Friday, November 18, 2011

Why $100 Oil Will Tank The Economy

by Josh Saunders, Great Pacific Trading Company

Oil continues to mirror the run up in the stock market. The financial cheerleaders continue to talk the markets higher all the while failing to mention that oil has snuck back to nearly $100 a barrel. To make matters worse, Brent Crude is trading at $112 a barrel. As America enters the holiday season the pressure is going to be felt not only at the pump, but will also impact the kiddo’s present pile under the Christmas tree.

Driving to get grandma in Omaha may be a little expensive. Some families may choose to have Grandma attend the Christmas morning gift opening via Skype. Instead of paying those high gas prices and airline fuel surcharges, grandma can see the excitement on her grand kids faces on the webcam. Nothing really says family closeness and Merry Christmas like a cyber hug. At least it will be easier to hide the disappointment of receiving another pair of hand knitted socks instead of a new iPhone 4S.

The fundamentals for a bull case in oil continue to show an up trend. As the world population continues to grow, more citizens are moving up the social ladder and using items that require oil or its by-products. In China and India alone the increase in the net population will be nearly 20 million people this year. As these two economies continue to grow into affluence they will buy and use more and more oil.

Last year the people of China purchased 13.8 million cars. Between India and China they add approximately 95,000 new cars a day to the worlds roads. This is an ever increasing amount of oil consuming vehicles battling for a finite supply of oil. The world pumps 88 million barrels a day and some would say this figure has peaked.

crude oil price chart December 2012

Simple supply and demand would dictate that a finite supply with rapidly increasing demand should only increase the price of oil. While we may see some trading volatility, the trend for oil is going to be up. The only headline that could stop this rising trend would be some magic source of renewable energy and a way to effectively store it.

Well, GM has sold 5,000 Chevy Volts, but I think you get idea. As the holidays roll around, high oil prices will put a clamp on shoppers wallets. For an economy that derives nearly 70% of its GDP from consumer spending, this does not bode well going forward. Rising oil prices will slash any hope of the consumer lifting the stagnate economy.

There could potential be a small bump in holiday sales, but it will come only with a jump in consumer credit. We are talking about black Friday and cyber Monday deals here!

Fellow commodity junkie and personal friend Josh Saunders is VP of Northern California Operations at Great Pacific Wealth Management.

Twitter- @saundezj


Tuesday, November 15, 2011

Bullish News for Corn Futures Heading into 2012

The bumper US corn crop of 2011 has turned into a disappointment, leaving global corn stockpiles at a three-year low.  Courtesy of Bloomberg via The Daily Crux:
The U.S. is reaping its smallest corn harvest in three years after a drought damaged what was a record crop as recently as July, driving annual prices to an all-time high and curbing an expansion in global food supplies.

The government will forecast production of 314.7 million metric tons tomorrow, 27.4 million tons less than four months ago, the average estimate of 30 analysts surveyed by Bloomberg showed. The cut is equal to output in Argentina, the second-biggest exporter. The U.S. Department of Agriculture already expected a third annual drop in global corn stockpiles and the first in soybean inventories in three years, offset by an expansion in wheat reserves to the largest in a decade.

Corn, used mostly to make livestock feed and ethanol, is the only one of eight members of the Standard & Poor's GSCI Agriculture Index to gain this year.
Corn prices tanked in September, but have since stabilized on these supply concerns:

corn futures chart november 2011
Corn futures have recovered from a rough September, as support again held around the 580 mark. (Source:

The futures markets are pricing in a modest increase in corn prices through next July (remember the old saying that corn always rallies by July 4th if it's going to rally at all).  But check out the lack of action at the long end of the futures curve!

corn long dated futures prices


2014 corn is a very interesting call option on Chinese consumption.  There have been reports that the Chinese are quite concerned about the availability of corn over the next five years (see: Corn Supply an Ongoing Concern for China).

We'll keep an eye on the corn market moving forward.  Futures are not a buy-and-hold asset class, especially the grains - I prefer to look for breakouts to the upside, especially those with favorable supply/demand setups (as we have here).

Sunday, August 21, 2011

Why the Fed's Out of Options - Thanks to Crude, Food, and You

The markets presented quite the twist on Thursday, when the much anticipated relief rally got whacked in the face.  Despite the hysterics and fear, though, US stocks did not break through their previous near term lows.  If I were a betting/trading man (ha) - I may be tempted to take a short term flyer on the long side:

S&P 500 price chart september 2011
The S&P 500 appears to have some support around 1120 - for now. (Source:

Investors who rushed to get long a couple of weeks ago - even if they had timed the bottom successfully - were early, if they held their positions longer than 3 days.

Where have we seen this movie before?  How about the "flash crash" from the spring of 2010.  At the time, it was touted as a tremendous buying opportunity, thanks to some insane computers.  In reality, those "freak lows" were not only tested, but exceeded, within the next few months:

S&P 500 flash crash price chart
May "flash crash" buying opp?  There was no hurry to pile back in - a lower low was on the way. (Source: Google Finance)

With Jackson Hole just around the corner, Bernanke is in quite the pickle...he's out of bullets!  He can't reduce rates, because they are already at zero (and pledged to be there through 2013!).  Contrary Investing favorite Jon Lederer pointed out to me last night (over a few beers of course) the stark contrast from the early 1980's recession, when the fed has 15 whole points at their disposal.

QE has been tried - twice - and if not backfired, then at least failed.  While WTI crude has backed off, Brent (the goo that powers the rest of the world) is still over $100:

brent crude price chart September 2011
After all the carnage we've seen in the markets lately, Brent Crude still sits above $100. (Source:

The most disconcerting charts, though - especially to leaders and policy makers - should be the prices of food.  If QE2 did anything, it sure lit a fuse under the price of food - check out the rocket shots put in my corn and soybeans:

corn price chart since QE2

soybean prices since QE2
Corn, 'Beans have been rip roaring to higher prices since Crazy Ben starting printing a second time. (Source:

There's not much room for yet higher prices here, before we see some serious social unrest.  To paraphrase DailyWealth's Brian Hunt - people will put up with a lot of crap, but once they are faced with high food prices, they will take to the streets.

Exhibit 3 why QE3 would be a challenging call - the dollar.  I had thought that a return to these deflationary conditions would trigger a corresponding rally in the dollar - thus far, I've thought wrong:
US dollar price chart September 2011
Although the whole world seems to be short the dollar, it's not acting too well, given the deflationary carnage around us right now. (Source:

Finally your parting moment of zen - the gold chart.  It's rising for all the right reasons, I currencies are getting flushed down their respective sovereign toilets, there is a madman running the Federal Reserve, etc.  Still - the parabolic move on this chart is a tough one to buy into:

gold price chart parabolic move bubble
Gold gets parabolic. (Source:

The short term is setup for some potentially gnarly action.  The only thing I can think to do is to remain focused on our longer term strategies:
This piece was originally published on our sister site, The Contrary Investing Report.

Saturday, August 06, 2011

The (Second) Best Jim Rogers Interview of the Year

Of course I'm biased - by vote for #2 of the year is a lengthy Rogers interview with Frank Curzio, which is excellent, thanks to the length and depth that Curzio allows for Rogers.  Here's the link.

You can hear that Jim is quite cautious right now - citing very little enthusiasm for anything, except for North Korea, agriculture, and his trusty exercise bike.

This WSJ video is more entertaining and insightful, as Jim gets pretty worked up at the know-nothing girl who appears to be doing her best to infuriate him:

And I had the opportunity to sit down with Jim Rogers this April while in Singapore - here's my writeup of our discussion.

Recommended related viewing: Check out Porter Stansberry's End of America video

Why the Norwegian Krone is Set to Rally as a Safe Haven Currency

Why is the Norwegian krone the forgotten safe haven?

Big hat tip to Dr. Evil, who sent over this idea, pointing out that while investors are flocking to gold and the Swiss franc as safe havens, the Norwegian krone is not getting much love from European currency traders:
Norweigian Krone price chart year to date versus euro dollar swiss franc
The NOK, while up against the dollar YTD, has lagged the CHF, especially of late...and is only even with the EUR.
(Source: Google Finance)
One of our favorite currency analysts, Chuck Butler, concurs with Dr. Evil - last Monday, he wrote:
The Norwegian Krone slumped in early morning trading after the home grown terrorist attacks. Apparently the same sick person was responsible for both the bombing and shooting rampage which rocked the northern European nation. The stories of the survivors of the shooting rampage were chilling, and my thoughts and prayers certainly go out to all of those affected.

The Norwegian krone has long been a favorite of the desk, and I would look at any sell-off as an excellent buying opportunity. These attacks will not have any lasting impact on the government or economy of Norway, both of which are very strong and stable. Norway has excellent fundamentals backing its currency, and should be seen as another ‘safe haven’ in the volatile global markets.
Source: The Daily Pfennig

The Norges Bank currently has rates at 2.25%, and there are expectations that there will be more rate hikes later in the year, and into the future.

