Gold Speaks Up

Dear Readers,

We've been making the round of metals in recent editions – it's back to gold this week, with Jeff Clark going directly "to the source."

One thing Jeff's article really makes clear is that we all need a Plan B in case the global economy goes off the rails, as we here at Casey Research fear it may. To that end, I encourage you to attend our upcoming Plan B Summit in Weston, Florida, April 27-29. I'll be there with the metals team, our energy team, technology team, and the rest of our key analysts, as well as a great faculty of some of the world's leading independent economic thinkers.

If you're not yet fully prepared for what's coming, this event could save your financial life.

Sincerely,

Louis James

Senior Metals Investment Strategist
Casey Research

Gold Speaks Up

By Jeff Clark, Senior Precious Metals Analyst

Have you ever had any doubts about gold? Does it sometimes feel like it should be performing better? Are you concerned about its volatility? Do you worry about how it might perform in the future? Have you ever wondered about its true purchasing power? Maybe nervous about a big drop in price again? I decided to go directly to the source to address these concerns: Gold himself. He put his arm around me and asked me to tell you a few things…

I hear that you've had some worries about me. I understand. Your world is a very uncertain place right now. And when it comes to money, it looks as though your leaders don't understand some basic monetary principles, making things even more unsettling.

But I want you to know that the problems you're experiencing are actually nothing new. I've seen these monetary, fiscal, and economic difficulties many times before. And I can tell you this: you're safe with me. That's a bold proclamation, but I've provided monetary protection numerous times throughout history – too many to count, in fact. I've served all kinds of people over the centuries, from kings and counts to serfs and servants.

To put your mind at ease, let's review my core characteristics, along with some history, to show how I can protect you against the monetary danger that's likely to worsen in your near future. We'll also take a look at your peculiar set of circumstances to see how I can be of service. By the time we're done, I think you'll feel much better about my ability to help your portfolio withstand whatever is thrown its way.

Enduring Characteristics

Let's start with the basics. I have some characteristics that no other matter on Earth has…

I cannot be:

• Printed (ask a miner how long it takes to find me and dig me up)
• Counterfeited (you can try, but a scale will catch it every time)
• Inflated (I can't be reproduced)

I cannot be destroyed by;

• Fire (it takes heat at least 1945.4° F. to melt me)
• Water (I don't rust or tarnish)
• Time (my coins remain recognizable after a thousand years)

I don't need:

• Feeding (like cattle)
• Fertilizer (like corn)
• Maintenance (like printing presses)

I have no:

• Time limit (most metal is still in existence)
• Counterparty risk (remember MF Global?)
• Shelf life (I never expire)

As a metal, I am uniquely:

• Malleable (I spread without cracking)
• Ductile (I stretch without breaking)
• Beautiful (just ask an Indian bride)

As money, I am:

• Liquid (easily convertible to cash)
• Portable (you can conveniently hold $50,000 in one hand)
• Divisible (you can use me in tiny fractions)
• Consistent (I am the same in any quantity, at any place)
• Private (no one has to know you own me)

I am internationally accepted, last for thousands of years, and probably most important, you can't make any more of me.

"Gold Is Money"

You've heard that statement before – but do you know what it really means? Money is a medium of exchange and a store of value. Almost anything can be used as money, but obviously some things work better than others. It's hard to exchange things people don't want’ and other things don't store value well. Over thousands of years, I have emerged as the best form of money (along with silver).

The paper dollars in your wallet are technically a currency, not real money. In other words, they are a government substitute for money. The man you call Aristotle best defined the primary reasons why I'm considered money: a good form of money must be durable, divisible, consistent, convenient, and have value in and of itself.

• It must be durable because you can't have your money disintegrating in your pocket or bank. That's why you don't use wheat; it can rot or be eaten by insects.

• It must be divisible, which is why you don't use diamonds or artwork; they can't be split into pieces without destroying the value of the whole.

• The lack of consistency is why you can't use real estate. One piece is always different from another piece.

• It must be convenient, which is why you don't use other metals like lead. The coins would have to be too big to handle easily to be of sufficient value.

• It must have value in and of itself. This is why you shouldn't use paper as money.

• And one more thing: I can't be created out of thin air. Not even the kings and emperors who clipped and diluted gold coins used paper as money, so Aristotle didn't include this in his list, but it's vital.

