Gold and silver safer than the dollar?... Middle East crisis spreading to 'important' countries... The biggest reason energy prices will soar... How we'll play it... Another Grail trade... More scary government stats... 
It's a near certainty in the market... When crises arise, money flows into U.S. Treasury bonds (the supposed safest security in the world). Following September 11, the dollar soared... After the Lehman collapse, the dollar soared... During the European debt crisis, the dollar soared... You get the idea.
But as Steve Sjuggerud points out in today's DailyWealth, things are changing:
| You see, in the past, without fail, the U.S. dollar has been what the Big Money runs to in a crisis. Always... Always, that is, until this latest crisis in the Middle East. In this crisis, the dollar is down. |
If the world isn't fleeing to the safety of the dollar, where is the money flowing? Gold and – especially – silver. Today, silver hit an all-time high of $34.44 an ounce. Gold is nearing $1,430 an ounce. Take a look at this one-month chart of both metals... and compare that with the dollar's performance at the bottom.
As Steve noted, it's been decades since the Big Money preferred gold and silver over the U.S. dollar as a safe-haven asset. Is this a sign the dollar's reign is over? Maybe. It's more likely a sign the Big Money isn't too worried about unrest in Tunisia, Egypt, and Libya.
But if trouble spreads to Saudi Arabia and Iran (the world's second- and third-largest oil producers, respectively), and the dollar still doesn't rally... then the reign is over. And we may soon test that situation...
As we noted in the February 22 Digest, protests are already occurring in the streets of Iran (the government took action to quell protesters today). And the Saudi market plunged around 7% today as the regional press reported Saudi Arabia sent tanks to contain the unrest in Bahrain. Also in the February 22 Digest, we explained what Middle East production cuts will mean for the oil market...
| BP estimates global oil consumption is around 84 million barrels per day. Libya's 1.5 million barrels are at high risk of being curtailed. If you consider Iran's 2.5 million barrels or (less likely) Saudi Arabia's 7 million-plus barrels face some risk of being curtailed... you have more than 12% of global exports in focus. (This doesn't count the large exports coming from Kuwait, United Arab Emirates, and Iraq). |
An oil shortage would destroy the market right now... Federal Reserve Chairman Ben Bernanke gave his biannual testimony to Congress today. He acknowledged rising oil and agriculture prices, but said inflation would remain tame. Then, in what could be the first time Bernanke's admitted the possibility of inflation, he said, "Sustained rises in the prices of oil or other commodities would represent a threat both to economic growth and to overall price stability."
There's talk of Saudi Arabia increasing oil output to cool prices and boosting the global economy. Commodity expert Jim Rogers says even if Saudi Arabia wanted to increase production, it doesn't have the reserves... "Saudi Arabia has been lying about the reserves for decades. Saudi Arabia the last two times said they [were] going to increase production and they couldn't increase production. Don't fall for that. The reason oil is going up is, the world is running out of known reserves of oil.
"While we don't necessarily agree with Rogers' Saudi views, we do think oil is becoming harder to find ("harder to find"... which is different than "running out"). And while the crisis in the Middle East is important for oil prices, the bigger, more permanent issue concerning the global oil market is the booming demand from China and India, aka "Chindia."
Both countries are scrambling to secure energy assets (read about China's efforts here). And both countries are building strategic reserves to protect against supply disruptions. China's plan calls for 500 million barrels (enough for 100 days of oil imports) by 2020. So far, the country's only filled 110 million barrels. And India wants 40 million barrels of strategic reserves by 2012. So far, India only has 9.8 million barrels. If it wanted reserves similar to those of China, the U.S., or Japan, the country would need around 250 million barrels of oil.
How are we taking advantage of Chindia's booming energy demand? We're buying the safest and largest stores of energy in the world. S&A Resource Report editor Matt Badiali calls it "hoarding." Matt especially likes a company operating in the Canadian oil sands. Almost no one knows about this stock. It's super-cheap... And it's just starting to break out. As Matt recently wrote:
| There is no exploration risk and little technical risk. It continues to trade as if oil prices are around $80 per barrel. It owns one of the simplest and safest oil businesses in the world. It's entirely focused in Canada... among the most stable countries in the world for resource businesses. All its assets are in one place... a giant asphalt sandbox. |
This stock is another "hoarding" play. Among Matt's strategies in the Resource Report, he has been recommending companies that control the world's largest and best resource deposits. As commodity prices continue to surge, the value of these companies' reserves will soar. And it seems clear oil prices are going higher. Matt's latest recommendation is the safest way to play this trend. To learn more, click here...
In yesterday's Digest, we covered the concept of "positive divergence"... which is one of the cornerstones of our newest advisory, the S&A Grail Trader.
This concept allows the analysts behind the service, Denny Lamson and Ron Coby, to pinpoint incredible "bad to less bad" trading set ups.
As we covered yesterday – and as Steve Sjuggerud has proved again and again in True Wealth – owning an asset when it goes from "bad to less bad" is the safest and surest way to make hundreds of percent on your trades. It offers both safety (because everyone has already sold) and huge upside (because the asset is cheap and hated). If you're not spending a good deal of time looking for these kinds of situations, you're unlikely to have much success trading stocks and commodities.
