 | | The Daily Reckoning | Tuesday, August 16, 2011 |
- Ten days of unprecedented turbulence...so where do we go from here?
- Panning for precious metals on the periodic table,
- Plus, Bill Bonner’s prime time presidential address to the nation...
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Who gives a damn about America’s credit rating?
I’m SICK of hearing about Keynesian vs. Austrian, fiat currency vs. Gold, US credit ratings and other BORING economic theories you have ZERO control over.
“WHO CARES!?”
Truth is, if you want to make money in the markets, none of that stuff even matters!
Let me prove it to you by showing you.
|  | | | Three Guesses as to What’ll Happen Next | | Speculating on the Direction of Stocks, Bonds and Gold | |  | | Eric Fry |
Reporting from Laguna Beach, California...
The Dow Jones Industrial Average bounced another 214 points yesterday to 11,483. From the lows of last Wednesday, the Dow has surged nearly 800 points and has erased all of last week’s losses.
Just like that, the correction is over!
If you happen to have awakened yesterday from a ten-day coma, you probably assume that nothing much happened while you were unconscious. The Dow is almost exactly where it was on August 5th. But something did happen. Stocks gyrated wildly, bond yields plummeted, precious metals soared and investors around the globe scratched their heads about what to do next.
The Dow’s 800-point rally has halted the widespread panic, but not eliminated the widespread anxiety. Share prices have rebounded somewhat, but fear, distrust and cynicism continue to influence the financial markets. Consider for example, that the gold price is still $100 higher than it was ten days ago and that Treasury bond prices are still substantially higher as well. Despite the rallying stock market, investors continue clinging to these flight-to-safety assets.
Meanwhile, the dollar has resumed falling, and is less than 2% away from its all-time lows.
These confusing cross-currents inspire the sorts of questions we financial market observers always love to address: “Hey, what’s gonna happen next? Do you think stocks are gonna go up now? What about gold? Is gold gonna tumble now?”
We love these questions because they are absolutely unknowable (and also because we cannot answer them, one-on-one, without breaking the law [and so we don’t]). Nevertheless, we have a ready answer for anyone who asks: “I think stocks are going to go up and down, but I have no idea when or by how much in either direction. Ditto for gold.”
You see, dear reader, we have some answers; they just aren’t good for much. But don’t be dismayed; our guesses are sometimes much less worthless than our answers. So let’s take a few guesses about stocks, bonds and gold...
Guess #1: The US stock market has probably made its lows for the current quarter, but probably not for the year. The recent selloff was sufficiently severe and frightening to produce the sort of capitulation that often leads to a rally of some duration. But the problems that inspired the stock market selloff have not gone away, they’ve just disappeared from the headlines temporarily. The dreary headlines will return...and so will the panicked selling, but maybe not for a few more weeks.
Guess #2: Long-term bonds are a big, fat “Sell.” The only credible case for buying a 10-year Treasury bond yielding 2.31% or a 30-year Treasury bond yielding 3.77% is the belief that:
1) The global economy will sink into a deflationary abyss and that;
2) Central bankers around the world will discontinue conducting the inflationary policies – like QEI and QEII – that have become their bread and butter. We would take the other side of both those bets. The global economy may be slowing down, perhaps dramatically, but a deflationary abyss is probably not in the cards. That’s because the world’s central bankers will never abandon their inflationary policies. They’ll keep “dancin’ with the one who brung ‘em” until there ain’t no more dance to be danced to.
Guess #3: Gold prices will go up and down, but up is the trend that will matter most. Sure, the gold price may retreat and “consolidate” its recent charge to record highs. But so what? Gold is a volatile asset that behaves in a volatile fashion. Longer-term, this unique monetary metal seems destined to recapture an ever-more-prominent role in the global monetary system.
The reasoning is straightforward and intuitive: The US government, like most leading governments around the world, is creating an ocean of paper-based financial claims. These governments are not only swelling their money supplies, they are also swelling their debts levels...and they are doing both things at a breakneck clip. As a result, the volume of paper-based financial claims is increasing out of all proportion to underlying economic realities, like GDP growth.
