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« Gold Prices Update 14th June 2010 | Main | Is the US Dollar Overbought? »

Why Won’t You Die, Damn it!

Gold Coins 13 June 2010.jpg

By David Galland, Managing Director, Casey Research

Back when I had more time, I would occasionally play Oblivion, a video game. A game so addictive, it’s been known to contribute to flunking out of colleges and the failure of marriages.

When persevering in a sword fight, your computerized opponents were prone to angrily muttering the phrase “Why won’t you die, damn it!”

That phrase pops to mind as I watch the global stock market continue to get hammered, as gold continues to battle the headwinds with impressive tenacity.

So why won’t the damn crisis just die – and with it, gold?

It’s not my intention to rehash the details of the events leading so many economies to this challenging place. Instead, I’ll cut right to the chase by stating my firm opinion that the reason this crisis is so persistent – why it won’t die anytime soon, and not without a lot of thrashing about – has to do with the debt at its core.

Earlier today, I was trying to explain the situation in terms appropriate to my son’s 13-year-old mind. I put it something like this…

Imagine if you made $12,000 a year working as a counter clerk at the local pizza parlor. Then imagine you had foolishly run up $12,000 in credit card debt, the proceeds of which you had frittered away on consumables that contribute in no substantive way to creating future wealth.

Now, imagine someone was foolish enough to continue lending you money, so that you were able to spend approximately 40% over the amount you earned – or $16,800 in total, some percentage of which was the interest you were paying on your overhanging credit card debt.

Given that set-up, I asked, how could you possibly pay off your debt?

“Get a better job?” He responded.

A good answer, I thought. 

But stepping out of the metaphor to the actual players in this drama, the indebted nation-states, how do they get the equivalent of a “better job?” Which is to say, raise revenue?

Only one way, really. And that is to raise taxes. But taxes can only be raised so far before they hit a wall beyond which people simply won’t, or can’t, pay them. And raising taxes by a sufficient amount to count, in the teeth of an epic downturn, will only further hobble the economy.

For the time being, thanks to all sorts of machinations, the U.S. Treasury is finding lenders willing to buy its debt and keep things afloat.

But now jump back to the pizza counter help and imagine what would happen to his or her finances if (a) the foolish lenders wised up and refused to keep trading good money in exchange for highly suspect IOUs backed by nothing… while simultaneously, (b) the credit card company bumped the interest rate on the debt outstanding from 3% to 10%?

In a nutshell, this is the current set-up of things. While the specifics will vary depending on whether it is the flag of Greece, Spain, Portugal, the UK, the U.S., Japan, etc., which flies over the home turf, the fundamental realities of this being a debt crisis are immutable.

And, as the EU is now learning, intractable. Which is to say, the only way that this crisis will die is if the debt can be reduced to a manageable level.

Given the sheer scale of the debt problem, all the easy ways for that reduction to occur have long ago packed up and left town.

At this point, any real solution will likely involve all of the following:

1) Bond investors being wiped out, or at least suffering serious losses. Tough luck, a non-bond investor might be tempted to think. But before you do, make sure you checked the prospectuses of your money market funds and the paper being held in great piles in the financial institutions where you currently park your money.

2) Inflation. Why pay back $1.00, when you can pay back 50 cents?

3)A wholesale canceling of contracts. Okay, so you thought you were going to collect Social Security in your declining years – think again. And that nice government pension? Oops.

4) Higher taxes across the board. Congress is getting ready to quadruple the federal tax on oil. And the imposition of a VAT in the U.S. is a near certainty, albeit with all manner of politically convenient but ineffective provisions to make it look like the Democrats aren’t breaking their pledge to not raise taxes on the middle class.

5) Ultimately, defaults on sovereign paper. Like the indebted pizza jockey, once it begins to be hard to find lenders, and those that you can find are only willing to lend at much steeper rate, all that is left to you is to borrow enough gas to drive down to the nearest office of Dewey, Cheatem & Howe and start the process to declare bankruptcy.

In other words, this crisis is not going to go quietly to its dirt nap. Instead, the end will almost certainly be akin to a Viking funeral with the political equivalent of rape followed by a raging fire on a sinking ship. Riots in the street and a serious degradation in the quality of life of the majority of the citizenry are all but inevitable, followed by a sea change in the political landscape.

Then, and only then, can the world get back to the business of forgetting the lessons learned in order to repeat the cycle all over again.

As for gold, the fact that it has refused to die as the world’s only reliable form of money over the last seven millennia should give you the confidence to include it in your portfolio at today’s purportedly elevated levels. 

Jeff Clark, the editor of Casey’s Gold and Resource Report, has been saying it for years: Buy physical gold and silver. And if you want even greater gains, invest in solid, undervalued gold producers that can provide leverage of up to 4:1 to gold itself. Read more in our report, here.

