2004 Issues #1 to #16
2005 Issues #17 to #58
59th issue 9 January 2006
60th issue 27 February 2006
Buy this essay and others in Jim's new book Being Sovereign.
The Indomitus Report
15 May 2006
"US Sen. Judd Gregg (R NH) is urging his home state to give Real ID a try, saying its needed to keep terrorists and ilelgal aliens from entering the country. According to the Manchester Union Leader, Gregg argues that New Hampshire residents will find it difficult to get on airplanes or enter federal buildings if New Hampshire doesn't embrace Real ID."
The available criticisms for the idiocy spewed by the filthy Senator Gregg range from the practical to the ideological. On the practical side, it is pretty easy to get around his foolish ideas.
For access to Federal spaces, use a Federally issued identity paper, such as a passport. For access to other spaces, a state-issued identity paper is sufficient. Now, in 2006, the USA passport has an electronic chip inside the back cover. So, some Americans would be reluctant to get the new passport, just as they are rationally reluctant to have their state issue an ear tag driver license.
But, the electronic passport is mostly just a paper passport. It has the same sort of stuff up front. The data page contains all the data that is on the chip. The only thing the chip has that the data page has not is a digital photo that theoretically can be used to pass through certain lanes of the airport security faster. The digital photo is read off the passport's chip and compared to your own face in a facial recognition software system and if you match up, you go on.
But, the key workaround here is: what happens if the chip is damaged? Well, nothing. The passport does not need to be replaced, according to USA State Department rules because the data page inside the front cover has all the same info.
So, don't worry about growing a beard or wearing make-up or having your passport chip read surreptitiously by an identity thief. None of these digital photo problems arise if the chip is damaged.
What could happen to the chip to damage it? Well, if someone were careless enough to, say, place the passport on a hard surface such as a work table, open the passport to its back cover and, oh, say, smash that cover repeatedly with a hammer just as hard as possible, that would certainly damage the chip enough to make it unreadable. One uses the subjunctive tense in such considerations advisedly, since it is merely hypothetical. One imagines that if one's passport were run over by a car or truck a few times, that would also do the trick. So, the satisfaction of setting the passport up in a gun range so that the chip might be shot through with a .308 caliber bullet is pleonastic. As few as thirty seconds in a microwave oven would likely be enough to render the chip non-working without setting the passport paper on fire, but a hammer seems like the most practical tool.
How do you respond if someone in a nasty uniform asks you what happened to your passport? Well, you've been in an accident, right? At some time in your life, something happened that was accidental. Might have involved a bicycle or a car. Maybe you stumbled or lost your footing. "I was in an accident. My passport was damaged." These are both true statements. If someone makes a mistaken inference, how is that your fault?
As a practical matter, these identity papers are utter crap. There is no value to them for nationalist security, there is no way to prevent terrorists from lawfully obtaining perfectly good identity papers, or forging adequate facsimiles, and there is no way to use them to keep illegal aliens out of the country. Judd Gregg is obviously a liar, and a poor one. Illegal aliens do not enter the country at border crossings, so their lack of Real ID is irrelevant. The terrorists who got access to airplanes on 11 September 2001 were all equipped with plane tickets, proper identity papers, and some even went through careful wanding procedures, all to no meaningful avail.
On the ideological side, Senator Gregg is obviously some sort of filthy nationalist socialist traitor to the constitution he swore an oath to uphold. The New Hampshire state senator John Barnes is evidently from the same strain of vermin. Barnes is the senator who proposed replacing the NH house's bill preventing implementation of the Real ID with language calling for it to be studied. As if there were anything about the Real ID that needed to be studied. As if the moral premise that Americans should have a national identity paper that functions as an internal passport required more than a moment's study.
John Barnes among his other legislative accomplishments has a sort of bill of attainder retiring a state vanity plate from circulation to honor the state resident who used to have that vanity plate. Presumably the honor is like having an athlete's jersey number retired. But, as a bill of attainder it is wholly inappropriate for any legislature.
Barnes and Gregg are the kind of sick, twisted, perverts who should be drummed out of politics. Perhaps the Free State Project, now that its happy home is in New Hampshire, will target them for replacement. These are also the sort of sick fascistic scum that the world would likely be better off without, and there are more than a few sharpshooters in New Hampshire. So, ideological purity seems likely to be upheld, if not in the short run then perhaps soon enough.
Acts of rebellion need not stop with passport chip smashing. Driver licenses have had magnetic strips on the back. These would be easily abraded by sandpaper or disrupted with a bit of microwave energy or a fairly powerful magnet. Indeed, one of my siblings does a lot of work outdoors, and his wallet gets a lot of dirt and grit in it, so his credit cards quickly lose their magnetic stripe. The cards still work, though, with diligent key punching by cashiers. So would driver licenses.
Then there is the practical question of getting a driver license in the first place. There is no machine to prevent your vehicle from starting if your driver license is expired. So, why bother to renew it?
You need a valid driver license if you are going to write checks, but why write checks? The free market money systems available at sites like FreeMarketMoney.com, Cambist.net, and such allow you to spend e-gold and other online currencies to get funds sent by check to wherever you please. So, you don't need a checkbook. You can get a debit card from bestgoldcard.com or the like and use it at ATMs and point of sale locations worldwide.
Acts of identity rebellion can be very powerful. If you don't use identity papers, your identity cannot be stolen. After all, the identity paper isn't you, it is a representation of you or a strawman. The thing about men of straw is, they burn quite readily. So, drop your driver license in the fireplace.
Of course, that might make your next traffic stop a bit more complex. There are alternatives available. World Service issues driver certificates and several free ports I've visited do, as well. It is quite easy to make your own with materials from any office supply store. And, of course, if you have nothing to present that's valid, why not observe the traffic laws more closely? It might even prove to be safer.
