Gold Fever is Spreading

March 23, 2009

Dear Outstanding Investments Reader:

I’m heading out on the road this week, so your update is a couple of days early. Meanwhile, keep an eye on your email in-box. Later this week you should receive the alert for your next OI monthly issue. The new investment recommendation involves high-end oilfield technology. This technology is absolutely critical for future offshore oil and natural gas production around the world. Really, if this technology is not deployed on a wide scale, you can kiss the Oil Age good-bye a heck of a lot sooner than anybody thinks. This sector of the oil industry is destined to boom. I believe there are great gains to be made from the key players in the field. Like I said, watch your email.

Gold Fever is Spreading

From the mining patch, we have AngloGold Ashanti (AU: NYSE) in the OI portfolio. I hope you picked up some shares over the past month or so. Because last week we learned that hedge-fund manager Paul Paulson paid $1.28 billion to buy a major stake in this great South African gold miner.

Apparently, Mr. Paulson (no relation to former Treasury secretary Hank Paulson) sees a solid-gold opportunity. And Paulson, you may know, has pretty good eyesight. He’s the hedge-fund manager who made $10 billion in 2007 and 2008 betting that the subprime mortgage market would implode.

Mr. Paulson made his deal just one day before Fed Chairman Ben Bernanke announced that the U.S. Federal Reserve would buy up to $1.2 trillion of U.S. Treasury debt. Mere luck? Pure coincidence? Makes you wonder. Because when the Fed released that news, the dollar promptly tanked and the price of gold quickly spiked upwards by near 7%. Many gold mining stocks saw significant gains within minutes.

Mr. Paulson buying into AngloGold Ashanti is, in essence, his $1.2 billion bet that the U.S. government is pursuing a long-term policy to debase the dollar. Dollar debasement will doubtless trigger inflation. Over time, this will cause a flight from paper currencies to gold. Gold miners should benefit.

I’ve already predicted gold at $3,000 within 30 months. I’ve heard other gold analysts forecasting gold at $4,500 within three years. So there’s a lot of room on the up-side. Buy gold. And don’t neglect the likes of excellent mining firms such as Goldcorp (GG: NYSE), Kinross Gold Corp. (KGC: NYSE) or Agnico-Eagle Mines (AEM: NYSE). They have great gold output profiles, as well as good cash flow. Also keep an eye on Yamana Gold (AUY: NYSE), recovering from a share-price drop after copper prices plunged last year. And for exposure to the rising silver market, look at Silver Standard Resources (SSRI: NASDAQ).

While I’m on the subject, Hecla Mines (HL: NYSE) has a great resource base of silver and gold. And Hecla has talented people onboard who know how to dig ore. But the company is suffering from too much debt in an era of frozen credit markets. Hecla go hit pretty bad late last year when prices tumbled for basic metals like lead and zinc. Hecla will recover, eventually. But it may be a slow ride out of the woods.

NovaGold (NG: AMEX) has its own cash flow problems. Like, its cash flow is not flowing. NovaGold is more of a “mine developer” than an up-and-running miner. Its one gold-processing operation, at Rock Creek, near Nome, Alaska, just did not get up to speed last year. The failure at Rock Creek came as a surprise to everyone, including NovaGold management. Nobody saw this one coming, including the insiders. Rock Creek was supposed to be yielding gold by the end of 2008, to fund the rest of NovaGold’s development. That didn’t happen.

So NovaGold hit the cash-wall in late 2008, and even now has financing problems. Yes, they’ve worked out a solution. But it’s a solution to the detriment and dilution of previous shareholders. Thus the stock is down. But at the same time, a lot of savvy investors own a piece of NovaGold. (Marc Faber, for example.) They anticipate – eventually -- some sort of action with the immense gold deposits that NovaGold controls at Donlin Creek, Alaska and Galore Creek, British Columbia. But for now, NovaGold is only for the patient stock-buyer.

