By the Editors of The Casey Report, Casey Research

President Obama promised to turn around the floundering economy that he inherited from his predecessor. He promised jobs. He promised transparency. Not only did he not deliver on those campaign promises, he has led the nation further into the abyss on all counts. Today we are less prosperous, deeper in debt, and enjoy fewer liberties than when Obama first stepped into the Oval Office. His own party is losing faith in the messiah.

You can see that loss of faith in the steady downward trajectory of Obama’s approval ratings. While Democrats can take heart from the fact that no truly viable candidate has emerged from the GOP, it’s clear that “Hope and Change” will not be sufficient to rally the electoral troops for Obama again in 2012. Voters are hurting, and Obama’s claims that the blame lies with George W. Bush no longer provide any solace.

Not only is the president’s own reelection in jeopardy, his sagging polls are dragging down other Democrat candidates as well. Republican Bob Turner handily took Anthony Weiner’s seat in New York’s 9th Congressional District, a district that had been a Democrat stronghold since 1923. New York’s 9th District has previously been represented by such Democrat stalwarts as Chuck Schumer and Geraldine Ferraro. During the special election for Weiner’s seat, Obama had only 31 percent approval in that district, although he won there with 55 percent of the vote in the 2008 presidential election.

A Democrat pollster attributed Turner’s win to “the incredible unpopularity of Barack Obama dragging his party down in the district.” Similarly, Republican Scott Brown took the Massachusetts seat that had been held by Ted Kennedy for almost 46 years. Brown’s win was attributed in large part to widespread discontent over Obama’s policies, particularly Obamacare.

A Democrat strategist is warning his clients not to run in 2012. He said, “I don’t want to see good candidates lose by 12 to 15 points because of the president.” Pete Sessions (R-TX), National Republican Congressional Campaign chairman, said, “This clear rebuke of President Obama’s policies delivers a blow to Democrats’ goal of making Nancy Pelosi the speaker again. An unpopular President Obama is now a liability for Democrats nationwide in a 2012 election that is a referendum on his economic policies.”

The New York Times has observed that no incumbent president since FDR has won reelection with unemployment over 7.2%. Keep in mind that unemployment is actually much higher than the officially reported 9.2%. Other presidents have recovered from low approval ratings and high unemployment and still won reelection, but that will not happen here.

The steps necessary to turn the economy around are antithetical to Obama and his collectivist, big-government philosophy. He will not make a 180-degree change in direction, so there is virtually no way unemployment will fall at all, not to mention substantially, before the election. Nor does he have any plans on the drawing board by which his popularity will rise. Instead, Obama berates a “do-nothing” Congress, including a Democrat majority in the Senate, for not passing his jobs bill – another dose of the same toxic medicine that has brought us to the economic doldrums where we languish today.

Even if Obama turns out to be his party’s standard bearer in 2012 and wins the election, he is likely to enter his second term having to deal with Republican majorities in both the House and Senate. Lacking the political skills of Bill Clinton, who similarly faced a Republican Congress, Obama would spend four years in a standoff with an intractable legislature – truly a do-nothing president.

Many of those who so enthusiastically supported Obama in 2008 now have buyer’s remorse. They could have had Hillary. Obama himself may be having second thoughts. He told NBC’s Ann Curry that “there are days where I say that one term is enough.”

Obama told ABC News’ Diane Sawyer that “I’d rather be a really good one-term president than a mediocre two-term president.” It’s fair to say that neither of those are realistic options. Neither really good nor mediocre remain within Obama’s reach.

Early in his presidency, he told NBC’s Matt Lauer that “if I don’t have this done in three years, then this is going to be a one-term proposition.” Clearly, he has not and cannot “have this done” in three years or four years. Looks like one term it is.

Stepping Down

Obama has been compared to Harry Truman, who came from behind in 1948 to defeat Thomas Dewey for a second term in the White House. Truman ran successfully against a “do-nothing” Republican Congress. Obama is busy blaming this “do-nothing” Congress for not passing his jobs bill. Unlike Truman, who faced a GOP majority in both the House and Senate, Obama so far only has to deal with a Republican House. He still faces gridlock.

