Fed: Business as usual...

Fed: Business as usual... Higher prices 'transitory'... Fraud: Oil or monetary?... Porter's latest Alex Jones gig... Gas in gold... Gold-crazy Chinese... Badiali's latest gold picks... Sign of a top: Rosenberg gives up... Reduce risk, hold cash...

*** Yesterday, Federal Reserve Chairman Ben Bernanke held the central bank's first-ever press conference. Bernanke fielded questions for an hour... And he didn't say anything we haven't heard before.

The Fed had already announced in a press release two hours earlier that it will end its $600 billion program of buying Treasury and mortgage bonds on schedule by June 30. The release also said the fed-funds rate, charged by banks for overnight loans, would remain between 0.0% and 0.25%.

*** Reality is encroaching upon the Fed's worldview... It raised its 2011 inflation forecast to 2.1%-2.8% (up from an expected 1.3%-1.7%) due to rising gasoline prices. Real inflation is probably running around 5.5%. The Fed dismissed higher commodity prices as "transitory." It also raised its unemployment forecast to a range of 8.9%-9% from 8.4%-8.7%.

Otherwise, it was business as usual at the Federal Reserve… and the Federal Reserve's business is inflation...

*** Bernanke also made it clear that, as he put it, "zero inflation is not consistent" with the Fed's mandate of maximum employment and "price stability" (a euphemism for inflation). Maximum employment is a vague, ill-defined phrase, which I take as an evergreen excuse to print money and keep rates low. Any normal economy has plenty of people who are unemployed for one reason or another.

*** You may recall last week, when the government formed a task force to investigate "fraud" in the oil markets. From the April 22 Digest…

Still no word on whether the Justice Department plans to investigate Ben Bernanke, the real culprit of gasoline's rising price… but we're not holding our breath. Of course, Bernanke denied responsibility, saying, "The Fed can't create more oil. We don't create the growth rates of emerging-market economies."

*** No, the Fed can't create more oil or any other form of real wealth. But it does create more dollars, which chase the same amount of oil, causing oil prices to rise. Rising commodity prices aren't the disease. They're the symptom. The disease – inflation – is nothing more or less than the Fed's constant debasement of the dollar.

*** To hear Porter's take on Bernanke and quantitative easing, you can listen to yesterday's interview with Alex Jones here. Porter's segment begins about 2 hours, 34 minutes into the show (roughly three-fourths of the way through the program).

*** And what was the market's reaction to Bernanke's words? The dollar got crushed. The U.S. Dollar index broke below 73. Meanwhile, gold is nearing a new high of $1,535 an ounce. And silver soared nearly 7% to more than $49 an ounce.

*** Of all the dangers facing the U.S. economy, most analysts place higher gas prices at the top of their worries. The common talking point here is each cent increase in the gas price saps $1 billion from consumer spending.

If so, this five-year chart of unleaded gasoline shows billions of dollars are being sucked from the economy right now. Gasoline has climbed 68% since last September... and is closing in on its 2008 peak.

*** So let's raise taxes on the "evil" oil companies, right? Let's go after the "speculators" who are taking advantage of these higher prices!

Before you march on Washington D.C., screaming for higher tax rates for ExxonMobil and jail time for energy traders, have a look at one more chart... You'll see your march should end at 20th Street and Constitution Avenue N.W. That's the Eccles Building, home of the Board of Governors of the Federal Reserve...

Our next chart shows what gasoline prices look like priced in gold. As you can see, when priced in sound, honest money (not in rapidly depreciating paper dollars), gas is lower than where it was in 2006.

*** As regular Digest readers know, the Chinese are watching this dollar decline closely. They know the U.S. government plans to "ease out" of its debts by devaluing its currency. That's why China is busy diversifying its huge pile of dollar reserves into vital natural resource deposits... like iron ore, copper, oil, and natural gas.

But many folks don't know China is also going "gold crazy." The World Gold Council recently noted Chinese demand for gold bars and coins soared 70% year-over-year in 2010. While the U.S. government scoffs at gold, the Chinese government is openly encouraging its citizens to buy gold. It's also building huge gold reserves itself.

