Gold is Going to the Moon
As part of Casey Research’s survey of expectations for gold in 2008, one of their BIG GOLD editors interviewed famous contrarian investor and Casey Research Chairman Doug Casey. Here’s his take on what’s to come…
BIG GOLD: Gold has passed its 1980 nominal high. Why do you think it’s breaking out now?
Doug Casey: The fact that gold has moved above its 1980 high is meaningful only in an academic way; today’s dollar is worth only a fraction of a 1980 dollar. From here on, it’s best to avoid thinking about anything just in terms of dollars. What’s developing now is likely to be the biggest monetary crisis of the past 100 years, potentially the biggest since the U.S. Civil War. This isn’t a prediction, just an appraisal of the tumultuous possibilities that are opening up. Americans are going to have to learn to think more like Argentines: if an Argentine tried to keep track of value in the local peso, he’d be bankrupt in 5 years.
BG: There are those who agree with you about a possible crisis but believe we’ll see deflation instead of inflation, or at least deflation before inflation.
DC: What we’re facing is a monumental monetary crisis that can take one of two forms. It can be deflationary, where billions and billions of dollars are wiped out through bankruptcies and defaults, and the remaining dollars become worth more as a result. Or it can be inflationary, where the world’s central banks keep dollar assets from being wiped out by supporting the issuance of debt – which is what they’re currently doing, by propping up failing banks and homeowners who can’t pay their mortgages. Those are your two alternatives. You can have either one – it’s really a flip of the coin as to which you get.
It’s also possible you can have both at the same time. You could have deflation in some areas of the economy, such as real estate, which is happening now, and inflation in other areas of the economy, where prices are going up, as with food and oil.
I’m of the opinion that government is so big and so powerful now, and the average person – idiotically – relies on it so heavily, that much higher inflation is inevitable. They’re certainly going to do their very best to keep a deflationary collapse from happening, because they all remember what it was like in the U.S. in the 1930s. Yet not too many people think about Germany’s inflationary collapse in the 1920s. It was much more unpleasant.
Inflation is the enemy of the person who works, saves and invests. But it’s the friend of the speculator.
BG: Why do you think gold stocks have lagged while gold has taken off?
DC: Gold stocks are a play on gold. But they’re also stocks. The best environment for them is when both gold and the general market are moving up, and lately the stock market has been problematical. People are going to panic into gold, because it’s cash – money in the most basic form. Gold stocks are not money; they’re speculative vehicles. And despite the strength in gold, the costs and risks of finding and building mines have gone up just as fast in the last couple of years. There’s no necessity for them to move in lockstep with gold itself. That said, I think gold stocks are really going to howl as gold goes into the Mania stage.
BG: The water in the pot is definitely getting hotter. Where do you think gold is going this year?
DC: Gold has been in a bull market since 2001. It’s gone up, on average, about 25% per year compounded, and there’s absolutely no reason the bull market should stop now. On the contrary, there’s every reason to believe that the gold bull market, having gone through its Stealth stage and still being in its Wall of Worry stage, is going to hit the Mania stage. To sell now would be to leave the big money on the table.
My best advice is, be right and sit tight. And that means staying long until you see a golden bull tearing apart the New York Stock Exchange on the front cover of Newsweek magazine, at which point it will be time to sell.
BG: What price do you think gold will hit in 2008?
DC: Strictly gazing through a crystal ball, I think it’s going over $1,200, no problem.
BG: What about the long-term price for gold?
DC: Just to reach its previous high in purchasing power, gold will have to go over $2,500 – probably more like $3,000 after you discount the phoniness in the government’s CPI numbers. But because this crisis is much more serious than the one in the late 1970s and early ’80s and much more far-ranging, $3,000 is actually a fairly conservative number. I’ll say it again: gold is not just going through the roof, it’s going to the moon.
BG: What advice would you give to readers of Big Gold about how to invest in gold and gold stocks in the coming environment?
DC: The first thing is, you’ve got to have a lot of physical gold in the form of gold coins. Second, make sure a large chunk of those coins is outside the political jurisdiction where you live. If you live in the U.S., they’ve got to be outside the U.S. If you live in Canada, they’ve got to be outside Canada, and so forth. Third, gold stocks are definitely going to howl, so you definitely should have a good position in them.
