Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future
The Daily Reckoning
Wednesday, December 16, 2009Signs of the times: Obamavilles vs. trillion-dollar banker gifts, Dormant uranium prices and how to bank on China's nuclear glow, Plus, Bill Bonner on the "soup lines of the '00s" and plenty more...
Joel Bowman, checking the virtual mailbox from Taipei, Taiwan...
Times are tough for the man on the street; Main Street, that is...not Wall Street. Truly, it is a tale of two streets. It is a tale of corner offices and Obamavilles...of trillion-dollar bailout funds and foreclosed single-bedroom walk-ups...of food stamps and fat turkeys...of insiders, puppeteers and the politically connected, to the struggling small business owner, disillusioned college graduate and near-to-wiped-out retiree.
It is, as Dickens said, the best of times and the worst of times. One thoughtful reader sent this email from Wisconsin:
"I have been following The Daily Reckoning for over two years. I agree with the DRabout 99.99999% of the time. But... What is the average family to do to at least stay even? Forget making a fortune. I just want to maintain my current very conservative standard of living in the USA. Most people do not have a clue as to the operation of the seemingly insane Fed and US Treasury leaders.
"Yes, I know gold, oil, etc. I remember my American sailor father in Germany buying a stein of beer in about 1925 or so for an American nickel with the German next to him paying 5,000,000,000 D marks. My Dad was paid in $20 US gold pieces at the end of each seafaring trip. I still have the gold US dollar coin which his father gave to him in 1935..."
Hmm... Hyperinflation and gold coins in the same sentence, huh? We don't mean to sound like a Ganges-soaked Buddhist, but maybe this really is a case of "the answer lies within."
Writes another, slightly disgruntled reader...
"Nowhere do I see you and your folk factoring in the effects of the increase in oil demand against the reduction in oil supply. Gas won't keep the trucks running, or the electricity being generated - at least not for very long. Maybe 5 to 10 years and we can no longer afford it. Then what? If we can't pump water, we can't irrigate. If we can't irrigate, we can't farm. Etc., etc., etc...."
You'll find a few thoughts on keeping the lights on below, but first up today...
Greg Guenthner, the boyish editor of Penny Stock Fortunes, never chases after "cougars," but he does think seniors are very sexy. Here's why:
I've got a housing play that's a guaranteed growth market for several years to come: Senior living communities.
Senior communities basically fit into one of three broad categories: independent living, assisted living and skilled nursing facilities. Independent living communities let seniors live independently while keeping resources like dining and community centers at close call. Assisted living facilities provide an increased level of medical attention, and skilled nursing facilities - better known as nursing homes - provide a higher tier of medical care.
If you think that the senior living business isn't sexy, you're dead wrong. An aging baby boomer population and ever-increasing life expectancy here in the US guarantee that the market for senior living communities is due to swell in the coming years.
Between 2000-2050, the US Census Bureau expects the population in the United States to increase by 49%. During that same time, the 65-and- over population is projected to increase by 147%, to 86.7 million men and women - a full 21% of the population.
With healthy occupancy currently in place for most senior communities, it's clear that aggressive expansion will be necessary in order to keep up with demand. Established businesses in this sector stand to do very well. That's why I just told my Penny Stock Fortunes subscribers about one of the best-positioned senior living companies in this rapidly growing sector. You can get the ticker by subscribing, here.
Next up, Byron King, editor of Energy & Scarcity Investor, offers an encouraging word for uranium:
While attending a conference in London last week, I had a fascinating series of talks with mining company executives from Africa, Southeast Asia and Australia. I also spoke with a group of London-based mining analysts. Gold was the hottest topic, of course. But one of my most interesting discussions focused on Uranium.
I met with an individual who has spent decades in the uranium industry. To preview, he is very bullish on the uranium price.
He showed me a chart of new nuclear power plants going up around the world. No surprise, China was pockmarked with numerous sites for future nukes.