You cannot get insurance for your vehicle without a valid driver license? Sure you can. Insurance in most states is on the vehicle, not the driver. Simply work with a friend or a company to buy the car rather than having it in your name. Not all your friends are going to be without driver licenses. Moreover, what business do you have owning property licensed and registered and taxed by the state if you are against the state? Shouldn't you reflect on the moral position of having no such property in your name? Why pay rent to the state in the form of property taxes? If you cannot own property allodially, perhaps you shouldn't own property in that jurisdiction.
Now it is time for a few predictions. The Real ID will fail to stop terrorism and fail to limit illegal immigration. It will provoke rebellion. In the next five years, several dozen police officers and many checkpoints are going to be shot by disgruntled Americans sick of having internal passports. It is regrettable that people take jobs which require them to do beastly things like demanding "papers please" and no more than they deserve if they are killed for doing such stupid things. The resulting crackdowns are going to foment further acts of insurrection and desperation.
The idea that the police officers and transportation security agents are "only doing their jobs" or are "just following orders" is irrelevant. They have a moral duty not to do things which are immoral. Demanding "papers please" is immoral. The defense that they were only doing their jobs didn't work for the Nazis at Nuremburg, and it shouldn't work here, either.
The Real ID program is scary stuff. Its objective is just the same as the objective of tattooing a number on the forearms of inmates of concentration camps in Nazi Germany. "The Real ID is when they tattoo a number on your forearm." Or a bar code on your forehead. The Real ID program establishes ownership of the population of the USA by the government of the USA which is hocked to its eyebrows to the banking cartel. Which means that, as a practical matter, when the bankers want to collect and the tax revenues aren't there, the bankers want slaves.
Don't be deceived. The National Guard proved its merit in New Orleans, calmly confiscating guns in door to door searches. Your brothers, your sons, your daughters, your cousins were in nationalist guard units that confiscated guns, right there on national television, right there in the Garden District of New Orleans - a place where homeowners clearly had need of firearms to defend their property just as much as those in the French Quarter or the Ninth Ward.
Shudder when you read that the National Guard has been sent to patrol the borders. A militarized border that is strong enough to keep people out, is strong enough to keep people in. That's the American border with Mexico, right now.
Free Market Money
"To the Moon, Alice! To the Moon!"
Where is gold going? Doug Casey says that this time gold isn't just going through the roof, but to the Moon.
It passed the $500 per ounce value in December, the $600 per ounce value in April, $700 in May, and seemed on Friday the 12th to have cut through any conceivable overhead resistance at $710 with barely a backward glance. What's going on?
Gold is certainly going up against the USA dollar. Another way of looking at the same relationship is that the dollar is dropping in value against gold. The dollar is also dropping much more broadly, against silver, against platinum, palladium, copper, nickel, zinc, aluminium - everything that American coins are made of or have ever been made of. Moreover, the dollar is dropping against other currencies and a well-known basket of currencies called the dollar index.
Why? Well, the obvious answer is that since about 1997 the Government Printing Office has been printing dollars at an increasingly furious pace while the Federal Reserve has been unleashing liquidity by any and all means. Current Fed chairman Ben Bernanke is perhaps best known for his quip prior to Y2K that any liquidity crisis would be met by printing money by the container load and dropping it over major cities from helicopters. Helicopter Money Ben is in charge, and hyperinflation is here.
So, is gold rising just in dollars? No. In fact, gold is rising against all major currencies. This fact suggests two things are going on. First, all the major currencies of the world are inflating. Few of them are inflating as rapidly and dangerously as the dollar. Second, demand for gold is rising while supplies are unable to keep pace.
The 1944 Bretton Woods agreement tying all world currencies to the dollar and the dollar to gold was abrogated in 1971, unilaterally by the United States repudiating its promise to redeem dollars for gold at any price. Of course, even in 1944 the idea of cooperative inflating was understood among the central bankers. As long as no nation was terribly out of line in inflating too slowly nor too rapidly, the bankers would continue to amass wealth through the hidden tax of inflation and the sheep would continue to bear up under the shearing.
Gold, on the other hand, is an excellent hedge against inflation. Silver is, too. As the gold price rises, people seek more of it because they perceive a problem with inflation. Silver, because it is more affordable, becomes the hedge for people of modest means.
Significant inflation is not only a problem in the dollar. The euro has clearly been inflating, and West Africans in France on fixed incomes have been aggressive in spreading the word of their discontent through activities such as riots and bonfires of automobiles. While the riots may be suppressed, the underlying inflation has not been, and perhaps represents a secular change in how central bankers plan to operate.
(It may be that the current hyperinflation is planned to ring in a world central bank with a one world currency as "the only solution" to economic distress being caused by the central bankers. Indeed, it may be that, rather than the war in Iraq causing high oil prices and a dramatically rising debt which needs to be monetized through inflation, that the inflation has to be excused through a deliberate war policy in a region where war would be likely to generate high oil prices. Central bankers are a shifty lot, and have never been seen to shirk from the massacre of hundreds of thousands for any available gain.)
So, where will it go? There were a few days in May when I felt it might stabilize for a bit at $710. If you look back at 1980, there were six days when the price of gold closed between $709 and $717. Indeed, the price zoomed up to $725 per ounce on Friday at the London afternoon fix, but closed in New York at $710.50. But, in early morning trading on 15 May there has been a recovery to $720. So, whatever respite the price might have taken at $710 has been brief.
