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How to Navigate an Economy Weighed Down by Government Meddling and Cronyism

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Doug Hornig
Casey Research

If you wanted to sum up the just-concluded Casey Research/Sprott Inc. Summit titled “Navigating the Politicized Economy,” you could say “The situation is hopeless but not serious.”

More than 20 speakers – many of them world-renowned financial experts and best-selling authors – gathered in Carlsbad, CA, from September 7 to 9 to ascertain exactly how hopeless, and what investors can do to protect themselves.

Casey Chief Economist Bud Conrad reconfirmed – with a blizzard of charts and graphs – that the ship of state is still heading for a fiscal iceberg … and that iceberg looms closer by the day.

The US national debt has far outpaced the government’s ability to pay it off. It’s unsustainable – and made continuously worse by the Federal Reserve, which pushes more and more debt onto its balance sheet, blowing up an ever-bigger bubble. And with the recent announcement of QE3 – read “money-printing without any limits” – Conrad thinks the resulting pop! will be one that will make the entire globe’s ears ring.

Eric Sprott, founder and CEO of Sprott Asset Management and one of the most highly regarded asset managers in Canada, reminded Summit attendees of the difference between “liquidation” and “bailout.” The last liquidation event on Wall Street was the collapse of Lehman Brothers; since then, bailouts have been the order of the day. That says as much about the health of the financial sector as it does about the banks’ friendly relations with Washington, D.C.

Sprott is convinced that the real death knell for the current financial system just may have been sounded by the emergence of NIRP (Negative Interest Rate Policy). In July, the German government was able to sell bonds with a negative interest rate – in other words, when the bonds reach maturity in two years, investors will get 0.06% less than they put in. They’re ironclad guaranteed to lose money.

And yet people have gobbled up those “investments,” content to park cash in German bonds that will lose less (or so they believe) than the bonds of other, shakier Eurozone countries with a high positive coupon rate. Or, alternatively, they may be betting on the collapse of the euro and subsequent settling of their bonds in more stable, new Deutsche marks. In either event, NIRP is not a healthy sign for the Eurozone.

Consequently, Sprott is highly invested in gold and in what he terms the investment of the coming decade – silver.

Another speaker with no love lost for the government and Federal Reserve is G. Edward Griffin, author of The Creature from Jekyll Island, an exposé of the Federal Reserve that became an instant classic.

Griffin believes that rather than being a failure, the Federal Reserve has been vastly successful. The problem is, he said, that the American public has no idea what it actually is that the Fed set out to do. Its mandate is not, said Griffin, to ensure currency stability nor to keep the US economy afloat. Instead, since its inception, the Fed has only had one purpose: to serve its member banks.

Griffin made no secret of his conviction that the Fed is a criminal organization engaged in the legalized plunder of the American population. Through excessive money-printing and the ensuing inflation, the Fed is basically imposing a massive tax. It’s a stealth tax, said Griffin – but as old Will so aptly stated, “A rose is still a rose by any other name.”

Americans, Griffin asserted, have been completely hoodwinked as to what’s happening, namely that they are being robbed on a massive scale.

Since the gold standard was abandoned in 1971, the dollar has lost 80% of its value. If this kind of larceny had been done out in the open – say, by the government imposing an 80% income tax for 40 years – we would have had another “Off with their heads” French Revolution in D.C. a long time ago.

If Griffin’s arguments left any shred of trust in the US government, they were swept away by the Hoover Institute’s Peter Schweizer. Schweizer, author of the instant best-seller Throw Them All Out, demonstrated how members of Congress can arrive in Washington as middle-class citizens and leave a few years later with millions in the bank. Their “secret of success”: due to convenient loopholes, it is perfectly legal for our nation’s finest to act and trade on insider information they hear in closed-door meetings. Accordingly, the crash of 2008 that nearly bankrupted many ordinary investors, said Schweizer, made a lot of legislators from both sides of the aisle a fortune.

After all those eye-opening and rather dismal revelations, several speakers were asked by the audience how much of their portfolio should be devoted to the ultimate crisis hedge of precious metals. Bud Conrad’s answer: 50%. G. Edward Griffin: 51%. Eric Sprott: “I’m all in.”

But far from just presenting the problems, the Summit’s blue-ribbon faculty also came up with solutions for investors – how to protect their assets and how to profit even in the toughest of times.

“Be afraid when people are brave; be brave when people are afraid,” advised Rick Rule, founder and CEO of Global Resource Investments.

Investing necessarily involves a series of hits and misses, said Rick, and whoever claims that they correctly anticipated all of the market turns of the past thirty years is simply lying: “No one has a system that turns out uniformly positive results. If they did, everyone would be using it.”

Rick said the best lesson to learn from our mistakes is that we will continue to make them. “The trick is not to be right all the time,” he says, “it’s to be right more often than you’re wrong.” And to position yourself ahead of trends that are unstoppable, then to wait for the market to come to you. That takes patience, the courage to buy when others are selling, and the discipline to sell into a market that is roaring higher.

As an example, he bought uranium mining stocks at a time “when you could hardly give them away,” during the depths of a bear market in the sector. While most pundits declared nuclear power dead, Rick knew its resurrection was inevitable (which, as he often points out, doesn’t mean it’s imminent). And he did have to wait for it for five years, but in the end he had the last laugh.

He mentioned Paladin, a uranium miner that looked like a bargain at $0.10 a share. It promptly fell to $0.01, a 90% decline that drove most speculators straight to the exits. But those who toughed it out or even added to their positions on the nosedive, were more than amply rewarded when the stock subsequently soared to $10… for a whopping 9,900% gain.

Rick said he’s quite optimistic, even though the junior resource sector in which he specializes has suffered through a lengthy bear market. The remedy for the investment blues, he suggested, is to be secure in the knowledge that all bear markets end and to muster the intestinal fortitude to wait them out.

John Mauldin, head of Mauldin Economics and best-selling author of Endgame: The End of the Debt Supercycle and How It Changed Everything, was optimistic as well. While he sees an economic catastrophe approaching next year that is unavoidable if Washington, D.C. keeps digging itself into the debt ditch we’re currently in, he doesn’t think it’s inevitable, provided that the political class takes a few simple steps to deal with the five most pressing problems we have – namely, in order: the deficit; the deficit; the deficit; the deficit; and, yes, the deficit.

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John believes that if the federal government can manage to cut it by at least 1% per year for the next five years, the economic ship of state could stay afloat, and that it will happen: “Those in power get it; they know that tax revenues will have to go up and that spending will have to be trimmed.”

They also know, he said, that doing these things will cause recession and bring a world of hurt to a lot of people. But he asserted that they also understand that to put the needed changes off any longer will precipitate a crackup that’ll have Americans pining for the salad days of the 1930s.

