Mr. Big's gold trade

Mr. Big's gold trade... Moody's shocking internal e-mails... Big Brown and Dr. Copper... Barney Frank is having his way with you...

Sometimes, it's absolutely essential to know a real insider, someone who's been around for decades and knows what's happening in a particular market. So when we saw an e-mail this morning from our friend Van Simmons at David Hall Rare Coins, our eyes widened...

Says Van, "The world is buying all the gold and silver it can put its hands on and has taken the physical supply off the market. It is my understanding that all mints from China, Australia, U.S. and Canada... are all out of gold and silver coins for sale."

The gold market is small compared to the stock and bond markets, and therefore much easier to manipulate. Says Van, "I suspected the market may be controlled by someone, and come to find out, there has been one big buyer of virtually all the mint production of coins. He buys all he can and then supplies certain wholesalers who get them graded by PCGS or other grading companies and sells them to dealers who then sell them to clients at higher premiums. So they have taken a bullion product and are making it more valuable.

"The guy who has been buying all the mint products feels like there is going to be a large demand over the next several years worldwide for bullion coins, so he has taken his positions in gold (maybe futures) and hedged them against the mint products and is making several percentage points. He told me last week he has sold hundreds of millions of dollars of mint products this year. Smart guy."

I asked Van about the details of Mr. Big's trade. He doesn't know... but he sure wishes he did.

"Let's hope we are all wealthy and retired by the time this house of cards falters."

Never was the Wall Street mentality summed up so directly and succinctly than in this internal e-mail by a Moody's credit analyst.

At the Grant's conference in New York on Tuesday, legendary short seller Jim Chanos said he's still short the credit-ratings agencies because "the business model is broken." Chanos warned us we'd be seeing damning e-mails from the credit-ratings agencies. The very next day – yesterday, October 22 – a U.S. House of Representatives panel released internal e-mails from Moody's and S&P employees.

Here's another frank e-mail, referring to the disastrous structured credit vehicles, which couldn't have existed if not for Moody's, Standard & Poor's, and Fitch: "It could be structured by cows and we would rate it."

One Moody's employee wrote in September 2007, "Seems to me that we had blinders on and never questioned the information we were given. It is our job to think of the worst-case scenarios and model them. Combined, these errors make us look either incompetent at credit analysis, or like we sold our soul to the devil for revenue."

Moody's is down more than 22% this week.

Moody's is shaping up like Marsh & McLennan, the global insurance broker that became less profitable after regulators changed its business model in the wake of the 2004 contingent commission scandal. My guess is you're going to see more of the Egan-Jones Ratings model, where the users of ratings pay for them, not the issuers of rated securities. Sean Egan has been preaching and practicing this for years.

I've been yammering at you about inflation, and I still think you should buy and hold gold bullion coins. But according to one economic barometer, the outlook is for a long, cold economic winter.

The barometer is UPS, the largest package delivery service in the world. UPS' third-quarter net income was down 9.9% due to what its CEO called "precipitous declines" in its next-day delivery service in September. UPS predicts a 4% drop in volumes in the fourth quarter. It raised its rates 4.9% this year, and will raise them again next year. I told Extreme Value readers to buy UPS if the stock ever closed at a 50% or greater discount to its intrinsic value... It's not quite low enough yet. If you're curious when to buy UPS, click here.

Or maybe you prefer Dr. Copper to UPS as an economic barometer. Dr. Copper says the world is in a deflationary spiral and has been for four months. Copper spiked to more than $4/pound in June and has fallen more than 50% since, selling today for around $1.83/pound.

Then again... is any asset in the world (aside from gold and silver bullion) not echoing UPS and Dr. Copper's dire sentiments? It seems all world markets are acting as barometers these days. The economic equivalent of atmospheric pressure is falling everywhere. What happens when pressure falls? That means rain, doesn't it? Really low pressure results in tornadoes and hurricanes, right? Anybody out there a meteorologist?

It seems that, if economics were meteorology, we'd be in for the storm of the millennium, with dark clouds covering the entire globe, just like in that environmentally apocalyptic move a few years ago, The Day After Tomorrow.

New York Attorney General Andrew Cuomo is gunning for AIG executive bonuses. The insurer will freeze $19 million in payments to former CEO Martin Sullivan and a further $600 million of deferred compensation and bonuses due to other AIG executives. Last week, AIG agreed to help recover improper payments made to executives as part of an investigation by Cuomo, who said "until taxpayers are repaid with interest... no funds should be paid out."

Cuomo threatened legal action unless AIG stopped "outrageous" expenditures. He said freezing planned payments will "stop the hemorrhaging" but the "more ambitious" goal is to capture payments already made.

Cuomo's tactics aren't enough for House Financial Services Committee Chairman Barney Frank. Frank wants a "moratorium" on all Wall Street bonuses. "They have a negative incentive effect because they are the ones that say if you take a risk and it pays off you get a big bonus," he said. And if it causes losses "you don't lose anything." The halt on bonuses should last "until they can get a better structure without that perverse incentive," he added.

I agree the incentive is perverse, but that's only because the risk is sloughed off on the clients and shareholders, all of whom are the ultimate source of those big payouts and ought to bear the brunt of the risks they willingly take. If you make a crappy investment, you deserve to lose your money. That's what happens in a market economy. That's how it's supposed to work.

Barney Frank knows he works for a country full of sheep who love handing him their power in exchange for promises of safety and security, promises that could never be kept.

More bad news for General Motors... The largest U.S. automaker will be forced to lay off salaried, white-collar employees even after more employees than expected took buyouts. The company is also suspending its matching payments to employee 401(k) contributions.

And Goldman Sachs... The Wall Street bank said it would cut 10% of its workforce, approximately 3,200 jobs.

New high: Market Vectors Double Short Euro ETN (DRR).

If you haven't yet listened to our webcast from last Friday featuring S&A analysts Jeff Clark, Steve Sjuggerud, Porter, and myself... it's not too late. See below. And send any questions or comments to: feedback@stansberryresearch.com.

"A few weeks ago I bought Yamana and Nova Gold, and I'm still holding SA and Great Basin. All are down considerably. I'm not panicking because I feel they are value plays. What would you guys suggest?" – Paid-up subscriber Deborah Arnett

Ferris comment: Of course, I cannot give personalized advice regarding the positions you name.

But here's what I tell anyone interested in gold investing: Don't ever forget that gold stocks aren't gold, they're stocks. And if there's one trade that's still in heavy liquidation, it's the short-dollar/long-commodities carry trade, where hedge funds sell short dollars by borrowing them on the cheap and buy commodities in various forms, including gold stocks.

Lower your near-term expectations on all stocks, and don't let people ever tell you they know where the bottom is. They don't. Ever.

"I signed up for last Friday's webcast but never got the e-mail with the log-in instructions. Can you send me a link for it?" – Paid-up subscriber Jake

Ferris comment: Anyone interested in listening to the replay should click here. The call will be available online through Monday. Also, remember, because this is a replay, you will not receive the e-mail Porter mentions at the end of the call.

Regards,

Dan Ferris

Medford, Oregon

October 23, 2008

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame