War, Peace, and Financial Fireworks

By Casey Research

Politics has long been a driver of international markets and fickle financial systems alike. Everything is connected. Here are some voices from the just concluded Casey Research Fall Summit talking about cause, effect, and war.

James Rickards, senior managing director with Tangent Capital Partners and an audience favorite at investment conferences, says the Middle East, Russia, and China are all working against the U.S. dollar and for gold.

America’s recently improved relationship with Iran is actually bad for the petrodollar, he claims, because the Saudis and the Iranians are bitter enemies. The Russians, for their part, aren’t sitting idly by while the US imposes sanctions on them—aside from Putin being able to freeze US assets in Russia, Rickards believes that Russian hackers may already have the ability to shut down the New York Stock Exchange.

China does want a strong dollar because it still holds over $1 trillion in dollar-denominated assets. But Beijing is aware that eventually the dollar will depreciate, so it’s buying gold to hedge against a decline in the value of the US currency. Current gold reserves are estimated to be between 3,000 and 4,000 tonnes of gold; the ultimate target may be 8,000 tonnes.

Rickards thinks that we are approaching a period of extreme volatility in the U.S. markets and recommends allocating 10% of one’s portfolio to physical gold.

Bud Conrad, chief economist at Casey Research, also is a petrodollar bear. For the past 40 years, he says, the petrodollar has bestowed extraordinary privileges on Americans, but that era is now coming to an end.
Dozens of countries have already set up bilateral trade agreements that circumvent the US dollar. Dollars as a percentage of foreign reserves have declined from 55% in 1999 to 32% today—and could reach 18% by 2019, says Conrad. Ultimately, the petrodollar will fail, which will lead to a rise in sought-after commodities, especially gold.

Conrad thinks the greatest danger we face may be a combined financial and political collapse. Current geopolitical problems are even worse than economic problems, he says, and the trend is toward more, not less, war. Wars, on the other hand, often precipitate financial collapse.

Grant Williams, portfolio and strategy advisor for Vulpes Investment Management in Singapore and editor of the hugely popular newsletter Things That Make You Go Hmmm…, wholeheartedly agrees.

War and financial turmoil have always been inextricably linked, says Williams. Both occur in natural cycles, and one often causes the other. He believes that we’re in an extended period of economic peace because the Federal Reserve has used monetary policy “to abolish the bottom half of the business cycle.”

Although that may sound like a good thing, it is not. The business cycle, argues Williams, is inevitable and natural; we need it to cleanse the economy. But the Fed has leveraged to such unsustainable levels to “keep the peace” that the inevitable fallout will be that much worse.

He foresees serious wars to accompany the coming financial turmoil. Today’s geopolitical setup, he says, is similar to 1914’s. In 1914, France was a fading former giant (that’s Japan today); Britain was a waning superpower, no longer able to guarantee global security (that’s the US now); and Germany was an emerging industrial power huffing and puffing and making territorial claims (today, that’s China).

Rather than all out war, Marin Katusa, Casey’s chief energy investment strategist, believes the new “Colder War” will be fought by economic means, specifically through domination of the energy markets.
While Europe is using less oil than it did over a decade ago, says Katusa, it’s depending more on Russia for its energy. North Sea oil and gas production is in decline, and Norway’s production has reached a plateau and is dropping. Russia, on the other hand, owns 40% of the world’s conventional oil and gas reserves.

The solution, Katusa says, is the “European Energy Renaissance.” As Putin tightens the thumbscrews on his energy trading partners, more and more EU countries are waking up to the fact that they will have to produce their own energy to gain independence from Russia. As the best ways to play this new paradigm, Katusa recommends three undervalued North American companies that are in the thick of the action.

To get Marin Katusa’s timely stock picks (and those of the other speakers), as well as every single presentation of the Summit and all bonus files the speakers used, order your 26+-hour Summit Audio Collection now. They’re available in CD and/or MP3 format. Learn more here.

