Doug Casey (Casey’s Gold & Resource Report):

L: Doug, we’ve talked about cars, cows, and cash, but the investment world thinks of you as a gold bug, so let’s give that a go; why gold?

Doug: Sure. First of all, it’s because gold is actually money. It’s an unfortunate historical anomaly that people think about the paper in their wallets as money. The dollar is, technically, a currency. A currency is a government substitute for money. Gold is money.

Now, why do I say that?

Historically, many things have been used as money. Cattle have been used as money in many societies, including Roman society. That’s where we get the word “pecuniary” from: the Latin word for a single head of cattle is pecus. Salt has been used as money, also including in ancient Rome, and that’s where the word “salary” comes from; the Latin for salt was sal (or salis). The North American Indians used seashells. Cigarettes were used during WWII. So, money is simply a medium of exchange and a store of value.

By that definition, almost anything could be used as money, but obviously, some things work better than others; it’s hard to exchange things people don’t want, and some things don’t store value well. Over thousands of years, the precious metals have emerged as the best form of money. Gold and silver both, though primarily gold.

There are very good reasons for this, and they are not new reasons. Aristotle defined five reasons why gold is money in the fourth century BC (which may only have been the first time it was put down on paper). Those five reasons are as valid today as they were then. A good form of money must be: durable, divisible, consistent, convenient, and have value in and of itself.

L: Can you elaborate on that?

Doug: Yes, and from them, we can draw inferences that will help us anticipate the fate of the dollar.

First, let’s take durable. That’s pretty obvious – you can’t have your money disintegrating in your pockets or bank vaults. That’s why we don’t use wheat for money; it can rot, be eaten by insects, and so on. It doesn’t last.

Divisible. Again, obvious. It’s why we don’t use diamonds for money, nor artwork. You can’t split them into pieces without destroying the value of the whole.

L: If I paid for a new Ford GT with the Mona Lisa, what would be my change – a small canvas by Picasso?

Doug: [Laughing.] That’s right. Maybe you’d get millions of those paintings of Elvis or Jesus on velvet.
Consistent. The lack of consistency is why we don’t use real estate as money. One piece is always different from another piece.

Convenient. That’s why we don’t use, for instance, other metals like lead, or even copper. The coins would have to be too huge to handle easily to be of sufficient value.

Value of itself. The lack here is why you shouldn’t use paper as money.

Actually, there’s a sixth reason Aristotle should have mentioned, but it wasn’t relevant in his age, because nobody would have thought of it…

Click here to read the rest of the interview at Whiskey & Gunpowder.

Adrian Ash (The Daily Reckoning):

The collapse in India’s gold demand during 2007-09 might seem good reason to question the fundamental strength of gold buying worldwide.

After all, if the world’s No.1 gold buyers can’t keep up with record-high gold prices, who can…?

But the plain fact, as BullionVault first forecast in spring 2009, is that China has overtaken India as the number one private gold buyer this year. The typical Chinese New Year gold rush has already begun (thanks in part to 3% discounts at major retailers), and robust demand looks likely to continue through 2010 if not beyond.

Full-year 2009 private demand in mainland China could outstrip India, the former No.1 buyer, by one quarter if not one third. Short of a (very unlikely) collapse in Q4 demand, full-year private gold buying – including jewelry and retail investment – is set to have grown 10% from 2008’s record in volume terms, rising 26% by value to equal $13.5 billion or more.

On recent trends, that would equate to more than 2.0% of China’s famously massive household savings (up from 1.0% ten years ago) and account for almost one ounce in every eight sold worldwide.

Basis the GFMS consultancy’s data (published by the World Gold Council), physical gold purchases by mainland Chinese households in 2009 was already running 19% ahead of India’s private demand for Q1-Q3.

Given China’s continued economic growth (certain to hit Beijing’s 8% target according to the Chinese Academy of Social Sciences) – not to mention the surge in money-supply and credit growth over and above GDP (put at 23 and 27 percentage points respectively by Deutsche Bank) – private gold consumption in Q4 most likely remained very robust. Whereas India’s private gold off-take during Oct-Dec. continued to shrink in the face of record-high prices. Indian bank and wholesale dealers have reported below-market bids from their clients throughout the autumn. Comments from the Bombay Bullion Association put Q4 imports 54% lower from 2008’s already disastrous finish.

