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No longer under-priced, Gold Bullion is from here a speculation…

WEDNESDAY was a good day for stock market investors, writes Bill Bonner in his Daily Reckoning. Prices went up. The Dow rose 254 points, leaving us uncertain about its near-term intentions.

Of course, we’re always uncertain here at The Daily Reckoning. But sometimes we’re more uncertain than others. What seems certain to us is that stocks are a bad bet.

You might find this interesting, dear reader:

Guess who was better off at this stage following the beginning of the crisis. The investor in the Great Depression? Or, the investor today?

Well, we haven’t done the calculation ourselves, but we’ve heard from two different sources that if you take inflation and re-invested dividends into account, investors during the Great Depression were actually ahead. The difference is in the dividends. In the 1930s, companies paid substantial dividends; today, they don’t.

But yesterday a report came out that told investors that manufacturing activity was picking up. After so much bad news for so long, that was all they needed. They switched back to "risk on" mode.

Back and forth…to and fro…Mr. Market is making us wait. But for what?

We expect stocks to go down until they finally reach their rendezvous with the bottom. We saw one estimate that put the final bottom seven years into the future. But who knows? All we know is that it hasn’t happened yet. And since we believe it must come sooner or later, we conclude that it must be ahead of us…because it is not behind us.

Since a lower low lies ahead, we see no reason to invest in stocks at all. The odds are against us. Besides, what’s the hurry? The good companies will still be around seven years from now. And the bad companies? Well, we wouldn’t want to invest in them anyway…

But where…how…are we going to make some money in the next seven years? That is a good question, dear reader. We’re so glad you asked.

Do you have a good answer? Hope so, because we don’t.

The only reliable bull market of the last ten years has been in gold. The yellow metal lost $2 yesterday, closing at $1,248. That is only $14 below its all-time high. Which means, while we’ve been watching Bernanke, Jackson Hole, and stocks –  gold has been quietly creeping up…

Stocks go down; stocks go up – and gold keeps moving up…

Fiscal stimulus, monetary stimulus, quantitative easing – and gold keeps moving up…

Recovery…no recovery – gold keeps moving up…

Inflation…deflation – and gold keeps moving up…

Are you beginning to see a pattern?

Yes, gold is in a bull market. It moves up on bad news. It moves up on good news. It moves up on no news at all.

And if we’re right about how this period of Great Correction ends, the price of gold in dollar terms should go up much, much more.

But here’s the important thing. Gold is money. You can use it to buy things. In terms of what gold will buy, it does not seem undervalued to us. Much has been written on the subject. But as near as we can tell, gold is now fairly priced.

Go ahead; buy all you want. It is a good way to maintain your wealth and protect it against the monetary and economic calamities that are doubtless coming. And if you expect to make a lot of money on it, you’ll probably succeed. When the Bernanke Fed loses its grip – which it will – and when the public gets on board the gold bull market – which it will – gold speculators will probably make a lot of money.

We’ve been a gold bug for the last 30 years. Two thirds of that time was miserable, punishing and humiliating. Only the last 10 years have been rewarding. We expect the next 10 years to be even more rewarding.

But the reward now is different. It is speculative…not inherent. When we bought gold in ‘99, we were buying an undervalued asset. We were buying real money, cheap. We made our money when we bought.

Now, gold is fully priced. It is a still a good way to save money. But we cannot expect to make money by waiting for the metal to revert to the mean. It’s already at the mean. Gold is now a speculation.

A warning: we still have not had the sell-off in the financial markets that we expect. The Dow has still not sunk down to 5,000. The lights are still on at banks that should have been put out of business months ago. The public still believes another "stimulus" effort might do the trick. Leading economists still believe they can manage the economy back to growth and prosperity.

We have not hit bottom yet. Far from it.

When we do, the price of gold could be substantially lower. Which is okay with us. We bought years ago. We’re happy with our gold holdings and don’t really care if the price drops. Heck, we’d be happy to see the price back below $1,000; we’d buy more.

But speculating on a rising Gold Price is a different thing. Most likely, speculators will be wiped out once or twice before gold hits its final top.

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Source:Speculating In Gold…?

A new name for a long-time paranoid lunatic…

SINCE I am known as something of a gold bug, a lot of people write to me about gold, says the Mogambo Guru in The Daily Reckoning.

But since I am a paranoid lunatic, I don’t read their letters, mostly because I now call myself Marvelous Macho Grande (MMG), figuring that an established alias could potentially come in handy when the prices of gold, silver and oil shoot higher and higher as inflation in consumer prices starts going parabolic as a result of the despicable Federal Reserve creating so, so, so much money, especially so that the despicable federal government can borrow and spend that selfsame so, so, so much money.

So, you can see how a dramatic, romantic new name like Marvelous Macho Grande (MMG) would perfectly suit a guy like me, which is a guy with a theoretical massive coming increase in wealth from investing according to The Mogambo Perfect Portfolio (TMPP), which uses the Austrian school of economics (see Mises.org) and the last few thousands of years of history as Absolutely Compelling Reasons (ACR) to invest in gold, silver and oil when the government is acting so insanely bizarre, as does ours now, blithely deficit-spending a monstrous 11% of GDP, now with a national debt nearing a heart-stopping 100% of GDP, and allowing the Federal Reserve to continue to create So Freaking Much (SFM) money that, like creating too much money always does, it creates booms and bubbles that predictably, inevitably, unstoppably, disastrously go bust, leaving you, sadly, worse off than before.

