Daily Crux reader,
The markets are closed today for the holiday weekend, so we won’t be publishingThe Daily Crux in its regular format.
In place of your regular AM and PM issues, we’re passing along a recent editorial from our colleague Porter Stansberry which he published this week in the S&A Digest.
As you'll see, Porter just admitted to a big mistake... and he's giving away one of his best ideas to rectify the situation.
If you only read one thing today, make it this.
Good investing,
Justin Brill
Managing Editor, The Daily Crux
www.thedailycrux.com
----------------------------------------- The single best way
to hedge against the U.S. dollar
By Porter Stansberry in the S&A Digest I'm going to give you a very big investment secret today. You'll want to print this one out and put it some place where you'll find it once every few years to remind yourself of this supreme lesson in how to hedge using certain precious metals stocks...
First, though, let me say the reason I'm going to tell you about all of this is because, frankly, I'm a little disappointed in our group's work over the last few days. When you see the world going to hell right in front of your eyes... when you see your country making the same basic economic mistakes that have condemned other nations to poverty for decades... it's depressing.
Looking at our work over the last few weeks, I realize we – Stansberry Research – have gotten pretty dark and pessimistic. There's no excuse for it. You're not paying us to tell you what's wrong in the world. You're paying us to tell you how to protect yourself from what's wrong in the world. And we need to get back to work.
So... today... let me show you the absolute best thing you can do to protect yourself from the growing risk of collapse in the world's paper currency system. I want every subscriber to be familiar with these ideas. These strategies are vastly more powerful than simply buying gold or silver or moving money offshore. As you'll see, the world's biggest hedge funds and money managers don't know anything about this particular strategy, so you can still get into these investments at the "ground floor."
To make up for the last several days of moping, I'm going to give you these ideas for free. Yes, really. I hate giving away good ideas. But... I feel like I've got to in this case because... well... you'll understand once you see what I'm talking about. These are more than just great investment ideas. This is pure logic applied to business. And frankly... it's beautiful.
Let me start with a story, as it was told to me a few years ago by Rick Rule. You might not know Rick's name, but he is the world's leading resource banker and has been since the early 1970s. If you want to build a mine almost anywhere in the world, you talk to Rick Rule about getting the money to build it. In the early 2000s, I sat down with Rick over a steak dinner in San Francisco. It was then I learned one of the most powerful business ideas of my entire life...
I don't have a recording of the conversation, so this isn't a perfect transcript. But I'll never forget the basics of what Rick told me. "The problem with the mining business is that it's a horrible business..." Rick began. "Absolutely horrible. You've got a declining asset base – a mine – surrounded by a bunch of incredibly expensive capital equipment that's constantly breaking down. Worst of all, you're totally exposed to multiple generations of politicians, since you can't move the mine. They all want their cut. They all believe your mine is their mine. And finally, all of these moving parts are being managed by mining company executives, who, you won't be surprised, aren't normally the sharpest knives in the kitchen...
"As a consequence, during the long bear market in metals prices (1980-1999), you could buy enormous mines for literally pennies on the dollar, based on reserve value. I knew I didn't want to go into the mining business. But I also knew that, sooner or later, thanks to inflation and paper money, metals prices would go much higher. I wanted to own as much silver as I could. And the cheapest way to buy it was buying silver still in the ground.
"In 1992, one of the world's largest owners of silver mines – Silver Standard – was struggling. We ended up buying the company for around $2 million. It was a complex deal, but that's roughly our basis. And then... we did nothing. Well, almost nothing. Instead of exploiting the assets, we simply held them. We didn't want to mine the silver. We only wanted to own it. As other well-proven mines came up for sale, we bought them too. But we never mined an ounce..."
Today, about 18 years later, Silver Standard is still the world's largest owner of silver resources. But its market cap is now $1.4 billion. That's a 700-fold return on capital. Imagine putting $10,000 into a deal like this, simply as a hedge against inflation. You'd be sitting on nearly $7 million today. Even as late as 1998, you could have bought Silver Standard on the open market for less than $4. It hit a recent peak near $50 in 2007.
This strategy – of buying resources in the ground and simply holding them – is called "hoarding." It's an unusual way to approach the mining business, but if you believe the U.S. dollar is going to collapse, it's perfectly logical. Why waste time, capital, and energy mining silver so that you can exchange it for paper? Why not just hold it until such time silver becomes money again?
Am I saying now is the time to buy Silver Standard? No, not necessarily. The company recently decided to move away from the hoarding model. Matt Badiali covers it in his letter, the S&A Resource Report, and you'll have to read Matt's latest review of the company for more details. The point of my story is that when it comes to using gold and silver as a hedge to cover your exposure to paper money or the declining solvency of the U.S. government, certain strategies can be vastly more effective than simply buying gold or shorting Treasuries.
