• Gold blasts through $1,015…so, where do we go from here?
• A long and short term case for owning the yellow dog,
• What exactly Will Robinson has to do with all of this and more…

Eric Fry, musing about gold from Laguna Beach, California…

“Danger Will Robinson!”, the ridiculous B-9 robot once warned on the 1960s TV show, “Lost in Space.” Although the B-9 only uttered these words one time during the three-year series, the phrase landed immediately in pop culture as a lighthearted warning against any unanticipated threat.

But the B-9 is now long gone. This endearing robot, formally known as the B-9, Class M-3 General Utility Non-Theorizing Environmental Control Robot, hasn’t made a public appearance since “Lost in Space” went off the air 41 years ago. Thus, for more than four decades, no being – biologic or electronic – has been around to wave its arms up and down and yell, “Warning! Warning!” whenever some sort of threat drew near.

Americans have had to go it alone.

Sure, we’ve got our car alarms, and our home security systems…and Robert Prechter. And we’ve also got a pretty sizeable army. But when it comes to our personal security and the security of our financial assets, we haven’t really had a reliable sentry to alert us to potential harm.

Or maybe we have and we just didn’t realize it…

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The Anti-Dollar
By Eric J. Fry

For the better part of 40 years, the gold price has been standing guard over monetary policy. The gold price has been alerting investors to the potential threat of inflation. And if the recent price action in the gold market is to be trusted, this sentry has not fallen asleep on his watch. During the last few weeks, gold has jumped about 10% to over $1,000 an ounce.

But our story really begins in the late 1960s, just as “Lost in Space” was going off the air and the U.S. dollar was going off the gold standard. Back when B-9 was waving its arms and yelling “Warning! Warning!” once per week, the gold price was fixed at $32 an ounce and foreign central banks could freely convert their accumulated dollar bills for gold.

The French thought this was pretty sweet deal and swapped as many dollars as they could find for gold. However, President Nixon soon realized that this trade was a very sour deal for the U.S. And so, in August of 1971, he ended gold convertibility for good. Without this inconvenient and inhibiting link to gold, the U.S. discovered the pleasures of reckless monetary policy: printing dollars to pay debts.

Inflation kicked up almost immediately, as did the gold price. Within a few short years of ending gold convertibility, inflation jumped to double digit rates and the gold price jumped to $800 an ounce. But then the “yellow dog” took a good long nap. It slept through most of the 1980s and 1990s, as monetary inflation remained RELATIVELY tame.

By the late 1990s, the gold price had slumped to nearly $250 an ounce. It has been climbing steadily ever since. The initial move from $250 to $450 between 2000 and 2004 did not exactly scream “Warning! Warning!” But the gold rallies of recent years have taken on a more ominous tone, from a monetary standpoint. In other words, gold is in a bull market because inflation is in a bull market.

The most recent rally in gold seems particularly intriguing – and ominous – in light of the crazy quantities of cash that the Treasury and Federal Reserve have been tossing at the financial crisis. In various ways through various channels, the nation’s monetary bodies have conjured trillions of dollars into existence that did not exist before Lehman Bros. went bankrupt.

In all earlier epochs, such activities would have produced a large and inevitable inflationary trend. We predict this epoch will be no different. The gold price is telling us as much. So are the Chinese, as Byron King, editor of Outstanding Investments observed in a recent missive to his subscribers:

The Chinese Keep Buying Gold

“Then again, why worry about the future of energy development? The West — the U.S. in particular — is working overtime to wreck the future by debasing its currency and choking its economy.

“Don’t take my word for it. In a recent article, the U.K. Telegraph quoted at length Cheng Siwei, former vice chairman of the Standing Committee of the Chinese Communist Party. He explained how Beijing is dismayed by the ‘credit easing’ coming out of the Federal Reserve.

“‘If they [the Fed] keep printing money to buy bonds,’ said Mr. Cheng, ‘it will lead to inflation, and after a year or two, the dollar will fall hard. Most of our [Chinese] foreign reserves are in U.S. bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen and other currencies.’ Mr. Cheng was referring to over $2 trillion of Chinese foreign reserves, the world’s largest holding.

“‘Gold is definitely an alternative,’ said Mr. Cheng, ‘but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets.’

“Thus, we have direct testimony from a high-level cadre that China, while cautious, is a key driving force in the gold market. It’s buying. The implication is that the Chinese will not overbuy gold, which may be why the yellow metal has hovered just below the $1,000 mark per ounce in recent weeks. At the same time, it’s more than likely that China will buy gold whenever there’s a price dip.

“The significance is that the Chinese seem to be prepared to establish a floor under any correction in gold prices. This limits the downside for well-positioned gold miners such as AngloGold Ashanti (AU: NYSE) and Kinross (KGC: NYSE).

“As for the upside to gold prices? That will depend on when monetary-driven inflation begins to bite into the economy. The tide of inflation will lift the boats of the gold miners.

“Mr. Cheng’s greatest concern with the U.S. is that the country ‘spends tomorrow’s money today.’ Meanwhile, he added, ‘We Chinese spend today’s money tomorrow.’

“To sum things up, according to Mr. Cheng, ‘He who goes borrowing, goes sorrowing.’ Mr. Cheng was, of course, quoting that famous Chinese philosopher Benjamin Franklin.”

The Short-Term Case for Gold

Byron’s analysis above highlights the compelling long-term reasons to allocate some capital to the gold market. On a related note, most gold mining companies are swearing off the practice of “selling forward” – i.e hedging – their production. In effect, therefore, the insiders are buying…and that’s usually a bullish sign. “The size of the [gold] industry’s hedge book is set to drop to a residual of less than 200 tonnes by the end of 2010, the lowest in almost 25 years,” the Financial Times reported recently. “The reduction is a 95 per cent drop from 3,000 tonnes a decade ago.” The mining industry’s bullish stance is just one more vote of confidence in gold’s long-term investment appeal.

Meanwhile, the shares of gold mining companies are flashing a compelling short-term buy signal. Since late July, the gold mining stocks, as represented by the HUI “Gold Bugs” Index have jumped more than 30%, while the gold price has advanced only about one third as much.

As the nearby table illustrates, rapid 30% rallies in the HUI tend to bode very well for the gold price. The five prior instances in which the HUI rallied more than 30% in a very short timeframe, the gold price subsequently jumped an average of 27%. A similar advance this time around would land gold at $1,160 an ounce by Christmas – or about $140 higher than today’s price.

No such rally is certain, of course. But the monetary stars seem to be aligning for both a short-term and a long-term advance in the gold market.

Joel’s Note: With so much tumult in the markets right now, it can be difficult knowing exactly how and, perhaps more importantly, when, to buy gold. Has China created an impenetrable floor? Or will the September rally swoon, giving you a better opportunity a few weeks or months from now? Or, will the gold bull have already bolted by then? There’s plenty to doubt…

That’s why we asked Byron King, our resident geologist and metals analyst, to come up with a few ways you can own gold with as little risk (and money) as possible. Even if you’re an age old gold bug, his findings might surprise you. Read them here.

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But even better, I’ve just discovered a way for you to sneak into the soaring gold market for next to nothing, with what I call “penny-per-ounce” gold.

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[Rude Endnote: Markets around the world rejoiced in unison overnight following the latest triple-digit gain for Wall Street’s Big 30. The Dow rallied another 108 points yesterday, bringing the index to within striking distance of only being down only 4,000 or so points from its all time high. God speed!

Here in Asia, most major measures stacked on at least 1.5%. For its part, Japan’s Nikkei 225 added 1.7%, as did Hong Kong’s Hang Seng. The Aussies pulled 1.4% closer to the psychological 5,000-barrier on the S&P/ASX200 and China’s CSI 300 gained just shy of 2% for the session.

And, of course, there’s gold. The yellow metal actually punctured the $1,020 per ounce mark yesterday, before “settling” back to $1,117 overnight. It’s up another couple of bucks this morning, last we checked.

Oh yeah, crude also edged higher, to $72.60 per barrel. Psshhh…Did we mention gold topped $1,020? Oh yeah, we did.

Okay then…more tomorrow.

Cheers,

Joel Bowman

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

Pittsburgh, Pennsylvania

• Gold mounts assault on the $1,000 per ounce mark,
• China buys $50 billion in “alternative reserve currency,”
• Death creeps like a “thief in the night” and plenty more…

Eric Fry, reporting from Laguna Beach, California…

The Good Book tells us that death comes like a “thief in the night.”

But death is also like a set of rogue waves…at least for those who remain. The death of anything precious – whether that be life, love or a bull market – occurs in the twinkling of an eye. But the response to the death of something precious is anything but sudden. Instead, it is protracted, agonizing, confusing and uneven.

One moment, you tell yourself you’re over it; the next moment you’re watering a snapshot with tears. One moment, you’re celebrating the joys of the past; the next moment you’re mourning the foregone joys of the future. One moment, you’re grateful you’ve recovered some of your capital losses; the next moment you’re lighting a candle for the capital that is still missing in action.

So I say that the experience of death – for those who are still living – is like a set of rogue waves. There you are, just splashing in the gentle surf when, all of a sudden, the first huge wave sweeps through. Bam! Death arrives. It’s not YOUR death, but some precious part of you is gone forever. So you’re pulled under the wave; you’re tossed around; you can’t breathe; you think you’ll never see the blue sky again.

But then, just as suddenly, you’re bursting above the surf…just happy to be breathing. Everything is fine and safe…until the next wave. Rinse and repeat. After the last wave finally passes through…and you’re still breathing, you usually emerge from the surf with a combination of gratitude and resolve. Grateful the experience wasn’t more painful; but resolved to avoid any similar pain in the future.

In life, avoiding the pain of bereavement is all-but-impossible. The death of a loved one is just that and there is no way around it. In love, avoiding bereavement is possible, but not altogether satisfying. You avoid agony by avoiding ecstasy. Mick Jagger may have said it best when he sang, “I just can’t pour my heart out to another living thing…I won’t cry when you say goodbye, I’m all out of tears. I won’t die when you wave goodbye; I’m out of tears.”

But what is love without risk? Perhaps it is merely “like” or “you’re a neat person.” Without risk, love will never say, “I miss you so much I want to cry…. I love you… I miss you…I can’t stand not seeing you tonight.” And without risk, love will never say these words and then sleep with your best friend. You can’t avoid it. Either you take the risk or you don’t.

But financial markets are a little different than life and love. There are similarities, of course. The death of a bull market also arrives like a thief in the night. And the sufferings of investors also resemble the fate of swimmers in the path of rogue waves. But there is one major difference: the investor does not HAVE to remain in the water until the wave approaches. The very same reckless abandon that animates relationships, nurtures passions and, in short, makes life worth living…is the same quality that causes investors to lose a fortune.

There’s no romance on Wall Street folks. There’s no place for reckless abandon. There’s no reason to suffer bereavement for your capital. Participation is purely optional. So when things start looking a little “sketchy,” it’s perfectly okay to back away. It’s okay to cash in a few chips.

It’s also okay to buy an asset that does not trade under the stock symbol, “GS” or “BRK/A.” It’s okay to imagine that things might not go perfectly. In fact, it’s not only okay to imagine adverse outcomes, it’s also okay to plan for them. Mr. Market will not notice if you’re getting intimate with another asset. And even if he did notice, he would not care.

Gold, the ultimate “other asset” has been making a bit of a move lately. We have no idea if this recent move is the start of something new or just a “jiggle,” as Jimmy Rogers would say. What we do know is that gold is nobody’s fool. Like a kind of monetary prenuptial agreement, gold exists to settle the score when things go badly. Gold also exists to settle the score when governments become unfaithful stewards of the currencies they issue.

