In the Shadow of the Castle

By David Galland, Managing Director, Casey Research

These days it takes very little to set me off on yet another rant against the American political class – a proxy for governments the world over.

On occasion, I’m tempted to apologize for these rants. Not so much for the message, but for the frequency.

Unfortunately, when surveying the landscape on which our hovels rest, the king’s castle looms large in the foreground.

I am not an envious person by nature and so wouldn’t begrudge the king his fine trappings, provided they were honestly earned.

But therein lies Ye Olde Rub.

Ever more frequently these days, the drawbridge comes down and a troop of the king’s finest sallies forth to extort from me more than half of my crops, and to read new royal proclamations whose net result is to add to the daily burden of trying to provide sustenance for family and jobs for workers.

Should I protest, say, by grabbing a pitchfork and telling the soldiers to clear off my land, or refuse to fill their wagons with the best of my crops – each leaf of which represents time and investment on my part – they would grab me by the shoulders, drag me to the king’s dungeon, and confiscate my property.

In fact, all that has changed since the days of yore is that the king’s knights tend to no longer rape, as well as pillage.

To be fair, the annals of history contain rare instances of kind and intelligent monarchs, the sort who understand that overburdening the peasants ultimately reduces crop production, leading to unnecessary and unproductive hardship and, in time, even revolt. Though, by temperament, I resist authority of any description, I suppose I could live comfortably under the rule of a fair and benign monarch.

The problem with that notion, of course, is that the corruptive nature of power leads to the near certainty that Baldash the Not So Bad will be followed by Norbit the Nasty.

And all of a sudden, instead of politely requesting I kick in some reasonable percentage of my crops to help maintain a constabulary, courts, and maybe the highways, Norbit’s men are kicking in my doors and we’re back to ox carts full of my produce being confiscated to provide a new set of gold plates and to pay the cost of invading neighboring lands.

While some among you will protest, there is, I would contend, little difference between a degraded monarch and a degraded democracy. In the monarchy, a single leader directs his minions in their ruinous acts; in a democracy, the directions come from professional politicians, as well versed in gaining and keeping power as any royalty of a bygone era. (Sir Robert Byrd held high office in this nation for 57 years.)

Far from being benign, the nation’s leadership, masters at appealing to the self-interest of an unprincipled voter class, have led us to a perilous situation where the fields are being left unplanted.

And an increasing percentage of the citizenry is now muttering angry curses as the king’s men ride by in their shiny black limo-horses.

For a clear understanding of just how poorly ruled this country has been, look no further than the latest budget projections. In his recent article, “America’s Impending Master Class Dictatorship,” Stewart Dougherty does just that, analyzing the government’s wanton spending and penning some notable, and quotable, words on the topic.

One stark and sobering way to frame the crisis is this: if the United States government were to nationalize (in other words, steal) every penny of private wealth accumulated by America’s citizens since the nation’s founding 235 years ago, the government would remain totally bankrupt.

Recently our stalwart CEO Olivier Garret sent over an insider doc from the Republicans’ Study Committee that provides talking points for candidates to use in the unending struggle for control of the castle. While I think the color of flag flapping over the battlements is at this point almost irrelevant, the document contains some interesting data points.

For instance…

• $13.5 Trillion of New Debt: The president’s budget proposes to increase the national debt from today’s level of $12.3 trillion to $25.8 trillion in FY 2020 – an increase of $13.5 trillion or 109.8%.  The amount of new debt proposed by this budget is larger than the total amount of debt accumulated by the federal government from 1789 to today (even including the $3.6 trillion of new debt over the last three years).
• $2.8 Trillion Tax Increase: The president’s budget submission increases taxes by $2.8 trillion over ten years. This includes allowing many of the 2001 and 2003 tax cuts to expire at the end of this year, such as allowing the top rate (which is often paid by small businesses) to increase from 35% to 39.6%, and allowing the top capital gains tax rate to return to 20%. These tax increases would take effect in an economy that, according to many economists, will still have an unemployment rate around 10%.
• Mandatory Spending: Increases from last year’s level of $2.1 trillion to $3.4 trillion in 2020, an increase of $1.3 trillion or 59.4%. Within that amount: Medicare spending increases from $425 billion in 2009 to $953 billion in 2020 – an increase of $528 billion or 124.2%; Social Security spending increases from $678 billion in 2009 to $1.20 trillion in 2020 – an increase of $523 billion or 77.1%; and Medicaid spending increases from $251 billion in 2009 to $487 billion in 2020 – an increase of $236 billion or 94.0%.
• Interest Payments on the Debt: Increases from $187 billion in FY 2009 to $840 billion in FY 2020 – an increase of $653 billion or 349.2%.

As mentioned yesterday, the projection on interest costs is far too conservative. While the government’s always flawed projections don’t anticipate it, both Bud Conrad and Doug Casey see strongly rising interest rates as a certainty in the foreseeable future. At that point, the debt death spiral begins in earnest, and the whole charade begins to come apart.

But it won’t take soaring interest rates to bring the economy down. That’s just going to accelerate things. And, of course, the worse things get, the worse the monarchy will act – demanding ever higher taxes and further debasing the currency, as they now certainly must.

How can you protect yourself? It really depends on where you are from.

One obvious solution would be to move to a different kingdom, one that treats you and your money better. Or that pretty much ignores you altogether. If you are from the U.S., the king’s tax collectors will follow you wherever you go – but even so, there are modest tax advantages you can gain by expatriation. Ask your tax counsel for details.

If, on the other hand, you live in a kingdom that doesn’t tax foreign-derived income (yet), becoming a citizen of the world can offer serious advantages and is well worth considering. The situation in most of the developed kingdoms, where easy money and quick mortgages greatly exacerbated the levels of debt, is only going to get more dire as the rulers cast a wider and stronger net in the quest for more revenue.

Even if you aren’t in a position to move, however, you’ll benefit from clearly understanding one key point about the king. While he may dress well and speak in dulcet and pleasing tones, he doesn’t actually produce anything. What money he has to spend must first be taken off the productive elements of the peasantry.

But there are limits to how much he and his men can squeeze out of the citizenry. We are nearing those limits.

That means that all that is left to the monarchy is for it to issue IOUs. And given the levels of their debts and ongoing spending, lots and lots of IOUs. Those IOUs are called dollars, or pounds, or pesos, or yen, or….

While there will be no straight line up or down for any asset class in the unsettled times we will live through, using periods of weakness to build your exposure to tangible assets – most notably gold, whose primary and best use is as sound money – is the only way to protect yourself from the Great Debasement that’s coming.