Hoarding is one of the two strategies I want you to know about. It's one of the best ways to hedge your exposure to the U.S. dollar and the world's paper currency system. But it might not be the No. 1 way to hedge. What could possibly be better?
The hoarding strategy suffers from two big problems. First, until the mine is in production, the metal you can get out of the ground economically is relatively unknown. You can estimate the value of a future mine by drilling and assaying, but you can never really know for certain until the mine is producing. As a result, the market greatly discounts nonproducing mines. The second problem with hoarding is financial: Investors must continue to put up capital to maintain their rights to the property. There are taxes and services fees as well as management overhead. Hoarding is typically negative cash flow, which puts the assets in jeopardy during periods when capital becomes hard to find. These two factors make hoarding companies incredibly volatile, which is why you have to buy them at the right times and fully understand how they work. Unless you truly understand how and why this approach works, y ou'll never survive the volatility.
Now... what if you could accomplish the same objective as hoarding – controlling vast amounts of metals – but only using mines that are in production? And what if you could do so in a way that produces lots of cash flow, so that you could also introduce a reasonable amount of leverage in the deal? You can.
The "royalty" strategy is essentially a hoarding strategy – but using only operating mines and adding in leverage through sliding scale royalties. Royalty companies have the greatest business model I have ever seen. It's beautiful. Here's how it works...
The best-known royalty company is Royal Gold. Royal Gold raises money by selling shares and carries almost no debt. It invests that money directly in 23 different active gold mines. It also invests in 10 mines that are in development. And it puts a small amount of money into 80 different exploration projects. In return for its capital, Royal Gold gets a permanent royalty from the mines' production.
There are different types of royalties and percentages – all of them are listed in Royal Gold's annual report. The royalties go as high as 15% of production, but most of them are less than 5%. This business model allows Royal Gold to lock up decades worth of gold production at today's price. In addition, many of their royalty deals have a sliding scale based on the current spot price of gold. The higher the price of gold, the higher the royalty Royal Gold receives.
How well does this strategy work? It works so well it's hard to believe anyone invests in gold or silver in any other way. Look at the chart below. And consider this: Since inception, investors in Royal Gold have earned an unbelievable 179,300% on their investment. Yes, the numbers are right. In 1992, you could have bought Royal Gold for three cents per share. Its recent high price is more than $53. Even if you'd only invested $10,000 into Royal Gold, your grubstake would now be worth about 180 times more – almost $18 million. 
These kinds of investment returns are so large they seem implausible at best. How could these companies make so much money? The answer lies in our monetary system, not in the companies themselves. You see, the more money the Federal Reserve prints, the more demand rises for safer alternatives, like gold and silver.
These two strategies – hoarding and royalties – are designed to provide investors with the maximum leverage possible to the rising price of precious metals. As long as the Fed continues to print money, these strategies should continue to work. And if we're even close to right about a final breakdown of the world's paper money system, these kinds of companies will absolutely go to the moon.
There's one more factor to consider... Silver Standard and Royal Gold are both well known, multibillion-dollar companies today. While their shares will probably still outperform gold or silver during a bull market, it's unlikely investors are going to see the gigantic returns of the previous two decades in either company. They're simply too big and too well known now.
But... what if I could introduce you to the CEO of the next Royal Gold? Or what if I could put you at the deal table with Rick Rule and introduce you to the CEO of his newest hoarding company? What if you could get in on "the ground floor" with a royalty firm that's only now beginning its operations, where the market cap is still less than $100 million? I can do all of this for you... and more.
On April 5, you're invited to join our top resource analyst (Matt Badiali) and Rick Rule in a meeting with two mining industry CEOs. These men both head startup royalty/hoarding companies. They're following the same proven strategies that have made vast fortunes for precious metals investors over the last two decades. I'm confident they'll do it again.
If you believe, as I do, that it is unlikely the world's paper money system will survive the next decade, investing in these companies is probably the single best way to hedge all of your exposure to paper money – better than any other trade you could ever construct.
Now, I don't want to mislead you. Investing in unproven royalty companies is risky. These stocks will be incredibly volatile – just like Royal Gold and Silver Standard have been. But our sources believe these companies have what it takes to succeed. If they do, shareholders could easily make 10, 20, 100 times their money – or even a lot more.
I know that sounds outlandish, but it has happened before and you'll be sitting with the same men who did it before. Whether you can join in on our meeting or not, I urge you to read our full report on this situation. It could literally save your fortune... or perhaps help you build your first.
Crux Note: For more information on this exclusive meeting, click here. |
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