Louis James'  Instablog

Archimedes once said that if he had a lever long enough and a place to stand, he could move the world. Today, the half-Greek island of Cyprus appears to be the fulcrum, and the long arm of the EU may be the lever that heaves the entire world over the edge of the abyss.

As Dennis Miller so eloquently pointed out in a recent Casey Daily Dispatch, most Americans would not be directly affected if North Dakota decided to seize citizens' money in order to pay its bills, but all Americans would be deeply disturbed by such an action. The principle of the matter couldn't be clearer; outright theft is wrong. But it'd probably be fear, not principle, that would have people heading for their banks in droves to withdraw cash as fast as possible.

Of course, on a moral plane, government money printing is equally reprehensible and cowardly to boot; it takes value out of people's savings just as surely as taking money out of their bank accounts, but in a hidden, indirect way. (One could make the same argument of taxation in general, unless it's voluntary.) But again, most people won't storm the Fed with pitchforks and torches as a matter of moral rectitude. They would, however, if the government simply reached into their bank accounts and seized money those people had planned to spend tomorrow.

And if North Dakota's hypothetical troubles were mirrored in other, much more populous states, like New York and California, it's easy to see how people in those states wouldn't want to wait for their governments to do the same thing. This is the abyss toward which the EU's hard line with Cyprus has pushed all of Europe.

Europeans living outside Cyprus should not kid themselves that this is just a Cypriot problem - anyone with a bank account in Greece, Spain, Italy, etc. should be thinking very hard about how safe their cash is from confiscation. As we go to press, the Cypriot parliament has backed away from the bank levy on everyone that caused so much uproar, but the new deal still seizes money from larger depositors. This does not undo the fact that it's still stealing - nor that the ECB asked for some of every citizens' savings. Europeans living in non-PIIGS countries should not kid themselves about the impact on themselves if the countries near default tumble like dominoes.

And people not living in Europe should not kid themselves into thinking that this is just a European problem; in today's global economy, every country would get hurt by a banking and economic collapse in Europe. Those who think Asia will save the world must remember that the EU is China's largest trading partner. Or was - who can say it will be tomorrow?

Key point: with a fractional reserve banking system, it doesn't take a majority of bank depositors to decide to withdraw their cash to put their banks out of business. If something like 10% of depositors decided to withdraw all of their money, banks would be in real trouble - and even if only a smaller percentage were to initially decide to keep their cash at home, they could spook the required fraction into panicking and pushing the banks into insolvency. In stable times, fractional reserve banking may seem like free goodies for all, but during unstable times, it makes banks that much more precarious. Things have to be pretty dire for an entity like the ECB to demand action that could spark such a panic.

But wait - the banks are backed by the governments, so depositors are safe, right?

Yeah, right - the same bankrupt governments that are facing insolvency themselves…

We've been saying for some time that the global house of cards could topple at the slightest rustling of the wings any of a number circling black swans. Something like the ECB turning draconian with Cyprus and scaring the heck out of everyone else in the EU seems more like a swan dive right into the heart of the teetering structure.

Many mainstream commentators are dismissing the significance of the Cyprus debacle - but the same type of people also dismissed the threat of the subprime crisis until it could no longer be denied.

This does not prove that what's happening regarding Cyprus today is the tipping point future historians will point to as the beginning of the end of the EU and hence the rest of the old economic order. But it could be.

Skepticism from the mainstream does not prove that Doug Casey is right about the global economy exiting the "eye of the storm" this year, but it's a great contrarian indicator.

What is absolutely clear is that the extreme measures the ECB has just shown it is willing to take are solid evidence that we are right about just how shaky things are - just how close to the crumbling edge of the abyss the whole world is.

Even if the direct, overnight theft of Cypriot bank deposits does not spark a bank run across Europe, it won't change this fact. The ECB will certainly admonish us all to "pay no attention to the man behind the curtain," but we've all seen the truth.

The question to ask is not, "How can we be certain?" That one's easy to answer: we can't be. The question to ask is, "What do I risk if this is it and I fail to prepare for the hell that's coming two steps behind?"

