Sunday, June 10, 2012

Cotton Surges "Limit Up" For Second Consecutive Day

Our soft commodity flavor-of-the-month, cotton, has seen its near term futures surge "limit up" for the second day in the row.  Was our case for cotton perfectly timed for once?  (See: Cotton's Blue Light Special)
Cotton futures price chart 2012
Cotton's sharp reversal sent shorts running for cover. (via

While there have been additional acreage reductions announced in the past week, this sudden rally is being attributed to fast and furious short covering.  I'd hate to be short any commodity in a secular bull market, let alone when Bernanke has a microphone in front of him!

We'll keep an eye on a potential breakout - I prefer to see a 20-day high, at least, when entering a cotton position, and this didn't get us there.  Which is fine, as I also hate to trade V-shaped moved in the softs - they rarely happen.  I would expect the trend in cotton to remain sideways to down for a bit, with the potential for stimulus-driven swings.

Advantages - and Myths - of Returning to a Gold Standard

The gold standard these days has been reduced to a distant memory and fantasy of hard money proponents.  IF we returned to a gold standard, would all our problems be fixed?  No, contends monetary expert (and parter of the late great Harry Browne) Terry Coxon - but the reality of the current monetary situation would be exposed, and we'd get to see some deserved egg on the faces of our modern day monetary masters of the universe.  Coxon explains...

Myths and Realities of Returning to a Gold Standard

By Terry Coxon, Casey Research

The gold standard, under which any holder of paper dollars could redeem them for gold at the US Treasury, is now within the living memory of just a few million Americans, nearly all of whom would be dangerous behind the wheel. But thanks to the money printing and the federal deficits that have grown to astounding scales since 2008, and thanks also to the clashing pronouncements of Ron Paul and Ben Bernanke, the idea of a gold standard has resurfaced in the public's consciousness.

I'm happy to see the concept enjoying a revival. Reading about it in the mainstream press and hearing it mentioned on the cable news shows makes me feel a little less like a Martian. It has almost made me feel avant-garde.

Despite my enjoyment of the revival, I've noticed that the idea seldom is presented as a clear and definite proposal or as an invitation to revisit an institution that worked well in the past. Too often, it shows up as little more than a slogan or a taunt aimed at central bankers or as just a political fashion statement. So let's take a closer look at what it really means. It's not that complicated.

What Isn't at Stake

The abolition of the gold standard has been the source of considerable mischief, but it hasn't been the source of all mischief.

I've heard the lack of a gold standard indicted as part of a government scheme to force the public to use paper money. It isn't.

The legal-tender laws are usually part of the story, but the story doesn't hold up. Declaring irredeemable paper dollars to be legal tender merely defines what a creditor may be forced to accept in satisfaction of a debt that is denominated in dollars. Operating under that regime is entirely voluntary; if you don't like it, you can avoid it by declining to accept anyone's IOU or other promise denominated in dollars. Despite the legal-tender laws that define what is a (paper) dollar, you are free to buy and sell and enter into contracts without using dollars.

The legal-tender laws amount to no more than the government's claim that it owns "dollar" as a trademark that it can apply to pieces of paper or to anything else it decides to – just as General Motors owns the trademark "Chevy" and can apply it to any piece of machinery or any other product it chooses. GM and GM alone is free to serve up Chevyburgers, and you are free to eat one or not.

Any two parties are free to use gold coins (or silver coins or strawberries) as a medium of exchange if they agree to. Pesos, francs and Canadian dollars are permissible as well. A return to the gold standard wouldn't alter that situation or expand the range of your choices.

I've also heard the lack of a gold standard blamed for overall economic instability. Defenders of the current system of fiat money do just the opposite – they blame the gold standard of the past for preventing the Federal Reserve from stabilizing the economy. It's quite a debate – little economic logic and much cherry picking from the big tree of history. It all comes down to which system gets stuck with responsibility for the Great Depression of the 1930s, which occurred at a time when US citizens couldn't redeem dollars for gold (no confidence-building gold standard to help the economy recover) but foreign governments could redeem dollars for gold (that old gold standard, still causing so much trouble).

What It Wouldn't Fix

A return to the gold standard wouldn't make you any freer than you are now. You'd still be filing tax returns and still be getting massage therapy from TSA employees; Congress wouldn't reform its big-spending ways, it would merely switch from taking and wasting fiat money to taking and wasting gold-backed money; and the Supreme Court, the guarantor of your liberties, would continue making things up as it goes along.

A new gold standard wouldn't be an elixir of stability for the economy. A severe depression in 1919-1920 demonstrated the Federal Reserve's ability to engineer financial train wrecks even when the dollar is redeemable for gold by anyone and everyone. And before the advent of the Federal Reserve, the US Treasury demonstrated the same ability through its borrowing operations, as did Congress on a few occasions simply by creating uncertainty about possible changes in the monetary system.

And a return to a gold standard wouldn't ensure long-term preservation of purchasing power for the dollar and dollar-denominated obligations – because, as we've seen, a gold standard adopted one day can be abandoned the next.

What It Would Fix

Now that we've dampened expectations, here's what a gold standard would do: threaten the individuals who run monetary institutions (such as the Federal Reserve) with embarrassment for bad behavior. It narrows their opportunities for dodging responsibility.

