DailyWealth

The Simplest Reason Gold Will Soar - #GOLD

Fri, 20 Nov 2009 08:00:00 EST

By Dr. Steve Sjuggerud

When the bank pays you nothing in interest, gold goes up. And right now, the bank is paying you nothing in interest.

Why does gold go up when interest rates are low? It's simple...

The knock against owning gold has always been that, unlike cash, it pays no interest... Compound interest is almost irresistible. If you can earn 7% a year on a $10,000 deposit, in 10 years time, it will be worth $20,000. Gold will just sit there like a bump on a log.

But every so often, like right now, paper money pays you no interest... and the scales tip in favor of gold.

That's the simple version. Let's add one little tiny wrinkle to it, so you can see why gold has become irresistible now...

The forecast for inflation in 2010 is around 2%. Yet the Fed is keeping interest rates near zero. So instead of earning nothing in interest at the bank, you're actually LOSING 2% a year to inflation. That's what's REALLY happening – the REAL interest rate at the bank (minus inflation) is NEGATIVE 2%.

My longtime friend Porter Stansberry asked me to do a study of what happens when real interest rates are less than zero. The results were astonishing...

In short, when real rates are negative, gold soars and stocks stink. And when real rates are positive, gold stinks and stocks soar.

Here are the actual results. (Note: These are COMPOUND ANNUAL GAINS.)

1973 through 1980. The median real interest rate was -1.15%. Gold returned +32% per year. The real return on the S and P 500 was -7% per year (not including dividends).

1981 through 2001. The median real interest rate was +2.7%. Gold returned -3.5% per year. The real return on the S and P 500 was +7% per year (not including dividends).

2002 to today. The median real interest rate was -0.4%. Gold returned +18.5% per year. The real return on the S and P 500 was -3% per year (not including dividends).

Well, there it is, plain as day. And you can see, these trends persist.

In 2010, real rates will be negative. (Bernanke will keep nominal rates near zero... so subtracting inflation will give you a negative real interest rate.) There is essentially no chance for a POSITIVE real interest rate in 2010. Said another way, you WILL lose money in the bank in 2010. Whatever interest you earn won't keep up with inflation.

History shows, under that environment, stocks don't do well... and gold soars. There's nothing in sight to end that trend. Trade accordingly.

Good investing,

Steve

One of the Greatest Tools Available to You as an Investor - $PG

Thu, 19 Nov 2009 08:00:00 EST

By Dan Ferris

Red sky at night, sailors delight, Red sky at morning, sailors take warning.

The old sailor's rhyme is quaint, but true.

If you see red sky in the west as the sun sets, a storm is moving away from you. If the eastern sky is red as the sun rises, look out – trouble is coming your way.

The rhyme holds true as a weather forecasting tool because of the way storms move through the atmosphere. That's what the red sky is: moisture and particles in the atmosphere, a possible storm system in the distance.

A version of the rhyme has been around for thousands of years. The biblical version appears in the book of Matthew. Jesus is criticizing the Pharisees and says, "O ye hypocrites, ye can discern the face of the sky; but can ye not discern the signs of the times?"

Investors are like that sometimes, too. They're wrapped up in predicting the next bull or bear market. They don't ask whether stocks – which are just pieces of a business after all – are priced for an adequate return or not. (It's "not" these days.) Like the Pharisees in the book of Matthew, investors try to discern the face of the sky, but can't discern the signs of the times.

I want to give you a tool, a way of looking at the overall market that will hopefully supplant the ubiquitous bad habit of trying to predict whether it'll go up or down in the next few days, weeks, or months.

I've found what I believe is the best way to establish a rational expectation about stock valuations over the next five to 10 years. If you stick with this tool and forget about predicting the market's ups and downs, you'll do much better than the traders likely to get whipsawed badly in the next few years.

You'll find the tool below, in my version of a graph created by Kevin Tuttle of Tuttle Asset Management. I found the original graph in a presentation by my friend Vitaliy Katsenelson of Denver-based Investment Management Associates. Vitaliy wrote a good book called Active Value Investing.

The chart doesn't show you bull and bear markets... It shows you all the bull markets and sideways markets from 1900 to 2006. (Nevermind the bear market of 1929-1932. It's the exception to the historical rule.)

So forget about bear markets. And forget about bull markets for several years. The only rational expectation for the next several years is a sideways market, just like the ones you can plainly see between every bull market on the chart.

On the bottom of the chart, you'll find changes in the price-to-earnings ratio of the market. Notice how the valuations fall over the life of a sideways market. Take a look at any one of the sideways markets on the top chart and match it up with the P/E ratio chart at the bottom. You'll see stocks starting out expensive and ending up cheap.

Stocks usually start going sideways at or above 20 times earnings. Sideways markets usually finish with stocks at or below 10 times earnings. The 100-year average P/E ratio of the S and P 500 is 16, about in the middle of the sideways market's general range. Right now, there's little doubt about what's happening. The entire U.S. market is trading at 29 times earnings. We're nowhere near the end of this sideways market.

So if you must obsess about the market, now you know how to do it. Forget about momentum. It'll kill you in a sideways market. You'll always be selling when you should be buying and vice versa. Focus on the overall market's valuation, not its direction. That'll give you an advantage over the momentum crowd.

Stocks have been going sideways since 2000. Back then, stocks reached their most expensive valuation ever, up around 40 times earnings. I believe there's a good chance you'll see the overall stock market get cheaper than anytime in history before the current sideways market comes to an end.

Markets tend to swing like a pendulum. When they swing too far in one direction, they swing about that far the other way. The pendulum never swung as high in the bull market direction as it did back in 2000. It ought to correct about that far in the opposite direction.

So maybe we'll see stocks down around five or six times earnings in five or 10 years. Perhaps the Dow Jones Industrials will yield somewhere around 8%-10%. Again, I'm not trying to make specific predictions. I'm not predicting a crash. I'm simply stating there is a load of evidence that bull markets start when stocks offer great values. Markets go down or sideways when they do not.

Finding the next big bankruptcy is easy. Look for companies that pay more in interest than they receive in income from their businesses, shortening debt maturities, and corporate fire sales. Find these patterns, and you've got a looming bankruptcy...

An era of "sideways" is upon us. When the pendulum swings back to great values, it will be time to buy as much stock as you can afford. And above is the tool to use to know it's here.

Good investing,

Dan Ferris

Find America's Next Big Bankruptcy Here - #Bankruptcy

Wed, 18 Nov 2009 08:00:00 EST

By Tom Dyson

Last week, I was in the mountains of Argentina for the inauguration of Doug Casey's real estate development, the Estancia de Cafayate. It was a week full of cocktail parties, golf tournaments... and unconventional ideas.

In between all the fun, I attended a small, private investment conference. The only speakers were Rick Rule, Doug Casey, Bill Bonner, and Porter Stansberry.

Porter gave the best speech. He presented a compelling argument that one of the largest companies in America is bankrupt and its stock must go to zero by 2011.

Before I present Porter's case, first consider Porter's track record for unearthing these bankruptcies. For three years, Porter told his readers over and over again that General Motors was bankrupt. He thumped the table a hundred times about it. Then he gave the same warnings about Fannie Mae, Freddie Mac, and the Wall Street banks months before they folded.

No other analyst I know of has a better track record for predicting the major corporate collapses of the past two years.

Porter says these major corporate bankruptcies are easy to find. Here's how he does it:

First, he looks for companies that increase their short-term debts. This subtle act of desperation always indicates a company that's having trouble with its finances... Short-term debts are debts you have to pay back within one year. These debts have lower interest rates than long-term debts because they carry less uncertainty. The downside is, you have to pay them back sooner.

Then Porter tries to imagine what would happen if creditors charged the company higher interest rates. Could the business handle it? GM was perfect example. Even when it carried an investment-grade credit, it still couldn't make enough money selling cars to cover their interest costs. When the ratings agencies downgraded GM's debt, the ship sank.

Fannie Mae had the same problem. It financed mortgages with short-term debts. When interest rates rose, it blew up.

Finally, Porter looks for a jettison of assets. Companies struggling with debts will sell their best assets to raise money. GM was forced to sell GMAC, Suzuki, Isuzu, and Hummer, for example. These asset sales always speed up the decline. The moment the market forces you to sell something, it loses half its value. But the debt secured against it keeps its value.

You can figure out if a company is headed for bankruptcy just by looking at its annual report. First, search for the word "maturity." It'll bring up the company's debt-repayment schedule. Compare this result to prior years to see if short-term debt has increased.

While you have the annual report open, look up interest expense in the income statement. Compare this to free cash flow in the cash flow statement. This tells you how comfortably a company can afford its debt.

For asset sales, you could search the annual report for "divestitures," but the CEO will probably mention the big ones in his letter to shareholders at the beginning of the report. (He'll remind shareholders what a good decision it was to sell those assets.)

In Cafayate, Porter told us which iconic American company goes bankrupt next...

This company fell into the classic short-term borrowing trap. It has a $100-plus billion block of debt to repay over 2011 and 2012.

This company is currently paying around $17 billion a year to service its $500 billion of debt. That's an interest rate of around 3.3%. But it only banked $12 billion in earnings after expenses last year. So there's a huge hole in the finances... even with its funding costs at 3.3%. When funding costs rise, the ship will fall apart.

Finally, Management has been running a yard sale. In the past five years, this company has sold off its best businesses. "The common stock – every single share," concludes Porter, "is not worth one penny."

Finding the next big bankruptcy is easy. Look for companies that pay more in interest than they receive in income from their businesses, shortening debt maturities, and corporate fire sales. Find these patterns, and you've got a looming bankruptcy...

Good investing,

Tom

What Bull? Dow Is Down 83% in Terms of Gold - #GOLD

Tue, 17 Nov 2009 08:00:00 EST

By Dr. Steve Sjuggerud

"I had no idea how bad it was," my friend Richard Smith told me after crunching the numbers...

Richard (founder of the excellent TradeStops) should know about crunching numbers... He has a Ph.D. in "mathematical systems theory." I'm not sure what that Ph.D. actually means, but I do know Richard is able to take a massive pile of numbers and find a simple way to tell me what they mean. Here's his simple conclusion:

The entire rally in the DJIA from 2003 to the peak in 2008 was actually a continuous decline when priced in gold... Even the super-rally in stocks over the last six months is nothing more than a very weak bounce off the bottom.

The simplest way to ask the big question is like this: How many ounces of gold does it take to buy the Dow Jones Industrial Average (DJIA)? Richard answers:

From a peak of nearly 42 ounces of gold to buy a share of the DJIA earlier this decade, we made it down to a low of almost seven ounces in March 2009. That is a decline in the "value" of the DJIA of 83%.

The implications are scary...

Sure, the man on the street feels good when he sees stock prices are up, gold is up, oil is up, etc. It feels like things are getting better. But it's not the truth...

The truth is the value of the dollar is going down fast. People want to believe differently. They want to believe the creation of money at a record pace by our government is creating wealth. But you don't create wealth on a printing press.

The government's simple goal was to reignite the U.S. real estate market. If you cut rates to zero and make money available, home prices can't fall any more – or so the government thought. The government didn't realize the low rates and money "printing" would lead to higher prices in everything BUT real estate.

A few years ago (summer of 2005), you would have needed 550 ounces of gold to buy an average house. Today, you need more like 150 ounces of gold. That is a 73% decline in the "value" of real estate.

You'll hear on the evening news that home prices are down by, say, one-third nationwide. But on TV, they never account for the destruction in the dollar. In terms of gold, home prices are down by more than 70%... Wow!

Yes, it takes more dollars to buy gold, oil, and the stock market lately. But don't kid yourself... Don't feel better... You are not any richer. The dollar is just dramatically weaker.

Sizing things up in terms of gold is one clear way to see it.

Good investing,

Steve

The World's Biggest Players Are Buying Gold - $XOM

Mon, 16 Nov 2009 08:00:00 EST

By Jeff Clark, senior editor, Casey's Gold and Resource Report

Central banks are net buyers of gold for first time in 22 years...

