If only printing money led to wealth...

If only printing money led to wealth... The most important chart to watch... A global race for gold... Silver set to soar... More on Clint Eastwood... Getting the last laugh on taxes...

This week saw two critical moves, one by the European Central Bank (ECB) and the other by the U.S. Federal Reserve. Although the decisions were technically different… the result will be the same – another round of vast increases to the global supply of paper money.

The ECB promised unlimited support for European sovereign bond markets. The Federal Reserve promised $40 billion of monthly bond purchases for an unlimited period, and announced that interest rates inside the banking system would continue to be near zero until 2015. These actions are unabashedly inflationary.

This all comes as no surprise to longtime S&A readers. We have been warning for years that a massive inflation was the only possible policy option left to both America's and Europe's leaders. Below, you'll find brief quotes that approximate the bookends of our long campaign to warn people of the inevitable inflation we saw approaching.

In between these issues, we've written tens of thousands of words about why these policies are dangerous. (They lead to massive misallocation of capital and destroy the purchasing power of middle-class wages.) We've described and implemented strategies to profit from these policies – the most important of which revolve around gold, the silver ratio, and capital-efficient companies that will see their earnings soar because of inflation.

If you didn't take our warnings or strategies seriously before, I hope now you can see that we have been right: The authorities mean to print their bad sovereign debts away through an ongoing and massive inflation.

Just how big is this inflation likely to be? When you look at the world's largest external debt positions, two economic areas appear as outliers: the European Union ($16 trillion) and the U.S. ($14.7 trillion). Even on a per-capita basis, the external foreign debts of the U.S. are enormous ($50,000 per person). Many countries in the European Union are in an even more precarious position. France has $74,000 in external debt per person. Germany has $57,000.

These countries obviously have much to gain by printing the currency necessary to repay their obligations. I estimate we'll see at least another doubling of the monetary base in both the U.S. and the ECB. The question is how these nations' creditors will respond.

In response… the West's creditors are piling into the one reserve asset no one can print: gold.

Since the beginning of quantitative easing in America, Russia has almost doubled its holdings of gold, buying 500 tons. China bought 454 tons during the same period.

And it's not only America's economic and military rivals who obviously no longer trust the U.S. dollar or the euro. In the last year, Switzerland's central bank has quietly increased its holdings of gold by nearly 25%.

We are approaching the moment of a global paper currency collapse: In the second quarter of this year, central banks around the world bought 157.5 tons of gold. That's up 63% from the first quarter. It's up 138% since last year's second quarter. At some point in the not-too-distant future... it becomes reasonable to expect that very few holders of gold will willingly accept dollars or euros in exchange. What will happen then?

Since January 2010, I've been writing about how the inevitable consequence of these inflationary policies must be the collapse of the market for U.S. Treasury bonds. Admittedly, my call for a collapse in bonds was premature. I didn't anticipate how the Fed could prop up the market and force down yields through its own purchases.

Nevertheless, my core trading idea – to be long gold and short U.S. Treasury bonds – has continued to be profitable. Below, you'll find a two-year chart of the price of gold – represented by the bullion fund SPDR Gold Shares (GLD) – and U.S. Treasury bonds – represented by the U.S. 20+ Year Bond Fund (TLT). As you can see, even though bonds have rallied (up 25%), gold has rallied far more (up nearly 40%). I continue to believe that this is the most important chart and most important trend in finance.

Here's what you must understand: Only by destroying its currency and its credit-worthiness by printing money to buy its own bonds can a bankrupt government guarantee continued access to credit. The inevitable result of these policies will be a much weaker currency (revealed by higher gold prices) and the eventual collapse of the country's sovereign debts (revealed by bond prices and yields on sovereign bonds).

I have no doubt that the stage is now set for a significant inflation. You should know by now what will happen… as this script has been played out for the last four years. Economically sensitive stocks will rally – banks, brokers, and insurance firms. The prices of food, energy, and precious metals will continue to rise. The real purchasing power of wages will fall. Government deficits will grow. And interest rates will begin to rise – although how much they're allowed to do so depends on the extent of the manipulation that's now underway by both the ECB and the Fed.

