The Speculation of a Lifetime

The Daily Reckoning PRESENTS: According to our pals at Casey Research, there are three different types of investors: those who invest in ideas, those who let the roll of the dice decide their investments, and the rational speculator. Which group do you fall into? Find out below…


Here at Casey Research we come across three types of investors.

By far the largest group would identify with the phrase “go along to get along.” They invest in “ideas” from their broker and mainstream financial rags. If feeling adventurous, they tune in to Cramer’s Mad Money for a hot tip.

There is, in our view, much wrong with that approach. For starters, a broker is paid to move stock and generate commissions, a built-in conflict of interest. And once a stock gets written up in Forbes or shouted up by Cramer, it is the exact opposite of a “hot” story.

The second group are the dice-rollers. They buy touts from telephone salespeople and haunt the financial chat rooms looking for “home runs.” In their youth, they were the “opportunity seekers” who sent away for the kit guaranteeing a six-figure income from the comfort of a living-room chair. There isn’t much one can do for them. They will either learn their lesson on the cheap and reform, or lose all or most of what they have.

The third type is the rational speculator. This rare breed understands the key tenets of serious investment success. In no particular order:

You rarely get hurt paying less for an asset than it is worth… and just because no one seems to want it at the moment doesn’t mean it’s worthless.

Risk and reward are linked. While not all risky ventures hold the promise of high returns (e.g., sending money to a Nigerian bank in the hope of receiving a fortune is all risk and no potential return), all investments offering high returns carry higher risk.

Understanding this link, savvy speculators do their homework to understand the risk side and, where possible, reduce it.

Think contrarian. That is the polar opposite of getting your investment advice from mainstream media. When Doug Casey first spotted the spectacular upside for uranium stocks in 1998, nuclear power was being universally shunned. But Doug saw what others didn’t – that (A) nuclear was the only practical mass power alternative, (B) uranium had fallen so out of favor, and its price beaten down so low, almost no exploration was being undertaken, even though (C) supplies were being drawn down to critical levels.

In hindsight, spotting that speculative opportunity seems a no-brainer. And, if you had been thinking like a contrarian and avidly studying out-of-favor markets, it would have been.

There is one final tenet to keep in mind about speculation.

Most people invest 100% of their money in the hope of earning a 10% return. A rational speculator, on the other hand, looks to invest just 10% to 20% of their money in investments that hold the potential for a 100% or better return.

Over the last two weeks, I’ve heard from two old acquaintances whose retirement nest eggs – millions in all – were wiped out by a series of bad trades in traditional stocks recommended by their mainstream brokers. A rational speculator, even after a complete wipe-out, would still have 80% to 90% of his money to start over with.

Now let me bring all these points together in a way that could hand you returns most investors would consider outlandish. In fact, it may be the best contrarian speculation of your lifetime. It starts by answering a simple question…

When asked about the outlook for the economy, most investors will answer something to the effect of… “My broker at XYZ Securities thinks the broad U.S. stock market still has a good run ahead of it.” In other words, they leave their thinking about the future to their brokers, the individuals who tend the myth of the permanent bull market (perhaps gently interrupted by occasional “soft” landings).

Which brings me to the speculative opportunity.

Simply and for some good reasons, take the contrarian side of the mainstream broker’s trade by investing in the sector that historically does best when the economy does worst: precious metals and, for serious leverage, carefully selected precious metals stocks.

Remember, the potential is so great that no more than 10% to 20% of your portfolio is required.

Here’s what you’ll be betting on.

1) That the Fed won’t be able to juggle the Mt. Everest of debt, the deflating housing bubble and the potential stampede out of the U.S. dollar by foreigners. Something has to give, and we think it will be the dollar… inevitably good for precious metals.

2) That because – for the first time in history – the unbacked currency of one nation (the U.S.) is the de-facto reserve currency of all the world’s central banks, a collapsing dollar will lead to a global monetary crisis.

3) That the current war in the Middle East will have serious and long-lasting consequences that require massive new infusions of money on top of already out-of-control government spending. And the fighting may trigger a larger conflagration that sends oil over $100… a highly inflationary outcome.

There are more reasons to make your contrarian bet on precious metals just now, but those should suffice, given the space available here.

But There’s More…

Your contrarian bet gets even more compelling when you consider that, historically, gold bull markets last a minimum of ten years. Gold bottomed in 2001, so we are just a bit over 5 years into the current bull market. And, based on the historic dislocations in the global economy, we don’t think that this bull market will be anything close to “average.”

One important early result of the bull market in gold and silver is that the junior exploration sector has been energized by an infusion of new capital. Serious exploration and drilling programs are already running on serious targets.

