A bit of sad news for my family... My wife's grandmother passed away this week. She was happy, healthy, and deeply involved in our family life – until the day before she died. We'll miss Grammy. We're saying goodbye today and tomorrow. Hope you'll forgive the shortened Digest today. If your grandmother is still with you, give her a call. Remind her that you care about her...
In 1973, the Hunt family of Texas (one of the country's wealthiest families) started buying precious metals to hedge themselves against inflation. Private citizens couldn't own gold at the time, so the Hunts bought silver. Six years later, Nelson Bunker Hunt and William Herbert Hunt, sons of the patriarch oil billionaire H.L. Hunt, started a silver pool with several wealthy Arabs. In a short period of time, the Hunt brothers amassed more than 200 million ounces of silver (half the world's deliverable supply).
Once the brothers had cornered the silver market, panicked investors chased the market higher. The price of silver rose nearly tenfold to $50 an ounce. But a rule change on the Comex and Federal Reserve intervention popped the bubble, and silver prices fell to $10 in March 1980. The Hunt brothers and their Arab partners lost more than $1 billion. The Hunt brothers eventually declared bankruptcy. And in August 1988, they were fined $10 million for market manipulation.
While the story of the Hunt brothers may seem like a warning to some, San Francisco-based hedge fund Passport Capital is citing it as proof a short squeeze is possible in the precious metals market... and as a reason to hoard physical gold (in lieu of gold proxies like GLD).
Passport believes 2009 will mark a shift in central banks' behavior in the gold market, as they become a net source of demand, not supply, for the first time in 20 years. And as central banks start buying, Passport thinks holders of paper gold won't earn as much as bullion holders.
A situation potentially unfolding in the gold market is similar to a short squeeze on a stock. As short sellers depress the price of the stock by shorting the stock naked, buyers may take advantage of the mispricing and start accumulating the stock. Eventually, enough stock will have gravitated to a few hands so that the remaining free float is not sufficient to cover the borrowing needs of short sellers setting the stage for a price spike.
We believe that gold is susceptible to a similar squeeze as the metal gravitates to investors who have little intention of lending or selling it at current prices, and central banks step back from the market as a provider of liquidity... The Hunt brothers' squeeze on the silver market three decades ago is an interesting parallel in history that suggests a physical squeeze on a precious metals market is possible, and that exchanges may change rules to protect the stability of markets in ways that do not necessarily benefit those holding futures positions.
David Einhorn of Greenlight Capital was probably the first hedge-fund manager to hold physical bullion. He said the carrying costs of storage were less than those of holding the gold ETF (GLD). Also, John Paulson, who has earned countless billions on his subprime and inflation bets, holds bullion (in addition to being the largest shareholder in GLD). He's also got a fund denominated in gold – and a new gold fund to protect against the dollar's demise. Just like the Hunt brothers, these hedge-fund managers are buying up tons of physical gold. They'll likely buy more gold on the dips. And they don't plan on selling. When central banks start buying and investors are clamoring for gold, will you have physical metal for delivery?
Frank Curzio has already shown you how to make a fortune on "hitch a ride" and low-expectation stocks priced at less than $10 a share in his two videos (here and here). Today, Frank shares his latest stock-picking technique. It's not so much a secret as a trend, but it's one of the most dependable ways to pick winning stocks below $10...
Sometimes when a company announces bad earnings, an executive scandal, lower guidance, etc., the stock will temporarily plummet. These "hiccups" are an investor's best chance to buy world-class franchises for less than $10. For example, in the midst of the downturn, 25% of S&P 500 stocks traded under $10. Today, it's around 8%. You see, once a great company falls to less than $10, it almost immediately snaps back. Following Frank's strategy in 2008 would have made you rich. To see Frank's latest recommendation using this trend, watch this free video.
New highs: Burlington Northern Santa Fe (BNI), Berkshire Hathaway (BRK-A), Tejon Ranch (TRC).
An explanation of what causes inflation in today's mailbag... and more about our customer service. If you'd like to share an experience you've had with our customer-service team (good or bad), let us know: feedback@stansberryresearch.com.
"I just read The S&A Digest and the following quote seems bassakward to me: 'The only way to make Treasuries more attractive is to raise rates, which will lead to inflation, a weakened dollar, and higher gold prices.' Won't higher rates lead to less inflation, stronger dollar and lower gold prices? Or do I need to go back to Econ 101?" – Paid-up subscriber JJT
Porter comment: I agree higher rates should cause an initial correction in commodity prices and a stronger dollar. But the relationship between inflation and interest rates is complex. One thing to remember, inflation is caused by one thing and one thing only: The permanent loss of purchasing power due to debasement of the money supply. Rising interest rates are a warning sign to investors that the future purchasing power of the currency is in serious doubt.