Meltdown at Denison Mines

Speaking of the banking and credit crisis, it has just claimed another victim. This time it’s long-term OI holding, Toronto-based Denison Mines (DML: TSX). In the past six months, Denison shares generally suffered due to the slow market for uranium. Uranium was selling at $42.50 a pound last week, after trading as high as $136 a pound in 2007. As a long-term investor I could live with that. Denison stock was down, but poised for a recovery when the price of uranium rebounds.

Last week, Denison shares dropped 20% after the uranium miner suspended some operations and announced that it may have to sell assets to keep from violating a debt covenant. What happened? Well, Denison has a $125 million line of credit, of which it has drawn down about $100 million. When you’re operating with that much debt, you had better believe that the bankers are crawling all over you. Whether it’s business or personal, now is not the time to be in debt or to have to rely on the kindness of bankers.

So in this unfriendly credit environment, last week Denison announced its 2008 results. Revenues were up significantly in 2008, to over $123 million, from $76 million in 2007. That’s good, right? But earnings went from 25-cents per share profit in 2007 to a 47-cent per share loss in 2008. That’s bad. This included a good-will impairment charge of over $36 million in the 4th quarter – just announced last Thursday. (Thanks a lot, guys.)

On the face of things, 2008 should have been a good year. Uranium output was up, and the company is also producing valuable vanadium ore as well. Overall sales were way up. The resources base of uranium and vanadium ores grew. Reserves stayed solid. Safety improved. Regulatory compliance was good. But the debt overhang made it difficult to run the operations. Cash flow went to service debt and juggle loan obligations. In that environment, the big, bad wolf eventually shows up at the door.

At the quarterly conference call last week, Denison CEO Peter Farmer said the company was in danger of violating a debt covenant tied to its profitability. Thus Denison is reviewing “strategic opportunities” to keep that from happening. In other words, it’s not an issue with the ore, the mining, or the general operations of the company. It’s not even an issue of selling uranium into the current market. It’s all about keeping the company looking good on paper for the bankers.

Then again, if you don’t want the bankers to run your life you shouldn’t borrow their money. So now, deeply indebted, Denison has limited options. These include, “entering into off-take contracts with utility companies... asset sales, purchases and joint ventures, investments by private equity investors and potential corporate transactions with other uranium producers.” Another option to satisfy the bankers is the resignation of CEO Farmer, which was announced on Monday, March 23. Mr. Farmer has been with Denison since 1985, and generally has done a good job over the years. If only he had not borrowed all that money, though. Him and a lot of other people and firms and governments.

For now, Denison will temporarily suspend production at two high-cost mines (Sunday and Rim Mines) in the western United States. In May, Denison will shut its mill at White Mesa, Utah, after it processes 500,000 pounds of uranium the company is under contract to produce in 2009. The mill should restart next year. And the company will do whatever else is necessary to spruce up the balance sheet to please the bankers. This is the price of being heavily indebted in a time of contracting credit markets.

I have to move Denison to the “hold” category in the OI portfolio. I don’t think that Denison is going to go bankrupt. And I think that Denison’s asset base of uranium properties is VERY attractive. So I think that Denison will still be around as a going concern. But it’s going to be a long, hard slog to get the stock price back up any time soon. If anything, we’ll wait and see. And it’s a long-term speculation.

That’s all for today. Thanks for reading.

Byron W. King

The Power to Tax is the Power to Destroy

Whiskey & Gunpowder
By Bill Jenkins
March 20, 2009
Pylesville, Maryland, U.S.A.

We watched in dismay as the unemployment numbers soared again last Friday — a massive loss of 651,000 jobs in February. Thank God it was a short month...

But let’s put this into perspective. In December, the non-farm payroll (NFP) figure was 577,000 jobs lost. In January, the NFP figure was a worsening 598,000 jobs lost. Then in February, 651,000 jobs lost. But that incredible decline is not the whole story.

The December numbers were revised to 684,000 — an additional 107,000 jobs lost. January’s number was also revised, up to 655,00 — an additional 57,000 jobs lost. What are the odds that the brutal February numbers are going to stand pat or get better? As I have said many times, some people have a vested interest in controlling (manipulating) these report numbers. A certain amount of fear is useful among the populace in the midst of a crisis.