Obama has also been compared to Truman in 1952. Truman believed that he could have the nomination simply for the asking, but he was challenged and defeated in a New Hampshire primary by Estes Kefauver, a first-term senator from Tennessee. Shortly after that defeat, Truman withdrew from the race. Ostensibly, he withdrew in the best interest of the country and because he was concerned that he could not govern effectively for four more years because of his advanced age. In fact, Truman was deeply disliked. He had been unable to bring the Korean War to an end or tame the federal deficit, and faced charges of corruption and cronyism in his administration. Sound familiar?

Another parallel can be drawn to President Lyndon Johnson. Johnson was too much associated with the costly and unpopular Viet Nam war, and his Great Society was said to be a failure. He faced challenges from within his own party from Senators Eugene McCarthy and Bobby Kennedy, the brother of the assassinated president Johnson had replaced. On March 31, 1968, Johnson announced that “I shall not seek and will not accept the nomination of my party for another term as your president.”

Democrat pollsters Patrick Caddell and Douglas Schoen, in a November 21, 2011 opinion piece in the Wall Street Journal, note that Truman and Johnson both “took the moral high ground and decided against running for a new term as president.” They conclude that “President Obama is facing a similar reality – and he must reach the same conclusion.”

Caddell and Schoen concede that…

Mr. Obama could still win re-election in 2012. Even with his all-time low job approval ratings (and even worse ratings on handling the economy), the president could eke out a victory in November. But the kind of campaign required for the president’s political survival would make it almost impossible for him to govern – not only during the campaign, but throughout a second term. Put simply, it seems that the White House has concluded that if the president cannot run on his record, he will need to wage the most negative campaign in history to stand any chance. With his job approval ratings below 45% overall and below 40% on the economy, the president cannot affirmatively make the case that voters are better off now than they were four years ago. He – like everyone else – knows that they are worse off.

They urge the president to “abandon his candidacy for re-election in favor of a clear alternative, one capable not only of saving the Democratic Party, but more important, of governing effectively and in a way that preserves the most important of the president’s accomplishments. He should step aside for the one candidate who would become, by acclamation, the nominee of the Democratic Party: Secretary of State Hillary Clinton.”

They note, “Having unique experience in government as first lady, senator and now as Secretary of State, Mrs. Clinton is more qualified than any presidential candidate in recent memory, including her husband. Her election would arguably be as historic an event as the election of President Obama in 2008.”

That Schoen and Caddell are Democrat pollsters who worked, respectively, for Bill Clinton and Jimmy Carter is all the more telling of the mood in the party. They claim to “write as patriots and Democrats – concerned about the fate of our party and, most of all, our country. We do not write as people who have been in contact with Mrs. Clinton or her political operation. Nor would we expect to be directly involved in any Clinton campaign.” They conclude that “not only is Mrs. Clinton better positioned to win in 2012 than Mr. Obama, but she is better positioned to govern if she does.”

Hillary, however, will supposedly have none of it. She told CBS’ White House correspondent Norah O’Donnell she would not consider running for president. She said, “I had a great run, I was very grateful that I could do that. I felt just really good about the experience, but that was then and this is now, and I’m looking forward.”

Caddell and Schoen will not be swayed, however. “If President Obama is not willing to seize the moral high ground and step aside, then the two Democratic leaders in Congress, Sen. Harry Reid and Rep. Nancy Pelosi, must urge the president not to seek re-election – for the good of the party and most of all for the good of the country. And they must present the only clear alternative – Hillary Clinton.”

Will Obama seize the high moral ground and step aside? Not likely. He is probably incapable of blaming himself for his predicament. He could be forced aside, perhaps by the threat of a scandal (Solyndra, MF Global, and illegal actions by his attorney general and Department of Justice). He seems even now to have trouble understanding what went wrong. He has apparently not yet considered the possibility that the luminaries with whom he has surrounded himself, including Fed Chairman Ben Bernanke, could simply be mistaken about how the world works.

Laissez Faire

Oddly, a do-nothing president is just what we need, but of a different sort than Obama. The answer to most of the difficult questions about government is that government has no business doing whatever it is in the first place. Of the crop of Republican contenders, only Congressman Ron Paul and New Mexico Governor Gary Johnson acknowledge that reining in the lumbering, overreaching behemoth that our government has become is the real challenge facing the next president. Other Republican hopefuls pay lip service to whittling government down to size but not by the drastic steps that are now not only necessary but overdue.