The gold market has observed this institutionalized counterfeiting scheme and has rendered its judgment: A US dollar buys only one sixth as much gold today as it did twelve years ago. Even if one uses gold’s blowoff top of $850 an ounce in 1980 as the starting point, a dollar buys half as much gold as it did thirty years ago.
No matter how you slice it, the dollar’s value is slipping. The chart below shows part of the reason why. The relationship between the gold price and America’s runaway debt levels is hard to miss.
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From the beginning of the 1980s through the end of the 1990s, America’s debt-to-GDP ratio rarely nudged above 60%. Accordingly, the gold price languished around the $300-mark for most of those two decades. But once America’s hellish debt levels started rocketing heavenward, the gold price also rocketed.
America’s soaring debt load is not the only reason the gold price is climbing, but it’s certainly one reason.
Yesterday’s 5-Minute Forecast “celebrated” the anniversary of the dollar’s departure from the gold standard.
“On Aug. 15, 1971, the administration of Richard Milhous Nixon did something extraordinary,” the 5-Minute Forecast reminisced, quoting the best-selling book by Bill Bonner and Addison Wiggin, Empire of Debt. “It slammed the ‘gold window’ shut. Henceforth, foreign governments would not be able to redeem their surplus US dollars for gold.
“Mention the late president’s name and the average person recalls the crime with which he is most associated: B&E (breaking and entering) at the Watergate. But while the public’s attention was distracted by Nixon’s fumbling sidekicks, another team of Nixon’s goons was pulling off the biggest heist of all time.
“What was their crime? Breach of contract? Theft? Fraud? Counterfeiting? It was all of those things. They breached the solemn promise of five generations of US Treasury officials and set in motion the worldwide credit bubble of the pax dollarum age.”
“Since 1971,” the 5-Minute Forecast continued, no longer quoting Empire of Debt, “the United States has added trillions to the world’s supply of dollars and credit. During this same time only about 58,000 metric tons of gold have been brought from the ground. Sooner or later, those extra dollars must be marked to market [i.e., marked down relative to the price of gold].”
But nothing moves in a straight line, of course. The red-hot gold market may well cool down for a bit.
“Gold is becoming extended and overbought,” warns Richard Russell, the octogenarian dean of cantankerous gold bugs everywhere. “I expect gold to be erratic and unstable like the rest of the market, and it will take guts to sit with gold over coming weeks.”
Looking further out, though, Russell expects gold to hit $2,000. So do we.
In fact, your California editor expects gold to hit $5,000 an ounce within a decade, if not sooner. He may not have said it first, but at least he said it.
What about platinum, you ask?
Byron King, editor of Outstanding Investments, provides a few guesses in the column below...
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| | The Daily Reckoning Presents | | The “Other” Precious Meal | |  | | Byron King |
When you hear the term “precious metals,” you likely think of gold and silver. That’s what the Spanish conquistadors had in mind, of course, when in the 15th and 16th centuries they trekked inland from their beachheads on the sands of the New World.
But there are other metals of great value besides gold and silver. In the two centuries after Christopher Columbus landed in the New World, the Spaniards seized the gold of the Aztecs in what’s now Mexico, and took that of the Incas, as well, further south in the Andes Mountains. But this was just the beginning, because the men from Iberia had developed a bad case of gold fever. They wanted more.
High in the mountain streams of New Granada – modern-day Colombia – the Spaniards panned for gold and found plenty. They followed the shows and traces. They looked for the mother lodes, where they located even more gold, and in those mountains they also found silver. Over many decades, the Spanish treasure ships went home heavily laden.
But as the Spanish searched for gold and silver, they also found another substance, and at the time it was quite a nuisance. There were smallish, dense white nuggets mixed in with the nuggets and flakes of gold.
These small particles were difficult to separate. They wouldn’t oxidize. They were dense, and in the sluices they dropped out with the gold. The particles had a high melting point and wouldn’t separate even in the hot crucibles from which the smiths poured gold bars at the refineries that dotted the Andean landscape. A few early chemists even tried to dissolve the white particles in acids, to no avail.
