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The Daily Reckoning | Saturday, January 7, 2012
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Inspiring the Ire of Dear Readers...
Checking in today from Buenos Aires, Argentina...
Joel Bowman
As vigilant Reckoners might well imagine, our inbox got slammed this week. What’s all the noise about? Why the virtual kerfuffle? We printed the line that inspired the e-flood earlier this week. Did you catch it?
“The price of gold will probably go nowhere this year,” wrote Bill, casually, in Tuesday’s issue. “We have a feeling that 2012 is not going to be a great year for money you get from the ground. Oddly, it will probably be a better year for the money you get from trees.”
Well, that was it. Reckoners immediately launched a “have you guys lost your mind?” campaign. “How could you predict such a thing?” they wanted to know.
Hey, it’s just a prediction, we wanted to say; a “feeling,” as Bill himself put it. Who knows what the future will hold? Not us. Of course, that doesn’t stop us from having plenty of guesses. Bill reckons gold will end the year about where it started it. Chris Mayer and Eric Fry have other ideas. They chimed in in Friday’s column.
“Gold is a buy, perhaps now more than ever,” argued Eric.
“Gold stocks will have a great year,” added Chris, tossing his hat into the ring.
So, what’s it gonna be? “Interesting,” is this editor’s first response. We’d sure like to see gold back around the $1,200 per ounce mark. That’d be time to, as resource investing legend, Rick Rule, likes to say, “back up the truck.” An opportunity like that is certainly not out of the question. Big bulls tend to have big, counter-trend corrections along the way. Mr. Market is not in the habit of making his path known in advance. Corrections are a good decoy...a way to rap the weak hands across the knuckles.
Then again, many of the conditions that drove gold to 11 consecutive years of gains remain firmly in place. Trigger-happy goons at the Fed...an uncontrollable flow of paper debt...a Congress unlikely (especially during an election year) to cut spending in any meaningful way.
Hmmm...We’ll have to reckon on this one a bit longer. In the meantime, we’ve gathered some of the brightest minds in the gold investing business to assess the situation for us in a free webinar scheduled to air next Thursday, Jan. 12, 2012, at 11 a.m. If you haven’t yet registered, you can still do so here.
And in case you missed it, here’s Eric’s column...The Daily Reckoning Presents Giving In to Temptation
Like trying to patch a nuclear reactor with scotch tape and chewing gum, the central banks of the world’s leading economies are trying to Spackle over cracks in the global monetary system with a variety of desperate tactics and measures.
Eric Fry
Unfortunately, hiding the cracks does nothing to strengthen the underlying infrastructure. To the contrary, hiding the cracks dupes individuals into believing all is well, even as the monetary system is crumbling around them.
Many European governments, for example, are spending much more money than they can possibly confiscate through taxation. These guys are broke... plain and simple. But so is the United States, based on any intellectually honest assessment of the facts.
According to the US Treasury’s own data, the US ended 2011 with total debt of $15.2 trillion, which means the US debt-to-GDP is now more than 100%! Move over Greece! Make way for Uncle Sam.
Bankrupt governments usually default...at least they used to. In the modern era of faith-based currencies and Ivy League educated central bankers, bailouts and shell games are the cogs and wheels that drive the global monetary machinery. But this machinery does not actually power anything...other than a massive fraud. It merely sputters along, chugging out massive plumes of toxic theories and misguided manipulations.
And whenever a central bank cannot provide direct, overt assistance to a specific insolvent investment bank or government, not to worry, a central bank can still provide indirect, covert assistance.
The recently announced “backdoor bailout” of European financial institutions illustrates the point. The European Central Bank (ECB) cannot directly bail out the insolvent governments of Greece, Italy, Spain, Portugal, et al. Meanwhile, the US Federal Reserve cannot directly rescue Europe’s insolvent banks.
Enter the indirect bailouts... Here’s how they work:
The Fed extends unlimited lines of credit to the ECB under so-called swap agreements. The ECB, in turn, provides dirt-cheap capital to Europe’s struggling banks. Then, the banks — understanding an unspoken quid pro quo — use the dirt-cheap financing to buy the high-yielding bonds of Greece, Italy, Spain, et cetera.
So if you follow the money, the Fed is lending money to Greece... and all along the way, the insolvent European banks are making money they don’t deserve to make, while taxpayers lose money they don’t deserve to lose... and also stand first in line to lose even more money as these various coddled banks and governments eventually default anyway.
