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How to Invest in Gold Mania |
Joel Bowman, with today's briefing
from Taipei, Taiwan...
Readers, investors and taxicab drivers of the world want to know: how
far can gold go? But they are all asking the wrong question. They should
be more concerned with how far it will go...and, more
importantly, when?
"When Midas fever hits," writes visiting columnist, Jeff Clark, in
today's essay, "prices will explode to the upside." Mr. Clark has a
couple of nifty charts to help put the size of that explosion into
perspective for us...
Of course, no price in the world moves in a straight line, especially
when that is what is most expected of it. Is the sizzling gold market
due for a short-term correction? "Watch out!" warns Bill Bonner...
You'll find all that, and plenty more, in today's edition of The
Daily Reckoning...
First up, here is Bill Bonner, with some thoughts from London,
England...
One turkey turns to the other...
"Things were pretty rough there for a while...what with the recession
and all. But now there's a recovery. Business is picking up."
"Yeah, this is great...no more hanging around this place
waiting...finally, the boss says we're all shipping out today..."
"I wonder what we're going to be doing..."
"I don't know...I'm going to some place called 'Butterball Birds'..."
"Hey, sounds like it might be fun...maybe it's some kind of theme park.
I'm going to work for a fellow named Frank Perdue..."
As our friend Nassim Taleb says, a turkey's life is very
agreeable...until the very last day. Until then, his whole life is a
bull market. Everything looks good. Good food. A roof over his head.
Plenty of company. Even free health care. The MPT guys would look at his
history. They'd see no volatility. Every day, the turkey gains weight.
Every day things get better. They'd see all reward and no risk. They'd
say 'every investor should have turkeys in his portfolio.'
The chartists, too. They'd look at the turkey's life and see a line
moving steadily up. 'Is this a winner or what," they'd say to each
other.
And what about the economists? Well, the old-timers would be suspicious.
'There's no such thing as all upside...there's no boom without a bust,'
they'd grumble. But the young fellows wouldn't listen. They'd plump for
the turkeys without hesitation, confident that if anything were to go
wrong, Ben Bernanke and Tim Geithner would set it right lickety-split.
And now, they think the Bernanke-Geithner team has just pulled off a
save. Thanks to them, the turkeys who ran Wall Street - and invested in
it - have been spared. America is getting back to work.
But what kind of work?
Alas, it's the work of a DEPRESSION - de-leveraging, busting up, working
out loans, defaulting on debt...going chapters 11 and 7.
Yes, dear reader, the recession is over. Welcome back to the Depression.
The number crunchers reported a positive GDP growth figure for the last
quarter of 3.5%. Everyone cheered. Now, the crunchers admit that they
were a little too optimistic. The real number is only 2.8%. But it's
still positive. So the recovery is still on...
Sort of. If you deconstruct the numbers, and pull out all the feds' hot
money effects, you'll probably find that the economy is not growing at
all. How could it be? It's a consumer economy. Consumers aren't
consuming...
The Wall Street Journal reports that "One in four borrowers
underwater."
Mortgage delinquencies at a record high, adds The New York Times.
Real joblessness is at 17.5%, reports CNBC.
Insiders are selling 17 of their own shares for every one that they buy.
"Consumers lose appetite for dining out," says The Los Angeles Times.
The National Retail Federation thinks holiday sales will be 1% lower
than last year. And last year they were depressed.
But The New York Times is worried about us over here in
England. "Lost decade feared for British economy," says a headline.
As we pointed out yesterday, the US economy has already suffered a lost
decade. No employment growth in the last ten years. No gains in the
stock market. No household income growth. As near as we can tell, the
whole nation is just another decade older and deeper in debt.
But that's the way it works, isn't it? A bull market on Wall Street...or
a boom in the economy...they're just like a turkey's life. It's all
fine...until it ain't fine any more.
And now, we're going to let you in on the secret. You can pass this on
to the White House and the Fed if you like.
How can you really get an economy out of a depression? Well, you have to
get into a depression first. Then, you can get out.
The cure for a depression, in other words, is a depression. Nothing else
will do. Mistakes need to be addressed and corrected. Losses need to be
recognized and written off. Bad decisions need to be put right.
So, bring on the depression! Get it on. Get it over with.
Too bad the feds don't get it at all.
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And more thoughts...
Yesterday was a typical day on Wall Street. The Dow fell a little. Oil
slipped a little. The dollar held steady at $1.49 per euro, about where
it has been for months. And the price of gold went up.
No matter what else happens, gold seems to go up. Watch out, though.
This gold market is ready for a correction.