Indeed, our government has now become so hostile and damaging to its citizens that one could fairly argue that we would be better off with almost no government at all. As Grover Norquist famously stated: “I don’t want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.”

Both Ron Paul and Gary Johnson are seen as not being presidential material because they are unwilling to perpetuate longstanding scams. They are thought not to be presidential material because they don’t understand how the game is played or, if they do, because they are unwilling to play it. Admittedly, presidential politics has been such an extremely complex and convoluted affair that it seems only sophisticated players can handle it, but that is exactly what is wrong here.

[Obama's policies are clear on one point: he seeks to continue slyly draining investors' assets through inflation. There are ways to circumvent it – if you're willing to learn how to make friends with shifting trends.]

Interviewed by Louis James, Casey Research

US-Iranian saber-rattling or impending shoot-out? In his usual, candid manner, contrarian investor Doug Casey talks about why he believes it’s serious this time… why the US is the greatest threat to peace today… why Iran might move towards a gold standard… and what smart investors should do.

L: Doug-sama, I’ve heard you say you think the US is setting Iran up to be the next fall guy in the wag-the-dog show – do you think it could really come to open warfare?

Doug: Yes, I do. It could just be saber rattling during an election year, but Western powers have been provoking Iran for years now – two decades, really. I just saw another report proclaiming that Iran is likely to attack the US, which is about as absurd as the allegations Bush made about Iraq bombing the US, when he fomented that invasion. It’s starting to look rather serious at this point, so I do think the odds favor actual fighting in the not-too-distant future.

L: Could they really be so stupid?

Doug: You know the answer to that one. We’re dealing with criminal personalities on both sides, and criminals are basically very stupid – meaning they have an unwitting tendency to self-destruction. One thing to remember is that most of those in power in the West still believe the old economic fallacy that war is good for the economy.

L: The old broken-window fallacy. Paraphrasing Arlo Guthrie, it’s hard to believe anyone could get away with making a mistake that dumb for that long.

Doug: People like those in power still suffer the delusion that it was World War II that ended the Great Depression for the US. Actually, it was only after the end of the war that the depression ended, in 1946. In his book World Economic Development: 1979 and Beyond, Herman Kahn documented long-term growth throughout the 20^th century. Between 1914 to 1946 – a very tough time, with WWI, the Great Depression, and WWII – the world economy still grew at something like 1.8%. I believe real growth would have been several times as great, were it not for the state and its products. But people still believe that spending money on things that explode and kill and destroy is somehow good for the economy.

L: I suppose they think it’s okay if it creates jobs here and destroys lives and livelihoods “over there.” But aside from the fact that it’s not safe to assume today’s enemies are not capable of bringing the battle onto US soil, it still ignores the fact that you’re spending money on stuff that gets destroyed – like broken windows – and that impoverishes us all. Worse, the cost is not just economic.

Doug: That’s right. This coming war with Iran has the potential to turn into something resembling WWIII, with enormous consequences.

Now, it’s hard to speak with any certainty on such matters, because most of what we have to go on are press reports. Governments keep most really critical facts on their doings to themselves, and what you read in the press is as likely as not just a warmed-over government press release – in other words, propaganda. Meaningless, if not actively deceptive. It is correctly said that in war, truth is the first casualty.

L: But we do have the Internet these days, with indie reporters offering coverage ignored by the talking heads in the mainstream media.

Doug: True; it doesn’t keep the chattering classes honest, but it does provide some diversity of spin, from which we can try to infer what’s really going on. And from all the various sources – mainstream and alternative, Western and from within the Muslim world – I have to say that it appears to me that the Iranians are not actually developing nuclear weapons.

L: Then why do they act in such aggressive and bombastic ways?

Doug: Western powers are pushing them around, telling them what they can and cannot do, and treating them like children or mental incompetents with no right of self-determination. How else would you expect them to react? They may have a collectivist theocratic regime, but it’s also a proud and ancient culture.