Does this characterization of the Fed’s activities sound like an exaggeration?
Consider this fact, courtesy of The Wall Street Journal: As recently as a few weeks ago, the amount of dollar swaps — i.e., loans — with the ECB was only $2.4 billion. “For the week ending December 14, however, the amount jumped to $54 billion,” the Journalreports. ”For the week ending December 21, the total went up by [another] $8 billion... No matter the legalistic interpretation, the Fed is, working through the ECB, bailing out European banks and, indirectly, spendthrift European governments. It is difficult to count the number of things wrong with this arrangement.”
Thus far, the Fed’s indirect bailout of Europe is relatively small, at a mere $62 billion. But we should expect that number to grow...a lot. And as that number grows, the Federal Reserve will be providing yet one more reason to buy gold, silver and other hard assets.
No modern central banker can seem to resist the urge to “cure” insolvency with more credit — credit that comes not from a store of accumulated capital, but from the mouth of a printing press.
Gold is a buy, perhaps now more than ever.
“2011’s close for gold marks the 11th year for higher year-end gold closing,” observes Richard Russell. “To my knowledge, this is the longest bull market of any kind in history in which each year’s close was above the previous year. This fabulous bull market will not end with a whisper and a fizzle. I continue to believe that the upside gold crescendo of this bull market lies ahead. We are watching market history. Below are the last day of the year quotes for gold:
2000 — $273.60
2001 — $279.00
2002 — $348.20
2003 — $416.10
2004 — $438.40
2005 — $518.90
2006 — $638.00
2007 — $838.00
2008 — $889.00
2009 — $1096.50
2010 — $1421.40
2011 — $1566.80
“I note the frustration and anger of the anti-gold crowd,” Russell continues. “To miss twelve years of rising prices is enough to make any investor furious with himself. I would guess that 99 percent of Americans have never participated in the gold bull market. Thus, sour grapes is the sentiment of the gold-haters...”
But there’s no sense being “a hater” or to continue sucking sour grapes. If the gold bull market is merely resting, rather than dying, there will be plenty of opportunity to become a gold-lover.
“Jeff Clark, editor of the S&A Short Report, sees the best opportunity to trade gold stocks of the past three years,” the S&A Digest reports. “After the end-of-the-year rout in the sector, one of Jeff’s favorite indicators dropped to its lowest level since October 2008 — one of the most pessimistic times in history for gold stocks. But after the indicator flashed ‘buy’ (as it is doing today), the average gold stock doubled over the next 10 weeks.
“Take a look at this chart of the gold sector bullish percent index, which shows the past two times Jeff’s indicator flashed buy (in June and October of last year)... Gold stocks rallied 20% over the following month in both instances.”
Longer term, the precious metals seem even more compelling.
“Gold stocks will have a great year,” predicts Chris Mayer, editor of Mayer’s Special Situations. “The market hated gold stocks in 2011, especially the juniors. The MarketVectors Junior Gold Miners ETF (GDXJ) is made up of small mining stocks. It fell 38% in 2011. This, despite gold itself finishing the year modestly up.
“Brigus Gold (BRD), for example, is dirt-cheap,” Chris continues. “In 2012, it is still targeting 100,000 ounces of production from its Black Fox mine. In the meantime, during 2011, Brigus boosted the total resource at Black Fox by 50% with high-grade ore extensions. So, the stock is now very cheap on reserves and trades for about 4x prospective cash flow at 100,000 ounces... So even if it gets a peer multiple of 8x, the stock could double. And that’s if gold goes nowhere!
“The market is offering low multiples on gold stocks right now,” Chris winds up. “Price-to-cash-flow multiples, for instance, linger near generational lows. Gold doesn’t have to go up for these stocks to make a lot of money. However, I think gold will make another run at $2,000 an ounce in 2012 — and exceed it. All the factors that drove gold to new highs in 2011 are still in place. The world’s monetary system is still a mess. And its leading brand, the US dollar, is not well. Combine a rising gold price with low multiples and you have a kind of financial rocket fuel.”
Regards,
Eric Fry,
for The Daily Reckoning
Ed. Note: So, will gold soar into the $2,000s this year...or have we come to the end of this long and glorious bull market? More importantly...does it matter either way? Again, don’t forget to register for our free Gold Webinar, set to air on Thursday, Jan. 12, 2012, at 11 a.m. Here’s the link.Could This Create More Millionaires Than the Bakken Oil Reserve Has?
