A big breakout in gold, silver, and uranium

A big breakout in gold, silver, and uranium... Signs of more quantitative easing... The new Daniel Drew... War finance, without the war... An interview with The Gold Report... Why I'm still buying gold and silver... I doubt your broker or the Wall Street Journal will reference Civil War finance as a way of explaining our current situation. That's too bad. Dead men tell no lies. And the last time the U.S. Treasury printed money on this scale was during the Civil War...

On February 25, 1862, Congress passed the Legal Tender Act, which allowed the government to pay its bills in paper, rather than in gold or silver. The law required merchants to accept these bills at face value. A similar bill was passed in 1863 and, by the end of the war, close to half a billion dollars had been printed. The result was a 25% increase in the money supply.

Not surprisingly, since the bills couldn't be discounted, merchants were forced to discount the bills' purchasing power by raising prices. An epic financial boom began as speculators used the sudden availability of money and credit to buy up hard assets, especially railroads.

Oliver Mitchell Wentworth Sprague, a professor of banking and finance at Harvard University in the early 1900s, wrote the seminal history of what happened next in his 1910 opus History of Crises. With each new wave of money, a mini-boom would follow, with gold serving as the single most important barometer of the money supply. When Union forces won battles, the price of gold crashed because speculators knew fewer "greenbacks" would be forthcoming from the presses. When the Confederates won, the price of gold soared. President Lincoln was so angered by the role gold played in allowing speculators to profit at the expense of his greenback financing, he outlawed trading in gold futures... That resulted in an immediate 30% increase in the price of gold. The law was quickly repealed.

Much the same thing is happening today. The two largest monetary authorities in the world, the Federal Reserve and the European Central Bank, have begun to finance their operations by printing money, now called "quantitative easing."

It began in March 2009. What followed was a massive boom in asset prices, led by gold. When the Fed ceased its activities in March of this year, the markets immediately began to fall. And this latest rally? When did it begin? In late July, when the European Central bank began buying hundreds of millions of dollars worth of bonds with newly created money.

What is propelling the market this week? That would be the Fed's comments about restarting its own quantitative easing. The Fed's September 22 announcement about the low rate of inflation was Fed-speak for "we're about to turn on the presses."

Print money, gold will rise. Threaten to print money, gold will go up more. So far this year, it's up 18%, which will likely be its 10th consecutive annual gain. That's the longest winning streak for gold since 1920. (Paper financing of World War I led to a decade of gains then, too.)

Keep this in mind: Bullion has outperformed global equities, Treasury bonds, and most industrial metals, even though it serves no economic interest. When people buy gold, they are simply abandoning paper money. Perhaps even more significantly, silver broke out this week to more than $21, its highest close since October 1980. Silver is the poor man's gold, and its price gains reflect widespread unease about the future of paper money.

Yes, I know the upward pressure on asset prices isn't limited to gold and silver. Uranium, for example, has reversed its long decline (as our own Matt Badiali predicted in July). But... the best way to protect yourself from the ongoing monetary debauchery continues to be gold – just like it was during the Civil War and World War I. (Private ownership of gold was outlawed by FDR in 1933 and continued until 1974.)

I first warned our subscribers in December of 2008 that the way OBAMA! was choosing to handle the financial crisis – and particularly, his handling of the massive bad debts at Fannie and Freddie – would lead to the end of the dollar standard. At the time, most people thought I was nuts.

The world's leading economy, the United States, has become fantastically indebted at every level of society... With a currency and a budget process totally untethered to any reality, nothing limits the amount of foolish spending Congress can (and will) authorize.... [But] it is only a matter of time now before our creditors realize America's government is just as bankrupt as Iceland's. We are witnessing the end of the paper-dollar standard. Like every experiment with paper money in history, our paper dollar will be destroyed in an all-out attempt to paper over deficit spending, bad investments, and war debts. – Porter Stansberry's Investment Advisory, December 2008

Nothing about my outlook has changed. My top recommendation then was to buy gold bullion, which was trading around $800 per ounce at the time. Bullion is now about $1,300 an ounce. My second-best suggestion was to buy gold mining stocks through the Market Vectors Gold exchange-traded fund (GDX). The fund was trading for less than $30 a share then... It has almost doubled since.

You can think of the situation today in the same way Daniel Drew – a 19th century railroad speculator – must have viewed Lincoln's greenbacks. Whenever there's an economic setback, you know OBAMA! and company are going to print more money. Every bit of bad news is going to be met with more money. Only this time, our leaders aren't issuing paper money to fight a war. This time they're using paper money to cover their own mounting bad debts, which arose because of socialist spending programs. In short, they're using paper money to fight a war against economics and human nature. My bet? They lose that fight. And that's why I think gold and silver are still a good bet.

