Addison Wiggin – May 16, 2011
- Debt ceiling hit, Armageddon fails to ensue… And so we press on, at least until Saturday
- Indians, Chinese, even Americans loading up on precious metals after the early-May pullback
- "A prized strategic asset"… Chris Mayer on an overlooked opportunity
- Oregon gas station owner's offer to deal in hard money… and why it's a bad bargain
- The "uncaring" Ron Paul, "remarkable architecture" and more advice on surviving Chinese toasts… in a variegated mailbag
Over the weekend, we traveled from Beijing to Shanghai, and then on to Laos' capital city, Vientiane.
We hosted a cocktail party in Shanghai, saw our mugs on the front page of the finance section of one of China's largest general interest newspapers (see below) and picked up some insights about doing business in Laos, whose stock market opened on Jan. 11, 2011… with just two shares listed.
We'll share those thoughts and other travel tidbits as the week rolls on. But for today, all we've managed to do is rest heavily on the sturdy shoulders of our partner in crime, Dave Gonigam back in Baltimore.
Treasury Secretary Tim Geithner solemnly informed Congress this morning, Dave tells us, for example, that the U.S. government has bumped up against the $14.29 trillion debt ceiling.
Strangely, Armageddon has not ensued.
So far, there appears little evidence of the "catastrophic, far-reaching damage" Geithner has warned of since the first of the year.
Or the "extremely dire consequences" Fed chief Ben Bernanke warned us about.
Heck, the major U.S. stock indexes are rallying a bit after Friday's losses. The Dow has poked its head back above 12,600. And oil has fallen below $99 a barrel.
For now, the Treasury department is shuffling money between accounts to stay under the debt ceiling — starting with a time-honored tradition forged by state and local governments. That is, Uncle Sam is raiding federal pension funds to pay the bills.
This, we're told, is supposed to delay Armageddon until Aug. 2. That is, of course, assuming Armageddon doesn't come on Saturday, as you have been warned of on billboards nationwide for some time…
Gold and silver are likewise yawning at the debt ceiling news. Gold has firmed a few bucks to $1,504, while silver sits at $35 on the nose. The recent pullback is sparking renewed buying of physical metal — both at home and abroad.
UBS and Standard Bank report their strongest bullion sales to India so far this year. That's a big deal, because India accounts for one-fifth of global demand for gold.
"High inflation in India is driving investors into precious metals as a store of value," notes the Financial Times, "when rising prices erode the value of their paper currencies."
Indians are snapping up silver too. "People are booking incredible amounts of silver," says Mumbai trader Chhabil Jain, "as they see the current drop in prices as a great opportunity to buy more … most are buying for pure investment."
"The Chinese are worried about inflation because they are big buyers of gold and, more recently, silver," adds Chris Mayer.
"Some of this buying is speculative. For example, in Shanghai, trading volumes in silver are up 30-fold for the year!
"Undoubtedly, Chinese speculators plowing in and out of silver have something to do with its violent whipsaws of late. (Although, silver has a history of this kind of thing. It's not called 'the devil's metal' for nothing.)"
Indeed, a chart of trading volume in Shanghai bears an uncanny resemblance to the silver price.
"As I say, some of this is speculative, but most of the accumulation of precious metals in China is simply a means to protect wealth, which has been the role of these metals in human societies for thousands of years." Inflation clocked in at 5.2% in China last week, and the unofficial rate is more like 10%.
"When inflation becomes a problem — that is, when paper money buys less and less — people turn more and more to gold and silver."
American buyers of physical gold are busy, too. The U.S. Mint has sold 85,000 ounces of Gold Eagles since May 1.
At that pace, May will be the best month in a year. Not bad for a period in which broad commodity indexes fell 10%.
"The last time sales reached that level," Bloomberg notes helpfully, "bullion rose 21% in the next year."
"Despite a big run-up in the price of gold," adds Chris Mayer, "it is still vastly underowned. As inflation starts to get more and more headlines, I think more and more attention will focus onto gold.
"We still have a long way to go. In inflation-adjusted terms, gold doesn't hit a new high until it breaks $2,000 an ounce."
To underscore the point, Chris included this chart in a recent special report to subscribers — one we've spotlighted before.
"This is another reason why gold stocks look attractive. In particular, I'd stay with the juniors and midtier producers."
Chris has two in mind… and he's eager to share them with you in that same special report. Both can still be had for under $2 a share. Both could reach many times that price… In fact, one he sees going all the way to $27.
Today's your last chance to get a copy of this report plus discounted membership in his high-end letter Mayer's Special Situations. The offer expires promptly at midnight.
The greenback is getting spanked today, the dollar index down more than three quarters of a percent, to 75.3. The euro, which makes up more than half the index, has firmed to $1.422.
Huh? That wasn't supposed to happen. All weekend, MarketWatch, Bloomberg and the press here in Asia were telling us the euro would weaken today, because of all the uncertainty over Greek bailouts, because IMF chief Dominique Strauss-Khan sits in a New York courtroom this morning to face charges of sexual assault.
Turns out the world's still spinning without him in action. Imagine that.
To no one's surprise, Social Security and Medicare are going broke at an accelerated pace.
The latest report from the trustees who oversee the programs says the Medicare trust fund will be exhausted in 2024, not 2029, as thought last year. The report also shaved a year off Social Security's useful life span, to 2036.
"Metallurgical coal (also called met coal or coking coal) is fast becoming a prized strategic asset," says Chris Mayer, turning his attention to another opportunity. "It's a high-grade coal used in making steel.