If you are still in the learning stage when it comes to precious metals, seriously consider a subscription to our Casey’s Gold & Resource Report – at just $39 a year, and with our three-month risk-free trial, it’s your single best way to get up to speed on what’s going on with this important asset class. More info here.

Got that theme song going through your head?

I love Clint Eastwood westerns. Heat, sand, guns.

Just like the Middle East.

Now let’s talk about investments.

New Baghdad and the Collapse of Capitalism

By Doug Hornig, Casey Research

Forty years ago, it was a small town on the Persian Gulf, merely one of seven sheikdoms joined in federation in 1971 to create the United Arab Emirates. Basically, there was nothing there but sand. Yes, oil had been discovered under that sand, and the city/state was enjoying its first economic boomlet. From about 60,000 in 1968, population tripled by 1975, doubled in the next ten years, and nearly doubled again by 1995.

Problem is, especially compared with many of its Gulf neighbors, it didn’t have all that much oil to begin with, and its reserves were falling fast. What it did have was Sheikh Mohammed bin Rashid Al Maktoum, the most influential member of the family that had ruled for more than a century and a half. And the sheikh had a vision.

Sheikh Mohammed believed that the Muslim world needed a New Baghdad, a center of commerce and learning and culture that would shine like the hub of the old caliphate, which had dominated the civilized world a thousand years earlier. He was determined to erect a dazzling, ultra-modern new metropolis, starting from scratch.

On the sands of Dubai.

The rest of the story is pretty well known. The crown prince, and later ruler, of Dubai had his way. His emirate became one of the richest and gaudiest places on the planet. Population shot to almost 1½ million, about 90% of them immigrants – from unskilled Bangladeshi laborers to software engineers from the U.S. – all lured by the promise of better-paying jobs than they could find at home.

Even more striking was the explosion of construction projects. Up went mansions, office skyscrapers, artificial islands, stadiums, a speedy Metro, a busy international airport, and the world’s only 7-star hotel, among other things. And the capstone was, of course, the Burj Khalifa, formally opened on January 4.

The Burj Khalifa is the tallest manmade structure on earth. Not by a little, mind you; halfway is not a word in Sheikh Mohammed’s vocabulary. Tallest by so much that it boggles the mind. It’s 2,717 feet high. That’s more than half a mile. For comparison purposes, take New York’s late Twin Towers. Stack them one atop the other. Now you’ve got the Burj Khalifa.

Begun in late 2004, the building was originally budgeted at US$869 million. Final tally as we entered 2010 was something north of a billion and a half. That bought the first luxury hotel to bear the Armani name, four swimming pools, a 158^th-floor mosque, 57 elevators, and an observation deck at 1,450 feet, along with 52,490 square meters of office space and 288,000 square meters divided among 900 apartments.

Its coming-out party, with 10,000 fireworks and synchronized fountains shooting jets of water 150 feet into the air, was a spectacular light show, worth watching if you haven’t yet seen it, here http://www.youtube.com/watch?v=yRxxv6AZ_xg&feature=fvw . Hard to believe that you’re looking at a bone-dry desert.

You may also be looking at a gargantuan white elephant. Although every unit in the Burj Khalifa has supposedly been sold, some unknown percentage of buyers (likely very large) was speculators who opted in during the height of the world real estate boom. Properties were flipped like it was Southern California. At the market peak, modest flats were fetching more than $2,700/sq. ft. No wonder Emaar Properties, developer of the project, claims it has already recouped its capital outlay from these suck–, er, investors.

Those prices have now plummeted by up to 50%. Of the folks left holding the bag, how many of the 25,000 slated to live in the building will actually do so? We don’t know, and no one who does will talk vacancy rates. In terms of transparency, Dubai makes the Bush administration look like an ad for Window World.

What we do know is that at the moment the structure is the Big Empty. Western critics have limbered up their keyboard fingers in order to pound out expressions of disdain, everything from “The Final Monument to Excess” to “Bling City Is Dead” to “The End of Capitalism.” The first may be apt, as we’ll probably not see the likes of the Burj Khalifa again, but the last? That’s something we want to look at more closely. There is a lesson to be learned.

The truth of the matter is that there were two key, and contradictory, elements to the Dubai miracle, and when the world recession hit in 2007, one overrode the other and the whole thing came tumbling down.

First: As noted, Sheikh Mohammed didn’t have a river of oil money to rely on. So how did he manage to build his gleaming city by the sea? On the surface, it was simple. Turn Dubai into one of the world’s premier places to do business. Make it essentially tax free. Create investment incentives. Attract entrepreneurs from all over. Enlarge and capitalize on the city’s status as a deep water port. Replace traditional smuggling with legit import/export operations. Become a world financial center.

In short, install the best aspects of free-market capitalism, then send an Open for Business letter to the world.

It worked. Capital, resources, and personnel flooded in. By 2005, oil and gas were responsible for only 6% of the emirate’s GDP. Property and construction was the biggest contributor at 22.6%, followed by trade at 16%, entrepôt (duty-free import/export business) at 15%, and financial services at 11%.

No one, apparently, thought it ominous that nearly a quarter of GDP was generated by the construction and trading of properties, nor paused to consider what would happen when the music stopped and supply exceeded demand. Dubai was riding high, a model for other resource-poor, developing nations, showing them how to get rich.

Today, the hot desert wind blows through half-buildings that will never be finished. Immigrants, their work visas rescinded, are rounded up and sent home. Mercedes Benzes and Jaguars have For Sale signs taped to their windows or are just abandoned at the airport. Real estate prices tanked by 50% in 2009 and are projected to suffer another 30% haircut this year. The stock market has plunged 70%. Unmaintained, the artificial islands designed as millionaires’ playpens have begun to sink beneath the sea.

The glorious ride is over. But just in case there was any doubt, the point was hammered home last November, when Dubai World – one of the country’s leading development conglomerates – told creditors it was declaring a six-month moratorium on repayments it could no longer make.

That sent shock waves through financial markets the world over. Everyone, it seems, had invested in Dubai during the boom times. Now they’re staring at a very unfavorable restructuring at best and flat-out default at worst.

Dubai’s debt, or at least as much of it as its rulers will reveal, is about US$80 billion, or 140% of GDP. Bad enough, but it may well be significantly understated. One local investment banker puts the real number in the $120-150 billion range; with no balance sheets to pore over, we can’t know. Dubai will ask oil-rich fellow emirate Abu Dhabi for help, but there are no guarantees help will be forthcoming. Abu Dhabi has always cast a disapproving eye on Dubai’s helter skelter expansionism, and if it does step in, it will probably demand a whole lot of collateral.

Critics of a certain bent have pounced. History’s grandest experiment in unfettered free-market capitalism ran aground, they cry. Therefore the system doesn’t really work.