So, you can see how I am not in the mood to answer emails from people who, deep down in their hearts, are pleading, "Oh, please help me, Masterful Mogambo Guru, or Marvelous Macho Grande (MMG), or whatever in the hell your name is this week: Sadly, I have not been following your terrific advice to Buy Gold, silver and oil as the One True Way (OTW) to end up with a lot of money without working for it, and now I need one of your famous Secret Investment Plans (SIP) to make up for lost time, else I am reduced to being the widow of a rich Nigerian banker who needs to sneak $100 million out of Nigeria and into your country. In that case, I will give you $50 million after you give me your bank account number and $5,000 in cash to pay various fees, expenses and bribes."

Alas, I don’t have $5,000 to invest in this terrific opportunity to make a quick $50 million, as likewise there are no Secret Investment Plans (SIP), although I have spent a lifetime looking for one.

Fortunately, constantly Buying Gold, silver and oil is always the smart thing to do when your stupid, desperate, half-witted, corrupt, clutching-at-straws government is acting like all the other stupid, desperate, half-witted, corrupt, clutching-at-straws governments that created too much money and destroyed themselves over the last 4,500 years.

And if you don’t believe me, then maybe you will listen to the famous Richard Russell of the Dow Theory Letters, who writes:

"Investors sometimes get caught up in the day to day and week to week movements in gold and silver. Don’t waste your time or energy on that, just accumulate. Standing in front of us is the greatest transfer of wealth in history. When the dust settles, those holding the gold will make the rules."

And "just accumulate" sounds so easy because it is so easy, which is why I say, as I always say until you are tired of hearing me say it, "Whee! This investing stuff is easy!"

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Source:Confessions of a Gold Bug

Buying Silver offers an "elaborate play" on the likely money inflation ahead…

EDITOR of the Gold Stock Adviser and International Contrarian as well as his Addicted to Profits advisory, David Skarica is currently completing his latest book, The Great Super Cycle: Profit from the Coming Inflation Tidal Wave and Dollar Devaluation, to be published by John Wiley & Sons in November.

Speaking here to The Gold Report, he forecasts "Chinese water torture" for the US economy, spurring more quantitative easing that will only buoy Gold Prices still further…

The Gold Report: You said in a recent Addicted to Profits newsletter that your stock-market indicators are not really screaming "bear". What are your indicators, and what has led you to believe that?

David Skarica: Part of it is sentiment, and part of it is the monetary outlook. And part of it is the cycle of the stock market.

On the sentiment side, I watch a few indicators: Investors Intelligence and the American Association of Individual Investors (AAII). Essentially, these are sentiment polls. Right now, Investors Intelligence levels are showing very high bearish readings, much like the AAII reading in late July showed more bears than bulls. In late June, early July, one AAII reading had the most bears since the 2008-2009 bottom. Investors Intelligence showed something similar. A few weeks ago it showed the highest number of bears since April 2009, which, of course, was the start of the bull market and rally.

To get a bear market, you need panic and people selling. But if people are already bearish, it is very difficult to get that selling pressure.

In the monetary outlook, at any point now the Fed is going to start more quantitative easing. That’s usually very positive for equities. Then what people have to remember is that everyone’s likely to get really bearish on the economy. We had a really great unwinding of leverage in 2008, and I don’t see that occurring again. I will talk about that with my third point. That is why I don’t see a huge amount of downside in stocks. Even if the S&P were to drop to 900, that is when quantitative easing would really begin, big time.

Part of my analysis in my new book examines the last three secular bear markets: between 1900 and 1920, the start of 1929 to 1949, and 1966 to 1982. Those were all 15-20 year periods when equities went sideways. There are usually two big bear markets, and they happen in the first half of the secular bear market. The examples were 1907 and 1914, 1929 and 1937, and 1970 and 1974. In the second half of the bear market, more muted moves occur in the stock market, combined with much higher inflation. That’s where I think we are.

The rally we’re seeing in the stock market is very similar to the 1908 or 1975 rallies, and those were followed by long-term trading ranges rather than big dips. The low of 666 on the S&P that was reached last March will probably hold, but inflation adjusted, we actually could go lower. If we get a drop of another 10-15% in current levels in the stock market, they’re going to come in with quantitative easing, which will actually probably lift stock prices, even if it doesn’t help the economy.

TGR: You’re saying that if the market starts to dramatically slide, the government is going to come in with some more money to prop up the economy again. But America doesn’t really have any money.

David Skarica: They’re going to print it.

TGR: Won’t that just prolong the inevitable?

David Skarica: What will happen in this cycle is very similar to what happened in the late 1940s or in the early 1980s. In those cycles when the bear market ended, the Fed and the government raised interest rates and the money supply dropped. Everything dropped in price, and that cleansed the system. But I just don’t think they’re ready to do that yet. If you look at interest rates, we’re coming off a secular low. That tightening cycle has to be the end. I don’t see that occurring for quite a while. The Brits had to do this after the Second World War when the Pound ceased to be world’s reserve currency. They essentially devalued way into the early 1980s, a 35-40 year period. There’s no reason why the US can’t slowly devalue over that long as well.

TGR: What’s your near-term market outlook, David?

David Skarica: That is really difficult because if you had talked to me in late June or early July, I was really bullish because of the terrible sentiment we saw. I still have a muted bullish outlook here. One chart I have in my newsletter compares the 1907-1909 period with the current period. The 1907-1909 period saw almost a 50% drop over a two-year period followed by a very strong reaction rally, followed by consolidation like we saw recently, followed by a second move higher. If that correlation continues, it means we would be at the top of the market in the first or second quarter of next year, and the S&P would rally to about 1,300.

In the very short term, we could see one more drop in the fall before we rally, but I really think those lows of May-June are going to hold. We could see a pullback. But after that pullback, we will be headed higher because of the quantitative easing.

