By Terry Coxon, Casey Research

By keeping all your assets in the country where you live, you commit, ahead of time, to ratify whatever policy your home government might adopt, no matter how objectionable, unreasonable or pernicious that policy happens to be. If the next new mandate is “Register today to get a nail pounded into your head,” you’re already signed up.

Americans, by and large, run all their affairs within the confines of the US. The US economy is so large and so varied that it’s easy to assume that everything you want to do with your wealth can be done without crossing any borders. And people in the US, like people anywhere, live with the habits and attitudes developed over generations. They’re only human. In the case of Americans, those habits grew out of long experience with a government that was small and that generally practiced the rare virtue of following its own laws. In a happy exception to mankind’s experience with rulers, there was little to fear from it.

Stay at home is still the norm for Americans, but it’s a norm that is slowly fading. Every billion-dollar tick of the government debt clock, every expansion of the government’s regulatory apparatus, every overreaching judicial decision made in the name of a compelling public need, every inversion of protection for citizens into license for the state and every intellectually tortured discovery of a new meaning in the Constitution’s 4,400 old words leaves a few thousand more people wondering how prudent it is to consign all their eggs to a single national basket. Encounters with high-handed IRS agents and eager TSA gropers do nothing to ease that concern. And for those who listen thoughtfully, the messages from our designated leaders and their would-be replacements only hurry the dawning sense of unease.

Specific worries include exposure to predatory lawsuits, especially claims that could draw extra go-power by association with politically favored causes or legally favored groups; fear of where income tax rates might climb; the prospect of losing a family business in a regulatory battle or simply through estate tax; the fragility of financial institutions that have operated for forty years with the assurance that the Federal Reserve would rescue them from any folly; the possibility that a government desperate to protect the dollar from collapse might impose foreign exchange controls or capital controls; the memory and precedent of the forced gold sales of 1933; and the thought that a government floundering in deficits might start pilfering from IRAs and other pension plans.

But beyond those particular worries and perhaps more important than any of them is the sense that from here on, anything goes. The politicians will do whatever they find convenient, because there is no longer anything to stop them – not an electorate that is jealous of its freedoms and certainly not the Constitution, which is now just a playhouse for judicial imagineering. No one can know what’s coming next from the government and the financial system it has fostered, but for many of us there is an awful suspicion that we are not going to like it.

Most Americans still have yet to stick a single financial toe across the border, but more and more are considering it. Many, perhaps millions of toes are now twitching at the thought. Their owners want to end their absolute dependence on what happens in the US. They want to prepare for whatever is coming down the road, even though they don’t know what it will be. They want to be as ready as possible, even though their worries can only guess at what’s ahead.

Because internationalizing your financial life means dealing with the unfamiliar, the project can seem more complex than it really is, so it’s best to start with the simplest measures, even if by themselves they don’t give you all the safety you’re looking for. Even from a simple beginning, what you learn with each step will make the next step easier to plan. Start with the first rung on the ladder of internationalization. Then climb, at your own speed, to reach the right level of protection.

Rung 1: Coins in Your Pocket

Gold coins that you’ve stored personally give you something whose value doesn’t depend on the health of the US economy, doesn’t depend on any financial institution in the US and doesn’t depend on any US government policy. Gold coins are portable and hold their value no matter where in the world you might take them. They’re internationalization in a wafer. Safety cookies.

It’s best to buy the coins for cash, for maximum privacy. And there is a good reason to favor one-tenth-ounce gold Eagles. Gold coins mean readiness for troubled times; if you ever need to dispose of the gold in an informal market, it will be easier to do so with small-denomination coins that are widely recognizable and whose value matches the scale on which large numbers of people normally trade.

The premium on one-tenth-ounce coins (the price compared with the value of the gold content) is higher than on the larger coins – usually about 15% for the small coins vs. 5% for one-ounce Eagles. But the premium isn’t a dead cost, like a commission or bid-ask spread. The premium is a second investment; it’s what you pay for the packaging, and you can expect to recover it when you sell or trade. And in the circumstances when you would have the strongest reasons for thanking yourself for having bought some gold, the premium you paid will look like a bargain.

By Kevin Brekke, Casey Research

A new polysyllabic term has entered the Wall Street lexicon and is sweeping through the investing world like a brush fire through a dry canyon: “hypothecation.” With its connection to the MF Global bankruptcy and aftermath, it engenders the kind of fear a homeowner might feel while monitoring the approaching flames.

The rise of hypothecation as the lead suspect in the MF Global tragedy has caused a fair bit of confusion about what, exactly, it is – and is not. Proving the idiom that nature abhors a vacuum, the blogosphere has weighed in with all manner of explanations, many of which have been less than accurate.

In an attempt to help our readers get to the heart of the matter, we will briefly review hypothecation – what it is and how it is used – and do so in plain English.

There is considerable ground to cover here, so we will get right into it, starting by defining the term, then discussing the role hypothecation played in the demise of MF Global before turning our attention to the question in the minds of many gold investors – was MF Global re-hypothecating gold bullion? Finally, we’ll have some closing thoughts on the potential implications for us as individual and institutional investors going forward.

The Two Faces of Hypothecation

At its most basic level, anyone who has traded on margin (borrowing money from a broker to purchase stock) or shorted a stock (borrowing shares through a broker that are sold today in the hope of replacing them with shares purchased at a lower price tomorrow and pocketing the difference) has participated in hypothecation.

Hypothecation is a legal term that means “to pledge something as collateral.” In the financial world of stockbroking, to hypothecate shares of stock means they are pledged against a loan from a broker for money to complete a transaction. For the investor, hypothecation necessitates a margin account.

Opening a margin account requires that a broker obtain a signed agreement from the investor. The margin agreement can be part of a standard account-opening agreement, or it might be a completely separate document. It is this agreement that opens the door for the assets in your account to be used for re-hypothecation purposes. Without such an agreement, you will not be able to open a margin account. In other words, if you have a margin account, you are in the game. If you don’t have a margin account, you are strictly an innocent bystander with no legal skin in the game.

