From
Russia With Gloves…and Why You Should Be Buying Gold Now! By Fitzroy McLean
/ May 10, 2010 • Categorized as Asset Protection
My
first personal experience with runaway inflation happened
in Poland not long after the fall of the Berlin Wall and the
dissolution of the Soviet Union. I was in Krakow for a meeting
and told my local contact I would call when I arrived. I tried
from the hotel but could not reach him, so I decided I would
take in some local culture and call him from town. Now it
may be hard for some of you to remember but these were the
days before mobile phones so a pay phone was the most logical
and convenient form of communication. After dinner I set out
to make the call and asked the barman for change for the pay
phone. He looked at me as if I´d asked for a unicycle
to go with a shot of motor oil. The inflation in Poland was
such that there were no longer coins in circulation. There
was only paper currency even though the pay phones only took
coins. Not only did the phone company lose revenue that night,
but I had to walk back to my hotel to make the call. A day
or two later I was enjoying an espresso in the main square
when church let out. In Krakow it is tradition that children
throw coins into the fountain and pray for a loved one after
the service. Since there were no coins and not wanting their
loved ones to suffer eternal damnation, they threw paper currency
into the fountain. Shortly afterwards a church worker came
over with a large wheelbarrow and fished out the prepaid salvation.
In absorbing the strange spectacle, I remember thinking how
horrible it must be to live in a country where your purchasing
power erodes so quickly.
I was reminded of this recently in, of all places, the gym
in Punta del Este Uruguay. The boxing trainer there is quite
a character. Everyone just calls him Polako, which is the
Spanish way of saying ¨The Polak¨. He was a non commissioned
officer in the Polish Army when the Soviets stopped funding
the payroll. After about six months without a salary, he and
a couple of friends headed west looking for opportunity. In
those days there was no EU so he was a tourist. When his visa
ran out he happened to be in Marseilles. What does a soldier
do when he runs out of money and his visa expires in Marseilles?
Why he joins the French Foreign Legion. Naturellement, mon
ami. After spending the bulk of his contract in Africa he
left the Legion and relocated to the beaches of South America
where he makes his living coaching boxers and wannabe boxers,
bouncing at hot night clubs and working as a bodyguard for
visiting Europeans. Not a guy you would expect to be well
versed on the vagaries of international capital flows. Right?
Au contraire, mon ami.
While catching my breath after a tough workout, I was chatting
with Hans. Hans is a German who recently changed residence
from Monaco in favor of Uruguay. He lives most of the year
in Uruguay but still spends two or there months at his home
in the Greek Isles. He has lived part time in Greece for nearly
15 years and the two of us have been calling for calamity
and violence since Greece´s debt woes first started
to become public knowledge. I was asserting my opinion that
in the near future the Euro will reach parity with the US
dollar. Hans was expressing his firm belief that the Greeks
would throw out their government long before they would bend
to the will of Brussels or Berlin, when Polako piped up, ¨Let
me tell you one thing. However bad you think it will be, it
will be much worse and last much longer¨. Polako then
went on to discuss the currency crises he has witnessed first
hand. Poland, Argentina, Uruguay and Brazil. Everyone, he
explained, even the most pessimistic underestimated how far
and how fast a currency can drop once people lose confidence.
First it starts with the bankers then it spreads to the people.
¨Once grandma starts bartering for borscht the money is
in a whirlpool of death¨ explained the former French Foreign
Legion heavyweight champ.
Polako then explained how the best way to preserve purchasing
power is to buy ¨real things¨. He said gold is the
best if you are rich but if not cigarettes, coffee, tea even
roofing shingles are a good way to stay out of the death spiral.
Hans agreed and as a savvy international investor with the
best paid advisers in Switzerland and Monaco at his disposal,
he has been buying gold and gold shares. Naturally, we at
Without Borders agree. We have been expecting and profiting
from the coming currency and sovereign debt crisis for many
months. What is most encouraging is that the man on the street
is just starting to take notice. That means the biggest profits
are still on the horizon. The average European is taking notice
and Americans should because the debt crisis express is heading
their way. There is less and less time to prepare for the
coming catastrophe. We are glad we own gold and gold companies
and we are shifting more of our portfolio into the best quality
companies that explore for and own natural resource deposits.
After my conversation with Polako and Hans I spoke to Carlos
Andres of the Frontier Research Report. Carlos is an authority
on macro-economics and monetary history. He studied these
esoteric topics at UCLA before he became a renowned financial
analyst specializing in the mining industry. He travels the
world visiting mining companies and analyzing political risk.
His advice was, ¨Everyone should own physical gold. Everyone
should own some shares in the best big mining companies and
if you really want accumulate multigenerational wealth when
all hell breaks loose, build a portfolio of junior gold stocks¨.
We tend to agree with him. Junior gold stocks are one of the
best kept investment secrets because they are so volatile
and hard to analyse that it isn´t worth the time of
mainstream brokers to study them. Another problem is that
mining is a cyclical business and as a result of persistently
low commodity prices for most of the last three decades it
was a dead industry. No hot shot engineer or financier wanted
anything to do with the industry. But the small mining companies
that explore for gold offer the most spectacular leverage
to the gold price. Those that do make a career out of learning
the business really clean up when the gold price explodes.
By leverage to gold we mean that for every $1 rise in the
price of gold the shares of good junior resource stocks that
have discovered economic deposits goes up several times. It
is not unusual to see these shares go up several hundred percent
in a few weeks once a discovery is announced. Then again it
is not unusual to see these shares go to zero when the company
spends all its money drilling holes in the ground that reveals
little more than dirt and rock. We suspect that the junior
resource sector will be the next mania once global currencies
start to melt. We are not experts and it takes an enormous
amount of work to separate the best junior resource companies
from those that will go bust. Exploration is a tough business
so we rely on experts who understand the business. Two of
the best resources are The International Speculator and The
Frontier Research Report.
We think it is worth your while to explore the explorers.
We definitely want to have exposure to hard assets when inflation
gets going. As bad as Greece´s situation seems it is
not much worse than many other governments including about
12 US states. If you don´t take the time positioning
your portfolio for the opportunity that the next crisis will
present you might be stuck bartering cigarettes for borscht
with Polako´s grandmother.
Fitzroy McLean is a senior editor at Without Borders a monthly
newsletter that highlights actionable investment advice from
around the world. He has lived in six countries and invested
in many more. Prior to his investment career, he was a soldier,
spy and mediocre rodeo cowboy. He was schooled at West Point
and Oxford but educated in the back alleys of Beirut and the
trading rooms in London.