About two weeks ago, Byron King, editor of Energy and Scarcity, expressed thoughts like these to his subscribers. Byron did not know that the gold rally he anticipated would occur almost instantly. But now that it has, let’s take a closer peek at Byron’s analysis…

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My Favorite “Mistake”
By Byron King

The price of gold has had a solid triple since about 2001, when an ounce would set you back a mere $300 or so. (Remember that? Oh, the good old days!) For the past year or so, however, gold has been stuck, trading in the $900-980 range. It goes up a bit, down a bit.

At this level, gold isn’t overly dramatic. We haven’t seen any really big moves one way or the other. The big moves will happen, eventually, I believe. We just have to be patient.

Why do I believe that gold will soar? Well, we’re still in the early chapters of the overall “gold story.” The plot is still forming, although I believe that all of the main characters are on stage.

We have excessive U.S. government spending. It’s out of control, to all intents and purposes. We have the deepening federal deficit, and associated exploding national debt. We have significant monetary players overseas, like Japan and China and Middle Eastern nations, holding trillions of dollars worth of U.S. bonds and other paper — and getting nervous about it. We have a hollowed-out North American economy that’s turned into what historian Charles Maier calls an “empire of consumption.”

Then we also have the utter incompetence and hubris of upper-level U.S. politicians and policymakers. They’re collectively so out of touch that they don’t even know that they’re out of touch. We have the parallel incompetence of the Big Media, with their overall “infotainment” approach to presenting vital news to the American people.

Where’s the tragic theme? There’s this sense of denial that anything really bad can possibly happen. It’s the monetary equivalent of a Dec. 6 or Sept. 10 kind of thinking. It’s a failure of imagination at the highest levels.

And whatever does happen, there’s this attitude that the U.S. can add complexity to the system and “spend its way” out of anything. Big government? Sure, and let’s make it bigger. (Hey, let’s have the government take over health care while we’re at it.) Stimulus? Go for it. Bail out Wall Street? Of course — aren’t they too big to fail? Cap and trade, and thus cripple the U.S. energy economy? Yep, we’ll just “conserve” more energy and build lots of windmills. Right?

It’s just spend, spend, spend, spend, spend. Or control, control, control, control, control. And bureaucratize, bureaucratize, bureaucratize, bureaucratize, bureaucratize. Modern governance is all about spending money we don’t have on complexity that we, as a society, cannot afford in any sense of the word. And few of the power brokers at the top seem to think that there’s anything wrong with it. They’ll just pass another law, spend some more money.

The tragic part of this drama is that the high and mighty are setting themselves — and the U.S. economy — up for a terrible fall. Sooner or later, with all the spending and new bureaucracy, we’re going to have an implosion and see a collapse in the level of complexity. Those green “notes” that the Federal Reserve prints — with the nice pictures of dead presidents on them — will not be worth nearly what most people believe.

Neither you nor I can do anything to prevent it. (OK, write to your congressman, for all the good it’ll do. Or go to a town hall meeting, for all the good it’ll do.)

The answer, of course, is to protect yourself and your family, and save what you can. When the mighty tumble, be sure not to be standing there in the crash zone.

Joel’s Note: Maybe the government will actually get its spending back on track…reevaluate its addiction to debt…relinquish control over things it neither understands nor can positively affect…

That will be the day to throw your gold out the window. Until then, learn the best five ways to secure a few ounces for yourself with Byron’s Gold Report, right here.

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[Rude Endnote: Speaking of government spending, control and bureaucratization, many of you have already noticed the following post doing the rounds on various social networking sites:

“No one should die because they cannot afford health care, and no one should go broke because they get sick. If you agree, please post this as your status for the rest of the day.”

Hmm…how warm and fuzzy. (We’ll leave aside the obviously flawed implications of the statement, i.e. that, if you are “anti socialized medical care” you are automatically “pro people dying in the streets.”)

Indeed, it does sounds like a nice sentiment, but aren’t we skirting a rather large issue here…as in, who’s going to pay for it? America is broke, remember? Medicare is already broke…Medicaid is broke…Social Security is broke…the entire government system is broke…broke to the tune of $65 trillion in UNfunded liabilities.

So, how to meet promises with payments? Can America keep selling debt abroad? Will Chinese bond buyers, for example, agree to shoulder the cost of American’s healthcare? Not likely. Already the Chinese are growing mighty nervous about the security of their dollar-denominated assets.

Just this week the IMF announced that China signed a deal to buy $50 billion worth of notes from the fund. (For perspective, that’s about one third of what America spends each year on “health conditions related to obesity,” according to Health and Human Services Secretary Kathleen Sebelius.)

The Wall Street Journal explains China’s move away from the dollar: “The notes are denominated in Special Drawing Rights, a quasi-currency issued by the fund and promoted by China as a potential replacement for the dollar as the world’s reserve currency.”

Translation: China is sick and tired of picking up America’s tab. Evidently, other major U.S. creditors feel the same way. India, Brazil and Russia have all pledged to purchase the IMF notes. That’s money that won’t be bidding at U.S. Treasury auctions.

How about confiscating the tax revenues of future generations (more borrowing)? Is it right to spend money these people haven’t even had the chance to earn yet in order to fix today’s problems? Forget about voting on what “your” taxpayer dollars are going towards…they were spent long ago. The debate now is about how much debt to leave the next generation…and the ones after that.

And as for simply printing more money, this ultimately results an inflation tax, which tends to hit those who are already struggling to afford adequate care in the first place.

Yet, despite all this, the largest debtor in the world continues to debate ways to spend more money it doesn’t have…as if this even matters. It’s a moot point, folks. There is no money. There are only politicians telling voters they can have the best care in the world and that everyone else will pay for it for them.

Perhaps people ought to start discussing what they can afford, rather than what they think they deserve.

We’ll be back with the usual weekly wrap tomorrow.

Until then…

Cheers,

Joel Bowman

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

Manhattan, New York

• All aboard the green train! A “boring” railroad company to consider,
• At least Wall Streeters are getting paid, right…right?
• Captain Bernanke whacking holes in the hull and plenty more…

Joel Bowman, reporting from Manhattan, New York City…

Today we pause to administer a collective pat on the back to each and every American taxpayer. Such charitable, compassionate folks we are, donating all that money to Wall Street’s downtrodden bankers.

Just imagine (difficult as may be) what would have transpired had we NOT fronted $175 billion in TARP funds to the likes of Citigroup and Merrill Lynch & Co. . Why, without that much needed emergency funding they may not have been able to pay themselves over $32 billion in bonuses this season. Oh, the horror!

According to a report compiled by New York Attorney General Andrew Cuomo cited in Bloomberg:

“JPMorgan Chase had 1,626 employees who received a bonus of least $1 million last year, more than any other Wall Street firm. Goldman Sachs had 953 employees who received $1 million or more in bonuses, while Citigroup Inc. had 738, Merrill Lynch & Co., 696, and Morgan Stanley, 428. Bank of America Corp. had 172, while Wells Fargo & Co. had 62.”

Meanwhile, back on Main Street, non-bonused Americans are finding the going a little tougher. Companies continue to lay off workers to cut costs and stay in the game. Officially, 6.5 million Joes and Janes have joined the breadline since the beginning of the crisis. And that number grows by the day.

As you might expect, unemployed people don’t buy as many new cars or have as many haircuts as the employed tend to do. It is hardly surprising then that consumer spending, which accounts for 70 percent of the overall economy, shrank more than twice as much as forecast last quarter as credit lines continued to dry up and citizens deposited money in things called “savings accounts.”

If the whole thing weren’t so tragic it would be a comedy. Then again, maybe it really doesn’t matter. As Doug Casey summarized at last week’s Agora Financial conference in Vancouver, “The situation is hopeless…but it’s not serious.”

So, enough of the gloom. In the column below, Byron King talks railcars, dividends and a better way forward. Enjoy…

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Railroad Ties, Utility Poles and a 4.4% Dividend
By Byron King

Railroads are “green.” Who knew? In fact, railroads produce such vastly superior fuel efficiency relative to cars and trucks that any credible effort to increase America’s energy independence must include initiatives to expand the nation’s rail infrastructure.

Koppers Holdings Inc. (KOP: NYSE) is one of the world’s largest suppliers of utility poles and railroad crossties. Sounds boring, I know. But this boring stock might just be on the verge of a much less boring wave of growth.

The modern railroad offers a lot of efficiencies – a train can move one ton of freight an average of 436 miles on a single gallon of fuel. Try to get that kind of mileage in your Prius! Thus, as America endeavors to reduce its dependence on foreign oil, more and more freight will move by energy-efficient rail. And Koppers will sell more railroad ties.

Koppers also manufactures utility poles – another boring industry on the cusp of a potential growth phase. Every alternative energy installation – like wind farms and solar energy fields – require transmission lines to transport electricity to the main grid. So as more alternative power projects pop up, Koppers will sell more utility poles.

But demand for utility poles will also come from existing utilities. The nation’s power-transmission infrastructure is aging ungracefully and in dire need of repair and maintenance. Some of these overhauls will require new utility poles.

In the early 1900s, a German chemist named Heinrich Koppers emigrated to the U.S. He had some ideas about how to build coke ovens for the steel industry, so he traveled to Chicago. There, in 1912, Herr Koppers founded a company to manufacture metallurgical coke and coal tar products.

But Koppers, the chemist, soon realized that he needed more money than he could raise through his own efforts. So in 1914, Koppers approached a Pittsburgh banker and industrialist named Andrew Mellon for a loan. Mellon was impressed with what he saw and bought up all of the Koppers patents. Mellon moved Koppers to Pittsburgh and set him up in business at the then heart of the American steel industry. In fact, the Koppers Co. offices were right down the street from Mellon Bank, so Mr. Mellon could drop in at his leisure and keep an eye on things.

Throughout the 20th century, the Koppers Co. became a world leader in the fields of coke, coal tar and related chemical byproducts. In fact, for many decades, the Mellon banking interests used Koppers Co. as a leading indicator for the general business climate. That is, if Koppers was selling a lot of coke and chemical products, it meant that the economy was strong. When sales weakened, it was a sign of a looming slowdown.

In 1988, Koppers became the target of a takeover effort. The company broke up into a variety of firms, one of which was called KI Holdings Inc. KI Holdings retained many of the old Koppers businesses in basic industry. In 2004, the company recapitalized itself as Koppers Holdings Inc.

Today, Koppers operates 38 facilities in the U.S., United Kingdom, Denmark, Australia, China, the Pacific Rim and South Africa. The company operates two main businesses. One is the Carbon Materials and Chemicals Division. And the other is the Railroad and Utility Products Division.

Through its Carbon Materials and Chemicals business, Koppers distills coal tar into a variety of products. These include carbon pitch, refined tars, creosote, phthalic anhydride and a variety of roofing-grade materials. These products are critical in the production of aluminum and some plastics, as well as in pressure-treating wood. Koppers is the largest distiller of coal tar in North America, Australia, the United Kingdom and Scandinavia.

Through its Railroad and Utility Products business, Koppers is also the largest supplier of railroad crossties in North America, and a significant supplier of utility poles and pilings. The trick for Koppers is that it leverages its creosote business to support its other division in the field of treated wood products. The main customers for Koppers’ products are railroads and utility industries, mostly the electric and telephone companies. Other customers include government entities like highway departments and large engineering and construction firms. Koppers does very little business with the retail customer, so its business is removed from the immediate effects of weak consumer spending.