Now, as you know, I don’t think there should be any countries at all – not in the sense of the modern nation-state, and I’m certainly no fan of the Tehran regime, but Iran is a sovereign state. The Iranians resent people from other countries assuming the right to tell them what they can and cannot do with their uranium enrichment program, just as people in the US would if Iranians told them what to do with… well, anything.

L: Do you have specific data to substantiate your view that Iran is not focused on creating nuclear weapons?

Doug: I was just reading about an official report that says that Iran is still not able to enrich uranium to the level needed to make nuclear weapons.

Uranium occurs in two isotopes with half-lives long enough to make it possible to find reasonable amounts of them in the earth’s crust: U235 and U238. Most of it is U238 – 99.3% – but it’s the U235 that’s fissile, meaning, it’s the one you want for making nuclear reactors and weapons. So you have to enrich your uranium – to about 20%-30% U235 to make reactor fuel and 90% or better to make weapons.

L: That’s why the Russians are able to sell “downblended” uranium from decommissioned nuclear weapons for use as reactor fuel. So, you’re saying the reports indicate that Iran is not capable of enriching uranium beyond the level needed for reactors?

Doug: Yes. But again, I have to stress that reliable information is very hard to come by. Remember when the US accused Iraq of having a program to develop so-called weapons of mass destruction? Apart from the fact that, except for nuclear weapons, that term is a complete misnomer, they had no such thing. It was either lousy intelligence or outright fabrication – and I suspect the latter. So how can we trust what they tell us today? Only a fool would be so naïve.

L: Indeed.

Doug: In any event, why shouldn’t Iran have nuclear weapons? I wish none of these countries had them, but they do. No one stopped China, no one stopped North Korea, Pakistan, Israel, India, France, nor any of the others in the disreputable club that have them.

L: Wasn’t it too late to intervene by the time those countries announced their nuclear capabilities?

Doug: I don’t think so. Israel was friendly, so Western powers looked the other way. North Korea was too rabid, so they were left alone. The other countries are too big. The cat’s out of the bag at this point; any country can develop nuclear weapons, if it really wants to. But it’s easier and cheaper to bribe a general – or maybe just a supply sergeant – in India, Pakistan, or Russia to get what you want.

Moreover, with the US on the rampage, prosecuting its counterproductive and unwinnable War on Terror, a lot of governments, especially ones unpopular in the West, have got to be thinking about acquiring nuclear capabilities. If Saddam had actually had nukes, the US would have left him alone, just as they’ve left the Kims to rot in the workers’ paradise they’ve made out of North Korea. It makes sense for a country stricken from the US’s official “nice” list and moved over to the “naughty” category to have some nukes. Everyone needs and wants a slingshot to keep the bully of the block at bay.

If you oppose nuclear proliferation, your first target should be US foreign policy, which is the biggest impetus behind the scramble to arms.

L: What about the argument that Iran would use nuclear weapons on Israel, if it had them?

Doug: That’s ridiculous. It’s true that just one or two nukes would turn most of Israel to glass, but it’s a matter of mutually assured destruction (MAD), just as the détente between the US and USSR was. Israel is reported to have about 200 nuclear weapons, and the Iranians know it. Even if they launched a successful first strike against Israel, they would get wiped off the face of the earth in response. The regime in Iran is repressive and borderline lunatic, but they aren’t that stupid. No way are they going to attack Israel with nukes. They not only cannot, but should not, be singled out for exclusion from the nuclear club.

L: But they’re part of the axis of evil, don’t you know?

Doug: Speaking of evil, it’s evil to initiate the use of force or fraud. If Iran enriches uranium or even builds tools for war, that’s not evil per se. But using force to stop them from doing something that is not in itself wrong is wrong, and that would make Iran’s attackers the axis of evil.

In my mind, the US is the biggest threat to peace in the world today. I can easily imagine those in power in the US starting a war over any silly pretext, real or imagined. It could easily happen by accident at this point. Things go wrong. Maybe some young hotheads in Iran’s Revolutionary Guard decide to take a boat out and attack a US frigate – launch a few RPGs at it before they’re blown out of the water. Then the US feels it needs to mete out some punishment and launches a strike against the base the boat came from – which would be attacking the Iranian mainland – and the thing spins completely out of control. Could happen at the drop of a hat. Maybe the commander of a US ship has a streak of General Jack D. Ripper from Kubrick’s Dr. Strangelove in him. Maybe the Russians or the Chinese – who are aiding the Iranians – mount a false-flag incident, because they want to see the US get involved in another tar baby.