Fourth-quarter Chinese consumption should be in the range of 116 tonnes (if it adds 37% to Q1-Q3 volume, as per the 5-year average) to 128 tonnes or more (if Q4 tops Q3 by volume, as it has each year since 2004). The running total to end-Sept. was 315 tonnes. It is likely to finish full-year at 431-443 tonnes.

India’s private demand, in contrast, ran 45% below 2008 levels during the first 9 months of the year, most notably depressed during Q1 (down 83% from Q1 08, with Indian investors becoming physical dis-hoarders on GFMS’s data; overall, India was a net exporter of gold for the first time since the Depression according to market historian Timothy Green). Applying the 5-year average ratio of Q4 demand to Q1-Q3 figures (27% added to 264 tonnes), full-year private off-take would come in at 336 tonnes, the lowest total since at least 1991 on GFMS’s data. . . .

Click here for the rest of Mr. Ash’s analysis at The Daily Reckoning.

Chris Mayer (The Right Side):

The U.S. dollar is a sort of monetary brand.

And like any other brand, it can fall out of favour. Even iconic brands can rapidly lose their “must-have” cachet. Sometimes, a brand can disappear entirely, as did Pan American Airways or “Members Only” jackets. But there is always something else waiting to take its place. So it is with the U.S. dollar, a brand making lows in the financial markets.

The dollar has been the “Coca-Cola of monetary brands,” says James Grant, editor of Grant’s Interest Rate Observer. But even the best of brands can be lousy investments. Grant uses the analogy of the New York Times. It was the greatest name in newspapers. In 2002, the stock sold for $53 per share – an all-time high, as it turned out. Today, the “Gray Lady” fetches only $8 per share.

“What happened?” Grant asked. The World Wide Web happened, he says. “The Times has hundreds of reporters, but this is a story they seem to have missed.” As if the lowly stock price was not evidence enough of its decline, the NY Times got another reminder when it borrowed $225 million against its headquarters building.

The cost of such borrowing, Grant reports, was 14%. The august Times today borrows at rates no better than a working-class stiff at a pawnshop. The U.S. Treasury should take note. The government seems as intent on creating dollars as prolifically as bunnies create other bunnies.

Here we get to John Paulson, a presenter at the Grant’s Fall Investment Conference and undoubtedly the richest man in the room. Portfolio magazine dubbed him “The Man Who Made Too Much” after he made $3.7 billion by betting against mortgage-backed securities (MBS). He is one of the greatest hedge-fund managers ever.

Gold is his favourite today. As to why, Paulson presented a simple, but compelling case. First, the monetary base has exploded in a way we’ve never seen before. The monetary base is essentially the Federal Reserve Bank’s currency and reserves.

The Fed, by buying up securities in this crisis, has pumped a lot of money into the economy.

Click here for the rest of Mr. Mayer’s article at Fleet Street Invest, UK.

Dan Denning (Whiskey & Gunpowder):

We’re going to review your 2010 asset allocation strategy in a roundabout way by exposing some of the snarky disinformation being put out by the mainstream media about gold, courtesy of Michael Pascoe at The Age.

First though, let’s just check to see that markets are still functioning normally. That is, let’s just check to see that heavy government intervention is supporting house prices (by providing guarantees to home lenders), GDP growth (by spending money on infrastructure), and disguising the true state of the labour market (by lying about how many people are out of work).

Yep. Situation normal, all fouled up. The oil price, the U.S. dollar, and bond yields were all up on bullish industrial production figures in the U.S. The “recovery” meme is taking a tenuous hold. Stocks were down. Because why would stocks rise if the economy were recovering?

Ah. Well that tells you something right there. It tells you that stocks haven’t risen in anticipation of a global recovery. They’re just enjoying the benefits of all that monetary and fiscal smack being peddled in Washington, London, Tokyo and Canberra. It’s hard to rally on fundamentals when you’re already over-valued.

Speaking of value, let us now return to the question of element number 79 on the periodic table. The snarky article we mentioned at the top is from Michael Pascoe at The Age, titled “There’s more gold where that came from.”

In the article Pascoe takes on the issue of “peak gold.” But how well has he done in accurately stating the argument for gold? And more importantly, is he right about the relationship between market prices and gold? Well, obviously we think he’s pretty wrong. But let’s see what he’s said.

“Part of the dogma of the less rational gold bugs is that the world is running out of the stuff. As an article of faith, it makes a pleasant change from the idea that fiat money is about to be exposed as huge confidence trick and we’re heading back to the caves.”

