Dear Readers,

A quick note here to wish you a very happy and extremely profitable 2012. If 2011 brought you red ink, please do not think I'm being ironic, nor merely hopeful: if you want to buy low to later sell high, major corrections such as we saw in 2011 are exactly what's needed.

For more on this, Alena Bialevich and Jeff Clark of the metals team have worked up a great review of 2011 and a look forward to 2012. This article needs no help; however, Bud Conrad has the latest on Federal Reserve action that has not yet made headlines, so we thought we'd add that into the mix. Both articles say just about all that needs to be said at present – Bud's provides data that underpin Alena's and Jeff’s thinking – so I will simply bow out and let them get to it.

But let me add that I personally did some buying during tax-loss season. Low prices – silly prices, in some cases – were available at the end of December, so I took them. I believe in our analysis and am putting my money where my mouth is.

Sincerely,

Louis James

Senior Metals Investment Strategist

Casey Research

2011: Dud or Springboard?

By Alena Bialevich and Jeff Clark

2011 was remarkable in many ways for the precious metals markets. Gold soared to new highs in early September, hitting at an intraday record of $1,920/ounce on the fifth. Silver screamed to within a hair of $50 on April 28. Corrections ensued, and the metals ended the year on a disappointing note for silver and an underwhelming note for gold. Equities for the sector were down, to way down for junior ventures, logging their worst annual return since 2008.

Here's a table of 2011 returns from most major asset classes:

(Click on image to enlarge)

Gold registered its eleventh consecutive annual gain, extending the bull market that began in 2001. The yellow metal gained 10.1% – a solid return, though moderate when compared to previous years.

Silver lost almost 10% year over year, due primarily to its dual nature. Currency concerns lit a match under the price early in the year, while global economic concerns forced it to give it all back later.

Gold mining stocks couldn't shake the need for antidepressants most of the year, and another correction in gold in December dragged them further down.

Meanwhile, those who sat in US government debt in 2011 were handsomely rewarded, with Treasury bonds recording one of their biggest annual gains. In spite of the unparalleled downgrade of the country's AAA credit rating, Treasuries were one of the best-performing asset classes of the year. The driving forces there are expanding fear about the sovereign debt crisis in Europe, combined with the Fed's promise to keep interest rates low through 2013.

But perhaps it would be more accurate to look at 2011 in a larger context. How did these investments perform over the past three years?

(Click on image to enlarge)

There's a lot to be said about the chart above, but we'll cut to the chase: Despite the higher volatility, we'd much rather be investing in the assets on the left side of the chart than those on the right.

But 2011 is now part of the history books. The important question before us is: Is gold still one of the best places for money going forward? Let's take a look at what we might expect in 2012 based on what we just left behind…

The Fundamental Case for Gold Remains Rock Solid

Gold demand from investment and central banks grew tremendously last year. Further, the geography of gold buying was widespread, with big purchases coming from Europe during the initial bouts of their crisis and Japan after the Fukushima accident. Small investors and monetary authorities alike purchased gold due to economic, financial, monetary, and political concerns. Quite frankly, we see none of these factors changing anytime soon.

Further, many countries continue to debase their currencies at phenomenal rates (see Bud Conrad's related article below). While US Treasuries may be a good temporary parking spot for cash, don't kid yourself about what's behind it all: nothing. The dollar is a fiat currency, no more. A true safe haven is something that cannot be debased, devalued, or destroyed by any government. After accounting for inflation, your dollars are worth less every year.

The reasons for gold's bull market aren't going away anytime soon. Make sure you have enough exposure to make a material difference to your portfolio.

Don't Be Deceived by Promises of Economic Growth

The US economy ended the year on a high note – the job market is improving, gas is cheaper, consumer confidence grew, real estate showed signs of recovery, and the holiday shopping season turned out better than most economists expected. So, can the US grow its way out of the debt burden? Can we forget about further money printing schemes that are bullish for gold?

We think there's little chance that growth will be sustainable in 2012. First, the biggest chunk of GDP growth in 2011 came from personal consumption – savings cuts and income growth in particular.

(Click on image to enlarge)

Strong GDP growth comes from production, not consumption. As Doug Casey has stated many times, it's also the secret to personal wealth: "Produce more than you consume and save and invest the difference."

Second, according to a recent Time article, "The government says that once you adjust for inflation, weekly earnings dropped 1.8% from November 2010 to last month" [November 2011]. As a result, "Consumers have used savings or credit cards to finance their purchases." This is hardly a sign of a strong economy.

Combining these facts with surging government debt and ongoing deficit spending means the "growth" in GDP is largely supported by… debt. US debt surpassed GDP last year for the first time since 1947, and if the Keynesians get their way, the cure for our massive debt overhang will be… more debt. Any such scheme, regardless of its name, is very bullish for gold.

Preserve your wealth with gold, not fiat currency.

The Gold Price Will Continue To Be Volatile

The average annual gold price in 2011 was $1,571.50/ounce, which was 28% higher than the prior year's average. As we outlined in our last article about gold corrections, the average retreat in gold since 2001 (of those greater than 5%) is 12.5%. Declines of this degree are normal. They will happen again. Thus, expected price behavior leads us to get excited when gold and related stocks go on sale, not depressed about the dips.

If you buy gold during corrections, your gain by the end of the year will be higher than the annual advance.

