Wednesday, June 30, 2010

RIM's Bleak Future

By Eric Jackson, Senior Contributor

06/30/10 - 06:00 AM EDT

Stock quotes in this article: AAPL , GOOG, RIMM, NOK, MOT

What happened to Research in Motion(RIMM)?

It has been the king smartphones seemingly forever. Yet, it's stumbled badly. Last Thursday, it announced its new subscribers were less than analysts expected and the stock dropped 10% the following day.

Now there seem to be thousands of RIMM haters among hedge fund managers and investors. Why? Didn't it add almost 5 million net subscribers last quarter? How can it be dying with that kind of growth?

In the stock market, the focus is always on where companies are going - not where they've been. In the smartphone market, this is probably doubly true.

Motorola's(MOT) RAZR used to be the world's No. 1 selling phone for many years, and as late as 2007.

After former CEO Ed Zander quit the company, one of his successor's (Greg Brown) first marketing campaignswas a promotion of the newest incremental version of the RAZR. Management then said that the new version would help the RAZR on the top by being faster and sleeker. However, the new RAZR was a dud and we haven't talked about it since. That story is a warning sign for RIMM.

The mobile phone and now smartphone business is brutally competitive. There's no loyalty. What's hot today is ancient history tomorrow.

At a conference last month, Apple(AAPL) CEO Steve Jobs talked about how he liked the consumer market much more than the business market. His reasoning was that, in the consumer market, if you make a good device, people will buy it. If you don't, they won't.

In business, it's often not the end users who are making the purchase decisions, so inferior products can remain market leaders for years and years with no accountability.

The co-CEOs of RIMM (which has always been a terrible organizational structure which hasn't been previously questioned because of RIMM's prior success) should take a look at that Jobs interview. RIMM is about to be RAZR'ed in the consumer market by Apple's iPhone 4 and the new phones using Google's(GOOG) Android software which are popping up all over.

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Monday, June 28, 2010

Time to Export Pier 1 Imports

By Eric Jackson
RealMoney Contributor

6/28/2010 5:30 PM EDT
Click here for more stories by Eric Jackson

Pier 1 Imports (PIR - commentary - Trade Now) was left for dead five quarters ago. Due to high debt, dwindling sales and a fear that it would go out of business, this well-known provider of cheap home furnishings and knick-knacks saw its stock price drop to $0.10.

By April 21 this year, the stock had rebounded to almost $10 -- a remarkable turnaround. But the stock had come too far, too fast, and in the face of a shaky U.S. consumer, Pier 1 dropped 32% to its current price of $6.56.

The management team and board deserve a lot of credit for persevering and making some smart moves in the company's darkest hours. But is Pier 1 worth $0.10 or $10? Let's review what it did right last year.

Part of the fear surrounding Pier 1 last year was its high debt load. In response, the company cut capital expenditures to $5 million last year from $51 million in 2006. It stopped selling online in 2007, because it hadn't done a good job at it. Marketing spending was cut from $117 million in 2007 to $61 million in 2009. The company closed 250 stores from peak levels (about a 25% decrease) and negotiated lower leases for another 350 stores.

Most importantly, though, the company has reduced its debt to $35 million. Management achieved this by buying it back and renegotiating with lenders. Last year's debt was almost $200 million. At the same time, the company has stockpiled cash, which is up to over $200 million. In 2007, cash on hand had fallen to $6 million.

Pier 1 executives were very proud when they presented their most recent quarterly results a couple of weeks ago. Analysts had expected a quarterly loss, but Pier 1 delivered earnings of $8 million and top-line revenue growth of 14% to $306 million. This was the first Q1 profit for the company in six years.


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Thursday, June 24, 2010

Viva MercadoLibre!

By Eric Jackson
RealMoney Contributor

6/24/2010 11:30 AM EDT
Click here for more stories by Eric Jackson

MercadoLibre (MELI - commentary - Trade Now) is the best stock you've never heard of.

For the 5% of you who know anything about it, you probably think of the company as theeBay (EBAY - commentary - Trade Now) of Latin America. There's much more to it, however, and now you can position yourself ahead of the pack.

If you like Internet companies with 35% operating margins that operate as a semi-monopoly in their space, with a 42% top-line quarterly growth rate, then MercadoLibre is for you. Unlike the lumbering giant that eBay has become as it struggles to grow revenues by 8% a quarter, MercadoLibre retains the promise of future growth.