Another of the most dynamic and optimistic Summit speakers was Casey Research’s Chief Technology Investment Strategist Alex Daley, who detailed some of the technological developments that have marked 2012 as the year of the breakthrough.

A lot is happening in the tech field, but Alex’s larger point was that change is coming at an increasing rate and a plummeting cost. Just for one example, Alex pointed out that it took 13 years and billions of dollars to successfully sequence the first human genome. Eleven years later, we can do it in 24 hours at a price that will soon drop below a thousand dollars.

With today’s rapid advances in nanotechnology, robotics, gene-based therapies, 3D printing, and the digitization of just about everything, the future’s so bright that even the most dire pessimist must find something to be hopeful about.

In the same spirit, Dr. Thomas Barnett, author of The Pentagon’s New Map: War and Peace in the Twenty-First Century, electrified the audience with his after-dinner keynote speech. For the better part of an hour, he held everyone spellbound with words and stunning graphics depicting the changes – demographic, cultural, religious, political, economic – that he sees coming over the next 40 years. And he is quite the optimist.

Much of what he predicted runs counter to commonly held views. Taking China, for instance, he said that we are not entering “China’s Century,” as so many have written in the popular press. He believes China’s ascendancy will last only about 15 years before the country hits several inevitable walls, and that the rest of the 2000s will belong, once again, to America. He also projected that the Muslim world will be more at war with itself than the West.

Navigating an economy bogged down with government meddling, fraud, and cronyism is no easy feat – but the all-star cast at the Casey/Sprott Summit spelled it all out for the audience. And now you can listen to every word of it from the comfort of your home, on CD and MP3. Hear over 20 plus hours of eye-opening presentations, animated panel discussion, and favorite stock recommendations from our faculty, which also included Doug Casey, Bob Hoye, Donald Coxe, former US Comptroller General David Walker, and many more. Find out more about our top-notch speakers, topics, and the Summit Audio Collection.

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How Investors Can Protect Themselves in a Politicized Economy

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Casey Research

Right on the heels of the Republican and Democratic National Conventions, the recent Casey Research Summit in Carlsbad, California—cosponsored by SprottGlobal—focused on a timely theme: “Navigating the Politicized Economy.” The somber revelations of the summit contrasted with the buzz of the party conventions. The Gold Report sat down with Louis James, Casey Research’s chief metals and mining investment strategist, Rick Rule, founder and chairman of Sprott Global Resource Investments and chairman of Sprott US Holdings, and Marin Katusa, Casey Research’s chief energy investment strategist, to discuss how investors can position themselves in a politically driven economy.

The Gold Report: Before we get into some of the nitty-gritty from the summit, could you give us a big picture of the troubled economic waters we’ll have to navigate if we want to stay afloat?

Louis James: When we said “Navigating the Politicized Economy,” we weren’t just talking about regulatory burdens but also about the overall response of governments around the world to the crisis that we’ve been calling for many years. That’s the context. It’s about how the world is responding to crisis. The response is political and very feelings-driven. It’s not a rational or scientific way of optimizing outcomes. It’s political, which means pandering to voters, which means doing whatever the larger number of usually less-informed people want as opposed to whatever science or engineering may determine is an ideal way to approach the issue. That’s scary. How you deal with that is more of a philosophical than an engineering question: how do you personally plan your life, given a world in which everything is more political every day. I think everybody should be asking that question.

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TGR: The Bureau of Labor Statistics jobs reports certainly always have political implications, and the news for August wasn’t good. The 96,000 jobs added were well down from 141,000 in July and not nearly enough to keep pace with population growth. The unemployment rate fell somewhat, but only because more than half a million people quit looking for work and are no longer counted in the tally. Is the dismal jobs report what prompted the gold price to jump up to $1,740/ounce (oz)? The daily headlines coming from Europe? Or do you suppose gold’s found a new bottom?

LJ: It’s not just the jobs report and other economic indicators that affect the market and the prices of gold and silver. In today’s market, it’s the way they relate to the probability of more quantitative easing (QE). It’s the mounting pressure for the Fed to do something. People watching this are saying it’s likely the Fed will inject more liquidity, which would be bullish for commodities and particularly bullish for precious metals. But if the Fed doesn’t do what’s expected, those gains could reverse quickly.

Ultimately, over the long term, we think inflation always wins. The government is between the rock and the hard place. Inflation is the easiest way out. People who think Republicans will embrace great fiscal discipline and put the economy back in a belt-tightening mode and build savings for the future and real capital accumulation for investing—they’re dreaming. It’s not going to happen.

Long term, we remain extremely bullish for all commodities, particularly the precious metals but near term, things can vacillate and fluctuate quite a bit. If for whatever political reasons the Feds don’t announce what people are speculating about, it could be bad. On the other hand, with a formal announcement about hundreds of billions of dollars of QE, the next uptick would dwarf the recent rise and could easily take us to new highs.

It’s important to think long term, But as speculators, we’re aware that in the short term, we seem to be coming out of a correction. If I had to go out on a limb, I’d say we probably have seen the bottom and we probably will see the QE. I don’t know that I’d push all my chips to the center of the table, but I certainly wouldn’t want to be out of the market at this time. (NOTE: The Fed did act as expected—it’s now a fait accompli. . .)

TGR: Do you agree, Rick?

Rick Rule: Basically, I do. As we learned in Lacy Hunt’s and Eric Sprott’s fine presentations at the summit, the total unfunded liabilities on the U.S. balance sheet are somewhere between $85 trillion (T) and $200T, and growing—by about $1T/year on an on-balance-sheet basis, and $8 billion (B)/year on an off-balance sheet basis.

Gold and silver traditionally do well during periods of instability, turmoil and fear. I suspect that the political debate in the U.S. for the last few weeks has provoked some measure of fear in others, as it has in me. The specter of Obama vs. Romney feels bleak, so I understand the response of gold in that respect.

Often overlooked is the fact that the opportunity cost associated with holding gold is very low now. In its war on savers and driving down interest rates, the government has cut the costs for people to hold gold, assuming they hold it on a leveraged basis. It also used to be a disincentive to holding gold because it didn’t pay any interest. Well, nothing else pays interest now, either. So if you think about holding gold in the context of the opportunity cost, that cost has disappeared.

I also think the recent spike in the gold price reflects the fact that some of the market has figured out that the government is trying to solve a solvency issue with liquidity. When one is deep in the hole, it’s wise to stop digging. Also affecting the gold market is the realization that as weak as the U.S. dollar is—the joke is it’s the worst currency in the world except all of the others—it has no obvious competitor in terms of the world’s reserve currency. Historically, of course, gold has been a store of value as well as a transfer mechanism. It’s the only common payment mechanism in the world that isn’t a promise to pay but rather constitutes payment itself.

