Coffee - It's more then just Starbucks' Achilles' Heel

If you having been following us you know that coffee [ticker JO] has been one of our favorite trades for early 2014. Our trading partner Adam Hewison sent us this great post on coffee and it's effect on price action in Starbucks [SBUX].......

Today, I am going to be analyzing the relationship between Starbucks Corp. (NASDAQ:SBUX) and its main raw commodity, coffee beans.

Let me start off by saying that I really like Starbucks and the coffee it sells. In fact, my favorite drink at Starbucks is a Venti Coffee Frappuccino with one third the ice, blended five times. Major Challenges

Starbucks faces a major challenge, one it cannot control - the price of its major commodity, coffee.

With one of the worst droughts in history hitting Brazil's coffee belt region, it is rapidly pushing prices higher. This is no ordinary drought as it is forcing more than 140 cities in Brazil to ration water. Reports in Brazilian newspapers indicate that some neighborhoods are receiving water only every three days. This is serious, as Brazil produces most of the world's coffee.

With Coffee (NYBOT:KC.H14.E) prices at 14 month highs, there is little to suggest that this trend is going to change any time soon. It would appear as though early predictions are indicating that coffee supplies could be 5 million bags lower than consumption for the 2014–2015 season.

The other side of the coin is that there are more and more people drinking coffee. We are seeing that in developing markets such as Brazil, India, and China where they are acquiring a taste for this delicious beverage.

I'm sure that Starbucks can put pressure on the growers and the wholesalers, but that will only go so far in savings. Eventually, they're going to have to take a hit on their bottom line because of the drought in Brazil and higher raw commodity prices.

When does the consumer eventually say that cup of coffee at Starbucks is just too expensive? Will consumers, instead of having one cup every day, cut back to maybe every other day?

A Tale Of Two Charts

In the two charts below, you'll see a broad yellow column highlighting the same time frames on each chart. It shows the high period in Starbucks and a low period in coffee prices.

What Does This Company Do?

Starbucks Corporation operates as a roaster, marketer, and retailer of specialty coffee worldwide. Its stores offer coffee and tea beverages, packaged roasted whole bean and ground coffees, single serve products, juices and bottled water.




Chart Legend & Technical Picture For Starbucks (Black Numbers)

1. All Trade Triangles are red and negative
2. Yellow column shows high in stock prices and inverse in coffee price
3. Downtrend firmly in place




Chart Legend & Technical Picture For Coffee (Black Numbers)

1. All Trade Triangles are green and positive
2. Yellow column shows low in coffee prices and inverse in stock price
3. Uptrend firmly in place

To summarize, I expect the current downtrend in Starbucks to continue unless there is a dramatic reversal in coffee prices or a reversal with the Trade Triangles.

If I am correct in my analysis and these two trends continue, Starbucks could move down to the following Fibonacci support levels:

38.2% @ $67.85
50% @ $63.31
61.8% @ $58.77

I hope you found this Starbucks Corp. (NASDAQ:SBUX)/Coffee (NYBOT:KC.H14.E) comparison informative and helpful.

Adam Hewison
President, INO.com

Click here to get all of Adams blog post in your inbox



This weeks special....Get our FREE "Channel Trading Program"

Appetite for Distraction

By Grant Williams

It was during the siege of Fort Sumter that the story I want to share with you takes place….

This story came to me from the pen of Jared Dillian, the very talented writer of an excellent publication called The Daily Dirtnap; and the moment I read it I knew I had to share it with my readers, because it illustrates perfectly something I have been talking to people about for years.

Readers can, and definitely should check out Jared's fantastic work HERE; and to give you a taste of Jared's enviable narrative prowess, I am going to let him tell you the story as he told it to me:

The Calhoun Mansion

Let me tell you again why I like gold and silver.

I was in Charleston two weekends ago for my mom's birthday. We did a horse and carriage ride, a historical tour, around the city. I always thought those things were cheesy, but as it turns out, the horse and carriage tours are very highly regulated, the tour guides have to pass a series of knowledge exams and then take continuing education. I kid you not! Ours had been doing it for six years, and was good.

So as we went by the Calhoun Mansion on Meeting Street, the tour guide fella starts telling us about the house. It was built by a guy named George Walton Williams, who was the richest guy in town. This was back during the Civil War. It's a 24,000 square foot mansion with 14 foot ceilings. It's just monstrous. It cost $200,000 to build — back in the 1860s! So how did Mr. George Walton Williams make his money?

Well, as you probably know, Charleston is a port city, and during the War, the Union Navy blockaded the port and then bombarded the city for weeks and months, but during this time, there were these guys who were "blockade runners" who would sneak by the navy ships, bringing necessary supplies to the city, which was under siege. Blockade runners made a lot of money — five grand a trip sometimes — but you know who made even more money? George Walton Williams did.

He financed the blockade runners.

Williams was not the only one doing this, but he was the most successful, why? Because he insisted on being paid only in gold and silver. If you know your Civil War history you also know that there was a Confederate currency, and I don't know if Mr. Williams had a particular view on the Confederate dollar, but at the conclusion of the war, the Confederate dollar collapsed, and everyone was left holding the bag — except for George Walton Williams.

Williams became like a J.P. Morgan character in the city — Charleston was the center of Southern finance, and Williams singlehandedly bailed out the Broad Street banks. He also built a pretty cool house.

Sorry to interrupt; I know you were enjoying Jared's prose, but we're just about to get to the point of this story, so I want to make sure everybody is paying close attention.

This next paragraph contains the fundamental principle of investing in gold and silver, which so few people genuinely understand — despite the multitudes of commentators expending countless thousands of words.

Hit 'em between the eyes, Jared:

So these anti gold idiots are just that, idiots, or else they have the memory of a goldfish, because currencies come and currencies go, as sure as night follows day. It is the natural order of things. And as you can see, it's not about trading gold to get rich or getting long gold or buying one by two call spreads or getting fancy, it literally is about protecting yourself in the end. It's not like Williams got rich. He just stayed rich. Everyone else got poor.

It's not like Williams got rich. He just stayed rich. Everyone else got poor.

That's it. Right there.

Thanks, Jared, I'll take it from here.

Click here to continue reading this article from Things That Make You Go Hmmm… – a free weekly newsletter by Grant Williams, a highly respected financial expert and current portfolio and strategy advisor at Vulpes Investment Management in Singapore.

The article Things That Make You Go Hmmm: Appetite for Distraction was originally published here at Mauldin Economics

Don't Miss This Weeks Free Trading Webinar...."Making the "Big Trades"

Why the Resource Supercycle Is Still Intact

By Rick Rule, Chairman and Founder, Sprott Global Resource Investments

Natural resource based industries are very capital intensive, and hence extremely cyclical. It is not unreasonable to say that as a natural resource investor, you are either contrarian or you will be a victim.

These markets are risky and volatile!

Why Cyclicality?

 

Let's talk about cyclicality first. Some of the cyclicality of these industries is a function of their being extraordinarily capital intensive. This lengthens the companies' response times to market cycles.

Don't miss this weeks free webinar "The Big Trade with John Carter"....Just Click Here

Strengthening copper prices, for example, do not immediately result in increased copper production in many market cycles, because the production cycle requires new deposits to be discovered, financed, and constructed......a process that can consume a decade.

Price declines—even declines below the industry's total production costs—do not immediately cause massive production cuts. The "sunk capital" involved in discovery and construction of mining projects and attendant infrastructure (such as smelters, railways, and ports) causes the industry to produce down to, and sometimes below, their cash costs of production.

