The Burning Platform

Massive Commodity Inflation and Investing in Gold

By Hard Assets Alliance Team

On this week’s episode of The Disciplined Investor (TDI) Show, Hard Assets Alliance GM Ed D’Agostino and Gold Bullion International Senior VP of Distribution Joe Yasinski explain how to better understand the process of owning precious metals outright. Host Andrew Horowitz engages the two in a discussion on the differences in paper versus physical assets and how to store them.

Some of the other important topics in this episode include the massive inflation seen in Japan, earnings, economics, buybacks and more…

Listen to the episode by clicking here.

Name That Black Swan

By Jeff Clark, Editor of BIG GOLD

Is there a potential event that could negatively impact your world so much that it’s imperative you insure against it?

Of course. That’s why you carry fire insurance on your home, for example. The odds of your house burning to the ground are very low – but the outcome would be so financially devastating that you need to have insurance to protect against the loss. The same could be said of life insurance, auto insurance, etc.

What about an economic or monetary event that, in spite of you being prudent with your money, could damage your financial status?

Those exist too, and they’re called “black swans.” It’s this type of event that is the basis of our third installment in the core reasons we must continue to own gold. In spite of gold’s recent waterfall decline, we’ll show that the need to own gold has actually grown.

First, what exactly is a black swan?

Like a black swan bird – something that occurs rarely in nature – a black swan event is a high-profile but rare occurrence that is beyond the realm of normal expectations. The term was introduced by Nassim Taleb in his 2004 book, Fooled by Randomness. It’s a metaphor that, according to Taleb, has three characteristics:

• The event is a surprise
• It has a major effect
• After the event, it is rationalized by hindsight, as if it could have been expected. In other words, the data were available to foresee it, but risk mitigation programs didn’t account for it.

What I found interesting in reviewing Taleb’s thesis is that he stated in 2004, “Banks and trading firms are especially vulnerable to hazardous black swan events and are exposed to losses beyond those predicted by their defective models.” In other words, his black swan theory essentially predicted the financial crisis that hit four years later.

You might argue that a black swan event could occur at any time. That’s true. But our current fiscal, monetary, and economic circumstances are so tenuous that the possibility of a black swan event hitting our economy is greater than usual. Indeed, the number of anomalous events that could take place is large enough that collectively they represent a high probability. And since we all live and work within an economic system and use money every day, the impact to us as individuals could be severe.

So the question is this: what data are available now that show where we are most vulnerable to experiencing a black swan event?

Social breakdown: Many European countries still have 50% unemployment in the under-24-year-old crowd, with little prospect of improvement. The triggers are in place for a breakdown of public order in the EU. Particularly concerning would be if the disorder spread to other countries and continents.

War: While Kim Jong-un of North Korea captures all the current headlines, US General James Mattis reports that sanctions and diplomatic efforts to stop Iran from gaining nuclear capabilities are not working. He said Iran is at the point of “enriching uranium beyond any plausible peaceful purpose” and called 2013 the “year of reckoning.”

Financial system collapse: The world economy is worth about $80 trillion. Banks hold derivative positions worth about $1.6 quadrillion (1,600 trillion). If a portion of those bets came crashing down, the financial system may not have the capability to cover the losses. Even if they did, the markets would be roiled.

A major bank raid: The Ottawa federal budget last month revealed that politicians are contemplating the possibility of a Canadian bank failure. One potential solution is similar to the one just imposed in Cyprus: for the first time ever, officials did not include a guarantee in the budget language that expressly prohibits the possibility of a raid on the bank accounts of ordinary Canadians.

China dumps Treasuries: As of January, China holds over $1.2 trillion in US Treasury securities, more than any other country. They’ve expressed concern for years about the diluting value of those securities due to money printing. If China were to sell Treasuries in any significant quantity, interest rates would jump and the dollar would crater.

Sudden, runaway inflation: This would be particularly devastating for the simple reason that hardly anyone is expecting it. We outlined in our February issue that history shows inflation can occur suddenly and rise sharply. Since it hasn’t occurred, many think it won’t… a dangerous assumption, given the ongoing massive dilution of many G7 currencies.