Norges Bank rate projections
Projections for the key policy rate (Source: Norges Bank).
The NOK sure looks like an interesting currency, given Norway's massive oil reserves, their government's responsible finances, and longer term demographic trends that look pretty favorable...especially by European standards.

Without an advanced trading account, the best way for an armchair investor to get exposure to the Norwegian Krone is to open an account with EverBank (as there are no ETFs or futures contracts available, at least that I was able to find, at this time).

Again, hat tip to Dr. Evil for important contributions to this piece.

GMO's Jeremy Grantham Newsletter: Serious Resource Shortages Coming

In his latest GMO Quarterly Newsletter, Jeremy Grantham (eloquently, as always) continued to channel his "inner Malthus" to deliver grave warnings on resource limitations that he anticipates humanity will face with increasing severity and urgency as the 21st century rolls on.  You may remember that Grantham's Q1 newsletter focused on what he called a "paradigm shift" in commodity prices, due to a 200-year hydrocarbon boom winding down.  (See: Jeremy Grantham gets bullish on commodities).

His Q2 letter is a quite a bit darker and more philosophical, too - he's genuinely worried that the planet may not be able to feed everyone soon.
This quarter, I would like to focus on the most dangerous parts of the coming shortages.  I will try to separate those that, for us rich countries, are merely going to slow down the growth rate of our wealth through rising prices, and those that will do not only that, but will actually be a threat to the long-term viability of our species when we reach a population level of 10 billion.  In all cases, poorer countries will be the most threatened.  Situations that will irritate some of us with higher prices will cause others to starve.  Situations that will cause some of us to go hungry will be for others a real disaster, and I believe this, unfortunately, will not be in the dim and distant future.
Investment implications?
The moral however, is clear.  As Jim Rogers likes to say: be a farmer not a banker – the world needs good farmers!  I might add: or become a resource ef?ciency expert and help the world save some of them for our grandchildren.  Farming will be a satisfying and enriching experience if, on a global basis, we rise to the longterm agricultural challenges.
In terms of efficiency, Grantham is especially concerned about the depletion of fertilizers (potash and phosphates) - which will, of course, provide money making opportunities for those with who produce and/or are sitting on reserves of these resources.

You can read Grantham's full Q2 2011 newsletter here.
Potash stock price chart 2011
Eponymous fertilizer play Potash Corp (POT) and its 3-year uptrend. (Source:

Thursday, June 09, 2011

3 Investments to Protect Your Portfolio From Inflation

Whether you think we'll see inflation or deflation in the short term, even the most ardent deflationists will admit that inflation is likely, eventually, once the bad credit outstanding has retired to money heaven.

So when inflation does return - whether it's next year, or longer, what are the best ways to shelter cold hard cash?  Inflation expert Terry Coxon explores here (fellow Harry Browne fans will recognize Terry's name - they did a lot of work together).  Coxon's Open Opportunity IRA is an especially attractive idea, for those of us who want more flexibility from our retirement plans (and/or are worried that the government may eventually try to lock them up in "Patriot bonds"!)

3 Ways to Shelter Your Cash from Inflation

By Terry Coxon, The Casey Report

The high rate of inflation most of us believe is waiting not too far down the road will be an earthquake for investment markets. The likely winners (gold, silver, precious metals stocks) and the likely losers (long-term bonds and most stocks) aren’t too hard to identify. But separating the sheep from the goats is only one element for financial success in an environment of rapidly rising consumer prices.

Higher rates of price inflation will bring greater volatility to all financial markets. The higher you expect inflation and hence gold to go, the more volatility you should expect to see for assets of every type. Even if in fact the dollar is on the road to perdition, there will be detours and backtracking along the way.

Inflation doesn't operate smoothly; it is a disrupter for both the economy and for the political system. From time to time over the next five to ten years, the Federal Reserve will come to see inflation as its most urgent problem. And every time that happens, the Fed will slow the creation of fresh dollars or even put up a big INTERMISSION sign and stop printing altogether for a while.

Such seizures of monetary virtue won’t last long, but while they do last, they will hammer most investment markets, including the market for the yellow stuff and for stocks of companies that produce or look for it. You could be absolutely correct about where the dollar is headed in the long run and still have a scary ride.

2008 was just a preview of the downdrafts you will need to survive. There will be even uglier smash-ups, and you don’t want to be among the hard-money investors who get carried off on a stretcher. To avoid being one of them, you’ll need to include cash as a constant, permanent element of your portfolio. Cash is a courage booster. Having a substantial cash reserve makes it easier to hold on to your other investments when they are getting battered and you are tempted to bail out. And cash gives you the wherewithal to buy on dips – and on the big dumps.

The Twins

Of course, cash will be the asset whose value is shrinking. But the rate at which the purchasing power of your cash declines will depend very much on how you hold it.

Interest rates on money market instruments, such as Treasury bills and large CDs, track the rate of inflation fairly closely. By creating money fast enough, the Federal Reserve can keep rates on money market instruments one or two percentage points below the inflation rate, but not indefinitely. And any such effort to suppress short-term interest rates succeeds at the cost of producing even higher inflation later. Similarly, the Fed can keep money market rates one or two points above the inflation rate for a while, with the likely eventual result of a slowing in inflation. But over long periods, the average yield on money market instruments about matches the average rate of inflation.

Given that money market yields travel the same path as inflation rates, holding cash doesn’t seem to be terribly painful. The loss in purchasing power about gets made up for by the yield. That’s a nice thought – until you think about taxes. Even though the yield is merely replacing the purchasing power being lost, the yield is subject to income tax, unless you do something about it.

Doing nothing about it is, in a subtle way, risky for your portfolio. When price inflation gets to, say, 10% and money market yields are near the same level, if you are in a 40% tax bracket, you’ll be losing purchasing power on your cash at a rate of 4% per year. The situation will get worse as inflation moves higher, and you’ll be tempted to cut back on cash in order to cut back on the leakage. And that will leave you dangerously ill-prepared for the next INTERMISSION sign.

Logically, then, to make holding cash cheap or even free, you need to hold the cash in an environment where the yield is protected from taxes. Let’s look at the possibilities, some of which, you should be warned, may make you say “Yuk.”

Deferred Annuities

A straight annuity is a contract with an insurance company that pays you a certain amount per year for the rest of your life. A deferred annuity begins with an accumulation period, during which the contract earns interest or some other investment return. You can end the accumulation period whenever you want and then either start receiving a lifetime of payments or simply withdraw the contract's accumulated value.

Earnings in a deferred annuity are tax-deferred until they are withdrawn. So if the return on a deferred annuity tracks money market yields, then the real value of the annuity will hold approximately steady, even at high rates of inflation.

Deferred annuities are now an almost forgotten topic. They were, for the first time ever, a very big topic in the high-inflation years of the 1970s and 1980s. The reason was simple – sky-high interest rates. But in more recent experience, interest rates have been so low that the advantage of tax-deferred compounding has hardly been worth the trouble. It's when interest rates are high that tax-deferred compounding brings a big payoff.

When price inflation heats up and puts money market rates on a boil, expect to see ads for deferred annuities on every financial street corner. The right annuity contract will certainly be better than leaving cash in a bank account, but it still won't be the most attractive medium for holding cash through a period of rapid inflation. There are one, or perhaps two, limitations on an annuity's appeal.

The first is that the protection from being taxed on a fictitious return only goes so far. Even though the money inside the annuity may be holding its purchasing power (with interest continuously replacing what is being lost to inflation), eventually you'll cash the annuity in. At that point, all the interest will be taxable. After, say, a decade of high inflation, most of what comes out of the annuity will be accumulated interest – which will be taxable as ordinary income. So you'd have a one-time loss of nearly 40% of your purchasing power, assuming you're in a 40% tax bracket. (I know that sounds awful, but it would be a far better result than paying tax on interest income year by year during a decade of rapid inflation.)

The second limitation is that, so far as I have been able to determine, no insurance company offers a program that would let you switch the value of an annuity between money investments and something related to precious metals. That may change as inflation and the public's interest in gold picks up. But until it does, there would be no tax-efficient way to tap the purchasing power your annuity had been protecting to buy something gold-related during the downdrafts we're trying to prepare for.

Cash Value Life Insurance

As with a deferred annuity, the earnings on a cash value life insurance policy can accumulate and compound free of current tax. But that’s where the similarity ends.

Unlike the earnings on a deferred annuity, the earnings on cash value life insurance can come out of the policy tax free. The tidiest way is for you to die at just the moment that is most convenient for your financial plan. An alternative, if you don’t have such an accommodating attitude, is to borrow the earnings from the policy. You can do so tax free if the policy satisfies the “7-pay” rule: pay for the  policy no more rapidly than with seven equal annual premiums.

Being able to borrow from the policy tax free would allow you to tap its value whenever gold and other hard investments have had a sizeable setback. Convenient. But, depending on your circumstances, that convenience may or may not be available to you for free.