Have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

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Reader Comments (7)

Déjà vu!

June 13, 2010 | Unregistered CommenterAndrei

With most of the current governments responsible for their keynesian economics indebtedness . I can not understand why they have not woken up yet. look at our PM in australia he thinks by going from a $13 Billion surplus to borrowing $58 billion putting us in a debt will some how make us stronger ,give me a break.

June 13, 2010 | Unregistered CommenterNigelHarrsion

Gentlemen, I've been struggling with what to do with my IRA at Edward adviser is anti-gold and ignorant about the mining it in, take the penalty & pay taxes, put the remaining dough into physical metal which I store myself (I already have a good position in self-stored physical)...or roll it over into a precious-metal IRA...where the metal is stored in an allocated account 1000 miles away, and subject to potential confiscation and all manner of shenanigans...or roll it over to an IRA-custodian that specializes in resource companies with a strong background in the mining sector...I'm going with the last choice...QUESTION: In your opinion, what are the best solid, under-valued gold miners to include in a portfolio? As always, your newsletter has been a great source of information (not to forget humor!)...thanks...Snakeman

June 13, 2010 | Unregistered CommenterSnakeman


Can you stay with Edward Jones but change your advisor to someone in their organisation who is more in tune with the way you think? It would save the hassle of moving, taxes, etc.

June 13, 2010 | Unregistered CommenterGold Prices


It appears to us that most governments are playing follow the leader in terms of using debt to gain popularity and try and hang on to their seats in parliament.

Norway is debt free and has a very high standard of living, lets hope that future politicians can use their model for success.

June 13, 2010 | Unregistered CommenterGold Prices

Norway: yes, but they have lots of oil to sell and for themselves.

The point here is the same as the other newsletters I read - you have to produce a product that people, at home AND outside your borders, will buy. That is the only way to fairly, without manipulation, raise the standard of living in your country, and to maintain a certain standard of life.

So in a nutshell, try to look at countries that are resource-rich, but aren't willing to degrade their currency/print gobs of money and go into debt - that is a start ... unfortunately, it is a tough find these days.

I am in Canada, and while it isn't (apparently) as 'bad' here as it is in the States, I fear the 'contagion' of what is happening world wide will hit us whether we like it or not ...

Heck, this week was a good start - our central bank (Bank of Canada) actually raised the prime rate, while other countries are scared $hitless to do the same.

If the bank decides to keep at it, we may have a chance at softening the blow of what is coming. However, I am sure it will upset a lot of Canadians, but I am also sure it will really piss off our neighbours to the south.

Another thing that our gov't did that I think was a good start was forcing higher down payments on home purchases. The critics were up in arms claiming that home sales would falter - NAY-BOB - they just kept going up, but this time, bank lending is slightly more responsible.

My $0.02.

GLTA gold longs ....

June 14, 2010 | Unregistered CommenterTJ


Just something for you to consider. As a former pension consultant, I would say you're on the right track by going with stock vs. bullion or coins in a retirement plan, assuming you have some holdings of physical metal outside the IRA. And that's coming from someone who was part of the group that arranged for the first trust company custodial holdings of hard assets, coins, stamps, diamonds, etc. within IRAs back in 1979-80.

Why not coins or bars in an IRA? Having some metal in there is okay, but it's not the ideal place. You want to generate income in an IRA to take advantage of the tax deferral. Compounding is your very good friend. Let it work for you.

But this brings us back to an earlier discussion. Most mining stocks don't pay a dividend and those that do don't pay a very substantial one. So, how do you invest in mining stocks in your IRA and still generate income? Sell covered calls and put on debit spreads.

They give you a way to play gold/silver in a retirement account and still generate income.

Given that you might want to be a bit more conservative in an IRA and because the mid-tier and senior producers and royalty companies are the ones that have options trading on them, I'd stick with those names.

GG, AUY, SLW, MFN, RGLD, NXG. The ETF GDX works okay too, as does the double gold ETF DGP if you prefer to trade gold itself. The doubling makes it perform more like a mining stock, giving you some leverage, but without any company risk.

Why fight your broker? I also used to be a broker. Most are lazy, ignorant salesmen whose job is to accumulate assets and then troll for commissions. Cut 'em off. Trade for yourself through an outfit like Interactive Brokers. You don't pay the big commissions and it's easy to rollover the IRA to a new broker.

Last thought. Even taking a conservative approach, it's fairly easy to to rack up gains of 15% a so a year. That doubles your money in about 5 years. Not bad.

Hope this helps.

June 14, 2010 | Unregistered Commenterfallingman

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