This is a reversal in my thinking from the outright inflationary ‘buy with both hands’ bent that I have held for the past two years. Even though it’s quite a speculative analysis at this early stage, it is a possibility that we must consider.

Important note: This is a short-term scenario that stems from my trading days, so if you are a long-term holder of a core position in gold and silver, as am I, nothing has changed in my extended outlook for these metals. The fiscal and monetary path we are on has a very high likelihood of failure over the coming decade, and I see nothing that shakes that view.

But over the next 3-6 months, I have a few specific concerns.

It’s time to build on the idea I planted in the Insider article entitled “Blame the Victim” (February 28, 2011) where I speculated on the idea that the Fed might be forced to end its quantitative easing programs, almost certainly because of behind-the-scenes pressure.

Here’s what I said:

“How I read [the Fed’s recent propaganda tour] is that the Fed is taking some heat for its inflationary policies, mainly behind closed doors, and it is trying to do what it can — with words — to soothe the situation. Perhaps China is making noises, or perhaps Brazil’s finance minister is making the phone lines feeding the Eccles building smoke ominously, or perhaps it is internal pressure coming from politicians with restless voters. Or all three.

“The big risk here is that the Fed will be forced by this rising pressure to discontinue the QE program in June at the normal ending of the QE II efforts. Couple that with a possible federal showdown over the debt ceiling right at the same time, and you have the makings for a massive fireworks display, possibly involving derivative mortars bursting in air.”

At the time, I speculated that all of the Fed’s pronouncements about inflation being almost nonexistent were actually signs that the Fed was taking some behind-the-scenes heat for the inflation its policies was creating. And I worried about what would happen if the Fed were to end the QE program in June.

Let’s just say it won’t be pretty.

Everything would tank. Stocks, bonds, and commodities. All of the risk assets that have been unnaturally supported by a flood of liquidity, too-low interest rates, and thin-air base money would give up those ill-gotten gains. Gold might behave a bit differently, because along with these market declines will come an enormous amount of uncertainty about the financial system itself, usually a condition for higher gold prices. So I expect gold to correct somewhat, but not nearly as much as everything else, and it could even gain.

The story is, admittedly, getting more confusing by the week, with some calling for hyperinflation and some calling for massive, outright deflation. I am trying to surf the probabilities and stay one step ahead of whatever curve balls are coming our way.

The basic idea is this: The Fed has been dumping roughly $4 billion of thin-air money into the US markets each trading day since November 2010. The markets, all of them, are higher than they would be without this money. $4 billion per trading day is an enormous amount of money. It’s gigantic by historical standards. As soon as the QE program ends, the markets will have to subsist on a lot less money and liquidity, and the result is almost perfectly predictable.

Hello, downdraft.

The markets are quite substantially elevated due to the efforts of the Fed. T, and then some, is quite likely to be rapidly eliminated as soon as the QE program has ended.

It’s really that simple.

To make the story even more difficult to follow, the Fed has been sending out teams of PR agents in an effort to guide the markets with their words.

First, on March 2, 2011 Bernanke said this:

Bernanke Signals No Rush to Tighten When Asset-Buying Ends

March 2, 2011

Federal Reserve Chairman Ben S. Bernanke signaled he’s in no rush to tighten credit after the Fed finishes an expansion of record monetary stimulus, seeing little inflation risk and still-slow job growth.

A surge in the prices of oil and other commodities probably won’t generate a lasting rise in inflation, Bernanke told lawmakers yesterday in semiannual testimony on monetary policy. A “sustained period of stronger job creation” is needed to ensure a solid recovery, and the Fed’s benchmark rate will stay low for an “extended period,” he said.

The “no rush to tighten credit” statement is a signal that the Fed will neither raise rates at the end of the QE program nor perform reverse POMOs where it reels cash back in and pushes MBS and/or Treasury paper back out.

Upon the cessation of the QE efforts, and the cessation of $4 billion a day in Treasury buying pressure, it’s a safe bet that market interest rates will rise. Bernanke is at least on record as saying that if this happens, it won’t be because the Fed has taken the lead.

Bernanke was being a little bit sloppy in his statements, because stopping QE will serve to tighten credit simply because there will be a lot less liquidity sloshing around the system. It’s a situation where the absence of excess is the same as the presence of tightness, if that makes any sense.

Then on March 5th, a much stronger and clearer signal was given, confirming my worries:

Fed Policy Makers Signal Abrupt End to Bond Purchases in June

March 4, 2011

Federal Reserve policy makers are signaling they favor an abrupt end to $600 billion in Treasury purchases in June, jettisoning their prior strategy of gradually pulling back on intervention in bond markets.

“I don’t see a lot of gain to reverting to a tapering approach,” Atlanta Fed President Dennis Lockhart told reporters yesterday. “I don’t think that is necessary,” Philadelphia Fed President Charles Plosser said last month.

Whoa. This is important news. Not only a cessation of QE, but the possibility of a sudden stop is being telegraphed. This will change everything.

The old saying ‘sell in May and go away’ might never be truer than this year, although with this sort of a warning, the cautious investor may want to get a head start on things and sell in March or April.

For some time there have been rumors that the Fed has been splitting into factions, with some of the inner team becoming increasingly uncomfortable with the QE program and its effects. But so far they’ve either spoken in code to reveal their displeasure or quietly resigned. So we’re pretty sure there’s an admirable level of support within the Fed for ending QE, and it has now bubbled to the surface and reached the public arena.

Of course, there’s some form of gobbledy-gook reasoning being floated to justify the plan for a sudden stop rather than a gentle wind-down, and it involves the distinction between ‘stocks and flows’ (from the same article as above):

Fed staff members, such as Brian Sack, the New York Fed official in charge of carrying out the bond buying, have argued the total amount, or stock, of securities the Fed has announced it will make has more impact on longer-term interest rates than the timing of those purchases. That’s a view now held by several members on the Federal Open Market Committee, including the chairman.

“We learned in the first quarter of last year, when we ended our previous program, that the markets had anticipated that adequately, and we didn’t see any major impact on interest rates,” Fed Chairman Ben S. Bernanke told the Senate Banking Committee during his March 1 semiannual monetary-policy testimony. “It’s really the total amount of holdings, rather than the flow of new purchases, that affects the level of interest rates.”

Fed Vice Chairman Janet Yellen supported that perspective, saying at a monetary policy forum in New York last week that “the stock view won out over the flow view.”