As we said yesterday, a little bit of governance goes a long way. You'd
think the feds might have learned their lesson. Their low rates...and
subsidized mortgage loans...led to the biggest bubble in housing in US
history. But no...they continue to cause trouble:
This from the Independent Institute:
"FHA Encourages More Bad Mortgage Loans
"An astounding 20 percent of the Federal Housing Administration's $725
billion portfolio of mortgage loans will go into default as the result
of the agency's recent campaign to subsidize first-time homebuyers with
little cash and weak credit. That prediction comes from an industry
insider who has seen it all happen before: former chief credit officer
of Fannie Mae, Edward Pinto, who recently testified before a House
committee on the gathering storm of FHA mortgage defaults. It's déjà vu
all over again. But why did federal policymakers allow history to repeat
itself?
"To listen to our glorious leaders discuss such matters is to realize
that they have no real understanding of what they are dealing with,"
writes Independent Institute Senior Fellow Robert Higgs
in a new post on The Beacon. "They see the collapse of an
artificially stimulated house-construction industry, and they conclude:
the government must subsidize more house construction. They see the
collapse of real estate prices, and they conclude: the government must
stimulate demand for real estate in order to raise its price."
Had policymakers grasped the causes of the housing boom and subsequent
bust, they would have stopped subsidizing unqualified borrowers, stopped
trying to raise the prices of houses, and let the economic process work
itself out through market processes. Continues Higgs: "Simply piling on
more and more of the same distortive policies that generated the crisis
in the first place can, at best, only delay the day of reckoning while
magnifying the adjustments that ultimately will have to occur."
"Government Responds to Economic Woes by Making More Bad Mortgages
Loans", by Robert Higgs (The Beacon, 11/22/09)
Housing America: Building Out of a Crisis, edited by
Randall G. Holcombe and Benjamin Powell
"Anatomy of a Train Wreck: Causes of the Mortgage Meltdown", by Stan
Liebowitz (10/3/08)
In other news, Eliot Spitzer is trying for rehabilitation. He seems to
be attempting a comeback as the champion of the little guy. So, in
Slate Magazine, he attacks Tim Geithner's deal to save AIG. It was
a sellout of the American taxpayer, he says.
"Geither's Disgrace," he entitles it.
But wasn't that the whole idea? To bail out Wall Street with the
taxpayers' money?
AIG was saved...thereby saving a lot of bankers' bacon all up and down
Wall Street. But what about the firms that weren't saved? The New
York Times reports that their bacon was fine too:
"At Lehman, the top five executives received cash bonuses and proceeds
from stock sales totaling $1 billion between 2000 and 2008, and at Bear,
the top five received more than $1.4 billion, according to
the study, which was released on Sunday night on the Web site of the
Program on Corporate Governance at Harvard Law School.
"The payouts came in the form of cash bonuses as well as thousands of
shares of stock that the executives sold as the share prices of their
companies soared. Most of the executives sold far more shares during
that period than the number they held when their companies hit bottom.
"'There's no question they would have done massively better had their
firms not collapsed,' said Lucian Bebchuk, one of the study's authors.
'But the wealth of those top executives was hardly wiped out. The idea
that they were devastated financially has kind of colored the picture
people have about what payoffs they were facing.'"
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Ian Mathias, editor of
The 5-Minute Forecast, has a few more details on the AIG
debacle from the Agora Financial HQ in Baltimore...
Brace yourselves for a shocking report from the US government: After
months of research and we don't even want to know how much money, an
independent investigator has concluded that the government wasted a ton of
money bailing out AIG.
You don't say!
Special Inspector General Neil Barofsky, the man tasked with policing the
TARP, released a report last week that focused on the transactions between
the New York Fed, led by Tim Geithner, and AIG's counterparties. As was
evident to, ummm... everyone, Barofsky concluded that the Fed blew it by
not demanding any concessions from the major holders of AIG credit default
swaps - like Hank Paulson's alma mater, Goldman Sachs. The NY Fed paid out
these contracts in full even though they would have been worth far less
had Mr. Geithner not stepped in and bailed out AIG. That cost the American
taxpayer "tens of billions of dollars," the report finds.
"Geithner's already tattered reputation took a major blow with his
investigation," Dan Amoss notes. "He does not come out looking so good. I
wouldn't be surprised if President Obama replaced Geithner in 2010, given
the mounting evidence that he was handing out taxpayer money and
guarantees willy-nilly during the 2008 AIG panic.
"With more information about the performance of loans and mortgages in the
coming months, the market's attention could easily shift back to the
capital adequacy of the US banking system. And with waning political
support for government subsidies, bank executives may have to start taking
their lumps the old-fashioned way: raise as much dilutive equity capital
as necessary to absorb credit losses. Bank shareholders and bondholders -
not taxpayers - should be responsible for their own
lending follies.
"Bank stocks are among the riskiest stocks to own."
And now to today's guest essay, below...
