The Room 3/17/08

Dear Reader,

You don't need me to tell you, but the $1,000 mark is the latest to fall beneath gold's mighty rise.

Even so, as a benchmark, the number $1,000 is meaningless. It represents no new high in the inflation-adjusted prices that count. And it is not attached to a magic switch that assures, once flipped, the price must subsequently march to the $1,200 forecasted for this year by our own Bud Conrad. (Who is now poking with his fork at the suspicious-looking meat resting on his dinner plate in China where he is visiting.)

Of course, decisively taking out the $1,000 level will, undoubtedly, result in yet more features in the mainstream media and cause yet more regret in the minds of those who have dumbly stood by while watching gold break through the whole numbers divisible by 100. In time, these factors will contribute to a mass migration towards the yellow metal.

But the real significance is one I briefly touched on in closing last week. To wit, so far this quarter, gold has consistently traded much higher than the average price received by the highly visible major gold producers in breaking the right sort of records last quarter.

A bit more detail...

In the fourth quarter of 2007, despite recent comments by certain less-than-attentive observers that the company was still hindered by hedges, Barrick Gold, the world's largest gold producer, was able to realize an average price of $799 per ounce of gold it sold. (That's actually about $10 higher than the average price that gold traded at during the quarter.)

Against those revenues, the company had an average cost per gold ounce sold of just $375, resulting in operating cash flow of some $748 million, better than double that from the previous quarter.

Now, let's jump ahead to some point in late April when Barrick releases its first quarter 2008 results. If prices hold at the average for the month to date, then the average price of gold for the quarter will ring in at $930, or $141 higher than the average price for the last quarter. Assuming no significant change in cost structures over the quarter, and assuming the same level of sales as last quarter, Barrick's first-quarter operating cash flow numbers will rise by another $300 million, pushing the total over the $1 billion mark for the first time in the company's history.

Repeat this record-breaking story pretty much across the industry (a story we continue to follow in more detail in BIG GOLD, which this month extends its analysis into big silver ... learn more) and you have a story that will tell very, very well when compared to the smoking holes that most sectors have left in the brokerage statements of their erstwhile adherents.

Waxing metaphorically, the herd is slow to move, but as the fire of crisis grows to the point where it is visible to all, the herd will move to the safety of gold. We'll be waiting.

The Best-Laid Plans

In recent commentaries, I have mentioned how it is that the fates of nations sometimes hinge on an accident or an unexpected event that renders the best-laid plans worthless, sometimes with catastrophic results. This week's honorable mentions go to...

Hillary Clinton. Recently we learned that the young girl who was at the heart of the most successful political ad of the season, the one showing her sleeping in the middle of the night and the phone ringing threateningly. As you may recall, the voice-over artist rhetorically asks a question along the lines of, "Who do you want to be there to answer it; youth, or that seasoned veteran of such things, "Ma Hil" herself?"

Given the wide acclaim the ad received, followed by two quick primary wins, I had thought Hil's reinvigorated efforts at doing in Mr. Obama had finally succeeded, and that, like the victim of an alley-way knife attack, he was stumbling toward his fate.

But all that changed when the girl, now a young woman, came forward and announced that she was, in fact, an ardent Obama supporter. And even worse for the ever-aspiring Mrs. Clinton, the young actress, perhaps hoping to expose her talents beyond feigning sleep, was only too happy to accept every opportunity to appear on various talk shows and, using her full dramatic range, to espouse the dim view she took of the Clintons' ad.

It is hard to say, yet, if this blunting of the Senator's momentum will prove the final stumbling block, but it very well could. One thing is for sure, voters in the remaining primary states won't be further swayed by that particular ad. And, so, perhaps, the history books will soon record Mr. Obama as the next president. Now some of you likely don't think that this is catastrophic, and I don't want to suggest it will be (though I can say that I am already no fan of his proposed changes in tax policy)... but if he does become president and his term in the highest office does turn out to be catastrophic, then historians may point to a sleeping girl when publishing dissertations that include "what if" scenarios.