Every issuer of money promises to protect its value. The promise is the same whether it is made on behalf of a fiat currency or for a currency backed by gold, silver, copper, other currencies or seashells or pelts. A gold standard doesn't prevent an issuer from breaking the promise. It merely makes it difficult for the issuer to pretend that it is keeping the promise when year after year it isn't.

With a fiat money system, you don't need any special talent in order to deceive the public with insincere talk about avoiding inflation and protecting the money's purchasing power. The years-long lag between printing and the effect on prices makes deception easy.

If you print more money this year, well, it's only a temporary measure and only because of the recession you're trying to avoid. Next year, you'll slow down the printing or maybe not print at all – you'll have to wait and see what conditions are next year. And don't forget to mention the odd years of rapid monetary growth that coincided with almost no price inflation at all. And when price inflation does pick up, there's always someone or something to blame – OPEC or terrible growing conditions for the soybean crop in Brazil or a war. You'll think of something.

Short of the complete destruction of a fiat currency, there is nothing that can demonstrate beyond doubt the shallowness of the promise to protect purchasing power that is being made on any day. There is no bright line separating performance from talk.

With a gold standard, deception is much more difficult. Creating too much money will lead to redemptions that drain away the official gold stockpile. Everyone can see the inventory shrinking. If it shrinks to zero, then the managers of the system have failed, period. There is no ambiguity about it, and the politicians in charge at the time have little room for denial.

The formal adoption of a gold standard holds no magic. It's just another promise. But it is a promise that carries an assured potential for egg-on-face political embarrassment if it is broken, and the only way for the people in charge to avoid that embarrassment is to refrain from recklessly expanding the supply of cash. That's why a gold standard protects the value of a currency, and that is why the politicians don't want it.

Terry Coxon is one of several big-picture analysts at Casey Research who sift through today's cultural, political and economic trends looking for clues as to when and how they might shift... because those shifts hold strong profit potential for bold investors. To enjoy more articles like this, as well as to receive specific, actionable investment advice including when to buy or sell specific stocks and shorting stocks, among other things, sign up today for The Casey Report. A ninety-day trial is completely risk-free.

Attention Commodity Shoppers: Cotton's Blue Light Special

Cotton futures have quietly dipped to their lowest levels in two years, prompting our "contrarian alert" to sound. King Cotton, since rocketing to levels not seen since Reconstruction, has since plummeted:

cotton five year price chart
Cotton spikes, and crashes. (via

Two months ago we mused that cotton and rice, both off significantly from their highs, may have piqued the interest of Jim Rogers, who recommended that investors interest in agriculture start by looking at what's down the most. Since then, cotton has drifted nearly seventeen cents lower, and is now sitting at levels not seen since early 2010.

On Cue: Supply Cuts Have Arrived Just as high prices tend to cure themselves with increasing supply and/or decreasing demand, low prices commonly exhibit the equal but opposite effect. And we're already seeing signs of supply going away, as China will decrease cotton plantings by nearly 10% this year...

Please read my full cotton analysis on Seeking Alpha.

Why Jim Rogers Believes the US Economic Situation is Very, Very Dire

Jim Rogers sat down with Newsmax for a short interview, in which he expressed his belief that the US economic situation is "very, very dire."

Kudos to Rogers for saying what few today seem to understand - that cutting spending and taxes would be good for the economy.  The State itself is not a generator of wealth - it is a net negative.


Source: Newsmax, Hat Tip: Daily Crux

Using This Pullback to Load Up on Gold

With gold successfully holding the $1520 mark after three tests, David Galland believes savvy investors should use this pullback as an opportunity to purchase gold and gold stocks.  I agree with him on gold, though I'm not yet convinced about the mining stocks themselves (more on this later today).

Gold’s “Contrarian Moment”

By David Galland, Casey Research

Glancing at the news most days, it's hard not to feel like Bill Murray's character in Groundhog Day. In the event you are unfamiliar with the movie, in it Murray's character becomes trapped in the same day… day after day.
In the current circular condition, we have the powers-that-be assuring us that the next high-level meeting will finally produce a permanent fix to the broken economy, essentially solving the sovereign debt crisis. Then, in no more than a few days, or at most a couple of weeks, the fix is revealed to be flawed and the crisis again sparks into flames... followed shortly thereafter by yet another high-level meeting – and the cycle begins anew.

While the characters may change – one week it is Greece, the next it is Spain, the next it is France, the next it is the US, the next it is Greece again, etc., etc. ad nauseam – the detached observer can only come to the conclusion that we are now well outside of the bounds of the normal business cycle.

As we at Casey Research have written on this topic at great length, I don't intend to dwell on this topic, but I did want to loop back in just long enough to comment on the recent price action in commodities, especially gold, in the face of the continuing crisis.

Today, a glance at the screen reveals that gold is trading for $1,565. For comparative purposes, as revelers warmed up their vocal cords to sing in the New Year on the last trading day of 2011, gold exchanged hands at $1,531. And exactly one year ago to the day, gold traded at $1,526 for a one-year gain of a modest 2.6%.

