Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future
The Daily Reckoning
Thursday, December 17, 2009
Joel Bowman, with a pictorial contribution from his outpost in Taipei, Taiwan...
We have an extremely graphic issue for you today, dear reader. Therefore, if you are easily unsettled, morally hypersensitive or generally lacking in good humor...please continue reading anyway.
Ben Bernanke has been named Time Magazine's Man of the Year. 
Immediately after the announcement yesterday, the blogosphere lit up with colorful remarks about what a "complete buffoon" the Fed Chairman is and how his "gross negligence" caused "the very conditions he is lauded as having combated."
As is generally the case, however, those quick to emotion are slow to the point. By all means, lambast the rag's editor, Richard Stengel, who crooned in the editor's note:
"We've rarely had such a perfect revision of the cliché that those who do not learn from history are doomed to repeat it...Bernanke didn't just learn from history; he wrote it himself and was damned if he was going to repeat it."
..but don't be surprised that the magazine chose an incompetent, control-freak figure as their célébrité de l'année. One only need thumb through a few past issues to understand what it takes to win the dubious accolade. Here are a few forgettable covers:
Of course, Time Magazine is not ONLY dedicated to annually commemorating the contributions of power-mongering central planners and liberty thieves, they also offer prescient analysis of hard-hitting topics...like the housing bubble.
Oh wait...scratch that last one...
Meanwhile, out here on the fringe of the publishing business, we toil away with our dedicated celebration of the underdog...of the downtrodden individual trying to outwit his own local Bernanke, and of the oft-dismissed ideal of reaping what you sow, of getting exactly what you deserve, and of laissez fair capitalism - a term increasingly and disturbingly used by the mainstream media in a strangely misinformed, pejorative sense.
And with that in mind, here is today's issue...
First up, our colleagues over at The 5-Minute Forecast caught value specialist, Chris Mayer, in a "predictions mood," yesterday. Part of his forecast: Semiconductors are due for a rebound.
"That's capital equipment spending in the semiconductor space," explains Chris, "along with some guesses for next year and beyond. Under the concept of the last shall be first, this is another good bet for a reversal in trend in 2010. It's already happening, as we've noted. We've got reports from industry giant Applied Materials showing sizable gains in orders from prior quarters. And guidance going forward from the company also shows 30%-plus gains.
"There is a lot of room here on this one for things to get better.
"Remember the words of wisdom from Horace, which so inspired investment great Benjamin Graham that he put them on the frontispiece of his book Security Analysis: 'Many shall be restored that are now fallen and many shall fall that are now in honor.'"
And now for today's guest essay...
--- Mayer's Special Situations Resource Report ---
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In 2008, that door is open again...and it just got easier than ever to "make money while you sleep"...
But there's no telling when it could close again... So you'd better collect your own "Chaffee Royalties" right NOW!
---------------------------------------------------------------The Daily Reckoning PRESENTS: Few people, when pressed, would gladly export their dwindling dollars to crackpot dictators abroad in order to secure their energy needs. But what choice do they have? The sun sets daily on solar aspirations and the wind doesn't always blow. So what now? Could we have been standing right above the answer all along? Our friends at Casey Energy have today's guest essay...
A Hot Future for Geothermal
by Marin Katusa & Marc Bustin, Editors of Casey's Energy Report
Vancouver, British Columbia
Capturing energy from the earth's heat is pretty easy pickin's for geologically-active areas of the world like Iceland, Indonesia, and Chile. In some locations, hot fluids are so near the earth's surface that naturally occurring hot fluids can be directly circulated through buildings for heating. Iceland, in particular, takes advantage of this low-hanging energy fruit.
However, in most areas of the world where geothermal energy is captured, the heat is used to generate electricity.
The most popular alternative energies - solar, wind and hydroelectric - rely directly or indirectly on weather conditions. Geothermal does not. Geothermal energy can operate around the clock in any weather condition, which makes it ideal for generating base-load electricity.
