I hope that everyone’s New Year’s Eve was as good as mine. I spent the night watching the fireworks from Baltimore’s inner harbor, only a short walk from my home. It wasn’t exactly the London fireworks show, but the natural beauty of the harbor made up for what Baltimore City’s fireworks budget lacked.

Like many of our readers, Casey’s Daily Dispatch has its own New Year’s resolutions. We’ve listened to your feedback and will make a couple of changes to the publication. First, the issues will have a more consistent length from now on. In the past, some issues were overly long while others were too short.

Second, the editions will become more newsworthy. I know that many readers have enjoyed my musings on food, the Marshall Plan, voting, riots, etc., but at the end of the day, our goal is to keep you informed about the major macroeconomic trends that will impact your life and investments. Don’t worry, we’ll still publish our more philosophical articles. Separating our editors from their philosophical side would be impossible and could lead to internal discord here. However, every day, you will see more coverage of current events and news stories. I’ll be mostly responsible for this aspect of the Dispatch.

Today, we’ll hear from Jeff Clark on his 2011 predictions about gold. Gold is definitely not done going up, but the question on everyone’s mind is of course, “How far can it go?” While predictions can give us no guarantees, at least they can give us a ballpark perspective. Then, Kevin Brekke will examine some differences between high-tax versus low-tax states. I may soon become one of Kevin’s statistics as I currently reside in Maryland, one of the high-tax states, and am planning to relocate with taxes being a definite incentive.

And then at the end of the issue, I'll have some short commentary on recent news tidbits.

How High Will Gold Go in 2011?

Jeff Clark, BIG GOLD

After stellar years for both gold and silver, what prices will precious metals hit in 2011? Here's an analysis based strictly on their price behavior in the current bull market.

First, take a look at the annual percentage gains that gold has registered since 2001 (based on London PM Fix closings):

Excluding 2001, the average gain is 20.4%. Tossing out the additional weak years of '04 and '08, the average advance is 24.8%.

So we can make some projections based on what it's done over the past 10 years. From the 12-31-10 closing price of $1,421.60, if gold matched…

• The average rise this decade, the price would hit $1,711.60
  
  
• The average rise excluding the three weak years = $1,774.15
  
  
• Last year's gain = $1,858.03
  
  
• The largest advance to date (2007) = $1,875.09

But what if global economic circumstances continue to deteriorate? What if worldwide price inflation kicks in? And what if government efforts at currency debasement get more abusive? If Doug Casey is right, a mania in all things gold lies ahead – what if that begins in 2011? Here's what price levels could be reached based on the following percentage gains.

• 35% = $1,919.16
  
  
• 40% = $1,990.24
  
  
• 45% = $2,061.32
  
  
• 50% = $2,132.40
  
  
• 1979's gain of 125.7% = $3,208.55

It thus seems reasonable to expect gold to surpass $1,800 this year, as well as reach a potentially higher level since the factors pushing on the price could become more pronounced.

Here's a look at silver.

As you can see, silver had its biggest advance in 2010. The average of the decade, again excluding 2001, was 27.5%. And also tossing out the '08 decline, the average gain is 34.3%. So, from the 12-31-10 closing price of $30.91, if silver matched...

• The average rise this decade, the price would hit $39.41
  
  
• The average gain excluding 2008 = $41.51
  
  
• Last year's advance = $56.22
  
  
• The 1979 gain of 267.5% = $113.59

So, $50 silver seems perfectly attainable this year. And that's without monetary conditions worsening.

It's titillating to ponder these advances for gold and silver, especially when you consider we might be getting close to the mania. And if we are, that should do wonderful things to our gold and silver stocks, too.

I would add one caution: the odds are high that there will be a significant correction before gold begins its march to these price levels. In every year but two ('02 and '06), gold fell below its prior-year close before heading higher. And here's something to watch for: in every year but one ('08), those lows occurred by May.

In other words, a buying opportunity may be dead ahead. And if you buy on the next correction, your gains on the year could be higher than the annual advance.

At BIG GOLD, we’ll continue to keep track of gold and silver as well as some of the best medium- to large-cap mining companies in the industry. With the gold mania possibly just around the corner, there’s no better time to try BIG GOLD risk-free for 3 months, with full money-back guarantee. More here.

Soak the Rich – Drown Everyone Else

By Kevin Brekke

It’s that time of year again when New Year promises of flatter stomachs and kicked habits are made to the collective conscience of an overindulged culture with fingers crossed behind its back. Another popular end-of-December ritual is the competitive sport of predicting the future.

But instead of focusing on “what will be,” I’d like to take a look at “what was” over the last decade or so. In particular, and in light of the recent debate over extending the Bush-era tax cuts, let’s narrow down the field of deserving topics and focus on the “Soak the rich” philosophy that’s spreading across the land like a runny nose through a class of preschoolers. A report out of the American Legislative Exchange Council, appropriately titled Rich States, Poor States, does just that and shows how debilitating this approach to tax policy has been.

In a section of the report with the sub-head “Lessons on How Not to Govern a State,” the differences in economic performance between the nine states with the lowest (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming) and the nine states with the highest (California, Hawaii, Ohio, Oregon, Maine, Maryland, New Jersey, New York, Vermont) marginal personal income tax (PIT) rates were examined. Here are the averaged numbers for the changes from 1998-2008:

Source: Laffer Associates

These results are certainly no surprise; one of our core principles here at Casey Research is that the path to creating wealth is paved with incentives to pursue goals of personal success, not punish it. The outcomes shown above underscore the reality that no matter what the size of the political division – city, state, or nation – they are all ultimately the sum of its individual citizens. And if they are allowed to work hard, take chances, and achieve their goals in the absence of excessive government-imposed taxation and regulatory shackles, the whole will benefit.

