Warren Buffett, the world's most successful investor, doesn't like gold. In a 1998 speech at Harvard, he told the audience, "It gets dug out of the ground in Africa or someplace. Then, we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."
The problem is, Buffett doesn't understand gold's utility. It is the world's perfect money. While it is not a productive asset, which Buffett prefers, it is a store of value. Also, as money, goods and services should be exchangeable for gold. Instead, we exchange them for paper. Last week, in an interview with Forbes, Buffett added to his bearish gold thesis:
"Look," he says, with his usual confident laugh. "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all – not some, all – of the farmland in the United States. Plus, you could buy 10 ExxonMobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"
Again, Buffett doesn't understand gold is money. If gold is the world's currency and we assign a value to all the gold in the world, it should equal all of the assets in the world. Because it is money, you can't value it like an oil company or farmland. Gold can't produce value, as Buffett says, because it is value.
When asked what the typical investor should own instead, Buffett answered without hesitation, "equities." While we don't agree with Buffett's long-term view of gold, we do agree equities are attractive today. And we think gold could be due for a correction.
Not even Jim Rogers, probably the biggest gold bull in the world, is buying at these levels (more on Jim's views shortly). Why? Too many people are bullish. Around 98% of investors are currently bullish on gold. And a comparable number hate the U.S. dollar. Look at this chart of the dollar's value relative to gold. It's at a 20-year low (as far back as I could chart):
Credit Suisse released a report a few weeks back saying a dollar rally is 100% certain (based on past occurrences with equally huge short positions in the currency). And investors are piling on short positions in front of "quantitative easing, part two." Over the past decade, the dollar has had a positive return over three months when short positions reached current highs. On a one-, two-, and six-month basis, the dollar has rallied 80% of the time. When the dollar rallies, gold falls.
Short Report editor Jeff Clark has been saying the same thing, though he's trading off his favorite technical indicators. Jeff went short metals two weeks ago after his indicators flashed "sell." He closed the trade last week for a 100% gain. He also initiated another short-metals trade last week. But this one will be an even bigger winner than the first. Plus, the trade is cheaper today than when he first recommended it to readers. He expects Short Report readers to make a quick 150% on the downturn. To access Jeff's latest trade, click here...
Back to Jim Rogers... Rogers said he's not buying gold because he expects a dollar rally. But he's still bullish on commodities. Rogers' view on commodities is similar to David Tepper's view on stocks. Rogers wants to own commodities if the world economy improves because shortages will follow. If the world economy doesn't improve, he still wants to own commodities, because the government will print money. You can watch the full interview here.
We're airing our latest Off the Record conference call tonight, and it's a special one. We've got Porter and famed speculator Doug Casey answering the two biggest financial questions in the world today: What is the government doing to our money? And how can I protect myself? While we do expect a short-term rally in the dollar, long-term it's doomed. Unless you take steps to protect yourself, your savings and investments could be permanently impaired.
Porter and Doug explain why we have already entered a dollar crisis and every step the government takes to "improve" the situation is only making things worse. They also tell listeners their favorite commodity to own today (both Doug and Porter agree this is the best way to make a fortune in commodities... It's not a precious metal). To listen to the call, click here...
New highs: Anheuser-Busch InBev (BUD), Coca-Cola (KO), Forest Labs (FRX), Prestige Brands (PBH), CARBO Ceramics (CRR), Enterprise Products (EPD), ConocoPhillips (COP), Washington REIT (WRE), McDonald's (MCD).
In the mailbag... Ever had questions about our politics? Read on... (and as always, please send your questions and comments to feedback@stansberryresearch.com).
"Porter, after reading the Digest for a long time, I can't believe that anyone would mistake you (or Dan Ferris) for a Republican. You have said more than once that you are a Libertarian – which means that you know what you stand for (unlike a Republican or Democrat)." – Paid-up subscriber Bob Tanner
"While reading the message from the Mr. Anonymous blaming the Republicans for the status of our country the need to respond could not be restrained. first I must preface my comments by; I refuse to belong to either party. Back in 1983 during my farewell speech to the Yellow Medicine County Corn Growers Association the message to my fellow farmers was 'Do not look to Washington to solve our problems. The politicians will not do it for us. They will do it to us.'
"Never in our country's history has that been truer than today. No matter which party's emblem they have on their sleeve, too many of our elected officials are crooks looking to line their pockets. Hopefully November 2 will put a few honorable people in place to try to change the course of our country. It does not matter which party they belong to as long as they have the best interests of the citizens in their hearts. In fact if they were all independents it would be great.