So far, the Obama Administration is following through on its promises to encourage renewable energy systems, such as solar and wind power sites. But a key problem with these energy systems is that they tend to be far from the existing electrical grid. So any new electrical buildout will have to include a large amount of new transmission capacity. The very foundation – literally – of this electric build-out will be utility poles. Thus, in addition to its existing markets for new and replacement poles, Koppers should see increased demand for poles as the grid expands.

Also in the next few years, more and more freight cargoes will move off the highways and onto the rails. Rising fuel prices, increased highway congestion and deteriorating infrastructure will all but guarantee this. But the U.S. rail system is already heavily burdened just by the existing traffic load. So the railroads of the future will require more track, sidings and maintenance. Again, the literal foundation for this buildout will be railroad ties. This should benefit Koppers.

And Koppers’ relationship with its customers does not stop when the trucks deliver the railroad ties and utility poles. Koppers even offers its customers a way to dispose of old rail ties and utility poles. These wooden products are saturated with creosote and other chemicals. So they are not usually welcome at landfills, and they require special handling during disposal.

But Koppers operates a state-of-the-art cogeneration plant in Pennsylvania that burns creosote-saturated wood products. The plant recovers almost all air emissions and avoids the need to landfill voluminous amounts of old ties and poles. And in the process this cogeneration plant produces enough electric output to service 600 homes (150,000 KW per day).

Finally, on the numbers, Koppers is a profitable, well-run company that pays a nice 3.2% dividend based on the current stock price of $27.75.

Koppers’ share price suffered along with much of the rest of the stock market last fall. From a 12-month high near $50, the stock tumbled to a low of $10 last March. Today, the stock changes hands around $27, or about 14 times estimated 2009 earnings.

Is there a downside from here? Of course, in this stock market, we have seen that bad things can (and do) happen. But, looking over the longer term, Koppers appears to be holding its own in a tough economy. It sells a critical set of goods – poles and ties – to indispensable industries – electric and rail. If any kind of basic industrial companies can navigate this difficult economy of ours, Koppers should be one of them.

Joel’s Note: If you want to learn more about the kind of rock solid investments Byron presents to his readers, we suggest getting your hands on the latest issue of his Outstanding Investments service. For an idea of what to expect, check out Byron’s metals report here.

— Gold Rallies Again: Full Report Here —

From Hulbert’s No 1-Ranked Advisory Letter Over 5 Years, Our Most Shocking Forecast Yet…

GOLD $2,000

“I’m so sure gold will soar higher I’ll even make you a guarantee… plus, I’ll give you five entirely new ways to play the trend…”

“Including one hidden way to snap up gold… for less than one penny per ounce…”

How can that be possible? Give me the next four minutes and I’ll show you how…

—————————————–

[Rude Endnote: Here’s a thoughtful reader mail to close on. This one comes from Karen in Atlanta:

“Apparently Dr. Bernanke agrees with Professor Krugman.

“According to Asia Times, he plans to jumpstart consumer spending with a new Fed plan – have the Fed make $1 trillion in consumer loans directly to high risk borrowers. He’ll securitize them and get AAA ratings with a US government guarantee against default.

“No Escape for Fed“

“As the ship of our financial state continues to sink, instead of running the bilge pumps at maximum speed, Captain Bernake is turning them off while he whacks more holes in the hull. Thanks for pointing the way to the lifeboats.”

Comments, questions and general abuse goes to the address below. We’ll be back on the weekend with your usual wrap-up.

Until then…

Cheers,

Joel Bowman

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

Wall Street, New York

• The energizing opportunity bailout funds will NOT be investing in,
• Helpful hints for Wall bankers looking to repair battered public images,
• And, not a single joke about recently deceased pop stars…

Eric Fry, reporting from the scene of the crime, New York City…

Your California editor returned to New York City yesterday, his old stomping grounds. The place didn’t look much different than the last time he passed through, about three months ago. The sidewalks weren’t very crowded and the restaurants weren’t very full. Maybe the “green shoots” of recovery aren’t as green as advertised.

So let’s turn to the news…

A quick perusal of yesterday’s headlines revealed little news of great importance. Hmmm…let’s see…a Southern governor publicly confessed his sins and sought forgiveness. Wall Street firms publicly denied their sins and launched a massive P.R. campaign.

“Wall Street’s largest trade group has started a campaign to counter the ‘populist’ backlash against bankers,” Bloomberg News reports. “In memos of confidential meetings with top financial executives, the Securities Industry and Financial Markets Association said it began this month the ‘execution phase’ of the operation, which pledges to ‘embrace change’ and accountability.”

To conduct this campaign of “change” and “accountability” Wall Street will toss tens of thousands of dollars at pollsters, P.R. firms and other public-image managers.

A cynical observer might be tempted to deduce, “Oh, that’s nice, first these firms blow up the American banking industry, solely for the sake of enriching themselves, then they funnel a portion of their bailout monies toward P.R. firms, for the sake of repairing their reputations.”

But let’s not yield to cynicism. Instead, let’s step inside Wall Street’s Gucci loafers for a moment.

If you were one of the individuals who’s unbridled greed had helped bring the economy to its knees, wouldn’t you want the public to focus on something else? And if you were one of the folks who’s raw self-interest helped investors lose trillions of dollars and helped workers lose millions of jobs, wouldn’t you want to launch a campaign “against populist overreaction?”

Living a charmed life – financed by taxpayers – isn’t as easy as it seems…especially not when so many folks are struggling. Do you think it’s easy to continue receiving multi-million-dollar paychecks while the economy struggles to digest the poison you fed it?

But this situation brings us to the heart of the problem. Where is the gratitude? Where is the compassion for the tens of thousands of low-level Wall Street employees who have lost their jobs, just so that the executives who remain can resume paying themselves salaries and bonuses they do not deserve?

Wall Street’s new P.R. effort might work, but your editors here at the Rude Awakening would suggest an alternative approach. We would offer a two-part image-recovery plan, free of charge:

1) Fire the P.R. firms.

2) Stop acting like complete jerks.

“The best P.R. comes from doing good,” one professional investor observes, “not from having to manage your image.”

In fairness to SIFMA, the trade organization represents 600 securities firms, brokerages and asset-management companies. The overwhelming majority of these operations conduct themselves with honesty and integrity. The employees they represent usually show up for work sober, work hard for their clients, and rarely kick the dog when they return home from a tough day.

Unfortunately, SIFMA also includes pariahs like Goldman Sachs, Citigroup Inc. and JP Morgan Chase. None of their bailout activities would be such a problem if they did not consume so much of our precious national capital, reputation and most importantly, investment opportunity cost.

When we hand $170 billion to AIG (who, in turn hands billions to Goldman Sachs, UBS and others), we do not invest $170 billion in dynamic capitalistic enterprises that could multiply our return down the road.

When we toss billions of dollars into the Wall Street black hole, the investment expectation is merely to “get our money back” or to “not lose a cent.” What private investor would risk capital with such a grim expectation?

While we here in America pile up massive debts to bail out failing industries, the next generation of leading world economies is busy deploying its wealth in promising endeavors around the globe.

China recently invested $10 billion to help develop offshore oil reserves in Brazil. This seems like a MUCH better investment than buying $10 billion worth of Citigroup preferred stock.

Byron King explains in the column below…

—- Byron King’s “Laughing Gold” Report – FINAL 84 COPIES* —

All those people who laughed at you when you talked up gold…

Wouldn’t you love to throw it back in their face starting this month?

Now’s your chance. You’re looking at the golden opportunity of a generation

One simple move could mean the biggest and best opportunity to get rich this century.

I explain this ten-minute step in a special report available NOW. But you must act soon — only 84 copies remain…Grab Yours Here.

* Number of copies available as of this Rude Awakening’s mailing. Offer limited to first print.

———————————-

Deep, Wet and Brazilian
By Byron King

Offshore areas of the world — especially in deep water — are the key to the world’s energy future. Far out and deep down. That’s where the last great hydrocarbon discoveries remain to be made.

That’s why, in my investment letter, Outstanding Investments, I’ve constructed a kind of end-to-end offshore energy mutual fund – from prospect to pipeline. Each company has a broad skill set. None is just a one-trick pony. Some of the companies overlap in skill sets, and even compete with each other.

A few of my favorite names include Norway’s offshore powerhouse StatoilHydro (STO: NYSE), as well as subsea equipment provider FMC Technologies (FTI: NYSE). Then there’s platform and pipeline builder McDermott Intl. (MDR: NYSE), as well as offshore services provider Superior Energy Services (SPN: NYSE).

Going forward, I’m be looking to recommend other deepwater plays…at the right price, of course. I’m looking for companies that can grab hold of key parts of the growing offshore business, and produce great profits in the coming years. I think you’re going to be astonished at what unfolds.

I recently attended the annual convention of the American Association of Petroleum Geologists (AAPG). (Some guys go to classic car shows; I go to geologist conventions). I’ve been a member of AAPG for 30 years, and it’s always fascinating to spend some time there. The meeting rooms and poster sessions feature reports from the front lines of the search for petroleum, natural gas and other energy resources.

One theme emerged loud and clear from this year’s conference: Deepwater. Most of the major oil discoveries that remain to be found in the world will be offshore, in deep water.

The always-ebullient Brazilian geochemist, Marcio Mello — CEO of Brazil’s HRT Petroleum Co. — wowed the crowd with a discussion of the oil potential of the South Atlantic. “Six of the last ten giant oil discoveries in the world were offshore Brazil,” he pointed out. And then Marcio moved the discussion to the other side of the South Atlantic and gave an eye-popping description of the oil potential of the offshore regions of Namibia.

“The Namibian offshore is analogous to that of Brazil,” Marcio stated, with slides and hard data to back it up. Then he showed his proprietary research into natural offshore oil seeps off Namibia, and the geochemistry that demonstrates immense hydrocarbon potential. “But Namibia,” said Marcio, “is way underexplored. So you can put down a little money for the concessions and get very rich.”

The point for investors is how much of future world energy development will involve subsea systems.

For additional perspective, let’s examine the current structure of the American energy supply. Right now, most of the U.S. energy mix comes from burning coal, natural gas and oil. In fact, according to the U.S. Department of Energy, the U.S. gets 87% of its total energy mix from burning fossil fuels. Another 7% of U.S. energy supply comes from nuclear power. The total is 94%.

That leaves about 6% of the U.S. energy mix to come from so-called “renewable” and alternative sources. And 3% of that 6% is renewable hydropower from unique sources like the Hoover, Grand Coulee and other dams. And we’re not building any more big dams.

Thus, only about 3% of U.S. total energy comes from things that grow, blow or shine. Of that 3%, about half (1.5%) is from “biofuels,” and that’s if you count a company like Weyerhaeuser (WY: NYSE) burning sawdust to run the sawmills.

Finally, there’s a very minor part of the total U.S. energy mix — about 1.5% — that comes from windmills, solar and geothermal. For as much visibility as these things get in the media and pop culture, their energy output is tiny — slightly above statistical noise in the overall national mix.

So just follow the numbers. The “alternative” energy sources are a miniscule component of the current energy mix. That’s after a few good years of significant investment, with lots of political support and plenty of tax breaks.

It will take many years (many decades!) for these energy sources to expand and meet the energy needs of the U.S. And that’s despite whatever the politicians and policymakers wish for in their dreams.

That’s why the U.S. must continue exploring for oil and gas. I cringe when I look at the falling rig counts in the U.S. and around the world. Every well that’s NOT drilled is one less source of hydrocarbon in the years to come, as depletion causes output from current wells to decline…which brings us back to the South Atlantic, one of the world’s greatest petroleum provinces.