The article War, Peace, and Financial Fireworks was originally published at casey research

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Floating Rate Funds Poised to Profit as Interest Rates Rise

By Andrey Dashkov

Money can’t be this cheap forever. In other words, one of the most likely scenarios the U.S. economy faces is rising interest rates. The current low interest rate climate is simply unsustainable. At some point—as it always does—the trend will turn around. We want to be prepared for that turn, and the right floating-rate fund can help.

A floating rate loan is a bank loan with interest that’s tied to some benchmark rate, often the London Interbank Offer Rate (LIBOR). When the LIBOR changes, so does the loan’s coupon. The rate is adjusted every 30 - 90 days. Floating rate funds are pools of capital that invest in these loans, earn variable-rate interest, and pay dividends that are themselves flexible.

Variable Dividends Boost Immunity

Variable dividends are the key feature of floating rate funds. They’re what separate floating rate funds from the rest of the debt market. Flexible dividends make shares of the bond funds immune to rising interest rates; the prices of the bonds and the fund’s shares don’t get punished when rates go up. What the investor sees is higher dividends; his principal is safe.

A note of caution is in order here: Even though floating rate bonds don’t have the same inverse price-yield relationship as fixed rate debt instruments, their prices can still go down. Although the automatic coupon adjustments mostly eliminate the first major risk of any debt instrument—interest-rate risk—floating-rate funds still hold the other major risk: credit risk. As a reminder, credit risk is the risk that the borrower won’t make payments on time or will default on the debt entirely.

The credit risk of floating rate loans is high because the companies that borrow under these conditions are usually rated below investment grade. They can’t go to capital markets for money because fixed rate loans would be too expensive, so they turn to banks that provide funds on floating rate terms.

Since the companies borrowing these funds are below investment grade, their default rates are close to those of speculative grade bonds. Vanguard Research reports that the average annual default rate from 1996 to 2012 for speculative grade bonds was 4.5%; for senior floating-rate loans, it was 3.4%. Better, but still much higher than investment-grade bonds at 0.1%.

High Post - Default Recovery Rates

Does this mean that you should avoid floating rate loans in favor of AAA-rated debt? No. First, floating-rate loans are high in a companies’ debt structure, which means that if the borrower defaults, investors holding floating rate debt have a priority claim on the company’s assets. This leads to very high recovery rates for senior floating rate loans in the event of default: 71.1%, or more than 70 cents on the dollar. Compare that to the next class of loans, senior secured, which are recovered at a rate of 56.8%.

Second, floating rate loans outperform both high yield loans and the aggregate U.S. bond market. According to Vanguard, during the last three rising rate periods (January 1994-February 1995, June 1999-May 2000, and June 2004-June 2006) floating rate bonds outperformed high yield instruments by 2.5 percentage points (pp) and the aggregate bond market by 4.3 pp.

After the rising rate periods end, however, floating rate funds tend to underperform both high yield instruments and the overall bond market. This is why we’re buying them now, when rates have nowhere to go but up. We don’t know when that will happen, but when it does, we want to be positioned to profit.
In addition to their excellent performance in rising interest rate periods, floating rate funds are good for diversification. Their correlation with the overall US bond market is close to zero, which makes them especially good for a portfolio focused on fixed-rate US bonds. However, they also belong in our retirement portfolio—the Money Forever portfolio—where we use them to diversify our allocation across various debt instruments and to make sure we are well positioned to profit from rising interest rates.

Entrée into the World of Big Money

To sum it up, floating rate funds provide a way to diversify into an investment class that is almost immune to rising interest rates. Like business development companies, floating rate funds offer retail investors entrée into an area of finance usually reserved for big money and institutions. In exchange for these opportunities, investors accept credit risk due to the low credit ratings of the borrowing companies. With that in mind, we pay close attention to the sectors of the funds we consider investing in, and prefer more defensive and crisis-resistant industries.

At Miller’s Money we closely monitor the bond market, constantly scouting out the best options for seniors and savers. Learn more need to know information about bonds and the role they play in today’s low-interest rate environment by downloading our free special report, Bond Basics today.