What about a black swan within the gold sector?

Comex delivery failure: In the first three months of the year, stocks of gold held at Comex warehouses plunged by the largest figure ever on record during a single quarter. While the reason behind the move is unclear, nearly two million ounces of gold being withdrawn from the Comex and moved to undisclosed locations does not paint a picture of confidence in the exchange. And it wouldn’t take an outright failure; an announcement of a delivery delay would send a very unsettling message.

There are undoubtedly numerous possible black swans, and I’m sure you can think of others. The point is, given our current set of circumstances – runaway debt levels, ongoing global easing programs, and little political will to do what is necessary to steer away from the crisis instead of deeper into it – how do we protect ourselves against some of these possible outcomes?

According to Wikipedia, “the main idea in Taleb’s book is not to attempt to predict black swan events, but to build robustness against negative ones and be able to exploit positive ones.“

Gold won’t solve all our problems, but when it comes to building robustness against possible monetary fallout, its 3,000-year track record says there is no substitute. Since many black swans swimming in our waters relate to our monetary or fiscal standing, the risk for gold is more to the upside than the downside. So in spite of gold’s recent waterfall decline, the need to protect against a black-swan event has actually grown. Only those who have purchased gold before a black swan event will be protected and benefit from rising prices.

Here are three concrete ways we think investors should consider “building robustness” with their gold holdings…

Favor physical metal over paper forms. In today’s environment, the pinnacle of risk is solely holding paper assets. Be sure that your gold holdings are denominated more in Eagles and Maple Leafs than in ETFs and certificates. This includes fractional programs where they don’t offer delivery, even if the metal you own a portion of is fully allocated.

Use non-bank storage. Private vaulting facilities are not subject to bankers’ hours, the sudden declaration of a bank “holiday,” or systemic risks within the financial sector.

Store a meaningful portion internationally. By storing some physical holdings outside your political jurisdiction, you reduce four primary risks: confiscation, capital controls, asset seizure by a government agency, and increased lack of personal control. We can never eliminate risk; the goal is to diversify so that any one event doesn’t impact our entire portfolio.

While it’s healthy to have an optimistic outlook, it’s dangerous to not be prepared financially in light of the current fiscal and monetary predicament that has trapped many countries. The data available now should compel us to make those preparations.

The Resurgence of the Nuclear Reactor

By Casey Research

In August 1956, the Calder Hall Power Plant in Seascale, England began generating electricity and earned the distinction of being the world’s first commercial nuclear power plant. It was a humble beginning for nuclear power; the plant only had a 50-megawatt (MW) output capacity, whereas the smallest US plant today has a 478 MW capacity. Nonetheless, Calder Hall represented the launch of a new era in energy that promised to bring electricity too cheap to meter.

But early on, the promising power source had its detractors. They objected to the high initial cost of constructing nuclear plants, the problems of radioactive waste disposal, and the risks of nuclear accidents and nuclear proliferation.

The detractors had an impact. The heavy regulation they pushed for and the litigation they initiated extended construction times and drove up construction costs. But despite their efforts, over 100 reactors had been placed in service in the United States by 1974.

Then came 1979 and a landmark event – the nuclear accident at Three Mile Island. In the aftermath, public opinion turned solidly in favor of the anti-nuclear movement, several construction projects were canceled, and no new US building permits for nuclear power plants were issued for the next 33 years.

Though the US abandoned nuclear expansion in the 1980s, other countries forged ahead. Worldwide startups peaked in 1984 and 1985, as over 30 plants were brought online in each of those years. However, escalating regulatory and litigation costs and pressure groups were not unique to the US. By the 1980s, it was becoming difficult to cost-justify new projects. On top of all that, the Chernobyl accident occurred in 1986, and the world had its own Three Mile Island moment.

In the 1990s, global startups fell to an annual average of less than six per year; in the first decade of the new century, average annual startups were just over three per year. In fact, since 1990 there have barely been enough startups to offset shutdowns.

