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The End of the World as we Know It by Doug Casey |
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DOUG CASEY EXPLAINS WHY IT'S THE END OF THE WORLD AS WE KNOW IT - AT LEAST FOR MOST INVESTORS WHO DON'T REALIZE THE DANGERS ON THE HORIZON.
IT’S THE END OF THE WORLD AS WE KNOW IT
by Doug Casey
...“And I feel fine.”
That’s not just the title of an R.E.M. song. It’s how today’s gold and
silver investors feel every time they get a reminder from a newspaper or
news program.
They see what you see, and anyone paying even a little attention can’t
help but notice the stunning array of problems that are menacing the
global economy and threatening traditional investments. In fact, I can’t
say I’ve experienced the like of it before. And that’s saying something,
considering I’ve made crisis (and how to profit from it) the focus of my
life’s work.
This time around, the unfolding crisis carries several especially
dangerous features - and a locked-in profit opportunity available to
anyone even moderately fleet of foot.
First, the intractability of the situation. That’s the word Paul Volcker,
former Chairman of the Fed, used to describe things, and it’s a perfectly
good word meaning, simply, that the underlying problems can’t be fixed.
In the Middle East, for example, even if we pull all our troops out today,
the situation won’t settle down for years... or maybe even decades. And
each day of turmoil will cost the U.S. more tens of millions in direct and
indirect costs - and keep the global economy in a state of chronic worry
over energy supplies. Then there’s the collapsing housing bubble. For
years a galloping real estate market was the primary driver of our
economy. Now real estate is hobbling on three legs and has become the
primary driver of personal and corporate bankruptcies.
Even more serious is the 6 trillion or so U.S. dollars in increasingly
twitchy foreign hands. Hardly a day goes by without some government or
another announcing plans to diversify out of the dollar. And no wonder,
given the record levels of personal and government debt in the U.S.
And even more debt is baked in the cake. We have a freshly-elected slate
of Democrat law makers looking to “do something”... from universal health
care, to global warming, to confronting the “unfair” trade practices of
China and Japan (the very people who own much of the above mentioned $6
trillion). Those projects are just for starters, of course. Congress’s
“must-do” list goes on and on, and for politicians, “do something” never
means “do something cheaply.”
So far, so bad.
But it gets worse. Much worse. Over 20% of the U.S. population - the baby
boomers - are now beginning to retire, and most of them have nowhere near
enough savings to enjoy their senior years. So they’ll be absolutely
dependent on the Social Security and Medicare promises they’ve been
hearing all their lives. Politically, those promises are impossible to
renege on. Financially, they’re impossible to pay. And along with the
government’s other unfunded entitlement programs, they add up to $50
trillion of off-the-books debt.
Mr.Volker spoke well. Intractable is the word.
There’s more, but that’s enough. We’re in a box canyon with a floor of
quicksand, and the only exit is blocked by a landslide. Investors who take
a business-as-usual attitude are not going to have a nice day.
In case that litany of problems isn’t enough to get the sweat beading on
your forehead, ponder derivatives. While these hybrids have been around
for decades, the rocket-shot rise of hedge funds and the advances in
financial modeling techniques have spawned something of a competition
among the so-called best and brightest to find ever-more-complex ways of
skimming pennies from very large piles of money.
The collective result is that our financial system has been wired up to
$370 trillion dollars of privately negotiated investment contracts.
They’re usually written to shift risk from one bank, pension fund,
insurance company or brokerage firm to another. And many are linked
together in long chains, with each contract providing collateral for the
next.
It’s all very clever, but layering the enormous size- $370 trillion
dollars, far more than the net worth of all the financial institutions in
the world - on top of all that complexity is downright scary. In simpler
times, a home loan going bad would affect only the particular lender.
Enough defaults would put the lender out of business. And that would be
the end of it. But today a wave of defaults can send a shock through the
portfolios of financial institutions around the globe, including hedge
funds, banks and pension funds far removed from the troubled borrowers.
Imagine an electrical circuit with thousands of connections. No one
designed it. No one tested it. No one has a diagram for it. It just grew.
Now, because of its size and power and pervasiveness, everything depends
upon it. So what happens when one of those thousands of connections burns
out? No one really knows, but I say it’s a circuit you should disconnect
from before the world learns the answer.
If you are relying on traditional investments to pad your nest for the
future, the problems stalking the world economy should be a matter of
serious concern.
Especially given that as bad as we think things are about to get, there
remains the potential for things to spin entirely and un-recoverably out
of control. That’s because so many wildcards are now in play. A war in
Iran? New York hit by a freelance nuke? A worldwide panic exodus out of
the dollar? Traditional investments would be the first casualty.