Between the Internal Revenue Code's requirements for a contract to qualify as “life insurance” and the perversely characterized “consumer protection” rules of the various states, it is not possible to buy a life insurance policy in the U.S. that does not have a face value far above the amount you’ve invested in the policy. The difference represents the insurance company’s risk – mortality risk – that you may stop breathing ahead of schedule. The insurance company, of course, will charge for that risk. There are a lot of variables, but think of the charge as amounting to something on the order of 1% per year of the capital you want to wrap inside the policy to protect the return from taxes.

Whether a cash value insurance policy (a 7-pay policy, so that you can borrow tax free) is a good place to shelter cash from the winds of inflation depends in large part on whether paying for mortality risk is or is not a wasted cost for you. If you now have a reason to own term life insurance, you are paying purely for mortality risk. In that case, it would make sense for you to convert to a cash value policy that could be invested in money market instruments as a way to prepare for high inflation. There wouldn’t be any additional mortality cost, and you would get the tax advantages of life insurance.

On the other hand, if you have no use for pure life insurance coverage, using a cash value policy for its tax advantages would require you to become a regular bettor in the actuarial casino, which you probably would not want to do.

Retirement Accounts

If it is available to you, by far the best way to hold cash through an inflationary storm is in an Individual Retirement Account. Without any of the costs that come with a deferred annuity or a life insurance policy, you can invest in T-bills, insured jumbo CDs and other money market instruments and in near-cash assets such as very short-term bonds. You can have a free hand to tap the cash at opportune times to purchase precious metals and precious metal stocks. The whole arrangement is protected from current taxes, and with a Roth IRA the proceeds eventually can come out tax free.

You can do exactly the same with a solo 401(k) plan. And if you have a 401(k) plan that's sponsored by your employer, you may be able to do about the same, depending on the investment options the plan allows.

A retirement plan would be the ideal vehicle, but there is a size constraint. While the size of a deferred annuity or of a cash value life insurance policy is limited only by the size of your checkbook, IRAs are not so easily scalable. However, if you have a traditional IRA and would like to move a chunk of non-IRA money into it, there is a way to effectively do so.

Take a close look at your traditional IRA. How much of it is building tax-deferred wealth foryou? Less than meets the eye.

If you are in, say, a 40% tax bracket, then no matter how large your IRA gets to be, when it comes time to take a distribution, 40% will go to the government. Your ability to postpone that event won't change the nature of it. In effect, the government now owns 40% of your IRA, and you own only 60%. If there is, for the sake of round numbers, $100,000 in your IRA, only $60,000 is working for you.

Fortunately, there is a way to buy out the government's share. It's a Roth conversion. You pay the tax now, so that eventually your withdrawals will be tax free. The result: the assets you own directly decline by $40,000 (the money you spend to pay the tax bill on the conversion); and the amount in the IRA that is working exclusively for you increases by $40,000.

That's a big improvement, because the net effect is to move capital out of a tax-paying environment and into a tax-free environment where all of the earnings get reinvested. To continue the example, the effective size of your IRA increases by two-thirds ($40,000/$60,000). That's two-thirds more money doing the happy work of tax-free compounding for your benefit.

You can do the same with a solo 401(k) – effectively plump it up through a Roth conversion.

The financial logic of a Roth conversion is compelling. The case is even stronger if you first restructure your IRA as an Open Opportunity IRA. The Open Opportunity structure starts out as a big idea – radically greater investment freedom – and then gets bigger.

Instead of being restricted to the menu of investments allowed by your existing IRA custodian, your IRA would own a single asset – a limited liability company that you manage. Then you would roll over the investments from your existing IRA into the new IRA and then into the LLC. As Manager of the LLC, you would have the choice of keeping the existing investments or switching to real estate, gold coins, equipment leasing or almost anything else.

That's the investment freedom. In addition, by designing the LLC appropriately, significant savings on the cost of your Roth conversion may be possible..

You can learn more about the Open Opportunity IRA in "The Year of the Roth," in the June 2010 edition of The Casey Report.

Time to Plan

Deferred annuities, cash value life insurance and retirement plans – these are the ready vehicles for protecting the purchasing power of the cash you need for portfolio safety during times of rapid inflation. They do the job by reinvesting money market yields, which tend strongly to track inflation rates, without loss to current tax.

Of course, the three alternatives aren't exclusive; you can use more than one. Which of them would be best for you depends not just on their characteristics but on your individual circumstances. Now, before CPI inflation starts making double-digit headlines, is a good time to start weighing your choices. Even if you don't like any of the choices, any of them will be better than letting your cash rot.

Contributing Editor Terry Coxon is president of Passport Financial, Inc., and for over 30 years has advised clients on legal ways to internationalize their assets to optimize tax, wealth protection and estate planning goals.

[For a very limited time, you can now profit from the investment advice of both the Casey Research team and 35 big-name experts… like ShadowStats’ John Williams, James G. Rickards, Chris Whalen, Mike Maloney and many others. Get your Double-Dip Crisis Bundle today – for one low price. More info here.]

Sunday, June 05, 2011

2011 Chinese Demand for Gold Overtakes Developed West (Combined!)

Here are some charts on China's demand for gold that'll make your jaw drop.  Courtesy of Frank Holmes, writing for
The World Gold Council (WGC) released its quarterly “Gold Demand Trends” report last week and, as always, it was filled with fascinating data on the strength of the global gold market. Gold demand grew 11 percent to 981.3 tons during the first quarter of 2011, worth $43.7 billion at quarter-end’s price levels.

This isn’t exactly a new phenomenon in China. From 2007 to 2010, investment demand grew at a compounded annual growth rate of 68 percent, according to the CPM Group. The firm forecasted Chinese investment demand to increase 34.7 percent during 2011 but based on this new data, it may need to adjust its forecast.

Song Qing, director of Shanghai-based Lion Fund Management, told Bloomberg news that, “Gold has taken on a new role in China amid concern about inflation…Just imagine the total wealth in China and even a small percentage of that choosing to buy gold. This demand is going to be enormous.”
Full article: Asian Tiger Sinks Teeth Into Gold

And this chart here says it all:
China Demand for Gold 2011 Chart
I was scratching my head, along with my friend here in the US, wondering who the heck was buying all of this gold during its recent run up.  Then I went over to Asia, and saw with my own eyes - the West is not driving this market any longer.  And this chart certainly says it all.

Interestingly, I learned that the same phenomenon has been taking place - to an even more dramatic degree - with rare, Chinese collectibles.  My wife's friend's father is an extremely wealthy Taiwanese businessman.  He's been collecting rare Chinese artifacts for the past 20-30 years.  Now that he's retired, he's starting to sell off some of his collection - and is doing so at astounding multiples of what he paid for the items (100x-1000x in some cases).

Now that the Chinese are minting new millionaires and billionaires, the supply/demand balance for rare historical artifacts is resulting in dramatic price increases.  And the same appears to be happening in gold, which is a trend the middle class can play themselves.

After all, what are they supposed to buy, other than renminbi, to store their wealth?  US dollars?  Euros?

This trend should remain in place, I'd guess, as long as real interest rates remain near zero, or negative, there (in theory real rates are about 1% today - if you believe that inflation is really running at 5%).

Hat tip to The Daily Crux for the tip on this link.

CLSA's Russell Napier on QE2's Failure, and His Outlook on Inflation - Deflation

A Scottish financial historian with an S&P target price of 400?  Be still, our beating hearts!

CLSA's Russell Napier is my new favorite - take a listen to his interview with Financial Sense's Jim Puplava.
He believes that QE2 has failed in terms of reigniting credit growth - at least here in the US.  But we are now exporting inflation to our emerging market creditors.  So if the US turns to a policy of "QE Infinite" there could be significant pushback.

(By the way, I agree 100% with his take on "Deflation in the Old West (US, Europe... and Japan), Inflation in Asia and Emerging Markets" - we're seeing that today).

I also appreciate his take that the US treasury and stock markets are both quite overvalued by any measure, thanks in large part to the Fed's QE events.  I've been arguing that we're still in a secular bear market, and we'd be fine forgetting US stocks until they are sporting P/E's of 8 and yields of 5-6%.

Napier cites the Singapore dollar as a potential "new Swiss franc" - as the Singaporeans have been allowing their currency to rise, to combat the aforementioned forced import of inflation from the West.

Finally he thinks the developed world could slump into a deflationary depression environment, while yields simultaneously rise (a la 1931).  Maximum pain for all!

Again, here's the link to the full interview.

Hat tip JL for sending this along!

Thursday, June 02, 2011

What's Really Happening in Iraq - and Why it Matters to Investors

Soldiering on: Why Our Military Adventures Matter to Investors

By David Galland, The Casey Report

Recently, I read a book titled The Good Soldiers that also serves as an object lesson in the disconnect between what’s going on in Washington D.C. and reality. It was written by David Finkel, a Pulitzer-winning author, and it came to me via a friend who is going through a stage where she feels drawn to books about war, mostly about World War II. Showing flexibility, her interest has expanded to the ongoing conflict in Iraq – the theater of operations that serves as backdrop for The Good Soldiers.