"Current world uranium usage is about 200 million pounds," he explained. "But current world production is only about 100 million pounds per year. This uranium supply deficit is getting filled by uranium from decommissioned nuclear weapons from the Cold War. That's ending. Uranium is in shortage, and it's getting worse every month. Thus, uranium mining is due for a future boom."
With a uranium boom coming, big players like Cameco (NYSE:CCJ) should do very well. But the biggest bang for the buck will come from small- and mid-cap uranium stocks, which could produce for triple- and quadruple-digit gains. In this month's edition of Energy & Scarcity Investor I'll give the full rundown on an exciting uranium miner that I expect to flourish during the next big bull market in uranium.
We'll have more from Byron on all things nuclear in the weeks to come. For now, sticking with the topic at hand, Romeo Dator has today's guest essay, below...
--- Introducing The Energy & Scarcity Investor ---
A California Energy Site So Secret, You Can't Even See it Without a Top-Level US Navy Clearance...
But a former Navy 'insider' is now ready to disclose the names of five 'secret' energy companies that could make you $253,434... Learn How Here.
The Navy has already collected $194 million from this discovery.
And CNNMoney.com reports that 'Investments in [this 'secret' energy sector] jumped nearly four-fold over the last two years, to about $100 million last year... Because it's [still] so small, there's large growth potential here...'
---------------------------------------------------------------The Daily Reckoning PRESENTS: Food...energy...water... These are just a few of the essential ingredients that China needs to keep its 1.3 billion people living, producing and moving to cities in order to manufacture Snuggies blankets for American couch surfers. We've touched on the food and water topics in recent DR issues so, today, we're going to take a look at energy...specifically, nuclear energy. Romeo Dator has the details, below...
China as a Nuclear Power Play
By Romeo Dator, Co-manager, China Region Fund (USCOX)
San Antonio, Texas
China is aggressively preparing for its energy future in order to accommodate rapid economic growth for decades to come. The foundation of the nation's electricity generation plan is coal, but with loud calls coming from around the world for China to cut its output of greenhouse gases, a significant portion of new power will be nuclear.
From an investment perspective, China's growing interest in nuclear power will provide enormous investment opportunities over the next few years. Some analysts say the price of uranium, while soft now, could double over the next couple of years.
China's nuclear capacity is now less than 9,000 megawatts, but the country has more than a dozen more plants either under construction or in the planning stages. According to figures from the brokerage CLSA, the capacity could grow fivefold by 2015. The official target is 40,000 megawatts by 2020.
Such an ambitious program raises the question of how to fuel all of the new plants that China wants to bring online in the next decade. Where will all of the uranium come from to handle this new demand?
China is not alone in its nuclear ambitions. Earlier this year, the International Atomic Energy Agency (IAEA) projected that global nuclear capacity would grow from about 370,000 megawatts (14 percent of world energy consumption) now to as much as 540,000 megawatts by 2020 and 810,000 megawatts by 2030. In dollar terms, capital expenditure on nuclear plants could total more than $500 billion over the next 20 years.
Roughly 40,000 megawatts of nuclear capacity are now being built on four continents, with China accounting for a quarter of that total, well ahead of #2 Russia and #3 South Korea. The chart below shows that China will be second only to the US in terms of future capacity when projects at all phases are completed.
China has uranium reserves within its borders and it is aggressively lining up supplies in Central Asia, Africa and Australia to make up any shortfall. But this shortfall is large and growing. According to a recent Reuters story, China can supply only a third of the 10,000 metric tons of uranium annually required to meet its 2020 nuclear capacity target.
The World Nuclear Association says the world's measured uranium resources are sufficient to last 80 years at current usage rates, with the largest untapped deposits found in Australia, Kazakhstan, Russia and Canada. But just looking at China makes it clear that usage rates are soon to see a sizable increase. Nevertheless, worldwide uranium production is unlikely to increase until uranium prices increase.
Uranium prices shot up to more than $135 per pound in 2007, after the first new nuclear power projects began emerging. But uranium subsequently slumped back down to $40 a pound, as above-ground stockpiles flooded into the market.