A year ago, the S&P 500 traded at 1,325, while today it trades at 1,318, a small loss. Yet, have you noticed we don't hear much about the imminent collapse of the US stock market, as we do about gold? This perma-bear sentiment about gold on the part of what some people lump together under the label "Wall Street" is especially apparent in the gold stocks.

Using the GDX ETF as a proxy for the sector, we see that the shares of the more substantial gold producers are off by an unpleasant 24% over the last year.With that "baseline" in place, let's turn to the current outlook for gold, and touch on some of the other commodities as well.
  • Gold. In the context of its secular bull market, and given that absolutely nothing has gotten better about the sovereign debt crisis – only worse – gold's correction is nothing to be concerned about.I know the technical types will point to levels such as $1,500 as important resistance points – and there's no question that if gold was to break decisively below that level that a lot of autopilot trades would kick in and put further pressure on gold.Yet, when you view the market through the lens of hard realities, which is to say, by focusing on the intractable mess the sovereigns have gotten the world into… in Europe, in Japan, in China and here in the US… then viewing gold at these levels as anything other than an opportunity is a mistake.
  • Gold Stocks. As far as the gold stocks are concerned, I consider today's levels to be extraordinarily compelling for anyone looking to build up a portfolio or to average down an existing portfolio.I say this for a number of reasons, starting with the contrarian perspective that this may now be the most unloved sector of the stock market. No one wants anything to do with gold stocks, and hasn't for some time now. As a consequence, the sellers will soon dry up, leaving almost nothing but buyers to push the sector back to the upside.This contrarian perspective is important because finding an honest-to-goodness opportunity to bet against the crowd is no easy thing in a world where literally thousands of competent equities analysts plop down at the desk each trading day with the sole purpose of searching for prospective investments. Many of these analysts are backed by huge firms with billions of dollars at risk in the markets, and so are armed with high-powered computational tools of the sort that was unimaginable even a few years ago. All of these analysts, armed with all their computational power, habitually scan a universe that totals about 4,000 publicly traded companies. Realistically, however, even a thin analytical screen will weed out all but perhaps 400 of those companies as being potentially suitable for investment.Thus, you have thousands of high-priced and well-armed securities analysts crunching pretty much the same data on a very small universe of possible investments. Given this reality, is it any surprise that securities are so tightly correlated? Which is to say, is it any surprise that these securities all trade right in line with the valuations that the analytical screens ultimately derive that they should? Which means there are really only two possible circumstances under which any of these stocks move up, or move down, by any significant degree
  1. Broad market movements. The saturated levels of analysis mean that, within a fairly tight range, all the stocks now move more or less together. Thus, with few exceptions, a big upswing or downswing in the broader market will send almost all stocks up or down together. To help make the point, I randomly pulled a chart of IBM and compared it against SPY (the S&P 500 tracking ETF) for the last year. Note the lockstep price movements:
  2. OK, IBM is a big company, so it will have a lower beta than many companies, but the point remains that saturated coverage of the stocks greatly reduces the odds of any one issue breaking free from the larger herd, unless there is…
  3. A surprise. All of these analysts, and all of their computerized analysis, help form a certain future price expectation for each security based on past financial metrics (earnings growth, return on equity, and so forth). Other than the broad market movement just referenced, or moves in line with a sub-sector of the larger market (e.g., if oil rises or falls, oil-sector stocks will tend to move up or down in sync), for a company to deviate in any substantial way from analyst expectations, by definition requires a "surprise" to occur.Of course, such a surprise can be positive, but because these companies are so closely watched, it is more likely to be negative. In the former category, a positive surprise might come in the form of an unexpectedly strong new product launch á la the iPad. In the latter, less happy category of surprise, it can be the blow-out of a big well in the Gulf of Mexico… or any one of a million other unanticipated vagaries of fate.
As investors, recognizing these fundamental realities is important because it points to where above-average market opportunities are most likely to be found (or not). And that brings us back to the whole idea of being a contrarian.
As mentioned a moment ago, "Wall Street" has never much liked the precious metals, and by extension the gold stocks. Given the length of the gold bull market – which, in our view, reflects systematic risk in all the fiat currencies, but which Wall Street views as an indication of a fatiguing trend confirmed by the underperformance of the gold stocks – traditional portfolio managers are unhesitant in giving the boot to the few gold shares that somehow made it into their portfolios against their better judgment.

If our thinking is not clouded by our own bias, then it would behoove us as good contrarians to buy these shares from the eager sellers at such unexpectedly favorable prices. By doing so, we are able to position ourselves to make a killing once the broader financial community realizes that the problems associated with fiat money, dramatically underscored by the intractable sovereign debt crisis, are only going to get worse. At that point gold is going to head for new highs and gold stocks to the moon.