So you see, there's no superstition here. It's simply common sense. I am particularly good for use as money, just as aluminum is good for making aircraft, steel is good for the structures of buildings, uranium is good for fueling nuclear power plants, and paper is good for making books. If you try to make airplanes out of lead or money out of paper, you're in for a crash.

And by the way, don't fret about those who say I'm not as good an asset as an income-producing vehicle. They misunderstand my role. I'm not trying to be a stock, for example. My function is as money and a store of value, so the proper comparison is to your dollars, or what you call Treasury Bills (of similar nominal value). And here is where I excel and serve my purpose: since 1913, the US dollar has lost 96% of its purchasing power. I have lost none.

Remember, I am the only financial asset that is not simultaneously someone else's liability. I don't require the backing of any bank or government.

The History Lesson

Because I am eons old, I've observed something throughout history that you may not have thought much about: government fiat currencies are a relatively new invention, and none has endured. Eventually, they have all failed. Me? I've never been defaulted on or worth zero. Remember this the next time you have any doubts about my long-term worth.

Another of my roles is to protect your purchasing power. Here are a few examples of how my purchasing power has endured:

• During the time of Christ, an ounce of me purchased a Roman citizen his toga (suit), a leather belt, and a pair of sandals. Today, one ounce will still buy a good suit, a leather belt, and a pair of shoes.

• In 400 BC, during the reign of King Nebuchadnezzar, some scholars reported that an ounce of me bought 350 loaves of bread. Today, an ounce still buys about 350 loaves ($1,700 divided by 350 = $4.85/loaf).

• In 1979, my average price was $306.68. This bought an average-priced full-size bed. Thirty-three years later, $1,700 would still buy you a nice full-size bed (and then some).

You can rest assured that over time, I will hold my value. And when you near the end of your life, you can pass me on to your loved ones, knowing full well they will have something that cannot be devalued, debased, or destroyed.

What Color Is Your Money?

Like you, I'm concerned about the current state of fiscal and monetary affairs. It seems your government leaders have boxed themselves into a corner. They've incurred too much debt and are spending too much money. It's important that you understand some lessons from history about this kind of behavior so that you're certain of what I can do for you.

The common denominators that lead to the downfall of every fiat currency are the two big Ds: debts and deficits. With that in mind, consider the following:

• Morgan Stanley reported that there is "no historical precedent" for an economy that exceeds a 250% debt-to-GDP ratio without experiencing some sort of financial crisis or high inflation. US total debt currently exceeds GDP by roughly 400%.

• Detailed studies of government debt levels over the past 100 years show that debts have never been repaid (in original currency units) when they exceed 80% of GDP. US government debt will exceed 100% of GDP this year.

• Investment legend Marc Faber reports that once a country's payments on debt exceed 30% of tax revenue, the currency is "done for." By some estimates, the US will hit that ratio this year.

• Peter Bernholz, a leading expert on hyperinflation, states unequivocally that "hyperinflation is caused by government budget deficits." Next year's US budget deficit is projected to be $1.3 trillion.

The solution many of your leaders are pursuing is to create more currency units. Here's an updated picture of the increase in the US monetary base vs. my rise in price since 2008, when your problems starting surfacing.

(Click on image to enlarge)

The monetary base has grown 205.8%, while my price is up 65.8%. This alone implies that my price in dollars is likely to climb much higher.

This is also the reason why I'm not in a bubble, as some have tried to claim. It is your central banks and bond markets that are in a bubble. The fact that my price is rising is a warning that what your leaders are doing is unsustainable and potentially dangerous to your currency.

Think about this: the US has debt backed by debt, based on debt, dependent on debt, and leveraged with debt. You can, for example, buy a bond (i.e., lend money) on margin (i.e., with borrowed money). This is not a sound way to run financial markets.

Meanwhile, the warning bells continue to sound regarding Europe's debt crisis. In just the past 30 days:

• Moody's cautioned that it may cut the triple-A status of France, Austria, and the UK; and it downgraded six other European nations including Italy, Spain, and Portugal.

• Standard & Poor's cut the triple-A status of France and Austria, while Italy, Spain, Portugal, Cyprus, Malta, Slovakia, and Slovenia were downgraded.

• Fitch downgraded Belgium, Cyprus, Italy, Slovenia, and Spain, and stated there was a 50% chance of further cuts in the next two years.

• Standard & Poor's downgraded 34 of Italy's 37 banks.

