligate spending, debt crises, currency crises, and ultimately currency regime change. This covers more than the demise of the USD as reserve currency of the world (as mentioned above); it also covers a loss of viability of the euro, and hyperinflationary outcomes for smaller currencies around the world as well.
It’s worth noting that government debt was practically nonexistent, by modern standards, halfway through the 20th century. It has seen a dramatic increase with the expansion of government spending, worldwide.
The US government has never been as deep in debt as it is today, with the exception of the periods of World War II and its immediate aftermath, having recently surpassed a 100% debt-to-GDP ratio.
Such an unmanageable debt load has made deficits even worse. Interest payments on debt compound, so in time, interest rates will come to dominate government spending. Neither the dollar nor the economy can survive such a massive imbalance so something is bound to break long before the government gets to the point where interest gobbles up 80%+ of the budget.
Gold Flowing from West to East
The most powerful trend specifically in gold during the past few years has been the tidal shift in the flow of gold from West to East. China and India are the names of the game with the former having officially overtaken the latter as the world’s largest buyer of gold in 2013. Last year alone, China imported over 1,000 tonnes of gold through Hong Kong and mined some 430 tonnes more.
China hasn’t updated its government holdings of gold since it announced it had 1,054 tonnes in 2009, but it’s plain to see that by now there is far more gold than that, whether in central bank vaults or private hands. Just adding together the known sources, China should have over 4,000 tonnes of monetary gold, and that’s a very conservative estimate. That would put China in second place in the world rankings of official gold holdings, trailing only the United States. The Chinese government supports this accumulation of gold, so this can be seen as a step toward making the Chinese renminbi a world currency—which would have a lot more behind it than US T-bills.
India presents just as strong a bullish case, if only slightly tainted with Indian government’s relentless crusade to rein in the country’s current account deficit by maintaining the outrageously high (i.e., 10%) import duty on gold and silver. Of course, this just means more gold smuggling, which casts official Indian stats into question, as more and more of the industry moves into the black and grey markets. World Gold Council research estimates that 75% of Indian households would either continue or increase their gold buying in 2014. Even without gold-friendly policies in place, this figure is extremely bullish for gold and in line with the big picture we’re betting on.
Nobody can predict when the next rally will occur nor the depth of the next sell-off. I can promise you this: as an investor you’ll be much happier about those surges if you stick to buying during the corrections. But it has to be for the right reasons, i.e., buying when prices drop below reasonable (if not objective) valuation, and selling when they rise above it. Focusing on the above fundamental trends and not worrying about short-term triggers can help.
Profiting from these trends is what we dedicate ourselves to here. Under current market conditions, that means speculating on the best mining stocks that offer leverage to the price of gold.
Here’s what I suggest: test-drive the International Speculator for 3 months with a full money-back guarantee, and if it’s not everything you expected, just cancel for a prompt, courteous refund of every penny you paid. Click here to get started now.
Gold and Silver HEADLINES
China’s gold “demand” dropped 19.4% in the first six months of 2014 from year ago, reports the China Gold Association. In the same period, production rose strongly as miners increased output to protect profit margins.
Chinese gold demand from January to June was estimated at 569.45 tonnes (18.3 million ounces), compared with 706.36 tonnes (22.7 million ounces) in the same period last year. The bulk of the decline was attributed to investors losing their confidence in the metal as an investment tool after the gold price registered its first annual decline in 13 years. Sales of gold bars and coins fell 62.1% and 44.3%, respectively. Lower demand this year is also attributed in part to huge buying last year, when the drop in prices prompted many to bring forward their purchases, eating into 2014 demand.
Meanwhile, jewelry and industrial demand in the first half rose 11% from a year ago to 426.17 tonnes (12.4 million ounces), while industrial consumption rose 11.3%.
The decline in Chinese gold consumer demand was foreseen. However, the long-term demand from the country is expected to expand to at least 1,350 tonnes (39.3 Moz) by 2017, due to growing China’s middle class and its wealth, the World Gold Council noted this April.
In this context, Jeff Clark’s article in last week’s dispatch debunking widespread reports that Chinese demand for gold is falling becomes particularly important.
Pay for a Hotel Room with Gold (Mining.com)
Rydges Resort and Spa, a hotel in the Wild West mining town of Kalgoorlie, in West Australia, allows travelers to pay accommodation bills with gold nuggets, bars, rings, and “anything” as long as it’s gold.
The idea came up in light of the upcoming mining conference that will take place in Kalgoorlie in August, but the resort is going to accept the yellow metal as payment all year round.
Trading in gold was standard practice in Kalgoorlie-Boulder in the late 1800s and there are still a few businesses that accept the precious metal as payment.
“People buy cars in gold here (…) I’ve also heard of some other types of businesses even doctors and stuff who have been accepting gold,” said Parkinson-Bates, the hotel manager.
So far, no one has paid the hotel in gold yet. Our guess is that people who own gold are bullish on its price and don’t want to spend it before it goes up again.
Infographic: The Gold Series—2014 Trends and Beyond (Mining.com)
As it is often said in investing, “the trend is your friend”. See the latest infographic from Visual Capitalist that defines the major trends that will favor gold for years ahead.
