If Only King Midas Would Return

In this world of financial insanity, there is one way to preserve your purchasing power: Buy gold. But, of course, longtime DR sufferers already knew that…

Gold has passed the $500-per-ounce mark, and it will go higher from here, too, as I gather from the Fin24.co.za site, where we read, "Global gold production is set to decline dramatically over the next four years and this is set to generate a scramble for gold ounces, DRDGold chief executive officer Mark Wellesley-Wood said in the company’s latest investor newsletter." So, gold demand is higher than supply, creating a deficit, which is making prices go up.

And don’t think that there will be many new gold mines started to take advantage of this rising demand. Mr. Wellesley-Wood continues, "Expenditure on exploration peaked in gold mining in 1997, and has been pretty flat since then. There are 29 new gold mines in the pipeline right now and even if all these are developed, it would require a further seven projects every year to make up the deficit."

Mr. Wellesley-Wood goes on to say, "The reality is that not all these 29 mines will get the go-ahead as cost inflation, especially capital cost inflation for resources projects, has increased by a great deal more than the gold price. So, where are the ounces going to come from?" Good damned question! And it is an especially good question because every jackass from the Fed, to the government, to "economists" on Wall Street are all in full agreement that there is no inflation, regardless of prices rising alarmingly. Hahaha! Somebody is lying their heads off here, and of the two camps, I note for the record that Mr. Wellesley-Wood has never lied to me before, and I am pretty sure that he is not going to start now.

But you don’t want to hear about how your fascist government is lying to you, or that the despicable U.S. Federal Reserve is lying to you, or that corporate Wall Street hucksters are lying to you, because I know that you have stories of your own about that, which would curl my hair if I heard them. Believe me, I do not want to hear them because I just got my hair uncurled from the last time I heard some of those stories.

Invest in Gold: The Dehedging Trend

But this rise in the cost to mine gold is a theme you hear all over the place, as it takes a lot of expensive energy, expensive labor, expensive permitting, expensive fees, expensive equipment, and expensive taxes to mine gold nowadays – all of which have to be passed along in the price of the gold they mine, which means gold prices will have to go up just to cover the higher costs! For example, he notes, "Newmont’s cost per troy ounce of gold produced increased by 22% to an average of US$232/oz, while South African costs per oz doubled to an average of $395/oz. From 2002 to 2004, the gold mining industry was also hit by sharp increases in explosives, steel, fuel and water as well as other costs."

He then gives us an additional boost to the idea of big price increases in gold. He states, "The dehedging trend is set to continue," he says. Why are people dehedging gold? He replies, "Who would want to be short gold in four years in this climate?" Hahaha! Exactly! They’d be financially wiped out if they were!

Finally, he concludes with one last reason to buy gold, as if we needed any more, "Merger and acquisition activity and industry consolidation will continue apace – if you can’t find it, buy it."

Fortunately, we unwashed, mouth-breathing troglodyte investors out here can buy gold bullion, helping to drive up the price by increasing the demand for gold, and we can also buy the shares of the gold miners, too, thus benefiting from the rise in the price of the shares as the price of gold goes up, due to the increased demand of us buying the stuff all the time! It sounds like it should be illegal, but it’s not!

Peter Spina of the Global Watch Gold Forecaster also has an idea why gold is rising so fast in price, and it has to do with Exchange Traded Funds. "ETF share demand contributed to 56% rise in investment demand for gold in the third quarter of 2005, whilst total gold demand increased 7% in tonnes and 18% in dollar terms. Against this, mine supply was up 3% year on year with the two big elements increasing supply coming from more scrap availability and a drop in de-hedging [Producers lowering their buying back of hedged gold, so allowing production through to the spot market]."

Beyond that, he notes, "The gold price has risen in all currencies!"

Newmont’s President, Pierre Lassonde, said, "Worldwide gold production in 2004 had the biggest fall in 39 years." He also said, "Demand in India, the world largest consumer, rose 47 percent last fiscal year, and 14 percent in China, the world’s fastest growing economy."

Invest in Gold: Things Are Getting Strange

Paul van Eeden at PaulVanEeden.com writes that things are getting strange in the world of gold. "We are witnessing a change in central bank behavior. Last year, Argentina bought 42 tonnes of gold and now Russia wants to increase the gold in its reserves from 5% to 10%. The Moscow Times quoted President Vladimir Putin this week as saying he supported the Central Bank in paying greater attention to gold in its foreign reserves."

Perhaps this has something to do with the very weird stuff that is happening to the gold lease rates, as they are upside down! Short-term rates are higher than the long-term rates! You pay more to lease gold for one month than to lease it for a year! Weird!

Finally, to show you the absolute intellectual impoverishment of the people who are teaching our children, let’s turn to an article sent to me, entitled "Precious Metal’s Elusive Value," and written by Andrew Cassel, who is a columnist for the Philadelphia Inquirer. He quotes Jeremy Siegel, who is a professor at Wharton. Mr. Cassel quotes this, ummm, "professor," who is so smug in his arrogance that he dismisses gold, "If you bought $100 worth of gold in 1802, Siegel says, your inflation-adjusted return would be about 30 percent. That is, you’d have a mere $130 in purchasing power after more than 200 years."