The recent flurry of closures was caused to a great extent by yet another accident. After the earthquake and tsunami in Japan on March 11, 2011 and the ensuing catastrophe at the Fukushima Nuclear Power Plant, several countries began to rethink their nuclear energy policies. In May 2011, Germany announced that it would abandon nuclear energy entirely, shutting down all 17 of its plants by 2022. In June 2011, Italian citizens voted overwhelmingly in favor of a referendum to cancel plans for new reactors. The Japanese Cabinet, though unclear about a specific plan, has issued a white paper calling for less reliance on nuclear power.

So is nuclear on its last legs? It would appear so… but before we make the funeral arrangements, let’s take a closer look.

A Nuclear Renaissance

In the wake of the Fukushima disaster, much of the attention in the Western world has been on the nuclear power debate, plant shutdowns, and project cancelations. Meanwhile, those in developing countries recognize the harsh reality that something has to be done to produce more power. Driven by population growth and increasing standards of living, future demand for energy in those countries will be strong, if not overwhelming.

The International Energy Agency forecasts that global demand for electricity will grow by a staggering 70% between 2012 and 2035. The increase will come predominantly from developing countries – over half is expected from China and India alone.

Serious pollution problems mean that those developing countries cannot produce all that electricity by burning coal. Amir Adnani, Uranium Energy Corporation’s CEO, says, “The plans to develop nuclear power in China and other countries are very much driven by a set of realities that is very different and very acute. People are dying every year in China, literally choking to death, because of all the toxins that are being put into the environment by burning coal.”

This explains why China, India, and the Russian Federation are quietly forging ahead with nuclear energy expansion while the West and Japan fret over it. As you can see in the table below, those developing countries are dominant leaders in the construction of nuclear facilities.

Source: European Nuclear Society

It typically takes about six years to complete a plant once it is under construction, so the 67 facilities shown above should be producing electricity soon. In addition, over 100 reactors are at various stages of planning and permitting.

So it looks like the needs of developing countries will be more than enough to revitalize and sustain the nuclear-power industry. As for the developed countries, many still heavily rely on nuclear energy, and that won’t change anytime soon. In fact, the reliance may only increase in the coming years.

Though many developed countries have been cool at best and hostile at worst toward nuclear energy expansion, a more conciliatory approach may be required in the future. That’s because many of the same people who are concerned about the risks and costs of nuclear power are even more concerned about global warming. That means fossil fuels and the carbon dioxide they emit must be limited.

But what will be used other than fossil fuels? The hope was wind and solar, but the inefficiencies, high costs, and intermittent nature of these two energy sources make them unlikely candidates for widespread use. What’s left is nuclear.

On February 9, 2012, the US Nuclear Regulatory Commission approved a license for two new nuclear reactors in Georgia, the first in over 30 years. This could be a sign of more approvals to come. But what could eventually really ignite a nuclear expansion are the promising technology advancements that are being developed.

Nuclear Technological Developments

Small Modular Reactors:

You’ve heard of the mini-brewery and the mini-steel mill; now meet the mini-nuclear reactor. Commonly known as “small modular reactors” or SMRs, these reactors are tiny compared to conventional ones. However, with capacities reaching up to 300 MW (power sufficient to supply 45,000 homes) they pack plenty of punch to have practical commercial application. Here are some advantages that SMRs offer:

• They are cheaper to construct and operate than conventional reactors.
• They can be standardized and factory built, a much more efficient process than on-site construction.
• They can be set up in groups to provide however much power an area needs. Grouping would allow for a unit to be taken offline for repairs, maintenance, or replacement without an interruption of service. On the flip side, more units can be easily added if an area’s power needs increase.
• They can basically run themselves with little on-site supervision.
• They can be stored underground, which enhances security.

Most important, because they are small and use less fuel, they are easier to cool, which greatly reduces the risk of a meltdown.

Small Modular Reactor

Some SMRs can even run on what was once considered nuclear waste. For example, a Bill Gates-backed company, TerraPower, is developing a reactor that burns depleted uranium. Depleted uranium burns very slowly, so TerraPower’s reactor could theoretically run for decades without the need for a fill-up. This is an exciting development. Unfortunately, the TerraPower reactor only exists as a prototype on a PC. This means that it will take several years before it could possibly make its debut on the power grid.