Despite it going solidly against my literary preferences, I dragged the book along during a quick trip to Florida – a spur-of-the-moment thing to attend a golf school (I figured it was either that or get thrown off the local course for energetic exclamations of elaborate expletives resulting from my golf shots constantly flying off in unexpected and unwelcomed directions). Out of courtesy if nothing else, I figured I’d read a few pages of the book before putting it down – and so was surprised when it sucked me in, and kept me in, pretty much until I was finished.

The background story is that the author of the book traveled to Iraq with a battalion of U.S. soldiers sent as part of the “surge,” then lived with them for the 14 months of their deployment. As far as I can tell, he approached his topic with no overt political intentions – rather, he just wanted to document the war as experienced by a battalion operating from a small base in one of the worst corners of Baghdad.

As one might expect, as they departed from the United States for Baghdad, the soldiers and their brigade commander, Col. Ralph Kauzlarich, were full of fight, patriotism, and the confidence that only a chosen people can possess. It was, in their view, a just war and they deeply believed that in no time at all they'd use their superior war-making capabilities – supported by the sure knowledge that they held the moral high ground – to clean the bad guys out of Dodge and get the whole mess straightened out pronto.

Reality, however, turned out to be significantly different, starting with the fact that rather than being welcoming, the population was overtly hostile – so much so that almost every time the soldiers drove off the base (which was part of the daily routine), the locals would try to maim and kill them. And they had considerable success at it.

In addition to trying to kill them, the community’s leaders seemed uninterested in the outreach efforts the colonel was instructed to make, including an initiative to rebuild the sewers and fix the power and water delivery systems in the area around his command. Of course, it didn’t help that it was the blunt-force approach used by the U.S. military in capturing Baghdad that destroyed so much of the infrastructure in the first place. Regardless, all attempts at doing “good works” were stalled and disappointed at every turn, with billions of dollars wasted in the process.

As the book progresses, the author juxtaposes President Bush's and General Petraeus' rosy comments about how well the surge is working with the on-the-ground realities. And those realities are presented as raw and graphic as they are – with the tops of soldiers’ heads being taken off by IEDs, or burning to death in Humvees while friends watch helplessly.

So successful was the military and political leadership in convincing Congress and the media that the surge was a winning strategy that, to this day, its acceptance as a fact has become a meme throughout the body politic. Back on the ground in Iraq, however, the daily grinding down of the front-line forces continues apace.

During the period of time covered in The Good Soldiers, the Iraqi insurgent attacks lightened up only slightly – but only because the ruling mullah in the battalion’s area of operation unilaterally called a cease-fire. The resulting dialing-back of attacks on U.S. forces was immediately pounced upon by the military leadership and the Bush administration as proof that the surge was working.

That that wasn’t the case became clear the day the same mullah called off his cease-fire and hell opened up. One minute the area was relatively quiet – the next, the streets were filled with armed gunmen and snipers, and bombs were going off on what seemed like every corner.

One of the more remarkable aspects of the war, an aspect that largely goes unreported, was just how sophisticated the Iraqi opposition became in their attacks against the occupying forces. Not only did their roadside bombs become murderously powerful – so powerful that they could almost evaporate a fully armored Humvee – but the Iraqis began attacking the U.S. bases using everything from mortars to rockets and even homemade missiles.

The lob bomb, for example, was created out of propane tanks, filled with ball bearings and shrapnel, with a triggering device welded to the nose, and a rocket on the rear. In one instance, two large dump trucks drove near the base; after tilting up their backs to drop their loads, they revealed rails which were then used to guide a barrage of lob bombs, resulting in millions of dollars of damage to the American base.

By the end of the battalion’s stay, the soldiers were mentally and, in many cases, physically ruined. One chapter near the end of the book, which recounted Col. Kauzlarich’s visits to some of his wounded soldiers back in the States – soldiers who suffered truly catastrophic injuries – I had to skip after just a couple of pages. It was just too painful to read.

Lessons from The Good Soldiers

There are a number of important lessons that can be derived from The Good Soldiers, including:
  • The on-the-ground commanders and soldiers being sent into places like Iraq and Afghanistan have only the best of intentions. Though their reasons for joining up may vary, as they head off for war, most believe their leaders wouldn’t deploy them unless there was good reason to do so. Thus when it becomes clear to them just how ill-used they have been – that they have lost friends and limbs for no discernable purpose – it creates a deep sense of disillusionment. The odds of another Timothy McVeigh emerging from the crowd of returning vets are very high.
  • Despite the U.S. government spending tens of millions of dollars a day in Iraq – with the total spent now approaching $1 trillion – the mission has accomplished nothing other than antagonizing the Iraqis whose doors the U.S. troops kick down regularly. When I say “accomplished nothing,” that is actually an overstatement. In fact, other than toppling Saddam, the outcome of the mission has been to create an everlasting antipathy between many Iraqis and the United States, blowing wind into the sails of the most radical elements of Iraqi society. What a mess.
  • The U.S. occupation has turned into a very effective laboratory for the insurgents. At the beginning of the conflict, the resistance fighters were relatively weak – but as time has gone by, the natural ability of humans to adapt and improvise has led to the development of an array of inexpensive but seriously lethal antipersonnel weaponry. That these technologies are now spreading throughout the region can be seen in the recent death of eight U.S. soldiers in Afghanistan, in a single blast.
  • Short of staging a scorched-earth form of warfare – turning these cities into parking lots – the U.S. cannot possibly ever win one of these conflicts. There is no fixed enemy that the U.S. can target with its superior weapons. And it’s unrealistic that the military can hunt down all of the opposition by going door to door.
  • The U.S. political and military leadership is straight out lying to its troops and to the public at large. It is hard to comprehend why, but I dare you to read The Good Soldiers and come away with any other conclusion. Maybe they continue the tragic farce because to cut and run – as we ultimately did in Vietnam – is just too embarrassing. Maybe it’s because they are so effectively lobbied by the war profiteers – may they eventually rot in the hottest corner of hell. Maybe it’s because they are allowed to wage war from a safe distance (no politicians visited the forward operating base where Kauzlarich and his battalion were based during their stay there, and Petraeus only made a single, quick stopover).

    Meanwhile, the U.S. continues to bleed billions in these misguided wars, while the soldiers just bleed.
Someone, and probably a lot of people, should be held accountable for this travesty – as in being brought up on serious charges and, if found to have propagated lies resulting in the loss of lives and the wasting of hundreds of billions of dollars, sent to jail for a very, very long time. Or, better still, turned over to the Iraqis to punish. I’m sure they’d figure out something appropriately medieval.

Why This Is Important to Us as Investors

Given the urgency of addressing the U.S. debt and deficits, the bloated U.S. military budget is clearly the most obvious place to start making cuts that will actually matter. Yet Congress made no such cuts when passing the $690 billion budget requested by the Defense Department – doing so last week by an overwhelming margin.

That budget includes another $119 billion to flush down the toilets of Iraq and Afghanistan. Showing that it has learned no lessons, the Obama administration – encouraged no doubt by new friends in the military-industrial complex – has already managed to spend $750 million in the undeclared war on Libya.

There is a way to use this understanding that the bankrupt U.S. and its allies are doing little more than breaking furniture and making enemies in the Middle East to one’s advantage. Simply, unless and until the U.S. politicians muster enough spine to pull out of Iraq and Afghanistan and slash the military budget, the government’s massive budget deficits will continue.

And if the budget deficits continue, then the trend for the U.S. dollar is sharply downward (though I remain convinced we’ll see a rally in the near term, a topic we’ll be tackling in greater detail in the upcoming edition of The Casey Report).

That is not conjecture, but the unavoidable conclusion uncovered by a number of objective analyses done on past sovereign debt crises by folks such as Kenneth Rogoff and Casey’s Chief Economist Bud Conrad.

To those readers who think that cutting the military budget, or pulling out wholesale from the Middle East, will increase threats to the continental United States, we will have to agree to disagree. In my view, destroying our economy to wage war – in the process squandering the huge commercial advantage of providing the world its reserve currency – is far more destabilizing. As is making yet more enemies by continuing to lob bombs and kick in doors here, there, and everywhere.

Unfortunately, the U.S. leadership and, I guess, some significant swath of the voting public who supports that leadership are suffering from some sort of mass psychosis (or maybe it’s paranoia), that actually has them thinking that it is somehow in the country’s interest to continue flinging billions of dollars and the lives of its good soldiers into lost causes overseas.

But don’t take my word on the topic – do yourself a favor and pick up a copy of The Good Soldiers today. As I can’t know where you stand on these wars, I can’t say whether or not reading the book will change your mind. But I can guarantee you that its on-the-ground perspective will enlighten you as to the true and disturbing nature of what’s really going on, and the futility of it all. It is anything but entertaining, but is very well written and very illuminating.

Meanwhile, use the military budget as a proxy for the seriousness (or lack thereof) of the government’s intent to reduce its spending by any significant amount. And, absent any serious cuts in that spending, continue to take measures to protect yourself against wholesale debasement of the currency.