What people have to understand is that this is a global market. Don’t be so focused on the US market. If you look at Turkey, the market there has actually broken above its 2007-2008 pre-crisis high. Brazil and India are within a few percentage points of their respective pre-crisis highs. When the US market broke down to new lows in late June, all of the Asian markets essentially held their lows and some went higher.

TGR: But if the US continues to print money, doesn’t it risk losing its status as the world’s reserve currency?

David Skarica: I think that’s a question of when it’s going to happen and not if. This is why it will lose its status: about 75% of its debt is short-term oriented, meaning two to seven years in duration. That means that if you run a deficit of $1.2 trillion a year over the next five to seven years, you’re going to rack up $5-$7 trillion Dollars in debt. And you’re going to have to roll over about $8-$9 trillion of the current $13 trillion in net debt. That means you’re going to need between $10 and $15 trillion to cover the debt. They’re going to do that by printing money.

TGR: Doesn’t it get to a point where they’re not going to repay their debt?

David Skarica: I think they’ll repay it because they can just print money to repay it. It’s not like in Argentina where you have to do a partial default because some of your debt is issued in another currency. They can just print the money and repay it. I don’t think default is ever a problem.

The real risk is more in these unfunded liabilities. You’re going to see what happened in Japan happen in the US They’re going to raise the taxes and the outlays on Social Security and then reduce the amount you receive. That is more where I see the risk rather than in defaulting on foreign debt.

TGR: So you don’t believe a massive crash is imminent in the US economy.

David Skarica: I think what you’re seeing today is what’s going to continue; it’s going to be more depressing, like Chinese water torture.

TGR: You mentioned earlier that some of the foreign markets continue to do quite well despite the economic problems in the US What will the role of these emerging markets be in tomorrow’s economy?

David Skarica: I think their role is consumption. We can talk about how their per-capita GDP is much, much lower, but most of these economies do not have the huge personal or federal debt load that the US has. This is where the emerging consumer is going to come from. You have 3.6 billion people in Asia as opposed to 300 million in the States. If you can generate one-twelfth of the per-person buying power of the U.S, the total Dollar amount is going to be equal.

I still think the US is going to play a really important role in the new global economy – global finance. That’s where the US can really serve; it can still be a source of capital for these markets and help these companies raise money. There’s definitely a role for US corporations going ahead, and obviously technology corporations are still top-tier companies.

TGR: What does the stagnating US economy mean for gold?

David Skarica: It means there are going to be higher Gold Prices because you’re getting increased inflation, and gold is a hedge against that. Because the value of the Dollar is going to decrease, there’s going to be more consumer demand for gold in the United States.

Also, in deflation, consumers get really worried and they hoard gold. That happened in the early 1930s before they made gold illegal to own, so deflation or inflation is really positive for the Gold Price because people are going to try to hedge with owning gold under those circumstances.

TGR: You’re not really a gold bug, but you’re certainly bullish on gold.

David Skarica: Well, one thing I really believe is that the gold bull market usually ends when the Dow-to-gold ratio – the number of ounces of gold it takes to buy one share of the Dow – goes about 1.5-to-1. That’s what happened in 1932; that’s what happened in 1980. Right now we’re still 8-to-1, 9-to-1. There’s a long way to go.

TGR: Do you have a price projection for gold?

David Skarica: I am really conservative in my price prediction, but last year I was thinking we would go to $1,100-$1,200, which we did. I would say by the end of 2011, I’d be pretty happy with $1,500 gold. But because quantitative easing might start again, I wouldn’t be surprised if it was a lot higher than that.

TGR: How are you playing gold in this environment?

David Skarica: I really like the equities, and the reason is because if you look at the ratios like the XAU-to-gold or the HUI-to-gold stocks, the XAU-to-gold usually roughly trades historically at 20% of the price of gold. So if gold is $1,000, then the XAU should be at 200. Well, right now the XAU is just over 175, and gold is $1,220. If you took away the financial crisis, this is the lowest all-time ratio of stocks to gold, lower than when they bottomed in 2000.

This tells us that if gold goes over $2,000, then the XAU should be trading at 400. Well, $2,000 in gold is about a 67% gain from $1,200, but 170 to 400 on the XAU is about a 150% gain from the current gold stock prices. I think the equities have more leverage, if they go back to their historical valuations.

TGR: Let’s talk about Buying Silver for a minute. Silver has traditionally traded at about a 15-to-1 ratio to gold. What do you see happening with silver throughout the rest of this year and through 2011?

David Skarica: I really like silver’s chart. I would say in 6-12 months’ time it will look better than gold because it hasn’t broken out yet. Like we saw when gold finally broke $1,000, you get this kind of outperformance jackup. Right now, silver is seeing huge resistance in the $18-$21 range. It really looks like silver is building momentum to break out in the spring. When you’re in the up cycle for precious metals, silver is essentially a more elaborate play. Silver Prices outperform on the upside and underperform on the downside. Silver goes up faster, but it also falls faster.

TGR: Thanks, David. We appreciate your interesting insights.

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Source:Water Torture for the US Economy

The Greater Depression, says Doug Casey, will dent industry – not true safe havens like gold & silver…

AS THE WORLD sinks deeper into what Doug Casey calls the Greater Depression, he sees default on the US national debt as inevitable, says the Gold Report, albeit probably in the guise of currency destruction.

Best-selling investment author, legendary mining-stock analyst and chairman of Casey Research, Doug also anticipates further contraction in real estate, particularly on the commercial front. And as long as stocks remain overpriced, he’ll shy away from equities – except perhaps in favored sectors such as silver and Gold Mining, as he details in this interview…

The Gold Report: Doug, at a recent conference you said that the US ought to default on its national debt now. Why that rather than letting it play out?

