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Dear Reader,

Unless he is deep in some jungle on the other side of the world, Doug and I speak pretty much every day, and often several times a day. On those occasions when the topic of the gold price comes up, especially if it has taken a hit, Doug’s comments run along the lines of, “I’m not worried in the slightest,” or “Anyone smart enough to be buying at these levels is going to get rich.”

As I have indicated in this space on multiple occasions in recent weeks, I, too, am unconcerned. Not just because I trust my favorite partner and resident guru, but also because I have made it my personal mission to study the structural integrity of the U.S. economy and the role that gold is playing, and is likely to play, in the months and years just ahead.

This is no small task and I would be the last person to tell you I have it all figured out; I don’t think anyone does. But I am fortunate to have a daily flow of valuable input from Doug and our world-class research team, including Louis James, Dave Forest, Bud Conrad and Terry Coxon.

As I write, Doug and the team are finishing up the lead article for the October 1 edition of the International Speculator, entitled “Can the Fed Save the U.S. Economy?”. After having reviewed the latest draft, I think it is one of the most important and timely lead articles presented this year. In it, you’ll read compelling and even irrefutable arguments that we are on the verge of a major change in markets, a change that will greatly favor gold.

The October 1 edition also includes the quarterly updates on all of Doug’s favorite stocks with a focus on those companies that have shown through the drills to be sitting on a serious deposit which, so far, is largely unappreciated by the nervous market.

I mention this because if you are not yet a subscriber to the International Speculator, I would strongly urge you to take us up on our 30-day free trial offer, if for no other reason than to get your hands on the October 1 edition. If you don’t like it, just cancel within 30 days for a full refund. Fair?

(The October 1 edition of the International Speculator is sufficiently important that I’d like to let all of the subscribers to all our various services have a look at it… but that would be unfair to paying subscribers.)

The Chinese Trillion

One of the most interesting and even historic phenomena of our age is the fact that the Chinese holdings of U.S. dollars will, over the next few weeks, rise above the one-trillion-dollar mark.

As commented on before, we are, as a nation, benumbed by the large numbers we hear reported on a daily basis, usually in association with the latest government expenditures. But even the jaded masses should sit up and take notice of the Chinese Trillion.

The Chinese certainly are.

Chinese Vice President Zeng Qinghong made his first-ever public comments on the reserves recently, quoted in the Financial Times as saying China “would take comprehensive measures to avoid further growth” in the reserves. In that same article, the FT reported an exchange between Chinese Central Bank Governor Zhou Xiaochuan and a reporter on the topic of the reserves, in which Zhou stated unequivocally that “we have enough.”

Which, in our view, is just a polite way of saying “we have too much.”

Yet the pipeline between China’s factories and the American consumer remains wide open (if for no other reason that our own manufacturing has been largely dismantled). Which means the billions of dollars will continue to flow in the direction of China… only compounding the problem of the Chinese bureaucrats in charge of managing that massive mountain of money. Bureaucrats who will lose serious face (and maybe worse) if they lose any significant amount of the trillion.

What are the Chinese to do?

For one thing, they are apparently unwilling to bend much on the topic of loosening exchange rate controls, as—according to the FT–the Chinese leadership is convinced it was the large revaluation of the yen that caused Japan’s 15-year recession. Trying to avoid a similar outcome is not just a matter of academic interest for the Chinese regime; a serious recession could literally trigger a revolution and drive a final stake through the heart of the Mao legacy. Of course, that would mean an abrupt termination of the political careers of the entrenched and universally corrupt members of the communist ruling party.

So, when you hear U.S. politicos posturing about the need for a flexible currency regime in China, be sure you are viewing the situation not from the perspective of U.S. politicians pandering for votes, or the potential voters from the U.S. rust belt concerned about outsourcing… but from the perspective of the deeply concerned Chinese leadership, individuals tenuously hanging on to the reins of power only because of the spectacular growth that country has had. Growth that has occurred largely because of the deliberate and ultimately unsustainable policy of their government to import U.S. inflation over the last decade.

This is a topic for a much larger article, but we are still left wondering what the Chinese will do with their trillion. In the only semi-public document on that topic—a shopping list, really—the top of the list is dominated by raw materials, a fact confirmed by the Chinese prime minister. No surprise, therefore, in the near daily reports of Chinese showing up here, there and everywhere with boatloads of cash and promises of more, to lock up all manner of minerals, copper in Zambia and oil from Venezuela being just two of dozens of examples.

According to the FT, the Chinese government is “also considering whether to buy gold, considered as a hedge against the potential of a falling U.S. dollar.”

Draw your own conclusions.

How Long Will The Gold Bull Market Last?

Yesterday, I sent out a sincere and, in reviewing it, fairly passionate email urging you to make it to our Casey Research/Explorers’ League Vancouver Gold & Silver Stock Summit.

In the event you didn’t get that email (or didn’t read it), I did want to make sure you at least saw the following chart on the historic life cycle of gold. As you’ll see, the shortest gold bull market in modern U.S. history lasted 10 years, with the longest lasting 25 years.

