Global Currency Crisis & Gold – What’s Really Going to Happen in 2011 – 2012

Following on from the first 2 parts in this series: Whats really going to happen in 2010 Whats going to happen in 2010/2011 – part II Another great writer and analyst makes it into our categories section, Bob Chapman of Global research with a seminal must read piece outlining the road ahead towards a new [...]

Casey Research – Gold Silver & World Views

Scrolling feed from Casey Research Daily Dispatch – news views and insights from one of the industry’s best.

  • Fri, 19 Dec 2014 06:17:00 +0000: Jury Nullification and Why Ross Ulbricht’s Prosecutors Are Trying to Evade It - Casey Research - Research & Analysis

    Dear Reader,

    I’ve mentioned the Ross Ulbricht trial previously because it matters and because almost no one else will touch the subject. Several days ago I got information on the trial that I think you should know about.

    I’ve never met Ross Ulbricht and I’ve never used his supposed website, but he was targeted for political reasons by a politician who loves power. That triggered me right away. Furthermore, the site that Ross allegedly ran, The Silk Road, was an important experiment—a true free market. It was precisely the kind of experiment that this world desperately needs, and which entrenched power hates.

    This case matters. Please let people know about it. The trial begins January 5.

    When I’m done, Doug French discusses some of the fallout of the oil price swoon.

    Let’s get to it.

    Jury Nullification and Why Ross Ulbricht’s Prosecutors Are Trying to Evade It

    Oil’s Swoon Undoes the Fed

    Doug French, Contributing Editor

    While we’re taught in school and reminded by many that central banks are in the inflation-fighting business, history proves the opposite. Economist Murray Rothbard compared central bankers who talked about suppressing inflation to arsonists who would run down the street yelling “fire” after setting a building ablaze.

    However, post financial crisis, Fed Chairs Bernanke and Yellen haven’t been able to light a fire under consumer prices. It’s asset prices that have soared with the central bank’s magic dust. Social media equity and the junkiest of debt, not to mention art and farmland, were pushed to the heavens by Fed policy arcana dubbed “ZIRP,” “QE,” and “Operation Twist”—all clever terms for money creation.

    The central bank turned central planner when PhD economists took over running the place, starting with Arthur Burns’ appointment by Richard Nixon and the bumping of the gold standard. These events all set the stage for a “Fed on steroids” era since the financial collapse.

    The central bank openly says its job is to push securities prices higher and yields lower. And while it can’t print jobs, it has clearly succeeded at pushing stock and bond prices upward.

    Dangerously for investors big and small, the amount of risk in a security, whether it be a stock or bond, is misrepresented when the Fed inflates the price with oceans of liquidity.

    The monetary mandarins have had their way in recent times: being knighted by the British queen (Greenspan); named person of the year (Bernanke); and participants in their rigged markets can’t wait to pay them six figures per speech in retirement.

    But now a single market previously thought to be bulletproof has turned the junk-bond market—a market levitated by Fed extravagance—on its ear. That market is oil. Time’s Dan Kadlec wrote this week that junk bond prices have dropped 8% after investors pulled $22 billion out of the market.

    He explains:

    The junk bond selloff began in the energy sector, where oil prices recently hitting a five-year low set off alarms about the future profits—and ability to make bond payments—of some energy companies. In the past month, the selling has spread throughout the junk-bond universe, as mutual fund managers have had to sell to meet redemptions and as worries about further losses in a possibly stalling global economy have gathered steam.

    This is quite a turnaround from the spring when the Wall Street Journal published an article titled “Investors Clamor for Risky Debt Offerings.” Investors put almost $3.5 billion in taxable high-yield bond funds and ETFs in the first quarter. “We’re in an environment where the discerning eye of real credit investors has given in to the less discerning generic yield grab,” Stuart Lippman, a portfolio manager at TIG Advisors LLC, told the WSJ.

    Junk yields had fallen to 5.4%, the lowest since 2007 and bond covenants reflecting a borrower’s market. “The Moody’s Investors Service covenant-quality index, which rates high-yield bonds for investor protections, with 1 the highest score and 5 the lowest, fell to 4.14 in March from 4.05 in February,” reported the WSJ.

    In June junk-bond yields were returning3.90% above Treasuries. “That spread has widened to 5.08 percentage points for junk bonds vs. 7.86 percentage points for energy bonds—an indication of how worried investors are about default, particularly for small, highly indebted companies in the fracking business,” writes John Waggoner for USA Today.

    The Fed’s quadrupling of its balance sheet and rate obliteration had made junk irresistible—Exhibit A: Puerto Rico. Earlier this year the municipal bond market was off to its best start in five years according to Bloomberg, “as Puerto Rico’s record $3.5 billion junk deal leaves demand for higher-yielding securities unslaked.”