White House Chief of Staff Rahm Emmanuel said, “You never want a serious crisis go to waste. This crisis [the economic turndown] provides the opportunity for us to do things that you could not do before.”

Secretary of State Hillary Clinton echoed that thought by saying “never waste a good crisis” in Brussels as she droned on about climate change.

Just before his election, Barack Obama proclaimed, “We are five days away from fundamentally transforming the United States of America.” Sadly, the fundamental change has already begun.

A New York Times reporter asked the president if he was a socialist. Obama dismissed it as a joke, but just a few hours earlier, Hugo Chavez, socialist president of Venezuela, invited Obama to, “Come with us on the road to socialism. This is the only path. Imagine a socialist revolution in the United States.”

Disgusting. Unnerving. Scary.

While a certain amount of fear may be helpful, panic and pandemonium would be absolutely counterproductive. I think it is in the government’s best interest at this point not to release the full damage in the employment market. Frankly, I am taking bets that the next set of jobless numbers will include a revision for this month that will put the February numbers at 725,000 jobs lost. That would put the official unemployment rate at just over 9%.

Of course, as it stands, we need to understand that the unemployment rate in and of itself is an average. The average figure is mitigated by categories on the lower end of the spectrum. For February, the lower categories of unemployment were Managerial and Professional Positions at 4.5% and 3.5% respectively. Not too disturbing...

But when we look at the other pieces of the puzzle, we see double-digit unemployment among Hispanics (10.9%), and African Americans (13.4%).

By broad category, we see the following unemployment news:

• Construction workers — 22.0%
• Farm and Forestry — 22.0%
• Production — 13.7%
• Transportation — 12.5%

These sectors will only continue to worsen, and they may in fact be worse already.

“So why,” do you ask, “are you going to such lengths to describe the gloominess of the situation?”

Today, it serves as the springboard for the commentary, and the lesson of the week.

John Marshall, Supreme Court Justice from 1801-35, left us this memorable quote: “The power to tax is the power to destroy.” It is well worth memorizing. But we are watching it at work all around us. Here is what it has to do with you and me.

When governments levy taxes, and there is some need to do so, they act as a parasite. Their modus operandi is to take, but never to create. The State’s real role is to be a negative influence, not a positive one. They are to inhibit evil on a personal level by constricting crimes against citizens. They are to inhibit evil on a federal level by acting against powers that would attack us.

Beyond there, expansions become positivistic. They become world improvements. Better roads. Better schools. Better commerce. Better parks. Better art. Better money. Better housing. Better health. Ad infinitum. Ad nauseam.

The Biblical story of the Tower of Babel relates the efforts of the first State to improve its lot in life. “The people are one (of one mind — Ed.). And now nothing will be withheld from them which they have imagined to do.”

This is the State mantra: “Yes, we can!” And States imagine that they can do anything. All they need is a few more bucks and a few more taxpayers who think that what they want to do next is just the best idea since sliced bread. But what they (the taxpayers) forget is that the government is a net destroyer of wealth. In order to “create” anything, they must take wealth from whoever is currently holding it.

In our day we are seeing the net effects of taxing everything in sight...

When you tax a man’s income, his income goes down. The power to tax is the power to destroy.

When you tax a man’s income, you are taxing his employment. So unemployment rises and employment goes down. The power to tax is the power to destroy.

When you tax a man’s ability to work, he works less. True productivity goes down. The power to tax is the power to destroy.

When you tax a man’s work, you tax the chief source of his freedom. “Six days thou shalt labor...” The power to tax is the power to destroy.

You see, a government can tax all kinds of income for all kinds of reasons.

But not Liberty.

Freedom is beyond a government’s ability to control (although they will try!). Freedom comes from God. Our Creator endows men with certain unalienable rights. Among them is Liberty. When a government tries to tax Freedom, it moves to different shores. It packs up all its inestimable benefits and heads to lands where it will be treated better. Where it will get a better reception. Where people who have been enslaved too long hunger and yearn for its gifts. To citizens who are willing to lay down their lives to secure it and fight back the forces of bondage to keep it.