The article Floating-Rate Funds Poised to Profit as Interest Rates Rise was originally published at Millers Money

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What Casey Research Staff Are Buying This Summer

By Jeff Clark, Senior Precious Metals Analyst

I ran across a business show last week that advertised that its guests would give out stock picks. That piqued my curiosity, so I watched to see what they would recommend. For disclosure purposes, a chart was shown that listed if the speaker, his family, his fund, or his clients owned the stock. By the end of the show, I was flabbergasted—not one speaker owned any stock they recommended!

Anyone can go on television and tell investors company X is a great investment, but how much should you trust them if they don’t follow their own recommendations? The counterargument is that the speaker could be biased if they recommend stocks they already own because then they’re just “talking their book.” True enough.

But consider a more personal situation: If you got specific investment advice from a professional you hired and found out he never bought what he told you to buy, how seriously would you take his advice?
What if a newsletter service recommended you buy gold and gold stocks, but their editors didn’t follow their own advice? And what if the market retreated and they encouraged you to average down—but they didn’t?
In the June BIG GOLD, I told subscribers to put the final touches on their precious metals portfolio over the summer, to take advantage of low prices. Do I take my own advice? What about the rest of our staff? And what about those at Casey Research who write non gold publications?

I decided to poll our editors to see if they follow the advice in BIG GOLD and International Speculator and what they plan to buy this summer in the precious metals arena. Here’s what they told me…
Doug Casey, Chairman: Most everything is overpriced, thanks to the Fed’s unprecedented money printing. That includes stocks and property, and bonds are in a bubble. So I continue to buy the metals consistently, and do private placements in deserving companies. The metals and mining stocks are about the only value out there.

Olivier Garret, CEO: I am definitely not reducing my exposure to precious metals [PMs] and stocks. I will add to my positions in PMs at Hard Assets Alliance. Our funds, of which I am a large shareholder, continue to deploy capital in the best-of-breed resource companies.

David Galland, Managing Director: Over the last year, I have been taking full advantage of the softness in the precious metals sector by concentrating my purchases only on the best of the best precious metals stocks, deciding on a price I am thrilled to pay and then waiting for the price to come to me. I have also been very selective in participating in private placements. If a private placement doesn’t come with a very favorably priced warrant with an expiration date at least three years out, giving the company time to take its business to the next level, then I’m simply not interested. That’s the beauty of periods of consolidation—you can afford to be selective.

I also like to build large positions in companies which I know have the right stuff, including a significant and feasible project as well as the money and the management needed to get the job done. When those companies pull back—as they invariably do in markets such as these—I have no reservations about buying more. Pretium Resources falls into that category. My personal upside target is over $15, so buying at these levels is a no-brainer for me. That said, I’m not greedy, so when I get a solid double-digit return on a stock, I’m happy to take a profit.

I guess when it comes down to it, now that I live most of the year in my version of paradise—La Estancia de Cafayate—and dedicate much of every day to fully enjoying the place, I try to keep things simple. Primarily, by setting aside a couple of hours each month to review my portfolio in order to make sure I still understand why I own all the investments I own and to rebalance any positions that have grown outside of my comfort zone, or pulled back, allowing me to continue to build a position. In the case of precious metals-related investments, I am very comfortable with them totaling about 25% of my overall portfolio.

Dan Steinhart, Managing Editor, The Casey Report: I have all the physical metal I want for now, and I averaged down on a couple junior miners in the last few months. For this summer, I’m looking hard at mid- and large-tier dividend payers. I want more exposure to gold because I’m confident it’s going to the moon, but I have no idea how long it will take to get there. Collecting dividends helps offset the opportunity cost while I wait. I already own a good amount of Goldcorp, so Yamana is my next target… I’m watching its chart for signs that the price has stabilized, and once I see that, I’m ready to buy.

Marin Katusa, Chief Energy Investment Strategist: I am looking to build positions in certain stocks but don’t want to advertise which ones.