Marin Katusa: I don’t know if I agree 100% with what Louis stated about having seen the bottom. I personally don’t think we’ve seen the lows yet. Many funds that carried the last leg of the bull market in juniors have blown up. Yes, the stocks gained recently, but volumes and dollar amounts are nowhere near where they were in mid-2010 to mid-2011. I believe we’re in a “pick right, sit tight market,” but not in the beginning of the next leg of a sector-wide bull market. Tax gain selling season is looming. I don’t think we’ve seen the end of the deflation in resource equities.

LJ: I’m thinking about the gold juniors in particular. We have what appears to be this macroeconomic thing, the impending liquidity, which I think is very bullish. We’ve also had some spectacular discoveries and, at last, some merger and acquisition (M&A) activity that has generated real excitement, which has been absent from our sector for most of the year. That makes it feel bottom-ish to me. Obviously, nobody knows, but I’m willing to go out on a limb and say this looks to be a good time to buy.

I understand the technicalities of what Marin is saying, but markets are rarely really about logic. They’re very emotional. Momentum shouldn’t play a role, but it does. To be clear, I’m not saying the bottom is in for sure, but my gut sense is that July might have been it. There are bargains out there now and I would not want to miss them. So at the end of the day, I’m agreeing with Marin: pick right, sit tight. Absolutely. But there’s money out there that wants to be deployed. Some strong reactions we’re seeing to good news from some companies show that there’s money on the sidelines that’s ready to come back into this sector.

TGR: But are they pricing in the higher resource prices?

LJ: I’m not sure they are, because the companies also have higher operating expenses. In addition, the capital to build big, new projects is really difficult to come by these days. So there’s good reason for anybody who’s paying attention to look at and balance the good and the bad.

RR: We represent the money on the sidelines. Sprott is sitting on about $700 million (M) in cash in permanent vehicles, looking to enter the market. In terms of the question of higher commodity prices, we need to remember the functional disconnect between the commodity prices and most juniors. Most juniors don’t have gold; they’re looking for it. If the price of something you don’t have goes up, it shouldn’t make any difference in your share price, although as Louis says, from a psychological point of view, it may affect perceptions.

It’s important to note, too, that the sector is undergoing a money shift. Institutional demand has driven the type of stock that was popular in the market. Fund managers were looking for leverage to gold, which led them to high up-front capital costs, low-margin gold deposits. The industry managed to lose a fortune on those deposits in the last 10 years. Having lost billions of dollars for their investors, many institutions now don’t have much left to invest. The drivers that existed in the market for the last decade are gone.

The people who have the money now are the industry itself, either raising money by way of equity or, in some cases, as a consequence of retained earnings or at least cash flow. Going forward, I expect financially accretive transactions rather than leverage to gold to drive the markets.

In a great speech at the Melbourne Mining Club, Nick Holland, the CEO of Gold Fields Ltd. (GFI:NYSE), talked about the total cost of production in the industry. Including acquisition, the cost is much closer to $1,200/ounce (oz) than $600/oz. The industry usually talks about cash costs, which is totally illusory. It omits the general and administrative (G&A) expense that goes into the mine, the upfront capital costs, the acquisition costs and, importantly, the $5B that the industry wrote off in the 1980s and 1990s.

So, extrapolating from the true total cost of production, the number of junior properties worth acquiring—acquisitions that would be accretive financially—is very low. So while the M&A activity that Louis talked about will surprise us in terms of premiums paid, it won’t be as broadly spread as people might think. Maybe 30 or 35 properties are actually worth acquiring, and they will go at pretty prices.

That’s going to be very interesting, and stock selection absolutely will be the key. I anticipate a near-term move in junior share prices as a consequence of the excitement we’re seeing in the market, but I also expect the issuance of equity coming out of the junior sector to swamp any amount of demand possible. Given the current structure of the industry, the only limit to share issuances is the standing inventory of timber between Vancouver Island and Newfoundland. These juniors are truly stunning in their ability to make paper. Some 4,000 companies in Canada are lurching toward extinction because they couldn’t raise any money for the last two years. They’re like a bunch of small governments; they’ve spent and spent and spent money, but they didn’t raise any.

But in terms of linking any major movement in the junior market to a higher gold price? No chance. Paper covers rock. Remember that game?

TGR: So no real upside?

RR: Yes, there is. I see three pieces. We’re already starting to see M&A, with fancy prices paid. Secondly, Louis alluded to the discovery cycle we’re in. The market rewards discoveries. In a terrible market, GoldQuest Mining Corp. (GQC:TSX.V) goes from $0.06 to $1.60/share,Reservoir Minerals Inc. (RMC:TSX.V) goes from $0.35 to $3.07/share, and Africa Oil Corp. (AOI:TSX.V) goes from $0.80 to $10/share. We’re 10 years and billions of dollars into this exploration cycle. There are some good discoveries. They’ll make more discoveries, and the markets will reward them.

We haven’t talked about it much, but we’re starting to see signs of a third thing: Sellers are exhausted. That the recent increases in share prices have been on stupidly low volumes suggests that the sellers are exhausted. In the names where there’s really a reason for the market to go up, it will go up. The difficulty is that those reasons are scarce. Most of the speculators—and I use that term guardedly—have fallen. They have not and will not deliver a reason for higher share prices. They won’t get rewarded, but the ones who do will truly surprise us.

TGR: You said earlier you expect a lot of equities to be issued. But with the explorer market still at a low with no signs of a rebound despite the enthusiasm about gold, what causes you to foresee all this new paper coming out?

LJ: When share prices are falling, the issuers say, “Last week it was higher, I’m not going to raise money now.” To use one of Doug Casey’s favorite terms, it’s perverse psychology. People make their decisions based on what happened last week, not on what’s going to happen. So, perversely, when the prices are falling, when they should be taking money while they can, the financings fall off. As Marin likes to say, “Friend or foe, take the dough.”

MK: When the prices turn up again, if we’re seeing a lot more positive psychology, everybody is going to try to finance, thinking, “Oh, it’s better than it was. We have to get money now while we can.”

RR: Managements get rational when their salaries are at risk. We’re getting to the point now where finances are being stretched thinly enough that they see true fundamentals coming into play—private school tuition going unpaid, the leased car getting towed, the country club dues delinquent. They wouldn’t have sold at $0.25/share when it meant they had to lay off the receptionist, but they’ll finance at a nickel if their wife’s Jaguar is going to get towed from the Safeway parking lot. That’s just the way it works, and we’re getting close to that. If they have the opportunity to do it, if there suddenly is some measure of hope in the market, if it’s possible to finance their nickel, and if doing so saves their salaries for a year, they’ll do it.

TGR: But if the institutions are out, as Marin has said?