To Doug, me, and all of us here at Casey Research, the answer to that is obvious: if we bet on the resumption of the economic storm and the so-called recovery continues, we'll miss some opportunities and maybe lose some money on investments that don't work out - but if we don't make that bet and the economy does come unglued, we will suffer heavy losses.

If - Doug would say "when" - the wheels fall off the economic "recovery," the vast majority of people will see a substantial reduction in their standard of living - and many will simply be wiped out. We don't plan to be among them.

If the inevitable has now become imminent, the general recommendations that Doug Casey has offered many times before become even more applicable and important. They are:

• Liquidate: Sell or dispose of any assets you have that might have been favored by the old economy, but are unlikely to hold value or generate income in the new one. That includes speculative real estate holdings in formerly hot markets and stocks in formerly invulnerable blue-chip companies. You might even sell your house, if you can, and rent instead. You should lighten your load in every way possible - even household junk filling your basement and attic - the storage unit you may be renting - anything you don't truly need. Turn it into cash.
• Consolidate: Cut your expenses to the bone and consolidate your assets into things that will hold value come hell or high water. The single best asset class for doing this is the precious metals: gold and silver. A substantial amount should be in cash form (coins). This is where you put your savings. Productive (not speculative) real estate is also good, but make sure it's in a jurisdiction that is unlikely to see you as a victim to be fleeced for the public good. As Doug constantly reminds us, a critical element is getting a major portion of your assets offshore.
• Speculate. With governments around the world on the verge of insolvency, most of them printing money by the helicopter-load, there are predictable economic consequences. Massive bubbles will be created, such as the one we see ahead in precious metals, and other bubbles will pop, like the collapse of more major corporations. There are no safe bets in such an environment (even gold can be confiscated if you leave it all in a jurisdiction that turns to stealing, as the EU has just shown it's willing to do), so you're better off speculating on a variety of bets placed on these trends. It's possible in such volatile times to make a lot of money - this is the raison d'être of most of our publications.
• Create: Despite all of the above, we are not apocalyptic, but actually quite optimistic, about the long term. In the coming years, the world is likely to change as radically as it did entering the industrial revolution - major change will impact everything: economy, politics, technology, demographics, social customs and mores, the military. Everything. This is a good time to look around and ask yourself what goods and services you can provide that people will need in the future. What worked during the late Long Boom won't work in the future - in order to create, you're going to have to think creatively, but it will be worth it. Life today is immeasurably richer than it was a thousand years ago, and in 100 years it will be better by a factor beyond our ability to comprehend. Maybe even 50. And in just 25, it will be beyond most people's belief. Become a forward thinker, or become road kill.

Personally, I just sold my sports car and consolidated down to one vehicle. We really didn't need two, and I'm using some of the proceeds to speculate on an emerging gold producer that has the potential to return ten times my investment. I plan to speculate on more great companies in the months ahead, especially if the market goes into a true panic, which it has not yet. Saving in gold has long been my practice, so that's nothing new for me. As for the future, I plan two things: A) invest in technologies and companies I believe have great potential, starting with some of those covered by the Casey technology division; and B) work hard to keep myself from becoming obsolete.

Do not underestimate the importance of the latter; there is medical technology right around the corner that could drastically prolong the human lifespan. Everyone not at death's door should have at least a 25-, if not 50-year financial plan.

It's the "speculate" component of Doug's "liquidate, consolidate, speculate, and create" formula that most people have the most trouble with.

We've said many times that the essence of speculation is to buy low and sell high. The best way to do that is to buy when there's blood in the streets - which is what is shaping up in the market now. Despite persistently high metals prices, there's panic in the air, and few are willing to buy. It's at times like these, when "everyone" has given up on a commodity, sector, or asset class that cannot dry up and blow away - like metals and mining - that you can buy at "stupid-cheap prices."

We have documented and commented upon the weakening market for metals and mining stocks, particularly gold stocks, in these dispatches for some time now. We've pointed out the widening gap between the value the market is giving to good companies and the commodities that underlie them, such as gold, which has traded sideways, not down, over the last year - and at a price point previously deemed unsustainably high. It is clear to us that a potentially life-changing buying opportunity is shaping up today, and it may just be the Cyprus black swan that turns out to be the tipping point in our favor.