    Puerto Rico is the Detroit of the tropics. The island paradise has been in recession for eight years, has an unemployment rate exceeding 15%, and half the population lives in poverty. Nearly a third of its citizens collect food stamps. and its economy has shrunk 14% since 2006.

    So how big is the market for the debt of a broke territory? In normal times, the answer would be “nonexistent.” However, this has been no ordinary market. With investors groping for yield, the paper of a bankrupt territory seemed like pennies from paradise.

    Puerto Rico debt was officially christened junk in February, but what the sunny territory has according to Zacks is “a stronghold on municipal bond portfolios, driven by its triple tax exemption policy.”

    It took oil’s swoon to shine a bright light on Puerto Rico’s problems. The country’s benchmark general obligation bonds with an 8% coupon hit 84.657 cents on the dollar, reports Reuters. The debt of the country’s electric power authority PREPA carrying a 5% coupon have been cut in half, trading at 49.125 cents on the dollar.

    The risks masked by Fed liquidity are starting to be uncovered throughout the junk-bond universe. USA Today reports, “Nuveen Symphony High Yield A fund plunged 16% Monday, bringing its total return for the year to negative 18.67%.”

    “Energy is falling out of bed and will drive the entire market lower,” Riaz Haidri, head of high yield at broker-dealer Cantor Fitzgerald & Co. told the Wall Street Journal.

    Energy bonds comprise 14% of the high-yield market, but “even nonenergy high-yield bonds have been hit as investors rushed to sell whatever debt they could to raise cash,” writes Katy Burne.

    The Eccles Building monetary operators’ Keynesian training tells them that the answer to everything that ails the economy is more money and cheaper debt. But debt, no matter how cheap, requires that sales be made or taxes collected, and payments be made.

    The junk-bond market is the first to crack. It won’t be the last.

    Friday Funnies

    This week I found some great clips of the great Mort Sahl.

    Explaining politics:

    Casey Daily Dispatch

    With Milton Berle, semi-seriously:

    Casey Daily Dispatch

    That’s It for This Week

    Have a great weekend, and please look into jury nullification. Then, if you decide that it’s important, tell people about it. Some of them will freak out immediately (being afraid of any thought contrary to power), but persist all the same—many of them will come around over time.

    Paul Rosenberg
    Editor, A Free-Man’s Take

  • Thu, 18 Dec 2014 11:25:00 +0000: A Disappointing Christmas for Silicon Valley? - Casey Research - Research & Analysis

    Just a week until Christmas, and that timing means this is our last missive of the year. Fret not, though; if you truly miss me, you can tune into this new Bitcoin video from our good friends at Mauldin Economics, where I play the skeptic as usual. Maybe you’ll want to pick up some virtual currency for a stocking stuffer. You’ll have some more time on December 25 anyway, since hackers got what they wanted: Sony canceled the release of The Interview after the five largest theaters bailed on the film under vague threats. See below for more details, but this thing is about to turn into something far more serious as the US government throws its weight into accusations of nation-state espionage.

    Us? We’re spending that extra time keeping our eyes on the small-cap selloff for bargains instead. In today’s brand-spanking-new issue of Extraordinary Technology, we just unwrapped a profitable young digital advertising platform Wall Street hasn’t really caught on to yet. With 63% growth last quarter, you can bet they will soon. Pick up your copy here, along with a risk-free peek at the whole portfolio.

    Now, on to the news moving the market…

    Rape, Stalking, and Intimidation Ripe from Silicon Valley

    I held up this issue just as we go to press because there is some breaking news I feel I must comment on. Like so many in the tech media we’ve been following the roller-coaster ride that is Uber. After months of seemingly bad news for the once-untouchable startup, Uber’s troubles just escalated big time.

    What was once easy to write off as an isolated incident—the driver in India accused of rape—now looks systemic. Four people in Boston have complained about being sexually assaulted in the last month by Uber drivers, including a rape allegation. This, on top of the company’s internal suggestions of casing an annoying female journalist and lax attitude to cyberstalking by employees, shows a company probably growing too darn fast. In the race to stay ahead, the company seems to have gotten lax on security for its systems and its drivers, putting customers in harm’s way. It’s announced new technology to better screen drivers—with a two-day turnaround, the company was either already working hard on this tough problem or they are masters of bullshit. The more bad stuff that comes out about the company, the more it looks like the latter.

    To top it all off, it’s not just Tampa and Portland banning Uber. India did it last week. Now all of France has bowed to a protest from taxi drivers, banning UberPop (the EU offering from the same company). Then the company’s “surge pricing” backfired again, this time in the Sydney hostage crisis. That price algorithm is going to get it in real trouble someday soon, running afoul of anti-price-gouging laws in effect in many cities like New York.

