We’re Ready to Profit in the Coming Correction....Are You?

By Laurynas Vegys, Research Analyst

Sometimes I see an important economic or geopolitical event in screaming headlines and think: “That’s bullish for gold.” Or: “That’s bad news for copper.” But then metals prices move in the opposite direction from the one I was expecting. Doug Casey always tells us not to worry about the short term fluctuations, but it’s still frustrating, and I find myself wondering why the price moved the way it did.


As investors we’re all affected by surges and sell offs in the investments that we own, so I want to understand. Take gold, for example. Oftentimes we find that it seems to tease us with a nice run up, only to give a big chunk of the gains back the next week. And so it goes, up and down…..

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The truth is, and it really is this simple, but so obvious that people forget, that there are always rallies and corrections. The timing is rarely predictable, but big market swings within the longer term megatrends we’re speculating on are normal in our sector.

Since 2001, the gold price had 20 surges of 12% or greater, including the one that kick-started 2014. Even with last year’s seemingly endless “devil’s decline,” we got one surge. If we were to lower the threshold to 8%, there’d be a dozen more and an average of three per year, including two this year.

Here at Casey Research, we actually look forward to corrections. Why? We know we’ll pay less for our purchases—they’re great for new subscribers who missed the ground floor opportunities years ago.

This confidence, of course, is the product of decades of cumulative experience and due diligence. We’re as certain as any investor can ever be that today’s data and the facts of history back our speculations on the likely outcomes of government actions, including the future direction of the gold price.

When you keep your eye firmly on the ball of the major trends that guide us, you can see rallies and corrections for what they are: roller-coaster rides that give us opportunities to buy and take profits. This volatility is the engine of “buy low, sell high.” Understanding this empowers the contrarian psychology necessary to buy when prices on valuable assets tank, and to sell when they soar.

There have been plenty of opportunities to buy during the corrections in the current secular gold bull market. The following chart shows every correction of 6% or more since 2001.

As you can see, there have been 28 such corrections over the past 13 years—two per year, on average. Note that the corrections only outnumber surges because we used a lower threshold (6%). At the 12% threshold we used for surges, there wouldn’t be enough to show the somewhat periodic pattern we can see above. It’s also worth noting that our recent corrections fall well short of the sharp sell off in the crash of 2008.

Of course, there are periods when the gold price is flat, but the point is that these kinds of surges and corrections are common.

Now the question becomes: what exactly drives these fluctuations (and the price of gold in general)?
In tackling this, we need to recognize the fact that not all “drivers” are created equal. Some transient events, such as military conflicts, political crises, quarterly GDP reports, etc., trigger short-lived upswings or downturns (like some of those illustrated in the charts above). Others relate to the underlying trends that determine the direction of prices long term. Hint: the latter are much more predictable and reliable. Major financial, economic, and political trends don’t occur in a vacuum, so when they seem to become apparent overnight, it’s the people watching the fundamentals who tend to be least surprised.

Here are some of the essential trends we are tracking…...

The Demise of the US Dollar

Gold is priced around the world in United States dollars, so a stronger US dollar tends to push gold lower and a weaker US dollar usually drives gold higher. With the Fed’s money-printing machine (“quantitative easing”) having been left on full throttle for years, a weaker dollar ahead is a virtual certainty.

At the same time, the U.S. dollar’s status as reserve currency of the world is being pushed ever closer to the brink by the likes of Russia and China. Both have been making moves that threaten to dethrone the already precarious USD. In fact, a yuan-ruble swap facility that excludes the greenback as well as a joint ratings agency have already been set up between China and Russia.

The end of the USD’s reign as reserve currency of the world won’t end overnight, but the process has been set in motion. Its days are all but numbered.

The consequences are not favorable for the US and those living there, but they can be mitigated, or even turned into opportunities to profit, for those who see what’s coming. Specifically, this big league trend is extremely bullish for real, tangible assets, especially gold.