Every month, David Galland and his co-editors – among them Doug Casey – of The Casey Report research and analyze significant events in the U.S. and global economy, as well as in politics and the markets. Their goal is to recognize the trends in the making that will directly or indirectly affect investors… and to provide the best profit opportunities, even in a time of crisis. Learn how you can outpace rampant inflation by crisis-investing like the pros in this free report.

Ed. note: I am a Casey Report subscriber and affiliate.

Monday, May 23, 2011

With QE2 Winding Down - Which ‘Flation Will Rule the Day?

The reported end, or at least pause, of QE, is exactly what the deflation camp has been waiting for.  (Well...sort of.  Since some liquidity is going to be hanging around in the form of “QE2.5”.  Remember when Bernanke claimed that after QE1, the Fed would remove the excess liquidity from the system?)Regardless, after June, the Treasury will have a cool $100 billion plus to finance monthly, without the help of the Fed - at least for now.  And there will not be nearly $100 billion per month in newly printed money searching for a home in emerging markets, agricultural futures, and crude oil contracts.  Will this trigger a return to 2008’s deflation nation?

First, let’s review what we *think* we know.  Ben Bernanke became, as Felix Zulauf noted, the first central banker in history to actually say that he wants stock prices to go up.  And boost stock prices he did!

Along with food prices...and energy prices...and other stock markets...etc.  We haven’t seen much inflation here in the US because, as I learned last month while traveling in Asia, inflation has been America’s leading export over the last year!

The growing, industrializing countries in Asia - which on the whole boast more favorable, and inflationary, demographics than we have in the Western world (especially Europe and the US) - have been bearing the brunt of Bernanke’s QE.  Here in the US, we’ve been getting squeezed on higher food and energy prices - but service based prices, and wages, have been largely stagnant, as there’s no pricing power.

Looking ahead over the next 5-10 years, there are fundamental reasons why Asia should continue to grow, and why food and energy prices should continue to climb.  There are also fundamental reasons why Europe and the US will probably be slow growth economies at best, and why their aging populations will exert some natural deflationary headwinds on their economies (much like Japan post-1990).

The wild card, of course, is money printing.  Bernanke sure made me, and other debt deflationists, look foolish over the last 24 months.  The correct play was to purchase traditional inflation hedges - like commodities and gold - when the money printing started.

And over the next 5-10 years, I think it’s highly likely that we’ll see more rounds of QE.  Sentiment is now against the Fed continuing to print, but when things roll over again, they’ll probably be able to garner enough support to turn on the printing presses again.

QE2, to me, was crazy.  In retrospect, the kickoff of QE2 should have been a glaring red flag that everyone was on tilt.  The world was not ending.  But a 20% drop in stocks put the fear of God into the Fed that if they didn’t “do something”, financial rapture would be upon us.

History appears to be rhyming here.  Andrew Dickson White’s excellent Fiat Money Inflation in France (hat tip Dr. Evil for the rec) profiles the political roadmap behind France’s classic hyperinflation of the late 1790’s.  They printed once - and the economy looked a little better.  They stopped, and things turned down.

So, they printed a second time.  And things got a little better, but not as much as the first time.  Gee, who knew finance was like heroin!

But now, the French government was hooked - they printed til, as Jim Rogers would say, they ran out of trees.

I don’t know of a historical example of a government printing money once, and then stopping.  It’s an addiction that is very hard to break.  So, over the long term, continued money printing appears to be the most likely scenario.

But what about the short term?  We very well could get another bout of deflation.  And with commodities and stocks looking winded after a 2+ year one way run to the sky, this might not be the best time to pile into inflation hedges.

Net-net, we are fortunate in investing that we don’t have to make every trade.  I like Jim Rogers’ take on agriculture the best.  Over the next 10 years, it has bullish fundamentals.  Prices will continue to rise until new supply comes on line - and that takes time.

Continued money printing will, unfortunately for the world but fortunately for us ag investors, add some very volatile fuel to price increases in the grains.

In summary, inflation or deflation?  It depends - and really, it doesn’t matter either.  Medium to long term, prices of food and energy will continue to rise, until new supply comes on line.  Emerging and growth markets will have to contend with inflation, while Japan, Europe, and the US will probably see a dichotomy of inflation and deflation.  Until and unless we see “QE Infinite” as Marc Faber is fond of saying.

Regardless of how this all plays out, agriculture appears to be the most sound bet on the board to me.

Related reading: Our exclusive interview with Jim Rogers from Singapore - on commodities, China, and more

Monday, May 09, 2011

China's Concerns About the Corn Supply (and Potential Shortages)

Beijing remains concerned about corn supplies, especially in the medium to long-term, the South China Morning Post reports, as China is becoming a big-time importer of corn:
"China's net import of corn could exceed 20 million tonnes in three years," said Liu Xiaobo, a Shanghai-based food analyst from Everbright Securities. "Most of the corn imports come from the United States, which is expected to increase its domestic consumption of corn for ethanol production and the same applies for corn-export countries in South America like Brazil.

"So, China can't assume it will always be able to buy enough corn from the international market," he said.

According to data from research institute, the mainland will need to import one million tonnes of corn in 2010-11, down from 1.5 million tonnes the previous year. Corn consumption is expected to grow from 158.8 million tonnes to 163 million tonnes, while corn production should increase from 155.5 million tonnes to 165.8 million tonnes.
Full article here: Corn Supply Remains a Worry for Beijing

This doesn't leave much supply slack in the system.  When countries swap from net exporter to net importer status, that can be quite bullish for the specific commodity in question.  This has happened in the oil market over the past 15 years, with more and more countries becoming net importers of the goo.
Corn Futures Price Chart 
Corn, which is traditionally said to rally up to July 4th, has ironically been on a tear since roughly July 4, 2010!

Rising demand coupled with tight supply is the theme of this 12-year old commodity bull market - and with that, let's revisit the words of our commodity investing patriarch, Jim Rogers:
“The average farmer in the United States is 57 years old,” Rogers shared (providing me with yet another “How the heck did he know that offhand?” moment).

“Who’s going to farm the land 10 years from now?  These guys will be 67…if they’re still around.  And nobody is graduating with farming degrees today.”

“There are just not enough farmers in the world.  There are vast stretches of empty land in Japan, believe it or not – with nobody to farm them.”

He thinks this commodity bull market could continue to rock and roll for some time because “little or no supply has come on line yet.”
Source: Live From Singapore, an Exclusive Interview With Jim Rogers

Over much of the past century, the US has been the sole driver of commodity markets.  It now appears we've got company in the front seat.

Investing note: There are a few ETFs that partially track the price of corn, with DBA being the most notable.
DBA price chart 2011 
DBA broke out in 2011.

Thursday, April 28, 2011

Live From Singapore: An Exclusive Interview with Jim Rogers (Commodities, China, Inflation, and More!)

I’m thrilled to report that while in Singapore last week, I had the great honor of interviewing Jim Rogers in person.  He was extremely kind in hosting me and entertaining my questions, and I’m excited to be able to share our fun 45-minute chat with you here.

As you may know, I’m a longtime reader and fan of Jim Rogers - and one of my constant frustrations with mainstream financial outlets is that, while they frequently interview Rogers, they lob too many idiotic questions his way, like “What should the Fed do?”

So I hope that you find our discussion around his current world and financial outlook insightful, especially if you’ve been following his work as closely as I have.

All of his books are excellent, as you probably know - three in particular had quite profound effects on my thinking about investing, the world, and life in general.  If you haven’t yet read all of these, I’d highly recommend you pick up a copy of his investing classics:
And now, on to our interview...

Still a Bull on China, and the Renminbi Too

Jim Rogers was a bull on China decades before it became fashionable, and he’s still wildly optimistic about China’s future.

“I believe China’s going to become the next great nation in the world,” he says.

“People call the Chinese ‘communist’...California and Massachusettes are more communist than China,” he remarked with a grin.

“The Chinese communist party is very smart - as are the leaders here in Singapore.  There is a thorough application process to apply to run for office - all applicants are well vetted.”  He says it’s quite rigorous, like “applying to Princeton” and added that “a guy like Obama would never have been able to run here (Singapore).”

Rogers has driven across China three times, and has seen much of the country’s evolution from the ground.  He’s been enthusiastic about China for some time now - at least since his Adventure Capitalist trip (cerca 2000).  Anyone who’s invested alongside his long-time bullish views on China has seen very handsome returns.

He says that according to local legend, Singapore was a role model for China’s development.  Singapore has evolved very rapidly over the past four decades, from a Southeast Asia backwater in the 1960’s, into one of the most prosperous countries in the world today.

“The rumor is that Deng Xioping visited here (Singapore) in 1978 - when he saw what was going on, he returned to China, and started to open the country up,” Rogers told me.  “In fact, if you ask some people here, they’ll say the Chinese are still keeping a close eye on what’s going on here.”

An interesting side play he likes for the years and decades ahead is Chinese tourism.

