Dear Reader,

Welcome to the weekend edition of Casey’s Daily Dispatch, a compilation of our favorite stories from the week for the time-stressed readers.

Of course, if you want to read all of the Daily Dispatches from the week, you may do so in the archives at CaseyResearch.com.

I Smell a VAT

In past editions of this service, I’ve advocated tuning your personal radar to pick up early indications that the government is taking an active interest in gold. Especially when that interest revolves around terrorists or tax evaders, two popular bogeymen these days.

It was, therefore, with more than a little concern that I read an article in our Ed Steer’s Gold & Silver Daily service yesterday on an item slid into the legislation authorizing the government takeover of health care. Here’s a snip from Ed’s letter…

    The good folks over at numismaster.com report that, starting on January 1st in 2012, U.S. federal law will require coin and bullion dealers to report to the Internal Revenue Service all gold and silver coin purchases and sales greater than $600. The report is written by David L. Ganz and is headlined “$600 Sale? Get Ready for Tax Form.”  Apparently this little jewel was an add-on to the national health care legislation. But there’s a new bill being introduced by Rep. Dan Lungren (H.R. 5141), which has gathered over 80 members of Congress as co-sponsors to repeal this section… so we’ll see how that turns out. The link to the story is here.

According to the author of the article Ed references, the rationale for the new regulations is that the taxocrats believe that people conducting off-book trading in precious metals are chiseling them out of $17 billion in lost revenue annually. The net result, however, will be that the government will soon know who’s got the gold.

Can’t a person just keep their gold purchases under $600? With the price of gold heading higher, that will increasingly require buying smaller-denomination bullion coins – which typically carry a higher premium. More importantly, a large body of case law gives the government license to charge people for “structuring” – i.e., taking active measures to get around a particular law. Thus, two $500 gold purchases could be construed as active evasion and carry additional penalties.

Looking to get a better handle on this matter, our own Jeff Clark of Casey’s Gold & Resource Report – a must-have at just $39 a year  – contacted Andy Schectman of the coin dealer Miles Franklin to get his quick take. Here it is… 

    It would be a logistical nightmare. But it’s not just gold – it’s any and all companies that would be required to file a 1099 for anything over $600. A lot of people feel it won’t pass, and I have a hard time believing it will, too. It would really kill the small businessman; they’d spend their entire time filling out paperwork for the government. Hopefully it won’t pass. Think about this: it might be a precursor to a VAT tax, so they can figure out where the money is coming from. Everyone should contact their congressman and encourage them to not let this pass.

Continuing our mini-investigation, we reached out to another well-informed source who confirmed that the new regs would apply to all businesses. For example, under the new regime a plumber who does work for you in excess of the $600 threshold would be required to file a 1099 report. 

That being the case, I have to think that Andy’s got it right – the implications of this move transcend just the precious metals. Rather, this is a deliberate step in the direction of implementing a VAT – once the government has everyone reporting essentially every transaction, taking the next step is a snap.

So what are the odds that the movement to have this clause repealed will succeed? In my opinion, given the sheer quantity of new regulations embedded in the new health care legislation, most of which is equally wrong-headed, the administration and its allies are certain to take a hard line about making changes. Simply, once the hard shell of the legislation is cracked open, great swaths of the thing will be subject to being picked apart.

I ran that opinion by Don Grove, our man in Washington, and he responded by sending across the following…

    David,

    This from Tom Coburn this morning:

      Jun 08 2010

      Drs. Coburn and Barrasso: Congress Should Repeal and Replace Health Law That Will Harm Seniors and Our Future

      (WASHINGTON, D.C.) – Physicians and U.S. Senators Tom Coburn (R-OK) and John Barrasso (R-WY) released the following statement today regarding how the new health law will affect Americans.     

      “The American people have rejected this plan because they see it not as a series of milestones, but millstones that will trap seniors and future generations in failing programs before drowning them in debt. No amount of rebate checks will plug Medicare’s $38 trillion funding gap. In fact, this new law will undermine Medicare even further by cutting benefits rather than waste, increasing premiums, reducing access and rationing care,” Dr. Coburn said.

      “If the President really wants to cut waste, fraud and abuse in America’s healthcare system, he’ll cancel his misleading multi-million-dollar PR campaign about the new health care law. Instead of selling a bad law, the White House should focus on actually fixing America’s health care system. The fact is that the President’s new law cuts Medicare, raises costs, kills jobs and burdens seniors’ grandchildren with more debt. We need to repeal this new law and replace it with health care reform that helps all Americans,” Dr. Barrasso said.  