Producers often engage in a "last man standing" contest, to drive others to mothball productive assets, citing the high cost of shutdown and restart. They fail to mention their conflicts of interest as managers, whose compensation is linked to running operational mines.

Interest-rate cycles can raise or lower the cost and availability of capital, and the accompanying business cycles certainly influence demand. Given the "trapped" nature of the industry's productive assets, local political and fiscal cycles can also influence outcomes in natural-resource investments.

Today, I believe that we are still in a resource "supercycle," a long-term period of increasing commodity prices in both nominal and real terms. The market conditions of the past two years have made many observers doubt this assertion. But I believe the current cyclical decline is a normal and healthy part of the ongoing secular bull market.

Has this happened in the past?

 

The most striking analogy to the current situation occurred in the epic gold bull market in the 1970s. Many of you will recall that in that bull market, gold prices advanced from US$35 per ounce to $850 per ounce over the course of a decade. Fewer of you will recall that in the middle of that bull market, in 1975 and 1976, a cyclical decline saw the price of gold decline by 50%, from about $200 per ounce down to about $100 per ounce. It then rebounded over the next six years to $850 per ounce.

Investors who lacked the conviction to maintain their positions missed an 850% move over six short years. The current gold bull market, since its inception in 2000, has experienced eight declines of 10% or greater, and three declines—including the present one—of more than 20%.

This volatility need not threaten the investor who has the intellectual and financial resources to exploit it.

The natural-resources bull market lives…

 

The supercycle is a direct result of several factors. The most important of these is, ironically, the deep resource bear markets which lasted for almost two decades, commencing in 1982.

This period critically constrained investment in a capital-intensive industry where assets are depleted over time.

Productive capacity declined in every category; very little exploration took place; few new mines or oilfields replenished reserves; infrastructure and processing assets deteriorated. Critical human-resource capabilities suffered as well; as workers retired or got laid off, replacements were neither trained nor hired.

National oil companies (NOCs) exacerbated this decline in many nations by milking their oil and gas industries to subsidize domestic spending programs for political gain. This was done at the expense of sustaining capital investments. The worst examples are Mexico, Venezuela, Ecuador, Peru, Indonesia, and Iran. I believe 25% of world export crude capacity may be at risk from failure of NOCs to maintain and expand their productive assets.

Demands for social contributions in the form of taxes, royalties, carried equity interests, social or infrastructure contributions, and the like have increased. Voters are not concerned that producers need real returns to recover from two decades of underinvestment or to fund capital investments to offset depletion. Today this is actively constraining investment, and hence supply.

Poor people getting richer…

 

The supercycle is also driven by globalization and the social and political liberalization of emerging and frontier markets. As people become freer, they tend to become richer.

As poor countries become less poor, their purchases tend to be very commodity centric, especially compared to Western consumers. For the 3.5 billion people at the bottom of the economic pyramid, the goods that provide the most utility are material goods and consumables, rather than the information services or "high value-added" goods.

A poor or very poor household is likely to increase its aggregate calorie consumption—both by eating more food and more energy-dense food like meat. They will likely consume more electrical power and motor fuel and upgrade their home from adobe or thatch to higher-quality building materials. As people's incomes increase in developing and frontier markets, the goods they buy are commodity-intensive, which drives up demand per capita. And we are talking billions of "capitas."

Rising incomes and savings among certain cultures in the Middle East, South Asia, and East Asia—places with a strong cultural affinity for bullion—have increased the demand for gold, silver, platinum, and palladium bullion. Bullion has been a store of value in these regions for generations, and rising incomes have generated physical bullion demand that has surprised many Western-centric analysts.

Competitive devaluation

 

The third important driver in this cycle has been the depreciation of currencies and the impact that has had on nominal pricing for resources and precious metals.

Most developed economies have consumed and borrowed at worrying levels. The United States federal government has on-balance-sheet liabilities of over $16 trillion, and off-balance-sheet liabilities estimated at around $70 trillion.

These numbers do not include state and local government liabilities, nor the likely liabilities from underfunded private pensions. Not to mention increased costs associated with more comprehensive health care and an aging population!

Many analysts are even more concerned about the debts and liabilities of other developed economies—Europe and Japan. In both places, debt-to-GDP ratios are greater than in the US. Europe and Japan are financing themselves through a combination of artificially low interest rates and more borrowing and money printing. This drives down the value of their currencies, helping their exports.

But which nations' leaders will stand firm and allow their export industries to wither as their domestic producers suffer from cheap competing foreign goods? If Japan's Abe is successful at increasing his country's exports at the expense of its competitors like Taiwan, Korea, or China, then his policies could lead to competitive devaluation. And how will the European community react, for that matter?

Loss of purchasing power in fiat currencies increases the nominal pricing of commodities and drives demand for bullion as a preferred savings vehicle.

The factors that have driven this resource supercycle have not changed. Demand is increasing. Supplies are constrained. Currencies are weakening. Thus I believe we remain in a secular bull market for natural resources and precious metals.

With that in mind, I would call the current market for bullion and resource equities a sale.

Where to invest?

 

Let's talk about a type of company most of us follow: mineral exploration companies, or "juniors." We often confuse the minerals exploration business with an asset-based business. I would argue that is a mistake.

Entities that explore for minerals are actually more similar to "the research and development" space of the mining industry. They are knowledge based businesses.

When I was in university, I learned that one in 3,000 "mineralized anomalies" (exploration targets) ended up becoming a mine. I doubt those odds have improved much in 40 years. So investors take a 1-in-3,000 chance in order to receive a 10-to-1 return.

These are not good odds. But understanding the industry improves them substantially.

Exploration companies are similar to outsourcing companies. Major mining companies today conduct relatively little exploration. Their competitive advantage lies in scale, financial stability, and engineering and construction expertise. Similar to how big companies in other sectors outsource certain tasks to smaller, more specialized shops, the big miners let the juniors take on exploration risk and reward the successful ones via acquisitions.

Major companies are punished rather than rewarded for exploration activities in the short term. Majors therefore tend to focus on the acquisition of successful juniors as a growth strategy.

Today, the junior model is broken. Many public exploration companies spend a majority of their capital on general and administrative expenses, including fundraising. Overlay a hefty administrative load on an activity with a slim probability of success, and these challenges become even more severe.

One response from the exploration and financial community has been to put less emphasis on exploration success and focus instead on "market success." In this model, rather than "turning rocks into money," the process becomes "turning rocks into paper, and paper into money."

One manifestation of that is the juniors' habit of recycling exploration targets that have failed repeatedly in the past but can be counted on to yield decent confirmation holes, and the tendency to acquire hyper-marginal deposits and promote the value of resources underground without mentioning the cost of actually extracting them.

The industry has been quite successful, during bull markets, at causing "sophisticated" investors to focus on exciting but meaningless criteria.

Being successful in natural resource investing requires you to make choices. If your broker convinces you to buy the sector as a whole, they will have lived up to their moniker—you will become "broker" and "broker."
We have already said that exploration is a knowledge-based business. The truth is that a small number of people involved in the sector generate the overwhelming majority of the successes. This realization is key to improving our odds of success.

"Pareto's law" is the social scientists' term for the so-called "80-20 rule," which holds that 80% of the work is accomplished by 20% of the participants.

