"Read This Or Die"... Legendary copywriter Jim Rutz is sharing one of his most famous sales letters with the group this morning. (You'll recall we're hosting our editors and a group of newsletter industry insiders at our private Spring Editors' Conference.) What was Jim writing about? It was a health newsletter. The equivalent in the financial space is the chart below. Understand this chart or go broke:
The chart is the last year's trading history of GDX – which is an exchange-traded fund (ETF) of gold-mining stocks. You can see gold stocks have rebounded almost all the way from their lows last fall. The ETF had been "bouncing" off $40 for the last several months. But today, it broke through decisively and is up 5% as I write. Since last December (when I recommended buying GDX), I've been warning people that the banking crisis of last fall would lead to a huge new wave of inflation. It's coming. Gold stocks are warning you. Please pay attention.
Bank of America raised $13.5 billion by selling stock after the government said it needed more cash to survive. BofA sold 1.25 billion shares at an average price of $10.77 each. Now, the public has bid the stock up to $12 today. Why would the public bid up the price of a bank that the government says needs $40 billion of additional capital? Nothing is better for banks than government-engineered inflation. By holding short-term rates low, the government will enable banks to earn their way out of the hole they're in. The bank stocks are acting the way they should if a huge new wave of inflation is coming.
While the government inflates the money supply to save the banks and lends them billions from the Troubled Asset Relief Program (TARP), the public has been distracted from the real impact of these policies by the class-warfare issue of excessive compensation. While there's no doubt the senior executives on Wall Street are impossibly greedy, it's also true the amount of money at stake – several hundred million per year – is a drop in the bucket next to the $700 billion that's been lent.
Besides... no matter what the government says, the crooks running the banks are going to take their pound of flesh. How are they getting around the rules? Life insurance. The Wall Street Journal calls the policies "informal pension funds for executives." Companies deposit cash into the contract and allocate the money across tax-free investments. Eventually, employers collect tax-free death benefits when employees, former employees, and retirees die. Bank of America owns the most life insurance on employees – $17.3 billion. Wachovia is next with $12 billion. Banks held a total of $122.3 billion in life insurance on employees at the end of 2008... Nearly double the number in 2004.
Doug Casey presented today on the three best stock investments he's ever made... which he described as "a fraud, a psychotic break, and an accident."
The fraud was Bre-X. During the last gold bull market, which lasted from 1993-96, the average junior-exploration stock increased 10 times. And Bre-X, one of the only mining stocks Doug has ever bought on the open market (he usually does private placements), increased by a factor of 140. Doug liked the story surrounding the company and bought "a bunch of it." After realizing the fledgling company had a bigger market cap than Freeport-McMoRan, the world's largest copper producer, he sold. Right after he dumped it, the company was exposed as a fraud.
Doug's second-biggest hit was an accident... a diamond field. Again, he invested in a company because of a good story... It was looking for offshore diamonds in Namibia. Doug was a founding shareholder at 25 cents a share plus warrants. He bought more around $4 in a private placement. Later, two geologists were flying home from the site and saw some interesting color formations on the ground. They stopped to check it out... and it turned out to be what is today the largest mineral mine in the world.
His last hit was a psychotic break. There was a broker in Chicago "who was a real party animal." Doug bought three private placements of a stock (he can't remember which) with the broker... The broker went crazy and starting buying all of the available shares... chasing it up to $20. Doug was selling all along the way.
The point of the story... Doug's three best investments "had absolutely nothing to do with securities analysis."
I'm sitting near Van Simmons, owner of David Hall rare coins, so I asked him what's happening in the gold coin world right now. It turns out the next three months are the most exciting three months for the coin market. All of the biggest shows happen between June and August. And Van says if you want to buy great coins, now's the time. The down economy may bring some gems into circulation. His clients are sending him huge checks to buy "world-class items that normally don't become available."
I asked him what is the cream of the crop right now... the coin he most wants to buy. He said "proof gold coins." They start around $11,000 a coin, and some of the rarest denominations have sold for more than $1 million apiece. They're the "caviar" of the coin market. Proof coins are incredibly rare. Some years in the 1880s, they only minted 20 to 30 of each denomination each year.
New high: Seabridge Gold (SA).
Gold skeptics in today's mailbag... send us your pet theories at feedback@stansberryresearch.com.
"If big time hedge funds recently bought as much gold as the report indicates it should have lifted the price way beyond $1000 already. The fact it didn't suggests that the report is old, that these purchases have taken place over time and responsible for gold being at $900 in the first place. When these guys decide to lighten their positions look out below." – Paid-up subscriber Erich
Porter comment: This subscriber has been sending us bearish messages on gold since it was trading for less than $500. The report in question isn't old. Gold will hit $2,000 before the end of next year.
Regards,
Porter Stansberry
St. Michaels, Maryland
May 20, 2009