 Casey Files:
Your Cash is Trash
and So Are Most of Your Investments
Doug Casey
The International
Speculator
Jun 15, 2007
Almost everyone, probably including
yourself, gets held back by inertia at one time or another. It
can happen with anything, including investments.
Inertia weighs on an investor,
trapping him in a state of paralysis and freezing his portfolio,
almost forcing him to hold on to whatever he already owns - for
no better reason than that he already owns it. He hopes that
every one of his old shoes will go up, even if the reason for
the purchase is long forgotten or the environment in which the
investment might have prospered has vanished. People who substitute
hope for cold-blooded analysis almost inevitably wind up losing
money.
So, for the sake of argument,
let's look at where you might best put your money for the rest
of the year 2007. To keep things simple, let's assume you start
by liquidating all the cats and dogs populating your portfolio,
so that you have just a pile of cash. No, let's not phrase it
that way... because then you're going to start wondering which
of the securities you own really are cats and dogs. You might
get bogged down. And then inertia will creep back in, and you'll
throw your hands up and do nothing. So let's assume you sell
everything, in true going-out-of-business style.
Now, what's the smartest place
to put that money? Let's look at the alternatives.
Bonds? A disastrous sucker bet. Bonds, at the moment,
are a triple threat to your capital. First, you have a huge risk
with interest rates, which are still near historic lows; as they
go up, the market value of your bonds drops proportionately.
Second, no matter which of the fiat currencies you choose, you
have a big currency risk; while the US dollar is on the fast
train to zero, virtually every other currency in the world is
being inflated along with it and is heading toward eventual oblivion.
Third, you have credit risk; General Motors isn't the only large
company whose bonds may go into default.
Stocks? The general market is yielding less than 2% in
dividends, less than 1/3 of what you typically see at major market
bottoms. And selling for more than 18 times earnings-more than
25% higher than its norm. Worse, for those who might be buyers,
the bull market of the century started in 1982 and, in inflation-adjusted
terms, ended in 2000. You might not want to hear it, but stocks
are almost certainly early into a bear market that could last
another 5 or 10 years. By all traditional measures, chances are
much better that stocks will drop 50% from here than gain 50%.
Cash? You could always just stay in T-bills. But they
currently yield only 5%, before taxes. And inflation (notwithstanding
the highly imaginary official figures) is probably running around
6% and likely to head higher.
Real Estate? At the present, at least in the U.S.,
this is probably the worst choice of all. The speculative boom
crested last year, and the market, burdened by an immense amount
of debt and overleveraged speculation, is likely to head down
for years to come. Of course, there are places in the world,
two of our favorites being Argentina and Uruguay, where there
isn't much of a mortgage market, so the properties aren't overleveraged
and values are still available. But unless you are looking to
pick up cheap land in undeveloped, exotic countries that have
avoided the credit-driven bubble, real estate should be last
on your list of investments.
Mutual funds? Any mutual fund you're likely to pick
is just a way of buying one of the investments we've already
dismissed. And paying all those fees and expenses that come with
a mutual fund just makes the bet that much worse.
So What Should You Do?
Since 2001, we've been in a natural resources bull market. If
you were one of the few who positioned yourself in gold, silver
or pretty much any of the metals or energy commodities - either
directly or through the shares in smaller resource companies,
which is the preferred vehicle we have been recommending to subscribers
of our International
Speculator -- you've already made the easy money.
At least to us, before the
bull market kicked off, the opportunity in the sector seemed
obvious, with many resource companies selling for less than the
cash they had in the bank. Few people even knew the sector existed,
and most of them thought it was a dead duck after the 20-year-long
bear market it had suffered since 1980.
The easy-money stage of the
resource bull ended in 2003, at which time we entered the second
stage, where the market climbs a "wall of worry." In
even the most formidable of bull markets, this phase comes with
inevitable corrections and scary downdrafts. Per its moniker,
with each short-term setback in price, investors who were shrewd
enough to get positioned early on into the long bull market fret
that they might be wrong. Some are shaken out, but the smart
ones buy even more on the dips.
But now, in my opinion, we
are about to enter the third, and most important, stage of the
classic bull market: the mania stage. This will resemble the
tail-end of the Internet stock bull market. It's hard to predict
exactly what catalyst will set it off, but it will very likely
be rising expectations for inflation. Fear will drive the foreigners
who hold about $6 trillion to sell the greenback, and they'll
be joined by savvy Americans. Some will buy other paper currencies,
like the euro or the yen. But those units are just backed by
U.S. dollars themselves, so they really aren't much in the way
of an escape pod. Inevitably, much of the money now sloshing
through the world will try to get into gold. While no one can
say with certainty, I expect the metal to hit $1,000 within the
next 12 months and go much, much higher by the end of the decade.
Is this an unreasonable prediction?
No.
Most casual investors mistakenly
look at gold and think it's been a leader in this bull market
when, in actual fact, it's a laggard compared to the industrial
metals that have been bidden up to extraordinary highs by soaring
demand from China, India and other emerging markets.
To give you just a few examples,
in the last five years, copper has been up 330%, nickel 560%,
uranium 1,150%, zinc up 460%, molybdenum up 450%, and even lowly
lead, the most basic of base metals, is up 425%. By comparison,
gold is up only 100%.
That will change, however,
because although gold has many and growing industrial uses, its
main use is as money. It will dawn on the herd that the world
is drowning in a flood of increasingly worthless paper currency,
and they're going to stampede toward the high ground of gold.
The metal isn't just going
through the roof. It's going to the moon.
Gold Good, Gold Shares Better
When gold really starts to
move, the mining exploration stocks are going to howl. That's
because gold exploration stocks are not just highly leveraged
plays on the price of gold. They are capable of providing you
with triple-digit gains based on exploration success alone.
Case in point, the last mining
share boom from 1993-96, which occurred at the tail-end of gold's
20-year bear market and carried hundreds of stocks with it, was
driven entirely by a handful of discoveries. Since gold prices
turned up, starting in 2001, a lot of money has been spent on
exploration, and that work will inevitably lead to major discoveries
and market excitement. Several of the companies we follow in
our International
Speculator are already drilling into what look to be
monster deposits. Confirmation of a major discovery could well
ignite a mania in the market.
While most other investments,
such as bonds, industrial stocks, real estate and broad mutual
funds are likely to be serious losers over the coming years,
the bull market in gold and gold exploration stocks has still
barely entered the public's consciousness. Although the easy
money has been made, the big money is waiting to be picked up.
Nothing in the investing world
is ever a sure thing, but today the exploration stocks look to
be as close as it gets. As for the inevitable corrections during
this "wall of worry" phase, remember that the time
to be timid is when everyone else is bold, and the time to be
bold is when everyone else is timid. Sell-offs in the gold and
gold mining sector are, to our way of thinking, gift-wrapped
opportunities to buy.
Doug Casey is chairman of Casey Research, LLC.,
one of the nation's oldest and most respected organizations dedicated
to providing independent investors with unbiased research on
opportunities to earn extraordinary profits by being just ahead
of the crowd. BIG
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Doug Casey
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321gold Ltd
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