The S&A Digest: Gold - A Barbarous Relic?

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 06/28/2013

"Send me the dog"... Doug Casey on central banks... Risk premium hits a record low... China's markets finally retreat... Communists hate Wal-Mart... Dean Foods a target?... Marathon's discovery...

Signs of a market top... The risk premium for junk bonds fell to an all-time low today, yielding only 2.42% over Treasuries. The spread is now half of the five-year average of 5% and is down from a 10% spread in 2002.

More signs of a market top... Chinese stocks dropped 6.8% as the government tripled the tax on securities transactions to cool the country's investment mania. The now 0.3% tax should curb the growth of the Chinese markets, which have been gaining 300,000 new investors per day.

And still more on China... China will raise the cap on foreign investments in local brokerages and joint ventures. Currently, foreign investors can own up to 20% of a Chinese securities firm and 33% of a joint venture. Tu Guangshao, vice chairman of the China Securities Regulatory Commission, said that China will raise the cap gradually by the end of the year.

It's good to have the right enemies... India's main communist party is trying to block the entrance of Extreme Value pick Wal-Mart (WMT). The group is urging the government to set up a licensing system to block direct foreign investments and backdoor investments, such as Wal-Mart's joint venture with Indian retailer Bharti. Small, family-owned stores currently dominate India's $300 billion retail sector, forecast to double by 2015.

In his June 2007 issue of S&A Dividend Grabber, Goldsmith commented on the fall of pick Dean Foods (DF):

On the other hand, if the stock gets any cheaper, it would make an amazing takeover candidate. As is, the company could buy all of its outstanding shares, bringing itself private, and still have $300 million in cash flow after paying the interest. What's to keep private equity or a larger food producer from doing the same thing?

The company today announced it is selling its WhiteWave tofu unit to Hain Celestial Group for an undisclosed price.

Microsoft (MSFT) today introduced a coffee-table-shaped computer. The "surface computer" has an embedded 30-inch touch-screen table monitor that allows users to move icons with their fingers. Right now, it costs more than $5,000.

Extreme Value editor Dan Ferris is one of the few analysts who's been betting big on Microsoft. He calls Microsoft "the textbook definition of a safe stock." Dan believes the company is one of five stocks that can literally pay for your retirement. And he's challenging any money manager in the world to beat the performance of his top five picks. So far? No takers.

S&A Oil Report pick Marathon Oil (MRO) today announced that its Droshky discovery in the Gulf of Mexico holds 80 million to 90 million barrels of gross oil equivalent. Initial production at the site could start as early as 2010. Shares of the oil refiner rose 3% today.

New highs: Freeport McMoRan (FCX), POSCO (PKX), Verizon (VZ), Delta Financial (DFC), Steinway Musical (LVB).

In the mailbag... someone wants a refund, for the Digest. We know we can't please everyone... and we wouldn't want to try. That's why we enjoy reading your notes – especially when you disagree with us. Send your jeremiad here: feedback@stansberryresearch.com.

"Send me the dog. I can do better with it than [with] your picks that I selected. My first Vizsla hunted for 14 years." – Paid-up subscriber Ken

"Porter, you finally got me mad. Lay off the unions! Take a look at the strongest union areas over the last century, and I think you will find they have the strongest long-term economies. Detroit may be an exception, but I believe that has more to do with bad management and design problems than it has to do with a fair day's pay for a fair day's work. You and your anti-union crowd would have all us blue collars working for minimum wage. But then who do you think would be buying the products to make our investments grow? I personally would not have enough savings or investments to be reading (or complaining about) your letters had it not been for my union wages and compelled savings. I could go on and on but I think you get the drift, and I challenge you to prove me wrong (about the economies)." – Paid-up subscriber Hal Paddock

Porter comment: There's no doubt that management is to blame for the predicament that GM is in now: They're the ones who decided to run the company at a capital deficit for the last 30 years. However, the way to fix the company is to rationalize its costs – which includes recruiting, hiring, and retaining skilled labor at the best available price.

And I've got news for you: You can hire people to build cars for far less than $78 per hour, which is what GM pays now. You also can get rid of ridiculous union policies that require nonskilled workers (like janitors, etc.) to receive the same wages as skilled workers.

The idea that the way to prosperity is to pay workers more than the market will bear (the union myth) is just as bankrupt as GM is about to become. You can't put the cart before the horse: Profits must be earned before wages can be safeguarded. Likewise, retirees can't demand benefits in excess of what the company can afford to pay – or else soon there won't be any company at all.

"You are always mentioning that you will refund the cost of the subscription to any of your newsletters if one is not happy with any of them. For close to a month, I have been trying to get your office to refund the $199.00 that I paid for the Medical Investor on May 4 with no luck. I e-mailed your office the same day advising you that that newsletter was not for me, again on the 7th, and returned the newsletter that was mailed to me via certified mail, which was received by your office on May 18th. If I am not entitled to a refund, then please advise." – Paid-up subscriber M. Longobardi

Porter comment: I'm sure your refund has been processed. But why not give us a call (toll free) to confirm? You can call customer service at 888-261-2693.

