The Room 8/22/08

August 22, 2008

Dear Readers,

Summer weather, at least that of the preferable sort, has finally returned to the corner of the globe where your correspondent sits listening, too loudly, to Michael Franti’s Yell Fire!. ( For those of you unfamiliar with Franti and his band Spearhead, his genre is what might be termed “Revolution Rock”… as in taking it to “the man.”

While I don’t agree with many of his lyrics, which skew far left, I do like the music and his thematic focus on peace and, paradoxically, burning things down. Regrettably, in his view the rebuilding would be of a socialist paradise.

It is, of course, deeply ingrained in human nature to want everything wrapped up in a nice utopian package. Problems arise, however, because one person’s idea of utopia is another’s idea of hell. And, inevitably, even utopia’s champions awaken one morning in full agreement that their vision was hell… just ask Robespierre or Trotsky.

In the end, no one gets their utopia because the entire notion is merely a dangerous fiction that, in the attempt, leads only to the disenfranchisement of one group or groups in favor of another. And, in time, of everyone.

In that light, I think it is safe to predict that, within a year of taking the White House, the Obamians, initially imbued with a perceived mandate for change and the power to nurse their perfect world vision will quickly learn three things.

First, attempting to “manage” a country as big and complex as the U.S. is, in the best of times, far more complicated than they now imagine. Second, after a series of failed experiments and a resulting sound thwacking about the ears, they’ll learn to embrace the same well-worn path of compromise, deceit and vote buying used by Republican and Democrat predecessors alike over the last century or so. And, third, as they find themselves assailed on all sides -- the economy in ruins -- they’ll finally learn that their particular vision of utopia is a fantasy.

The same would hold true for the McCainians, should the fates smile on them this November.

But either way, it will be the long-suffering taxpayers of the economy – you and I, to be specific – that will be strapped into the traces and forced to provide the muscle required to pursue the reigning utopian whimsy.

While I’m not planning to go down the revolution path, taking up residence in Galt’s Gulch seems more attractive to me with each passing day.

Fiat Finale

In last week’s edition of The Room, I shared some thoughts about the fall in the euro and the concomitant rise in the U.S. dollar. At the time, my marginally younger self wrote…

“If you think the thing through, precedent to the global monetary crisis, the euro first had to stumble. Well, it now has. The next stage -- and given the volatility of the situation, I don’t think we’ll have to wait long for it – will be the realization that there is no safe fiat currency. It is at that point that the massive hurricane, a crisis of confidence in the entire fiat system, will begin ravaging the global economy in earnest.”

This week, the trading herd quickly came to the conclusion that, by running back to the dollar, they had run back into a burning house and, singed hair smoking, many came running back out.

While some of the hot money flowed, reluctantly, one has to assume, back into the mortally wounded euro, some of it also made its way into the yen, which is being touted as a new “safe harbor” for money looking to avoid the worst of the currency storm. In my mind, that is a sure sign of how desperate things are becoming, given that yen-denominated instruments offer next to no yield and are linked to an economy entirely dependent on imported oil. And if that is not enough, Japan has also seen a steep reversal in its GDP, threatening a return to its two-decade-long economic meltdown.

More importantly, looking at the price of gold this week, it becomes clear that money is also finding its way back into gold, helping the yellow metal bounce well off last week’s low of $786.

While the finale for fiat currency will take time to unfold, and requires as prerequisite the masses developing a “felt need” for a reliable “it’s-not-a-fiat-currency” play… the quick rebound in gold this week is certainly a step in the right direction.

During a far-too-rushed 9 holes of golf before the opening of business yesterday, a friend asked me if gold’s recent stumble had worried me. Paraphrasing my response…

“One should never be complacent or overly certain that any investment trade they are making will work out as planned. As such, the setback in gold caused me to reflect upon my base case scenario.