• Moody's warned just last week that it may cut the credit ratings of 17 global financial institutions and 114 European ones.

The European crisis is far from over; and the path of least resistance for politicians is to create more currency units. This action can and will have clear and direct consequences: currencies will devalue, and inflation – perhaps hyperinflation – will result.

Once again, I encourage you to use me to protect some of your wealth.

How Much Is Enough?

Given the state of your monetary system, you should accumulate me (and silver) on a regular basis. Just buy some every month and put it in a safe place. After what I've witnessed throughout history, and based on the current path your government leaders insist on pursuing, I suggest using me as your savings vehicle instead of putting dollars in a bank.

If you don't own enough of me when these fiscal troubles really accelerate, I fear you will regret it. I've warned many in the past about the dilution of nations' currencies, and those who didn't heed my warnings experienced severe financial pain. Excuses won't pay the mortgage nor feed the family when the effects of currency debasement hit your home and pocketbook.

Make sure you own enough of me to make a difference to your portfolio. This means having more than a couple coins or a few shares of GLD, the latter of which is only a proxy for my price.

How do you know if you own enough? Ask yourself:

• If inflation returns, or even hyperinflation hits…
• If the economy is flat…
• If uncertainty and fear continue around the globe…
• If stock markets languish…
• If the amount of spending from the world's governments proves futile…
• If government interference in the economy continues to increase…
• If the value of the US dollar takes a major fall…
• If the world enters a recession or depression…
• If you wonder if you have enough "safe" money…

 … would you feel that you own enough of me?

Buy a sufficient amount so that as your currency continues to lose value, your portfolio won't. If you do your part, I promise that I'll do mine.

Your monetary friend,

Gold

P.S. Your friends at BIG GOLD have arranged a limited-time offer for you to buy up to $1,000 worth of me and my cousin silver for no premium. It's a great way to jump-start your bullion savings program. Learn more about BIG GOLD.

Gold and Silver HEADLINES

Gold Demand Trends 2011 (World Gold Council)

2011 was the eleventh consecutive year of the current gold bull market. Annual demand increased 0.4% and reached 130.8 million troy ounces (4,067.1 tonnes), with investment demand – physical bar and coin purchases in particular – being the key driver.

The leading role in the gold-market dynamics belongs to China, though India still led all comers in terms of absolute values of gold consumption. Full-year jewelry and investment demand in China reached 24.7 million ounces (768 tonnes) – a 20% increase. However, India is still the biggest gold consumer with 30 million ounces (933.4 tonnes) of annual demand. Both countries will likely continue playing the leading roles in the gold market in 2012, with China likely becoming the top gold-consuming country.

World mine production increased 4% year-on-year to reach an all-time high, but this was offset by a 2% decrease in scrap supply and an enormous increase in central bank purchases of 14.1 million ounces (439.7 tonnes), the biggest amount since 1964. WGC analysts conclude, "The continued decline in recycled gold in the face of continuously rising prices is a bullish development."

We agree.

India's Gold (FOFOA)

There are 1.2 billion people in India; 10 million weddings occur there each year. Half of the gold bought in India is jewelry for weddings. A family without gold is seen as an "incomplete family." The World Gold Council sees an opportunity here. Its representative in India created a program to help the poor buy gold. Indians are typically very conservative and save around 30% of their income – a lot of it in gold.

"When Indians buy gold, they don't think they're spending money. In their minds, that is a savings. That purchase of gold is going to your savings account. It's not an expense, it's an investment."

In fact, "Gold is more than just a store of value in India. It is a visible status symbol of such cultural importance that demand for it apparently exceeds net-production (savings). To put this in perspective on an aggregated basis, India is importing around $34 billion in physical gold while running a $150 billion overall trade deficit. And the trade deficit is projected to reach maybe $160B this year."

This Week in International Speculator and BIG GOLD – Key Updates for Subscribers

International Speculator

• One of our "bottom feeder" companies has made a valuable addition to its exploration team. What do we think?

• A silver producer we like announced the sale of one of its non-core properties – a deal we like a lot – and delivered very good new drill intercepts. Get the details.

BIG GOLD

It's earnings season…

• Of the five largest gold producers in the world, we only recommend one. Check out its quarterly results and our reaction.

• This producer's stock rose 7.6% when it released earnings last week, so is it off to the races now?

• This company had some bad news late last year, handing it a poor quarter. Should we sell, hold, or buy?