MercardoLibre went public in August, 2007, in the mid-$20s. It rose to nearly $80 by the end of that year before starting a long decline leading up to the heart of the financial crisis. It bottomed at $8.88 on Nov. 21, 2008, before beginning its current ascent. It's now trading at nearly $60 and is up more than 14% year to date.

The company is based in Buenos Aires, Argentina. It has a partnership with eBay to sell in Latin America, including Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay and Venezuela. It recently launched activities in Costa Rica, the Dominican Republic and Panama.

MercadoLibre posted $186 million in revenues last year, puny beside eBay's $9 billion. It also targets a much more geographically limited region, however, you could also argue that Latin America's best days are still ahead of it. Also, Latin America has the highest Internet penetration rate of any major continent. This is a region where the growing middle class will assert itself in the coming decade, and MercadoLibre will be there to capture that growth.


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Wednesday, June 23, 2010

Indiana Senator Looks Out for His Pocketbook

By Eric Jackson

06/23/10 - 10:15 AM EDT

Stock quotes in this article: WLP , C , GS , TWX

Eight months ago, I wrote about Sen. Evan Bayh's (D., Ind.) self-interested views on the proposed health care reform.

His wife, Susan Bayh, sits on the board of WellPoint(WLP) from her hometown of Indianapolis. Over the last six years, Susan Bayh has received at least $2 million in compensation from WellPoint alone for serving on its board. What's more, she has four other lucrative corporate directorships. In 2008, she collected $656,062 in cash and stock for all her board work.

Sen. Evan Bayh (D., Ind.) and wife Susan

Sen. Bayh receives $165,000 in annual salary. According to 2008 reports filed, Susan Bayh's stock holdings were worth between $1.3 million and $2.7 million. Their family's total net worth was between $4.3 million and $15.1 million. And they owned a $1 million home in Washington in the name of Susan Bayh.

Why wouldn't Susan Bayh's financial relationships have a material impact on shaping Evan Bayh's views on health care reform and the countless other political issues he voted on through the years?

Last November, Bayh surprisingly announced he wouldn't seek re-election this fall. After all, he was a strong front-runner to be Obama's vice presidential candidate back in 2008. So the 54-year old went from potentially being a heartbeat away from the presidency to -- a year later -- professing that he no longer wanted to be in politics.

Politicians -- even lame duck ones -- just can't seem to leave without trying to polish up their image before they go. Sen. Dodd has been feverishly trying to pass his financial reform bill before the clock strikes midnight on his political career. On the surface, you would think that -- given the state of the economy after Wall Street basically stopped functioning two years ago and given the Democratic majorities in both the Senate and the House -- financial reform would be a slam dunk to pass. Not so.

One of the latest changes to have emerged as part of the plan is the issue of "proxy access." Despite the fact that our free market system is the most open and transparent in the world -- and despite us believing that CEOs work for their shareholders -- our current system allows CEOs to have a huge influence in selecting their board of directors who is charged with overseeing their performance and setting their salary.


[** This post is an excerpt of the full article, which is available on by clicking here. Free Site.**]

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Monday, June 21, 2010

You're the Yuan That I Want

By Eric Jackson
RealMoney Contributor

6/21/2010 9:00 AM EDT
Click here for more stories by Eric Jackson

I have been bullish on China for some time. News over the weekend that Beijing was going to allow the yuan to float in some manner within the next year has been very positively received by the global equity markets. It's bullish for the Chinese economy, and global equities, but it's also very good news for Chinese equities. Here's why.

Although the United States has been bellyaching about the yuan's peg to the dollar for a long time, I actually expected no change in Chinese policy. After all, put yourself in China's shoes: Keeping the yuan tied to the dollar was continuing to support the growth of Chinese exporters globally. The Chinese government remembers well how quickly export demand dropped after Lehman Brothers failed. As a result, many factories went from running full tilt in China to laying off workers and lying dormant. Bustling barges in the Yangtze and Pearl Rivers, with incoming raw materials and outgoing exports, suddenly stopped.

