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The Daily Reckoning | Monday, May 2, 2011 Osama gets his overdue bullet...and silver cops an overdue snap back, Resource nationalization and other forces driving the commodity bull, Plus, Bill Bonner on great heights and shaky foundations...and some words on the US economy, too... ------------------------------------------------------- URGENT NEWS... Breakthrough: New "Magic Bullet" Technology Could Zap Deadly Cancer Cells at Will In the latest clinical trial, over 85% of cancer patients achieved complete or partial remissions of their symptoms using the "magic bullet" technology. This is a rare opportunity to get in early on a little-known Biotech Company that's making medical history... Click here for full details. The Long Legs of the Silver Rally Why the Recent Silver Selloff Could Be a Good Thing Eric Fry Reporting from Laguna Beach, California... US Special Forces put a bullet through Osama bin Laden's head yesterday. Unwittingly, this elite fighting force may have also thrust a stake through the heart of the silver market. We will leave it to Wolf Blitzer and other world news commentators to articulate the geopolitical significance of bin Laden's rendezvous with 40 virgins. Our beat is financial...and in our little corner of the news world, the death of bin Laden seems like a perfect excuse for a long-overdue dollar rally...and silver selloff. The silver market has been hot...red hot...probably too hot. The dollar, for its part, has been stone cold - sinking lower and lower with almost every trading day. Both assets are fully deserving of their respective price trends. The silver market, in other words, deserves to be soaring against the US dollar. And over the next few years, your California editor would not be surprised to see silver top $100...or even $200. But over the next few weeks, the precious metals are likely to become a bit less precious for a while. Your editor does not raise this caution to suggest that silver be sold. Rather, he raises it to suggest that silver be bought...at lower prices. To begin this brief analysis of the frothy silver market, please consider one essential fact: the following remarks are no better than guesses. Educated guesses, yes. But guesses all the same. To continue this analysis, please consider a few fascinating data points: 1) Silver has soared more than 50% so far this year, and 150% during the last 12 months. 2) The price chart of silver has developed a parabolic trajectory, typical of toppy markets. 3) Speculative trading activity is dominating many parts of the silver market. For example, recent trading volume in SLV, the $13 billion ETF that represents holdings in silver bullion, has been exceeding the trading volume in SPY, the massive $89 billion ETF that represents the S&P 500 Index. Prior to the recent silver frenzy, SLV would produce only about one quarter the daily trading volume of SPY. But now it is SLV's trading volume that routinely tops SPY's! 4) Various gauges of investor sentiment are flashing extreme bullish readings for silver. The Elliot Wave's Daily Sentiment Index shows that 95% of investors are bullish on silver. Likewise, the Market Vane's Bullish Consensus shows 93% of commodities traders are bullish on silver. When such an overwhelming majority of market participants hold such an overwhelmingly bullish opinion about a given asset, that asset tends to disappoint its fans...at least for a while. Taken together, these various signs, indicators and portents say loud and clear that a major correction in the silver market is very likely, very soon. On the other hand, Ben Bernanke's reckless monetary policy - spearheaded by money-printing escapades that are so moronic only a PhD in economics could possibly devise them - say loud and clear that silver (and gold) are much better long-term bets than the US dollar. So why bother worrying about short-term risks in the silver market? Good question. Maybe you shouldn't...unless you have an interest in converting these short-term risks into a long-term buying opportunity. The silver rally still "has legs," even if those legs might wobble occasionally. Likewise, the broad commodity bull market that has been gaining strength during the past few months also has legs, and not just because Ben Bernanke calls counterfeiting a "monetary policy." In the column below, Chris Mayer explains one other very compelling reason why commodity prices are likely to move higher still. Chris Mayer's Special Situations Announces... Over 70 MILLION ounces of gold... ..Has been mined from this secret region. That makes it by far the largest gold rush on the planet in terms of actual gold produced. Now one penny mining stock is sitting on what could be the gold motherlode. Check out this FREE presentation here for the details... The Daily Reckoning Presents The Rising Tide of Resource Nationalism Chris Mayer You know the old film The Treasure of the Sierra Madre? Three men set off into the hinterlands of Mexico to strike gold. They find it, but then greed sets in and they start to mistrust each other. Things go badly from there. I am really simplifying a great movie, but I couldn't help but think of the film after reading the papers. The confluence of headlines and stories pointed to the dangers of setting off to find great deposits in relatively unexplored parts of the world. It is already inherently fraught with risk. And then there are many more stories of promising ventures that went nowhere than there are of successes. But should you actually find something valuable, you have new risks, more like the ones faced by the three men of the film. The danger is that you might