This is exactly the point of the stuff, you preening halfwit! Gold preserves purchasing power! Hahaha! What a buffoon! What the lackluster professor Siegel did not mention is that if you had saved a $100 in fiat cash, even as late as 1913, then your loss in buying power would have been over 96%! Hahaha! So, what do you want in your future? Depreciated and stupid fiat money, where you end up broke and bitter, or gold, where you end up where you started in terms of buying power, or (as now) ahead of the game and making big, big money on gold’s rising price? Hahaha!


The Mogambo Guru
for The Daily Reckoning

December 05, 2005

Mogambo Sez: Let me quote John Hussman of the Hussman Funds, as he says, "The current market condition is extremely overbought, and the constellation of internal divergences and interest-rate action has ‘whipsaw’ written all over it." In short, things will soon start falling apart, and if you are in equities or bonds and not in gold, you will soon be shown the tragic error of your ways, and your sleep will be disturbed as the words of The Mogambo ring in your ears, "We are freaking doomed!"

Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter, and a vocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications.

"Gold fever breaks out again," says a headline from SF Gate.

The diagnosis, we think, is premature. We checked the news. We found no sign of "fever." Nor did we find much agitation or sweaty palms. The gold market’s pulse is strong. Its appetite is good. It looks like it is in fine shape.

Friday, the yellow metal traded at $507 (February contracts).

The second stage of gold’s bull market has begun. The public has begun to take notice, but just barely. There is certainly no fever. You can test this yourself. Just ask your friends and neighbors if they have bought any gold lately. Most likely, the response will be same as if you had asked it they had taken up clogging or canasta. "Huh?" They’re popular in some circles, but not yet "mainstream."

Even most people who bother to think about it have the wrong idea. "All commodities are going up," they’ll tell you, "because of such strong demand from Asia."

As we have pointed out so many times that readers are sick of hearing about it, the world economy may be divided into two parts. In the East, people make, and in the West, they take. In the Orient, people lend, while in the Occident, they borrow. In Asia, they manufacture and save, yet in America, they buy and consume. On the one side of the globe, they create deflation…on the other, inflation.

And yes, it is true, just about everything the Asians can make is going down in price, and holding down prices and wages throughout the world. But things they cannot make – energy, health care, housing, copper…you name it, are going up. And if the Feds have anything to do with it, these prices will go up a lot more. The U.S. money supply, as measured by M3, rose by $42 billion in the week ending November2, 2005. This is what "inflation of the currency," is all about. Eventually and inevitably it ends in higher prices, but for what? For the foreseeable future, it should be prices of things the Chinese can’t mass-produce: commodities, energy, and gold.

We noticed a chart of gold compared to other commodities. And guess what? Gold is rising against all major currencies, and all major commodities.

Why is that?

It tells us that there is more going on here than just ordinary "inflation." And we think we know what it is. All the world’s governments want weak currencies and mild inflation. And all the world’s speculators, including ordinary homeowners, are convinced that central bankers will make sure that nothing interferes with existing trends. The more sure they are, the bigger the bets they are willing to make, and the greater the risk to the financial system. No one knows what will happen, but smart investors are buying insurance: gold.

Christopher Woods forecasts a gold price of $3,700 before the end of the decade. He states, "Gold is the antithesis of the increasingly insane world of asset-backed securities and collateralized debt obligations which purport to be free market creations, but which have only grown to the size they have because of the insidious understanding of all those involved in these exploding markets that central banks will bail out the handful of big intermediaries who dominate dealing in these instruments if there is any real problem."

More news from our currency counselor…


Chuck Butler, reporting from the EverBank trading desk in St. Louis:

"Big Al decided to ‘come clean’ and told the crowd that the exploding U.S. budget deficit and protectionist backlash against trade deficit could disrupt the global economy. Whoa there, partner. Has Big Al become a Pfennig reader?"


Bill Bonner, back in London with a few more opinions…

"Not only did the Indian BSE index cross its historic high of 9,000 in November, but it also reported the sharpest rally in a single month. The gain of 896.49 (11.35%) points on the Sensex in November was the highest single month rise in more than a decade," our resident India expert, Sala Kannan, tells us.

"Does the market know something we don’t? Perhaps the rally is in anticipation of India’s massive retail sector opening up.

"And wouldn’t be just the stock market that is looking forward to this event. The Indian consumer will be delighted to have access to McDonald’s, Nike, Wal-Mart, etc.

"Why? Because all developing economies are driven by a phenomenon called the ‘demonstration effect.’ Simply put, it is the developing country’s desire to consume like its Western counterparts. Demonstration effects are effects on the behavior of individuals caused by observation of the actions of others. So trends and developments in one place will often act as a catalyst in another place.