But we have forgotten such things. We are not the noble people we once were. Much of our citizenry is infected with indolence. Multitudes look to the State as the supplier of everything from soup to nuts, cradle to grave, and womb to tomb. You can see it in the faces of ordinary Joes when they light up at getting their “tax refund.” Forgetting the tremendous sum of money the state has already taken, they are just glad to “get something back.”

We have become a nation of slaves. Bound to the idea that the government will provide.

As we come up on the Easter season, it is customary in many homes to watch Cecil B. DeMile’s The Ten Commandments, his depiction of the freeing of God’s children from bondage and slavery. What he doesn’t show is how the people complained shortly after being freed that their lives were too hard. (Because living free isn’t easy.) They said to Moses that they would rather go back to Egypt. They’d rather be slaves.

Hunting for food. Finding water. All this was too much responsibility.

In Egypt, life was simple. Their taskmaster’s brought them food. Their slave-drivers brought them water. Their lords told them how many bricks to make. (And they were happy to have 100% employment!)

But the rigors of living free were just too much for them.

So it has become in our own day. Men would rather live in servitude to an all-providing State, reveling in their own laziness, than to take up the mantle of responsibility and live free.

That is true of many. But it is not true of all.

It is not true of me. I hope it is not true of you. And I suspect it isn’t. Otherwise we would never have found each other here.

But for the long run, the excessive taxing of wealth and the attempted taxing of Liberty does not bode well for our Motherland. A man reaps what he sows. So does the country in which he lives.

Days to come will find wealth following in the wake of Liberty — shifting to other quarters. We will begin looking for other opportunities in places where freedom reigns supreme. But for now we will have to work with what we have. Money will continue to flow into and out of the major currencies for a while yet.

Regards,
Bill Jenkins

Household Deleveraging

“The larger story,” opines Rob Parenteau, keeping a sturdy eye on the macro picture for us, “can be found in the deleveraging effort of households, which accelerated in the fourth quarter of 2008.

“We have never seen such a sustained buildup of credit flows to the U.S. household sector like the one that began in the late ’90s. Nor has the U.S. economy experienced such a reversal of household credit flows since the Great Depression.

“Policymakers, investors and entrepreneurs need to grasp this essential piece of the puzzle:

“There are good reasons why the household sector is paying down debt in an environment of declining asset prices and personal income. Falling asset prices reduce wealth faster than households can pay down debt.

“We believe this has a number of very important implications, not the least of which is for the restructuring of global growth away from a growing dependence on consumer debt binges in Anglo-American developed nations. Not to mention the policy objective of renewing lending to the private sector… it’s misguided.”

Yet it’s the very core of the justification for the TARP bailout and the broader congressional stimulus plan. Rob unpacks this phenomenon in the latest issue of The Richebacher Letter, entitled “Deleveraging Demystified.” You can learn more on the site.

The Great Credit Contraction

U.S. Could Use Crisis to Wage 'Financial Warfare'

By Noah Shachtman March 16, 2009 | 7:17:00 AM

There's growing concern in defense and intelligence circles that the global recession has the potential to threaten America's national interests. But a small group of academics and Pentagon policy-makers believe that the U.S. could benefit from the financial havoc.

With economies around the world on edge, they argue, a weakened-but-still-gargantuan USA has new opportunities to pressure adversaries through the strategic application of market trades and bank transfers. They call their theory "financial warfare." (more)

Oil and Gold Portfolio Comments -- Lots of ’Em

March 19, 2009

Oil and Gold Portfolio Comments -- Lots of ’Em

Dear Outstanding Investments Reader:

Do you remember that old expression about how “a rising tide lifts all boats”? Whatever is causing the current rise in the economic tide of Wall Street is lifting a lot of the boats in the portfolio from post-crash lows.

Oil Moving Up

It didn’t hurt that in the past three weeks, the price of oil has moved from the high $30s to a solid position in the upper $40s per barrel (and over $50 as I write). I expect this price to hold steady for a while and then move up more. Sure, there will be ups and downs. But the trend is up.