It's because of this drying up of global demand that Beijing was forced to pump a $600 billion stimulus package into the Chinese economy to get the wheels turning to keep GDP ticking over at the pace it needs to support its growth and unemployment targets. Along with the stimulus, the Chinese government mandated the country's banks to push forward lending. It also accelerated a push to transition the overall economy from an export-driven one to a domestic- or consumer-driven one.

China is still dependent on exports and will remain so for several years to come. However, you would have to view its efforts to shift the country's economic emphasis so far as successful. It got the economy rolling again and, when foreign Cassandras started complaining there was a property bubble in the works, it preemptively pricked that bubble -- in about a month. All the most recent data out of the major Chinese cities suggest real estate has cooled, yet growth continues and inflation is tame.


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Thursday, June 17, 2010

Netflix: Love the Product, Love the Stock

By Eric Jackson
RealMoney Contributor

6/17/2010 1:30 PM EDT
Click here for more stories by Eric Jackson

I'm in love with the Netflix (NFLX - commentary -Trade Now) product. I know very few customers who don't. Most of the stock jockeys who chat about whether Netflix is a buy, sell, or hold seem to get disconnected from the actual service that is the basis for the stock's price.

What's not to like about being a Netflix customer? It's cheap on the monthly subscription fee considering how many movies I'll rent in a month. It's also efficient. The DVDs typically arrive a day after I order them -- via regular mail. I had a problem once in the last two years of using the service, and the company's customer service was great.

And as much as I enjoy the traditional discs-in-envelopes business, I am an even bigger fan of the Netflix on demand service that I use through my TiVo (TIVO - commentary - Trade Now) service. The service is quick. Downloads appear to be quicker than those from the traditional cable company on-demand services. Even the Amazon (AMZN - commentary - Trade Now) on-demand movies that I can get through my TiVo appears to be slower.

The Netflix on-demand service -- which of course is the future for this company -- is quick and easy. It has the best interface I've seen of presenting possible movie choices to you and learning from your history of selections. It's a smarter service -- and it gets smarter as more subscribers use it. Netflix is in a good position to keep doing well in this business even after the mail-order business is gone.

My biggest complaint against Netflix's on-demand service is that the company still has a relatively small catalog of titles, considering this is one of the industry leaders. Hopefully, with more cash in the bank and a bigger user base, the company will be able to change situation this soon with the Hollywood powers-that-be.


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Wednesday, June 16, 2010

Ex-Tech CEOs Whitman, Fiorina Are Lousy Candidates

By Eric Jackson, Senior Contributor

06/16/10 - 07:00 AM EDT

Stock quotes in this article: HPQ , EBAY

Meg Whitman and Carly Fiorina have star power. They are both wealthy and have led well-known technology companies. Both also won their primaries last week in their latest step of their careers. Whitman -- the former CEO of eBay(EBAY) -- is seeking to become California's governor when she goes up against Jerry Brown. Fiorina -- the former head of Hewlett-Packard(HPQ) -- is attempting to unseat well-known California senator Barbara Boxer.

I don't have a dog in this fight as I don't live in California. However, as an investor in our capital markets and as a proponent of strong corporate governance, I oppose their candidacies.

Both hold themselves up as experienced and successful corporate leaders. Because they led large companies, they argue that they would make good political leaders. They're suggesting that leading a large number of people in business is not all that different than leading a handful of political staffers; proposing new business strategies is not all that different from proposing new legislation; and doing sit-down interviews for business magazine cover stories is not all that different from doing sit-down interviews with cable news channels.

Both former CEOs are running as Republicans, so they're brandishing their business backgrounds as evidence that they are fiscal conservatives.

Here are the problems with both candidates though, as I see it:

  • Both women left their organizations under a cloud

    According to Bloomberg BusinessWeek, Fiorina was fired by her board of directors in 2005 after the board determined it could no longer work with her and that her tenure at H-P had been a failure. That same article quotes a former H-P exec as saying Fiorina's "good with marketing; she's a good speaker for the company. But this is a company that doesn't need a statesman. It needs a hands-on operations person ... Things [that] needed to make us more competitive in certain segments weren't being done."

    By the time Whitman exited eBay in January 2008, the company's stock was down 48% from its December 2004 all-time highs. The company's growth had stalled severely. One analyst covering eBay at the time referred to Whitman's playbook for the company as "old and dusty." And eBay's $4 billion acquisition of Skype to turbo-boost eBay's growth was judged to have "bombed" by the time Whitman left.