I'd like to leave you this week with an excerpt from a recent interview I did with Karen Roche – a very smart woman who writes the gold-centric magazine The Gold Report. See the interview after the mailbag.

New highs: Silver Wheaton Corp. (SLW), Anheuser-Busch (BUD), DirecTV (DTV).

The mailbag... one more "nerd" weighs in on Microsoft, while another subscriber waves the flag for GM. Send your e-mail to feedback@stansberryresearch.com.

"OK, as all the nerds are putting in their two cents, this nerd and business owner has some MS insight. My first business was only a mild success, partly due to all the operating systems in use. We had a brilliant cutting edge product but invariably, when we showed it to a customer they said, that is great, if it will run on VAX or DEC or IBM OS, or.... We will buy it. We were a small company, 12 at the peak. We could not spend the effort porting our software to all the different environments. With my current company, it runs on Windows, take it or leave it. As Windows is the dominant OS by far, this is not a problem for us. Why would I port my software for 4% of the market?

"Microsoft has enabled me to be successful as a small company, allowing me to focus on our product and the needs of our customers rather than on the platform the application run on. As for crappy software, one has to look at the job being tackled. Windows runs on dozens of different manufactures computers and accepts cards from hundreds or thousands of manufacturers, many of which Microsoft has never even seen. Making a secure and stable system in this environment is infinitely more difficult than the closed world of Mac.

"Yes, Apple produces good software and tight integration because they control the hardware and the software. As long as you stay in their little world, life is good. Try to venture out and see what happens. To me, Apple is the big bad wolf, stifling creativity unless it comes from Apple. For us independent developers, Microsoft is the enabler and Apple stifles. Most people just do not understand this important point. Hope to see you in Switzerland!" – Paid-up subscriber Andy

Porter comment: The power corporations can attain over certain industries is one thing... But I see Google as a much bigger threat to innovation and even free speech. It has begun censoring paid search results, refusing to display the advertising of certain publishers. And they won't explain why. Google's search-engine market channel is the lifeblood of the publishing industry, today. With the power to censor advertising, Google can literally decide what will and what won't be published in the future. There's no doubt it can also heavily influence many other sectors of the economy, too, simply by deciding who is allowed to use Google and who isn't.

"Maybe if you are a true American, you buy General Motors stock, but if you are just a Republican you say NO! My observation of your GM comment!" – Paid-up subscriber Gene B.

Porter comment: I'm not exactly sure what you're trying to say... But I've never understood the idea that buying American-made products is patriotic, if those products aren't the best value. What seems patriotic to me is buying the best product at the best price. That's what allows me to be most productive. And when my productivity increases, I can generate more wealth, more employment, and more benefits to the whole economy.

Think of it this way: Imagine we're talking about airport porters – the guys who help you carry your bags to the car. Remember when the suitcase makers started putting wheels on suitcases? It was devastating to those airport guys. Likewise, to hotel bellmen. But do you think it would have been good for our country to outlaw wheels on bags, just to make sure those guys had something to do?

"I started with S&A a number of years ago with The Oil Report. After time I got my brother hooked on S&A and, to help with our investing, we bit the bullet and became Alliance members. His education into the market and its workings have been invaluably helped and accelerated by your writings.

"For instance, the day before Porter recommending selling Anadarko puts, we sold the January 2012 RIG 30 puts for $7 when the stock was in the mid 40s. Now RIG is around 60, and that one transaction paid for our Alliance membership. Your writings have been especially beneficial in helping my brother learn about selling calls and puts, and how they can be low risk, and generate income. And it has certainly helped my education as well (I was in the financial services industry 20 years ago)...

"One of the BEST pieces of research I've seen from anyone was Tom Dyson's September 2010 12% Letter. As you know, in it he and a researcher with a degree in actuarial statics picked the 10 best dividend-paying stocks. Quoting that issue, 'We trawled through all 14,720 stocks trading on United States stock exchanges' to come up with the 10. The methodology used was nothing short of superb, and this is the EXACT type of research anyone would want, and many would pay big $$$ for. An absolutely fabulous piece of work, and tomorrow I am adding several of those stocks to my personal portfolio..." – Anonymous

Porter comment: Most people won't join the S&A Alliance because they think it's too expensive. In many cases, that's a big mistake. I know the S&A Alliance will pay for itself – and I've gotten hundreds of letters, like the one above, that explain exactly how.

