"Who in this room has enough gold bullion to live off of for one year," Porter asked the roughly 250 Alliance Conference attendees. Only about 10 people raised their hands. Porter then asked who held at least 15% of their investable assets in gold bullion... Around one-third of the room raised their hands – an improvement, but still not the number you would expect considering the current gold mania.
And these aren't the average people you'll find on the street... These are our Alliance members – our very best clients. They receive everything we publish and will publish (except Phase 1) in the future – for life. Everyday, we pound them over the head with information explaining gold's benefits and why they should buy it... And we've been recommending gold in one form or another for at least five years. In other words, this isn't a fair control group. But the majority of these folks still don't own sizable gold positions.
As Brian Hunt, Stansberry & Associates editor in chief, said while moderating Monday's panel discussion, "If you asked 100 people on a street corner if they owned gold, I'll bet nobody would say yes."
So if you worry gold is too popular, don't worry at all. The yellow metal has a long, long way to run.
Yes, some of the world's most respected hedge-fund managers – like John Paulson and David Einhorn – are buying bullion. That's a big step in promoting gold as a monetary asset and convincing the world the U.S. economy is doomed. And gold is floating around a noninflation-adjusted all-time high of $1,100 an ounce. But until the average investor starts buying (and it will happen eventually), we'll see gold run much higher.
It's particularly surprising to hear a real Wall Street guy like John Paulson say, as he did at the Grant's conference in September, "I have lost faith in the U.S. dollar as the reserve currency for my assets." Most wealthy financial people are so politically correct, it makes you want to throw up. Ted Turner gave a billion dollars to the United Nations, one of the stupidest things ever done with any amount of money. Warren Buffett is giving his fortune away to Bill and Melinda Gates so they can then give it away in their attempt to fix the world.
So to hear Paulson say in public that he doesn't trust the dollar is remarkable. Neither Buffett nor Gates would ever come out and say explicitly that he doesn't trust the dollar as a reserve currency. Buffett has told us stories about inflation, but he's also constantly telling us how great America is. He's actually got people believing Burlington Northern Santa Fe (BNSF) is some kind of "Buy American" investment. It's not. He's not buying American. He's hedging against the U.S. dollar and, with much softer language, warning us of its imminent demise.
Buffett's BNSF deal was a great way to do an enormous inflation hedge without giving up too much of the dry powder he needs to continue to invest and grow Berkshire's net worth. The deal is 40% Berkshire Hathaway shares and 60% cash, with about half the cash being borrowed. So he's using other people's money and spending only a relatively small amount of Berkshire Hathaway's cash. He essentially will exit cash without actually using up his balance-sheet cash. Who wouldn't love to be able to do that?
Buffett plans to generate more cash by selling his stakes in two other railroad giants before the BNSF deal closes. Supposedly in the first quarter of next year, he'll sell 9.6 million shares of Union Pacific and 1.9 million shares of Norfolk Southern. The sale will generate around $700 million at today's prices.
How things change... Last year at this time, value investors were saying, "Buy, buy, buy..." Investor/researcher Steve Leuthold said equities were more attractive than any time since 1984. Warren Buffett said, "Buy American. I am." Third Avenue's Marty Whitman was saying high-quality equities were more attractive than ever.
Today, just one year later, the tables have turned 180 degrees. Stocks are overvalued and the best investors are scared. John Paulson doesn't trust the dollar, Warren Buffett is hedging it, and value maven Jeremy Grantham says stocks are overvalued, trading for perhaps 25% more than fair value.
One of the things I learned at this year's Alliance meeting is that, if you want to find value right now, try Indian stocks. Our friend Rahul Saraogi, an investor from India, told us about rapidly growing, cash-gushing, debt-free businesses trading at less than five times earnings. You don't find that in the U.S. these days.
I managed to find one stock like that this year, IMS Health, trading around five times free cash flow last August. It recently got a buyout offer for $22 a share, about 70% above where we first recommended it. Otherwise, it continues to be really hard to find anything safe and cheap enough to buy.
New highs: Vanguard Inflation Protected Securities (VIPSX), Fairholme Fund (FAIRX), Cresud (CRESY), Market Vectors Gold Miners ETF (GDX), Visa (V), BNSF Corp. (BNI), AmeriGas Partners (APU), McDonald's (MCD), Keyera Facilities (KEY-UN.TO), Coca Cola (KO), Altria (MO), Microsoft (MSFT), Automatic Data Processing (ADP), IMS Health (RX), Goldcorp (GG), European Goldfields (EGFDF.PK), Akamai (AKAM), Yamana (AUY), Royal Gold (RGLD), Silvercorp Metals (SVM), Barrick Gold (ABX), Silver Wheaton (SLW), Sino Gold (SGX.AX), Eldorado Gold (EGO), Encore Acquisition (EAC).
In the mailbag... some good questions for the financial minds of the Atlas 400. You'll have to make do with my take on them. Send your queries to feedback@stansberryresearch.com.
"Isn't it possible that gold will be the only commodity run up? Managers who are long on agri, short on Tbills (let alone short on stocks) are taking a bath recently and this may continue, at least in theory." – Paid-up subscriber Walter
Ferris comment: Possible, but I think improbable. Anything priced in dollars should become nominally more expensive once those dollars start to flood into the system. Once the banks start multiplying loans and deposits through the system again, look out. The price of most goods will soar.
"To what extent does the Fed's ultra-low interest rate policy contribute to Goldman's (and others') recording those obscene 'trading' profits? Another would be: How much do Goldman and others make as a direct result of the Treasury's huge bond issues?" – Paid-up subscriber Alan
Ferris comment: Well, perhaps it helps them lever up easier. I know their quarter ending numbers are quite different than what takes place during the quarter. I heard one guy say their assets rise 10%-15% above quarter-end levels. Cheap financing would make it easier, or at least less expensive, to take on that extra leverage.
"What is the risk that gold becomes so high priced/over priced or just plain attractive to economies in trouble such as Russia, that they dump their gold and drive down the market?" – Paid-up subscriber Carson
Ferris comment: The amount of currency in the world is in the trillions, and it's everywhere, like sawdust in a workshop or sand at the beach. Gold, on the other hand, is sufficiently limited in supply by Mother Nature. When people start exiting giant currency markets and pouring into gold, what Russian banks do won't matter so much. My friend Ron Coby is a money manager and the author of the investing book The Upside of Down. He tells me he and his business partner are getting close to putting on the "ABC trade" – Anything But Currency.
Regards,
Dan Ferris and Sean Goldsmith
Kiawah Island, South Carolina
November 10, 2009