That said, as we always should do, let's quickly assess whether our own bias is leading us astray in believing in gold and gold stocks when virtually the entire army of analysts won't even consider them. Some inputs:
  • Gold prices remain near historic highs – and that has a significant impact on the bottom line of the gold producers. Barrick Gold Corp. (ABX), for example, currently boasts a profit margin of over 30%, better than twice that of IBM and almost ten times that of Walmart. While ABX sells for just 1.6 times its book value, IBM sells for 10X.
  • Interest rates remain at historic lows, producing a negative real return for bond holders. Unless and until investors are able to capture a positive yield – a potential stake through the heart of gold – there is no lost-opportunity cost for holding gold. And bonds are increasingly at risk of loss should interest rates be pressured upwards, as they inevitably will be.
  • Sovereign money printing continues – because it must. In today's iteration of Groundhog Day, the Europeans are once again meeting in an attempt to fix the unfixable, but the growing consensus – because there is no other realistic option left to them – is that they will have to accelerate, not decelerate the money printing. Ditto here in the US, where a fiscal cliff is fast approaching due to the trifecta of the expiring Bush tax cuts, mandated cuts in government spending from the last debt-ceiling debacle and the new debacle soon to begin as the latest debt ceiling is approached. The problems in important economies such as China and Japan are as bad, and maybe even worse.
  • Debt at all levels remains high. With historic levels of debt, rising interest rates are a no-fly zone for governments, because should these rates go up even a little bit, the impact on the economy and on the ability of these governments to meet their obligations would be dramatic and devastating. This fundamental reality ensures a continuation of policies aimed at keeping real yields in negative territory, meaning that the monetization/currency debasement in the world's largest economies will continue apace.To get a sense of just how bad things are and how soon the wheels might come off, sending gold and gold stocks to the moon as governments throw all restraint in money printing to the wind to save themselves and their over-indebted economies – here's a telling excerpt and a chart from a recent article by Standard & Poor's titled The Credit Overhang: Is a $46 Trillion Perfect Storm Brewing?
Our study of corporate and bank balance sheets indicates that the bank loan and debt capital markets will need to finance an estimated $43 trillion to $46 trillion wall of corporate borrowings between 2012 and 2016 in the U.S., the eurozone, the U.K., China, and Japan (including both rated and unrated debt, and excluding securitized loans). This amount comprises outstanding debt of $30 trillion that will require refinancing (of which Standard & Poor's rates about $4 trillion), plus $13 trillion to $16 trillion in incremental commercial debt financing over the next five years that we estimate companies will need to spur growth (see table 1).

You can read the full article here. While the authors of the S&P report try to find some glimmer of hope that roughly $45 trillion in debt will be able to be sold off over the next four years – even their base case casts doubt on the availability of the "new money" shown in the chart above. Note that this is the funding they indicate is required to fund growth. Which is to say that should the money not be found, the outlook is for low to no growth for the foreseeable future.

It is also worth noting that the analysis assumes that something akin to the status quo will persist – which is very unlikely given the pressure building up behind the thin dykes keeping the world's largest economies intact. The landing of even a small black swan at this point could trigger a devastating cascade.

We have said it before, and we'll say it again: there is no way out of this mess  without acute pain to a wide swath of the citizenry in the world's most developed nations. While this pain will certainly be felt by sovereign bond holders (and already has been felt by those who owned Greek issues), it will quickly spread across the board to banks, businesses and pensioners – in time wiping out the lifetime savings of anyone who is "all in" on fiat currency units.

In this environment, gold isn't just a good idea – it's a life saver. And gold stocks are not just a golden contrarian opportunity, they are one of the few intelligent speculations available in an uncertain investment landscape. By speculation, I mean that, at these prices, they offer an understandable and reasonable risk/reward ratio. Every investment – even cash – has risk these days. With gold stocks, you at least have the opportunity to earn a serious upside for taking the risk… and the risk is much reduced by the correction over the last year or so.
Now, that said, there are some important caveats for gold stock buyers.
  • With access to capital likely to dry up, any gold-related company you own must be well cashed up. In the case of the producers, this means a lot of cash in the bank, strong positive cash flow and a manageable level of debt. (Our Casey BIG GOLD service – try it risk-free here – constantly screens the universe of larger gold stocks for just this sort of criteria, then brings the best of the best to your attention.)In the case of the junior explorers that we follow in our International Speculator service (you can try that service risk-free as well), the companies we like the most have to have all the cash they need to clear the next couple of major hurdles in their march towards proving value. That's because a company can have a great asset but still get crushed if it is forced to raise cash these days… and the situation will only get more pronounced when credit markets once again tighten as the global debt crisis deepens.
  • Beware of political risk. Despite the critical importance of the extractive industries to the modern economy, the industry is universally hated by politicians and regular folks everywhere. If your company – production or exploration – has significant assets in unstable or politically meddlesome jurisdictions, tread carefully. And it's important to recognize that few jurisdictions are more politically risky than the US. This doesn't mean you need to avoid all US-centric resource stocks – but rather that you need a geopolitically diversified portfolio that you keep a close eye on at all times (something we do on behalf of our paid subscribers every day).
  • Know your companies. Some large gold miners are also large base-metals miners. And at this juncture in time, personally I'm avoiding base-metals companies like a bad cold. While most base-metals companies have already been beaten down – and hard – over the last year and a half, the fundamentals remain poor. Specifically, they not only have the risk of rising production costs and political meddling, but unlike gold – where the driving fundamental is its monetary role in a world awash with fiat currency units – the base-metals miners depend on economic growth to sustain demand for their products. In a world slipping back into recession – or perhaps, in the case of Japan and China, tripping off a cliff – betting on a recovery in growth is not a bet I'd want to make just now.
While it is hard to accurately predict the timing of major developments in any one economy, let alone the global economy, there are a number of tangible clues we can follow to the conclusion that the next year will be a seminal one in terms of this crisis.