"What – you have nothing to say, so you talk about dog crap. You should be telling us how to react to the Chinese stock market tax, and the fact that many of your recommendations are tanking. I paid for investment advice, not dog crap stories. What about Intl Coal? All that babble and an old December 1, 2006 chart – what I want is a buy-up-to price and a trailing-stop recommendation. Stop the BS and get to work, or I am asking for a refund." – Paid-up subscriber Bottinor

Porter comment: Uh... the Digest is free... And it's worth every cent you've paid for it.

"One thing I have learned in my 50 years on this rock is that religion and politics are not to be discussed unless you want to scatter people like a stink bomb. I've lost more friends just by mentioning my political or religious affiliation. Better to keep them wondering. By the way, thanks to Dan for the ICO recommendation. Ka-ching!" – Paid-up subscriber Brett Fromme

Porter comment: We don't talk about religion here... and we only discuss politics as it applies to economics. (See Doug Casey's essay below, for an example).

"I surrender – your readers are more capricious than my clients. I wouldn't call a 5% or so loss 'tanking,' referring to the guy who bought WLK and the unfortunately timed Icelandic Bonds. The guy who bought ABY is just disgruntled because he's showing somewhere near a 20% loss. If he had a gain, he wouldn't have given a hoot about how many BOW shares he would have gotten. There is a message here – 'cherry picking' is an art, certainly if you buy only two stocks or take two ideas from the editors. Can't fault the guy who bought ABY – Ferris pounded the table on it. But investing is not like a horse race – it doesn't end after six furlongs. It only ends when you throw in the towel or run out of money." – Paid-up subscriber Jim Pursley

"This is not a hate bomb! You have been all right with me. I have made some good investments with your newsletter... I had a mailer to sign on to get the info on how to invest in the companies that pay the monthly dividends, but I can't find it. Please which previous newsletter sold the info on how to get the retirement advice? I just want to invest into these companies only not subscribe to anymore newsletters." – Paid-up subscriber Diane

Porter comment: Our 12% Letter specializes in researching high-yielding stocks... But please understand: We don't offer any brokerage or money-management services. All we do is sell newsletters. If you don't want to read newsletters, perhaps you should contact a financial management company?

"A month ago, April 26, I sent you my resume and expressed interest in being a member of your Advisory Board. The idea has a lot of appeal to me, and I'm confident I can play an important role for you. With nearly 40 years of experience working with individual investors of means, I continue to believe my qualifications are uniquely suited for the role. I haven't heard anything from you and am uncertain if you even received my e-mail. You said you had gotten over 1,000 responses so it's understandable that you're overwhelmed. Nonetheless, my interest remains, and I look forward to hearing from you." – Paid-up subscriber Allen Jones

Porter comment: Allen... as we've stated frequently... we plan to have our board in place by June 30. We are reviewing the applications now and interviewing the people whose credentials we think will be most useful to our business. Once we have completed our review and selection process, we will notify everyone who applied to thank them for their interest.

Regards,

Porter Stansberry

Baltimore, Maryland

May 30, 2007

Editor's Note: "He's got a 12-cylinder brain... that runs on six cylinders most of the time..." is how a mutual friend once described Doug Casey, the famed international speculator.

I've known Doug for more than 10 years. I've traveled around the world with him. And I've seen him make astoundingly good investment recommendations, both in gold stocks (in and out of Bre-X before it collapsed) and in real estate (buying Aspen 30 years ago).

But one of my favorite Doug Casey moments happened in Shanghai in 1999. China was booming then (as it still is now), and stock promoters were all over the place. We ran into one in the hotel lobby, and he invited us for dinner, hoping, I'm sure, that we'd write up his watered stock in one of our letters. We ate at a nice steak house in Pudong, right on the Bund. Doug was content to enjoy his dinner, drink his wine, and mostly ignore the blatant lies and boasts of our host. (His brain was idling on six cylinders, in other words...) But then, the stock promoter said something that questioned the existence of absolute morality. Suddenly, it was as if someone hit Doug over the head.

"Now wait a minute... That's wrong. It's totally wrong..." Doug went on for about 10 minutes, giving the best overview I'd ever heard – totally extemporaneously – on Randian objectivist philosophy.

When he was finished, our host was visibly shaken. Doug had pulled back his curtain... and revealed the man for what he was: a mental midget.

Gold – A Barbarous Relic?

By Doug Casey

How many times have you heard gold described as the "barbarous relic"? It is a favorite phrase of gold-bashers everywhere who are trying to make gold the object of derision. I cringe every time I hear it, which is all too frequently, because gold is neither barbarous nor a relic.

There is indeed a barbarous relic: central banking. Central banks are barbarous in part because they conspired to put an end to Newton's brilliant invention – the gold standard – that safeguarded sound money for 200 years. However, it is the process of central banking itself, as it has come to be practiced, that deserves the greatest public wrath.

Central banking is barbarous for the following reasons:

Corruption of Money as a Product of the Free Market

Money is a fundamental building block of our society because it allows people to interact with one another in the market process. Money existed long before governments and central banks began to "manage" it. Tragically, instead of being a neutral and unfettered tool in commerce, fair to one and all, money has now become a matter of force and decree, which is disruptive to the market process and therefore harmful to society.