Some experts think that the hydrocarbon resources in the pre-salt formations off the Brazilian coast may rival those of Saudi Arabia in magnitude. We’ll see about that. But it’s beyond dispute that Brazil and its energy resources are a complete game-changer for that nation, and the rest of the energy-consuming world. It goes back to basic geology and the history of plate tectonics.

When South America started to pull away from Africa about 140 million years ago, an isolated seaway formed — a proto-Atlantic Ocean — that filled again and again with sequences of limestone, thin shales and, finally, massive salt beds. The processes of petroleum geology worked as advertised in the region. And these processes left utterly eye-popping volumes of petroleum locked in high-quality reservoirs covering vast areas.

The big downside (and it’s big and down, to be sure!) is that all that oil is under a mile or two of South Atlantic seawater, covered by three or four miles of rock and salt beds — it depends where you’re located on the continental shelf and slope.

But that’s why it takes companies with phenomenal technical and managerial skills, plus deep pockets, to play in this great game. The bottom line is that with the right companies working at it, there’s enough oil down there to produce a very big payday, not just for Brazil, but for many of the companies that contribute to the effort.

I’ll discuss at length the new developments offshore Brazil during my talk in Vancouver at the upcoming Investor Symposium, July 21-24. The title of my talk will be Is God Brazilian? So that ought to give you a clue about what I think lies under all that water column and rock down there.

— Breaking Research from The Strategic Short Report —

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—————————————–

[Rude Endnote: Global markets joined in the Wall Street festivities overnight after the Dow stacked on an impressive 178 points to snap its recent string of losses.

Here in Japan, where your editor is enjoying his afternoon tea, the Nikkei 225 rallied 0.8% while Hong Kong’s Hang Seng and China’s CSI 300 rose 1.8 and 0.3% respectively. Down Under, the Aussie All Ordinaries ended the session 1.25% higher.

European stocks are breaking to the upside in early trading today too. France’s CAC 40 was higher by about half of one percent last we checked. London’s FTSE and Germany’s DAX were up around 1% each.

Crude too enjoyed the return of confidence to the market. A barrel of the black stuff goes for a shade over $71 this morning. Not to be outdone, gold leapt another $4 per ounce over the last 24 hours. An ounce of the yellow stuff now fetches $943.

We’ll be back with your usual weekend wrap tomorrow.

Until then…

Cheers,

Joel Bowman

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

Taipei, Taiwan

• Citigroup and GM out, Travelers and Cisco in,
• Should we have seen Government Motors coming long ago?
• One hundred Empire State Buildings worth of pennies and more…

Joel Bowman, reporting from Taipei, Taiwan…

The numbers on your screen might look familiar, but much has changed since the Dow was last where it is now.

Sure, the banks are still broke, people are still loosing jobs, home prices are still falling, manufacturing is still grinding to a halt and factories are still going out of business. And of course the Feds are all still busy “doing something.” But some things have changed.

Two new companies find themselves at home on the Dow Jones Industrial Average, for instance. The Travelers Companies Inc. (TRV) and Cisco Systems Inc. (CSCO) now eat and sleep where General Motors Corp. and Citigroup Inc. (C) used to live. General Motors, as we all know, was forced to move to a smaller, less comfortable crib, closer to public transport lines so it can take the bus to bankruptcy court. Citigroup, meanwhile, will be selling pencils from a cup on a street corner near you… at least until it can raise enough for first-and-last-month rent.

Another thing that changed is the amount of money allocated to fighting the natural tide of the market. At the turn of the year people thought $700 billion was a lot of money to hand over to whatever companies can lose it the fastest. Now the wonks reckon the total bill will come to around $14 trillion, or about what the entire GDP of the country.

But one should never underestimate a politician’s ability to underestimate the cost of something. In March they told us the budget deficit would be about $1.2 trillion. A few months later and that figure had ballooned to $1.8 trillion. Now, $600 billion might not seem like much when it’s someone else’s money, but it sure is a lot when you’re that someone else. And, unfortunately for taxpayers, they are always that someone else. The $600 billion “adjustment,” just for reference, is larger than any TOTAL budget deficit in history.

For those of us who don’t deal in trillions of dollars every other weekday, here’s another way of imagining that amount of money: At 37 million cubic feet of space, the Empire State Building is capable of holding roughly 1.8 trillion pennies. So, just stack one hundred Empire State Buildings and you’re looking at the deficit, one penny at a time.

Change can be a good thing, of course. If the government SAVED 100 Manhattan skyscrapers worth of pennies, for example, that would be a good change. If the economy added half a million jobs per month, instead of losing that many, we would welcome that as a change for the better too. It is positive change we can see – change we don’t have to “believe” in – that we’d really like to see driving the market.

Whether stocks will lose a couple of thousand points from here – as they did in the first few months of the year – or gain a couple of thousand – as they did over the past few – is anyone’s guess.

Plenty of people will make those guesses too, so just for sport, here’s ours: stocks, as a whole, will do both those things, but probably in reverse order. First we’ll see them climb, maybe not all the way out of the muck, but high enough for people to believe that they’ll never fall again. Then, when enough people believe the unbelievable, they will fall, possibly harder and faster than they’ve ever fallen in their life. Then, like a goldfish mistaking his reflection for a brand new friend, people will believe the unbelievable all over again and tell you stocks will never go up.

Of course we could be entirely wrong. (It happened once in 1993 and then once again in the summer of ’98, so it COULD happen again…theoretically.) In any event, we’re certain to end up with more money or more humility. Either one would be nice.

Finally, your regular Rude musings are below. Be sure to check out a couple of wonderful essays on gold and what’s got Chinese so rib-tickled by our resident energy and metals sage, Byron King. Regulars Chris Mayer and Bill Bonner also chime in with their thoughts and Eric lends us a column of yore on the future fate of GM. Enjoy…

—- Byron King’s Breaking Gold Report: 356 Copies Left —-

All those people who laughed at you when you talked up gold…

Wouldn’t you love to throw it back in their face starting this month?

Now’s your chance. You’re looking at the golden opportunity of a generation

One simple move could mean the biggest and best opportunity to get rich this century

I explain this ten-minute step in a special report available NOW. But you must act soon — only 356 copies remain…Grab Yours Here

—————————————–

And the Rest of Your Rude Reading…

Class of ‘09: You’re Screwed!
By Bill Bonner

Last weekend, we journeyed to Boston to attend a college graduation. Thousands of callow scholars were on display. Each was handed his papers…and then marched out of the hockey stadium. To the tune of ‘Pomp & Circumstance,’ wearing a long, red robe, he entered the outside world solemnly…like a patsy joining a poker game.

Major League Debtors, Revisited
By Eric J. Fry

The ranks of BBB- credits are a lot like AAA baseball teams.

Both groups include “players” that aren’t quite Big League material – either because their talents are diminishing or because their talents aren’t yet fully developed…or perhaps, because they never really possessed much talent in the first place.

Sell the Banks, Buy Oil Stocks
By Chris Mayer

It seems Mr. Market believes the financial crisis is behind us, as the financial sector has more than doubled since its March lows. I think Mr. Market is a victim of what investor Bruce Berkowitz has called “premature accumulation.” Compared with bank stocks, there is another group of stocks with a much more compelling story to tell. We’ll get to them below.

When the Chinese Laugh, Prepare to Cry
By Byron King

In the past couple of weeks, many fallen stock market heavyweights have gotten up off the mat. But for my money, most of the fighters in the ring ought to be subject to a “standing eight-count.” I just don’t trust this latest market rise. I don’t see where it’s coming from. Call it a bear-market rally. Call it a dead-cat bounce. Call it your chance to sell into strength. But don’t call it the end of the tough times. We’re in the early rounds of a long-term restructuring of the world’s economic system.

Gold, Gold and More Gold
By Byron King

What’s going on with gold and silver? And more importantly, what’s going to be going on with gold and silver over the next several months?

Gold had a heck of a month in May, rising about 9%. And silver did even better, advancing more than 26%. It’s that silver slingshot effect, in which silver occasionally makes up for the time spent in the shadows of gold. Can gold and silver do it again in June? You surely know that price of gold and silver can go down as well as up. Don’t be shocked at a pullback. But for the medium and long term, precious metals look good.

—————————————–

[Rude Endnote: If you have any comments of suggestions you would like to share with the Rude readership, don’t be shy. The address is below.

We’ll be back with more tomorrow.

Until then…

Cheers,

Joel Bowman

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

P.S. We’ve only got 356 copies of Byron’s Laughing Gold Report left. Over one hundred went out the door last week, so we don’t expect these last ones to hang around for long. If you want one, grab it here.

Pittsburgh, Pennsylvania

• May’s silver slingshot, up 26% and climbing,
• The medium and long-term prospects of that other shiny metal,
• Markets around the world rejoice, “This time it’s different!” and more…

Joel Bowman, reporting from Taipei, Taiwan…

Before we knew what little we now know, we knew between a little and a lot less. It was during this time, when the twin towers stood proud and a man by the name of Greenspan was a god among men, that your editor first journeyed to Washington D.C. in search of adventure and, with a bit of luck, a pebble of knowledge for his meager collection.

Walking alongside the Reflecting Pool, between the shadows of Constitution Gardens and the towering figures of history, we asked our American friends what seemed to us an innocent enough question.

“When do you think the American Empire will collapse?”

(Pause for collective “GASP!”)

We didn’t yet know that it was impolite to question the superiority of a Rome from within the city walls. (And we weren’t at all aware of a psychological condition known as cognitive dissonance – “I know all empires end. I know America is an empire. I believe the American empire will not end.”)

The history of history itself is built on tales of rampaging armies in far off lands, of conquests over virgin islands, of delivering (a new, correct) god to the heathens and of washing the unclean with the sponge of superior culture. And for every victory parade, there lay a fallow field of dead soldiers, marking the end of their unsuccessful campaign; evidence of one defeated empire and the expansion of another.

Despite the inexorable march of history, however, and its faithful tendency toward repetition, people don’t want to believe it will happen again as it always does.But “this time” is never different. Even the delusion that it is so remains the same.

As far as the history of dying empires goes, America has a lot to live up to. But fear not, the nation’s elected officials are on the case as we write to you, making sure history repeats itself. “Yes we can!” they chant.

One of the first orders of business for any leader attempting to destroy his empire is debasement of the currency. (Another step includes stretching the military to a transparent sheath across a region too large for it to manage…but that’s for another column.)

From the denarius of Nero, the groat of King Henry VIII, the Hungarian pengö and the wheelbarrows full of Wiemer Republic Marks, the dollars of “Zim” and the presses of Bernanke, all currencies are as doomed as the power of those who mint and print them.

The United States is debasing its currency. Every empire that has ever done so has collapsed. Some will say “I believe this time is different”…the same way their forefathers did. Others will recognize that it never is. Ever.

Of the many advantages the individual enjoys over the group, the ability to think for himself is surely the greatest. He is nimble where the empire is sluggish; decisive while the empire is confused; and exercises utter, uncompromised control over his domain, where the empire endures mutiny at every crisis or threat of one. And, while their deaths are equally certain, the individual has the chance to pass away rich, while all empires must whither poor.

In the column below, Byron King discusses the old anti-mob store of wealth and looks ahead over its medium and long-term prospects. Please enjoy…

—- Byron King’s Breaking Gold Report: 448 Copies Left —-

All those people who laughed at you when you talked up gold…

Wouldn’t you love to throw it back in their face starting this month?

