Welcome to the Room - May 11, 2007
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Last Updated May 4, 2007
Gold, that temperamental temptress, has had me in a dither these past couple of weeks. First, on April 20, she topped the $691 mark, leading me to dare to think she was going to forego Shopping Season this year and breeze right through $700 (or, I guess, more importantly, the $696 level that many technical types now believe indicates more joy to come).
But then, on April 26, she changed her mind, leaving me standing at the door, champagne and balloons in hand, and began a retreat that led to the precipice of $669.50 on May 2.
Just as I was in the act of straightening my tie and assuming the old stiff upper lip required to rally on through the dark days of further weakness sure to follow, something happened: gold knocked coyly on the door and with a sweet kiss on the cheek suggested we head off to the dance after all.
Speaking less metaphorically, because it never does to fall in love with your investments, this week gold has shown serious support, not just edging away from the brink but, as the chart below so clearly shows, positively bounding away.
Some of that support came from an unexpected source… none other than the oft-vilified Barrick Gold, which announced on May 1 it had self-inflicted a $557 million loss in the first quarter of the year by biting the bullet on a good deal of its forward hedges.
Importantly, as indicated in the price action in Barrick’s share price over the period in question (shown in the chart just below), rather than punish Barrick for setting a match to a tad over half a billion dollars worth of shareholder cash, investors cheered the company on by sending its shares up smartly.
This bit of corporate maneuvering is particularly interesting, for two reasons.
First, it shows that the Barrick management team sees gold going a lot higher from here. Given the career and corporate risks of getting it wrong (again), you can assume they took more than a casual peak over the horizon to come to their conclusion.
Second, that their shares rallied so strongly on the news indicates that the larger players with the financial weight required to pop a $25B company by 8% in short order are fully on board with the notion that gold is going higher, and so are the shares in Barrick.
(Ed. Note: We’ll be reevaluating Barrick in the upcoming edition of our new BIG GOLD
service, the next edition of which will be out on or about the 22nd of this month).
Okay, About That Love Thing...
Having confessed to some modicum of emotional attachment to Ms. Gold, I feel compelled to share a quick peek behind closed doors here at Casey Research, LLC.
While we, like many of you I am sure, are eagerly anticipating the prospect of gold decisively taking out the $700 level – just as we eagerly anticipated it taking out the $500 and $600 levels previously -- rest assured that such emotionality is based solely on the longer-term fundamental view held here at Casey Research, the view that helps control our investment strategy.
On that front, you might find it comforting that hardly a week goes by that we don’t challenge our assumptions about the monetary crisis we see coming. Typically we do so by picking apart one or another of the "all is well" arguments found in mainstream financial publications, looking for an angle that we might have overlooked.
So far, none of those arguments have carried water, or more specifically, provided a credible rationale for how the U.S. and, by extension, the world is going to avoid a monetary mess.
For those of you new to the family, I might sum up our corporate view as follows...
There is now serious pressure on the U.S. economy thanks to fantastical levels of unfettered government spending… spending that is, thanks to politically untouchable entitlement programs such as Medicare and Social Security, also uncontrollable. Toss into the mix a global perma-war, raging trade deficits and a deflating bubble in that dearest of all assets – home sweet home – and the pressure grows to the point where it begins to force the Fed to make a move. Since the Fed’s last rate hike on June 29, 2006, it has been like a deer caught in the headlights, but events will soon cause that to change.
And the odds greatly favor the change will involve moving interest rates down to stave off a devastating recession. But the rub is that lowering rates will be seen, correctly, by many as the starting gun for the Inflaty 500
, a race that will feature the foreign holders of over $6 trillion of our U.S. dollars trying to unload those dollars before they collapse in value.
Of course, that is just the briefest of overviews, but no matter how we look at it, we see a monetary crisis of a size and scope to push gold to a whole new level. Sure, it may take time before we say goodbye to $700, and make no mistake, it won’t happen without a fight by those with a vested interest in seeing gold stumble (just this week we had more news that central bank selling has picked up again lately). But $700 will fall... it is now all but inevitable.