“On doing so, I can’t see that there have been any fundamental changes in the economy or in the outlook for the economy. Has the government decided to let the chips fall where they might in the housing market? Have they announced a decision to link the dollar to gold or some other tangible, or to cut taxes, or to dial back the massive government programs that require those taxes? Has the Treasury told Freddie and Fannie they are on their own? Nope. None of it. In fact, the only change is that gold has gotten cheaper. So, I’m not worried…”

What I think I actually said was, “What has fundamentally changed that should make me optimistic about the U.S. dollar, or pessimistic about gold? Nothing. So, fuhgeddaboudit. Now, how about making the putt.”

But that was what I meant…

Deflation? Don’t Bet on It.

There has been analysis presented here and there suggesting the government of these United States is not inflating the money supply in response to the truly unprecedented economic conditions now holding sway. In fact, some of the analysis has it that the U.S. money supply is actually contracting. This is a fairly complicated discussion, and time and space don’t really allow for it here. But I will repeat our core thesis that, with the controls of the proverbial printing presses never far from the hands of the powers that be, there is almost no chance that they will not use those controls over and over, and to whatever degree they feel is needed, to avoid an economic crash.

When Bernanke made his oft-repeated comment about dropping dollars from a helicopter, should the need arise, he wasn’t just being glib… he was stating a truth.

While the Fed and the Treasury have shown a noteworthy amount of creativity in the succession of plans they have shoved into the arena, each one doomed to fall under the gladiatorial trident of a hostile Mr. Market, they are quickly running out of options not involving a helicopter. The almost certain failure of Freddie and Fannie, the logical consequence of which will be, essentially, the U.S. government stepping into the role of the world’s largest provider of mortgage financing, is simply not tenable and will require not just helicopters but C-130 cargo planes on an unprecedented scale. Of course, they’ll do their very best to obfuscate the reality of the situation, but that won’t change the reality one bit.

But back to the topic of whether or not the money supply is or is not expanding, the folks at put out a note this week that sheds some helpful light on the topic…

Monthly July M3 Gained $81 billion. In the last several days, I have received a large number of subscriber requests for comment on monthly M3 growth, given a popular-media story of a private estimate out in the U.K. of a $50 billion monthly contraction in July U.S. M3 money supply. Based on my regular estimation of ongoing M3, no such contraction took place in the series as traditionally defined by the Federal Reserve (methodology discussed in the August 2006 SGS Newsletter); to the contrary, monthly M3 increased by roughly $81 billion.

…While interesting, month-to-month money supply changes can be misleading, given the vagaries of Fed reporting. Year-to-year change, as discussed in the August 3rd Money Supply Special Report, provides more-reliable, long-term indications of monetary trends.

On a year-to-year basis, annual M3 growth slowed to around 15.4% in July, from 15.8% in June and was down from the all-time high annual growth rate of 17.4% seen in April. Nonetheless, the current M3 annual growth remains highly inflationary, rivaled outside the current period only by the events preceding Richard Nixon’s closing the gold window and imposing wage and price controls in August 1971. The current pattern of slowing annual growth appears to be an artifact of the still-deepening banking solvency crisis, which likely will see still further Fed accommodation and liquidity expansion in the near future.

Could the Fed and the Treasury make a mistake and put their hands in their pockets and keep them there as Freddie and Fannie fail, joined soon thereafter by a meteor storm of failing banks and financial institutions? Will they resist “doing something” or even “whatever it takes” to try and turn around the free fall in home prices – that key driver of the economy? Unlikely, in the extreme, we say. Meanwhile, watch what happens to Freddie and Fannie… because that will provide hard evidence as to which way Washington is going to skew.

Inflation, What Inflation?

The pundits, including Bernanke (no bias there), are spouting off hopefully about inflation moderating, now that the prices of oil and commodities have come off somewhat. I suppose they think by merely talking about lower inflation, they can lower inflation… don’t hold your breath. Confirming that sentiment, the Producer Price Index, a leading indicator, rang in at a stunning new high this week. This from our own Bud Conrad…

Here is today's data:

Producer Price Index




Total finished    




ex food & energy




Total intermediate




  ex food & energy




Total crude       




  ex food & energy




1.2% for the month is 15% a year
4.2% is over 50% a year

The foolish idea that there is no inflation because of recession or some such excuse is just not matching reality.