For starters, there is the next round of Greek elections on June 17, the result of which could very well be the anointment of one Alexis Tsipras as the head of state. An unrepentant über-leftist whose primary campaign plank is to tell the rest of the EU to put their austerity where the sun doesn't shine, the election of Tsipras would almost certainly trigger a run on the Greek banks, followed by a cutoff of further EU funding and Greece's exit from the EU. And once that rock starts to slide down the hill, it is very likely that Spain and Portugal will follow… after that, who knows? As I don't need to point out (but will anyway), June 17 is right around the corner, so you might want to tighten your seat belt.

A bit further out, but not very, here in the US we can look forward to the aforementioned fiscal cliff. Or, more accurately, the political theatrics around the three colliding co-factors in that cliff (the approach once more of the debt ceiling, the expiring tax cuts and mandated government spending cuts). While the outcome of the theatrics has yet to be determined, it's a safe bet that the government will extend in order to pretend while continuing to spend – and by doing so, signal in no uncertain terms that the dollar will follow all of the sovereign currency units in a competitive rush down the drain.

Bottom line: Be very cautious about industrial commodities as a whole, at least until we see signs of inflation showing up in earnest, but don't miss this opportunity to use the recent correction to fill out that corner of your portfolio dedicated to gold and gold stocks.

To get more perspectives like this, plus sector-specific commentary in energy, technology, and precious metals, sign up for the free Casey Research daily newsletter, the Casey Daily Dispatch. It's a great way to be introduced to the world of contrarian investing.

Tuesday, February 21, 2012

Thorium: The Energy "Silver-Bullet" to Replace Uranium?

Last May we covered a Financial Sense Newshour interview with Kirk Sorensen, founder of Flibe Energy - he made the case for little-known element thorium as the potential “silver bullet” to our energy problems.

Today, Casey Research energy expert Marin Katusa dives into the thorium topic once again, to see if it has realistic hopes of becoming a potential alternative to uranium...

Why Not Thorium?

By Marin Katusa, Chief Energy Investment Strategist, Casey ResearchMarin Katusa

The Fukushima disaster reminded us all of the dangers inherent in uranium-fueled nuclear reactors. Fresh news last week about Tepco's continued struggle to contain and cool the fuel rods highlights just how energetic uranium fission reactions are and how challenging to control. Of course, that level of energy is exactly why we use nuclear energy – it is incredibly efficient as a source of power, and it creates very few emissions and carries a laudable safety record to boot.

This conversation – "nuclear good but uranium dangerous" – regularly leads to a very good question: what about thorium? Thorium sits two spots left of uranium on the periodic table, in the same row or series. Elements in the same series share characteristics. With uranium and thorium, the key similarity is that both can absorb neutrons and transmute into fissile elements.

That means thorium could be used to fuel nuclear reactors, just like uranium. And as proponents of the underdog fuel will happily tell you, thorium is more abundant in nature than uranium, is not fissile on its own (which means reactions can be stopped when necessary), produces waste products that are less radioactive, and generates more energy per ton.

So why on earth are we using uranium? As you may recall, research into the mechanization of nuclear reactions was initially driven not by the desire to make energy, but by the desire to make bombs. The $2-billion Manhattan Project that produced the atomic bomb sparked a worldwide surge in nuclear research, most of it funded by governments embroiled in the Cold War. And here we come to it: Thorium reactors do not produce plutonium, which is what you need to make a nuke.

How ironic. The fact that thorium reactors could not produce fuel for nuclear weapons meant the better reactor fuel got short shrift, yet today we would love to be able to clearly differentiate a country's nuclear reactors from its weapons program.

In the post-Cold War world, is there any hope for thorium? Perhaps, but don't run to your broker just yet.

The Uranium Reactor

The typical nuclear-fuel cycle starts with refined uranium ore, which is mostly U238 but contains 3% to 5% U235. Most naturally occurring uranium is U238, but this common isotope does not undergo fission – which is the process whereby the nucleus splits and releases tremendous amounts of energy. By contrast, the less-prevalent U235 is fissile. As such, to make reactor fuel we have to expend considerable energy enriching yellowcake, to boost its proportion of U235.

Once in the reactor, U235 starts splitting and releasing high-energy neutrons. The U238 does not just sit idly by, however; it transmutes into other fissile elements. When an atom of U238 absorbs a neutron, it transmutes into short-lived U239, which rapidly decays into neptunium-239 and then into plutonium-239, that lovely, weaponizable byproduct.

When the U235 content burns down to 0.3%, the fuel is spent, but it contains some very radioactive isotopes of americium, technetium, and iodine, as well as plutonium. This waste fuel is highly radioactive and the culprits – these high-mass isotopes – have half-lives of many thousands of years. As such, the waste has to be housed for up to 10,000 years, cloistered from the environment and from anyone who might want to get at the plutonium for nefarious reasons.

The Thing about Thorium

Thorium's advantages start from the moment it is mined and purified, in that all but a trace of naturally occurring thorium is Th232, the isotope useful in nuclear reactors. That's a heck of a lot better than the 3 to 5% of uranium that comes in the form we need.