MK: I never said that they were out. What I’m saying is we need a lot of new money to come into the junior sector to replace the invested dollars that have gone to money heaven, and new funds to replace the funds that have blown up. Some, like the fund I manage with Rick, have done very well, but at least with our cash, we’re waiting.

RR: Most of the traditional institutional investors in the gold sector are out of money. They need fresh new flows of investor capital. A move in the gold price to $1,800/oz might help with that. But certainly more direct in terms of the nickel and the dime issuances, Fidelity or BlackRock or Front Street weren’t going to do those anyway. It would be the rank-and-file punters and speculative brokers.

TGR: With another round of QE3 appearing imminent, with what’s going on in Europe, with the recent jobs report, many people are speculating that the general market will climb at least until the elections. Would that bring money back in? Will punters come out with the rising tide?

LJ: If more significant discovery news comes out and generates excitement at the same time. Metals and mining is a drop in the bucket in comparison to the oil business. It’s a very small market, and the gold subsector of that is of course even smaller. As Rick likes to say, a little bit of hope goes a long way, and it does touch everybody. In the same way that a Bre-X scandal can KO the entire industry, a Pretium Resources Inc. (PVG:TSX; PVG:NYSE) actually can uplift the industry—again, because it’s such a small industry. And yes, that can enable everybody to raise money. At times, all you need to raise money in our sector is a pulse, and sometimes not even that. At other times, nobody can raise money on any terms.

TGR: Getting back to the navigating-in-a-politicized world theme, is there an investment opportunity today? Is this the time?

MK: It’s always the time if you find the right companies. This is why I urge people to be very careful, patient and do their homework. The sector-wide bull is not there. It’s company specific.

LJ: One more point. The speculative component goes away if the global economy visibly tanks or the wheels come off. So the near term certainly presents plenty of opportunity for lower prices, and this should be seen as a buying opportunity for the very best picks.

TGR: Last time we talked, you said risk mitigation is the key to success, but in a risky market like this, how do you do that?

MK: Many factors come into play. Louis and I have had the advantage of working very closely with and being mentored by both Doug Casey and Rick Rule, so I think the key thing is to first look at areas that interest you. At that point, determine your risk appetite as an individual investor and start doing your homework. It always starts with the people. That’s the most important “P” of Casey Research’s eight Ps of Resource Stock Evaluation. You also have to look at what type of investments a company is doing, its stage of development, financial metrics and so forth. Risk mitigation is complicated, but those are some quick and easy places to start.

RR: Another thing that many people can do to mitigate risk is hire help. For instance, if you can have 40 people in the Casey organization working for you six or seven days a week, and you get that help for the price of a $1,000 subscription that you can leverage against a $1M portfolio, it’s pretty stupid not to do it.

Marin’s point about people is key. These businesses are made by people. The deposit is important, but it isn’t initially about the deposit; it’s initially about the people. Another important factor in terms of specific company risk mitigation is balance sheets. When access to capital is uncertain, having capital is critical. In a capital-intensive business, if you don’t have any capital, you don’t have any business.

Then you get around to traditional securities analysis. You don’t even necessarily have to get them right—just closer to right than your competitors do. Risk mitigation requires only knowing more than the people you’re bidding against in the market.

TGR: But in any market you want to look at those sorts of things. Do you change how you invest in a volatile, risky market?

RR: I do. Volatile markets are very good for me. I like to buy stuff when nobody else wants to buy it. In the 1990s, those swings sometimes took years, and now they sometimes take weeks. The idea that I get more frequent sales, in other words, there are more frequent panics, is not anathema to me. It’s nice for me. If the market gives me the opportunity to buy something at a 50% discount to what I think it’s worth, I’m going to do it. As you get older, if you’re successful, you learn that sometimes stuff is cheap enough. You don’t wait for the absolute bottom. The fact that you get these opportunities more frequently is good.

TGR: How about the sell side?

RR: I’ve also had to be a more frequent seller. It used to be that for successful positions my average holding was something like 70 months. In the last two or three years, I’ve had situations in which every level of greed was fulfilled in three or four months. I guess that’s wonderful, but certainly the volatility you talk about has changed my parameters.

TGR: Do you invest differently when it’s a volatile market?

LJ: I’d say that when the risk appetite in the market changes, it changes what kind of investments we recommend. Volatility is our friend for the reasons Rick outlined. If you want to shoot for the 50-baggers or 100-baggers, you’re not going to get them on multibillion-dollar companies. That means taking chances on a large number of earlier-stage companies.

But higher volatility generally means more risk aversion. Under those circumstances, we look for less-risky plays, so a development story rather than a grassroots story because the trend is well established. The share price trend in development-stage companies is well estabished; share prices spike on the discovery, decline during the “boring” engineering phase and then come up as the company ramps up to production. It’s what Marin calls the pregnancy period, the nine months up until first pour.

For whatever reason, it seems to work out that way so it’s a very reliable trend. If you can find a company with no discovery risk, with all the technical risk addressed, with the right people and a real project that will become a mine, the chances are very high that its stock will go up when the mine goes into production. So we’ll look for much lower-risk investments of that nature when people are more risk averse, which tends to be when the market is more volatile.

Logically, the math says, stick with the plan; if you broaden your buying out, you can capture spectacular wins. It doesn’t take many 100-baggers to pay for all the ones that didn’t work out. This is basically what Doug Casey does, but few people have that discipline to do that, so we tend to alter our recommendations when people are more risk-averse.

MK: A volatile market doesn’t change the way we evaluate companies. It changes the way we execute on the information.

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TGR: Eric Sprott claims silver’s the investment of the decade. To what extent have you rebalanced your recommendations toward silver?

LJ: It’s accidental, but if you look at our portfolio, you might think we agree 100% with Eric; we sure have a lot of silver plays, and almost all our producers are silver producers. There was a time, post-2008 crash, where I absolutely agreed with Eric’s outlook on silver. Because silver has its industrial component—as we all know it’s a precious metal but it’s also an industrial commodity that gets used up, unlike gold—silver sold off much harder in 2008 than gold. The industrial component brought the metal down, which I saw as a great buying opportunity. But I consider that to have been event-specific. Must the gold/silver ratio go back to the historic 17:1, or whatever? No. I don’t see any magic in these ratios. They don’t have predictive power. Silver is not only an industrial metal as well as a precious metal, it’s also a byproduct. Large copper mines produce significantly more silver than silver mines, and most silver mines are actually lead-zinc mines with big silver credits.

Thus, we’ll have silver production whether or not there’s silver demand. It’s very different from the gold sector, with a very different risk-reward proposition.

TGR: What about cash? As investors, what percent do you recommend keeping in cash right now?

LJ: Our general guidance is still one-third gold, one-third stocks that will do well in a crisis, and one-third cash. We’re keeping a lot of cash because we can’t discount the possibility of another 2008-style crash. Doug thinks it will happen. It may not be as acute as 2008, but I think it will probably be longer and deeper. If we get stupid prices on great companies, we want to have cash for that. And until inflation really kicks in, cash is not a bad thing to have.

