Published November 10, 2011

Gold Stocks Are Dirt Cheap

Dear Reader,

You have to hand it to our species – we Homo sapiens are a clever and devious bunch. If we scoot out a bit on the lower branches of the anthropological family tree – creationists should probably skip this next part – our ancestors, once equipped with an appropriately sized brain, were quite adaptable. From fashioning tools to mastering husbandry, the challenge of controlling those things necessary for survival has always been critical to adaptation.

And that included outfighting or outsmarting Neanderthals for position, dominance, and resources. Kubric'’s opening scene of 2001: A Space Odyssey comes to mind. And speaking of Neanderthals, the US Congress continues down the (d)evolutionary path of tax-and-spend dominance in the quest to find greater numbers of taxpayers. Senators Charles Schumer (D-NY) and Mike Lee (R-UT) introduced a bill that will, if passed, grant foreign buyers of US real estate a new "homeowner visa."

Under the provisions of the bill, a foreigner who spends US$500,000 on the purchase of US real estate would be granted a visa permitting the individual to live in the US. According to Sen. Schumer, "They will be here spending money and paying taxes, and the most important thing is they'll sop up the extra supply of homes we have right now compared to demand, and that's what's dragging our economy down."

The hope is that a wave of foreign property buyers will be the salvation of the battered US housing market. Visions of European and Chinese buyers acting like a moist sponge dragged across the land and wicking up excess supply are dancing through the heads of anxious real-estate professionals. The bill has the wholehearted endorsement of the National Association of Realtors and luxury homebuilder Toll Brothers.

However, sweeping away the sugar-plum fairies reveals several restrictions to the program.

The purchase must be in cash; no mortgage or home-equity loans are allowed. The buyer could bring a spouse and minor children to live in the US, but working in the US is not allowed without first obtaining a work visa. Neither the buyer nor dependents would be eligible for Medicaid, Medicare, or Social Security benefits – no lounging in the hammock of the welfare state.

The visa would be renewable every three years but does not put the buyer on the path to citizenship.

The buyer must spend at least US$250,000 on a primary residence that is a residential property. The balance can be used to buy rental property. The property must be bought for more than its most recent appraised value. The visa is revoked if the property is sold.

Okay, so far the program sounds reasonable. But all the above is nothing more than the honey smeared on the catch of a cocked mousetrap.

As Senator Schumer stated, the program brings with it the added benefits of new US residents who will spend money in local economies and pay taxes. And he does not mean only property and sales taxes.

The final snare of the program is that the buyer is required to live in the home for 180 days a year and to pay US income taxes on all foreign earnings.

Snap! Gotcha!

It is puzzling that the number of days of required residence for the homeowner visa does not conform to the IRS's "substantial presence" test. Under this test, a non-US citizen is deemed a US resident for income tax purposes if physically present in the US for 183 days during each of three consecutive years.

But conform or not, if one successfully satisfies the requirements for this proposed new visa program, he enters the US income-tax system. As the program is geared towards higher net-worth individuals who will certainly have streams of income from outside the US, the program is more of a tax scheme than a visa program.

The proposed new visa program is part of a broader initiative with the Orwellian acronym "VISIT-USA": the Visa Improvements to Stimulate International Tourism to the United States of America Act. I am familiar with medical tourism, sex tourism, ecotourism, and the like. Leave it to Uncle Sam to dream up "tax tourism" as a viable enticement for foreigners to come to this country, invest a half-million dollars, spend half the year in residence, and be rewarded with the privilege of paying taxes on their worldwide income.

There seems no limit to the ability of the US government to concoct ways to entrap or ensnare citizens of any country into the US tax net. The survival of the modern day nation-state depends on it.

Gold Stocks Are Cheap – Dirt Cheap

By Alena Mikhan and Andrey Dashkov

Despite the pullback this fall, gold has been performing well this year. The price of the yellow metal is up 28% YTD, driven in large measure by strong demand in Asia and the dim economic outlook in the west. Gold miners are reporting good third-quarter bottom lines. In this ointment, however, there is a fly: gold stock performance, which has massively lagged the underlying commodity price surge over the year. This has been ongoing for months, now bringing us to the point where gold mining stocks look notably undervalued.

