Buffett's big mistake... Gold hits a record high... Why investors have it so rough in China... Our 'gold and blue chips' strategy... A big potential income opportunity around the corner…
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"I think [Buffett] is making a big mistake..."
In a recent CNBC interview, hedge-fund billionaire Ray Dalio explained how he has a different view on gold than legendary investor Warren Buffett.
Regular Digest readers know Buffett is one of the most vocal detractors of gold ownership. Buffett dislikes the precious metal because it produces nothing and provides no income. He says the only thing you can do with gold is "fondle it... but it will not respond."
Digest readers know we disagree with Buffett on a few ideas... This is one of them.
Dalio is the founder of Bridgewater Associates. In 2011, Bridgewater ranked as the largest and best-performing hedge fund in the world. It has about $130 billion under management. Over the last 20 years, it has returned 14.7% on average. Dalio is rightly one of the most respected investors in the world. And when talking about gold, Dalio says Buffett is dead-wrong...
Keep in mind... Dalio is not a "gold bug." He's an investor who will trade any asset class, including stocks, currencies, bonds, commodities, and gold. And Dalio believes it is too risky not to have gold in one's portfolio.
In the interview, Dalio said, "Gold should be a part of everybody's portfolio." His reason is simple: It's sound diversification. Gold is real money. Its value cannot be debased like paper currencies can. The words had barely left Dalio's mouth before the interviewer interjected, "Warren Buffett won't touch gold!" Dalio responded by saying he thinks Buffett is making a big mistake.
As we've written many times in the Digest, most of the large, developed economies of the world (like the U.S. and Europe) are in a "no way out" situation. They have taken on incredible debts and massive, unfunded liabilities. The only way to pay for it all is to print more money. Dalio noted the same by saying, "We have a situation now where you have too much debt. Too much debt leads to printing of money to make it easier to service."
Supporting Dalio's thesis, gold hit a new high in euros and Swiss francs last week... The precious metal hit 1,379.6 euros an ounce and 1,666 francs an ounce.
Signs of the Chinese slowdown abound: Chinese industrial companies' profits dropped for a fifth-straight month in August... Net income dropped 6.2% from a year earlier to $60.4 billion, according to the National Bureau of Statistics in Beijing. That's the biggest drop this year – compared with a 5.4% decline in July and a 1.7% drop in June.
In particular, the Chinese iron ore and steel industry is struggling. The trade organization China Iron and Steel Association recently announced approximately 40% of the country's iron mines have shut down due to three-year-low steel prices.
And last week, the country's biggest steelmaker, Baosteel, announced it closed a 3 million ton-a-year plant in Shanghai. And the company doesn't believe the $160 billion in infrastructure projects the Chinese government approved this month will boost demand... "The government's infrastructure investment may only improve sentiment... I don't expect a big lift in steel demand," Zhang Dianbo, assistant president of Baosteel, told reporters.
The problems in China extend past infrastructure spending. Consumption is also slowing.
Last week, athletic-apparel giant Nike reported quarterly earnings. The company earned $1.23 a share, besting expectations of $1.13. And revenue was $6.67 billion compared with the $6.44 billion expected.
North American orders disappointed, growing only 13% compared to expectations of 14%. Western European orders grew 6% versus expectations of 4.2%.
But new orders in China plunged... Nike's new Chinese orders fell 6% compared with expectations for 1.2% growth.
Nike President Charlie Denson said all retailers in China were battling slowing economic growth and excess inventory... "This is a natural evolution that we've seen in many markets, so it's not a surprise. What is a surprise, like everything in China, is how fast it got here," he told analysts.
On top of the slowing economy, investors in China also have to worry that companies there have some of the worst accounting practices in the world, according to Jim Chanos, the legendary short-seller who alerted the world to (and profited from) the collapse of Enron. We've covered his viewpoints many times in the Digest.
Chanos recently said he "wouldn't trust any company's accounts in China"... and that when it comes to financial statements, most companies "don't have real numbers." He says the Chinese government's financial numbers are just as bad.
So with China… you have a slowing economy... dubious government numbers... and companies with financial statements you can't trust.
With Dalio's take on gold... and with the mess that is China… we're more and more inclined to recommend the investment strategy we've been recommending for a long time: Own lots of gold and silver. And when it comes to stocks, own elite, U.S. blue-chip companies like Microsoft and Johnson & Johnson.
Gold offers investors a "crisis hedge" against paper-money disasters... and stable, dividend-paying stocks are able to increase their cash flows and dividends to outpace inflation.
Regular readers know how blue-chip stocks form the foundation of Dr. David "Doc" Eifrig's incredibly successful Retirement Trader service. As we covered last week, Doc and his readers have put together one of the greatest track records in history by "selling puts" on blue-chip stocks. Remember... when you "sell a put" on a stock, you agree to buy shares at a specific price in the future. You receive a cash premium for entering the deal.
Doc's strategy involves agreeing to buy blue-chip stocks at discount prices. For example, if Doc thinks a stock is a good bargain at $30 per share, he'll agree to buy it at the great bargain price of $28... and get paid for entering the deal.
Over the past few weeks, we've written a great deal about how this strategy is a low-risk way to pull huge amounts of investment income out of the market. You can access this commentary – and build your knowledge of how this low-risk strategy works – here.
We bring up Doc's strategy today because he believes put sellers could get a tremendous opportunity to safely make thousands of dollars over the next few months. Doc thinks it's likely that volatility will surge in the coming months because of the election. (History shows this is likely.)
In last week's Retirement Trader update, Doc alerted readers to be ready for this opportunity…
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I still think ahead of the November presidential election, people could become fearful and start looking for protection – and either sell out of positions completely or buy put options that run through the end of November. We'll look for any large spikes [in volatility] above 20-22 to take advantage of that fear... and gather "extra" income through our option-selling strategies. |
If you're unfamiliar with the "lingo" in Doc's update, don't worry. It simply means that if volatility surges, option prices rise as well. This is a great thing for Retirement Trader readers. Periods of high volatility can actually "make" a trader's year. That's why it's so important to be prepared for them... and have a trading plan mapped out in advance.
One final thing before we sign off today...
If you have a few moments, make sure to check out the recent Wired article on 3-D printing. This extraordinary technology will reshape the world's manufacturing capabilities. 3-D printing can literally print objects like hand tools, toys, and even houses. When most people first learn about this technology, they say things like, "Unbelievable," or "There's no way that's real."
While 3-D printing has been around for years, it's only now becoming cheap enough that the printers will soon be sold to the mass market. One 3-D printer profiled in the article can be had for less than $2,500. Imagine that when your child asks you for a new toy, you just go out to the garage and print it.
It's real... and it's on the way. You can read all about it here.
New 52-week highs (as of 9/28/2012): Sandstorm Gold (SSL), Virginia Gold Mines (VGQ), Royal Gold (RGLD), and Sysco (SYY).
The mailbag was light today... Send derisive rants and boozy praise alike to feedback@stansberryresearch.com. We read every e-mail.
Regards,
Sean Goldsmith and Brian Hunt
New York, New York and Delray Beach, Florida
October 1, 2012