It is worth recalling, per Terry Coxon’s excellent article “Eats & Heats” in The Casey Report, that without an open-ended supply of new money, the price of a select basket of commodities can’t create inflation. Instead, people, forced to pay more for a necessity, say, oil or food, will simply cut back on non-essentials.

The widespread price increases we are now seeing are a clear sign that the chickens spawned by years of fiscal prolificacy are coming home to roost.

Got Gold? Lucky You…

There is clear evidence that a gold price of anywhere near $800 is now considered cheap. Nothing underscores that more than the surge in demand for one-ounce American Eagle coins, the increasingly popular way for citizens to express their preference for hard money over the fiat dollar.

As you don’t need me to tell you, this week the U.S. Mint suspended shipments of the American Eagle due to the fact that it miscalculated rising demand and simply ran out of coins. While some will, and have, read all sorts of implications in this development, to me it is a straight-up sign that the dollar’s credibility is crumbling.

Humans reflexively equate scarcity with value. It’s why large diamonds command such a premium over the common piece of glass. Or why the best way to privately sell a used car is to “accidentally” schedule a viewing of two prospects at the same time. One car, two buyers, the demand-meter goes up.

Viewed from that perspective, the widely spread news of the Mint suspending sales of the American Eagle, albeit temporarily, one assumes, will only help to further cement gold’s desirability in the minds of the many.

Here’s a story that broadcast the story to a mass market, from the Wall Street Journal…


The Eagle Has Been Grounded

Mint Halts Gold-Coin Sales
After Supply Depleted Amid Price Drop

August 21, 2008; Page C1

As gold prices tumbled from their highest level ever, investors and collectors loaded up on one-ounce "American eagle" gold-bullion coins. The buying spree came to an abrupt halt this week after the U.S. Mint stopped selling the coins for the first time since production began 20 years ago.

[Ed Note: Not so… the Mint has suspended sales of Eagle coins in the past, most recently in September of 2007.]

"Due to the unprecedented demand... our inventories have been depleted," the Mint -- part of the U.S. Treasury Department -- told its dealers Friday. "We are therefore temporarily suspending all sales of these coins."

The move shocked sellers and collectors of the coins, which are the most widely traded in the U.S. Suppliers became angry as they turned away customers. Theories about the decision's underlying cause ran rampant -- from investors in gold futures to Russia's invasion of Georgia.

…The Mint says it simply was wiped out. It has sold 311,000 ounces of the coins this year -- about 50% more than in all of 2007. In the first few weeks of August alone, buyers snapped up 63,500 ounces.


Meanwhile, our friends and partners on, confirm the shortage by posting the following on their much trafficked website.

IMPORTANT NEW NOTICE: Demand for bullion products has increased significantly in recent days. As a result, we may experience delays in supply and possibly delays in processing and shipping by our vaults.

No question, this is a friendly trend for those of you who have placed a bet on gold as a safe harbor in the monetary storm we see coming.

As an aside, there is an interesting historical antecedent to this situation… in 1970 when, among others, France under de Gaulle rushed to the then-open U.S. gold window to exchange dollars for gold, per the terms of the Bretton Woods agreement. Of course, the outcome of that bit of geopolitical theater was that Nixon closed said gold window.

Wonder what the government will do when the tide of the U.S. populace trading their dollars for gold reaches a flood stage? Maybe suspend the American Eagles permanently?

More on Gold’s Shortage

Steady correspondent Ed Steer passed on along the following email. I suspect many of you have seen it, but I am reprinting it here for those of you who did not. It offers an insiders perspective of the gold shortage from a large physical gold-trading operation.