actually find gold. You might even go through all the hard work of delineating it and even building it...but can you keep it? Increasingly, miners face risks that they won't be able to reap the full benefit of their work. Under the banner of resource nationalism comes many efforts by national governments to intervene or take back resources leased out to foreigners. Latin America is the global leader or resource nationalization/confiscation. There is Venezuela, of course, which nationalized its oil and gas industry. Bolivia did the same thing. Ecuador instituted a 70% tax on oil profits. All of these governments changed the rules of the game - after the fact - and investors lost lots of money. Brazil is another one. You've probably read the ongoing drama over Vale and its CEO. Vale is a big Brazilian miner. It's been extraordinarily successful over the years. But the government wants it to expand into steel and shipbuilding to help boost Brazilian employment. The old CEO didn't want to do that. So the Brazilian government pushed him out. The Brazilian government denies it, but it seems pretty clear to everyone else that that's exactly what happened. Now investors worry that Vale will put the government's social agenda ahead of what's good for shareholders. Maybe it will pursue some money- losing projects to keep the government happy. There are many more examples of governments looking to change the rules. South Africa, Zambia, Australia and Colombia are all looking to increase the taxes on metals extracted from within their countries. Plus, we've seen acquisitions quashed by governments, too. One of the largest was when Canada didn't approve of BHP's proposed takeover of PotashCorp. As The Wall Street Journal reported: "Many miners are pulling back or reducing the target size of foreign acquisitions to avoid defensive moves by governments. In some cases, they are abandoning huge exploration projects, which are costly and may end up benefiting the local governments rather than shareholders or customers." This is a sword that cuts both ways. On one the hand, if you are an investor in a project for which the rules change, you're not happy. On the other hand, all of this uncertainty means that new supplies for key resources look iffier. It discourages new investment, which helps boost the prices of underlying commodities. The lucky mines and exploration ventures that manage to operate freely, without governmental expropriation, become all the more valuable. Because resource nationalism - along with environmental issues like the BP disaster in the Gulf of Mexico - will slow the development of essential new commodity supplies, the prices of most commodities are all but certain to maintain their upward trends over the long term. Additionally, the deteriorating fiscal position of the US government - which implies a lot more money printing and a weakening dollar - means that prices for many commodities could go a lot higher still. Sure, you'll get some frightening corrections along the way, but you'll want to be a buyer when these corrections arrive. Regards, Chris Mayer, for The Daily Reckoning Joel's Note: Readers do well to remember that resources - any resource - remain a non-value until they're pulled from the ground. It is the efforts of men (and women) that bring oil...or silver...or phosphate to market. And, it is the companies these men and women work for which deserve our praise and attention. A value hunter at heart, Chris seeks out the best of these companies and helps his readers identify when - for whatever reason - they begin trading at meaningful discounts. These occurrences he calls "Special Situations." As such, his Mayer's Special Situations investment service has unearthed some truly magnificent opportunities for his followers in recent years in everything from mining companies to water and piping outfits and beyond. Right now, Chris sees two tiny stocks that fit the bill. Both are junior gold miners. One is working territory next to one of the most lucrative ore zones in history. The other is still finding gold in lands where the conquistadors first laid claim hundreds of years ago. Both have the potential to multiply your money many times over. Chris provides a few more details in his brand new presentation, here. Uncovered: A Way to Tap into an "Other" Pool of Government-Backed Income Potential... ..that only a handful of Americans know about. And with Social Security becoming less and less of a guarantee, now is the time to act. Click here now and discover a way to protect your retirement from the uncertainties surrounding Social Security. Bill Bonner GDP and Job Growth Not Consistent With Feds’ Economic Outlook Bill Bonner Reckoning from Baltimore, Maryland... First, did you notice? Gold shot up $25 on Friday. At this rate, it will be at $1,600 by the end of this week. Why? The smart money is betting that the feds will keep pushing inflation. But today, let's ignore the feds and talk about what's happening in the economy. You saw the latest GDP numbers last week. In the first quarter, the economy grew at a 1.8% annual rate, said the estimate. That is equivalent to the average real rate of growth for the US economy since 1925. The only trouble is, this growth isn't real. It's counterfeit. It's phony. The feds blamed the decline in growth on the weather. Krugman blames the feds for being too timid. Bernanke said growth wasn't so bad. He said it was "moderate." So, let's step back. What do you see? Real estate is still going down. No doubt about that... The unemployment rate is going down too...but most of the improvement has been made by taking people who can't find a job off the list! Sounds crazy. But