A Crisis vs. THE Crisis: Keep Your Eye on the Ball

Louis James, Chief Metals & Mining Investment Strategist

Dear Reader,

Precious metals have retreated again in the last few days, apparently in response to the conflict in Ukraine heading for a diplomatic solution rather than a full-fledged civil war. But is that what’s really going on? And how does that fit into the bigger picture?

Casey Metals Team analyst Laurynas Vegys has a look at just these questions in his timely article below, which I hope you’ll find as thought provoking as I did.

Sincerely,

Louis James
Senior Metals Investment Strategist
Casey Research

P.S. Newsflash: I've been invited to speak at the upcoming Stansberry & Associates Natural Resource Conference, Saturday May 31, 2014, at the AT&T Performing Arts Center in Dallas, Texas. Oddly enough, they didn't ask me to speak about gold, nor any metals at all, but about my move to Puerto Rico in search of lower taxes. If you're curious about my legal move to reduce my taxes while remaining in the US, or want to hear the latest regarding resource investments, this event is the soonest you'll be able to do so. For more information, click here.

Rock & Stock Stats
Last
One Month Ago
One Year Ago
Gold 1,286.80 1,359.00 1,392.50
Silver 19.29 20.86 23.25
Copper 3.02 2.95 3.20
Oil 104.30 98.88 88.00
Gold Producers (GDX) 23.57 26.43 28.22
Gold Junior Stocks (GDXJ) 34.66 41.60 47.04
Silver Stocks (SIL) 12.33 14.00 13.73
TSX (Toronto Stock Exchange) 14,500.40 14,368.98 11,996.34
TSX Venture 998.77 1,038.95 932.94

A Crisis vs. THE Crisis: Keep Your Eye on the Ball

Laurynas Vegys, Research Analyst

Today I want to talk about crises. Two of the most notable ones that have been in the public eye over the course of the past 6-8 months are obviously the conflicts in Ukraine and Syria. The two are very different, yet both seemed to cause rallies in the gold market.

I say “seemed” because, while there were days when the headlines from either country sure looked to kick gold up a notch, there were also relevant and alarming reports from Argentina and other emerging markets, as well as from China during many of the same time periods. Nevertheless, looking at the impressive gains during these periods, one has to wonder if it actually takes a calamity for gold to soar.

If so, can the yellow metal still return to and beat its prior highs, absent a major political crisis or a full-blown military conflict? My answer: Who needs a new crisis when we live in an ongoing one every day?

More on this in a moment. Let’s first have a quick look at what happened in Ukraine and Syria as relates to the price of gold. Here’s a quick look at the timeline of some of the major events from the Ukrainian crisis, followed by the same for Syria.


There seems to be a fairly clear pattern in both of these charts. Gold seems to rise in the anticipation of a conflict; once the conflict gets going, or turns out not as bad as feared, however, it sells off. We see, for example, that as the news broke that chemical weapons were being used in Syria and Obama was threatening to intervene, gold moved up. But when the US did not wade into the bloodshed and Putin proposed his diplomatic solution, gold slid into a protracted sell-off, ending up lower than where it began.

It’s impossible to say with any degree of certainty how much of gold’s recent rise was due to anticipation of the Ukraine/Crimea crisis, but there were certainly days when gold seemed to move sharply in response to news of escalation in the conflict. And again, after it became clear that the US and EU would do little more than condemn Russia’s actions with words, gold retreated. As of this writing, it’s down about $85 from its high a little over a month ago. (We think many investors underestimate the potential impact of tit-for-tat sanctions, but they are not wrong to breathe a sigh of relief that a war of bullets didn’t start between East and West.)

In sum, to the degree that global crisis headlines do impact the price of gold, the effects are short-lived. Unless they lead directly to consequences of long-term significance, these fluctuations may capture the attention of day traders, but are little more than distractions for serious gold investors betting on the fundamentals.

You have to keep your eye on the ball.

The REAL Crisis Brewing

Major financial, economic, or political trends—the kind we like to base our speculations upon—don’t normally appear as full-fledged disasters overnight. In fact, quite the opposite; they tend to lurk, linger, and brew in stealth mode until a boiling point is finally reached, and then they erupt into full-blown crises (to the surprise and detriment of the unprepared).

Fortunately, the signs are always there… for those with the courage and independence of mind to take heed.

So what are the signs telling us today—what’s the real ball we need to keep our eyes upon, if not the distracting swarm or potential black swans?

Readers who’ve been with us for a while know that the big-league trend destined for some sort of major cataclysmic endgame that will impact everyone stems from government fiscal policy: profligate spending, leading to debt crisis, leading to currency crisis, leading to a currency regime change. And not in Timbuktu—we’re talking about the coming fall of the US dollar.

The first parts of this progression are already in place. Consider this long-term chart of US debt.

Notice that government debt was practically nonexistent halfway through the 20th century, but has seen a dramatic increase with the expansion of federal government spending.

