Saturday, October 2, 2010
I doubt your broker or the Wall Street Journal will reference Civil War finance as a way of explaining our current situation. That's too bad. Dead men tell no lies. And the last time the U.S. Treasury printed money on this scale was during the Civil War...
On February 25, 1862, Congress passed the Legal Tender Act, which allowed the government to pay its bills in paper, rather than in gold or silver. The law required merchants to accept these bills at face value. A similar bill was passed in 1863. By the end of the war, close to half a billion dollars had been printed. The result was a 25% increase in the money supply.
Not surprisingly, since the bills couldn't be discounted, merchants were forced to discount the bills' purchasing power by raising prices. An epic financial boom began as speculators used the sudden availability of money and credit to buy up hard assets, especially railroads.
Oliver Mitchell Wentworth Sprague, a professor of banking and finance at Harvard University in the early 1900s, wrote the seminal history of what happened next in his 1910 opus History of Crises. With each new wave of money, a mini-boom would follow, with gold serving as the single most important barometer of the money supply.
When Union forces won battles, the price of gold crashed because speculators knew fewer "greenbacks" would be forthcoming from the presses. When the Confederates won, the price of gold soared. President Lincoln was so angered by the role gold played in allowing speculators to profit at the expense of his greenback financing, he outlawed trading in gold futures... That resulted in an immediate 30% increase in the price of gold. The law was quickly repealed.
Much the same thing is happening today. The two largest monetary authorities in the world, the Federal Reserve and the European Central Bank, have begun to finance their operations by printing money, now called "quantitative easing."
It began in March 2009. What followed was a massive boom in asset prices, led by gold. When the Fed ceased its activities in March of this year, the markets immediately began to fall. And this latest rally? When did it begin? In late July, when the European Central bank began buying hundreds of millions of dollars worth of bonds with newly created money.
What is propelling the market lately? That would be the Fed's comments about restarting its own quantitative easing. The Fed's recent announcement about the low rate of inflation was Fed-speak for "we're about to turn on the presses."
Print money, gold will rise. Threaten to print money, gold will go up more. So far this year, it's up 18%, which will likely be its 10th consecutive annual gain. That's the longest winning streak for gold since 1920. (Paper financing of World War I led to a decade of gains then, too.)
Keep this in mind: Bullion has outperformed global equities, Treasury bonds, and most industrial metals, even though it serves no economic interest. When people buy gold, they are simply abandoning paper money. Perhaps even more significantly, silver broke out this week to more than $21, its highest close since October 1980. Silver is the poor man's gold, and its price gains reflect widespread unease about the future of paper money.
Yes, I know the upward pressure on asset prices isn't limited to gold and silver. Uranium, for example, has reversed its long decline (as colleague Matt Badiali predicted in July). But... the best way to protect yourself from the ongoing monetary debauchery continues to be gold – just like it was during the Civil War and World War I. (Private ownership of gold was outlawed by FDR in 1933 and continued until 1974.)
I first warned our subscribers in December of 2008 that the way OBAMA! was choosing to handle the financial crisis – and particularly, his handling of the massive bad debts at Fannie and Freddie – would lead to the end of the dollar standard. At the time, most people thought I was nuts.
The world's leading economy, the United States, has become fantastically indebted at every level of society... With a currency and a budget process totally untethered to any reality, nothing limits the amount of foolish spending Congress can (and will) authorize... . [But] it is only a matter of time now before our creditors realize America's government is just as bankrupt as Iceland's. 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
Nothing about my outlook has changed. My top recommendation then was to buy gold bullion, which was trading around $800 per ounce at the time. Bullion is now about $1,300 an ounce. My second-best suggestion was to buy gold mining stocks through the Market Vectors Gold exchange-traded fund (GDX). The fund was trading for less than $30 a share then... It has almost doubled since.
You can think of the situation today in the same way Daniel Drew – a 19th century railroad speculator – must have viewed Lincoln's greenbacks. Whenever there's an economic setback, you know OBAMA! and company are going to print more money.
Every bit of bad news is going to be met with more money. Only this time, our leaders aren't issuing paper money to fight a war. This time they're using paper money to cover their own mounting bad debts, which arose because of socialist spending programs. In short, they're using paper money to fight a war against economics and human nature. My bet? They lose that fight. And that's why I think gold and silver are still a good bet.
If you'd like to know the absolute best ways to invest in gold, we recommend you pick up a copy of The Stansberry & Associates Gold Investor's Bible. No, we don't usually publish books. But we think S&A collectively knows more about gold investing (be it bullion, ETFs, coins, or certificates) than anyone else on the planet. And we think gold is one of the most important investments you can make right now. That's why we're giving this book away for free.
We've been covering gold since 2003, when it traded for around $300 an ounce. Since then, we've become friends with the best gold analysts, gold dealers, and gold traders in the country. And they've all shared their best secrets with us. We want to pass those secrets along to you.
Our new gold book shows you how to collect dividends of 20% a year on your gold and how to save hundreds, even thousands, of dollars when buying gold bullion. We also explain how to avoid paying tax on your ETF sales and how to legally take as much gold as you want out of the country. In short, we tell you every trick and gold investing strategy we've discovered over the past decade. To learn how you can receive your free copy of The Stansberry & Associates Gold Investor's Bible (you just pay $5 shipping and handling), click here.
Date Range:9/23/2010 to 9/30/2010
Date Range:9/23/2010 to 9/30/2010