RR: Functionally for me in the money I manage, 10% cash is float. About my lowest allocation to cash is 10%. And I’m about 35%. I would like to be more heavily invested now. I see more opportunity in the market, where I can be a private placement investor because I believe if one is a speculator, one has to get warrants. That’s the way one operates in the market. I have been singularly unsuccessful at negotiating placements on acceptable prices and terms. As a consequence, my cash position has grown organically as opposed to strategically. I would like to be much more fully invested now than I am. I think market prices are reasonable.

TGR: What do you think, Marin?

MK: We’ve closed out a lot of the big gains and now have fewer than 10 positions in the newsletter. I’m looking to deploy the money and like Rick, I’ve been unsuccessful on the terms. That’s also why I think we’re also going to go lower. Between March 2009 and March 2010, I did more than 75 private placements. They were on good terms with full three year warrants, but nowadays, because I can’t get those attractive terms with companies that meet my criteria, I’m just sitting on the sidelines.

RR: These cash holdings aren’t strategic for either one of us. We’re not following any methodology that says you should be one-third in cash. It’s opportunistic. We don’t have the opportunity in this market to deploy the cash despite the fact that the market has taken these companies’ share prices down. So far, the management teams haven’t been willing to accept placements on terms that we, as check-writers, find realistic.

MK: A strategic advantage of funds doing private placements is because most funds would move markets if they wanted to fill their desired position in a junior in the open market. So there is a lot of strategy plus the kicker of the full warrant.

TGR: You’ve often said, Marin, you have a program that does cash on hand versus market cap.

MK: We call it the Casey Cash Box.

TGR: Only a handful of companies had the cash on hand a couple years ago. Is the fact that there are substantially more of them now part of why you’re unable to renegotiate?

MK: No. It’s a different sector in that half of the junior mining companies have less than $1M in the bank. It’s a very different market today, but at the low of 2009, in March, we had about one-third of all the companies on both the Toronto and Venture trading less than cash, which was close to 700 companies. Today we have just under 45.

TGR: Does it depend on when the CEO’s wife’s Jag is being repossessed?

RR: That’s very important.

TGR: Thank you for your insights.

Hear the recommendations of all 28 experts at the Casey Research “Navigating the Politicized Economy” Summit with the audio collection.

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Are Businesses Quietly Preparing for a Financial Apocalypse?

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Dan Steinhart
Casey Research

US corporations are sitting on more cash than at any point since World War II.

That’s without including banks. I’m only talking about nonfinancial corporations – the ones that sell goods and services and make the economy go.

Those businesses hold $1.4 trillion. In absolute terms, that’s the most ever. In relative terms, it’s the most since World War II.

As investors, we can infer quite a bit from corporations’ inability (or unwillingness) to deploy their cash.

For one, it indicates that business have assumed a very defensive stance.

Cash, of course, is a buffer against uncertainty – the uncertainty that business slows for any reason. Management wants a healthy cash reserve with which to pay the bills and remain liquid should anything unexpected happen. I think we can all agree that this is prudent, and a good business practice.

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But $1.4 trillion? That tells me that businesses are not just a little jittery about the future. They’re prepared for an apocalypse.

Think about this, it’s important;

If these businesses could conjure up even the most marginal of projects to earn a meager 1% return, they would generate $14 billion profit. Instead, they’re sitting on the cash and earning near zero for a guaranteed after-inflation loss.

It’s a bad omen that corporate management would forego a collective $14b per year. Clearly, by their judgment, the risk of investing in new projects outweighs the reward – the exact opposite of the conditions needed to produce healthy economic growth.

That’s the bad news. But here’s the good, if paradoxical, news:

Even with all of this corporate slack, earnings and profit margins are very healthy, and stocks have performed quite well. Case in point, the S&P 500 is up 15% YTD.

Why the disconnect?

Well, the rising margins and earnings are easy to explain: corporations have cut costs over the past few years, becoming leaner and more efficient. This also partially explains higher stock prices.

But I think there’s another contributing factor to rising stock prices: the downright terrible outlook for bonds. Our analysis of stocks vs. bonds indicates that stocks are by far the better investment today.

The overriding reason is simple: at near zero interest rates, bonds offer almost no upside and catastrophic downside.

Simply by virtue of not being bonds, stocks have done well.

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Back to that pile of corporate cash. There’s no question that it’s a waste today. But today’s waste is tomorrow’s potential.

Corporations aren’t going to sit on that cash forever. Eventually conditions will be such that they’ll either want to or have to invest in new projects.

Perhaps inflation will be the catalyst – corporations can tolerate losing 1.7% per year today. But if the inflation rate heats up to, say, 4%, you can bet that corps will be scrambling to deploy that now idle cash into whatever mediocre projects they can rustle up.

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When that happens, they have $1.4 trillion in cash ready to go. No need to negotiate a loan. No need to issue equity to raise funds. They have all the fuel they need. The gas tank is full.

So while the economy has plenty of problems, and stocks are a far better bet than bonds, lack of cash is not one of them.

Companies are ready to invest and grow. They just need an economic and political environment conducive to doing so.

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One Chart Explains Why Government Debt Is Dragging on the Economy

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Dan Steinhart, Managing Editor
Casey Research

The US has too much debt. This is no longer a controversial statement. Some may believe other problems are more urgent, or that we need to grow our way out rather than slash spending. But even the most spendthrift pundits acknowledge that the debt-to-GDP ratio of the US must decrease if we are to have a stable, prosperous economy.

The private sector has reacted to this over-indebted reality as you would expect: by deleveraging. Since 2008, households and businesses have extinguished of 67% of their debt when measured against GDP. Some paid debt down purposefully, and others defaulted. For our purposes, it doesn’t matter how the debt went away. Only that it did.

Meanwhile, the government has done the exact opposite. It has upped its own borrowing by 52% of GDP since 2008.

As a result of these countervailing forces, the aggregate debt-to-GDP ratio has declined only slightly since 2008. Had the government not stepped in, the US economy would we well on its way to a sustainable debt path. Instead, it has shed a paltry 15% of GDP. In other words, government borrowing largely offset private deleveraging.

Click Image to Enlarge

Why, in a country in that so desperately needs deleveraging, would the government do such a thing?

The typical response is that such a quick and drastic drop in debt would have flung the US into a depression. That’s probably true, as far as it goes. There’s no denying that debt growth correlates strongly with GDP.

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But it’s only half the story. And the other half is more important.

Filling the debt gap with just any borrowing doesn’t cut it. In order for debt to aid in economic growth, it needs to be productive. Borrowing for the sake of borrowing is worse than ineffective – it’s destructive. Debt itself is neither good nor bad. It depends on what the borrower uses the money for.