In fact, most SMRs are still in the very early stages of development, with many challenges to be met and many questions to be answered. However, the concept has enough promise to induce the US government to invest in its pursuit. If it proves to be viable, this technology could really shake up the energy scene.

Thorium Reactors:

Imagine a cheap, plentiful atomic fuel that could provide safe, emissions-free power for hundreds of years without refueling and without any risk of nuclear proliferation. That fuel is thorium, and proponents claim it eludes many of the pitfalls of today’s nuclear energy.

Robert Rapier, chief technology officer and executive vice president at Merica International, says:

“Longer term, commercialization of thorium reactors would dramatically reduce (although not totally eliminate) the risk of nuclear-weapon proliferation. Thorium is abundant relative to uranium, and thorium does not have to undergo the enrichment process that uranium requires. Further, thorium reactors have little risk of melting down because climbing temperatures will decrease the power output, eliminating the runaway reaction possibility present in a uranium-fueled reactor. Thus, these reactors would naturally tend toward the fail-safe state. The primary disadvantage is that thorium reactors are still mainly at the experimental stage, and therefore commercial viability has not yet been clearly demonstrated.”

Pebble-Bed Reactors:

The pebble-bed reactor concept was first introduced way back in the 1940s. The US, Germany, and South Africa have experimented with the technology over the years, but it is the Chinese who have persisted in the experiment and plan to implement the technology in two reactors near the Yellow Sea.

Under the pebble-bed design, uranium fuel rods are replaced with tennis-ball-sized graphite spheres that contain tiny beads of uranium, and helium (instead of water) is used as a coolant. A New York Times piece provides a simple explanation of how the technology works:

“Rather than using conventional fuel rod assemblies…(pebble-bed reactors) use hundreds of thousands of billiard-ball-size fuel elements, each cloaked in its own protective layer of graphite.

“The coating moderates the pace of nuclear reactions and is meant to ensure that if the plant had to be shut down in an emergency, the reaction would slowly stop on its own and not lead to a meltdown.

“The reactors (are) cooled by non-explosive helium gas instead of depending on a steady source of water – a critical problem with the damaged reactors at Japan’s Fukushima Daiichi power plant. And unlike those reactors, (pebble-bed) reactors are designed to gradually dissipate heat on their own, even if the coolant is lost.”

Challenges remain for pebble-bed reactors, and some environmentalists oppose the technology. They point to the fact that the volume of radioactive waste increases under the pebble-bed design, but do concede that pebble-bed waste is far less radioactive per ton than spent uranium fuel rods.

These technological developments in the nuclear-reactor space are promising and certainly worth keeping an eye on… but it’s unlikely that anything disruptive will hit the mainstream anytime soon.

So from an investment standpoint, this means that the best and most immediate way to play the nuclear trend is not the companies that make the reactors, but the companies that mine the fuel for the reactors.

The Coming Uranium Bull Market

There are a number of supply and demand circumstances that appear to be forming a perfect storm for bullish uranium prices. From the demand side, the 67 new reactors that we discussed earlier will be coming online in the near future.

On the supply side, there isn’t enough uranium being mined to meet current reactor requirements, let alone new facility requirements. According to the World Nuclear Association, there was a 40-million-pound uranium production gap in 2011. It is unlikely that that gap will be closed at current prices; miners claim that their production costs average $85 per pound. With spot prices at about $40 per pound, miners have no incentive to bring new capacity online.

Another factor affecting the supply side is the coming end of the Megatons to Megawatts program. Under this arrangement, the US and Russia agreed to convert high-enriched uranium from Russia’s dismantled weapons arsenal into low-enriched uranium for use in power plants. This secondary source provides about 15% of the US’s annual supply of uranium. However, the program will expire later this year and when it does, the production gap will widen. Guess what will happen to uranium prices. That’s right: they’ll skyrocket.

Intrigued yet? Want some more specific investment advice? Help is on the way. Marin Katusa and the Casey Research Energy Team are on top of the emerging opportunity in uranium and have assembled a panel of world-renowned energy experts to discuss it in further depth in an upcoming webinar titled The Myth of American Energy Independence: Is Nuclear the Ultimate Contrarian Investment? The webinar premiers at 2:00 p.m. Eastern on Tuesday May 21, 2013 and is free of charge. In addition, all attendees will receive a free copy of our new Global Resource Intelligence Report on uranium (a $29 value). I urge you to reserve your seat today.