“The Chinese have not been able to travel for the last 300 years.  Now they can - and they are going to flood the world with tourism for years to come,” he says.

Chinese tourists should have a lot of purchasing power from a strong currency, if Rogers is right.  He cites the Chinese renminbi as one of his favorite picks right now, and believes it’s about as close to a sure thing as you can get.

“Here in Singapore, they've allowed their currency rise to mitigate inflation.  I expect the Chinese will eventually have to do the same thing.”

“You’re better off cutting growth in advance, than allowing inflation to get out of control.  If growth drops to 3%, who cares?  That’s better than letting inflation get out of control, because once it does, it’s very tough to reign in.”

"Then you have to incur a recession or worse to control inflation."

I asked if inflation is really running around 5% as reported in China and surrounding Asia.

“Who knows - but at least they admit they have inflation!  They’re not trying to deny its existence like the US,” he quipped.

He blames the United States, and Japan to a lesser extent, for “printing money like crazy and exporting inflation to the rest of the world.”

Commodities Should Remain Hot

“Most of my portfolio is in commodities, and currencies,” he shared.  “I expect to make money in commodities because, if demand continues to rise, that is bullish for commodities.”

But what if we see a repeat of the financial collapse of 2008?

“If demand collapses, I anticipate the central banks of the world will print more money, and that will then cause commodities to rise,” he counters.

Agriculture is still his favorite, thanks to supply constraints that are nowhere close to being solved - including a lack of farmers.

“The average farmer in the United States is 57 years old,” Rogers shared (providing me with yet another “How the heck did he know that offhand?” moment).

“Who’s going to farm the land 10 years from now?  These guys will be 67...if they’re still around.  And nobody is graduating with farming degrees today.”

“There are just not enough farmers in the world.  There are vast stretches of empty land in Japan, believe it or not - with nobody to farm them.”

He thinks this commodity bull market could continue to rock and roll for some time because “little or no supply has come on line yet.”  He points out that the commodity sector was starting to attract attention pre-2008, as its bull run began around 1999, but the 2008 financial crisis knocked a lot of potential new supply offline.  Which of course sets the stage for further price increases.

Bearish on the US and UK - Crisis Soon?

“The US has peaked in relative power, if not absolute power as well,” Rogers says.  He believes the US is now on a post-empire downward trajectory of sorts, analogous to the UK last century.

“Around 1918, the UK went into decline.  By the mid 1970’s, it was bankrupt.”

“Starting in 1979, it experienced a bounceback rally of sorts - thanks to their oil fields in the North Sea.  Most people give Maggie Thatcher credit for their comeback, but the real white knight for the UK was the North Sea oil discovery,” he said.

“You give me the largest oil field in the world, and I’ll show you a good time too,” Rogers remarked with a grin.

“But the US would need 4 or 5 North Sea oil fields to save the current situation,” he says.

Why so many?

“Because the Federal debt is unpayable.”  The financial profligacy of the United States disturbs Rogers quite a bit - he believes we’ve reached a point of no return, and thinks another crisis could start as early as this fall.

“Foreigners are already starting to get cold feet about investing in the US,” he said, citing the fact that some Swiss banks are no longer buying any US shares.

I asked if he thought the current system of government in the US was ultimately salvageable - he paused for a bit to think, and said with some level of remorse: “I don’t think so, unfortunately.  Not without some level of serious system shock or failure.”

“Plato wrote that the natural progression of government is from dictatorship, to oligarchy, to democracy, to chaos.  So we may be on the track from democracy to chaos in the US.  We’d need a serious shock to shake people up.”

Does the End of QE2 Really Matter?

With QE2 now officially set to end, I asked if it mattered.

“No, it doesn’t really matter.  They’ll continue to print money.  Maybe they’ll call it QE3, or Cupcake, or something else" - but he's thinks they'll continue to print.

With next year being an election year, he expects that the powers that be in the US will do whatever it takes to keep the economy looking good.  “Nobody wants to be held responsible for an economic mess,” he told me , expecting that the US government will continue to paper over their problems, and perhaps even accelerate their efforts to do so.

Actions to Consider - Investing and Personal

And with this upbeat outlook for Americans and other Westerners, what personal actions should we take to protect our portfolios - not to mention our savings, and most importantly, our personal freedom?

As discussed, commodities are still Rogers’ favorite place to be - especially agriculture and energy, because the supply bottlenecks that were in place at the start of this commodity bull market have barely begun to be addressed.  And it can take 5-10 years or more for supply to come online, he pointed out, citing again the 10-year delay between the North Sea oil discovery and its becoming a productive oil field.

Fforeign currencies are his preferable hedge against further anticipated US dollar weakness - with his favorite being the Chinese renminbi.

But what if things get really sticky in the US?  I asked him his thoughts on protecting assets from potential “patriotic” confiscation by the US government (if Uncle Sam, say, decides he needs a little help in paying off his debts).

“Foreign exchange controls are coming to the US.  The UK had exchange controls by 1939, and they remained in place until Thatcher repealed them,” he said.

“They never work.  But politicians always resort to them.”

“So, while it’s still legal, and ethical, to do so, I would recommend diversifying your money outside of the US.”

(I took this as a personal homework assignment, as later that day I walked into a Singapore bank , with only my US passport in hand, and asked if I could open up an account.  No dice, they said - I’d need to show a work permit.  But I did manage to stir up things with the bank teller a bit - you could tell she was not anxious to open up a foreign bank account for an American.)

“To my knowledge, no country to date has expropriated money from overseas that was already there before exchange controls were instituted - but the US is always an exception,” Rogers remarked regarding the safety of money outside of US soil.

Having recently read Barton Biggs’ Wealth, War and Wisdom - an excellent study of wealth preservation during World War II - I asked whether a business would be harder to confiscate than, say, a lump of cash sitting in a foreign bank account.

“Of course,” Rogers agreed.  “It’d be harder to expropriate an overseas farm, for example.”

So where to from here?

“I don’t know what to tell you,” Rogers advised me, “except to move to Asia, and teach your children Mandarin.”

“Teach them to farm, too.”

He has certainly followed his own advice - he now lives in Singapore with his wife and two daughters.  And his girls, ages 3 and 7, are incredibly cute blond girls who amuse and floor the locals (Singapore is 70% Chinese) with their fluent Mandarin.

But what about my wife’s job at Intel in California?

“Your wife should leave Intel...and take up farming,” he said with a grin.

Jim Rogers latest book is A Gift to My Children: A Father's Lessons for Life and Investing.  If you haven't yet read it, go pick up a copy now!

Big thanks to Jim for hosting me and speaking with me.  It was a real thrill to speak with him in person, and I'm really glad we got to dive into these discussion topics in depth.

People I shared this story with asked me what he's like in person - he's a GREAT guy, super cool.  Very easy to see why he's so universally loved and admired around the world,

Friday, March 25, 2011

Eye-Opening Video on How China and Russia are Plotting to Dump the Dollar

In January, Jeff Clark of Casey Research’s BIG GOLD advisory set out to get opinions from some of the smartest, most accomplished investors in the gold industry – where is the gold price going to go, how volatile will the markets be, what’s the outlook for precious metals stocks? Read on for some of the most insightful answers you’ll see anywhere…

(And if you want to jump to the eye-opening video on China and Russia plots to dump the dollar in the near term, click here).

Rick Rule is the founder of Global Resource Investments (, now part of Sprott, one of the most acclaimed and sought-after brokers in the natural resource industry. Rick has spent 30 years in the sector and is a regular speaker at investment conferences in the U.S. and Canada. He and his staff have an extraordinary record of success in resource stock investing.

James Turk is the founder and chairman of He’s authored two books on economic topics, published numerous articles on money and banking, and is co-author of The Collapse of the Dollar. He’s a widely recognized expert on precious metals.

John Hathaway is portfolio manager of the Tocqueville Gold Fund, the third best-performing gold mutual fund in 2010. He is a Harvard grad with 41 years of investment management experience.

Charles Oliver is senior portfolio manager of the Sprott Gold and Precious Minerals Fund (and several others). Charles led the team at AGF Management that was awarded the Canadian Investment Awards’ “Best Precious Metals Fund” in 2004, 2006, and 2007.

Adrian Ash runs the research desk at BullionVault, one of the world's largest online gold ownership services. A frequent guest on BBC News in London, his views on the gold market are regularly featured in the Financial Times, The Economist, and many others.

Ian McAvity has been writing the Deliberations on World Markets newsletter since 1972. He was a founder of the Central Fund of Canada (CEF), Central Gold Trust (GTU), and Silver Bullion Trust (SBT.U).

Ross Norman is co-founder of, an online provider of precious metals news, analysis, and prices. Ross has won several awards from the London Bullion Market Association for his price forecasting, winning in 2002 and 2006.He now runs Sharps Pixley (, which sells bullion in the UK and continental Europe.

BIG GOLD: Gold was up 30% in 2010; to what do you attribute its rise?