Looking forward, however, rising demand for nuclear power seems likely to produce rising prices for uranium. In fact, some analysts expect the uranium price to reach $80 a pound by 2011.
Watch this space.
Regards,
Romeo Dator
for The Daily Reckoning
Joel's Note: Romeo Dator is the co-manager of the US Global Investors China Region Fund (USCOX). For more insights and investment research from US Global Investors, visit http://www.usfunds.com
Disclaimer: Please consider carefully a fund's investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visitinghttp://www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by US Global Brokerage, Inc.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund's returns and share price may be more volatile than those of a less concentrated portfolio.
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And now over to Zurich, Switzerland, where Bill Bonner has today's reckoning...
Are we in a depression yet? The number of Americans living on food stamps has risen to 37 million. Food stamps are the soup lines of the '00s.
And what else was big in the '30s? Escapist movies. Here's a headline for you:
"Box office takings set to smash records," says The Financial Times. What kind of movies? End of the world catastrophes...vampires...strange non-humans doing strange things. For example, there are ads for Avatar all over Europe. The film seems to concern Spock-like creatures that use bows and arrows. Pure escapism, in other words.
Stocks went down a bit in America yesterday. The commentariat blamed it on higher producer prices, thought to be harbingers of consumer price inflation.
Of course, consumer price inflation is what everyone is counting on. The debts of the past need to be reckoned with. Borrowers are doing the best they can. They pay when they've got the money. They default when they don't. Since '07, mortgage debt is down about 2% - to about $10 trillion. Most of that decline comes as a result of defaults and foreclosures.
Let's see, 2% over 2 years ain't very much. At that rate, it will take half a century to bring mortgage debt down to the comfortable levels of the '80s. What's more, it will be hard to do at all. Incomes are stagnant...or actually falling. As people cut back on their spending in order to pay down debt, it reduces income to employers which has as a consequence a weaker economy...with fewer jobs and less income to the folks who are trying to pay off debt.
What a drag! People ran up huge debts believing that they would never actually have to pay them. They figured they would refinance, and pocket the built-up "equity." But, according to a report in this week's press, though mortgage rates are at a multi-generational low, finding a banker willing to lend is as hard as finding a liquor store that makes home delivery on Sunday. That's largely because the equity most homeowners have is negative. Houses are down about 30% since '07. Any buyer who bought or refinanced a house in the last 4 or 5 years is likely to be underwater.
Even in normal circumstances paying off debt is a long, hard process. Mortgage debt is long-term. Paying it off is long-term too. Many people see years of painful scrimping and saving ahead of them.
What they would all appreciate is a little help from inflation. Inflation lightens the load. It increases nominal incomes while holding mortgage payments steady. It increases nominal 'equity' too. House prices tracked inflation for a hundred years. It was only in the last ten years or so that they went crazy. So, if the feds could gin up a little more inflation...it might cause house prices to rise again...and almost all Americans would breathe a sigh of relief.
Of course, no one would be more appreciative than the world's biggest debtor - the US government itself. Inflation would boost tax revenues. It would also cut the real costs of the feds' many obligations. Most important, it could pay off that $3 trillion it borrowed in 2009 with $3 trillion worth of cheaper dollars in, say, 2015.
There are only two little hitches.
First, the feds can't really control inflation. Aiming for a little, they may get a lot more than they bargained for. That's supposedly why stocks went down yesterday. As soon as inflation begins to show itself, investors expect the Fed to take action to control it. That will mean higher interest rates...which should take the starch out of this 'recovery' tout de suite. On the other hand, there's also the possibility that all that cash and credit piling up on the sidelines will suddenly want to get into the game. Prices could rise much faster than the feds would like. John Williams of ShadowStats predicts that hyperinflation will soon arrive in the US. Perhaps he is right.
Second, even if they could conjure up inflation, their hands are tied. Did you read the headline in The Wall Street Journal yesterday? Well, you didn't need to. We read it for you.
"Markets force Greek promise to slash deficit."