Now’s your chance. You’re looking at the golden opportunity of a generation

One simple move could mean the biggest and best opportunity to get rich this century

I explain this ten-minute step in a special report available NOW. But you must act soon — only 448 copies remain…Grab Yours Here

—————————————–

Gold, Gold and More Gold
By Byron King

What’s going on with gold and silver? And more importantly, what’s going to be going on with gold and silver over the next several months?

Gold had a heck of a month in May, rising about 9%. And silver did even better, advancing more than 26%. It’s that silver slingshot effect, in which silver occasionally makes up for the time spent in the shadows of gold. Can gold and silver do it again in June? You surely know that price of gold and silver can go down as well as up. Don’t be shocked at a pullback. But for the medium and long term, precious metals look good.

I’ve often referred to owning gold and silver as a form of “insurance.” And now, guess what? According to a recent report from Bloomberg, Northwestern Mutual Life Insurance Co. — the third-largest U.S. life insurer by 2008 sales — has been buying gold. This is the first time in its 152-year history that Northwestern has purchased gold.

According to Northwestern CEO Edward Zore, “Gold just seems to make sense; it’s a store of value.” Then Mr. Zore added, “In the Depression, gold did very, very well.”

According to Bloomberg, Northwestern has accumulated about $400 million in gold. CEO Zore believes that the price of gold could double “or even rise fivefold” if the economy continues to weaken. “The downside risk is limited, but the upside is large,” Zore said. “We have stocks in our portfolio that lost 95%.” But gold “is not going down to $90.”

So here’s a large, sophisticated company like Northwestern Mutual putting gold where its money is. I guess it wants to be around for another 152 years.

Meanwhile, the central banks, money center banks and most politicians of the world (except Germany’s Angela Merkel) HATE monetized gold and silver. Why? Because precious metals require governments to operate in an economy based on hard work and long-term investment, rather than on bailouts and deficit-spending. So there are serious forces out there attempting to manipulate the precious metals back down. Expect it.

But you can’t cheat Hephaestus, god of the forge. So if the metals retreat and share prices pull back for mining companies, use the opportunity to acquire more metal and shares at a discount to the future price. And remember that my basic precious metals recommendation is that you should have 5-10% of your portfolio in physical metal — and TAKE DELIVERY!

I’ll be plenty happy if gold and silver move upward in the short term — say, over the next few months. But if we have to wait for the medium term, say, six-12 months, that’s OK too. And surely, over the long term, a year or more, these metals ought to shine (no pun).

U.S. politicians are spending the country so deep in the hole that the nation will never be able to work and pay its way out. Thus, the monetary stars are aligning toward economic hard times and future inflation. And as we see with Northwestern Mutual above, one investment idea that has historically worked out during hard times and inflation is the precious metals angle.

Along those lines, let’s look at the share price of the old Homestake Mining Co. back in the 1920s and 1930s. Homestake was among the world’s largest gold miners in its day, digging gold from the Black Hills of South Dakota. Due to a dearth of records, many historians use Homestake as a proxy for the entire gold-mining industry in that era.

Between 1929-1935, the Homestake share price rose — along with a significant rise in both earnings AND the dividend. Homestake’s earnings per share (EPS) increased from $4.16 in 1929 to $32.43 in 1935. In other words, the gold miner showed annual compound EPS growth of 41%!

And much of the rise took place in 1930, 1931 and 1932, before Franklin Roosevelt became U.S. president — and seized the nation’s gold, in April-May 1933! But even FDR’s gold seizure didn’t stop the upswing for Homestake. The stock, and its earnings and dividend, kept appreciating and held strong through most of the early years of the New Deal.

That is, the rest of the U.S. business economy suffered from declining earnings during essentially ALL phases of the Great Depression. The overall U.S. economy was awful, with national unemployment rates well over 25% at times. But through it all, the gold mining industry was a hot spot of economic vibrancy.

While we’re looking at the history of gold in the Great Depression, let’s consider what was going on with the banks in the U.S. According to economist John Walter, writing in 2005 in the Economic Quarterly of the Federal Reserve Bank of Richmond, the U.S. went from over 31,000 banks in the mid-1920s to under 15,000 banks by 1934. That is, over HALF of all banks FAILED! In 1933 alone, over 4,000 banks failed — that’s about 80 per week, or 16 per business day.

And back then, a bank failure was almost always a total wipeout for depositors. There was no federal deposit insurance until late 1934, and the initial coverage was just $2,500. Most depositors in those 16,000 failed banks of the 1920s and early 1930s just plain lost everything. There was no relief at all. If you were a depositor, you went down with the ship.

Banks that didn’t fail paid depositors a paltry 1% (or less) in “earned interest” on their savings. Makes you wonder why people kept any money in banks at all. Risk losing it or get paid 1% interest. Not much choice, right? No wonder that a lot of Depression-era people spent the rest of their days saving money in coffee cans in their basement.

All the while, Homestake shareholders collected dividends in the range of 8-10%, plus capital appreciation. The Homestake dividend went from $7.00 in 1920 to an astonishing payout of $56 per share by 1935.

It’s interesting that “hard times” are somehow good for gold miners and gold mining stocks. One explanation I’ve heard is that the after-effects of the 1929 stock market crash caused a sustained contraction of the money supply (thanks to the Federal Reserve), along with a reduction of bank credit.

The result of less credit was that lending just plain froze. (Sound familiar?) Many businesses, households and individuals simply could not obtain credit no matter what their story. And most of the early New Deal programs — “relief,” the Civilian Conservation Corps, the Works Progress Administration and the like — were just transfer payments to otherwise idle individuals. The New Deal may have institutionalized humanitarian government policy toward the unemployed, but it was NOT capital investment.

So with most private capital investment halted during the New Deal, there was a dearth of fundamental capital formation in the economy. The economy couldn’t get traction to move ahead.

Tight credit extended even to governments, and by extension to their fiat currencies. As world trade tightened due to protectionism, public credit evaporated as well. Eventually, investors fled from paper currencies (even U.S. Treasuries). The big players in international finance converted paper currency into the only “money” that was not someone else’s liability — and not subject to counter-party default: gold.

Let me sum up by quoting one of America’s legendary financial geniuses, Bernard Baruch (1870-1965). He said, “Gold has worked down from Alexander’s time… When something holds good for 2,000 years, I do not believe it can be so because of prejudice or mistaken theory.”

Joel’s Note: Did you receive Byron’s Laughing Gold Report? It was released last Friday and is almost sold out already. If you want one, click here. (Unlike greenbacks, we can’t just print more when they’re done, so you’ll have to be nimble.)

— The Strategic Short Report —

New Research Source Reveals…

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Introducing the controversial and little-used “paddle strategy” that once launched the family fortunes of a U.S. President…

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And it now stands behind the top three most profitable market moves in history…

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—————————————–

[Rude Endnote: Just about every major market in the world posted a gain yesterday. In Asia, Japan’s Nikkei 225 was among the best of the lot, finishing the session just over 1% higher. Both Hong Kong’s Hang Seng and the Aussie All Ordinaries were close behind though, up almost a percent each.

Over in Europe the big three were storming home last we checked. London’s FTSE, France’s CAC and Germany’s DAX were all higher by about 2% a few minutes ago.

Oil too is back up to a hair under $70 per barrel while that barbarous relic Lord Keynes whined about all those years ago sits nice and pretty right around $979 per ounce.

We’ll catch you again tomorrow, when our mind is a little clearer and we have something more cohesive to offer.

Until then…

Cheers,

Joel Bowman

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

Pittsburgh, Pennsylvania

• Demanding a “standing eight count” for rising stocks,
• Chinese economics students to Secretary Geithner: “Ha, ha, ha!”
• A worthless dollar washes up on Chinese shores and plenty more…

Joel Bowman, reporting from Taipei, Taiwan…

It’s a rainy old day here in the city of Taipei. Deluge from the surrounding mountains streams down into the valley, prompting traffic jams, sodden sandals and other general inconveniences. But the clouds don’t care. They just keep on raining.

It is relatively easy to forgive the clouds their indifference to human sufferings. One can’t expect to hold a collection of water droplets accountable for malicious intent when an afternoon stroll through the park is ruined. That would be foolish. It would be like blaming the sun for forcing us to live half our lives in the dark.

When it comes to flooding the world with a torrential downpour of fiat currency, however, it is a little harder for the nimbus-like perpetrators to play the “I’m just a hapless little raincloud” defense.

Knowingly debasing the world’s reserve currency – a currency that, when adequately destroyed will wash away businesses large and small, drown the potential savings of multiple future generations and, perhaps, even an empire itself – is a crime far more severe than just raining on the proverbial parade.

Some folks just shrug when they learn that their government is actively eroding their currency. “Not much I can do about it,” they say.

Others become furious, organize marches and rant in (increasingly less) obscure finance publications.

If you are a Chinese student studying economics, on the other hand, you laugh. And if the treasury secretary of the United States tells you that your dollar-denominated assets are “very safe,” well, you laugh very hard…then you continue your business of buying up the world’s resources. You stockpile precious metals at record rates and patiently await the day when the dollar levies break and the only thing that floats is a dragon boat made of gold.

Byron King takes a closer look at what you might consider doing when the leaders of tomorrow’s China laugh in our face…

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When the Chinese Laugh, Prepare to Cry
By Byron King

In the past couple of weeks, many fallen stock market heavyweights have gotten up off the mat. But for my money, most of the fighters in the ring ought to be subject to a “standing eight-count.” I just don’t trust this latest market rise. I don’t see where it’s coming from. Call it a bear-market rally. Call it a dead-cat bounce. Call it your chance to sell into strength. But don’t call it the end of the tough times. We’re in the early rounds of a long-term restructuring of the world’s economic system.

Let me change my metaphors from boxing to building. So are there any architects to this long-term restructuring? For as much as some people think they’re designing the next big thing for the 21st Century, this new economic edifice looks more and more like just a pile of stones. Make that “expensive” stones. Nobody’s in charge. Everybody is just tossing whatever they have onto the heap. If it stays there, great. If it rolls off, too bad.

That is, the recent stock market rise strikes me as just a 2009-version of old fashioned “irrational exuberance.” The market is rising because it looks like there is going to be massive government spending on so-called “stimulus.”

Yep, a few trillion dollars of government spending will stimulate something. We’ll pave potholes, paint bridges, replace 100-year old sewer pipes. We’ll build new government buildings. Then we’ll hire more government employees to sit at desks inside of those glistening national assets. And we’ll make lots of transfer payments to displaced workers (600,000 or so new ones per month, of late) for unemployment comp, medical assistance, and food stamps – one in every 10 Americans, by the way. But is this a basis for long term world economic recovery? Where’s the growth?

Really, where IS the growth? I’m missing it. U.S. Steel, for example, just suspended a gigantic, $1 billion project to upgrade its coke works in Clairton, Penna. Coke is an essential ingredient in manufacturing basic steel. “We cannot speculate as to when conditions will improve enough to allow work to resume,” the company stated in a press release. Wow. They won’t even speculate?

Stopping work on this major capital project follows on the heels of U.S. Steel laying off about 7,000 unionized and salaried employees in recent months. As the Pittsburgh Post-Gazette editorialized, “For longtime Pittsburghers, it’s back to the future. … It’s the 1980s all over again.”

Meanwhile, aluminum maker Alcoa is revisiting its strategy of making primary metal in the U.S. This is due to a proposed change in federal law to raise taxes on overseas earnings. More specifically, Congress wants to end the deferred payment of taxes on profits earned overseas. So to help pay for its pyramids (sorry, “stimulus”), Congress wants to tax businesses immediately in the U.S. on money earned in foreign jurisdictions. Alcoa is not pleased.