The New Cold War: The “Putinization” of Uranium

By Casey Research

By the Casey Research Energy Team

Like the United States, the European Union relies heavily on Russia and the Commonwealth of Independent States (CIS) for its uranium, as shown in the chart below:

Russia is projected to produce 64 million pounds per year by 2020. The majority – 40 million pounds – will come from Russia itself, and the remainder from its foreign projects in Kazakhstan, Ukraine, Uzbekistan, and Mongolia.

But there’s an often forgotten subsector of uranium production: the processes necessary to convert U₃O₈ into something that power plants can use.

For that purpose, yellowcake is first converted into uranium hexafluoride (UF₆) at a conversion facility, then enriched, or concentrated, at an enrichment plant. Russia’s main conversion facility is at Angarsk, with a capacity of 42 million pounds of uranium per year. A small facility near Moscow, rated at 1.54 million pounds per year, primarily converts recycled uranium.

Russia can claim about one-third of the uranium-conversion capacity worldwide. Rosatom, the regulatory body of the Russian nuclear program, is also looking to set up an additional conversion plant by 2015, with the planned capacity currently unknown.

The United States normally owns 20% of the world’s conversion capacity; however, its plant, Metropolis, is currently shut down for maintenance and upgrades. Though the plant is scheduled to reopen in June 2013, the current shutdown just adds to the growing scarcity of UF₆.

You may have noticed that the United States isn’t listed in the chart above. As of January 2013, the US has no conversion capacity and isn’t expected to be back online till mid– to late 2013.

Almost half of the world’s capacity to enrich uranium will lie in Russia once the country completes the planned expansion of its current enrichment facilities. Accordingly, the life source of reactors and power generation is not obtaining the uranium but having access to facilities that turn them into nuclear fuel.

Russian President Vladimir Putin is attempting to corner the uranium sector and the UF₆ and enrichment markets alike. Russia’s squeeze will be felt around the world – not only in regard to uranium supply but to enrichment as well.

It’s difficult to say how Putin’s squeeze on uranium will play out, but it’s pretty certain to contribute to what is shaping up to be a spectacular bull run in this energy subsector. Investors who choose the right companies and get in early could see life-changing gains. To help with that process, the Casey Research Energy Team has put together an informative webinar with several nuclear-power and speculative investing experts. The Myth of American Energy Independence: Is Nuclear the Ultimate Contrarian Investment? is free, and will premier on May 21 at 2 p.m. EDT. Get more information and sign up today.

Could Cuba’s Past Be Your Future?

By Jeff Thomas, International Man

An article was published in Uruguay that has received little notice outside of Latin America. This article refers to Cuban dissident Yoani Sánchez, also little known in the First World. Ms. Sánchez has recently been allowed to travel outside of Cuba for the first time, as a result of the elimination of “exit visas.” The requirement for exit visas was imposed in 1961 to stop Cubans who opposed the then-new Castro regime from being able to leave Cuba. (Editor’s note: The regime in Washington imposes an “exit tax” for certain Americans who renounce their citizenship.)

It’s comforting to think that Ms. Sánchez and all Cubans are experiencing the early stages of a more open Cuba, just as the peoples of East Germany, Russia, China, and other countries have experienced in recent decades. This is another reminder that the concept of totalitarian socialism/communism is not a very workable one and cannot last indefinitely.

It can, however, last for half a century or more, and – even if it pleases those of us who believe in maximizing the liberty of every individual to see yet another oppressive government failing to maintain totalitarianism – we must also recognize that half a century or more of such oppression is enough to destroy individual lives entirely, based on the human lifespan.

Therefore, the real importance that the elimination of exit visas in Cuba might have for the reader of this article (who very likely has never needed to apply for one), is to question whether this requirement might be in his future.