The idea that Brian Sack, a 40-year-old economist with a PhD from MIT, is winning the day in the argument of “stocks over flows” is somewhat troubling to me. MIT is a quantitative shop, home to some very brilliant people, but how markets will actually respond is another specialty altogether, one that requires a bit of on-the-street experience. Markets have a bad habit of not being logical, not fitting neatly into tidy formulas, and ignoring things like ‘stocks and flows.’

I’ll go even further. I’ll take the other side of that bet and opine that the flows are much more important than the stocks, because it is the flows that support the continued budget deficits of the US government — which, it should be noted, will still be with us each and every month long after June 2011. Those deficits are baked into the cake and will require in excess of $125 billion in new Treasury sales each and every month.

Who will buy all the Treasury bonds after the Fed steps aside? That is unclear. If there are not enough buyers at these artificially inflated prices, then the price will have to fall until sufficient buyers can be found. Falling bond prices are at the other side of the financial see-saw from rising bond yields; one goes down while the other goes up, and the Fed has been pressing firmly down on yields for a while via the QE II program. When that’s over, pressure will be reduced and yields will rise.

Regards,
Chris Martenson
Whiskey & Gunpowder

March 11, 2011

The Coming Rout in Stocks, Bonds, Commodities, Gold and Silver was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

In 1933 President Franklin Delano Roosevelt signed Executive Order 6102, which made it illegal for U.S. citizens to hold gold bullion.

Prior to that, the $20 bill was essentially a warehouse receipt for a one-ounce gold coin. Prior to the Federal Reserve Act of 1914, the $20 bill actually told you this.

After Executive Order 6102, $20 notes weren’t allowed to be exchanged for gold anymore. Americans couldn’t legally own or trade gold as money and savings, only as jewelry or collectible coins.

A year after making monetary gold ownership illegal, FDR revalued gold from $20.67 per ounce to $35 an ounce with the Gold Reserve Act. The Act also required all gold and gold certificates to be turned over to the Treasury.

The dollar was debased. A chunk of the gold it used to be good for was legally removed. Instead of  “containing” 1/20 an ounce of gold, each dollar now only contained (or represented) 1/35 an ounce. And of course you couldn’t actually own the gold itself.

In 1971 Nixon severed the last official ties between gold and the dollar. The dollar quickly sunk to its real value, which had been debased by years of money supply inflation.

By 1975 Americans were allowed to own bullion gold again, but during the roughly 40 years bullion gold ownership had been illegal, the dollar had been drastically debased. At its former lowest point in the summer of 1980, the dollar was worth only 1/850 an ounce of gold. It regained some value for a while, but for the past couple of years a dollar would only get you less than 1/1000 an ounce of gold (right now it gets you less than 1/1300 an ounce).

That was the story with a piece of paper that was merely standing in for a monetary metal. But what happens in the case of circulating coins actually composed of monetary metals?

Let’s look at quarters, dimes, nickels and pennies…

• Prior to 1964, U.S. quarters and dimes were 90% silver. From 1965 to 1970 half dollars were 40% silver “clad” over a copper-nickel or “cupronickel” mix. Now quarters and dimes and half dollars have no silver in them at all. They are now entirely copper and nickel, but only enough to get a little more than 1/4 their face value.

• Prior to 1983, U.S. pennies were 95% copper and 5% zinc. In 1982 we started getting pennies made of 97.5% zinc with only 2.5% copper plating. Since 1983 every new penny has had this composition.

• The U.S. nickel has been cupronickel since 1946: 75% copper and 25% nickel with trace amounts of manganese. But that’s probably about to change…

Why are quarters and dimes no longer silver? Why is the penny no longer mostly copper? And why will the nickel likely follow suit fairly soon?

Because the amount of silver and copper and nickel in each case came to exceed the face value of the coin. The debasement of the U.S. currency over time has required the metal in the coins to be replaced with a cheaper substitute.

The average American has no idea what inflation really is or why currency debasement is a problem at all. He figures one metal is as good as another in minting of the currency…that when the face value of a coin falls below the value of the metal in the coin, it’s nothing more than a curiosity. Substitute a cheaper metal, they think. Problem solved.

And indeed the problem is solved for the government, which mints the coins made of real money at a loss after the effects of bouts of the inflation started by monetization of government debt. Savers and the overall economy on the other hand…their problems are just beginning…

But that is a story for another time. For now let’s look at the opportunities to be had when the government makes metals available for a fraction of their market price via coins…And let’s see if there are any opportunities left (Hint: there are!).

If you had seen the writing on the wall in the early 1960’s and started hoarding quarters and dimes while they still were almost wholly silver, you would have found that your dimes were worth a high of $3.57 each. Your quarters would have been worth $8.93 each.

In fact, these 90% coins still trade just like regular silver bullion bars and rounds. They were taken out of circulation — “hoarded” — by those savvy to debasement (Gresham’s Law tells us that good money will be hoarded when bad money floods the market). These coins were collected without any transaction costs. They were bagged up with different face value totals: $1,000 bags, $500 bags, $250 bags, $100 bags and $50 bags. These bags now sell with a transaction cost.

Each of these bags traded for over 35 times their face value because of the silver in the coins. At least they did at silver’s peak in 1980. Even after the peak and during the ensuing 20-year slump they were selling for more than three times face value.

Now thanks to waves of money and credit expansion from the Federal Reserve, silver (and gold) is pushing back toward its old highs. These bags of so-called “junk” silver are trading at more than 20 times their face value. They may hit 30 times face value again…and beyond…

Between 2000 and 2006 I was a big believer in silver as an investment (I still am). I begged all my loved ones to sell their (overpriced because of credit expansion) homes, pay off their credit cards and shove the rest of the money into silver.

No one listened. Here are a couple of graphs that makes them wish they had.

The red vertical lines in both graphs represent the start of 2006.

If you had sold your house at the very peak of the housing bubble in 2006…just before silver took off…you could now sell your silver and buy back your house…plus five more houses like it.

And there’s a lot more potential for that trade to get even better.

Silver shot up about fourfold, while real estate plummeted by a quarter or a third. That’s “so far.” Silver’s price could multiply again — even if does dip in the interim — while housing could drop even more.

Even if you didn’t catch the peak, but just saw the writing on the wall in 2000-2005, you’d still have done pretty well by selling your home and buying silver. You wouldn’t have gotten quite as much for your house, but you would have gotten silver at around $4 instead of $9.