Now, no one can time a market bottom, except by accident. But when you can buy something that has to go up when it's selling cheap, you can make a lot of money - if you have the patience to endure until it does go up. In the case of mining stocks today, we don't think that patience will be required for a long time, but it will have to hold up to extreme volatility in the near term.

This is, frankly, not a viable plan for everyone. People prone to panic when stock in a good company drops 30% for no reason often end up inverting the speculator's formula, buying high and selling low. But for those who have the discipline to stand by their judgment of what has value, regardless of what the rest of the market is saying, it's times like these that create the most leveraged buying opportunities - opportunities that literally set the foundation for accumulating serious wealth.

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The nature of success and failure in speculation: discipline and perseverance matter much more than strength or speed. It's necessary, but not sufficient, to be right - you have to stay the course.

Key point: There's a clear and present opportunity we see in the Cyprus crisis, which has already given the price of gold a shot in the arm. However it turns out, the cat is out of the bag as regards how the EU regards peoples' savings, and that could lead to the next leg up in the gold market. If the whole system does topple over the edge of the abyss, it should spark a gold mania such as have never been seen before, not even during the famous spike of 1980.

It's a matter of when - not if - the next gold mania hits. When it does, demand for companies that mine the yellow metal will escalate - creating profit opportunities that most investors dare not dream of. The biggest of these opportunities will be in select junior mining companies. Consider these gains in junior miners from previous precious-metals market rallies: Silverado Mines, 3,988%... Eagle River Mines, 3,478.9%... Goliath Gold, 7,011%... Francisco gold, 3,350%... there are many, many more such examples.

To help you get in on the ground floor of the coming precious metals mania, Casey Research has put together a very special online event: Downturn Millionaires. This free webinar will premier on April 8 and features some of the world's most successful natural-resource speculators - like Doug Casey and Rick Rule - who will reveal how they made their fortunes in beaten-down markets and what you need to do to emulate their success.

For more information and to register, click here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

My message lately has been very simple: buy low.

And do it now.

The essential formula for investing, as you know, is to buy low and sell high. So easy to say, so hard to do.

It takes real mettle to be a successful contrarian, and it's precisely because so many investors are so nervous about our market today that it's a buyer's market.

Let me digress for a crucial, relevant sliver of history.

Seward's Folly

It was literally a deal done in the dead of night: 4:00 a.m., March 30, 1867. The US Civil War was a recent and very raw wound; the South destroyed and desolate, the North broke and bleeding, urgent needs of the people beyond counting. We'll never know the full truth of how the purchase of Alaska came together, but I suspect the true motives of those involved would weave a story worthy of a season of Deadwood: corruption, expropriation, murder… I'm sure it was all there.

Why else would the war-torn USA agree to spend desperately needed funds on a frozen wasteland you had to cross potentially hostile British territory to reach, and was full of hostile natives bristling with weapons once you got there? All the more reason not to pay for a territory so remote and useless that the Russians were willing to sell it for two cents an acre.

Even the British, who were busy settling British Columbia (now the Canadian province between the US states of Alaska and Washington), didn't want Alaska and turned down a Russian offer on the territory. An initiative by then US Secretary of State William H. Seward would eventually seal the deal. This is why the purchase of Alaska became known as Seward's Folly, a name that stuck for many years.

Something interesting happened during the formal transfer of Alaska. A blacksmith named Ahllund witnessed the handover, recounting that the Russian flag got stuck on the pole as it was being lowered. A soldier was ordered to climb the pole and retrieve the flag, but couldn't. A second tried and failed. The blacksmith offered no details on why the flag got stuck or why the pole was so hard to climb. My romantic heart has to wonder if the sharp-eyed eagle of Russia, the imperial symbol of the monarchy, knew its masters were giving away an enormous wealth in minerals for too small a price. Be that as it may, a third soldier succeeded where his comrades failed, and that was the end of it.

It took 31 years, in fact, until gold was discovered in the Klondike, setting off the famous race to prospect, sometimes called the Klondike, Yukon, or Alaska gold rush. The discovery is close to the Yukon/Alaska border, and the deposits, of course, pay no heed to the boundaries drawn on maps by men. Plenty of gold was discovered - and more than 100 years later is still being discovered - on both sides of that imaginary line.