    I will admit that I did not search the massive tome that is Obamacare for “gold,” “silver,” or “coins,” and even if I had, I would have missed this provision that impacts such transactions. When the government is this desperate to squeeze money out of citizens, it is already well into diminishing returns. This level of busy work does not come without a crippling price. People will rebel and simply not comply. They can’t. It’s impractical. Many will probably not even know they are not complying. 

    Congressman Steve King (R-IA) introduced legislation, a discharge petition, that will completely repeal Obamacare. The brief text of his bill H.R. 4972 “To repeal the Patient Protection and Affordable Care Act” follows:

      Effective as of the enactment of the Patient Protection and Affordable Care Act, such Act is repealed, and the provisions of law amended or repealed by such Act are restored or revived as if such Act had not been enacted.

    King said:

      “Today the work begins to repeal Obamacare and restore the principles of liberty that made America a great nation. The American people must take their country back by methodically eliminating every vestige of creeping socialism, including socialized medicine. The Pelosi Democrats will pay a price for their overreach. This fight is far from over.”

    H.R.4972 has 95 cosponsors. Rep. Tom Price (R-GA) is circulating a request that members support King’s discharge petition. 74 representatives have signed Price’s request. If a majority sign, Pelosi will have to bring King’s bill to the floor for an up-or-down vote. 218 signatures are needed to force a vote on the House floor.

    20 senators have cosponsored Senator Jim DeMint’s S. 3152,  the Obamacare repeal bill in the Senate. DeMint’s bill is even shorter: “The Patient Protection and Affordable Care Act, and the amendments made by that Act, are repealed.” DeMint said: “I will continue to work to gain support for full repeal in the Senate, so that together with the efforts in the House, we can save health care freedom for all Americans. ObamaCare is built on a flawed foundation of government-run healthcare and it must be overturned in its entirety.”

    These efforts for complete repeal would of course encompass Section 9006 of Obamacare imposing the $600 1099s. Meanwhile, Dan Lungren’s (R-CA) HR 5141, the Small Business Paperwork Mandate Elimination Act, has 91 cosponsors and attacks the problem with surgical precision. His bill reads: “Section 9006 of the Patient Protection and Affordable Care Act, and the amendments made thereby, are hereby repealed; and the Internal Revenue Code of 1986 shall be applied as if such section, and amendments, had never been enacted.”

    I would not write off repeal. As Nancy Pelosi said, “We have to pass the [health care] bill so that you can find out what is in it.” Now it’s passed, and we’re finding out more by the day and don’t like what we find. 

    Regards, Don

Clearly, the battle is joined – but, unlike Don, I hold out little hope that any of these attempts at repeal will succeed. The Democrats know this is their Maginot Line. If Obamacare unwinds, then their already dismal chances of holding power after the November elections become dark, indeed. Further, the latest polls show that the health care legislation is gaining popularity and is now approaching a majority. As time passes and November approaches, I think the legislation’s popularity will grow as more and more people decide they want something approaching “free” medical, a want that becomes ever more acute as the economy struggles and unemployment continues to rise.

In other words, deep political trenches are being dug on the battlefield of nationalized health care – and the Democrats hold the political high ground, making a retreat unlikely.

Back on the specific issue of setting the stage for a VAT, even politicians on the Republicrat side of the aisle are talking about the need for a national sales tax. Get ready for it, it’s coming.

Meanwhile, if you are a physical-gold investor in these United States and would like to prepare… a few thoughts:

  1. Use dips in the gold price to top off your portfolio before the 2012 implementation date.

  2. Document your purchases so that, should you ever be dragged in to explain the source of funds you used to buy your gold in a subsequent sale, once the regulation is in place, you have a ready answer.

  3. Consider opening a safe deposit box at a reputable Canadian bank, then make occasional gold buying/storage trips up north. I suspect that the availability of Canadian safe deposit boxes will become scarce well before 2012 rolls around.

Since we’re on the topic of gold, I wanted to share an interesting snippet from an interview with James Rickards that ran on the Institutional Risk Analytics site.

Time to Board the Gold Stocks Train?

By Jeff Clark, Casey’s Gold & Resource Report

One of the big hints that gold stocks will be ready for take-off is when they stop following the broader markets and strictly track gold, particularly if the market falls and gold stocks don’t. We now have data showing this has just occurred.

From April 2009 to April 2010, gold stocks mirrored the S&P. The two markets held hands as often as high school sweethearts; there was very little separation between them. While it wasn’t always a daily connection, any weekly and especially monthly chart showed them moving in tandem.

Until now.

For the quarterly period of April through June, gold stocks advanced 11%, tracking gold’s gain of 10.7%. The S&P, however, lost 14.1%.

