Seeking Alpha

Louis James'  Instablog

Louis James
Send Message
Louis James' background in physics, economics, and technical writing prepared him well for his role as senior editor of the International Speculator and Casey Investment Alert. Like Doug Casey, Louis constantly travels the world, visiting highly prospective geological targets, grilling... More
My company:
Casey Research
View Louis James' Instablogs on:
  • Doug Casey's 9 Secrets For Successful Speculation

    When I started working for Doug Casey almost 10 years ago, I probably knew as much about investing as the average Joe, but I now know that I knew absolutely nothing then about successful speculation.

    Learning from the international speculator himself-and from his business partner, David Galland, to give credit where due-was like taking the proverbial drink from a fire hose. Fortunately, I was quite thirsty.

    You see, just before Doug and David hired me in 2004, I'd had something of an epiphany. As a writer, most of what I was doing at the time was grant-proposal writing, asking wealthy philanthropists to support causes I believed in. After some years of meeting wealthy people and asking them for money, it suddenly dawned on me that they were nothing like the mean, greedy stereotypes the average American envisions.

    It's quite embarrassing, but I have to admit that I was surprised how much I liked these "rich" people-not for what they could do for me, but for what they had done with their own lives. Most of them started with nothing and created financial empires. Even the ones who were born into wealthy families took what fortune gave them and turned it into much more. And though I'm sure the sample was biased, since I was meeting libertarian millionaires, these people accumulated wealth by creating real value that benefited those they did business with. My key observation was they were all very serious about money-not obsessed with it, but conscious of using it wisely and putting it to most efficient use. I greatly admired this; it's what I strive for myself now.

    But I'm getting ahead of myself. The reason for my embarrassment is that my surprise told me something about myself; I discovered that I'd had a bad attitude about money.

    This may seem like a philosophical digression, but it's an absolutely critical point. Without realizing that I'd adopted a cultural norm without conscious choice, I was like many others who believe that it is unseemly to care too much about money. I was working on saving the world, which was reward enough for me, and wanted only enough money to provide for my family.

    And at the same instant my surprise at liking my rich donors made me realize that-despite my decades of pro-market activism-I had been prejudiced against successful capitalists, I realized that people who thought the way I did never had very much money.

    It seems painfully obvious in hindsight. If thinking about money and exerting yourself to earn more of it makes you pinch your nose in disgust, how can you possibly be effective at doing so?

    Well, you can't. I'm convinced that while almost nobody intends to be poor, this is why so many people are. They may want the benefits of being rich, but they actually don't want to be rich and have a great mental aversion to thinking about money and acting in ways that will bring more of it into their lives.

    So, in May of 2004, I decided to get serious about money. I liked my rich friends and admired them all greatly, but I didn't see any of them as superhuman. There was no reason I could not have done what any of them had done, if I'd had the same willingness to do the work they did to achieve success.

    Lo and behold, it was two months later that Doug and David offered me a job at Casey Research. That's not magic, nor coincidence; if it hadn't been Casey, I would have found someone else to learn from. The important thing is that had the offer come two months sooner, being a champion of noble causes and not a money-grubbing financier, I would have turned it down.

    I'm still a champion of noble causes, but how things have changed since I enrolled in "Casey U" and got serious about learning how to put my money to work for me, instead of me having to always work for money!

    Instead of asking people for donations, I'm now the one writing checks (which I believe will get much larger in the not-too-distant future). I can tell you this is much more fun.

    How did I do it? I followed Doug's advice, speculated alongside him-and took profits with him. Without getting into the details, I can say I had some winning investments early on. I went long during the crash of 2008 and used the proceeds to buy property in 2010. I took profits on the property last year and bought the same stocks I was recommending in the International Speculator last fall, close to what now appears to have been another bottom.

    In the interim, I've gone from renting to being a homeowner. I've gone from being an investment virgin to being one of those expert investors you occasionally see on TV. I've gone from a significant negative net worth to a significant nest egg… which I am happily working on increasing.

    And I want to help all our readers do the same. Not because all we here at Casey Research care about is money, but because accumulating wealth creates value, as Doug teaches us.

    It's impossible, of course, to communicate all I've learned over my years with Doug in a simple article like this. I'm sure I'll write a book on it someday-perhaps after the current gold cycle passes its coming manic peak.

    Still, I can boil what I've learned from Doug down to a few "secrets" that can help you as they have me. I urge you to think of these as a study guide, if you will, not a complete set of instructions.

    As you read the list below, think about how you can learn more about each secret and adapt it to your own most effective use.

    Secret #1: Contrarianism takes courage.

    Everyone knows the essential investment formula: "Buy low, sell high," but it is so much easier said than done, it might as well be a secret formula.

    The way to really make it work is to invest in an asset or commodity that people want and need but that for reasons of market cyclicality or other temporary factors, no one else is buying. When the vast majority thinks something necessary is a bad investment, you want to be a buyer-that's what it means to be a contrarian.

    Obviously, if this were easy, everyone would do it, and there would be no such thing as a contrarian opportunity. But it is very hard for most people to think independently enough to risk hard-won cash in ways others think is mistaken or too dangerous. Hence, fortune favors the bold.

    Secret #2: Success takes discipline.