Silver probably has another trick or two up its sleeve. It probably has a lot more upside than gold. It will probably play catch up till the silver/gold price ratio gets larger. Who knows?

Look at the other coin that was debased: the lowly penny…

Prior to 1984, the penny was almost all copper. Now those old pennies have been driven out of circulation and hoarded (Gresham’s Law strikes again). And they’re worth just under three times their face value: Almost three cents for the old one-cent piece.

Copper hasn’t had quite the success that silver has. Non-debased silver coinage has been worth 35 times face value and is currently worth 20 times face value and climbing. Copper coins’ triple-bagger over nearly thirty years doesn’t seem nearly as impressive. That’s because it’s not. But it is telling.

The thing is, silver now has transaction costs. Whether you buy bars, rounds or pre-debasement coins, you have to pay a middleman. You have to pay shipping if you get it online.

Meanwhile, copper pennies are still floating around, but hard to find. It’s really not worth the effort to gather underpriced copper this way.

But nickels? That’s a different story. Every single circulating nickel still has 3.75 grams worth of copper each…along with 1.25 grams of nickel. The silver dimes and quarters and the copper pennies are gone, but the copper-nickel or cupronickel nickel is still the only kind of nickel there is. For now…

What if you could have simply been there to start collecting silver quarters and dimes when they were actually circulating? You’d just have had to walk up to your bank and withdraw your money as quarters and dimes. This would have worked up to 1963. After that you’d have to sort through your quarters and dimes to make sure you didn’t have one of the new, non-silver ones.

The best opportunity with silver coins has long passed. But there is still a similar opportunity with silver’s humble cousin, the cupronickel five-cent coin.

Buy Two, Get One Free

Copper is currently about $4.60/lb. Nickel is currently about $13.00/lb

120 five-cent pieces is $6.00. Those 120 coins contain a pound of copper and 1/3 pound of nickel. That’s about $8.93.

If you deposit $6 in any bank in the nation, then withdraw your money as nickels, you get almost $9 worth of metal. That’s an immediate 50% return. That’s like paying for two thing and getting three.

You can’t legally cash in on it now (anti-smelting laws for pennies and nickels were introduced in late 2006). But the bullion market for cupronickel coins will develop, just as it did for silver U.S. coins. This will happen once the government starts minting five-cent pieces made out of cheaper metals.

To those who doubt this will happen, I refer you to the bags of silver coins trading as bullion for over 20 times their face value. You can easily order such a bag right now by going to any of a number of online bullion dealers. These bags of coins sell right alongside silver bars and rounds.

Right now, the government is subsidizing your copper and nickel purchases…and cutting out the middleman. As much as we complain about government, we ought to stop and offer them a little thanks for this.

The debasement of the U.S. nickel is looking very likely. Right now you have another opportunity to do what the silver coin hoarders did back in the early 1960’s.

Hoarding nickels right now gives you an immediate benefit. You get between $0.07 and $0.08 of copper and nickel for a mere $0.05. Thanks to Uncle Sam. But your good uncle won’t subsidize this forever. He can’t afford it.

What’s even more is that there is a hedge against deflation risk that you just don’t get with bullion. You see this discounted metal is minted. It will always have a nominal value of what’s stamped on it by its issuer.

So if the dollar strengthens and copper, silver, and gold all get cheaper in dollar terms, you can still spend your nickels just like any other money. Your purchasing power stays the same, maybe even increases.

But if the dollar declines, then the value of the cupronickel in the currency will rise against the face value. Eventually — at two or three times face value — these five-cent pieces will trade as bullion just as 90% silver quarters and dimes did and still do.

Again, there is currently no transaction cost to saving in nickels and no risk from plummeting metal prices. There is literally nothing (in case of deflation) to lose and everything (in case of inflation) to gain.

Your only real problem is storage; a few thousand dollars of nickels takes up a lot of space…and it’s heavy. But people had the same problem with silver when it was cheap. I doubt they’re complaining now.

Having “too much” cupronickel won’t seem like much of a problem if inflation continues to drive the cupronickel in five-cent pieces far in excess of face value.

At worse the dollar strengthens and you’ve just saved money whose purchasing power has increased. That is not a bad worse case scenario at all.

The cupronickel is the last bit of honest U.S. currency there is. Right now it’s dying slow, like the others did. But things could speed up quick.

The cupronickel could surprise us all. Gold and silver are having their day. Maybe eventually cupronickel will, too. What cannot be dismissed is the current discount on the stuff (thanks, Uncle Sam) and the extremely limited downside.

Regards,
Gary Gibson
Managing Editor, Whiskey & Gunpowder

February 16, 2011

Gold, Silver, Copper, Nickel and the Slow Death of Money was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Yet this is not unusual for Big Oil these days. In fact, most are making big bets on natural gas.

Exxon Mobil completed eight projects last year. Seven of them were for natural gas projects — not oil. Of the three scheduled this year, two of them are gas. ConocoPhillips paid $5 billion for Origen, an Australian gas company.

Meanwhile, Chevron hammers away at its mammoth liquefied natural gas plant off the coast of Australia, at a total cost of more than $40 billion. (Liquefied natural gas, or LNG, is easier to transport.) Most of the oil giants are also slamming billion-dollar fistfuls to pick up shale gas acreage in places such as the Marcellus in Appalachia.

This shift creates new opportunities for investors. But before we get to those, let’s try to understand what’s happening.

There are several things at work here. One is that new oil deposits, like pitchers who can hit, are becoming harder to find. They are also costlier. The Kashagan oil field, which was supposed to be a great find in the Caspian Sea, is seven years behind schedule and billions of dollars over budget. Another factor at work is that 90% of the world’s oil reserves are in the hands of national oil companies. They are off-limits for the likes of Exxon and others.

By contrast, natural gas deposits are more plentiful. They are also getting cheaper to develop. The cost to build an offshore LNG terminal is about half of what it was only two years ago. The big LNG plants can be just as expensive as anything in the oil world, but — unlike oil — these projects don’t usually go forward unless there are long-term contracts in hand to support them. Some of these contracts go for 20-year terms. This makes the business more appealing to the majors, who don’t have to sweat the huge ups and downs they endure in the oil markets.

With contracts in hand, the gas business is just one of putting together an Erector Set. As The Economist notes, “The gas business is really an infrastructure business: drill wells, build gas plants, install pipelines and accrue profits.”