After a while, the Spanish named the white nuggets “platina,” a diminutive of the Spanish word plata, meaning silver. The metallurgists of the time – alchemists, as the term was used for many centuries – thought that the dense metal was a form of “unripe” gold.
Yet the substance wasn’t gold, and it wasn’t silver, and no one had any idea of what to do with these nuisance contaminants. Thus, for many years, the platina had no value.
By the mid-18th century, European scientists were applying an early form of scientific method and deciphering the nature of many metals and other elements. In 1751, a Swedish chemist named Henrik Scheffer was experimenting with a small sample of platina. At first, he wanted to take the “unripe” gold and upgrade it to the real thing. Based on his knowledge of gold, professor Scheffer added arsenic to the mix.
Lo and behold, professor Scheffer melted the platina, which he at first called “white gold.” But then, after a few simple tests based on density and hardness, professor Scheffer realized that he was dealing with an entirely new element. He named it platinum.
In 1802, it was the turn of an Englishman, a medical doctor-turned- chemist named William Wollaston, to develop a process to recover platinum in commercial quantities. During his research into platinum, using primitive electrical methods pioneered by the great American experimenter Benjamin Franklin, Dr. Wollaston and his collaborators also discovered the element palladium, followed in 1803 and 1804 by the elements rhodium, iridium and osmium.
At the request of the French Academy of Sciences, in 1879, Johnson & Matthey created what became the standard meter for nearly 80 years – a rod made of an alloy of platinum-iridium. Looking back, in 1799, the international meter was originally defined as one ten-millionth of the distance between the North Pole and the equator, at the longitude of (where else?) Paris. Later, in the 1880s, the Johnson & Matthey rod redefined the length of a meter based on the distance between precision marks on a new X-shaped rod composed of 90% platinum and 10% iridium, cooled to 0 C. The French Academy of Sciences used platinum-iridium alloy because it doesn’t oxidize, is hard, can be highly polished and expands or contracts very little with temperature changes. This particular bar served as the international standard of measurement until 1960, when the meter was redefined in terms of the wavelength of light emitted by the krypton-86 isotope.
Over the next several decades, any number of European, Russian and North American scientists pursued studies into the nature of what became known as “platinum group metals” (PGMs).
In particular, in England, there was a metallurgist named Percival Norton Johnson. He ran a mineral assaying business. One day, he received a shipment of exotic ore from Russia, and that led Mr. Johnson to work on refining PGMs. In 1838, Mr. Johnson teamed up with another metal-man named George Matthey, eventually giving rise to the famous partnership of Johnson & Matthey.
Over time, the Johnson & Matthey group pioneered and perfected numerous techniques to separate and refine PGMs. Eventually, Johnson & Matthey developed methods to melt and cast pure homogeneous platinum ingots. Johnson & Matthey is still a famous name in the metals world today.
So now you know the modern history of platinum, but let’s approach things from another angle. What is platinum, really? What’s the big deal? Why is platinum important? What makes platinum the basis for an investment idea?
The basics are that platinum is a soft, dense, ductile metal. As we’ve seen above, platinum is very resistant to corrosion. These days, you’ll find platinum in high-end jewelry, exotic forms of wire, electrical contacts and nonreactive laboratory vessels.
Platinum also plays an important role in industries as divers as chemicals, plastics, oil refining and pollution control and more. Beyond industrial demand, there’s also a strong market for platinum in the jewelry business, as well as in bullion form, for investment. Platinum jewelry has experienced strong growth in demand, due to its purity, color, prestige and basic value. Meanwhile, the ongoing decline in the value of the dollar has led to strong demand for platinum as an investment, particularly in the form of bars, coins and other collectable items.
Looking ahead, there are entirely new uses for platinum in the fields of medical technology, exotic alloys and other forms of technology and nanotechnology.
It’s all good, right? So what’s the downside? The problem for future platinum users is that the global supply of platinum is tightening. It’s an expensive substance to mine, separate and refine. During a recent trip to South Africa, I heard story after story from senior mining executives about the difficulty of expanding production.
One mining engineer with a long track record of success told me, “When you look at the demand trends and how hard and expensive it is to expand production, there’s no way we can avoid shortfalls over the next two years and more. There’s not going to be enough platinum from any source to meet demand. I expect prices to shoot up in 2012 and beyond.”