    It's not just a matter of courage, of course; you can bravely follow a path right off a cliff if you're not careful. So you have to have a game plan for risk mitigation. You have to expect market volatility and turn it to your advantage. And you'll need an exit strategy.

    The ways a successful speculator needs discipline are endless, but the most critical of all is to employ smart buying and selling tactics, so you don't get goaded into paying too much or spooked into selling for too little.

    Secret #3: Analysis over emotion.

    This may seem like an obvious corollary to the above, but it's a point well worth stressing on its own. To be a successful speculator does not require being an emotionless robot, but it does require abiding by reason at times when either fear or euphoria tempt us to veer from our game plans.

    When a substantial investment in a speculative pick tanks-for no company-specific reason-the sense of gut-wrenching fear is very real. Panic often causes investors to sell at the very time they should be backing up the truck for more.

    Similarly, when a stock is on a tear and friends are congratulating you on what a genius you are, the temptation to remain fully exposed-or even take on more risk in a play that is no longer undervalued-can be irresistible. But to ignore the numbers because of how you feel is extremely risky and leads to realizing unnecessary losses and letting terrific gains slip through your fingers.

    Secret #4: Trust your gut.

    Trusting a gut feeling sounds contradictory to the above, but it's really not. The point is not to put feelings over logic, but to listen to what your feelings tell you-particularly about company people you meet and their words in press releases.

    "People" is the first of Doug Casey's famous Eight Ps of Resource Stock Evaluation, and if a CEO comes across like a used-car salesman, that is telling you something. If a press release omits critical numbers or seems to be gilding the lily, that, too, tells you something.

    The more experience you accumulate in whatever sector you focus on, the more acute your intuitive "radar" becomes: listen to it. There's nothing more frustrating than to take a chance on a story that looked good on paper but that your gut was warning you about, and then the investment disappoints. Kicking yourself is bad for your knees.

    Secret #5: Assume Bulshytt.

    As a speculator, investor, or really anyone who buys anything, you have to assume that everyone in business has an angle. Their interests may coincide with your own, but you can't assume that.

    It's vital to keep in mind whom you are speaking with and what their interest might be. This applies to even the most honest people in mining, which is such a difficult business, no mine would ever get built if company CEOs put out a press release every time they ran into a problem.

    A mine, from exploration to production to reclamation, is a nonstop flow of problems that need solving. But your brokers want to make commissions, your conference organizers want excitement, your bullion dealers want volume, etc. And, yes, your newsletter writers want to eat as well; ask yourself who pays them and whether their interests are aligned with yours or the companies they cover.

    (Bulshytt is not a typo, but a reference to Neal Stephenson's brilliant novel, Anathem, which defines the term, briefly, as words, phrases, or even entire books or speeches that are misleading or empty of meaning.)

    Secret #6: The trend is your friend.

    No one can predict the future, but anyone who applies him- or herself diligently enough can identify trends in the world that will have predictable consequences and outcomes.

    If you identify a trend that is real-or that at least has an overwhelming amount of evidence in its favor-it can serve as both compass and chart, keeping you on course regardless of market chaos, irrational investors, and the ever-present flood of bulshytt.

    Knowing that you are betting on a trend that makes great sense and is backed by hard data also helps maintain your courage. Remember; prices may fluctuate, but price and value are not the same thing. If you are right about the trend, it will be your friend. Also, remember that it's easier to be right about the direction of a trend than its timing.

    Secret #7: Only speculate with money you can afford to lose.

    This is a logical corollary to the above. If you bet the farm or gamble away your children's college tuition on risky speculations-and only relatively risky investments have the potential to generate the extraordinary returns that justify speculating in the first place-it will be almost impossible to maintain your cool and discipline when you need it.

    As Doug likes to say; it's better to risk 10% of your capital shooting for 100% gains than to risk 100% of your capital shooting for 10% gains.

    Secret #8: Stack the odds in your favor.

    Given the risks inherent in speculating for extraordinary gains, you have to stack the odds in your favor. If you can't, don't play.

    There are several ways to do this, including betting on People with proven track records, buying when market corrections put companies on sale way below any objective valuation, and participating in private placements. The most critical may be to either conduct the due diligence most investors are too busy to be bothered with, or find someone you can trust to do it for you.

    Secret #9: You can't kiss all the girls.

    This is one of Doug's favorite sayings, and though seemingly obvious, it's one of the main pitfalls for unwary speculators.

    When you encounter a fantastic story or a stock going vertical and it feels like it's getting away from you, it can be very, very difficult to do all the things I mention above. I can tell you from firsthand experience, it's agonizing to identify a good bet, arrive too late, and see the ship sail off to great fortune-without you.

    But if you let that push you into paying too much for your speculative picks, you can wipe out your own gains, even if you're betting on the right trends.

    You can't kiss all the girls, and it only leads to trouble if you try. Fortunately, the universe of possible speculations is so vast, it simply doesn't matter if someone else beats you to any particular one; there will always be another to ask for the next dance. Bide your time, and make your move only when all of the above is on your side.

    Final Point

    These are the principles I live and breathe every day as a speculator. The devil, of course, is in the details, which is why I'm happy to be the editor of the Casey International Speculator, where I can cover the ins and outs of all of the above in depth.

    Right now, we're looking at an opportunity the likes of which we haven't seen in years: thanks to the downturn in gold-which now appears to have subsided-junior gold stocks are still drastically undervalued.