Doug Casey: Several other things almost equally radical should be done besides defaulting on the debt. I recognize that an outright default is most unlikely, but the national debt should be defaulted on for several reasons.

To start with, once the US government defaults on its debt, people will think twice before lending it any more money; giving politicians the ability to borrow is like giving a teenager a bottle of whisky and the keys to a Corvette. A second reason is that the debt is an albatross around the necks of the next several generations; it’s criminal to make indentured servants out of people who aren’t even born yet. A third reason would be to overtly punish those who have been lending money to the government, enabling it to do all the stupid and destructive things that the government does with that money.

The debt will be defaulted on one way or another. The trouble is they’re almost certainly going to default on it through inflation, by destroying the currency, which is much worse than defaulting on it overtly. That’s because inflation will wipe out the relatively few people who are prudent in this country, those who are actually saving money. Because they generally save in the form of Dollars, they’re going to wipe them out financially.

It’s just horrible. Runaway inflation will reward the profligates who are in debt – people who’ve been living above their means. And punish the producers who’ve been saving and trying to build capital. That’s in addition to the fact it will destroy millions of productive enterprises. A runaway inflation is the worst thing that can happen to a society, short of a major war. They just should default on it honestly, as it were.

TGR: But your belief is we’ll try to inflate our way out of it to pay for it.

Doug Casey: Don’t say "we". Say the US government. I don’t consider myself part of the problem. Americans have to learn that the government isn’t "us". It’s an entity that has its own interests, its own life, its own agenda. It views citizens as milk cows – or perhaps even beef cows – strictly as a means to its ends.

TGR: Whether it’s overt or by default, doesn’t that end up in the same place down the line?

Doug Casey: There are two ways they can default – one by saying, "We don’t have the money and we’re not going to pay you," and the other by continuing to print up money and giving people the number of Dollars that they’re owed, except the Dollars are worthless. The first alternative is by far better, for many reasons we can’t fully explore now. But it’s going to be traumatic either way.

TGR: But the assumption that we could actually just print more Dollars and pay off the debt implies that somewhere the debt will stabilize.

Doug Casey: Oh no. It doesn’t have to stabilize. To pay interest on the national debt, and to pay for additional spending, all the Federal Reserve has to do is buy bonds from the US government. It doesn’t have to stabilize at all. The government is most unlikely to cut back on its spending, most of which has become part of the social fabric – Medicare, Social Security, unemployment benefits, food stamps, corporate bailouts, continuing foreign wars, domestic "security"…These people are crazy enough that it could get like Germany in the ’20s or Zimbabwe a few years ago.

TGR: At what point do we tip over and turn into a situation such as Zimbabwe or the Weimar Republic?

Doug Casey: At the moment we’re in an economic twilight zone or, if you wish, the eye of a hurricane. There is apparent stability in the economy. The stock market’s high. The bond market’s high. Only the real estate market is in visible trouble. Retail prices are level; they’re not going up and maybe they’re even going down in some cases. This is a temporary situation. We will inevitably – and soon – hit the other side of the storm. At some point those trillions of Dollars created by the US government – and many other governments around the world have created trillions of currency units – are going to have an effect. When will that be? The timing is uncertain. But I think it’s going to be soon.

TGR: Will it be rapid?

Doug Casey: If these things were perfectly predictable, it would be easier to dodge the bullet. This is an almost unique time in world economic history, and I think we’re not only going to have economic consequences, but social and political consequences, and very likely military consequences. So hold on to your hat.

TGR: To protect what individual wealth we may have, you’ve recommended selling real estate and renting, holding assets outside the United States, owning gold, etc. When we’re out of the eye and in the thick of this economic hurricane, what types of equity investments should people be holding?

Doug Casey: Now is a very bad time to have most kinds of equities; stocks in general are very overpriced, by almost every parameter. I’m not looking to sell my gold until I can buy solid blue chip stocks for dividend yields in the 8% to 10% area. That’s after they cut their current dividends. Although it’s certainly not the bargain it was 10 years ago. Nonetheless gold will go higher. Stocks will go lower. I don’t know exactly when I’ll sell my gold and buy stocks, but it will be when there’s a panic into gold and when stocks are bargains. I’m sure I’ll be afraid to make the trade when the time comes – but good trades almost always run counter to your emotions. Perhaps the tip-off will be when Newsweek or Time – if either still exists then – run a front cover with a golden bear tearing apart the New York Stock Exchange.

I think it will be a generation before American real estate is a solid buy again. And the world at large will likely have quite a different character then.

TGR: I take your point about equities in general, but are you also staying away from gold equities? Or do you maybe see an opportunity there?

Doug Casey: They’re a special situation; on the one hand they are a play on gold, but on the other hand they’re stocks. There’s an excellent chance that with the trillions of currency units being created, the government inevitably will wind up inflating other bubbles. There’s a very good chance for a bubble in gold and a very big bubble in gold stocks. So I would say that they are an exception to other equities. We could see these juniors go up by an order of magnitude or more, even while most other stocks are going down.

Historically, junior resource stocks are the most volatile class of securities in existence.

TGR: Might other sectors also be in that situation?

Doug Casey: My crystal ball is hazy, but it seems to me that junior resource stocks are the best speculative place in the equities market. There’ll probably be others, but I don’t see them very clearly at this time. I’m waiting to see what materializes. You have to look at all markets of all types, everywhere in the world, to find things that are overpriced, as well as things that are underpriced.

Most of the time the trend in any given market is uncertain. I prefer to act only when, in my subjective opinion, the odds are greatly in my favor, and when the potential return is a multiple of my investment. In other words, most people invest 100% of their capital in hope of a 10% return. I prefer to wait until I can invest 10% of my capital for a 100% return.