    But Uber’s problems aren’t necessarily its own fault. After all, taxi drivers have always had a dark streak. Rape, robbery, and assault are just a few of the things that occur with some regularity in the profession. It’s no surprise then that Uber would face the same challenges—especially when its drivers aren’t going through secondary background checks from the government and don’t have the financial bonding issues of a taxi medallion hanging over their heads. (Maybe Uber might consider selling bonds of its own, letting people sponsor drivers and risk their capital for a share of good performance? It would distribute the incentive for safety in a way the company can’t do now. Or maybe they should only hire women drivers? Though then you’d find stories about employee safety… taxi driving is a rough gig.)

    Regardless, the company has a serious PR problem. Unless it gets out in front of it in a big way, the company could end up being remembered only for the crimes of its staff and drivers.

    Windows May Live for Another Day, Market Data Say

    Back in July, we called your attention to the fact that after eight consecutive quarters of decline, the PC market had stabilized at about 315 million annual units. That good news caught many industry experts by surprise, as they had expected annual demand, which peaked at 365 million units in 2011, to continue to plunge until it was well below the 300 million mark.

    The free-fall in PC demand was halted by two main factors:

    1. The ending of support by Microsoft (MSFT) for its Windows XP operating system, which is motivating XP users to buy new computers with supported systems; and
    1. The slowing of the cannibalization of the PC market by tablets, whose meteoric sales plateaued.

    Now, another catalyst for PC sales has appeared on the horizon. Windows 10 was announced by Microsoft in September and is expected to be released next fall. That could spark a big upgrade cycle for PCs even though, or especially since, its predecessor flopped.

    Pacific Crest analyst Brendan Barnicle maintains that many PC owners have delayed replacement of their old units because of their dislike for Windows 8, which was released in October 2012 to reviews which ranged from blasé to complete bashings.

    “Microsoft (MSFT) saw relatively weak adoption of Windows 8, but early reviews are encouraging for Windows 10,” Barnicle said. He went on to say that Intel has sized up the opportunity by suggesting that as many as 600 million PCs might upgrade to Windows 10.

    The investment implications are immense. However, picking the right stock(s)… those that will experience significant benefits from the trend but don’t have those benefits already built into their share price... will, as usual, be the trick. In the September issue of BIG TECH, we recommended such a stock. It’s already started to drift higher as Wall Street’s unfounded fears that the PC era ended have abated like a soccer mom’s concern over the last “food that will kill you” from the evening news. But it’s still a bargain. In fact, we see the stock returning 50% in the next 12-18 months, regardless of what happens to the broader market. For access to this recommendation, sign up for a risk-free trial of BIG TECH.

    Apple Pay Sees Massive Corporate Adoption… Actual Users Remain to Be Seen

    Apple Pay appears to be gaining traction in the electronic payments arena, succeeding where tech giants such as Google, Verizon, and AT&T have floundered. In recent weeks, Apple (AAPL) has signed up dozens of banks and retail stores—and posted many a press release about it. The company claims that Apple Pay supports the cards used for 90% of purchase volume in the US. “Retailers and payment companies see Apple Pay as the implementation that has the best chance at mass consumer adoption, which has eluded prior attempts,” says industry expert Patrick Moorhead.

    Our take: no company will turn down the opportunity to put its name next to Apple, the most valuable brand (and stock) in the world. Supporting Apple Pay is not technically complex for a bank, and it requires almost nothing of most retailers who have had NFC-capable terminals (the tech behind Apple Pay) for years. For them to say they are on board is nothing but a PR exercise.

    But Apple phones only comprise about 25% of the US-installed base, so even if it could get 50% of users to ditch tried and true credit cards, they’d still only support less than 10% of purchasing power at most. And getting to that 50% level is an enormous undertaking that would costs billions in marketing and promotions—old habits die hard, especially when the replacement is more complicated to use and adds no value. As it is right now, the limited data say most people just aren’t using it, not even the decidedly tech-forward panel that InfoScout put together:

    Even if Apple succeeds in capturing a significant share of the electronic payments market, the resulting profit probably won’t be enough to move Apple’s share-price needle much in the intermediate term. Carl Icahn estimates that by 2017, Apple Pay could generate $2.5 billion in annual revenue, which by our estimation, would increase earnings per share by only about $0.32.

    But here’s the bigger picture: Apple Pay is one more element in a growing ecosystem of lifestyle products and services that, in Icahn’s words, differentiate Apple from a simple hardware company. Not only that, but a few solid base hits with products such as Apple Pay and Apple Watch could, when taken together, turn out to add up for shareholders. Still, at recent prices driven by the massive shift from small- to large-cap stocks, Apple stock’s too rich for our blood now.

    3D-Printing Stocks Collapse Back to Industry Reality

    In general, it’s been a good year for tech stocks. But the same can’t be said for 3D printing, with the industry’s main players getting massacred.

    What gives? For starters, enthusiasm has waned and multiples have rapidly contracted, which always eventually happens with emerging technologies. At that point, only companies that can actually deliver sales and earnings growth will bounce back. Also, investors are concerned over increasing competition from the likes of Hewlett-Packard (HPQ), which is making an aggressive push into the space.