It is important that you as an investor understand the terms of trading on margin. Once you trade on margin, any common stock, cash, or securities in your margin account can be considered as collateral for the money you borrow. And if the terms of the margin agreement allow it – almost universally the case – the broker can borrow or loan shares in the investor’s account up to the value of the amount borrowed (the margin).

Here it seems appropriate to mention that hypothecation is sanctioned by the SEC – subject to a host of rules, of course. Yet some of the recent reporting regarding hypothecation makes it sound as though brokers are taking shares from customer accounts for their own use and unbeknown to the customer. Unless the broker is engaging in deliberate fraud, that is not the case.

Most margin account agreements contain language that clearly explains that if a customer trades on margin, one understands that shares or other securities in one’s account – up to the amount of margin – can be borrowed or lent to other customers for shorting or to the broker for other uses. If a customer does not agree with this arrangement, one should not trade on margin. This is standard practice in the stockbroking industry.

Those “other uses” lead us to the second face of hypothecation.

Re-hypothecation

Re-hypothecation is when a broker reuses customer-pledged collateral to back the broker’s own trades and borrowings. It is 100% legal. However, while the practice may be legal, that does not mean it is prudent. Using the same collateral to support two separate borrowing transactions is obviously a risky tactic.

As background, under US Federal Reserve Board Regulation T and SEC Rule 15c3-3, a prime broker may re-hypothecate an amount up to 140% of the customer’s liability to the broker.

Let’s quickly do the math on that one. If a customer has purchased $1,000 of securities, of which $500 is margined (borrowed), the broker is permitted to re-hypothecate up to $700 of the collateral – $500 x 140%.

Echoing the above, the use of re-hypothecated customer collateral is a common practice among broker dealers.

However, MF Global pushed the envelope on re-hypothecation by arbitraging differences in re-hypothecation regulations between jurisdictions and using off-balance-sheet maneuvers to ratchet its leverage to very high levels – referred to as hyper-hypothecation. The many components of this elaborate scheme, when combined, may make it impossible for MF Global’s clients to recoup any of their losses.

MF Global Goes Offshore

“Give me a place to stand and a lever long enough and I will move the world.” – Archimedes, 220 BCA

Once a leverage junkie, always a leverage junkie. It will help to understand the MF Global collapse if we keep in mind that its leader, Jon Corzine, is an ex-Goldman Sachs (GS) man, and the boys at GS love their leverage. The 140% leverage allowed under the US re-hypothecation regulation just didn’t scratch Corzine’s itch.

The solution: take it offshore.

Corzine decided to extend the lever a few thousand kilometers east and stand in the UK. In the UK, it turns out, there is no limit to the amount that can be re-hypothecated. It is the responsibility of the customer to negotiate the terms of re-hypothecation. Absent that, the broker is free to re-hypothecate 100% of the securities in a customer’s margin account, not just the securities acting as collateral.

The forensic accounting and investigation into the collapse of MF Global and the disappearance of possibly $1 billion or more in client funds is under way, and I do not wish to draw any premature conclusions. But preliminary reports about the investigation suggest that MFG had churned pledged client assets – re-hypothecating collateral several times – and used it to place a massive $6.2 billion bet on European sovereign debt.

It was a bad gamble that sent MFG into history’s dustbin.

This is an arcane and complicated topic, and this article does not attempt to cover every detail. The goal is to provide enough information for a reader to have a better sense of the terms that are probably going to be in the media a lot in the days and weeks just ahead.

By Jeff Clark, BIG GOLD

This may sound sensationalistic, but I think the odds are very high that, on average, gold producers will sell in the $200 range before this bull market is over. With most of them trading between $20 and $40, the returns could be tremendous. And while the typical junior won’t reach the same price level, their percentage returns will be much greater and potentially life-changing, as you’re about to see.

The timing of this article may seem incongruous, given the recent weak performance of gold and gold stocks. But that was the identical situation in each of the past manias: both the metal and the equities didn’t excel until the frenzy kicked in. The following documentation is actually a fresh reminder of why we think you should hold on to your positions – or start accumulating them, if you haven’t already.

So, are my projections based on some fantastical gold price, or a complex formula for gold stock valuations? Nope. I base my projections simply on what gold stocks have done in the past. And to the surprise of many investors, it’s a performance they’ve logged several times, making the following prices very believable if you’re bullish on gold.

It comes with a warning, though:

Caution: the following tables may cause excitement, drooling, or the temptation to go all in. Read and invest at your own risk. 

You’ve undoubtedly read about gold’s spectacular climb in 1979-’80. And you’ve likely heard how well gold stocks performed in general. But most researchers haven’t identified exact returns from specific companies during this era.

The reason? Digging up hard data prior to the mid 1980s, especially for the junior explorers, is difficult because it hasn’t been computerized. So we sent a couple of researchers to the library to view the Wall Street Journal on microfiche. We also relied on Scott Hunter of Haywood Securities; Larry Page, president of the Manex Resource Group; and the dusty archives at the Northern Miner. (This means our tables, while accurate, are not necessarily comprehensive.)

Let’s get started…

The Quintessential Bull Market: 1979-1980

The granddaddy of gold bull markets occurred during the 1970s decade, one culminating in an unabashed mania in 1979 and 1980. Gold peaked at $850 an ounce on January 21, 1980, rising 276% from the beginning of 1979. Yes, the price of gold on the last trading day of 1978 was a mere $226 an ounce.

Here’s a sampling of gold producers from this era. What you’ll notice in addition to the mouthwatering returns is that gold stocks peaked not until nine months after gold.

Returns of Producers in 1979-1980 Mania
Company	Price on 12/29/1978	Sept. 1980 Peak	Return
Campbell Lake Mines	$28.25	$94.75	235.4%
Dome Mines	$78.25	$154.00	96.8%
Hecla Mining	$5.12	$53.00	935.2%
Homestake Mining	$30.00	$107.50	258.3%
Newmont Mining	$21.50	$60.62	182.0%
Dickinson Mines	$6.88	$27.50	299.7%
Sigma Mines	$36.00	$57.00	58.3%
Giant Yellowknife Mines	$11.13	$39.00	250.4%
AVERAGE			289.5%

You’ll see there was great variability among the returns of these companies. That’s why, even if you believe we’re destined for an “all-boats-rise” scenario, you still want to own the better companies.