We haven’t seen this level of separation between gold stocks and the general stock market since the first quarter of 2009. This demonstrates obvious strength in our sector, and is precisely the kind of action that can signal we’re getting closer to our precious metals investments starting a major leg up.

In the big picture, this data should be considered a short-term indicator. However, it’s a refreshing reminder that at some point, it won’t matter what the broader markets are doing. In the precious metals bull market of the 1970s, the Barron’s Gold Mining Index soared 652%, while the S&P gained only 22% for the entire decade. This means that if you’re bearish on the economy, you don’t have to be bearish on gold stocks.

Whether this is the beginning of permanent separation or not, the following chart tells us the stock market, in relation to gold, is going one direction.

At gold’s bottom in April 2001, the Dow/Gold ratio (DJIA divided by gold price) was 41.2. It now stands at 7.9 (as of July 2).

When gold peaked in January 1980, the Dow/Gold ratio reached “one,” meaning they were both selling for about the same price. To hit that same ratio today, gold will have to go higher and the Dow simultaneously lower. The fundamental reasons gold will rise are far from over, and a second leg down in the broader markets seems almost locked in at this point. 

In this context, Doug Casey’s call for a $5,000 gold price doesn’t seem so farfetched. It also coincides with his call for a Greater Depression, an environment not exactly suited for higher stock prices. $5,000 gold = 5,000 Dow.

Where do you think they’ll meet – three? Eight?

This has obvious implications for your investments. If you’re investing for the big picture, you first want to think twice about any conventional stock investment. You might even consider a short position on one of the indices, something without a time limit, such as an inverse ETF.

Second, you should plan on higher gold prices. While pullbacks are inevitable, it does mean that even if you don’t own gold yet, it’s not too late. In fact, any excuse you have now for not buying gold will seem shallow and meaningless when the dollar begins cratering and so does your standard of living.

Third, don’t shy away from gold stocks. Yes, they’re still stocks and thus vulnerable, and we’re not sure the separation is here to stay, but selling your core holdings would be, in my opinion, a mistake. One of these days gold stocks won’t wait around for you to jump back in. And you could find yourself chasing them, a tactical error for the investor looking to maximize profit from what we believe will be a once-in-a-generation bull market.

In fact, if you had followed only this strategy since the precious metals bull market began in April 2001, you’d be up 375% in your gold holdings and up 707% in your gold stocks. An investment in the S&P, meanwhile, would’ve returned you exactly zero.

It’s our opinion this trend will continue. Gold stocks could very well get cheaper in the short term, handing us an excellent buying opportunity. But in the big picture, they’re destined for much higher levels.

My advice is to make sure you’re on the right side of this trend.

What’s a good price on gold, silver, and precious metals stocks? We’ve charted every summer pullback in prices since the bull market began in 2001, giving us target zones for every asset in our portfolio. Our Summer Buying Guide is an invaluable resource for identifying a good bargain in our industry. And you can access it right now, for $39 per year, with a risk-free 3-month trial. Click here for more.

The Trouble with TIPS

By Alex Daley, Senior Editor, Casey’s Extraordinary Technology

There continues to be a raging battle out there amongst economists, investors, and pundits alike whether our economic woes and free-spending politicians are creating an environment of short-term deflation or inflation. But even amongst the most hardcore of the deflationary camp, there seems to be an emerging consensus that long term this government debt bubble has to pop one way or another – so rising prices are coming over the long run.

And, increasingly, we see calls for buying traditional inflationary hedges: commodities, gold in particular, and TIPS (Treasury Inflation-Protected Securities). We’ve been over the logic for the former many times before, and it is very good advice in these times, but it is the call for buying the latter that has us largely scratching our heads. 

TIPS are Treasuries that pay basically the same currently low rates of interest that other Treasuries do, only the principal of the note is adjusted each year based on the measured rate of inflation. The theory goes that as inflation rises, so does the value of your investment and the associated interest payment. Like so many other things, what sounds great in theory is likely to fall flat in reality. If inflation really does start to increase in a noticeable way, there are many reasons to believe these investments won’t fare much better than any other debt in the same period, and will certainly underperform peers like gold.

To start, those calling for inflation are doing so predominantly because of fears that the U.S. dollar is now set up for a significant decline in value, and that the Treasury will be unable to meet the government’s obligations without printing vast quantities of money – devaluing all the existing currency in the process. So, at exactly the time when the Treasury is facing down the barrel of the gun, struggling to meet obligations, at that very moment, its obligations will increase.

