In recent statements made by federal reserve chairmen, “Helicoptor Ben” said he would continue to goose the economy with the $600 billion Treasury bond buying program. Despite reports that the program would be cut short due to a strengthening economy we know this simply isn’t possible. The federal reserve must raise the debt ceiling and debase the currency in order to bailout state budget deficits, pension funds, social security and bad debt held by banks and consumers.

“If output is too low and unemployment is too high, then that would be a situation that requires more stimulus.” – Ben Bernanke

Not only do we believe that QE2 will be carried out in its entirety, but we also believe QE3 is already on the table. Rising interest rates on our massive debt load would be catastrophic, as would a failure to raise the debt ceiling for the US government. All of the liquidity injections and bond purchases are destroying our currency. Paying attention to the price of gold and the chart below will help you understand how close we are to piercing through key technical levels.

The Federal Reserve is holding a two-day meeting to address lackluster jobs numbers, weak growth and low inflation. Ben Bernanke seems optimistic that the purchases of government debt will spur economic growth, while some economists like Marc Faber and Paul Volker disagree. Stagflation and hyper-inflation are two words being thrown around by skeptics while others argue that QE2 simply won’t be big enough.

Analysts disagree on size and scope of quantitative easing, but most agree that the dollar (NYSE: UUP will suffer in both the short and long term. This dollar devaluation is necessary to bail out state budget deficits, pension funds and bad debt held by banks. In summary, our currency will be sacrificed to make toxic assets appear healthy. The problem with this logic is that debts will be repaid in devalued dollars with reduced purchasing power.

Disclosure: Author is long gold at the time of publication.

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Canadian Based Company with  Huge Gold Reserves

NovaGold Resources Inc (AMEX:NG, Free Analysis!), a Canadian based minerals and exploration company may not have notable production, but it holds one of the world’s largest unhedged gold reserves. While the company came under fire in late 2008 for delaying mining infrastructure plans, its assets have made a dramatic increase in value. NovaGold owns 50% interest in two of the worlds largest underdeveloped copper-gold properties. With proven reserves of over 17 million ounces of gold and another 12.5 million ounces of measured and inferred reserves, the company is extremely levered to the price of gold.

With precious metals reserves increasing so quickly, the company could once again attract several suitors. Barrick Gold made an offer in 2007 and was quickly rejected, undervaluing NovaGold’s massive unhedged reserves. This time around things could be different. Gold mining companies could finally step up to the plate with reasonable offers in effort to replenish depleting reserves. In any case, Novagold is said to have plans in the works to begin infrastructure build out at Galore Creek. The transition from a exploration and development company to a gold producing company could be extremely profitable for investors. Paulson & Co. and Soros Fund Management have taken large stakes in the company, collectively amounting to greater than 15% of the total shares outstanding. In a recent announcement, Paulson & Co has filed a 13D with the SEC declaring a  9.10% stake.

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Small Silver Producer with Projects in China

Silvercorp Metals Inc, (NYSE:SVM, Free Analysis!) explores and developes mining properties in Canada and China. The company has several projects focused on silver, lead, and zinc mines in the Ying Project, the HPG Project, the TLP Project  and the LM Project in China. It also has interests in the Silvertip project in northern British Columbia, Canada. A well financed company with over 75$ million in cash equivalents, Silvercorp should be able to expand and grows reserves going forward.

The company is particularly attractive based on its foreign asset reserves, particularly in China where it produced better than 4.5 million ounces of silver. Inflation coupled with a rise in industrial demand for precious metals should send this stock higher. Silvercorp Metals also pays a small but significant dividend of 1% for long term investors. With silver making huge moves higher it would not be unreasonable to see dividend hikes in the future. Asian countries have seen tremendous growth GDP figures. These gains could not have been possible without large quantities of industrial metals for infrastructure build out, automobile manufacturing and electronics production.

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Small  Producer with Silver Assets in Mexico

Endeavor Silver Corp, (NYSE:EXK, Free Analysis!) is a Canadian based mining company with large silver mining assets in Mexico. Known as the world’s top producer of silver, Mexico has political stability and a favorable tax structure. Because of its history as a world leading silver producer, the country has developed a skilled work force and strong commitment to natural resource development.

The company is well on its way to becoming a premier mid-tier silver producer. After a 10% increase in year-over-year production in 2009, Endeavor forecasts a 20% gain in 2010. Enjoying multi-year high gold and silver prices, the company has increased margins while reducing cash costs. Looking to acquire and buyout smaller mining companies in effort to grow reserves, Endeavor recently made an all cash offer for Canadian based Cream Minerals.

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Disclosure: Author is long all of the stocks mentioned in this article at the time of publication.


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Blue skies await this 11.50 Billion dollar company after today’s breakout candle. After 3-years of consolidation Minas Buenaventura finally pierced through its previous all time high of $42.32 from late 2009. When a stock breaks above all previous levels of resistance, this is known as a “blue skies breakout”. Hitting $45.20 on September 30th, 2010, BVN looks poised for a move even higher as selling pressure eases and remaining shorts cover.

As mentioned earlier, Compania de Minas Buenaventura (BVN) is set to take advantage of rising precious metals prices. Lower energy and infrastructure costs coupled with higher gold and silver prices have helped improve margins. Best of all, margin expansion should lead to higher dividends in the future as profits increase.

Disclosure: Author was long shares of (BVN) at the time of publication.

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One of the best aspects of the book is its ability to explain complex economic principles in a simplistic fashion. This allows the book to communicate to a wide range of audiences – especially novice investors. This allegorical tale sheds light on topics that are so frequently discussed but so poorly understood.