Technically, we might say, they look dirt cheap. Even Doug Casey, who's a serious bottom feeder, is admitting that compared to the metal itself, gold stocks are looking cheap again.

Consider these charts:

(Click on image to enlarge)

(Click on image to enlarge)

The average price/earnings ratio in the industry – a valuation ratio of a company's current share price compared to its per-share earnings (quarterly figures are used here) – is going down while the price of gold is increasing. This situation has persisted for several quarters; and now gold stocks look cheap on a P/E basis.

This big divergence between companies' earnings and the underlying commodity price won't last: Either gold will retreat or P/Es will catch up, or both. Since the fundamental trends driving gold upward are still very strong, the second scenario looks more probable, raising the prospect of a huge rally of mining stocks somewhere in the short- to mid-term. Comparing changes in the AMEX Gold Bugs Index against gold leads to a similar conclusion: in the second half of 2011, gold stocks have been lagging. See the chart below.

(Click on image to enlarge)

If they are on sale, why aren't we seeing a rush into these equities?

One opinion on why gold stocks are not recognized by the general investing public as being cheap is concealed in the way stocks are estimated. Most analysts prefer to use an unrealistically conservative gold price, which is far below what we have been observing for quite a while now. From Pierre Lassonde, in a Mineweb article:

"Most analysts are using their economist's projections for gold and for the last 10 years it's always been way under the reality. For example today the average is probably looking out five to 10 years as they're using $1,100 gold vis-à-vis a real gold price of $1,600 so what do you expect... they put out recommendations using $1,100 gold, so therefore the price that most of the stocks are trading at on a net asset value is around $1,100 to $1,200 gold and that is not going to change until, either the street uses todays' [sic] gold price, or even the contango."

This is a fancy way of saying that a price-moving plurality of gold analysts and investors don't expect gold prices to stay this high, let alone go higher. In our view, these people are driving forward looking in the rear-view mirror, rather than understanding what's going on in the global economy and therefore what's likely to happen in the future.

We see global economic uncertainty and currency crises sweeping the whole planet, providing investors – and even some central banks – with incentives to build positions in bullion. In their turn, gold stocks have a leverage effect on the underlying asset prices, courtesy of our friend volatility.

This confluence of trends, to use a tired but apt phrase, is shaping up into a perfect storm. Mining stocks look undervalued, and gold is headed higher. Something's got to give, and we think it could produce a spectacular move in gold stocks before too long – one that could spark the real Mania Phase Doug's been predicting to cap this bull cycle. It's time to take a contrarian stance and buy gold miners while others are selling.

[Jeff Clark, editor of BIG GOLD, increased the value of his mother's IRA by employing this "booster shot" effect to gold investing. Learn how to take advantage of it yourself.]

All Aliens?

By Doug Hornig

The specter of aliens among us has been a staple of sci-fi books and movies since… well, ever since there have been sci-fi books and movies. But what if we are all aliens?

That's another proposition – i.e., that life on earth originated somewhere out in the vastness of deep space and was transported here – that has received a lot of play in both the popular media and scientific circles over the years.

Since we can't turn back the clock a few billion years to watch the first life develop, we'll likely never know for certain what actually happened. Much of the commentary therefore has been playful, of the "Oh, isn’t that a far-out idea?" variety. At the same time, there have been steadfast denials by those who believe in creationism, because an extraterrestrial origin for mankind would ruin just about everything.

But there's been little in the way of hard science to inform our thinking.

There was a flurry of publicity last spring when media sources proclaimed that researchers had found fossilized bacteria in a meteorite. That turned out to be untrue. Sure, it's theoretically possible for an anaerobic bacterium to hitch a ride on a rock that's cruising through the cosmos. But we haven't found even that fossil yet, let alone something alive.

For all that we know, life arose here – and possibly, only here – through some mysterious convergence of ingredients and forces. Chemical reactions, electrical discharges, impact shocks, cosmic radiation… all may have played a part.