    Nevertheless, Canaccord Genuity is bullish on the incumbents, calling for a much better performance in 2015, especially for 3D Systems (DDD) and Stratasys (SSYS), which the firm expects to appreciate 66% and 62% respectively.

    We’ve seen and won similar rises before in the 3D-printing space, but we wouldn’t bet on that big a comeback this time around. We’re still high on the technology, but we’ll wait until our evaluation turns up more companies that can meet our 9 Ps criteria.

    Solar Investors Get a Bad Burn

    Solar stocks are taking a beating, with Guggenheim Solar ETF (TAN) shedding 25% over the last three months. The drop in solar almost mirrors the drop in oil prices, which has bewildered both analysts and solar execs alike, according to an Investor’s Business Daily article. The cause of the confusion: oil isn’t used to create much electricity, so falling oil prices should have no direct effect on solar demand. But of course, the market probably realizes that, so there’s likely something else at work, like a rotation out of all energy stocks.

    At any rate, the pullback in solar will be short-lived, according to Merrill Lynch, which expects the industry to bounce back in 2015, thanks to soaring installations. The firm cites SunEdison (SUNE), SunPower (SPWR), SolarCity (SCTY), and Vivint Solar (VSLR) as top picks. SunEdison looks especially interesting, since the firm boasts a deep roster of accomplished investors, including Greenlight Capital’s David Einhorn, who recently gave an informative and entertaining presentation on why he’s investing in the company.

    We’re not ready to wade in just yet. Government manipulation in the solar markets has been on the wane, and it remains to be seen if the biggest benefactors, Europe and China, have the steam to keep pouring good money after bad on an energy source that costs more than market rate. Or does it? If these kinds of economics end up scaling, solar energy could finally see a bright future.

    Bits & Bytes

    The hot field of financial technology had a big week, with the market debut of LendingClub (LC), which was the largest IPO for a US-based tech company this year. LendingClub’s highly successful IPO marks the beginning of a revolution in which a host of startups will upend the financial industry, according to an interesting article published on TechCrunch. If there was ever an industry that needed a good whooping from tech, it’s banking. Oh, wait… LendingClub’s biggest investor was actually Wells Fargo.

    IPOs for New Relic and Hortonworks each opened up by a big margin as well. But questions are already starting to emerge on whether the companies, especially Hortonworks with its massive losses, can sustain those prices very long. (Just who’s buying all those open market shares at huge premiums as IPO participants jump ship on day one anyway? Could it be the banks themselves?)

    Free stock trades? There’s an app for that, courtesy of Silicon Valley startup Robinhood. In addition, the trading platform doesn’t require an account minimum. Early signs point to the app being a big hit, with over half a million users already signed up. Fidelity, an incumbent brokerage, has certainly taken notice, running an ad campaign in an attempt to keep customers from fleeing its trading site. In the end, how the site will make money is still a secret—I’d guess by selling your financial info like does.

    Gartner is out with its Q3 smartphone numbers, and the market is still booming. A total of 301 million smartphones sold in the quarter, up 20% from a year ago. But not all handset makers fared well. Samsung saw unit sales decline from 80 million in Q3 2013 to 73 million in Q3 2014. On the flip side, Xiaomi had a remarkable quarter, with sales jumping from 3.6 million in Q3 2013 to 15.7 million in Q3 2014. Xiaomi is gaining significant traction with its low-cost handsets in China, which is one of the fastest-growing smartphone markets, as well as India for now (but not for rival OnePlus).

    BlackBerry has officially launched a new handset too: the Classic. It comes equipped with a full QWERTY physical keyboard, physical navigation keys, and a nearly indistinguishable design from BlackBerry smartphones from yesteryear. The company says the phone will appeal to those looking for the traditional BlackBerry experience… all two of them.

    The Edge Consulting Group is known for making accurate calls, such as the eBay and Symantec breakups. And now the London-based firm is back with another prediction, calling for a spinoff of Amazon’s Web Services business next year. With Amazon’s quarterly losses and low-margin retail business irking investors, spinning off AWS would trigger a re-rating of Amazon’s overall business at a more favorable valuation, according to The Edge Consulting Group. The firm estimated that an AWS spinoff would raise the total valuation of Amazon’s two businesses to a combined value of $195 billion, a 36% increase from today’s market cap… unless Microsoft’s big gains start to cost it some share:

    The feds are going after emails held by Microsoft as part of a drug-related investigation. But Microsoft refuses to comply on the grounds that the emails are stored in a data center in Ireland, which is outside the US government’s jurisdiction. Tech giants such as Verizon, Amazon, Cisco, and HP are backing Microsoft. The decision is up to the courts, with a ruling expected in the coming months.

