This year, the federal government is conducting a fiscal experiment – something that's never been done before.
The government will attempt to borrow 50 cents of every dollar it spends, pushing our annual deficit to more than $2 trillion. This amount of deficit spending will equal between 15% and 30% of our country's total GDP. That's a level of fiscal stimulus that's never been attempted before – ever, except in time of war.
There is a war of a kind underway. Most people don't understand it because it's not a war that involves soldiers or guns. It's a war against sound money. It's a war against creditors. While every battle involves uncertainty, there is no doubt who will win this war: inflation.
Last year, I began to write about my fears the government would go overboard in its efforts to prop up the banks and the economy. Those fears have more than come to pass. In addition to the enormous amount of fiscal stimulus, the Federal Reserve has tripled the size of its balance sheet and bought long-duration U.S. government bonds, monetizing our debts. We will pay for this profligate spending, not through constitutional means – as approved by Congress – but through inflation.
Right now, inflation is moving various base metals, financial stocks, and transportation stocks higher. But the best and most historically significant way to protect yourself from the debasement of the currency is through gold.
At the end of last year, when I could see what the government was going to do to our money, I recommended readers of my investment advisory buy shares of the gold miners exchange-traded fund (GDX). As you can see, the recommendation has done very well. We're up nearly 60% in about six months.
I told my readers to buy gold stocks because I noticed the spread between the gold-mining stocks and the metal itself had never been larger. You can see the big gap with your own eyes in the following chart. (The price of gold is in red – GLD – and the price of gold stocks is in blue – GDX.)
For obvious reasons, the price of gold and the gold-miner fund are normally tightly correlated – as they were at the beginning of 2008.
But then, in the big financial blowup, the shares of gold miners fell while the price of gold remained essentially unchanged on the year. Why? Because when hedge funds were forced to deleverage as credit became scarce in the third quarter of 2008, they had to sell their holdings – which included gold stocks. The unwinding of many leveraged commodity bets created an unusual anomaly between the price of gold stocks and the price of gold itself.
As you can see, the gap between the two, which went as wide as 40%, hasn't yet been closed fully and still stands at about 15%. If you don't own gold bullion yet, I hope you buy some soon. It's going much higher. If you want extra leverage to this rise, it's not too late to take a position in gold stocks. The war against sound money will send them hundreds of percent higher in the next few years.
Good investing,
Porter Stansberry
P.S. The downside to buying gold stocks, of course, is they are extremely volatile. But I recently showed readers of my Put Strategy Report how to profit on gold stocks while reducing the impact of that volatility and collecting cash up front.
Essentially, we can go back in time to when the spread between gold stocks and the price of the metal was near its widest point, recapturing the same incredible opportunity we had last December. To learn more about my strategy, click here.
Our chart of the week is the U.S. government's worst nightmare. It shows the uptrend in the cost of borrowing money.
As we've mentioned many times in the past few months, we expect the government's "bailouts for everyone" policy to produce inflation. This theory is market-approved... as shown by the declining dollar and soaring gold stocks.
Another picture of inflation at work: The interest rate on 10-year government bonds is soaring right now. This week, the rate jumped to its highest level since November 2008. Uncle Sam's creditors are getting worried... and we are entering dangerous times.
Today, I'm going to share several of my favorite technical indicators and patterns. Becoming familiar with them will help you to spot the best trading opportunities in the market.