Today, Barrick is selling for $47.59 (as of November 25). If our mania started now and mimicked the average 289.5% return, ABX would reach $185.36 at its peak. GDX at $54.79 today would hit $213.40.

Keep in mind, though, that our data measure the exact top of each company’s price. Most investors, of course, don’t sell at the very peak. If we were to able to grab, say, the middle 80% of the climb, that’s a return of 231.6%. Barrick would hit $157.80 and GDX $181.68 in that scenario… still tantalizing returns.

And with all due respect to Barrick management, there are gold stocks we’re convinced will far outperform the largest gold company in the world in the coming mania.

Here’s a sampling of how junior gold stocks performed in the same period, along with the month each peaked.

Returns of Juniors in 1979-1980 Mania
Company	Price on 12/29/1978	Price Peak	Date of Peak	Return
Carolin Mines	$3.10	$57.00	Oct. 80	1,738.7%
Mosquito Creek Gold	$0.70	$7.50	Oct. 80	971.4%
Northair Mines	$3.00	$10.00	Oct. 80	233.3%
Silver Standard	$0.58	$2.51	Mar. 80	332.8%
Lincoln Resources	$0.78	$20.00	Oct. 80	2,464.1%
Lornex	$15.00	$85.00	Oct. 80	466.7%
Imperial Metals	$0.36	$1.95	Mar. 80	441.7%
Anglo-Bomarc Mines	$1.80	$6.85	Oct. 80	280.6%
Avino Mines	0.33	5.5	Dec. 80	1,566.7%
Copper Lake	$0.08	$10.50	Sep. 80	13,025.0%
David Minerals	$1.15	$21.00	Oct. 80	1,726.1%
Eagle River Mines	$0.19	$6.80	Dec. 80	3,478.9%
Meston Lake Resources	$0.80	$10.50	Oct. 80	1,212.5%
Silverado Mines	$0.26	$10.63	Oct. 80	3,988.5%
Wharf Resources	$0.33	$9.50	Nov. 80	2,778.8%
AVERAGE				2,313.7%

If you bought a reasonably diversified portfolio of top-performing gold juniors prior to 1979, your initial investment could’ve grown 23 times in just two years. If you managed to grab 80% of that move, your account balance still would’ve grown 1,850%.

This means a junior priced at $0.50 today that goes on to become a Mania Phase winner could sell for $12 at the top, or $9.75 at 1,850%. If you own ten juniors, imagine just one of them matching Copper Lake’s return.

Here’s what returns of this magnitude could mean to you. Let’s say you have $10,000 to devote to a portfolio of the best-of-the-best gold juniors. If our mania someday matches the classic 1980 blow-off top, your portfolio could be worth $241,370 at its peak… or about $195,000 if you manage to grab the middle 80%.

This all assumes, of course, that you sell to realize the profit. If you don’t take the money and run at some point, you may end up with little more than tears to fill an empty beer mug. Consider this: many junior gold stocks, including some in the above list, dried up and blew away after October 1980. Investors who held to the bitter end not only saw all their gains evaporate but lost their entire investments as well. Keep that in mind, because all bull markets eventually come to an end – even golden ones.

Returns from that era have been written about before. So I can hear some investors saying, “Yeah, but that only happened once.”

Au contraire. Read on…

The Hemlo Rally of 1981-1983

Many investors don’t know that there have been several mini-manias in gold and especially gold stocks outside of the 1979-’80 period.

Ironically, gold was flat during the two years of the “Hemlo rally.” But something else ignited a bull market. Discovery. Here’s how it happened…

Up until this time, most exploration was done by teams from the major producers. But because of lagging gold prices and the resulting need to cut overhead, they began to shrink their exploration staffs, unleashing a swarm of experienced geologists armed with the knowledge of high-potential mineral targets they’d explored while working for the majors. Many formed their own companies and subsequently went after these targets.

This led to a series of spectacular discoveries, the first of which occurred in mid-1982, when Golden Sceptre and Goliath Gold discovered the Golden Giant deposit in the Hemlo area of eastern Canada. Gold prices rallied that summer, setting off a mini bull market that lasted until the following May. The public got involved, and as you can see, the results were impressive for such a short period of time.

Returns of Producers Related to Hemlo Rally of 1981-1983
Company	1981 Price	Price Peak	Date of High	Return
Agnico-Eagle	$9.50	$21.00	Aug. 83	121.1%
Sigma	$14.13	$24.50	Jan. 83	73.4%
Campbell Red Lake	$16.63	$41.25	May 83	148.0%
Sullivan	$3.85	$6.00	Mar. 84	55.8%
Teck Corp Class B	$17.00	$21.88	Jun. 81	28.7%
Noranda	$33.75	$36.38	Jun. 81	7.8%
AVERAGE				72.5%

Gold producers, on average, returned over 70% on your money during this period. While this isn’t the same spectacular gains from just a few years earlier, keep in mind this occurred in about 12 months’ time. This would be akin to a $30 gold stock soaring to $51.75 by this time next year because it’s located in a significant discovery area.

Once again, it was the juniors that brought the dazzling returns.

Returns of Juniors Related to Hemlo Rally of 1981-1983
Company	1981 Price	Price Peak	Date of High	Return
Corona Resources	$1.10	$61.00	May 83	5,445.5%
Golden Sceptre	$0.40	$31.00	May 83	7,650.0%
Goliath Gold	$0.45	$32.00	Mar 83	7,011.1%
Bel-Air Resources	$0.81	$1.60	Jan. 83	97.5%
Interlake Development	$2.10	$6.40	Mar. 83	204.8%
AVERAGE				4,081.8%

The average return for these junior gold stocks that had a direct interest in the Hemlo area exceeded a whopping 4,000%. A $0.50 junior stock today would exceed $20.