Not only are all these government debts ballooning at a time when the most questions about the reliability of these debts are being raised – which is sort of like lending money to an addict in the middle of a bender, just because he promises he’ll pay you back double tomorrow – the value the principal is tied to is one of the most infamously dubious statistics of all, the Consumer Price Index (CPI). If the CPI doesn’t reflect what’s going on in reality, by happenstance or by manipulation, you could find the value of your inflation hedge rising much more slowly than the value of the dollar is falling. And there is plenty of reason to suspect that will be the case.

Much has been made of the CPI’s deficiencies. While the government has claimed a 3.3% inflation rate over the past decade, college tuition rose 8%, healthcare jumped nearly 10% annually, and even the cost of food jumped 7% per year from 2002 to 2009. The widely respected Shadow Government Statistics website has done extensive research on the subject and suggests that the real rate of inflation, which is reflected in your dollars’ declining purchasing power, has been vastly different than the CPI for most of the last 30 years:

And that is during a period that many consider to have had only modest inflation compared to what’s to come. Will the rest of the economy follow down the same path as gasoline prices, with 15%+ yearly increases? If so, the 3% increase in principal each year will quickly prove to be barely better than nothing at all. With the yields on interest for the securities also near all-time lows, with a ten-year TIPS coupon rate just above 1% – and any yields you receive further reduced by taxes – you could easily find yourself still losing money to inflation.

The government uses statistical sleight of hand to keep the number low because a low CPI both reduces its obligations (China alone owns over $900 billion in TIPS at last count, so incrementing that principal by a few extra percent means big increases in debt) and keeps consumer confidence and media sentiment high.

Contrast that instead with gold, another popular inflation hedge. The value of an ounce of gold, whether you have it physically or held in trust for you in an account or certificate, is not determined by some government agency. Its price is reflective of supply and demand, and with massive global markets trading the yellow metal almost 24/7, the price quickly adjusts when a currency is in trouble and buying power drops.  No artificial statistical creation determines the price, just the market. 

TIPS may have been a good idea in the early 1980s, when they provided double-digit coupon rates on top of the inflation-pegged principal and inflation rates seemed to be coming back under control after a number of bad years. And they did considerably better over the last decade than any stock market index (but not nearly as well as gold). The problems were still there, but at least the return had a fighting chance to beat real inflation. However, today the prospects of pegging our fortunes on an accurate CPI and a 1% interest rate sound far less appealing.

If your idea of protection against a devalued currency as a result of government debt is buying some more government debt that will rise according to a statistic that the debtor has every incentive in the world to manipulate to their own benefit, then go right ahead and buy TIPS.

Otherwise, we’d recommend sticking to gold and commodities. Friends don’t let friends invest in TIPS.

And Now for Some Good News!

There is a global horse race going on right now. Among the leading contenders are:

Totalitarianism, Freedom, Regulation, Taxation, Individualism, Collectivism, Militarism, and Revolution.

While the betting is now solidly against Freedom and Individualism, it is too early to rule them out of the race. Not with a growing number of people starting to understand the challenges faced by horses weighed down by the deadweight of the governments on their back.  

In what is a rare and hopeful sign out of the UK – a nation that is notable for a societal script that has, until just recently, run parallel to that of George Orwell’s 1984 – the new government has launched a well-conceived web site that invites the public to nominate old laws that should be struck from the book. 

Here’s an excerpt on the topic from an article that ran on the Metro.co.uk site…

    Parliament invites public to nominate ‘old laws’ they wish to abolish 

    The public is being invited to nominate laws they want to abolish in what deputy prime minister Nick Clegg called a move away from ‘the old way of doing things’.

    At the Your Freedom website people can propose ways to get rid of pointless regulation and red tape.

    Mr Clegg said: ‘We are turning things on their head. The traditional way of doing things is that government tells people what to do. We are saying, ‘‘Tell us what you don’t want us to do’’.’

    Letting dormant laws accumulate on the statute book sent out the ‘wrong signal’ and there was plenty of ‘old stuff’ that should be dropped, he told BBC Breakfast. The last government had gone too far in invading people’s privacy, he added.

    ‘Did that make us safer? No, it didn’t necessarily make us safer, so we’ve got to get the balance right.’ From today any minister who proposes a new regulation will also have to propose an existing law to be scrapped in a ‘one in, one out rule’.

    The website is at: www.hmg.gov.uk/yourfreedom

Be sure to check out the site. If the Brits keep this up – they have also recently announced some pretty decent cuts to government spending – and if the people don’t chase the new team out of office or take to the streets in mass protests, then the British pound, and stocks, might make a good contrarian bet. Given the poor state that government’s finances are now in, I’m not sure I’d make that bet anytime real soon – but it’s worth watching.

And that, dear reader, is that for this week. Until next week, thank you for reading and for subscribing to a Casey Research service!

David Galland
Managing Director
Casey Research