    My team and I recently identified a set of junior mining companies that we believe have what it takes to potentially become 10-baggers, generating 1,000%+ gains. If you don't yet subscribe, I encourage you to try the International Speculator risk-free today and get our detailed 10-Bagger List for 2014 that tells you exactly why we think these companies will be winners. Click here to learn more about the 10-Bagger List for 2014.

    Whatever you do, the above distillation of Doug's experience and wisdom should help you in your own quest.

    The article Doug Casey's 9 Secrets for Successful Speculation was originally published at caseyresearch.com.

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

    Tags: gold, speculate
    Mar 17 3:30 PM | Link | Comment!
  • The Correction Isn't Over, But Gold's Headed To $20,000

    In April of 2008, Casey International Speculator published an article called "Gold-Relative Performance to Oil" by Professor Krassimir Petrov, then at the American University in Bulgaria, now a visiting professor at Prince of Songkla University in Thailand. He told us he thought the Mania Phase of the gold market was many years off, which was not a popular thing to say at the time:

    "In about 8-10 years from now, we should expect the commodity bull market to reach a mania of historic proportions.

    "It is important to emphasize that the above projection is entirely mine. I base it on my own studies of historical episodes of manias, bubbles, and more generally of cyclical analysis. In fact, it contradicts many world-renowned scholars in the field. For example, the highly regarded Frank Veneroso and Robert Prechter widely publicized their beliefs that during 2007 there was a commodity bubble; both of them called the collapse in commodity prices in mid-March of 2008 to be the bursting of the bubble. I strongly disagree with them.

    "I also disagree with many highly sophisticated gold investors and with our own Doug Casey that the Mania stage, if there is one, will be in 2-3 years, and possibly even sooner... Although I disagree that we will see a mania in a couple years, I expect healthy returns for gold."

    It turned out that Dr. Petrov was right. Five and a half years later, here's his current take on gold and the metal's ongoing correction…

    Louis James: So Krassimir, it's been a long and interesting five years since we last spoke… Gold bugs didn't like your answer then, but so far it seems that you were right. So what's your take on gold today?

    Krassimir Petrov: Well, most gold bugs won't like my answer again, because I think we are still between six to ten years away from the peak of the gold bull. We are exactly in the middle of this secular bull market, and a secular bull market is usually punctuated or separated by a major cyclical bear market. I think that the ongoing 24-month correction is that typical big major cyclical correction-a cyclical bear market within the context of the secular bull market.

    Thinking in terms of behavioral analysis, most investors are very, very bearish on gold. People who are not gold bugs overall still dismiss gold as a good or even as a legitimate investment. That, too, is typical of a mid-cycle. So as far as I'm concerned, we are somewhere in the middle of the cycle, which may easily go for another 10 years.

    I expect that this secular bull market for gold will last a total of 20 to 25 years, dating back to its beginning in 2000. Some people like to date the beginning of this secular bull market at the cyclical bottom in 1999, while others date it at the cyclical bottom in 2001. I prefer to date it at 2000, so that the secular bottom for gold coincides with the secular top of the stock market in 2000.

    L: That's interesting. But I'm not sure gold bugs would find this to be bad news. The thing they're afraid to hear is that the market has peaked already-that the $1,900 nominal price peak in 2011 was the top, and that it's downhill for the next two decades. To hear you say that there is a basis in more than one type of analysis for arguing that we're still in the middle of the bull cycle-and that it should go upwards over the next 10 years-that's actually quite welcome.

    Petrov: Yes, it's great news. But we're still not going to get to the Mania Phase for at least another two, but more likely four to six years from now.

    Now, we should clarify what we mean by the Mania Phase. Last time, it was the 1979 to early 1980 period. It's the last phase of the cycle when the price goes parabolic. Past cycles show that the Mania Phase is typically 10% or 15% of the total cycle. So it's important to pick the proper dates for defining a gold bull market. I prefer to date the previous one from 1966 as the beginning of the market, to January of 1980 as the top of the cycle. That means that the previous bull market lasted 14 years, and it's fair to say that the Mania Phase lasted about 18 months, or just under 15% of the cycle.

    So I expect the Mania Phase for the current bull cycle to last about two to three years, and it's many years yet until we reach it.

    In terms of market psychology, we still have many people who believe in real estate; we still have many people buying and believing in the safety of bonds; we still have many people who believe in stocks. All of these people still outright dismiss gold as a legitimate investment. So, to get to the Mania Phase, we need all of these people to convert to gold bull market thinking, and that's going to be six to eight years from now. No sooner.

    L: Hm. Your analysis is a combination of what we might call the fundamentals and the technicals. Looking at the market today-

    Petrov: Let's clarify. When I say fundamental analysis, I mean strictly relevant valuation ratios. For example, according to the valuation of gold relative to the stock market, i.e., the Dow/gold ratio, gold is extremely undervalued, easily by about 10 times, relative to the stock market.

    Fundamental analysis can also mean the relative price of gold to real estate-the number of ounces necessary to buy a house. Looked at this way, gold is still roughly about 10 times undervalued.

    Thus, fundamental analysis refers to the valuation of gold relative to the other asset classes (stocks, bonds, real estate, and currencies), and each of these analyses suggests that gold is undervalued about 10 times.

