By Porter Stansberry

Saturday, December 31, 2011

Strange things can happen during a currency crisis.

By now, DailyWealth readers are familiar with my claim that we're not just headed for a currency crisis, we're in one right now. I don't see how anyone can look at the recent collapse of the American banking system, the implosion of Fannie Mae and Freddie Mac, the bankruptcy of Europe, and the skyrocketing price of gold, and deny this claim with a straight face.

Fortunately, strange things happen in a currency crisis... and some "strange" advice I've been giving is turning out to be incredibly profitable for those who listened.

I've been telling investors for years that if they are unable (or unwilling) to hedge their portfolios by shorting fraudulent or highly indebted companies, the best thing to do is split your savings between cash and gold. This is how I stated it in the February 2010 issue of my Investment Advisory...

The safest thing to do right now is to split your savings between short-term Treasurys and gold. That's the equivalent of a "cash" position, as the gold will hedge your dollar exposure and the short-term Treasurys will mitigate the volatility of gold.

You can do this through exchange-traded funds (ETFs). The Barclay's iShares 1-3 Year Treasury ETF is an easy way to own short-term Treasurys. The symbol is SHY. And GLD is the most liquid gold ETF.

Many investors can't get their heads around this idea... or understand why I published it. Cash and gold represent two totally different ideas to them.

But that's precisely why it's perfect advice for conservative investors. You want to own assets that can soar in value during a currency crisis (like gold), while maintaining a cash position to mitigate the volatility of gold.

With this strategy, you stay away from the danger present in the stock market right now. You stay "hedged" and even set yourself up to make large capital gains.

Don't think it's possible to profit with such a defensive portfolio? Think again... anyone who took me up on my advice in February last year has watched his portfolio climb 24%... while stocks in general have swung up and down with incredible volatility. As I expected, gold has skyrocketed... gaining 44%. Cash, which I track with shares of the short-term U.S. Treasury bond fund (SHY), has gained just 3%.

You read that right: Investors in a safe, defensive "50% cash, 50% gold" portfolio have watched their portfolios grow 24%... without touching stocks.

As I've described in recent issues of my Investment Advisory, the risks to the global paper money system have never been greater...

In Europe, government debts continued to soar, until... eventually... the interest rate soared. Lenders realized there was no way they'd ever get their money back.

And it will happen here next.

The debt in many states across the country is mind-numbing. Illinois' pension liability now exceeds $100 billion. Roughly half is unfunded. In California, the pension liability is $50 billion. Another 10 states have unfunded pension liabilities in excess of $10 billion. The Pew Foundation estimates when retiree health care benefits are included, the total unfunded liabilities of the state governments currently exceed $1 trillion.

These debts are not currently on the books of any institution in America. They're merely promises made by our state and local governments. But these promises add up to a bill we cannot possibly pay – not if we plan to honor the $20 trillion the federal government currently owes (which includes all of the debts of Fannie Mae and Freddie Mac).

What does this mean for the future of America? I'm sorry... But it's not good.

That's why I continue to encourage investors who aren't comfortable hedging their long stock portfolios with short sales to simply go 50% cash and 50% gold. I expect the currency crisis not only to continue, but to escalate. This strategy will continue to protect (and even grow) your capital throughout the crisis.

Good investing,

Porter Stansberry

Further Reading:

Porter has been telling DailyWealth readers to buy gold and silver since 2006, when gold was just $650 and silver was just $12.50 per ounce. "It's going much, much higher," he wrote back then. Both "hedges" are up 140% in that time. Read his classic essay here: Why You Must Buy Gold, or Even Better, Silver, Now.

Market Notes

THE CHART OF THE YEAR... THE CHART OF THE MILLENNIUM

As we like to do each December, today, we present not the chart of the day... not the chart of the week... but the chart of the year.

Longtime readers know that ever since we started publishing DailyWealth in 2005, we've been outspoken bulls on gold (we were gold owners and gold bulls years before that even). To paraphrase Barbara Mandrell, "We were gold bulls when gold wasn't cool."

Our bullishness has paid off. Every year since 2001, gold has finished the year higher than where it started. The end of this year makes it 11 consecutive years of higher prices. Looking back over the past 200 years, we can't find a single other liquid, frequently traded asset that can make that claim.

Longtime readers are also familiar with the two fundamental tailwinds behind this rise. One, Western governments in the U.S. and Europe have taken on debts and obligations that cannot possibly be paid with sound honest, money. They will be paid with devalued, debased paper money. Gold, being "real money," rises as a result. And two, the relatively poor countries of Asia are growing richer. They have a centuries-old cultural affinity for gold and silver. And they are buying IN SIZE.

All this comes together to produce our chart of the year... the chart of the millennium. In a world that seems to embrace corruption, the "something for nothing" way of life, and government lies more and more each day, the bull market in real, honest money stands like a lighthouse on a dark night.