Then there's the safety side of thorium reactions. Unlike U235, thorium is not fissile. That means no matter how many thorium nuclei you pack together, they will not on their own start splitting apart and exploding. If you want to make thorium nuclei split apart, though, it's easy: you simply start throwing neutrons at them. Then, when you need the reaction to stop, simply turn off the source of neutrons and the whole process shuts down, simple as pie.

Here's how it works. When Th232 absorbs a neutron it becomes Th233, which is unstable and decays into protactinium-233 and then into U233. That's the same uranium isotope we use in reactors now as a nuclear fuel, the one that is fissile all on its own. Thankfully, it is also relatively long lived, which means at this point in the cycle the irradiated fuel can be unloaded from the reactor and the U233 separated from the remaining thorium. The uranium is then fed into another reactor all on its own, to generate energy.

The U233 does its thing, splitting apart and releasing high-energy neutrons. But there isn't a pile of U238 sitting by. Remember, with uranium reactors it's the U238, turned into U239 by absorbing some of those high-flying neutrons, that produces all the highly radioactive waste products. With thorium, the U233 is isolated and the result is far fewer highly radioactive, long-lived byproducts. Thorium nuclear waste only stays radioactive for 500 years, instead of 10,000, and there is 1,000 to 10,000 times less of it to start with.

The Thorium Leaders

Researchers have studied thorium-based fuel cycles for 50 years, but India leads the pack when it comes to commercialization. As home to a quarter of the world's known thorium reserves and notably lacking in uranium resources, it's no surprise that India envisions meeting 30% of its electricity demand through thorium-based reactors by 2050.

In 2002, India's nuclear regulatory agency issued approval to start construction of a 500-megawatts electric prototype fast breeder reactor, which should be completed this year. In the next decade, construction will begin on six more of these fast breeder reactors, which "breed" U233 and plutonium from thorium and uranium.

Design work is also largely complete for India's first Advanced Heavy Water Reactor (AHWR), which will involve a reactor fueled primarily by thorium that has gone through a series of tests in full-scale replica. The biggest holdup at present is finding a suitable location for the plant, which will generate 300 MW of electricity. Indian officials say they are aiming to have the plant operational by the end of the decade.

China is the other nation with a firm commitment to develop thorium power. In early 2011, China's Academy of Sciences launched a major research and development program on Liquid Fluoride Thorium Reactor (LFTR) technology, which utilizes U233 that has been bred in a liquid thorium salt blanket. This molten salt blanket becomes less dense as temperatures rise, slowing the reaction down in a sort of built-in safety catch. This kind of thorium reactor gets the most attention in the thorium world; China's research program is in a race with similar though smaller programs in Japan, Russia, France, and the US.

There are at least seven types of reactors that can use thorium as a nuclear fuel, five of which have entered into operation at some point. Several were abandoned not for technical reasons but because of a lack of interest or research funding (blame the Cold War again). So proven designs for thorium-based reactors exist and need but for some support.

Well, maybe quite a bit of support. One of the biggest challenges in developing a thorium reactor is finding a way to fabricate the fuel economically. Making thorium dioxide is expensive, in part because its melting point is the highest of all oxides, at 3,300° C. The options for generating the barrage of neutrons needed to kick-start the reaction regularly come down to uranium or plutonium, bringing at least part of the problem full circle.

And while India is certainly working on thorium, not all of its eggs are in that basket. India has 20 uranium-based nuclear reactors producing 4,385 MW of electricity already in operation and has another six under construction, 17 planned, and 40 proposed. The country gets props for its interest in thorium as a homegrown energy solution, but the majority of its nuclear money is still going toward traditional uranium. China is in exactly the same situation – while it promotes its efforts in the LFTR race, its big bucks are behind uranium reactors. China has only 15 reactors in operation but has 26 under construction, 51 planned, and 120 proposed.

The Bottom Line

Thorium is three times more abundant in nature than uranium. All but a trace of the world's thorium exists as the useful isotope, which means it does not require enrichment. Thorium-based reactors are safer because the reaction can easily be stopped and because the operation does not have to take place under extreme pressures. Compared to uranium reactors, thorium reactors produce far less waste and the waste that is generated is much less radioactive and much shorter-lived.

To top it all off, thorium would also be the ideal solution for allowing countries like Iran or North Korea to have nuclear power without worrying whether their nuclear programs are a cover for developing weapons… a worry with which we are all too familiar at present.

So, should we run out and invest in thorium? Unfortunately, no. For one, there are very few investment vehicles. Most thorium research and development is conducted by national research groups. There is one publicly traded company working to develop thorium-based fuels, called Lightbridge Corp. (Nasdaq: LTBR). Lightbridge has the advantage of being a first mover in the area, but on the flip side the scarcity of competitors is a good sign that it's simply too early.

Had it not been for mankind's seemingly insatiable desire to fight, thorium would have been the world's nuclear fuel of choice. Unfortunately, the Cold War pushed nuclear research toward uranium; and the momentum gained in those years has kept uranium far ahead of its lighter, more controllable, more abundant brother to date. History is replete with examples of an inferior technology beating out a superior competitor for market share, whether because of marketing or geopolitics, and once that stage is set it is near impossible for the runner-up to make a comeback. Remember Beta VCRs, anyone? On a technical front they beat VHS hands down, but VHS's marketing machine won the race and Beta slid into oblivion. Thorium reactors aren't quite the Beta VCRs of the nuclear world, but the challenge they face is pretty similar: it's damn hard to unseat the reigning champ.