Demand won't slow until people stop perceiving inflation as a problem with their portfolio. If inflation is a problem, then it makes little sense to be in dollars, dollar denominated certificates of deposit or other "savings" and not a lot more sense to be in dollar denominated stocks. Rather, one wants to be in gold or in gold-denominated stocks as we find at PVCSE.com and dBourse.com. Nothing is finer than earning dividends in gold with a stock priced in gold while the irritating problem of inflation is someone else's worry.
Of course this sensible policy isn't going to appeal to everyone, but the gold price of the Dow as of Friday's close was just above 16 ounces of gold to buy the Dow Jones Industrial Average. Our expectation here at The Indomitus Report is that this price will hit a value of less than 3 ounces before gold is overpriced and the Dow sees another secular bull market.
What about supply? If there are huge gold mines about to open up and flood the market with plentiful gold, it would be good to know about it. Happily for those of us long on gold just now, there aren't. Gold is supply trapped.
Part of the context of the supply trap is that peak in January 1980 followed by about 19 years of lower prices. Sure, there were some rallies which we now see were bear market rallies. But the price declined on a trend from 1980 to 1999 before finding its bottom. So, for a generation, there was not much point to getting into gold exploration. Geologists were needed in other fields, and the market was not in metals mining. A generation of geologists retired, and not all of them were replaced.
Another part of this context was the particularly low prices from 1996 through 2002. Nobody explores for gold when the price is below $350 per ounce. Starting in 2003, it became obvious that gold would reach profitable price levels soon, and exploration began again in earnest. But, one does not take a major new discovery to gold on the street in less than a few years time. You cannot even expect to re-open an existing mine in less than 18 months.
One of the reasons is permits. Governments all over the world have their teeth in the mining industry because it cannot run very far. Mines are set in the ground, and are easy targets for taxation. Few people in most countries are involved in mining, so "severance taxes" can be quite high without upsetting many voters. Moreover, environmental issues have come to the fore especially since 1980, and permits involve a lot more tests and studies on environmental impacts. Running through the red tape may take five years or more - some mines are never authorized to go into production.
New supplies are coming, but there are other problems. God has seen fit to bless some of the most politically unstable regions of the world with enormous deposits of gold. Russia, South Africa, Indonesia, Congo, and Bolivia come to mind as having large deposits of gold and plenty of turmoil in recent years. While political risk is as nothing compared to technical risk in evaluating mining company prospects, once the gold has been found the only remaining problem is political. Turning gold in the ground into gold in the market (and thus having new supply make any change in the price) depends on having a stable business environment. Most new gold mines simply are not where stability is available.
Naturally, such things are worked out over time. Bolivia's current problems with its arch-socialist madman Evo Morales are unlikely to last any longer than any other Bolivian government. Nor is it a foregone conclusion that Bolivia would be one country for the rest of this century. Indonesia's problems may motivate that country to split into many new countries, as we've discussed in previous issues. Congo, Russia, and South Africa have been moving toward greater political stability, and Canada, the USA, and Australia are widely regarded as stable. But, the market isn't interested in promises of gold three years from now.
All markets are composed of willing buyers and willing sellers. The buyers want gold now, the sellers don't have all that much - even with 87 metric tonnes "dishoarded" by central banks in recent months - so the price is rising. New supply is unlikely, in my view, to be an impediment to the price for at least two more years. By the end of 2008, every existing mine is going to be going full bore to produce gold while the price is high; every mine that was closed in the 1990s should have been re-opened; every major discovery that was made since January 2003 is going to be nearing production or in actual production. So, supply is going to be available to quench the thirsty demand by then.
Where should we expect to see the price go? My oldest guess is $6400 per ounce. My current thinking is beyond $5000 per ounce, probably at least $8500 and possibly beyond $10K.
The value $8500 was arrived at some years ago when I considered that the dollar of 2000 had about the value of the dime of 1970. A number of actual measurements supported this observation. For example, there was the 1971 model year Lincoln Crowne Victoria LTD luxury sedan which sold for around $2800 and the same vehicle in its 2001 model year incarnation which sold for $28,000 or more. Forecasting a crisis thirty years on from 1980 would give a peak price about ten times as high. On 21 January 1980 the London afternoon fix was $850. That same day the April 1980 delivery gold futures contract price reached $895.
So, our ten times model gives us a price of $8500 per ounce at the peak, possibly $8950. Another similar analysis is to look at the price increase from 1965 to 1980. The base price was $35 per ounce by government decree, and was supported with considerable gold sales by the "London gold pool" of the 1960s. GATA.org has detailed similar machinations in the 1996 to 2003 period, and subsequently, suggesting a price fixing scheme at least involving central banks. I gather that Barrick and JP Morgan Chase have defended the allegations against them in a private suit brought by the Blanchard Companies in New Orleans by asserting that their restraint of trade had official government sanction (and should, in their view, be protected by the sovereign immunity of the government!). So, a similar pattern of attempted (and failed) price fixing exists.
The base price in 1999 at the nadir seems to be $252.80 per ounce. The change from $35 to $850 is 24.29 times the base value. So, 24.29 * 252.80 gives us a value of $6140.51. If we use the futures index price of $895 per ounce, we get a factor of 25.57 for the change, and $6464.10 for the new peak.
This range of values from $6140 to $8500 is quite narrow as astronomers measure things. They are not only within the same order of magnitude, but they are related by a factor of 1.38. In astronomy we were taught to regard 11 and 99 as the same number, since they are the same order of magnitude - things in the universe are quite spread out once you get beyond Earth orbit (something humans have neglected to do since 1972!) so it makes a certain kind of sense. With the two values so close together, it seemed like I might have some idea of where things were going - especially as the two methods for estimation were not identical.