As to what’s going to happen over the next few years, I feel confident that we’ve entered upon the Greater Depression in earnest. It will be an extended period of time when most people’s standard of living drops significantly. But as I said, I think there’s an excellent chance of a bubble igniting in resource stocks. That will build on the bubble that’s going to come in gold.

High levels of inflation make "investing", in the Graham-Dodd sense of the word, very hard. And inflation makes speculation almost necessary. Just don’t confuse speculation with gambling – they’re very different. Speculation is the art of capitalizing on politically created distortions in the market.

TGR: What’s your definition of resource stocks? For some, it’s very broad and includes metals, agricultural commodities and such. Are you referring specifically to gold?

Doug Casey: I’m most friendly toward gold; it’s the only financial asset that’s not simultaneously someone else’s liability. I’m friendly toward silver, too, because silver is kind of poor man’s gold. I’m very friendly toward oil because I do believe a good, solid argument can be made for what was first defined by M. King Hubbert as "peak oil." Also, oil is likely to be a major player in the next major Mid-East conflict. I like uranium; nuclear is certainly the safest, cheapest and cleanest form of mass power generation.

There’s an excellent case to be made for agricultural commodities in general, and live cattle in particular. I’m not very friendly toward base metals such as lead, zinc, copper, aluminum, iron and so forth. Usage of industrial metals could drop considerably in the ongoing depression.

TGR: You mentioned earlier that you thought it would be a generation before real estate represents a good investment again. Many economic theories, though, tell us that real estate is a good thing to have in an inflationary environment. How do you reconcile those two schools of thought?

Doug Casey: The problem is that we’ve just finished a decade-long real estate boom. Actually, there’s been a property boom, largely driven by debt, since the end of World War II. There’s been immense overbuilding and it’s got to be absorbed. A lot of the overbuilding will have to be bulldozed, quite frankly, because it’s completely uneconomic. I think the economic contraction we’re going into is so serious that in this country you’ll be able to buy real estate for back taxes, much like in the last depression.

But it’s much more serious than what happened in the 1930s when real estate taxes were de minimis. Now many people have to pay $10,000, $20,000, even $30,000 a year in taxes on their houses before they even start paying the mortgage and the utilities and maintenance. And municipalities are likely to try raising the mill rate, because they’re largely bankrupt, and assessed values are way down.

There’s a great deal more I could say about what’s yet to come in the real estate sector. But let me just say the real estate bubble has a long way to deflate yet.

TGR: Is it both residential and commercial or is it worse in one sector?

Doug Casey: That’s tough. Is emphysema worse than Parkinson’s? I suspect, however, that commercial is going to be worse than residential.

People’s shopping habits are one of the things that the Internet has changed and will continue to change. It makes more sense to buy things online and have them delivered to you, than to take the time and expense of going shopping, and the merchant having to deal with retail space, inventory, a geographically limited clientele and so forth. I wouldn’t be surprised to see prices on a lot of commercial property come down 80% or 90%. You’ll see a lot of properties permanently shuttered. That’s a disaster for owners, who will still have to pay taxes. There will be no money for maintenance.

TGR: We spoke earlier about inflation and the likelihood of the US government printing its way out of debt. Do you see a point in time where the United States or even other governments will go back to the gold standard?

Doug Casey: It’s both essential, and inevitable. That’s because they have no reason to trust one another. They need a medium of exchange and a store of value that’s not faith-based.

All the other governments of the world know that the US is bankrupt and the Dollar is nothing but a floating abstraction. Why should they hold billions or in some cases trillions of these things on their balance sheets? They’re going to go back to gold because it’s the only financial asset that’s not simultaneously somebody else’s liability.

It’s not because gold is magic in any way. It’s just because it has characteristics that among the 92 naturally occurring elements make it uniquely well suited for use as money. It’s durable. It’s divisible. It’s convenient. It’s consistent. It has use value in and of itself. And it can’t be created out of thin air by some government. It’s a better combination of those things than any of the 92 elements. It’s infinitely better than paper. So yes, I think they’ll go back to gold within this generation.

TGR: You were speaking of buying things online. Most people today don’t even use paper bills. We do everything electronically in terms of banking. Aren’t those properties of gold that you described irrelevant in the electronic era?

Doug Casey: To the contrary. Gold is an asset. You can put it in your bank account and transfer it. You can buy and sell it electronically. The fact that it can be transferred electronically today makes it a better money than ever before. So no, not at all, gold is quite relevant. It’s not in any way an anachronism. I pity fools like Bernanke and Geithner who don’t understand that. If they totally destroy the Dollar, they may end up hung by their heels from a lamppost.

TGR: You said you’re very partial to oil and uranium. Are you attracted to any other energy resources?

Doug Casey: Yes. My friend Rick Rule has justifiably and very intelligently been a big promoter of geothermal energy, because it’s actually superior to even nuclear in some ways. It should have a huge future. There’s very little geothermal being generated right now, and a great deal could be generated in the future. Many other forms of power generation are possible – tides, ocean currents, heat differentials in the ocean, solar microwaved down from collectors in high orbit – there are many, many innovative technologies out there.

Of course as technology keeps advancing, conventional solar will become cheaper and more efficient. Energy shortages, and high energy costs, are totally caused by political issues. In a true free market world they wouldn’t even be worth talking about.

TGR: But will technology-reliant sources such as solar and wind power be able to sustain through this downturn that you’re expecting?

Doug Casey: Well, most of the power we have is now generated via coal. Coal is very problematical as an energy source – it’s dirty, bulky and could be used for better things than burning. Stupidly, most new plants will be running on coal, not nuclear.

