Dear Reader,

The 2008 crisis caught plenty of investors by surprise. I don’t blame folks for not seeing it coming. Discerning between a bubble and strong growth can sometimes be difficult. That’s the very reason so many lost big time in the recession. The boom itself must be convincing.

Furthermore, even if one saw the crisis coming, the proper reaction isn’t obvious. Assume an investor in 2003 saw a major bubble on the horizon. Well, what does he do? Foresight alone can’t save him. Of course, the investor could bet against real estate, but that could mean four years of losses until the bubble bursts. There’s no value in finding oneself correct but bankrupt four years later. As the saying goes, “The market can stay irrational much longer than you can stay solvent.” The investor could also try to ride the bubble and then exit early. The timing problems here are obvious. With either decision, bubbles can give even the prescient investor a headache.

The current European crisis is different in one major way: Everyone can clearly see it coming. Though the dilemma of riding a bubble or waiting for a crash is present here as well, the options are different for world governments this time. During the last crisis, the floodgates had already been opened. In 2007, investors began to realize that real estate and sub-prime mortgages were a problem, but there was nothing anyone could really do. The Fed had already pushed money at low rates for years. The excess liquidity was still flowing throughout the system. All the houses were already sold, and the mortgage backed securities were already packaged.

The only thing an investor could do was sell his own home or mortgage-backed securities. Of course, if all investors try to do the same thing, the end result is a self-fulfilling prophecy of a crash. By 2007, there was no turning back from the waterfall around the river’s bend.

What’s different this time? In Europe, we are looking at perhaps the most preventable crisis of all time. The crisis is not about the houses already sold; it’s about debt levels. These countries can still make extreme cuts and save themselves from a crisis. Would these actions be painful? Of course! And they would likely increase the unemployment rate of these struggling economies. Furthermore, hard-core austerity would be equivalent to political suicide.

Nonetheless, Europe has the choice of unwinding this crisis in a painful but controlled manner or sending the entire world into a downward financial spiral. It’s their choice. Europe is not akin to 2007 America. The bad real estate and MBS deals couldn’t be undone. In the case of Europe, the debt levels can be undone. Perhaps a European slowdown is unavoidable, but a crisis doesn’t need to happen.

For the rest of the issue, Jeff Clark will discuss the 1980 gold price peak adjusted for inflation. Though some commentators have noted the peak’s approach, the distance really depends on the inflation numbers used. Then, Andrey Dashkow and Alena Mikhan will discuss Asia’s demand for gold. With leaps in demand for it from the continent, gold will continue to increase with or without QE3.

How Much Upside Is Really Left in Gold and Silver?

By Jeff Clark

With gold a stone’s throw away from $2,000 and already up 30% on the year, the objective investor might begin wondering how much higher both it and silver can climb. After all, gold is nearing its inflation-adjusted 1980 high – and that peak was a spike that lasted only one day.

So, how much return can we realistically expect in each metal at this point? And is one a better buy than the other? There are dozens of ways to calculate price projections, but I’m going to use data based strictly on past price behavior from the 1970s bull market.

First, let’s measure what today’s inflation-adjusted price would be if each metal matched their respective 1980 highs, along with the return needed to reach those levels:

Returns Needed to Match Inflation-Adjusted Price
Percent Climb to
Match 1980 High
As of 8-31-11

Based on the CPI-U (the government’s broadest measure of inflation), gold is a couple of jumps away from matching its 1980 high of $850. Silver, meanwhile, has much further to climb and would return over three times our money if it reached its former peak.

But the CPI is a poor measure of real inflation. Let’s use John Williams’ Shadow Government Statistics calculations. His data are much closer to the real world, and the statistics are calculated the way they were during the Carter administration, stripped of later manipulations.

Check out how high gold and silver would soar if they adjust to this level of inflation:

Returns Needed to Match ShadowStats Alternate CPI
MetalPrice to Match
ShadowStats CPI
Percent Climb to
Match ShadowStats
As of 8-31-11

Clearly, both metals would hand us an extraordinary return from current prices. Those are some admittedly high numbers, but keep in mind that’s what the CPI figures above would register if government officials had never changed the formulas. What’s tantalizing about these levels is that we’re not even halfway to reaching them.

Let’s look at one more measure. I think another valid gauge would be to apply the same percentage gain that occurred in the 1970s. From their 1971 lows to January 1980 highs, gold rose 2,333%, while silver advanced an incredible 3,646%. The following table applies those gains to our 2001 lows and shows the prospective returns from current prices:

Returns Needed to Match 1970s Total Percent Gain
MetalPrice to Match
1970s Total % Return
Percent Climb to
Match '70s Return
As of 8-31-11

Gold would fetch us two-and-a-half times our money, while silver would give an almost quadruple return.

Regardless of which measure is used, it’s clear that if gold and silver come anywhere close to mimicking the performance of the last great bull market, tremendous upside remains.

One might be skeptical because these projections are based on past performance, and nothing says they must hit these levels. That’s a valid point. But I would argue that we’re in uncharted territory with our debt load and money creation – and neither shows any sign of ending. We had a lot of problems in the 1970s, but our current fiscal and monetary abuse dwarfs what was taking place then. The need to protect one’s assets gets more pressing each day, not less so. That to me is the key signaling this bull market is far from over.