China knows that to be a "big boy" on the global economic playground, it needs to have a vast store of real wealth – gold – backing its currency. That's why China is sponsoring a massive program to develop its domestic gold mining industry. The program has turned China into a major gold producer in just a few years.

The government there has "anointed" a handful of the world's best gold mining companies to get the job done. As the gold price marches higher, investors could easily make hundreds of percent from these elite gold producers. Our geologist Matt Badiali has compiled a complete report on the situation – what's happening, why it's happening, and the handful of companies you need to own – which you can learn more about here.

*** The best way I know to reduce risk in your equities portfolio is to hold more cash. I like cash right now for a couple reasons.

First and most important, I doubt you understand any asset better than cash. Risk is not knowing what you're doing. I bet few gold stock shareholders understand how complicated, expensive, and messy the gold mining business can get. To reduce risk, put your money in the asset you know best: cash.

Second, I doubt any asset is more hated today than the U.S. dollar. It's nearing all-time lows against other currencies. Everyone is terrified of inflation. We can't ignore gasoline and food prices, which appear to rise daily. I'm certain the U.S. dollar is headed inexorably toward its intrinsic value – zero.

But stocks, bonds, and commodities have soared since early 2009 and again in late 2010 – thanks to the Fed's two rounds of quantitative easing.

Public securities markets are never permanently accommodating. They more often resemble Venus flytraps. They're highly seductive, right up until the moment they eat you alive. And what will everybody want, if only by mere default, as they exit falling stocks and bonds? Cash, of course.

*** I'll attend the Berkshire Hathaway annual meeting this Saturday in Omaha. Extreme Value readers will get my views on the meeting in Monday's weekly update.

Berkshire is one of the few stocks I like a lot right now. It's easily worth $170,000 per share and trades for less than $130,000. More than $1 billion a month in free cash flow pours into the company and lands in the hands of the greatest investor of our generation. Making great acquisitions is a rare skill. Few corporate managers have proven their ability to do it as well as Warren Buffett. He's not perfect, but he's as close as you need him to be to keep your investment safe and growing.

*** Almaden Minerals (AAU), Cambria Global (GTAA), PowerShares Dynamic Biotech (PBE), DirecTV (DTV), Automatic Data Processing (ADP), Hershey (HSY), Royal Gold (RGLD), Johnson & Johnson (JNJ), iShares Silver (SLV), ExxonMobil (XOM), EV Energy Partners (EVEP), SVB Financial (SIVB).

*** Tell us how you feel about the U.S. dollar right now. Are you fleeing the greenback… or holding cash? E-mail us at feedback@stansberryresearch.com.

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"I truly don't understand the mentality of people who take the time to write and complain... They call you a scam? They throw out accusations with a flavor of entitlement... almost like life owes them and instead of appreciating the efforts and integrity, the values that you share, the passion about your work, this country, waking people up, they almost expect you to do it all for free... .You guys rock! With lots of appreciation" – Paid-up subscriber MT

Ferris comment: You're right. So many people act like they're owed something. But you seem to understand that nobody owes you a thing. Thanks for the kudos.

*** "I am a paid up new subscriber, having been reading the newsletter only a few weeks.

"Thanks to Stansberry Research, I managed to trade $3,500 into $61,000 in about 30 days, using the futures markets of emini S&Ps, wheat and, of course, silver.

"No question, the biggest contributor to the gains is silver trading, buying low-risk options on the futures. Needless to say, I am astounded with the results but more importantly, the S&A research gives me the confidence to take a position, hold it and ignore the CNBC noise.

"Reading the nightly S&A Digest and Mr. Stansberry's insights are key, in my mind, as I review my charts every night.

"There is no way one can listen objectively to Bernanke without having read Porter's writings, first. Then, you can make sense of the babble. All I can say is THANKS!! and the subscription is worth every penny, even though copper is not my favorite metal at this time." – Paid-up subscriber Joe G.

Ferris comment: Thanks for the kind note. I'd be curious to hear more about your strategy of "buying low-risk options on the futures."

Regards,

Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
April 28, 2011