But there is more. The world’s use of natural gas is growing faster than its use of oil. The IEA’s guess is that oil consumption grows half a percent a year. Natural gas consumption, by contrast, should rise more than 50% in the next 20 years. Total, the big French oil company, is even more bullish. It estimates that China will use much more natural gas than is commonly assumed. Only a lack of infrastructure keeps China’s appetite for natural gas under wraps. But China is in the process of building that infrastructure today. It is only a matter of time before the nat gas markets feel its impact.

Finally, natural gas is cleaner burning. There is a lot of talk of carbon taxes of one kind or another, not only in the U.S., but abroad. I believe it is matter of when, not if, governments punish dirtier fuels. Natural gas will benefit.

However, I don’t expect the price of natural gas to rise in a big way anytime soon. There is simply too much of it. Natural gas producers are all expanding production. Most are spending more to expand production than their cash flow supports. This is happening even though most look like they don’t make any money at $4 nat gas. (A recent survey put the industry average at $5.74.) This doesn’t bode well for the price of natural gas in the short term. As beaten up as it is, it could stay here for a while, or even go lower.

And so we hold only one pure play on natural because it is a low-cost producer with no debt, so it can still create shareholder value in a low-price environment.

Longer term, the current low nat gas price is not sustainable, as most of the industry seems to lose money at these prices. As old contracts (made when natural gas prices were higher) roll off, these producers will start to shut down production.

The following chart shows the cost curve for the lower 48 states in the U.S. These producers need $7 gas to make money. If this is right, then our pure natural gas company in Capital & Crisis will make a lot of money.

This is because logic dictates that we should expect the price of nat gas to gravitate toward the cost of the marginal producers. (And since our company’s costs are under $2, it stands to make a lot of money when gas turns around. I’m content to wait it out…and buy more).

But let’s get back to natural gas in broad terms. Even though pricing looks unexciting in the near term, demand looks healthy long term. The world will burn more natural gas in cars and buses of the future than it does today. It will burn more natural gas to heat and cool homes than it does today. It will rely more on natural gas to provide electricity.

Long-term investors should treat these things as inevitable. Big Oil certainly is. And we are already building the infrastructure to support all of that future growth today. The best way to play this latter trend is in another idea we already own.

Regards,
Chris Mayer
Whiskey & Gunpowder

September 20, 2010

How to Profit When Big Oil Bets on Natural Gas was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Brazil impressed Zweig with its enormous size — it is bigger than the continental U.S. — and impressive landscapes. He also saw what many saw before him. “Here lies immeasurable wealth of soil that has never been plowed or cultivated,” he wrote, “and beneath it are ores, minerals and natural resources that have not in the least been used up nor even extensively explored.”

And so it remains today. As I say, Zweig was not the first to find charm in these sunny lands. A long line of travelers and adventurers have said much the same thing. But it took a long time to get going, so much so that it became a joke: “Brazil, the land of the future and always will be.”

Still, natural resource booms did help settle and build Brazil, as Zweig observes. Booms in lumber, sugar and cotton settled the north and created Bahia, Recife, Olinda, Pernambuco and Ceará. Gold settled Minas Gerais. Coffee raised São Paulo. Rubber gave life to Manaus and Belem. And on and on…

Today, though, Brazil seems to be putting it all together and the old joke has gone stale. Brazil is the leading exporter of a long list of agricultural commodities. Then there are the big oil discoveries off its coastline. And there is the ample soil and water, as I’ve written about before. Brazil’s net debt is at a level that in the words of the Financial Times, “makes much of the developed world green with envy.”

Meanwhile, unemployment is low. The economy is growing 8–10% a year. Poverty from 2004–08 fell by half. Meanwhile, a growing middle class continues to make its presence felt — retail sales rose 30% in March alone. “There’s nowhere else in the world that’s had the dramatic change in the middle class like Brazil, not even China,” says one analyst quoted in The Wall Street Journal recently. “You’ve got an unfathomable amount of money there.”

So what are the investment opportunities in Brazil today? I’ll have a better handle on things in the coming months as I spend some time down there. But I have some initial thoughts to share here.

For a long time, Brazil was not a place to trust with one’s money. But the rules these days are friendlier for investors. Yes, the laws are still complicated and taxes are still high. Labor laws are still outdated and often inflexible. Overall, Brazil is still not a great place to do business. It ranks 129 out of the 183 nations tracked by the World Bank. Yet it still has come a long way. As one partner at a leading international law firm put it, “For the first time in the history of Brazil, we have an excellent environment for investment.”

There are plenty of places to look for those investments. Where are the needs most critical? In a word: infrastructure.

Sewage facilities are inadequate. The FT opines that here the “need for investment is perhaps greater than any other sector.” While some 80% of Brazilians have access to clean water, less than half have access to a sewage system. And Brazil treats less than a third of its wastewater.

Roads are notoriously bad. Only 10% or so are even paved. As a result, freight costs eat up a third of the value of what’s shipped. Sometimes, the freight never arrives. Recently, a McDonald’s had to go a day without serving french fries because the supply truck never made it in. The roads affect most everyone since the roads handle some 68% of Brazil’s transport needs.

The ports and rail links also feel the strain of a booming economy. Brazil’s biggest port, at Santos near São Paulo, handles only a 10th of the traffic of big Asian ports like Hong Kong.

Brazil Needs Lots of Steel

Another way to see these claims of weak infrastructure is to look at Brazilian steel use, which is very low. Brazilians consume only about 100 kilograms of steel per person. That number has barely moved since 1980! The Chinese consumed 30 kilogram of steel in 1980 and now consume 300 kilograms per person. European countries often top 500 kilograms. South Koreans use 1,200 kilograms per person! So there is a lot of room for steel consumption to grow in Brazil.

Lakshmi Mittal, the CEO of the world’s largest steel company, summed it up well. “The level of consumption is well below the country’s potential. It also indicates a lack of infrastructure investment in the last two decades.”

Some of this is in the process of being fixed. Brazil has a huge port in the works near Rio, called Acu Super Port. It is a mammoth project — nearly two miles long, it will hold 10 deep-water berths. Brazil also has plans for more roads, a high-speed rail line between São Paulo and Rio and more.