Or not.

The fuss over the false meteorite report muddied the scientific waters for a while, and perhaps that's why there was little publicity back in August when NASA researchers announced that they truly had discovered at least the precursors of life in a meteorite.

This isn't entirely new. "People have been discovering components of DNA in meteorites since the 1960's [sic], but researchers were unsure whether they were really created in space or if instead they came from contamination by terrestrial life," says Dr. Michael Callahan of NASA's Goddard Space Flight Center, in Greenbelt, Md.

Callahan, lead author of a paper on the discovery that was published in the Proceedings of the National Academy of Sciences goes on to say that, "For the first time, we have three lines of evidence that together give us confidence these DNA building blocks actually were created in space."

The Goddard team ground up samples of twelve carbon-rich meteorites from Antarctica and Australia, ran them through a liquid chromatograph, and further analyzed the samples with a mass spectrometer, which helps determine the chemical structure of compounds. They found adenine and guanine, two of the four basic molecules (AKA "nucleobases") from which DNA is built. And they're pretty confident those molecules came from beyond our planet.

Why? They give three reasons.

First, the team discovered for the first time, in a meteorite, trace amounts of three molecules related to nucleobases: purine, 2,6-diaminopurine, and 6,8-diaminopurine. The latter two are almost never found in nature. These compounds have the same core molecule as nucleobases, but with a structure added or removed.

"You would not expect to see these nucleobase analogs if contamination from terrestrial life was the source, because they're not used in biology," says Callahan. "However, if asteroids are behaving like chemical 'factories' cranking out prebiotic material, you would expect them to produce many variants of nucleobases, not just the biological ones, due to the wide variety of ingredients and conditions in each asteroid."

Second, the team analyzed adjacent ice samples from Antarctica with the same methods used on the meteorites. The amounts of the two nucleobases, plus hypoxanthine and xanthine, found in the ice were much lower – parts per trillion – than in the meteorites, where they were generally present at several parts per billion. More significantly, none of the nucleobase analogs were detected in the ice samples. With the Australian rock, the team analyzed a soil sample collected near the fall site. As with the ice samples, the soil had none of the nucleobase analog molecules present in the meteorite.

Finally, the team determined that these nucleobases – both the biological and non-biological ones – could be produced in a completely non-biological reaction. "In the lab, an identical suite of nucleobases and nucleobase analogs were generated in non-biological chemical reactions containing hydrogen cyanide, ammonia, and water. This provides a plausible mechanism for their synthesis in the asteroid parent bodies, and supports the notion that they are extraterrestrial," Callahan states.

Add the three together, and you have a persuasive case that in fact chemical reactions in deep space can result in the building blocks of DNA. That doesn't prove that ours came from extraterrestrial sources, of course… only that it might have.

But the possibility has just become a whole lot more intriguing. For those wanting more, see this video presentation of Dr. Callahan's research.

Additional Links & Reads

Jefferson County, AL Is Biggest Municipal Bankruptcy (Bloomberg)

Yesterday Jefferson County Alabama, declared bankruptcy. To date, it is the largest municipal bankruptcy in US history. But there will be more. The move came after state lawmakers failed to back a September agreement with creditors led by JPMorgan Chase & Co. that would have reduced its sewer-system debt of more than $3 billion. This is really the first sane thing we've seen from a government entity since the whole financial crisis began. Admit you're broke and start over, in the meantime punishing the banks and investors that financed rampant spending and unsustainable practices.

French and Germans Explore Idea of Smaller Eurozone (Reuters)

German and French officials have discussed plans for a radical overhaul of the European Union that would involve setting up a more integrated and potentially smaller Eurozone, EU sources say. French President Nicolas Sarkozy gave some flavor of his thinking during an address to students in the eastern French city of Strasbourg on Tuesday, when he said a two-speed Europe – the Eurozone moving ahead more rapidly than all 27 countries in the EU – was the only model for the future.

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

Kevin Brekke
Casey Research, LLC