The Greeks are running a big deficit. About 13%...about the same as the US. Investors are afraid the Greeks will soon get in the same position as Dubai, unable to continue paying their debts. So, they're selling Greek paper...making it more expensive for the Greeks to raise money to cover their deficits.
At first, the Greek reaction was defiance. The top man announced to the world that he wasn't going to cut spending - not with anarchist mobs in the streets and retirees demanding more benefits at home. But then, the very next day, he must have realized that he was running out of room to maneuver. The Greeks decided to retreat. They need to finance their deficits somehow. To do so, they must convince lenders that they have things under control.
Is the US so different? The sums are larger, but the logic is the same. America runs huge deficits...$1 trillion - $2 trillion per year, as far as the eye can see. In order to finance those deficits it needs the cooperation of lenders. The US must assure them that it will not let inflation undermine their credits. Otherwise, they will sell Treasury debt...force up interest rates...and make things even harder on US debtors. Then, we will see another headline in the WSJ:
"Markets force Obama promise to slash deficit."
Bernanke may talk of dropping money from helicopters. But he can't do it. The man's theory is stupid. It is also impossible to apply when you need it.
And more thoughts...
What happened in the gold market yesterday? The price of the yellow metal held steady.
So what do you do? Is this the dip you should buy?
Well, as we keep saying...it depends. A few months ago, our view was simpler. We trusted gold because we didn't trust central bankers. We still trust gold. And we still don't trust central bankers. But now we see that the central bankers are even more unreliable than we imagined. They are diligently trying to do the wrong thing, as usual. But they're not very good at it.
They increase the monetary base at central banks. But they can't melt the huge overhang of cash and credit frozen in the system. A depression has iced over the economy. The feds turn on the pumps, but the liquidity freezes up. This cold snap could last a long time. In fact, with the feds blocking necessary adjustments, it could turn into an Ice Age. And there's not much they can do about it - except make the situation worse.
Bond yields are already rising. There is a report of rising prices at the producer level. It wouldn't take much to spook lenders and force the Fed to retreat...just as Greece did.
What's more, there are two major trends underway. Neither has fully expressed itself. The bear market that began in 2007, for example, never took stock prices down to the levels you'd expect at a major bottom. Far from it. That means a major bottom is still ahead. We have had Crisis I. We will probably have Crisis II in 2010. It will make it easier for the feds to finance their deficits. But it will make it harder for the rest of the world to pay its debts.
On the other hand, the other major trend that has not fully expressed itself is the bull market in gold. When we were in the US last week we saw an ad encouraging people to sell gold "while prices are high." People think the rise in gold is a fluke. But markets make opinions. At the top, they will believe that higher gold prices are permanent. Then, we will see ads encouraging consumers to buy gold before the price goes higher.
But don't expect the top in gold any time soon. The major top in gold may have to wait for the major bottom in stocks. And the whole process could take many years.
So, relax. Sit back. Keep your seatbelt buckled. And enjoy the depression.
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Daily Endnote: Finally today, our colleagues over at the inimitable Whiskey & Gunpowder go live with their "The Nine Things You Need To Know Before Investing in Gold & Silver Coins" webinar tomorrow.
W&G managing editor, Gary Gibson, secured some time with world-renowned coin expert, Nick Bruyer, of First Federal Coin Corporation, to help answer reader queries regarding the best and safest ways to invest in coins. Here are a few of the questions they'll be addressing in the webinar:
If you're interested in the free info from the Whiskey gang (actual Kentucky whiskey NOT included) you must register for the event today. Here's a link to get started. And, from what we've been told, Nick has a selection of coins available at a special discount for webinar participants.
The W&G guys do a great job over at "The Whiskey Bar," so we hope you'll find the time to give it a look. Again, the event goes live tomorrow, but registration closes today. Here's the link if you're interested. They'll send all the necessary instructions to you directly.
And that about wraps it up for us today. We'll see you again, same time, same place, tomorrow.
Until then...
Cheers,
Joel Bowman
Managing Editor for The Daily Reckoning
joel@dailyreckoning.com The Daily Reckoning - Special Reports:
Thursday, 17 December 2009
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