The best way to invest in rising Brazilian steel use is through native companies. That’s because the Brazilians are among the lowest-cost producers of steel in the world. Brazil sits on some of the lowest-cost and highest-grade iron ore and coking coal deposits in the world. Power costs are low thanks to hydropower, which provides four-fifths of Brazil’s electricity. And the relative isolation of the Brazilian market from other big steel producers gives the home team a big advantage in freight costs.

The only tricky thing is the Brazilian real, a currency that has been strong of late and raises the cost of Brazilian steel. (We are a far cry from 1990, when Brazilian inflation peaked at 2,950%!) Finally, and somewhat ridiculously, Brazil still has import duties on steel.

Another fact that bodes well for steel use: Energy consumption is also remarkably low. Brazil consumes about 1.2 tonnes of oil equivalent per capita per year. That’s less than half what Portugal and Poland use. And they are among the poorer members of the EU. The U.S. uses 7.8 tonnes. Building a new and needed energy infrastructure for Brazil’s expanding economy will consume a lot of steel.

Steel is just one idea, but there are many other sectors to invest in in the country. From a big-picture standpoint, it’s hard not to like Brazil. As Zweig wrote, “In its geology, this gigantic empire lacks hardly any kind of ore, stone or plant.” Finally, it looks like Brazil is taking advantage of its space. (Things would end badly for Zweig, though. Even Brazil couldn’t beat back the demons. He committed suicide in Brazil in 1942.)

Regards,
Chris Mayer
Whiskey & Gunpowder

August 11, 2010

Why You Should Buy What Brazil Needs was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

But first, a brief trip down memory lane…

You may recall how the economy fell out of bed in 2008. This was not some disaster one read about only in the papers or watched from a safe distance on TV. It affected nearly everything.

I remember making a trip to an investment conference in Manhattan that I go to every year. The big difference this time was that I could stay at the swanky hotel that hosted it. Normally, a $450-a-night hotel — before taxes — one could, in 2008, book a room for half that price — off the rack. And then were plenty of rooms available. A more enterprising soul, with the help of Priceline.com, could stay at a 4-star hotel for $99 a night.

I’ll also never forget eating at an Italian restaurant in Manhattan where they were giving the wine away for free. I guess they wanted to bring warm bodies in there any way they could and hoped somebody would order a dessert so the kitchen could at least earn some kind of profit margin.

Such deals in hotels and restaurants, where such deals were once unthinkable, reflected the hurt of an imploding stock market, of layoffs and of a general popping of a bubble brought to an ugly close.

Farming also felt the effects of the bust. Crop prices still promised a good return for farmers, but financing was harder to come by. Farming is a capital-intensive business. You need to spend a lot of money before you see a dime. So farmers often put off expansion simply because money is so tight.

Say you were a farmer in Saskatchewan and you wanted to add acres to your farm to take advantage of market prices. You’d have to purchase or rent more land. You’d probably need new tractors and combines to handle the extra workload. You’d need more on-farm storage. You’d need fertilizer and seed and chemicals.

How much would all that cost? Recently, I spoke with Brad Farquhar, vice president of Assiniboia Capital Corp., which runs the largest farmland fund in Canada. He said it is normal for farming expansion to cost $150–300 per acre. That means a 2,000-acre expansion needs an investment of $300,000–600,000.

Some farmers have the financial capacity to do that on their own, but most typically turn to a local bank or credit union. In the meltdown days, it was tough for anybody to get a loan. Even now, credit is not as easy as it was in the palmy days of no-doc loans and no-money-down. Lenders are cautious.

So while a farmer could make an extra $100 an acre in revenues for every $30–50 an acre spent in fertilizer, he doesn’t necessarily do it. In fact, farmers cut back on fertilizer in the meltdown days, from which we are only now rebounding. Then, too, there are timing issues. Nitrogen fertilizer is often cheapest in July, right when farmers have maxed out on their borrowing capacity. That means that they can’t take advantage of the lower prices.

These funding gaps are where Brad’s Assiniboia steps in to fill the void. They provide the funding as an investor, with the profits shared between the farmer and Assiniboia. The firm has a simple truism as its mantra: “The returns are highest where capital is scarce.” Saskatchewan farming (and agriculture generally, at least at the farm level) is one such place.

You’d think something like this would’ve evolved sooner. But it was a new concept when the firm began approaching farmers in 2009. As Brad describes it, after a lot of time at farmers’ kitchen tables and hundreds of cups of coffee later, farmers began to sign up for Assiniboia’s program. In fact, Assiniboia now has 36,000 acres of farmland from this offer in 2009.

His firm is high on canola now. Why canola? Brad points to a list of reasons. One, canola is not controlled by the Canadian Wheat Board, which fixes prices for wheat and barley. Another is that there is a futures market in canola in Winnipeg, which gives them tradeable market prices. (Crop insurance is done through the provincial fund.)

Finally, the heart of canola country is right in Assiniboia’s backyard, in Saskatchewan. It’s like the Silicon Valley of canola. Brad also points out that “recent genetic developments are pushing yields to whole new levels.” These breakthroughs are happening in Saskatchewan and lead to better economics.

Besides, the profit hook is enticing. “Average crops should provide good returns, but any above-average production or commodity price makes the return numbers take off,” Brad says. “And the majority of the downside is covered by crop insurance. So it’s like having a perpetual call option on canola.”

Brad prepared the next chart, which shows a few scenarios of how a share in his limited partnership (LP) might fare depending on crop yield and price. You can see that a low yield and a low price make for a poor result. But the range of outcomes skews to the upside. A bumper crop and a strong price could hand you a 101% gain. (Note: In the table, “bu” stands for bushel.)

We also harp on ownership in these pages, and one other thing I like about this model is that farmers have skin in the game. About half or more of the profits will go to them, so they have every incentive to make it work.

Assiniboia is raising a new fund now with an expected closing date of July 30. This fund would invest in Saskatchewan during the 2011, 2012 and 2013 growing seasons. Overall, it’s a four-year commitment and the fund would wind up in 2014, when you would get your initial investment back.

If you are interested in learning more about the fund, contact Brad Farquhar at brad@assiniboiacapital.com. Note: The minimum investment is $25,000. I think it’s another fine way to participate in agriculture without actually having to do any farming by your own hand.

Thanks for reading.

Regards,
Chris Mayer
Whiskey & Gunpowder

July 19, 2010

Potential 101% Gains in Canola Farming was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

I think most Americans would be shocked to see Beijing today. A friend of mine, well traveled and well-read, told me he thought he would find a city to compare to Mumbai or Managua. Instead, he found a city to compare to New York or Chicago.