Rick Rule: Gold is unique, in that both primary investment psychology motivators – greed and fear – drive the price. Gold markets ricochet between greed and fear buying, and we are starting to see that in the markets now. The fiat currency weakness, both the dollar and the euro, are the motivators for the fear buyer, and the momentum caused by fear buyers is the motivation for the greed buyer.

James Turk: Two things. First, policies like zero interest rates and quantitative easing are eroding the purchasing power of all the world's currencies, so it is no surprise that commodity prices – which are always sensitive to currency problems – are soaring.

Second, as people increasingly recognize the difference between owning paper gold and physical gold, the demand for physical continues to climb. Given that it is a tangible asset, physical gold does not have counterparty risk and therefore protects wealth when stored properly. It is the ultimate safe haven.

John Hathaway: Growing distrust of fiat currencies.

Charles Oliver: In reality, the true value of gold does not change. What has changed is the decrease in value of the fiat currencies used to measure the gold price. In 2009 and 2010, the U.S. debased its currency via direct money printing and a massive quantitative easing program where the government purchased $1.5 trillion of mostly its own bonds.

The U.S. government will buy another $600 billion of its bonds in 2011 concurrent with running the largest deficit in its history. With this in mind, it is no surprise that the gold price rallied.

Adrian Ash: Last year's eurozone debt crises gave only a foretaste of the sharp spikes in physical demand we could see as the single-currency experiment unravels, while the Fed's fresh dose of debt-monetization (aka QE) lit a fire under institutional gold buying. China's surging demand continued to make gold a strong emerging-Asia play, too.

The underlying cause, however – boring but true – was negative real interest rates. Cash in the bank now means certain losses, failing to keep pace with inflation as badly as in the late 1970s. So once again, cautious savers are choosing hard assets instead of government-controlled currency, and gold is the stand-out alternative because it's tightly supplied, indestructible, debt-free, and truly stateless.

Ian McAvity: I believe gold's rise should be recognized as a devaluation of the three major currencies in gold terms – the U.S. dollar, euro, and yen. That focused global attention on gold as the oldest and most credible currency in its traditional role of a store of value. This trend is now a decade old and may be entering the phase for acceleration, now that the major currencies and sovereign debt issues are both coming under the microscope.

Ross Norman: Really, it was more of the same from the previous 10 years – but particularly so the economic-related issues from the last two. The gold price fundamentally reflects the debasement of currencies – gold is not expensive, but the currencies you buy it with are worth less simply because we are printing so many of them.

If you genuinely believe that global growth is established, that debt repudiation will be carried through (the public will willingly take their fiscal medicine), and that economic stability will be restored without a hiccup, then don't buy gold. The trouble is, few believe that story, and hence the 30% gain in gold.

BG: What forces will move gold this year? And what's your price projection for 2011?

Rick Rule: I suspect that this year will give us extraordinary volatility across all markets, including bullion. I think the eventual direction is higher, because of the well-catalogued failures of collectivism. But I suspect we will have some event-driven spike in metals prices, although I couldn't forecast which of many possible events will occur.

I have no earthly idea where gold will close, but to be a good sport and play the game, I'll say $1,750.

James Turk: The same forces will move gold higher this year, which I expect will reach $2,000, probably in the first half.

John Hathaway: A reversal of spreading distrust of government policies, central bankers, and paper currencies can only be accomplished by high real interest rates. The secular direction of the gold price will remain higher, and conversely, the valuation of paper currencies will trend lower, without a restoration of respectable real interest rates, which in my opinion, would be in the neighborhood of 4% on a sustained basis. In the absence of such a change, there is no telling where the price of gold, in U.S. dollar terms, could go.

In my opinion, gold is no different than any other market in that it assesses current fundamentals and discounts the future. Just exactly what it is reflecting at any given moment is the real challenge. In my opinion, the gold market has only partially reflected the monetary debasement that has taken place since the credit implosion of 2008, and it has not yet begun to assess the damage yet to come.

Without knowing what further convoluted and extreme measures yet to be implemented by this administration and the Fed, it is impossible to place a number on the future price.

Charles Oliver: Global currency debasement will continue in 2011. The European sovereign debt crisis continues to unravel in slow motion, and it looks highly likely that the Europeans will magically create lots of money to backstop the debt of the next European government that finds itself on the verge of bankruptcy. I expect this backdrop will help propel gold to around $1,700 by yearend.

This level is supported by an upward trend channel that commenced in 2008 with a 2011 yearend range of $1,550 to $1,750. I also believe gold could break through the upper boundary of these trend-lines should some unexpected event occur.

Adrian Ash: Headline debt crises aside – Portugal, Spain, California, take your pick – 2011 will see negative real interest rates force ever more cash savers to choose gold (and also silver) instead. Simply extrapolating the current bull run's annual gains would see 2011 end with gold some 20% higher at $1,695 per ounce, averaging $1,450 across the year. Even on the official CPI measure, U.S. savers have now been underwater for 24 of the last 36 months after inflation.

But no one at the Fed, not even sole dissenter Thomas Hoenig (no longer a voting member in 2011), wants to see positive real returns paid to cash. The ECB, Bank of Japan, and Bank of England all look stuck near zero interest rates, too. And while Beijing might hike Chinese lending rates, it fears sucking in yield-hungry money from the West. With China's deposit rates left untouched at barely half the pace of inflation, the early gold-demand spike around Chinese New Year (Feb. 3rd) could prove dramatic.

Ian McAvity: I don't do specific forecasts in my work, but I think there's a prospect of gold pushing into the $2,000-$2,400 range this year, or perhaps 2012. This presumes an element of monetary panic relating to the U.S. dollar or euro during the year. A gold price of $2,400 would be the CPI-adjusted equivalent of 1980's $850 in current dollars, so this is not an unrealistic number.

Ross Norman: After 10 successive years of price strength during which gold rose fivefold, it is tempting to ask if prices are now peaking; we think not, and fresh all-time highs of $1,850 are in prospect. The list of forces on the buy side remains as long as your arm. But on the sell side there are potentially miners reentering hedging/forward-selling programs, central bank disposals, and possibly some contrarians – these are unlikely to be significant and, in short, with few sellers the scales should continue to weigh very significantly in favor of the bulls.

With gold’s entrenched trend line to draw on, the adage "The trend is your friend" seems likely to hold true. A twenty-something percent increase looks likely for the year, and the gold chart should maintain a steady 45-degree climb after a period of consolidation during Q1.

Our outlook for gold in 2011: Average $1,513; high $1,850; low $1,350.

BG: How volatile do you expect gold to be? What's your low price that would present a good buying opportunity?

Rick Rule: Volatile on steroids! If we have a replay of the liquidity crisis of 2007-2008, gold could crack $1,000 on the downside. I don't time these things; I build cash when values in other sectors are not available, and bullion for me is a form of cash.

James Turk: I do not expect gold to be volatile. It looks to me that the gold price is ready to accelerate to the upside, and I do not expect there to be any significant price corrections because the demand for physical metal is just too strong. There is always a lot of money on the sidelines ready to buy any dip.

Any price below $1,500 represents a good buying opportunity because I do not expect gold to remain below that price much longer.

John Hathaway: If the Fed announces an end to quantitative easing, gold could drop $200. In the greater scheme of things, such an announcement would change nothing.

Charles Oliver: I expect volatile currencies and governments for the next several years. Which means that gold and other hard assets priced in U.S. dollars will remain volatile. The current bottom of my gold trend channel is $1,300, so if it dropped that low, I think it would make a great buying opportunity. If gold broke below $1,300 (which I do not expect), then you might see it test the $1,000 level. That level was resistance for several years, but now it is a major support level, one I believe may never be breached again.

Adrian Ash: Gold volatility actually fell in 2010, hitting 5-year lows even as the dollar price took out new record highs above $1,400. So while gold keeps making headlines, it's more overreported than overinvested, and that's likely to keep any dips shallow, especially as larger investment institutions in the West look to steadily build their positions. Demand from Indian households – the world's No.1 physical buyers – is again adjusting to new rupee highs, too.

That said, keep an eye on the start of new quarters (April, July, Oct.) as investment funds will hold on to winning positions to impress their clients, only to take profits the very next day (witness July 1, 2010 and New Year 2011 already).

If you're trying to pick the bottom of a pullback, it's worth noting that gold hasn't fallen vs. the dollar for more than two months running since 2001.

Ian McAvity: Volatility will be much greater. India paid $1,045 for 200 tonnes of gold from the IMF – that's a critical level and would be a great crash-scenario buy point, but I doubt we'll see it. The last important breakout occurred at $1,260 and should be support and an attractive buy level; below that, $1,160 to $1,200, if it's part of a general market wipeout. I'd bet that gold comes screaming back from such a decline if Bernanke and the ECB proceed with QE3 or QE4 to fight it.

Ross Norman: Fear and uncertainty are running high, and that should almost certainly translate into greater price volatility. I think we are close to the low for the year (we see that at $1,350), and it is quite healthy to see some of the excessive speculative froth being blown off the market just now. It makes a more compelling case a month or so from now.