Webster’s defines “dogma” as “a religious doctrine that is proclaimed as true without proof.” Already you can see what Pascoe is up to. Gold bugs are nutters and zealots. Apparently 5,000 years of monetary history where gold has proven utility as a medium of exchange and store of value does not qualify as empirical evidence of gold’s value. There’s no pleasing some people, especially those who come to an argument with their mind already made up.

Click here for the rest of Mr. Denning’s analysis at Whiskey & Gunpowder.

Lee Lowell (Investment U):

If you’re looking for some calm during the market’s ongoing storm, don’t expect to find much in the commodities sector.

Not that this is a bad thing.

If you know what you’re doing, commodities offer some of the most lucrative and potentially explosive profits anywhere in the investment world. And because simple supply and demand is the key driver for many of these everyday products, it’s a sector ripe for volatility and speculation from hedge funds and large institutions.

Heck, you only have to look at the oil market to see that in action.

It’s not uncommon to see prices cycle from highs to lows and back to highs again in a relatively short time. And it’s this rapid-fire, rollercoaster movement that causes many would-be commodities investors to park themselves on the sidelines, rather than risk their cash.

But this is often a mistake – particularly since there are some quick and easy ways that investors can take advantage of the world’s commodities. So let’s see what 2010 has in store…

Why The Price of Oil Is Headed Back to $100

It wasn’t long ago that oil prices blasted to all-time highs around $147 a barrel (July 2008, to be exact).

But they then set off on a remarkable decline that culminated with the price sinking to lows around the mid-$30 level by early 2009 – a full $115 or so lower than the record high, which equates to a staggering $115,000 move in equity on just one contract.

But as the chart below illustrates, oil has spent most of 2009 busily clawing back a sizeable chunk of the downward move – and I expect that trend to continue in 2010.

Click here for both the oil trends chart and the rest of Mr. Lowell’s article on Investment U.

Jeff Clark (Casey Research):

In the short term, a catastrophic deflation is quite possible. But in the long term, extremely high levels of inflation are now inevitable. The situation is very serious. Gold is the best hedge against both of these things. The better part of your financial assets should be in gold, augmented by well-thought-out speculations. Doug Casey, November, 2009.

Doug Casey and the editors at Casey Research are very skeptical that we are experiencing any sort of economic recovery. In our opinion, too many economic indicators are based on faulty data and optimistic assumptions. Our research suggests that a recovery isn’t sustainable yet. And with that, we lack the foundation needed to support the rapidly rising stock markets.

Among the many reasons for our doubt is this standout:

Over the next two years, the so-called Alt-A and Option ARM loans face massive resets. Even with today’s low mortgage interest rates, most of these home loans, currently enjoying ultra-low teaser rates or pick-your-own-monthly-payment schemes, will see their monthly payments adjust higher – far higher. The result: loan losses and write-downs will balloon for banks, and mortgage holders will get hit with another wave of homeowner defaults. We just don’t see any way for the economy and markets to escape the fallout.

Even the Fed’s perpetual public smiley face can’t hide what’s happening. In their own statement last month, they said, “Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.” A clear and present danger remains in the system.

What does this mean for our favorite sector? Following the market lows in March, gold and gold stocks have, with some exceptions, mirrored the market’s moves both up and down. If the markets correct again, whether mild or severe, gold and gold stocks could get taken down as well.

There will come a point when gold stocks separate from the movements of the general markets, and we look forward to that day. But for now they’re still holding hands.

In the meantime, our view of the big-picture outlook hasn’t changed. Rising inflation and a falling dollar are baked in the cake. Price inflation follows monetary inflation, and governments around the globe have pursued an unprecedented and unsustainable policy of inflating the money supply. Monetary inflation + time = price inflation. It’ll come, and when it does, it will wipe out those who are unprepared.

But in the near term, current economic uncertainties mean heightened risk and call for caution. In other words, this isn’t the time to be aggressive with stock purchases.

So, how does one invest in this kind of environment? Is there a way to hedge your exposure against price fluctuations?

Yes! The secret lies in asset allocation.

Achieving good portfolio performance is possible without overexposing yourself to stocks. The strategy involves playing defense as well as offense.

The following tables compare the returns an investor could expect using different asset allocation models under three hypothetical market scenarios, and assumes a starting portfolio of $10,000.

