Casey Research

The Resurgence of the Nuclear Reactor

2013-05-21T08:52:00Z

By Casey Research

In August 1956, the Calder Hall Power Plant in Seascale, England began generating electricity and earned the distinction of being the world's first commercial nuclear power plant. It was a humble beginning for nuclear power; the plant only had a 50-megawatt (MW) output capacity, whereas the smallest US plant today has a 478 MW capacity. Nonetheless, Calder Hall represented the launch of a new era in energy that promised to bring electricity too cheap to meter.

But early on, the promising power source had its detractors. They objected to the high initial cost of constructing nuclear plants, the problems of radioactive waste disposal, and the risks of nuclear accidents and nuclear proliferation.

The detractors had an impact. The heavy regulation they pushed for and the litigation they initiated extended construction times and drove up construction costs. But despite their efforts, over 100 reactors had been placed in service in the United States by 1974.

Then came 1979 and a landmark event – the nuclear accident at Three Mile Island. In the aftermath, public opinion turned solidly in favor of the anti-nuclear movement, several construction projects were canceled, and no new US building permits for nuclear power plants were issued for the next 33 years.

Though the US abandoned nuclear expansion in the 1980s, other countries forged ahead. Worldwide startups peaked in 1984 and 1985, as over 30 plants were brought online in each of those years. However, escalating regulatory and litigation costs and pressure groups were not unique to the US. By the 1980s, it was becoming difficult to cost-justify new projects. On top of all that, the Chernobyl accident occurred in 1986, and the world had its own Three Mile Island moment.

In the 1990s, global startups fell to an annual average of less than six per year; in the first decade of the new century, average annual startups were just over three per year. In fact, since 1990 there have barely been enough startups to offset shutdowns.

The recent flurry of closures was caused to a great extent by yet another accident. After the earthquake and tsunami in Japan on March 11, 2011 and the ensuing catastrophe at the Fukushima Nuclear Power Plant, several countries began to rethink their nuclear energy policies. In May 2011, Germany announced that it would abandon nuclear energy entirely, shutting down all 17 of its plants by 2022. In June 2011, Italian citizens voted overwhelmingly in favor of a referendum to cancel plans for new reactors. The Japanese Cabinet, though unclear about a specific plan, has issued a white paper calling for less reliance on nuclear power.

So is nuclear on its last legs? It would appear so... but before we make the funeral arrangements, let's take a closer look.

A Nuclear Renaissance

In the wake of the Fukushima disaster, much of the attention in the Western world has been on the nuclear power debate, plant shutdowns, and project cancelations. Meanwhile, those in developing countries recognize the harsh reality that something has to be done to produce more power. Driven by population growth and increasing standards of living, future demand for energy in those countries will be strong, if not overwhelming.

The International Energy Agency forecasts that global demand for electricity will grow by a staggering 70% between 2012 and 2035. The increase will come predominantly from developing countries – over half is expected from China and India alone.

Serious pollution problems mean that those developing countries cannot produce all that electricity by burning coal. Amir Adnani, Uranium Energy Corporation's CEO, says, "The plans to develop nuclear power in China and other countries are very much driven by a set of realities that is very different and very acute. People are dying every year in China, literally choking to death, because of all the toxins that are being put into the environment by burning coal."

This explains why China, India, and the Russian Federation are quietly forging ahead with nuclear energy expansion while the West and Japan fret over it. As you can see in the table below, those developing countries are dominant leaders in the construction of nuclear facilities.

Country	Nuclear Plants in Operation	Nuclear Plants Under Construction
Argentina	2	1
Armenia	1	0
Belgium	7	0
Brazil	2	1
Bulgaria	2	0
Canada	19	0
China, Mainland	17	29
China, Taiwan	6	2
Czech Republic	6	0
Finland	4	1
France	58	1
Germany	9	0
Hungary	4	0
India	20	7
Iran	1	0
Japan	50	3
Korea	23	3
México	2	0
Netherlands	1	0
Pakistan	3	2
Romania	2	0
Russian Federation	33	11
Slovakian Federation	4	2
Slovenia	1	0
South Africa	2	0
Spain	8	0
Sweden	10	0
Switzerland	5	0
Ukraine	15	2
UAE	0	1
United Kingdom	16	0
United States	104	1
Total	437	67

Source: European Nuclear Society

It typically takes about six years to complete a plant once it is under construction, so the 67 facilities shown above should be producing electricity soon. In addition, over 100 reactors are at various stages of planning and permitting.