How do you play the tightening platinum market? In my view, the best large-cap company to own is South Africa-based Impala Platinum Holdings Ltd. (IMPUY:PINK SHEETS).
The company goes by the name of Implats, and it’s a South African blue chip. Implats shares trade on the Johannesburg Exchange, the London Exchange and as American Depository Receipts (the Pink Sheets) on the OTC market. About 60% of Implats shares are owned by South African people and institutions, with 40% owned by others across the globe. For OI tracking purposes with Implats, we’ll use the OTC.
Impala is big and substantial. Implats produces about 25% of all the PGMs that come out of South Africa, using about 54,000 workers, including contractors, with 49,500 in South Africa and 4,600 in Zimbabwe. With production numbers and employment rolls like that, the company carries clout in political circles.
In 2010, Implats’ revenues were $4.4 billion, with $821 million net. After adjustments, Implats’ profit margin was 18.6% in 2010, with operating margins over 29%. The current Implats share price is just over $24, which is down from a recent high near $34. The lower share price is due to the general market swoon, based on fears of the world economy drifting into a double-dip recession. With the pullback, Impala has a market capitalization of $15 billion, and is selling for less than 10 times next year’s estimated earnings.
I like this entry point. Implats is a “Buy.”
Regards,
Byron King,
for The Daily Reckoning
Joel’s Note: A self-described “rock hound” himself, Byron King, Agora Financial’s resident geologist, has been unearthing explosive profit opportunities for hisOutstanding Investment readers for years now. He was well ahead of the rare earths story, for example, alerting his readers to sector-specific plays while the mainstream media was still scrambling to locate their periodic tables. His ability to operate ahead of the curve even earned his investing service Hulbert’s #1 ranking over a 5 year period.
Daily Reckoning readers who wish to avail themselves of Byron’s unmatched expertise may find the following presentation – detailing 9 specific ways to profit by investing in gold...even if/when it does reach $2,000 per ounce – of great interest. Watch it 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.
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| | | | Bill Bonner | | Saving the US Economy by Presidential Decree | |  | | Bill Bonner |
Reckoning from Poitou, France...
As expected, investors were worn out by last week’s wild ride. This week, they need to slow down. Take a rest. Try to figure out what is going on.
After taking about 10 minutes over the weekend to think about it, everyone seems to have decided that all is well.
The Dow rose a healthy 213 points yesterday. Gold went up $17.
Investors are still bullish. The press is bullish. Warren Buffett is bullish.
What are the odds that all this bullishness will pay off? About zero, in our opinion. Not that stocks might not go up for a while. But they’re not likely to go up far enough or for long enough to make owners much money.
Why? You know why, Dear Reader. Because the debt is still there. And it’s getting bigger.
Debt weighs down a household...or an entire economy. With gross US government debt equal to 100% of GDP you can’t expect a thriving economy. All you can expect is a Japan-like, slumpy, zombie economy. Shoppers still walk around. People still go to work. But nothing much happens.
Remember, Rogoff and Reinhart predict that when you get over 90% debt-to-GDP, the economy slows down by about 1%. Instead of 3% long term growth, we get 2%.
That’s the optimistic way to look at it. More likely, debt will weigh on the economy...causing the feds to intervene. They launch more stimulus measures...and transfer more of the economy over to the control of the federal government. This, too, will slow the real economy down.
Then, more desperate than ever, the feds will panic. They will print money – a lot of it. Then, all Hell will break loose.
But wait...that’s still a long way in the future.
Besides, we have a feeling that there’s something else going on too. For example, there’s the Empire...stumbling into every trap the gods set for it. Half the federal budget is related to the imperial agenda. In a way, this puts the US in a marvelous position. It could save itself easily. It could balance the budget in a single stroke.
As you know, we have renounced all political involvement here at The Daily Reckoning. We are smirking observers...not earnest world- improvers, nor even willing participants in the political process.
And if, by some accident, we were suddenly elected president we would immediately demand a recount!
But what a great thing it would be to be president of the USA today! Such a great opportunity...