    In terms of portfolio analysis, gold today is probably about one percent of an average investor's portfolio.

    L: Right; it's underrepresented. But before we go there, while we are defining things, can you define how you look at these time periods? Most people would say that the last great bull market of the 1970s began in 1971, when Richard Nixon closed the gold window, not back in 1966, when the price of gold was fixed. Can you explain that to us, please?

    Petrov: Well, first of all, we had the London Gold Pool, established in 1961 to maintain the price of gold stable at $35. But just because the price was fixed legally and maintained by the pool at $35 doesn't mean that there was no underlying bull market. The mere fact that the London Gold Pool was manipulating gold in the late 1960s, before the pool collapsed in 1968, should tell us for sure that we already had an incipient, ongoing secular bull market.

    The other argument is that while the London Gold Pool price was fixed at $35, there were freely traded markets in gold outside the participating countries, and the market price at that moment was steadily rising. So, around 1968 we had a two-tiered gold market: the fixed government price at $35 and the free-market price-and these two prices were diverging, with the free price moving steadily higher and higher.

    L: Do you have data on that? I never thought about it, but surely the gold souks and other markets must have been going nuts before Nixon took the dollar completely off the gold standard.

    Petrov: Yes. There have been and still are many gold markets in the Arab world, and there have been many gold markets in Europe, including Switzerland. Free-market prices were ranging significantly higher than the fixed price: up to 10, 20, or 30% premiums.

    There's also a completely different way to think about it: in order to time gold secular bull and bear markets properly, it would make the most sense that they would be the inverse of stock market secular bull and bear markets. Thus, a secular bottom for gold should coincide with the secular top for stocks. And based on the work of many stock market analysts, it is generally accepted that the secular bear market in stocks began in 1966 and ended in 1980 to 1982. This again suggests to me that it would make a lot of sense to use 1966 for dating the beginning of the gold bull market.

    L: Understood. On this subject of dating markets, what is it that makes you think this one's going to be a 25-year cycle? That's substantially longer than the last one. We have a different world today, sure, but can you explain why you think this cycle will be that long?

    Petrov: Well, based on all the types of analyses I use-cyclical analysis, behavioral analysis, portfolio analysis, fundamental analysis, and technical analysis-this bull market is developing a lot slower, so it will take a lot longer.

    The correction from 1973 to 1975 was the major cyclical correction of the last gold bull cycle, from roughly $200 down to roughly $100. Back then, it took from 1966 to 1973-about six to seven years-for the correction to begin. This time, it took roughly 11 years to begin, so I think the length of this cycle could be anywhere between 50 and 60% longer than the last one.

    Let's clarify this, because it's very important for gold bulls who are suffering through the pain of correction now. If we are facing a 50-60% extended time frame of this cycle and the major correction in the previous bull market was roughly two years, we could easily have the ongoing correction last 30 to 35 months. Given the starting point in 2011, the correction could last another six, eight, or ten more months before we hit rock bottom.

    L: Another six to ten months before this correction hits bottom is definitely not what gold investors want to hear.

    Petrov: I'm not saying that I expect it, but another six to ten months should not surprise us at all. A lot of people jumped on the gold bull market in 2008, 2009, 2010, 2011, and these people haven't given up yet. Behaviorally, we expect that these latecomers-maybe 80-90% of them-should and would give up on gold and sell before the new cyclical bull resumes.

    L: Whoa-now that would be a bloodbath. Can we go back to your version of fundamental analysis for a moment and compare gold to other metrics? You mentioned that gold is still relatively undervalued in terms of houses and stocks and some things, but I've heard from other analysts that it's relatively high compared to other things-loaves of bread, oil, and more.

    Petrov: Let's take oil, for example. We have a very stable long-term ratio between oil and silver, and that ratio is roughly one to one. For a long time, silver was about $1.20, and oil was roughly $1.20. At the peak in 1980, silver was about $45, and oil was about $45. Right now, silver is four to five times undervalued compared to oil, so in terms of oil, I would disagree for silver. The long-term ratio of gold to oil is about 15 to 20, depending on the time frame, so gold may not be cheap, but it's not overvalued relative to oil either.

    But suppose gold were overvalued relative to other commodities-which I doubt, but even if we suppose that it's correct, it simply doesn't mean that gold is generally overvalued. The other commodities could be even more-meaning 10, 15, 20 times-undervalued relative to the stock market, or real estate, or bonds. There is no contradiction. In fundamental analysis, it is illegitimate to compare gold, which is largely viewed as a commodity, to other commodities. We should compare it as one asset class against other asset classes.

    For example, we could compare gold relative to real estate. By this measure, it is easily five to ten times undervalued. Separately, we could evaluate it relative to stocks. When you compare gold to stocks in terms of the Dow/gold ratio, it's easily five to ten times undervalued. Separately again, we could evaluate it relative to bonds, but the valuation is much more complicated, because we need to impute a proper inflation-adjusted long-term yield, so it's better not to get into this now. And finally, we could evaluate it separately against currencies. More on that later.

    Now, I believe that when this cycle is over, we are going to reach a Dow/gold ratio far lower than in previous cycles, which have ended with a Dow/gold ratio of about 2:1 (two ounces of gold for one unit of Dow). This time, we are going to end up with a ratio of 1:2-one ounce of gold is going to buy two units of Dow. So, if the ratio right now is about 8:1, I think gold could go up 16 times relative to the stock market today.