I sent back video clips of some of the highlights to another friend. After watching a few clips he wrote: “I suspect that what a lot of Americans are unsure about is the size and scope of what’s really there in everyday life in China. In most memories, it’s a nation of rice scroungers… raking the good earth with fingers crossed.”

One of the clips I sent gave you a peek inside a busy Carrefour, a French retailer running a Wal-Mart-like operation in China. My friend continued, “Yet here there’s a butcher with piles of fresh, red meat out in the open (it MUST be selling fast to be out like that)… and 30 kinds of toothpaste on the shelves… and 60-plus cash registers jammed with customers.”

All of the world’s best-known brand names were on display in brightly lit wide aisles. You almost have to see it to believe it. Even in the five years since I was here last, Beijing has changed a great deal. Surprise, though, has become something of a routine here.

In 2001, consensus opinion had the population of Beijing hitting 14 million by 2040. It topped that by 2003. Today, it has about 22 million people. Also in 2001, experts thought that Beijing would have — gasp! — 1 million cars on its roads by 2010. It also topped that figure in 2003. Today, there are nearly 5 million cars on the road.

China is now the world’s largest car market and is quickly becoming the world’s largest market for a number of consumer goods. It’s also the world’s largest market for mobile phones. We saw plenty of Beijingers chatting away at checkout counters and in their cars just as people do in the U.S.

The whole country isn’t like this, of course. We wandered about 40 minutes from downtown and visited a small village still technically in Beijing. We walked down dusty lanes, past modest dwellings and a small Buddhist temple. Villagers smiled as we passed. They don’t see foreigners here much, but you could stop and get a Coke and a Snickers bar.

We also happened to meet the head of the village, who greeted us warmly and showed us inside his house, a small courtyard home. After snapping a group picture, he asked us to e-mail a copy, and we dutifully wrote down his address. Some of these homes don’t have a private bathroom, but you can still send e-mail.

That’s China for you, in a nutshell. It’s been an uneven advance — and there is still a long way to go.

Back in central Beijing, we visited a Bank of China branch. There were 77 teller windows. In the central foyer was a display case with gold and silver coins for sale, as if they were pens or tote bags. The Chinese buy more gold than anybody else, recently surpassing India. 

I tell you all this to prepare you for this key idea. As CLSA, the Asian investing specialists, put it in a recent report: “The future of Asia is domestic.”

This is an important shift. For a long time now, China’s economy (and Asia’s generally) has been geared toward servicing the West, toward exports. Now begins a transformation, the rise of the Asian consumer.

One key data point here is disposable income. CLSA notes that the number of Asians (excluding Japan) with disposable income of $3,000 annually will rise from 570 million to 945 million by 2015. More than two-thirds of that increase will come from China alone.

As CLSA notes, “The consumption spending of this middle class will rise from US$2.9 trillion to US$5.1 trillion by 2015, with China, India and Indonesia contributing to 69%, 16% and 4% of the increment.” By 2014, about 44% of the population in China will top this $3,000 threshold — a 27% increase over 2009.

These numbers back what I intuitively grasped on my trip. There is a big mass of consumers that want all the things many of us take for granted — like Crest toothpaste and bluejeans and air conditioners. That’s a lot of fresh money in the pool — and companies like Yum! Brands, McDonald’s, Wal-Mart, Carrefour, Starbucks and many others are all jockeying for a share of the prize. And in many cases, they already have substantial businesses here. You can see their presence while you are driving around Beijing.

Servicing this growing middle class is going to be an important investment theme for the next several years.

Regards,
Chris Mayer
Whiskey & Gunpowder

June 16, 2010

How to Invest in What China Really Needs was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Though not original, I don’t think the market quite realizes the challenge involved in feeding all those mouths. Now, I’m not saying we face mass starvation. I’m not saying it can’t be done. I am only saying there are challenges and constraints more acute now than in the past. And these constraints make for an appealing investment idea.

First, let me sum up the size of the demand. There are a lot of ways to present the same data. The most arresting is perhaps from the USDA projections. These show that the incremental acreage required to feed this population by 2030 is about equal to the planted acreage in the U.S., Brazil and Argentina!

That’s a lot of acreage and a good reason to own farmland as an investment over the long haul. Arable land per person — which includes both land under cultivation and land that could be farmed — is a dwindling resource, as the nearby chart shows.

One other added wrinkle is that so many countries have biofuel mandates. That means the governments of the world are basically forcing industry to burn food to make energy. This is a major force in the markets. For example, just in the U.S., about one quarter of the corn harvested winds up in an ethanol plant.

All of this simply means we need to get more out of every acre. This gives a nice tail wind to the companies that work up and down the agricultural chain — from irrigation equipment to fertilizers.

One of the best and safest ways to participate in the broad global agri-boom is to own shares of an emerging grain powerhouse right here in the U.S. Remarkably, recent events have pushed the stock price all the way down. The market has handed us a gift, and let me tell you why.

The market is focusing on near-term earnings weakness as a number of investment banking firms have ratcheted down their earnings projects for this year. At the current quote, the stock trades for about 11–13 times this year’s earnings.

However, I look at this stock very differently. I’m not focused on the quarter-to-quarter earnings swings. I am interested in the larger story of how it’s building a global grain powerhouse. Today, it’s expanded its menu of offerings and its geography with significant operations in Australia. It’s invested a lot of capital in building one of the world’s most efficient grain-handling operations, with access to all the important markets, particularly those in Asia.

With its strong balance sheet, low valuation and diversified agri-platform, this company is my favorite low-risk way to play the agricultural markets. The market seems to trade it like a fertilizer stock, but a better comparable is probably Archer Daniels Midland or Bunge. It’s safer than, say, Archer Daniels Midland, a mainstream favorite. And is considerably less leveraged than, Bunge, a popular Brazilian soybean processor.

This company is an absolute buy. I’m expecting its share price to gain 60% by next year. Longer term, I believe the stock has greater potential as the slow, but sure agricultural story unfolds.

Regards, 
Chris Mayer
Whiskey & Gunpowder

June 14, 2010

The Agricultural Investment You Need to Make Right Now was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

One of the first things people change as they emerge from poverty is their diet. They move toward more meat and a greater variety of fruits and vegetables. So while we may wonder about how many cars or toasters the brave new world’s top consumers will want, we know for sure they’ll eat more food.