[Marin has an enviable track record in the uranium sector, with one current pick up nearly 1,600% since he first recommended it to his subscribers 39 months ago. Now he's targeting a little-known company that possesses oil-recovery technology that could reward investors with similar gains.]

Sunday, February 12, 2012

Why Silver Bulls May Rejoice Again on May 26, 2013

When Will Silver Reach a New High?

By Andrey Dashkov, Casey Research

In last week's Metals, Mining, and Money from Casey Research, Jeff Clark estimated that given the magnitude of the correction that started last September, it may take until May 2012 for gold to reach a new high. Let's take a look at how long it may take for silver to rebound.

It's a commonly known fact that silver is more volatile than gold. Already in this decade, silver has risen by a factor of 12 from its ten-year low ($48.70 vs. $4.07), while gold has seen about a sevenfold climb ($255.95 vs. $1,895).

This volatility – as you'll see in a minute – holds for corrections as well. On average, silver's retreats have been deeper and longer than gold's. The three big gold corrections we looked at last week averaged 22.8%. Take a look at the three biggest for silver, along with how long it's taken to recover and establish new highs.

(Click on image to enlarge)

The three biggest silver corrections in the current bull market average to 42.1%.

Our recent correction is the second biggest on record since 2001, but what really makes it stand out is the duration. The 2004 and 2006 declines took only five and four weeks respectively to reach their low points. And it was 31 weeks after the crash of 2008 that silver bottomed. Our current decline, measured from the peak reached on April 28, 2011 to its December 29, 2011 low, spans 35 weeks… quite the determined downtrend.

It also takes silver longer to recover than gold: gold's three biggest corrections required an average of 57 weeks and 6 days to regain their old highs, while it's taken silver's three biggest falls an average of 98 weeks and 4 days to catch up.

So how long will it take to recover from the 2011 slump? We don't know the future, of course, but the current correction is close to the average of the three in the chart, so let's apply the average recovery time to our current situation. The average 42.1% correction took 98 weeks and 4 days to recover; using the same ratio, a 46.3% correction would take 108 weeks and 3 days. Counting from the previous peak of April 28, 2011, we wouldn't break the $48.70 high until May 26, 2013 (based on London PM Fix prices).

It shouldn't come as a surprise that silver will take longer to return to its old high than what we found with gold in last week's article. Why? Half of silver's use is industrial, so a weak economy can drag down its demand. We certainly saw that in 2008.

And an exact date is pure conjecture, of course, and ignores fundamental factors that directly influence the price. 2011 is not 2008. In fact, we've already seen an interesting shift in investment activity in both gold and silver markets. The Silver Institute pointed out in a recent market report that "investor activity" was the biggest contributing factor to both last April's rally as well as September's selloff.

Meanwhile, demand for physical metal has not only held firm but was projected by GFMS to reach a new record high in 2011.

Investment demand is rooted in the metal's monetary characteristics. It's not a stretch to say that we expect silver to regain its currency appeal soon, given the amount of worldwide fiat currency destruction. This will be perhaps the strongest catalyst for prices going forward. We wouldn't want to be without any silver.

If there's anything that sticks out from this bird's-eye view of the past ten years of data, it's that corrections are normal. And just as obvious is the fact that corrections end.

As with gold, the silver bull market is far from over, regardless of any weakness we may see in the near term. Don't be the impatient investor who gives up too early. And trying to time the market for a short-term profit shouldn't be the strategy in the midst of a long-term bull market. Instead, keep silver's fundamentals in mind: its industrial uses are growing and, like gold, silver is money.

That said, we believe that the window for buying silver at $30 won't be open for too long. The profit you someday realize from silver will be made buying now, when the price is low.

[Precious metals and precious metal stocks can be a solid way to store wealth, but only if you invest wisely. Don't let yourself be robbed.]

An Underappreciated Bullish Catalyst for Gold Stocks

A New Reason Gold Stocks Will Soar

By Jeff Clark, Casey Research

There are a number of reasons why many of us believe gold stocks will shoot for the moon before this bull market is over – they've done so many times in the past… the gold price still has a long way to climb… and producers are generating record revenue and profits. But I think there's another reason why gold stocks will soar – one that hasn't dawned on many in the industry yet.

The premise for my theory first lies in how gold itself is viewed. Some investors see gold as strictly a commodity or the infamous "barbarous relic." This group sees no compelling reason to buy the metal and so own little to none. Others view it as a play on a rising asset or because of supply and demand imbalances; they buy while those reasons are positive and sell when they turn negative. Still others view gold as a store of value, an alternative currency, or a hedge against inflation; they tend to buy and hold.

Ask yourself why you own gold. Is it because it's just another asset that offers diversification? Are you buying because it's going up and someone like Doug Casey thinks it will continue doing so? Or is it due to a genuine concern about the dilution of your currency, both now and in the future?

What's interesting to note is the shift in the number of investors wanting exposure to gold. Many who ignored it a decade ago are now buying. Those who started buying, say, five years ago, continue purchasing it today in spite of paying twice what they paid then. Slowly but surely, it's becoming more important to more people. To wit, increasing numbers of investors are viewing gold as a must-own asset.