L: So… another case of not just doing the wrong thing, but the exact opposite of the right thing, with economic, political, and ultimately physical world consequences.

Doug: That’s right. Just look at what they’re doing now, trying to isolate Iran from the world with an embargo. That could be seen as an act of war.

L: Well, wait a minute. A blockade is regarded as an act of war, but if Western countries decide to harm their own economies by not trading with Iran, that’s unfriendly, but not force or fraud.

Doug: Well, it would be forcing citizens in those Western countries to pay higher prices for things, denying them the choice of buying oil from Iran if they wanted to. But I agree; that’s more a matter of criminal tyranny and stupidity than an act of war. Still it sure is prodding Iran, throwing rocks at the hornets’ nest, as the US did with Japan before WWII. The Japanese basically have no domestic oil production and were getting their oil from the US and the Dutch East Indies. The US cut off both supplies, backing them into a corner, leaving them little choice but an aggressive response.

At any rate, I think all of this could backfire on the US. Since the Iranians apparently can’t clear deposits through New York, where international dollar trades clear, they’ve made a very commonsense move to cut the US out of the middle and sell their oil directly to India, without using dollars. I think other countries will follow – and then what? Iran isn’t going to want bushels and bushels of rupiah or yen or whatever. I think the odds favor them turning to gold. It’s said that’s one of the means of payment the Indians will be using.

Gold is the logical choice and the next step in the demise of the US dollar as the world’s reserve currency. There’s a lot of demand for the dollar to buy and sell oil. If countries stop using it, demand for the dollar would fall, at the very time the US is greatly increasing the supply of dollars. The day is coming when trillions of dollars outside the US will only be spendable inside the US. At that point it’s game over for the dollar.

L: You’ve talked about the world going back onto a gold standard before. What do you say to the people who say that gold is a barbaric relic from the past that doesn’t work in a modern economy – they can’t go around with pockets full of doubloons to buy cars or chests full of treasure to buy houses…

Doug: Such people are not thinking rationally and are economically ignorant. As always, we should start with a definition: what is money? The short answer is that it’s a store of wealth and medium of exchange. For reasons we’ve discussed and as Aristotle outlined over 2,000 years ago, gold is simply the best form of money ever adopted. And in our modern world, you don’t have to physically cart the stuff around. You can, but you can also transfer ownership of physical gold electronically, through services like GoldMoney.com.

L: Note: We do endorse GoldMoney.com as a convenient and reliable way to own, trade, and transfer gold, but readers should be advised that Doug is an investor in it.

Doug: Right. I like to put my money where my mouth is.

L: Okay, so you see this trend being bullish for gold, clear enough. But most of the gold ever produced in the world still exists in purified form in various vaults around the planet. Gold doesn’t get used up like silver does, so there’s plenty of supply. So, would the physical need for gold as money really impact the price of gold and related equities, or would that be more a function of governments further debasing their currencies?

Doug: Well, it’s estimated that there are some six billion ounces of refined gold in human possession around the world, or, somewhat less than one ounce per person. Global gold production is said to be about 80 million ounces a year, or about a 1.3% annual increase in the supply of gold. That would be the steady, “natural” rate of inflation if we were on a gold standard. The amount of various currency units in the world is increasing at a much, much faster pace than 1.3%. Nobody really knows, not even the Fed, but depending on how you define the money supply, it would take $10,000 to $50,000 – or more – per ounce to back all of the dollars in existence with gold. Whatever the correct number is, I expect gold’s price in dollars to increase dramatically as the world moves closer to and eventually adopts a gold standard.

L: So, any investment implications beyond the obvious? Buy gold and silver for prudence and protection, buy gold stocks for speculative leverage?

Doug: That’s the basic recipe. And diversify your holdings internationally. You can never tell when the government of your home country will have a psychotic break.