Precious-metals research firm GFMS reports central banks around the world bought more gold in the second quarter than they sold for the first time since 1987. And consider this:

- Amount of gold France will sell this year: zero
- Amount of gold Germany will sell this year: zero
- Amount of gold Switzerland will sell this year: zero

So let's get this straight: China and Russia are buying gold, several European countries have ceased selling their gold, and central banks are net buyers. Wall Street is also piling into gold. John Paulson, the most successful money manager of 2008, has made a $4.3 billion bet on gold and gold stocks. David Einhorn, Paul Tudor Jones, and Jim Rogers have all purchased gold this year, too.

And just last week comes this news from the Financial Times: The world's wealthiest families are also switching to gold. "Two-thirds of the 100 respondents to a survey by the Family Office Channel, a new website, said that super-rich families are now more likely to invest in gold and other commodities."

These trends are real and they're pushing gold higher by the day. But the real fireworks will start when Main Street catches gold fever. The gold market is tiny; ergo, any panic out of the dollar by the general public will send gold investments into the stratosphere. As Doug Casey likes to say, "It'll be like trying to push the contents of Hoover Dam through a garden hose."

But what exactly does a garden hose look like?

If we added up all the gold ever mined on the planet, its total value would equal no more than $5 trillion at today's prices. Yet, look at how this compares to the debt and bailouts and other monetary mischief of current governments...

- Let's make this chart very clear. Of the $5 trillion in gold ever mined...

- The U.S. government has thrown more than twice as much at the economy in the past 12 months.
- The U.S. debt is more than double this amount so far this year.
I intended to include annual gold production as one of the comparisons, but the chart isn't big enough and neither is your monitor: 2008's global gold production equaled about $73 billion. To make that figure discernable on the chart would require the Total World Bailouts bar to hit the ceiling above your head. That's how small the gold market is.

The implications are undeniable: When the greater public rushes into gold – whether in response to inflation, dollar woes, war, whatever – the price will be forced up by an order of magnitude.

While physical gold will protect our wealth, it's the gold stocks that can potentially make us wealthy.

Once again, to get a sense of the Lilliputian size of the gold industry, I compared it to several other leading industries and stocks.

The value, as measured by market capitalization, of all gold producers around the world is less than Wal-Mart's. Every gold stock would need to nearly double just for the industry to match ExxonMobil. The oil and gas industry is about 12 times bigger.

When your neighbors and relatives and co-workers and friends all start clamoring to buy gold stocks, the pressure on prices will be enormous, rocketing our positions upward.

Just putting these charts together stirred my feelings of restlessness, making me anxious for the mania in precious metals to arrive. But the timing is not up to us. Be patient. If you're invested in gold and high-quality gold stocks, you're on the right side of this trend.

Good investing,

Jeff Clark
Casey Research

Is It a Gold Bull Market or a Dollar Bear Market? - #Gold

Fri, 13 Nov 2009 08:00:00 EST

By Dr. Steve Sjuggerud

Which is it? A gold bull market? Or a dollar bear market?

Yes, you can have one without the other...

For example, gold soared 50% from early 2002 to early 2005 – but that was a dollar bear market, not a gold bull market. Let me explain...

Gold went from $280 to $420 an ounce in those three years. But in terms of euros, gold was exactly flat, at around 320 euros per ounce. So that was a bear market in dollars, NOT a bull market in gold.

So which is it today?

My simple definition of a bull market in gold is this: When gold is rising in terms of all four of the most widely traded currencies, you're in a gold bull market.

Today, we're in a gold bull market.

In each of the last three months (and in six of the last 11 months), gold has risen month-over-month versus all four major currencies: the dollar, the euro, the yen, and the British pound.

The numbers are astounding...

Since 1971, gold has risen against all four currencies month-over-month 31% of the time. If you simply hold gold during the month after that happens, the compound annual gain in gold is an astonishing 34%.

For the other 69% of the time (when gold didn't rise against all four currencies in the previous month), gold lost money over the next month. Extraordinary!

Last week, I showed you a simple gold indicator with some incredible results... I said, "Simple is elegant. A few minutes a year turned $10,000 into $1.28 million over 41 years, without any number gymnastics."

With that simple gold indicator, gold rises at a compound rate of 17% a year in "buy" mode.

With today's simple gold indicator, gold rises at a 34% compound annual rate after it's moved up against four currencies.

When you combine the two simple indicators, gold rises at a compound annual rate of 44%. Wow!

Granted, both indicators are rarely in "buy" mode at the same time – it's happened 26% of the time since 1971. But importantly, we're in "buy" mode in both indicators right now...

But to answer the question at the beginning... Is it a bull market in gold? Or a bear market in the dollar?

The truth is, unlike 2002-2005, it's both... It's a bull market in gold, AND a bear market in the dollar. The U.S. dollar has dropped nearly 15% since March against an index of the euro, pound, and yen.

Both of our simple gold indicators are in "buy" mode... and both have incredible track records. There's no hurry to sell your gold yet.

Good investing,

Steve

The Ultimate Gold Bubble Test - #Gold

Thu, 12 Nov 2009 08:00:00 EST

By Brian Hunt

In the past three months, there's been a very popular – and very wrong – thing to say about owning gold.

I hear it a lot from inexperienced Wall Street analysts, bloggers, and money managers who spend little time living in the "real world."

Here's what they're saying: "Gold is way too popular now... It's near the end of its bull market." The recommended "action to take" is to cash in your gold profits and move on to something different.

I can tell you that taking this advice is a big mistake. Anyone who believes gold is too popular with the mainstream public simply doesn't know who the mainstream public is... and they don't understand how bull markets end.

Sure... gold is up big since it broke out to a new high in September. In just over two months, it has climbed from $950 an ounce to $1,100 an ounce.

Gold is also enjoying a lot of mainstream press these days. Six years ago, when I would tell someone I was placing a significant portion of my net worth in gold, they'd look at me like I was crazy. Now, they nod and say, "I heard something about gold the other day on TV."

That's as far as the average Joe goes with his interest in gold. This is why gold is nowhere near a "blow off" top. Two days ago, at the Stansberry and Associates Alliance Conference, I showed folks how to perform the ultimate test of whether an asset is "too popular" or "in a bubble." Here it is:

Ask 100 people on the street if they own gold. See what they say.

Don't ask folks who read newsletter writers like Doug Casey or Porter Stansberry. Don't ask folks who you regularly talk investments with. Ask randomly chosen members of the public if they know why gold is "real money." Why gold has climbed from $650 to $1,100 in the last three years.

I guarantee you the average person on the street is going to look at you like you asked him which airline offers nonstop flights to Venus.

He's going to have no idea what you are talking about. He's heard about gold on the news a few times, but he can't tell you why gold is rising, who is buying it, or why it is the best form of money mankind has ever found.

Gold is divisible, portable, lasting, consistent the world 'round, useful in industry... and as master speculator Doug Casey reminds us, gold cannot be created out of thin air by a government. In other words, you actually have to work and save in order to build a gold hoard. You can't "Bernanke" your way to real gold wealth.

The people who realize this – like billionaire hedge-fund manager John Paulson and super investor Chris Weber – are getting more publicity now than they were six years ago. But it's nowhere near enough publicity for a seasoned investor to say, "Gold is too popular."

When a bull market gets too popular, it looks like tech stocks did back in 1999. This was when everybody and his brother bragged at the office Christmas party about making a fortune in Cisco or Microsoft. It was when schoolteachers, personal trainers, and cab drivers suddenly became tech stock experts. Folks knew what "bandwidth," "routers," and "e-commerce" meant. Only when an asset enjoys that sort of widespread attention can you say it's too popular.

I can't say that about gold right now... not after talking with friends who do not invest... not after talking with the people sitting next to me on the plane. The public still has no idea what "bullion" really is... or how the government's reckless "tax and spend" behavior is clobbering our currency.

Don't believe me? Just ask 'em.

There could come a time when almost everyone you know is trading gold stocks like they did tech stocks in 1999... or discussing the virtues of gold as a form of savings. But few people do this now.

Which means that, while the gold market may be overbought in the very short term, the real, long-term move in gold has much farther to run.

Good investing,

Brian Hunt

Don't Fool Yourself: America Is "Now a Communist Nation" - #Communist #Manifesto

Wed, 11 Nov 2009 08:00:00 EST

By Porter Stansberry

At last year's Alliance Conference, I urged folks to buy stocks – vehemently... It was the most bullish I've been in my entire life. But now I feel the opposite way. When the facts change, I change my mind. I never thought we'd see the government running $2 trillion deficits, taking over health care, owning all the banks...

The stock market seems to believe the government can solve all of our problems with paper money and bureaucratic mandates. My bet is, it doesn't work... at least, not for long. And given the choice between earning less than 1% in the bank and buying gold at $1,100 per ounce, I'm buying gold.

Watching the government rack up debts that will be impossible to repay while narrowing the tax base (at least 50% of Americans pay zero federal income tax) at the same time is very scary. Not only has the government gone mad with spending and corruption, but it also expects about 10% of the population to pay for essentially all the costs. The math simply doesn't add up: 10% of the population can't (and won't) pay for all of the costs of a socialist federal government.

This has nothing to do with traditional party politics. Both parties have grown the size and responsibilities of government. Both parties have added to the national debt. And both parties support the narrowing of the tax base – because that's what makes good political sense in an unlimited democracy... Promise the voters they can live at the expense of their neighbors and future generations.

Unfortunately, we know from history this kind of political system can't last for long – for lots of reasons. One important reason: The rich will leave. Or they will stop working. They will hide their incomes or only invest in tax-protected vehicles. And we know the political response will be tougher laws on emigration, taxation, more money printing, and – eventually – capital controls that make it impossible to protect yourself from a massive currency devaluation.

That's the script. We've watched the same things happen dozens of times around the world following World War II and the introduction of a global paper currency standard, which allowed governments to run huge deficits and finance their activities through inflation and devaluation. We just never thought we'd see it happen here.

Today, the idea of leaving America in search of freedom and financial security seems like absolute madness. But it won't for long. And by the time most people wake up to the very real threats to their standard of living, it will be too late.

The trends I'm talking about are cultural and fiscal, not ideological. Read the original Communist Manifesto. It's nearly identical to today's government policies. Any politician who tries to oppose the landslide of modern entitlements is immediately labeled a kook and is unelectable.

Whether you think we ought to have free health care and drugs for retirees, more military spending than the rest of the world combined, a bankrupt retirement scheme based on government debt, government guarantees for the banks, etc. doesn't matter to me. I'm not interested in pie-in-the-sky ideas about how the world should work. I write about how the world does work.

And I can tell you this with 100% accuracy: You cannot support the world's reserve currency when you are the world's largest debtor, when you plan to finance annual deficits exceeding $2 trillion with progressive income taxes and money printing. Our economy is a charade. And when it falls apart, the consequences will be devastating.

Regards,

Porter Stansberry

The Four Best Places to Keep Your Gold - #assetstrategies

Tue, 10 Nov 2009 08:00:00 EST

By Tom Dyson

"Keep moving," said the TSA agent...

Two years ago, I traveled from Las Vegas to Baltimore with five gold coins – worth $8,000 – in my pocket. I wanted to know if the gold coins would set off the airport security systems.

I put my bag onto the belt and threw my shoes into a plastic bin. I kept the coins in my pocket. The security officer beckoned me through the metal detector.

Nothing happened. The gold coins did not set off the metal detector.

I love owning physical gold bullion. With gold bullion, I have an asset that'll never lose its value or its utility, no matter what happens in politics or the economy. I can't always buy the gold I want at the shop around the corner, so I've spent some time researching the ins and outs of transporting and storing my gold...

For example, if you're moving gold out of the country, keep it in your pocket, not your hand luggage. Only ferrous metal (which contains iron) sets off the detectors in airports. So pure gold coins in your pocket will not set off airport metal detectors. If the gold is in your hand luggage, it will show up in the x-ray machine.

Last week, I sat down with Michael Checkan, an international gold investment specialist who's been in the business for 30 years. I asked him to discuss the different ways to store your gold once you've bought it...

A bank safety deposit box was the first solution Michael mentioned. It is the easiest. Boxes cost as little as $50 a year. If you're already a customer of the bank, they may even offer it to you for free.

But I have a problem with banks. What if they go bankrupt? You don't want to get stuck banging on a locked door when you need your coins in a hurry. Second, Michael says the Feds can force banks to divulge information about your security box. They can force the bank to tell them whether or not you own a box. Then the Feds can issue a subpoena and force the bank to open it.

So Michael suggested keeping gold bullion in an IRA...