"One doesn’t need to look too hard to find evidence of the demonstration effect all over the world. Recently, a friend returned from a tour of Buddhist monasteries in Tibet. ‘What was most striking…the one thing I’ll never forget,’ she recollects, ‘were the local kids swarming around me demanding I give them my cap. They knew no English, but pointed to my cap all excited, yelling, ‘Nike! Nike!’

"Another friend visited Darfur, the genocide-stricken region of Sudan as a UN volunteer. Even amid the conflict and misery, he recalls seeing two sailboats carrying advertisements for Pepsi and 7-Up.

"No matter what part of the world, people want Western consumer goods. They want to wear Nike and drink Pepsi. It is no different in India. Already, India is the world’s second largest consumer of cell phones. The country has over 50 million subscribers. With a 65 million two-wheeler market, India is also the world’s second largest consumer of motorcycles, mopeds, etc. And Toyota Motor Corp. recently launched its Camry and Corolla in India. And not just these things, but over 5 million square feet of Western-style malls were built last year alone!

"The demonstration effect is alive and well in India. But with the opening up of the retail sector, it will become even easier for Indians to be Western-style consumers. And that will mean windfall profits for new retail entrants, like Wal-Mart."

*** A book that will "tell you what’s really going on" the Economist magazine says in their December 1 issue of our Empire of Debt. We slipped in right between our favorite New York Times columnist Thomas Friedman and those Freakonomics guys.

Empire also debuted at #6 on the New York Times Business Bestseller list, thanks to you, o poor sufferer of these fevered pages.

*** Not everyone likes our work. One reviewer on Amazon.com accused of completely overlooking Ricardo’s Law of Comparative Advantage. To which we might respond in two ways:

Ricardo’s Law didn’t prevent the British from losing a grip on their empire. Secondly, as Adam Smith, Ricardo’s mentor, noted: "What is prudence in the conduct of every private family can scarce be the folly in that of a great kingdom.

But probably the worst barb comes from our friend at babylon.com, a website that chronicles the empire’s worsening financial condition. "Do you remember when The Daily Reckoning was something more light hearted with frequent colorful metaphors etc.?" Brian asks on our own Discussion Board "Over the last year their newsletter has turned darker and darker."

Et tu, Mr. Babylon? Alas, we make this feeble gesture. We’re bringing back The Daily Reckoning joke page – the Essentialist Humor Files.

*** "John the Baptist was a man who was on fire, but he was not consumed."

Many are the miracles reported. Few are those that are not flimflam.

We attended mass at Notre Dame in Paris on Sunday. The front of the cathedral has been cleaned recently. We had not realized how white it was meant to be. The place is more stunning than ever.

But it is a strange ceremony at Notre Dame. The building is owned and maintained by the French government as an important monument. It is also still in service as a catholic church. The two uses give it an odd feeling, as if we were no longer worshippers, but animals in a zoo. We half expected the tourists to throw peanuts.

While the priest preached his sermon on St. John the Baptist, crowds of gawkers walked around inside the church, stopping to chat about the curious ritual going on in front of them and flashing their cameras every second or two. Among them were large tour groups from China who seemed to want to capture every detail of Notre Dame on video; they are probably planning to reproduce it – at twice the scale – in Shanghai. One woman made the entire circuit without ever taking her eye off her camera. We wondered why she bothered to come at all.

And there in the middle, sitting on hard, wooden benches, the faithful clung to their ancient rites. The organ rumbled and roared. Soprano soloists filled the church with notes we hardly knew existed. The priests swung incense. The wafers were handed out and soon the service was over.

Edward turned around and asked, "It is over? Can we go now?"

We wondered if the whole thing were not over. The people who built these churches believed their mission was to conquer and Christianize the entire world. They practically succeeded. They marched behind the cross to the Holy Lands, then to the Americas, and on to Asia. On the side of one of the pillars at Notre Dame was a plaque honoring soldiers of the British Empire – more than a million of them – in World War I. It showed the extent to which England’s empire reached. Canada, New Zealand, Australia, Newfoundland, South Africa and India were represented. No mention was made of other protectorates, colonies, occupied countries, and trading stations throughout the world.

But now, the tide of history seems to have turned. Even the French are apologizing for their colonial past. Asian economies are growing at twice or three times the rate of those of the West. Asian tourists are swarming over the relics of Europe, and Asian central banks are enabling America’s imperial and economic overstretch.

The European /Anglo-Saxon Empire has been on fire for 500 years, ever since the Castilians kicked the last Moors out of Spain and began the conquest of the Americas. It will be a miracle if it is not consumed…sooner or later.

*** We felt stupid for even having such thoughts. Before us was a little boy who needed something more than a thought; he needed a prayer. There was nothing else we could give him. Edward had brought a friend with him. He is a good kid, who enjoys the same things Edward does – skateboards, notably. But the poor boy’s mother is in the hospital. She is dying, we have heard, of cancer. We looked up toward the majesty of Notre Dame and thought about what lay ahead for the boy. There are probably worse things than losing your mother at the age of 12, but there cannot be many. Elizabeth looked at us, and looked again. She must have thought she saw a tear in a cynical, old eye.

The Daily Reckoning