that's what they do. If you don't find a job in a certain amount of time, they figure you've given up. But does that mean you're no longer unemployed? Of course not. It means you're worse off than ever. You're one of the "long-term" unemployed...out of work for so long that employers are reluctant to take you back. They think you've lost the habit of work...and your skills are out-of-date. To give you an idea of how many people are looking for work, McDonald's just did a big nationwide hiring campaign. While it hired a few thousand new employees, it had to turn away 932,000 applicants! Even those who have work are losing income. Wages are flat...and falling when you adjust them for inflation properly. Consumer prices rose at a 7.4% annual rate in the first quarter, according to MIT's Billion Prices Project. Hmmm... How many people got a 7% + raise ? GDP is going up at a 1.8% rate. Adjust that number for population growth...and a correct measure of inflation...and you see that the average person is getting poorer. "Moderate" growth? There's no growth at all. These facts are NOT consistent with the feds' economic outlook. They ARE consistent with our Great Correction outlook. The feds thought they could fight the slump in the usual way - with more EZ cash and credit. Now they find that none of their programs - TARP, TALF, QE1, QE2, and zero interest rates - has worked. Why? Because EZ money is part of the problem, not part of the solution. In our view, the economy (with the help of Mr. Market) is correcting a number of things... ..a half century of credit expansion (debt increases were mostly prudent and productive in the '50s and '60s...but not in the '90s and '00s) ..a bubble in housing and finance, caused largely by EZ money ..an overvalued stock market (the correction began in Jan. 2000...but the bottom still hasn't been found) - also caused by EZ money ..a 30-year bull market in bonds ..a foolish monetary system set up by Richard Nixon in 1971. That seems like more than enough work even for a Great Correction. But wait...there's more... Nearly 10 years ago we wrote a book on the subject (with Addison Wiggin). We predicted that the US would follow Japan into a long bear market. It was more of an intuition than real analysis. And it was wrong...or so it appeared. The feds intervened so aggressively in 2001 and after, it looked like our intuition was faulty. Stocks rebounded...and went on to greater glory. So did the US economy...which went into bubble-mode in '05-'07. But now our intuition doesn't look so bad after all. Japan went into a slump in 1990. It has never come out. Employment is about the same today as it was 21 years ago. Stocks sell at a third of their 1990 prices. And real estate is still down 50% to 75%. In the US, take out the government deficits...and unsustainable debt- financed consumption...and the US private sector economy has gone nowhere in the last decade. No more real jobs. No more real income. No more real GDP per capita. And the stock market, adjusted for inflation, is lower than it was in January 2000. It now looks like the Great Correction actually began at the very beginning of the 21st century, in January 2000. For 10 years, it was disguised by the feds. Now, the phony beard is slipping off. We've been in a correction for more than a decade already. And if we follow the Japanese model...we'll still be in a Great Correction in 2021. If the feds don't blow us up first... And more thoughts... On Friday night, leaving the office, we walked by a neglected apartment building. In front, three men were setting up a scaffold. On top of the scaffold, they had placed a ladder and were just tying a rope to the ladder as we walked by. Something wasn't right. After 40 years of weekend projects, we have a 6th sense for handyman disasters. We stopped. We stared. It took a minute to realize what was wrong. The workmen must have had a suspicion too. One was arguing with the other two. "I'm not going up that m************ ladder. You go up the ladder." "C'mon...get the hell up that ladder." "No...you go up the ladder." The scaffold rose about 20 feet above the sidewalk. But it was set up at an angle. They hadn't leveled it. It wouldn't matter if you were just going up 6 feet. But by the time the top level was put in place, it was no longer over the base...it was way off. And then, to make it worse, these clowns were setting up a ladder on top of the crooked scaffold. The ladder reached up another 20 feet or so. The foot of the ladder was sure to kick out to the downhill side...causing the whole structure to come down. And the rope wouldn't help. It was tied in such a way as to keep it from falling over backwards; the risk was that it would fall to the side. But what to do? It was none of our business. We don't like to meddle. If we saw you in a restaurant with your hair on fire, we wouldn't say anything; we wouldn't want to interrupt your dinner. We felt like bringing out chairs and charging admission. Or maybe getting out a camera and recording the event for 1,000 Ways to Die. But we couldn't just walk away. Finding no foreman on the job, we approached the men on the scaffold. "I know this is none of my business, but could I offer a suggestion?" "What's that?" "You should level the scaffold. Otherwise, the more weight you put on at the top, the more likely it is to fall over." "Thank you...thank you...thank you...ha ha ha ha...." "Just trying to help..." we said as we walked on. This weekend, we checked the paper. We thought we might find an article: "Workman killed in fall." We found nothing. Maybe they took our advice. Or maybe they just got lucky. Regards, Bill Bonner for The Daily Reckoning