Bud Conrad, Chief Economist: Gold is my largest personal position. As I wrote in the April issue of The Casey Report, the world’s financial system is approaching an important rebalancing. New political alignments will undermine the dollar’s special privileges and in turn will elevate gold’s importance.

The petrodollar arrangement will not last forever, and cracks are beginning to form that suggest it may decline faster than most expect. Since the 1970s, Saudi Arabia and OPEC have only accepted dollars for oil. The new $400 billion agreement between Russia and China does not use dollars, and this is a major geopolitical shift that could eventually undermine the reserve status of the dollar. The price of gold could rise into the thousands of dollars very quickly if the petrodollar system fails.

In the meantime, investors should understand that current price weakness comes from short term, big, institutional influence rather than from economic fundamentals. There are big forces that are able to move markets—interest rates, commodities, and stocks. The key movers are the central banks and their closely related big banks. Some international banks are being indicted for illegal activities in LIBOR, foreign exchange, and most recently London bullion fixings. Employees are being fired, some are leaving, and firms are closing some of their trading desks. We even have suspicions about some bankers’ deaths.

The Fed’s massive and not completely revealed actions have been used along with the truly massive derivatives and futures markets as developed and traded by the big banks to distort the traditional economic forces so that big deficits can be managed by keeping rates low. Prices can thus be managed in the short term, and the media continues to support the government’s policies. That high-frequency trading is tolerated as described in Michael Lewis’ book Flash Boys is only the tip of the iceberg of all that is going on.
In the long term, I agree with Doug Casey: we still face the greatest financial collapse ever when the current machinations hit their limits and the deception becomes widely understood.

Dennis Miller, Senior Editor, Miller’s Money Forever: I have a full allocation to precious metals, but I have a growing concern that Obamacare, by design, will ration care for seniors. Pity the poor senior that goes to Panama for treatment because he can’t get it in the US, or the wait is too long, or it’s too expensive—only to realize currency controls have been instituted and he can’t get money out of the country! As a result, I have been using some of the strategies in our Going Global 2014 report to assure that this won’t happen to me or my wife. And gold is part of that strategy.

Nick Giambruno, Senior Editor, International Man: This summer I plan to continue with steady purchases through MetalStream^® for gold bullion held in Singapore. I’m also keeping a higher than normal cash reserve for stink bids on juniors. I already have adequate exposure to silver and large producers.

Shannara Johnson, Chief Editor: I buy silver every week through SilverSaver, a metals accumulation program that allows you to save as little as $25 per week. When I get extra money, such as bonuses, I often use a lump sum to buy a larger amount of silver on dips. As Doug Casey says, only metal that you can hold in your hand is really yours, so whenever my SilverSaver account reaches a certain level, I have some of the bullion delivered.

The reason I’m buying silver instead of gold is that it’s more affordable, and also because of the “divisible” part of Aristotle’s criteria for money. If there ever comes a crisis so devastating that paper dollars become worthless and precious metals are used for trade and barter, I imagine that silver bullion coins will be easier to, say, buy food with than gold coins or bars.

I’m very wary of the cancer that is eating away at the heart of America—call it crony capitalism or neo-feudalism—and everything the government and Wall Street do seems to be designed to separate the little guy from his money. I believe precious metals are manipulated, the markets are manipulated, and we saw in Cyprus that nothing is sacred anymore, not even our own bank accounts. I don’t plan to sell my silver unless I have to—it’s a safety net in case things go from bad to worse.

Doug Hornig, Senior Editor: I think quality numismatic coins are the best buy right now, which I’ve focused on, because they’re down 50% or more from their highs, which is a lot more than gold itself. If collectibles rebound as they always have, I’ll do very well. But if not, I still have the value of the underlying asset, gold, which provides a powerful amount of downside protection, and that’s not to be sneezed at.
I don’t buy gold as a speculation; just as an heirloom (hopefully, provided I don’t need it myself) for my kids. So I couldn’t care less about the gyrations of the gold price. Anyone who wants to play those ups and downs is welcome to, and it could be very profitable to do it. It’s just not for me. I’m strictly buy and hold.

