Jeff Clark's  Instablog

By Jeff Clark, Senior Editor, Casey’s Gold & Resource Report and author of this new FREE Special Report: ‘When Is the Right Time to Buy Gold?’

Jerry’s broker wrinkled his nose in disapproval.

“I don’t like it, Jerry,” he said in a grave tone, as if scolding a misbehaving child. “Why don’t you invest in the gold company I told you about?”

Jerry thought this might happen. His broker was traditional, conventional, and only pushed company products. And the man knew embarrassingly little about gold stocks.

“Because I want to diversify my gold stocks. There’s a lot of gold around the world. And this company is capitalizing on that.”

The broker was shaking his head. “The company I recommend is right here in North America, Jerry. There’s no need to buy one with mines halfway around the world. Besides, we don’t know what the politics are over there.”

Disappointed with the mainstream advice, Jerry left and called another broker. This one specialized in resource stocks.

Jerry explained his reasoning for wanting to buy this particular gold stock. The broker listened patiently, but was so quiet Jerry thought maybe he was cool on the idea.

“Politics in general are somewhat unpredictable there, but less so for mining,” the broker explained. “In fact, they just lowered their tax rate on mining companies. The company he’s recommending is well run, but it’s already a mature producer with a huge market cap, and has no exposure to these other parts of the world you’re looking at.”

Jerry felt comfortable with his original hunch after finishing his discussion with the new broker. He put some of his money into the stock of the younger gold producer, with assets on the other side of the globe.

A year later, Jerry ran into his old broker at a local bar. The man smirked when he spotted Jerry. He was obviously unhappy about losing Jerry’s account and apparently wanted to rub it in.

“You should’ve bought that gold stock I recommended last year,” the broker said smugly. “It’s up 43%.”

“Good for you,” Jerry replied, “But that stock I told you about is up 75%.”

The broker’s smile wilted, and confusion clouded his expression. He spoke tentatively, not sure he wanted to hear the answer. “How’d you know to look at companies there?”

“Lots of reasons,” Jerry replied. “But for starters, there’s lots of gold over there.”

Gold Around the Globe

The keyword is geographical diversification. And while no single investment variable can guarantee profits, geographical diversification does add a layer of safety and enhanced profit potential that investing solely in companies located in one country or region cannot offer.
Jerry’s broker, like many in the U.S. who don’t know much about the gold industry, are uncomfortable investing in smaller producers or in faraway regions. And yet, most of the gold is currently being dug up in Africa, South America, China, and Oceania. North America accounts for only 16.3% of total gold production.

Further, of the 15 largest gold deposits in the world, only five are in the U.S., Canada, or Mexico. Many countries where gold has been traditionally mined, such as South Africa and the U.S., are experiencing production declines, while other areas, like South America and China, are just now starting to rev up.

►First Step to Geographical Diversification: Make sure you have global exposure. If you’re only investing in companies that have deposits where you have cell phone coverage, you’re greatly limiting your profit potential. Don’t ignore a region just because it’s an unfamiliar culture or doesn’t speak your language.

“Can We Tax That?”

Don’t get me started on politicians and NGO’s [Non-Governmental Organizations] monkey-wrenching the free market’s wheels. Hey, I want mining companies to keep cyanide out of the drinking water and for local communities to see some economic benefits as much as the next guy. In point of fact, most modern mining efforts run clean operations and provide good-paying jobs to local residents. But more often than not, greed is the motivation behind the politics – governments want revenue, and mining companies can be an easy target.

As gold and silver mining stock investors, it is imperative we understand and monitor the politics of any region where our companies operate. And not just the federal or provincial authorities; we must be alert to local community sentiment towards mining as well. Just because federal or state regulations are supportive doesn’t prevent a local group from agitating against a development.

And laws affecting miners can change at any time, and suddenly, making the political climate tricky to judge and planning for mining companies and investors difficult. Would it be safe for me to assume, for example, that your tax planning of 10 years ago has had to be modified? The same applies with mining.

A stable political jurisdiction today can be tomorrow’s iffy hot bed of discontent. For example, the U.S. is consistently rated one of the lowest-risk countries in Resource Stocks’ yearly World Risk Survey. Yet, Washington politicians have drafted a bill that, if passed, would adversely affect mining in the U.S. While nothing is imminent, and we don’t expect it would pass in its current form, we can’t say that mining in the U.S. will never have any risk, and it is something we have to keep an eye on at all times.

On the other hand, eight of the world’s 10 highest-risk jurisdictions are in Africa, where Randgold has all of its operations. However, they mostly operate in countries where the politics are more stable, reducing their political risk to a tolerable and more predictable level.


The lesson: we cannot make assumptions about politics and mining based on geography.

So what’s the solution?

►Second Step to Geographical Diversification: Don’t be overexposed to any single government. In today’s political climate, and for the foreseeable future, there is no such thing as a 100% risk-free country. Politicians and political whims come and go, so risk will always be fluid. And we think gold mining could become an increasingly attractive target as the gold price rises and international economies struggle.