Out-of-Control Government Debt and Deficits

Readers who’ve been with us for a while know that another major trend destined for some sort of cataclysmic endgame can be seen in government fiscal policy: profligate spending, debt crises, currency crises, and ultimately currency regime change. This covers more than the demise of the USD as reserve currency of the world (as mentioned above); it also covers a loss of viability of the euro, and hyperinflationary outcomes for smaller currencies around the world as well.

It’s worth noting that government debt was practically nonexistent, by modern standards, halfway through the 20th century. It has seen a dramatic increase with the expansion of government spending, worldwide. The U.S. government has never been as deep in debt as it is today, with the exception of the periods of World War II and its immediate aftermath, having recently surpassed a 100% debt to GDP ratio.

Such an unmanageable debt load has made deficits even worse. Interest payments on debt compound, so in time, interest rates will come to dominate government spending. Neither the dollar nor the economy can survive such a massive imbalance so something is bound to break long before the government gets to the point where interest gobbles up 80%+ of the budget.

Gold Flowing from West to East

The most powerful trend specifically in gold during the past few years has been the tidal shift in the flow of gold from West to East. China and India are the names of the game with the former having officially overtaken the latter as the world’s largest buyer of gold in 2013. Last year alone, China imported over 1,000 tonnes of gold through Hong Kong and mined some 430 tonnes more.

China hasn’t updated its government holdings of gold since it announced it had 1,054 tonnes in 2009, but it’s plain to see that by now there is far more gold than that, whether in central bank vaults or private hands. Just adding together the known sources, China should have over 4,000 tonnes of monetary gold, and that’s a very conservative estimate. That would put China in second place in the world rankings of official gold holdings, trailing only the United States. The Chinese government supports this accumulation of gold, so this can be seen as a step toward making the Chinese renminbi a world currency, which would have a lot more behind it than U.S. T-bills.

India presents just as strong a bullish case, if only slightly tainted with Indian government’s relentless crusade to rein in the country’s current account deficit by maintaining the outrageously high (i.e., 10%) import duty on gold and silver. Of course, this just means more gold smuggling, which casts official Indian stats into question, as more and more of the industry moves into the black and grey markets. World Gold Council research estimates that 75% of Indian households would either continue or increase their gold buying in 2014. Even without gold-friendly policies in place, this figure is extremely bullish for gold and in line with the big picture we’re betting on.

So What?

Nobody can predict when the next rally will occur nor the depth of the next sell-off. I can promise you this: as an investor you’ll be much happier about those surges if you stick to buying during the corrections. But it has to be for the right reasons, i.e., buying when prices drop below reasonable (if not objective) valuation, and selling when they rise above it. Focusing on the above fundamental trends and not worrying about short-term triggers can help.

Profiting from these trends is what we dedicate ourselves to here. Under current market conditions, that means speculating on the best mining stocks that offer leverage to the price of gold.

Here’s what I suggest: test drive the International Speculator for 3 months with a full money back guarantee, and if it’s not everything you expected, just cancel for a prompt, courteous refund of every penny you paid. Click Here to get Started Now.

The article We’re Ready to Profit in the Coming Correction....Are You? was originally published at Casey Research

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The Age of Transformation

By John Mauldin

One of the many luxuries that my readers have afforded me over the years is their willingness to allow me to explore a wide variety of topics. Not all writers are so blessed, and their output and responses to it tend to stay focused on specific, often quite narrow topics. While this approach allows them to dig very deep into particular subject matter, it can reduce the total scope of their research, vision, and advice. But don’t get me wrong; these types of letters are very important. I benefit greatly from being a subscriber to a number of letters that give me detailed analysis for which I simply don’t have the time to do the research. There’s just too much going on in the world today for any of us to be an expert in more than a few areas.

I seem to find the most enjoyment and elicit the best response when I try to give my readers the benefit of my broad scope of reading and research as I try to figure out how all the various and sundry pieces of the puzzle fit together. For me, the world is just that: a vast and very complex puzzle. Trying to discern the grand themes and detailed patterns as the very pieces of the puzzle go on changing shape before my eyes is quite a challenge.