L: What do you say to the people afraid that in a world so traumatized as to go back onto a gold standard, the risk of owning any paper asset, including gold stocks, would be too high? No one will trade gold stocks for a can of dog food in a Mad Max world…

Doug: That’s a valid concern. You can’t eat paper, and even owning shares in a gold mine may not be of much use in a real economic cataclysm – the US government shut down gold mining during WWII as a nonessential industry. It could happen again. But that’s why, as you said, we own gold for prudence, and the stocks are strictly speculative vehicles.

But let’s have some perspective. The security of your stock portfolio may become the least of your concerns if the US starts a war with Iran that touches off WWIII. If that happens, the US government and population will both turn hysterical, and the whole country will be locked down like a prison. What was once America will become even more of a police state than it is now. Who knows where that would end?

So, one of the most intelligent things you can do is as I’ve been saying for years: diversify your assets and your physical presence internationally. Having some place you like to spend time off the beaten track, where you can ride the storm out, should be top priority for everyone who can afford it. Preparing for the worst at home should be top priority for those who can’t.

L: Would you care to put odds on open war between the US and Iran?

Doug: I’d say it’s highly probable within the next two to four years – say, between 50% and 75% – that an actual shooting war will break out.

L: Not much time to prepare. I sure hope all our readers are doing what they can.

Doug: Me too.

L: Right then. Thanks for your thoughts and guidance, Doug.

Doug: You’re welcome. We’ll talk again soon.

[To get an even better sense of how badly a US-Iran war could hurt the American economy, watch our free video. It's the first step to take to prepare yourself and your investments for what lies ahead.]

A recently-published, landmark research paper shows the link between stock market performance and presidential election winners.

What’s the biggest influence on the outcome of presidential elections?

Many observers would identify the role of campaign spending by super PACs, a candidate’s debate performance, and, of course, the health of the economy (“stupid”).

Yet if you want an answer backed by a large body of evidence, you’ll find one in the recently-published, landmark research paper by Robert Prechter, Deepak Goel, Wayne Parker and Matthew Lampert, titled “Social Mood, Stock Market Performance and US Presidential Elections.”

A lot of time, data analysis, and copious statistical evidence led them to this straightforward result: “Social mood as reflected by the stock market is a more powerful regulator of re-election outcomes than economic variables such as GDP, inflation and unemployment…”

In other words: If you want a good predictor for the result of an incumbent president’s re-election, look to the stock market.

Large amounts of earlier research have focused on stock performance after a presidential election. But very few scholars have reversed that order, to investigate a possible link between elections and preceding stock market performance. So reverse that order is what the authors did. What’s more, they’re the only ones to study the issue from a socionomic perspective — the premise that waves of social mood simultaneously drive the valuations of stocks and sitting presidents.

The group published their research on January 17, and it’s already getting attention. A Washington Post columnist read the paper and got its practical usefulness, by noting that Obama should benefit from a stock market that’s been mostly higher since 2008, while a Republican challenger “should hope the Dow crashes.”

You can read the entire research paper yourself by following this link >>

This chart debunks a long-held myth.

Back in the day, one of the first things I “learned” about investing was that low or declining interest rates are good for stock prices.

I’ve since had to “unlearn” this.

A certain market commentator recently reminded me of the “lower rates equal higher stocks” myth. He opined that stocks aren’t being kept afloat by hopes for a European debt solution, but then claimed that the real reason to be bullish is very low interest rates.

Yet is the near-zero rate on T-bills the reason stocks have held up since early October?

“[The chart below] shows a history of the four biggest stock market declines of the past hundred years. They display routs of 54% to 89%. In all these cases, interest rates fell, and in two of those cases they went all the way to zero! In those cases, investors should have traded all their bonds for stocks. But they didn’t; instead, they sold stocks and bought bonds.”

Elliott Wave Theorist, February 2010

Have a look at the chart:

From the evidence, you can see why the notion that low interest rates and a rising stock market almost always “go together” is just not accurate.

Now, we do know that stocks can fall when interest rates are high:

“The only comparably deep bear market in the past 80 years in which interest rates rose took place in the 1970s when the Value Line Index dropped 74 percent. Economists all draw upon this experience, but they ignore the others. Today’s environment of extensive investment leverage and an Everest of debt in the banking system is far more like 1929 in the U.S. and 1989 in Japan than it is like the 1970s.”