Recent News in International Speculator and BIG GOLD—Key Updates for Subscribers
- One of our top gold exploration companies reported some early-stage drill results, but they are extremely encouraging on one of many targets in a large property. See our recommendations for entry points.
- Below-the-market pricing for short-form financing made this stock fall sharply. This was a more or less common occurrence for similar cases, but also a buying opportunity for those new to the story.
- The latest issue of BIG GOLD includes two exclusive silver bullion offers for subscribers, along with our top silver stock pick of the year. This issue could pay for itself, and your timing couldn’t be better to capitalize on low silver prices. Check out the risk-free and low-cost BIG GOLD.
- Fri, 25 Jul 2014 06:17:00 +0000: The World According to Paul (Not Ron Paul) - Casey Research - Research & Analysis
David Galland here, dropping in to introduce a new columnist for Friday’s Daily Dispatch.
I am doing so because I’m largely responsible for signing him up, which I did for one simple reason: I love the way he thinks.
His name is Paul Rosenberg, and he knows a lot about a lot of things. While I had heard of him before and even read one of his books, I hadn’t met him or thought of allying with him until a fellow resident here at La Estancia de Cafayate proposed him as a speaker at one of the Casey Research events held here biannually.
As Paul was interested in how Doug Casey’s vision of what a community of freedom-loving individuals living the good life in a remote, wine-producing valley in the Argentine outback was going, he agreed to make the journey.
Listening to his erudite presentation on the earliest trade routes of mankind and what they tell us about the unhealthy and largely unnecessary relationship now existing between people and the rulers of nation-states, the idea came to me that this was someone our readers need to hear from.
And so it was, over dinner with Doug and Paul at the Grace Hotel on the property here at La Estancia, that the ground was laid for Paul to begin writing the Friday edition of the Daily Dispatch.
A few words about his background.
First and foremost, Paul is a thinker, which I define as someone who habitually looks past the dancing-dog headlines dominating today’s news and digs deep into issues that actually matter. He doesn’t just turn over a trowel or two in pursuit of greater enlightenment, but attacks his work with a backhoe, trenching into history, philosophy, engineering, mathematics, the world’s religions, sociology, psychology, physics, and any number of other areas of human activity.
That’s because Paul is a polymath in the purest sense of the word, defined as “a person of great and varied learning.” He has written over 60 books, including a series of engineering books and the one that first caught my eye, the controversially titled God Wants You Dead. Other titles include A Lodging of Wayfaring Men, The Words of the Founders, and Production Versus Plunder.
In addition, he is a cofounder of the Fiber Optics Association (and wrote the first ever standard for the installation of fiber optic cables in buildings) as well as the founder of Cryptohippie, a specialized provider of communications privacy software.
For reasons I believe you’ll come to understand in the weeks ahead, the people I know who read Paul count themselves as determined fans. I asked one such fan—the same resident who recommended we have him as a guest speaker at the Casey Research event here—to write a few words describing why he thought so highly of Paul…
Paul understands human history and how institutions and individual will has influenced it. He is an optimist who knows how to infect others with optimism through his writing. Using historical references, he shows readers how to avoid having their lives squeezed into a pattern of systems defined by others. He believes that the courage to act based on our intuition and individual judgment can free us from becoming a victim of self-aggrandizing and abusive power structures.
Paul’s writing is definitely not for everyone, although I wish it were. For me, it is invigorating.
I have no idea what Paul is going to be writing about in his Friday missives—this week it’s about the relationship between central banks and democracy—but given his many interests, it could be about literally anything. Whatever it is, however, I expect it will be well worth your time.
Before signing off and heading down to the clubhouse for lunch with friends, I’d like to mention a couple of dates you’ll want to take note of:
- The Casey Research Thriving in a Crisis Economy Summit in San Antonio—September 19-21. Paul Rosenberg will be among a blue-ribbon faculty addressing today’s most pressing economic and investment issues. In addition to doing a lot of serious work over the three intensive days of the Summit, we’ll also have some fun in a variety of social events, including a VIP tour of the Alamo, where I personally hope to tag along with Paul and hear his perspective. Registrations are going fast. For the complete itinerary and to lock in the best registration fee available, click here.
Doug Casey’s Estancia Experience—November 7-12. Join Doug Casey, other members of the community, and me here at La Estancia de Cafayate for a weeklong celebration of life at its best. We’ll be enjoying great meals at the Grace Hotel and clubhouse, relaxing at the spa, visiting several of the best winemakers in Cafayate (including a private tour and “sundowner” at the spectacular Piattelli bodega), sharing meals on the quaint plaza, horseback riding to a private estancia for a full-blown Argentine asado, playing some golf, participating in an investment conference, and much, much more. For an itinerary and more details on this extraordinary opportunity to experience the good life in Cafayate, drop an email to firstname.lastname@example.org.
Space is extremely limited, so be sure to write sooner rather than later. See you here!