To try to figure out which puzzle pieces are going to have the most influence and impact in our immediate future, as opposed to languishing in the background, can be a frustrating experience. I often find myself writing about topics (such as a coming subprime crisis or recession) long before they manifest themselves. But I think it is important to see opportunities and problems brewing as far in advance as we can so that we can thoughtfully position ourselves and our portfolios to take advantage.

Today I offer some musings on what I’ve come to think of as the Age of Transformation (which I have been thinking about a lot while in Tuscany). I believe there are multiple and rapidly accelerating changes happening simultaneously (if you can think of 10 years as simultaneously) that are going to transform our social structures, our investment portfolios, and our personal futures. We have had such transformations in the past. The rise of the nation state, the steam engine, electricity, the advent of the social safety net, the personal computer, the internet, and the collapse of communism are just a few of the dozens of profound changes that have transformed the world in which we live.

Therefore, in one sense, these periods of transformation are nothing new. I think the difference today, however, is going to be the simultaneous nature of multiple transformational trends playing out within a very short period of time (relatively speaking) and at an accelerating rate.

It is self evident that failure to adapt to transformational trends will consign a business or a society to the ash can of history. Our history and business books are littered with thousands of such failures. I think we are entering one of those periods when failing to pay close attention to the changes going on around you could prove decidedly problematical for your portfolio and fatal to your business.

This week we’re going to develop a very high-level perspective on the Age of Transformation. In the coming years we will do a deep dive into various aspects of it, as this letter always has. But I think it will be very helpful for you to understand the larger picture of what is happening so that you can put specific developments into context – and, hopefully, let them work for you rather than against you.

We’re going to explore two broad themes, neither of which will be strange to readers of this letter. The first transformational theme that I see is the emerging failure of multiple major governments around the world to fulfill the promises they have made to their citizens. We have seen these failures at various times in recent years in “developed countries”; and while they may not have impacted the whole world, they were quite traumatic for the citizens involved. I’m thinking, for instance, of Canada and Sweden in the early ’90s. Both ran up enormous debts and had to restructure their social commitments. Talk to people who were involved in making those changes happen, and you can still see some 20 years later how painful that process was. When there are no good choices, someone has to make the hard ones.

I think similar challenges are already developing throughout Europe and in Japan and China, and will probably hit the United States by the end of this decade. While each country will deal with its own crisis differently, these crises are going to severely impact social structures and economies not just nationally but globally. Taken together, I think these emerging developments will be bigger in scope and impact than the credit crisis of 2008.

While each country’s crisis may seemingly have a different cause, the problems stem largely from the inability of governments to pay for promised retirement and health benefits while meeting all the other obligations of government. Whether that inability is due to demographic problems, fiscal irresponsibility, unduly high tax burdens, sclerotic labor laws, or a lack of growth due to bureaucratic restraints, the results will be the same. Debts are going to have to be “rationalized” (an economic euphemism for default), and promises are going to have to be painfully adjusted. The adjustments will not seem fair and will give rise to a great deal of societal Sturm und Drang, but at the end of the process I believe the world will be much better off. Going through the coming period is, however, going to be challenging.

“How did you go bankrupt?” asked Hemingway’s protagonist. “Gradually,” was the answer, “and then all at once.” European governments are going bankrupt gradually, and then we will have that infamous Bang! moment when it seems to happen all at once. Bond markets will rebel, interest rates will skyrocket, and governments will be unable to meet their obligations. Japan is trying to forestall their moment with the most breathtaking quantitative easing scheme in the history of the world, electing to devalue their currency as the primary way to cope. The U.S. has a window of time in which it will still be possible to deal with its problems (and I am hopeful that we can), but without structural reform of our entitlement programs we will go the way of Europe and numerous other countries before us.