Currently, all commercial geothermal electricity is generated by so- called conventional systems, whereby naturally occurring hot water or steam is accessed at comparatively shallow depths in areas of very high geothermal gradient. Wells are commonly drilled to depths on the order of 2 km. The steam they produce is used to spin turbines that in turn generate electricity.
The success and sustainability of a geothermal reservoir depends mostly on managing the reservoir properly. For a reservoir to be sustained, the natural and induced recharge of fluids must balance the produced fluids. Almost all reservoirs require the produced water to be re- injected in order to maintain reservoir pressure and water levels. Because geothermal power plants require naturally- steam, potential development is generally restricted to areas near volcanic activity.
Notwithstanding this one significant limitation, geothermal power is an increasingly attractive energy source, both because it is very clean and because it is very cost competitive. As you can see from the chart below, not all energy sources are created equal when it comes to cost per kilowatt-hour. 
In terms of production cost, geothermal certainly holds its own at 6.5 cents per kilowatt-hour - about the same as wind. Coal and nuclear power are still powering the way ahead with their 4-5 cent/kWh generation costs, but with natural gas at 7 cents and petroleum topping 10, geothermal has already proven itself to be a viable alternative.
In terms of current worldwide energy production, geothermal - along with solar - is a drop in the bucket:
Given the fact that geothermal energy is only a minor player in the worldwide picture for energy, why are we still bothering with it?
Because in terms of economics, geothermal energy trounces solar and wind.
Here's what we mean:1. Geothermal energy does not depend on weather. The sun doesn't shine around the clock or even every day; neither does the wind blow all the time. In contrast, hot rocks are there 24 hours of the day, seven days a week. The predictable amount of electricity makes it easy for geothermal companies to sign long-term energy contracts without worrying as much about underproduction or "wasted" production.
On an economic basis, geothermal has a virtually unique advantage among the "green" energies. Its power plants can compete with those fired by coal or natural gas, even before any government subsidies. Therefore, for geothermal operating companies in the United States, the government subsidies that Obama is showering upon the alternative energy sector are pure icing on the cake.
2. Higher load factor. Utility companies, and anybody buying power from geothermal energy companies, have to consider load factor: the difference between nameplate capacity (how much the generator is designed to produce) and actual production. The smaller the difference, the higher the load factor, and the more money the utility will make. For a wind farm, the load factor is generally 30-40%, and even lower for solar farms. In contrast, geothermal power plants can generally operate near 90%, since, as we said before, hot rocks are always available.
3. Lower capital costs. Even though solar panels have gotten much cheaper to make, the construction costs of a large solar farm are still extremely high. Recent estimates place the cost of solar energy to be upwards of US$10,000 per kilowatt-hour (kW) whereas wind is around $1,700-$3,000/kW. Geothermal is similar to wind at US$1,600-$2,800/kW depending on location, though due to reasons 1 and 2 above, geothermal is economically superior to solar and wind. In fact, these numbers put geothermal on par with building a coal plant under the new requirements for carbon capture.
Geothermal capital costs are relatively low for two reasons. First, there's no need to sequester, or capture and stash, any carbon emissions. This requirement alone can add 40-60% to fossil fuel projects. Second, geothermal power plants enjoy the best of both worlds: they require less land than wind and solar projects, and fewer permits than coal and nuclear because they're less hazardous.
And best of all, geothermal companies are virtually off the radar of most investors. For those keeping an eye on geothermal technology and geothermal companies, a window of great opportunity is now open.
Regards,
Marin Katusa & Marc Bustin,
for The Daily Reckoning
P.S. These authors lead the research team of Casey's Energy Report. As a special year-end offer, we have drastically lowered the price of Casey's Energy Report - but only until December 18. Sign up for a 3- month trial today and receive 40% off the subscription price PLUS a free holiday gift! Click here to learn more.
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And, over in Zurich, Switzerland, Bill Bonner has today's reckoning...
Gold rose $15 yesterday. What to make of it?
Perhaps it was because Ben Bernanke's extended his "extended period" pledge? He said, in effect, if this economy doesn't come out of its slump, it won't be his fault. He'll keep monetary policy as loose as possible for as long as possible. Not that we had any doubt about it. He has a theory. It's a bad theory, but it's all he has. And it tells him that you fight a depression with loose money.