Whether it makes sense for you or not, I can't say. But I do know this: Becoming an Alliance member will help you become a better investor. The results are often amazing. Just ask any existing member.

*

Interview with Karen Roche
of The Gold Report

The Gold Report (TGR): To what extent has government debt increased to cover the increased credit provided to individuals?

Porter Stansberry (PS): Over the last three years, what's happened is a huge transfer of obligations from private balance sheets to public balance sheets. The biggest and most important example — which isn't even discussed in Congress or in Washington as being a problem, which is truly amazing — was shifting $10 trillion of obligations owed by two private corporations, Fannie Mae and Freddie Mac. We shifted responsibility for all those credits onto the U.S. Treasury. That had the impact at the time of doubling – doubling! – our entire national debt in one swipe of the pen. That's just an incredible transformation that took place when the government decided to guarantee all of Fannie's and Freddie's creditors, when you know what Fannie and Freddie really own with all that money they borrowed is most of the mortgages in the United States – at least the ones the Federal Reserve hasn't bought yet. You can see that we, as a nation, have decided that the government ought to be responsible for our mortgages. In a way, that's us saying we believe the government ought to be responsible for all of our private debts.

TGR: And where does that lead?

PS: It's interesting, isn't it? That was the goal of every socialist regime in history, right? And yet, here we are in America living in the new socialist utopia where no private citizen is really responsible for their private debts. It all becomes a matter of social obligation. You know, I don't think it's any real great surprise to any thinking person when I say I doubt this experiment has a happy ending. I don't think you can socialize everyone's private obligations and end up with a good economic result.

TGR: Is some big train wreck the likely outcome?

PS: I'd argue we're in the midst of the train wreck. We're going to see a continual increase in sovereign debt around the world, even though, according to any standard model of repayment, the leading sovereign debtors are all already bankrupt.

Just to give you an example, if you look at the size of the U.S. federal government debt outstanding today – not the unfunded obligations, just the bonds that are outstanding – and you look at the federal government's annual revenue, the debt is now 356% of the revenue.

If the federal government didn't own the world's reserve currency, you can imagine that it would be impossible for that government to get credit anywhere. No one would lend to an entity that's so far in debt as the government already is. And yet it's the government that continues to provide additional stimulus to the economy by adding to its already swollen obligations.

So what I think you're seeing is that the government continues to pump money into the economy via expansion of credit and/or straight out printing money (via quantitative easing). That has a diminishing-returns effect, so people would argue now that the "cash for clunkers" didn't do anything and TARP hasn't done anything, etc.

So I think we're in the middle of this train wreck; our currency is gradually being debased and efforts to restart the economy with additional spending aren't working. They probably can't work. How long does this continue? How much debt gets racked up before real, true panic sets in and people simply start to flee the currency at all costs?

TGR: How long? How much?

PS: I don't know the answers. But I don't believe the current strategy is feasible. I think the only thing that really can be done – it would be painful, but less painful than the calamity we're heading toward – is to demand that people be responsible for their private obligations. No more bailouts, no more stimulus, no cash for clunkers. You, the American people, have to live within your means starting on this date.

If we then defaulted on the U.S. government bonds, we'd tell our creditors, "We're going to give you a certain percentage of our tax receipts, but we have to renegotiate our debt because we can't pay it back." It would be really bad for six or nine months, but then I think things would be great because you would have washed out all the excesses, people could get back to work and the dollar would fall to a value that would make our economy very competitive on a global basis.

TGR: Demanding people live up to their private obligations on a par with the defaulting on U.S. government bonds strikes me as curious. On one side, I see individuals who have benefited least from any stimulus – in fact many of them are unemployed, losing their homes, and going into bankruptcy. The banks are the ones getting bailed out.

PS: When I say that people have to be responsible for their private obligations, I'm talking about the big banks. If a bank actually had to be accountable to its depositors, there's probably not a major bank in the United States that would be open tomorrow. I mean we're all comfortable with the banks because we know that the printing press stands behind them. But that's no way to run an economy. For the economy to work, there has to be winners and losers and people have to be responsible for their obligations. We're living in a socialist dream right now, and it's going to end up becoming a socialist nightmare. These dreams always do.

So when I say individuals have to be responsible for their obligations, really what I mean is, the creditors of people cannot continue to expect the government to guarantee every obligation. It simply isn't feasible. It can't be done. You can't guarantee every mortgage in the United States. You can't do it. Likewise, the U.S. government's creditors have to understand that there is such a thing as government default on debt. It happens all the time. If you make a loan to a government that is in as over its head as our government is, you're making a bad bet.

Regards,

Porter Stansberry
Miami Beach, Florida
September 24, 2010