Which brings us to the second element in the Dubai miracle. It was built on a mountain of debt that couldn’t survive an economic downturn. And who supported that debt? The government. All of those go-go corporations, like Dubai World, are essentially government owned. Sheikh Mohammed wanted his New Baghdad, no matter the cost.

Granted, private enterprise businesses are imperfect. When in trouble, they will lie and cheat like anyone else. But in the end, they have a bottom line that they have to reveal at some point. Accounting tricks are eventually exposed. Capitalism, like a computer, is strictly binary. A company with sound finances prospers; a company that fails in the marketplace simply disappears.

Government-sponsored entities have no such limitations. They’re actively encouraged to overreach, to take risks that no sane CFO would approve. Because if they bleed red ink, the government is there to step in and prop them up. All of Dubai’s corporations were “too big to fail.” But fail they did, and in the process pushed the government into insolvency as well.

The takeaway from this story is simple. Dubai was no more free-market capitalist than Soviet Russia. Or the U.S., for that matter. If the government is the guarantor of last resort or just perceived as the ultimate reliable source of bailout money, a business has no incentive to be well run. When government (with taxpayer funding) takes a stake in even that most American of corporations, GM, capitalism truly has collapsed. Not, however, because of its shortcomings. Because government has not allowed it to function properly.

Though we lack a symbolic last gasp like the Burj Khalifa, make no mistake about it: we’re all fellow travelers with Dubai now. Washington would do well to study what happened there and hopefully learn a thing or two. Because we’re speeding toward the same crack-up.

The U.S. economy is like an out-of-control sports car in search of a tree, and the government is not “here to help you.” Take matters in your own hands and prepare as best as you can for the crash that will come. To find out what to expect in 2010 and how to bullet-proof your assets, read our FREE special report “The Good, the Bad, and the Ugly.” More here…

It takes some real analysis and perceptive talent to know the difference between a stock market rally and just a dead cat bounce. You may have heard the term dead cat bounce when relating to an individual stock, but it applies to markets as well.

Buy on a dead cat bounce and you set yourself up for a major disappointment and financial loss.

One of the most important financial seminars is coming your way soon, The Casey Research
Crisis & Opportunity Summit is in Las Vegas April 30, 2010 – May 2, 2010.

Protecting your assets should be a top priority for you and this conference will show you what you need to do.

In the meantime, let’s talk more about..

The Big Dead-Cat Bounce

By Doug Hornig, Senior Editor, Casey Research

It’s now been a year since the dark days of early March 2009, when, although no one knew it at the time, the stock market hit rock bottom. From there, all of the indexes went on a tear through the rest of the year, moving almost uninterruptedly higher before easing slightly in the first two months of 2010. At this writing (March 5), the Dow is still up 60%, the S&P 500 68%, and the NASDAQ 83%.

Virtually no one was calling for this kind of rally a year ago. But it happened. So investors are either seeing the “green shoots” supposedly sprouting from the moribund economy or believe that they’re about to break ground any day now. That sentiment is continually reinforced by government officials and media talking heads who almost universally proclaim that “the worst is past,” “we’re back from the brink,” or other words to that effect.

It’s often said that stock market action is a leading indicator, reflecting what investors think the economy will be like six or nine months down the road.

Are they right? Will good times soon be here again? Or is this just a big dead-cat bounce?

Jobs: Now here, we’ve clearly turned the corner. Everyone says so. For evidence, all we need do is look at the declining rate of job loss in the country. Uh-huh.

Perhaps it’s rude of us to point this out, but a declining rate of job loss is still a job loss. It is not the same as job creation.

The hard reality behind February’s “encouraging” numbers is that 14.9 million people remained out of work. 8.4 million jobs now have been lost since the start of the recession. In addition, there is a net need for 100,000 new jobs a month, just to keep up with first-time entrants to the workforce.

Even if the economy were suddenly to start churning out new jobs at the robust rate of a half-million a month – and the chances of that range from zero to none – it would still take nearly two years to return just to pre-recession employment levels.

(Near-term employment figures may blip up, as the government hires one and a half million people – who knew we needed so many? – to help take the census. That could lead to a classic false dawn.)

Anyone looking to the housing market to lead the recovery, as it often does, had better find a magnifying glass. January marked the third consecutive monthly drop in new home sales, and it was a whopping 11.2% tumble. Mortgage applications fell to the lowest level in 13 years. There was even a decline of 6.1% from January of 2009, itself a very dark month. Congress’s extension of home buyers’ tax credits is proving to be of increasingly little consequence.

New home sales are very important, since they cause a cascade effect down through the entire supply chain, from architects to building contractors, to sawmills, to sheetrock manufacturers, to carpenters, plumbers, and electricians. But sales of existing homes are also relevant, and there, too, the figures are grim. After piggybacking on federal subsidies through the fall, sales absorbed the worst pummeling on record in December, down 16.2%. January was a little better, only off 7.2%.

One number that is unfortunately growing is this: distressed sales, such as foreclosures, accounted for 38% of sales in January, up from about 32% in December. People are losing their homes at an increasing rate, with few buyers stepping up to the plate.

But hey, maybe there is a huge pent-up housing demand out there. We doubt it, but if there is, it doesn’t matter. Because lenders are ignoring it. In 2009, U.S. banks posted their sharpest decline in lending since 1942. One reason is that many are too cash-strapped themselves to deal with borrowers. According to the FDIC, at year’s end its “problem” list of U.S. banks at risk of failing hit a 16-year high at 702 (or nearly one in eleven), rocketing up from 552 at the end of September and 416 at the end of June. And little wonder. More than 5% of all outstanding loans are now at least three months past due, the highest level recorded in the 26 years the data have been collected.

Then there’s those that can’t lend because they’re no longer with us. 140 banks went belly-up in 2009, and 2010’s total will be worse than that if January’s 15 failures prove representative. The FDIC is bankrupt after reporting a $20.9 billion loss in the fourth quarter of 2009 in its Deposit Insurance Fund.

However, never let it be said that the government won’t try to squeeze some lemonade out of its bag of lemons. To wit, the FDIC’s own financial woes haven’t prevented it from opening a huge new satellite office in the Chicago area. The facility will be dedicated to managing receiverships and liquidating assets from failed Midwest banks, and will occupy seven floors of an 11-story building. The office space being leased is well over 100,000 square feet and will employ approximately 500 temporary employees and contractors.

Does the FDIC know something we don’t? We can’t say for sure, but the fact is that the agency has already opened similar offices in Irvine, California, and Jacksonville, Florida.  Each time, the number of bank failures in those states spiked dramatically after the FDIC set up shop.