But the web of food production shivers and shakes in the short term in response to economic pressures. Farmers cut back — like everybody else — in 2008 and 2009. One of the things they cut back on was fertilizer. They used 30–40% less potash than usual, for instance. Potash, a key fertilizer ingredient, saw six consecutive quarters of falling volumes.

Farmers ran down their inventories. All that deferred buying pushed North American potash inventories below their five-year averages — first time that’s happened since November 2008. In some cases, farmers didn’t apply potash at all. Potash stays in the soil for up to two years, so you can skip applications. But you can do that for only so long.

In any event, farmers are now returning to the market. One potash company reported its highest potash volumes ever in the first quarter of 2010 — a fivefold increase, year over year. With corn at around $4, famers have every incentive to buy fertilizers. Grain prices support good returns for farmers at current fertilizer prices.

Longer term, there will be pressure to produce more food. In turn, farmers will seek to boost crop yields. Fertilizers are one way to get there. There is plenty of room for growth here, as application rates remain well below recommended rates.

Of all the nutrients, potash has the greatest potential for growth — a potential 298% increase to match that recommended rate of 66 pounds per acre.

One interesting piece of news from China in February was the government initiative to boost crop yields by sending out 100,000 agronomists to educate 160 million farmers about modern farming techniques. The goal is to boost fertilizer use and demonstrate the benefits by way of soil samples. China is the biggest fertilizer market in the world, but crucially, it lacks much in the way of potash. China must import most of its growing needs.

That’s because potash is a rock and quality mines are scarce. It costs a lot of money and time to bring one online. A brand-new (or greenfield) 2 million-tonne potash mine will cost you a minimum of $2.2 billion — not including what it would cost for infrastructure such as rail, power, etc. It would also take seven years.

So the bigger-picture reasons for owning potash still make sense. More importantly, for our purposes, is the value of the stocks.

The April 20 edition of Foreign Policy included a story titled “Peak Phosphorous,” with the subhead: “It’s an essential, if underappreciated component of our daily lives, and a key link in the global food chain. And it’s running out.”

The story begins:

“From Kansas to China’s Sichuan province, farmers treat their fields with phosphorus-rich fertilizer to increase the yield of their crops… Our dwindling supply of phosphorus, a primary component underlying the growth of global agricultural production, threatens to disrupt food security across the planet during the coming century. This is the gravest natural resource shortage you’ve never heard of.”

You think OPEC is a force with 75% of the world’s oil reserves? Well, just five countries control 90% of the world’s phosphate reserves: Morocco, China, South Africa, Jordan and the United States.

The U.S. has only 12 phosphate mines. When food supply issues get hairy, countries essentially stop exporting phosphate. China did this in 2008. (China has the second largest reserves of phosphate, after Morocco.) I don’t see a phosphate shortage as imminent, but it’s a potential flash point that would surely light a fire under a couple of the stocks in the Capital & Crisis portfolio.

These stocks are potential monsters. They could double their output by 2015 and 2020. About 75% of new supply coming online till 2020 is from these two titans. This provides a powerful way to increase earnings even if potash prices go nowhere. If prices do climb, then earnings will jump sharply.

The value in these stocks, though, really comes from their huge net asset values (NAVs), as seen by looking at replacement values. In other words, let’s answer the question what would it cost us to build these assets from scratch?

If it is cheaper to buy the stocks than to build the assets, we have a promising situation. Think about that as if you were potash producer. If it cost you $1 billion to build a 1-million-tonne facility or $500 million to buy a ready-made potash mine in the stock market, what would you do?

All things being equal, you buy the stocks. In today’s market, the stocks are cheaper than building new mines. A number of global mining giants get the attractive investment profile I’ve laid out for you. Vale and BHP have already made small purchases. Vale bought Bunge’s phosphate mines and took a majority stake in Fosfertil, a Brazilian fertilizer company. In 2009, Vale also bought potash reserves in Argentina and Saskatchewan. BHP already owns reserves for a possible mine in Saskatchewan. All of these would be greenfield projects.

So given all the risks, expense and time… why not just buy the two big players in the Capital & Crisis portfolio if they are cheaper? (Not only are they cheaper, but the assets are of a much-higher quality).

I have my own conservative estimates of their NAVs based on replacement value. However, I could be way conservative. Morgan Stanley’s estimates are much higher, to give one other estimate. They include an estimate for infrastructure. They also use average costs based on existing publicly disclosed greenfield projects.

The high cost of new assets also provides price support for fertilizer prices. To lay out all of that cash for a new potash mine and get just a 10% return on your investment, you’d need potash prices of $500 per ton to make it work. Currently, prices are around $350 per ton. Brownfield expansions — or additions to existing mines — are cheaper. Some can work at prices as low as $250 per ton. These brownfield expansions are what the Capital & Crisis investments are doing. But they’ve got the best assets.

Regards,
Chris Mayer
Whiskey & Gunpowder

May 26, 2010

Potash, China and the Fire Under Agricultural Commodity Prices was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

“The earth is not getting warmer. It’s getting colder. The climate Nazis at the UN admitted this week that their claim that the Himalayan glaciers are melting away was false. I may as well have said the Great Salt Lake is going to turn to sugar.”

Jim’s put together a “Little Ice Age Portfolio” as a response to the climate change hysteria. But the investment response is secondary to the seriousness of the issue, he says. “There’s very little evidence that rising carbon dioxide levels lead to rising temperatures. It’s more likely — as temperature records show — that changes in climate are correlated to solar activity and sun cycles. Imagine that.”

“If it were true that reducing carbon dioxide emissions into the earth’s atmosphere reduced the earth’s temperature, it would be a bad idea to do it. In the Dark Ages, another period of lower solar activity, the Nile River froze. On the other hand, Rome prospered because agriculture thrived and you could grow grain in Carthage.”

“In a colder world, Canada would be an iceberg and one of the great grain growing regions of the world would disappear. People believe that because farmers plant a crop, it will be harvested and the modern world can live on a diet of high-fructose corn syrup that malnourishes people and makes them fat. But in another Little Ice age, hundreds of thousands of people would die if the world’s grain growing regions marginally declined. Billions would die if the impact was more severe.”

“The Black Death hit Europe in the Little Ice Age, too. Lower crop yields reduced the quality and quantity of nutrition available. This weakened immune systems and made people more exposed to infectious diseases. Why, if you’re a humanitarian, would you pursue a public policy that pushes a billion people who are already on the edge of starvation into outright famine?”