The Beijing Olympics. While I haven't thoroughly researched the topic, general commentary has it that China is viewing the upcoming Beijing Olympics as a matter of some national pride... a "coming out" party of sorts, during which they shall display the country's many marvels for all the world to gawk at. Proof of how serious they are about making a good impression may be provided by the fact that they are moving entire industries in order to reduce the city's infamous pollution. And, in an attempt to outdo all others that have come before, they were even going to risk life itself to have the Olympic torch dragged up to the very top of the world... Mt. Everest.

But that may have been the one bridge too far, the misjudgment that catches the attention of the fickle finger. For, as you are probably aware, since 1951 cartographers have been obliged to include the north side of that formidable mountain on a map within the borders of China, and not the independent nation formerly known as Tibet which the Chinese overran in that year, causing some consternation among many, most vocally Richard Gere and his kindred spirits in Tibetan monkdom.

This week, we read that certain parts of Tibet are aflame, and that Chinese troops have moved in to provide the monks with some on-the-spot reeducation. While I can't know, I suspect the odds now favor things going from bad to worse for the Chinese Olympics. If I'm right, then next up we'll see the government of some country or another announce it will, in protest, not participate. It is not inconceivable, even, that the increasingly politically correct United States could bow to pressure to yank the yanks and who knows where things lead from there. I guess we'll have to read the history books to find out.

(When dealing with political topics, one should always tread cautiously. My references to President Obama are, of course, pure conjecture. Senator Clinton has shown herself to be a formidable opponent and so cannot be written off at this point. Likewise, while I continue to think the odds are long against McCain, even a victorious campaign by that elder songster is not out of the question. But forced to it at this point, I'd have to give the tip to Obama. And lest you might wonder which presidential aspirant I actually favor, I will go on record here as being firmly on board for "None of the Above.")

Geologists Rule!

You may have seen the article this week about the soaring demand for geologists, a story we have been following in the International Speculator for some years. The bottom line is that Canadian schools are now graduating just 1,200 geologists a year, which stacks up against demand for better than 9,000. (University programs for geology in the U.S. have all but disappeared in favor of courses related to saving the environment.)

As a result, the starting salary of a freshly turned-out geo now exceeds that earned by a similarly launched MBA by a fairly considerable margin.

While I am pleased as punch to see our hard-working friends in the business being so handsomely rewarded, there is a much more important point to be made here. Namely that with industry demand for geos now outstripping supply by more than 7.5 to 1, the logical move for the producers, which must continuously replace their depleting reserves, is to become increasingly more aggressive about acquiring the junior exploration companies, especially those topped off with good projects.

There is an old adage that says "The best place to find a mine is next to another mine." These days you might modify those pearls of wisdom by saying, "The best place to find your next mine is not by kicking a lot of rocks, but by scrolling through the 'Has Metal' ratings of the exploration stocks followed in our International Speculator." (Has Metal being how we indicate which of those companies we follow already have a significant discovery under their belt, and are, generally speaking, just waiting to sell it off to a major.)

In other words, while the producers can start from scratch and try to find the talent needed to discover their next major gold deposit, they will likely find it more efficient and time saving to simply buy up an exploration company that already has the goods. It is not too late to get positioned in those companies, but it soon will be.

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Expert Reveals Wolves Pose No Danger to Sheep

This week I read with some amusement that Standard & Poor's had sounded the "all clear" signal, stating that the worst of the subprime crisis was over. Kevin Brekke, our Switzerland-based editor, came across a similar item earlier in the week and felt moved to write. Here it is...

If you were a hesitant sheep, alone in a field, at dusk, nervously scanning the shadows for anything resembling a pair of fangs or pointed ears, would that headline provide some comfort, some confidence, possibly lulling you into relaxing, letting your guard down, and munching on some tasty clover? Uh-huh, I thought so.