Gold Equities Are (Still) Dirt Cheap

Yes, precious metals stocks have lagged the underlying commodity price throughout the year. Yes, they were a disappointment in 2011 – but 2011 is only one chapter in this gold bull-market story. For most miners, margins are high, dividends are increasing, and valuations are extremely low, despite the recent fall in metal prices. We can't tell you exactly when the turnaround will begin, but we're confident that the time is coming when gold stocks will once again bring us leveraged performance, particularly when the greater investment community recognizes their value and clamors for increased exposure to the gold market.

The old adage to buy low and sell high still applies. When it comes to gold stocks, we're at the "buy low" part of the formula right now.

So, if you're feeling like 2011 was a dud for your gold portfolio, we suggest you shake off the funk. It is precisely when such feelings abound that contrarian buying opportunities are at their best. The way to buy low is to buy when others are selling. Using the current weakness in prices to get positioned for the next liftoff is the way to play this. Remember that volatility cuts both ways: just like dips, a springboard to the upside will come – of that we're certain. And given the tenuous state of global finances and the temptation to print, one of these liftoffs is going to be life-changing.

[We're actually quite excited about the recent correction in gold and gold stocks. 2012 could be one for the record books, based on the simple fact that big climbs follow big falls – and we expect many more big climbs in this bull market. Tomorrow's edition of BIG GOLD includes a discount on a popular US-minted gold coin, a price you won't find anywhere else. Subscribe now to get this limited-time offer on a beautiful bullion coin at a great discount.]

Federal Reserve Expands Balance Sheet $100 B in Last Two Weeks by Currency Swaps

By Bud Conrad

Below is an update of a chart I developed, showing the history of the size of Federal Reserve swaps of currencies with foreign central banks. In this swap, each central bank prints up its currency and gives it to another central bank. The biggest US partner so far is the European Central Bank (ECB) which, in turn, is providing dollar-denominated loans to European banks.

This is another indirect way for the US to expand its creation of dollars and at the same time support European banks. The historical picture below shows that the program grew to $600 billion at the peak of the 2008 credit crisis. If the current spike is the start of something similar, we could easily return to that level. At almost $100 billion in two weeks, we'd get there in as little as three months.

(Click on image to enlarge)

(These data were published on December 29 by the New York Federal Reserve.)

The biggest swap in the current round is $85B with the ECB, and an additional $14B was swapped by the Bank of Japan. A trivial $320M was swapped by the Swiss National Bank.

These currency swaps are another back-door currency creation and manipulation scheme being carried out by the central banks with almost no supervision, approval, nor accountability by their respective governments.

When Bernanke was asked by the Senate where the $600B swaps went the last time, he pleaded that he didn't know because he only gave the money to the other central banks, which then made the loans to specific banks. So this activity is also a scheme for hiding who the final recipients are. I think these actions are unconstitutional, but I'm not expecting anybody to bring up the issue, as the Fed is operating pretty much as it wants to.

Looking to the future, the Fed can easily make the action as big as the last $600B (QE2) without making any actual pronouncement to call it QE3. I think the Fed is on its way to new levels of "printing," as are the other central banks.

This is bullish for gold.

Gold and Silver HEADLINES

"Resource Curse?" (Oxford Policy Management)

An interesting report examining the effects of country dependence on mineral exports (defined as such if mineral exports constitute 25% or more of total tangible exports) was published in December by Oxford Policy Management Ltd., a UK-based think tank.

The report studied the number of countries that became mineral dependent since 1996 and found that the rate of dependency has increased – especially since 2004 – due to strongly rising global commodity prices. As of 2010, the average dependence rate in the group considered "dependent" is a whopping 60%. The fastest increase in dependence was observed in countries where iron ore, copper, and gold are major export components.

The report's findings do not necessarily paint an optimistic picture for those countries with high dependency ratings, in spite of high commodity prices. They can become overly vulnerable to fluctuating commodity prices, which in turn will have a direct impact on their economies. This is especially the case for the 20 most-dependent countries, many of which are low- and middle-income states, such as Botswana, Mongolia, Chile, Peru, and Mali.

Gold on Your Face (Wall Street Journal)

Gold's metallic properties are being employed in another unusual application. In Thailand – a country where gold is deeply ingrained in the local culture – it has recently become a popular cosmetic treatment. Despite research done by a German team in 2010 that showed that applying gold has no effect on skin condition, the luxury status of the metal makes some want to feel more attached to it – literally. More of a ritual than a medical procedure, it does make a powerful statement about gold's popularity, which we like.

Last Week in International Speculator and BIG GOLD – (A Quiet Week for our Stocks)

International Speculator

• An International Speculator stock confirmed that a strategic agreement concerning its flagship project is proceeding as planned.

BIG GOLD

• One of our producers with big growth already on tap has proposed a buyout of a company with over nine million ounces of gold – but they'll have to issue a lot of shares to complete the transaction. Is the dilution worth it?
• A popular silver producer is receiving odd communications from anonymous callers, and the stock has fallen to low levels. Cause for concern, or buying opportunity?
• One of our smaller producers settled some of its debt through convertible notes, giving holders the choice between cash or shares. A great majority chose shares, indicating they think the stock is undervalued.

GET READY! The January issue of BIG GOLD comes out tomorrow – and it's our blockbuster annual gold survey. Jeff interviewed a whopping 26 analysts, fund managers, economists, Casey editors, and bullion suppliers about what to expect in their respective fields for 2012. The guidance offered in this one monster edition will give you a solid idea of what to expect this year, as well as how to position your investments for maximum protection and profit. Invest alongside us with a risk-free trial to BIG GOLD.