This is especially impressive when you realize it occurred without the gold stock industry as a whole participating. This tells us that a big discovery can lead to enormous gains, even if the greater industry is flat. In other words, we have historical precedence that humongous returns are possible without a mania, by owning stocks with direct exposure to a discovery area. There are numerous examples of this in the past ten years, as any long-time reader of the International Speculator can attest.

By May 1983 – roughly a year after it started – gold prices started back down again, spelling the end of the bull market. Another reminder that one must sell to realize a profit.

The Roaring ’90s

Junior exploration companies were now starting to collect on the “intellectual capital” they’d inherited from the majors. Another series of gold discoveries in the mid-1990s set off one of the most stunning bull markets in the current generation.

Companies with big discoveries included Diamet, Diamond Fields, and Arequipa. This was also the time of the famous Bre-X scandal, a company whose management was later found to have been “salting” drill intercepts.

[One of Doug Casey's biggest wins during this time was Diamond Fields. He started buying the stock around 25 cents and later sold at prices as high as $120. You can do the math. To read more about his other spectacular wins in The 1970s Interview with Doug Casey...]

By the summer of ’96, investor interest had sparked a minor mania, and companies with little more than a few drill holes were selling for $20 a share. The table below, which includes some of the better-known names of the day, is worth the proverbial thousand words. And if you’re the kind of investor with the courage to buy low and willingness to sell during a frenzy, it can be worth a million dollars.

Returns of Producers in Mid-1990s Bull Market
Company	Pre-Bull Market Price	Price Peak	Date of High	Return
Kinross Gold	$5.00	$14.62	Feb. 96	192.4%
American Barrick	$28.13	$44.25	Feb. 96	57.3%
Placer Dome	$26.50	$41.37	Feb. 96	56.1%
Newmont	$47.26	$82.46	Feb. 96	74.5%
Manhattan	$1.50	$13.00	Nov. 96	766.7%
Cambior	$10.00	$22.35	Jun. 96	123.5%
AVERAGE				211.7%

The average producer more than tripled your money during this period. Once again, these gains occurred in a relatively short period of time, in this instance inside of two years.

Here’s how winning juniors performed. Hold on to your hat.

Returns of Juniors in Mid-1990s Bull Market
Company	Pre-Bull Market Price	Price Peak	Date of High	Return
Cartaway	$0.10	$26.14	May 96	26,040.0%
Golden Star	$6.00	$27.50	Oct. 96	358.3%
Samex Mining	$1.00	$7.20	May 96	620.0%
Pacific Amber	$0.21	$9.40	Aug. 96	4,376.2%
Conquistador	$0.50	$9.87	Mar. 96	1,874.0%
Corriente	$1.00	$19.50	Mar. 97	1,850.0%
Valerie Gold	$1.50	$28.90	May 96	1,826.7%
Arequipa	$0.60	$34.75	May 96	5,691.7%
Bema Gold	$2.00	$12.75	Aug. 96	537.5%
Farallon	$0.80	$20.25	May 96	2,431.3%
Arizona Star	$0.50	$15.95	Aug. 96	3,090.0%
Cream Minerals	$0.30	$9.45	May 96	3,050.0%
Francisco Gold	$1.00	$34.50	Mar. 97	3,350.0%
Mansfield	$0.70	$10.50	Aug. 96	1,400.0%
Oliver Gold	$0.40	$6.80	Oct. 96	1,600.0%
AVERAGE				3,873.0%

Many analysts refer to the 1970s bull market as the granddaddy of them all – and to a certain extent it was – but you’ll notice that the average return here exceeds what the juniors did in the 1979-’80 market.

This is akin to that $0.50 junior stock today reaching $19.86… or $16 if you snag 80% of the move. A $10,000 portfolio could grow to over $397,000 (or over $319,000 on 80%).

Gold Stocks and the Greater Depression

Those of you in the deflation camp may dismiss all this because you’re convinced The Great Deflation is ahead. Fair enough. But you’d be wrong to assume gold stocks can’t do well in that environment.

Take a look at the returns of the two largest producers in the US and Canada, respectively, during the Great Depression.

Returns of Producers During the Great Depression
Company	1929 Price	1933 Price	Total Gain
Homestake Mining	$65	$373	474%
Dome Mines	$6	$39.50	558%

During a period of soup lines, crashing stock markets, and a fixed gold price, large gold producers handed investors five and six times their money in four years.

If deflation “wins,” we still think gold equity investors can, too.

The Catch

Before you sell your kids to buy gold stocks, be aware of the fine print: history may not repeat. There’s no law that says we have to get a mania; it’s a good bet, we’ve no doubt, but it could be different than what we saw before – maybe the mania occurs just in gold and not the stocks… or maybe it’s only in certain geographical areas… or it takes longer than what some investors have the patience for.

The point here is simple: don’t invest so much that you get wiped out if it doesn’t come to pass.

In the end, though, we think the efforts by governments around the world to reflate the economy will work. Throughout history, a fiat currency system has never lasted – not even once. Eventually, they all fade away. And whether or not gold (or silver) are somehow figured into the monetary replacement, the odds are high that we’ll see a mania of epic proportions in our industry, as the world’s current fiat currencies implode. Truly life-changing gains will be reaped by those with the foresight, courage, and cash to act before it arrives.

So, yes, someday we think your favorite gold stock will sell for $200. Or perhaps a lot more.

[If you've been thinking about joining Doug Casey and Louis James as they speculate on the best of the best precious metals juniors, now is the time to take advantage of a special discount on Casey International Speculator. If you prefer the relative stability of the profitable gold and silver producers, Jeff Clark brings you the best ideas on those every month in BIG GOLD. Now is the time to invest, before the mania kicks in, as prices on gold stocks are as attractive as they’ve ever been.]

By Bud Conrad, Casey Research

Though late to the party as usual, the proverbial man on the street – along with members of mainstream media and Wall Street heavyweights – is finally waking up to the decade-long, 700% increase in the price of gold, joining a growing buzz around the monetary metal. From questions whether gold is in a bubble to predictions that soaring prices are just around the corner, one thing is clear: a new phase of awareness for gold is upon us. How far might it move before these troubling times are over?