“If winter comes early or stays late, whole crops will be wiped out. Reducing the output of food — something that would result from a colder Earth — is evil. It’s based on non-existent science in which people forecast things that may happen centuries from now based on their ideological resistance to prosperity. They are trying to force down living standards in the Western world based on their own guilt about prosperity and income inequality.”

“Global warming just another phrase for good weather. If it’s true carbon dioxide emissions warm the planet, we should burn more coal. You can tell the science is dubious because you now have a bizarre feedback loop in which warming makes the world cooler. It’s rubbish.”

“The big risk in the discrediting of the global warming crowd is that it could discredit other, more legitimate concerns about the climate, like the huge amount of harmful chemicals in our water supply. The persistence of dangerous chemicals in our recycled water is something to be really worried about. You don’t want the environment to turn into a sink for man-made chemicals.”

There was much more to report. But we’ll have to leave the rest for another day. Jim is hard at work on the January issue of Strategic. He’s analysing the possibility of a fiscal collapse in the United States, and where investors can seek refuge before it happens.

Until then…

Regards,
Dan Denning
The Daily Reckoning Australia

January 22, 2010

Contrarian Climate Change was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

I learned about these laws last year when one of my subscribers in Arizona called.

He wanted to buy gold from a foreign dealer for storage offshore, but the dealer refused to sell to him. The reason: the Arizona Model Commodities Act. After some research, I learned that 21 states have enacted the MCA or some variation of it: Arizona, California, Colorado, Georgia, Idaho, Indiana, Iowa, Maine, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oregon, Utah, and Washington.

I looked into the Nevada law, which a lawyer in that state told me was typical of MCAs in other states. Basically, residents of Nevada can purchase “commodities” only under circumstances which effectively exclude having precious metals delivered a non-U.S. storage facility.

The MCA came into existence in the 1980s, after a series of commodities scams in the 1970s.

One of the most notorious ones was International Gold Bullion Exchange (IGBE). Beginning in 1979, William and James Alderdice built their tiny jewelry business in Fort Lauderdale into a multi-million-dollar enterprise with over 1,000 employees.

IGBE advertised in The Wall Street Journal, Barron’s, and many other respected financial publications. In exchange for discount prices, customers waited three months or more for delivery. But many customers never received anything. When authorities finally caught up with IGBE, much of the gold supposedly stored for customers turned out to be railroad ties painted gold. In the end, customers lost millions of dollars.

With this background, it’s not surprising that states acted to protect their residents from commodities scams. But the laws appear to prohibit commodities purchases for delivery overseas.

Fortunately, companies that sell precious metals for storage overseas have developed some creative ways to deal with these laws. One option is for the buyer to use the address of a friend or family member in a non-MCA state. Another is to purchase the metals through an IRA with a custodian in a non-MCA state. A third is to sell the metals to an offshore structure that the buyer controls or is a beneficiary of.

Ultimately, though, the lesson of IGBE and similar scams is “buyer beware.” Wherever you buy, if you don’t take physical possession of precious metals you purchase, make sure that the company you’re dealing with is storing real gold, silver, platinum, or palladium—not railroad ties painted to look like the real thing.

Now, Here’s How to Report Them…

Unfortunately, neither the IRS nor the U.S. Treasury has provided direct guidance on how to report metals held offshore. As a result, I generally recommend that my clients report such ownership, although there appear to be some exceptions.

First, a little background…

U.S. citizens and residents have an annual obligation to report the existence of all “foreign bank, securities or ‘other’ financial accounts” if the aggregate value of those accounts exceeded US$10,000 at any time during the preceding year. Those failing to do so face a fine up to US$250,000, imprisonment up to five years, or both. (In an earlier blog entry, I described how non-U.S. persons have the same obligation if they are “in or doing business” in the United States.)

The report, which the Treasury Department cleverly calls Form TD F 90-22.1, is due by June 30 of the following year. Thus, you must file this form by June 30, 2009, if you had any reportable foreign account relationships anytime in 2008.

You have a separate obligation to disclose any “reportable” foreign accounts on Schedule B of Form 1040. Hopefully, you already made that acknowledgment when you filed your 2008 tax return. If not, you should file an amended return and make the required disclosure (check “yes” on line 7a of Schedule B).

The Treasury Department and the IRS construe the term “financial account” very broadly. The definition unquestionably includes bank, securities, and other accounts that hold financial instruments. However, it does not include individual bonds or stock certificates. This is an important distinction. If you have a foreign brokerage account that contains stock, this is a foreign financial account. If you hold individual shares of the stock directly, it is not reportable.

By analogy, the same rules would presumably apply to gold or other precious metals held offshore. If you hold the metals in a safety deposit box or private vault, without opening a bank or other financial account, you don’t appear to have any reporting obligation. (However, at many foreign banks, you must open an account in order to rent a safety deposit box.) On the other hand, if you purchase the metals through a foreign bank account and the bank stores the metals in its vault as part of your account holdings, the relationship would be reportable.

What if you arrange for a company to purchase gold or other metals on your behalf and that company stores those metals on your behalf in a foreign bank’s vault? While nothing is certain in life (other than death and taxes) a strong case can be made that this is not a “foreign financial account” if the following conditions apply:

• The company does not itself sell the metals but only brokers purchases and sales

• The metals are held together in a designated area of the foreign bank’s vault

• Each bar or coin is identified by a unique, certified number.

• The bars or coins in the vault are individually packaged and labeled so that it they are readily identifiable as your property.

• You can take physical possession of the metals at any time.

Naturally, the IRS might disagree with this analysis. And if you enter into such an arrangement, I highly recommend confirming my interpretation with your own tax advisor.

Regards,
Mark Nestmann

January 15, 2010

Since 1990, Mark Nestmann has helped hundreds of clients seeking wealth preservation and international tax planning solutions. He is the author of many books and reports dealing with these subjects and a popular public speaker.

Beginning his career as an investigative journalist in 1983, Nestmann now serves as President of The Nestmann Group, Ltd., an international consultancy assisting individuals to achieve their wealth preservation goals. He also is the Tax and Asset Protection editor for The Sovereign Society. Nestmann divides his time between offices in Vienna, Austria and Phoenix, Arizona.

Keeping Precious Metals Offshore was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.