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Black Swans Need Not Apply

Written by Louis James Subject: Casey Research Articles
I was pounding pavement instead of kicking rocks recently, on Wall Street of all places. There were Suits hanging around outside the familiar iconic buildings, despondently smoking cigarettes. In my surely biased opinion, the feel of the place was distinctly less energetic than usual.

But what really struck me was not one, but two guys with sandwich-board placards announcing “WE BUY GOLD” – for different companies.

Just afterwards, while having lunch at Rockefeller Center, my sister, a conservative mainstream banker, called and asked me how to go about buying physical gold. I knew that day was coming, just as I knew the Soviet Union was destined to collapse sooner or later from the weight of its own economic stupidity, but it was still a shocker when it happened.

And yet, if you ask your neighbors, you’ll most likely have a hard time finding any who own gold. My New York adventures are signs of an approaching gold mania, not a present one. But I believe more firmly than ever that it’s coming.

Meanwhile, the Wizards in Washington entreat us to pay no attention to the man behind the curtain, hoping to distract the American consumer from the mounting evidence that the so-called recovery in the U.S. of Oz is faltering. Rather than let the market liquidate malinvestment and mismanagement, government intervention to prop up failed companies, bankrupt states, busted banks, and toxic business models (like condo flipping) is only dissipating vast sums of borrowed money to no useful end.

The second dip in the U.S. economy is coming, if not upon us, and that will exacerbate the rest of the world’s problems. The evidence in favor of this is so abundant, no black swans need appear on the scene to drive the point home. The next leg of this “W” shaped recession we’ve been warning about for some time is already baked in the cake. Here’s why:

Top Five Reasons Why the Economy Is Going Down

  1. A “jobless recovery” in the U.S. is not a recovery. You can bail out
      the largest and most mismanaged companies and change the rules
      to allow banks to forgo reporting their mistakes, making national
     economic statistics look better. But that doesn’t change the reality
     that millions of people are out of work – since the crash, over six
     million more in the U.S. alone – and unable to find jobs.
  2. Nor does it make it any less alarming that the rate of bank failures is
      well ahead of last year’s record (140), with 86 shuttered as of
      mid-June. Nor does it have the slightest effect on a myriad other
      harsh realities that politicians, as a group, are unable to face.
  3. The EU’s massive rescue package has not, and will not, avert
      trouble in the eurozone. To the contrary, the situation continues to
     deteriorate, pressuring the euro ever lower and taking it to levels not
     seen since early 2006. In today’s global economy, what’s bad for
     Europe is bad for Asia and the U.S. Ominously, the Baltic Dry
     Index, a barometer of international trade that staged a feeble
     recovery following the 2008 crash, is falling sharply again.
    With all due disrespect for the man, Alan Greenspan considered this
     his “must watch” leading indicator, and it has proved a good 
     predictor of where the global economy is headed. That would be

 4. Just as Greece exposed the extent of Europe’s problems with the
     PIIGS (and they thought the “Mexican Swine Flu” was a problem!),
    California seems poised to upset the whole U.S. applecart if it
    doesn’t get bailed out. It would be hard to maintain the illusion of
    recovery if the most populous state in the U.S. – with a GDP greater
    than Russia – implodes into a black hole. Illinois, New Jersey, and at
    least 43 others are just behind, hat in hand.
 5. From Obama’s attempted ban on drilling for oil in the Gulf of
    Mexico, to the new financial regulations Congress has passed, to
    America’s flirtation with socialized medicine, it is clear that the U.S.
    has entered a new era of Big Government. Big Government, Big
    Debt, Big Deficits, Big Military… and surely soon: Big Taxes. One
    does not have to be an anarcho-libertarian to see this as a Big
   Problem delivering huge, negative unintended consequences.
 6. The real estate markets are still an unfolding disaster. May sales of
     new homes fell by 30% to a record low (seasonally adjusted
     300,000 units vs. 800,000 “normal” sales) and dropped another
     2.6% in June. Housing starts are down similarly, and previously
     more rosy stats have been revised downwards. A recent report
     from Florida tells us that 81% of all loans in the state are
    “underwater,” and that nearly 40% of all Florida borrowers owe
    more than 150% of the value of their homes – just another hay bale
    in the wind. And the commercial real estate debacle we have been
    warning of has yet to hit the fan.