A substantial body of evidence exists that it is roughly true across a variety of disciplines. In a large enough sample, this remains true within that top 20%—meaning 20% of the top 20%, or 4% of the population, contributes in excess of 60% of the utility.

The key as investors is to judge management teams by their past success. I believe this is usually much more relevant than their current exploration project.

It is important as well that their past successes are directly relevant to the task at hand. A mining entrepreneur might have past success operating a gold mine in French speaking Quebec. Very impressive, except that this same promoter now proposes to explore for copper, in young volcanic rocks, in Peru!

In my experience, more than half of the management teams you interview will have no history of success that shows that they are apt at executing their current project.

Management must be able to identify the most important unanswered question that can make or break the project. They must be able to say how that question or thesis was identified, explain the process by which the question will be answered, the time required to answer the question, how much money it will take. They also need to know how to recognize when they have answered the question. Many of the management teams you interview will be unable to address this sequence of questions, and therefore will have a very difficult time adding value.

The resource sector is capital intensive and highly cyclical, and we expect that the current pullback is a cyclical decline from an overheated bull market. The fundamental reasons to own natural resource and precious metals have not changed. Warren Buffett says, "Be brave when others are afraid, be afraid when others are brave." We are still "gold bugs." And even "gold bulls."

Rick Rule is the chairman and founder of Sprott Global Resource Investments Ltd., a full-service brokerage firm located in Carlsbad, CA. He has dedicated his entire adult life to different aspects of natural-resource investing and has a worldwide network of contacts in the natural-resource and finance worlds.

Watch Rick and an all-star cast of natural-resource and investment experts—including Frank Giustra, Doug Casey, John Mauldin, and Ross Beaty—in the must-see video "Upturn Millionaires," and discover how to play the turning tides in junior mining stocks, for potentially life changing gains. Click here to watch.

The article Why the Resource Supercycle Is Still Intact was originally published at Casey Research.com.

Don't miss this weeks free webinar "The Big Trade with John Carter"....Just Click Here

 

You asked for it.....another LIVE Clinic with John Carter

Last week our trading partner John Carter put on a free live clinic looking at how he makes his "big trades".


Replay and 2nd LIVE Clinic HERE


That produced a TON of questions. So after answering about 200 emails he told us......

"I'm just going to do another clinic for everyone, too many examples and points that will really help people trade."

So that's what he's doing Tuesday the 25th at 8 p.m. eastern time.


Get your seat & watch replay of 1st clinic HERE


We'll see you on Tuesday!


Get ready for John's Clinic by watching one of his recent videos

Master Limited Partnerships Generate Safe Income for Seniors and Savers

By Dennis Miller

It's time to answer the "who, what, when, where, and why" of investing in master limited partnerships (MLPs)…....


Andrey Dashkov, senior research analyst at Miller’s Money Forever, is the rare person who, when you asked for a hammer comes back with a hammer, nails, staples, and glue. In short, he often comes up with better solutions to tricky problems than I ever thought possible.

Being the Architect of your next "Big Trade"....This weeks FREE webinar!

Since Andrey and I are on a nonstop mission to unearth the best opportunities for generating safe income, we have looked to MLPs more than once. Many Business Development Companies (BDCs) and Real Estate Investment Trusts (REITs) also fit the bill. Today, however, we are focusing exclusively on how MLPs can produce a healthy and steady income without exposing your nest egg to unwelcome risks.

The Nuts and Bolts of MLPs

 

By Andrey Dashkov
An MLP is an entity structured as a limited partnership instead of the traditional C-corporation. This allows the company to avoid corporate-level taxes. The limited partners pay most of the taxes, which means that MLPs are essentially pass-through entities.

In the United States, the net effective rate of corporate income tax is 40%. That means a corporation calculates its profit, pays the appropriate income tax to the government, and then pays dividends from what remains. With an MLP all the profits are passed through to the unit holders.

While a traditional corporation can choose to pay a dividend, an MLP does not have that option. In order to maintain their status, MLPs are required to generate at least 90% of their income from qualifying sources and distribute the major portion of that income. In most cases these sources include activities related to the production, processing, and distribution of energy commodities, including gas, oil, and coal.

The government gives a special treatment to these activities to encourage investment into the United States' energy infrastructure.

Limited partners (LPs) own the company together with a general partner (GP). The GP takes care of the day-to-day operations, typically holds a 2% stake, and can usually receive incentive distribution rights (IDRs). LPs, called unit holders, (which we can become by buying shares of publicly traded MLPs) receive dividend-like cash distributions. LPs, unlike traditional shareholders, do not have voting rights.
There are many advantages to MLPs, including:

• Attractive yields;
• Inflation protection;
• Portfolio diversification;
• Tax advantages; and
• Resilient business model.

 

Attractive Yields

 

MLPs pay various yields that average 5-10%. Data for the Alerian Index, which tracks the top 50 MLPs, show that in Q2 2013 MLP yields varied from 3-12%, with an average of 6.5%.Besides the actual yield, MLP investors can count on distribution growth. Dividends per share of Alerian Index constituents grew at a compounded rate of 4.1% over the past five years.

Inflation Protection

 

Several factors hedge against inflation:

• Inflation-adjusted contracts renewed periodically;
• Distribution growth has historically outpaced the growth in CPI; and
• MLP unit (share) prices are weakly correlated with movements in inflation and interest rates.

 

Portfolio Diversification

 

MLPs have a low correlation to other asset classes, including equity, debt, and commodities. However, for a short time they may correlate with any asset class or the market in general.

MLPs are less volatile than the broad market. Currently at 0.5, the average beta of Alerian Index, is quite conservative. This suggests that if the broad market goes down by 10%, we should expect the Alerian Index to drop by 5%. An individual company's volatility may stray from the average, but in general MLPs should be much less volatile than the market as a whole.

Generally, the vast majority of MLPs operate in the energy sector, but usually do not own the underlying commodities; this is part of the reason for the decreased volatility. Their income generally consists of transportation fees. However, some MLPs can be exposed to commodity risk (coal, propane, and oil exploration and production MLPs, among others). Economy-wide consequences of a severe recession may impact the demand for energy commodities and, in turn, the profitability of transportation companies.

Tax Advantages

 

An MLP investor typically receives a tax shield of 80-90% of one's annual cash distributions, which is a very nice feature. This defers tax payments until the unit (your share) is sold.

The tax payment schedule for an MLP is illustrated below. Assume you bought one unit of an MLP for $20 and sold it after five years for $22, having received $2 annually in years 1-5. Assuming your ordinary income tax is 35%, and the long-term (LT) capital gains are taxed at 15%, you can see the breakdown.

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Purchase price	$20.00
Distribution per unit		$2.00	$2.00	$2.00	$2.00	$2.00
Income per unit		$2.00	$2.00	$2.00	$2.00	$2.00
Depeciation expense		$1.60	$1.60	$1.60	$1.60	$1.60
Cost basis	$20.00	$18.40	$16.80	$15.20	$13.60	$12.00
Sale price						$22.00
Taxes:
Earnings per unit		$0.40	$0.40	$0.40	$0.40	$0.40
Depreciation recapture						$8.00
Amount subject to ordinary tax rates		$0.40	$0.40	$0.40	$0.40	$8.40
Ordinary tax rates		35%	35%	35%	35%	35%
Taxes owed at ordinary rates		0.14	0.14	0.14	0.14	2.94
Amount subject to LT capital gains						$2.00
LT capital gains rate						15%
Taxes owed at ordinary rates						$0.30
Total taxes owed		$0.14	$0.14	$0.14	$0.14	$3.24
Source: Credit Suisse

Resilient Business Model

During periods of economic uncertainty, MLPs remain a solid source of income. In 2008-2009, 78% of all energy MLPs either maintained or increased their distributions. In comparison, 85% of real estate investment trusts (REITs) either cut or suspended dividend payments.