“Let’s step back a bit and take a look at what we need to make aluminum,” said Alcoa spokesman Kevin Lowery in a recent interview with the Pittsburgh Tribune-Review. “We need the raw material bauxite, which is not found here (in the U.S.). We also need competitively priced power, like we have in Iceland. And we want to be close to our markets,” about half of which are not in the U.S. according to Alcoa sales data.

In other words, the “Aluminum Company of America” could just as easily become the “Aluminum Company of Iceland.” The new company could sever its U.S. ties and run its overseas business activities without paying any U.S. taxes at all. Or, I should add, employing any U.S. workers.

So net-net, the “stimulus” could stimulate at least one major U.S. manufacturer (or perhaps MANY major U.S. manufacturers) to divest their foreign operations and set them up as stand-alone foreign entities. That’s hardly the pathway to future national prosperity.

If that’s not bad enough, here’s another of my worries.

Where’s the stimulus money going to come from? Is the U.S. going to borrow it? From whom? The Chinese? I doubt it. They have other ideas. And if the U.S. does borrow it, how much interest can the country afford to pay on its national debt? We’re nearly at the point where paying interest on the debt has become the new “business” of America. As opposed to, say, making steel or aluminum.

Today, the U.S. policy approach is to spend, spend, spend. The federal government believes it needs to pump as much stimulus into the economy as possible. Thus, the U.S. is adopting a policy of — I believe the term is — “helicopter money.” This is merely a reference to a past comment by Federal Reserve Chairman Ben Bernanke about dropping dollars from helicopters.

But our largest foreign creditors are increasingly wary of this helicopter money…so much so that a roomful of Chinese students burst into laugher a few days ago when Treasury Secretary Geithner declared, “Chinese [dollar-denominated] assets are very safe.”

“His answer drew loud laughter from his student audience,” Reuter News reported, “reflecting skepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves…”

So they’re laughing in Beijing, eh? And it’s “loud laughter,” no less. That is, they’re laughing at definitive statement by one of the highest executive officials of the U.S. government. That’s a disgrace, in my view. And as an investor, you better sit up and take notice. What’s going on here?

Before I get into the monetary view, and the related OI investment angle, I can’t get away from this “loud laughter” issue. Let’s look at the neurological basis for laughter.

I know a guy who’s a neurosurgeon of national rank. Really, if you need brain surgery, this is the go-to guy. Well, once we were talking about why people laugh. As near as I recall — I’m paraphrasing — this was his explanation:

“There’s a lot of research going on about why people laugh. There’s much we don’t know. But basically, researchers believe people laugh because they see or hear something that travels up two or more very different neurological pathways inside the brain. When the different signals get to the top, they close at a neuron junction that has never been activated before. It’s almost like there’s a ‘spark’ at that junction, and that causes you to laugh. Laughing is a neuro-physiological first response to things that don’t seem to make sense.”

So now that we know a little bit (very little, to be sure) about the neurological basis for laughter, why were the Chinese students laughing at the U.S. Treasury Secretary? Was it “a neuro-physiological first response to things that don’t seem to make sense?” Really, Secretary Geithner was in Beijing on official business, not to do a stand-up act. He’s not Jay Leno.

Were the Chinese laughing because what Secretary Geithner was telling them just did not make sense? Was it outside of the Chinese worldview, based on everything else they see happening in the U.S.?

In other words, Mr. Geithner was creating an entirely new category of neurological junctions inside the heads of a roomful of Chinese students. That should scare the daylights out of you!

Evidently, the Chinese anticipate inflation in the U.S. They anticipate a decline in the dollar. They are deeply concerned that their U.S. dollar holding will lose substantial value over time. That’s drilled into their heads. In fact, the anticipation of loss in the value of U.S. dollar assets is so ingrained among the Chinese that they are ready to LAUGH at a high-ranking U.S. official who tells them otherwise.

They’re LAUGHING! And this is in China, where courtesy and custom almost always dictate politeness and respect toward an invited and honored guest. This ought to be a “Stop the presses!” kind of moment.

But the scene of Chinese laughing at the U.S. Treasury Secretary fits in with many other aspects of Chinese behavior. The Chinese national strategy is to go around the world and secure energy and other natural resources for the balance of the 21st century.

The Chinese are buying up oil and natural gas resources, as you surely know. They’re making deals with the Venezuelans and Iranians for energy development. They’re making deals in Iraq for energy. They’re financing the development of Brazil’s deep offshore oil deposits.

And the Chinese are locking up other natural resources. They’re making deals from Australia to Brazil over coal and iron ore resources. They’re building copper mines from Congo to Afghanistan. They’ve secured 97% (no typo, 97%) of the world’s known deposits of rare earths. And the Chinese are buying up entire forests in South America.

Meanwhile, China is the world’s largest gold-producing nation. Yet China’s net exports of gold are zero. China imports far more gold than it exports. China keeps its gold at home. China is building its own national gold reserve, and monetizing it by buying and allocating much of its mine production of yellow metal to the state bank. China trusts the U.S. dollar about as far as Tim Geithner can throw the Great Wall.

The Chinese are laughing at us. Is the U.S. even listening? What should the prudent investor do? Well, if nothing else, Buy some gold and silver.

Joel’s Note: If you missed Byron’s brand new Gold Report, issued at 5pm last Friday, you can still grab a copy. Last we checked there were still a couple of hundred left, although, unlike U.S. dollars, we can’t simply print more when these ones run out. (Due to the nature of the companies Byron recommends to his readers, his service has a strict member cap.) If you’re interested, simply follow this “laughing gold” link.

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[Rude Endnote: Markets are down a smidge in early trading in the U.S. after indexes across most of the rest of the globe dipped overnight.

Here in Asia, Hong Kong’s Hang Seng fell only 0.4% while Japan’s Nikkei 225 slid 0.75%. After a promising start to the week (“promise” being the operative word there) the Aussie All Ordinaries fell over 2% today.

Over in Europe and London’s FTSE continues to trend lower. The beleaguered index was off almost half a percent last we checked. Germany’s DAX was relatively unchanged while France’s CAC had gained about 0.25%.

The big story continues to be in the commodities ring where gold and oil are consolidating higher prices after their steadily building surge. Gold clawed back $8 overnight after falling back into the $960s late yesterday. An ounce of the precious metal goes for just over $973 as we write. Oil too is back up to just over $67 per barrel after some downward pressure overnight.

We’re a bit late this morning…so we’ll cut it…right…there.

Until tomorrow…

Cheers,

Joel Bowman

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

Pittsburgh, Pennsylvania

• Markets bounce back and China ramps up commodity inhalation,
• Could the dollar become the world’s next “barbarous relic?”
• A graphic display of the greenback’s value collapse, gold rockets ahead of Byron’s Miserable Rich Gold Report (5pm today) and plenty more…

Eric Fry, reporting from Laguna Beach, California…

Hey Rude readers, can you see the chart below? The Chinese can see it to…and that may be a big part of the reason why the gold price keeps marching steadily higher.

The Chinese can see that U.S. dollars – like all the rest of the world’s paper currencies – tend to lose value over time…lots of value. The Chinese can also see that the current crop of American leaders is implementing policies that will likely accelerate the dollar’s decline.

American politicians, Federal Reserve appointees and Treasury officials are united in their efforts to counteract the forces of recession. Their weapon of choice: dollar debasement. From behind the ramparts of New Era acronyms like “TARP” and New Era euphemisms like “quantitative easing,” the Fed and its comrades-in-arms hurl trillions of dollars of currency and credit toward the enemy…hoping to scare it into retreat.

So far, the enemy seems unfazed. Recession continues to advance, even though the battlefield is littered with Private “Benjamins.” Therein lies the problem for the U.S. economy. Even if the Fed manages to repel the forces of recession for a while, the cost to our beloved dollar could be incalculable. In other words, we might win this particular battle, but we are likely to lose the war. The more dollars the Fed catapults into the banking system, the greater the risk that hyper-inflation will ensue.

Several high-ranking Chinese officials fear such an outcome…and they are not afraid to say so. In mid-February, Zhou Xiaochuan, the Governor of China’s central bank wondered aloud, “Is it time for China to consider using its reserves somewhere else, instead of concentrating too much on the United States?”

One month later, Premier Wen Jiabao remarked, “I am a little bit worried. I request the US to maintain its good credit, to honor its promise and to guarantee the safety of China’s assets.” A few days prior to this statement, Luo Ping of China’s Banking Regulatory Commission offered a less delicate version of the premier’s remark: “Once you start issuing $1 to $2 trillion [of Treasury bonds], we know that the dollar is going to depreciate. So we hate you guys, but there is nothing much we can do.”

Nothing much, perhaps…but something, nevertheless. The Chinese can diversify a portion of their reserves into gold. And that’s exactly what they appear to be doing. Even a modest re-allocation to gold could produce a meaningful rise in the gold price…and that’s without including growing demand from the rest of the world’s dollar-phobes.

In today’s edition of the Rude Awakening, Byron King, our resident expert on gold and other commodities, explains why the Chinese might accelerate their gold purchase over the coming months.

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Why is China Buying Gold?
By Byron King

Remember the old expression, “I wouldn’t do that for all the tea in China.” People used to associate China with tea. Well, now it’s time to associate China with gold, and a lot of it. Because the Chinese recently announced that they control over 33.89 million ounces of gold for monetary purposes. That’s an increase of 75% in Chinese gold holdings over the past six years.

This kiloton of Chinese gold makes the Middle Kingdom the world’s sixth largest holder of the yellow metal. The U.S. — courtesy of President Roosevelt’s gold confiscation in 1933 – tops this list of the world’s largest gold holders, followed by Germany, the IMF, France and Italy.

How did the Chinese accumulate so much gold? China purchased it over the past six years through its State Administration of Foreign Exchange (SAFE). SAFE is quite distinct from the People’s Bank of China (PBOC). The SAFE purchases meant that the gold did not appear as part of China’s officially reported monetary reserve figures.

The Chinese gold purchases, evidently, were part of a slow and steady buying program between 2003 and the present. It makes you wonder what the Chinese were thinking back in 2003. I happen to know, courtesy of an acquaintance at the Naval War College, that the Chinese were quietly forecasting that the U.S. would destroy its dollar by going to war in Iraq.

At any rate, SAFE bought all of the gold from domestic Chinese suppliers, so the overall impact was minimal on the international gold markets. Now the Chinese gold holdings have been transferred from the SAFE books to the PBOC. Hence, the official announcement. And here’s what REALLY matters. China is monetizing its gold!

This SAFE-to-PBOC transfer marks a profound decision by Chinese government leaders. Obviously, the Chinese government has bought gold over the past six years. But the Chinese have been engaged in an internal debate over whether to add the gold holdings to the official Chinese monetary reserves. That is, if the gold was not “monetary,” then it was just another non-monetary investment commodity like iron ore or copper or petroleum.

But now, with the announcement by the Chinese Central Bank, it appears that the debate is resolved. The gold has been added to Chinese monetary reserves. This action by China is part and parcel of an under-the-radar global effort to rehabilitate gold as a monetary reserve asset.

Gold has not been a factor in global trade and currency exchange since the late 1960s. But there’s a powerful movement afoot in the world to reestablish gold as part of an international monetary system. It’s because the U.S. dollar has been so badly mismanaged over the decades. No, you won’t read about it in your local newspaper, or even in the standard, mainstream business media. But that movement is out there. It’s happening.

At the same time, for many decades, the U.S. establishment has pooh-poohed the “gold effort.” U.S. policymakers, politicians, bankers and academics were collectively smug in their empirical certainty that, as Lord Keynes once noted, “Gold is a barbarous relic.” Apparently, the Chinese don’t agree. Not anymore. Indeed, the Chinese may well be thinking that the U.S. dollar is the real “barbarous relic.”