More recently, however, I was reminded of an exceptionally embarrassing moment in my first year of business school. I was expected to perform statistical analysis on a large number of economic factors from recent history (1965 to 1985) and give a five minute presentation on the economic factors driving the price of oil. The exercise boiled down to what, if any, advice would one give to Big Oil companies in Houston about how to predict the price of oil in coming decades. (Readers may recall the price of oil per barrel was fairly low in 1986.)
In my presentation, I pointed out that the only factor in the economy which had any meaningful predictive value was the rate of interest. Nothing else even came close. So, if one knew where interest rates were going, one could anticipate the direction of the price of oil.
My instructor used my presentation as an opportunity to illustrate how exceptionally silly my comment was, perhaps to stave off some similar conclusions by the other forty members of our required class. He noted that nobody but the Federal Reserve can predict interest rates. In a stunning moment of clarity, I realized that interest rates are the key to predicting a great deal of information in the economy, so being able to set interest rates is a significant power. (Indeed, I would rate it up there with the issue power of money in establishing whether we'll have free enterprise or a command economy, and, thus, whether we have a civilization or chaos.)
So, the price of gold? It'll be whatever the central bankers choose to make it - they have plenty of metric tonnes of gold to sell if they want it lower. It'll be significantly determined by the coming high interest rates which are going to be alleged to be vital to recovering from inflation, just as they were in the late 1970s. (Curious, then, that there were two oil price shocks in 1973 and 1979, masking the monetary inflation of the day. Hmmmm.)
Of course, the central bankers pretend they aren't focused on gold. But gold and silver remain the only form of money that central bankers don't directly control. Their policies influence the prices of everything, but the market still has its say.
And, in spite of their enormous power, or because of it, central bankers remain fallible. They have no source of omniscience and no greater ability to hire talent than anyone else. The experiences of Weimar Germany, Austria, the Republic of China, South Vietnam, and Yugoslavia, to take a handful of examples from the 20th Century alone, suggest that central bankers err. They tend to err by creating hyperinflation rather than other problems (though the Great Depression stands as an example of their inconsistent fallibility) and we seem to be dancing on the edge of a severe hyperinflation.
It is nothing more than a hunch, but gold could go well beyond ten thousand dollars per ounce. At levels above $32,000 per ounce, which are within the span of my recent thinking, the dollar as we know it ceases to function as a workable medium of exchange. (It already fails as a unit of account across any period of more than a year; it is miserable as a store of value for any term longer than a few weeks these days.) When it ceases to function as a medium of exchange, the bankers will replace it with something else. Maybe their long awaited "bancor."
Happily, it is in moments of widespread tumult implied in the collapse of the dollar that free market alternatives become interesting to a broader audience. We happen to be prepared, just now, with several free market alternatives based on gold and silver which offer workable media of exchange not only for online commerce but for all commerce. Since we are ready for it, the balance of this century may be the era of free market money. That would be a consummation devoutly to be desired.
Finally, we have to ask, "When would these things likely come to pass?" The bankers evidently want to inflate the dollar, now. They seem satisfied with the idea of monetizing the debt, possibly to make the dollar value of their claim even higher - however meaningless that is to sensible people reading this newsletter it may impress the general public. The monetary inflation is happening now, and the price of gold has responded. The vast majority of gold and silver are in private hands, so the central bankers won't be able to bottle up the price forever.
A few paragraphs above, I noted that the crisis seems to be coming after three decades from the previous peak. I should now like to put an error bar on that estimate. Thirty years from 1980 plus or minus two and a half years. Yes, an error bar five years wide gives me a 17% fiddle factor. More exactly, the new peak would be 21 January 2010 plus or minus 914 days. So, the crisis occurs during the period 22 July 2007 and 23 July 2012. Why?
Several things come together in this period. We've discussed in a previous issue the slave rebellion and civil rioting cycle. This cycle reaches a new peak during the five years around 2010. Perhaps the return of debt peonage and open slavery would do the trick this time? There's also clearly a crisis brewing in the financial system itself, not just the markets.
Think of a spinning top balanced on its tip - the tip of real money and actual productive resources. Layered on top of that tip are some really useful financing schemes which allow resources to be hedged, borrowed against, and invested for various purposes. Credit card debt for working people is a way of borrowing against their future income stream. Real estate debt assumes that the value of the underlying asset won't deteriorate faster than the money supply inflates - though a crisis in real estate assets seems to be upon us. But, also layered on top of that tip and the sensible financing tools which allow for rapid economic growth are a whole lot of other things. Social welfare programs. Payments to the elderly extracted from the pay of the young. An enormous and growing bureaucracy. Incredibly corrupt defense contractor companies and the even more corrupt military agencies that corruptly allocate contracts among them. Staggering levels of debt with secondary and tertiary obligations coming due. A rapidly retiring Baby Boom generation followed by a gap, with a very hard pressed boomlet expected to finance a growing horde of retirees. Another round of endless war, this time again a land war in Asia. An incredibly corrupt war on drugs and criminal drug cartels managed by USA espionage agencies. Layers and layers of derivatives, hedges, securitized assets, margins, futures, and short positions.
Visualize all those elements as structures, some sticking out on one side, some on another, some at one level, some up higher, some joined together vertically or horizontally or diagonally. The top is spinning, and there is a great deal of angular momentum, but all these superstructural elements have been growing while the top is spinning. So the angle of contact with the platform is no longer perfectly vertical. There's tilt and drift and what we used to call "coning" in the rocketry business, meaning an unstable precession of the nodes. Instead of rotating about its central axis, it is now also yawing and pitching, and these other motions are not dynamically stable.