    L: That's quite a statement. Government intervention today is so extreme and stocks in general seem so overvalued, I can believe the Dow/gold ratio could reach a new extreme-but I have to follow up on such an aggressive statement. What do you base that on? Why do you think it will go to 1:2 instead of 2:1?

    Petrov: If I remember correctly, we had a 2:1 ratio during the first bottom in 1932; the Dow Jones bottomed out at $42 and gold was roughly about $20 before Roosevelt devalued the dollar. That was also the beginning of the so-called "paper world," when we embarked on the current paper cycle.

    The next cycle bottomed in 1980; gold was roughly 850 and the stock market was roughly 850, yielding a ratio of 1:1. Now, if we look at it in terms of the "paper" supercycle, beginning in the early 20th century and extending to the early 21st century, you can draw a technical line of support levels for the Dow/gold ratio. If you do this, you end up with Dow/gold bottoming at 2:1 (in 1932), then at 1:1 (in 1980), and you can project the next one to bottom at 1:2.

    Another way to think about it is that we are currently in a so-called supercycle-whether it's a gold supercycle or a commodity supercycle-and this supercycle should last 50 to 70% longer than the previous one. It will overcorrect for the whole period of paper money over the last 80 years.

    From a behavioral perspective, I could easily see people overreacting; we could easily see that at the peak we're going to have a major panic with overshooting. I expect the overshooting to be roughly proportional to the length of the whole corrective process.

    In other words, if this cycle is extended in time frame, we would expect the overshooting of the Mania Phase to be significantly larger. It should be no surprise, then, if we get a ratio of 1:1.5 or 1:2, with gold valued more than the Dow.

    L: That's a scary world you're describing, but the argument makes sense. How many cycles do you have to base your cyclical analysis on, to be able to say that the average Mania Phase is 15% of the cycle?

    Petrov: Well, gold is the most complicated investment asset. It is half commodity, and it behaves as a commodity, but it's also half currency. It's the only asset that belongs in two asset classes, properly considered to be a financial asset (money) and at the same time a real asset (commodity). So, even though gold prices were fixed in the 20th century, you can get proper cycles for commodities over the time period and include gold in them. If you look into commodity cycles historically, there are four to five longer (AKA Kondratieff) commodity cycles you can use to infer what the behavior for gold as a commodity might be.

    L: So would it be fair, then, to characterize your projections as saying, "As long as gold is treated by investors as a commodity, then these are the time frames and the projections we can make"?

    Petrov: Right.

    L: But if at some point the world really goes off the deep end and the money aspect of gold comes to the forefront-if people completely lose confidence in the US dollar, for example-at that point, the fact that gold is a commodity would not be the main driver. The monetary aspect of gold would take over?

    Petrov: No, not exactly, because you will still have a commodity cycle. You will still have oil moving up. Rice will still be moving up, as will wheat, all the other commodities pushing higher and higher, and they will pull gold.

    Yet another important tangent here is that in commodity bull markets, gold is usually lagging in the early stages. In the late stages of a commodity bull market, as gold becomes perceived to be an inflation hedge, it begins to accelerate relative to other commodities. This is yet another very good indicator that tells me that we are still in the middle of a secular bull market in gold. In other words, because gold is not yet rapidly outstripping other commodities like wheat, or copper, or crude oil, we're not yet in the late stages of the gold bull market.

    L: That's very interesting. But if I remember the gold chart over the last great bull market correctly, just before the 1973-1976 correction, there was quite an acceleration, such as you're describing-and we had one like it in 2011. Gold shot up $300 in the weeks before the $1,900 peak.

    Petrov: Absolutely correct. This acceleration before the correction is exactly what tells me that the correction we're in now is a major cyclical correction, just like in the mid-1970s. The faster the preceding acceleration, the longer the ensuing correction. This relationship is what tells me that this correction will be very long and painful. Yet another indicator. Everything fits in perfectly. All of these indicators confirm each other.

    L: Could you imagine something from the political world changing or accelerating this cycle? If the politicians in Washington are stupid enough to profoundly shake the faith in the US dollar that foreigners have, could that not change the cycle?

    Petrov: Yes, that's a possibility. This is exactly what a gray swan is; a gray swan is an event that is not very likely, that is difficult to predict, but is nonetheless possible to predict and expect. One example of a gray swan would be a nuclear war. It's possible. Another could be a major currency war, à la Jim Rickards. There are a number of gray swans that could come at any time, any place, accelerating the cycle. It's perfectly possible, but not likely.

    Now, going back to your question about monetizing or remonetizing gold-the monetary aspect of gold taking over that you mentioned. The remonetization of gold wouldn't short-circuit the commodity cycle; the commodity cycle would continue. Actually, you'd expect the remonetization of gold to go hand in hand with a commodity bull market.

    You also need to understand that the remonetization of gold would not be a single event, not a point in time. Remonetization of gold is a process that could easily last five to ten years. No one is going to declare gold to be the monetary currency of the world tomorrow.

    What will happen is that countries like China will accumulate gold over time. Over time, gold will be revalued significantly higher, and there will be global arrangements. The yuan will become a global currency, used in international transactions. Many institutional arrangements need to be in place around the world, including storage, payments, settlements, and some rebalancing between central banks, as some central banks have way too little monetary gold at the moment.