The actual path that any of the countries will take (with the exception of Japan, whose path is now clear) is open for boisterous debate, but the longer there is inaction, the more disastrous the remaining available choices will be. If you think the Greek problem is solved (or the Spanish or the Italian or the Portuguese one), you are not paying attention. Greece will clearly default again. The “solutions” have so far produced outright depressions in these countries. What happens when France and Germany are forced to reconcile their own internal and joint imbalances? The adjustment will change consumption patterns and seriously impact the flow of capital and the global flow of goods.

This breaking wave of economic changes will not be the end of the world, of course – one way or another we’ll survive. But how you, your family, and your businesses are positioned to deal with the crisis will have a great deal to do with the manner in which you survive. We are not just cogs in a vast machine turning to powers we cannot control. If we properly prepare, we can do more than merely “survive.” But achieving that means you’re going to have to rely more on your own resources and ingenuity and less on governments. If you find yourself in a position where you are dependent upon the government for your personal situation, you might not be happy. This is not something that is going to happen all of a sudden next week, but it is going to unfold through various stages in various countries; and given the global nature of commerce and finance, as the song says, “There is no place to run and no place to hide.” You will be forced to adjust, either in a thoughtful and premeditated way or in a panicked and frustrated one. You choose.

I should add a note to those of my readers who think, “I don’t have to worry about all this because I am not dependent on Social Security.” Wrong. A significant majority of the retiring generation does depend on Social Security and also on government controlled healthcare, and their reactions and votes and consumption patterns will have an impact on society. Ditto for France, Germany, Italy, and the rest of Europe. The Japanese have evidently made their choice as to how to deal with their crisis. If you are a Japanese citizen and are not making preparations for a significant change in your national balance sheet and the value of your currency, you have your head in the sand.

There’s no question that the reactions of the various governments as they try to forestall the inevitable and manage the crisis will create turmoil and a great deal of volatility in the markets. We have not seen the last of QE in the U.S., but Japan is going gangbusters with it, and it is getting fired up in Europe and China.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best selling author, and Chairman of Mauldin Economics – Please Click Here.

The article Thoughts from the Frontline: The Age of Transformation was originally published at Mauldin Economics

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A Crisis vs. THE Crisis: Keep Your Eye on the Ball

By Laurynas Vegys, Research Analyst

Today I want to talk about crises. Two of the most notable ones that have been in the public eye over the course of the past 6-8 months are obviously the conflicts in Ukraine and Syria. The two are very different, yet both seemed to cause rallies in the gold market.

I say “seemed” because, while there were days when the headlines from either country sure looked to kick gold up a notch, there were also relevant and alarming reports from Argentina and emerging markets like China during many of the same time periods. Nevertheless, looking at the impressive gains during these periods, one has to wonder if it actually takes a calamity for gold to soar.

If so, can the yellow metal still return to and beat its prior highs, absent a major political crisis or a full blown military conflict? My answer: Who needs a new crisis when we live in an ongoing one every day?

More on this in a moment. Let’s first have a quick look at what happened in Ukraine and Syria as relates to the price of gold. Here’s a quick look at the timeline of some of the major events from the Ukrainian crisis, followed by the same for Syria.

There seems to be a fairly clear pattern in both of these charts. Gold seems to rise in the anticipation of a conflict; once the conflict gets going, or turns out not as bad as feared, however, it sells off.

We see, for example, that as the news broke that chemical weapons were being used in Syria and Obama was threatening to intervene, gold moved up. But when the US did not wade into the bloodshed and Putin proposed his diplomatic solution, gold slid into a protracted sell off, ending up lower than where it began.

It’s impossible to say with any degree of certainty how much of gold’s recent rise was due to anticipation of the Ukraine/Crimea crisis, but there were certainly days when gold seemed to move sharply in response to news of escalation in the conflict. And again, after it became clear that the U.S. and EU would do little more than condemn Russia’s actions with words, gold retreated. As of this writing, it’s down about $85 from its high a little over a month ago. (We think many investors underestimate the potential impact of tit-for-tat sanctions, but they are not wrong to breathe a sigh of relief that a war of bullets didn’t start between East and West.)