As I said in previous updates, OPEC output cuts are starting to hit home. Back near the beginning of 2009, some OPEC players began to choke back the valves. So tankers didn’t load. And now, two-three months later, those tankers that didn’t fill up with OPEC oil are not docking at Western terminals. Oil that does not unload doesn’t get refined. And oil that doesn’t get refined does not become gasoline at a filling station near you. At any rate, oil supplies are tighter and prices are higher. One of my old admirals used to say, “When all else fails, count the other guy’s ships.”

So in the past couple of weeks, McDermott Intl. (MDR: NYSE) moved from the $10 range to near $14. Baker Hughes (BHI: NYSE) went from under $27 to near $31. Halliburton (HAL: NYSE) went from under $15 to almost $17.50. Superior Energy Services (SPN: NYSE) went from $11.50 to well over $14.

Apache Oil (APA: NYSE) climbed from $52 to over $64. BP (BP: NYSE) went from $34 to over $39, and management stated that the dividend will remain unchanged for the rest of this year. It’s always nice to get an 8.7% yield and have management tell you that it’s a safe expectation.

Refiners in the Doldrums

No news seems to help the beaten-down refiners, however. They’re still in the doldrums. Tesoro (TSO: NYSE) has barely budged from the $13 range. And Valero (VLO: NYSE) has been trading in the $16-17 range.

There are a couple of problems for the refiners, especially pure plays like Tesoro and Valero. (I say they’re pure plays because they don’t produce crude oil. They just buy and refine it.)

The refiners are victims of a stealth “gas war” at the pumps. That is, last year, the dramatic increase in gasoline prices turned the political spotlight on fuel prices and oil company profits. A lot of people, politicians and media pundits just plain hated oil companies for making record profits. Nobody ever complains when IBM makes a profit. But Exxon? It’s like those greed-heads robbed the collection box down at Mother Teresa’s chapel for blind, orphaned lepers or something.

So a lot of the majors like Exxon, Chevron, Shell, etc. simply lowered their prices for fuel and are running near break-even or at a loss. The numbers for “downstream” operations at most oil companies look pretty bad.

I guess the thinking is that if the executives get hauled in front of Congress (again), they can truthfully claim that they’re not making money from charging consumers at the pump. Instead, they make their money at the upstream end of exploration and production. Is this the right way to run a business? No, it’s not something that John D. Rockefeller would have recognized back in the 19th Century. But we live in the 21st Century. Today the alternative is getting ripped to shreds by a spiteful and energy-ignorant political class that’s pandering to raw populist resentment.

The problem for refining companies like Tesoro and Valero is that they don’t have upstream operations. They can’t cross-subsidize their refining losses with production profits. So Tesoro and Valero are getting squeezed at the refinery.

One good note is that Tesoro and Valero both refine a lot of heavy oil, which tends to be cheaper than the light, sweet stuff. So the heavy oil generates what’s called a “crack spread.” That’s the difference between the lower price for heavy oil and the higher price for light, sweet crude. It’s how Tesoro and Valero made money in the past, and it’s what lets them keep the doors open even now.

Meanwhile, several new refineries are in the end stages of construction, particularly on a 580,000 barrel-per-day (bpd) behemoth on the west coast of India owned by India’s Reliance Petroleum Ltd. It may seem strange that a far-off Indian refinery is disturbing the refined fuels market in North America, but it’s true.

When this new Indian colossus is up and running sometime in 2010, there will be an instant glut of refined product on world markets. Just the bow wave of this new capacity has, apparently, hurt the prospects for North American refineries. Still, it may be a reverse case of people “selling the rumor,” instead of waiting for the actual refined products to hit the markets and establish their own channels of commerce. The North American refiners may very well be oversold.

For now, I think that the holdings in Tesoro and Valero are quiet money. Of course, they own refineries. And who’s going to build a new refinery in the U.S. these days? You have to go to India to find new refineries. Still, there are no fundamental supply-demand issues that will cause a return to the good old days of eye-popping earnings. So I don’t expect any Lazarus-like resurrection. But if the U.S. economy begins to improve and shows some strength, both of these guys could surprise us with earnings increases and make nice moves.