That said, you can expect that the average guy will be cutting his standard of living, driving less, turning down his heat in the winter, turning down his air conditioning in the summer and turning off the lights when he leaves the room. So I’m not sure that electricity consumption will be going up for years to come, especially with a lot of stores being shuttered and so forth.

Wind and solar are trivial sources of power. Good for certain applications in certain locations, but not suitable for mass power in an industrial civilization with anything like our present technology.

TGR: So if electricity consumption goes down…wind and solar are barely economically viable now.

Doug Casey: That’s right. It’s just a question of the alternatives. You weigh what you pay for a kilowatt hour on the grid versus what it costs an individual to put up private wind or solar, or for utility to put up commercial wind or solar. I see no reason to invest in these alternatives other than economics.

The way I see it, arguments made about saving the planet and so forth are basically ridiculous, even if naively well-intended. All the blather about "carbon footprints" is scientifically nonsensical. It’s not a matter of tree hugging. If you’re paying more for something than necessary, you’re misallocating capital. You’re destroying capital. That’s a real crime against humanity.

To me, it’s strictly a matter of economics. If at some point technology makes a great breakthrough, maybe solar will become the best and cheapest power source; that would be wonderful. That’s not the case right now. As I said before, maybe they’ll be able to put solar collectors into geostationary earth orbit and beam down solar to earth by microwave. There are lots of possibilities for solar to become economic. It’s just that right now, it costs several times what other forms of power do. It doesn’t make sense, except in certain places, in certain applications.

TGR: Given that, would we expect to see any solar in your portfolio?

Doug Casey: If somebody makes a cosmic breakthrough, I’m happy to buy the stock. I’m certainly not inclined against solar on any philosophical grounds.

TGR: The Chinese recently announced that they will start selling gold coins through their banking system. What do you make of that? Is it really big news?

Doug Casey: I think it is. The Chinese know that one of the reasons Mao took over is because the government of Chiang Kai-shek destroyed the national currency. The Chinese can see the problems with the US Dollar. That it could blow up in their hands. They also see the problems they’re creating for themselves by creating trillions of new renminbi. So I think that they’re encouraging the average guy in the street to do some saving with gold so that if things go sideways with these paper currencies, the average guy isn’t left too destitute and too angry. At least he’ll have some Gold Coins. I think they’re being quite intelligent about encouraging their people to own gold.

TGR: What do you make of the fact that a country with a communist orientation encourages its citizens to Buy Gold, while the world’s supposedly premier democracy does not?

Doug Casey: First of all, let’s recognize that communism was a very short-term aberration in the 5,000-year grand screen of Chinese history. Mao only ruled the country for about 30 years. Since the late ’70s, China’s been returning to its old ways. Everybody knows that the Communist Party in China is nothing but a scam for its members to cream something off the top of everything. It’s ludicrous to say China is a communist country. It’s easier to do business in China than it is in the US – lower taxes, less regulation, less legal hassles.

In point of fact, the Chinese are reverting to the mean. For many centuries, up until the Industrial Revolution, China was much wealthier than the West. Now it’s rising again.

As far as the United States is concerned, unfortunately it’s going the other way. The issue has nothing to do with democracy. Democracy is just mob rule dressed up in a sports coat. It’s much overrated. The US government is becoming more powerful, and the US is radically departing from the economic philosophy of free markets that made it great. It’s simultaneously becoming more politically repressive. The Chinese are just reverting to their traditional economic philosophy, which is not communism, it’s capitalist trade and production.

TGR: Presumably, participants will get a lot more of what we’ve been talking about at the Casey Summit that you have scheduled for October 1-3 in Carlsbad, California…?

Doug Casey: For sure. We’re going to be talking about specific ways to take advantage of the problems that we have today. It’s important to remember that as the Greater Depression deepens, most of the real wealth in the world still will be here. It’s just going to change ownership. The key for this conference is we’re going to examine why things are the way they are. But perhaps even more important is how to capitalize on them, how to take advantage of them.

TGR: Of course you’ll be at the conference too. And your lineup includes Bob Bishop, Eric Sprott, Richard Russell, Bob Prechter and obviously Rick Rule.

Doug Casey: And Neil Howe, who with William Strauss wrote The Fourth Turning and Generations: the History of America’s Future, 1584 to 2069. It’s among the most brilliant, and original, analyses of long-term trends of history I’ve ever seen.

TGR: And I understand you’ll be introducing the Casey NexTen. How does that complement your Casey Explorers’ League?

Doug Casey: When Ross Beaty, Bob Quartermain, Simon Ridgeway and the other members of our Explorers’ League come out with a new deal, it automatically carries a huge premium because they’re proven commodities; highly technically competent, honest guys with good work habits, who have found and made economic more than three mines.

With the Casey NexTen, we’ve done a lot of work on finding the next generation, guys who have all the makings of these veterans, the young editions of our Explorers’ League. With this group, you can still buy in cheap and get them as they’re just moving into the most productive stages of their lives as opposed to moving toward retirement.

Getting to know them personally, which is possible for people who attend the conference, would be one of the most financially productive things that you’ll be able to do if you have any interest at all in resource stocks.

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Source:Buy Gold, Sell Zinc

Why this leading "hard assets" manager says to raise your precious metals’ exposure…

WITH MORE THAN 45 years’ experience in portfolio management, John Embry has simultaneously researched the gold sector for 30-plus of those years.

Embry joined Sprott Asset Management in 2003, after 15 years as vice-president of equities at RBC Global Investment. Here he speaks to The Gold Report about how the "extraordinarily painful" economic times ahead will ultimately lead to a new currency backed by, of course, gold…

The Gold Report: We recently interviewed John Williams of ShadowStats, who noted that the M3 money-supply measure has had its sharpest ever year-over-year decline. He concluded that we will see a deepening recession with inflation/hyperinflation afterward. You are in the camp that believes hyperinflation will occur first, and then deflation will wipe out the remaining debt. What do you see in the numbers to indicate that?