    L: I agree, and see some of those things happening already. But I don't expect any government to lead the way to a new gold standard. I simply expect more and more people to start using gold as money, until what governments are left bow to the reality. I believe the market will choose whatever works best for money.

    Petrov: Indeed, and that's a process that will take many years. Getting back to gold in a portfolio context, relative to currencies, gold is extremely cheap. Historically, gold will constitute about 10-15% of the global investment portfolio relative to the sum of real estate, stocks, bonds, and currencies. Estimates suggest that right now gold is valued at roughly about one percent of the global investment portfolio.

    L: That implies… an enormous price for gold if it reverts to the mean. Mine production is such a tiny amount of supply; the only way for what you say to come true is for gold to go to something on the order of $20,000 an ounce.

    Petrov: Correct. $15,000 to $20,000. That's exactly what I'm saying.

    In a portfolio context, gold is undervalued easily 10 to 15 times. On a fundamental basis, gold is undervalued relative to stocks 10 to 15 times, and relative to real estate about 10 times. When we use the different types of analyses, each one of them separately and independently tells us that we still have a lot longer to go: about six to 10 more years; maybe even 12 years. And we still have a lot higher to rise; maybe 10-15 times.

    Not relative to oil, nor wheat, but gold can easily rise 10 to 15 times in fiat-dollar terms. It can rise 10 times in, let's say, stock market terms. And yes, it can go 10 to 15 times relative to long-term bonds. (We have to differentiate short-term bonds and long-term bonds, as bond yields rise to 10 or 15 percent.)

    So, portfolio analysis and fundamental analysis tell me that we still have a long way to go, and cyclical analysis tells me we are roughly mid-cycle. It tells me that from the beginning of the cycle (2000) to the correction (2011) we were up almost eight times, from the bottom of the current correction (2013-2014) to the peak in another six to ten years, we are still going to rise another 10 times.

    Whether it's eight years or 12, it's impossible to predict; whether it's eight times or 12, again, impossible to predict; but the order of magnitude will be around 10 times current levels.

    L: You've touched on technical analysis: do you rely on it much?

    Petrov: Well, yes, but in this particular case, technical subsumes or incorporates a great deal of cyclical analysis. It's very difficult to use technical analysis for secular cycles. We usually use technical analysis for daily (short-term) cycles, or weekly (intermediate) cycles, or monthly (long-term) cycles. We use them as described in the classic book Technical Analysis of Stock Market Trends by Edwards, Magee, and Bassetti.

    If we apply technical analysis to our current correction, it doesn't appear to be quite over yet. It could still run another three to six months, possibly nine months. But when we talk about the secular cycle, we need to switch from technical to long-term cyclical analysis.

    L: Okay. Let's change topic to the flip side of this. Can you summarize your view of the global economy now? Do you believe that the efforts of the governments of the world to reflate the economy are succeeding? Or how does the big picture look to you?

    Petrov: The big picture is an austere picture. Reflation will always succeed until it eventually fails. The way I see it, the US is going down, down, and down from here-the US is a very easy forecast. The UK is also going down, down, and down from here-another easy forecast. The European Union is going to be going mostly down. However, most of Asia is in bubble mode. Australia is in a major bubble that's in the process of bursting or is about to do so; it's going to go through a major depression. China is a huge bubble, so China will get its own Great Depression, which could last five to ten years. This five- to ten-year China bust would fit within my overall 10-year forecast for the remainder of the secular bull market in gold.

    I see a lot of very inflated and overheating Asian economies. I was in Hong Kong in January, and the Hong Kong economy is booming to the point of overheating. It's crazy. I was in Singapore just three months ago, and the Singapore economy is clearly overheating. Last year I was teaching in Macao for a few months, and the economy is overheating there as well-real estate is crazy; rents are obscene; five-star hotels are full and casinos crowded.

    Right now I'm teaching in Thailand. It's easy here to see that people are still crazy about real estate-everyone's talking about real estate; we still have a peaking real estate bubble here. Consumption is going crazy in the whole society, and most things are bought on installment credit.

    Another easy forecast is Japan; it too will be going down, down, and down from here. Japan has nowhere to go but down. It's been reflating and reflating, and it hasn't done them any good. Add all this up and what I actually see is a repeat of the 1997 Asian Crisis, involving most Asian countries.

    L: So your overall view is that reflation works until it doesn't, and you believe that on the global scale we're at the point where it won't work anymore?

    Petrov: Not exactly. We're at the point where reflation doesn't work anymore for the US, no matter how hard it tries. It doesn't work for the UK; not for most of Europe; not for Japan-no matter how hard they try. But reflation is still working in China. Reflation is still working for most of Asia and Australia. As I see it, Asia is overheating significantly, based on that global reflation.

    Even the Philippines was overheating when I was there two years ago. Malaysia is overheating big time-consumerism at its finest-and I'm hearing stories about Indonesia overheating until recently as well. Maybe we have the first sounds of that bubble bursting in countries like India, Malaysia, and Indonesia. The Indian currency is weakening significantly; so is the Malaysian currency. If I remember correctly, the Indonesian currency is weakening significantly, and I know well that their money market rates are skyrocketing in the last few months.