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By Jeffrey Tucker
Some friends and co-workers spent their holidays at Rancho Santana in Nicaragua, where you can live like a king on a pauper’s salary. The beaches are among the best in the world, and the people are nuts for Americans. There is every amenity and consumer product, even better stuff than you can get at Wal-Mart. Local food is outrageously good. There are even local beers that best most on the market in the US. In general, it’s the real deal, the closest thing to a paradise this world has to offer.
The Genius of the Price System
By Jeffrey Tucker
The other day, a local hamburger joint was advertising a 99 cent hamburger, and I took the offer. It was great. I wondered how they can make money this way. A few days later, my head still swimming with memories of that great experience, I went back. This time, I dug in a bit deeper and upgraded the order, including fries and a drink, and this time shelling out for my passenger too. The total bill came to $16. Wow. That’s how they make money!
Volatility is Your Friend
By Chris Mayer
Gaithersburg, Maryland
It hasn’t been an easy environment to invest in. Fundamentals seem not to mean anything. The market paints with a super broad and emotional brush. Everything seems to go up and down at the same time. It’s fascinating to see how people cope with the volatility. Their choices and behavior lead to some very odd market price constellations.
Why Has Gold Been Down?
By Jeff Clark, Casey Research
After all, in spite of some short-term fixes, there remains no real resolution to the sovereign debt issues in many European countries. We’re certainly not spending less money in the US, and now we’re bailing out Europe via currency swaps with the European Central Bank. Shouldn’t gold be rising? Yes, but nothing happens in a vacuum. There are some simple explanations as to why gold remains in a funk.Do you make these six costly investing mistakes?
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To find out if you’re making these same mistakes, simply watch his 100% FREE presentation in the comfort of your own home now by clicking the link below...
Click here to learn more.The Weekly Endnote... And now, it’s over to a few readers for some thoughts, ideas and rumors. If you’d like to reply to Reckoners Daan, Jerry of Jeff, see address below...
First up, this one from Reckoner Daan...
Back in 2000 or so I wrote an essay that dealt with an unnamed person, but who clearly was Alan Greenspan. It was written as fiction in the first person, as if happening in a dream. The main theme is that everything Greenspan did in Washington — all his money printing and largess the moment there was a crisis of any kind — was done with one hidden objective in mind: to create such a dollar crisis that the world will be compelled to return to a gold standard.
It would seem from recent comments about a new global reserve currency that should one be defined as a basket of currencies, gold would also be included. Perhaps the dream version of Greenspan will soon prove to have succeeded? Here is a link to the essay if you want to have a look.
Regards and have a good 2012.
And this, from Reckoner Jerry...
“Yes, dear reader. That’s what it will probably come to. That is the endgame of paper money schemes. And when the government prints money...as in Zimbabwe or Argentina...or Weimar Germany...all hell breaks loose.”
Thanks Bill Bonner for saying this right out loud, keep it up!
It makes us wonder. What if that were Alan Greenspan’s plan all along? What if he really were Ayn Rand’s man in Washington? What if he intended to bankrupt the US government, by setting up a financial calamity?
Maybe he knew it was inevitable anyway. Maybe he figured that it was easier to go along with it than to fight it...and that it took him where he really wanted to go — towards the collapse of the paper dollar and the Big Government of the USA.
What if he weren’t such a scoundrel after all?
And finally this, from Reckoner Jeff W...
I thought I’d share some musings on Bill Bonner’s commentary on growth and the human condition.
He posits that perhaps growth is an anomaly, essentially the product of new, cheap energy.
And he wonders whether we have run into a wall based upon the lack of cheap (oil) energy.
Here’s another what-if, all my own: What if humanity is not poised to enter into a long slide into regression to a sad mean? What if we are simply pausing between stages of growth?
What if the next stage of growth simply requires an adjustment in the source of cheap energy? It seems to me that there is at least a hundred years’ worth of cheap energy in natural gas in the world. What would happen to growth if human society would reorient its energy production infrastructure such that it were founded on natural gas instead of oil (and coal)?
Is it possible that such a strategic repositioning of our energy base could become the springboard for a new phase of growth? Could it provide the growth that would allow the world economy to grow out of the current debt crisis we seem to face?
Just some musings...
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As always, we welcome your thoughts. Email them to the address below and...
..enjoy your weekend.
Cheers,
Joel Bowman
Managing Editor
The Daily Reckoning
Saturday 7 January 2012
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