So, what do you expect? Interest rates will remain artificially low as long as Bernanke can get away with it...or until the depression ends...whichever comes sooner. That said, he hardly has to lift a finger. Judging from the last auction of short-term Treasury debt, lenders can't think of anything better to do with their money than to give it to the government - in return for nothing. The last auction produced a yield of zero on one-month loans.
We went to visit a pair of clever Swiss bankers yesterday. These fellows manage money for clients all over the world. What do they think? They were focused on stocks:
"This year, the people who made the most money were those who were most heavily invested in equities. And if the patterns of the past hold up, 2010 will be a good year for equities too. Whenever the 10-year performance goes close to zero, the next few years tend to be very good for stock market investors. In fact, there has never been an exception, going all the way back to 1881. Last year was one of the worst years in stock market history. This has been one of the best. And next year should be one of the best too."
He handed us a chart to illustrate his point. It shows the 10-year performance of the stock market. We see that very rarely are stock market returns negative over a 10-year period. In fact, there are only two worth mentioning. One was in the '30s, when in August '39 stocks had returned MINUS 4.68% for the previous ten years. The other major losing period came in February of this year, when investors had gotten an average annual return of -3.43% since 1999.
The message seems simple enough. When the market turns down sharply...expect a sharp turn-up to follow. But studying the chart more carefully, we see two things. First, we see sloppiness in the figures. The thirties pattern was not a clean break and then a clean bounce...but a series of breaks and bounces. In fact, investors endured 10 years of losses running up to '30...and then more 10-year periods of losses in the years '37, '38, '39, and '40.
The other thing we notice is that an investor could have made a lot of money in the '30s...if he was lucky. The year 1933 was one of the best years ever. Of course, the investor was well advised to take his gains off the table. Prices slipped in '34...bounced...and then fell apart. By the end of the '40s, the poor long-term, buy and hold investor had not made a penny in two decades of investing. This pattern, by the way, is not so different from what the Japanese have suffered during the last 20 years. They've seen good times. They've seen bad times. But the general trend of the markets has been down for two decades.
We have a feeling that the worst is still ahead for this market too. Few of the mistakes of the bubble period have been corrected. None of the challenges of the new post-bubble economy have been met. Little of the huge mountain of debt trash has been taken away and disposed of properly. The big reckoning is still to come.
Which brings us back to the price of gold. It was over $1,200 just a few days ago. It's had a little correction. But we doubt that it has had the correction we've been waiting for. There is still no sign of consumer price inflation. Nor is there any sign that consumers are returning to their old spendthrift habits. Nor is there any sign that jobs are becoming more plentiful...or that this depression is going to end any time soon. When that becomes clearer, stocks will fall again. Gold should fall too.
People will want safety. But where will they seek it? Ah, that's another big question. In the first stage of the crisis, they sold gold and bought dollars. Will they do the same the next time? Or will they fear that the dollar may be part of the problem, rather than part of the solution? If so, won't they flee stocks for gold?
We don't know.
And more thoughts...
Last night, we went to a symposium called "Zurich Minds." You can find out more about it at http://Zurichminds.com. Our friend, Rolf Dobelli brings together people from all over the world to talk about what is on their minds. Last year, we went to hear another friend, Nassim Taleb, author of The Black Swan. This year, we went to see what Rolf would come up with.
The program was fascinating, as usual. A young woman explained neutrinos. A young man told us about his hobby. On weekends, he puts on a suit that makes him look a little like a flying squirrel, if you can imagine a flying squirrel dressed in parachute silk. Then, he drives up to one of Switzerland's highest cliffs and jumps off. With the help of his flight suit he is able to fall/glide down the mountainside, covering 2.5 meters in horizontal distance for every one meter of fall. Then, at the last minute, he pulls a small parachute to break his fall.
He was meant to make his presentation with a fellow jumper. Alas, the other fellow died two weeks ago in a tragic accident.