So it looks like the needs of developing countries will be more than enough to revitalize and sustain the nuclear-power industry. As for the developed countries, many still heavily rely on nuclear energy, and that won't change anytime soon. In fact, the reliance may only increase in the coming years.

Though many developed countries have been cool at best and hostile at worst toward nuclear energy expansion, a more conciliatory approach may be required in the future. That's because many of the same people who are concerned about the risks and costs of nuclear power are even more concerned about global warming. That means fossil fuels and the carbon dioxide they emit must be limited.

But what will be used other than fossil fuels? The hope was wind and solar, but the inefficiencies, high costs, and intermittent nature of these two energy sources make them unlikely candidates for widespread use. What's left is nuclear.

On February 9, 2012, the US Nuclear Regulatory Commission approved a license for two new nuclear reactors in Georgia, the first in over 30 years. This could be a sign of more approvals to come. But what could eventually really ignite a nuclear expansion are the promising technology advancements that are being developed.

Nuclear Technological Developments

Small Modular Reactors:

You've heard of the mini-brewery and the mini-steel mill; now meet the mini-nuclear reactor. Commonly known as "small modular reactors" or SMRs, these reactors are tiny compared to conventional ones. However, with capacities reaching up to 300 MW (power sufficient to supply 45,000 homes) they pack plenty of punch to have practical commercial application. Here are some advantages that SMRs offer:

They are cheaper to construct and operate than conventional reactors.
They can be standardized and factory built, a much more efficient process than on-site construction.
They can be set up in groups to provide however much power an area needs. Grouping would allow for a unit to be taken offline for repairs, maintenance, or replacement without an interruption of service. On the flip side, more units can be easily added if an area's power needs increase.
They can basically run themselves with little on-site supervision.
They can be stored underground, which enhances security.

Most important, because they are small and use less fuel, they are easier to cool, which greatly reduces the risk of a meltdown.

Small Modular Reactor

Some SMRs can even run on what was once considered nuclear waste. For example, a Bill Gates-backed company, TerraPower, is developing a reactor that burns depleted uranium. Depleted uranium burns very slowly, so TerraPower's reactor could theoretically run for decades without the need for a fill-up. This is an exciting development. Unfortunately, the TerraPower reactor only exists as a prototype on a PC. This means that it will take several years before it could possibly make its debut on the power grid.

In fact, most SMRs are still in the very early stages of development, with many challenges to be met and many questions to be answered. However, the concept has enough promise to induce the US government to invest in its pursuit. If it proves to be viable, this technology could really shake up the energy scene.

Thorium Reactors:

Imagine a cheap, plentiful atomic fuel that could provide safe, emissions-free power for hundreds of years without refueling and without any risk of nuclear proliferation. That fuel is thorium, and proponents claim it eludes many of the pitfalls of today's nuclear energy.

Robert Rapier, chief technology officer and executive vice president at Merica International, says:

"Longer term, commercialization of thorium reactors would dramatically reduce (although not totally eliminate) the risk of nuclear-weapon proliferation. Thorium is abundant relative to uranium, and thorium does not have to undergo the enrichment process that uranium requires. Further, thorium reactors have little risk of melting down because climbing temperatures will decrease the power output, eliminating the runaway reaction possibility present in a uranium-fueled reactor. Thus, these reactors would naturally tend toward the fail-safe state. The primary disadvantage is that thorium reactors are still mainly at the experimental stage, and therefore commercial viability has not yet been clearly demonstrated."

Pebble-Bed Reactors:

The pebble-bed reactor concept was first introduced way back in the 1940s. The US, Germany, and South Africa have experimented with the technology over the years, but it is the Chinese who have persisted in the experiment and plan to implement the technology in two reactors near the Yellow Sea.

Under the pebble-bed design, uranium fuel rods are replaced with tennis-ball-sized graphite spheres that contain tiny beads of uranium, and helium (instead of water) is used as a coolant. A New York Times piece provides a simple explanation of how the technology works:

"Rather than using conventional fuel rod assemblies…(pebble-bed reactors) use hundreds of thousands of billiard-ball-size fuel elements, each cloaked in its own protective layer of graphite.

