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Weekend Edition

The Best of The S&A Digest
Saturday, May 10, 2008

The surest sign of a civilization in decline is inflation.
 
Governments throughout history have resorted to debasing their currencies to meet their expenditures beyond tax receipts. We hardly think twice about inflation anymore. After 70 years of this kind of cheating, we've come to expect it.
 
Luckily for our feckless leaders, it is easier than ever to rob the citizens of their savings, too. In the modern world, the "emperor" doesn't have to bother employing an army of coin clippers. The government simply credits its account at the Treasury with as many digital dollars as it needs. Counterfeiting has never been easier.
 
But... a funny thing happened along the way to a complete breakdown of the world's monetary regime. The old-fashioned parts of the system – circulating coins – have begun to reveal the fraud. A penny, which isn't even copper anymore (it's 97.5% zinc and 2.5% copper), costs 1.26 cents to make. And a nickel, which isn't really nickel either (it's 75% copper and 25% nickel), costs 7.7 cents.
 
Copper and nickel prices have tripled since 2003, and zinc has doubled. One congressman estimated minting the coins at these high prices cost taxpayers $100 million last year.
 
Like pennies and nickels, gold coins rise in cost as our government debases its currency. They're a noncorrelated asset (meaning they don't follow the value of the stock market). And from time to time, rare gold coins will make you a tremendous amount of money – they've done pretty well since 2003 when we began recommending them. Click here to access our report on our favorite gold coins to buy now.
 
The downturn in the economy means huge profits for pawnshops. And it's not just gas-station attendants and waitresses fueling the growth.
 
A Philadelphia pawnshop reported making more loans to upper-middle class citizens and businesses. One local, high-end jewelry shop pawned $150,000 of inventory just to make payroll. Investors are pawning gold and diamonds to cover margin calls on stocks. And a Grammy-nominated Philadelphia musician pawned 30 guitars, worth $170,000, to cover mortgage payments on properties he bought during the real estate boom.
 
Sean Goldsmith attended Berkshire Hathaway's annual shareholders meeting. Here's what he heard...
 
Buffett thinks small investors shouldn't buy Berkshire Hathaway stock. He thinks he'll be lucky to grow the business 8% to 10% in the future (versus 22% a year in the past).
 
Due to Berkshire's size, it's difficult to find companies large enough to make a difference in the bottom line. Buffett estimated a company would have to be $50 billion or larger to generate a reasonable return, and outperformance is difficult when investing in a universe that small. Buffett said if a small investor is willing to look at thousands of companies, he'd find more attractive businesses than Berkshire.
 
While naifs blame the oil companies for rising prices and demand the counterfeiters in Washington do something about it, we're willing to bet Washington is no better at ginning up oil supplies than it is at running a balanced budget.
 
As such, regardless of what Congress says, oil prices are very likely to keep rising. Readers of the S&A Oil Report are doing a pretty good job riding the bull. They're up 176% on Brazilian oil giant Petrobras (PBR); 61% on Transocean (RIG), the world's largest offshore driller; 60% on Chevron (CVX); and 96% on Occidental Petroleum (OXY). And the huge gains won't stop there. We're in the midst of the biggest energy bull market of our lifetimes.
 
William Doyle was rich when he was earning $780,000 a year to head Potash Corp of Saskatchewan and held $7 million in stock options at the end of 2003. Then the agriculture boom hit, and fertilizer prices soared. Potash prices have gone from $100 a ton four years ago to more than $600 today, and some forecasts call for $1,000 by year's end.
 
The company's share price followed suit, quadrupling in the last 16 months. Now Doyle's stock options are worth almost $600 million – a number never before seen by an executive of a Canadian public company.
 
The ag boom is making people very rich, and Tom Dyson found the best way to play it. His latest International Strategist recommendation is another potash mine. If we assign a forward P/E multiple of two to Tom's pick, it's worth $2 billion. Right now, the stock trades for just over $500 million.
 
Meanwhile, Potash Corp trades for 43 times earnings (a tad rich, perhaps?). When you buy Tom's stock, you get an energy, timber, and metals business for free. To learn more about International Strategist and receive Tom's latest pick, click here...
 
Good investing,
 
Porter Stansberry and Dan Ferris




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