Dear Reader,

When the Federal Reserve announced exceptionally low rates until mid-2013, I thought to myself, “Just when the Fed couldn’t get any worse, it does.” Now, with Bernanke’s new plan to purchase $400 billion of long-dated Treasuries over the next year, the situation has grown even more dire.

So let’s see where this puts us. The Fed’s policies got worse than I thought possible and then worsened more from there. Note that I’m a pretty pessimistic guy when it comes to the Fed… but I’m not the only one concerned here. Bernanke has pretty much gone vigilante.

This isn’t about Keynesian economics versus Austrian economics any more. Even many Keynesians wouldn’t agree with Bernanke’s actions. If anyone can find me a mainstream macroeconomics textbook that recommends five years of near-zero rates along with long-dated Treasuries purchases, please send it over. I would love to see such a book… but one doesn’t exist.

I’m not sure that even Bernanke thinks that he knows what he’s doing. The market is absolutely spooked. At the moment the DJIA is down 419 points, oil has fallen 6.5% to $80.32, and even gold has taken a near 4% hit. We’ve had some sharp sell-offs in the past two months, but this is different. It’s much closer to the reaction in 2008, where nearly everything was sold.

In past months, we saw some unique activity, such as gold acting as a safe haven. Even yesterday, gold performed better than most of the market. Furthermore, the euro kept its balance with the dollar despite the rough markets. Now the market is reacting in a more familiar way. Investors are running to Treasuries, pushing the 10-year yield to 1.72%, and the dollar has strengthened to 1.34 EUR/USD.

I hope that subscribers have been serious about holding one-third cash as per our suggestion. That stockpile may soon become one of your best decisions for the year. If the market takes another serious dive, the opportunities for those holding cash could be astounding.

Next, we have an article from Andrey Dashkov and Alena Mikhan on the growing demand for gold investments in India, particularly through local ETFs. Gold jewelry has always been viewed as an investment in India, but now, Indians are searching for a purer plays on gold. Then we have a short correction to our recent Keystone pipeline article.

India’s Gold Market: Consumers Are Turning into Investors

By Alena Mikhan and Andrey Dashkov

In August, assets under control of India’s gold Exchange Traded Funds (ETFs) are reported to have increased threefold year-on-year, even as gold appreciated by almost a half. Data from the Association of Mutual Funds in India show that total assets of gold ETFs reached 74.8 billion rupees (US$1.6 billion) from 26.4 billion rupees (US$550 million) a year earlier.

Gold ETFs in India have a rather short history. The first one, Mumbai-based Benchmark Mutual Fund (owned by Goldman Sachs Asset Management), was started in 2007. As of today, there are 11 ETFs in operation, holding around 24.1 tonnes (775 thousand troy ounces) of gold.

Gold ETFs became popular among Indian investors for a range of reasons. First, they provide good returns, consistently generating annual gains above 20% – more than any other asset class in India. While top equity mutual funds (excluding sector-oriented funds) gained only 7.4% since the beginning of the year, as of August 24, gold ETFs had gained around 32%.Another reason is that gold ETFs are affordable, even for lower-income investors. For instance, some funds are selling for a minimum monthly payment of 100 rupees (around $2). Another advantage is that unlike jewelry, gold quality in ETFs is guaranteed.

It should be noted that India’s ETFs holdings (775,000 ounces among 11 ETFs) are tiny compared to its annual consumer gold demand of around 31 million ounces (960 tonnes in 2010). However, with the benefits that ETFs provide investors, we expect to see further increases in ETF asset values. The World Gold Council’s Gold Demand Trend reports from Q1 and Q2 2011 mention that ETF demand in India was on a rise and confirm that this form of gold investment is gaining wide popularity.

Statistics show that pure investment demand is growing in India. According to the article:

Demand for gold bars, coins and other pure investments in India, Asia’s third largest economy, soared 83 percent in 2010 from the year earlier to 349 tonnes, according to GFMS, a precious metals consultancy that is part of Thomson Reuters.

The amount of gold used in making jewelry in 2010 rose 36 percent to 685 tonnes – giving investment demand 34 percent of total buying, up from 28 percent in 2009.

Second-quarter data from the World Gold Council mention that total investment demand in India increased 78% year-on-year and reached 108.5 tonnes of gold (3.8 million ounces), while jewelry demand rose 17% to 139.8 tonnes (4.9 million ounces). For the 12-month period ended at Q2 2011, jewelry demand in India grew 19% while investment demand growth rate was 50%. The table below shows that the trend for investors taking a larger share in the total demand numbers is recent and apparently accelerating.