"It is going to be extremely difficult to make the decisions needed to change the course. We have crossed the line where climbing back out will be very painful. That said we deserve to be where at this point in history because we as citizens have elected and reelected this band of theives. Blindly following some party doctrine will never solve this problem. We need to look inside and own our decisions." – Paid-up subscriber W.N. Anderson
"Sorry that I don't have any good news to help ease your pain. But I do have a question: Why only now are you whining about the Federal deficit and not three years ago?" – Paid-up subscriber Terry Moore
Porter comment: Three years ago would have been October 2007. This is from my newsletter in January 2006 – almost five years ago. I warned about our debts, the coming inflation, and the looming disaster of Ben Bernanke. Here's what I wrote:
Ben Bernanke, our new Fed chairman, is a mental midget.
In his first major policy speech after his appointment to the Fed, Ben Bernanke addressed the National Economists Club in Washington D.C. It was November 21, 2002. He promised to use the power of the Federal Reserve to forever hold off the consequences of our financial profligacy by monetizing not only our debts, but private assets, too, if necessary:
"The second bulwark against deflation in the United States, and the one that will be the focus of my remarks today, is the Federal Reserve System itself... a principal message of my talk today is that a central bank whose accustomed policy rate has been forced down to zero has most definitely not run out of ammunition... If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets... essentially equivalent to Milton Friedman's famous 'helicopter drop' of money.'"
In short, Bernanke said that as Fed Chairman, he was willing to dump money from helicopters to keep the economy going!
A few years ago, Bill Bonner wrote that, when explaining booms, busts, and inflation, central bankers were like squirrels watching a bank robbery. They saw it all happen. And it meant nothing to them. Ben Bernanke is the perfect "squirrel." His book, Essays on The Great Depression, studies the biggest economic earthquake of the last 100 years from the perspective of 40 different countries. Bernanke concludes the whole thing happened because... that's right: The Fed didn't print enough money fast enough. Not mentioned is the role of Ben Strong's credit inflation of the preceding years.
Bernanke is a complete naïf; a man with a terrific education and not a single original thought. Central Casting couldn't have delivered a better bagholder. Bernanke's job is to liquidate all the credit that's been extended to us by the Asians.
Just when we need a Fed chairman who's not afraid to print money, Helicopter Ben arrives on the scene. He's not afraid of inflation because he knows nothing about it. In fact, read his book and you'll see: Economics has never crossed his mind.
Ben Bernanke is going to up the rate of monetary inflation, which in the short term will give a boost to speculative stocks, real estate, and gold. Sure, in the long term this will ruin the credit of the United States and lead to the insolvency of millions. But before that happens, a lot of money is going to be made...
Without a rampant, raging inflation, America's economy would slam to a crushing halt. There's no way the average American will ever be able to pay off his mortgage, write the checks to pay for his future health care, or afford a retirement outside of a trailer park.
In total (federal, state, local, social security obligations, business, household, and domestic financial companies), we owe $40 trillion. This does not include unfunded future government obligations, only the social security surpluses that have already been spent. That's such a big number that it doesn't make sense. Think of it this way: It's $136,000 per man, woman, and child in the United States. Here's the amazing part: 66% of this debt originated after 1990. And we don't just owe it to ourselves. Foreign investors own 21% of our outstanding obligations.
If we actually had to pay all of this money back, we'd all be broke and insolvent. You'd be looking at the Great Depression... but worse by an order of magnitude.
The solution? Roll out your Bernankes...
With inflation, there's plenty o' cash to pay for prescription drugs and lazy 40-year retirements for every Tom, Dick, and worthless Harry. Let's all sit around and get diabetes! That's not to mention the real pork, like NASA, the DOE, "Homeland Defense," and bridges to nowhere. With inflation you can forget about a depression, or even a recession. Instead, say hello to the greatest increase to the size of government since LBJ. And here's the best part: with inflation, there's enough money to start a war with every two-bit dictator in the world. We could even bug every single phone in America. (It's only used for your protection, of course...).
To pull off the biggest inflation in history, all we needed were a bunch of crazy Asians who, like drunken college students, are willing to swallow whatever we put down the monetary bong. Those poor Chinese. First they spend 50 years believing in the lies of an illiterate peasant, who directed millions to starve for crazy ideas. Then they lend Ben Bernanke close to a trillion dollars!
How did someone with absolutely no real world experience end up running the most important financial institution in the free world? He was first selected by George W. Bush to the Federal Reserve Board in 2002, and then Bush promoted him to its chairmanship last year. Bush and Bernanke do have something in common: Neither is widely admired for his intellect. I suppose one day Bush will blame Bernanke's nomination on "faulty intelligence." And he'll be right.
Regards,
Sean Goldsmith and Porter Stansberry
Baltimore, Maryland
October 25, 2010