And one other thing. Valero is quietly buying up a lot of ethanol plants at totally distressed prices. Many of the ethanol high-flyers of a couple years ago are now in bankruptcy court. No, I’m not a fan of ethanol. But Congress mandated that a lot of ethanol be blended into gasoline. So Valero is ahead of that curve. Management is thinking ahead.

Nuclear Moves

With the nuclear power plays, nuclear component maker Curtiss-Wright (CW: NYSE)Cameco (CCJ: NYSE) got up off the mat, to move from $13 to $16.50. Denison Mining (DML: TSX) is languishing with many other Toronto stocks, trading in the $1.30 range. moved about 10%, from the $23 range to $25. Uranium miner

It’s as if everyone is waiting for some signal from the new Obama administration on the policy toward nuclear power. What are the new guys going to do? They aren’t saying. Not yet, except for canceling the nuclear waste storage site at Yucca Mountain, Nev., after 20 years of work and $10 billion in investment. Well OK. That says a lot. Maybe too much, considering the silence emanating from elsewhere.

The Obama camp has made no secret of its antipathy toward fossil fuels and enthusiasm for a zero-carbon future. Now it has to make policy. I hope it’s not exactly a news flash that we could quadruple the power supply of renewable energy systems in the U.S. and still not be able to match the daily baseload of power from nuclear plants.

Really, take the current power supply from wind, solar and geothermal. Double it with a lot of new investment. Thousands of new windmills. Tens of thousands of new solar cells. Hundreds of new geothermal wells. Now double that again. And do it in the current environment of frozen credit markets. It’s not as easy as it sounds, right?

OK, it’s not easy. But suppose you could quadruple the renewable power output in, say, four years. And suppose you could wire it all up to a dramatically expanded power grid, with wires running to the deep hinterlands. It’d still be less than the current megawatts the country is getting from nuclear. So do you see the problem?

Like it or not, the Obama administration had better get its act together on nuclear and make a commitment. Either that or it had better start drafting the press releases to explain the rolling brownouts and blackouts that are already cooked into the pie.

Precious Metals

The stock market rise has put some selling pressure on gold and silver. Gold prices have retreated from $1,000. But we are still in the early innings on these precious metal investments.

The Outstanding Investments gold and silver portfolio is focused on the long-term decline in the value of the dollar. So any decline in the price of gold and silver is another opportunity to build your stash of physical metals (5-10% of your portfolio in REAL GOLD and SILVER) as well as great mining company shares.

Remember, you won’t get much warning when the dollar decides to fall off a cliff. Take yesterday for example, the dollar took a major hit after the Fed announced that it will be buying more gov’t bonds and mortgage backed securities – that’s another 1.2 trillion in ”new” currency hitting the money supply. The announcement created a frenzy in the gold market. The price of gold shot up $50 per ounce less than 2 hours after the feds meeting.

Precious metals are like fire insurance. You don’t wait until you smell smoke to call your agent and buy coverage.

Shares in South African miner AngloGold Ashanti Ltd. (AU: NYSE) have moved up over $36, for a nice gain in less than a month. But there’s much more to go with this great and growing miner.

Canadian stalwart Agnico-Eagle Mines (AEM: NYSE) is still hovering in the $50 range. I’m not worried. It has the reserves in the ground and the skills to dig them out.

Kinross Gold Corp. (KGC: NYSE) is doing fine, despite the share price pullback to the $16 range. The company operates in a wide range of jurisdictions, from South America to Alaska to Russia. There will always be some news about a dispute with the local authorities. And there’s just something about gold mines that makes the mouths of politicians everywhere salivate like Pavlov’s dogs. I believe that Kinross management has its issues under control. One way or another, Kinross will still mine gold from its growing list of properties and strong reserve base.

In fact just yesterday I learned that Ecuador invited Kinross to resume operations in that country. All operating suspensions have been lifted. Kinross Gold can resume activities on its Fruta del Norte gold-silver project in south-eastern Ecuador, which it acquired when it bought Aurelian Resources on September 30, 2008. The deposit is believed to contain 13.7 million ounces of gold and 22.4 million ounces of silver. First production could begin as early as 2012. This is great news.

