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June 8, 2010
Alert 44-2
Why Gold Is a Sure Long-Term Bet
Here’s an important warning – and recommendation – from Porter Stansberry, one of our favorite analysts. We hope you’ll heed his advice about “the greatest single investment decision of your life.”
What a spectacle ...
In an utter and complete repudiation of its founding principles, the European Union's central bank (ECB) has decided to copy the U.S. Federal Reserve's 2008-2009 strategy of "papering over" Europe's massive debt problems. The ECB will provide nearly unlimited credit to Europe's sovereign borrowers, while also buying troubled assets from Europe's largest banks.
This latest development has caused a significant change in what I call "the most important chart in the world."
Readers of my investment advisory are familiar with the chart by now... as we've been publishing it nearly every month. It shows the value of U.S. government long bonds (represented by the fund "TLT"), the price of gold (represented by "GLD"), and the price of silver (represented by "SLV").
This is the battle for monetary supremacy... The market is arguing over a fundamental question: What is money? Dollars? Gold? Or silver?
For more than 60 years, the U.S. dollar has unquestionably been the world's safest, most liquid form of money – its reserve currency. During times of economic trouble, investors rush to buy U.S. bonds as a safe haven, causing their value to rise sharply.
And that's what happened – briefly – during the Greek crisis in April. But then, something changed. As soon as the ECB announced its big bailout and established a swap line with the U.S. Treasury (more about this below), investors realized there's no real difference between the U.S. dollar and the euro. They are simply different names for the same thing: paper money. And investors understand the value of paper money may finally collapse under the weight of these massive sovereign debts.
What did investors buy when they sold the U.S. dollar in this crisis? Where did they run? As you can see, in reaction to the ECB announcement, investors bought gold... and to a larger degree, silver. I believe this preference for metallic money will continue to strengthen as the financial problems of the U.S. Treasury begin to mount.
If you ignore this trend, you will be financially destroyed over the next several years. If you act now to protect yourself and your family, it will be the greatest single investment decision of your life.
Now ... let's look more closely at what the Europeans have done to stave off the collapse of the European Union ...
To maintain a veneer of legality, the ECB will create an off-balance-sheet entity to "borrow" roughly $1 trillion from itself, the U.S. Federal Reserve, and the IMF. Europe's member states agreed to guarantee these debts, which the ECB claims will be "riskless" because they're simply loans between central banks.
At the root of every paper currency arrangement is a simple scheme to grant credit where none is due. In this case, the scheme is designed to give credit to bankrupt governments in the European Union, via guarantees from those same bankrupt governments and additional credit from the U.S. Treasury, which is itself a troubled creditor at best.
In short, the ECB is going to print up lots of euros and give them to the least creditworthy states and the worst bankers in Europe.
The politicians apparently believe this massive infusion of new money and credit will "jumpstart" the European economy, which will then produce enough tax revenue and banking profits to finance these new debts. Don't laugh ...
Meanwhile, to ensure this action doesn't result in a collapse of the euro currency, the Federal Reserve has agreed to open a "swap" line, which will allow the ECB to fund as much of these new "loans" with dollars as is necessary to prevent a run on their currency.
Will this work? At the risk of dramatic future inflation, will creditors really be willing to accept devalued euros, which offer investors almost nothing in interest payments? I don't think there's a chance in hell.
The reason paper money systems always fail is because they provide no practical limit to credit. New currency reserves can always be printed. Bad debts – credit defaults – can be "papered over" rather than restructured. The stability of paper money systems seems like a virtue. The ability to simply manufacture money – without a deposit or true asset as collateral – is the ultimate financial sinecure. As long as confidence in the system remains, the amount of credit that can be manufactured seems limitless.
Unfortunately, this always leads to more debt. At some point, the whole system simply collapses. The debts become so large, they create an untenable economic imbalance, overwhelming the real economy. And when the credit bubble finally bursts, it doesn't destroy just one or two banks' house of cards. It wipes out the entire system, which is linked together by the currency itself.
Remember... this just isn't about problems in far-off Europe. The U.S. is in the same situation: under huge debts we cannot hope to repay.
As early as late 2008, I warned the U.S. had embarked on a massive inflation – the creation of money – designed to save our banking system.
I believed this marked the beginning of the end for the U.S. dollar paper standard. And the imbalances in our economy had become so large they had warped the real economy: Americans no longer made anything or saved anything (no deposits and no true assets to back up the money).