  • Both women have shown questionable judgment under duress

    According to Fiornia's memoirs, in January 2005 -- just weeks before she was fired by the board -- she ordered a private investigation into who on H-P's board might be leaking confidential information to the press. Those recent leaks had made Fiorina look bad. Later, these confidential investigations involved spying and lying to the phone company in order to access a reporter's private phone records. Fiorina has kept herself at arm's length from these actions to date.

    The New York Times reported on Monday that Whitman paid an eBay employee "around $200,000" after shoving her while the employee was trying to prepare her for an upcoming interview. Whitman required the employee to never speak publicly about the incident in exchange for the payment.

  • Both women feasted on excessive perks which were beyond the pale compared to other CEOs

    Whitman racked up over $1 million in private air travel on the eBay corporate jet in 2006 and 2007.

  • Both women have overseen organizations where they have increased spending -- not decreased spending -- belying their touted fiscal conservatism.

    If either woman had a business record of cutting back excessive spending at their organizations and turning around performance, I'd be willing to go along with them portraying themselves as fiscal conservatives. However, that's not what happened. eBay was a once-hot tech company trying desperately to find a new direction when Whitman left. H-P was a sluggish colossus, losing market share and in need of a radical restructuring to get it back on track when Fiorina was done.

  • Both women arguably couldn't get another job as a CEO at a major corporation today.
  • Although most voters won't understand this, the truth is that neither of these women would have an easy time finding another top CEO job today. They bring so much negative baggage from their last jobs that few boards would want to take a risk on them. Any organization that would hire them would likely be much smaller and much less successful than H-P or eBay.

    American politics needs more experienced business and financial people. The reality is that business execs and investment managers who are successful and think they can continue to be successful in their careers aren't choosing to go into politics. They're probably thinking, "Why should I subject myself and my family to the 24/7 news media investigations into my past, when I can keep getting acclaim in business or finance and make a heck of a lot more money?" I don't blame them.


    [This post is an excerpt of the full article, which is available on by clicking here. Free Site.]

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    Monday, June 14, 2010

    A King Among Casinos

    By Eric Jackson
    RealMoney Contributor

    6/14/2010 5:00 PM EDT
    Click here for more stories by Eric Jackson

    It's been a rough two months in the market, starting with the surprising SEC charges against Goldman Sachs (GS - commentary - Trade Now), followed by Europe's sovereign-debt woes and the flash crash. Some feared a second financial collapse, until the European Union announced its $1 trillion rescue plan. Then concerns ran amok about a European slowdown that could derail China's economy.

    With all this happening, Las Vegas Sands(LVS - commentary - Trade Now) should be sunk into the lows of the year. It's got heavy debt, major exposure to China through its Macau properties, and its U.S. operations are still incredibly weak .

    Yet, LVS is up 72% year to date, compared with the S&P 500's 2% decline. It is also outperforming peers with a bigger presence in Macau, such as Wynn Resorts (WYNN -commentary - Trade Now), up 42% for the year, and MGM Mirage (MGM - commentary - Trade Now), up 27% for the year. Even against a smaller U.S. regional player such as Boyd Gaming (BYD - commentary - Trade Now), which has regained a healthy 31% of its stock price this year, LVS is still way ahead.

    What's even more remarkable, these healthy gains didn't come in January, followed by a sharp retracement since Europe's troubles began. The stock's gains held up, and even increased through the past six weeks.

    Consider Royal Carribbean (RCL - commentary - Trade Now), the ultimate consumer-discretionary purchase. During the "melt up" from January through April, the cruise-ship operator, along with many other retailers and discretionary names, benefited. Its stock gained more than 40%. Then came Goldman, Greece, the flash crash and China worries. Suddenly, investors recalled RCL's heavy debt burden -- $6 billion market capitalization and long-term debt exceeding $8 billion. If RCL were a country, it would be one of the PIIGS (Portugal, Ireland, Italy, Greece and Spain). In fact, RCL has been battered these past six weeks, although it remains up 12% for the year, still good by S&P standards.


