Dear Reader,

In case some of you didn’t make it to the airing of the American Debt Crisis event last week, it’s up online. I’m really surprised at how well it turned out. I knew that it would be good but Doug Casey, David Galland, Olivier Garret, Bud Conrad, and Terry Coxon did an amazing job. Some of our regular readers should be familiar with a lot of topics in the video, but it’s still entertaining. If Doug is in the video, one is pretty much guaranteed a good time.

Speaking of events, we have another one lined up at La Estancia de Cafayate: Discover Cafayate, held November 1-6, 2011 in beautiful northwestern Argentina. Here are the confirmed faculty and topics for the conference:

• Doug Casey, with an update on the Greater Depression.
• Marin Katusa, chief investment strategist of the Casey Research Energy team, will be in Cafayate with a short list of his favorite small-cap resource stocks. This sole speech has the potential to pay for your entire trip.
• Claudio Maulhardt, Copernico Capital Partners, on the outlook for the Argentine economy and investment markets.
• Adrian Day, author and money manager, on the global investment opportunities he is finding in uncertain markets. Unlike most money managers, Adrian has long understood the importance of precious metals in a portfolio and of looking internationally to find compelling opportunities.
• Jeff Berwick, DollarVigilante.com, a seasoned expat and financial writer on the importance of internationally diversifying your money and, if possible, your life.

As informative as the conference is intended to be, the real value in attending is the unique opportunity it offers to experience for yourself one of the most special spots on the planet – and to do so in the company of a diverse group of interesting individuals – members of the fast-growing community at La Estancia de Cafayate and other guests.

While there is no specific charge for the conference, La Estancia de Cafayate is asking a modest event fee of $300 to help cover a wide range of activity costs, including numerous social events, golf, horseback riding, wine tastings, and much more. By registering before October 1, 2011, the fee is discounted to $225 per person.

For more details and to get your questions answered, please send an email to Dave Norden.

These events are always a lot of fun and to date have always sold out. If you have been interested in what’s going on in Doug Casey’s version of Galt’s Gulch, or just looking to enjoy the trip of a lifetime, drop Dave a note today. You’ll be very happy you did!

Next in the issue, Jeff Clark will look back at gold mining stocks during the last gold mania. Their performance is not exactly what one would expect.

Am I Really Going to Get Rich from Gold Stocks?

By Jeff Clark, BIG GOLD

Let’s just admit it: we’re invested in gold stocks not just to make money, but for the chance to change our lifestyles. And with their lackadaisical year-to-date performance, one may begin to wonder if they’re still going to bring the magic.

While the answer will depend as much on the individual investor as it does the market, let’s look at some historical patterns to get a hint as to how similar or different our situation is to past bull markets, as well as what realistic expectations we can hold about the future.

The first thing I wanted to know is if there is historical precedence for gold stocks to underperform gold during a bull market. If so, then maybe what we’re experiencing isn’t out of the ordinary, and more importantly, wouldn’t necessarily mean they are destined to continue lagging. And that brings us to our first historical observation…

Gold stocks underperformed gold for two years prior to the 1979-‘80 mania. What many frustrated investors don’t realize is that leading up to the blow-off top in gold in 1980, gold producers lagged the metal for two full years. From January 1977 through the end of 1978, gold rose 58.4%. But gold stocks, as measured by Barron’s Gold Mining Index, were up only 11.7%. The metal outperformed the producers by a margin of four to one, despite it being the middle of a bull market.

Today, gold is up 26.5% year-to-date (through September 19), while gold stocks (GDX) have risen only 3.2%. This is a similar pattern to the pre-mania behavior of the last bull market; it tells us that the current relationship between gold and the equities is not abnormal.

Let’s look at the mania itself and see what else we can learn. Here’s a chart of gold and gold stocks in 1979 and 1980:

(Click on image to enlarge)

Once the mania began, gold producers returned roughly four times the money. From January 1, 1979 through their peak in October, 1980, gold stocks rose $293.6%. The metal gained 274.8% during its part of the mania, hitting its pinnacle of $850 on January 21, 1980.

The big action was with the juniors and explorers; the average return of 15 companies we sampled was 2,313% during this 22-month period. What’s ahead could be truly spectacular.