Creation of Money Substitutes

Prior to the creation of the Bank of England, every exchange in the trading activity that we call "the market process" tendered value for value. In other words, gold was exchanged for land, silver for food, etc. – assets were traded for assets. The Bank of England changed this process by creating money substitutes. Banknotes are not a tangible asset, like gold or silver. Banknotes are merely money substitutes and not money itself. Money substitutes are a liability of the bank issuing that paper currency, and money substitutes create all sorts of payment risk that one does not have when using tangible assets as currency.

Secrecy

Because central banks act in secrecy, they are not held accountable. For example, the so-called Open Market Committee of the Federal Reserve is far from open. It meets and makes decisions behind closed doors. The minutes released one month later are thoroughly redacted, leaving outsiders in the dark about the members' deliberations. Central bankers consider themselves – and act as if they were – above the law. Moreover, this secrecy favors insiders, and it is this fundamental principle upon which central banks' market intervention has been constructed, including, for example, their intervention in the gold market.

Taxation without Representation

Central banks have freed governments from having to ask their citizens – through their elected representatives – for more taxes. Central banks can acquire government debt and use it to create currency out of thin air for governments to spend on their latest whims. Even worse, through their policies that create inflation, central banks enable governments to steal from their citizens.

Disinformation

There are several tools in the central banks' arsenal, and one of them is disinformation, which they regularly practice. For example, central banks have come to make people believe that inflation is "rising prices." But wet streets do not cause rain. By changing the definition of inflation to one of "rising prices" rather than what it really is – monetary debasement engineered by central banks – the true culprits (the central banks themselves) are masked.

Deception

Not only are central banks guilty of disinformation, but deception is one of their most frequently used tools. The history of banking is replete with examples that demonstrate not just a lack of disclosure but, rather, outright deception. To give just one example, consider how central banks today account for their gold loans. They carry both gold in the vault and gold out on loan as one-line item on their balance sheets. In effect, central banks are saying that they can ignore the truthful disclosure established by Generally Accepted Accounting Principles. As a result, they can report both cash and accounts receivable as one and the same thing. Accounting like that would make even the fraudsters at Enron blush.

Creation of Command and Control Economies

Central banks have, in effect, turned the market into a command (i.e., state-run) economy. The power to create money out of thin air brings with it the much greater power to control a nation's economy, and therefore the economic destiny of millions. Central bankers today act like the former Soviet Union politburo members, who pulled strings and pushed buttons to try to make the economy – which means each and every one of us who participate in the economy – bend to their control. But it is not only the economic destiny of millions that is determined by central banks. The exercise of power by central banks raises subtle, but potentially more disturbing, issues.

Propagation of Control and Restrictions

Central bankers and their comrades in government know that the command-economy power that they have claimed forces them to walk a fine line between prosperity and economic collapse, given the inherent fragility of the credit-based monetary system they operate. To try to reduce this ever-growing fragility – in a vain attempt to make it easier for central banks to control the command economy effectively and totally – governments take away peoples' freedom. Central banks usher in controls, such as the reporting of bank accounts and funds transfers, and policies, such as the "too big to fail" doctrine that underwrites bad decisions at banks with taxpayers' money. Controls perpetuate a central bank's stranglehold on power regardless of whether they are doing a good or a bad job – and it is usually bad – in commanding the economy.

Debt over Savings

The command economy that central banks operate encourages the growth of debt, rather than savings. Banks want to expand their balance sheets – i.e., to make more loans – in order to earn greater profits. Governments want central banks to accommodate this objective. The resulting credit expansion provides the public with opportunities to acquire new things, which creates an illusion of prosperity that makes people believe their wealth is rising.

The result of this debt-induced pseudo-prosperity is a complacent populace, which tends to perpetuate governmental power and politicians' perquisites. Instead of following a sound and time-tested "pay as you go" policy, consumers, businesses, and governments have adopted a new creed – "buy now and pay later." The mountain of debt that exists in the United States today and the excessive consumption that continues to enlarge that mountain are the direct results of central banks' activity and their need to grow more debt to avoid the inevitable bust that would follow if the debt growth were to stop. Newsletter writer Richard Russell explains it very simply in just three words: "Inflate or die." That reality explains why current Federal Reserve Chairman Ben Bernanke has said, in effect, that he would drop $100 bills from helicopters if necessary to inflate the economy.

Not far in the future, when the U.S. dollar collapses as just one in a long list of fiat currencies that have collapsed before it, people will look back and ask themselves how it was possible that barbarous institutions like central banks could have hoodwinked so many people into thinking they were good institutions acting in the public interest. The answer is that central banks have created the illusion of prosperity. Because people think that they are well off, they have no reason to question basic tenets that they are led to believe. For this reason, people are easily cozened into believing that gold is the barbarous relic, that central banks are doing a good job, that officially measured inflation is low, and that their financial future is secure. However, nothing could be farther from the truth.

To learn more about Doug Casey and his research firm, Casey Research, visit his website.

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