      *All returns exclude commissions and taxes 

      *Cash return for 1 year of 1.55% based on use of money market account; higher rate possible with a CD, but access to your cash is restricted, and it involves fees and penalties for early withdrawal.

You can see that you’re giving up only 6.6% in gains in Scenario #1 by apportioning your portfolio in equal thirds vs. being overweight stocks. But if stocks decline while you’re overweight that category, as shown in Scenario #2, you stand to lose 16.8%.

If you don’t elect a defensively positioned portfolio at this point, and gold stocks indeed get sucked into the vortex of a general market sell-off, you’ll wish you had that extra $2,300 in cash – which buys well over 100 shares of Kinross at today’s price. And when KGC likely doubles in a couple years, as we expect, remorse may be knocking on your door.

By allocating your investments in a more defensive mode, you’re making a small sacrifice for possible profits over the next six months without sacrificing long-term returns.

You can continue to follow the thinking of the editors at Casey Research — and get specific recommendations for solid, secure gold investments — with an inexpensive subscription to Casey’s Gold and Resource Report. It comes with a free report called The Three Best Ways to Invest in Gold, and until December 18, you’ll get a free subscription to Casey’s Energy Opportunities — all for only $39. Click here to find out more.

Jeff Clark (Casey’s Gold & Resource Report):

Long-term readers know that gold moves inversely to the dollar, meaning if the dollar drops, gold tends to rise (and vice versa). This happens with about 80% regularity. But what many gold writers haven’t acknowledged is the leveraged movement our favorite metal has demonstrated this year to the world’s reserve currency.

The U.S. dollar index, a six-currency gauge of the greenback’s value, has dropped 7.8% so far this year (as of December 3). Meanwhile, gold is up 38.7% year-to-date. In other words, for every 1% drop in the dollar index, gold has risen 4.9%. If that approximate percentage holds over time, one can begin to estimate what the gold price might be if you know what the dollar might do.

While the dollar is likely to bounce at some point, making gold correct, the long-term fate of the dollar has already dried in cement. If the dollar were simply to return to its March 2008 low of 71.30 next year – a 4.6% drop from current levels – this would imply a rise in gold of 22.5% and a price of about $1,478 an ounce.

The long-term scenario is more dramatic. If you believe the dollar will lose half its value from current levels, this would imply a gold price around $4,164. If you believe it will lose 75% of its value, gold would reach about $5,642. Doug Casey has called for a $5,000 gold price; if he’s right, guess what that implies for the dollar?

And think about this: these calculations ignore what else might “show up,” such as when price inflation shows up in the economy, the greater public shows up to buy gold, or the Chinese don’t show up at an auction. Could $5,000 gold be too low?

Unless you think the dollar’s problems are solved, its eventual demise is gold’s eventual glory. Prepare, and invest, accordingly.

And keep up on the gold and precious metals markets in Casey’s Gold and Resource Report. Each month I’ll bring you the best research and investment recommendations in the business. And until December 18, you can get a subscription for 50% off the regular price and receive a free gift worth $79. Click here to learn more.

Bill Bonner (The Daily Reckoning, UK):

We are high over the African veld… at least, we think it is called veld. That’s ‘field’ to you and us. And we’re so high above it we can’t see it anyway.

After a few days in Johannesburg, we’re on our way to Dakar. Why would Bill want to go to Dakar? We asked the same question. But Dakar is just a stopover on the way to Washington.

Meanwhile, there are things to be reckoned with.

When we left the ground, it appeared that we were finally getting the shakeout in gold that we’ve expected… and maybe the beginnings of a shakeout in stocks too.

(Whoa… we just landed in Dakar… got an internet signal. Seems gold is down another $22. The Dow, however, rose 51 points yesterday.)

On Friday, the London gold market saw the highest volume traded in history.

London gold expert, Dominic Frisby, sent this commentary:

“After peaking last Wednesday at about $1,220 an ounce, the price has fallen almost $100 in just four trading days. Friday’s capitulation – some $60 – was particularly ugly. It shows just how much speculative, hot money there is in the sector.

“So what now?

“In the week to last Wednesday 7 December, almost $300m of call options (options betting the market will rise) were traded in the largest gold exchange-traded fund (ETF), GLD.

“That is more than the entire call volume of the second and third quarters of this year – in just five trading days. On Wednesday alone, trading volume in GLD calls amounted to almost 50% of what the market traded in the entire second quarter.