To qualify for inclusion in an IRA, the gold must by pure, 24-karat gold. The Feds make one exception to this rule: They allow you to put the U.S. Eagle, a 22-karat gold coin, in your IRA. (Here's a good FAQ about including gold bullion in an IRA.)

I see a couple of big problems with buying gold in your IRA. First, you can't put coins you already own into an IRA. You have to make a fresh purchase. Secondly, you don't have access to the coins. A qualified custodian must keep them on your behalf.

Another option is to send your gold overseas to a private security vault. I like this idea. You keep your gold where it's out of reach of the U.S. government. These private vaults don't qualify as financial institutions, so you don't have to report them as foreign accounts when you file your taxes. Michael recommends Safes Fidelity in Geneva and Das Safe in Vienna. These are the two safest, most confidential vault businesses in the world. You can send them your gold through the mail. Just make sure you use registered insured mail. Or you can take it there yourself.

But of all the places Michael suggested, hiding gold on your property was my favorite solution. You have instant 24-hour access to your gold, and you don't pay any storage charges. The key is, it has to be safe.

One option is to install a safe or a gun locker in a discreet part of your house. Make sure you secure the safe to the floor so a thief can't carry it out of your house. Or you can bury the gold in your backyard or a friend's backyard. You can buy waterproof coin tubes online or go to Home Depot and buy a PVC tube and caps to seal the ends.

Just make sure you tell one person where you hid it... in case something happens to you. And don't tell anyone else.

Good investing,

Tom

Looking for a Couple to Go On a Business Adventure - #Cafayate #Argentina

Mon, 09 Nov 2009 08:00:00 EST

By Tom Dyson

This weekend, I met a couple from Aspen, Colorado. The husband, Charlie, opened Aspen's first snowboard store back in the 1980s. He called it Sidewinder Sports...

At the time, snowboarding was still a fringe sport. Today, snowboarding is a mainstream sport, and Aspen is one of the wealthiest cities in America.

A few years ago, Charlie and his wife decided to sell their snowboard business and start a new business. They ditched Aspen. It was already fully developed. They wanted something different and cheaper. They found Cafayate...

Cafayate, Argentina is the town master investor Doug Casey and his associates have chosen as the location for their luxury resort. It's a beautiful wine-producing town in the mountains. Some people told me it reminded them of Napa. Others said Tuscany. I say it feels like a gentler version of Telluride, Colorado.

It is an amazing place, set in spectacular scenery with fantastic weather all year 'round. You can't beat it.

Doug has sold 120 lots so far. Buyers have mostly come from America, but I met Canadians, Europeans, and wealthy Argentines. More will come soon. These people want to retire in this wonderful place, or they want a second home for luxury vacations. They also want to move money offshore and use Doug's development as a sort of land bank.

Over the coming months and years, thousands more people will come here as tourists, visitors, and employees.

To capture this influx of wealth, Charlie and his wife have settled in Cafayate and built a new business. It's a gourmet Mexican restaurant aimed at the gringos and other rich tourists. They call it "Colorado." I ate there three times in four days. The food is excellent and so is the service.

As Cafayate booms, this is going to be one of the most popular restaurants in town.

As the owners, Charlie and his wife will have the income to lead a very comfortable life... and their land and business will increase in value gradually over time... just like they experienced in Aspen. Plus, they'll be at the center of a growing community, where the lifestyle is relaxed, the wine is plentiful, and the people are interesting. Most of all, they'll have a fantastic adventure.

Here's my suggestion: Doug's real estate development is sparking a massive and sudden influx of wealth into this small town. If you're interested in starting a new life in a sleepy town that's turning into the next Aspen, copy what Charlie and his wife are doing. Go to Cafayate and open a business.

I suggest you open a brick oven pizza restaurant... or maybe a gourmet bakery. Almost any upscale business would work. Just copy the most popular concept you find at the nearest ski resort.

By piggybacking on Doug's success, and the Aspen couple's business model, you'll earn a comfortable living, you may get wealthy, and you'll definitely have the adventure of a lifetime.

Good investing,

Tom

35% Return on Capital Is Normal Here - $HYG

Fri, 06 Nov 2009 08:00:00 EST

By Dr. Steve Sjuggerud

Someday, my friend Rahul will be a famous investor. I like to say he's the "future Warren Buffett of India."

I trust him so much, a year ago I gave him a substantial chunk of money to manage in Indian investments for me. It's performed extremely well (admittedly emerging markets are up big this year). Rahul is speaking at our upcoming Alliance conference on Monday, so I asked him to share a few words about what's going on right now in India. Here's what he had to say...

My friend Jim's return on capital is 35%...

Yes, that is thirty-five percent on his money in his business... and he doesn't borrow any money.

His business? Power generation. How can you make 35% on a power plant? Jim's plant is here in India...

Specifically, Jim runs a company that operates a "merchant" power plant. A merchant power plant is one which does not have a long-term sale agreement with any customer... It sells power for short durations (usually under a year) to the highest bidder.

With the economy growing at a very rapid rate, India has a chronic power deficit... While long-term power-sale agreements are made at rates between 3.5 cents to 5.5 cents per kilowatt-hour (or unit), merchant power plants are commanding rates up to 8 cents per unit. Peak power is being purchased by consumers in many cases at 20 cents per unit.

I spend most of my time researching companies and talking to businesspeople. I've found that Jim's scenario is not the exception but the norm in many smaller companies in India...

Rahul is right. I visited India a year ago... Rahul took me around to see some of his favorite investment ideas. One was a company called Seshasayee Paper. In short, the company bought a massive paper operation from the Northeastern U.S., took it apart, and moved it to rural India.

In its fiscal year ending in 2007, its return on equity was 34%. In its fiscal year ending in 2008, it had a 28% return on equity. If you annualize its latest quarter, the return on equity is down to 22% – still admirable.

You'd think a business with such a return on equity would trade at a premium to its equity value (essentially its liquidation value). Nope. It trades at a 26% discount.

The shares of this paper company have more than doubled since their October 2008 lows. So you'd think they'd be expensive. Nope. Even after that big run, shares are still only trading at five times trailing earnings.

There is no estimate for this company's future earnings... because there are basically no brokers who follow it. Just Rahul. India has thousands of small companies. Rahul picks through them to find the best opportunities, like Seshasayee.

After my trip, I was impressed with Rahul... and I was impressed with the ability entrepreneurial Indians have to turn hard work into profits. When he says the future is bright for India, I believe him.

By the way, don't think Rahul is bullish on India just because he's Indian...

He came to the U.S. and graduated from an Ivy League school, fully expecting to find his career in the States. But while in the States, he realized the REAL opportunity was back home in India – in businesses like his friend Jim's power plant and Seshasayee Paper.

While Rahul lives in India, he's in the States this week, speaking at our Stansberry Alliance Conference on Monday. We look forward to seeing many of you there.

Good investing,

Steve

A Still-Safe 18% Dividend - $NLY $HTS

Thu, 05 Nov 2009 08:00:00 EST

By Dr. Steve Sjuggerud

Exactly one year ago in DailyWealth, I told you about "the greatest moment in American finance." My headline was "You Should Take Advantage of This No-Risk Trade Right Now."

If you took my advice and bought shares of "virtual bank" Annaly, you're up 42% today... And we're only halfway through the trade.

A year ago, I told you we had the opportunity for 85% capital gains, PLUS 39% in dividends – for a total return of more than 120% in two years.

While I told DailyWealth readers about Annaly, I told my paid subscribers in True Wealth my favorite way to play it... through shares of another virtual bank: Hatteras Financial, which has done even better.

The "virtual bank" business is incredibly simple... They borrow money at a low interest rate and invest it at a higher interest rate in an ironclad safe, government-guaranteed investment. They earn the difference – the "spread." As I told you last year, when these guys are in their sweet spot, they make a fortune.

Right now, they're in their sweet spot. And there's still plenty more in profits ahead. But the share prices have fallen lately.

I'm not worried. The trade is still on track. Look, Hatteras should pay $5 in dividends in 2010. With its stock price around $27.50, Hatteras' dividend yield is about 18%. Let me be clear...

That's an 18% dividend, with your money invested in government-guaranteed investments.

Hatteras is now trading for a reasonable price again, at only 1.09 times book value, as opposed to its recent peak around 1.4 times book value.

In short, I'm not worried about Hatteras or Annaly. They're both great income vehicles... They capture the spread between what they earn in interest and their interest cost. That spread is currently around 3% – that's huge.

And the Federal Reserve can't raise rates until at least next summer (2010). So Hatteras and Annaly will be able to borrow money cheaply for at least another six months.

My plan with virtual banks is to sell well before it appears the Fed will raise rates. So for 18% dividends... plus even bigger potential capital gains... own Hatteras or Annaly now. Plan on selling once they rise above a price-to-book value of 1.4 (for a capital gain of 30% or more from current levels, PLUS dividends). Or sell sometime in the first quarter of 2010, well before the Fed considers raising rates.

This should be easy money... If you bought a year ago, when I told you about Annaly in DailyWealth, you'll end up with more than 100% in capital gains and dividends. Even if you didn't buy then, you've got a great chance now: a safe total return (capital gains plus dividends) approaching 40% in less than six months.

Good investing,

Steve

The Best Simple Gold Indicator Around - $GOLD

Wed, 04 Nov 2009 08:00:00 EST

By Dr. Steve Sjuggerud

Just over 2% per year... that's all gold has gained since the end of 1979.

Gold sure hasn't done much.

If you look over the last 41 years, gold performed better... about 8% per year. It did well in the 1970s because of inflation fears – similar to fears we have now. Then gold did nothing for the 1980s and 1990s.

Today, I'll share with you an incredibly simple gold indicator that does an amazing thing... It captures the upside in gold, and it actually makes money when gold does nothing.

For the conclusion up front, this chart tells the story... The gold line is the price of gold, and the black line is the simple gold indicator. If you invested $10,000 using this indicator, it turned into $1.28 million.

As you can see, the gold indicator kept up with the price of gold in the 1970s... Then when gold went to sleep for 20 years, this indicator kept making money. And now that gold is going again, you're making big money.

The indicator is incredibly simple, too... It requires less than an hour of work a year to follow. Yet, since 1968, when this indicator said "buy," the price of gold rose at a compound rate of over 17% per year. And when this indicator said "move to cash," gold fell at a compound rate of worse than 2% per year.

The indicator is simple. You look at the price of gold once a month. You buy (or keep holding) if the price of gold is above its nine-month average. And you move to cash if it's below its nine-month average.

There's nothing magical about the nine-month average, by the way... You can use the eight-month, 10-month, and 11-month averages for "buy" signals, too. Same goes for the "move to cash" signals.

Testing this indicator since the end of 1979 gives similarly good results. In "move to cash" mode, the price of gold lost about 3% compounding per year. And in "buy" mode, gold gained around 7.5% compounding per year.

While 7.5% compound annual gains in buy mode since the end of 1979 doesn't sound as sexy as 17% a year since 1968, keep this in mind: Without this indicator, gold has only compounded at 2.3% a year since the end of 1979.

I've loaded you up with numbers here, but the concept is actually simple...

Own gold when it's above its nine-month average. Move to cash (earning interest) when it's below its nine-month average. Doing this simple thing since 1968 would have turned $10,000 into $1.28 million – for a compound annual gain of 12.5%.

The secret to the indicator, of course, is that it limits the pain of your bad years.

Consider this table of the 10 worst 12-month periods for the price of gold compared to how the simple indicator performed during those 12-month periods. Gold lost over 30% in every case. The worst the indicator performed was a 3% loss. Take a look:

End of 12-month period Simple Gold Indicator Gold

3/31/1982 14% -37%
9/30/1981 -3% -36%
8/31/1976 5% -36%
6/30/1981 -3% -34%
11/30/1981 7% -34%
7/31/1981 3% -34%
8/31/1981 2% -32%
5/31/1982 13% -32%
7/30/1976 5% -32%
12/31/1981 14% -32%

I can't take credit for this simple indicator. My friend Mebane Faber wrote about a similar system in his book, The Ivy Portfolio. In that book, Meb describes why it works:

"When markets are declining people become more fearful and use a different part of their brain than during periods when markets are going up," he writes. So the reason it works is "rooted in human psychology."

Meb says it's "simple" and "timeless." And he's right.