How Democracy Made Central Banking Possible
The Exclusive EconomyRex Van Schalkwyk, Contributing Author
Thomas Piketty has missed the target. The cause of the endemic inequality that so troubles him is not the capitalist system, and certainly not the free market (of which there is none). The cause is the exclusive economy.
Piketty proposes a global wealth tax to solve the problem of inequality—a solution that is as misdirected as his identification of the cause. He believes compliance would be achieved by the imposition of selective sanctions against noncompliant states. Such action would never achieve universal obedience: it would require international cooperation on a scale never yet attempted in history.
At some time in the dystopian future a global wealth tax may be enforced, but then only by the further empowerment of the elite, who control the exclusive economy. The hegemony that now resides in the US—to which Britain has an unquestioned allegiance and the European Union only a qualified one—would first be extended to the rest of the world; or at least that part that is to benefit from Piketty’s global wealth tax.
There is no doubt that societies have become more unequal, even as the political slogans for greater equality became more strident. The problem is that the causes have been misdiagnosed.
The real cause of the inequality that so troubles politicians is the systematic destruction of the free markets over the last century. The essential wealth-building effects of those markets became, at first, more elusive and finally, altogether inaccessible to all but the privileged elite: those who have systematically benefited from an exclusive arrangement. This includes the unlawful frontrunning of equities and other financial markets through the mechanism of high-frequency trading, a device of the exclusive economy.
Because there is today no free market in the cost of money (interest rates), there cannot be a free market in anything that is counted in money. Low interest rates—systematically depressed by the Federal Reserve over the past two decades—have enriched the bankers, the borrowers, the financial institutions, and the speculators at the expense of the frugal, the pensioners, and the teachers.
Financial asset and property prices have exploded, making them accessible only to those who already have them. The result is that 90% of the wealth has gone to the 5%, while 10% has gone to the 95%. The predictable outcome is that the 95% have experienced no real income growth in the past 30 years. The middle class has been eviscerated.
Meanwhile, the exclusive economy has created, for some individuals within the privileged elite, wealth equal to that of an entire nation. This outcome had been predicted, from a benign perspective by Friedrich von Hayek and malevolently by Zbigniew Brzezinski.
In his Road to Serfdom, von Hayek argued that the US and the UK had progressively abandoned freedom in economic affairs—without which personal freedom has never existed. The misguided attempt by these countries to achieve prosperity by embracing some form of centralized planning would inevitably lead to mass impoverishment and totalitarianism.
Have these countries embraced some form of centralized planning, as predicted by von Hayek? Unquestionably; central banking is precisely that. The way in which the whole of the financial community holds its breath in anticipation of the pronouncements of Janet Yellen (and Ben Bernanke and Alan Greenspan before her) is proof enough of that fact.
Further proof is all around us. The stock exchange is manipulated by the Working Group on Financial Markets (also known as the “Plunge Protection Team”). The housing market is energized by the program of quantitative easing and directly supported by a regime of low interest rates. The precious metals market is persistently depressed by means of government and Federal Reserve interventions, with the assistance of the stooge banks, which have been proclaimed too big to fail.
There is also a program of confiscation of private resources by means of bank “bail-ins”, pension fund confiscation, and sundry extractive taxes, soon to be enforced by the self-proclaimed financial guardians.
This list doesn’t even touch upon the unprecedented extraterritorial jurisdiction assumed by the US over offshore accounts held by its citizens, under the ubiquitous Foreign Account Tax Compliance Act (FATCA). This act demonstrates more than any other the true imperial overreach of the US administration, and the corrupting influence of the unconvertible US dollar as the reserve currency of the world. It also presages the onset of a global tax, but not the one envisaged by Piketty.
It’s clear that the price discovery mechanism of the market has failed under repeated assaults from the central planners, the monied elites, and their political allies. Price is no longer discovered in the marketplace, but determined within self-serving bureaus and then decreed to be so. What chance does the common man have in such an unequal contest?
Although Zbigniew Brzezinski, a founding member of the infamous Trilateral Commission, comes to essentially the same conclusion as von Hayek, his sensibilities are decidedly not on the side of freedom; nor does he have any concern for the lot of the common man. In his book, Between Two Ages: America’s Role in the Technetronic Era (1970), he wrote: “The technetronic era involves the gradual appearance of a more controlled society. Such a society will be dominated by an elite, unrestrained by traditional values.”
A society dominated by an elite, especially one that is unrestrained by traditional values, would certainly be a dictatorship of the elite. Because the current elite in the US is identified by its access to wealth and political power, and because Brzezinski has used America as his template for the envisaged technetronic society, it is equally certain that Brzezinski foresees the US as the vanguard of this new world order, as he calls it. If such a society would levy a global tax, it would inevitably be levied for the benefit of the elite—certainly not for the creation of a more egalitarian society, as Piketty would hope.
Piketty, it seems, is in a dilemma: either he embraces the price discovery mechanism of the free market and its associated benefit of a more inclusive economy, or he persists in vain hope for a global wealth tax, and the universal tyranny of a global government that must accompany it.
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That’s It for This Week!
As always, thank you for being a Casey Research reader. We hope you have a wonderful weekend.