Consider a businessman who borrows money to invest in a new project. If his endeavor is successful, it generates enough income to service the debt and return a profit. His income rises more than his debt. Viewed from a macro perspective, GDP rises faster than debt, and so the debt-to-GDP ratio declines. Paradoxically, he actually reduced the debt-to-GDP ratio by taking on debt. This is good debt.

Then there’s unproductive debt, which is bad. And in times of over-indebtedness, it’s really bad. Think your neighbor buying a TV on credit. He now has more debt with no additional income. He has added to debt, but not productivity. This is bad debt.

The government is the undisputed champion of creating bad debt. Borrowing to spend on weapons, relics (the post office), and losers (Solyndra) does not produce wealth.

Even if you argue that some of these expenditures are necessary, they are certainly not productive, in the sense that they add only to the debt side of the ledger without even the prospect of producing income.

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That’s the fatal flaw of the government stepping in to fill the borrowing gap. Government debt is dead weight. It is a detriment without a corresponding benefit. And even worse, it crowds out private investment, accomplishing the exact opposite of its alleged goal of spurring growth.

The borrowing gap should be filled either with productive debt or not at all. Private businesses are indeed beginning to grow credit, albeit very slowly. That’s a good sign, especially for equities – a factor that is shifting the balance between stocks and bonds that investors should have in their portfolios, and just one of the factors covered in our recent free investor bulletin on striking the right balance in your portfolio. But glance up at the chart one more time. Government borrowing has metastasized to the point that it consumes a third of all debt in the US, leaving private borrowing precious little room to grow.

All debt is not created equal. If the debt doesn’t produce growth, it’s a waste at best, and a destruction of wealth at worst.

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Preparing for Inflationary Times

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Jeff Clark
Casey Research

“All this money printing, massive debt, and reckless deficit spending – and we have 2% inflation? I’m beginning to believe that either the deflationists are right, or the Fed’s interventions are working.” – Anonymous Casey Research reader

The CPI, in our view, does not accurately measure inflation, which accounts for some of the discrepancy our reader is pointing out. However, the proper definition of inflation is “an increase in the quantity of money,” which we’ve had in spades. We’ve not experienced the concomitant increase in prices, which is what we’re addressing in this article.

It’s logical to assume that when you create more of something, you dilute the value of what’s already in existence. That’s exactly what has happened to the US dollar since the 2008 financial crisis hit. Economics 101 says this should lead to higher inflation – yet official Consumer Price Index (CPI) levels remain benign.

It’s this unexpected development that led a reader to pen the above quote. Is the inflation argument dead? If so, does that mean gold’s big run is over? It’s a timely question since the current sell-off in gold is largely attributed to low inflation expectations.

This is the first installment in our in-depth series of examining the next big catalysts for the gold price. This month we’re looking at inflation. While a low CPI may be puzzling in the midst of massive, global currency abuse, there are three realities about inflation that convince us it’s not only coming, but will catch an unsuspecting citizenry off guard.

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Let’s take a look at why we’re convinced inflation will be one of the next big catalysts for the gold price…

Reality #1: History shows that high levels of debt and deficit spending eventually lead to inflation.

This statement makes sense on the face of it, but seminal research has been done that confirms it. A country simply cannot escape high inflation when carrying oversized debt levels and/or running massive deficits. Sooner or later, these sins catch up to you, regardless of what the current thinking may be.

Debt. The first of these historical studies is detailed in the book, This Time Is Different by Carmen Reinhart and Kenneth Rogoff, who’ve extensively researched the impact of high debt on inflation and gross domestic product (GDP).

Based on a comprehensive study of global incidences, Reinhart and Rogoff gave the following conclusion:

Debt levels over 90% of GDP are linked to significantly elevated levels of inflation.

When specifically studying US history, they again observed that:

Debt levels over 90% of GDP are linked to significantly elevated inflation.

When US debt levels met or exceeded 90% of GDP, inflation rose to around 6% – roughly triple current levels – vs. the 0.5% to 2.5% range when the ratio was below 90%.
However, with regard to timing, they state:

There is no apparent pattern of simultaneous rising inflation and debt.

In other words, inflation is a clear and definite result of high debt levels, but it’s not a day-to-day link. This likely explains the current lag between high debt and a low CPI reading.

So are we nearing that 90% mark? Bud Conrad, chief economist of Casey Research, estimates we’re currently at approximately 110%. Further, he projected from his research in December that…

Using my assumptions, gross debt to GDP crosses 120% in 2014. That is well past the danger point of 90% that Reinhart and Rogoff cite. What’s scary is that my assumptions are not even close to a worst-case scenario, so the situation could be much worse.

Bud does not expect to see much more deflation. One reason is because…

In essence, much of the deflationary pressures have been cleared out. Going forward, there should be fewer outright losses from bad loans, and thus less deflationary pressure. For that reason (and many others), I expect higher inflation sooner rather than later.

Deficit Spending. Peter Bernholz is widely considered the leading expert on the link between deficit spending and hyperinflation. He conclusively states from his research that…

Hyperinflation is caused by government budget deficits.

The US budget deficit totaled $5.1 trillion during Obama’s first term in office. The longer deficits last and the bigger they are, the closer a country moves toward very high inflation levels.

The Congressional Budget Office (CBO) recently reported, however, that the 2013 deficit will drop to $845 billion. Good news, right? Not exactly, because the reduction is largely a result of higher taxes. The CBO was therefore forced to admit…

The fiscal tightening from higher taxes and lower spending will slow economic growth to an anemic 1.4 percent by the end of 2013, causing the unemployment rate to edge back higher.

It turns into a vicious cycle, because if unemployment grows, money printing will continue and even increase. The CBO further admitted…

Deficits are projected to increase later in the coming decade, however, because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt.

If deficits grow – or even just remain elevated – we inch closer and closer to the hyperinflation Bernholz warns about. Breaking this cycle will be very difficult, if not impossible… at least not without serious consequences.

These studies present clear and direct evidence that spending more than is brought in and continually adding to the national credit card leads to higher inflation. Sooner or later, this type of reckless behavior catches up to an economy. The sobering reality is that avoiding moderate to high levels of inflation in our current fiscal state would be an historical first.

Unfortunately, that’s not the only inflationary fear we have to contend with.

Reality #2: History shows that inflation can occur suddenly and grow rapidly.

Not only is higher inflation a near certainty, history tells us that once it grabs hold, it can quickly spiral out of control. Given our crumbling fiscal state, we must consider the possibility that price inflation could kick in abruptly and rise rapidly.

Amity Shlaes, a senior fellow of economic history at the Council on Foreign Relations and a best-selling author, provides some examples from the past century of US inflation that was at first subdued but then abruptly rocketed to alarming levels. Look how quickly inflation rose in just two years from “benign” levels.