It has taken time and patience, but that patience is about to be rewarded, as exploration programs head into their advanced stages – where we can actually see which companies have found deposits big enough and rich enough to be mines. In that regard, 2007 should be a banner year… and you definitely want to place your contrarian bets before the newest crop of discoveries are announced in the weeks and months just ahead.

Historically, when you match up a bull market in precious metals with major mining discoveries, you get the kind of roar that can turn your speculation into a fortune.

The mere fact that you are reading this hints that you are thinking about jumping on the precious meals bandwagon – but don’t stop thinking like a contrarian. Keep this most important point in mind: not one in ten U.S. investors currently owns a single gold stock. They know nothing about them, but they do have brokerage accounts and they do like a good story.

As the U.S. dollar comes under pressure – as it must – the story of gold and silver as alternative stores of wealth will begin to make the rounds, and it will be a story that tells very well. At that point, public interest will soar, and the contrarian bet you make today will start flying on afterburners.

Early pays. Early pays big. So the time to act is now, before the stocks get pricey – not when you are hearing about junior precious metals explorers in Forbes or from the mouth of Jim Cramer on Mad Money. At that point, the tide will already be cresting, and we’ll be cashing in on what now is shaping up to be the speculation of a lifetime.


David Galland
for The Daily Reckoning

David Galland is the Managing Director of Casey Research, LLC., publishers of Doug Casey’s International Speculator, one of the nation’s oldest and most respected publications dedicated to identifying rational speculations with the very real potential to earn 100% or more in a year or less. Do you have what it takes to be a rational speculator? Learn more about a risk-free 30-day trial subscription to the International Speculator – click here now:

International Speculator

Yesterday was budget day in the United States. The Bush Administration revealed itself – once again – to be the biggest spending regime of all time. No government ever spent so much. No government ever increased spending so much. No government ever redistributed so much wealth – from the taxpayers to the defense contractors…from renters to home owners…from the middle classes to the financial classes…and (most importantly) from future generations to the folks living right here and right now.

The Bush budget includes about three quarters of a trillion dollars for defense. But defense has little to do with it. Defense against whom? A disorderly bunch of fanatics with explosives around their waists and box-cutters in their hands? The amount of money in the ‘defense’ budget earmarked for these guys is trivial. And rightly so…the danger they represent is trivial. No dear reader, the defense budget can better be described as hundreds of billions of dollars we don’t have, to buy weapons we don’t need, to fight enemies that don’t exist.

The whole spectacle is breathtaking…and, like all public spectacles…absurd.

Nearly half a trillion in debt will be added over the next two years according to the Bush plan. Americans have neither the will, nor the money to ever repay it. They cannot even keep up with the interest payments. So, now the debt feeds on itself.

For one year, the budget includes 624.6 billion dollars for defense. To help put that in perspective, here’s an interesting tidbit: the defense budget is more than the budgets for the Department of Education, Agriculture, Commerce, Energy, HUD, Interior, EPA, Homeland Security, Justice, State, Transportation, Labor, NASA, Engineers, Judiciary, and VETS. COMBINED. And with 63 billion left over.

And yet…people still buy long-term U.S. government debt yielding less than 5%! Go figure.

The whole thing just keeps getting bigger and bigger. It is not just a single bubble…it is a whole cluster of mega-bubbles…in property, in art, in stocks (especially Chinese stocks)…and a Hyper Bubble in worldwide liquidity!

What is going on? Why doesn’t it pop? We have our ‘Crash Alert’ flag flying from The Daily Reckoning flagpole. But no one even bothers to look up.

We thought about it last night…pausing only for prayer and alcohol. What we were looking for was an answer to the age-old question: Why are so many people so stupid? When we watch TV or read the news, we find views that would make an imbecile blush with embarrassment…numbers that would make a sober man gasp for air.

What bread do these people eat? What air do they breathe? Why are they allowed out in public?

And yet, when we meet them, we discover that they drive cars…they have jobs…they manage their own checkbooks. How is it possible? We have always wondered.

And we think we have found the answer.

The Inverse Square Law: Useful intelligence decreases by the square of the distance from the facts.

Like gravity.

If a person issues too many I.O.U.s, lenders catch on quickly and cut him off. When a bank issues too many notes, word gets around. Depositors get jumpy. Then, they take out their money…and the bank fails. This used to happen all the time before the Federal Reserve System was set up.

Likewise, if a country spent more than it could afford, gradually, if not immediately, people holding the nation’s currency would begin to sweat. Then, they would sell the currency for others, or for gold. Interest rates would rise…and the problem would correct itself – either gracefully or calamitously.

But now with this new imperial money, un-backed by anything but faith, people are so far from the facts, they don’t know what to make of it. Can the United States go broke? If it could, how come it hasn’t? None of us has any idea how many dollars walk the earth…nor how much each one should be worth. The banker in Japan…the hotel owner in Paris…the speculator in Madrid – they are all fools.