I wouldn't be surprised to see silver double by the end of this year. In the new issue of my newsletter – due out today – I show subscribers what I believe is the best way to play the next big leg up in silver. I'd be surprised if this stock isn't one of the top 10 performers in the world over the next six months. Be sure to read this month's new issue. (If you're not already a subscriber, you can gain immediate access to my Investment Advisory here.)

I would also recommend a subscription to the S&A Resource Report. As I said above, the flow of money into hard assets will send metals prices soaring. And in the S&A Resource Report, editor Matt Badiali recommends the world's best mining companies (in addition to oil stocks, which will also do well during inflation). I expect his recommended portfolio to outperform the market by a wide margin this year. To learn more about his advisory... click here...

New 52-week highs (as of 9/13/2012): Berkshire Hathaway (BRK), Guggenheim BulletShares 2015 High Yield Corporate Fund (BSJF), Franco-Nevada (FNV), Cambria Global Tactical Fund (GTAA), iShares iBoxx U.S. High Yield Fund (HYG), iShares Dow Jones U.S. Insurance (IAK), SPDR S&P International Health Care Fund (IRY), Dow Jones U.S. Home Construction Fund (ITB), SPDR Barclays Capital High Yield Bond Fund (JNK), Longleaf Partners Fund (LLPFX), PowerShares Buyback Achievers Fund (PKW), ProShares Ultra Health Care (RXL), Sequoia Fund (SEQUX), Vanguard Inflation Protected Securities Fund (VIPSX), V.F. Corp. (VFC), Abbott Laboratories (ABT), Eli Lilly (LLY), Monsanto (MON), Huntsman (HUN), First Majestic Silver (AG), Yamana Gold (AUY), Royal Gold (RGLD), Loews (L), Brookfield Asset Management (BAM), Medtronic (MDT), Chevron (CVX), ExxonMobil (XOM), Encana (ECA), Procter & Gamble (PG), Union Pacific (UNP), Wells Fargo (WFC), Two Harbors Investment (TWO),Wal-Mart (WMT), Target (TGT), and GenMark Diagnostics (GNMK).

In the mailbag... an important thing to remember as the stock market takes off thanks to the Federal Reserve... and some pretty surprising feedback regarding Clint Eastwood (from last Friday's Digest). You might be surprised to know how many subscribers don't agree with us about the most basic fundamentals of liberty and freedom. Send your rants here: feedback@stansberryresearch.com.

"I had a meeting with my broker yesterday to go over our individual performances over the last 12 months since I started with S&A (mostly The 12% Letter)... He controls my retirement account and I have been managing my brokerage account. I had a 12.1% return and he had 5.2% return. I told him that he had one more year to beat me or he is finished...

"After reading S&A for a year I don't think he has a chance. He has so many more holes in the bucket: his fee, mutual-fund loading fees, set. I guess I should have known as I rode the elevator up to his posh downtown office." – Paid up subscriber J. Petersen

Porter comment: I'm not surprised that by following our more conservative recommendations, you were able to earn a 12% return over the last year. The market has been in the midst of a powerful bull market, generated mostly by the huge inflation that's underway in the form of monetary stimulus (quantitative easing) and fiscal stimulus. The feds are borrowing more than $0.40 of every dollar they spend.

I believe this bull market is likely to last a while longer... but I want to warn you that this global monetary experiment that's now underway will lead to the total collapse of the world's monetary system. Time grows short. Make sure that you're also storing bullion. Make sure that you follow your stop losses. Make sure you don't get lulled into the same false sense of security that's likely to become pervasive in the weeks and months ahead. And congratulations on your success.