BG: Gold stocks as a group did not outperform gold in 2010 – will that change in 2011? And if the broader markets sell off, will gold stocks fall along with them or trade on their own?

Rick Rule: Interesting point; the stocks did not outperform bullion, even as the companies actually began to feel the positive impacts of higher gold prices and massive capital programs.

I do think select stocks will broadly outpace the bullion markets in 2011. The senior producers are doing something they have not done for decades – earning good money! Their reinvestment options are constrained because most of them have already launched and funded major capital programs for whatever internal growth is available to them. Surplus capital can go to increasing dividends, buying back stock, and to acquisitions. Juniors who make attractive discoveries that can reduce depletion charges and lower a major's overall cash costs will be bought at startling prices.

If broader markets decline as a consequence of an event, particularly a liquidity-driven event, the gold stocks will decline with them. If a broader market decline occurs as a consequence of debt and equity overvaluation and earnings disappointments, the markets will decouple as they did in the late 1970s.

James Turk: The mining stocks will continue to outperform in 2011, but by a much larger margin than last year, and are still relatively cheap compared to bullion. Remember, the mining stocks were in a bear market from the collapse of Bre-X in 1997 to the collapse of Lehman Brothers in 2008. After Lehman, even the best quality mining stocks were unbelievably cheap. It was a capitulation low, where emotion prevailed over logic, which is how all bear markets end. This new bull market will drive the mining shares to what will probably be unbelievable heights when we look back a few years from now.

John Hathaway: Gold stocks are generally cheap relative to bullion. The XAU [Philadelphia Gold/Silver Index] trades at roughly 15% of the bullion price vs. a historical norm of more than 20%. Gold stocks could do fine even if gold is flat, something I don't expect. If we have another 2008 style sell-off, gold stocks will be hurt again in the short term, but the stage would be set for much higher highs for the metal and the stocks.

Charles Oliver: In 2010, the large-cap stocks that dominate the weighting in most gold indexes underperformed the gold price. However, the mid-cap stocks had a great performance in the first part of 2010. In the latter part of the year, the small-caps roared to life and outperformed most other groups.

I expect that 2011 will initially be similar to the end of 2010; however, in the second part of the year, I am concerned that the general stock market may be due for a correction that could impact all stocks and sectors. If there is a modest, orderly pullback, gold stocks could rally (much like they did in 2002), though you may see an increased focus on the bigger, more liquid names first. With this in mind, and the relatively cheap large-cap stocks, I have been increasing my weighting of larger-cap names.

Adrian Ash: So long as deflation (i.e., default) threatens credit markets, unencumbered gold is going to appeal more than geared production, especially to those cautious savers now being forced out of cash by negative real rates. Yes, you've got to expect the kind of gold mania that Doug Casey has long forecast to light a fire under the broader gold mining sector. But another broad sell-off in world equities in 2011 would only compound the last decade's disillusion with risk investments.

Ian McAvity: The major gold stocks have not performed well against gold since 2003. They will get decent spurts, but long-term reserve replacement and premium-priced M&A [Merger and Acquisition] takeovers dilute their shareholders. The lows for gold stocks may be governed by the magnitude of any crash-like decline in the stock market. If the S&P or Dow falls 20% or more within a 3-month or less window, the margin clerks will sell every bid on anything. I prefer the metal to the major miners.

Ross Norman: I would not anticipate a broader equities sell-off. It does seem that most asset classes are performing strongly, and that may be a secondary consequence of QE. Broadly, I take a similar, and positive, view of mining equities as I do for gold. Should there be an equities correction, then in all likelihood mining shares will also retrace to some extent in the same way that a rising tide lifts all boats.

BG: Silver was up 81.9% in 2010, but is still below its 1980 nominal high. What's your outlook for silver in 2011?

Rick Rule: The near-term outlook for silver is very bullish, as a consequence of physical supply shortages. Longer term could be problematic as a consequence of Indian dishoarding, an event last seen in earnest in 1997.

James Turk: I expect silver to reach $50 in Q1 2011. It may then take a breather, but eventually – and probably later in 2011 – silver will climb above $50.

John Hathaway: More volatility than gold.

Charles Oliver: In the earth's crust, the ratio of silver to gold is 17:1. For most of the last 650 years (except the last 100) the monetary exchange rate was also around 17:1. In fact, when the United States was on a bi-metallic reserve standard, the U.S. government mandated "The Coinage Act of 1834," putting the gold/silver ratio at 16:1. In 2010, the ratio moved from around 60 to below 50. I expect this trend to continue in 2011 and think the metal could trade up to and beyond $50 in the not-too-distant future.

Adrian Ash: Silver's primary use is industrial, rather than as a store of wealth like gold. So it should be more vulnerable to the economic cycle (see the post-Lehman price collapse), and you could argue it's simply tracking the huge rally in base metal and energy prices. But looking at that 1980 high – forced by the Hunt brothers' speculative corner, rather than a jump in use – I think something else is going on, and silver is being remonetized by private wealth in the same way gold has been remonetized since hitting "trinket" prices in the late 1990s.

A much smaller and tighter market than gold, silver is both more attractive and responsive to sudden inflows of cash. As with gold, silver's volatility fell in 2010, but it was more than twice the average level (daily basis) of the last four decades. Price-wise, another year like 2010 would see the $50 peak taken out. The biggest surprise is that the mainstream press hasn't stoked the idea of a "silver bubble" like it has done for gold since 2009.

Ian McAvity: If gold runs above $2,000, I expect the silver/gold ratio to reach the 36:1 level, which would mean a price somewhere between $55 and $66. I view that ratio as a material driver of the silver price, trading off its long monetary metal history, apart from its attractive supply/demand profile. The 1980 spike to $50 was a very brief spike that isn't really a meaningful measuring point, in my view. The monthly average London Fix for January 1980 was $39.27, and gold's monthly average peak was $675.31; those are more realistic prior peak levels to measure against.

Ross Norman: After the 2010 rally, it might seem churlish to expect much more in 2011 for silver. Early 2011 profit taking has seen silver decline more than most assets, underlining the strong speculative element in the recent price run, and this also confers some weakness to its case. However, the investment community has taken silver to heart, and contrary to its modestly attractive fundamentals, the market prices are likely to overperform again. Unlike in 2010, we expect silver's price action to conform more closely to that of gold – firmer, but a little more rational.

Our outlook in 2011 for silver: Average $37; high $44; low $27.

BG: What's your best advice for precious metal investors in 2011?

Rick Rule: Be prepared for the most volatile market of your life, and use that volatility to your best advantage.

James Turk: It is the same advice I have been giving for more than a decade; continue accumulating the precious metals, and if you are inclined to take the investment risk, the mining stocks as well. We need to recognize one salient fact: national currencies are being destroyed and their purchasing power eroded by misdirected government policy. Consequently, gold and silver are safe havens and the best way to protect your wealth.

John Hathaway: Have at least 10% of your liquid assets in precious metals and related mining stocks. Keep your bullion outside the U.S. A good way to do so is through Gold Bullion International, which can be accessed through their website. Unless you want to spend a lot of time researching the gold mining industry, consider investing in a well-managed precious metals mutual fund. There are a number, but I am partial to the Tocqueville Gold Fund, one of the top performers last year.

Charles Oliver: All the fundamentals – excessive government debt, high budget deficits, runaway healthcare costs, growing Social Security payments, demographic trends – lead to one conclusion: Governments are bankrupt and are going to debase their currencies via money printing, quantitative easing, off-balance-sheet transactions, and whatever other tricks they can pull off. The bull market in gold is alive and well and has a heck of a lot further to go. Buy it.

Adrian Ash: Next to overtrading, the biggest profit killer in gold this last decade has been to trust clever hedge funds trying to beat the metal. Sure, the best mining stock funds have delivered fantastic returns, but they struggled to outperform gold in 2010, and there's no certainty that will continue. But if you're right to buy gold for defense, then it’s best to simply buy and hold until the prime drivers – abysmal monetary and fiscal policy across the West – are reversed. Oh, and of course, be sure to visit BullionVault for a free gram of gold, too!

Ian McAvity: For individual investors, don't go crazy with leverage or portfolio concentration. No matter how much of a gold bug you are, keep in mind we're in a period where the mistakes (QE2 is one of them) will compound the second half of the ongoing financial disaster that started in 2007.

Ross Norman: For followers of cycles, 2011 looks like the year that the Kondratieff Winter begins to bite – a period normally associated with debt repudiation, trade wars, and firm commodity prices. A winter that puts Europe into hibernation, and the smart money acquires a protective coat. This is to say, buy gold, including the leveraged 2:1 ETFs.

[These world-class experts are right to bank on gold and silver – because the U.S. dollar keeps losing more and more of its value. Watch this eye-opening video on how China and Russia are plotting to dump the dollar in the near term… why you should be worried… and what to do about it.]

Ed. note: I am a Big Gold subscriber and affiliate.

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