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    Thursday, June 10, 2010

    Apple's Four Takeaways

    By Eric Jackson
    RealMoney Contributor

    6/10/2010 4:59 PM EDT
    Click here for more stories by Eric Jackson

    In the past two weeks, Apple's (AAPL - commentary - Trade Now) Steve Jobs has made two public appearances, speaking out on the company's direction, one at the D8 Conference and the other on Monday at the WWDC conference in San Francisco, at which he introduced the newest version of the iPhone.

    Not everyone has the chance to watch 90-minute presentations online. So I'll boil down the key takeaways from the presentations.

    Perhaps surprisingly, I don't think the iPhone is really that important in the grand scheme of things. It looks fantastic. I want one. My oldResearch In Motion (RIMM - commentary -Trade Now) BlackBerry, by comparison, looks quaint.

    Also, despite the hoopla, I don't think the recent email security breach on the AT&T (T -commentary - Trade Now) iPads or the threat of a government investigation -- because of impinging on poor little Google (GOOG - commentary -Trade Now) -- are going to hurt Apple's stock much either.

    For me, there are four real takeaways from the various talks that are huge positives for Apple's stock if they prove to be correct.

    1. The world is moving to smaller mobile devices to access the Internet at the expense of the PC.

      Jobs made a point in his D8 interview of comparing the PCs to the way we only used to buy trucks when we lived in a primarily agrarian society. Then, cars came along. And suddenly, we needed to own cars, and very few of us, especially in cities, bought trucks anymore. Jobs says that's what's going to happen with PCs as we move toward mobile devices (such as the iPhone and iPad). The future growth, he believes, will come from these smaller, more portable devices -- at the expense of future growth of iMacs.

      It was interesting to hear Steve Ballmer of Microsoft (MSFT - commentary - Trade Now) rebut this later at the same conference by saying tablet computer is just a different form factor of a PC, so PC sales will continue to grow. I believe Jobs would argue that there are differences, which is why Apple had to write a new operating system for the iPad to make it work for that smaller device. However, the point is that people want more of these smaller devices to get access to the Web. And that's critical to this next point.

    2. This secular shift will hurt Google and benefit Apple.

      Jobs also declared in his D8 talk that, on the basis of what the company has seen from iPhone usage data to date, people interact with their smaller mobile devices differently from they do so with their PCs. The most significant difference, he claims, is that iPhone users don't go off to do a special Google search in the same volume they do searches on PCs. Instead, they spend the bulk of their time in applications on the iPhone. They might do a search in an app (such as Yelp, searching for a local store), as opposed to stopping their app usage to go to Google. So if Jobs is right, this is a major threat to Google's long-term cash-cow business in Web-based AdWords clicks. It might also explain why Google is moving so quickly to compete with Apple in the mobile world with its Android offering.

    3. Apple is rethinking how ads will work in this new mobile device-centric world, and Google will be forced to rethink its cash-cow model and adapt.

      Apple is rethinking how to allow advertisers to best interact with users who are on a mobile device. Their new iAds are more graphic-rich than a typical Google ad. Also, Apple has embedded the ads within the apps. Therefore, when you see an ad that you want to interact with, you click on it within the app. The app pauses while you explore the ad, and when you are done, you get to return to exactly where you paused your app.

      In effect, Apple is rethinking how consumers want to interact with ads. Apple is betting that you don't want to be ripped out of your app and taken off to a separate browser page that has to open to render an app created for viewing on a PC. If this new format catches on, could Google adapt the same kind of approach to compete? Sure, but Google's greatest challenge will be turning its back on the approach that has made Google Google and rethink its approach from scratch. History says that's very difficult for successful companies to do.

    4. The future is all about the apps.

      If you take away nothing else from the Jobs' presentations, remember that over 200,000 apps exist today for iPhone that weren't around two years ago. Now, thousands of apps will be written for iPad to optimize that device's form factor. If you give people the choice between a slick application and a poor one that is being repurposed, they will choose the richer one every time. If that's true, Apple has a leg up on Google and Facebook. We will see if it can keep it.

      At the time of publication, Eric Jackson held long positions in AAPL, GOOG and MSFT.

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    Gold: The Only Asset Worth Owning - Part II of Eric Sprott Interview

    By Eric Jackson, Senior Contributor

    06/10/10 - 06:00 AM EDT

    Stock quotes in this article: FNM , FRE

    Eric Sprott founded Sprott Asset Management in 2001 and has over $5 billion in assets under management. He has been an outspoken gold bull since 2000 and warned that the bursting of the Nasdaq bubble was the start of a long-term deflationary trend that is playing out. I met him last week in Toronto for an interview.