Subject: UBS Metals Daily: 20/08/08: "Busiest in My Career"

We had a long conversation with our physical gold specialist in Zurich yesterday as he wanted to update us on what had gone on in the market over the past few weeks. Erwin, who has traded our physical book for 20 years, reports that over the past two weeks our vault staff have been the busiest he can remember across his career with demand for all types of gold from all sorts of clients. The only time we were as busy as this was in the first half of 2005, when rampant demand from India bought all the gold we could supply. Recent demand has been as strong as this, but more geographically spread: the Middle East, some parts of Europe and other Asia (ex India) have also seen very good buying, with refineries struggling to supply their customer needs. We have heard anecdotal evidence of Indian kilobar premiums above $2/oz, much higher than the usual 60-80c, and other premiums are also extremely strong both in Switzerland and in the important gold-consuming markets. The demand we have seen is strongly suggestive of an evaporation of scrap supply, something that has been a large part of the gold market over the past year, which is another important sign.

As the largest clearer in Switzerland, we can say with confidence that the physical gold market has demonstrated that it collectively considers gold to be attractively priced between $780 and $820/oz. The last time we saw strong (but not this strong) gold demand was in August 2007 with gold around $660/oz. We had estimated that gold would have to get down to $700-750/oz to stimulate demand, but this proved too pessimistic: after a year of dull fundamental demand, the gold industry can wait no longer and has had to pay up to $800/oz, a much higher price than we expected.

So why, in the face of this very strong physical demand, has gold fallen? The answer is simple: long liquidation by investors and speculators trading on the OTC and futures markets. The accompanying chart shows how Tocom open interest fell has declined over the past couple of months: we showed the COTR for Comex gold on Monday in the daily. Gold ETF holdings have held up pretty well so far with no sign of the frantic liquidation seen in the Platinum ETF. But a combination of speculative liquidation and new short selling was enough to counter the strong physical demand, and gold sank lower. Another way of looking at the impact of the strong fundamental demand is in gold's performance relative to other precious metals. As we noted in yesterday's Metals Daily, gold has greatly outperformed silver, platinum and palladium and we attribute this to the much greater proportion of price elastic demand for gold than for the other precious metals.

The final point to consider is that the recent transactions have been between fast money, selling; and sticky money, buying. A large amount of gold has moved into the hands of longer term holders. And while the frantic demand of the past two or three weeks will probably soon slow, that won't matter: long positioning is now greatly reduced. Any shorts looking to cover may find fewer sellers than they expect considering the strong hands that now hold gold. We hold our one- and three-month forecasts for gold at $850 and $900/oz respectively. All that stands in the way of an impressive tactical gold rally is a correction in the dollar. If you are confident that EURUSD has seen its low for the near term, buy gold now.

Other short-term precious metals forecasts adjusted.

Following the sell-off across the precious metals markets that has seen all metals fall, we have adjusted our short-term precious metals forecasts, something that we did not do when we cut our short-term gold price forecasts a couple of weeks ago. In line with our view in gold, we see some upside in one month for all precious metals and further upside over a three-month period. We now forecast that platinum will trade to $1550/oz in one month and $1700/oz in three months; we see palladium at $300/oz and $350/oz in one and three months respectively; we expect silver to increase to $14.70/oz in one month and $16.40 in three months; and we see some recovery in the rhodium price from current levels just above $4000/oz, although we do not recommend investors trade rhodium due to the illiquid, opaque nature of this market.

Coming Events

In addition to the collapse of Fannie and Freddie, and the fire sale of what’s left of Lehman, there are a couple of coming attractions I wanted to bring to your attention.

  • The first is our Crisis & Opportunity Update, Casey Research’s first-ever online event, which will be broadcast Friday, September 12.

The genesis of the idea comes from a 2004 meeting between Doug Casey, Bud Conrad, Terry Coxon and myself in a San Francisco Starbucks.

It was the first time that we all sat down as a group. In the wide-ranging discussion that followed, we found that we agreed, unanimously, that the U.S. was on a one-way path to a serious monetary crisis. From that meeting, we rigged the proverbial sails for many of the forecasts and recommendations you have subsequently read in our publications.

The same group is reconvening for an unrehearsed, in-depth discussion on the global crisis now unfolding, and, as importantly, how you can protect yourself and profit. As this is something of an experiment for us, we are going to make the online event available free of charge.