"Met coal prices go for two or three times the price of coal used to generate electricity. Steelmakers are willing to pay a lot of money to secure it." And producers of met coal are in high demand, judging from the mergers and acquisitions this year alone…
- Rio Tinto offering $4 billion to buy out Riversdale Mining. Riversdale was a recommendation in Mayer's Special Situations — good for a 60% gain in a little over 4 months
- Arch Coal offering $3.4 billion for International Coal Group — which would make Arch the nation's second biggest producer of met coal
- Alpha Natural Resources buying out Massey, creating the No.1 U.S. producer.
It's a basic supply-and-demand story, Chris says: "Chinese, Indian and Brazilian steelmakers have expanded capacity and built many new mills along their coastlines ready to import met coal. China doesn't have enough and has been a net importer since 2009. India suffers from chronic shortages of met coal, and Brazil will also have to import a lot.
"The big producer is Australia. Various bottlenecks have emerged there, including delays in port infrastructure projects and flooding issues. The second-largest exporter is the U.S."
Which is where Chris has come across a lucrative opportunity. "The market still underestimates the strategic importance of coking coal." After running the numbers, Chris sees the potential for this $3 stock to reach $14 — better than a four-bagger.
Chris named this stock Friday in the new issue of Mayer's Special Situations. You can access it as soon as you sign up for membership — still available at a significant discount until midnight tonight. You'll also get a special report identifying the two junior gold stocks he likes. Seriously, what are you waiting for?
"We first ran across this on the photo-sharing website Picasa Friday," Mr. Gonigam also reports. "Over the weekend, it went viral."
Unfortunately, background information is exceedingly hard to come by. Supposedly, this is in Ashland, Ore. — a town along Interstate 5 just north of the California state line. But a casual search reveals no name of the gas station or the owner.
Whoever the owner is, he's getting a great deal from anyone who bites. "Two Roosevelt dimes contain 0.14468 ounces of silver," comments retired professor Michael Rozeff from University at Buffalo. "If gas costs $4 in Federal Reserve Notes, then the implicit price of silver that makes $4 equivalent to 0.14468 ounces of silver is $27.65 per ounce. So this price seems roughly in the ballpark.
"But if we take $35, which is nearer today's silver's price, then the implied price of gasoline is $5.06, which is steep. At any price less than $5.06, I'd hold onto the dimes and use FRNs."
"Dr. Ron Paul is certainly a likable and well-spoken gentleman, but just like the whole Republican pack," writes a reader in response to Dr. Paul announcing he'll run for president again, which we conveyed on Friday, "he's crazy as a loon. At least he doesn't try to make it sound like he cares about people."
The 5: Unless, of course, you listen. He does care about people… he wants them to be free.
"Could you give me some info on links with the current components of CPI, the old way it was calculated and the difference you noted in Friday's report? Need to document this for my boss. Enjoy your updates."
The 5: The man who does the heavy lifting in that regard is our friend John Williams; his invaluable website is ShadowStats.com. He does the same with unemployment and GDP too. Good luck with your boss.
"You are gazing at some remarkable architecture," a reader writes after we posted a picture of the China Central Television complex on Friday. "The story of this campus involves a conscious attempt to be different than every other tall building in the capital of China, or anywhere else.
"Rem Koolhaas and the Office for Metropolitan Architecture convinced the Chinese public broadcasting company that it was in their best interests to make a statement that expressed difference from the norm if they were going to engage in building for the next millennium. CCTV believes the architecture reflects their fit with traditional Chinese society.
"They are forward thinking, contemporary, and they aim to make a difference in their society. We should be able to judge their goals as television continues to steer Chinese society toward a more capitalistic worldview. Your comments indicate the building team might be successful in that regard.
"Contemplate for a moment the feat of joining the two massive cantilevers that form the top of the building. Accomplishing that was a study in engineering and precise construction. High-rise building as a mobius loop — a suitable form for a public broadcasting company, I suggest."
The 5: I guess. Until they tried to burn it down.
"At one post-dinner party in Jinan, capital of Shandong," another reader shares of his own experience with the vile beverage baijiu, "with several members of the academic and business community.
"As an honored foreigner (my wife is Chinese), I was involved in every toast, while others took turns. Yes, it was only from wine glasses, but I made it through the evening not only still able to walk, but I also didn't use the bathroom, proving a second capability for 'holding.'
"The U.S. honor upheld by a boy who grew up in one of those hard-drinking iron mining towns of northern Minnesota!"
"I entered China in 1986 to teach an engineering graduate class at Shanghai Jiao Tong University," regales another. "We had a 'celebration' later, which included (I was told) the most notorious 'drinker' in the Chinese academy.
"After several rounds of 'toasts' from the 36 assembled faculty, I detected what was going on, so I rose to toast those assembled with a Blue Blazer — you fill a glass with the high-alcohol drink and light it with a match… and then gulp it down.
"Only one Chinese physics professor was able to accomplish it, and the 'notorious president' called the rest of the party 'closed'!"
The 5: Well played.
The 5 Min. Forecast
P.S. Apparently, The Demise of the Dollar was a big hit in China. Four national papers requested interviews with us during our stay in Beijing.
At this point, we're not exactly sure what we're meant to have said.
P.P.S. Don't forget… there are only a few hours left to respond. If you'd like to secure reduced-price access to Chris Mayer's premium advisory Mayer's Special Situations… a special report identifying two junior gold stocks set to soar… and the brand-new issue naming the $3 producer of highly desired metallurgical coal that he sees headed to $14… do it, but only before midnight tonight. Last chance…. so you might as well do it now.