Dear Reader,

This is “crunch” week – the week I get serious about editing the June edition of The Casey Report.

As a consequence, for much of today’s edition of this missive, I’m going to quickly comment and otherwise make snide remarks on some of the more interesting news stories now crossing over the screen.

Most news, when reflected upon, is neither all that important nor nearly as urgent as the media would like you to think it is. However, similarly to the visible tip of an iceberg, some news does have significance in that it points to larger stories lurking just out of sight.

Let’s see if we can spot some of the significant stories in today’s offerings.

Story #1 – Big Money Moving into Gold.

Headline: Gold Rising as Euro Weakens Spurs More Speculation

Snippet: Buying accelerated as the MSCI World Index of 23 developed nations’ stocks tumbled as much as 16 percent since mid-April and the euro weakened to a four-year low against the dollar. Holders of ETPs, including George Soros and John Paulson, accumulated a record 1,938 tons by May 21, eclipsing all but four of the biggest central-bank holdings. Full story here.

Comment: As mentioned in a recent Dispatch, during my recent visit to the trading floor of a major financial institution, I was told that many traders were “all in” on gold. For those of you not poker players, that term refers to believing so strongly in a hand that you’re willing to bet all of your chips on it.

Just a few months back, Bloomberg (among others) was running derisive articles about John Paulson’s new gold fund, labeling it a folly. That’s in sharp contrast to the Bloomberg article above, which is pro-gold from top to bottom. This sort of meme will be foundational in causing big and small investors alike to wrap their heads around the idea that, yes, gold can return to its former inflation-adjusted high of $2,266. And it can do so even in the absence of the roaring price inflation that we expect down the road.

Despite attempts by the lame-stream media to dismiss gold’s value as little more than a barbaric lust for things shiny, gold is money. Always has been and likely always will be. Though we have mentioned the reasons for gold’s unique monetary properties on numerous occasions, they bear repeating. And so I will, quoting my dear friend and business partner, Doug Casey…

…[gold] has intrinsic value (it’s valuable in many uses), it’s convenient (houses are not easily portable), it’s divisible (the Mona Lisa isn’t), it’s durable (wheat rots), and it’s consistent (diamonds have different grades that are not always easy to see).

Doug Casey - The Coming Currency Crisis, International Speculator, June 2006

As the gold bull continues to charge forward and the talking heads roll their eyes and wave their hands at how overvalued gold has become, you may find it helpful to compare gold’s monetary characteristics to the “competition” for your money, starting with the unbacked fiat currencies the world’s governments want you to have full faith in.

Story #2 – LIBOR Still Rising.

Libor Shows Strain, Sales Dwindle, Spreads Soar: Credit Markets

“This is a quintessential liquidity crisis,” said William Cunningham, head of credit strategies and fixed-income research at Boston-based State Street Corp.’s investment unit, which oversees almost $2 trillion. “It’s not inconceivable to imagine a situation where the markets behave so poorly, the liquidity behaves so badly, and risk-tolerance just evaporates that – particularly in Europe – consumers contract, businesses stop hiring and stop investing, and economic activity halts.” Full story here.

Comments: Crash part two is in the making. In response, the only entities left standing will be the central banks and the IMF, which is a conduit for those central banks. And they will react with the only tool left in their kits – inflation. Unfortunately, the tool is dull, so they are going to have to work extra hard down at the printing presses to delay the inevitable. For years now we have been forecasting that the central banks were going to be stuck between a rock and a hard place – and sure enough, they are. Damned if they don’t print, damned if they do. Either way, they’re damned… and as a result, so is the latest experiment with fiat money.

Story #3 – You Know It’s Bad When a 146-Year-Old Bank Run by the Catholic Church Can Collapse.

CajaSur Seizure Marks Change for Spain’s Ailing Banks

Within hours, the Bank of Spain stripped Gomez of his powers and threw out managers at the ailing 146-year-old lender, controlled by the Catholic Church in the southern city of Cordoba, citing “viability problems.” CajaSur lost 596 million euros ($748 million) on 426 million euros in revenue. Full story here.

Comment: The pain in Spain is making it hard to reign. Kudos to the Bank of Spain for trying to be proactive in dealing with its own simmering crisis, but the blood is in the water and the sharks are starting to notice. Next up, even higher interest rates on Spanish debt, followed quickly by everyone pondering the answer to the question, “Will the trillion-dollar EU bailout be enough?”

In our view, the bailout wasn’t too little – but way too much. The struggling euro and soaring purchases of gold in Europe (and elsewhere) tell us that Mr. Market is of the same opinion. And that leaves Spain in a bullfight without a cape and no exits in sight.