As rates begin to rise – gradually at first – investors will become more and more concerned about the loss of future purchasing power. The Fed's current propaganda – that more than doubling the monetary base won't cause inflation because of weak economic growth – will be revealed as a lie. And our creditors will abandon our dollar. Prices will soar – especially for precious metals, energy, collectibles, and farmland. Most people will view the soaring prices as the problem – a problem they will call inflation. Little will they know that inflation really started 18 months ago.
"Dear Porter... I have never sent a comment to The Digest. Reading the Jan 27 issue prompted me to. As an Alliance member, I have invested in a number of recommendations among your publications. I have made money on some and lost money on others. The one I have made the most money on is True Income. I had never invested in bonds before Mike Williams showed me how to and what to buy. He has given me a great education. It was lucky timing that I first started reading Mike's work in early 2008. This is when the financial markets imploded. I had the cash on hand to buy some of Mike's picks at once in a lifetime lows. I have made (for me) a bundle. Thanks Mike.
"I have also done well with Dr. Sjug, Dan Ferris, Matt Badiali and The 12%Letter. I miss Monthly Dividend Program. Enjoy reading Doc Eifrig's Retirement Millionaire (I am retired). My subscription to Alliance is the best investment I ever made, bar none. The commentaries in The Digest are priceless. I love you guys. Keep the great work coming. You have made my retirement an interesting place to be in." – Paid-up subscriber James
Porter comment: Thanks for your note... I'm very proud of Mike Williams' work. Not only did he not panic with the rest of fixed-income investors, he got our subscribers into the best opportunities – like convertible bonds and high-yield bonds that have earned enormous returns. I'm very happy you were able to take advantage of the situation, and I hope many more readers will follow your lead over the years.
One thing to remember about newsletters like Mike's or our other specialty products: Even if it's not a great idea to buy those markets today, the only way you'll be ready to act on opportunities in the future is if you've been following our analysts long enough to trust their advice. Once every five to seven years, there are HUGE opportunities in junk bonds... or emerging markets... or oil-service stocks... or tech stocks... or blue chips... That's why we offer coverage on almost every area of the market. And that's why our S&A Alliance customers inevitably do much better than folks who are only reading one or two of our services. They can follow the entire market through the eyes and ears of our analysts... and they're not going to miss a good opportunity in any market.
"I was astonished to read your comment to Don where you almost boasted about your 'college educated' customer service staff after all of your writings over the years denigrating the value of a college education. It would seem that you have potentially contradicted your comments to your readers with the practices of your business. While I believe in quality education, I also believe there are many other ways to arrive at the same result that are, in many cases, more effective and more efficient.
"I must say that my practical education has provided me with far more life value than that provided by my formal education. Having made that criticism, I would encourage Don to follow your advice regarding the lifetime subscription opportunities available for your services. I understand that they may sound expensive when one is just starting out but I have found the funds expended on my Alliance membership to be one of the best investments I have ever made; not only from the standpoint of the investment analysis I receive but also for the educational value of the techniques I have learned from your staff." – Paid-up subscriber Ken McGaha
Porter comment: My comment was intended to encourage people to rely on our customer-service staff. I know I dread having to call anyone's customer-service staff, because I end up talking to someone who doesn't speak English (either because they're located in a foreign country or because they didn't get a decent education). We hire college-educated customer-service staff (and pay more for them) because we, like many employers, use a college degree as a simple proxy for a basic education.
I'd caution people against paying more than necessary for this basic proxy. And I'd caution especially talented people against wasting time and money getting this proxy, since there are many better ways to launch a career. Likewise, if a bright and ambitious young person wanted to start a career with Stansberry, we'd be happy to hire him (or her) for our customer-service team without a degree, assuming of course he was hard-working and capable.
"I am sick and tired of you sending me several daily emails appearing to be part of my regular subscription(s). After I spend several minutes reading about the next 'hot' item, I find that I always need to subscribe to another one of your services to get to the details... I am not going to subscribe to every service you have. You should consider a flat fee for all of your services, and discontinue wasting people's time like this... I have tipped off several of my friends not to waste their time with your company." – Paid-up subscriber Gary Becker
Porter comment: We publish several free e-letters and support these products via marketing for our newsletters. If you don't want to receive our marketing messages, all you have to do is unsubscribe from our e-letters (The Digest, DailyWealth, Growth Stock Wire). Doing so will not alter your subscriptions. Also, we do offer a "flat rate" for our products – our S&A Alliance and our Private Wealth Alliance. To learn more about either, please give our sales team a call at 888-863-9356.
Regards,
Porter Stansberry and Sean Goldsmith
State College, Pennsylvania and Baltimore, Maryland
January 29, 2010