The Big-Picture Economic Environment

Kicking things off, I would like to explore several themes in order to put the current economic situation in context. 

For example, continuing weakness in employment and housing indicates that the big slowdown that started in 2007 persists. Actually, the economy never exited the recession but rather – thanks to massive intervention – enjoyed a temporary reprieve that I have called the “Eye of the Storm.”

We experienced the first part of the storm from 2007 to 2009, but by late 2009 and into 2010 massive bailouts, stimulus, and deficit spending produced a false-dawn recovery. This recovery was most pronounced in the financial sector where the government transferred toxic private-sector debt – including large amounts held at Fannie and Freddie – onto the government’s own balance sheet.

We now are entering the second half of the storm, as it is becoming impossible to ignore the unprecedented and intractable sovereign debt problems sweeping the globe. These problems are especially obvious in the weak countries of Europe where punitive levels of interest rates are pushing weaker members of the eurozone to the brink. As the parts begin to fail, so will the whole.

And the US is not so far behind, with its own historic levels of government debt and deficits running at levels never seen before.

As we at Casey Research have warned of ahead of time, in their attempts to avert a 1929-style depression, governments took on the bubble in toxic private debt, stupidly transferring that burden onto the government (and taxpayers), causing the problem to morph into today’s sovereign debt crisis. Simply, with the government debt too big to ever be repaid, we are now beyond the point of no return.

The private debt problem is not resolved, either. That’s because much of the bad debt on the books of corporations and financial institutions was hidden through “Extend and Pretend” practices, starting with the elimination of mark-to-market accounting requirements. Much of this debt will eventually be revealed to be in default.

Worse, because sovereignties around the world have caused their finances to deteriorate to such extreme levels, they are now ill prepared, and maybe even unable, to step in yet again to soften the blow of private-debt deleveraging and write-downs. As a consequence, the next part of the storm could be prolonged as companies and banks are dragged down.

Furthermore, due to their poor decision-making to this point in the crisis, the governments themselves are now facing a loss of confidence in their sovereign debt, evidenced by soaring interest rates and the rising cost of credit default swaps (CDS) for the PIIGS.

There is no way to recapitalize the Greek debt, and Finland is right to demand collateral, which it recently has. The contagion will extend to the other PIIGs and to the stronger European countries of Germany and France – they can’t also bail out Spain and Italy, which are too big to fail, without destroying confidence in their own economies. Yet absent such a bailout, massive restructuring of weak-country debts held on the books of the banks in the stronger countries will further exacerbate and extend the crisis.

Meanwhile, the European Financial Stability Facility (EFSF) is too small, and the resources to cover all the countries in trouble just aren’t there. Economists now understand that the PIIGS are well past the point of no return with 130% or so of debt to GDP. The European Central Bank (ECB) will be expanded, like other central banks, to print more euros, but still the system is going to face more debt problems.

The ratio of debt to GDP in Europe, the US, and elsewhere (which is projected to only increase from here) will lead to the sort of problems historically associated with Latin American banana republics, collapsed communist states, and certain countries in Africa. While this is not being adequately discussed in the mainstream, the debt of the supposedly advanced countries is projected to explode beyond the levels that are already tormenting the PIIGS. Put another way, in the decade just ahead, I expect the advanced countries to undergo the same pain we are already seeing in the weak countries.

Supporting that contention, a new paper by the Bank for International Settlements (BIS) points out that when government debt approaches 80% to 100% of GDP, there is a weakening in the economy. Greece and the euro system aren’t just facing an economic weakening but a breakdown of the financial system.

Importantly, the debt-to-GDP ratio of the United States is now (conservatively) at 95%, and demands from a tidal wave of retiring baby boomers will make the deficits far worse. Remarkably, annual deficits of a trillion dollars or more over the coming decade are projected. The US debt-to-GDP ratio will break above 100% in two years or less, and debt could double in the next decade if interest rates rise in concert with a widespread loss of confidence in the government’s ability to manage its fiscal and monetary affairs.

The next logical step in this sovereign debt crisis is for us to see further signs of a loss of confidence in the currency. Such a currency crisis is usually measured by rising inflation that, in turn, leads to higher interest rates, which make the crisis worse. That’s because a vicious debt “death” cycle begins to form, with interest on the debt begetting ever-worsening deficits begetting ever higher interest rates that, in time, leave the country unable to even pay the interest on its debt, let alone pay down the debt itself.

Sounds dramatic, I know – but that is what is happening in Greece. The major difference from historical events of a similar nature is that this time, it is not just the smaller, less developed countries – the so-called banana republics – that are in the throes of a financial collapse but most of the world’s advanced economies. This is certain to end badly.

In the short term, the central banks will print up money for their governments and bankers, but in the long run, the loss of confidence will become so great that currencies self-destruct. As the problems extend around the globe, currencies and bond markets will be wiped out together.

In time, new currencies will have to be issued, almost certainly with some form of link to gold and other commodities. To survive what’s coming, you need to understand the process and try to gauge how fast it may unfold. To shed further light on those issues, in the following I provide data on how serious the situation is and conclude with my predictions for the price of gold.

Central Banks Can Print Paper, But They Can‘t Print Gold

Gold is the only real money. In contrast, the power of central bankers to create fiat money out of thin air has distorted our financial systems beyond anything imagined in the early days of slips of paper issued for gold held at the local goldsmith’s.

To get a sense of the distortion, we’ll start by looking at the difference between the quantity of gold held by central banks and the amount of paper money they have issued. As you can see in the chart below, the amount of gold held has been surprisingly stable. But the blue line, a close reflection of the narrow definition of money that has been created globally, shows that the quantity of all forms of financial assets has grown dramatically.

The clear point of this chart is that the nominal quantity of the paper money in circulation has been growing much faster than the gold that formerly underpinned that currency and may be called upon to do so again before this is over. Regardless, as the power of money creation greatly benefits the money printers, we expect profligate money spending and creation to continue apace.