You can make it a lot more complicated. But simple is elegant. A few minutes a year turned $10,000 into $1.28 million over 41 years, without any number gymnastics. Why make it more complicated?

Right now, the simple gold indicator says "buy."

Good investing,

Steve

The Best Three Gold Coins to Buy Right Now - Canadian Maple Leaf

Tue, 03 Nov 2009 08:00:00 EST

By Tom Dyson

"What if my bank account gets wiped out?"

My friend has nightmares about a virus attack on the global computer network. He says terrorists are developing programs that will wipe out bank databases. Account records will vanish, he says, and no one will know who owns what or how much. It'll wreak havoc on the financial system.

I have different "financial wipe out" nightmares. I worry the federal government will run out of credit and won't be able to backstop the FDIC. They'll be hundreds of bank failures, like there were in the Great Depression. In my nightmare, I lose my savings in a bank collapse.

Here's another bad dream: Inflation gets so bad, the Feds impose currency controls and then devalue the dollar. My money gets stuck in the United States... losing its value.

These fears are some of the reasons I'm building a stash of gold coins... and why you should, too. Gold is real money. You can take the coins anywhere you want in the world, and they'll always have value. Gold coins are the ultimate "safe haven" insurance asset.

And here's the bonus: Right now, there's no "opportunity cost" of owning gold. Usually, you're giving up the chance to earn interest on your cash when you buy gold. But now, the dollar is paying next to no interest.

Yesterday morning, I had breakfast with one of the largest private gold bullion dealers in the world. His name is Michael Checkan. He runs a business called Asset Strategies International. I asked Michael what gold coins he likes right now...

Michael told me you should keep two things in mind when you buy gold coins. First, you want a good deal. He says you should buy the coins with the lowest premium to the international gold spot price you can find. Right now, there's an orderly market in gold coins and you shouldn't pay more than a 5% premium to spot. As I write, gold is at around $1,060. So you shouldn't pay more than $1,113 an ounce for your coins.

Secondly, you should buy coins with the highest worldwide acceptability, so you'll have no problem selling them anywhere in the world. For example, Michael says Asians prefer 24-karat gold coins, but the American Eagle and the Krugerrand are only 22-karat gold. They aren't so popular in Asia. He also says the South African Krugerrand, the British Sovereign, the Mexican Peso, and the Austrian Corona gold coins are "passé" and not as popular worldwide anymore. You won't get such a good deal when you sell these.

So which coins should you buy?

Michael likes one-ounce Canadian Maple Leaf coins best. He also likes Australian Kangaroo one-ounce nuggets and the new American Buffalo coin.

The national mints sell these coins to wholesalers at a 3% premium to spot gold. The wholesalers take another 0.5% and the retailer takes 1.5% in profit. So you pay a 5% premium to spot. (The Buffalo is a new coin and supply is still a bit tight. If you buy fewer than 10 coins, you may have to pay a 6% premium.) These coins are all 24-karat gold, they are all popular worldwide, and you can hold all three of these coins in your IRA. When you sell, you should expect to receive the spot gold price plus about 1%.

There's never been a more important time to own gold than right now, even if it's just a few gold coins. We're entering severe financial turbulence, and gold coins are the ultimate insurance. Canadian Maple Leafs, Aussie Kangaroos, and American Buffalos are the best coins to buy right now.

In my next essay, I'll discuss what you should do with your gold coins once you've bought them...

Good investing,

Tom

This Is Where I'll Go to Escape America - #Cafayate #Argentina

Mon, 02 Nov 2009 08:00:00 EST

By Tom Dyson

"Tom!"

My wife screamed. I turned around. She was clasping her backpack. The pocket was open.

"He took my purse!" she said.

The thief had followed us, waited until we reached a major street crossing, unzipped the backpack, and pulled the purse out. The thief disappeared into the crowd and we never saw him. It was the perfect crime. We lost $125 and the camera with all our pictures on it.

My wife and I have come to South America to look at property. We're not planning to move here... We just want an escape pod in case we ever need to flee from the United States. Our first stop was Punta del Este in Uruguay. Then we went to Buenos Aires, the capital of Argentina...

Buenos Aires has great restaurants, museums, parks, and shops. It's also noisy, polluted, and crawling with thieves. Fun to visit, but it's not a place we'd ever want to live...

So I came to Cafayate.

Cafayate is a small town in northern Argentina. It's set in the most spectacular scenery I've seen since I crossed the Canadian Rockies in a railroad boxcar three years ago. The town is small, but sophisticated. It reminds me of an art community in the Colorado Rockies. There's a large plaza in the center of town with world-class restaurants and outdoor cafes around it. You can get a full steak dinner and a bottle of wine for $5 in these restaurants.

The weather is perfect... warm air with a mild breeze... all year round. The mountains get snow on them, but Cafayate is in a valley and so close to the equator, it's always warm.

But here's the real reason I'm so excited about this town: Doug Casey is building a world-class resort here. He says it's going to be the world's finest community on the face of the globe. Doug is a brilliant guy who has traveled the world 100 times, so it's an extraordinary claim. If anyone can pull it off, it's Doug and his partners.

Here's how Doug described some of Cafayte's choice aspects:

The centerpiece is an 18-hole golf course designed by Bob Cupp, whose last project was the $140 million Statue of Liberty course in New York. Bob says this may be the best course in South America and one of the top 100 in the world.

...We're growing every type of fruit, berry, and vegetable that you can imagine, organically right on site. So the food is a far cry from what you're used to getting at McDonald's. If you get tired of the fantastic beef, you can fish in either of our two lakes. We're in the middle of a wine region with thousands of acres of grapes planted around us.

What gets me even more excited than the location, however, is the people behind the project. There just aren't a lot of people out there who still believe in 100% personal responsibility, small government, and minding your own business. I know Doug and his partners believe in these things.

I'm playing golf on Doug's development this afternoon... and touring it tomorrow. I can't wait to see this place. It's going to be a libertarian Shangri-la for American expats. More in my next column.

Good investing,

Tom

Get Your Money Saved for This Right Now - #IRA

Fri, 30 Oct 2009 08:00:00 EST

By Dr. Steve Sjuggerud

Better get your money saved..

On January 1 – just two months from now – our desperate government will foolishly give us a too-good-to-be-true deal...

You could make $336,000 – potentially much more – all because of government desperation. But you need to get your act together to make the most of it.

It takes a bit of explaining... But I can't wait to take part in it. It is the best return on your money with next-to-no risk I can imagine. As one financial planner put it: "Would you rather pay taxes when you plant the seeds or harvest the crop?" This is a chance to pay on the value of the seeds, not the crop.

What I'll do on January 1, 2010 is incredibly simple. I will convert six figures worth of my IRA into a Roth IRA. Doesn't sound like a big deal... but it REALLY is. Let me explain...

Let's say you have a $100,000 IRA (just to keep the math simple). And let's say you're 50 years old. If that IRA account grows 10% a year for 20 years, it will have $672,000 in it. At that point, you'll be 70 years old and you'll have to start taking money out...

The government will likely take as much as half of it.

If it's a traditional IRA, the government will treat the money you take out as income and will tax you on it. With America's government debts expanding so rapidly, I hate to consider how high tax rates could be in 20 years... I wouldn't be surprised to see some income tax rates reach 50%.

In short, with a traditional IRA, the government could take half of your money in taxes – that's $336,000 in our example.

But if you convert it to a Roth today, the government will get none of that money... the entire $672,000 will be yours, TAX-FREE. Here's why...

The government's budget deficit is the worst ever – by far. It needs your tax dollars right now. So it would rather take $33,000 in tax from you now (on your $100,000 worth of "seeds") than $330,000 or much more from you in the future (on your $672,000 worth of "crops").

In short, the government will allow anyone to transfer a traditional IRA into a Roth IRA starting January 1, 2010. By doing this, you're making an incredibly safe "gamble." You're giving up $33,000 today to let your wealth grow TAX-FREE forever.

You see, once your money is in a Roth IRA, it is no longer the government's to grab – you've already paid them their taxes.

That's the difference between a Roth IRA and a traditional IRA... In a Roth, you fund it with after-tax money and let it grow tax free. In a traditional IRA, you fund it with pre-tax money, and then you have to pay taxes on that money when you take it out.

You'll get so many benefits if you do the switch...

For example, if inflation hits, and your $672,000 dollars turns into 10 times that – $6.72 million – the government still can't tax you... You've already paid your tax bill on that money. You're a tax-free multimillionaire.

Another benefit is tax rates today versus tax rates in 20 years... By converting to a Roth IRA now, you're paying taxes on your IRA at TODAY'S income tax rate, which is most likely lower than future income tax rates.

Here's one of the biggest benefits of all: You do not have to pay your $33,000 tax bill out of your $100,000 IRA – you can pay it out of other money. So you can have the full $100,000 at work for you, tax-free. This is the way to do it, if at all possible.

Even better, the government will give you a few years to pay off the full tax bill. You can spread out the payments through the 2012 tax year. So in reality, your $33,000 tax bill won't have to be paid in full until April 15, 2013 – or October 2013 if you take an extension on your taxes. From the beginning of 2010 until October 2013 – it's like taking a four-year tax-free loan from the government.

So get your act together. Start getting your money saved up outside of your IRA. And convert your traditional IRA to a Roth IRA on January 1, 2010.

The government is willing to take your tax payment on the seeds instead of the crops... and it's willing to give you nearly four years to pay the bill. It's foolish. Jump on it!

Good investing,

Steve

What the "Man Who Made Too Much" Says About Gold - $GLD

Thu, 29 Oct 2009 08:00:00 EST

By Chris Mayer

The U.S. dollar is a sort of monetary brand.

And like any other brand, it can fall out of favor. Even iconic brands can rapidly lose their "must-have" cachet. Sometimes, a brand can disappear entirely, as did Pan American Airways or "Members Only" jackets. But there is always something else waiting to take its place. So it is with the U.S. dollar, a brand making lows in the financial markets.

The dollar has been the "Coca-Cola of monetary brands," says James Grant, editor of Grant's Interest Rate Observer. But even the best of brands can be lousy investments. Grant uses the analogy of the New York Times. It was the greatest name in newspapers. In 2002, the stock sold for $53 per share – an all-time high, as it turned out. Today, the "Gray Lady" fetches only $8 per share.

"What happened?" Grant asked. The World Wide Web happened, he says. "The Times has hundreds of reporters, but this is a story they seem to have missed." As if the lowly stock price was not evidence enough of its decline, the NY Times got another reminder when it borrowed $225 million against its headquarters building.

The cost of such borrowing, Grant reports, was 14%. The august Times today borrows at rates no better than a working-class stiff at a pawnshop. The U.S. Treasury should take note. The government seems as intent on creating dollars as prolifically as bunnies create other bunnies.

Here we get to John Paulson, a presenter at the Grant's Fall Investment Conference and undoubtedly the richest man in the room. Portfolio magazine dubbed him "The Man Who Made Too Much" after he made $3.7 billion by betting against mortgage-backed securities (MBS). He is one of the greatest hedge-fund managers ever.

Gold is his favorite today. As to why, Paulson presented a simple, but compelling case. First, the monetary base has exploded in a way we've never seen before. The monetary base is essentially the Federal Reserve Bank's currency and reserves. The Fed, by buying up securities in this crisis, has pumped a lot of money into the economy.

You've probably seen this chart, or some variation of it. Still, there haven't been noticeable signs of inflation as a result of that big spike – not yet.

As Paulson explained, that's because this base money has not yet been lent out and multiplied throughout the economy. Yet the monetary base and money supply are highly correlated, "almost 1-to-1 between the two," Paulson said.

That means that as the monetary base expands, the money supply surely follows, though there is a lag. (Money supply is a broader measure of money than just the monetary base, as it includes personal deposits and more. The monetary base is like a kind of monetary yeast. It makes money supply rise.)

If money supply grows faster than the economy, that will create inflation, says Paulson. As it is impossible for the economy to grow anywhere near that vertical spike in the monetary base, Paulson contends inflation is coming.

The U.S. is not alone in its money-printing exercise. The supply of most currencies is expanding rapidly – even the normally tame Swiss franc. In the race of paper currencies, they are all dogs. Hence Paulson's interest in gold, which no government can make on a whim.