Even so, just because we can’t see it doesn’t mean we can’t be blindsided by some "white knight" who appears from an unexpected quarter to save the day for the U.S. dollar. I have seen far too many analysts fall in love with a position, only to later find out that their love was misguided.
So, here’s what I’d like to ask you to do. Send us your best-reasoned, fact-supported argument as to why we are NOT going to have a monetary crisis. Send them to email@example.com.
We’ll present some of the best counter-arguments and tell you why we think they are wrong… or maybe even why they may be right. (At which point we may start looking to adjust our portfolio recommendations).
But until we can see something we simply cannot see at this point, we’ll continue scouring the planet for the world’s very best junior resource plays... the plays that, over the past four years, have reliably proven to offer the biggest returns.
I recently had an opportunity to witness for myself the quiet gloom now gathering over the U.S. economy.
It was occasioned by the expiration of my car lease, forcing me to wedge myself away from the comforts of my cozy New England hometown and travel to the nearest mid-sized city (Burlington, Vermont) and to the street where car dealers cluster.
I wasn’t looking for it at the time, I was just looking for a replacement car, but my attention was quickly distracted by the swollen inventory of cars, used and new, that occupy every possible inch of parking space at the dealers... all the dealers.
The one that not only attracted my attention but also my pity was the local Hummer dealer. I couldn’t help but feel a tinge of sympathy for the owner of that dealership, a wrong-footed businessman who arrives at work each morning to the unchanging sight of a long line of manly gas guzzlers that nobody, but nobody, wants to buy in these enviro-sensitive days.
Forget the fact that debt-laden U.S. consumers can’t afford the expensive shipping container-looking things, but it would take a special kind of misanthrope to want to put up with the daily shame of rumbling along in a car that for some sizable majority of the planet’s population is the very symbol... the prototype... the poster child... and the icon of a wasteful capitalist pig intent on trodding on the environment out of sheer spite and malice toward all of mankind (gee, makes a guy almost want to buy one...).
Methinks the Hummer, like, say, the Iguanodon or Brachiosaurus before it, will soon join the ranks of the extinct... and the used versions, quietly eroded by their daily "keying" (the spontaneous act of expressing displeasure at a vehicle’s owner by dredging a car key through the paint of the offender’s vehicle) will end up being used for day trips by resorts on the Mexican Riviera.
But the experience of seeing all these cars gathering dust, and the Hummers were not the exception but the rule, gave rise to the thought, "I wonder how reliable automobile sales – or the lack thereof – are as an economic indicator? Are they a leading indicator, of the lagging variety, or nothing much at all?"
And that line of questioning led me, as it so often does, to pick up the phone to my lifeline on such matters... the estimable Albert "Bud" Conrad, chief economist and resident wonk here at Casey Research. Despite arranging his papers for a trip to Dubai where he’ll be giving the keynote address at the Gold and Precious Metals Investment World Conference
, Bud kindly paused to shed light on the topic.
Here’s his report...
Autos and the Economy:
For the month of April, U.S. auto makers reported sales were down 7.6% from what they were a year ago. Among the worst performers were Ford, which suffered a 12.9% decline, GM (9.6%), and Nissan (18%) over the year before.
Which brings me to your question of how important are falling auto sales as an economic indicator?
To get to the answer, I start by looking at Gross Domestic Product (GDP), measured in real terms, as that offers the most comprehensive measure of how a country is doing economically. Then, to get a sense of how well auto sales track GDP, I produced a chart, below, that compares the growth in real GDP to the number of auto sales over time. As you can see, they are quite closely correlated.
The latest official tabulation of auto sales in the U.S. hasn’t yet incorporated the latest announcement from the car companies, but sales when next reported will be on the low side of what is shown in the chart. The conclusion is that auto sales are one more indicator that the economy is slowing.
With consumers coming under increasing pressure, including from rising gas prices, we can expect auto sales to remain sluggish, especially for the Hummer dealer you mentioned – so sluggish that last month they closed down the one in my neighborhood.
But the worst for the gas guzzlers is still ahead. Updating the chart from last week showing gasoline inventories, we see that the precipitous decline continues, as it has for the past 3 months... a period when we would normally see inventories building ahead of the summer driving season. As a result, gas at the pump is almost certainly headed higher, maybe over $3.50 a gallon and soon... perhaps even before the sting has gone out of your Memorial Day sunburn.