Importantly, central banks are no longer selling off their gold but rather are increasing their holdings. You can see that shift in the small upturn in the red line at the right of the chart. Central banks halting gold sales and becoming net buyers of gold decreases supply and increases demand, leading to higher gold prices.

As a related anecdote, Venezuela’s President Chavez recently recalled gold reserves not currently held in Caracas, exciting the gold bulls with the thought that the withdrawal of some 150-200 tonnes of gold from the Bank of England and bullion banks will force a squeeze on traditional stockpiles of gold. Chavez is further proposing to nationalize Venezuela’s gold mines. His many faults aside, I think Chavez understands the situation perfectly and is using his dictatorial powers to move back towards gold faster than slower-moving nation-state competitors.

Elliott Wave International has just released a free report that will help you navigate the year ahead. You’ll get all of the indicators that they have been analyzing over the past year, with 25 eye-opening charts and 14 pages of straightforward commentary. As volatile as the markets have been and will likely continue to be, you owe it to yourself and your portfolio to download this free report.

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The stock market’s 17-month drop into March 2009 erased all the gains in the Dow Jones Industrial Average since the late 1990s. That’s a full decade’s worth of gains.

And the two-week drop that ended August 9 basically wiped out all the gains from 2010 – 2011.

Just since August 1, there have been over 25 days that the Dow closed more than 200 points above or below its previous close. That’s volatility.

What does this all mean for the markets and your portfolio? Is another downturn ahead or is it finally a buying opportunity?

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8 technical analysis tools that give any trader an edge

You may have seen a TV ad where “traders” describe their strategies, and one says, “I trade on fundamentals.” That sounds very reassuring — except that, on any given day, “fundamentals” are a mixed bag:

• You might have a good U.S. employment report…but bad news from Europe
• A positive Fed statement…but a negative housing number
• Strong earnings…but slowing consumer spending

And so on. Which “fundamental” factor trumps the other? Which one carries more weight in your forecast? Your guess is as good (or bad) as anybody’s.

Your alternative is technical analysis, which forecasts the markets’ short- and long-term moves based on objective metrics, not guesses. 

Here at EWI, we’ve always strived to help our readers learn to think for themselves. So we’ve put together for you a free 8-lesson report, “Best Technical Indicators for Successful Trading” that teaches you how to use these technical tools:

1. The Personality of Elliott Waves
2. Head and Shoulders Pattern
3. Fibonacci Retracements
4. Advance-Decline Line
5. Sentiment
6. Volume
7. Trendlines
8. Momentum Analysis Using MACD

Here’s a small preview of this free 8-lesson report.
Trendlines

A trendline represents the psychology of the market; specifically, the psychology between the bulls and the bears. If the trendline slopes upward, the bulls are in control. If the trendline slopes downward, the bears are in control.

Moreover, the actual angle or slope of a trendline can determine whether or not the market is extremely optimistic, as it was in the upwards sloping line in Figure 1-1 or extremely pessimistic, as it was in the downwards sloping line in the same figure.

Now we’re on to the fun part — drawing trendlines. You can do this several different ways…

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Finish Reading This 8-Lesson Report Today, FREEIn this free report, you will learn some of the most effective tools of the trade from analysts at Elliott Wave International, the world’s largest technical analysis firm. Find out which technical indicators are best for analyzing chart patterns, which are best for anticipating price action, even which are best for spotting high-confidence trade setups — plus how they all complement Elliott wave analysis. Download your “Best Technical Indicators” report now >>

Prechter talks with Mind of Money Host Doug Lodmell

Robert Prechter offers a broad overview of the Wave Principle in this interview clip with The Mind of Money host, Douglass Lodmell. 

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Learn the Why, What and How of Elliott Wave Analysis Financial media use news and economic events to explain market moves. Steer clear of this misguided approach. Learn what really moves the markets with The Elliott Wave Crash Course. In this series of three FREE videos, Senior Tutorial Instructor Wayne Gorman demolishes the widely held notion that news drives the markets. Each video will provide a basis for using Elliott wave analysis in your own trading and investing decisions.

By David Galland, The Casey Report

Of all the social memes related to the economic and investment landscape, none is more dominant than that there is a small cadre of powerful Wall Street money men who, working behind the scenes, effectively control investment markets, the global economy and the politicians that play such a big role in that economy.

Whether you call them fat cats, greedy bankers, soulless manipulators or unindicted co-conspirators, the one sure thing, in the minds of most, is that they wield the power behind all thrones and that it is their whispered agreements, invariably made in darkened rooms full of cigar smoke, that decide the economic fates of us all.

Over the years, I have met quite a few of these “Lords of Finance” and found them to possess the same wide range of traits, positive and negative, shared by all humans: fear, insecurities, self-delusion, high hopes, good intentions, social aspirations, good habits and bad. 

And, of course, the greed that the Lords of Finance are said to possess in extra doses. Like Gordon Gekko, I have no problem with greed, as long as the pursuit of that which gives you pleasure does no harm to others.

There is one trait, however, that, in my experience, is almost always present in a Lord of Finance – and that is an acute intelligence. When it comes to matters of finance, even the average Lord of Finance has a keenly honed mind that has been trained to precision to understand the complex pieces of investment markets.

Which brings me to my interview. We’ll call him LOF, because the only way he would agree to be interviewed was if it was anonymous. A former colleague of a friend of mine, his career on Wall Street has stretched over 40 years and includes 10 years as the chief financial officer for one of the world’s most powerful investment banks. Leaving that position to strike out on his own, he and a group of colleagues went into money management, overseeing billions of dollars. Now, slowing down in the latter years of his career, he and his colleagues manage “only” tens of millions.

My goal for the interview was two-fold. First, it is to help calibrate our own views on the outlook for the economy with an individual who is not just hyper-intelligent but who has spent a lifetime immersed in the money game at the very highest levels. Casey Research sees ongoing crisis, getting far worse before it gets better. But what about a Lord of Finance?