Consider this astounding fact: The government has accumulated more debt during the Obama administration than it did from the time George Washington took office to Bill Clinton’s election in 1992. Total US government debt at the end of 2013 exceeded $16 trillion.

Let’s put that in perspective, since today’s dollars don’t buy what a nickel did a hundred years ago.

Except for the period of World War II and its immediate aftermath, never before has the US government been this deep in debt. Having recently surpassed the threshold of 100% debt to GDP, America has crossed into uncharted territory, bringing itself in-line with the likes of…

  • Japan, “leading” the world with a 242% debt to GDP ratio
  • Greece: 174%
  • Italy: 133%
  • Portugal: 125%
  • Ireland: 117%

The projection in the chart above is based on the 9.4% average annual rate of debt-to-GDP growth since the US embarked on its current course in response to the crash of 2008. If the rate persists, the US will be deeper in debt relative to its GDP than Ireland next year, deeper than Portugal in 2016, Italy in 2017, Greece in 2019, and even Japan in 2023 (and the US does not have the advantage of decades of trade surpluses Japan had).

Granted, the politicians and bureaucrats say they will slow this runaway train, but we’re not talking about Fed tapering here. Congress will have to embrace the pain of living within its means. We’ll believe that when we see it.

But let’s take a more conservative, 10-year average growth rate (an arbitrary standard many analysts use): 5.3%. At this rate, the US will still be deeper in debt than Ireland and Portugal in 2017, Italy in 2019, Greece in 2024, and Japan in 2030.

Either way, this is still THE crisis of our times; all of the countries mentioned above are undergoing excruciating economic and social pain. It’s no stretch to imagine the kind of social and political turmoil that has resulted from the European debt crisis coming to Main Street USA, as American debt goes off the charts.

It’s also important to understand that the debt charted above excludes state and local debt, as well as the unfunded liabilities of social entitlement programs like Social Security and Medicare.

This ever-growing mountain—volcano—of government debt is long-term, systemic, and extremely difficult to alter trend. Unlike the crises in Ukraine and Syria (at least, so far), it’s here to stay for the foreseeable future. While some investors have grown accustomed to this government-created phenomenon and no longer regard it as dangerous as outright military conflict, make no mistake—in the mid- to long-term, it’s just as dangerous to your wealth and standard of living.

Protecting yourself from this crisis is simple: convert as much government currency units as you can into real money: gold.

Precious metals are the only financial assets that are not simultaneously someone else’s liability. No government in the world can simply print up all the gold it would like to spend, and, unlike bitcoins and other such abstractions, gold can’t be stolen over the Internet. This is not news to our readers, but is so essential to their future financial health, it’s worth emphasizing again and again.

And profiting from this trend is what we dedicate ourselves to here: speculating on the best mining stocks that offer leverage to the price of gold.

Here’s what I suggest: take a risk-free, 3-month trial subscription to our monthly advisory focused on junior mining stocks, the Casey International Speculator. If you sign up today, you can get instant access to two special reports detailing which stocks are most likely to gain big this year: Louis James’ 10-Bagger List for 2014 and 7 Must-Own Mining Stocks for 2014. You can get all of them. Click here to get started now.

I know of no better way to not just survive what’s coming but thrive despite it all.



Gold and Silver HEADLINES

India’s Pain Is UAE’s Gain (Mineweb)

The gold restrictions in India have had some positive unintended consequences for another nation. Bullion traders in UAE are registering brisk sales, much of the rise attributed to expatriate Indians and visitors from India to the UAE.

“The UAE’s gold trade has become the de facto beneficiary of the Indian government’s tough stance on domestic consumption. There is almost a 16% difference on a per gram basis, in buying gold ornaments in the UAE as compared to buying gold in India,” said an official at a store in Dubai’s gold souk.

The country was the top destination for gems and jewelry out of India, with volumes totaling $14.37 billion last year, followed by Hong Kong at $9.86 billion, and the US at $4.79 billion.

This shows how strong the culture for gold is in India. Citizens know the long-term value of the metal and will seek it out regardless of how their politicians try to restrict it.

Strike-Hit Platinum Producers Increase Pay Offer (Bloomberg)

The world’s largest platinum producers increased their offer for miner wages, as the strike that has crippled operations entered a 13th week. Per company officials, annual pay will double by July 2017.

However, the companies cannot satisfy all union demands, because “labor costs account for approximately 55% to 60% of annual production costs and unsustainable increases in these costs will be catastrophic.” The negotiations will continue on April 22.

The strike has shut some of the biggest mines in South Africa, which accounts for more than two thirds of the world’s mined platinum, used for jewelry and as automotive catalysts in vehicles. The shortfall in production is so big that Morgan Stanley predicts it will take at least four years to fix.


Recent News in International Speculator and BIG GOLD—Key Updates for Subscribers

International Speculator

  • With all major permits now in hand, this company is now green-lighted to quadruple output. We like the story a lot, and our expectation is that mining costs will be exceptionally low and margins commensurately high.

BIG GOLD

Apr 21, 2014
comments powered by Disqus