    So we may have now the beginning of the next Asian Financial Crisis. Asia is still going to be able to reflate a little longer, another year or two, maybe three. It's very hard to say how long a bubble will last as it is inflating. The same thing for Australia; it will continue to reflate for a few more years. So for Asia and Australia, we are not yet at the point when reflation will no longer work. Very difficult to say when that will change, but we're there for the US, UK, Europe, and Japan.

    L: Why won't reflation work for the US and its pals?

    Petrov: Reflation doesn't work because of the enormous accumulated economic distortions of the real sector and the labor market. All the dislocations, all the malinvestments have accumulated to the point where reflation has diminishing returns.

    Like everything else, inflation and reflation have diminishing returns. The US now needs maybe three, four, or five trillion annually to reflate, in order to work. With each round, the need rises exponentially. The US is on the steep end of this exponential curve, so the amount needed to reflate the economy is probably way more than the tolerance of anyone around the world-confidence in the US dollar won't take it. The US is at the point where it is just not going to work.

    L: I understand; if they're running trillion-dollar deficits now and the economy is still sluggish, what would they have to do to get it hopping again, and is that even possible?

    Petrov: Correct. The Fed has tripled its balance sheet in a matter of three to four years-and it still doesn't work. So what can they do? Increase it 10 times? Or 20 times? Maybe if they increased it 10 or 20 times, they could breathe another one or two or three years of extra life into the economy. But increasing the Fed's balance sheet 10 or 20 times would be an extraordinarily risky enterprise. I don't think that they will dare accelerate that much that fast!

    L: If they did, it would trash the dollar and boost gold and other commodities.

    Petrov: Yes, that's clear-the bond and the currency markets would surely revolt. That's a straight shot there. The detailed ramifications for commodities, if they decide to go exponential from here, are a huge subject for another day. For now, we can say that they have been going exponential over the last three to four years, and it hasn't worked.

    Also, we know well from the hyperinflation of the Weimar Republic that they went exponential early on, and it stopped working in 1921. For two more years, they went insanely exponential, and it still didn't work. I think the US is at or near the equivalent of 1921 for Weimar.

    L: An alarming thought. So what happens when Europeans can no longer afford to pay the Russians for gas to heat their homes? Large chunks of Europe might soon need to learn Russian.

    Petrov: Not necessarily, but Europe is going to become Russia's best friend and geopolitical ally. The six countries in the Shanghai Co-op are already close allies of Russia. So is Iran. So Russia has seven or eight very strong, close allies. European countries will, one by one, be joining Russia. Think about it from the point of view of Germany: why should Germans be geopolitical allies of the US or the UK? Historically, it doesn't make any sense. It makes a lot more sense for them to join the Russians and the Chinese and to let the Americans and British collapse. So that's what I expect, and Russia will use all its energy to dictate geopolitics to them.

    L: Food for thought. Anything else on your mind that you think investors should be thinking about?

    Petrov: Well, it's fairly straightforward. First, I do expect that the stock market is going to lose significant value over the next five to ten years. Second, I believe that real estate is still grossly overvalued; as interest rates eventually rise, real estate will fall hard-overall, it will not hold value well. Third, I also believe that bonds are extremely overvalued and that yields are extremely low. I expect interest rates to begin to rise and bond prices to fall, so I strongly discourage investors from staying in bonds. Finally, I expect that governments will continue to inflate, even though it doesn't work, and that currencies will devalue.

    I strongly encourage investors to stay out of all four of these asset classes. Investors should be staying well diversified in commodities. They shouldn't ignore food-agriculture. They shouldn't ignore energy. But their portfolios should be dominated by precious metals.

    L: That's what Doug Casey says, and that the reason to own gold is for prudence. To speculate for profit, we want the leverage only the mining stocks can give us.

    Thank you very much, Krassimir; it's been a very interesting conversation. We shouldn't let this go another seven years before we talk again.

    Petrov: [Laughs] Okay. Hopefully a lot sooner.

    Hopefully you'll be prepared when the gold bull market reaches the Mania Phase… and hopefully you are taking advantage of the low gold price to stack up on your "hard money" safety net. Find out the best ways to invest in gold, when to buy, and what to watch for-in Casey's 2014 Gold Investor's Guide. Click here to get your free special report now.

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

    Tags: gold, correction
    Dec 10 9:32 AM | Link | Comment!
  • Doug Casey: 3 Stocks To Own When Gold Recovers

    Doug Casey believes the current gold correction has bottomed. Speaking to me a few days ago, he said: "With rare exceptions-that are mainly luck-only liars buy at the exact bottom and sell at the exact top. Purchase of precious metals remains the most prudent thing you can do to protect your wealth, and a very reasonable speculation at this point. Gold is not the giveaway it was at $250 back in 2001, but it's very reasonable near $1,400 now.

    "I think mining stocks have also bottomed at this point, and there are several great speculations available today. All the so-called quantitative easing-money printing-by governments around the world has created a glut of freshly printed money. This glut has yet to work its way through the global economic system. As it does, it will create a bubble in gold and a super-bubble in gold stocks. This remains in the future; what we've seen so far is just foreshadowing."

    Note that in Doug's view, it doesn't really matter whether gold has bottomed or not; what matters is that opportunities now exist to buy low in order to later sell high.