Secondly, I wanted to gain some insights into the rarified world inhabited by the Lords of Finance. Is their dismal reputation warranted, or are they just people whose education and professional instincts have taken them to the top of highly rewarding and highly influential careers?

Let’s find out.

DAVID: People have a lot of perceptions about the “Lords of Finance,” if you will – the big banks, the operations in New York, the political connections and so forth. As you worked in the executive suite of one of the largest and most influential of these institutions for a long time, I want to get your take on those perceptions and also see how well our views on the current economic situation sync up, or not.

LOF: This is totally anonymous, right?

DAVID: Yes, completely anonymous.

LOF: Okay, great.

DAVID: So as a background, the first question, how long have you worked in the financial industry, what did you work in, and what sort of capacities?

LOF: Right. Well, I guess it started in the mid-‘60s, so I’ve been in the business now for 45 years. It is hard to believe, and the first 25 or so, really the first 30, I guess, were with a major investment bank that will go unnamed, rising to the position of chief financial officer.

Since retiring, I was involved with a firm managing billions of dollars. So, in answer to your question, most of my career has been with a big bank, but I have also run my own money management business. I am also a CPA, having started with a big CPA firm back in the early ’60s.

DAVID: Right. So 40-plus years in the business.

LOF: Correct.

DAVID: In all that time, have you ever experienced anything in the markets and the economy similar to what’s going on today?

LOF: No. In my experience, this is unique. And I remain concerned about the potential for another serious crisis. And for the first time, I’m concerned as to whether or not the American economy really has the kind of robust characteristics that we have enjoyed for most of my life and most of our careers, which is something quite new to me.

DAVID: So you aren’t buying the story that we’re out of the worst of this and that it’s happy days from here?

LOF: No, I certainly don’t buy that story.

DAVID: How would you describe the current state of the big financial houses? Does the fact that they’re still laying off thousands of people suggest these firms are hunkering down for a protracted period of slow growth?

LOF: Yes, I’m sure that’s what they’re doing. I think they’re also in an environment that is extremely uncertain, looked at from their point of view. You have a public that is still angry at them, for good reason, for their culpability in what happened in 2008 and 2009 and continues to happen.

Then you’ve got a regulatory bill, this Dodd-Frank bill, which has really yet to evolve because so many regulations have yet to be written by the various agencies. So the banks really don’t know what the landscape is going to look like going forward, and that makes it very difficult to plan, especially when it’s clear that the appetite is for more stringent regulations and not less.

Another aspect is that the environment in which they were able to make so much money by using tremendous leverage has certainly changed. It is highly questionable whether they can do that sort of business again, given that the balance sheets of these big banks are so opaque and so difficult to manage. So much so that I question whether any outside regulator can decipher and understand the risks that these banks have been taking. Actually, I question whether the banks themselves understand the risks that they’re taking. I think there are so many interactions that I have to wonder whether anybody really understands the kinds of risks that are out there. All of which adds up to a very challenging environment for these banks to operate in.

DAVID: Speaking of uncertainty, Dodd-Frank contains something like 400 new rules the banks are going to have to comply with, most of which have yet to be implemented. That would support your contention that it’s going to be very hard to plan in that kind of environment. Especially because some of the new legislation strikes right at the heart of key lines of their businesses – lines that have gone away and are unlikely to return anytime soon. So that’s got to really add some pressure.

But actions speak louder than words. Knowing everything you know about the big financial houses, would you invest in one today?

By Terry Coxon, The Casey Report

Money market funds began as a bright and useful idea, became a habit, and recently have become a bad habit.

Money market funds were invented in 1971 as an innovative end-run around Federal Reserve Regulation Q, which prohibited paying interest on demand deposits. The purpose of Reg Q was to stifle competition in the deposit-taking business in order to benefit commercial banks – at the expense, of course, of depositors.

The regulation had little effect until the late 1960s, when two factors converged. The first was consumer price inflation; it was mild compared to what was soon to follow, but it was still noticeable, and it fueled a general rise in interest rates. The second factor was the arrival of the IBM 360, which made computing much cheaper. Before that device, the administration of checking accounts was still labor intensive and little advanced from the days of green eye-shades. It was expensive for banks to maintain checking accounts, so they weren’t inclined to pay interest on them, Reg Q or no Reg Q. 

Then the drop in the cost of maintaining checking accounts and a rise in the revenue that could be earned from investing depositors’ money turned demand deposits into a very attractive proposition for banks. Since Reg Q forbade head-on competition for deposits, individual banks did what cartel members always do when there are profits to be made – look for ways to compete indirectly. In lieu of paying interest, banks began giving away premiums to attract large deposits. The era of the free bank toaster was born.

The first money market fund, Reserve Fund, went far beyond small appliances to exploit the opportunity provided by high interest rates and cheap data processing. The legal strategy devised by the fund’s promoters was to avoid the regulatory environment of banking with its Reg handcuffs and instead to set up shop as a SEC-registered mutual fund. But unlike any mutual fund up until then, it didn’t invest in stocks and bonds; it invested in jumbo bank CDs earning open-market yields. And its share price didn’t fluctuate; it was held steady at $1.00 by paying a tiny dividend every day, which could be reinvested automatically in more shares. Shareholders could redeem by writing a check, which the fund would cover when it was presented to the bank where the fund kept its checking account.

From an investor’s point of view, Reserve Fund was functionally a bank, even though legally it was an investment company. But for all intents and purposes, it was a bank with zero net capital, which meant that its investment policy had to be emphatically conservative. So, since the jumbo CDs that the Reserve Fund was buying were far bigger than FDIC insurance limits, the fund bought only from banks it considered indestructible. Shortly after Reserve Fund opened for business, another invention, Capital Preservation Fund, took conservatism to an extreme with a policy of investing only in Treasury bills. This made the fund’s shares arguably as safe or safer than FDIC-insured deposits, and with no limitation on size (the FDIC insurance limit at the time was $10,000).