One of our favorite uses of the Grail technology is to take Stansberry & Associates' value-focused research and ask, "What does the Grail say about this?" That allows us to find precise buy points for our recommendations and create huge increases in the risk/reward profile of our trades. An example of this phenomenon at work is Dan Ferris' recent purchase of World Dominating Divided Grower Medtronic (MDT) in the 12% Letter...
Medtronic dominates the U.S. pacemaker and spine-implant market. For years, the company has used its dominant position to become one of the world's great dividend-paying stocks. The company has increased its dividend every year for the last 32 years in a row. Few companies will ever approach that claim. It's one of the great wealth-compounding vehicles in the stock market.
Last summer, concerns on the economy and the broad market correction hammered MDT shares. Soon after the decline, Dan pointed out this dividend machine offered tremendous value... and a cheap way to own a steady and growing dividend stream. Around the same time, Ron and Denny told us the Grail was screaming, "BUY MEDTRONIC"... that it was likely due for a huge jump higher. Below is a chart from early 2010 to the time up to the Grail's buy signal.
As you can see, things were bad for the stock.
Fast-forward to today... Medtronic has soared 16% (a huge increase in value for a World Dominator) as things have gone from "bad to less bad"... and the Grail called it.
This kind of situation is one of the most exciting applications of the Grail technology. Ron and Denny plan to "overlay" this amazing timing system on our S&A portfolios to help generate tremendous risk/reward trades. If you've ever wanted to make large, short-term gains from our safest stocks, you're absolutely going to want to be a Grail reader. Right now – and for a limited time – we are offering the best deal you'll ever see for this service. You can click here to learn more.
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New highs: Berkshire Hathaway (BRK-A, BRK-B), Cenovus Energy (CVE), WisdomTree Japan Small-Cap Dividend (DFJ), Cambria Global (GTAA), Mirasol Resources (MRZ.V), Silver Wheaton (SLW), Suncor Energy (SU), Automatic Data Processing (ADP), Calpine (CPN), Hershey (HSY), iShares Silver Trust (SLV), Texas Pacific Land (TPL), Abraxas Petroleum (AXAS), EV Energy Partners (EVEP), SandRidge Energy (SD), Walter Investment (WAC), Philip Morris International (PM).
Though fleeting, we always enjoy praise in the mailbag. Repetitive questions... not so much. Send us your feedback to feedback@stansberryresearch.com.
"I'm a seasoned 30 veteran of Wall Street. I've been investing for 25 of those 30 yrs. I now manage my own money with my two sons. I consider myself a very sophisticated investor. We trade and invest in just about every asset class. I'm also a new subscriber to the Digest. I think the advice you give is very good for the typical as well as the mores seasoned investor. Being reminded of good investing basics as well as having some outside the box thinking is helpful to all. Keep up the good work." – Paid-up subscriber Ralph Cioffi
Goldsmith comment: Thanks, Ralph. We're happy you're on board.
"You're wrong! We can learn. I have been an Alliance subscriber for many years now. I have read, learned, and implemented your sound advice over those years. I am also an Oxford Club Chairmen's Circle member. Since the Oxford Club emphasizes Asset Allocation (and as you say Stansberry does not), I learned those lessons from Oxford. Between Oxford and Stansberry, I have learned about position sizing, trailing stops, etc. I learned put selling totally from Stansberry.
"I started learning and preparing for retirement about 5 years in advance of that event. When I retired 4 years ago I had a $500,000 portfolio which is asset allocated with 50% in bonds, etc. 30% in Dividend paying stocks, and 20% for speculation. Against that I sell puts to generate retirement income. Between the put premiums and the dividends/interest I make about $5000 a month. All with risk well controlled.
"I do not keep a file card for each position; I keep an excel spreadsheet for each position with all the information you state should be on that 'file card' and more. I also took your advice and keep 6 months living expenses in cash, and keep gold bullion at GoldMoney, which is thus stored out of the United States. I want to take this opportunity to thank you and your staff of writers for all that you have provided by teaching sound prinicples of investing and also providing individual stock picks with all the valuation work done for me. I plan to continue to be an eager student for many more years." – Paid-up subscriber Lynne Shepard
Goldmsith comment: Thanks, Lynne... But Porter said he believes in learning, just not teaching.
"I really liked your essay on Friday. I hope you will answer just one more question. As part of the essay, you stated that 30-40% of the portfolio should be in corporate bonds. However, in your December PSIA, you indicated that bonds were collapsing. Perhaps you were only referring to treasury and muni bonds. But then in January, Steve recommended selling the bond funds in his portfolio based on your headline from a month earlier.
"I hate to say it, but I sold a majority of my bond funds after considering the information presented. Perhaps the longer trend will show that bond prices decline as yields increase and there will be a good opportunity to re-enter. But for now, I find myself with far less allocation to bonds than I would normally have.
"I can see why some readers may get angry or confused by the seemingly contradictory advice. And though I take sole responsibility for my investment decisions, I would love to see further commentary in your publications as to how such trend/market/economic forecasts should play into a well balanced portfolio. Hopefully understanding the bigger picture will lead to wiser decisions. And while I know making a publication longer would increase costs significantly, perhaps you could consider an online only supplement." – Paid-up subscriber Javid Labenski
Goldsmith comment: We've been clear about the bonds we recommend buying: Corporate bonds that are trading at a large discount to par. We've explained it numerous times in the Digest. Reread the August 6, 2010 Digest for a clear explanation.
Good investing,
Sean Goldsmith
Baltimore, MD
March 1, 2011