Remember, this model isn't the market for gold or the market for real estate or some other particular market. It is the financial structure of the entire economy. With 83% or more of world trade denominated in USA dollars, and dollars backed by nothing more than the ability of the USA government to collect taxes, and taxes dependent on nothing but trade and commerce to generate jobs and income to pay the taxes, there is nothing to the tautology. It comes full circle and you find yourself with paper obligations to adhere to legislated requirements to meet bureaucratic red tape to escheat assets or encumber incomes which only exist if there are willing buyers and willing sellers.
In other words, large sections of these structures evaporate or separate from the spinning top, further destabilizing it. Without dynamic stability, the system reset is at a much lower, slower level of spin - possibly stationary. And, of course, nothing in nature requires that a reset be available - the dynamically unstable system may fly apart in a supernova. The sky is littered with nebulae which are the remnants of dynamically unstable stars that left the Main Sequence and tore themselves apart.
Robert Landis explained why the system survived last time. The dollar was exported to a lot of places where the local currency was much worse. Creating worldwide demand for dollars allowed a lot more supply to come into existence. But the dollar is no longer unique, nor even particularly well formed. Other paper currencies, such as the EU euro have more useful denominations. The digital gold industry reveals for anyone who cares to look that any asset can be monetized - gold and silver work extremely well in this respect. And, the global demand for dollars doesn't have a lot of new market to be created - there are very few places where economic activity is significant that aren't using dollars in trade right now. So, there's no easy out.
We shall have the catastrophe. If politicians, bureau-rats, contract officers, bankers, and central bankers seem to be openly and obnoxiously grabbing for all the loot they can get, it is simply Louis Quatorze behavior. Louis XIV of France once said, "Apres moi, le deluge." After me comes the flood. Well, he was never, ever observed to scrimp on luxuries. His grandson succeeded him and his great grandson lost his head in the French Revolution followed by much chaos and bloodshed. To fight Napoleon, men and women from every city in Europe gave their lives, their children, their property, and their measuring systems.
Europe got over it, and got better, and the rest of the world moved along. But, there weren't a lot of nuclear, chemical, or biological weapons running around. There wasn't the temptation of nuclear terrorism as a foil to keep populations in line. There wasn't the propaganda ministries of the mainstream media. Well, the possibilities for chaos and bloodshed are certainly magnified, but this digression began with the question of: when?
Soon. So, our suggestion is: prepare.
Here's how the stocks we presently suggest in this area look of late (Monday morning 15 May 2006):
Everything is looking up. The three laggards in our table are Luzon, Apex, and Newmont which are very different companies. They have in common a considerable political risk where much of their assets are found. Even in these cases, readers who bought on our suggestions and held have seen their positions improve. Yes, even Luzon has spent some time in the last year above thirty-three cents per share. (We suggested at .29 so if you were eager to get off that ride, you should have done so by now.)
Luzon has new management which has been successful at finding financing. We get their press releases which include recent notes on successful deal signing even in the face of Evo Morales making scary noises about nationalizing everything in sight. As noted above, we don't take Morales as a serious threat long term. In the short term, he does have the ability to prevent Bolivia from benefiting from the current bull market in resources. However, that is more likely to end his political career than set him up as a future Castro. It may even split Bolivia into several countries.
The same issues of Bolivian politics apply to Apex Silver. Apex has spent time in the lofty reaches of $27/share. We suggested at $12.55 and we also suggested you sell half your position on the day the price reached double. You were watching, so you recovered all of your investment. The other half of your shares are icing on the cake, and, yes, that icing began to slide off.
Apex is mining far to the South of the capital at La Paz. It is not in the eastern district that would possibly secede if the turmoil grows enough. While not isolated from the political risk of Morales, that risk appears to be mitigated for now. Morales is saying he'll nationalize the mining industry and his ministers are saying that he won't.
What that means is that the popular support for nationalization is about the same plurality that carried Morales into office. Whereas the opportunity to exact taxes, fees, and bribes from foreign companies investing in Bolivia's mining sector hasn't motivated a fast move to nationalization. Bolivians clearly haven't learned the lessons in how bad socialism really is that Argentinians could have taught them. For example, the Bolivian government chased out a Brazilian ironworks recently and the bureau-rats were able to buy off the workers who went on strike in support of the company by offering them welfare payments. Sad.
Bolivia probably isn't going to stick with Morales. The USA Drug Enforcement Arrogancy, er, Agency, is making noises about the supply of cocaine, suggesting intervention as a possible reaction. Such noises help secure his popular support, of course. On the other hand, Bolivia has had dozens of governments in the last century and seems to have no great enthusiasm for any particular leader or set of ideas.
There are reports that Apex has been selling its silver production in advance, locking in silver prices that, while high, are below the current market level. That seems to have been the case in 2005. On the other hand, selling future production to finance the extraction of the resource seems like a workable financing scheme, especially with silver prices well over twice the company's cost of production. The only ominous note to this activity would be if the management didn't expect the mine to come into production because of political risk. We're not well positioned to get inside details on that level of granularity, but it seems worth keeping an eye upon.
Newmont Mining has been doing fairly well for us, running from $43 to $62 per share. It is among the very largest mining companies in the world and the only one listed on the NY stock exchange. Its measured and indicated resources in gold and copper provide assets over $150 per share, which can be bought today for a third that amount. We continue to research political risk in the company's major resource zones, especially Indonesia.
Newmont seems to have been treated unfairly in a recent press report. One of their directors resigned, evidently to take a job with a college or university. Boston.com carried a story by the Associated Press stating that Leo Higdon resigned from the board of Newmont and implying that he did so over accusations that the company was polluting in Indonesia and Peru. His actual reason for resigning, clearly stated by him in various other press reports was the time involved in being president of Connecticut College along with his directorships of other companies left him no time for Newmont. Unfortunately, journalistic integrity is rather minimal in many instances.