As important as gold and gold stocks are, though, I suspect we’re going to see foreign exchange controls of some type or description in the years to come. That means if you don’t have assets outside your native country, you’re going to be caught like a lobster in a trap. I think it’s very important to diversify internationally. Buying foreign real estate is one prudent way to do so because, even though there’s been a worldwide property mania, there are still some places where property is very cheap, leaving plenty of upside. In addition, if you pick a locale where you’d like to live, you’ll have a comfortable place to wait things out – which is a serious plus, because I think things in the U.S. are going to get really ugly in the years to come. And most important, the government can’t make you repatriate foreign real estate.
BG: What if I don’t have the ability to buy real estate outside the country I live? I know you can have a foreign bank account and a safe deposit box, but I have to report those, so how does that help me?
DC: You have to report a bank account, but you don’t have to report a safe deposit box.
BG: What if I have over $10,000 of coins in that box?
DC: It doesn’t matter. It’s just like having a million dollars of foreign real estate – not reportable. Of course they can change these arbitrary laws – probably to make them more restrictive and invasive – at any time.
BG: Thanks, Doug, for the practical advice. Anything else you’d like to say to Big Gold readers?
DC: Hold on to your hat; you’re in for the ride of your life.
BIG GOLD is a monthly advisory from Casey Research, one of the nation’s oldest and most respected organizations providing unbiased research on natural resource investments.
BIG GOLD is designed for conservative investors looking for an easy and lower-risk way to participate in gold markets through producing and near-production precious metals companies, ETFs and mutual funds you can buy and sell through your favorite discount broker.
What a remarkable day! We never thought we’d see the likes of it.
First, Ben Bernanke appeared in the U.S. Senate, with former Fed governor Paul Volcker by his side, and announced an incredible turnaround in Fed policy. Yes, he said, he and his fellow Fed governors were very concerned about weakness in the financial sector. And yes, they were very sympathetic to all those people who had high mortgage payments to make and all those people who had bought shares in Bear Stearns and other high-flying investment firms. But he went on to say that the Fed’s primary mission was not to protect people from the consequences of their own mistakes; it was to protect the nation’s money and its credit.
Bernanke went on to hint strongly that there would be no further rate cuts. Instead, Fed policy has turned back to its more traditional role of fighting inflation, he said. The Fed has become serious about stabilizing the value of the dollar.
“We can no longer ignore the economic consequences of price increases in fundamental resources, such as oil, wheat and iron ore,” he said. “These price increases not only cause suffering on the part of average citizens who now pay an average of $3.23 for a gallon of gas. They also cause huge distortions and malinvestments in the whole world economy.”
While he was still speaking, prices of stocks began to fall – in anticipation of higher interest rates – with the Dow closing down 535 points. The dollar rose against all foreign currencies; the euro dropped back to $1.30. A shop owner in Paris was heard to say that he actually liked Americans. Commodities fell, and the price of gold dropped to $750 an ounce.
That was just the beginning. At 11AM a group of corporate executives, present and former – including Stan O’Neal, Richard Fuld, Ray Irani, John Mack, Barry Diller and William Foley – appeared at a press conference in New York. The spokesman for the group startled reporters when he announced the group’s intention to return a considerable part of its earnings to the shareholders for whom they worked.
“We’ve thought long and hard about this,” said Mr. Fuld. “And we’ve come to realize that these salaries are just absurdly high. None of us can think of anything we’ve done anytime in the last ten years to warrant a salary of even half of what we get paid – much less the $38 million Stan got or the $322 million Ray got. Speaking for myself, I spent practically all of last year attending meetings, parties, and ceremonies – and frankly I can’t recall what any of them was about. None of them needed me. And I’ll tell you something else, when I attend those board meetings, half the time I don’t even know what the accountants and lawyers are [there] talking about. We got together this morning and asked each other how those CDSs work, for example. None of us had any idea. And apparently, believe it or not, between us, we’ve got billions of them on our books.”
As we’ve been saying here at The Daily Reckoning, executive salaries are preposterous. But we never thought we’d see the day when executives would admit it.
But the day wasn’t over.
