What Inflation Could Look Like in 2014


Dear Readers,

I'm dashing through Amsterdam today, on my way back out into the field to look for more opportunities. Many mining stocks have been soundly thrashed over the last week or two – that's great news for those new to the sector. Anyone thinking they are too late to get on the gold train before it leaves the station should get off the fence and take action.

In order to "buy low and sell high" you have to be a contrarian; you have to buy when an underlying trend is clear and going strong, but others are selling – exactly what's happening now. Jeff Clark's article below on the coming inflation is a good reminder of exactly why that trend remains our friend.

There are risks, of course – some of our miners are facing possible force majeure in Mali – but that's why there are also enormous gains possible in our field. Successful speculators have to be actively involved in their portfolios – they have to be informed, willing to take calculated risks, and to stand by their own judgment when prices fluctuate.

We'll do our best in this publication to help those new to the field learn, and those experienced to gather the critical information they need.

Sincerely,

Louis James


Senior Metals Investment Strategist
Casey Research


Rock & Stock StatsLastOne Month AgoOne Year Ago
Gold1,645.571,780.341,437.03
Silver31.5435.3237.34
Copper3.773.804.42
Oil105.35107.83105.25
Gold Producers (GDX)49.7657.2660.28
Gold Junior Stocks (GDXJ)24.6529.5739.37
Silver Stocks (SIL)22.6725.3928.15
TSX (Toronto Stock Exchange)12,361.8112,731.2814,087.18
TSX Venture1,540.751,694.132,318.01


What Inflation Could Look Like in 2014

By Jeff Clark, Senior Precious Metals Analyst

Most economists, especially those from the mainstream, will tell you that inflation is widely expected to remain benign for the foreseeable future. And for those who think it could climb higher, it's usually because they think it should be higher. History has a message for them: be careful what you wish for.

There are plenty of examples in history showing that once inflation takes hold, it can quickly spiral out of control. That's the danger we face now. Here's what I mean…

A recent article about sudden inflation by Amity Shlaes, a senior fellow of economic history at the Council on Foreign Relations and a best-selling author, provides some examples from the past century of US inflation that was at first subdued but then abruptly rocketed to alarming levels. I put them into a chart so you could see how quickly inflation rose within just two years from "benign" levels. I then made some projections for us today based on these historical examples.

(Click on image to enlarge)

According to Shlaes, US inflation was 1% in 1915 (based on an earlier version of the CPI-U). Over just two years, it hit 17%. As she states, it happened because the Treasury "spent like crazy on the war, creating money to pay for it…"

Given the fact that our spending and money-printing is now out of control, I projected what our inflation rate would be if we matched the inflation rates of these time periods. The first striped bar to the right represents what the CPI would register if we matched the 1915-1917 rise. Inflation would hit 19% by 2014. (Yes, the CPI has been tinkered with many times, but this is at least what "unofficial" or "authentic" inflation would register.)

In 1945, the official inflation rate was 2%. It accelerated to 14% in 24 months. If we matched this percent rise, we'd hit 15% by 2014 (middle striped bar)..

And the example that kicked off the greatest bull market in gold and silver, the early 1970s. The CPI stood at 3.2% in 1972, a level close to ours today. It soared to 11% just two years later. Mimicking this rise, the third striped bar shows we'd also be at 11% in 2014. (Shadow Stats says we're already at 10% based on 1980 methodology, so from this level we'd hit 17% in 24 months.)

Could we really have inflation that high within two years? Consider the following:

  • Fox Business reported on March 7 that "wages grew much more quickly at the end of last year than originally estimated…" This is an important data point because most economists believe you can't have higher inflation without rising wages.
  • Commercial and industrial loans have risen 14% year over year, and business and consumer spending are in an uptrend.
  • Home-building permits are at their highest point since October 2008. Existing home sales fell 0.9% last month, but that's after January sales were up 4.6%.
     
  • Jobless claims are coming down, retail sales gained the most in five months, and auto sales were up 16% last month. One report I read stated that we've had 24 consecutive weeks of stronger US data.

If the economy continues to improve and more money is sloshing through the system, it's easy to see how inflation could grab hold. Yet, if you understand Austrian economics, you'll look beyond how the mainstream views inflation and to its root cause: monetary debasement.

  • The US monetary base stands at $2.72 trillion, a 168% increase since October 2008.
  • The national debt in the US has risen by a whopping $4.9 trillion just since Obama took office. It now stands at $15.5 trillion.
  • The US budget deficit this year is projected to be over $1.3 trillion, an obscene amount that exceeds the entire annual budget of just 20 years ago.
  • According to ISI Group, there have been an incredible 122 "stimulative policy initiatives" from central banks around the world over the past seven months.

Remember, in these historical examples, inflation was initially low and therefore off everyone's radar. But government tinkering with the monetary system lit the spark that led to a sudden and rapid rise in inflation. It caught many off guard, just like I suspect it would now. Don't think there are no consequences to our unwise fiscal and monetary course; a potentially ugly tipping point is more likely than not at some point.

Given the abuse most fiat currencies are undergoing around the world today, coupled with obscene amounts of deficit spending, I think gold should be viewed not just as a potential moneymaker but as protection against the rabid inflation that will invariably damage our economy and dilute our pocketbooks. If you think deflation is next, I'll accept that argument – for a time – if you accept mine, that the Fed would almost certainly panic at another deflationary event and print to the max. This is why we're convinced that inflation, à la currency dilution, is inevitable. (Harry Dent, best-selling author of The Great Crash Ahead, is convinced deflation poses our biggest economic threat, while Currency Wars author James Rickards believes inflation is the real danger. You can hear them debate the issue – and participate as a member of the audience – during the Inflation-Deflation Face-Off program at the upcoming Casey Research Recovery Reality Check Summit.)