One of the highlights of the program was a noted surgeon who showed us how to operate on a human brain. Some people left the room, their hands to their mouths...but we were glued to the screen. We had never seen brain surgery at all; last night we got to see it from the surgeon's perspective.
"There is some science involved," said Dr. Bertalanffy. "But it is mostly a skill that you learn over many, many years. It takes at least 10 years to master it...no, more like 20. And I'm still learning. And this is not something you can learn in school. You have to learn it by working with a real master. And that master had to learn it from another master.
"You are dealing with very small, delicate nerves, arteries and veins. But you are also dealing with a human being. Just a tiny error and the person will never be the same again. You don't want to make a mistake..."
We watched in suspense and amazement as Dr. Bertalanffy showed a video of brain surgery as he saw it. He probed into the soft tissues...exploring the folds and crevices in a brain, looking for a tumor...and then getting it out without causing further damage.
He told the story of how he once performed an emergency operation in a foreign country, with no preparation and without proper tools.
"I don't think I would do it again. But this woman came to me. She needed this operation or she could die at any minute. But it was a very dangerous and difficult operation, deep in the brain. I was actually at the airport and ready to get on a plane to come back to Switzerland. But she came to see me at the airport and I agreed to do it. Something told me that it would be all right. And she was confident too. I don't usually pray when I operate. Just like I don't expect the pilot to pray when I get in a plane; I expect him to be capable of flying the plane. But this time, I prayed. And I'm happy to say, it worked out."
The star of the show, however, was Dan Dennett, an American philosopher from Tufts University. Mr. Dennett believes the world and everything in it is an accident, in the sense it has no purpose and no designer. He says he can explain human consciousness without resorting to 'magic.'
But there was nothing very original in his approach, as near as we could see. And something a bit too smug and self-satisfied about his conclusions. Like the dotcom hustlers at the end of the '90s...or Wall Street in 2006... He acted as though he had it all figured out.
He described the creation and development of human beings and their culture in much the same terms that Austrian economists explain the workings of an economy. They are the result of 'spontaneous order,' in which the pieces assemble themselves without the help of central planning. Things take shape from the bottom up...cells get together to form hands and arms...and brains. One person joins with another to form a community. Then, they develop culture, language and so forth...all of it - like successful businesses - the result of natural selection rather than divine intervention.
"The best way to understand cultural Darwinism," said Dennett, "is to think of the Polynesian canoe. The canoe makers don't necessarily understand why they make them the way they do. But they still make them well...and improve them over time. The rule is pretty simple: if the canoe comes back, copy it."
We're perfectly willing to believe that that's the way the process appears to a 21st century observer. We suspect, however, that professor Dennett may be leaving something out - the part he doesn't understand. Darwinism only describes the mechanisms...the drive chain...of the evolving world. It doesn't really tell you much about 'why' things are the way they are or what they will be in the future. Nor does it have much to do with the existence or non-existence of a grand designer - God. If God wanted to throw a monkey wrench into the gears, He could do so anytime He wanted. He could also permit people like Dan Dennett to think they know what they are talking about. God would have to build the world with something. Why not eukaryotes, quarks and evolution?
What separates man from the beasts? Put the question to some of our friends in London and they will say "the English channel." In Paris, they say "the Mediterranean." Dan had a different answer. Not a body of water; a body that chatters.
Even termites live in communities...build elaborate cities...and have a division of labor. But ants can't transmit knowledge and ideas via words. This is the critical, distinguishing feature of mankind...and it is what has permitted him to be so successful, he says. He can pass ideas and information by way of 'memes'...words are 'memes.'
"The triumph of human kind is a very recent development. Ten thousand years ago we were just another animal trying to make a go of it on planet earth. Humans - and all their livestock - were barely 1% of the vertebrate biomass on the planet. Now, they are 98% of it."
Hmmm...1 to 98. What a spectacular success story. A 5,000% increase. Hey wait a minute...that's a bubble! Yes, dear reader, humans are a sell.
Until tomorrow,
Bill Bonner
for The Daily Reckoning The Daily Reckoning - Special Reports:
Thursday 17 December 2009
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