Story #4 – Beware Financial Reform.

Senate financial bill mandates SEC reporting of DRC-mined minerals

Tucked away in the landmark financial overhaul bill passed by the Senate is a provision requiring mining companies to declare with the SEC if certain minerals originated in the Congo or neighboring African nations.

The amendment also requires mining companies to report what steps the company took to ensure that purchase of these minerals did not benefit armed groups in Africa.

Originally known as the "Congo Conflict Minerals Act of 2009," the amendment requires the annual disclosure to the SEC of activities involving columbite-tantalite, cassiterite, and wolframite from the Democratic Republic of Congo. These metals are used in mobile telephones, laptop computers, and digital video recorders as well as other global technological products.

The act asserts, "Continued weak governance in the Democratic Republic of Congo has allowed the illicit trade in the minerals columbite-tantalite, cassiterite, wolframite, and gold to flourish, which empowers illegal armed groups, undermines local development, and results in a loss or misuse of tax revenue for the Government of the Democratic Republic of Congo."

The amendment calls for any company using the minerals as a primary ingredient in its products to file the reports with the SEC and to describe the steps take to ensure that the mineral procurements did not benefit armed groups in Africa. Full story here.

Comment: In recent discussions on the financial reform bill, I have commented that few if any elected representatives have actually read the thing, let alone fully understand its consequences. As such, it might be difficult to find someone to explain to me just what requiring mining companies to certify where they get their minerals from has to do with U.S. financial reform?

I can only imagine what else is lurking within this beast.

Story #5 – The UK Gets All Fiscally Conservative.

George Osborne outlines detail of £6.2bn spending cuts

[UK Chief secretary to the Treasury David] Laws said the cuts were designed to send a "shockwave" through government departments and discourage waste but he said they would protect "as far as is possible" key front line services and protect those on the "lowest incomes". Full story here.

Comment: For the record, the current annual budget deficit of the UK is 156 billion pounds – so we’re talking on the order of a 3.9% reduction. Better than nothing, I guess. But of course the government is now going to have to deliver on the cuts.

This is part of a larger trend toward being more fiscally responsible, forced upon the politicos by Mr. Market, along with a growing bloc of correctly concerned citizenry. As a consequence, the wayward Western governments are going to have to at least pay lip service to the idea of reducing spending. Unfortunately, the size of the existent government commitments is so massive that should the politicians follow through with cuts of the scale actually required to put their respective fiscal houses in order – cuts that would go a whole lot deeper than 3.9% -- the whole thing would come unglued, both economically and socially.

Worse still, to try and make those cuts in an economic climate as uncertain as this would be akin to handing a drowning man a twenty-pound weight, further reducing tax revenues and requiring even deeper cuts. You can see how quickly this gets circular.

Things are going to get really bad, regardless of what the politicians do at this point. Cutting spending only hastens judgment day. And as soon things do start getting really bad, you can be certain that – with encouragement from voters (and rioters) – the politicians will quickly forget their austerity pledges.

That the problems are intractable emanates from the not-so-simple reality that the biggest problem currently faced by the world is an excess of debt. Until that debt overhang can be eliminated, the economy is not going to get significantly better.

But politicians operate in a different world, a world where – they believe – what they say is more important than what they do. Thus, it would be at around this point when FDR, were he still among us, might have thought it helpful to intone a soothing sentiment such as, “We have nothing left to fear but fear itself.”

That is no doubt a sentiment you can be sure that BHO will soon knock off. Unfortunately, to be anywhere close to accurate, today the statement would have to be revised to, “We have nothing left to fear but that our creditors will want their money back.”

In the end, the banks are either going to fail or their respective governments are going to again try to bail them out by issuing trillions of dollars worth of additional debt.

To the extent that prospective buyers of that debt are comfortable buying the stuff up, even though the odds are increasing daily that they won’t get paid back anywhere near 100 cents on the dollar – let alone the 103 cents on the dollar now being offered – is the extent to which the house of cards will remain standing. But the minute that government issuance at current low yields exceeds ready demand, the winds of change will begin gusting.

In the final analysis, all of this is going to work out just fine – but not without first navigating some very rough waters.

Hey, since we’re on the topic of government cutbacks – a quick glance at the front page of today’s Huffington Post underscores the sort of emotional minefield politicians will have to tiptoe through in order to rein in runaway spending by even a little.

http://www.caseyresearch.com/displayCdd.php?id=437