To those of you who say gold hasn't always kept up with inflation, don't kid yourself about what it would do in a highly inflationary environment: it would surely climb like it did in the 1970s. And those "productive assets" Warren Buffett prefers over gold? They would have a difficult time raising the prices of their products quickly enough to keep up with a rapidly escalating CPI. Gold may not perfectly track inflation when it's low, but it is precisely a high-inflation environment where it serves one of its core purposes.

You may think high inflation is further away than 2014, but don't dismiss the fact that it can happen suddenly. And keep in mind the possibility that a sudden shift in inflation – especially inflation expectations – could be the spark for a mania in precious metals. I can easily see this being the catalyst that finally pushes the greater public into our sector, causing a paradigm shift that eventually sends it into a bubble.

Either way, I think we're all best served to heed the words of John Paulson, the preeminent hedge fund manager who oversees $14 billion in assets: "By the time inflation becomes evident, gold will probably have moved, which implies that now is the time to build a position."

We agree. As we stated in the February BIG GOLD, if 10% of your total investable assets (i.e., excluding equity in your primary residence) aren't held in various forms of gold and silver, we think your portfolio is at risk. And as Doug Casey reminded us last week, "Anyone who thinks they have any measure of financial security without owning any gold – especially in the post-2008 world – is either ignorant, naïve, foolish, or all three."

This is the time to accumulate, while gold and silver prices are below their peaks. Buy a little every month and store it in a safe place. And for even better bargains, look to the undervalued stocks, which I would argue offer better protection against inflation than most other equity investments since their cash flow will climb commensurate with gold and silver prices. We identified the two best stocks for new money right now in the current issue of BIG GOLD, and you can get the brand-new pick from International Speculator – an African company that has built its first gold mine and is already working on its second.

If we match the inflation rates seen several times in the recent past, what will your savings be worth in a few years? We'll have lots to worry about in a high-inflation climate, but our purchasing power can be protected by owning gold.


Gold and Silver HEADLINES

Military Coup in Mali (Bloomberg)

The West-African nation of Mali saw its longtime president deposed in a military coup last week. Mali is a democratic country and had been ironically described by the New York Times as "one of the least likely candidates for a coup attempt in all of West Africa." The capital of Bamako has been described as "tense but calm," though recent reports now say there has been widespread looting, including the presidential palace. The coup has been widely condemned.

We're continuing to monitor developments there; subscribers can check the portfolio page for updates. We'll note that the coup has nothing to do with mining.

Australia, Canada Are the Least Risky Mining Jurisdictions (Behre Dolbear)

Behre Dolbear Group, a Denver-based mining consulting firm, updated its annual report on political risks in the global mining industry. The survey ranks 25 countries based on seven criteria: economic system; political system; the degree to which social issues affect mining in the country; delays in receiving permits due to bureaucratic and other issues; the degree of corruption; the stability of the country's currency; and the competitiveness of the country's tax policy.

According to the report, Australia, Canada, Chile, Brazil, and Mexico are the top five nations for mining projects. The worst countries for political risk are Russia, Bolivia, the Democratic Republic of Congo, Kazakhstan, and Papua New Guinea. Some countries – Venezuela and Zimbabwe in particular – are completely excluded from the survey because they're so risky, despite significant mineral wealth.

The United States took sixth place in this year's ratings. While gaining high scores in most categories, the country shares last place with Papua New Guinea when it comes to permitting delays. However, there are friendly states that are exceptions to the rule: Nevada, Utah, Kentucky, West Virginia, and Arizona.

The much-discussed mining tax the Australian government recently approved makes us wonder about the criteria for these rankings, but they're food for thought, nonetheless.

Annual Silver Jewelry Sales Survey (Silver Institute)

The Silver Institute published its third annual retail jeweler survey. Key findings include:

  • The vast majority of jewelry retailers (77%) said their silver jewelry sales increased in 2011
  • About half of the respondents (48%) said their silver jewelry sales increased between 11% and 25%, and 27% saw an increase greater than 25%
  • Silver jewelry represented, on average, 37% of retailer unit volume and 27% of dollar volume
  • 53% of retailers rated silver jewelry as having provided the best margin during the 2011 holiday season
  • 93% said they are optimistic that the current silver boom will continue for the next several years

The report concludes by pointing out that the growing interest for silver jewelry might be the result of historically high prices for gold, making silver jewelry more attractive for budget-sensitive consumers.

Indian Jewelers Say Five-day Strike Cost $700 Million (Mineweb)

More than one hundred thousand bullion dealers across India closed their shops for five days in protest against duty hike on gold imports. Traders estimate that the loss in revenue may have already exceeded $700 million in sales.

On Thursday, March 22, the shops re-opened to welcome Indian customers who would be purchasing for the country's new-year celebration.

Demand for physical gold plunged in the fourth quarter of 2011, due to a high inflation rate and a weak rupee, making it less affordable for the majority of Indians.


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

International Speculator

  • One of our companies has operations in Mali, where, per above, a military coup is under way. See our extended comment on the situation and what to do next.
  • A silver producer from our portfolio has been transferred to BIG GOLD. Follow the company's most recent press releases, including the latest quarterly earnings announcement, on its BIG GOLD portfolio page.

BIG GOLD

  • One of our royalty companies posted a loss last quarter, yet we think this is a buying opportunity. Find out why.
Mar 26, 2012