According to Shlaes, US inflation was 1% in 1915 (based on an earlier version of the CPI-U). Within just two years, it soared to 17%. As she states, it happened because the Treasury “spent like crazy on the war, creating money to pay for it…”

In 1945, the official inflation rate was 2%; it accelerated to 14% in 24 months. Inflation registered 3.2% in 1972 and hit 11% by 1974.

It’s clear that the arrival of inflation can be sudden, and that prices can quickly spiral out of control. Given the profligate amount of money being printed by many countries around the globe, we could easily become victim to rapidly rising inflation. If we matched the increases in the chart, our CPI would register 11%, 15%, and 19% respectively, by February 2014.

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Regardless of the timing, though, this is a clear warning from history: expecting the CPI to remain low indefinitely is a dangerous assumption.

Reality #3: Most developed-world governments need inflation.

It is a fact that high inflation reduces the real cost of servicing debt. Our debt levels have grown so high that the only politically acceptable way to deal with them is to inflate the currency. Politicians and central bankers have no incentive to stop, and thus will continue until disastrous price inflation emerges. Just because it hasn’t occurred yet doesn’t mean it won’t.

Other political solutions simply aren’t realistic. There is no amount of politically acceptable increase in tax revenue or austerity measures that can meet existing and future obligations. Printing money is the only viable solution. Once you internalize this, an understanding of the most likely consequences becomes clear.

Even if deflation in select asset classes persists or we get another deflationary event like 2008, we can rely on central bankers to concoct more rescue schemes financed with freshly created money. Perhaps just as likely is that the economy does improve and all the money that’s been held back enters the system and sparks inflation.

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Conclusions

Based on these realities, we can draw some well-grounded conclusions about the coming rise in inflation.

The onset of higher inflation isn’t certain, but the outcome is. These realities make clear that higher inflation is virtually ensured at some point. It’s thus imperative we prepare for it.

What we use for money will experience a significant – perhaps catastrophic – loss of purchasing power. As shown, this is not speculation, but a process of cause and effect observed repeatedly throughout history. As a result, you will likely use some of your gold and silver to protect your standard of living – that is, after all, one of its purposes. The point here is to make sure you own enough ounces to offset a significant decline in purchasing power.

When inflation begins rising, precious metals will respond and move to higher levels. We don’t know if this is the next catalyst for gold, but we’re confident it will be a major driver of future prices.

Keep in mind that gold tends to moves in anticipation of inflation – think of it as inflation insurance. By the time inflation is “high,” the big moves in gold and silver will have most likely already occurred.

Stay vigilant, my friends, because higher inflation is coming – and as a result, so are higher gold and silver prices.

If you’ve ever dreamed of making a fortune in the markets, today’s junior precious-metals mining sector offers the best opportunity you’ll likely ever see. To help you understand this market more clearly, Casey Research is hosting a free special web video event, Downturn Millionaires. It will feature serially successful speculators who will reveal how they made their millions in junior miners, and how you can follow in their footsteps.

Register Today For The Free Webinar

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Ignore Cyprus at Your Own Risk

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Louis James
Casey Research

Archimedes once said that if he had a lever long enough and a place to stand, he could move the world. Today, the half-Greek island of Cyprus appears to be the fulcrum, and the long arm of the EU may be the lever that heaves the entire world over the edge of the abyss.

As Dennis Miller so eloquently pointed out in a recent Casey Daily Dispatch, most Americans would not be directly affected if North Dakota decided to seize citizens’ money in order to pay its bills, but all Americans would be deeply disturbed by such an action. The principle of the matter couldn’t be clearer; outright theft is wrong. But it’d probably be fear, not principle, that would have people heading for their banks in droves to withdraw cash as fast as possible.

Of course, on a moral plane, government money printing is equally reprehensible and cowardly to boot; it takes value out of people’s savings just as surely as taking money out of their bank accounts, but in a hidden, indirect way. (One could make the same argument of taxation in general, unless it’s voluntary.) But again, most people won’t storm the Fed with pitchforks and torches as a matter of moral rectitude. They would, however, if the government simply reached into their bank accounts and seized money those people had planned to spend tomorrow.

And if North Dakota’s hypothetical troubles were mirrored in other, much more populous states, like New York and California, it’s easy to see how people in those states wouldn’t want to wait for their governments to do the same thing. This is the abyss toward which the EU’s hard line with Cyprus has pushed all of Europe.

Europeans living outside Cyprus should not kid themselves that this is just a Cypriot problem – anyone with a bank account in Greece, Spain, Italy, etc. should be thinking very hard about how safe their cash is from confiscation. As we go to press, the Cypriot parliament has backed away from the bank levy on everyone that caused so much uproar, but the new deal still seizes money from larger depositors. This does not undo the fact that it’s still stealing – nor that the ECB asked for some of every citizens’ savings. Europeans living in non-PIIGS countries should not kid themselves about the impact on themselves if the countries near default tumble like dominoes.

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And people not living in Europe should not kid themselves into thinking that this is just a European problem; in today’s global economy, every country would get hurt by a banking and economic collapse in Europe. Those who think Asia will save the world must remember that the EU is China’s largest trading partner. Or was – who can say it will be tomorrow?

Key point: with a fractional reserve banking system, it doesn’t take a majority of bank depositors to decide to withdraw their cash to put their banks out of business. If something like 10% of depositors decided to withdraw all of their money, banks would be in real trouble – and even if only a smaller percentage were to initially decide to keep their cash at home, they could spook the required fraction into panicking and pushing the banks into insolvency. In stable times, fractional reserve banking may seem like free goodies for all, but during unstable times, it makes banks that much more precarious. Things have to be pretty dire for an entity like the ECB to demand action that could spark such a panic.

But wait – the banks are backed by the governments, so depositors are safe, right?

Yeah, right – the same bankrupt governments that are facing insolvency themselves…

Is This “IT?”

We’ve been saying for some time that the global house of cards could topple at the slightest rustling of the wings any of a number circling black swans. Something like the ECB turning draconian with Cyprus and scaring the heck out of everyone else in the EU seems more like a swan dive right into the heart of the teetering structure.

Many mainstream commentators are dismissing the significance of the Cyprus debacle – but the same type of people also dismissed the threat of the subprime crisis until it could no longer be denied.

This does not prove that what’s happening regarding Cyprus today is the tipping point future historians will point to as the beginning of the end of the EU and hence the rest of the old economic order. But it could be.

Skepticism from the mainstream does not prove that Doug Casey is right about the global economy exiting the “eye of the storm” this year, but it’s a great contrarian indicator.

What is absolutely clear is that the extreme measures the ECB has just shown it is willing to take are solid evidence that we are right about just how shaky things are – just how close to the crumbling edge of the abyss the whole world is.