Gold stocks peaked nine months after gold. The April Fool’s joke in 1980 was on those who thought the bull market was over at that point. What’s important to realize is that the public’s biggest shift from gold to the equities occurred after gold’s blow-off top.

Regardless of the extent to which the public may be buying gold today, it’s clear gold stocks aren’t on their radar screens. If history is any guide, they will be.

Gold stocks did well in spite of the world being a tumultuous place. Inflation was over 12% in 1980 and interest rates hit 13.5%. Two recessions occurred in the late ‘70s and early ‘80s. An oil crisis hit in 1979, and Iraq invaded Iran. In the midst of all this, gold stocks soared.

With our debt and currency concerns demonstrably worse now, one could easily argue that our present environment is even more supportive of the gold industry.

Gold stocks exploded even though the S&P was subdued. The S&P rose 36.8% in the same time frame (1-1-79 through 10-20-80)… Not too shabby. But gold stocks outpaced it almost eightfold. To give you a sense for how much that is, it would be akin to Barrick – currently priced around $53 – selling north of $200, while the S&P climbed to 1,647 from 1,204.

I think there’s one last lesson from these data.

Make sure you invest in gold and not just gold stocks. Not only is your risk decidedly higher if you invest solely in equities, you lack an alternate form of money that has been used repeatedly throughout history. You’d hate to be part of the mania only to see one or more of your stocks plummet from a political issue or flatline because of a management problem. Gold, meanwhile, will be serving its unfaltering role as money – what I use for a large chunk of my savings. Don’t make the mistake of thinking you don’t need gold just because you own gold stocks.

So, will gold stocks bring us riches? History doesn’t repeat in exact terms, but it usually rhymes. And given our similarities to the last great bull market, I think we’re in the right place.

[What gold and silver producers do we think will perform best when the mania arrives? Your timing couldn’t be better to check out BIG GOLD: Our latest issue provides an update on all our stock recommendations. And if you’re ready to speculate and shoot for the kind of returns the explorers saw in the 1970s, check out Doug Casey’s flagship publication, Casey International Speculator, which includes BIG GOLD free of charge. Both have a risk-free three-month trial.]

Additional Links and Reads

Survey Says: Gold to Top $2,000 this Year (Bloomberg)

Specifically, the survey notes an average target price of $2,083 with the highest estimate at $2,268. It’s always good to see more people optimistic about gold, but I don’t know how much weight to put on this survey. According to the article, the survey is based on sixteen respondents from the London Bullion Market Association’s annual conference. Though the number of respondents is small, it could still be significant… if the respondents are highly knowledgeable. After all, people check equity analyst recommendations all the time and often there are no more than a dozen opinions there.

Americans Say Federal Government Wastes Over Half of Every Dollar (Gallup)

This is a really strange poll, and I suspect that it could be flawed. According to the poll, Democrats see 47 cents of each dollar of federal spending as waste. Independents and Republicans believe 52 cents of every dollar are wasted. In my opinion, they’re both rather optimistic, but what’s really fascinating here is the small difference between Republicans and Democrats. If they’re only five cents apart on their opinions of wasteful spending, then what’s all the quarreling about?

Likely the participants are interpreting the question in various ways. For example, a Democrat could answer, “Yes, the government is wasting tons of money on wars and not enough on welfare”. Similarly, a Republican could see welfare spending as waste and military spending as appropriate. As a result, the cent total could be very close but still worlds apart in terms of views on the government.

SEC Probes Insider Trading Around Credit Downgrade (Politico)

First the Justice Department went after S&P. Now government thugs are tracking down anyone with large bearish positions prior to S&P’s credit downgrade announcement:

Securities regulators are looking for firms that bet the stock market would drop – in particular, bearish trades that seem unusually large or were made by firms that typically do not make them.

An SEC spokesman declined to tell the Wall Street Journal which investment firms have received subpoenas.

However, sources familiar with the matter tell the WSJ that the subpoenas are unusually broad – some recipients were asked which person at their firm first heard about the S&P downgrade, when they found out about it and how they found out about it.

Considering the situation in Europe, I wouldn’t be surprised if plenty of innocent companies had large bearish positions in the stock market. But we get the message here: “Don’t bet against the U.S. government or else.” Do you think there will be an equivalently serious investigation of a defaulting European country’s debt? I strongly doubt it.

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

Vedran Vuk
Casey Daily Dispatch Editor