Hedge funds have had the worst quarter since they’ve been keeping records. Fifty of them went broke last year. About 8,000 more to go, by our estimate.
What is remarkable is the hedgies response. According to the American Hedge Fund Association, managers are reversing their typical “2 and 20” compensation package, to make up for their lost income. Instead of charging 2% of capital and 20% of performance (usually over a benchmark), they’re charging 20% of capital and a 2% performance fee.
An article in the Financial Times demonstrated recently how the previous fee structure worked. Managers were encouraged to take risks, knowing that “heads I win, tails I lose someone else’s money.” Taking a big chunk of the gains, while not participating in the losses, gradually transfers ownership of the capital from the investor to the manager. This new system of fees merely speeds up the process.
Finally, Alan Greenspan himself stepped up to the microphones yesterday.
“I think it is time for me to apologize,” said the former head man at the Fed. “This crisis in the financial markets; it’s really my fault. It was on my watch that the bubble in residential real estate developed. It was while I was at the Fed, too, that the huge parallel banking system grew to its monstrous size – with trillions of dollars worth of CDSs, SIVs, MBSs, and all the other crazy alphabet derivatives, that are causing so much trouble.
“I knew all along that the only real money is money backed by gold. And I knew that there would be Hell to pay when people got carried away with the cheap paper-dollar credit that I was helping to make available. I remember that I said at the time that the growth in sophisticated investment vehicles helped spread out the risk. And I also told homebuyers that they should take advantage of those ARMS that they now regret.
“I am truly sorry for what I have done.”
What a day!
*** In addition to the financial news, the political news was also worthy of comment. The little town of Ashford, Tennessee, held a special election yesterday, after its mayor died in a freak poker accident. He was playing poker with friends in an abandoned warehouse when the roof collapsed, killing him, the chief of police, the coroner, and the town’s leading brothel owner, Ray Borvis.
The resulting election to replace the mayor and police chief pitted democrats against republicans in a bitter battle for control of Ashford. Here we see democracy in its purest form. This the actual transcript of a public debate held at the James Earl Ray Memorial Hall yesterday.
“I have every respect for my opponent in this race,” said the democrat, Liddell Fulsom, a stout man who was said to sweat a lot. “It is just that I don’t think he shares the values of Ashford and its people.”
“What values are you talking about?” replied Myron Byer, the republican. “The values of the previous administration are nothing to be proud of.”
“What? Are you casting dispersions on the town and its people? I know I am very proud to be from Ashford. We’re number one in the state in supporting the U.S. government…why, we have more flags flying in Ashford than in any other city in the country…per capita, of course.”
“Yes, but that’s because you got a special deal on the flags, made in China, of course…and then you sold them to the city government so they could put them up all over town. And you made $5 on each one of them…didn’t you?”
“Are you opposed to free enterprise, Mr. Byer? Would you like to tell the people of Ashford why? It’s because you were – and probably still are – a radical, a draft dodger and a subversive.”
“Are you kidding? I was a student during the Vietnam War…I had a student deferment. And then I got a high number in the lottery. I was just lucky.”
“And I guess you’d say that those of us who served our country were unlucky? I spent 18 months fighting for Ol’ Glory in the swamps and jungles of Southeast Asia, and you know, those are the proudest moments of my life. I feel very lucky that I had the honor to defend this great country.”
“And what about killing those women and children…remember, you were court-martialed for it? Are you proud of that too?”
“Wait a minute…that’s hitting below the belt…they were armed Vietcong…I was railroaded by communists and the peaceniks… And at least I wasn’t spending my time up at the university fooling around with thespians.”
“You don’t even know what a thespian is…”
“And I don’t want to know…I’m a married man with four upstanding children…”
“No, you’re a racist, a bigot and a moron.”
“Hold on, you piece of sh**. Or I’ll come over there and punch your lights out. Let’s face it, Myrie, you don’t have a prayer in this election. You’re desperate.”
“Oh yeah, I’ve already announced my plan to build a new senior center. All this town’s got are seniors. And they’re behind me.”
“How do you think you’re going to pay for this thing?”
“I’m going to raise taxes on that stupid store of yours.”
The Daily Reckoning
April 1, 2008