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The Daily Reckoning
Presents: |
It seems that hardly a day goes by
without news that gold has reached some new and lofty high. (Just this
moment, as we sit down to pen this very note, we see our favorite metal
has eclipsed the $1,180 per ounce mark.)
The size and pace of such a movement has led some in the mainstream
media to question just how much room is left on the upside for our
favorite metal. In today's essay, guest columnist Jeff Clark lends some
perspective on exactly that question. A quick note before we start: this
essay works best if you read it while seated. Details below...
How to Invest in Gold Mania
By Jeff Clark
Stowe, Vermont
"There's no doubt in my mind that we'll have a mania in gold. And
because the gold and especially silver markets are so tiny, the rush
into them will be like trying to push the contents of Hoover Dam through
a garden hose. Our positions will go absolutely ballistic." - Doug
Casey, September 2009
There's certain to be a rush into gold and silver, and buying before
Main Street catches gold fever is the only way to play this trend.
Because when Midas fever hits, prices will explode to the upside, for
both the metals and the stocks. How do we know that?
First, let's look at gold. If we added up all the gold ever mined on the
planet, its total value would equal no more than $5 trillion at today's
prices. Yet, look at how this compares to the debt and bailouts and
other monetary mischief of current governments...
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Let's make this chart very clear. Of the $5
trillion in gold ever mined...
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The US government has thrown over twice as
much at the economy in the past 12 months.
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The US debt is more than double this amount so
far this year.
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Total global government bailouts are almost
four times larger (and this is a conservative figure; one estimate puts
it at $24 trillion).
I intended to include annual gold production as
one of the comparisons, but the chart isn't big enough and neither is your
monitor: 2008's global gold production equaled about $73 billion, and to
make that figure discernable on the chart would require the Global
Bailouts bar to hit the ceiling above your head. That's how small the gold
market is.
The implications are undeniable: when the greater public rushes into gold
- whether in response to inflation, dollar woes, war, whatever - the price
will be forced up by an order of magnitude.
While physical gold will protect our wealth, it's the gold stocks that can
potentially make us wealthy.
Once again, to get a sense of the Lilliputian size of the gold industry, I
compared it to several other leading industries and stocks.
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The value, as measured by market capitalization,
of all gold producers around the world is less than Wal-Mart's. Every gold
stock would need to nearly double just for the industry to match
ExxonMobil. The oil and gas industry is about 12 times bigger.
When your neighbors and relatives and co-workers and friends all start
clamoring to buy gold stocks, the pressure on prices will be enormous,
rocketing our positions upwards.
Meanwhile - and admitting we're first and foremost gold bugs - the picture
for silver is even more dramatic. The potential for silver stocks is jaw
dropping.
If the gold industry is tiny, then silver's $9 billion market cap makes it
a nano industry. The entire silver industry is over 21 times smaller than
gold's! If gold explodes, silver will go supernova.
Consider these macro-facts about a micro-market and what they reveal about
silver's enormous potential:
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There are over 200 companies in the S&P 500
with a market cap larger than the entire market of silver producers.
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There are five times more gold stocks than
silver.
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Total silver production in 2008 was valued
around $10.3 billion (at today's prices). That represents just 1.5% of
the $700 billion bailout last year, and 0.006% of the current US
monetary base.
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Of the 20 largest silver producers, only five
actually call themselves a "silver" company, due to the fact that about
73% of all silver mined is a byproduct of other metals mining.
Any flood into the silver market would overwhelm
it. In other words, the rise will be stunning. While it's not going to
happen tomorrow, I strongly suggest you get on board before that rocket
ship takes off.
Just putting these charts together stirred my feelings of restlessness,
making me anxious for the mania in precious metals to arrive. But the
timing is not up to us. Be patient, because if you're invested in gold and
silver and the respective, high-quality stocks, you're on the right side
of this trend.
Regards,
Jeff Clark
Senior Editor, Casey's Gold & Resource Report
for The Daily Reckoning
P.S. Had you bought gold, say, four years ago, when it
was around $450/oz, you'd be sitting on a nearly 130% gain. But you could
have made up to three times as much with even the most conservative
precious metals investments - large- and medium-cap gold and silver
producers. It's not too late to jump on the bandwagon.
Click here to find out more.
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Daily Endnote: "So, what is the standard working
timetable for Thanksgiving over there in America?" your managing editor
inquired during a teleconference with some of his stateside workmates
yesterday.
"Everyone gets the day off," replied our senior editor, Eric Fry, "except,
obviously, for Australians living in Taipei. They still have to work,
right Joe?"
"Yeah, sorry Joel," confirmed our publisher, Joe Schriefer. "Not much I
can do there. I think you'll find that's pretty much standard procedure."
Hmmn...we'll just see about that...
Happy Thanksgiving,
Joel Bowman
Managing Editor, The Daily Reckoning
joel@dailyreckoning.com
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