    Consider this chart of the price of gold and a junior gold miners ETF, over the last year:

    (click to enlarge)

    Several things are evident in this chart. The first is that-as has been well established over decades of observation-gold stocks are much more volatile than gold itself. Note that this is true on the upside as well as on the downside. It reinforces Doug's edict that while the reason to own gold is prudence, the way to speculate for profit on upward movements in gold is to buy stock in the right gold companies.

    This also highlights the second compelling thing about this chart: Gold stocks have lost much more ground than gold itself and now offer much more imminent upside, if Doug is right about where gold is going next.

    There's no need to reiterate all that we've said about the runaway global money printing and its inevitable consequences for gold. Assuming you're on board with the premise, the question is what to do if Doug is right about the market bottoming.

    The answer is obvious: It's time to buy.

    However, as Doug likes to say, speculation is not a synonym for gambling; you want a good speculation to be as safe a bet as possible.

    While we do expect gold to rise in the near term, it may dip again before jumping up to new highs and exploding into the Mania Phase of this bull cycle-so right now we're focusing on companies that have major deliverables in the near term.

    Imminent Push, as we call it, dictates where we place our chips today.

    In the current issue of the International Speculator, we're summarizing Doug Casey's current top 3 junior gold stock picks, all of which have major news pending.

    #1: The Explorer-Turned-Producer

    Normally, we're skeptical when an explorer aspires to become a producer, as exploration and production are two completely different businesses requiring two completely different skill sets. However, this company was founded and is run by a mining engineer, and its two current projects have an unusually short path to production.

    The first project is relatively small but high grade, and required very little capital to build the mine and plant. Production is scheduled to start by the end of this month. The question at this point is not whether it can be done or will be done, but whether operations will be as profitable as projected.

    Those projections were exceptional: The company should be able to pay back the initial $6 million investment within two months, followed by another $40 million or so in free cash flow.

    Since publication of these projections, the company has drilled into more high-grade gold beside and below the current deposits being worked. This gives us two ways to win on this play in the near term: If the cash starts flowing next quarter (as we think it will), the shares should soar; and if the company keeps making this little project bigger, that can only add to the upside.

    However, the best part of this story is the company's second project, which is already much larger and high grade-this one is showing world-class potential. And with cash flowing from the first project, the value in the second one could be brought to market with little or no dilution for shareholders.

    That gives the stock what we call "ten-bagger" potential (meaning share prices could rise 1,000% or more), and it'll start happening in the weeks and months ahead.

    #2: The Takeover Candidate

    Doug Casey's second top pick for today is a company that is almost certainly on the verge of being bought out by a larger company, at a hefty premium for current shareholders.

    The story may not have ten-bagger potential, as larger companies rarely offer more than a 100% premium-that is to say, more than double the average of recent share prices. But such rapid gains overnight, combined with the very high probability of their occurring in the near term, make the stock an outstanding speculation.

    How can we be so sure this will happen?

    Pick #2 owns the mineral rights to a property that is completely surrounded by the property of another company that has made a multimillion-ounce gold discovery in one of Canada's best mining jurisdictions. It's not just a matter of location, either-our little company has already demonstrated that the gold mineralization continues onto its neighbor's land, including some exceptionally thick and high-grade intersections.

    The only reason this opportunity even exists is that many mining executives were nervous about making acquisitions during gold's recent downturn, so the larger neighbor's management probably thought that they had all the time in the world to take over our pick. And they were right; no one else has bought it yet.

    However, an intermediate producer has just bought our little company's neighbor, and there's no reason to believe that this larger buyer will leave our company's gold in the ground, just across the property line.

    There are no sure things in junior mining speculation, but this takeover is as close as it gets-and we expect it to happen before the end of this year.

    #3: The Holy Grail of Exploration

    Doug's third pick for today's market is a relatively straightforward value-adding proposition.

    One can make money mining gold, even on a small scale, if the grade is high enough. One can also make money mining low-grade gold, if its characteristics are amenable to low-cost production methods and the deposit is large enough to allow economies of scale.

    The best of both worlds, obviously, is to find a deposit that is both large and high grade.

    That's extremely rare, of course. Many of those discoveries are in basket-case countries that are either too dangerous to work in or where the government is likely to steal your mine if you build it. Large, high-grade discoveries with little political risk are the holy grail of mineral exploration.

    This company has just such a deposit in one of the more pro-business jurisdictions of Latin America, and its current drilling campaign will both upgrade the current resource estimate and make it larger-potentially much larger.

    The drilling now under way has already returned spectacular results of the sort that move share prices sharply upward, especially when the sector itself is up. So if Doug is right about where gold is headed, we should see these shares rise faster than gold in the months ahead-and a big leap is likely when the company issues a new resource estimate calculation.

    We're confident this one's getting bigger and better, and it has a short fuse.

    All three of these stocks are poised for substantial gains in the very near future. You'll find the names, stories, and detailed instructions how much to buy and at what price of all 3 of our "recovery picks" in the just-released September issue of Casey International Speculator.

    I suggest you take full advantage of Casey's 100% satisfaction guarantee and try the International Speculator for three months, at no risk at all. If you're not fully satisfied, you cancel any time within those three months and get all your money back, promptly and no questions asked. It's really that simple. Just click here to get started. And don't wait; if we're right, these deals won't be around for long.

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

    Tags: gold, stocks, sector
    Sep 11 10:18 AM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

More »
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.