Shares in Yamana Gold (AUY: NYSE) dropped to the $4 range last fall and have clawed their way back up to $8 in recent weeks. Yamana’s most recent operating statements make the case that management continues to steer the ship toward a solid recovery in the current price environment. And things could improve quite a bit, very fast, if gold prices continue to rise. Yamana earned $179.4 million in the fourth quarter of 2008, despite a $74 million hit from price adjustments for copper. This last item was directly related to the epic collapse of copper prices during the period. It looks as if copper prices have stabilized (consumption is rising in China!), so the bad news is contained for Yamana.

No news seems to be good enough to lift up the shares in NovaGold Resources (NG: AMEX), hovering in the $2-3 range. Its Donlin Creek project in Alaska recently received the prestigious Thayer Lindsley Award from a major Canadian mining organization. The award honors the NovaGold team for defining the Donlin Creek site, and classifying it as one of the most significant new ore discoveries in the world. Right now, NovaGold is beginning the permitting process so that it can eventually turn the 30 million-plus ounce discovery into a mining operation.

Meanwhile, word came that investment guru Marc Faber holds a significant number of NovaGold shares. And Faber has a nose for great investments. Still, NovaGold has delivered too much bad news to the markets in the past year. It’ll take a while for NovaGold to recover. Then again, some cashed-up larger mining firm could always swoop in and just take the company over. Stranger things have happened.

That’s all for now. (Except, remember to buy some gold!)

Thanks for reading. Best wishes…

Byron W. King

A Bubble’s Gotta Do What a Bubble’s Gotta Do

Whiskey & Gunpowder
By Don Stott
March 13, 2009
Colorado Gold

A Bubble’s Gotta Do What a Bubble’s Gotta Do

I really believe that all bubbles must burst. Bubbles are highly unstable! This one had to pop eventually, and of course it did. Most will blame it on greed, but that’s like blaming plane crashes on gravity. There were several causes of the current depression, but the main one is that there is no ‘market price’ on interest rates. When I say ‘market price,’ I mean the marketplace setting interest rates, and not the Federal Reserve. A credit worthy applicant might and should get a lower rate than a greater risk. Bad risks should get no loans at all. When a central bank attempts to stimulate an economy by setting low interest rates, and then floods the marketplace with low cost dollars, guess what is going to happen? There should be no central bank which sets interest rates. It destroys the marketplace, which levels all things.

When, on top of the central bank making interest rates absurdly low, and the Barney Franks and other do-gooders urging banks to loan to the unworthy and threaten to fine them if they didn’t, a lot of bad loans were made by bankers to those who were irresponsible. They had to, because a Jimmy Carter “Community Reinvestment Act,” would cause the irresponsible bankers to get sued if they didn’t make bad loans. In addition to the pressure from the CRA, ACORN was blocking bank drive through lanes with pickets, and threatening banks if they didn’t make bad loans. Loans requiring no money down were made by the thousands. All you needed was to be a minority, or a bad credit risk, have a low income, and want a home. Sort of like the Bol Weevil in the song. “Jus lookin’ for a home.”

Homes were being bought so fast, and with such easy mortgages, that home builders decided to build to meet the demand. With the good times rolling, developers borrowed, bought land, built streets, sewer lines, underground utilities, and waited for spec house builders to show up and buy the lots. A few did, but by then, the crash had started. There’s thousands of empty lots on hundreds of empty developments in America today.

Banks might not have been so irresponsible, but for the fact that if they made a bad loan, they immediately sold it off to Freddie and Fanny, thereby releasing them from any risk. Fanny and Freddie, then bundled the loans in batches, and sold them to everyone who would buy them. When the bundled packages of mortgages were rated at AAA by rating agencies such as Moody’s, how could they lose?