In sum, to the degree that global crisis headlines do impact the price of gold, the effects are short-lived. Unless they lead directly to consequences of long-term significance, these fluctuations may capture the attention of day traders, but are little more than distractions for serious gold investors betting on the fundamentals.

You have to keep your eye on the ball.

The REAL Crisis Brewing

 

Major financial, economic, or political trends—the kind we like to base our speculations upon—don’t normally appear as full-fledged disasters overnight. In fact, quite the opposite; they tend to lurk, linger, and brew in stealth mode until a boiling point is finally reached, and then they erupt into full-blown crises (to the surprise and detriment of the unprepared).

Fortunately, the signs are always there… for those with the courage and independence of mind to take heed.
So what are the signs telling us today—what’s the real ball we need to keep our eyes upon, if not the distracting swarm of potential black swans?

The big-league trend destined for some sort of major cataclysmic endgame that will impact everyone stems from government fiscal policy: profligate spending, leading to debt crisis, leading to currency crisis, leading to a currency regime change. And not in Timbuktu—we’re talking about the coming fall of the US dollar.

The first parts of this progression are already in place. Consider this long-term chart of US debt.

Notice that government debt was practically nonexistent halfway through the 20th century, but has seen a dramatic increase with the expansion of federal government spending.

Consider this astounding fact: The government has accumulated more debt during the Obama administration than it did from the time George Washington took office to Bill Clinton’s election in 1992. Total US government debt at the end of 2013 exceeded $16 trillion.

Let’s put that in perspective, since today’s dollars don’t buy what a nickel did a hundred years ago.

Except for the period of World War II and its immediate aftermath, never before has the US government been this deep in debt. Having recently surpassed the threshold of 100% debt to GDP, America has crossed into uncharted territory, getting in line with the likes of…....

• Japan, “leading” the world with a 242% debt-to-GDP ratio
• Greece: 174%
• Italy: 133%
• Portugal: 125%
• Ireland: 117%

The projection in the chart above is based on the 9.4% average annual rate of debt-to-GDP growth since the US embarked on its current course in response to the crash of 2008. If the rate persists, the US will be deeper in debt relative to its GDP than Ireland next year, deeper than Portugal in 2016, Italy in 2017, Greece in 2019, and even Japan in 2023 (and the US does not have the advantage of decades of trade surpluses Japan had).

Granted, the politicians and bureaucrats say they will slow this runaway train, but we’re not talking about Fed tapering here. Congress will have to embrace the pain of living within its means. We’ll believe that when we see it.

But let’s take a more conservative, 10 year average growth rate (an arbitrary standard many analysts use): 5.3%. At this rate, the US will still be deeper in debt than Ireland and Portugal in 2017, Italy in 2019, Greece in 2024, and Japan in 2030.

Either way, this is still THE crisis of our times; all of the countries mentioned above are undergoing excruciating economic and social pain. It’s no stretch to imagine the kind of social and political turmoil that has resulted from the European debt crisis coming to Main Street USA, as American debt goes off the charts.

It’s also important to understand that the debt charted above excludes state and local debt, as well as the unfunded liabilities of social entitlement programs like Social Security and Medicare.

This ever-growing mountain—volcano—of government debt is a long-term, systemic, and extremely-difficult-to-alter trend. Unlike the crises in Ukraine and Syria (at least, so far), it’s here to stay for the foreseeable future. While some investors have grown accustomed to this government created phenomenon and no longer regard it as dangerous as outright military conflict, make no mistake—in the mid to long term, it’s just as dangerous to your wealth and standard of living.

Still think it can’t happen here? To fully understand how stealthily a crisis can sneak up on you, watch Casey Research’s eye opening documentary, Meltdown America.

The article A Crisis vs. THE Crisis: Keep Your Eye on the Ball was originally published at Casey Research

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