So, what happens when it becomes a must-own asset to a substantial majority instead of a small minority? Sure, the price will rise, probably parabolically, but putting aside speculation on the price of gold for now, have you thought about what happens if you have trouble finding any actual, physical gold to buy?

I think what many bullion dealers warned of regarding supply in last month's BIG GOLD could come true. Andy Schectman of Miles Franklin insisted that the bullion market "will ultimately be defined by complete lack of available supply." Border Gold's Michael Levy cautioned, "If an overwhelming loss of confidence in the US unfolds, the demand for physical gold and silver will far outweigh all known inventories." And Mike Maloney of warned that if shortages develop, "physical bullion coins and bars might become unobtainable regardless of price."

Here's a trend to consider. The following chart shows the growth in the world's population vs. the total supply of gold from around the world. By this I mean new supply from mines, not the existing holdings of refined gold of various sorts held by governments, institutions, and individuals around the world.

The population of planet Earth has grown roughly 15% just since the year 2000, while the new supply of gold from all sources (mining, scrap, de-hedging) has fallen 4.2%. The rate of growth in the world's population last year was 1.1%; while this is roughly similar to the increase in annual mine production for 2011, the trend right now is clearly for the growth in population to surpass the global supply of gold coming to market.

At the same time, demand keeps growing. China imported 3.3 million ounces of gold last November – and total global mining production outside China is just 6.4 million ounces per month. Gold bullion held by the world's central banks is at a six-year high – but it's roughly 15% below the amount they held in 1980 and has fallen in half as a percent of their total reserves.

Silver supply and demand paints an even starker picture: last year, for the first time in history, sales of silver Eagle and Maple Leaf coins surpassed domestic production in both the US and Canada. Throw in the fact that by most estimates less than 5% of the US population owns any gold or silver and you can see how precarious the situation is. A supply squeeze is not out of the question – rather it is coming to look more and more likely with each passing month.

This is great for gold owners and speculators, but it has further implications: As increasing numbers of people view gold as a must-own asset, and as supply is not keeping up with demand, where is the next logical place for investors to turn to get exposure?

Gold stocks.

Imagine the plight of the mainstream investor who calls a bullion dealer and is told they have no inventory and don't know when they'll get any. Picture those with wealth finally becoming convinced they must own precious metals and being informed they'll have to put their name on a waiting list. Imagine a pension fund or other institutional investor scrambling to get more metal for their fund and being advised the amount they want is "currently unavailable."

Mining equities would be the fastest way to meet that demand.

It's already happening on a small scale. Don Coxe, the Strategy Advisor to BMO Financial Group and consistently named one of top portfolio strategists in the world, stated that, "Gold has in the past decade evolved from being a curiosity, to a speculative investment, to a sound and necessary investment." He then urged investors to "emphasize the miners at the expense of the bullion ETFs."

David Rosenberg, chief economist and strategist for Gluskin Sheff, wrote, "If we accept the premise that gold is acting like a currency, in a world where central banks in many countries are bent on depreciating their own paper money, one could conclude that bullion will rally against all these units. Gold miners offer an attractive way to play this bullion rally. Because input costs tend to be heavily concentrated in the early years of a rally, history has shown that gold miners' shares tend to dramatically outperform bullion in the later stages of a gold bull market."

And it won't be just investors buying stocks; sovereign wealth funds will buy entire companies. China proposed to buy Jaguar Mining in November – a producer that can barely turn a profit – for a 74% premium, double the typical amount. China National Gold Group purchased five gold mining companies over the past four years, spending almost a half billion dollars to do so.

Then there was this from Mineweb last week: "A consortium of Indian companies led by Steel Authority of India has turned its sights to gold and copper exploration."

And this: "Afghanistan has now invited bids to develop gold mines in the provinces of Badakhshan and Ghazni…"

Keep in mind that the market cap of gold stocks is small – Apple and Exxon Mobil are each bigger than the entire gold sector. The boring water-utilities industry is almost three times larger. The sometimes-hated life insurance industry is more than 11 times bigger.

Meanwhile, most institutional investors are underweight gold and gold stocks, if they own them at all.
The average pension fund devotes approximately 0.15% of its assets to gold stocks; doubling its holdings – still just one-third of one percent – would represent $47 billion of investment in the gold industry. If they wanted 1% exposure, $117 billion would flood our sector. And don't forget about the needs of hedge funds, sovereign wealth funds, mutual funds, private equity funds, private wealth funds, insurance companies, ETFs, and millions of worldwide retail investors like me and you.

All these entities could easily view a shift into gold stocks as a viable way to gain exposure to precious metals. It'll be the next logical step to take – maybe the only sensible step available if the supply of physical metal remains constrained. It will feel like the most natural thing in the world for them to do.
Make no mistake: if this bull market continues, gold stocks will truly soar. An increasingly desperate clamor for exposure to gold could light a short fuse for our market sector. It's not here yet, but when the rush starts, it will be both breathtaking and life-changing.

Are you positioned?

[You can buy deeply discounted gold today, getting yourself positioned for handsome profits ahead. Learn how to do it.]

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