Doug Casey on Gold's New High, the Fed, and the Greater Depression

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L: Good evening Doug. The Fed’s new $600 billion liquidity injection pushed gold to new records, at least in current dollars, topping our $1400 target for this year. Our gold stocks are up even more. Even the World Bank is suggesting that a return to some sort of gold standard might be worth considering. Does the market feel “toppy” to you? What do you make of the latest numbers?

Doug: Well, first, it’s fascinating that the head of the World Bank is actually talking about gold. That signifies a huge sea change. Especially in that the IMF has been a huge seller of gold, and the world’s central bankers have the lowest percentage of their assets — ever — in gold.

I’ve long said, bull markets have three phases. This is classic market theory, nothing unique to me. There’s the Stealth Phase, when prices are extremely cheap and everyone hates the investment — or if they don’t hate it, they’ve forgotten about it. That’s long gone for gold, this time. There’s the Wall of Worry Phase, when people know it exists, and it seems likely to go higher, but people deny it, or find all sorts of reasons to believe that every correction along the way up means the market has peaked. I think we’re in the late stages of this market phase, and heading into a real Mania for gold — manias being the third phase of classic bull markets.

L: If $1400 is just a step along the path, how high do you think gold could go?

Doug: I don’t know. There are lots of numbers out there from people making different projections. If you think of a manic peak similar to that of 1980, you get an inflation-adjusted figure of $2250, just to match that peak. If you use John Williams’ Shadow Government statistics, which I believe are much more accurate, you get a number over $3500.

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Just to redeem the approximately $7 trillion owned by foreigners would need gold at about $25,000 an ounce. But if you take the U.S. national debt — say $14 trillion, which is a gross understatement — and divide it by the 262 million ounces of gold thought to remain in Fort Knox — you get a number in excess of $50,000 per ounce.

Spending as much time in Argentina as I do now, it’s becoming much more natural for me to assume that government numbers are cooked up to suit. It seems to me that American politicians have taken a lot of lessons from the Kirchners. The numbers are getting so big, perhaps Obama will have to ask his science advisor what comes after a trillion.

L: The low-end figures of $2250—$3500 could happen just on the basis of a gold bubble forming, completely apart from runaway inflation or other economic forces we see driving things, looking forward.

Doug: Yes. I hate to be bullish on an investment that has quintupled in the last ten years, but everything I see points towards it rising further, with probably at least another double in it. And there just isn’t much of anything else I want to buy. U.S. real estate? Forget about it. General equities? They’ve become high risk. Bonds? Don’t make me laugh; they’re the current bubble — and the short of the century.

L: So, if you had some extra cash in your pocket and were of a mind to buy more physical gold, would you buy today? Or would you wait to see if there’s a major correction from the new $1400 record?

Doug: The last physical gold that I personally bought was a bunch of Krugerrands at about $1190 per ounce. Could it correct? Sure, but if I have a lot of cash, I feel much more comfortable holding gold and silver than government currency units.

You know the short term is very hard to predict. Longer term, one key factor is that many of these central banks — in China, Japan, Europe, India, and elsewhere — are sitting on very little gold and a lot of dollars. And, despite all the mistakes they’ve made, selling wholesale at the bottom and buying now that gold is back up again, these people are not entirely stupid…

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L: I thought you said that central bankers are idiots who dress well?

Doug: [Laughs] Yes, absolutely. They’re horrible people from almost every point of view, and utter fools. But even they are getting a clue that having something of tangible value on reserve might be wiser than holding the paper of a bunch of other, manifestly bankrupt, governments. The ones who have some sense may realize that the acceptance of paper money is a very recent, and anomalous, fashion. And that could just lead to new stupidity at the top, when they panic and dump dollars, all trying to pile into gold at once. These fools are the enemy of stability and progress, but the friend of the speculator. They can be counted on to sell at the bottom and buy at the top.

There’s another old trading rule: The trend is your friend.

I have to say again that the fundamentals behind this trend for gold are very, very strong. It’s going to continue upwards. And although we’re moving towards a Mania Phase, it’s nothing near a mania today.

L: Could that be a sign of the real top — central bankers piling on gold like rugby players on the ball?

Doug: That’d be one, but you know the one I’ve said all along will be a clear sign to head for the exits is when you see a golden bull tearing up the NYSE on the cover of Slime or Newspeak.

L: If Time or Newsweek still exist by then.

Doug: [Chuckles] Right. And good riddance to both.

L: So, the bottom line is that you don’t care if gold might drop sharply tomorrow, the gold trend is our friend, and buying today will still work out well for those who stay the course. You’re a buyer.

Doug: Consider the alternatives — they’re quite unattractive. Another old market rule, since I’m quoting old market rules, is: Don’t fight the Fed. And never since the Fed was created has there been a more clear signal from the Fed. People have made fun of Bernanke for saying he would drop hundred-dollar bills from helicopters, but that is in essence what he’s doing — but with a lot more hundred-dollar bills than you could fit in a helicopter, or even a squadron of helicopters.

You don’t want to fight the Fed: buy gold.

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How do you do that? There are lots of specifics given in our BIG GOLD newsletter, which covers reputable dealers for buying (and selling) physical gold, as well as ways to own gold through securities. ETFs, other funds, royalty companies, major producers with millions of ounces of proven mining reserves, BIG GOLD picks out the best of the best in all these areas.

L: And if it does go down in the near term, we just buy more.

Doug: Yes. I mean, if you look just a couple years down the road, we’re looking at an absolutely world-class catastrophe. I keep telling anyone who will listen: this is not just the biggest thing since the Great Depression, this is the biggest thing since the Industrial Revolution.