Even if the direct, overnight theft of Cypriot bank deposits does not spark a bank run across Europe, it won’t change this fact. The ECB will certainly admonish us all to “pay no attention to the man behind the curtain,” but we’ve all seen the truth.

The question to ask is not, “How can we be certain?” That one’s easy to answer: we can’t be. The question to ask is, “What do I risk if this is it and I fail to prepare for the hell that’s coming two steps behind?”

To Doug, me, and all of us here at Casey Research, the answer to that is obvious: if we bet on the resumption of the economic storm and the so-called recovery continues, we’ll miss some opportunities and maybe lose some money on investments that don’t work out – but if we don’t make that bet and the economy does come unglued, we will suffer heavy losses.

If – Doug would say “when” – the wheels fall off the economic “recovery,” the vast majority of people will see a substantial reduction in their standard of living – and many will simply be wiped out. We don’t plan to be among them.

What to Do?

If the inevitable has now become imminent, the general recommendations that Doug Casey has offered many times before become even more applicable and important. They are:

Liquidate: Sell or dispose of any assets you have that might have been favored by the old economy, but are unlikely to hold value or generate income in the new one. That includes speculative real estate holdings in formerly hot markets and stocks in formerly invulnerable blue-chip companies. You might even sell your house, if you can, and rent instead. You should lighten your load in every way possible – even household junk filling your basement and attic – the storage unit you may be renting – anything you don’t truly need. Turn it into cash.

Consolidate: Cut your expenses to the bone and consolidate your assets into things that will hold value come hell or high water. The single best asset class for doing this is the precious metals: gold and silver. A substantial amount should be in cash form (coins). This is where you put your savings. Productive (not speculative) real estate is also good, but make sure it’s in a jurisdiction that is unlikely to see you as a victim to be fleeced for the public good. As Doug constantly reminds us, a critical element is getting a major portion of your assets offshore.

Speculate. With governments around the world on the verge of insolvency, most of them printing money by the helicopter-load, there are predictable economic consequences. Massive bubbles will be created, such as the one we see ahead in precious metals, and other bubbles will pop, like the collapse of more major corporations. There are no safe bets in such an environment (even gold can be confiscated if you leave it all in a jurisdiction that turns to stealing, as the EU has just shown it’s willing to do), so you’re better off speculating on a variety of bets placed on these trends. It’s possible in such volatile times to make a lot of money – this is the raison d’être of most of our publications.

Create: Despite all of the above, we are not apocalyptic, but actually quite optimistic, about the long term. In the coming years, the world is likely to change as radically as it did entering the industrial revolution – major change will impact everything: economy, politics, technology, demographics, social customs and mores, the military. Everything. This is a good time to look around and ask yourself what goods and services you can provide that people will need in the future. What worked during the late Long Boom won’t work in the future – in order to create, you’re going to have to think creatively, but it will be worth it. Life today is immeasurably richer than it was a thousand years ago, and in 100 years it will be better by a factor beyond our ability to comprehend. Maybe even 50. And in just 25, it will be beyond most people’s belief. Become a forward thinker, or become road kill.

Personally, I just sold my sports car and consolidated down to one vehicle. We really didn’t need two, and I’m using some of the proceeds to speculate on an emerging gold producer that has the potential to return ten times my investment. I plan to speculate on more great companies in the months ahead, especially if the market goes into a true panic, which it has not yet. Saving in gold has long been my practice, so that’s nothing new for me. As for the future, I plan two things: A) invest in technologies and companies I believe have great potential, starting with some of those covered by the Casey technology division; and B) work hard to keep myself from becoming obsolete.

Do not underestimate the importance of the latter; there is medical technology right around the corner that could drastically prolong the human lifespan. Everyone not at death’s door should have at least a 25-, if not 50-year financial plan.

How to Become a “Downturn Millionaire”

It’s the “speculate” component of Doug’s “liquidate, consolidate, speculate, and create” formula that most people have the most trouble with.

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We’ve said many times that the essence of speculation is to buy low and sell high. The best way to do that is to buy when there’s blood in the streets – which is what is shaping up in the market now. Despite persistently high metals prices, there’s panic in the air, and few are willing to buy. It’s at times like these, when “everyone” has given up on a commodity, sector, or asset class that cannot dry up and blow away – like metals and mining – that you can buy at “stupid-cheap prices.”

We have documented and commented upon the weakening market for metals and mining stocks, particularly gold stocks, in these dispatches for some time now. We’ve pointed out the widening gap between the value the market is giving to good companies and the commodities that underlie them, such as gold, which has traded sideways, not down, over the last year – and at a price point previously deemed unsustainably high. It is clear to us that a potentially life-changing buying opportunity is shaping up today, and it may just be the Cyprus black swan that turns out to be the tipping point in our favor.

Now, no one can time a market bottom, except by accident. But when you can buy something that has to go up when it’s selling cheap, you can make a lot of money – if you have the patience to endure until it does go up. In the case of mining stocks today, we don’t think that patience will be required for a long time, but it will have to hold up to extreme volatility in the near term.

This is, frankly, not a viable plan for everyone. People prone to panic when stock in a good company drops 30% for no reason often end up inverting the speculator’s formula, buying high and selling low. But for those who have the discipline to stand by their judgment of what has value, regardless of what the rest of the market is saying, it’s times like these that create the most leveraged buying opportunities – opportunities that literally set the foundation for accumulating serious wealth.

The nature of success and failure in speculation: discipline and perseverance matter much more than strength or speed. It’s necessary, but not sufficient, to be right – you have to stay the course.

Key point: There’s a clear and present opportunity we see in the Cyprus crisis, which has already given the price of gold a shot in the arm. However it turns out, the cat is out of the bag as regards how the EU regards peoples’ savings, and that could lead to the next leg up in the gold market. If the whole system does topple over the edge of the abyss, it should spark a gold mania such as have never been seen before, not even during the famous spike of 1980.

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It’s a matter of when – not if – the next gold mania hits. When it does, demand for companies that mine the yellow metal will escalate – creating profit opportunities that most investors dare not dream of. The biggest of these opportunities will be in select junior mining companies. Consider these gains in junior miners from previous precious-metals market rallies: Silverado Mines, 3,988%… Eagle River Mines, 3,478.9%… Goliath Gold, 7,011%… Francisco gold, 3,350%… there are many, many more such examples.

To help you get in on the ground floor of the coming precious metals mania, Casey Research has put together a very special online event: Downturn Millionaires. This free webinar will premier on April 8 and features some of the world’s most successful natural-resource speculators – like Doug Casey and Rick Rule – who will reveal how they made their fortunes in beaten-down markets and what you need to do to emulate their success.

For more information and to register, click here.

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