Now, a note of caution is in order. Despite the excellent income track record, MLP share prices stumbled as they became more correlated to the general market. However, the investors who held them through the difficult times saw the share price rise again. MLPs returned to January 2008 levels in early 2010; the S&P 500 did not do the same until 2013.

The same plunge could happen again if a severe economic crisis hits. As we said, MLPs may move with a falling market. The fact that more investors are aware of MLPs now than a decade or two ago adds to this risk. As investors have searched for yield, MLPs have become more mainstream; however, they are by no means your average S&P 500 stock.

Also, there are two immediately positive outcomes to the higher investor awareness of MLPs: higher liquidity and access to more capital. In the Money Forever portfolio we look for the best and safest available and then protect our downside with protective stop losses.

Principal Risk Areas

 

With any investment offering a reward, there is a corresponding risk. Here are the key risks of MLPs.
Risk #1: Economic downturns. If the US economy is hit by a severe economic crisis that drives the demand for energy products down, MLPs will take a blow. Like a trucking business that transports products for which the demand is going down, if less product is shipped through a pipeline owned by an MLP, their revenue may decrease.

This, however, is where some investors may get confused. If a pipeline MLP has a contract with an energy company, the price of the transported product may increase or decrease, but at the same time, the MLP may have a fixed-fee arrangement with the energy company. So, if the volume flowing through the pipeline remains steady, its revenue should not fluctuate.

Risk #2: Access to capital and interest rates. As a general rule, MLPs return 100% of their distributable cash flow (DCF), less a reserve determined by the general partner, to the unit holders. Unlike real estate investment trusts that must give away a certain share of their cash flow every quarter, MLP distributions are governed by individual partnership agreements, so the terms vary.

However, the majority of cash an MLP earns will be distributed, so it's only natural that they turn to issuing debt or equity to finance growth projects. When their interest costs rise MLPs that need capital right away will be at a disadvantage. We prefer companies with enough internally generated capital to finance growth, and no major ongoing projects that require billion dollar loans and thereby run the risk of being underfunded or funded at an unfavorable interest rate. We also prefer companies with fixed rate debt to floating rate.

Risk #3: Management and execution. Management should have a track record of successful investment in new assets and cash generation to finance distributions.

We also look for companies that have 5 to 10 year capital plans as part of the write up, and a history of following those plans. They tend to fare better when it comes to keeping capital costs under control.

Risk #4: Sustainability of cash distributions. The above three risks boil down to whether or not an MLP will be able to churn out cash for its unit holders. The distributions should be sustainable, and should grow year after year. The primary reason for buying an MLP is income. We need to make sure the cash keeps coming in.

A company's track record of cash payments is a good, but not perfect, indicator of how it will perform in the future. Variable-rate distributions tend to, well, vary more significantly than those of traditional MLPs.

Distributions in the midstream sector tend to be more predictable; natural gas pipelines and storage generate the most stable cash flows while refining/upstream MLPs do so to a lesser extent. We carefully consider these factors when evaluating our investment options.

The "Taper" Factor

 

When Ben Bernanke uttered the word "taper" on June 19, the markets jittered. Even the traditionally defensive sectors such as utilities took a hit.

MLPs were not immune to the potential implications of the Fed easing up on its bond-purchase program which many believe is helping the US economy. The market panicked, and MLPs dropped in price. Readers will note the index dropped in the middle of 2013. The drop was less steep than those in either the broad market or the utilities sector and MLPs rebounded—in less than a week, while it took approximately three weeks for both the S&P 500 and XLU to get back to their June 18 levels.

When evaluating a potential candidate, a prudent investor will see how they have performed during times of market volatility. Sometimes trading a bit of yield for much less volatility is a smart move.

The IRA Caveat

 

We do not recommend putting MLPs in an IRA account. By placing an MLP in a tax-deferred account, you may lose part of the tax advantage the MLP structure provides. In an IRA account, unrelated business taxable income (UBTI) of over $1,000 is subject to federal income tax. If you earn more than $1,000 annually from an MLP's cash distributions and other sources of UBTI, the excess will be taxable. This becomes more likely over time, since most MLPs increase their cash distributions.

A Peek Behind the Curtain

 

In summary, an MLP gives us a couple of advantages from a tax perspective. There is more money to pay out in dividends. Unlike a traditional corporate dividend, which is paid after a corporation pays income taxes, MLPs do not pay corporate income taxes. An MLP's income is taxed only once, when the dividends are received.

Initially, when you buy an MLP, only 10 to 20 percent of the MLP distribution is considered taxable income. The rest of the distribution is considered return of capital and isn't subject to tax when you receive the dividend. Basically you put off paying some taxes for the short term. When you eventually sell your MLP, the tax is adjusted so the net amount of taxes is the same. The formula is technical, but the information you receive from your broker can be given to a competent CPA and you should be fine.

You can see why MLPs have become so popular in a yield-starved environment. While they have attracted a lot of investors, there are still some great opportunities for those willing to do their homework.

Dennis and I added our favorite MLP to the Money Forever portfolio in October, and we are chomping at the bit to share it with you… But, because of the special relationship we share with our paid subscribers, you'll need to sign up to for a premium subscription at no-risk to your pocketbook to find out what it is. Subscribe to our regular monthly newsletter and take a peek at the MLP we recommended, along with our entire portfolio.

If, after 90 days, you decide it's not right for you, we'll return 100% of your money without a fuss. Click here to get started.

The article Master Limited Partnerships Generate Safe Income for Seniors and Savers was originally published at Millers Money

Being the Architect of your next "Big Trade"....This weeks FREE webinar!

World Money Analyst Update on Russia

By John Mauldin

In last week's special Thursday edition of Outside the Box, World Money Analyst Managing Editor Kevin Brekke interviewed WMA contributor Ankur Shah on emerging markets, but they didn't touch on one very important emerging market: Russia. So this week I have brought Kevin back to sound out the views of Alexei Medved, WMA's Russia and CIS contributing editor.

And right off the top, Alexei tells us two significant and surprising things about the Russian market:

One should look at investing in Russia from at least two time perspectives: long term, meaning 10 plus years, and a medium time horizon of 1-3 years.

Long term, Russia is still the best performing major stock market in the world for the period 2000–2013, when measured in U.S. dollars against the major market indexes. It is well ahead of not only all developed markets, but also the markets in China, Brazil, and several other emerging markets that were and are much more a centre of attention by Western media and investors. This long-term outperformance was achieved despite the fact that 2013 was not a good year for Russian equities, with the RTS Index down 5% in 2013.

Medium term, the Russian market remains the most undervalued. The average P/E is about 4.5, significantly below other emerging markets and way below the multiple on shares in the developed markets.

Needless to say, there are challenges with investing in Russia, too; and Alexei and Kevin cover them thoroughly. If you have wondered about Russia – or for that matter the markets of emerging and developed countries anywhere else in the world – you really should tune in to World Money Analyst.

John Mauldin, Editor

Stay Ahead of the Latest Tech News and Investing Trends...