All our stock picks in this sector are up. We're showing doubles currently in Western Prospector, Northgate, Tan Range, and Pinnacle. Vista, Silver Standard, Northern Peru, and Almaden are good prospects for doubles. Keep in mind that Lumina Copper Company split in May 2005 into three listed companies (Northern Peru, Regalito Copper, Lumina Resources) plus one unlisted company, giving us a nice triple. Northern Peru is now set to double from our basis in it at the split. The market seems to have finally taken some notice of Lumina Resources as a fine opportunity. But our best pick of all remains Tan Range - we suggested at C$1 and the price is approaching C$9.
If you've not bought the stocks on our list, or weren't following our suggestions at the time, you might ask: what one stock would we suggest you buy, now. That one would be Lumina Resources. It has great management, good paper, excellent measured and indicated resources worth hundreds of dollars per share, and it is selling for just over a dollar per share. In terms of meaningful value for a great price, it is our suggestion of the week.
For various reasons, we've been looking closely at Osisko and Eagle Plains. We'll work on profiles for these possibilities soon.
Free Market Money
One nice thing about this report being so long, even though I don't seem to ever finish it on time, is we get to see what happened after I wrote previous paragraphs. This time, gold demonstrated that significant overhead resistance at $710 per ounce wasn't where I thought it was, but was a lot stronger than I had supposed.
Gold closed on Friday 19 May 2006 at $657 per ounce troy or $21.12 per gram. Very clearly the overhead resistance was across a broad range from $710 up to $729. Gold ran up on the 12th, ran down to close at $710.50 as mentioned above, then ran back up on the 15th to $720, back down, and on Thursday began its dramatic progress toward Friday's close. Where does gold go from here? Depending on where you measure each wave from, my best guess is that it finds a bottom around $650 and comes back up. The good news is that we now know what's overhead.
Gold will spend a few days recovering to values near $700, then build a base for assaulting the $720 level, again. The overhead resistance at this level is the last known price level from the 1980 trading year, and we'll move through it within two months. If it takes as much as sixty days, then this period would be what passes for a Summer doldrums this year. It may not take that long.
As of Friday 19 May, the Dow may be purchased for just under 17 ounces of gold. Earlier in the week the ratio stood at 16 ounces to buy the Dow. Remember it was over 19 in early February this year. Any new highs in the Dow are inflation dollars finding homes in the stock market. No real growth is possible until the Dow reaches a value less than three ounces of gold. (Author James Turk in a recent essay suggests fifty grams or a bit more than one ounce.)
Oil was $68.53/bbl in the spot market for West Texas Intermediate on Friday 19 May. It took 9.59 barrels to buy an ounce of gold.
Silver closed Monday just over $12.46 per ounce, and seems to have recovered, along with gold from early morning lows. Gold was similarly back to Friday's close after posting lows in Hong Kong of around $636. NY close Monday for gold was again about $657. These figures put the gold/silver ratio at 52.73 ounces of silver to buy one of gold. This trend broke down through its pennant formation, as James Turk pointed out in a recent commentary, dropped remarkably, and has returned to near its previous level - but still below the earlier trend.
While $636 is slightly below the anticipated Fibonacci number, I would anticipate gold going higher in a few days. It should build a base near $700 to test overhead resistance again, and while it might fail once more to penetrate overhead resistance at $720, I think the two assaults on that level have been adequate. The next assault should swing through that level, then drop back briefly to build a base there. Should that work out as expected, I suggest gold past $900 by year's end, possibly over a thousand. Early next year, I expect gold to reach $3000 and possibly even $5000 per ounce, with silver reaching values from $167 to $300. Near these levels, monetary crisis is brewing, and to Dutchboy it back, I would expect legal tender laws, currency controls, wage and price controls, and considerable repression - all fingers in a dike which is beyond salvaging.
Let me be among the first to suggest that the Summer of 2007 is going to be long, hot, and violent. Open rebellion in some major cities would likely make the Watts Riot look like a walk in the park.
Copper recently ran up to $3.90 per pound in early May, then retreated. It has climbed back today to reach $3.4273 at this time of writing (21:09 Houston time, Monday 22 May). Copper closed Friday 3 March at $2.2811 per pound. Ag/Cu ratio stands at 3.64. So it takes 3.64 pounds of copper to buy an ounce of silver. That ratio has fallen dramatically since our report in February. The related Au/Cu ratio is 191.70, also down dramatically from February. With 191.70 pounds of copper now buying one pound of gold, we are seeing a dramatic resurgence in the relationships of all the metal money elements.
Zinc also peaked nicely at $1.71 in early May and has dropped down to about $1.39 per pound early Monday to reach $1.4651 as of this writing.
The premium on those pennies minted before 1982 is now 128%. The metal in $100 face value of pre-1982 pennies is worth about $228.26. In other words, sorting out older pennies that have no numismatic value is now a way to double your money, and then some. (Of course, scrap metal prices aren't the same as spot metal prices. The mechanics of actually recovering the older pennies is easy due to the difference in mass (earlier pennies weigh more). The economics is not as easy due to the need for large volumes of pure copper to approach spot - pennies have that 5% admixture of zinc.)
In a classic "please don't try this one at home," I would like to reiterate that pennies minted since 1982 are 97.5% zinc and weigh just 2.5 grams. At current prices, the new pennies (zinkers or stinkers) are worth just $83.45 per hundred dollars face value. Zinc at $1.80 per pound pushes the new penny over the top. Since we've seen zinc at $1.71 earlier this month, I suggest this cross-over would also be reached later this year.