John Embry: Well, I think I’m being misunderstood because I think we are in a highly deflationary situation as we speak. I don’t really disagree with Williams. The basic problem is that the amount of debt in the system is extraordinarily deflationary. The only way to combat it without having the hard 1930s-style deflation is to print more money. The risk of doing that is hyperinflation. I think they will opt for that, but I’m not 100% convinced the economy will go that way. The economy could very well go Bob Prechter’s way (Elliott Wave International) and go into a hard deflation, but not without a huge effort from the authorities in the United States to prevent it.

TGR: Let’s go down the path where we reduce quantitative easing and start seeing inflation that ultimately becomes hyperinflation. Does quantitative easing ever pay off that debt, or do we go into hyperinflation and still default on the debt?

John Embry: In the end you will default on the debt. If you go back and look at any hyperinflation situation in history, the currency and the debt that’s denominated in the currency get destroyed. I would not do that. I would take the pain. I agree with Jean-Claude Trichet, head of the European Central Bank, who said that you’ve got to start reining things in. Better to take some pain now than the even worse pain caused by the total social disruption that hyperinflation creates.

TGR: Are we in a situation where, if we really implemented austerity measures, we could avoid debt default and/or inflation? Or are we just too far down the line?

John Embry: I think we’re way too far down the line. If you were to go into a real austerity program in the United States by raising taxes, cutting spending and having interest rates that reflect the reality of the situation, you would go into a hard deflationary depression. I don’t see an alternative. I’ve said many times that the middle ground has long since been lost. We’ve just had the greatest credit cycle in history, and as a result we’re going to pay a huge, huge price for it.

TGR: But if the austerity program would throw us into a deflationary depression, then more quantitative easing would ultimately end in a deflationary depression.

John Embry: In the end you will end up with a new currency system. And those who invest in the right assets will come out intact at the other end. Those who invest in paper assets of any description will be wiped out.

TGR: That leads into our next question. In your recent column in Investor’s Digest you said Fed Chairman Ben Bernanke "knows full well that it is his monetary policy featuring zero-based interest rates for the world’s reserve currency and profligacy of his own government that are fueling the desire to own gold." If Mr. Bernanke were replaced by John Embry, what changes to US economic policy would be made?

John Embry: I sort of pre-empted the question by suggesting I would be inclined to take the pain now. But, if John Embry had been determining monetary policy for the last 15 to 20 years, we would have never been in this position. As I have said before, I believe very strongly in Austrian economics. You’ve got to rein in the credit cycle early if it’s getting out of control, or you’re going to end up exactly where we are now. I do not see a solution that isn’t extraordinarily painful.

TGR: Are you referring just to the US or is Canada, where you are, going to see the same painful situation?

John Embry: That’s a very good question because there’s a lot of hubris up here in Canada. We think we’re immune because we have resources and we’ve done a better job with our banking system, etc. But if the United States gets into deep difficulty, we get into deep difficulty because our economies are so closely aligned. Now, we may not get in as much trouble because we have more resources, we have a lot less people and our finances are in better shape. But the fact is the whole Western world will be seriously impacted by what happens in the United States. The United States is the linchpin of the entire Western world.

TGR: Will the impact be felt in the Eastern countries?

John Embry: Yes, I think the impact will be felt there, too. I believe China will be the emerging power in the next century, and I’ve believed that for a long time. But before the United States became the emerging power in the previous century, they went through a depression followed by a World War. And China’s not just going to glide through this without difficulty. If the US were to get into major difficulty, China would have a real economic setback. It wouldn’t be for the long term, but the short term could turn very ugly.

TGR: To what extent will China incur economic pain?

John Embry: The problem with the Chinese is that the Communist government basically has to provide improved living standards for China’s massive population. If they don’t do that, I think you will see incredible unrest. I foresee that happening if this thing goes in the direction that it appears headed.

TGR: What do you make of reports from China on the pending real estate bubble and the Chinese government telling its citizens to Buy Gold?

John Embry: I think there is a huge real estate bubble in China. I saw some statistics and I can’t even remember the number of homes that were apparently not inhabited. But it was massive. I find it fascinating that the Chinese government is telling the public to go to gold, which is the exact opposite strategy that’s being followed in the Western world. I think they realize that this is probably the safest place for their people to be invested in the coming period. The Chinese are very smart. I think, quite frankly, that in the end the Chinese will back their currency with gold.

TGR: You mentioned that we were ultimately going to get a new currency system. Would it be just the Chinese going to a Gold Standard, or would it be the world?

John Embry: I think that if we get a new currency, which I firmly believe we will before this is all said and done, I think gold will be a component of the new currency. You’ve seen the Chinese on occasion mention the idea of a kind of Special Drawing Right (SDR, an IMF currency unit) backed by a basket of currencies and gold. I believe gold will be reintroduced to the system because there will be so much bad feeling toward fiat currency. They’re not going to get away with it a second time, at least not for another 100 years.

TGR: When we start moving to a new currency that you say will be backed in part by gold, won’t almost all currencies have to hyperinflate and become devalued because there’s just not that much gold being mined?

John Embry: Oh, I think that’s in the cards. The United States might be the linchpin for the whole problem, but because of this competitive devaluation that’s going on nobody wants to have a strong currency. If the US currency is failing because of the problems we’ve discussed, there’s no question that the other currencies are going fail with it. That’s why I hold all of my assets in hard assets, be it gold, silver, oil companies – anything that’s producing something tangible.