Click here to sign up for Patrick Cox’s free daily tech news digest.

Each day, you get the three tech news stories with the biggest potential impact.

---

World Money Analyst Update on Russia

 

World Money Analyst: I am very pleased to speak with Alexei Medved. Alexei is the Russia and CIS contributing editor at World Money Analyst, and I caught him at his office in London. Thank you for joining us today.

Alexei Medved: My pleasure, thank you for inviting me.

WMA: As you and I have discussed before, Russia remains a little understood market for many Western investors. Can you talk a little about the investment backdrop for Russia?

Alexei: One should look at investing in Russia from at least two time perspectives: long term, meaning 10 plus years, and a medium time horizon of 1-3 years.

Long term, Russia is still the best-performing major stock market in the world for the period 2000–2013, when measured in U.S. dollars against the major market indexes. It is well ahead of not only all developed markets, but also the markets in China, Brazil, and several other emerging markets that were and are much more a centre of attention by Western media and investors. This long term outperformance was achieved despite the fact that 2013 was not a good year for Russian equities, with the RTS Index down 5% in 2013.
Medium term, the Russian market remains the most undervalued. The average P/E is about 4.5, significantly below other emerging markets and way below the multiple on shares in the developed markets.

WMA: How has the Russian market held up so far this year, with emerging markets under pressure?

Alexei: Since the start of this year, the Russian market has underperformed other markets, down 8% in US dollar terms. This, to a large extent, could be explained by a noticeable decline of the ruble against the US dollar (-5.5%).

As you know, so far this year many emerging markets and emerging market currencies have been punished significantly, as Western institutional investors became worried about macroeconomic pressures in some of the emerging economies, like Turkey and Argentina. These countries have problems that are real and serious: too much external debt, a trade deficit, a budget deficit, declining foreign currency reserves, etc. So, it is understandable why foreign investors withdrew a lot of money from these markets recently.

What is hard to understand is why they also withdrew significant amounts of money from the Russian market. In my view, it is primarily because most investors continue to view emerging markets as a single class of investments. So, when they withdraw money they do it across the board, in all emerging markets. This is generally not the best approach. In contrast, investors do not approach developed markets as a single class, but differentiate between the countries.

WMA: Using your examples of Turkey and Argentina, how does Russia compare in terms of the macro picture?

Alexei: The macroeconomic position of Russia is vastly different from that of Argentina or Turkey. For starters, Russia has a positive trade balance and a balanced budget, unlike these and many other emerging and developed countries. Russia also has a very low debt load, with the ratio of external government debt-to-GDP around 10%, much lower then the roughly 95% in the US and even higher in some European countries. Further, the unemployment rate in Russia is around 5.5%, meaning the country is essentially running at full employment.

The unrefined "sell everything that's emerging" approach apparently in play by Western institutional investors has led to the Russian market being unjustifiably punished. The good news is that the punishment has created even better investment opportunities for investors who can avoid “heard mentality.” There are solid, profitable Russian companies that are trading today at very low valuations.

WMA: One of your areas of expertise is the use of short-dated, US-dollar-denominated Eurobonds to capture higher yield and manage risk. Can you explain this strategy a little for our readers?

Alexei: Of course. I think Russia and the CIS also present a good opportunity for fixed income investors. Given my serious worries about a possibility of rising inflation and yields in developed markets, we recommend investing only in relatively short-term bonds (under 4 years). Our [Alexei's independent business] weighted portfolio maturity is now under 2 years. One can either invest in Russian sovereign debt or the safest corporate bonds and receive somewhat higher yields than in comparable developed economy bonds. Investing in bonds that do not have an investment grade rating from one of the major rating agencies is another option.

Based on our local knowledge, we particularly like some high-yield bonds where we have a decent understanding of the company and believe that the bonds will be repaid, despite fairly low ratings from the credit agencies. This way, we invest in bonds that offer 10%-12% yields.

WMA: Switching to issues of politics and governance, many observers are concerned about issues of corruption in Russia, making it difficult for an investor to navigate the market. Has the current government embraced reforms on this?

Alexei: Obviously, one has to be very careful when considering investing in Russian equities or bonds. For investors that lack knowledge about the country, I do not recommend they attempt a do-it-yourself approach to selecting Russian shares. A better approach is to either invest through an index fund or to seek share selection advice from people who specialize in the Russian market on a day-to-day basis. This is in spite of the fact that over the last decade, Russia to some extent became much more investable.

Back to your question, corporate governance has generally improved, although perhaps not as much as some investors would like. The government is taking steps in this direction, yet a lot remains to be done. As Russia recently became a full member of the World Trade Organization (WTO), and its market is opening up to external competition, Russian companies will have to become more efficient to compete, and thus more profitable for investors wake up to the reality that Russia is a serious global player that's here to stay. This opens up even more opportunities for investors.

WMA: The January issue of World Money Analyst highlighted the importance of taking a longer view on markets and investments, something that you and I agree on. You've made some great recommendations at WMA, and recently advised to take profits on two stocks that were held for a year or longer. Can you briefly go over these trades?

Alexei: Yes, as I said earlier, one has to look at these opportunities on a medium- to long-term investment timeline and not attempt to trade these markets, as one’s investments can get unjustifiably punished, as is happening now. We have been active in the Russian market for over 20 years and certainly maintain such an approach when we look at investments to recommend to our clients. Once the investment is made, we monitor it on a constant basis, as one cannot just “salt it away.” Once the shares reach our target price, we sell them and move on to the next opportunity.

In the January 2014 issue of WMA, I recommended taking profits on two positions. The first was the shares of Russian airline Aeroflot, recommended in the January 2013 issue. By January 2014, its shares had moved up nicely on the back of stellar company operating results. We advised to sell the shares and realized an 84% gain, including the dividend, in 12 months.

The second was the shares of AFK Sistema, a large cap (US$18 billion) company that restructured itself from a conglomerate into essentially a private equity fund. I recommended its GDRs in the July 2012 issue. By January 2014 the shares had moved up significantly, and I advised to sell in that month's issue of WMA. We pocketed a total return of 63% in 18 months.

These returns are particularly remarkable against a negative 5.6% return of the Russian RTS Index in 2013.

While we still like both of these shares, their significant appreciation had reached our price targets, so it was time to cash in some chips. And seeing that these shares are now trading lower, we got out at the right time and preserved the investors’ profits.

WMA: We can't talk about Russia and not mention the ruble. Investing in certain currencies – like the Canadian dollar and Norwegian krone – has been in vogue for several years on the premise that these are "resource currencies" supported by the natural resource wealth of the issuing country. With Russia's vast mineral and commodity wealth, should we consider the ruble a commodity currency?

Alexei: Given that Russia is a large producer of oil, gas, and some other commodities, to some extent the ruble should be seen as a commodity currency, perhaps even a petrocurrency. So, if one believes that the oil price is likely to decline significantly and stay low for years to come, one should not buy Russia. However, if one believes that the oil price trend is flat to up in the medium and long term, Russia will do well macroeconomically.

WMA: Next to the emerging markets, another big issue is developments in Ukraine. You have covered Ukraine for World Money Analyst subscribers. The country seems to be caught in a conflict about alliances: to enter into a closer economic alignment with Moscow, or shift to stronger ties with the EU. What are your thoughts on this and the investment implications for Ukraine?