Elsewhere, consumer confidence is flagging and, since the economy is 75% consumer-driven, that doesn’t bode well. The Conference Board’s index took a swan dive in February, to its lowest point since last April. The index plunged to 46 from January’s reading of 56.5, stifling the previous three months’ uptrend. As a measure of how bleak the public mood is, the economy is considered stable only when the consumer confidence reading exceeds 90. We’re barely halfway there.

And finally, we don’t want to lose sight of the 800-pound gorilla in the room, the federal debt. How bad is it? Well, the Bank for International Settlements recently released a very frightening figure. In order just stabilize debt at pre-crisis levels, the BIS says the U.S. government must run a budget surplus of 4.3% of GDP. Every year. For ten years.

For an in-depth look, try Harvard economist Kenneth Rogoff’s new book, This Time is Different: Eight Centuries of Financial Folly (co-authored with Carmen Reinhart of the University of Maryland), the first comprehensive survey of past financial crises around the world.

Dr. Rogoff, who may be the country’s leading expert on the historical record, concludes that a banking crisis often leads a country into default, because government’s response is usually to try to prop up the financial system with yet more debt.

If that sounds familiar and disconcerting, it should. Even more so because Rogoff has identified a clear tipping point, beyond which there is little hope of recovery. When a government’s debt grows to equal annual GDP, the game is essentially over.

Where we are now: We have $12.5 trillion in gross debt, growing at $2 trillion per year, on a GDP of $14.3 trillion. Next year, it will be $12.5T + $2T = $14.5 trillion on a projected $14.5T of GDP. Or 100%. A level we cannot survive for long.

That means it’s likely, in the not-too-distant-future, that the government will be confronted with a very stark choice between defaulting on the debt or trying to inflate its way out. The former would kill off economic growth and likely launch a worldwide depression of epic proportions.

Disastrous as that would be, if the alternative is chosen and Washington’s printing presses beget hyperinflation, that would probably be worse. In a serious deflation, those who have saved for a rainy day can make it through okay. In hyperinflation, which unconstrained further spending could easily bring on, everyone loses.

The truly prudent prepare, as best they can, for either eventuality.

How to prepare for the worsening crisis… how best to diversify your portfolio and protect your assets… which investments and specific stocks to pick… learn all that and more at the Casey Research Crisis & Opportunity Summit in Las Vegas, April 30 – May 2. Listen (and talk!) to top-notch speakers like Doug Casey, Agora Financial Chairman Bill Bonner, real estate pro Andy Miller, Sprott Chief Investment Strategist John Embry, and many more. Early-bird discounts still available for those who sign up today. Click here to find out more…

There is a saying that when it comes to government, nothing is official until it’s been officially denied. The question of who is going to buy the IMF’s gold has bounced around from one country to another; in fact, when China talks about not buying gold, you can be pretty sure they will.

And why would they say otherwise? To pre-announce their intentions would do nothing for them and drive up the price against them. Any wise buyer would do the same.

So will India buy the IMF gold, China, Russia, another country? One thing you can count on is that it WILL be bought.

Here is what Jeff Clark has to say:

Competition for the IMF’s Gold?

By Jeff Clark, Senior Editor, Casey’s Gold & Resource Report

On February 24, Reuters reported that the Reserve Bank of India was “set to be a buyer” of the 191.3 tonnes (6.74 million ounces) of gold the IMF is selling. Although the bank wouldn’t comment directly on the possibility, they did say, “We are closely looking at the gold market… gold is a safe bet.”

The article then quoted an unidentified official from the China Gold Association as saying, “It is not feasible for China to buy the IMF bullion, as any purchase or even intent to do so would trigger market speculation and volatility.”

But the next day, Finmarket news agency in Russia reported that China “confirmed its intention” to buy the IMF gold. “Chinese officials have confirmed previous announcements from IMF experts and said that the purchasing of 191 tons of gold would not exert negative influence on the world market.”

While they’ve been silent since, both India and China have publicly hinted they want this latest batch of yellow bars from the IMF. There’s no way to know if a competitive bid would spring up between these two countries, but…can you imagine the ramifications if one did?

When India bought 200 tonnes of IMF gold last November 3, it set off a buying spree that saw gold rise 14.2% in 4 weeks. What if this time around, a couple central banks both want the gold for sale? What if China says to India, “Not so fast, guys. We’d like to bid on that, too…” and word of that clash leaked out?

Pure speculation, of course, but competing for gold purchases isn’t a far-fetched idea. This sale is not pre-arranged; it’s an open market sale. Also, there’s only so much to go around. These two countries have only a tiny amount of their reserves in gold. Throw in the fact that central banks worldwide are already net buyers.

A pretty delicious thought, wouldn’t you say?

The gold price dropped a tad on the IMF announcement, but is up 1.1% since then. It’s pretty hard to make a case that IMF sales will hurt the gold price. As I said a few weeks ago in my dirty jokes column, IMF sales tend to mark bottoms in the price and not tops. The World Gold Council reported that floor traders now consider $1,054 as a floor in the market. Why? That was the average price India paid for the 200-tonnes they bought from the IMF last fall.

Meanwhile, what is our government doing?

You’ll recall that that big spike in the U.S. monetary base in late 2008 was never before seen in history. The Federal Reserve basically doubled it overnight. Our economist Terry Coxon described it as “beyond unprecedented.”

So, they stopped that insane activity, right? Since December 2008, the monetary base has swelled from 1.69 trillion to 2.18 trillion, a 29% increase and another new record.

Printing paper money vs. buying physical gold. I don’t know about you, but I think I’ll follow China and India’s lead here, even if I have to compete for the price I pay for my gold.

Is $1054 really the bottom in the gold price? Check out our 4 clues in the current issue of Casey’s Gold & Resource Report here risk free.

Entropy is a subject I have studied quite a bit; so have you! In your garage, entropy is the law that says your garage will go from a state of order to disorder and never backwards (without exerting work to make it happen).

Entropy in your investment portfolio is the accumulation of dogs in the hope they might some day be resurrected while selling your winners too early and kicking yourself for selling so soon!

David Galland of The Casey Report has an insightful essay he has given me permission to include, and I do so gladly.

Take it away David…

Entropy – Why the World as We Know It Is Dying

By David Galland, Managing Editor, The Casey Report

The concept of entropy is one of the most useful terms for understanding just about everything. While it has its origins in natural law – thermodynamics, specifically – the concept holds true pretty much across all closed systems.

In the simplest of terms, every closed system will ultimately degrade toward a state of maximum entropy.

I’ll use the current political system of the U.S. as a convenient example. When American democracy was first shoved out of the nest by the founding fathers, it was new, fresh, and energetic. It took the world’s breath away at its boldness and unlimited promise, and set the wheels turning on tangible change across much of the world.