Therefore, in the content of the exploding monetary base, gold seems relatively cheap. In other words, as the money supply rises, so does the price of gold, eventually. As a result, says Paulson, "gold has been a perfect hedge against inflation."

There is some slippage over time. The gold price can change faster or slower than the money supply. But when the market gets worried about inflation, the gold price usually changes much faster – as happened in the 1970s. In 1973 – to pick a typical year – inflation was 9% and gold rose 67%. That was a pattern common in the 1970s.

The potential for inflation this time around is greater than it was in the 1970s, given that the growth in the monetary base is so much greater than it was in the 1970s. Gold could do much better this time around, reaching "$3,000 or $4,000, or $5,000 per ounce" as Paulson said.

Future historians will look back at the present day and see clearly how this unfolded. They will see the litany of news items that pointed to the dollar losing its top perch: China and Brazil are settling up trade in their own currencies. The Russians and others are openly calling for a new monetary standard. Even mainstream outlets are discussing alternatives to a dollar-based standard, a province once solely occupied by cranks and gold bugs. Not a week goes by without these kinds of stories.

As for a replacement waiting in the wings, Grant offers up gold. Indeed, a kind of "de facto gold standard" seems to be taking shape. The SPDR Gold Trust, the largest gold-backed security in the world, is now the sixth largest holder of the metal in the world. Anybody with a brokerage account can easily buy gold today through the trust, which trades on the NYSE under the ticker GLD.

It's still early. Most people still own no or very little gold. As it becomes clearer what's happening, they will buy more gold, especially as it is now easy to do so.

The gold supply, too, is limited against the vast pool of dollars. As Paulson points out, global money supply is 72 times the value of gold. I'm betting that gap will narrow. It only has to narrow a smidgen and the gold price flies.

As Grant eloquently put it: "Gold is a speculation. But it is a speculation on a certainty: the debasement of the currency." Gold stocks, too, are a speculation. But they are a speculation on an inevitably higher gold price.

Regards,

Chris Mayer

The Most Accurate Investment Forecast in History - #REIT

Wed, 28 Oct 2009 08:00:00 EST

By Dr. Steve Sjuggerud

Jeremy Grantham made the "Two Big Calls" better than anyone in history.

1) He called the peak in the dot-com bubble...

In a fantastic interview with Outstanding Investor Digest in May 2000, Grantham saw no hope of anything but a bust – at a time when everyone was buying stocks. The interview headline was "Bubbles have always given back everything, there have been no exceptions – NONE."

2) Grantham said "buy" in March 2009, a day after the market hit bottom. It then soared nearly 60%.

On March 9, he wrote a letter to his customers saying, "We now believe the S and P is worth 900 at fair value or 30% above today's price. Global equities are even cheaper." While everyone else was scared to death, Grantham was buying.

Two big calls, right on both counts. So I always read Grantham's insights.

His latest quarterly letter came out this week. Yet again, it's full of gems of wisdom. But the most amazing part of the letter came at the end, when he shared his track record...

Grantham publishes his seven-year forecasts every quarter. In short, over the last seven years, nobody did it better than he did. With the exception of U.S. real estate stocks (REITs), Grantham got the order right – the ones he predicted to perform the best did. And vice versa. Take a look:

Asset Class Estimated Rank 7-Year Forecast* Actual 7-Yr Return Actual Rank

Emerging-Market Equities 1 10.0% 14.3% 1
Int'l Small Cap 2 8.9% 7.7% 3
U.S. REITs 3 8.1% 1.5% 10
Emerging-Market Debt 4 6.9% 9.2% 2
EAFE 5 6.5% 4.0% 7
Foreign Bonds 6 4.6% 6.8% 4
U.S. TIPS 7 3.1% 5.3% 5
U.S. Small Caps 8 2.8% 3.0% 8
Lehman Aggregate 8 2.8% 4.4% 6
U.S. T-Bills 10 2.1% 2.1% 9
U.S. Large Value 11 1.1% 0.9% 12
S and P 500 12 0.5% 0.8% 13
U.S. Large Growth 13 -0.2% 1.2% 11
* real return/year

This was not guesswork... The probability of picking them in that order or better is 1 in 900, according to Grantham.

In Grantham's latest seven-year forecast, he says the outlook for bonds is terrible. For stocks, it's not much better. Your best bet is in foreign stocks... And if you have to invest in U.S. stocks, stick with high-quality blue chips (most of which collect half their earnings overseas anyway).

After increasing his holdings of U.S. stocks in March, Grantham now says they're more than 20% overpriced today. (Remember, they've risen some 58% since their March lows.)

Grantham is now taking some money off the table. He says, "I would still guess (a well-informed guess, I hope) that before next year is out, the market will drop painfully from current levels." ("Painfully" starts at -15%.)

All in all, Grantham says it's "a safe bet that seven lean years await us."

He called the dot-com bubble in 2000. He said to "buy stocks" in March 2009. And his predictions over the previous seven years might be the most accurate big-picture forecast in investment history.

Jeremy Grantham is a man worth listening to. If you're seriously into markets and politics, his latest letter is worth hours of close study. (You may not agree with everything he says... but based on his track record, it's worth considering.)

You can find Jeremy Grantham's latest quarterly letter at www.gmo.com.

Good investing,

Steve

A Shocking Presentation from a Master Speculator

Tue, 27 Oct 2009 08:00:00 EST

By Tom Dyson

I just heard an amazing speech.

I'm at the South American business forum. It's a conference for 100 of South America's most elite university students. The students won a competition to be here. They're taking the event very seriously...

We're in the old Argentine stock market building in Buenos Aires. It is 154 years old and one of Argentina's grandest buildings. Giant portraits hang on the walls, the floors are made of marble, and hardwood banisters as wide as skateboards line the staircases. It's Friday evening. A full symphony orchestra is blasting out a Revel concerto in the basement. The music carries to every corner of the building...

The presenters include the "director general of ecology commission at the United Nations" and the "copresident of intergovernmental panel on climate change." There's even a Nobel Peace Prize winner here. I arrive early and catch a panel discussion between two United Nations bureaucrats on global warming.

Then Doug Casey takes the stage...

First, he tells the students to ignore everything they've heard so far. The speakers are all government stooges with no idea how the real world works. "Their ideas are nonsense," he says.

Heads rise. Some students giggle in embarrassment.

Doug then explains how inflation, not bankers, caused the financial crisis... why democracy is a terrible way to organize society... how global warming is a hoax... and why most modern schools and universities are a complete waste of time if you're looking for an education.

Some students are beginning to get upset. I see heads shaking in disagreement. One girl is so keen to argue, she puts her hand up and interrupts Doug's presentation. I hear more giggles.

Then Doug gives the students advice. First, he tells them to stop worrying about global warming and do something productive like start a business. To get rich, he tells them, all they have to do is produce more than they consume and save the difference in real money.

Then he tells them to read two books: The Market for Liberty by Linda and Morris Tannehill and his own book, Crisis Investing for the Rest of the 90s.

The Market for Liberty shows how society would function without a government. It's an amazing book. You can download it free here.

Crisis Investing for the Rest of the 90s is Doug's best book. It accurately predicted the events of the financial crisis and has been a close companion of mine for the last 12 months. You can buy a used copy on Amazon for less than a dollar.

Finally, Doug gives us his favorite investments...

He likes the Argentine cattle business. Cattle prices, adjusted for inflation, are at an all-time low. Farmers can't make any money at these prices and they're deserting their cattle businesses. So few people want to farm beef these days, Argentina, once the beef capital of the world, has recently become a net importer of beef. Doug is building a huge cattle and dairy herd on a ranch in the north of Argentina.

Doug also likes gold. He thinks it's going to $4,000 or $5,000 an ounce in the future as the Fed tries to inflate its way out of the crisis.

Selling government bonds is Doug's third speculation. Governments have artificially suppressed interest rates around the world, he says. When the bubble bursts, interest rates will go through the roof. Government bonds will collapse in value when this happens.

Doug received a hearty round of applause at the end of his speech. Some students enjoyed the controversy. But I wonder how many heard the message...

Good investing,

Tom

The Perfect Place for Expatriates - #Uruguay

Mon, 25 Oct 2009 08:00:00 EST

By Tom Dyson

I'm writing to you from a farm in South America...

There are three horses outside my bedroom window. My host, Fitzroy, lets horses roam his property. In the morning, we find them munching grass on the front lawn. And when we're having afternoon tea on the back patio, they'll come wandering slowly past...

In a moment, my wife and I will walk across the garden, past the horses, to the main house, where we'll join Fitzroy's family for breakfast. The housekeeper, Alexandra, is there. She's already set the table, pressed the oranges, and prepared a large plate of organic sausage, ham, and eggs.

After breakfast, we'll saddle the horses and Fitzroy will take us for a trot around his property...

We're in Uruguay, in a town called Punta del Este.

They call Uruguay the "Switzerland" of South America because of its powerful banking secrecy laws. It's also one of the last countries in the world where you can own property anonymously. Finally, there's no tax on foreign earnings. So Europeans and South Americans move here to avoid income taxes.

These laws attract money to Uruguay. Uruguay is the second-richest country in South America, after Chile.

For six weeks every summer, Punta del Este is the most important party town in South America. If you're a celebrity here, this is where you come for your summer vacation. If you're a wealthy aristocrat from Brazil, Argentina, or Columbia, you come here to party with the celebrities.

During this "party month," tables at nightclubs sell for $10,000 a night, rents jump 4,000%, and it takes two hours to move across town because of the traffic.

Luckily, high season doesn't start until January. For now, we're the only tourists in town...

For full-time residents, Punta del Este is a sleepy seaside town. Three-quarters of the houses and apartments are empty. Most of the restaurants are closed. And they disconnect the traffic lights. The standard of living for these folks is extraordinarily high...

Fitzroy, for example, lives in a large country house with wooden floors and big windows. He has a lake, a forest, and a horse paddock on the grounds. On the other side of the lawn, there's a cottage for the housekeepers and another cottage for guests.

He told me his country estate would sell for around $750,000 if it were on the market today. The same property in England or America would cost 10 times as much...

We went on a tour of Punta del Este's real estate market with Fitzroy. We found dozens of seaside cottages and small homes for under $200,000. They come with neat lawns, brightly painted walls, and fruit trees. Most of them even have separate quarters for housekeepers. A full-time housekeeper costs $400 a month. The country club charges $150 a month for offseason membership. And the top private school charges $200 a month per pupil.

The weather is wonderful. It never freezes. In the summer, you rarely need air conditioning. Travel connections are great, too. The international airport is two hours away and offers direct flights to the United States and Europe.

In short, Punta del Este is the perfect location for expatriates. It's cheap, easy to reach, and the quality of life is unbeatable, even in America. Best of all, there's going to be a property boom here as money flees from the bankrupt governments in America and Europe.

If you ever get the chance to visit Punta del Este, I highly recommend it. Just make sure you avoid the party season... unless you like that sort of thing.

Good investing,

Tom

The Next Currency to Crash - $YCS

Fri, 23 Oct 2009 08:00:00 EST

By Dr. Steve Sjuggerud

"What's your slam-dunk currency trade right now?"

I asked my friend Jack that question earlier this week...

Jack's the best guy I know at currency analysis. I've known him for 16 years. Back in the mid-1990s, we worked 20 feet away from each other at a firm specializing in international investing. Jack taught me a lot about currencies and managing my trading (cutting your losses and such).

This week, I drove down to tiny Palm City, Florida, where Jack's Black Swan Trading group is based. We spent a few hours catching up.

Jack explained his favorite trade right now... and he explained an easy way for an individual investor to take advantage of it...

In short, Jack thinks the Japanese yen today is like a ticking time bomb. It's ready to explode... We just don't know when. As of this month, the time may be right.

You see, right now, the Japanese yen is extremely overpriced. It's just off a huge high versus the dollar. The only time it's been higher against the dollar was in early 1995.

Since that's the only similar high in the yen's history, let's take a closer look at what happened next...

In 1995, the Japanese yen was comically overvalued. Everyone knew it. But just like the last six months, the yen kept going higher. Then the bottom fell out.

Soon after the yen peaked in 1995, it crashed... The yen lost 20% of its value in three months and a total of over 40% of its value in three years. That's an astonishing fall in the value of a developed country's currency.