Well, then, how about this:

Economists See US Avoiding Recession

or this,

Experts' Forecast Sees No Recession

If you were a hesitant small investor, feeling alone and in the dark about the markets and the economy, nervously scanning the headlines for anything to help you protect your life's savings, would that headline provide some comfort, some confidence, possibly emboldening you to snap up some bargains in today's beaten-down stocks? And maybe buy some California real estate, and, heck, why not head over to Electronics World and see what's on sale?

Do you think that maybe that's the reaction those headlines were designed to trigger?

I must admit that, although suspect from the start, the headline got my attention. So I reviewed the article and guess what - the author had some other enlightening and insightful observations on the economy, such as:

  • The U.S. may experience negative growth for 1Q2008

  • Sluggish job growth for balance of '08

  • Housing doldrums to persist "for a very long time"

  • GDP growth for the year of 1.5%

Now, any reasonable person digesting this report, possessing but a modest degree of objectivity, could readily conclude that the author would only admit to what can't be denied - the current environment of bad to worsening conditions - and then supplement it with encouraging predictions of what is just a quarterly report or two away. And if the economy is to grow at an annual rate of 1.5%, with the first quarter likely to be around (or below) zero, then the next three quarters have some heavy lifting to accomplish, a scenario that looks increasingly unrealistic.

But a recession? No.

My point here is that the headline for this report could just as misleadingly have read:

Experts' Report Sees Negative First Quarter GDP

But then that headline doesn't have quite the same reassuring tone, now does it?

One editor's version of this story that hit the wires mentioned the author of this report was an academic and an economist. A quick Internet search of the author uncovered some "coincident indicators." The author is a Ph.D., graduated Princeton, a published academic, holds a university department chair, and is "a frequent visiting scholar at the International Monetary Fund and the Board of Governors of the Federal Reserve System." Sound familiar?

As a random comparison, Ben Bernanke is a Ph.D., graduated Princeton, a published academic, held a university department chair, has contact with the IMF, and is the head of the Federal Reserve System. A coincidence?

A published yet obscure and mostly unknown economist writes a report and Wham! it hits the AP news wire and web pages like a topless photo of Paris Hilton. Now how do you suppose that happened? And who do you think shaped the headline?

With the number of vested interests intent on continuing with the status quo, the confidence game will be kept on life support for as long as needed, and by questionable means. The Fed, the dollar, our government, our banks, our economy, the markets, all rely on the confidence of those dependent on, and profiting from, more of the same. Numbers are fudged, statistics skewed, data manipulated, balance sheets doctored, news sanitized, and headlines managed. Backing and filling operations run around the clock to keep the façade of confidence intact.

The new realities we face will require more than scanning the headlines and watching a few minutes of BigFinancialChannel. Investors today, of all stripes, will need the vigilance to fully vet the information on which they base their investing decisions.

And that's exactly what we at Casey Research strive for every day. As it becomes increasingly difficult to separate the wheat from the chaff, and avoid getting the chaff, investors are supplementing their universe of ideas with the help of newsletter advisory services.

But for those stuck in the old paradigm, blind to the shifts occurring around them, well... Hey! Look over there, fellow mutton-chops. There's some juicy Google shares. Let's munch on those for the moment.

How You Know When the Economy Is in Trouble

This week the moving trucks pulled up in front of the offices of Carlyle Capital Corp, the publicly traded fund operated by the Carlyle Group. The trucks were sent in by the folks down the street at JPMorgan Chase & Co and Citigroup, among others, when Carlyle failed to meet $400 million in margin calls. The long and short was that they seized Carlyle's assets in an attempt to squeeze what remaining value was left in the firm, yet another victim of the ballooning credit crisis.

Now, in case you are unfamiliar with Carlyle, they may be the best-connected firm in the world, boasting a current or former board of directors and major investors that include a veritable Who's Who in the World.

Among the listed members, I found...

Former President Bush, former British Prime Minister John Major, Saudi Prince Al-Walid, George Soros, James Baker III, Colin Powell... the list literally goes on, and on.