Oh...it makes our aorta bulge and our head hurt to think of it...
..we would go on TV...nationwide...Prime Time...and, with gravity in our voice and mischief in our heart...announce:
My fellow citizens. We are faced with a choice. Either we continue with our program of trying to police the entire world. Or we give it up. If we continue, we will go broke. And our armies will be destroyed...along with our economy and our currency. If we stop now, we can save our currency...our economy...and our way of life.
Which will it be? Guns or butter? A respectable nation...or an empire with a death wish? I know which I will choose.
Effective immediately, as Commander-in-Chief, I am ordering all US troops stationed overseas to come home. We will defend our nation to the death, but we will no longer meddle in other countries’ affairs. We will be a decent nation, a good nation; we will no longer be a great empire. Most Americans never wanted it anyway.
I am also submitting a balanced budget for next year. You will see in it that I am closing all foreign bases and eliminating all military spending that is not directly related to our real national defense. That alone would spare the USA the misery of its inevitable comeuppance. But if we were president...why not go further? How could we resist? More below...
And more thoughts...
It is not our place to give advice to anyone. If the US government wants our advice, it will have to at least send us invitations to fancy parties and let us go through the ‘diplomatic passport’ line in airports.
Yes, it’s true, had it asked our advice about the Great Reckoning, the US could have saved itself trillions of dollars...and now the economy might already be in a genuine recovery, instead of staggering towards bigger and bigger problems.
But the phone never rang. Our feelings were hurt.
Still, civic minded as we are, we can’t help but offer a little counsel – at no expense – to our leaders.
First, let’s look at the problem we are becoming: Japan!
Yes, dear reader, as incredible as it seems...we were right 10 years ago. Very long termDR sufferers will recall that we so often warned about “following in Japan’s footsteps” that readers got sick of hearing about it. We had to promise never to mention it again.
But now we’re breaking our promise. Yes, we were 10 years too early. Yes, we didn’t expect the biggest bubble in human history. Yes, we were probably wrong about all sorts of things...but here we are...following in Japan’s footsteps!
Why? Because we have a sick, debt-disabled economy...and because the feds won’t let it die. In Japan, they’ve kept it alive for 20 years...consuming the savings of an entire generation in order to keep it on life-support.
And now the US is on life support too – with deficits equal to 10% of GDP...as far as the eye can see. Ben Bernanke has already pledged to keep the key lending rate at zero for the next 2 years...so the IV drip will continue...just as it has in Japan.
So, welcome to a Japan-like zombie economy. But at least Japan didn’t have to pay for military zombies stationed all over the world too!
Okay, those are the facts on the ground, as we see them...
So, let’s go back to POTUS. The decider. The chief exec. And let’s imagine that he were we...or we were he...or some such thing....
And we were on TV... We had just announced that we had saved the Republic...by cutting off the Empire. And then, how could we help ourselves...?
But wait. There’s more.
My fellow Americans, I don’t know about you, but I’m tired of supporting all these zombies. Why are there so many zombies? Because there’s so much meat for them...
You wanted change...I’ll give you change...
Here’s how to get rid of zombies. I’m proposing to scrap the entire tax code. From now on, Americans will pay 10% of their income...no deductions...no nonsense. You’ll fill out your tax return on a postcard.
Serfs in the Dark Ages were only required to work one day in 10 for their lords and masters. You shouldn’t have to do more.
The federal government will have to get by on that. That’s all. I’m proposing a Balanced Budget Amendment...with a permanent 10% tax rate. No ifs. No buts. No zombies.
You all know what a 10% flat tax will do? It will make the US the most dynamic economy in the world.
And what about all the debt? Simple. We’re raising interest rates. Yep. To 5%. It will drive all these deadbeats into bankruptcy. The debt will disappear...almost overnight. So will a lot of these big, zombie banks.
And by the way, by executive order I’m hanging George W. Bush, Dick Cheney, Joe Biden, Alan Greenspan, Paul Krugman and Thomas L. Friedman.
Some of them for war crimes. The others...well...just because the world will be a better place without them.
Thanks for listening. Regards,
Bill Bonner,
for The Daily Reckoning |
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