Of course, there are areas we’d simply avoid. Of the 15 largest gold deposits mentioned above, we wouldn’t consider investing in six of them solely because of the host country’s politics. We want diversification but not at the expense of unnecessary risk.

The One-Company Rule

Okay, perfect politics is a fairytale, so is there a way to minimize a downdraft in your portfolio if a government makes a negative move against one of your company’s mines, or mining in general?


There is.

►Third Step to Geographical Diversification: Own a sufficient number of companies. Having several eggs in many baskets will prevent your portfolio from suffering a Humpty Dumpty event if the government where your mining stocks are concentrated decides to follow, for example, Venezuela’s lead. Country risk can be offset with the right mix of stocks. That’s why we don’t just buy Barrick and say, “We’re diversified!”

So... is your gold stock portfolio globalized? Do you have too much exposure to any one government? And do you own enough gold stocks so that bad news with any one company doesn’t sink your portfolio?

The easiest way to diversify, of course, is to buy a mutual fund (see the table below for our top picks). But we think the mining stocks with the greatest profit potential are those newer producers with operations in regions seeing increasing production and greater exploration prospects.

“Buy low, sell high” is easier said than done. Is there a particularly good time to buy gold? Are there patterns in gold’s market fluctuations? Find out everything you need to know in our FREE Special Report How Do I Know When to Buy? Click here to read it right now.

By Jeff Clark, Senior Editor, Casey’s Gold & Resource Report

Like many of you, the passage of the healthcare bill wasn’t met with the popping of champagne in my house. I found myself chanting “Uncle Sam, Uncle Sham” as the day wore on. Higher taxes and other major changes are headed our way. And yet, I think there’s something in the bill that’s even more dastardly.

If you’re a supporter of the bill, you’d point to its benefits: Poor adults will get Medicaid. Low-income families will get federal subsidies to buy insurance. Small businesses may get tax credits. Kids will be able to stay on the parents’ policy until they turn 26. Seniors get additional prescription drug coverage. People with pre-existing medical conditions can’t be denied or dropped.

While no one is really against any of those things, the elephant in the room (or boa constrictor in the bed) is how those things are going to be paid for. Here’s how: the “wealthy” will pay higher taxes; businesses with 50 or more employees will have to insure them or pay a penalty; individuals will have to pay a fine if they don't buy insurance; premiums will rise for many who already have insurance; and seniors with Medicare Advantage policies could lose those plans or pay more to keep them.

Regardless of how you feel about the bill, the fact is that taxes are going up, and not necessarily just on the “wealthy.” The healthcare plan will cost $940 billion over the next decade, almost $100 billion a year.

I haven’t read the 2,407-page bill (almost twice as long as the Gutenberg Bible), but there are plenty now who have. Here’s a summary I compiled, from various sources, that outlines the tax ramifications of what is now the law of the land. Assuming the Senate passes the package of changes, the biggest tax increases will be in Medicare payroll taxes. Those take two forms, both starting in 2013:

But keep in mind that the Bush tax cuts expire at the end of this year, which will push the Medicare tax on capital gains to 23.8% in 2013 on these earners. Dividends, currently taxed at the top rate of 15%, will be taxed as ordinary income, with the top rate scheduled to rise to 39.6% (from 35%).

This means that the tax on dividends could go as high as 43.4% when the new Medicare tax goes into effect in 2013. (Obama has proposed a top dividend tax rate of 20%, so if Congress enacts his proposal, the top tax rate for dividends would “only” rise to the 23.8% level in 2013.)

You may think you’ll escape this tax if you’re not “rich.” But it’s those darn Unintended Consequences politicians never seem to think about that could still sting you. For example, the 3.8% Medicare surtax could snag you if you happen to sell some real estate for a big gain.

The other major tax increase is the one imposed on health insurance plans that are more generous, the so-called “Cadillac” health plans. And this tax increase doesn’t just apply to high-income earners; those state and union workers that lobbied for better health coverage instead of big pay increases are going to find they’re included with the “rich” in a new excise tax. Starting in 2018, family insurance plans valued at more than $27,500 ($10,200 for individuals) would pay a 40% tax above that level. Ouch.

And there’s other ways you’ll be taxed, particularly through the magic of “passing it on to the consumer.”

For example, pharmaceutical manufacturers will pay an annual fee based on their market share starting in 2011; same for health insurers, starting in 2014. A 2.3% excise tax on the sale of medical devices will start in 2013. A 10% excise tax on indoor tanning services goes into effect this July.

How will all these businesses afford the additional tax? They won’t. You’ll pay it, through higher prices.

Further, were you one of those who incurred medical expenses above 7.5% of your income, thus allowing you to deduct them? That ceiling will be 10% starting in 2013. (It remains 7.5% for those over 65.)