So now the Chinese are primed to begin using gold as a monetary asset. What’s the practical impact? I expect to see central banks worldwide start to add gold to their monetary reserves. The floodgates are opening. The PBOC and other central banks from here to Timbuktu are going to become net purchasers of gold in the years ahead. And people who own physical gold, as well as shares in well-managed mining companies, will benefit greatly.

One important commentator on gold prices is Peter Munk, founder of Barrick Gold, the world’s largest gold-producing firm. Recently from Switzerland, Munk remarked, “I have to think [gold prices] are going to be significantly higher than last year, just like last year was higher than the year before.”

According to Munk, the recent injection by the Federal Reserve of new currency into the money supply is an “enormous, enormous inflationary factor” for the dollar. This will make gold and silver “more and more desirable.” In addition, “Gold has got a very strong and stable support right now as long as we have this enormous uncertainty out there. And I think this uncertainty will probably last for a while, because I don’t see any major catalyst that can turn this around.”

Finally, Munk said, “Every year in the last three years, as the world becomes less and less secure in terms of normal investments and people lose faith and confidence in bonds, stocks, secured debt instruments, people turn to gold. It automatically attracts people in direct proportion to their fear, and that is fear of losing their money.”

Founded by Munk in 1983, Barrick Gold is among the world’s largest gold miners. Barrick has pursued growth through judicious expansion and a continuing process of acquisitions. “Barrick has grown,” said Munk, “primarily through an aggressive acquisition program in the last 25 years. So of course, we’d be on the lookout all the time for strategic acquisitions or mergers…The major gold deposits throughout the world in the main have already been found, so it’s getting more and more difficult, and that’s why you see global gold production heading downward, despite higher prices and increased spending on production.”

The bottom line in all of this is that you should be sure to pad your portfolio with gold and silver, both the physical metals and shares in quality mining companies. America’s political leaders have promised to fight recession by debasing the dollar. That may be the one and only political promise you can ever really trust.

Joel’s Note: Byron’s “miserably rich” Gold Report is out at 5pm this afternoon (Friday, 29). To ensure you are on the mailing list, click right here.

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[Rude Endnote: Many of the world’s markets marched in step with the U.S. overnight after the Dow climbed over 100 points in yesterday’s session. Whether Wall Street leads them to the land of milk and honey or off the side of a cliff remains to be seen. We’d suggest an emergency parachute, just in case.

Here in Asia, Japan’s Nikkei 225 rose by 1.75% while China’s CSI 300 and Hong Kong’s Hang Seng finished 1.5% and 1.6% respectively. The Aussie All Ordinaries capped off a decent week, also closing out Friday’s session up 1.6%.

European markets too were headed higher last we checked. London’s FTSE, France’s CAC and Germany’s DAX were all up around 1.5% just a few moments ago.

Over in the commodity pits, it’s starting to look like 2007 all over again. Crude jumped to over $66 per barrel overnight while gold leapt $14 per ounce to $977.

Wait. Did we mention Byron’s “Miserable Rich” Gold Report above? Did we mention it will be out at 5pm today and that you can sign up for it here? We did? Okay then, we won’t harp on it any longer.

Catch you tomorrow.

Until then…

Cheers,

Joel Bowman

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

Laguna Beach, California

• Eric Fry, Bill Bonner and Jim Grant on the “recovery that wasn’t,”
• Taking another look at gold before it’s too late to grab a cheap ounce,
• The Great Depression vs. The Great Recession in numbers, and plenty more…

Eric Fry, reporting from Laguna Beach, California…

Eighty-two steps back…one step forward. Welcome to the Brave New World of American governmental finance.

Last fall, without so much as a grunt from an elected official, the former Treasury Secretary of the United States doled out $170 billion dollars to the incompetents at AIG. Yesterday, the current President of the United States announced triumphantly that his new budget would “save” $17 billion, thanks to the elimination of 121 federal programs.

In other words, ten steps back…one step forward.

But the story gets worse. Obama’s new budget will also include numerous “non-saving” items that, taken together, will produce a projected budget deficit in 2010 of $1.38 trillion – a figure that is 82 times great than the $17 billion savings that Obama triumphantly proclaimed.

And let’s not forget that real-world estimates of the federal deficit would add several hundred billion dollars to the government’s optimistic $1.38 trillion forecast. Nor should we forget that during the last few months the government has added trillions – literally, trillions – of dollars of direct and implied guarantees to the liability side of its balance sheet.

In this context, $17 billion of savings doesn’t look like savings at all; it simply looks like a tiny dollop of credit that the government has not yet inhaled.

Here’s a news flash folks: Money you do NOT borrow does not constitute “savings.” But this elementary fact does not prevent politicians, professional investors or journalists from utilizing the vernacular of thrift to describe one of the most reckless credit binges in the history of mankind.

Raw arithmetic does not seem to play a role in the national budgetary debate. These days, as long as you’ve got a good speech writer and a compliant populace, you can convert any act of fiscal idiocy into an icon of fiscal prudence.

But let the record state that untapped credit lines are not the same thing as savings. And let the record further state that nations do not amass wealth by amassing debt. Yet, amassing debt is exactly the strategy that Americans have pursued for many years…and it is also exactly the strategy that the current Administration is pursing in the pursuit of resurgent prosperity.

The strategy won’t work…But it might be good for gold bugs.

“What marks our Great Recession for greatness is neither the loss of jobs nor the shrinkage in GDP,” declares James Grant, editor of Grant’s Interest Rate Observer, “but the immensity of the federal response to those afflictions. The scale of the government’s intervention is much more than unprecedented. Before 2008, it was unimaginable. We have reached the ‘kitchen sink’ phase of US counter-cyclical policy.”

“To try to exorcise the Great Depression, President Herbert Hoover deployed fiscal and monetary stimulus equivalent to 8.3% of gross domestic product,” says Grant. “To banish the demons of 2008-9, successive administrations have spent, or encouraged to printed, the equivalent to 28.9% of GDP. A macroeconomist from Mars, judging by these data alone, would never guess how much more severe was that depression than this recession. The decline in real GDP from August 1929 to March 1933 amounted to 27%; that from December 2007 to date, just 1.8%… so for a slump 1/15 as severe as the Depression, our 21st-century economy doctors administered a course of treatment more than three times as costly.”

What does this all mean? Well, it probably means a couple of things, at least. The first thing it means is that the government will debase the currency for the sake of reviving the economy. A weakening dollar seems like one of the very best trades of the next three to five years. The second thing that the government’s outsized response means is that America’s national finances will be a disaster for years to come. No one can borrow $1 trillion without somehow paying a price… not even the richest country on the planet.

The stock market rally of the last two months implies that the economy is recovering. But that’s a lie. The economy is not recovering, no matter how many times CNBC’s Larry Kudlow argues to the contrary. The economy is contracting…in almost every industry and in almost every way. Recovery takes time.

“The deceptions of the Bubble Epoque, 2001-2007, were enormous,” writes Bill Bonner, editor of the Daily Reckoning. “The correction has been enormous too. And here are the same economists who mismanaged the economy, offering advice to governments who mismanaged their regulatory roles, about how to keep mismanaged companies alive, so that bondholders who mismanaged their investments might not go broke. That this will result in more misery is a foregone conclusion…The measure of that misery, if our iron law holds, is how adamantly governments fight to keep their mismanagement going.

“Just looking at the numbers, the toll will be monstrous,” Bonner continues. “All over the world, interest rates have been cut and budgets padded. France’s deficit is running at 8% of GDP. England is running a deficit of more than 12% of GDP. And the U.S. is mobilizing as if it had been attacked by Martians. On the credit side, the feds have cut rates more than ever before, for a monetary boost equivalent to 18% of GDP, according to Grant. As to spending, $13 trillion has been pledged…an amount equivalent to a full year’s annual output of the United States of America. This response is 3 times more (adjusted to today’s dollars) than the U.S. spent to fight WWII. It is 12 times more (relative to GDP) than the total committed to fight the Great Depression.”

Maybe this massive bet will payoff. But in times past, whenever governments have “gone all in,” currency debasement was sure to follow…and a gold rally was never far behind. In today’s column, our resident geologist, Byron King, explores history’s golden suggestion in more depth. Please enjoy and, as usual, forward any comments to the address at the bottom of the page…

—Byron King’s Energy & Scarcity Investor —

I’m seeking a few brave souls with the “stones” to become…

“Miserable Rich!”

Do what I’m about to show you — before Friday, May 29 — and you could make so much money, you’ll demand I apologize for “spoiling” you with so much success.

Impossible? Don’t take my word for it. See For Yourself Right Here…

—————————————–

Got Gold?
By Byron King

In 2001, gold traded as low as $250 per ounce. Then, over time, gold rose slowly, but steadily, to just over $1,000 per ounce early in 2008. Gold pulled back and hovered in the range of $800-900 for much of 2008 and then climbed back up to the $1,000 mark again in February 2009. Despite a pullback in March, it looks like gold wants to break the $1,000 mark again…and stay there. Indeed, gold may see $2,000, even $3,000, before your two-year subscription to Outstanding Investments runs its course.

But before we get to that, let’s explore a few of the driving forces behind gold’s once and future position as the ultimate hedge against government-sponsored fiscal idiocy.

Record Levels of Demand

Along with the generally rising price trend, demand for physical gold is heading toward record levels this year. Worldwide mine output is almost entirely locked up. Smelting and refining operations are running flat out, if they can get their raw materials. Mints around the world, from the South Africa Mint near Johannesburg to the U.S. Mint at West Point, are booked solid.

The increase in demand for gold is remarkable. It’s occurring during a period of relative strength in the dollar, and when investment in other types of commodities has all but collapsed. Then again, the decline in other commodities has spurred the rise in gold prices, as well as a rising price for silver. That is, much of the world’s gold and silver comes as a byproduct of copper mining. Much more of the world’s silver is a byproduct of mining lead and zinc. But copper, lead and zinc operations have all scaled back dramatically in the face of the worldwide recession and credit freeze. So there is less gold and silver coming from the mouths of the mines.

Demand From Exchange-Traded Funds

The increase in gold exchange-traded funds (ETFs) like streetTRACKS Gold (GLD: NYSE) has also been dramatic. The ETFs advertise that they buy physical gold and silver, to reflect a 1-for-1 investment of funds for metal. This is not entirely true, in that ETF holdings of physical metal are almost surely less than the stated amounts, just due to the difficulty of securing metal from the refineries.

Still, ETF holdings are rapidly approaching half of the world’s annual mine supply. According to a recent estimate by Citigroup, “If ETF inflows continue at current rates, investments will be 1,900 tonnes in 2011, at an implied price of $1,300 per ounce.” Based on public statements by ETF managers, the business model is to get to 100% full backing of all ETF financial assets with physical metals.

Investors Seek Relative Safety

In the current environment of massive government spending worldwide, many savvy investors and institutions see a fearsome, systemic threat to the broad financial markets. This drive to find relative safety is part of the movement to acquire and hoard physical gold and silver. Thus, the demand for coins and bars should hold steady or increase, and “safe-haven demand” will support higher prices – potentially much higher prices – for precious metals.

It’s fair to say, however, that the bullish trend in gold and silver has crowded the trading pits. So any investor in precious metals has to understand that signs of stability, particularly a return of market confidence, will almost certainly cause a quick pullback in gold and silver prices. But in my view, any period of weakness is likely to be short term. There is just too much future inflation already baked into the world’s monetary pie.