Nickel metal was at $9.41/pound Monday evening. The USA nickel coin, which is 75% copper and 25% nickel is showing a 8.53% premium to face value. The metal content in the current issue nickel is worth about 5.43 cents ($0.0543). As anticipated, crossover arrived this year. Not only does it cost more to mint the penny and nickel, the older pennies and the current nickels have more value as metal than they do as coins, and the new issue pennies soon would have more value as metal than as coins.
Now, that's an untenable relationship. Both penny and nickel are going to start disappearing from circulation as this perception becomes more widespread. The US Mint would likely announce a "temporary measure" later this year to stop minting the coins owing to "unusually high metal prices" which we'll be told is "surely a temporary condition." Nothing could be further from the truth. Until the dollar is remonetized or withdrawn from circulation and replaced with "new dollars" there won't be any way to produce pennies or nickels out of metal. Any attempt to produce them would simply result in Americans showing up at banks to change paper dollars into bags of nickels, melting them down for the copper and nickel.
The recent change in design of the nickel with the scary-large Jefferson seems, to me, to be right in time for a switch of metal content. Thus far, I've taken the 1990 Red book and publications of the US Mint as authoritative, but I wouldn't be surprised if a metal assay found they had been cheating for some time.
Since neither the penny nor the nickel are essential for vending machine commerce, they may be removed from circulation or replaced with plastic tokens. Won't that highlight inflation for the common man, woman, and child?
The quarter and half dollar coins are fairly safe for a while. Their current metal contents are about about 19% of face value. Copper at $18 per pound and nickel at $50 per pound would also send them over the edge. These much higher prices are clearly a potential for next year.
If we consider a silver/copper ratio of 2 to be reasonable, then copper is $18 per pound at a silver price of $36/oz. A gold/copper ratio of 150 is also reasonable, which means copper at $18/lb and gold at $2700/oz. These are certainly figures we could see in the next 18 months. Similarly, nickel has been closing on 1:1 with silver, which would mean a silver price of $50/oz for nickel to be $50/lb. Again, that's not an unreasonable value for silver to reach in the next 18 months. So, that tells us that quarters, which are the mainstay of the vending machine biz, are going to have to change metal content within two years.
The pressures are mounting on the monetary system. Without coins, cashiers cannot make change, vending machines don't operate, poor people cannot do their laundry, and monetary inflation begins to hit home. Ultimately, the dollar is going to be valued at a different level, by fiat. Trade in your old dollars for new dollars at ten to one.
Furthermore, expect that the old dollars which aren't in the country by a certain date won't be accepted for change. That deadline may not be announced far in advance. If you have friends overseas, by all means, warn them of the approaching storm. They should be standing up and exiting the theater now, in a calm and orderly manner. The rush for the exits is coming, and it'll make the massacres from "festival seating" at rock concerts in the 1980s look like nothing in comparison.
U3O8 was $43/pound as reported from 15 May 2006.
Schlumberger was $68.85 on the close Friday 19 May. But, it split 2:1 on 10 April 2006. So it is up 67.5% since our suggestion.
Please encourage all of your friends to consider the opportunities of joining a gold-denominated stock exchange such as dBourse.com or PVCSE.com. With the stock priced in gold, you don't have to worry about your investment keeping up with inflation. And with dividends from these companies also paid in gold, you are well on your way.
Remember, PVCSE is a private club. Members only. But, that doesn't mean it is difficult to join. Also, anyone with a company that is seeking capital would do well to consider a listing on PVCSE.
The main idea behind a private stock exchange is to make available capital to companies without all the rigamarole, garbage, and byzantine idiocy we encounter with mainstream stock exchanges. Companies and individuals should have access to capital. The banking cartel and the finance industry exist to limit access to capital, charge high fees and rates for capital, exclude competitors through licensing and other government coercion, and generally make access to capital almost painfully difficult.
"The good news is that all vehicle systems, including the main engine, thrust vector control, structures, avionics, software, guidance algorithm, etc., were picture perfect."
The bad news is that the Falcon launch vehicle failed on liftoff twenty-nine seconds after launch. It appears from preliminary analysis that not "all" vehicle systems were picture perfect. The main engine is a system attached to fuel tanks by a fuel feed system. Since it appears that a fuel leak caused a fire at the top of the main engine, which in turn disrupted the pneumatic system which in turn caused shutoff of fuel to the main engine, the flight was a failure.
To describe the flight in such glowing terms is really not a good idea, Mr. Musk. It reminds me of the rather dramatic footage from November 1989 when Space Services Vice President Peter Armitage was heard to say to the attending crowd, "It looks like another perfect flight for Starfire One," at the exact moment that coning in the first stage caused the payload to fall off the launch vehicle.
Mr. Armitage had an excuse for his glowing comments. He was facing the crowd, looking over his shoulder occasionally, and could not actually see the payload separate from the vehicle and tumble away. Happily, the Starfire had achieved enough altitude to allow the barometric sensor to deploy the payload parachute, and that launch was largely salvaged. The Starfire went on to six more perfect launches.
Mr. Musk has less excuse. His rocket failed, he was there, and it makes no sense at all to say, "Falcon was executing perfectly on all fronts until fire impaired the first stage pneumatic system," as he does later in the same release. A fuel leak of any origin is not consistent with perfect execution on the fuel feed system "front." Losing the entire rocket and its payload within a few hundred meters of the launch pad is not picture perfect or perfect execution of all fronts. It is a horrid picture of disaster.
In comments at the International Space Development Conference in Los Angeles earlier this month, Mr. Musk mentioned that the failure has been traced to some actions by a small number of technicians on the launch pad the day before launch. In his comments, he ascribed the processing error to a "couple of technicians" and the leak check port of the rocket.