Good as the idea was, money market funds got off to a slow start with the public, but the continued upward trend in inflation and in interest rates soon turned them into a giant industry with hundreds of funds and a river of management fees flowing to their promoters. And for the most safety-minded investors, the Treasuries-only funds offered a welcome refuge from worries about the reliability of commercial banks.

Money market funds are still a giant industry, but you have to ask why. Limits on bank deposit interest rates are long gone for individuals, so even before today’s near-zero returns, the yield advantage on money market funds was modest at best. And with the bogeyman of sovereign default peeking out of so many windows lately, the phrase “Treasury bills-only” no longer has quite the tranquilizing effect it once did. In fact, given that most FDIC-insured deposits are owned by Americans (aka potential voters) while much of the Treasury debt is owned by non-voting foreigners, FDIC-insured bank deposits may be a better bet than T-bills.

Take a look at what is now the largest retail money market fund – Fidelity Cash Reserves. It has $120 billion in assets. The yield for investors is 0.01% – keep a hundred dollars in the fund for a year and you get a penny. Put $10,000 into the fund and twelve months later you have $10,001. And there are risks: the fund holds nearly 52% of its assets in uninsured bank CDs and another 14% in commercial paper. I can only surmise that most of the $120 billion is there because of investor habit and inertia.

Money Market Funds: An Idea Whose Time Has Passed

Today there is little good reason to use a money market fund for substantial amounts of cash.

1. There is no material yield advantage because there is no material yield on cash anywhere – unless you are willing to take risks that mock the idea of cash. The highest yield on a money market fund I’ve seen since the Federal Reserve hammered rates into the floor at the end of 2008 was an offshore operation called Bank of Ireland USD Liquidity Fund, with a yield of 0.54%. How the fund earned that much (after expenses) in a world where 30-day jumbo CDs return 0.20% and one-month T-bills yield 0.04%, I don’t know. But if the fund’s risk disclosure was adequate, it would have included language that amounted to “Baby needs shoes!”

2. With most money market funds, there is a material safety disadvantage vs. FDIC-insured CDs since, of course, commercial paper and jumbo CDs carry a risk of default.

3. With a T-bill-only fund, the best you can say in favor of the fund vs. FDIC-insured CDs is that it’s a tossup. Both are very secure.

If you invest with a family of mutual funds, moving redemption proceeds into a money market fund in the same family is convenient. But I recommend enjoying that convenience only if the fund really is limited to Treasury bills. And you’ll have to read the fund’s prospectus to be confident that that is the case. Don’t rely on the fund’s name to tell you where your money is. A “government-only” fund typically invests in IOUs from US government agencies or government-sponsored enterprises or in private loans secured by such IOUs. Even if the fund has “Treasury” in its name, you may find upon close examination that T-bills are the primary investment but that the fund puts 15% or 20% of its assets into uninsured CDs to spice things up. So if you consider the homework needed to be sure you’re getting T-bills and nothing but T-bills, the convenience argument for using the fund gets weak.

The reason for holding part of your wealth in cash is absolute protection from default risk. If a money market fund doesn’t provide that protection, it isn’t really a cash medium. It’s something else.

[Even though they may not know it, few mainstream investors have actually made money in recent years, due to inflation eating away at the meager gains these investments provide. Try crisis investing like the pros: subscribe to The Casey Report today… and save an incredible 72% off the list price. But hurry, this offer ends at midnight, November 4.]

by Charles Petty

Investing in real estate requires investment of not only money but also time and effort. Real Estate investing requires that you buy a property, rehab, maintain it and then rent it out.

But if you want to enjoy the fruits of investing in real estate without all the hassle, then real estate securities is the place to look. Even if you have another business but yet wish to dip your fingers in real estate without investing your precious time, then you can choose from any of the following real estate securities.

Real Estate Limited Partnership

One of the ways to enter into the real estate market without any day-to-day hassles is to become a limited partner in a firm that actively deals in real estate. There can even be additional limited partners in one firm. A general partner will be assigned the task of managing the daily affairs of the company including buying and selling of properties, renting it out, collection of rent, managing expenses, etc. Limited partners can act only in case of any gross mismanagement by the general partner that would necessitate his or her removal from the firm. As a limited partner, you will be able to receive a portion of the profits that your firm generates. The returns in this mode are quite high but so are the risks since there might be many partners involved in a single company.

Real Estate Investment Trusts [REITs]

REITs are companies that must shell out at least 90% of their net income to its shareholders. Real Estate Investment Trusts purchase and oversee various real estate projects and the income generated from such ventures is subject to single taxation at the investor level. Thus, the returns to investment in such an instrument is quite high.

There are various REITs that specialize in acquiring, managing and disposing of several different property sectors such as residential homes, apartments, commercial offices, hotels, warehouses, etc, and you can even find  REITs segmented by different regions. This method of investing offers modest capital appreciation in the long run.

Real Estate Mutual Funds

Real estate mutual funds invest their money in select REITs and even in other publicly traded companies that are active in the real estate market. These mutual funds thus offer a high yield in the form of dividends. The only problem with real estate mutual funds is that due to the dual fee structure, you will need to pay management fees and expenses to the management of a REIT as well as an additional 1 to 2% fee to the manager of the real estate mutual funds.

High Yield Private Mortgage Notes

Professional real estate investors normally use these notes in the form of loans. They use them to buy, rehab or even equity cash out of various properties that generate income. These notes are also completely guaranteed by matching collateral in the form of productive real estate. These loans are normally for a duration of one year and never exceed 65% of the currently appraised value of property and the income generated is in the form of interest payments. Because real estate investors need this money to continue in their buisness they are often willing to pay high yields on these investments. Also these loans take less time to get processed as compared to traditional loans that are advanced by lending institutions so real estate investors often prefer them. Since these loan are backed by real estate, the borrowers credit is not a major problem while securing them. Investors have an opportunity to earn around 12 to 18 percent by investing in these instruments.

If you are new to such investments, then hire the right professionals to guide you on the best securities that can provide you with the highest returns with the lowest risk. Investing in real estate securities is thus a profitable alternative to directly dealing in real estate.