"[Clint Eastwood's] speech is the kind of thing that slowly becomes legend. By making it impromptu, he drew a stark contrast of sincerity with the scripted pap that most politicians yap. The empty chair was brilliant, too – Obama is the quintessential empty suit. All hat and no cattle. Talk talk talk talk. In a few minutes, Mr. Eastwood, with cleverness, wit, and aplomb, disemboweled not only the President, but all career politicians who care more about being somebody than doing something (useful). We haven't seen Will Rogers' homespun common sense wisdom on the national stage in a long time – until last week." – Paid-up subscriber Larry Forbish

Porter comment: I wish people around the United States would put empty chairs in their yards (as opposed to the typical candidate yard sign). It would be a sign that you're opposed to the excesses of both parties and the political system in general. It would be a sign that you support less government… that you abhor both major parties… and that you have zero respect for professional politicians. In short, an empty chair in the yard means that you vote "no." No to all the above. No to people telling you how to live and taking half your income...

"Eastwood is a nice guy. And so are you. But your simplistic approach to governing the masses is ridiculous. Yes, everyone uses 'the road.' However, some use the road more often than others... The cost for repairing the road should be borne by the users in direct proportion to their ability to pay.

"If a family makes $5,000 per year and your family earns $500,000 per year and the two families live on the same road, obviously, Family No. 1 cannot afford to pay what Family No. 2 can afford to pay. We, the People own this country, regardless of race, religion or economic status in life... The private sector, fueled with profit-motive and corporate greed, has no intention to lend a helping hand to the downtrodden owners of America. Yet, these wealthy 'owners' fail to pay their fair share of anything... The last person we need as president is Romney. – Paid-up subscriber Dr. Julius Larry

Porter comment: This objection comes straight from the communist manifesto. To each according to his needs, from each according to his means. I have no comment on that... If you think communist systems work, you must have never heard of the 20th century. Good luck.

In regards to the "wealthy" not paying a "fair share," I simply can't bear to read this kind of stuff anymore. In total, during my life, I will pay a combined tax rate (corporate, income, real estate, use, sales, capital gains, estate) that's roughly 75% of my earnings. I spend millions a year on taxes – far more money than I'm able (or willing) to spend on myself or my family. There's nothing fair about this... nothing at all. It's outrageous that my family's largest expense is government. Nevertheless, many people – like Dr. Larry – continue to say this isn't enough, even citing "fairness." How much would be fair, I wonder?

I will enjoy the last laugh, however. I know every penny the government takes from me is a penny that will be wasted or lost. It is a penny that can't generate any wealth. It is a penny that can't compete with me. It is a penny that will foster dependence, ambivalence, and corruption. Every penny it takes from me simply makes me wealthier and more powerful in comparison. So enjoy it, you bastards.

I know one day, the crowd you've seduced with your looting will turn on you and destroy you. When that day comes, don't come up the road to my mountain. You won't be welcome. My neighbors might be poor. They might be uneducated. But they are well-armed. And they know what to do to a thief, believe me...

"I love Clint Eastwood – as a star, as a director, and as a musician. But his speech was rambling and incoherent, and in no way brilliant. Similarly, your essay was simplistic, as it did not address the complexity of our society. Your road story of mountain democracy did not add any insight. I guess your thesis is that there should be no taxes and very limited government. Why is that better?

"I guess you'd advocate eliminating the armed services, interstate highways, national parks, medicare, medicaid, social security, regulations on cleaner air, water, and education. All of the above you define as socialism, I guess, though of course that's not the correct definition of socialism. Perhaps you don't see global warming and climate change as a problem, either if you're not that extreme and simplistic, then you have to make some tough choices. How much government is the right amount? What percent of GDP should the budget represent? What should our priorities be?

"Those are the issues of our day, and there are no simplistic answers. The devils in the details. Did you or Clint in any way provide any insight into those tougher questions? I don't think so." – Paid-up subscriber Jeffrey Stein

Porter comment: I'd suggest you're missing the best thing Clint has to offer... which is perspective on the proper role of government in society... the respect we ought to have as Americans for the sovereignty of the individual.

"Eastwood was an idiot and so are you. Please cancel your crap." – Paid-up subscriber Thomas Jones

Porter comment: You're certainly welcome to cancel your subscription any time you'd like, Tom. Just give our nice folks in customer service a call. And please, if it's not too much trouble, be polite. Those nice kids handle a lot of calls on Mondays after I write the Digest...

Regards,

Porter Stansberry

Baltimore, Maryland

September 14, 2012