    Second of two parts

    EJ: You've loved gold for a long time but, when the crisis hit in 2008, gold and junior miners got killed like everyone else. How do you explain that?

    ES: I treat what happened to gold stocks in 2008 as anomalous. Now, two years later, gold's at a record price and gold stocks have come back from an absolute pasting.

    I'm not convinced the market is always right. The market can be very wrong for a certain time period. I remember in 2006 when homebuilder stocks rallied 60% because people thought housing was turning.

    We love gold and silver stocks. I'm still bullish on my prior stock picks of junior miners. [At the May ValueInvesting Congress, Sprott recommended OceanaGold Corp., which is listed in Toronto under OGC, Avion Gold (AVGC.PK), and East Asia Minerals (EAIAF.PK).] Why? Because there could be times in the life of investing when people only buy one thing. That's what happened in the mid-1930s. They only bought gold stocks. So much so, there were 80,000 gold mines in the States then because they could get financing.

    I just get the feeling that that could easily happen again. When you look at a system that's in trouble, you think: what's the one thing I could do to get through it? You're thinking survival, because it's not going to befun. By owning gold, you can survive it because it will have its purchasing power vs. anything out there. If we're still eating food and trading things, you will be able to use gold to buy those things.

    EJ: So you see us staying in a deflationary environment?

    ES: I do, certainly for paper assets. I think you might end up getting necessary inflation in food, energy, precious metals, where there could end up being real shortages.

    EJ: Is that why you like energy?

    ES: Yes. Unfortunately, one of the things that could happen if the whole financial system has a problem is that your whole ability to produce things goes down. If you can't borrow money in the energy business and you can't drill, your production is going down this year... immediately.

    The same thing happens in agriculture. When they had the credit crisis, the farmers couldn't buy fertilizer -- just as little as a year ago. The shortages could develop quickly because of financial problems. So prices will initially drop due to a lack of demand, but then supply plummets.


    [This post is an excerpt of the full article, which is available on by clicking here. Free Site.]

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    Wednesday, June 09, 2010

    Gold Running in Short Supply: An Interview with Eric Sprott

    By Eric Jackson, Senior Contributor06/09/10 - 06:30 AM EDT

    Stock quotes in this article: PHYS , GLD

    Eric Sprott founded Sprott Asset Management in 2001 and has over $5 billion in assets under management. He has been an outspoken gold bull since 2000 and warned that the bursting of the Nasdaq bubble was the start of a long-term deflationary trend that is playing out. I met him last week in Toronto.

    First of two parts

    EJ: You've been one of the biggest gold proponents. Where's the price per ounce of gold going?

    ES: I don't have a good price target. We get involved in themes that play out for a long time. Interest ratesand reported inflation started going down in the 1980s. No one dreamed of buying gold in 2000. You were an idiot talking about it. I was initially attracted to it because I thought there was a physical shortage then. There still is.

    Central governments were selling gold 10 years ago. This put a burden on a very small market. Today, central governments are buying, the miners are unhedged, you have big gold ETFs, you have coin sales going crazy. Some central banks are even telling their people to buy gold.

    I've got to believe that a physical shortage will manifest itself somewhere soon. There's only 162,000 tons of it out there -- and I don't know anyone selling it. Someone's going to try to buy a bar of gold sometime and it won't be there.

    My partner, John Embry, went into gold many years ago because he thought it would become a substitute for fiat currencies. Governments are printing money and, sooner or later, people will realize that it's better to own gold than any bank deposits. This theme is obviously massively playing out as we speak. You look at the quantitative easing (QE) programs, budget deficits. The global fiscal irresponsibility plays into the hands of the gold owner. More people will figure it out and they'll go there.

    We now have large investors -- John Paulson, to name one -- putting their money into gold. If everyone started putting 5% of their portfolios in gold, there wouldn't be enough. I'm convinced the upside for gold is still quite positive. When I see some projections for $2,000, $3,000, or $5,000 per ounce, none of them bothers me. We don't know where the price will go but it will be the inverse of QE. The more they print, the more it will go up.


    [This post is an excerpt of the full article, which is available on by clicking here. Free Site.]

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