Also this month, to the surprise of none, the SpaceX lawsuit against Boeing and Lockheed-Martin was dismissed in federal court "with prejudice." I think the suit had real merit, in that it claimed that Boeing and Lockheed do have, in my opinion, a history of anti-competitive behavior actionable under RICO, Sherman, and Clayton anti-trust acts.
The launch failure cannot have done their case any good, since in February the case had been dismissed on the grounds that SpaceX isn't able to compete directly with either Boeing or Lockheed. The launch failure is evidence for this contention. And, gosh, after hundreds of tests during which the rocket had never failed in this particular way, a couple of technicians alone on the launch pad the day before liftoff happened to establish conditions for a leak resulting in a fire resulting in shutdown of the main engines resulting in a total loss for SpaceX.
I fully expect that the Air Force investigation won't find a shred of evidence for sabotage. There won't be anything to tie those two technicians back to either Lockheed or Boeing. It must be one of those really freaky coincidences.
NASA delenda est.
SpaceDev closed at $1.45 on Friday 19 March, down five cents from our suggestion.
"Sea Launch Company, a consortium of USA, Norwegian, Russian, and Ukrainian companies said Tuesday it had signed a contract with a USA telecoms company to put its satellite into orbit."
Sea Launch was originally a concept of Bob Truax. His Sea Dragon launch vehicle was conceived of in the 1980s, to be a huge monster, built of solid steel and based on very early plumbing concepts. It would be launched from the ocean, much like early ARC Technologies rockets were intended to be launched. After Truax went to Boeing with the ideas, what remained was no big dumb booster, but only the idea of launching from mid-ocean to allow for various useful trajectories using mobile launch platform equipment.
EchoStar Communications is expanding its Dish Network. They have agreed to have EchoStar XI launched by Sea Launch. The contract represents the third launch of an EchoStar satellite by Sea Launch.
What remains of Sea Launch is run by Boeing with help from Norway's Kvaemer Group, Russia's Energia, and Ukraine's Yuzhnoye design bureau and Yuzhmash production association. The heavy lifting is done by the Ukrainians with their design and production of the rockets, spacecraft systems by Energia, shipping technologies from Kvaemer, systems integration by Boeing, and the all-important red-tape defeating and anti-competitive practices (in my opinion) supplied by none other than the ITAR compliance shmliance legal beagles at, you guessed it, Boing! Er, Boeing.
NASA delenda est.
New Country Developments
Taiwan Semiconductor TSM is $9.46 up substantially on our suggestion. AU Optronics (AUTO.ob) has risen from about $0.45/share in early November to $0.94 today. Yeah, we doubled. Sell half your position and ride the joy.
"Between 1999 and 2001, Anthony Atala, at that time a team leader at Children's Hospital in Boston, replaced diseased bladders of seven young people with bladder tissue grown from their own bladder and muscle cells. Thus, the team cloned the first complex organ - a bladder. Self-cloned bladder cells work well because the patient's body should not reject them. SO far, the young people have retained the bladders."
Evidence abounds that artificial organs and replacement organs are coming. Nanotechnology and bio technology are working marvels with human organ replacement. It should soon be possible to clone more complex organs, and help the body replace diseased or failing parts.
The best part of cloning replacement organs from human tissue is that rejection ceases to be a problem. As long as healthy donor cells from the patient can be found, the cloned tissue is from the patient himself. The immune disorders which accompany drugs taken to reduce rejection of transplant organs are obviated by using tissue from the patient himself.
The good news is that most diseased organs are not completely destroyed or entirely diseased. Even genetic diseases which cause, say, malformed bladders in children, usually leave a few cells with proper expression. Harvesting these normal cells and then building a new bladder from cloned tissue on a scaffolding as described in our February issue seems like a great advancement.
Of course, there are many difficulties with the technology of cloning. Among these are the source of the donor cells for cloning research. There are valid ethical concerns over the use of fetal cells from aborted children. However, if the patient donates his own cells for the development of a replacement organ, these ethical concerns don't apply.
FDA delenda est.
Legislatura delenda est.
Here's how our stock suggestions in the nanotechnology and life extension sector look right now (close Friday 19 May 2006).
Dendreon is our only problem child here. It is our view that Provenge is likely to get FDA fast track approval because of the large number of cancer patients it benefits. Prostate cancer is a leading killer, and Provenge has exciting results (33% survival compared to 15% survival in placebo alternative) with few and mild side effects.
Meanwhile, Elan made a nice double for us, and continues to move forward.
Publication Note: Well, I managed to fill in one back issue, the December issue on Day of Deceit. Unfortunately, that issue inspired considerable depression and lassitude. Recent subscriptions including a trial subscription have inspired renewed activity.
Gratuitous example of bizarre legislation: A 1917 law still on the books is apparently the latest excuse for the arch-fascist Alberto Gonzales to attempt to intimidate reporters. He is apparently contemplating prosecuting NY Times journalists for publishing information in the Valerie Plame affair, even though the information was leaked by people in the White House. The man is obviously a menace to decency, human society, justice, and individual liberty. No surprise that he is the attorney general for the Bush administration. In related news, an ABC reporter says he has been warned that the National Security Agency is using phone records turned over by gutless major telecomm operators to track down the sources for reporters at several major news agencies.
Now, you have to be grateful for these stories. Sure, they sound terrible, but that's because every time the government becomes more rigid, it seems like they are going to do terrible things. And they might - things terrible enough to polarize large segments of the population into open rebellion. But, the good news is that these newsstories tell us that the government is unable to keep its grasp on power much longer. Remember Dr. O'Neill's analogy. Rigidity is a sign of incipient failure in a mechanical system. Flexibility is better. The more rigid they become, the more confident we can be that their idiocy is going to blow up in their faces.
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