The Man From Barrick Gold

One important commentator on gold prices is Peter Munk, founder and CEO of Barrick Gold, the world’s largest gold-producing firm. Recently from Switzerland, Munk expressed optimism about gold prices. “I have to think [gold prices] are going to be significantly higher than last year, just like last year was higher than the year before,” Munk told Reuters News Service.

According to Munk, the recent injection by the Federal Reserve of new currency into the money supply is an “enormous, enormous inflationary factor” for the dollar. This will make gold and silver “more and more desirable.” In addition, “Gold has got a very strong and stable support right now as long as we have this enormous uncertainty out there. And I think this uncertainty will probably last for a while, because I don’t see any major catalyst that can turn this around.”

Gold Attracts People in Proportion to Their Fear

Finally, Munk said, “Every year in the last three years as the world becomes less and less secure in terms of normal investments and people lose faith and confidence in bonds, stocks, secured debt instruments, people turn to gold. It automatically attracts people in direct proportion to their fear, and that is fear of losing their money.”

Founded by Munk in 1983, Barrick Gold is among the world’s largest gold miners. Barrick has pursued growth through judicious expansion and a continuing process of acquisitions. “Barrick has grown,” said Munk, “primarily through an aggressive acquisition program in the last 25 years. So of course, we’d be on the lookout all the time for strategic acquisitions or mergers…The major gold deposits throughout the world in the main have already been found, so it’s getting more and more difficult, and that’s why you see global gold production heading downward, despite higher prices and increased spending on production.”

According to Munk, Barrick is unlikely to diversify further into base metals. But Barrick will likely recover larger amounts of copper as it mines for more gold. “It is inevitable that [Barrick's] copper production will grow,” he said. “If the world straightens itself out and we resume growth and expansion – and I don’t think we will, by the way, not on the short term – then copper is a wonderfully profitable base metal to mine.”

The bottom line in all of this is that you should be sure to pad your portfolio with gold and silver, both the physical metals and shares in quality mining companies. The future is bright for gold and silver.

Joel’s Note: Yesterday we mentioned Byron’s premium service, the Energy & Scarcity Investor. But what you may or may not know, is that Byron is also the mind behind Outstanding Investments, Hulbert’s #1 ranked advisory letter over a five year period.

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[Rude Endnote: Markets in Europe and Asia shrugged off yesterday’s Wall Street stumble with most major indexes gaining overnight.

Despite the Dow ending the day down 1.2% and the S&P 500 finishing behind by 1.3%, Asian markets continued a strong week’s performance with Hong Kong’s Hang Seng and Japan’s Nikkei 225 closing higher by 1 and 0.5% respectively. The Aussies narrowly escaped dipping into the red. The All Ordinaries there closed up 0.1%.

European markets continue to steam along, too. Germany’s DAX was leading the major indexes there, up around 2.4% last we checked. London’s FTSE and France’s CAC weren’t far behind, higher b y 1.3 and 1.9% respectively.

Commodities too hold gains cinched earlier this week with crude hovering around $57.55 per barrel and gold weighing in at $916 per ounce.

We hope you enjoy the final trading day as this hectic week winds down. We’ll be back tomorrow with your usual weekend wrap-up. In the meantime, why not drop us a line anytime at the address below.

Until next time…

Cheers,

Joel Bowman

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

Pittsburgh, Pennsylvania

• Following a rare “known known” in the climate change debate,
• A venture capitalist, a satellite engineer and a steel company exec walk into a bar,
• Trust nobody, question everything and be sure to offend someone…

Joel Bowman, reporting from Taipei, Taiwan…

Economists, climatologists, swine flu-ologists; on a long enough timeline, everyone gets their time in the sun. After all, we humans are pattern-seeking creatures, often preferring a crack-up theory to no theory at all.

As a species, we’ll listen to just about anyone prattle on about just about any subject. If they can manage to build a few letters around their name – say, Dr. or MBA or Rev. – we are trained to take their word as gospel. Daring to stray from the flock, to question the logic of the professing logician, is tantamount to treason, with punishments for the skeptic ranging from an innocuous look askance to social ostracism to eternal damnation of the soul.

Not all MBAs are idiots, of course, just as not all doctors are quacks or all reverends panhandling shysters. In fact, a handful of these men and women are doing admirable work each and every day…just don’t take their word for it, at least not as your only source.

We touch on the faith issue – faith in money, healthcare, omnipotence, etc. – only because today’s column wades none too carefully into the waters of a similarly controversial subject: climatology. Many of you will have taken it as an article of faith that the earth is warming and that mom’s computer and dad’s frequent flyer miles are to blame. Others point to solar flares, flatulent cows or temperamental volcanoes for the rising temperatures. And still others maintain that there is no global warming to speak of at all and that, in fact, the earth has been in a cooling phase since before the turn of the millennium.

Whatever your conviction, there is one aspect of the global warming debate that cannot be ignored: planetary temperature moderation is on the world government’s “to do” list, whether you are for or against it. From D.C. to Sydney, your elected (and non-elected) officials are pouring tax dollars into combating “global warming,” be it bona fide fact or junk science fiction.

Our (questionable) suggestion with regards to this issue is to simply concentrate on the only “known known;” in other words, to follow the money that is, as we type, funneling into the clean energy industry. In the column below, our resident energy and scarcity enthusiast, Byron King, sits down with three gentlemen who make knowing where the money is going their business.

Please enjoy and send any comments to the address at the bottom of this page…

—Byron King’s Energy & Scarcity Investor —

I’m seeking a few brave souls with the “stones” to become…

“Miserable Rich!”

Do what I’m about to show you — before Friday, May 29 — and you could make so much money, you’ll demand I apologize for “spoiling” you with so much success.

Impossible? Don’t take my word for it. See For Yourself Right Here…

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Clean, Rhymes with Green
By Byron King

There’s lots of money to be made in the “clean energy” sector…Maybe more so now than ever before. My confidence in the investment potential of renewable energy gained some interesting corroboration the other day.

I had lunch with a “brain trust,” of sorts. Participants included a retired executive from an aerospace company. This guy helped design and build many of the reconnaissance satellites that the U.S. has launched. There was a senior executive from a large steel company. There was a venture capitalist who made his first $500 million in the software industry, and who now has much of that wealth spread around in biotech and nanotech startups. And then there was me.

If you’re into lunches where you’d rather listen than eat, then this was the lunch for you.

According to the satellite builder, the dominant elements of the political and media culture are “completely in the tank” when it comes to believing in the dangers of “climate change.” It’s not as if climate change is demonstrably true, he pointed out. There are valid scientific data from both sides of the climate change issue, and many valid data points in between. But according to the satellite builder – some of whose satellites were built to track climate change — “For at least ten years, if you have not been promoting the dangers of climate change then you have not been receiving government grants. So the research community is following the money.”

Thus, the research literature is coming out strongly in favor of “doing something” about climate change. And policy-makers are using this research literature to justify doing something about climate change, even if the something that they are doing does not make any scientific or economic sense.

According to the steel executive, the climate change issue has spurred what amounts to “a pathological hatred” of carbon-based energy systems. “It doesn’t have to make practical sense,” says this source. “It doesn’t even have to work with economics. It just has to support a policy to utterly transform the nation’s energy system. The people making policy now have a crusader’s mentality. So the new policy makers want to promote radical change in energy policy. They’re going to jam it down the throat of the economy.”

According to the steel executive, the steel industry expects to see inflation-adjusted, baseline energy prices triple or quadruple within ten years. “Whether the government taxes carbon-based energy at the source, or whether they pass ‘cap-and-trade’ legislation, it’s going to cost us. So we’ll pay. Of course, we’ll pass along the new costs to the steel buyers. If demand goes down, we’ll close facilities. Then the TV cameras will show up at the plant gates to watch us shut the doors and click the padlocks. And we’ll get called bad names by the people who never much liked us in the first place.”

The venture capitalist chimed in with some thoughts. “If the feds are going to spend billions on stimulus, then they ought to direct some of that money to help fund promising research. How about some money to pay for every fossil-fuel power plant in the country to siphon off some of its CO2? Then run the CO2 through a facility to grow algae to make biofuels.”

“We’d be killing about four birds with one stone,” explained the venture capitalist. “We’d be taking down CO2 emissions. Not much, maybe, but some. We’d be helping an embryonic industry that can be competitive in coming years. Heck, turning algae into fuel is easy. The basic part is just high school chemistry. So we’d be creating a new supply source for the liquid fuels industry. And we’d be able to point to at least one success story where people can agree that we all did something right.”

Then the venture capitalist added that one of his startups is “working on coal-eating bugs.” He explained that “There’s a lot of coal buried so deep, or under other conditions that we can’t mine it. That coal will never get out. So why not put bugs down in the deep seams, and let them eat the coal? Then we can harvest the gases that come out the back end of the bugs, and use that as feedstock for other things.”

At one point, one of the lunch participants turned to the silent person at the table, who was busy taking it all in and making a few discrete notes. Then came the dreaded question, “Well Byron, what do YOU think?”

I focused my comments on geothermal development. I pointed out that for all the anti-carbon sentiment out there, the most under-appreciated, “clean and green” energy source is geothermal. There appears to be strong support for geothermal development via tax incentives and other, policy-based standards. Combine this with the growing social focus on clean, renewable energy sources.

Right now, 24 states have renewable portfolio standards (RPS) for electricity production. And Congress is leaning towards setting a national standard of 20% to 25% RPS power production by 2025. We’re at the point where a utility like California’s Pacific Gas and Electric is so desperate for “clean” energy that they’re contracting with a privately-owned company to build a satellite to harvest solar energy from space, and “beam” it back to earth.

Many of the geothermal companies that are out there now are in relatively advanced stages of development. But the problem during the past year or so has been lack of access to capital. In other words, lack of capital is the strongest headwind to progress.

I’ve recommended five geothermal companies to the subscribers of Energy and Scarcity…and I still like all five of these companies. They are all finding steam. They all have power purchase agreements in place. And they are all about to become players within the “clean green” energy space.

No matter what problems might still befall the U.S. economy, I would expect many geothermal companies to thrive. They are simply in the right place at right time.

Joel’s Note: As Byron mentions above, members of his Energy & Scarcity Investor are right now sitting atop a potential green energy goldmine. Obviously we can’t undercut Mr. King’s paid subscribers by giving these names away gratis, but we can offer you this report Byron whipped up for us, including a special offer to get your name on his mailing list. Interested parties can click here to learn more.

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[Rude Endnote: Woo hoo! Stress test results are back and only half the 19 banks don’t have enough money. Champagne, anyone?

Markets in the U.S. toasted the dubious results yesterday with the Dow and S&P 500 gaining 1.2 and 1.7% respectively.

Measures across Asia and Europe jumped aboard the rally train too overnight. Japan’s Nikkei 225 was about the best of them. The index, though still some 30,000 points below its all time high, added a hefty 4.55% overnight to the mid-9,000s. Hong Kong’s Hang Seng and the Aussie All Ordinaries finished strongly too, up 2.3 and 1.9% respectively by the close.

Over in Europe, optimism is spreading quicker than pig pandemic panic. Last we checked the poms were leading the charge with London’s FTSE was up 2.7%. France and Germany were not far behind, both up about 2%.

Over in the commodities pits, gold and crude both rocketed overnight. A barrel of the light sweet stuff goes for nearly $58 this morning, up another buck sixty overnight. Not to be outdone, an ounce of the heavy yellow stuff added another $13 and now goes for $923.

That’s all from us today. Remember to send any feisty comments to the address below and tune in again tomorrow for more Rude insights.

Until then…

Cheers,

Joel Bowman

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