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Famous image of the treacherous Chilkoot Pass, which prospectors had to scale as they headed to the Klondike to seek their fortunes.

My point, however, is not the independence of geology and politics, but the vision of whoever was really pulling Seward's strings and hence truly responsible for the purchase of Alaska. "Vision" may be the wrong word. I doubt that the interests behind the deal envisioned the gold rush to come decades hence and were placing their bets early. What I'm sure they did see were the Russians being squeezed by their creditors (the Rothschilds), and an opportunity to buy a huge tract of land even cheaper than the three cents per acre Jefferson had paid for the Louisiana Purchase in 1803. In both cases, the sellers had to sell and potential buyers were few - a classic contrarian setup.

The Wall of Worry

People who buy low - especially contrarians who nail the bottom of a market - are frequently called fools at the time, and for very good apparent reason: all the forces that explain the sell-off are well known. Arguments against the contrarian's folly are numerous and backed by recent experience and facts that most find too compelling to ignore. This is what makes the "Wall of Worry" phase of a market cycle so… worrisome.

I see this in the precious-metals market today, with rising mining costs, taxes, royalties, regulatory hurdles, and more, erecting not just walls, but fortresses and citadels of worry. All the reasons why Doug has called mining a "crappy, choo-choo-train industry" keep getting worse. The fact that recent experience for most speculations on mining stocks has been painful, even with high metals prices, makes it even harder to buy low and charge the fortresses of worry.

Imagine trying to convince one of our hunting/gathering ancestors, whose only experience with fire was terror and devastation, that fire would become his or her best friend. That might actually be easier than trying to convince a person who's just lost a fortune on commodities that buying commodities is a great idea. Depending on the timing, it would be true precisely because commodities had just wiped many people out, and the demand for commodities never goes away. It wouldn't matter, though; the prejudice based on painful recent experience is entrenched, the battlements of worry too fiercely defended.

The current market for precious-metals stocks is not quite so bad, in terms of devastation, but it's almost as good, in terms of investor disgust and clear opportunity. That stems from investors placing too much emphasis on their recent experience, rather than on understanding the fundamentals driving the market.

Consider the chart below that shows that relative to the underlying commodity - gold - gold stocks are, on average, about as cheap as they get. They are as cheap as they were at the beginning of this cycle (an opportunity only a few visionaries like Doug were willing to take), and even as cheap as they were during the crash of 2008 (an opportunity few were brave - or liquid - enough to take).

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Of course, most of the companies in the Casey Research International Speculator portfolio have outperformed the average; some have been great wins, even while the market has fallen. This emphasizes that just because there's an opportunity to buy low, that doesn't make indiscriminate buying a good idea. Focusing on the best of the best also sets the stage for maximizing gains going forward.

In that context, it's particularly important to remember that after the crash of 2008 it took the market half of 2009 to regain momentum. Yet, the best of the best mining stocks rebounded even before the end of 2008.

All of which is to say that today we are in a classic Wall of Worry trough. It's not an intercycle bottom, but it is an excellent intracycle opportunity for those with the guts and vision to be contrarians - or at least those who recognize a chance to buy on the cheap when they see one.

I see the current market as one of great opportunity because I look at more than the joy or pain of recent experience. You could say that I'm a fundamentalist when it comes to markets. You don't need me to repeat all the arguments we've made time and again in our Casey Research publications. Let me instead just highlight one key, recent development that really underscores the solidity of the trend we're betting on: Japan's incoming government is promising to run the money-printing presses at full speed and print its way into prosperity.

This alone is inflationary; but of course, Japan is not alone. The EU, in spite of the austerity talk, has also pretty much said it will do whatever it takes to prop things up, and the US has thrown caution to the winds with its open-ended QE4-ever. The skids on the slippery slope are fully greased, the slide has begun, and there is no one and nothing on the global scene with the strength and the will needed to stop it.

The crash will come. Maybe not next month, and - if recent economic figures from the US government are to be believed - maybe not this year. But come it will.

As that becomes increasingly apparent, the resulting stampede into gold and gold stocks should exceed even Doug's "trying to pass the contents of the Hoover Dam through a garden hose" expectations.

Everything I see in the global economy today points that direction. Nothing I see convinces me that the governments of the world can succeed at borrowing and spending their way into prosperity - at most, they can delay judgment day a little longer. At most.