They'd come to believe they could grow wealthy merely by trading houses with one another, effectively manufacturing money. It was an enormous delusion, bringing about the largest accumulation of debt in human history, a debt bomb enabled by the first truly global paper currency – backed by nothing at all. Here is what I wrote then ...
We are past the liquidity crisis. The forced selling has come to an end. We are now beginning the solvency crisis... With a currency and a budget process totally untethered to any reality, nothing limits the amount of foolish spending Congress can (and will) authorize... We are witnessing the end of the paper-dollar standard. Like every experiment with paper money in history, our paper dollar will be destroyed in an all-out attempt to paper over deficit spending, bad investments, and war debts.
– Porter Stansberry's Investment Advisory, December 2008
I told you the best way to protect yourself from the reckless and unlimited money printing was to buy gold: "Buy as much gold bullion as you can reasonably afford." And because gold shares were crushed in the bear market of 2008, I specifically told my subscribers not only to buy gold, but to buy gold stocks: "There has literally never been a better time in history to buy gold stocks."
Back then, gold was trading for around $850 an ounce. And the fund of gold-mining stocks I recommended was trading at a little less than $30.
Today, as you surely know, gold trades for around $1,200 and the mining fund is close to $50 per share. At one point after the ECB announced its big bailout, the gold mining fund shot up almost 10% in two trading days.
While some pullback is expected to follow after such a sharp rally, these big moves in gold and gold stocks are likely to continue. More and more people are beginning to realize gold is the only stable currency left. The paper currencies of all of the sovereign issuers are not only troubled, they are all ultimately backed by the U.S. Treasury.
I believe my prediction and advice to buy gold is the most important thing I've ever written.
I don't think this merely because the prices of gold and gold stocks have shot up. I think this because the underlying fundamentals have deteriorated in exactly the way I predicted.
Before the bailouts began in late 2008, total U.S. government debt held by the public stood at around $5 trillion. Today, total U.S. government debt held by the public stands at almost $10 trillion. It has doubled in less than two years. The rate of new debt issuance is still completely out of control. This April, the U.S. government's deficit totaled more than $80 billion. This marks the 19th month in a row the U.S. government has run a monthly deficit. That's the longest string of monthly deficits ever.
Moody's now warns it may downgrade the U.S. Treasury's debt as soon as 2013 because interest payments on our national debt alone could surpass 20% of federal revenue by then. That leaves only 80¢ of every dollar in tax receipts to pay for Medicare, Social Security, defense, etc., which we already can't afford (hence the 19 straight months of deficits).
I'll keep hammering away at these issues because all of these problems are going to get a lot worse.
As I see things today, the ECB's actions prove that all of my concerns about the future of our paper money system are valid. Not only is the ECB prepared to print as much new money as necessary to protect its banks and sovereign borrowers, the Federal Reserve is backing the plan. How will these systems survive if the U.S. is downgraded?
Investors will continue to seek safety in gold (and silver), pushing prices higher at a faster and faster pace until they see a serious and credible effort to bring the U.S. deficit under control. But that won't happen.
Barack Obama is on the verge of losing control of both the U.S. House of Representatives and the Senate. His ability to raise taxes will probably disappear. Even so, there has never been – nor will there ever be – any real political support for drastically reducing the size of the federal government.
As a result, the U.S. dollar will collapse. It's no longer a prediction. It is a certainty. Few people believe me yet, but more and more people have begun to consider my repeated warning: The U.S. dollar will lose its standing as the word's reserve currency.
This will happen far sooner than anyone can imagine. And the destruction of our currency will wipe out most of the middle class in the United States and lead to a decline in our standard of living.
Given these facts, I once again urge you to buy as much gold bullion as you can reasonably afford and store it someplace safe. It's the single most important financial step you can take right now.
Good investing,
Porter Stansberry
P.S. As I said, I think you should hold a large portion of your wealth in gold bullion – not as a trade or as an investment, but as a form of savings. If you want to invest in what I believe will be a soaring gold price, I encourage you to check out what some people have nicknamed the "Colorado Gold Bank." It's an incredible way to compound your gold holdings safely and steadily (and it has nothing to do with regular gold stocks, ETFs, options, or mutual funds). You can learn about this investment here.
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