Back to Me
I have been accused by some of being easily distracted. For proof of that statement, below I present a photo of my wife’s car, which I had borrowed for the day and which, being a good husband, I stopped to fill with gas. During the fill-up, I wandered into the station to grab a cup of coffee, then climbed back into the car and headed to the office... which is where a passerby took the photo below.
In other proof of how distracted I can be, until Bud sent along the chart showing gas supplies, I hadn’t really noticed what I was paying at the pumps... but I now note that gasoline is again trading hands for over $3.00 a gallon in these parts. I suspect, therefore, that $3.50 might be on the conservative side of the forecasts of where prices are heading this summer.
There are few commodities where rising prices are more quickly and urgently felt than with gasoline. Costlier fill-ups not only cause direct financial pain to commuters but quickly translate into higher costs for all those many items that need to be shipped hither and thither. Adding yet more pressure on the consumers that keep the economy afloat.
Just another straw on the camel’s back... I am really not sure how many more the poor creature can take.
Before jumping to topics unrelated to cars, I thought I would mention that GM dealers have just begun offering loan subsidies to buyers with poor credit ratings.
"We’re obviously trying to get some additional sales at the end of the month," a spokesman from GM was quoted as saying.
So, let me get this straight. Despite GM just having reported a drop in profits of 90% last quarter, a loss that is the direct result of "diversifying" into subprime home loans, they are now pushing into a similar line of business for their automobiles, welcoming any and all to drive off with a spanking new car, whether one can actually afford to continue making the payments or not?
Years ago, I used to have a dog by the name of Napoleon that also couldn’t be taught anything... including how to stop at the edge of a busy street.
Now This Is Rich!
Earlier this week we had the news that U.S. "lawmakers" were simply aghast that their counterparts in the Iraqi parliament would dare to take a two-month break from the daily routine of standing up on chairs yelling at each other, ducking mortar attacks, being kidnapped and so on.
According to the AP, Rep. Chris Shays (R-Conn) was heard to sputter..."If they go off on vacation for two months while our troops fight — that would be the outrage of outrages."
Joining in the chorus of condemnation were esteemed members from the other side of the aisle, including Sen. Ben Nelson (D-Neb) who chimed in with "I certainly hope they're not going to take any sort of recess when the question is whether they're going to make any progress."
A quick logic check is in order.
We invade on mistaken premises (oops!), destroy the Iraq economy, set up a democracy complete with a vote that assures a Shi’ite government takes power – effectively reestablishing (with Iran) Greater Persia in the process – then we insist that the new government somehow remake the ruins into something that looks more like a nice suburb in California, even though our own considerable efforts have failed to make a dent in that direction.
And U.S. officialdom is then surprised, nay outraged, that the Iraq legislature would dare take a couple of months off, rather than continue the ongoing charade that they are going to actually create a secular government with justice and freedom for all?
So, what is the U.S. going to do about it? Tie the Iraqis to their desks? Or maybe even threaten to pull up stakes and bring the U.S. troops home?
If the worst that can happen is that the U.S. pulls out, finally getting out of the way of the Shi’ites and letting them get on with the bloody payback and economic looting that is inevitable whether we stay or go, then I suspect the Shi’ite-dominated Iraqi parliament just might chance their holidays after all.
Oh, and it’s kind of fun to note that in 2006 the U.S. senate worked only 132 days of the year, down from 211 in 1995. Meanwhile, down the hall, members of the House of Representatives barely broke a sweat, putting in just 97 days with their shoulders at the wheel, down from 168 in 1995... a 42% decrease.
Don’t get me wrong, as far as I’m concerned, I like the trend… but given the pile of serious challenges confronting the nation, challenges which are an order of magnitude more important in the long run than is Iraq... you’d think the elected officialdom might at least go through the motions of showing up at work a bit more reliably, if only to rest their heels on the desk.
Notes from the "Daily Pfennig"
Chris Gaffney, vice president of EverBank World Markets and, together with my old friend Chuck Butler, alternate author of the "Daily Pfennig," recently wrote something I thought worth passing along...