Structure of India’s Consumer Gold Demand
Q2 2011
Q2 2010
Full year 2010
Full year 2009
Source: World Gold Council

If the gap between investment and jewelry demand continues narrowing, gold purchases for investment purposes could soon outdo the traditional consumer demand in India. That would have a significant impact on the market, potentially even reducing its seasonality.

Gold investment is not likely to become a total substitute to the traditional buying that is a part of Indian culture, but time will show if investment tools becoming available to the masses will facilitate a nationwide wave of new demand.

[You don’t have to read a business or mining newspaper from each continent to keep up with shifting trends like this one. The Casey International Speculator team can be your eyes and ears worldwide, sifting through companies, politics, and trends to give you actionable advice on junior miners. A trial subscription is risk-free for three months – start kicking the tires today.]

A Correction on the Keystone XL Article

By the Casey Research Energy Team

In our recent article about the Keystone XL and Northern Gateway pipelines, entitled Unclogging the System, we incorrectly stated that there are no heavy oil refineries in Canada. Our apologies – we know that there are such facilities in Canada and misstated our thoughts. The thought was to convey that there are nowhere near enough heavy oil refineries, also known as upgraders, in Canada to deal with current oil sands production, let alone to deal with the production increases planned for the coming years.

Using very rough approximations, upgraders in Alberta can process some 1.3 million barrels of bitumen each day. Current oil sands production totals just over 2 million barrels of bitumen per day, and is set to increase to 3.7 million barrels per day over the next 12 years.

Upgraders are extremely expensive to build, running tabs of between $4 and $10 billion. Before the 2008 recession, several companies had plans to build new upgraders, but almost all of those plans have been shelved. Even if a few more upgraders are built in Canada in the coming years, there would still be a need to send significant volumes of bitumen to American heavy oil facilities, or through pipelines to Pacific Ocean tankers.

In addition, we should have noted that the bitumen in question – the heavy, black oil sands product that requires all this refining – comes from in situ steam-assisted gravity drainage operations. Open pit oil sands operations can more easily be converted into synthetic crude, without the need for upgraders. However, there are fewer and fewer open pit oil sands operations.

Additional Links and Reads

US Officials Flunk Test of American History, Economics, Civics (AFP)

The Intercollegiate Studies Institute gave a civics, economics, and history quiz to 2,500 participants, including those self-identified as “elected officials.” The results were frightening, with the majority flunking. To top off this already depressing poll, regular citizens outperformed elected officials by answering 49% of questions correctly while the officials only answered 44% correctly.

Here’s one of the particularly disappointing answers:

Among the questions asked of some 2,500 people who were randomly selected to take the test, including “self-identified elected officials,” was one which asked respondents to “name two countries that were our enemies during World War II.”

Sixty-nine percent of respondents correctly identified Germany and Japan. Among the incorrect answers were Britain, China, Russia, Canada, Mexico and Spain.

On a side note, ISI is a pretty good organization. I don’t agree with them on everything, but they’re certainly fellow travelers in the free market movement. Here’s the Institute’s website. Most readers should enjoy it.

Bank of America, Wells Fargo: The Downgrade Shoe Finally Drops (MarketBeat)

Merely a few weeks ago, the media was praising Buffett’s Bank of America purchase. Furthermore, most ignored that Buffett had only recently sold Bank of America from his portfolio. That seemed like a really strange move to me.  Bank of America simply isn’t in good shape and the neither is the whole US banking sector. Yesterday, Moody’s confirmed this view by downgrading BofA by two notches and knocking down Wells Fargo (another Berkshire holding) by a single notch.

After Buffett bought BofA, numerous articles made proclamations about Buffett earning a billion within a day. With Bank of America down 4.8% today to $6.08, where are the articles titled, Buffett Loses Billion in a Week? In the long run, the financial press is not doing anyone a favor by pretending the glass is always half full. Investors should be aware of the danger here.

Chesapeake Energy Hydraulic Fracturing Educational Videos

In our energy publications, we’ve provided diagrams of different drilling processes. Here’s another particularly good demonstration: videos of hydraulic fracturing. I’ve seen a lot of presentations that explain the process, but this could be one of the best. This is sure to be a hot topic in US energy policy for some time. Unfortunately, it’s a technical and complex subject. Hopefully, these videos can clear up some questions about the process. Here’s part 1 and part 2.

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

Vedran Vuk
Casey Daily Dispatch Editor