Before the ink dried on the Constitution, however, the degradation began. From the beginning, the country’s political operations fell into the hands of a strictly limited number of parties, which quickly coalesced into just two. Since then, they have essentially shared power, with only minor differences in policies between the two. Simply, absent a disruptive external force, the closed political system quickly matured into an institutionalized “sameness” that all but assures no serious challenges – leading, ultimately, to the certainty it will degrade to only a shell of its former self.

It was, perhaps, because of his own understanding of natural law that Thomas Jefferson was heard to remark, “The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. It is its natural manure.”

That doesn’t mean I am advocating revolution – just pointing out the fact that any closed system, no matter how well constructed, will degrade. To expect the United States of America to avoid this fate is to expect the impossible.

Switching to a corporate example, I used to be a regular buyer of Toyota cars. They were well made, innovative, and suited my changing needs over the years. And I wasn’t alone – in 2007 they became the world’s largest automobile maker, with a global manufacturing and distribution system that made them appear dominant. Behind the scenes, though, entropy was at work.

In 2008, when the time had come to lease a new car, I reflexively headed over to the local dealer fully expecting to drive off with yet another Toyota, just as I had done several times over the previous decade or more. But as I walked around the showroom, it was impossible not to notice that the company had lost its edge. The cars on offer were not only more expensive than the competition, but even the newest models had that “so yesterday” look about them.

Surprising even myself, I walked out and ended up leasing from another company. I remember vividly at the time saying to my wife that we should short Toyota’s stock. Of course we didn’t – but if we had, it would have been a good play, as you can see in the chart of the company’s stock price here. Note that Toyota’s share price peaked in 2007, almost concurrently with it becoming the world’s largest car company.

As I said at the onset, you can see entropy at work in virtually every closed system. Consider the U.S. dollar, which became the world’s de facto reserve currency as a result of Bretton Woods. What an amazing advantage for the United States – this unique ability to provide the world’s central banks with their primary reserve component! And to have all the world’s commodities dealt in dollars. In short, the dollar became the centerpiece of the global economic system.

It was, of course, damned to entropy, with Nixon’s ending the dollar’s gold backing just being part of the natural progression. And if he hadn’t done it, one of his successors would have – due to some “emergency” or as a “temporary” measure, or some other flimsy political cover. Regardless, the degradation of the currency gained speed and, systematically, it’s been all downhill since.

You may also want to think about entropy when pondering the Chinese miracle. No question, China is having a heck of a run. As James Quinn writes in his article “Is China’s Recovery a Fraud?” in the February edition of The Casey Report, in 1970 that country’s GDP was just $92 billion. Today it is $4.9 trillion!

“Unstoppable!” cheers the punditry. The Chinese leadership, whose capable hands are very much on the levers of the macro-economy, are cut from special cloth, they add.

In answer to that, Quinn points out that despite China being an export-based economy, purpose-built to supply goods to a U.S. population engaged in a mad rush to spend themselves into debt and default – which is to say, an economy now only a memory – there is currently 30 billion square feet of commercial real estate under construction in China.

I’m not sure if bowling is popular with the Chinese, but with all that spare space, some enterprising individual might want to consider promoting it as the coming thing. Roller rinks? Indoor laser tag centers?

Meanwhile, back in the U.S., we the people are no longer content with a free-market system that embraces periodically burning down the house in order to rebuild stronger and better – a system which has been proven to create wealth, and lots of it. Instead, we are hell bent on adopting the closed economic system of a socialist model where everything and everyone is tightly controlled.

On that point, a recent article in the Wall Street Journal titled “No Exit in Sight for U.S. as Fannie, Freddie Flail” sheds light on the continuing degradation in the free market that used to underpin the nation’s hugely important housing sector…

Fannie and Freddie, for their part, remain at the core of a housing-finance system that inflated a dangerous housing bubble. After prices collapsed, sending shock waves around the world, the federal government put America’s housing-finance system on life support. It has yet to decide how that troubled system should be rebuilt.

On Dec. 24, Treasury said there would be no limit to the taxpayer money it was willing to deploy over the next three years to keep the two companies afloat, doing away with the previous limit of $200 billion per company. So far, the government has handed the two companies a total of about $111 billion.

(Full story here.)

Can’t you just smell the entropy? The results are not just predictable, they are evident – just look around.

As investors, it is, I would contend, important to understand the notion of entropy – and to watch for it in your portfolio companies, in your bureaucracies, and, on a more personal level, your relationships and your health. On that last point, the human body is very much a closed system and so, as we all are too painfully aware, will degrade until it ceases to exist.

You can slow the degradation by taking care of yourself. But it’s also worth remembering that it’s a one-way slope, so enjoy yourself while you are fit and able to.

While it’s impossible to halt entropy, what you can do is take action to protect yourself and your assets from its effects. That’s what the editors of The Casey Report do best: recognize and examine emerging trends in the economy and markets, and help investors take advantage of the opportunities that arise from them. And profits are everywhere if you know what to look for – even in the worst economic crises. Click here for more…

Paul Ryan — the Man Who Could Save America

By Doug Hornig, Casey Research

Since the stunning result of the Massachusetts senatorial race, President Obama has softened his tone quite a bit, essentially saying to Republicans that if they have any good ideas, “Bring ’em on.”

Whether he’s sincere or not remains to be seen, but the implication is that he’s unworried, because in his opinion the opposition party only knows how to criticize and doesn’t have anything constructive to say.

He needs to call Wisconsin Congressman Paul Ryan, ranking member of the Committee on the Budget, and have him over for tea.

Ryan is a representative who appears to take his job – overseeing the federal budget –  seriously. In 2008, he introduced legislation called “A Roadmap for America’s Future.” It died, so he’s reintroducing it this year. It won’t pass, unless the Democrats somehow manage to lose control of the House. It’s just too simple.

It’s also breathtakingly visionary. In one fell swoop, Ryan takes on taxes, health care, Social Security, and the federal deficit, and fixes them all. He puts the government back on the road to solvency, something no other plan comes close to achieving. Most important, he wants to shift our mindset, so we finally recognize that the cure for debt problems is not to pile up more debt.

Income and Other Taxes

Ryan has a nicely targeted sense of humor. For those who can’t bear to part with today’s elephantine tax code, he leaves it in place, and anyone who loves it can still use it. For the rest of us: Single filers would pay 10% on income up to $50,000 ($100,000 for joint filers) and 25% thereafter, with a generous standard deduction and personal exemption ($39,000 for a family of four). That’s it. No loopholes, deductions, credits or exclusions. Fill out the postcard and mail it in.