The only name missing from the Highest PIT group is Illinois. Its inclusion would complete a perfect trifecta, together with New Jersey and California, of states struggling with some of the largest budget deficits in the U.S. Considering that the legislature and governor in the Land of Lincoln are all but assured to seek tax increases in their attempt to close a budget hole the size of Lake Michigan, the history of likely outcomes of such a move does not bode well for the state’s future. Higher taxes drive residents and businesses out of the state, reduce employment, and slash total tax receipts. And the cycle repeats.

In fact, a shrinking population is one of the common conditions found in municipalities that have defaulted or are about to default on bond obligations and/or file bankruptcy.

As insidious and self-destructive as envy can be, it is part of the human condition. A number of psychology experiments have been undertaken that demonstrate it is an inherent and powerful trait. For example, in one experiment participants were asked to choose from the following two scenarios:

Situation A:

You are a salaried employee earning $50,000 a year. Everyone else that works around you earns $25,000 a year.

Situation B:

You are a salaried employee earning $100,000 a year. Everyone else that works around you earns $200,000 a year.

Test after test show that the majority selects Scenario A. When given the choice, people would rather forgo a doubling of their earnings than suffer the thought of others earning more than themselves. Stated differently, when confronted with the opportunity to destroy the wealth of others, even though doing so will hurt them as well, they nonetheless choose this course.

Soak the rich. As this trend gains momentum, a growing number of taxpayers will seek relief in states with lighter tax burdens. As this pattern continues, it will leave the tax consumer segment of the polity to drown in a sea of diminishing public services, fewer career opportunities, and ultimately far higher taxes upon themselves.

The U.S. Census Bureau has recently begun releasing results of the 2010 decennial census. As more data is made available, it will be interesting to study population migration patterns among various economic demographics that should reveal the winners and losers in the battle for taxpayers. I’ll be tracking this trend and will update the story in future editions of the Dispatch.

Keynesian Ideas Reduced to the Extreme

By Vedran Vuk

Every Christmas season, it inevitably snows somewhere. And as a result, the regular shopping madness momentarily halts in some part of the country. In short time, the news readily reports on the devastation that this will cause on retailers. A recent Gallup poll points out the shortfall in post-Christmas shopping due to the weather.

But there’s nothing to worry about here. These reports are sad examples of Keynes’s dominance in today’s economic thought. Keynesian economics aims to stimulate the economy through spending; saving is seen as an undesirable and even selfish act. But this is a silly idea; after all, saving is only delayed spending. Any economy requires that consumers purchase goods both now and in the future. Imagine if everyone did their shopping at Christmas and at no other time of the year. The results would certainly not be good.

Yet these news reports make it seem as if the economy will fall through the roof without immediate consumer expenditure. Most people will react to the snowstorm much like I did. With snow on the ground, I decided that it would be best to go shopping a few days later. So, yes, my spending was temporarily lower. But a few days later, I was at the local mall. This wasn’t some great economic tragedy.

Just listen to how silly this sentence sounds in the Gallup report, “While consumer spending is expected to be lower after Christmas compared with the heavy shopping week leading up to it, retailers were reportedly counting on Americans to head back to the malls on Sunday to cash in gift certificates and take advantage of post-Christmas sales.”

And how have things changed due to the snow? Can retailers not count on Americans to cash in their gift cards now? Have consumers used their gift cards and excess cash for firewood in the meantime? Shoppers didn’t make it to the mall this week. But surely next week or perhaps even next month, they will utilize their disposable income somewhere. Always spending your income immediately is a policy of personal and national bankruptcy. The snowfall reduces Keynesian logic to its purest and most absurd form.

China Carefully Fights Inflation

By Vedran Vuk

With the purchasing managers’ index down to 53.9 from 55.2 in November, China appears to be controlling inflation. The late-December hike in interest rates was definitely a welcome sign. In a recent Daily Dispatch issue, I complained about China’s unwillingness to raise rates. They increased reserve requirements, set price controls, and even changed real estate laws to cool inflation. But nonetheless, they remained complacent on rates.

The December interest rate increase was only the second of 2010. However, two rate increases in such a short period of time usually signal more to come. And China may be able to raise rates with little fanfare.

As a Bloomberg article points out:

“China’s key stock gauge declined 14 percent last year, the worst performer among the world’s 14 biggest benchmark indexes, because of concern that government curbs to counter inflation will crimp growth and profits.”

If this statement is true, China might be in good shape. If the market has already priced in the interest rate movements, the Chinese shouldn’t expect a harsh reaction from higher rates. The market barely reacted to the December rate hike, lending credence to this point of view. But perhaps the Chinese anti-inflation efforts may become too aggressive. That could have unexpected negative effects.

For now, China is doing a decent job of controlling inflation without crashing its stock market. Raising rates is always a tricky and dangerous business. We’ll have to keep a close eye on China’s monetary policy in the following months. So far, so good.

Well, that’s it for today. Thank you for reading and subscribing to Casey’s Daily Dispatch.

Vedran Vuk
Casey's Daily Dispatch Editor