Alexei: It is very sad that the situation in Ukraine has deteriorated as far as it has. Some lives have been lost. Ukraine is torn between the current government that is leaning towards the Customs Union with Russia, and a large proportion of the population, perhaps a majority, which would support a closer cooperation with the EU.

Ukrainians are also fed up with perceived government corruption and diminishing civil liberties in the country. In December, Russia provided a US$15 billion rescue package to Ukraine and immediately disbursed US$3 billion. It remains to be seen which way the current situation will be resolved.

However, there are some corporate bonds in Ukraine that should be relatively immune to this political turmoil. One of the companies we like in Ukraine is MHP, the largest chicken meat producer in Europe. The company is fairly insulated against possible further depreciation of the local currency, as it sells 37% of its products abroad. After the recent sell off in Ukrainian bonds, one can buy the Eurobond of MHP priced in US$ with a maturity in April 2015 and a yield-to-maturity of 10.6%. Such a high yield on short-dated paper is very hard to find elsewhere.

WMA: Any final thoughts for investors about the opportunities in Russia?

Alexei: The latest sell off of Russian shares represents an opportunity to buy quality companies at discount prices. Today, we can see compelling value in world class companies with assets not just in Russia but globally (including the USA), good corporate governance, and nice dividends. In short, I agree with Warren Buffet: “Buy when others are fearful.”

WMA: Alexei, thank you for sharing your valuable insights into the dynamic Russian market.

Alexei: You are welcome. My pleasure.

Learn more about World Money Analyst here.

The article Outside the Box: World Money Analyst Update on Russia was originally published at mauldineconomics.com.

Being the Architect of your next "Big Trade"....This weeks FREE webinar!

Weekly Coffee Futures Recap for Friday February 21st

It's time to check in with our trading partner Mike Seery for his take on where coffee ended the week.


Coffee futures in the May contract rallied 3000 points this week closing right near contract highs at 170 a pound all due to the fact of a major drought in central Brazil which is the largest grower of coffee in the world sending prices up about 60% in the year 2014 and I’m still recommending if your long this market to continue to stay long as I think 2.00 is coming relatively soon and could happen on Monday especially if no rain happens over the weekend. Volatility is very high in this market currently so if that scares you look at the July bull call option spreads limiting your risk to what the premium costs allowing you to live through these daily fluctuations as this volatility should continue for months to come.

Coffee futures are trading far above their 20 & 100 day moving average with awful chart structure currently, however if you are long a futures contract I would place my stop below the 10 day low which is around 135 a pound which is quite a distance away, however this stop will be raised on a daily basis and will become relatively tight in the next 5 days. When you trade the commodity markets you want to let your winners run and get out of your losers relatively quickly and this is the perfect example of one market like coffee that can make your entire year

Trend: Higher
Chart structure: Awful

Don't miss this weeks free trading webinar....Being the Architect of your next "Big Trade"

Being the Architect of your next "Big Trade"....This weeks FREE webinar!

This has been a BIG week for us and our trading partners. Last Tuesday John Carter of Simpler Trading treated us to a free webinar, "The Insiders Guide to the Big Trade", and once again he brought us another game changer.

This weeks webinar was over prescribed as 16,000+ investors and traders vied for a seat at this extremely popular class. And honestly, we got a lot of complaints as some traders logged on late only to find their seat had been taken.

John has heard you loud and clear so he added another webinar so don't wait. Sign up now, then make sure you get logged on 10 minutes before we get started.

It all starts this Tuesday, February 25th at 8:00 p.m. EST 

Get your seat now!

In this free online class we will share with you:

   *     The common thread these companies share

   *     How you can minimize your risk on these trades

   *     What time frames you should watch

   *     When to avoid the markets like the plague

   *     The best stocks to use – and why you need to trade options on them

          And much more…...

If you haven't seen it make sure to catch John's video from last week. He showed us some live trades in his actual account that puts some of these methods to work. One of these trades he shows us from January 14th is a definite must see!

John has also created another video this week that shows how he "puts" [pun intended] these methods to work. Tesla [ticker $TSLA] has been in the news. Let's see how John worked this trade, watch "Trading Tesla Puts" right now.

Just visit John's registration page and mark your calendar. 

See you on Tuesday, 
Ray @ The Crude Oil Trader


Register for "The Insiders Guide to the Big Trade"

99 Problems… And Crude Oil Ain’t One of Them

By Marin Katusa, Chief Energy Investment Strategist

America has some serious problems.


Despite the fact that the United States spends $15,171 per student—more than any other country in the world—American students consistently trail their foreign counterparts, ranking 23^rd in science and 31^st in math.

The US also spends more than twice as much on health care per capita than the average developed country, yet underperforms most of the developed world in infant mortality and life expectancy. The U.S. rate of premature births, for example, resembles that of sub-Saharan Africa, rather than a First World country. And if you think Obamacare is going to change that… I have a bridge to sell you.

K Street has a bigger influence on American politics now than Main Street, and economic key players like the TBTF banks, the insurance industry, etc., have nearly carte blanche to act in whichever way they see fit, with no negative consequences.

The US government is spending more money to spy on Americans and foreigners than ever before. Since August 2011, the NSA has recorded 1.8 billion phone calls per day (!)—with the goal of creating a metadata repository capable of taking in 20 billion "record events" daily.

More than one in seven Americans are on the Supplemental Nutrition Assistance Program (SNAP)—better known as "food stamps."

The list goes on and on.

But there is one problem that America doesn't have......getting oil out of the ground.

After decades of declining domestic production, U.S. producers finally figured out how to extract oil from difficult locations, whether that's the shale formations or deposits under thousands of feet of water… and they've kept going ever since.

Today, the U.S. is one of the few countries in the world that have seen double digit growth in oil production over the past five years.

This presents some great investment opportunities for the discerning investor.

The oil industry's new treasure trove, the legendary Bakken formation, has turned formerly sleepy North Dakota into one of the hottest places in the United States. According to the Minneapolis Fed, "the Bakken oil boom is five times larger than the oil boom in the 1980s."

Unemployment in the state with 2.7% is the lowest in the nation; in Dickinson, ND, even the local McDonald's offers a $300 signing bonus to new hires, on top of an hourly wage of $15.
Here are some more fun facts, courtesy of the Fiscal Times:

• There are now an estimated 40,856 oil industry jobs in North Dakota, plus an additional 18,000 jobs supporting the industry. Between 2010 and 2012, Williston, ND, a town with a population of only 16,000, produced 14,000 new jobs.

• While other US states are struggling, some even being close to bankruptcy, North Dakota now has a billion-dollar budget surplus.

• The number of ND taxpayers reporting income of more than $1 million nearly tripled between 2005 and 2011—and that in a state with a total population of 700,000.

• The low population numbers will soon be a thing of the past, though: the population in the oil-producing region is expected to climb over 50% in the next 20 years.

• 2,000-3,000 new housing units are built every year in Williston, ND, but it's still not enough to fill the need. Rents have gone from a pre-boom $350 per month for a two-bedroom apartment to over $2,000 today… the equivalent of a studio apartment in New York's rich Upper East Side.

The entire "energy map" of the United States has been altered by the Bakken: the Midwest, rather than the Gulf, is now the go-to area.

And who profits the most? The pipeline companies that can quickly adapt to this new situation and the refinery companies that can use this readily available domestic oil.

Though the rest of the world is trying to catch up, the United States has a huge head start over everyone else. The advancements it holds in hydraulic fracturing and horizontal drilling had been built on the back of one and a half centuries of oil and gas exploration and the thousands of firms that service the drillers and producers.