Conquer the Crash, second edition, (pp. 429-431)

Interest rates do not dictate the market’s price pattern — nor does any other event outside of the market itself.

The market has a life of its own, as revealed by the Elliott Wave Principle.

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See the evidence that refutes 10 false claims on what drives stock prices — and find out what really moves the markets — in the 50-page Independent Investor eBook. You’ll also get some of the most groundbreaking and eye-opening reports ever published in Elliott Wave International’s 30-year history, with new analysis, forecasts and commentary to help you think independently in today’s market. Download Your Free 50-Page Independent Investor eBook Now >>

By Jeff Clark, Casey Research

There are a number of reasons why many of us believe gold stocks will shoot for the moon before this bull market is over – they’ve done so many times in the past… the gold price still has a long way to climb… and producers are generating record revenue and profits. But I think there’s another reason why gold stocks will soar – one that hasn’t dawned on many in the industry yet.

The premise for my theory first lies in how gold itself is viewed. Some investors see gold as strictly a commodity or the infamous “barbarous relic.” This group sees no compelling reason to buy the metal and so own little to none. Others view it as a play on a rising asset or because of supply and demand imbalances; they buy while those reasons are positive and sell when they turn negative. Still others view gold as a store of value, an alternative currency, or a hedge against inflation; they tend to buy and hold.

Ask yourself why you own gold. Is it because it’s just another asset that offers diversification? Are you buying because it’s going up and someone like Doug Casey thinks it will continue doing so? Or is it due to a genuine concern about the dilution of your currency, both now and in the future?

What’s interesting to note is the shift in the number of investors wanting exposure to gold. Many who ignored it a decade ago are now buying. Those who started buying, say, five years ago, continue purchasing it today in spite of paying twice what they paid then. Slowly but surely, it’s becoming more important to more people. To wit, increasing numbers of investors are viewing gold as a must-own asset.

So, what happens when it becomes a must-own asset to a substantial majority instead of a small minority? Sure, the price will rise, probably parabolically, but putting aside speculation on the price of gold for now, have you thought about what happens if you have trouble finding any actual, physical gold to buy?

I think what many bullion dealers warned of regarding supply in last month’s BIG GOLD could come true. Andy Schectman of Miles Franklin insisted that the bullion market “will ultimately be defined by complete lack of available supply.” Border Gold’s Michael Levy cautioned, “If an overwhelming loss of confidence in the US unfolds, the demand for physical gold and silver will far outweigh all known inventories.” And Mike Maloney of GoldSilver.com warned that if shortages develop, “physical bullion coins and bars might become unobtainable regardless of price.”

Here’s a trend to consider. The following chart shows the growth in the world’s population vs. the total supply of gold from around the world. By this I mean new supply from mines, not the existing holdings of refined gold of various sorts held by governments, institutions, and individuals around the world.

(Click on image to enlarge)

The population of planet Earth has grown roughly 15% just since the year 2000, while the new supply of gold from all sources (mining, scrap, de-hedging) has fallen 4.2%. The rate of growth in the world’s population last year was 1.1%; while this is roughly similar to the increase in annual mine production for 2011, the trend right now is clearly for the growth in population to surpass the global supply of gold coming to market.

At the same time, demand keeps growing. China imported 3.3 million ounces of gold last November – and total global mining production outside China is just 6.4 million ounces per month. Gold bullion held by the world’s central banks is at a six-year high – but it’s roughly 15% below the amount they held in 1980 and has fallen in half as a percent of their total reserves.

Silver supply and demand paints an even starker picture: last year, for the first time in history, sales of silver Eagle and Maple Leaf coins surpassed domestic production in both the US and Canada. Throw in the fact that by most estimates less than 5% of the US population owns any gold or silver and you can see how precarious the situation is. A supply squeeze is not out of the question – rather it is coming to look more and more likely with each passing month.

This is great for gold owners and speculators, but it has further implications: As increasing numbers of people view gold as a must-own asset, and as supply is not keeping up with demand, where is the next logical place for investors to turn to get exposure?