Cuban Model...Unworkable
Research for Online Investors

by John Dalt

9/9/10

El’ Presidentie Fidel Castro of Cuba told writer Jeffery Goldberg of the Atlantic Monthly that “The Cuban model (Soviet style communism) doesn’t even work for us anymore.”  Wow, this ought to come as a surprise to some in Washington.  Just think, we might start exporting GM cars (made by our government) to Cuba to replace the 1958 Chevys they have been driving since Castro locked down the country.

This may be one of those cases where 84-year old men can say anything they want, and get away with it.  Or maybe it is that old men can say what has been obvious to everyone else, but they have deluded themselves from admitting.

Goldberg was accompanied by Julia Sweig, a Cuba expert from the Council on Foreign Relations.  Ms. Sweig said the comments reflected an acknowledgment that “the state has too big a role in the economic life of the country.”

Castro seems to be mellowing in his older age, he criticized his actions during the 1962 Cuban missile crisis. 48 years ago, Castro urged the Russians to launch nuclear weapons against the United States. Castro told Goldberg, “It wasn’t worth it at all.”

Castro criticized Iran’s leaders for denying the holocaust and anti-Semitism.  He fears the U.S. and Israel will try to enforce sanctions against Iran, starting a nuclear war.  You can read Reuter’s story “Fidel Castro says Cuban model No Longer Works.”

The World Economic Forum (WEF) released their annual report today ranking the world’s economies for competitiveness.  The U.S. fell to fourth.  The U.S. has fallen from first under President Obama.  Is he to blame?  Probably not completely.  Has he done anything to keep it from being worse?  No, in fact the problems pointed out in report are in many cases directly related to the current “crony capitalism” attitude in Washington.

What are the top three reasons given for the U.S. slide in rankings?  Macro-economic imbalances, concern about the country’s financial markets, and weakening of public and private institutions.  You can read it at Reuters.

What is the short explanation?  Oh! Bama’s experiment in socializing and regulating the U.S. has eroded the ability to gather capital, created an uncertain business environment, and hindered the ability of our businesses to compete against other economies on an efficient basis.  A sad state.

We opened a position in the AGQ (Ultra Silver) yesterday in the SwingTrader.  Seems crazy, gold and silver had just hit 52-week highs.  Why did we do it?  The ‘Trade of the Year’ still has legs!  September and October are traditional strong buying months for India’s gift market.  China has encouraged citizens to buy precious metals, and incremental moves higher are just the beginning of a possible spike.

Is there risk to this trade?  Of course.  Gold and silver could fall back to consolidate after the nice run in the last two weeks.  But here is the deal; gold mines are producing less gold today.  The last high in gold production was in 1999, when gold sold for less than $300 per ounce.  Miners produced 83.69 million ounces in 1999; last year's production was only 74.46 million ounces.  The world’s mines produced 11% less gold while the price is close to 400% higher!  2009’s production was not a fluke; it was actually 12.6% increase over 2008’s, but still less than the high mark of 1999.

There are two other sources for gold to supply the world market.  Central bank sales and scrap gold.  Central banks were traditional sellers of gold, to the tune of a couple of hundred tonnes per year, until last year.  In 2009, central banks changed their attitude towards owning gold.  They were net buyers.  India bought half of the IMF’s gold last fall and China wants the rest.

The only other source of gold is ‘scrap’ sales.  Scrap gold is primarily sourced by the advertisements we see on TV, “sell your old jewelry for cash.”  Scrap gold also comes from recycling old cell phones and other electronic items that use gold.

As the price of gold climbed in 2008, scrap gold sales increased 34% year-over-year to equal nearly 66% of new mine production.  In 2009, scrap sales increased again to 53.63 million ounces.  If you add this to new mine production, the total is 128.09 million ounces.  This represents a record quantity of gold available on the market.

The problem with scrap gold?  Pretty soon people run out of old jewelry to sell!  According to the World Gold Council, scrap gold sales in the first quarter in 2010 were down to 11.03 million ounces.  This is 43% less than scrap gold sales in the first quarter of 2009.  Mine production in the first quarter was up 1.37% over 2009’s first quarter.  If we add mine production and scrap sales, 2010 projections would be 7% less gold available than in 2009.

Where does all this information lead us to consider the gold market?  Mining production has declined, central banks are net buyers, and scrap sales have peaked and are starting to decline.

We like gold…and silver.  Use a tight trailing stop just under support so you sell at a small loss if the market rolls over to consolidate.  Be ready to jump back in to recoup your small losses for the next precious metals bull.

To the mailbox:
Speaking of engineering…our son is very mathematical. But, I already see him getting lazy and thinking his social life is number 1.  He's only 13!  If I am to keep him in line, it will mean academic camps in the summer and a whip in my hand.---paid up subscriber T.M.

John’s reply:  Science camps and no sense of entitlement.  Kids have lost the drive to succeed because they believe "it will all work out"

In a capitalist society, capital is owned by the private sector; in a socialist one, it's owned by the public sector. Wealth can be created in either instance .—subscriber J.R.

John’s reply: Huh? How can the greatest (or worst) potentate claim to create wealth by taking property under threat and “investing” in state 5-year plans? Entrepreneurs make an “investment” to produce products for sale, hopefully at a profitable price to the consumer. Government expenditures are for the gratification of the politicians and bureaucrats. What does the government sell that consumers value more than the money it costs them in a free exchange? Bureaucrats’ picking winners and losers is the source of much “mal-investment.”

Quotes:
I think when you spread the wealth around it's good for everybody.- Barack Obama to Joe "the Plumber" Wurzelbacher, 2008

The problem with socialism is that you eventually run out of other people’s money .---Prime Minister Margaret Thatcher

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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