So far, other countries simply lack the experience and the infrastructure to even compete.

In fact, American companies have spent 50% more money on energy research and development (R&D) than companies anywhere else in the world. What's more, they are exporting this technology across the globe, enabling other countries to unlock their own hydrocarbon reserves.

Obviously, they're not doing this out of philanthropy; there is a lot of money to be made by licensing out their technology and "lending a helping hand."

The biggest winners, hands down, are the energy-service companies that already know how to get oil out of US fields… and that apply these methods to other fields worldwide to boost production and reduce decline rates.

As the easy-to-extract oil depletes in the U.S. and abroad, oil companies and governments are beginning to look at past-producing oil fields. As it turns out, the producing wells drilled in the 1970s and '80s weren't very good at getting every drop of oil out of the ground. With modern technology, however, it is now possible to access previously out-of-reach deposits. Even a mere 5% or 10% improvement in oil recovery rates means billions, if not trillions, more in revenues.

Rediscovering previously overlooked fields was what started the boom in the Bakken as well as the Eagle Ford formations… and other countries are beginning to catch on.

We believe that this new trend of applying new technologies to old oil fields is not a fad but here to stay. That's why our energy portfolios are stocked with companies doing just that in Europe, Oceania, and even South America.

As it's becoming clear that the era of cheap, light, sweet crude is nearing its end, the industry is adapting to this new reality of oil becoming more difficult to access. And if investors want to make profits in today's energy markets, they, too, must learn to adapt.

Read our 2014 Energy Forecast for more details on what's hot and what's not in this year's energy markets. This free special report tells you about the 3 sectors we are most bullish on for this year, and which sectors to avoid in 2014. Read it now.


Don't miss this weeks free webinar "How to Architect the Trade"

The Energy Sectors You Should Invest in This Year

Top energy analyst Marin Katusa, frequently featured in the financial media such as Forbes, Business News, Financial Sense News Hour, and the Al Korelin Show, says two undervalued energy sectors will provide windfalls for smart investors this year.

The bullish side: The report details the most bullish energy sectors for 2014 and beyond.

In one of those bullish sectors, there is a country that boasts one of the lowest taxation rates for oil and gas plus has the benefit of a $12.00 per barrel difference in price.

The second one is an energy sector that is extremely undervalued right now, but is slated for major growth this year.

Another is poised to make big gains from the Putinization of Europe—and the resulting push for European countries to produce their own oil and gas.

See which companies are ready to make the biggest gains in the oil and gas industry this year (and it’s not the actual oil and gas producers).

The right time to get into these sectors is now, before the big gains are being made. Investors who get positioned early on can reap big rewards.

The bearish side: There are also three other energy investments that Marin recommends not to touch this year—not because these energy resources don’t have merit (Casey subscribers have invested in them before), but because the risk of losing your money is just too great right now.

Read his assessment, including which energy investments you should be bullish on for 2014 and which you’d only lose money on.

Click here for Marin’s free report, The 2014 Energy Forecast.



Don't miss this weeks free webinar "How to Architect the Trade"

The Insiders Guide to the Big Trade....this weeks free webinar

It's time for another wildly popular "game changing" free webinar, "The Insiders Guide to the Big Trade", from our trading partner John Carter at Simpler Trading.

It all starts this Tuesday, February 25th at 8:00 p.m. EST 

Get your seat now!

In this free online class we will share with you:

   *     The common thread these companies share

   *     How you can minimize your risk on these trades

   *     What time frames you should watch

   *     When to avoid the markets like the plague

   *     The best stocks to use – and why you need to trade options on them

          And much more…...

If you haven't seen it make sure to catch John's video from earlier this week. He showed us some live trades in his actual account that puts some of these methods to work. One of these trades he shows us from January 14th is a definite must see!

Just visit John's registration page and mark your calendar. 

See you on Tuesday, 
Ray @ The Crude Oil Trader


Register for "The Insiders Guide to the Big Trade"

Erosion of Trust Will Drive Gold Higher

By Casey Research

A Q&A with Casey Research


James Turk, founder of precious metals accumulation pioneer GoldMoney, has over 40 years' experience in international banking, finance, and investments. He began his career at the Chase Manhattan Bank and in 1983 was appointed manager of the commodity department of the Abu Dhabi Investment Authority. 

In his new book The Money Bubble: What to Do Before It Pops, [click here to order on Amazon.com]James and coauthor John Rubino warn that history is about to repeat. Instead of addressing the causes of the 2008 financial crisis, the world's governments have continued along the same path. Another—even bigger—crisis is coming, and this one, say the authors, will change everything. 

One central tenet of your book is that the dollar's international importance has peaked and is now declining. What will the implications be if the dollar loses its reserve status?

In a word, momentous. Although the dollar's role in world trade has been declining in recent years while the euro and more recently the Chinese yuan have been gaining share, the dollar remains the world's dominant currency. So crude oil and many other goods and services are priced in dollars. If goods and services begin being priced in other currencies, the demand for the dollar falls.

Supply and demand determine the value of everything, including money. So a declining demand for the dollar means its purchasing power will fall, assuming its supply remains unchanged. But a constant supply of dollars is an implausible assumption given that the Federal Reserve is constantly expanding the quantity of dollars through various forms of "money printing." So as the dollar's reserve status erodes, its purchasing power will decline too, adding to the inflationary pressures already building up within the system from the Federal Reserve's quantitative easing program that began after the 2008 financial collapse.

Most governments of the world are fighting a currency war, trying to devalue their currencies to gain a competitive advantage over one another. You predict that China will "win" this currency war (to the extent there is a winner). What is China doing right that other countries aren't? How would the investment world change if China did "win"?

As you say, nobody really wins a currency war. All currencies are debased when the war ends. What's important is what happens then. Countries reestablish their currency in a sound way, and that means rebuilding on a base of gold. So the winner of a currency war is the country that ends up with the most gold.

For the past decade, gold has been flowing to China—both newly mined gold as well as from existing stocks. But that flow from West to East has accelerated over the past year, and there are unofficial estimates that China now has the world's third-largest gold reserve.

The implications for the investment world as well as the global monetary system are profound. Why should China use dollars to pay for its imports of crude oil from the Middle East? What if Saudi Arabia and other exporters are willing to price their product and get paid in Chinese yuan? Venezuela is already doing that, so it is not a far-fetched notion that other oil exporters will too. China is a huge importer of crude oil, and its energy needs are likely to grow. So it is becoming a dominant player in global oil trading as the US imports less oil because of the surge in its own domestic fossil fuel production.

Changes in the way oil is traded represent only one potential impact on the investment world, but it indicates what may lie ahead as the value of the dollar continues to erode and gold flows from West to East. So if China ends up with the most gold, it could emerge as the dominant player in global investments and markets. It already has become the dominant player in the market for physical gold.

You draw a distinction between "financial" and "tangible" assets, noting that we go through a recurring cycle where each falls in and out of favor. Where are we in that cycle? With US stocks at all-time highs and gold down over 30% since the summer of 2011, is it possible that the cycle is rolling over?

Our monetary system suffers recurring booms and busts because of the fractional reserve practice of banks, which allows them to create money "out of thin air," as the saying goes. During booms—all of which are caused by too much money that banks have created by expanding credit—financial assets outperform, but they eventually become overvalued relative to tangible assets. The cycle then reverses. The fractional reserve system goes into reverse and credit contracts, causing a lot of promises made during the good times to be broken. Loans don't get repaid, unnerving bankers and investors alike. So money flees out of financial assets and the counterparty risk these assets entail, and into the safety of tangible assets, until eventually tangible assets become overvalued, and the cycle reverses again.