Back then, if you'd bet against the yen with just a little leverage, you could have made a whole lot of money – easily triple-digit gains... even more depending on how you traded it.

Jack told me we're seeing a similar setup today in the yen... and the potential is there for similar gains.

You see, the Japanese can't raise interest rates, since the economy is in the tank. And the Japanese government is issuing more debt to make up for its shortfall in tax revenues. So in essence, it's creating more money out of thin air.

Look, when a currency pays no interest, and its government is writing I.O.U.s, then the value of a currency should fall. Nobody wants something that pays no interest and is increasing in supply.

But for the last six months, the Japanese yen has done the opposite of what it "should" have done. It's gone up... until this month. Jack believes after its huge rise from April, the yen may finally be changing its trend.

In the past, it was tough for individual investors to bet against the yen, particularly in retirement accounts. You couldn't trade futures or options, and you couldn't go short. But now, there's a way to bet against the yen AND get a bit of leverage AND do it all in your retirement account. It's through the ProShares UltraShort Japanese Yen Fund (YCS).

Here's a chart of YCS over the last six months. You can see as the yen has strengthened, these shares have crashed... down from $25 to $20 in the last six months.

But the fund is already up from $20 to $21 this month as the yen has weakened. (It's a "double inverse" fund, meaning for every 1% move down in the yen, this fund should move up 2%.)

A move back to April's level of $25 would be a 25% gain from YCS' lows around $20 – and even then, the Japanese yen would still be near its all-time highs versus the dollar. My point is, even after that gain, there's still much more room to run.

If you know my writing, you know I look for three things in a trade: 1) cheap, 2) ignored or hated, and 3) an uptrend. In the yen's case, we have all three.

Time to follow my friend Jack's advice (the best currency analyst I know), and bet against the yen. The double-inverse Japanese yen fund (YCS) is the smartest way to play it. Thanks, Jack!

Good investing,

Steve

The Road Map to Making a Fortune in Emerging Markets - $NLC

Thu, 22 Oct 2009 08:00:00 EST

By Chris Mayer

Two weeks ago, I returned from my second visit to the financial capital of India, the city of Mumbai (formerly Bombay).

On the first go-round, I was mainly in tourist mode and visited several other cities, too. This time, I spent a week here just working, meeting businessmen, and talking with investors.

I got a different perspective simply living there on a day-to-day basis. I got a sense for more mundane things like the harrowing daily commute. I got a better feel for how the city works. Mumbai looks and feels chaotic and messy, but for millions, it gets the job done.

Some parts of Mumbai are tough to stomach, such as the widespread and seemingly hopeless poverty. While at a stoplight, little kids came up to our car window begging. One was carrying a little baby, barely clothed, dirty. It was sad to see.

One of the things about India that I always find striking is the contrasts. There is great poverty in this city, but also great wealth. Often, they are side by side. For instance, we visited the oldest gold market in the city. It's part of a larger market that also houses a temple to the goddess Mumbadevi, from whom some think the city got its name. This market was packed with people. Cars, including ours, rolled slowly down the narrow streets, honking their horns at indifferent pedestrians.

Old, dilapidated buildings lined the streets with shops selling everything from linens to pineapples. In the gold market, we saw several blocks of gold merchants selling gold in all its forms. We stopped to visit the largest market maker for gold in the city.

We entered a decrepit building with towering slums around it. We got in a creaky elevator little bigger than a phone booth, with an attendant who opens and shuts the door. The elevator looked about a hundred years old. We got to our floor and went down a filthy hallway so narrow that you had to turn your shoulders to get by other people in the hall. Finally, we got to this gold merchant's office.

When we got inside, we entered a modern looking office – clean, wooden floors; air conditioned; a wall-mounted TV playing the Indian version of CNBC. You'd never know the squalor and chaos that exists just outside the door.

When it comes to India, I also always think of the infrastructure opportunity here. Our other daily trips throughout the city brought home how rough the basic infrastructure is. The roads are often clogged with cars and people and the occasional cart drawn by man or beast. The effects of this poor infrastructure are wide and deep.

India, for instance, actually wastes more fruit and veggies than it consumes, according to The Economic Times, India's largest financial daily. India is the second largest producer of fruits and vegetables in the world, but 30%-40% never make it to their destination.

As the Times reports: "Gaps such as poor infrastructure, insufficient cold storage capacity, unavailability of cold storage in close proximity to farms and poor transportation infrastructure all are contributing factors."

There are also routine brownouts and blackouts throughout India, often lasting for seven hours or more, which lead to food spoilage. It may seem hard to believe, but after being here for a week, I believe it.

Somehow, so far, India has managed to overcome many of these obstacles. The economy is still growing more than 6% annually. We saw more evidence of this, too, when we spent some time going over a cross section of midcap and small-cap Indian stocks. Many are growing 30%-40% per year, and have done so for 15 or 20 years.

One of the people we met on this trip was Jayesh "Jimmy" Seth, who runs KC Securities, a large brokerage firm in Mumbai. We also met his son, Harsh, a 22-year-old Northwestern graduate who returned home to make it in Mumbai.

Over lunch one day, Jimmy told us the advice he gave Harsh: "When you are in America, take note of all the daily conveniences you enjoy. Write them all down. Then, when you come back to Mumbai, check that list again. Whatever's missing, start a business around that."

It's a good piece of advice, as India has lots of gaps to fill, such as those basics of infrastructure. I think it's a brilliant strategy for all emerging markets. Look for the gaps in these emerging markets. Find what they don't have but want or need. Invest in the companies that fill those gaps.

For U.S. investors, you can play this idea with shares of water, agriculture, and energy producers. The huge and growing countries of India and China simply don't have enough of these resources to grow. They must buy them.

For instance, my readers have made good money on Nalco Industries (NLC), one of the world leaders in water filtration equipment and services. We've also made great returns in Potash, the world's largest agricultural fertilizer company.

I'm also bullish on smaller, local India plays. More will become available to U.S. investors as India grows. These ideas – and the resource investments I just mentioned – are the road map to making a fortune in emerging markets.

Sincerely,

Chris Mayer

Gold Guru: "$1,000 Is the New Floor for Gold" - #CNBC

Wed, 21 Oct 2009 08:00:00 EST

By Dr. Steve Sjuggerud

"$1,000 an ounce is thought by some to be gold's ceiling..." John Doody wrote last week to his subscribers. "We see it as now the FLOOR."

When John Doody talks about gold, I listen...

This year, his Top Ten List of gold stocks is up over 100%. John says his Top Ten list has averaged a 30% annual return since the start of his newsletter, Gold Stock Analyst. John has been writing Gold Stock Analyst for about 15 years.

One thing I like about this former economics professor is that it's all about the numbers to him... It's not about conspiracy theories like it is with so many gold bugs. For example, John will actually tell you when gold stocks are overpriced according to his model – imagine that with dyed-in-the-wool gold bugs!

So why does John think gold will keep going up now, when many others say it's bumping up against its ceiling? I asked John that yesterday...

It's simple, he said, if you just compare the price of gold to interest rates.

In short, when interest rates are high, then gold (which pays no interest) falls. And when interest rates are low (like they are now), gold rises. To keep it apples to apples over time, John subtracts inflation from interest rates.

In the 1980s and 1990s, you earned high rates of interest on your cash. So gold was flat for those two decades. Plain as day.

But for much of this decade and the decade of the 1970s, you typically earned NEGATIVE interest on your cash (after you subtracted inflation). So gold has soared.

John sees those negative real interest rates continuing. So gold will keep rising. Simple as that.

For the specifics, currently, the consensus inflation rate forecast for the first half of 2010 is around 2%. But banks basically pay you no interest. So you have a choice: Own gold, which pays no interest. Or hold cash, which pays you NEGATIVE interest, when you take inflation into account.

Yesterday, John explained that since the Federal Reserve will likely keep interest rates very low for a very long period of time, gold can keep going higher.

I asked John if gold had become too popular these days. He said absolutely not...

"Look, hedge funds are just starting to get into gold. Retail investors haven't bought. CNBC calls gold a bad inflation hedge. Central banks haven't bought. If gold was popular, I'd have a hundred thousand subscribers, not a couple thousand. We've got a long way to go. $1,000 isn't the ceiling... it's the new floor."

John ran the numbers, and in a sneak preview of his upcoming issue, he proves how the price of gold has "beaten" inflation fivefold since it first started freely trading 40 years ago.

"CNBC says that gold has only gone from a peak of $850 in 1980 to $1,050 today – for a $200 gain," he said. "So CNBC's conclusion is that gold is not a good inflation hedge... That's just plain wrong, but the people believe it."

To be brutally honest, if you plan to be a serious investor in gold stocks – and you're willing to do your homework – you're foolish if you don't read John's newsletter. John updates his unique valuation numbers every month for the 75 precious metals companies he follows. Plus, he writes up a detailed analysis about once a quarter on each company.

It is the best starting point in the business. It's the first place I go to find out how much gold each company has in the ground and what its cash flows are.

If you agree with John – that $1,000 gold is the new floor, not the ceiling – chances are, you're buying gold stocks. And if you're buying gold stocks in size, you ought to do it with John's help.

Good investing,

Steve

My Favorite Ways to Hold Cash - $SHV

Tue, 20 Oct 2009 08:00:00 EST

By Tom Dyson

In yesterday's DailyWealth, we discussed America's huge new appetite for saving cash and paying off debt.

For the first time in years, individuals want cash. The paradox is that at the same time, investors hate cash. The government, the mainstream press, and even most newsletter writers have emphatically discouraged its ownership, leading most investors to dump their cash in favor of stocks, gold, and other noncash assets.

With cash so desirable, yet so shunned by investors, I think now's the perfect time to own it. But the thing is, hiding bank notes under your mattress is not a sensible way to invest in cash. The cash doesn't pay you interest, and you run the risk of theft or fire destroying your nest egg.

I'm not particularly comfortable leaving my money in a local bank, either. Already, 170 banks have collapsed in this crisis, and thousands more will follow. If I were a banker, my first motivation would be making sure my institution was a safe warehouse for people to deposit their money. I'd trade on this reputation. Profit would be a secondary consideration.

But nowadays, depositors don't care about the safety of their deposits. FDIC insurance allows modern bank managers and loan officers to pursue profits without considering their reputations. So naturally, most banks have reached too far for profits, and the worst offenders will eventually collapse.

I don't count on FDIC insurance. I worry the government will bankrupt itself in its fight against the recession. When the crunch comes, it won't be able to honor the promises it has made through the FDIC system.

So where do I think you should put your cash?

The first, absolute safest, cheapest way of storing your cash is to buy Treasury bills. When you buy a Treasury bill, you lend the U.S. government your money for less than one year. These ultra short-term debts of the federal government have virtually no credit risk or interest-rate risk. The downside is, you'll get less than 0.5% interest per year in these instruments.

You can buy these bills through your broker, possibly your bank, or visit www.treasurydirect.gov. It's the Treasury's official site for selling its bonds. You can open an account at Treasury Direct and manage your investments directly through the Treasury's website. You'll pay no commissions or trading fees this way, unless you ask the Treasury to sell a bill in the open market before it matures, in which case, it'll charge you a flat $45 fee.

You can also buy T-bills on the stock market, using exchange-traded funds. This is a convenient option if you don't feel like opening a new account with the Treasury, or you want to be able to sell at short notice.

The iShares Barclays Short Treasury Bond Fund (SHV) holds a basket of the shortest-term T-bills. It has an expense ratio of 0.15%. It has $1.6 billion in assets. This year, its price has fluctuated between a high of $110.47 and a low of $110.18.

If you want to earn more interest than T-bills will pay – and have the flexibility of checking – I recommend you open a checking account or take out a CD with EverBank. EverBank promises to pay an interest rate in the top 5% of nationwide interest rates. It doesn't charge checking fees or monthly fees, and it offers even higher "teaser" introductory rates for the first three months. Right now, it pays 2.51% for the first three months and 1.72% thereafter.

Steve Sjuggerud and I know Frank Trotter, EverBank's founder. Frank is a prudent banker and his bank is safe. But if it's important to you, the checking account is FDIC-insured. EverBank controls more than $6 billion in assets.

Cash is the most contrarian asset in the world right now... and there's huge demand for it at the same time. With economic risk and uncertainty the highest they've been in decades, I recommend you start building a cash pile immediately.