This reminds me. My friend Porter Stansberry found an amusing online software application that converts text into crudely animated video. He uploaded a very funny conversation about gold — it’s a minor work of genius. It lacks only sex and violence, although holding forth the promise of both…

(Ed. Note:

L: So, moving from gold to gold stocks, a lot of our stocks are up a lot more than gold — does the market feel a bit frothy to you?

Doug: Well, although I know the value of following a trend, I’m actually a bottom-fisher by nature. I’m far more comfortable buying when things are dirt cheap and nobody wants them, and we’re pretty far from there at this point. But, once again, we’re still ahead of the mania. Since most of the money in the world is still thinking in terms of stocks, I think that’s where most of it is going to go when the big rush to flee inflation gets underway. So gold will go up, and stocks in general may go up — even though they are overpriced already — and people are going to look for the best-performing stocks, which will be gold stocks. The stage is set for gold stocks to absolutely start howling, at some point.

To use poker jargon, Bernanke has made an all-in bet that’s going to be inflationary. So I’m inclined to make an all-in bet myself, on gold and gold stocks.

L: That leads to an interesting question. We’ve long counseled our subscribers to take profits when they get their first double in the stock. That way, they get the same exposure to the remaining upside in a story, in dollars, but absolutely free of risk, having recovered their initial investment. But the dynamic could change when we enter the Mania Phase — why take profits if the most likely thing you are to do with that money is put it right back into that same stock, or a similar one?

Doug: Taking profits is still a good idea. Even in the Mania Phase, as you double your money on your stocks, you can scrape some of that money back off the table and put some of it into the safer investment in physical gold and silver, or other real assets that are either cheap, or that you want or need for other reasons. You could also reinvest into other good speculative picks — if your whole portfolio doubles, you could sell half and double the number of companies in your portfolio, spreading your risk and upside potential over a larger number of picks. There are lots of girls on the edge of the dance floor waiting to be asked. Some of the most attractive are the ones that come with warrants in a private placement. That’s something I know you specialize in finding for Casey’s Investment Alert subscribers, and Marin does the same for Casey’s Energy Confidential subscribers. Those warrants double your upside with no up-front cost.

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Remember another market truism: There’s no telling how high a tree is going to grow. In other words, it’s hard to predict where the top of a market may be.

I’m not feeling anxious now to get out of gold or gold stocks, but there will come a day when the tree seems tall enough. It always makes sense to realize gains and minimize risk as you go.

L: Then what?

Doug: It’s my hope that by then I’ll be able to buy solid, blue chip stocks for 8% to 10% dividends, and then I’ll make a big switch. In other words, rather than try to pick a magic number for gold, I’ll look at it relative to other values. I also think cheap, productive agricultural real property is a good idea. That’s why I have 1600 head of cattle grazing on Argentine grasslands right now, and I’d look to buy more with my profits on gold stocks.

We’ll really have to keep our eyes open, going forward, because we’re going into terra incognita, economically and financially.

L: This time it really is different.

Doug: So many “unprecedented” things have already happened — this time it really is a big deal. And the average guy isn’t even paying attention, with the eye of the hurricane making some things appear to have gotten better in the last year and a half. There’s been no blood in the streets yet, and the average guy thinks things are going to improve. I don’t think that’s going to happen.

L: Okay, but I have to point out that you called for an imminent and major equities correction earlier this year — and we haven’t seen that yet. Do you still feel that’s coming?

Doug: I feel like a cat on a hot tin roof. The stock market is still very overpriced, and with the persistent economic bad news, there’s a good chance corporate earnings will plunge, so it could still happen.

But I have to admit that though I knew it was coming, intellectually, I just couldn’t quite make myself believe the Fed would open the floodgates as it has. I mean, I thought Bernanke would do as he threatened, with his helicopters, because he’d see no other choice, but emotionally, it’s just hard to really believe that someone that smart will actually do something that stupid. I’ve never met Gideon Gono, Zimbabwe’s head central banker, but it would almost seem that Bernanke’s hired him as a consultant.

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Hundreds of billions in new liquidity at the stroke of a pen — of course it will impact the stock market, and you don’t want to fight the Fed.

L: I’ve often thought that stupid people make stupid mistakes, but they are garden-variety mistakes with a limited scope of resulting mayhem. Smart people make much bigger mistakes because they know they’re smart and are willing to gamble on large and serious matters — like the entire global economy. So when they make mistakes, the resulting devastation is often far more widespread.

Doug: That’s a good observation.

L: So, short version: Buy gold. For leverage to gold, buy gold stocks. If they get cheaper in the near term, buy more. And don’t forget to take profits when you have them, realizing some gains so you can’t lose them, and reinvesting others in new plays to increase your exposure to the upside.

Doug: Exactly. And not to be overly promotional here, but there’s no better way for people new to gold to get started than to subscribe to our BIG GOLD newsletter, and for those who already know the gold sector and are willing to risk more to gain more to subscribe to the International Speculator.

L: Thanks Doug — Jeff and I work hard to deliver value to our readers.

(Ed. Note: Jeff Clark is the editor of BIG GOLD.)

Doug: I know you do. You must be flying 200,000 miles a year visiting prospects all over the world.

L: Who knows, with all the helicopter and Cessna and local airline hops? It’s over 100,000 miles a year on the three big air alliances. But I better stop now, before I start blushing. Thanks for the guru update. I guess we’ll speak next in Buenos Aires.

Doug: I’ll be interested to hear what you find in Paraguay. Travel safe.