A New Consideration

There does not seem to be a lot of discussion out there on this topic, yet I believe that it is a very significant subject that should be a part of regular discussion for anyone who presently holds only one passport – that of the country in which he resides. For people in this category, if one’s home country is also experiencing a significant economic decline (as we see in many First World countries), one would be wise to consider whether the country might soon be experiencing a flight by a significant portion of its population. Such flights are common when countries experience a significant economic decline or a decline in freedom.

Many people in the First World, who, until recently, were hoping that “everything will sort itself out,” are now becoming increasingly concerned that this will not occur – that instead, the situation is likely to worsen, possibly quite substantially.

For those who now find themselves in that situation, the old method of waiting to see what occurs, then deciding how to deal with the new normal, will no longer work. In today’s world, it is becoming essential to project what the future will bring.

Case in point: If the reader lives in a country where laws are being written to limit his ability to expatriate a portion of his wealth, or, worse, to repatriate it if it has already been internationalized, he would do well to examine which of his freedoms will be the next to be lost.

There is little discussion at present over whether it may soon be necessary in some counties that are part of what was once called the “free” world to apply for an exit visa in order to travel outside that country. Yet historically, declining countries commonly impose such restrictions to ensure that their citizens do not seek greener pastures.

There is the tendency in all of us to say, “They couldn’t possibly do that. If they did, then, for all practical purposes, we’d be living in the Soviet Union.” And yet, in much of the First World, residents are already accepting as “the new normal” governmental edicts that only ten years ago would have been unthinkable.

Rather than look at the present and say, “Well, it’s worse than it was, but I can still live with it,” perhaps the greater wisdom would be to examine the direction in which one’s government is headed and then project the logical conclusion to this direction. Then, assess whether that projected future is one in which one would be content to live.

If the answer is no, we may alter our investment philosophy and even buy a bit of precious metal for a rainy day, but such minor adjustments will not protect those who may find that they are trapped in a country where the oppression is expanding exponentially. In such a condition, the one and only alternative is to “get out of Dodge.”

The Comfort of Sameness

The trouble is, it is human nature not to want to face such a decision. We may like to travel, but only as tourists. We become accustomed to the house we live in, we like the selection of food at our local supermarket, and we even take a certain comfort in the fact that we know our neighbors, even if they are not our favorite people. There is an unquestioned comfort in the relative stability of our immediate surroundings.

The prospect of moving to a location outside of an increasingly oppressive country is an enormous step to take. Will I be able to find employment? Will my wife be able to speak English to her hair stylist? Will my children be able to go to soccer practice?

The more the prospect of such a dramatic change is considered, the more unpalatable it becomes. It represents dramatic change, and truth be told, most of us prefer the comfort of sameness.

And, just as has happened over the millennia, the great majority of people will not think any further on the subject, as it causes so much discomfort. It is easier to say, “But I like it here.”

Thus, we return once again to the central truth that we would prefer to avoid. If “here” is going to remain as it is, then by all means, it makes sense to retain the comforts that go along with it.

However, if we conclude that, in the future, “here” will no longer exist as it presently is, the fact that our familiar surroundings may remain the same will be of little comfort. Unfortunately, if we attempt at that late date to create an exit strategy, we will discover two things. The first will be that that there are large numbers of our fellow citizens attempting to do the very same thing, and we may find that new travel restrictions have been passed in our own country. The denial of passports may become common, and the requirement to apply for exit visas may be in place. Second, we will discover that, just as has occurred throughout history, the doors that once welcomed new arrivals are now closing, as too many have applied for residency.

In my belief, the world is on the cusp of its greatest period of change – certainly the greatest period of change in our lifetimes, and possibly the greatest period of change in history. In a mere ten years, the country in which the reader lives may be unrecognizable by today’s standards. If ever there was a time to assess the future and consider whether, at the very least, to create an escape hatch in another locale, that time is now.

Start learning about internationalizing your investments and yourself now. Learn about how to get a second passport… setting up an offshore LLC… the unparalleled benefit to owning foreign real estate… how a foreign trust can protect your wealth through generations… investing in international stock markets… and much more. A special report from Casey Research, titled Going Global 2013, covers every aspect of freeing your wealth and yourself. Get started on your international adventure today.