These are, without exaggeration, among the most powerful people in the world. So why would the major NY banks, which owe so much of their success to their political connections, engage in such a distinctly unfriendly act as calling in the $400 million and, by doing so, essentially torpedo Carlyle's fund beneath the water line?

All I can come up with is that this is a sign of the deep, deep trouble these and other institutions are in. While the heirs of JPMorgan's carefully built empire may horribly regret the limited choices left to them, the knowledge that there are only a limited number of seats left in the life boat has guided them in their decision, I believe, to place a firm hand on the expensively coiffed head of Carlyle and shove it underwater in the scramble for safety.

David Rubenstein, a principal in Carlyle, sat for an interview with Bloomberg, in which, they report, he was heard to say...

"We have made a lot of money with, and for, these banks and this is a hiccup in a 20-year relationship. We don't think any of them have any animus [sic] toward us and we're not antagonistic toward them."

Using our top secret Casey Quote Translator, Model X-III, we uncover that what Mr. Rubenstein was actually saying was...

"The ingrates, how dare they! Who do they think they are messing with? Oh, boy, oh boy, just wait until the next time the bastards want something from the government, any government, then we'll make them pay! YOU HEAR ME! IT WILL BE NOTHING BUT DARKNESS AND PAIN!!"

Watch out below...

Are You a Skeptic?

Doug Hornig, who edits our Daily Resource PLUS, sent in the following item that I thought instructive and worth sharing...

It occurs to me that Internet credibility is a subject of interest that might fit in the Room sometime, or Doug's End Notes in the International Speculator. We've become so conditioned to getting information from the Net that it can interfere with our good common sense and healthy skepticism. That's why I always keep close to hand.

Case in point: there's an email currently making the rounds. I got it from a mutual friend. Now I love the guy and respect him quite a lot, but we do disagree on some topics about which I find him, well, myopic. He will, it seems, believe anything that supports his view of the terrorist threat or trashes liberals. Thus he sent me a related email, from which I excerpt the following:
This week, the University of Kentucky removed The Holocaust from its school curriculum because it "offended" the Muslim population which claims it never occurred.

This is a frightening portent of the fear that is gripping the world and how easily each country is giving into it.

Now, that seemed unlikely to me. I don't know much about Kentucky, except that they usually have a terrific basketball team, but I couldn't imagine that a major American university would do such an absurd thing. So I went to Snopes and found that, of course, I was right to be skeptical. It's a hoax.

What's especially fun in this case is how the hoax evolved. It's a bit like the old game of Telephone. The story got started when the history department in one small school in northern Britain (the UK) did in fact stop teaching the Holocaust. Someone picked that up and started the rumor that the same thing applied to all UK schools. Then some moron saw that story, thought that UK meant University of Kentucky, and started spreading that rumor.

So, as always with the Net, caveat emptor.

David again.

I would extend Doug's comments to include being skeptical about your sources of information. I have to bite my cheek when I travel around the web world looking at precious metals-related content, and come across ads for various information services being offered by people that I know for a fact have next to no knowledge on the topic, but have only just opportunistically jumped onto the bandwagon. Even worse, there are any number of such services being promoted by people paid to tout the stocks they wax so poetically about. I grit my teeth, wanting to write articles here naming names and pointing fingers, but resist... because who needs the legal hassle.

But, as you are skeptical about stories you receive in emails, so should you be skeptical about the information services you choose to help guide you in your investing.

New Trend: The End of Printed Books

While it dates me, I can still remember the smell that emanated from the very first fax machines. And the joy of being able to move from a manual typewriter to an IBM Selectric.

Even more telling, I can recall, having been involved in a business requiring printing, slogging down to the typesetters and watching as they arranged lead type into frames in preparation for printing.

I remember 8-track audio tapes and know that my children will look back in the future and similarly remember VHS and cassette tapes in much the same way.

What's next? Say goodbye to printed books...

With Amazon's über-successful launch of the Kindle electronic book reader leading the way, and showing the way... coupled with the increased environmental sensibilities now gripping the minds of humanity, the idea of cutting down forests to fill libraries is an idea whose time has passed.