Good investing,

Tom

Money-Compounding Machines in India

Fri, 16 Oct 2009 08:00:00 EST

By Rahul Saraogi

When we look at the Indian markets today, it gives us a tingling feeling at the bottom of our hearts...

We see a market with demographics, demand, entrepreneurship, rule of law, the English language, functioning capital markets, and a culture of minority equity ownership. Above all, we see a market that is giving us the ability to build positions in the compounding machines of the 21st century at prices that are unimaginably cheap.

So quite honestly, we don't think it matters what the Sensex (India's Dow) is going to do over the next week or month or year. We don't think it matters whether the U.S. economy will enter a double dip recession or not. It does not even matter when or by how much central banks will raise interest rates.

We just need to accumulate holdings in these exciting companies – these compounding machines – and sit tight for a very long period of time.

India continues to be considered (with other emerging markets) as a risk play relative to developed markets, going up and down based on risk taking and risk aversion. In order to make sure that our compounding machine is not interrupted by periods like October 2008, we construct our portfolio with stocks of companies that will continue to perform even if the stock markets were to shut down for a period of time.

And in order to make sure that we are not forced to fold our hand, we avoid leverage at all costs.

We seek to find good companies at attractive prices and then just hang on to them. Most of our time is spent avoiding and ignoring the noise and excitement around us. A lot of people know the right thing to do but many of them are carried away by the noise and emotion around them.

We are very fortunate to have excellent partners who share our investment philosophy and have enabled us to implement this compounding machine. We love what we do and to borrow from Warren Buffett again, we "tap dance to work very morning."

Regards,

Rahul Saraogi
Chennai, India

The Federal Reserve Is Openly Telling You to Buy Gold and Silver

Thu, 15 Oct 2009 08:00:00 EST

By Porter Stansberry

At the end of last year, I began writing about what I saw happening as the Federal Reserve started assuming the liabilities of the investment banks and the federal government began deficit spending at an unprecedented pace.

I've been calling these changes the "End of America" because I believe the fiscal policies of the U.S. will result in a massive devaluation of the dollar and the end of the U.S. dollar as the world's reserve currency.

To get an idea of why I'm concerned, have a look at a chart James Bullard, president of the Federal Reserve Bank of St. Louis, included in a recent presentation to the National Association for Business Economics.

What you see here is Bullard's estimate of the future growth of Federal Reserve assets.

A lot of people seem to have forgotten something that is very much on Bullard's mind: The growth of the Fed's balance sheet isn't nearly finished. In fact, the Fed has only completed purchasing about half of the $1.75 trillion worth of assets it has promised to buy. The assets are mostly mortgages and mortgage-related securities.

Even though these direct purchases are unprecedented, that's only about 10% of the story. Since the beginning of the crisis, the Fed has lent, spent, or guaranteed $11.6 trillion.

That includes providing a backstop on the entire system of mortgage finance in the United States, a system that currently shows nearly a $1 trillion loss.

Since the expansion of its balance sheet got started in earnest last fall, the trade-weighed value of the dollar has fallen 15%. Keep in mind, the Fed's assets form the base of our monetary system. The more it grows, the more money and credit become available to the banking system. And the faster the money supply grows, the more likely the value of the dollar will continue to fall.

As Bullard points out, a doubling of the monetary base won't necessarily cause an immediate doubling of inflation... But suppose it takes 10 years? The average inflation rate would still be 7% a year. If inflation does grow to this average level, at least a few of those years will see inflation running at or near double digits.

Nothing in our financial markets is prepared for this kind of inflation. Inflation at these rates would cause the average multiple of earnings for equities to fall by at least 50%. Likewise, we would see high-yield corporate bonds yielding at least 20% – double what they are now. And U.S. Treasuries would probably see their yields triple. The destruction of wealth in the bond markets would be unprecedented in modern finance.

It's going to happen. I guarantee it.

My forecast only assumes the Fed's actions don't continue past what's been announced so far. My bigger concern is what happens if Congress decides the Fed did such a good job fixing the housing bubble that perhaps it should lend a hand on health care or the entitlement time bomb? Although a small handful of people have been writing about the enormous fiscal challenges that all the Western democracies face over the next decade, I'm sure most of today's equity investors don't really understand what lies ahead.

Consider these numbers: Right now, today, without counting any of the unfunded liabilities of our government (which are very real obligations, by the way), our national debt is $12 trillion. There are roughly 100 million American households. So that's a national debt of roughly $120,000 per family. That's more than the average American owes on his mortgage.

Think about what this means in terms of interest payments. Even with interest rates at all-time lows around the world, the U.S. will spend almost $400 billion on interest to service our existing national debt – that's a 3.3% interest rate. Currently, the U.S. takes in roughly $2 trillion in taxes, half of which come from income taxes. So the interest on our debt is already consuming 20% of all tax receipts, or 40% of all income taxes.

It seems obvious to me this money will never be repaid – could never be repaid. The only real question is how much of a "haircut" our creditors are willing to accept in terms of the loss of purchasing power of the U.S. dollar. So far, inflation remains relatively benign. Our creditors don't seem to be losing very much. But we know this will change and could change rapidly, as the Fed continues to expand its balance sheet with less and less creditworthy assets. At what point will our creditors finally decide they can't finance any more of our deficit spending because we're simply not worth the risk?

No one in Washington realizes you can't borrow money endlessly. By the time Barack Obama leaves office (assuming he is reelected), the national debt will likely exceed $20 trillion. What will our creditors charge us to finance this debt? How will our debts compare to the value of our economy? It is impossible to know what will happen. But here's the one thing that seems most obvious: Our borrowing costs will go up, a lot.

At some point in the next few years, our creditors are going to stop believing in our ability to pay our debts in honest money. I don't know what will break first, but we can't go on printing money to prop up our banks and spending money we don't have to prop up our culture of entitlement.

And I don't believe there's any way to avoid it – certainly not with the political system we have in place right now. To protect yourself, you'll have to be very good at managing your assets. You also need to make sure to take the advice we've been issuing for years: Buy and hold plenty of real, honest money that cannot be debased by the government. Buy and hold plenty of gold and silver.

Good investing,

Porter Stansberry

What I Learned Inside the Vault - $CLCT

Wed, 14 Oct 2009 08:00:00 EST

By Dr. Steve Sjuggerud

I couldn't believe David handed it to me.

I was holding seven-figures of value between two fingers, inside an impenetrable vault.

I knew exactly what I was holding... It was one of the world's rarest stamps. Ounce for ounce, it might be one of the world's most valuable items.

When I entered the Collector's Universe building, I'd asked David if he'd ever seen one of those stamps in person before. He grinned, but didn't say anything. He simply started the tour. When we later got to the vault, he explained that grin. (I enjoy going on company visits... you learn so much.)

David Hall is the president and cofounder of Collector's Universe, a company that authenticates and grades a variety of collectibles, including coins, stamps, sports cards, autographs, and more. So it's not surprising that one of the world's most valuable collectibles was there that particular day.

David's company single-handedly changed the way rare coins are traded. Before 1986, you had to be an expert in coins. After 1986, you didn't have to know much at all... You just had to look for the company's patented sonically-sealed container. (The coin-grading division is called Professional Coin Grading Service. And today, thousands of PCGS-graded coins sell on eBay every day, sight unseen.)

Collector's Universe trades on the stock market under the symbol CLCT. As of its latest report, it had $24 million in cash and no long-term debt. Yet its market value is only $42 million. Subtracting the cash, what the market is essentially saying is David's highly successful coin-grading and collectibles-grading business is only worth $18 million.

For years, David had been using the cash flows from coin grading to expand into other areas, most recently grading and authenticating diamonds. But this year, the expansion plans got nixed. The company is going back to its bread and butter.

With no plans for expansion now, there's no need for over half of the company's value to be sitting in cash. If I were on the board, I'd recommend distributing most of that cash to shareholders... either in a one-time distribution or with the start of a dividend. If the grading business truly generates the cash flow David described, and there are no expansion plans at the moment, then the company could sustain a high dividend for a long time.

I haven't done the research into David's company's stock to recommend it in my newsletter. The reason is, quite frankly, it's too small to recommend to my paid subscribers... The bottom would fall out the day I say "sell."

I tell you this story because there are hundreds more stocks like CLCT out there... hundreds of microcap companies that have no brokerage-firm coverage selling for little more than cash in the bank. Yet they have legitimate cash flows from their businesses.

With a little digging, you can find them. I love these ideas because they're "too small." You're not going to get burned in Wall Street's game because companies this size are too small for Wall Street to pay attention to.

The work isn't that hard if you know a bit about investment analysis... but it is work. Read the 10-K. Read or listen to the quarterly conference calls. And then call the company and ask questions about things that don't make sense or add up. If you're paying next to nothing and you're buying into an uptrend, then your chances are better.

If you're willing to roll up your sleeves a bit, you'll find hundreds of microcaps worth digging into deeper. You could make a few times your money in them.

Good investing,

Steve

Two Ways to Profit on a Huge New Currency Trend

Tue, 13 Oct 2009 08:00:00 EST

By Tom Dyson

The Reserve Bank of Australia hiked its interest rate this week...

This was a big piece of financial news. Central banks around the world have been cutting rates for two years, and interest rates are as low now as they've ever been.

When a company raises its dividend, its stock becomes more attractive to investors. Its share price rises. When a bank raises interest rates on its savings accounts, people deposit more money in the bank. It's the same way in the currency markets. Rising interest rates make a currency more attractive and it rises against other currencies with stable interest rates...

The governor of Australia's central bank hinted there would be more interest rate rises on the way. This could be the start of a new trend of rising interest rates around the world. Analysts say Canada, New Zealand, South Korea, and Norway are likely candidates to follow Australia's lead.

If this is the start of a new trend of rising world interest rates, you can expect big new trends in the currency exchange markets, too. That's because interest rates are the single most important driver of exchange rates in the currency markets.

Australia's currency has risen this week as investors celebrate the higher interest rates they'll receive for owning it.

On the other hand, the dollar has fallen 15% in the last seven months. Newspapers will say it's because the Saudis want to price oil in euros or because the Fed prints too much money. This is garbage. The real reason is, it has the lowest interest rate of any major currency in the world except Japan, and speculators expect these low rates to remain indefinitely.

So how do you make money from a new global trend of rising interest rates?

While other central banks are considering raising rates, the Fed has so far refused to join the party. The dollar is the worst-performing major currency in the world this year as a result.

Two weeks ago, the Bureau of Labor released its monthly unemployment report. The report showed that somewhere close to 6 million jobs have vanished from the American economy in the last 18 months. As I write, jobs are still disappearing, albeit at a slower pace.

The employment situation hasn't been this bad since World War II ended and defense contractors eliminated 4.3 million jobs no longer needed for the war effort. With the ongoing unemployment bloodbath, rate hikes in America are unlikely until next year.

First, this gives you a great opportunity to buy the dollar right now, while it's cheap and no one is anticipating rate hikes from the Fed. For regular investors, UUP is the best way of profiting if the dollar rises. It's a fund that replicates the performance of the dollar against a basket of the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. By the time Bernanke announces his first rate hike next year, the dollar will have already rallied 10% or more.

Second, a trend of rising interest rates on currencies is great for people looking to buy gold at lower prices. Gold has no interest rate. So when interest rates rise on world currencies, they become more attractive – and they rise – relative to gold. This is especially true with the dollar. It's the world's reserve currency and gold is incredibly sensitive to movements in its interest and exchange rates.

As long as unemployment keeps rising, there's no way the Fed raises interest rates and gold prices will stay high. But next year is a different story. The first hint of rate increases by the Fed will send shockwaves into the gold market. If you're looking to buy gold, wait until Bernanke starts raising interest rates. By then the market will have already discounted the rate hikes and gold will be forming a low point.

Good investing,

Tom

What the Man Behind the Most Profitable Short Sale Ever Says Now

Mon, 12 Oct 2009 08:00:00 EST

By Tom Dyson

Robert Prechter just closed out the most profitable short sale in history...

Prechter is one of my favorite stock market analysts. He writes a newsletter called the Elliott Wave Theorist. Over the past three years, the advice in his newsletter has been sublime.

Prechter is pessimistic. He thinks America is heading into the worst depression in 300 years... the worst since the founding of the American Republic. Doug Casey, founder of Casey Research, is another bear. He jokes Prechter is the only analyst who thinks things will be worse than he does.