    Google has released its top searches for the year. Robin Williams, World Cup, Ebola, MH370, ALS, and Flappy Bird headed up the list. No Apple products, though, which hasn’t happened in a few years. Alas, even Tom Cook’s coming-out distraction couldn’t rekindle the magic of Steve Jobs.

    Turns out Google has a virtual reality headset. And it’s made of cardboard and a smartphone. It started as a jab at Facebook for paying a whopping $2 billion for Oculus VR, a virtual reality company. But evidently, it’s starting to catch on, with over 50,000 Google Cardboard copycat units delivered from real companies capitalizing on the joke.

    Google is expressing greater interest in the healthcare space. Its venture capital arm, Google Ventures, allocated more than one-third of its investment dollars this year toward healthcare and life-sciences companies, up from 9% each of the prior two years. Google sees some major opportunities in health care, but also said valuations in the sector are much more reasonable than others sectors, such as Consumer Internet.

    Tinder has company in the mobile dating space. Meet Hinge, a mobile dating app that has positioned itself as the thinking man’s/woman’s Tinder. Whereas Tinder just shows you anyone in your age range, Hinge only matches you with friends of friends that its romance-graph algorithm thinks you’ll get along with. In other words, it’s more of a matchmaking service than a meat market. Now we get to see what daters really want from their app.

    As is too often the case, it emerges that the hack attack on Sony exploited a vulnerability the company knew about already. The unfortunate reality is there are just far too many security holes in most systems to ever patch. Until entirely new methods of securing applications emerge, I just don’t see the constant string of hackings slowing down at all. Don’t forget to teach your kids encryption this holiday break…

    The hacking has also shone a light on some pretty unsavory tactics from Sony and its allies in combatting Google’s power, as well as a questionable plan to battle piracy. And that Malcolm Gladwell is a real gossip.

    It appears that Facebook is changing its relationship status from “Married to Bing” back to single, as the company dumped the Microsoft search engine.

    Yahoo, meanwhile, empowered by its new Firefox search takeover, is urging Chrome users to “upgrade” their browsers.

    Tech headlines love to poke fun at Microsoft. But this interesting read from The Verge shows just how tough the battle is to get enterprises to adopt new tech, even when you pay them huge amounts to do so.

    Your tax dollars at work: an app to guess your blood alcohol level from playing games.

    Tired of fading into irrelevance, UK telecom BT is buying back into mobile after exiting nearly a decade ago.

    Is the Net neutral if you cannot open the HBO Go app when you’re on Comcast’s network? Frightening precedent for outright censorship of what cable providers see as threats.

    Is PowerPoint going bye-bye? Sway looks like a subtle way to try out a whole new way to build presentations without scaring off meeting kings in the meantime.

    Apparently Apple DRM didn’t hurt anyone, proving caveat emptor and common sense hold up after all.

    Lastly, you’ll never believe what travelers are trying to sneak past the TSA. Snakes, chain saw blades, and even a samurai sword. Don’t believe it? See for yourself.

  • Wed, 17 Dec 2014 06:25:00 +0000: The Oil Collapse: How Seasoned Traders Are Responding - Casey Research - Research & Analysis

    Dear Reader,

    I get more investment analysis in my inbox every day than I can possibly read. But I always read Jared Dillian’s stuff as soon as I get it. Jared used to be a trader for Lehman Brothers. Now he trades for himself and writes about it. I hate the word “contrarian” because it’s overused, but Jared really is a contrarian. You won’t get his fresh perspective on the markets anywhere else.

    He’s also a thoughtful writer, great at explaining why he thinks what he thinks. I just bought his book Street Freak: A Memoir of Money and Madness to read on an upcoming plane ride.

    In the following article written exclusively for Casey Research readers, Jared questions the consensus opinion that lower oil prices are a good thing. People seem to think that lower gasoline prices will stimulate the economy by freeing up consumers to buy more iPhones and Chipotle burritos. But what about the market ramifications?

    If you like what you read, check out Jared’s free weekly communiqué The 10th Man. It’s always full of good investment ideas. You can browse the archives at that link to read the past issues.

    Happy holidays!

    Dan Steinhart
    Managing Editor of The Casey Report

    The Oil Collapse: How Seasoned Traders Are Responding

    Jared Dillian, Editor, The 10th Man

    I was in Memphis last week visiting some folks. I found myself in a conference room with some very seasoned commodity traders… veterans of the floor, some going back to the ‘70s. Let me tell you something: if you ever find yourself talking to a 40-year veteran of the commodities markets, you should listen to what he has to say. Anyone who can last that long trading futures is pretty smart.

    Funny thing is, I’ve been around long enough that now I am one of the old traders!

    But I’m not a commodities guy by training. I’m one of those slicked-back-hair moneychanger guys who is never going to get to heaven. But I always learn a lot when I go to Memphis—which, by the way, is the third-biggest futures trading city after Chicago and New York. There are quite a few large trading firms that specialize in grains, meats, and cotton. Memphis is a big deal, and probably the best-kept secret in the financial world.