So yes, I'm that sure of what's ahead. Only the timing is uncertain. People may call it Casey's Folly now, but I don't think we'll have to wait 30 years - or even three years - for our own "Klondike Moment," when we'll be cashing in on some extraordinary profits on our own investment prospects.

I'll leave it to bigger fools or knaves to declare when the next gold rush will commence. What I can say is that I don't want to be short when it happens.

Louis James serves as chief metals and mining investment strategist for Casey Research, as well as editor of Casey International Speculator, which features junior mining companies Louis has identified as having huge upside potential. The current issue is loaded with buy recommendations - over 30 as of this writing - making now one of the best times ever to leverage precious metals to potentially life-changing gains. Learn more about Casey International Speculator and the strategies Louis uses to pick winning junior miners.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

We often hear the claim that gold producers have not met investors' expectations for the past couple years. While there are many potential reasons for this, one explanation for their underperformance lies in the fact that producers diluted their share structures, leaving shareholders with smaller gains than they would have otherwise harvested.

To show how this dilution has impacted the industry, let's first review how gold miners performed last year compared to the S&P 500.

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The chart is hardly a surprise: the precious-metals producers had a poor showing, losing 26.6% in 2012 - something we think will reverse this year - while stocks in the S&P 500 delivered a solid 14.2% annual gain.

We think that while last year's performance of the S&P 500 companies is commendable, the future may disappoint investors who believe the US economic recovery is on solid footing: last week's GDP data suggest that our economy continues to struggle, something that was immediately reflected in the price of gold the day the news was released. As 2013 progresses, we expect to see more signs of a weaker economy and subsequently, stronger gold prices.

But let's look at the bigger picture to see how the S&P 500 has expanded as a group during the past decade. To measure the rate of expansion, we plotted the total market capitalization against growth of shares outstanding. The idea here is to compare the rate of S&P 500 share dilution to the change in size of the companies. Size does not equal performance (we'll look at that in a moment), but it gives a rough idea about how much market value investors may have gained had there been no dilution at all.

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[Technical note: We did not include all S&P 500 companies in the above chart - only those for which share structure data was available since the first quarter of 2003. For example, Google went public in 2004 and was not included. We followed the same method with the HUI Index, with the only stock excluded being New Gold Inc. (T.NGD).]

Since there is little growth in shares outstanding, the majority of the market capitalization (Mcap) growth can be attributed to share price performance.

The total Mcap of the S&P 500 increased by 78.6%, or about 6% per year on a compounded basis. And no wonder - the sector includes a lot of large stocks that do not grow at the same rate as mining juniors. However, the chart also shows how quickly market value can shrink when a crisis hits.

Let's now have a look at what happened to the HUI constituents within the same time frame.

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There are two observations to be made from these charts. First, compared to S&P 500 companies, gold producers grossly overissued new shares. Since 2003, as a group, they more than doubled their shares outstanding, significantly diluting existing investors.

Second, despite the large increase in shares outstanding, HUI companies have grown their market capitalization by 302.5% as of the fourth quarter of 2012, quadrupling the size of the group. This comes in stark contrast to the 78.6% growth of the S&P 500. On a compounded annual basis, gold companies grew at 14.9% annually for the last ten years, more than twice as fast as the S&P.

So while shares outstanding of the gold miners were increasing at a high rate, the market capitalization of the HUI constituents outpaced the growth of shares outstanding, because the assets miners purchased with the funds they received from the new shares generated extra value. Since market capitalization doesn't necessarily expand when new shares are issued, it's the price performance that accounts for this growth.

Looking at the next chart, you can see that the performance of gold stocks continues to be both stronger and more volatile than the S&P 500. Note that we didn't modify the indexes here - these are the performance numbers that investors have been looking at for the past decade, and they make the case that the gold-mining sector has been far from lackluster.

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The gold-mining sector has been outperforming the S&P 500 for the vast majority of the last decade.

With this focus on efficiency and economics, gold companies should richly reward those bold enough to invest in them now. But there's another way to play the gold market that doesn't involve buying producers, nor does it require buying the yellow metal itself. And it could be even more profitable...

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.