Additionally, the plan promotes saving by eliminating a whole bunch of other taxes — on interest, dividends and capital gains. It scraps the alternative minimum tax and abolishes the death tax. It replaces the corporate income tax – currently the second highest in the industrialized world – with a business consumption tax of 8.5%, about half the world average, putting American companies and workers in a stronger position to compete in the global economy. And it allows for immediate expensing of new business investment.

Health Care

A refundable tax credit – $2,300 for individuals and $5,700 for families – to purchase coverage (from another state if they so choose) and keep it with them if they move or change jobs. State-based high-risk pools. Supplemental payments to low-income recipients, who can choose their care rather than be consigned to Medicaid.

Medicare

Large-scale, common-sense reforms involving vouchers and medical savings accounts, along with a very gradual rise in eligibility age, designed to preserve the best parts of Medicare while securing its solvency for generations to come.

Social Security

Maintains benefits for current recipients, while making the program permanently solvent by combining a modest adjustment in the growth of initial Social Security benefits for higher income individuals with a gradual, modest increase in the retirement age. Includes a property right, so that your vested Social Security interest does not die with you. Those who own these accounts can pass on assets to their heirs.

Making all this work would require some adjustments, though. Nondefense discretionary spending, for example, would be frozen for ten years at 2009 levels in nominal terms and allowed to grow thereafter by an amount linked to CPI.

There has been immediate criticism from Democrats, mainly centered around cuts to Medicare. And some of the objections could be valid; maybe the plan could be tweaked a little to bring more of the opposition on board. Or maybe they’ll just continue to complain because reducing the size of government doesn’t sit well with them.

But the thing is, even the critics have been forced to admit that the plan would probably work. How do we know? Ryan had the confidence to submit it to the Congressional Budget Office for analysis. As you probably know, the CBO has stated frankly that continuing along the current path leads to unsustainable deficit levels and bankruptcy for the country.

According to CBO projections, debt will spike sharply upward in 2015, rising – relentlessly and unstoppably – to over 700% of GDP in 2080. Of course, the economy will be destroyed and government forced to default long before then.

If Ryan’s Roadmap were adopted, however, the CBO estimates that debt/GDP would peak at 100% in 2043 and “decline thereafter, reaching zero by 2080,” then move into surplus. (For the complete CBO report, go here.)

Yes, all predictions are bound to be flawed. Yes, we must remain skeptical of anything that comes from a politician. And yes, it’d be better for government to shrink more than this proposal envisions. But, especially concerning taxes, it’s a big step in the right direction.

The president is wrong. There is another idea out there, and according to the government’s own budgetary watchdogs, it’s a good one. It “just” necessitates adopting a 75-year time line.

Of course, the odds of Congress looking that far ahead are slim to none, and you know where Slim is. But who knows, if enough Americans beat the drum for Paul Ryan, this country may actually have a future.

Doug Casey and his team keep saying that in this day and age, politics is inseparable from the economy and the markets. In The Casey Report, we closely follow the actions of Washington’s movers and shakers, which help us, stake out the best action plan for our portfolio. Learn how to make the best of any crisis – and profit while others lose their shirts. Click here for more.

Short answer – HECK NO!

If Ben Bernanke wanted to run a real company in the real world he would have to operate by real rules, not Alice in Wonderland, printing press in my back pocket rules.

But… maybe someone else has a different opinion!

Is Ben Bernanke Smart Enough to Be a CEO?

By Vedran Vuk, Casey Research

Ben Bernanke has got to be laughing it up after being reappointed to another term as Federal Reserve chairman. What else could we expect from the ex-lawyers and lifetime Beltway bandits voting on global monetary policy?

As he starts his second term, I’m once again reminded about how supremely unqualified this man is for the job. Prior to becoming Fed chairman, Ben Bernanke basically had zero experience outside academia. His resume only includes three full-time years working for the Federal Reserve and eight months on George W. Bush’s Council of Economic Advisors. The other 23 years of his career were spent teaching college.

A successful publicly traded company could never choose a similar candidate. Imagine a company announcing, “We’re changing CEOs. Our new choice is an excellent professor of management from Princeton. His organizational skills include writing a syllabus, assembling textbooks, and publishing in academic journals with no real-world consequences. Further, our candidate has worked for three years in a government-like position and eight months in the White House.”

As an investor, I would flip out. Yet, this is the exact guy responsible for setting the entire country’s interest rates. To take a further look at Ben Bernanke, I think that we should use Doug Casey’s own 8 P’s of investing in resource stocks applied in our publications, such as the International Speculator.

One of Doug’s most important P’s for choosing a company is People. So, how would Bernanke fare should we apply these same standards to him?

Doug points out,

“To state the obvious, Boy Scout virtues like honesty, thrift, courage, and diligence are always good traits for your management teams, as are competence, knowledge, experience and, perhaps most importantly, a track record of success.”

Let’s start with honesty, competence, and a track record of success. As this great YouTube compilation of Bernanke quotes shows, the chairman has a track record of being wrong on just about everything – including  the housing bubble, economic fundamentals, and risky bank loans. That pretty much rules out “track record of success.”

This leaves only two options for his character – either he’s an honest idiot or a malicious genius. Regardless, he would fail at least two of the three above-mentioned characteristics.

Let’s continue with diligence and thrift. He has been very diligent about printing piles of money to alleviate his deflationary phobia. Maybe that’s a partial credit there. Thrift… please highlight it and make a bookmark in the dictionary. Then, ship the copy to the Fed.

Well, what about courage? Not only does Ben seem to lack confidence in front of crowds – a strange characteristic for a 23-year college professor – but he’s a complete pushover as well. Whenever the market dips slightly, Bernanke comes out promising endless liquidity and infinitely low interest rates. I’m not sure that we’ve ever had a more cowardly Fed chairman. Bernanke has to be the complete opposite of the tough-as-nails Volcker who raised interest rates to double digits without even flinching.

On knowledge, I will give him some credit. He’s written a bunch of academic articles and has surely read a lot of books on macroeconomics. But his complete lack of first-hand market experience prevents him from really utilizing that knowledge. Plus, if he really knew so much about interest rates, he would have spent more time making money and less time teaching.

Experience is the key. Think MBA programs in business. Why do these programs help so many managers when the topics covered are nearly identical to undergraduate programs? It’s because the second time around in school, students come to the classroom with experience. The synergy between education and experience is the key. Education alone is useless.

Ultimately, out of the eight characteristics that Doug mentions, Ben Bernanke fails about six or seven. This guy could never make it as a CEO. Yet the man continues leading the country into disaster as the chief executive for U.S. interest rates. This would almost be too funny were it not so frightening.

Bernanke may not pass Doug Casey’s diligent 8 Ps test… but the companies recommended in Casey’s International Speculator sure do. Investing in the best of the best junior resource stocks is a good way to safeguard your assets from the meddling and – let’s face it – downright stupidity of the government. Click here to learn more.