TGR: You had an interesting interview with Mineweb recently. The headline used a quote from your interview. It reads: "If gold is not between $1500 and $2000 in the next 18 months, I’m dead wrong." What specifically would you be "dead wrong" about? The price? The timing? The underlying fundamentals?

John Embry: I would say probably the underlying fundamentals, because I think that they’re sufficiently bad that we will not be able to hold this together for another 18 months. In that event, I would see the Gold Price moving up sharply. They could conceivably keep this thing stuck together for 18 months. I just don’t believe it. If it’s not $1,500 to $2,000 by then, clearly I’m wrong in the sense that they’ve been able to allay the difficulties in the system longer than I thought. The United States is plunging back into a hard recession, if not worse. The implications of that for the Gold Price are extraordinarily bullish.

TGR: So, really it would be the timing that would be wrong…

John Embry: Yes, I guess you can’t change the fundamentals. The timing would be wrong. But at the same time my analysis of the underlying fundamentals would suggest this is getting relatively imminent. I was fascinated to see that Niall Ferguson, a brilliant historian and economist, is of the mindset that this thing is going to fall apart within two years. At least I’m in the company of intelligent people.

TGR: John, do you think it will fall apart slowly or rapidly?

John Embry: That’s a really good question and Ferguson addressed that. He thinks it will come quickly and so do I. I have a friend who thinks if you’re not positioned the right way financially, one day the curtain’s going to come down, and when it goes back up, you’re not going to be able to alter your position. That means you better own the right stuff going in.

TGR: You were managing funds with gold holdings long before the era of $1.5 trillion deficits and sovereign debt issues in Europe. How has your strategy for asset management changed over the last decade, and more specifically, pre-2008 versus post-2008?

John Embry: That’s a very good question. I’m working here with my partner Eric Sprott. I’m not managing money on a day-to-day basis anymore. I’m just working on strategy and the gold scene. But I know that the long side of Eric’s hedge fund has gone almost exclusively to precious metals, and he’s short housing, banking and all of those industries. Clearly this is something that’s evolved. I mean we have gone more and more in that direction as we’ve become more and more sure of our point of view.

I recently read Michael Lewis’s The Big Short, which I found fascinating because the fellows who figured out that subprime mortgages were going to be a major problem were in such a minority that their clients were turning on them almost until the whole thing broke. I feel much the same way today about the public’s view on the economy. Everybody is being told things are fine and that the economy is going to return to normal and growth will continue. I think that underlying assumption is dead wrong.

TGR: In reading your recent interviews and columns, one thing that comes through quite plainly is the passion behind your arguments that the public is being duped and not being told that they should own gold. Why are you so passionate about what’s happening?

John Embry: I appreciate your saying that because I am. I think it’s really important to tell the public the truth if you really believe that this is what’s going on and you want them to protect themselves. I think the public is getting horrible advice from a lot of financial establishments. It’s amazing. I can draw parallels to when the subprime thing blew up. It was astounding to me that people thought housing prices in the United States would rise forever. I mean housing prices are related to underlying income. They were so far out of line that it had to crash.

TGR: What’s your view of Buying Silver compared to gold in this economic environment?

John Embry: I like it better, believe it or not, as much as I love gold for the simple reason that there’s so much less aboveground inventory in silver. Unlike gold, silver gets consumed at a reasonably rapid clip because of its medical and industrial uses. The current price ratio of gold to silver is about 65 to 1. Historically, it has been as low as 15 to 1. As the whole precious metal cycle really starts to lift off again, I suspect that the silver ratio is going to fall fairly significantly from 65. If that happens, clearly you’re going to have a better percentage gain in silver than you are in gold. I wouldn’t have all my money in silver,but I would certainly have solid exposure.

TGR: Will silver equities also have the opportunities for five and ten baggers?

John Embry: Oh, for sure because there are a lot more gold stocks. Silver is a pretty scarce element in the earth’s crust and it’s pretty hard to find. There are not a lot of silver stocks. Of the silver stocks that I like, only one has outperformed silver over the last while. To me that’s a great silver stock, because they can control their costs through the approach they have.

TGR: If the Silver Price has a rapid rise, are any of the miners going to outperform silver in the future?

John Embry: Yes, I think they will. I mean both the gold and the silver stocks are miles behind the bullion. That reflects the negative sentiment in the whole area.

TGR: Why are there negative sentiments?

John Embry: It totally baffles me in the sense that the fundamentals couldn’t be more compelling. But at the same time that isn’t what the public is being told by the financial establishment. Just the other day The Economist featured an article on the front page with the question, "Has Gold Topped?" It was the standard questionable statistics, dubious conclusions, etc. But if you actually read it closely, you could have drawn the exact opposite conclusion and become a roaring gold bull. Essentially, the public doesn’t know a lot about it and it’s not their fault. Nobody’s telling them. To me, that isn’t an accident. This is being orchestrated. But I think it’s just about to become spectacularly unstuck.

TGR: What do you think will be the tipping point?

John Embry: If the US is lapsing back into some serious economic difficulty, there will be a sudden realization that the financial situation is hopeless. As a result they’re going to have to create so much money or take such a brutal deflationary depression that people will change their philosophy and not invest in US bonds at 2.85% for 10 years. It won’t take much money coming in the direction of gold and silver to have a significant impact.

TGR: Do you have any parting thoughts?

John Embry: My one parting thought is that people have to understand how serious this is and protect themselves. They’ve got to have some precious metals in their portfolio. If they don’t, I think they’ll rue the day they didn’t.

TGR: How much should they have?

John Embry: I used to say 5% to 10% before this mess started rolling. I’d say a minimum of 25% now.

TGR: Thank you for your time, John.

John Embry: You’re quite welcome.

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Source:Not Five or Ten, But 25% Gold