Cheap money is what it was, and everyone was partaking. Cheap money draws people like flies to honey. More dollars were created between the years 2000 and 2007 than in the entire history of America, and that’s nothing compared to what’s going on now. From 1998 to 2006, home prices went up 150%. Homes didn’t change; only their prices. Mortgages were given to virtually anyone, who immediately sold them to Fanny and Freddie, who resold them in attractive “AAA” rated packages to investors around the world. Everyone was off the hook! Victims are the buyers of the packaged mortgages which were falsely rated “AAA.” Home prices got so high, and the flippers of houses did so well, that when the obvious peak was reached and the bubble would simply have to pop, guess who was holding the bag? Governments, pension funds, central banks, individuals, and you name it. Why sho uldn’t someone buy a packaged group of “AAA” rated mortgages? Besides, the mortgage packages were insured by AIG, the world’s largest insurer. How many hundred billion to AIG so far? Then, brilliant Wall Streeters decided to place huge bets on the phenomena, called ‘derivatives.’ Hundreds of trillions of dollars worth.

Fanny and Freddie are government backed institutions, “too big to fail,” have been bailed out, and operate at the instructions, funding, and power of the Congress. When the Barney Franks told Fannie and Freddie to make sub-prime loans to help the poor and worthless, they did, and told banks to send them all they wanted. They did, and made even more bad, sub-prime loans to virtually anyone who walked in the door. Mortgages were so easy, that thousands of people became “Mortgage Brokers” overnight, and set up in shopping centers and any available office space. Everyone was having a blast! Commissions and points were flying around like trailers in a hurricane. When the peak was reached, a chain reaction was started, which hasn’t stopped, nor reached the bottom yet.

All the while, before the peak was reached, the majordomos of economics, such as Sir Alan Greenspan, were encouraging people to get ARMS, or Adjustable Rate Mortgages, which was a sure guarantee of a failure. Greenspan said in 2003 that “The notion of a bubble bursting and a whole price level coming down, seems to me as far as a nationwide phenomenon, really quite unlikely.” It may have seemed “unlikely” to Sir Alan, but it didn’t to me. When it started down hill, naturally we needed more government to fix it, so the “Emergency Economic Stabilization Act of 2008” was passed, which authorized the Treasury to purchase $700 billion in assets “at any time.” The taxpayer was on the hook. Then there is the “Troubled Assets Relief Program Act,” which allows the Treasury to seize any financial institution’s assets at whatever price it dic tates. Then, short selling was prohibited under, “The Uptick Rule,” as it destroyed the banks reputation. This is an outrage, of course, as are all the bailout programs. Government officials are running around like the well-known chicken with its head cut off. We now have the “Term Auction Facility Act,” the “Term Securities Lending Facility Act,” and the “Primary Dealer Credit Facility Act.” Sound like more government to you?

On October 9, 2007, the Dow was 14,164.53. See what the real estate crash did to even stocks? Let’s now get back to the primary cause, and that has to be interest rates. The interest rate acts like a floodgate, or the market’s governing body, which keeps floods from ruining everything. If the interest rate is controlled and manipulated, to ‘boost the economy,’ we get into a bubble phase, which feeds on itself, till it has to burst. My banker, I am sure, sets interest rates on those to whom he loans, based on their credit worthiness. Interest rates, SHOULD NOT BE SET BY ANY GOVERNMENT OR PRIVATE BANK. The setting of interest rates way below what the market would have set them, by the Federal Reserve, has caused the world-wide chain reaction we now see. As you know, in my opinion, the Federal Reserve should be instantly put out of business, and the Congress should not subsidize o r dictate to anyone. The Fed raised interest rates and flooded the market with dollars 80 years ago, and caused the great depression. It did the same thing between 1995 and 2000, by increasing the money supply 52%, which caused the ‘dot com’ bubble to burst. The Fed’s lowering interest rates eleven times to help us out of the dot com bubble, started the housing bubble. The Federal Reserve is an unmitigated fraud and disaster, and there is no logical reason for its existence.

To fix the mess we are now in by endless printing of dollars and creating more and more bureaucracy, is pouring gasoline on a fire. Hey DC Gang...STOP FIXING IT.

Regards,
Don Stott
Colorado Gold