Why is it that these cycles last as long as they do? Like a slow-moving supertanker, the economy never turns on a dime but rather is slowly beset by an accumulation of bad government policy, the run-up of debt, various and sundry misallocations of capital and so on… until finally, the direction of things change. And once set in a new direction, it takes a similar, drawn-out series of events and corrections to turn the ship of the economy again.

In the case of gold, the simplified answer has to do with the role that gold has played as money over the millennia. When the cycle turns in such a way that the faith and confidence of the citizenry is shaken (see the period in and around the Great Depression), people turn to gold.

I am increasingly convinced that we will see a concerted attempt by the powers that be (governments, central banks, Wall Street institutions) to break gold’s back before it can decisively rise above the psychologically important $600 level. But I am even more convinced that they will fail, because they set the stage for that failure themselves, and set it all too well.

Even so, the next time gold takes a hit—come back to this chart and take comfort. Given the structural imbalances in the global economy, the odds are far better than average that we are not in the shortest gold bull market in modern history, but maybe one of the longest.

The Walls We Build

[WARNING: For those of you who don’t like it when I delve into politics, now is the time to stop reading.]

Doug and I have been close friends for going on twenty years now. As friends tend to be friends because they share world views—and we do—there are times when even I shake my head at some of Doug’s more “forward thinking” projections.

For example, since 9/11 (and even before) he has believed that the U.S. is on the slippery slope to becoming a police state. When he first expressed these thoughts, I couldn’t help but think that Doug had it wrong, because that could never happen here in the land of the free and the home of the brave.

But my, how a few years have changed that view. Among a long list of things I never, ever thought I’d see as long as I lived, we now have domestic no-warrant spying, unreported prisons and institutionalized torture. Local governments grab attractive private property to build office parks and Congress passes a bill calling for spending billions on a fence across the southern border. Please understand, I am not a “liberal” and think the Democrats are just as bad as the Republicans. Maybe even worse, because at least the republicans seem to actually believe in something—misguided and maybe criminal that something may be. The Democrats, by contrast, seem only to believe in trying to retake power, and so vote in favor of war and against constitutionally “guaranteed” freedoms strictly for political expediency and so that they won’t be considered soft on terrorists. Pathetic.

Doug has long said that one of the signs that the move towards a totalitarian state is beginning in earnest will be when the government begins to exert controls on the flow of money out of the country.

I am sad to say that we are now seeing an attempt at just that. Last Friday Western Union announced in a filing related to its pending IPO, that it had been served a warrant by the Attorney General of Arizona prohibiting the company from sending funds amounting to $500 or more into the state of Sonora, Mexico. Instead, the money must first be placed into a government-controlled “detention account” where it will be held until the authorities have spoken to both the sender and the recipient and are satisfied that they are not engaged in any illegal activities. Interestingly, even though the warrant is from the AG of Arizona, it covers any funds sent from 29 states.

The seizures of funds exceeding the limit of $500 has already begun.

Of course, the AG has just winged Western Union’s IPO and destroyed it’s lucrative remittance business—for which I doubt they’ll be wiring an apology anytime soon—but what they have really done is to set a precedent, using that tired excuse that they are trying to combat drugs and other smuggling operations. If this precedent stands, then it opens a whole new chapter in the refutation of the principles that made this country the bastion—and the beacon—of freedom for the 100 years or so after its founding.

Another 9/11 type incident (which the government’s own intelligence agencies now confirm is all the more likely thanks to the emotions stirred up by the Iraq war) will push us past the tipping point.

Looking for intelligent and legal ways to diversify globally is making more sense every day. On that front, if you want to join the list of people we are keeping updated on real estate in Argentina, drop us an email at [email protected]

Speaking of Argentina

While it is not hard duty, it is required duty, and so I am off to Argentina again next week, returning on October 9 in time for the final preparations for the Vancouver Summit, October 15 & 16.

Speaking of the Summit…

This just in…

Explorers' League Honoree Ross Beaty, Chairman of Pan American Silver, has had a long-standing prior commitment preventing him from making it back to Vancouver until late in the day on October 16, the last day of the Summit. Too late to participate as a speaker.

However, he has just graciously offered to travel straight from the airport to personally host a six-course sit-down dinner at the Victoria Chinese restaurant for any of the Summit registrants staying over in Vancouver that night. Ross' review of the restaurant is that it is “informal, sloppy but good, noisy and should be fun.”
The restaurant is near the Westin Bayshore (Summit headquarters) and the dinner will last from 7:00 pm to about 9:00 pm. Doug will be there, as will I, and any of the other speakers we can round up. If you are registered for the Summit, you'll be receiving a separate email that asks you, for planning purposes, to RSVP for the event. You'll then receive a ticket when you register at the Summit.

If you are not yet registered for the Summit, time is running out. Learn more and register today.

Hope to see you there.

Sincerely,

David Galland