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Taipei, Taiwan

• Did you listen to what Dick had to say about gold?
• Dinner and drinks with the world’s largest U.S. dollar holders,
• Plus, Rude Awakening ends THIS WEEKEND, Mayer’s $1 offer is back and plenty more…

Joel Bowman, reporting from Taipei, Taiwan…

A Korean and his Scottish girlfriend and a Norwegian-born American and her Aussie boyfriend sit down for Japanese barbeque in Taiwan. If only we had a punch line…

Last night your editor joined a visiting couple for dinner at our favorite restaurant here in Taipei. After liberal helpings of marble beef, buttered scallops and spiced, seasonal vegetables – and enough warm sake to melt the polar caps – we wandered over to one of the local jazz bars. The area is popular with visiting Japanese businessmen, so we weren’t surprised to find it packed.

After a few more sakes and we found ourselves talking to Atsushi, a Taipei-based businessman originally from Tokyo. Pretty soon, the conversation turned to stock markets and the direction of the east versus that of the west.

“I have most of my money invested in the Japanese markets,” he informed us. “But it hasn’t done much for…well…a long time. It just kind of sits there…

“Maybe the Yen is too strong, right now,” Atsushi continued. “That hurts our exports and makes it hard for our companies to compete. Plus, American’s are cutting back, you know.”

“No kidding?”

“They are saving…but they are saving in dollars. The dollar has already fallen so much this year…it means they are really not saving that much, measured in their own currency.”

“But their debts are in dollars too,” we added, just for the sake of discussion. “It’s hard to go broke if you can pay back debts in a currency you can print.”

“Yes, but that won’t last forever,” Atsushi said with a certain confidence. “Besides, we have quite a few of those American dollars in Japan. Same for China.”

“And Korea,” our friend added. “We have some too!”

Everyone has dollars, Rude reader. They are flooding the world, printed and pushed by the Feds so American consumers can buy Chinese, Japanese and Korean knickknacks and so the U.S. government itself can purchase (on your behalf) Wall Street’s least efficient banking and insurance firms…and the nation’s auto makers…and the citizens’ mortgages…and their student loans and car loans…

French president Charles De Gaulle once described America’s reserve currency status as an “extraordinary privilege,” but, as our Japanese friend observed, it won’t last forever. You’ve heard the warnings and threats from China, Russia, Brazil. You’ve read the rumors that the OPEC nations were going to ditch the greenback…and you saw what it did to the world’s reserve currency in a matter of days. You’ve even seen Chinese students laugh in the face of Timothy Geithner as he assured them that their dollar holdings were safe.

And more recently, as the rest of the world looks for ways to go “ex-dollar,” you’ve witnessed the rise and rise of our favorite precious metal.

In today’s Rude Awakening, our second last issue ever, we bring you another essay from the “remembering Rude” vault. We originally published Mr. Chris Mayer’s remarks on gold back in February of this year and, with gold bumping against all-time nominal highs, readers who took his advice faired pretty darn well. Please enjoy…

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Buy Gold…We Really Mean it This Time
By Chris Mayer

His name was Dick Baker. Mark Twain called him an old friend and wrote about him in Roughing It (1872). He was the pocket miner of Dead Horse Gulch.

Twain and Baker would wander up in the hills of California, panning for gold. Pocket mining was a specific method in which miners hoped to zero in on the richest deposits “whose vagrant grains of gold have escaped and been washed down the hill,” as Twain wrote, “spreading farther and farther apart as they wandered.”

Sometimes all you needed was to find one spade’s worth of gold. That alone might pay $500 back then. “Sometimes the nest contains $10,000,” Twain relates, “and it takes you three or four days to get it all out.” The pocket miners told tales of finding $60,000… even $120,000 worth of gold, a fortune in those days.

Investing in 2009 is a little like pocket mining: A lot of panning around looking for that worthy payoff. But for the first time in a couple of years, the business of gold mining itself looks attractive, for two important reasons. One has to do with the big picture. The other involves the underlying economics of gold mining, which are attractive even if the price of gold goes nowhere.

As to the first, I’ll be brief, because it’s not the most compelling reason to buy gold stocks in my opinion, yet it’s the one most everyone spends most of their time talking about. It’s that the U.S. government is spending money like there is no tomorrow, which is bound to lead to printing a lot of money (read: inflation) and hence a rising gold price. It’s true, though: You couldn’t draw up a better scenario for gold than what’s going on right now.