Especially when you consider that, with Kindle, you can actually download full-length books, wirelessly, from pretty much anywhere, in less than a minute. Now nobody loves a proper book more than I, but the idea of loading up your reading device with the latest book you want to read while nestled comfortably in your chair, or while waiting in the airport for yet another delayed fight, is pretty appealing.

Finish the first book in a series and want to go right on to the next? Click and you are good to go.

And further iterations of the readers are now inevitable, given the demonstration of solid market demand. For instance, you could sign up to automatically receive notification that the latest books by your favorite authors are now available.

In short, I think the book readers are here to stay and will soon dominate, leading to the demise of all but art books.

What are the consequences of this shift? For starters, there is probably a big opportunity coming for whichever company captures the space. At this point, Amazon and Sony are in the lead, but it could easily be some other company that takes the lead (never count out Microsoft or Google when it comes to this sort of thing). It could bring the cost of books down.

Of course, on the downside, traditional book printers will need to change or die.

In time, of course, we'll somehow see this feature built into an all-in-one device (phone, Internet, book reader)... but I think that is some years away because no one wants to read a book on a tiny screen.

For the heck of it, if you have any thoughts on how an investor might play the end of traditional books (or wish to disagree with my hypothesis), drop me a line at and I'll publish the best ideas.

(Since we're on the topic of personal communication technology, going on nothing other than a couple of ads I have seen during my rare viewing of commercial television, I would say that Sprint is in trouble. They are heavily advertising a two-for-one deal on a phone that looks like some cheap toy. Its primary feature seems to be a slide-out keyboard that allows you to type in small type on a tiny black and white screen... a sign that the company is well out of touch with the times, if you ask me.)

End Notes

I have another 10 pages of notes, but less time than required to do them justice, so I will summarize some of the other items that caught my eye this week...

* Making the World a Safer Place. The Consumer Product Safety Commission is being revamped, restaffed and its funding boosted. As part of this new initiative, the cap on fines that the agency can now levy against companies failing to report product hazards will rise from $1.8 million to as much as $20 million, if the Senate bill passes. Using standard operating procedure on these things, Senator Pryor, the bill's sponsor, commented, "The vote is a victory for the health and safety of children."

About time, some will say. Just more regulation and more burden on U.S. manufacturers, I say. When was the last time you or someone you know was hurt by a faulty product?

* Running out of gold. I came across some interesting comments this week by Kevin McArthur of Goldcorp. Here's an excerpt of his remarks...

Goldcorp Inc expects the price of gold to top $1,000 an ounce and stay there for a long time, a development that will allow the company to improve operating margins, Chief Executive Kevin McArthur said on Monday.

In a wide-ranging interview at the Reuters Global Mining Summit, McArthur, who is also president of the Canadian gold producer, said he thinks the price of gold, which was at $973 an ounce on Monday, is not "anywhere near a bubble."

"We are not replacing the reserves that we're mining, and yet demand continues to grow worldwide. We're going to run out of gold," he said of the global gold industry.

* Derivatives Next? The good folks at had an interesting article discussing Warren Buffett's dim view of the size and scope of derivatives, and postulating that if that bubble starts to deflate, things will go from catastrophic to, well... whatever is two or three times catastrophic. The author, Paul Farrell, kindly provides the latest data from the Bank of International Settlements to illustrate just how big the derivatives bubble, now at $516 trillion, really is...

  • U.S. annual gross domestic product is about $15 trillion
  • U.S. money supply is also about $15 trillion
  • Current proposed U.S. federal budget is $3 trillion
  • U.S. government's maximum legal debt is $9 trillion
  • U.S. mutual fund companies manage about $12 trillion
  • World's GDP for all nations is approximately $50 trillion
  • Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion
  • Total value of the world's real estate is estimated at about $75 trillion
  • Total value of world's stock and bond markets is more than $100 trillion
  • BIS valuation of world's derivatives back in 2002 was about $100 trillion
  • BIS 2007 valuation of the world's derivatives is now a whopping $516 trillion

* Bank Runs... Dust Bowls Next? My somewhat more pessimistic partner, Doug Casey, wrote again over night that... "The only thing I'm actually pretty sure about is that we're in for the biggest economic/social/financial/political upheaval ever." For those of you aware of Doug's solid record in forecasting these sorts of things, those are words worth noting.