As a Casey reader, you’ll be sent an email, probably next week, on how to sign up and participate. It should be, I believe, very timely and very worthwhile. More soon.

  • The second thing I want to bring to your attention is the upcoming edition of The Casey Report, due out September 2, the primary focus of which is the housing market.

For the upcoming issue, I did a long interview yesterday with real estate entrepreneur Andy Miller, the quintessential pro whose daily labors involve transactions valued in millions of dollars. A longtime acquaintance of Doug Casey’s, Andy gave what most considered the best of many stellar presentations at our Scottsdale Summit earlier this year.

What he has to say about the implications of what’s now going on behind the scenes in real estate is essential to your well-being… not to mention your pocketbook.

If you have not yet signed up for a subscription to The Casey Report, now is the time to do so… taking advantage, of course, of our no-questions-asked, 100%, three-month money-back guarantee.

I guarantee you’ll find this next edition of The Casey Report worth every penny you pay for your entire subscription… times ten… or you get all your money-back. Learn more and sign up now, you’ll be extremely glad you did.


If pushed to it, I would probably favor McCain being elected… but only, and I use that word deliberately, because having a Republicrat in the White House with a Demopublican-controlled Congress would mean gridlock, the best possible outcome.

But the tea leaves continue to point to Obama taking the prize, an outcome that was made more likely by McCain’s latest gaffe: not being able to remember how many houses he owns in a media interview, kicking the blocks out of his whole subtheme of Obama as an elitist out of touch with the common man.

In any event, make no mistake that I have a strong philosophical difference with the noise coming out of the Obama camp on their utopian plans for managing the economy. The litany of proposed solutions to the current economic problems coming out of the Obama camp, none of which involves encouraging the entrepreneurial class, are increasingly revealing a serious new-age socialist agenda. This week, Obama tried to kill two or even three birds with a single shot by talking of creating millions of union jobs in alternative energy. (Adding an extra layer of butter to the unions, he also stated that, upon election, he’ll end tax breaks for companies with overseas operations.)

I could go on, but my friend and occasional golf adversary, Porter Stansberry, did such a good job in an essay he published this week in his SA Digest, that I asked him permission to share it with you. Here it is…

Speaking of the utter corruption of our national politics... OBAMA! proposes to take things to a new level of absurdity and perversion. His "tax plan" has nothing to do with taxes. It's simply a plan to redistribute incomes according to his idea of "fairness."

Not surprisingly, OBAMA! thinks it's "fair" to take money from a small minority of citizens and give the cash to millions of other citizens, who will surely constitute a majority at the polls. What a concept! Just buy the election using the tax code!

Specifically, OBAMA! wants to make income taxes "refundable." What he means is, even if you don't pay taxes, you will still get cash from the government. For example, his "Savers Tax Credit" would match 50% of the first $1,000 people save – if they earn less than $75,000 per year. What about the fact that a couple earning $75,000 a year doesn't pay federal income taxes at all? No matter – instead of getting a tax credit, they'll simply get a check. The same goes for 50% of the first $6,000 poor families spend on health care. OBAMA! also wants to give $1,000 to each working couple and pay 10% of poor families' mortgages – all on a "refundable" basis.

What OBAMA! intends to do is create an entirely new class of working poor, all of whom will be utterly dependent on the government dole.

How will OBAMA! pay for this "fairness"? He can't, of course, without raising taxes significantly on the middle class. But he's still going to raise taxes on the upper income earners, even though he admits doing so won't increase total tax receipts. Why? Because he wants to promote "fairness."

Oh... one more thing. OBAMA!'s plan to "save" Social Security relies on raising the payroll tax by 32% for families earning more than $250,000 per year. Will this actually work? No. Every time you raise marginal tax rates on the rich, you decrease revenues because rich people can defer income or simply stop working.

But according to OBAMA!, even though these policies won't work, they're more "fair." OBAMA!'s plan represents the classic, ultimate problem of an unlimited democracy. It is always in the best interest of the majority to vote itself the rights and the property of the minority. But doing so destroys the fabric of the society, as incentives are perverted and respect for the law evaporates. You can eat the rich... but only once.