The $2 trillion or so loss in stock market valuations during the recent
correction is a precursor of what’s to come... in a best case. The worse
case is... much, much worse.
Working apart from the investment multitudes, a very small minority of
investors over the past few years have been building portfolios of
precious metals and Canadian precious metals stocks. It’s a minority I’m
happy to be a part of, as it allows me peace of mind and the considerable
advantage of viewing these crises somewhat dispassionately.
That doesn’t mean I’ll enjoy standing on the sidelines and watching the
impact of a monetary crisis on the lives of the unprepared. Of course not.
Yet I would be a fool, having recognized a crisis shaping up, not to take
the fairly obvious steps to profit.
Which brings me to the opportunity that the crisis is carrying on its
back.
For any number of reasons, but first and foremost its use as money in all
the world’s cultures, throughout all recorded history, gold has begun to
find renewed favor with in-the-know investors as the currency of last
resort.
Make no mistake, despite gold’s rise from its $255 low in April of 2001 to
over $650 as I write, so far, only the thinnest of trickles, a minor
fraction of global capital, has made it into gold. When the flight to
safety really heats up, the real fun will begin, and the price of gold
won’t just add dollars, it will add digits.
If that sounds like hyperbole, remember that, unlike the U.S. dollar,
which can be created at the speed of light, the available supply of gold
is finite and is painfully slow to change.
You can’t print gold the way you print paper money. And you can’t just
build a gold mine the same way you might build a Starbucks almost anywhere
and on short notice. Instead, you first have to find a promising ore body
- which is, without exaggeration, like finding a needle in a haystack... a
haystack buried “somewhere” in the earth’s crust.
Then you need to go through the immensely complex and expensive exercise
of confirming that the ore body is economically viable. Then, years after
you started exploring, you can start the even more time consuming and
expensive process of actually building your mine. That entails finding a
labor force, bringing in power, roads, mills, etc., etc... with every step
hindered by environmentalists waving court injunctions.
The long and short is that there are hardly any gold mines of size
scheduled to come on stream... and we are not talking about just over the
next year or two, but ever. Most people in the know see annual gold
production falling from here on.
For proof, there was news recently out of South Africa, the most world’s
prolific gold producer. Despite the loud incentive of higher gold prices,
South African gold production in 2006 dropped to the lowest level since
1922.
And, above ground, there just isn’t much gold to go around either. The
U.S. government, for example, possesses the world’s largest gold
reserves...and those reserves amount to only about $170 billion at today’s
prices...not even a rounding error on the trillions of dollars in debt the
government has guaranteed.
Put simply, the amount of gold available to investors and central banks is
like the number of beachfront home sites at Malibu - it’s not going to
change much. As a result, when the rush for the lifeboats begins in
earnest, the upward pressure on gold will be unimaginable. As will be the
profits for anyone who acts now, ahead of the crowd.
If you haven’t yet started accumulating precious metals, you still have
time. Start by picking up some bullion coins from a reputable dealer
(silver should do as well as gold).
Then build a portfolio of the better small companies exploring for new
deposits - the ones with the best management teams, working on the best
projects, in the best geology. These stocks are the true profit gems - in
part because of an accident of recent history.
During the long bear market that ended in 2001, the large mining companies
all but eliminated their exploration departments. Now they urgently need
new deposits to restock their declining ore reserves. But rather then
scouring the world themselves, the majors let the more agile and
entrepreneurial junior explorers - often Canadian firms, due to the
resource orientation of that country’s economy - invest the capital and
sweat needed to find a new deposit. Then, when a junior company’s project
seems ripe, the majors compete to buy the deposit or to acquire the junior
explorer itself - and they pay up in a most serious way.
Pick your companies right, and you can pay pennies today for shares in a
junior exploration company that history has shown again and again will
sell, with a little success, for $10, $20 or more when the market gets
rocking and investors at large rush into all things gold.
While there’s no such thing as a sure thing, there are times - like now -
when the deck is heavily, massively, stacked in your favor.
You are, therefore, left with a relatively simple choice. Do nothing and
hope that all the world’s troubles just drift away—and risk personal
financial disaster if they don’t. Or take action, if even with a modest
share of your portfolio, and position yourself for extreme profits.
[Editor’s note: Doug Casey is the author of the New York Times
Best-Seller, Crisis Investing, and Chairman of Casey Research, LLC.,
publisher of the highly respected International Speculator newsletter, now
in its 27th year. International Speculator is the most profitable source
of unbiased research on investments with the real potential to double or
better in the coming year, with a focus on the best managed junior gold
and silver exploration companies. http://www.caseyresearch.com]
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