    So I asked about what it was like to trade live cattle during the BSE (mad cow) outbreak about 10 years ago.  “How about limit down for an entire week?” they said. Small traders went under. Cattle ranchers went under, guys who lifted their hedges at exactly the wrong time. It was downright ugly.

    That was bad.

    But what’s happening to oil is a million times worse.

    There are a lot of folks who get pretty angry when you suggest that a near-50% drop in the price of oil might be a negative in the short term. They look at you like you’re dumb. They talk about the massive benefit to consumers, the synthetic “tax cut” that everyone’s getting, what it’s going to do to consumption, etc.

    All of this is true. But if you take a major commodity and slice it in half in the span of a month or two, there are going to be major consequences.

    When I say that the commodities markets haven’t seen anything like this since 1980 when gold went haywire, I mean it. And you don’t put gold in your gas tank. Sure, there have been some minor calamities, like when cotton went parabolic a few years ago, but crude oil is perhaps the world’s most important commodity when you take into account both its economic and geopolitical significance. People go to war over the stuff. Routinely. And with oil falling from $105 to $57 in just six months, it might happen again.

    We’ll get to that in a second. But for perspective, when people look at this move in oil 10 years from now, they’re going to call it the “Crash of ‘14.” That’s my prediction. A move of this magnitude in a short amount of time is a crash. When stocks went down 19% in a week in 2008, that was also a crash.

    What’s the definition of a crash? I say any move over six standard deviations. For comparison, the Crash of ‘87 was 25 standard deviations—a move so uncommon, so statistically rare, that it wasn’t supposed to happen in a length of time greater than the age of the universe.

    I haven’t done the math on oil yet, but if it’s not six standard deviations, it’s close.

    *   *   *   *

    As you probably know by now, the move in oil has been more of a supply story than a demand story. We were drilling holes all over the planet in search of it. My wife works in the Turkana Basin, on the border of northwest Kenya and Ethiopia, which is one of the most remote spots in the world. They were drilling for it there, too.

    That’s what happens when oil gets to $140 a barrel. People are incentivized to look for it. It takes time to explore and produce the stuff. It takes years for wells to finally come online and for supply to hit the market.

    There are still projects that may never be completed, like Vaca Muerta in Argentina, that Yacimientos Petrolíferos Fiscales (YPF) is developing in conjunction with Chevron. The poor Argentinians—screwed again.

    And like we’ve been seeing in the mining industry, once a company has brought production online, it’s difficult to take it offline. It’s hard to start it back up again, to get all the permits, to hire everyone back. So people will continue to produce at uneconomic levels for a long time, hoping that the price will come back, while simultaneously ensuring that it won’t for a long time.

    So back to my earlier point—is it bullish or bearish for the US? It’s not a hard question to answer. People are making it hard. 20 years ago, it would have been unequivocally bullish. Now, maybe not. We produce slightly more oil than we consume. There will be winners and losers, which is being reflected in the stock market.

    For some countries, it’s unequivocally bearish, especially for adversaries like Venezuela, Iran, and Russia. But also for allies, like Canada, which is probably in the most precarious economic position of any country in the world.

    The takeaway is: an oil crash makes the world less stable.

    *   *   *   *

    I am a decent economic historian, but kind of a crappy political historian. People keep telling me scary stories about Russia—how Russia today closely resembles Germany in the 1930s. How Putin is in the midst of a full-blown currency crisis. How the West is (perhaps foolishly) applying sanctions. How the threat of annexation of Russia’s smaller neighbors could be higher than we think. How the willingness of the West to challenge it would be very low.

    All because the price of a commodity crashed.

    Russia is very much a petrostate. There are others. Norway has been enjoying a phenomenally high standard of living for years, with some of the highest incomes and the strongest currency in the world on a purchasing-power parity basis. A lot of that had to do with a very successful and well-managed state-owned oil industry, and one of the largest sovereign wealth funds to boot. If you’ve seen a chart of Norwegian krone (NOK) vs. the Swedish krona (SEK) recently, you know that oil’s plummet has been a game-changer.

    I fear oil. But I don’t fear oil because oil will make the stock market go down—which it will. I fear oil because there are going to be second- and third-order political effects that we cannot even conceive of right now. Take Venezuela—my prediction is that Venezuela will descend into anarchy and hyperinflation—a failed state. This has consequences for the entire region, but especially Colombia. Take Venezuela and multiply it by 100, and you get a sense of the magnitude of the problem that we’re facing.

    *   *   *   *

    Old traders know: price moves like this do not happen in a vacuum. There’s a chain reaction that extends out for years. So in situations like this, I do what an old trader does: I reduce risk. I cut back my exposure to things that gain from stability, and I increase my exposure to things that gain from volatility.