“That is a sign of extreme speculative excess. It is not the time for short-term investors to buy. At such extremes, you have to ask: where are the next buyers going to come from?

“As we head into year end, there are a lot of fund managers who will want to lock in their profits for the year.

“I’m afraid that means they will sell their gold – and anything else they own that has done well – at the slightest hint of a turn in the markets, because they will want to secure their gains (and their bonuses) on what will have been an excellent year. That’s what we saw on Friday and why the market fell so hard, so fast.

“In the short term, this does not bode well for any market – except one. “It may be that we are finally seeing the end of the ‘Great Reflation Trade’, this astonishing rally out of the crash.”

Click here for the rest of Mr. Bonner’s article at The Daily Reckoning, UK Edition.

Steve Sjuggerud (The Right Side):

Dear Reader,

“We made three thousand dollars just yesterday in gold,” a family member told me this week.

“I know your friend Porter says buy. And I haven’t heard you tell anyone to sell. But it’s starting to feel like the dot-com days… I’m getting worried.”

This family member should have reason to be concerned… Yes, he scored big in the dot-com boom – at first. But he later gave back much of the gains.

What did he do wrong? He had no plan. He didn’t know when to sell.

So… when do you sell once you’re in a dot-com-style bubble?

First off, while it may feel like a bubble to you in gold, I think we’re just getting warmed up. The dot-com bubble peaked in March 2003. Remember, at that point, stock trading was the talk of dinner parties. We’re not quite there yet.

Also, you don’t need to believe Armageddon is near… that deficits and debt will destroy America… to believe gold will go up. Beyond the Chicken Little scenarios, we have plenty of reasons to own gold that have proven to make you money in the past. I’ve covered a few of those in recent issues of DailyWealth:

· You’d have made 17% a year in gold using a modified version of my friend Meb’s system.

· You’d have made 15% a year in gold using the “gold versus currencies” strategy.

· You’d have made 18% a year in gold using real interest rates as an indicator.

If you own gold when at least one of these systems says “buy,” chances are, you’ll do very well. All three of those are in “buy” mode right now.

OK, so when is the exact, optimal moment to sell your gold? The first two systems will get you out in plenty of time before it busts. Another idea is to use a trailing stop.

Click here for the rest of Mr. Sjuggerud’s analysis for The Right Side at Fleet Street Invest, UK.

Dan Denning (Whiskey & Gunpowder):

The market has metal on its mind. Shares are wandering without much conviction as we look at the flickering green screens this morning. But metals? That’s a bull market with some conviction, or at least a lot of momentum.

February gold traded above $1,218 yesterday and closed at $1213. Gold has closed higher 20 of the last 22 sessions. In that time, according to Dow Jones newswires, it’s up 15% – nearly double the return of the S&P 500.

Does this mean investors are starting to give up houses and shares and speculate on gold instead? The U.S. government has been forced to suspend sales of American Gold Eagle coins, according to Javier Blas in the Financial Times last week. It’s the second time the mint has had to suspend sales since Lehman went belly up in 2008.

There’s a bit more to the story, though. The mint has sold 1.19 million ounces of gold this year. That’s a 75% increase over last year. Hmm. But it’s also sold 26 million ounces of silver coins – the highest level of sales in 23 years.

What does this tell you? Well, the rational answer is that bullion or gold and silver coins are assets without counterparty risk. True, the value of gold and silver coins fluctuates with metals prices and liquidity. But your payment does not depend on someone else’s credit quality. Your payment is in your pocket.

That rational answer presumes that investors are now showing a preference for tangible assets that are…real. But is it more fear than reason? After all, a rational investor might prefer the leverage you get with gold stocks as the best way to profit from rising gold prices. That would be the easier investment strategy.

But that suggests to us the move to gold isn’t so much an investment strategy as it is a financial survival strategy. Investors are less and less worried about capital gains and more and more worried about the preservation of their purchasing power and capital itself. Gold is the ultimate expression of that worry – a flip side of the lack of confidence in modern monetary policy (or just modern money).

Gee. It’s soooo kooky to distrust central bankers, isn’t it?

Morgan Stanley appears to distrust UK central bankers. Morgan released a report yesterday, according to Ambrose Evans-Pritchard in the UK Telegraph, which highlights the risk that capital will flee . . . .

Click here for the rest of Mr. Dennings article on Whiskey & Gunpowder.