Along those lines, this week we learned that foreclosures in the U.S. had jumped by 60% in February, and bank seizures doubled (a category that now includes the snowboard shop down the street).

Further evidence that this downturn is taking a turn towards Doug's point of view, I came across two items of interest.

The first had to do with a long line-up that formed outside of the Boca Raton Housing Authority when that institution offered up housing vouchers. The scene turned ugly, requiring the services of the local constabulary which these days arrives dressed as if going to war. You can view the photos here... and to keep your finger on the pulse, you should. If you have a similar reaction as I did, you may get a creeping feeling on the back of your neck.

The second involves a tent city that the city of Ontario, California set up in a field at its airport last year, an attempt to help out the area's homeless. The tent city has now expanded from 20 residents to over 250, with many, many more trying to get in. The local government is unsure what to do from here, and so is trying to reduce the influx by letting in only those with some sort of identification proving they are from the area. Where does it lead? Where does it end? I don't know. Photos here.

* Flat Tax... Hah! Years ago, I had lunch with Donald Alexander, who had then just retired as the head of the Treasury. During our lunch, the much younger version of myself asked him "Hey, didn't the American Revolution start over the issue of taxation without representation? Well, my generation never got to vote on income tax, what are the odds of a do-over?" At which point, I remember him dismissively waiving his hand and commenting with something that I recall as disdain, "You're all wet."

While I still like that idea of a re-vote, I'm not holding my breath. Instead, as discussed last week, I'd happily settle for a 10% flat tax. But this week, we learn that if either of the democratic contenders come into power, taxes will be anything but flat. In fact, according to Bloomberg...

Hillary Clinton and Barack Obama both propose significant changes to the tax code that would add to its complexity. His plan emphasizes income inequality, while hers seeks to change Americans' behavior.

Obama's proposal would shift the tax burden toward the rich from low- and middle-income workers. Clinton proposes targeted tax breaks designed to change the way Americans use energy, save money and care for elders.

Obama, 46, "seems to have focused on redistribution," said Michael Graetz, a professor at Yale Law School in New Haven, Connecticut, and a former Treasury official.

Clinton, 60, "is proposing tax credits for everything short of flossing your teeth," said Lee Sheppard, a tax lawyer and columnist at Tax Analysts in Falls Church, Virginia.

The two candidates' plans -- especially Clinton's -- would further complicate a tax system that experts say is already Byzantine. Obama would tweak and augment current laws, while Clinton would introduce even more rules by adding at least nine new credits with complex qualification requirements, phase-outs and sliding scales.

And That's It for This Week...

Sorry to have gone on so long, once again, especially after my comments last week about tightening things up. But we live in a very busy world just now.

As I often like to do, a quick check of the screens as I wrap up shows me that gold is holding strong at $999 and the U.S. stock market is, once again, getting hammered... with the DJIA down 235 points, erasing the misplaced optimism that briefly flared after the Fed's $200 billion gambit to trick the markets earlier this week.

I came across a blog earlier in the week that was kind of sad. It was populated by day trader types, every one of them lamenting about the personal pain they had suffered by jumping back into the financials prematurely. As they told it, they each had figured things just couldn't get any worse... only to learn the hard way that, yes, they could. Elsewhere, I read the views of a pundit, whose name now escapes me, that earlier this week would have been a good time to buy Bear Stearns because, according to him, the company was, despite appearances, a picture of health. At one point today, the market disagreed so vehemently with his advice that it sent the shares of the wounded Bear down a record 53%.

And they say gold is risky.

That's it for now. Until next week, thank you for reading...


David Galland
Managing Director
Casey Research, LLC.

Posted 03-17-2008 4:33 PM by David Galland