    Nobody has a playbook for this, because nobody saw it coming. But a leveraged long position with no cash is probably a bad idea right now.

  • Tue, 16 Dec 2014 06:24:00 +0000: Oil Talk: Straight from the Gut—US Secretary of Energy - Casey Research - Research & Analysis

    Last week, I invited all Casey subscribers who happened to be in the Vancouver area to come out to The Colder War book-signing party on December 10.

    We had a great turnout, as you will see from the video below, but Olivier Garret and I decided that since the speech was so good from former US Secretary of Energy Spencer Abraham, who served under George W. Bush, we would make it available to all of you who follow me on these missives. It was a great event, and I hope you enjoy Abraham’s captivating speech here:

    Casey Daily Dispatch

    So how can we profit from the blood in the energy markets? Easy.

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  • Mon, 15 Dec 2014 10:49:00 +0000: Russian Bear—or Gold Bull? - Casey Research - Research & Analysis

    Dear Reader,

    Last week oil was down, emerging markets were down, Wall Street was down—even the US dollar was down… but gold was up. That’s just the latest fluctuation, so, as encouraging as it is for us, we’ll wait for our favorite metal to show some real strength before getting too excited.

    Meanwhile, the warm feelings gold bugs were celebrating got doused by news of Russia selling off its gold reserves as a response to its economic difficulties. But is it true?

    Fortunately, we have fluent Russian speakers on staff here, so we were able to go to the source, and we’ve got the straight facts for you.

    Yet another reminder that there is no substitute for careful thought and due diligence in all business matters.

    Speaking of which, my friend Dennis Miller of Miller’s Money Forever has pulled together a great deal of important information on today’s bond market and boiled it down into a free special report, The TRUTH About Bonds. It’s not a simple matter to summarize, so I’ll just say that while there are toxic bonds out there, there are opportunities as well, and Dennis can help investors tell the difference. I encourage all our readers to give his free report a read.


    Louis James
    Senior Metals Investment Strategist
    Casey Research

    Rock & Stock Stats
    One Month Ago
    One Year Ago
    Gold 1,222.64 1,159.10 1,224.90
    Gold (SGE) 1,221.13 1,169.72 1,260.22
    Silver 17.04 15.62 19.41
    Copper 2.94 3.03 3.33
    Oil 58.08 77.15 97.82
    Gold Producers (GDX) 18.63 18.24 21.01
    Gold Junior Stocks (GDXJ) 24.04 25.60 29.90
    Silver Stocks (SIL) 8.98 9.06 10.88
    TSX (Toronto Stock Exchange) 13,731.05 14,856.20 13,114.39
    TSX Venture 653.78 771.37 886.09

    Russian Bear—or Gold Bull?

    Laurynas Vegys, Research Analyst

    I’m staggered by the amount of confusion about gold purchases by Russia’s central bank. For example, a headline I saw last Friday clearly calls for scrutiny.

    The headline on a well-known news website couldn’t have been clearer: Russians have started dumping their gold in response to their deepening financial woes. The article claimed that $4.3 billion worth of gold reserves—3.5 million ounces of gold at today’s price—was sold by the Central Bank of Russia.

    It took me just two clicks to find out that the reality was not nearly as sensational as the headline would have us believe. It turns out that the article was based on the text of a Russian language website someone was, it would seem, just too lazy to translate. The original report in Russian didn’t say anything about selling gold, stating clearly that it was international currency reserves that decreased to $416.2 billion from $420.5 billion. I suspect that a picture of gold bars on the page was all it took for the author(s) to jump to a mistaken conclusion.

    The offending article has been edited since, but the story, or rather its original headline (see the above image), has been left lingering in the second-top position of Google search results. In fact, it’s still there as I write this.

    Now, my reason for telling you this story has little to do with bemoaning poor reporting standards as employed by today’s mainstream media and everything to do with keeping one’s critical thinking cap on. The importance of checking your facts and not being overly reliant on a single outlet for your daily dose of news cannot be stressed enough. Remember, in this day and age, false facts and interpretations have the ability to travel at the speed of light.

    With that in mind, here’s a look at the year-to-date net purchases of gold by Russia’s central bank, according to the International Monetary Fund (IMF). Russia has added a total of 133.5 tonnes to its reserves so far this year.

    Going straight to the source, the mighty Russian bear, indicates that this number is too low. Governor Elvira Nabiullina announced that Russia’s central bank bought about 150 tonnes of gold this year, which falls comfortably within the range of our own estimate of 156.6 tonnes. That’s almost double 77.4 tonnes of gold purchased in 2013. The Russian bear looks like a gold bull to us.

    To put things in perspective, Russia’s “close” second contender in the race to load up on cheap gold, Kazakhstan, has reportedly purchased 42.2 tonnes, while Azerbaijan checked in third at 10 tonnes, with the rest of the gold-buying countries trailing below the 6-tonne mark.