Prechter makes his stock market predictions by studying America's social mood. When he expects an improvement in the social mood, he'll predict a rise in the stock market. When he sees Americans becoming pessimistic, he turns bearish.

In 2007, for example, America was feeling more prosperous than ever before. But problems were beginning to appear... especially in the real estate market. House prices had peaked a year earlier, and the credit markets had started to lock up. New Century Financial collapsed in March 2007.

Prechter knew these problems would infect America's social mood. On July 17, he told his readers to expect a major decline in the stock market:

"Aggressive speculators should return to a fully leveraged short position now," he wrote.

Here's another example: In February 2009, the stock market had fallen 58%, the largest bank in the world, Citigroup, was on the brink of bankruptcy, and Wall Street was in total panic. The daily sentiment index was registering 3% bulls for the S and P 500. In short, the social mood was the darkest it had been since the 1970s. Prechter sensed a turning point.

On February 23, Prechter told readers to expect a strong bounce in the stock market and advised them to close out their short positions. "To be successful," he said, "you have to sell when people love 'em and buy when they don't."

Prechter claims selling the S and P in July 2007 and closing the position in February 2009 was the most profitable short sale in history. "This [800-point profit]," he says, "is surely the largest number of points that anyone has ever made, or will ever make, in the S and P futures in 19 months, and maybe ever."

Less than two weeks after I'd received this letter, the social mood turned positive and the stock market started a record-breaking rise. Here's what Prechter predicted this new trend would do to America's psyche...

"Regardless of its extent, [the rally] should generate substantial feelings of optimism. At its peak, the President's popularity will be higher, the government will be taking credit for successfully bailing out the economy, the Fed will appear to have saved the banking system, and investors will be convinced that the bear market is behind us."

As I write, seven months later, the S and P is up over 60% from its lows... As Prechter warned, a wave of optimism is washing across the investment community. Except for his remark about the President's popularity, which is waning, Prechter's description of the social mood in America could not have been more accurate.

Thing is, Prechter has now turned bearish again. The S and P has rallied to his target area of 1,000 to 1,100, and he says a new turning point in the social mood is at hand. In his August issue, he advised his clients to get bearish again...

"Investors should continue to keep the bulk of their wealth in cash and the safest possible cash equivalents, in the safest institutions," he writes. "If you actively invest in the stock market with money you can afford to put at risk, it's time to return to the short side."

Although it's worth noting Prechter's pessimism, I wouldn't bet against the market until it displays a bit of weakness – like if the S and P 500 fell to its lowest low of the past month (around the 1,025 area). This ensures you're betting with the short-term trend, rather than against it.

Good investing,

Tom

A Simple, Incredible System that's Beaten the Market by 10% a Year

Fri, 09 Oct 2009 08:00:00 EST

By Dr. Steve Sjuggerud

"Using a form filed with the government that's available to everyone, we've found ways to beat the market by as much as 10% a year."

Investment analyst Mebane Faber told me that recently (in so many words), over dinner with my good friend and mentor Van Simmons.

Mebane ("Meb" for short) is a relatively unknown young analyst, but he's doing fantastic work...

Last week, I told you about his simple investing system that didn't lose money for 35 years. (It's from his book, The Ivy League Portfolio.) What's more, it beat the market with less risk. And astoundingly, you only have to look at your portfolio once a month – 12 days a year. It's simple, but incredible... the mark of a great idea.

Last night, he explained another simple but incredible idea...

"Big investors – those with over $100 million – have to disclose their investment holdings in government filings called 13Fs," Meb explained. "The information is backward looking... But I've studied it, and it turns out it can be extremely valuable."

One thing Meb does is "clone" the big hedge-fund managers, like George Soros, David Einhorn, and Seth Klarman. Through these government filings, he can use these gurus' expertise without paying them big fees.

Meb explained that "mining" these government forms to copy the best portfolios works best with investment managers who hold stocks for a long period of time... investors like the world's second-richest man, Warren Buffett. Let's take a closer look at how you could use Meb's ideas to "clone" Warren Buffett's portfolio out of the government filings...

The 13F filings are quarterly. To keep it simple, Meb takes Buffett's top-10 holdings and equally weights them in his portfolio. Three months later, when the new 13F filings come out, he changes the portfolio.

Meb said, "It turns out that a simple portfolio that invests in Buffett's top 10 stock holdings, equal-weighted and rebalanced quarterly, beat the market by 10% a year from 2000 through 2008."

(A recent academic paper, called Imitation is the Sincerest Form of Flattery, corroborates Meb's research. It used a similar strategy from 1976 to 2008, and it beat the market by 11% per year.)

"Mining" these 13F forms turned out to be so valuable, Meb created a way to backtest these ideas automatically. He and his partner Maz Jadallah founded AlphaClone and made his program available to the public... for way too cheap (with a free 14-day trial and a "Guest Pass").

Now, you can easily backtest the performance of a portfolio that simply follows the stock ideas of the biggest and best money managers as soon as their portfolios are available through government filings.

If you're interested in picking your own stocks, or you'd like to see how you could have performed if you'd followed the best hedge-fund managers in the business, give AlphaClone a try.

And keep an eye out for Mebane Faber. This young analyst keeps delivering original, simple ideas.

Good investing,

Steve

An Answer to the Biggest Question Investors Face Right Now - $CRB

Thu, 08 Oct 2009 08:00:00 EST

By Chris Weber

One year ago, in the October 1, 2008 issue of the Weber Global Opportunities Report, I used as a title "The Immediate Danger is Deflation."

My view was, to put it briefly, that the world's central banks can try to inflate as much as they can, by creating money and supplying it to banks. But if banks are afraid to lend it out, or are rebuilding their capital base, and if businesses and consumers are afraid to borrow – and rebuilding their own balance sheets, meaning saving more and spending less – then there is not much that central banks can do.

One year later, I am sorry to see no real evidence that things have changed. If anything, consumers are even more afraid to borrow and spend now than they were a year ago. The heightened threat of becoming jobless may have a lot to do with this. Those who borrowed madly in the past are now in a kind of hangover. They are now trying to save more.

The markets themselves are bearing witness to this. If they feared inflation, interest rates would be much higher than they were a year ago. Instead, they are lower. A year ago, the US 10 year T-note yielded almost 4%. Today it yields just 3.17%.

The Commodities Index, CRB, has fallen from 325 to 259 in the same year. Though the Dow Jones has risen sharply since last March, remember that last October 1 it was close to 11,000, not the 9,700 area it is now. London's FTSE is up a bit: from 5,000 to 5,100. But that's just 2%. Japan has fallen from over 11,000 to 9,800.

Nearly every piece of real estate can be purchased for less money today than was the case one year ago. In other words, cash has been king this past year. And that is another way of saying that deflation dangers have still not gone away.

But one area has done better than the rest. Let's turn to precious metals.

One year ago, gold was $860. Now it is $1,042. Silver was $12.30 last September 30. Today it is $17.43.

For my readers who have been with me for years, I know I have been repeating the same mantra for all that time: Have the core of your net worth in a mix of cash and precious metals.

For my new readers, I repeat this, and point out that this approach has saved a lot of money that would otherwise have been lost. Both cash and precious metals buy more than they did one year ago, two years ago, and even farther back. I meant it as a cautious method to conserve money in perilous times, but it has turned out to be pretty much the best approach one could have.

There are those who are absolutely certain that the future will be high and even hyperinflation. There are others equally certain that deflation will be our eventual outcome. To me, it seems like nothing has changed in the 35-plus years I've been in this business. Back when I started out, there were the same arguments, the same certainty on both sides. Only the names of the combatants have changed.

For me, let's just say I'm not smart enough to know what the outcome will be. The only thing on earth that I am absolutely certain of is that I will die; that indeed everyone alive today will one day die. Speaking only for myself, I may die tonight or I may live 50 more years.

Beyond that, I am reasonably certain that history shows that paper money not backed by gold or silver loses value over time. One million dollars 50 years ago was a lot of money. It was even more money 100 years ago. Today, well, it's not chicken feed, but let's say it doesn't buy what it did 50 years ago, or even 20 years ago.

But in terms of assets like stock and property, one million dollars (or euros, etc.) buys more than it did one year ago.

This may just be a temporary development; it may be the start of a new trend. I am not going to bet everything I have on either one or the other. Instead, I've been protecting myself from both. And that's why I have been owning and building cash right along with the precious metals I own.

I have cash in case I am wrong about inflation vaulting the price of gold and silver higher. I have gold and silver in case I am wrong about the value of holding cash. I have tried to protect myself against both inflation and deflation. I own some real estate in case that goes up. It would make sense for me to own some general stocks that would do well if the world economy does well too.

In other words, my watchword has been to protect yourself in case you are wrong: to protect yourself against being hurt by any eventuality. This was my view one year ago, and it remains my view today.

To me, the future is unclear right now. We stand on a kind of knife edge. On one side lies deflation, and on the other inflation. I have tried to hedge myself against both, and yet not be hurt if either happens. The recommended combination of cash and precious metals has not only done well in the past year. It has done well since 2000.

And while I am watching developments every day, I see no reason to change my approach, which has worked so well. Of course, it has worked in the sense that it has given me more money in my net worth than a decade ago. But more important, it has enabled me to sleep well during all that time – a decade which has been very turbulent and disappointing for many if not most. And to me, this gift is priceless.

Good investing,

Chris Weber

Pocketing Cash from those Oblivious California Fools - $PZA

Wed, 07 Oct 2009 08:00:00 EST

By Dr. Steve Sjuggerud

Greetings from sunny California... one of my favorite places to visit, but a place I'll never call home.

I choose to live in Florida. Florida has no state income tax. And in my hometown, you can still park your car at any beach or on Main Street without feeding a meter. Not in California. And with California's current financial situation, it can never go back.

That's why I won't move to California. I know it'll cost me...

California's state income tax is among the highest in the country. And it is likely going higher... No wonder more people are moving out of the state than moving in. Property prices have crashed (so government revenues from property taxes have crashed). California's public schools rank among the worst. Unemployment is at record highs. The list goes on.

Instead of working on these problems, California's politicians are "balancing" their massive budget deficit by "using accounting tricks that couldn't fool a grade-schooler," according to legendary bond-fund manager Bill Gross. California has created questionable "IOUs" at a faster rate than your typical Latin American dictator. And California has the worst credit rating of any state.

In short, California is broke. It's no secret. But somehow, California's politicians are in complete denial. To solve its problems, California needs massive government spending cuts (ha!) and massive tax hikes (just try to pass those).

If California is in such trouble, who would do something as foolish as loaning California money? Well, I did... In January of this year, I recommended you buy California government bonds..

We were actually making a safe bet. I figured the U.S. government wouldn't let California fall apart. And the bonds were paying very high yields for government bonds – tax free.

We were actually making a safe bet. I figured the U.S. government wouldn't let California fall apart. And the bonds were paying very high yields for government bonds – tax free.

Back then, investors were scared. The best opportunities often appear during times of fear. So I recommended a way to profit from "those oblivious fools."

Today, I recommend you pocket your profits from that trade...

Back in January, I recommended the PIMCO California Intermediate-Term Bond Fund. The total return since I recommended it has been about 10%. That might not sound exciting, but a double-digit return in less than a year in boring municipal bonds is exceptional. Even better, a decent portion of that gain – all the income – is tax free!

But now, the trade is over. Here's why:

In short, the "free" money is behind us. Investors are not nearly as scared as they once were. The reward in California municipal bonds is no longer worth the small risk.

California tax-free bonds only pay about 1% interest above the national average for state tax-free bonds. The thing is, California is essentially bankrupt. Other states (while struggling) aren't.

As recently as June, the "spread" between California bonds and the other states was more like two percentage points. The current spread around one percentage point isn't worth it...

So take that double-digit profit and move it to higher ground. My favorite place to move that money and keep it tax free is the PowerShares Insured National Municipal Bond Fund. The symbol is PZA.

The tax-free yield is about 4.5%. You'd have to earn 6% in a taxable account to equal 4% tax-free.

I love California. But I don't want leave my investment dollars in the hands of California's government, not for such a tiny return. Pocket your cash from those oblivious politicians. Take the 10%. And move it to higher ground, in something like PZA.

Good investing,

Steve