The ABCs of ETFs

Investing primer: The pros and cons of different funds

By Marin Katusa, Casey’s Energy Opportunities

Why invest in a fund, a cluster of stocks, rather than the stocks themselves? The reasons are twofold.

First, a fund provides cheaper diversification for those investors with smaller amounts of capital. Buying each component of a fund spreads out your risk in the same way, but you can rack up significant brokerage fees in the process.

The second reason is true for most investors across the board: some funds can get you into sectors that otherwise present significant hurdles to play. Examples include the commercial real estate sector or the convertible bond sector, since regular retail investors would be hard pressed to purchase a commercial building or to participate in a convertible debt financing.

Many different types of funds beckon to investors now, and knowing how they work will help you maximize your gain from them. We’ll highlight three to set up the fourth: open-end funds, closed-end funds, hedge funds, and the one we like now to balance risk and reward, exchange-traded funds (ETFs).

Open-End Funds

How they work. Most mutual funds advertised and sold right now are open-end funds. An open-end fund does not restrict the amount of shares that can be issued or redeemed at any time. Usually, at the end of each trading day, additional shares will be created or redeemed in relation to the fund’s net asset value (NAV), the fund’s total asset less its total liability. An investor who wishes to buy or sell units of an open-end fund deals directly with the fund itself, rather than other investors.

Open-end funds can either be “passive” or “active.” A passive open-end fund allocates its holdings according to the S&P 500, Russell 2000, or some other index. The fund manager attempts to track the index as closely as possible. In contrast, an active open-end fund will attempt to beat the index it’s tracking by timing the market or selectively choosing the companies within a sector. In reality, most fund managers for mutual funds these days are not even human – they are algorithms that pick stocks.

Advantages. Open-end funds can be found everywhere, are readily accessible, and straightforward to understand. In fact, if you walk into a major bank, they can likely offer you several open-end funds depending on your risk tolerance and the sector of your choice. Choosing a fund manager that delivers positive excess return (also called “alpha”) may provide consistent, market-beating performance. Finally, the reinvestment of returns without incurring additional transaction costs could be beneficial for small investors.

Disadvantages. Mutual funds (both open-end and closed-end) tend to have higher expenses than ETFs, money taken out of your investment each year. For a passive open-end mutual fund that tracks the same index as an ETF, it’s often cheaper to purchase the ETF instead. For one thing, mutual funds tend to have more trades compared to an ETF, which makes the tax bill larger – costs that are passed on to fundholders. Also, with an active open-end fund, an investor is paying for the expertise of the fund manager (or in most cases, the stock-selecting computer) on top of the diversification benefits the fund is providing.

Open-end funds may have minimum purchase requirements as well as restrictions on the number of times that the fund can be bought or sold within a period of time. In a time of tremendous panic, many investors could sell their fund holdings, leading to a liquidity crisis for the fund and potentially large losses, as the fund sells as much holdings as possible to pay back its fundholders.

Closed-End Funds

How they work. Like the open-end variety, closed-end funds start with an amount of money that they then use for investments. The main difference here is that a closed-end fund issues a limited amount of shares at the beginning and no more for the life of the fund. After the initial offering by the fund, new investors would need to buy the units of the fund from other investors via the secondary market.

Thus several closed-end funds are traded on exchanges – though they’re not to be confused with ETFs, however much fund companies have occasionally tried to market them as such. For one thing, closed-end funds are often actively managed, whereas ETFs are most often passively managed. Secondly, ETFs need to disclose their holdings continuously, whereas closed-end funds can disclose holdings as infrequently as every quarter.

Lastly, ETFs tend to trade at or around their NAVs, a feature often not the case for closed-end funds. In fact, a closed-end fund could deviate quite far from net asset value. Since by definition it can’t create more shares, the unit price at any given time reflects its assets but also expectations of its future performance – that is, investor demand.

Advantages. Units of closed-end funds traded on an exchange can be bought or sold at any time, with neither trading restrictions nor minimum investment requirements. Compared to active open-end funds, closed-end funds tend to have a slightly better expense ratio because they are rarely advertised. And since closed-end funds do not deal directly with investors, they’re less vulnerable to a “run on the bank” situation than an open-end fund.

Disadvantages. Since most closed-end funds are active, they tend to have a higher expense ratio than ETFs or index funds. However, the bigger problem for a closed-end fund is the fact that the unit price on the exchange is often not in line with its NAV. An investor looking to buy into such a fund first needs to perform the due diligence; he must determine the appropriate discount or premium to apply to the NAV to come up with a target price. That’s not easy for the average investor.

Another feature to look out for is that since active funds are constantly rebalancing in an effort to time the market and to improve risk-adjusted returns, your portfolio allocation may be shifting without your knowledge. For that matter, this is also true of actively managed open-end funds. Both can lead to poor risk management.

Hedge Funds

How they work: Like the funds we’ve already talked about, hedge funds take a collection of money and purchase assets with it. However, hedge funds can only be offered to qualified individuals with a net worth of over US$1,000,000 or income of over US$200,000 per year. This structure allows hedge funds to purchase and use investment vehicles that a traditional fund, whether open- or closed-end, cannot – leverage, derivative contracts, short selling, and the like. This flexibility allows hedge fund managers to pursue investment strategies outside the bounds of traditional “long-only” funds. Hedge funds are highly deregulated compared with mutual funds.

Advantages. Hedge funds can have some of the highest returns in all of Wall Street. An example would be John Paulson’s hedge fund that bet against Lehman Brothers in 2007, returning more than US$15 billion to his investors in just one year. Moreover, hedge funds can get investors into sectors that even mutual funds cannot enter, such as distressed securities, options, and other more exotic derivatives.

Disadvantages. Hedge funds can be highly risky, especially depending on the sector and strategy of the fund. Also, hedge funds generally prefer to work in secrecy and drop the cloak of confidentiality around their trades, so fund holdings are usually disclosed once a quarter at most.

Hedge fund units are highly illiquid, and holders won’t receive their investments until the fund dissolves, which could be several years. In addition, some hedge funds also charge a very high expense ratio – especially the ones with strategies that involve more trading and more leverage, such as a fixed-income arbitrage hedge fund. Hedge funds also face the same portfolio allocation risk as actively managed open- and closed-end funds.