    The story only gets better; the fact is that Russia has been buying gold for years, as shown in the chart below.

    What we’re seeing here is not some haphazard pattern of purchases. Quite the contrary, this is a trend that has been in motion for quite a while, right under the noses of indebted Western governments and against the backdrop of unprecedented rounds of money printing by the world’s major central banks. This trend has taken Russia’s gold holdings from around 400 tonnes 13 years ago to what is fast approaching 1,200 tonnes at the end of 2014. Russian reserves currently represent the world’s sixth-largest hoard of the yellow metal.

    What should also jump out of the chart above is that the 150 tonnes bought year to date is above any amounts of gold acquired in previous years—significantly so.

    In the end, Russia has been well ahead of other countries in the gold-buying department for quite some time, so it’s hardly a surprise that it’s become a heavyweight gold champion among central banks worldwide this year. Gold now makes up 10.8% of Russia’s total reserves, and a whopping 18.4% of its M1 monetary supply—both unparalleled in the Western world.

    The message is clear: Russia prefers to hold gold more than the US dollar.

    In fact, the US dollar’s status as reserve currency of the world is being pushed ever closer to the brink by Russia and China as they continue making agreements between themselves and other countries on deals that bypass the US dollar.

    At the same time, however, it’s true that Western sanctions and the collapse of oil prices are taking their toll on Russia’s economy; the ruble is down by more than 40% this year.

    This leads many to ask if Russia will start selling its gold in a bid to stave off further slides in its currency. It’s hard to see how selling gold would prop up confidence in the ruble, but that’s par for the course among mainstream analysts who still don’t grasp that gold is money.

    Many such analysts thought Russia was selling gold when it plunged between August and November this year. It turns out, however, that Russia was actually backing up the truck to take advantage of the bargain prices.

    Now, with each new megadeal tying Russia closer to China (the world’s second-hungriest gold consumer), Russia is making a clear bet against the US dollar. This makes it unlikely that Russia will do anything that might benefit the USD—and what better way to boost the greenback than to sell gold (in dollars)?

    So no, we don’t see Russia selling its gold any time soon—not to any significant extent anyway. If anything, given its track record as a (very) consistent shopper, it will probably be buying more soon.

    Gold and Silver HEADLINES

    Silver Demand for Industrial Applications Forecast to Reach Nearly 680 Million Ounces in 2018 (Silver Institute)

    Total silver industrial demand is forecast to grow 27%, adding an additional 142 million ounces of silver demand through 2018 compared with 2013 levels, according to a new report from the Silver Institute (note: login may be required to access a full online copy of the report).

    Half of the anticipated growth will come from the electrical and electronics sector, while additional demand will be due to growth in other industrial applications.

    Increasing demand for silver in solar panels, as well as in the production of ethylene oxide, automobiles, bearings, and batteries, has triggered a demand shift among key geographical locations. Increased use of silver in both China and India is the trend that seems likely to continue.

    "Gold Obsessed" Chinese Officer's Graft Case Worth $5 Billion (Reuters)

    An ex-senior Chinese military officer was charged with bribery using gold bars, in connection with a graft case that investigators estimate is worth some $5 billion.

    Lieutenant General Gu Junshan, former deputy director of the logistics department of the People's Liberation Army, is presently facing several charges of corruption, including unlawfully selling hundreds of military positions in the army.

    When offering bribes, Gu would fill up a Mercedes with hundreds of bars of gold and then simply hand over the car keys to the recipient, according to Chinese media reports. But when it was his turn to receive “gifts,” he allegedly preferred ground-up gold rather than gold bars.

    Bullion Board Seen by Council as Way to Manage India Gold Demand (Bloomberg)

    India, the world’s largest gold consumer after China, should start a bullion board to regulate trade and a spot exchange to offer uniform prices across the country, says the World Gold Council (WGC) in a joint report with the Federation of Indian Chambers of Commerce and Industry.

    The board should manage imports, encourage exports, and boost infrastructure for the industry, while the spot bourse would create a national pricing structure derived from the London fixing.

    The WGC thinks the key to meet Indian demand lies in making better use of the gold already in the country and not restricting shipments. India’s bullion imports surged this financial year as tax increases and a rule linking shipments to re-exports failed to curb demand among jewelry buyers and investors.

    Recent News in International Speculator and BIG GOLD—Key Updates for Subscribers

     International Speculator

    • One of our favorite exploration teams reported another round of important drill results from its gold project in Nevada, supporting the company’s geological theory and improving our confidence in the project. The company has been successfully ticking off the milestones, which puts it on track toward delivering another major discovery in the jurisdiction.


    • This producer just announced that the first gold pour at its new gold mine in Southern Africa was ahead of schedule. The project’s low cost structure and growth in company-wide production in 2015 and 2016 means our investment thesis remains on track—but is now the time to buy more?