One may also be skeptical because the media continue to claim gold is in a bubble. To date their proclamations have been nothing but a great fake-out, every time. Want to know when we’ll really be a bubble? When they stop saying it’s one and actually start buying and recommending gold. When they begin running 15-minute updates on the latest gold stock. When you are sought out relentlessly by your friends and relatives because they know you know something about all this “gold and silver stuff.”

All told, I think the baked-in-the-cake inflation – rooted in insane debt levels and deficit spending – will be one of the primary drivers for rising precious metals this decade. This means the masses will look for a store of value against a plunging loss of purchasing power. Enter gold and silver.

The current correction may not be over, and we can count on further pullbacks along the way. But the data here suggest the upside in gold and silver is much bigger than any short-term gyration – or any worry that may accompany it.

[How exactly does an investor protect against the ramifications of massive debt levels in this country? Check out the free online video event, The American Debt Crisis, being held on September 14 at 2 p.m. EDT. This premier Casey event will review the current economic crisis and offer actionable advice for protecting yourself and your money. Join Doug Casey, David Galland, Olivier Garret, Bud Conrad, and Terry Coxon, as well as guests Michael Maloney, John Mauldin, and Lew Rockwell for this highly informative and practical event. Don’t miss it!]

QE or Not QE, Asian Markets Are Driving Gold

by Alena Mikhan and Andrey Dashkov

We’ve seen some real gold volatility in action… up to nominal records then down in a quick retreat. So, what’s next?

Much will depend on whether the US Federal Reserve will embark on another round of quantitative easing (QE3). If QE3 goes live, anticipation of future inflation will persuade many investors to down the trusted path of securing their capital in gold.

But the reality is that even without QE3, gold can go up – one is tempted to say it must go up. As discussed many times and in many ways, the economic problems already on deck are not being solved, and any one of them can make gold soar.

Gold is in the unique investment class of “ultimate safe haven.” Demand will be much higher once push comes to shove and fiat currencies lose what little credibility they still have. This is developing, with or without another round of quantitative easing.

And demand for gold has been accelerating recently. The focus is now on Asia. China, India, and a range of smaller countries showed impressive demand for gold in Q211. The second-quarter update of Gold Investment Digest, published by the World Gold Council, reports on physical bar and coin demand:

Turkey and India were the two strongest markets, chalking up growth rates of 90% and 78% respectively. China (+44% year-on-year) also accounted for a significant portion of the growth in global demand.

It will be quite interesting to see third-quarter statistics, but anecdotal evidence already shows that higher prices don’t scare Asian gold buyers, instead prompting them to purchase more on the dips.

“The surge in prices has sparked another gold-buying craze. The 50 gram and 100 gram gold bars were selling like hot cakes,” said Ms. Liu, a store manager at Shanghai’s major jeweler Lao Feng Xiang Co Ltd, who said gold sales this month were up at least 30 percent from a year ago.

This summer was an interesting one, not quite the tranquil Shopping Season we had hoped it to be. Gold closed at $1,536.50 per ounce on May 31; it closed on August 31 at $1,813.50, an 18% increase.

Fall shall be an interesting season, too. The current price action is already hot, but traditional Indian and Chinese festive seasons are approaching, and those often boost gold prices. This may be one of the reasons why sales in Asia are flourishing at the moment – buyers expect the gold price to continue its ascent and want to use the opportunity to buy cheaper.

So do we. Casey International Speculator tracks the best companies in the precious metals sector and provides investors with advice on how to profit from the current gold trends.

Additional Links and Reads

Is It Time for the Financial World to Panic? (ZeroHedge)

Here’s a fairly good list of 25 reasons why the financial markets are in serious trouble. However, I do have a bone to pick with the list. It notes the lack of willpower for a Greek bailout as one of the problems. In my opinion, another bailout will only delay the inevitable. The bailout game plan seems just plain dumb to me. Essentially, the plan is to bail out the weaker countries to buy enough time for growth to return. It’s a different version of Bernanke’s game plan: keep rates low to restore the economy before serious inflation kicks in.

US Self-Employed Struggle to See Opportunities (Bloomberg)

According to this article, the number of self-employed has fallen 10% since July 2008. Much of the drop can be explained by the lack of jobs for carpenters, electricians, and other construction workers. Besides relaying the numbers, the article shares another interesting point toward the end:

Some entrepreneurs actually are thriving, [CEO of the National Association for the Self-Employed] Arslan said. Those who get approved as state or federal contractors are doing very well, as are business owners who work in healthcare and information technology, she said.

In the past, I’ve noted this growing trend. Almost all the incentives point to working for the government or contracting for it. How can there be a prosperous private sector if the best and brightest see the greatest rewards coming from government contract work?

Green Jobs Are No Match for Davis-Bacon (Reason)

This Reason article points out a key obstacle to creating green jobs: labor regulations. Whether it’s the Davis-Bacon Act or the “Buy American” provisions, the current number of green jobs is nowhere near the five million Obama promised during his campaign. According to the EPA, only 7,140 green jobs have been created thus far.

This isn’t only a problem of failing to create green jobs; it shows deep ideological rifts in the Democratic Party. Within it are the labor union members who would prefer more industrialization and jobs, while other sectors of the Democratic Party favor environmentalism and less industrialization. Usually the party manages a careful dance, giving favors to both groups despite their opposing views. However, in this case, they have tripped over their own feet.

That’s it for today. Thank you for reading and subscribing to Casey Daily Dispatch.

Vedran Vuk
Casey Daily Dispatch Editor