Even some sharp-eyed value types – usually buried in the footnotes of their favorite companies, rather than speculating on the price of gold – find themselves drawn to the yellow metal. Indeed, some even seem apologetic about it. “We never thought we would ever buy gold or gold stocks,” writes David Einhorn in his latest quarterly letter to shareholders of his Greenlight Capital.

He talks about his grandfather, who was a gold bug and for the last 30 years of his life bought only gold and gold stocks. Since the age of 10, Einhorn heard warnings from his grandfather about the ravages of inflation and the dangers of the government’s printing press. And of course, for most of those 30 years, gold was a lousy investment. “Being patient is one thing,” Einhorn writes. “Being ‘wrong’ for three decades is quite another.”

Today, Einhorn admits to seeing old Grandpa’s ideas playing out. He’s buying gold and call options on a basket of gold miners.

Behind the bigger picture, though, there’s a more compelling reason to buy gold stocks today. First: The price of gold miners as a group is off more than 20% in the last year, even though the price of gold has held firm. Add to that mix falling mining costs in 2009 and you have a recipe for explosive earnings.

As gold analyst John Doody points out, oil accounts for about 25% of the costs of running a mine. Gold miners use a lot of energy to power big shovels and dump trucks and to haul ore. The price of oil, as you need not reminder, has collapsed. It’s down more than 70% from its high in July. For the first three quarters of 2008, gold miners had to contend with an average oil price around $118 a barrel. Barring a huge rally in oil, gold miners will reap a windfall in lower oil costs oil since then. As I write, oil is $36 a barrel.

Not only will gold miners get the benefit of lower oil costs, the currencies of the gold-producing countries have all fallen against the dollar. This means their costs are lower today in dollar terms. Consider, for a moment, where the gold comes from. In the mid-1990s, four countries dominated gold production and made up more than half of global production. They were Canada, Australia, South Africa and the U.S. But by 2006, these four producers made up only about one-third of global production. Today, you see China produce a lot of gold, as well as Peru, Mexico, Chile and countries in Africa. (This according to Frank Holmes’ book The Goldwatcher. The book, by the way, is a must-have manual for gold investors. Part II, in particular, has a wealth of gold investing strategies and insights.)

Many gold mining stocks today have assets in countries where the currency is falling against the dollar. As Doody says, “All the commodity nation currencies – the Canadian dollar, the Australian dollar, the South African rand, the Brazilian real, the Mexican peso – they’re all down 20-40%. When your mining costs in those countries are translated back into U.S. dollars, they’ll be 20-40% lower.”

Those two factors – lower oil costs and currency effects – mean gold profits should be higher in 2009 than in 2008 even if the price of gold goes nowhere.

I’ll add one other reason to like gold stocks here: They did pretty well in Great Depression I. And history may repeat. Even at their lowest prices in 1933, the stocks of Alaska Juneau Gold Mining and Homestake Mining were still well above their 1929 highs. At their highest prices, they were 230% and 300% higher, respectively.

Old Bernard Baruch was a principal stockholder in Alaska Juneau. It was his largest holding in 1931. Baruch was a savvy old trader and investor. He knew where the soup would stick to the spoon after Roosevelt’s New Deal policies. It would mean a devaluation of the dollar and a rise in the gold price.

Eventually, gold did surge, and so did gold stocks. “Baruch reaped an especially large profit,” his biographer James Grant writes, “for he had been buying stock and bullion.”

Obama’s stimulus plan smells a lot like Roosevelt’s New Deal. And if this is the greatest financial test we’ve faced since the Great Depression – as I believe it will ultimately be – then gold stocks may also be among of the few stocks to make new all-time highs in 2009.

If Twain were still kicking, I think he’d go look for his old friend Dick Baker, the pocket miner of Dead Horse Gulch, and head for those California hills.

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[Rude Endnote: And that’s it…the final weekday edition of The Rude Awakening. From Monday onwards, you’ll be able to catch us at The Daily Reckoning, where we’ll continue publishing our daily missives.

If you haven’t already signed-up to receive the DR (for free, of course), you can still do so right here.

We hope you can join us.

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com