Now, those of you who are Obamians may take some umbrage at Porter’s sentiments, or at me for republishing them. Typically, I would receive emails (which you are welcome to send to me at admonishing me to stick to investments and leave the politics alone.

Don’t be overly miffed… as investors, it is not just important but critical that we get a sense of what’s on the horizon, politically speaking. If I seriously thought McCain had a chance, which I don’t (sorry, McCainians, but I just don’t), then I would dedicate much more ink to his proposed policies.

For the time being, however, it’s Obama we have to understand in order to prepare. In the way of illustration, I might mention the fact that Obama has made no bones about his intention to raise capital gains taxes as an early order of business. So, what action do you think investors with said capital gains might take in November, should Obama prevail?

Can you say, “sell”?

In order to give you a fighting chance to cope, and even profit, from what’s coming, we are currently working up a special report on Obama’s likely policies as they will likely affect investment markets. It’s no easy task: if you credit his campaign rhetoric, he has big plans… not the least of which are universal healthcare (who wins, who gets hurt?) and a new era of green energy initiatives (who gets the subsidies?), etc., etc.

I’m not sure yet how we’ll distribute it, but will let you know once it’s finished in a week or so.

(And, of course, if the odds begin to swing in John McCain’s favor, then we’ll do an analysis of his proposed policies as well. )


  • I.O.U.S.A. The folks at Agora have produced a documentary, I.O.U.S.A., which is getting a lot of attention. I have to hand it to Addison Wiggin and the others at Agora behind this project, as they are actually making a credible attempt to wake Americans up to the facts on the ground about the historic debt now burdening the country at all levels. It’s still uncertain how many theaters will carry it in a general release, but you can view a trailer and learn more by following this link:
  • Russia vs. the U.S.A. ( er… I mean, “Georgia”). A number of you wrote in response to my comments last week on Russia’s invasion of Georgia. Yes, you are right that Georgia started it… but that they were bombing their own citizens, an apparent given right of nation-states, and had not crossed any borders to do so… not the case with the Russians, technically made Russia the aggressors. But, my key point, that by going into Georgia, the Russians were drawing a line in the sand for further U.S. moves in neighboring states, holds water. On that topic, Ed Steer sent along an interesting essay from Pat Buchanan that you might find of value. Read it here.

  • Book Recommendations. Subscriber and correspondent Magnus W. wrote asking for some recommendations on good history books. I shot the request out to the team, and here are a few of the responses.

  • Phyles, Phyles Everywhere. Kristen Aja, who helps support the various phyles of Casey Research subscribers cropping up here and there, thought it would be a good idea to recap where these meetings of like-minded individuals are now regularly taking place. If you live in or near one of these areas and would like to be connected with the local organizers, drop Kristen a line at

    Here’s the current list of active, or pending, phyles. In the process of forming: Montreal; DC/Baltimore; Annapolis, MD; Bahrain, Saudi Arabia. Already existing: Atlanta; Dallas; London; Ohio (Cincinnati, Columbus, Dayton); Silicon Valley/Palo Alto; Portland, OR; Sacramento; Toronto; New River Valley, VA; Los Angeles; Denver; Princeton, NJ.

That’s It for This Week!

There is so much more to cover but so little time… and so I must sign off. As I do, I note that the inattentive have driven the DJIA up by 181 points this Friday, and gold is trading in the spot market at $822, a modest retracement from yesterday’s close, despite a strong down move in oil of over $6.00, and a modest uptick for the dollar against the euro.

So, it’s largely business as usual as I bid you farewell this week. Unfortunately, business as usual these days is anything but usual.

As always, thanks for spending some of your valuable time reading this week’s edition, and for being a Casey subscriber.

Speaking of which, if you aren’t yet a subscriber to The Casey Report, don’t forget to sign up today in order to receive the pivotal next edition on real estate and much, much more, when it is published on September 2. Learn more here


David Galland
Managing Director
Casey Research, LLC

Posted 08-27-2008 9:43 AM by David Galland