There’s more, most of it in the form of greater restrictions, increased penalties, and higher fines on various entities, businesses, health plans, or individuals. But what I especially cringed at was this: the bill vastly expands the responsibilities of, and gives greater strength to, the IRS. The agency will hire as many as 16,500 additional auditors, agents, and other employees just to enforce all the new taxes and penalties. Specifically, the bill will empower the IRS to do the following: verify citizens have “acceptable” health care coverage; impose fines up to $2,085 or 2% of income (whichever is greater) for failure to purchase “minimum essential coverage”; confiscate tax refunds; and increase audits.

The upshot is that this will force many taxpayers to be more conscientious of monitoring their income and tax withholding.

Perhaps most damaging to the government’s plans is if the bill leads some to ask the Ayn Rand/Atlas Shrugged questions: What if I just stop being productive? What if I stop working once my income approaches the threshold? What if I invest less so that I stay under the limits?

And last, here’s the time bomb that could trump the tax concerns: none of these taxes are indexed to inflation. Since the bill fails to index to inflation the exemption threshold for the Medicare taxes on both earned and unearned income, it’s almost certain many taxpayers will get to these tax levels a whole lot quicker than they think.

What this essentially means is there is now more incentive on the part of the government that we have inflation. If inflation reaches 10% at some point, which is below the 14%+ rate it hit in 1980 and far below any hyperinflationary level that’s possible, the $100,000 earner gets to the magical $200,000 level in seven-and-a-half years. From the government’s perspective, it makes the printing of money a lucrative affair.

Yes, higher taxes are coming. But with the government’s built-in incentive for inflation, along with the reward that comes from getting more citizens to higher tax rates, many may find the tax issue an annoying mosquito bite compared to the alligator chomp of inflation. And high inflation affects every citizen, regardless of income or tax rate. Those who think they’ve escaped the cold may find they’ve walked into a freezer.

With this added push to inflate, our investment strategy for the foreseeable future is now clear: We must invest in assets that not just keep up with inflation but outpace it. All wise citizens do tax planning. Have you done inflation planning?

We think it’s imperative investors be overweight precious metals. But with the big run-up over the past year, is now a good time to buy? Get our answers on both gold and gold stocks with a 3-month, no-risk trial to Casey’s Gold & Resource Report. To read more about how to outpace inflation by making handsome returns on your investments, click here.

By Jeff Clark, Senior Editor, Casey’s Gold & Resource Report

On February 24, Reuters reported that the Reserve Bank of India was “set to be a buyer” of the 191.3 tonnes (6.74 million ounces) of gold the IMF is selling. Although the bank wouldn’t comment directly on the possibility, they did say, “We are closely looking at the gold market... gold is a safe bet.”

The article then quoted an unidentified official from the China Gold Association as saying, "It is not feasible for China to buy the IMF bullion, as any purchase or even intent to do so would trigger market speculation and volatility.”

But the next day, Finmarket news agency in Russia reported that China “confirmed its intention” to buy the IMF gold. "Chinese officials have confirmed previous announcements from IMF experts and said that the purchasing of 191 tons of gold would not exert negative influence on the world market.”

While they’ve been silent since, both India and China have publicly hinted they want this latest batch of yellow bars from the IMF. There’s no way to know if a competitive bid would spring up between these two countries, but...can you imagine the ramifications if one did? When India bought 200 tonnes of IMF gold last November 3, it set off a buying spree that saw gold rise 14.2% in 4 weeks. What if this time around, a couple central banks both want the gold for sale? What if China says to India, “Not so fast, guys. We’d like to bid on that, too...” and word of that clash leaked out?

Pure speculation, of course, but competing for gold purchases isn’t a far-fetched idea. This sale is not pre-arranged; it’s an open market sale. Also, there’s only so much to go around. These two countries have only a tiny amount of their reserves in gold. Throw in the fact that central banks worldwide are already net buyers.

A pretty delicious thought, wouldn’t you say?

The gold price dropped a tad on the IMF announcement, but is up 1.1% since then. It’s pretty hard to make a case that IMF sales will hurt the gold price. As I said a few weeks ago in my dirty jokes column, IMF sales tend to mark bottoms in the price and not tops. The World Gold Council reported that floor traders now consider $1,054 as a floor in the market. Why? That was the average price India paid for the 200-tonnes they bought from the IMF last fall. Meanwhile, what is our government doing?




You’ll recall that that big spike in the U.S. monetary base in late 2008 was never before seen in history. The Federal Reserve basically doubled it overnight. Our economist Terry Coxon described it as “beyond unprecedented.”

So, they stopped that insane activity, right? Since December 2008, the monetary base has swelled from 1.69 trillion to 2.18 trillion, a 29% increase and another new record.

Printing paper money vs. buying physical gold. I don’t know about you, but I think I’ll follow China and India’s lead here, even if I have to compete for the price I pay for my gold.

Is $1054 really the bottom in the gold price? Check out our 4 clues in the current issue of Casey’s Gold & Resource Report here risk free.