Exchange-Traded Funds (ETFs)

How they work. ETFs, too, hold a collection of assets: stocks, bonds, commodities, futures contracts, derivative contracts, and others among them. The fund manager then creates or redeems new shares as necessary based on the assets and available cash in the fund at the time. Large institutional investors and ETF specialists can deal with the fund manager directly to create or redeem these shares, generally in large quantities by delivering “baskets” of the underlying asset held by the ETF. For example, if the ETF were based on U.S. Treasury bills, an ETF market maker could purchase more shares from the ETF fund manager by delivering an amount of T-bills to the ETF, and vice versa if they wished to redeem shares from the ETF.

The participation of these institutional investors and ETF specialists ensures an ETF will trade around its NAV per share. If the ETF trades at a price significantly higher than its NAV, these “market makers,” as we call them, would take the opportunity to sell the ETF and buy the baskets of assets to create more ETF shares for profit without risk. This action, known as arbitrage, exerts a downward pressure on the ETF’s price to meet its NAV. Conversely, prices that drop below the NAV get a bump upward when arbitrageurs buy to take advantage of the riskless profit.

Advantages. In addition to their inherent tracking of NAV, ETFs have some of the lowest expense ratios among all the funds. They typically charge about 0.25% to 1% per year and sometimes as low as 0.07%, in contrast to the 1.0% to 1.5% of the average mutual fund. May not sound like much, but it can add up significantly in the long run.

Another advantage of ETFs is that they can be traded like any other security, which means they can be shorted and investors can purchase options on them – a flexibility that experienced investors in particular appreciate. Finally, the holdings of ETFs are announced at the beginning of each trading day, which lets you know exactly what you own at any time. As we said, most other funds generally disclose their holdings much less often, such as once per quarter

Disadvantages. ETFs have no trading restrictions, and their simplicity can lure investors into overtrading and high transaction costs. One needs to keep strategy in mind. If you’re starting with less capital but thinking long-term, the usual mutual fund strategy – making a small initial investment and regularly adding to it – can work against you with an ETF.

Due to the transaction costs, a higher-expense mutual fund could actually outperform an ETF in the short run. ETF investments are best made with several large chunks of capital, rather than many small ones.

Potential Pitfalls of ETFs

The combination of high investor interest and the advent of more and more exotic ETFs that cover virtually every imaginable sector is giving rise to several risk factors with which you should become familiar. Among them:

• Closed-end funds posing as ETFs. Many closed-end funds, trying to catch the ETF bandwagon, have relabeled their funds with the words “ETF” in their names. These funds may look the same and also trade on exchanges, but they’re not ETFs. Compared with a closed-end fund, ETFs generally have more transparency, better tax implications, and lower expense ratios.

• Leveraged ETFs. Leveraged ETFs are funds that track 200% or even 300% of an index’s daily returns by using options and derivatives. The key word here, however, is “daily,” which means that over the long run, these ETFs may not truly mimic the price action of the underlying asset as well as they should be. Case in point: the price of gold vs. the leveraged gold bull ETF vs. the leveraged gold bear ETF:

If you had bought spot gold in the past 12 months, you’d be up 27%. In contrast, the Horizon BetaPro Gold Bull (T.HGU) would have garnered you only 9%, and the Horizon BetaPro Gold Bear (T.HGD) would have shaved you a disastrous 62.5%.

In an environment where there is no clear trend for the underlying index of the ETF, leveraged ETFs based on the index will suffer. This means even if you bought both the bull and the bear, you are at risk of losing money. This effect would only compound if you were buying a triple-leveraged fund. Unfortunately, leveraged funds are a necessary evil when you want to bet against an index or a commodity, since there does not exist a “bear” ETF with high enough liquidity that does not leverage.

• Tracking error. Similar to the leveraged-fund example above, some ETFs do not actually track the underlying commodity or index as well as we may believe. You’ll find this most often with commodity ETFs, which often track not the actual physical commodity but the futures.

Consider the United States Natural Gas Fund (UNG), which has risen about 12% between mid-November and mid-December. Nice. But in the same time frame, the Henry Hub spot price for natural gas rose 110%, frustrating many investors who thought they would reap much higher rewards. What was the cause of such discrepancy? The UNG uses swaps and Henry Hub futures to proxy actual natural gas. While the spot price was shooting up 110%, the Henry Hub futures price only rose 16%. So before you buy, be sure to know exactly what the ETF is tracking.

In Casey’s Energy Opportunities, Marin Katusa and his team provide a solid education in all things energy… and beyond. For just $39 per year, you can become a veritable expert and profit from the prudent investments they recommend. Click here to find out more…

During the campaign, Obama was riding on a train and gave a “choo, choo” for everyone to enjoy. Visions of things to come.

In case you are unaware of why investors want to own gold, here are some prominent ones:

Gold:

• responds to its own supply and demand
• protects against short-sighted government actions and interventions
• is a bellwether of market sentiment and economic outlook
• protects against currency devaluation and inflation
• is global
• is one of the most beautiful metals ever found in the earth’s crust
• is a store of value
• is timeless
• is money

But if that were not enough, those timeless reasons are now added to by the following:

1. For the first time ever, China has invested in GLD, the gold exchange-traded fund. Their sovereign wealth fund, China Investment Corporation, recently invested $155 million in the ETF. The amount represents only .05% of the sovereign funds’ $300 billion, meaning there’s a lot more where that came from.

2. The Prime Minister’s Office in India is creating a stream-lined process so that the country’s state-owned corporations can “aggressively pursue the acquisition of strategic mineral resources.” The Indian government, normally known for thick-layered bureaucracy, has created a centralized body that will have “rapid strategic and decision making powers.” This is telling, both from the perspective that they see some urgency to the matter, and that the acquisition targets are minerals.

3. “Iran is now a nuclear state,” declared President Ahmadinejad last week. The Islamic republic has produced its first batch of high-level enriched uranium, which they claim is solely for electricity purposes but can also be used to create material for atomic weapons if enriched to 90%. In response, the U.S. imposed new sanctions, and the U.N. is considering adding more of its own sanctions, too.

(That one’s got to have you feeling warm and fuzzy now, doesn’t it?)

4. The U.S. government must inflate. Here’s another reason we think that sooner or later inflation trumps deflation… by 2020, government economists project that entitlement benefits (Social Security, Medicare, etc.), along with interest payments on the national debt, will devour 80% of all federal revenues.

There just is no other way around it. How is Uncle Sam going to come up with $100+ TRILLION dollars any time soon? That’s what the U.S. is going to need in the lifetimes not of our children and grand-children, but OUR lifetimes. Trillion dollar deficits? Come on.

We now have been fighting in Afghanistan longer than the Soviet Union. With about as much success.

Politicians are leaving Congress by the car-load (and taking their leftover campaign money with them).

Owning gold should be a cornerstone investment in everyone’s portfolio. But, is now a good time to buy? Check out the four “clues” we outline in the new issue of Casey’s Gold & Resource Report here, risk free…