From the Back Cover of the Book

• Why governments can spend without ever seeming to run out of money?
• Why some countries are rich while others are poor?
• Whether spending or saving is the best cure for a bad economy?
• Where inflation comes from?
• Why it’s so hard to catch a fish with your bare hands?

Coming off his popular book, Crash Proof 2.0, Schiff compares the United States economy to a small island economy. He describes how an economy that was once on top of the world, is now burdened with unfunded liabilities and massive deficits. Moreover, he presents a case for the United States no longer being the engine of the global economy, but the caboose.

“The conventional wisdom is that foreign economies depend on Americans to buy their exports. This is false. The global expansion of the past decade has created new demand everywhere, and people and businesses in all corners of the world are spending. However, in America, spending has largely been achieved through a massive vendor financing scheme. Foreign supplied credit has allowed Americans to continue buying, even while American income and savings have dropped. As this credit goes bad, the losses are landing on the bottom lines of foreign financial firms. In other words, the global pain is not resulting from American contraction but from having financed our preceding expansion. This is a critical distinction few have been able to make, and it is vital to appreciating the decoupling that has already occurred beneath the surface.”

Rising Fuel Costs

It is well known that prices of fuel have been creeping back up. Crude oil is already touching $80.00 again. Since Burlington Northern Santa Fe is a transportation company utilizing trains, it would seem that Buffett is betting on oil maintaining or more likely increasing in cost (inflation). Transportation by train simply isn’t nearly as efficient as transporting by truck with crude oil below $50.00 per barrel for prolonged periods of time. However, as fuel costs move higher transportation by train gains a competitive advantage. If you take the entire loaded weight of a typical freight train and divide it over the amount of gasoline it uses – freight trains could potentially move one ton of material over 400 miles on a single gallon of gas. Warren Buffett’s bet on train freight becoming increasingly popular over trucking is a bold bet on the price of oil and other fuel sources rising.

Dollar Devaluation (Inflation)

Trains transport a variety of goods, but are notorious for their use in commodity transportation. As you might already know commodity prices rise when demand increases or currency devalues. With the dollar at a 14-month low it would seem like Mr. Buffett is also betting on a inflation. Not only is Buffett buying a hard asset in Burlington Northern Santa Fe, but he is also betting on increased commodity prices. Companies utilizing train freight benefit from increased margins when commodities rise in price. This is especially true when the value of the commodities they transport rise more than the fuel used. Since trains are one of the only methods for transporting commidities they have huge negotiating leverage for shipping rates.

Intangibles

Because of the massive amounts of land requirements and infrastructure needed to operate a railroad, increasing competition is highly unlikely. Only existing railroad companies will compete with Buffett’s acquisition. Secondly, the railroad industry has been hard hit by the recession. This makes the price attractive to a value investor like Buffett,  scrambling to diversify out the US Dollar.  Providing the economy doesn’t double dip or fade Buffett may very well be getting in at the trough. Lastly, transportation by train is environmentally friendly and therefore appeals to the green movement.

The railroad industry is a great place to be in the current economic environment. Rising inflation coupled with increased fuel costs give transportation by train a major advantage over other forms of transportation. Gold bugs solidified this thesis immediately after the buyout announcement, sending gold higher by 25 dollars per ounce to $1089.10.  Oil also staged a small rally after the news was released. All of these factors support the thesis that Buffett’s bet on the railroad industry indicates serious potential for inflation and increased fuel costs. Examining this purchase more closely seems to hint their is more too it than meets the eye.


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Dollar Devaluation and Inflation

Although prices haven’t immediately risen, inflation is alive and well. By nature inflation is caused by an increase of the money supply or a large change in supply and demand for goods.  Simply stated, increasing money supply  always causes inflation because the underlying currency is devalued. Currency devaluation is very negative, despite what you might have been told. Devaluation through inflation steals from people who save their money. At the same time debtors are rewarded since the debt owed is  devalued. Worse yet, inflation and devaluation discourage savings and encourage spending. Hence the reason, both tactics are used during weak economic periods of time.  This key point also explains why Ben Bernanke has chosen to trash the dollar – the average US consumer is heavily saturated in debt.

Free Report: Get a Complete US Dollar Analysis Today!

US Dollar Carry Trade Beginning

Up until recent months the Japanese Yen was the currency of choice for the Carry Trade. For those who don’t already know, a carry trade exists when one country has much lower interest rates than other countries. The country with low interest rates buys up currency and assets of other countries with higher interest rates in order to achieve a better return.  With the recent decrease in US interest rates the Yen Carry Trade is unwinding and the new US Carry Trade is starting.  Now countries like Japan are selling the US dollar and buying back stronger currencies and assets. This unwinding process will put even more pressure on the US Dollar.

Trapped Inside a Box

Nothing has changed from a fiscal perspective in relation to the federal reserve. While the Obama administration boasts a policy of change, nothing has changed for the federal reserve. Ben Bernanke is well on his way to an unprecedented dollar destruction with Alan Greenspan at a distant second. Current policies could easily result in the most sever dollar destruction in history. With the economy still being fragile despite massive stimulus and spending, further dollar dilution will surely be on the way. After all, the federal reserve is trapped inside a box. If they let interest rates linger this low for long periods of time hyper-inflation will occur. If the fed tightens monetary policy to defend the dollar, the economy will go into a deflationary recession. We know this scenario won’t occur since Bernanke once stated that he would rather drop money from helicopters than suffer another deflationary depression. In either scenario bad consequences exist for the economy.

Consequences of Inflation

• Increased money supply is always inflationary
• Inflation steals value from existing currency
• Inflation helps debtors – hurts savers
• Commodity prices increase
• Middle Class and Poor Lose
• Upper Class Wins

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