Ed Steer, Editor, Gold & Silver Daily: I’m full up on stocks, as I’m still “all-in,” with virtually all of them junior silver producers from BIG GOLD. Right now I’m buying silver—physical metal in hand—as it won’t be at this price forever.

Chris Wood, Senior Analyst, Casey Extraordinary Technology: I just used the bulk of the cash I had budgeted for investing this summer to buy several of the Casey Extraordinary Technology stocks we recently recommended. So I probably won’t do much in the way of precious metals investing this summer, but I definitely plan on it this fall: buying physical gold and silver bullion coins, and setting up an account with the Hard Assets Alliance.

The short term technical picture for gold doesn’t look great, coupled with the dollar strengthening over the past month and yen declining, which is generally bearish for gold. But I honestly don’t care about that at all. The long-term fundamental picture has only improved, save for the small bit of tapering that the Fed has initiated in its bond buying program. Central banks around the world continue to create currency units at a record pace.

And the mid-term outlook for gold looks good too. Even though the dollar has strengthened over the past few weeks, the beginning of the end of the petrodollar system (shown most recently by the China/Russia gas deal) and China’s desire to essentially create a new UN without the US and EU but with Russia and Iran, has to be bullish for gold.

Kevin Brekke, Managing Editor, World Money Analyst: The post-2008/09 financial crisis run-up in gold had everyone from die-hard gold bugs to momentum jockeys riding the price wave. It seemed the trend would never end. Then came the countervailing realities of monetary, currency, and economic interventions, deflationary forces, and—gasp!—profit taking.

The ensuing price volatility in the precious metals sector had the myopic, trade for today crowd scamper to the next hot trade. Yet, the consequences of misguided policies remain unknown, and the excesses that were deployed to resolve them have simply been repressed. The underlying fundamentals are unchanged, and I will not sell my gold and render myself unarmed against the eventual fallout from a delayed day of reckoning.

Louis James, Chief Metals & Mining Investment Strategist: Our household is tight on cash this summer, as we just poured much of our liquidity into buying our new home in Puerto Rico. Still, my wife and I have been going over our budget and plan to buy some stocks, maybe more bullion as well. Which ones will depend on what looks best when we pull the trigger, but adding to our position in BOZ is a high priority, and we’re thinking about SWC, too, as we’ve yet to add exposure to platinum/palladium, and our diversification into that sector in the newsletters seems to be working out even faster than expected.

If the market correction continues and we see the capitulation this summer that was close but never really fully developed last December, I will do all I can to scrounge up more cash to deploy, because I think it will be both life-changing and a once in a lifetime event.

What About Me?

I have been buying tubes of silver Eagles and Maple Leafs every time silver dips to $19.50 or below. I plan to buy the discounted bullion offered in the June BIG GOLD, as well as the new Canadian Howling Wolf. I have full exposure to equities in the precious metals space—but then Louis or Marin will recommend a compelling speculation and off I go turning over couch cushions.

What I have found very rewarding is that by just sticking to a regular accumulation plan, my stash has steadily grown. Given the crises I see ahead, I want to be sure my household can withstand the fallout, which could be ugly if Doug Casey, Bud Conrad, James Rickards, and Jim Rogers are right. The financial crisis in 2008 was a wake up call, and I realized then I probably didn’t have sufficient monetary protection. I feel differently today, thanks to my regular buying habits.

Since I’m in the public eye, I don’t keep any bullion at home—except for a dummy stash. I use several of the services recommended in our Bullion Buyers Guide, that you don’t have to be a high-net-worth investor to use.

Conclusion

What you see above started out as a survey but ended up becoming a great set of precious-metals-related investment advice. I hope you find it helpful.

If you’re interested in precious metals investments, but don’t know where to start, read our free special report, the 2014 Gold Investor’s Guide. It tells you how and when to buy gold and silver bullion… what to watch out for when investing in gold stocks… and much more. Click Here to Get it Now.

The article What Casey Research Staff Are Buying This Summer was originally published at Casey Research

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