So for example, the boom in financial assets that ended in 1967 led to a reversal in the cycle until tangible assets became overvalued in 1981. The cycle reversed again, and financial assets boomed until the popping of the dot-com bubble in 2000. We are still in the cycle favoring tangible assets, but there is no way to predict when it will end. We know it will end when tangible assets become overvalued, but as John and I explain in The Money Bubble, we are not even close to that moment yet.

You cite the "shrinking trust horizon" as one of the long-term factors that will drive gold higher. Can you explain?

Yes, this is an important point that we make. Our economy, and indeed, our society, is based on trust. We expect the bread we buy from a baker or the gasoline we buy for our car to be reliable. We expect our money on deposit in a bank to be safe. But if we find the baker is putting sawdust in our bread and governments are using depositor money to bail out banks, as happened in Cyprus last year, trust begins to erode.

An erosion of trust means that people are less willing to accept the counterparty risk that comes with financial assets, so the erosion of trust occurs during financial busts. People as a consequence move their wealth into tangible assets, be it investments in tangible things like farmland, oil wells, or mines, or in tangible forms of money, which of course means gold.

Obviously, gold has been in a painful slump since the summer of 2011. What near-term catalysts—let's say in 2014—could wake it from its slumber?

We have to put 2013 into perspective, because portfolio management is a marathon, not a 100-meter sprint. Gold had risen 12 years in a row prior to last year's price decline. And even after last year, gold has appreciated 13% per annum on average, making it one of the world's best performing asset classes since the current financial bust began with the popping of the dot com bubble.

Looking to the year ahead, there are many potential catalysts, but it is impossible to predict which event will be the trigger. The derivatives time bomb? Failure of a big bank? The sovereign debt crisis returns to the boil? The Japanese yen collapses? It could be any of these or something we can't even imagine. But one thing is certain: as long as central banks continue their present money-printing ways, the price of gold will rise over time to reflect the debasement of national currencies. The gold price might not jump to its fair value immediately because of government intervention, but it will rise eventually and inevitably.

So the most important thing to keep in mind is the money printing that pretty much every central bank around the world is doing. The central bankers have given it a fancy name—"quantitative easing." But regardless of what it is called, it is still creating money out of thin air, which debases the currency that central bankers are supposed to be prudently managing to preserve the currency's purchasing power.

Money printing does the exact opposite; it destroys purchasing power, and the gold price in terms of that currency rises as a consequence. The gold price is a barometer of how well—or perhaps more to the point, how poorly—central bankers are doing their job.

Governments have been debasing currencies since the Roman denarius. Why do you expect the consequences of this particular era of debasement to be so severe?

Yes, they have, and to use Rome as the example, its empire collapsed when the currency was debased. Worryingly, after the collapse of the Roman Empire, the world went into the so called Dark Ages. Countries grow and prosper on sound money. They dissipate and eventually collapse when money becomes unsound. This pattern recurs throughout history.

Rome of course did not collapse overnight. The debasement of their currency cannot be precisely measured, but it lasted over 100 years. The important point we need to recognize is that the debasement of the dollar that began with the formation of the Federal Reserve in 1913 has now lasted over 100 years too. A penny in 1913 had the same purchasing power as a dollar has today, which, interestingly, is not too different from the rate at which Rome's denarius was debased.

After discussing how the government of Cyprus raided its citizens' bank accounts in 2013, you suggest that it's a near certainty that more countries will introduce capital controls and asset confiscations in the next few years. What form might those seizures take, and how can people protect their assets?

It is impossible to predict, of course, because central planners can be very creative in coming up with different forms of financial repression that prevent you from doing what you want with your money. In fact, look at the creativity they have already used.

For example, not only did bank depositors in Cyprus lose much of their money, much of what was left was given to them in the forms of shares of the banks they bailed out, forcing them to become shareholders. And the US has imposed a creative type of capital control that makes it nearly impossible for its citizens to open a bank account outside the US. Pension plans are the most vulnerable because they are easy to get at. Keep in mind that Argentina, Ireland, Spain, and Poland raided private pensions when those countries ran into financial trouble.

Protecting one's assets in today's environment is difficult. John and I have some suggestions in the book, such as global diversification and internationalizing oneself to become as flexible as possible.

You dedicated an entire chapter of your book to silver. Which do you think will appreciate more in the next year, gold or silver? How about in the next 10 years?

I think silver will do better for the foreseeable future. It is still very cheap compared to gold. As but one example to illustrate this point, even though gold underwent a big price correction last year, it is still trading above the record high it made in January 1980, which was the top of the bull run that began in the 1960s.
In contrast, not only has silver not yet broken above its January 1980 peak of $50 per ounce, it is still far from that price. So silver has a lot of catching up to do.

Silver is a good substitute for gold in that silver, too, can be viewed as money outside the banking system, which is an important objective to keep wealth liquid and safe today. But silver may not be for everyone, because it is volatile. This volatility can be measured with the gold/silver ratio, which is the number of ounces of silver needed to equal one ounce of gold. The ratio was 30 to 1 in 2011, and several months later jumped to 60 to 1.

So you can see how volatile silver is. But because I expect silver to do better than gold, I believe that the ratio will fall to 16 to 1 eventually, which is the same level it reached in January 1980. It is also the ratio that generally applied when national currencies used to be backed by precious metals.

Besides gold, what one secular trend would you be most comfortable betting a large portion of your nest egg on?

Own things, rather than promises. Avoid financial assets. Own tangible assets of all sorts, like farmland, timberland, oil wells, etc. Near-tangibles like the equities of companies that own tangible assets are okay too, but avoid the equities of banks, credit card companies, mortgage companies, and any other equities tied to financial assets.

What asset class are you most bearish on?

Without any doubt, it is government debt in particular and more generally, government promises. They have promised more than they can possibly deliver, so a lot of their promises are going to be broken before we see the end of this current bust that began in 2000. And that outcome of broken promises describes the huge task that we all face. There will be a day of reckoning. There always is when an economy and governments take on more debt than is prudent, and the world is far beyond that point.

So everyone needs to plan and prepare for that day of reckoning. We can't predict when it is coming, but we know from monetary history that busts follow booms, and more to the point, that currencies collapse when governments make promises that they cannot possibly fulfill. Their central banks print the currency the government wants to spend until the currency eventually collapses, which is a key point of The Money Bubble. The world has lost sight of what money is.

What today is considered to be money is only a money substitute circulating in place of money. J.P. Morgan had it right when in testimony before the US Congress in 1912 he said: "Money is gold, nothing else." Because we have lost sight of this wisdom, a "money bubble" has been created. And it will pop. Bubbles always do.

As James Turk said, "near-tangibles like the equities of companies that own tangible assets" (i.e., gold stocks) are good investments—and right now, they are dramatically undervalued. In a recent online video event titled "Upturn Millionaires," eight influential investors including Doug Casey, Rick Rule, Frank Giustra, and Ross Beaty gathered to discuss the new realities in the gold stock sector—and why the odds of making huge gains are now extremely high. Click here to watch the event.


Don't miss this weeks FREE webinar "Insiders Guide to The Big Trade" with John Carter