But do yourself a favor, dear reader – look up. Incline your head towards the top of our Daily Reckoning mast. There, you will find our ‘Crash Alert’ flag still flying proudly, and singularly. We may not be right about this today or tomorrow…or even for many months. But we will be right about it eventually…and importantly.

More news:


Chuck Butler, reporting from the EverBank world currency trading desk in St. Louis…

“It looks like the latest retail sales report from the United Kingdom has the pound moving higher versus the dollar, and the other currencies are following the pound’s lead. U.K. retail sales for January increased at the fastest pace in six months.”

For the rest of this story, and for more market insights, see today’s issue of The Daily Pfennig


And more thoughts…opinions…

*** Our family is still discussing a taboo subject: Money.

Pater Familias is trying to cinch up the family belt. The rest of the family is for loosening it a notch.

“Just because you have money is not a good reason to spend it,” he argues. “We have always lived modestly, we should continue to do so.”

Here, he was playing fast and loose with the facts. Having a chateau in France is not exactly a modest way to live, at least not by most middle-American standards. But standards have a way of slipping.

Most of the family seemed unaware that there was anything extravagant about the way we live. The boys think that everyone has a chateau. Besides, their friends seem to live even more extravagantly. One gets an allowance of 100 euros a week. Another got a new car when he turned 18. Still another has the family credit card…with no spending limit (or so we were told).

The boys want to know why we can’t keep up with these Joneses. And to them, a chateau is hardly a symbol of excess; it is a symbol of drudgery. They have painted too many shutters and toted too many stones to regard the place as a luxury.

“Dad,” said Henry. “Why wouldn’t you want to live as well as you can? What do you want to save money for? So you can spend it later? Why not spend it now, when you can enjoy it. If you wait…you might be too old to enjoy it…or you might be dead.”

*** “Don’t mention the war…”

We have with us this week a German boy, Peter, aged 15. He is a handsome, polite fellow, who looks for all the world like the young man in Norman Rockwell’s famous painting of a farm boy going off to college. He’s an exchange student, with whom our son, Edward, stayed in Germany.

The exchange program is part of a European Union plan to foster a more cohesive continent. It is supposed to give French children an opportunity to speak German and learn more about German culture, and vice versa. But since both boys speak English, all conversations, both in the Hinzell household and in ours, have been in our native tongue.

This past Sunday we took Peter on a little tour of Paris.

“Let’s not go there,” Elizabeth whispered as we entered a park behind Notre Dame Cathedral. “There’s a memorial in there to the French Jews who were deported during the war…”

“Maybe that’s where we should go…he might learn something…”

“I’m sure he’s already aware of what happened in World War II…and we don’t want to make it seem like we’re making a point or something. Besides, it’s not as if we believed in collective guilt…and the whole thing happened 50 years ago. Why make him feel uncomfortable?”

*** We went to mass in Notre Dame and couldn’t help but compare it to Canterbury Cathedral, where we had gone a few weeks ago. Both are spectacular…but Canterbury is much brighter inside. It is built with lighter stone, with a warm yellow hue, and has great windows all around the upper reaches. Notre Dame, by contrast, is dark, mysterious, forbidding.

Overwhelming…secretive. We could easily imagine hunchbacks riding on its colossal bells…and gypsy girls hidden in its alcoves.

Around the edges of Notre Dame you will find monuments and remembrances of various saints…while in Canterbury, it is soldiers who are honored – those who served the empire in various outposts and garrisons.

Surely the English and the French worship different gods.

*** A smoker replies:

“I wonder when the collapse comes, how many people will wish they had a smoke to smoke? You don’t smoke and that’s your decision; I do and that’s mine. That’s why this (was called) ‘the land of the free’ at one time in history.

“When people begin wondering if they will have bread to eat, I wonder if all the idiots who pass laws for ‘the public good’ will be more worried about where their next dollar or meal will come from? Pass more laws so you can ‘feel good’ about squeezing all you can out of poor people. Funny how they pass laws about smoking in public etc., but then they put a $10 tax on a carton of cigarettes? They still get cigarette taxes and want them?

“Of course, this is to discourage people from smoking ‘they say’. I’m not saying smoking is good, but I should have the ‘freedom to choose’ whether I want to or not, and you should be able to choose if you want to enter a business that allows smoking. I could go on about all the other so called ‘do-gooder laws’ but I won’t rant and rave.

“I think Americans will take whatever is dished out to them these days. But when the collapse comes, their minds will shift to self-preservation, I will guarantee that! I am amazed that they have been able to stall the collapse for so long. This time it will make The Great Depression look like a cake-walk. ‘Let Them Eat Cake’ comes to mind. By the way, Bogart would not have been Sam Spade without a cigarette. Paul Newman had a line in a movie I’m reminded of als ‘We all have to die, it’s just a matter of when.'”