I could go on, but I’m sure you get the point that what’s already visibly ahead is Trouble with a capital “T” – never mind the possible black swans that may soon arrive. That said, while the global economy doesn’t need any black swans to tip it over the edge, the fact is that there are plenty of them out there, circling lower like buzzards. The BP oil spill disaster was one – a major disaster to those affected directly, but barely more than a hatchling black swan, on the global scale of things.

Full-grown black swans could range from no-holds-barred war in the Middle East, to a spectacularly stupid new regulation in the EU or U.S., to an exceptionally long and harsh winter. Events that would be unfortunate difficulties to a robust economy can be fatal blows to one as rickety as the world’s today.

Which will it be? I don’t know – I’m not a fortune-teller – but I don’t need to know. All I need to know is that they are out there, like sparks swirling around a powder keg – and this one has a lit fuse anyway.

The Big Question

Assuming our predictions of a double dip in the world economy are right, the big question we face as speculators betting on gold is: what will happen to gold in the next economic downturn?

Or, more specifically (and perhaps painfully): will gold and junior gold stocks get hammered as they did in 2008? Or will visible failure of the governments’ rescue attempts, and the debts and deficits left in their wake, cause gold to go through the roof and head for the moon, pulling our gold stocks along behind?

All of us here at Casey Research believe the ongoing train wreck of the global economy will send gold to the moon and our stocks to the outer planets – but that doesn’t mean it’s about to happen now. A particularly frightful black swan could set off the mania we’re expecting at almost any time, which is why we have core holdings in precious metals and related stocks. Absent that, we believe the gold market could continue its “two steps forward, one step back” progress for many months to come, with the odds presently seeming to favor a step back.

It's easy to think that the mania is around the corner, with gold setting new record highs (not inflation-adjusted) in recent weeks – but betting that way would lead to massive losses if 2010 ends up more like 2008. Waiting for clarity, on the other hand, leaves time to redeploy cash into winning picks when it looks clear that the mania is starting.

And, as we’ve said before, in our present near-term deflationary environment, cash is not a bad place to be.

Cash and Core holdings – I think of it as C&C – never forgetting that gold is a form of cash. If gold takes off in the near future, we’re positioned to benefit. If it does the opposite, we’ll have the cash to scoop up the bargains.

Heads, we win – tails, we win more. I like it.

If we’re so sure gold and our shares are eventually headed way north, why not buy more now?

Well, if you’re relatively new to the sector and are still building your core portfolio, cautious buying on the dips is justified. But ask yourself these questions (and be honest with the answers – it’s your own money that’s at stake):

    If you had arrived on the scene in early to mid-2008 and started
    buying just before things fell off a cliff, would you have had the
    staying power to hold on and thus benefit from the resurgence in
   2009 and new highs in 2010?

    Would it make you sick to see great companies on sale for pennies
    on the dollar, but already have all your speculative cash tied up in the
    market, at higher prices?

If you can honestly and without hesitation answer yes to the first and no to the second, then buying (more of) the Best of the Best now may work out well for you.

But I have one more question: why take the chance?

If we wait to see if the market corrects and it doesn’t, our profits will be lower – but so will our risk.

I’ve said it before, but it’s worth repeating in these heady times: “Buy High, Sell Higher” may work sometimes, but it relies on someone coming along later, willing to take even bigger risks than us. Our favorite recipe is “Buy Low, Sell High” – especially if offered a shot at “stupid cheap” prices as in the fall of 2008. When it’s time to buy, with or without the lower entry points we expect, I will definitely say so in these pages.

Patience remains the key virtue of the savvy speculator today.


[Louis James, senior editor of Casey’s International Speculator, is simply the best in the business when it comes to junior mining companies – his boots-on-the-ground approach and due diligence have been making substantial gains for subscribers. It’s no coincidence that every single stock he recommended in 2009 has been a winner… and 2010 is shaping up to be even better. Read more here.]

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