Here in Panama at the Sovereign Society Wealth Symposium, I have heard many a conversation centering around China... What's going to happen there? Will we place further tariffs on their goods, etc.
I've explained to everyone that as far as I am aware... There are currently 3 subcommittees from the U.S. House of Representatives that will hold joint hearings on Wednesday, May 9th, to focus on China... The discussions will center on to what extent not only China's renminbi is undervalued as a result of the government, but also Japan's yen.
They will most likely come to the conclusion that these are "highly manipulated" currencies by each respective government. Now here's where it gets really meaty... The subcommittees, if finding the currencies are manipulated, will then discuss two things... 1. What further tariffs should be placed on their goods coming to the U.S. and... 2. Why the U.S. Gov't, namely the Treasury Dept., has not done more to rectify this situation.
Uh-Oh... That sounds to me like they are greasing the tracks for the protectionism measures that are already in the pipeline! I don't need to tell you, or maybe I do... That currency participants do NOT favor protectionism measures! I would take these past couple of days, and any future ones we have before we get to May 9th, and use them as buying opportunities for the currencies, because if this all plays out, the dollar is going to be taken to the woodshed, and not just for a swat! Ok... Dollar, go on out into the field and select the switch you wish to be beaten with!
U.S. Treasury Secretary Henry Paulson has been making headlines lately preparing for his talks with Chinese economic leaders in Washington in three weeks. Yesterday Paulson called the low returns Chinese earn on internal savings "perverse." He feels these low rates of return are one of the main reasons for the lack of consumption in China, which has helped fuel their huge trade surplus. Paulson would like to see the Chinese leaders encourage consumption by their people. China's savers are earning about 2.5% on their roughly $2 trillion in assets, even as the economy advances. That means savers must save more of their income, rather than spend, to meet their investment goals. China has a 50% savings rate, which limits domestic spending and leaves the nation reliant on exports. Paulson believes the biggest driver of the record U.S. trade deficit with China is due to the "structure" of China's economy.
I have got to disagree with Secretary Paulson on this one. Yes, I would love to see China's middle class become better consumers as even a small tick up in consumption would increase worldwide GDP. But don't blame the trade gap on frugal Chinese consumers, the reason for the trade gap is right here in the good old "borrow and spend" United States. Instead of preaching to other countries to be more like us, we should take a look at our own savings patterns. I don't have the figures handy this morning, but I have got to believe the U.S. has the world's worst savings rate. Deficit spending is rampant, from the government right on down to the consumer. We continue to flood the world markets with U.S. IOU's, driving down the future value of our nation. I think Paulson should look to educate consumers right here in the U.S. about savings rather than try and promote our bad habits onto others.
Another story caught my eye this morning and illustrates just how screwed up we are here in the U.S. The Federal Reserve is holding hearings on the subprime mortgage mess and will likely set up a fund to "bail out" subprime borrowers. Instead of letting these borrowers suffer the consequences of their poor choices, Congress has encouraged the Fed to let them off the hook. What kind of example does this give other borrowers? Our country has become so screwed up and dependent on deficit spending that we can't let consumers suffer the consequences of borrowing too much. Why, if consumers were actually made to pay all of their debts back they may have to save a little more and spend less; and what would that do to our economy? Maybe it's because I was born and raised in the Midwest, but this leverage-to-the-max attitude of today's consumers just doesn't make sense and in my opinion will contribute to a dramatic fall in the value of our US$.
(For more on EverBank and their innovative currency and gold products, click here
Chicago - Seats (and Time) Are Running Out
The seats are filling fast for our Chicago Gold & Silver Share Summit featuring the Explorers’ League. It’s May 30 & 31, at the wonderful Drake Hotel.
If you are still on the fence about attending, it’s time to jump down and sign up. For the latest schedule and registration information, click here
I hope to see you there.
Sorry for going on so long this week. There is so much to talk about, but that is enough.
As always, thank you very much for reading, and for being a subscriber. If you have thoughts on today’s edition, feel free to drop me a note at firstname.lastname@example.org.
Until next week...