"The coating moderates the pace of nuclear reactions and is meant to ensure that if the plant had to be shut down in an emergency, the reaction would slowly stop on its own and not lead to a meltdown.

"The reactors (are) cooled by non-explosive helium gas instead of depending on a steady source of water – a critical problem with the damaged reactors at Japan's Fukushima Daiichi power plant. And unlike those reactors, (pebble-bed) reactors are designed to gradually dissipate heat on their own, even if the coolant is lost."

Challenges remain for pebble-bed reactors, and some environmentalists oppose the technology. They point to the fact that the volume of radioactive waste increases under the pebble-bed design, but do concede that pebble-bed waste is far less radioactive per ton than spent uranium fuel rods.

These technological developments in the nuclear-reactor space are promising and certainly worth keeping an eye on... but it's unlikely that anything disruptive will hit the mainstream anytime soon.

So from an investment standpoint, this means that the best and most immediate way to play the nuclear trend is not the companies that make the reactors, but the companies that mine the fuel for the reactors.

The Coming Uranium Bull Market

There are a number of supply and demand circumstances that appear to be forming a perfect storm for bullish uranium prices. From the demand side, the 67 new reactors that we discussed earlier will be coming online in the near future.

On the supply side, there isn't enough uranium being mined to meet current reactor requirements, let alone new facility requirements. According to the World Nuclear Association, there was a 40-million-pound uranium production gap in 2011. It is unlikely that that gap will be closed at current prices; miners claim that their production costs average $85 per pound. With spot prices at about $40 per pound, miners have no incentive to bring new capacity online.

Another factor affecting the supply side is the coming end of the Megatons to Megawatts program. Under this arrangement, the US and Russia agreed to convert high-enriched uranium from Russia's dismantled weapons arsenal into low-enriched uranium for use in power plants. This secondary source provides about 15% of the US's annual supply of uranium. However, the program will expire later this year and when it does, the production gap will widen. Guess what will happen to uranium prices. That's right: they'll skyrocket.

Intrigued yet? Want some more specific investment advice? Help is on the way. Marin Katusa and the Casey Research Energy Team are on top of the emerging opportunity in uranium and have assembled a panel of world-renowned energy experts to discuss it in further depth in an upcoming webinar titled The Myth of American Energy Independence: Is Nuclear the Ultimate Contrarian Investment? The webinar premiers at 2:00 p.m. Eastern on Tuesday May 21, 2013 and is free of charge. In addition, all attendees will receive a free copy of our new Global Resource Intelligence Report on uranium (a $29 value). I urge you to reserve your seat today.

The New Cold War: The “Putinization” of Uranium

2013-05-18T10:01:00Z

By Casey Research

By the Casey Research Energy Team

Like the United States, the European Union relies heavily on Russia and the Commonwealth of Independent States (CIS) for its uranium, as shown in the chart below:

Russia is projected to produce 64 million pounds per year by 2020. The majority – 40 million pounds – will come from Russia itself, and the remainder from its foreign projects in Kazakhstan, Ukraine, Uzbekistan, and Mongolia.

But there's an often forgotten subsector of uranium production: the processes necessary to convert U₃O₈ into something that power plants can use.

For that purpose, yellowcake is first converted into uranium hexafluoride (UF₆) at a conversion facility, then enriched, or concentrated, at an enrichment plant. Russia's main conversion facility is at Angarsk, with a capacity of 42 million pounds of uranium per year. A small facility near Moscow, rated at 1.54 million pounds per year, primarily converts recycled uranium.

Russia can claim about one-third of the uranium-conversion capacity worldwide. Rosatom, the regulatory body of the Russian nuclear program, is also looking to set up an additional conversion plant by 2015, with the planned capacity currently unknown.

The United States normally owns 20% of the world's conversion capacity; however, its plant, Metropolis, is currently shut down for maintenance and upgrades. Though the plant is scheduled to reopen in June 2013, the current shutdown just adds to the growing scarcity of UF₆.

You may have noticed that the United States isn't listed in the chart above. As of January 2013, the US has no conversion capacity and isn't expected to be back online till mid– to late 2013.

Almost half of the world's capacity to enrich uranium will lie in Russia once the country completes the planned expansion of its current enrichment facilities. Accordingly, the life source of reactors and power generation is not obtaining the uranium but having access to facilities that turn them into nuclear fuel.

Russian President Vladimir Putin is attempting to corner the uranium sector and the UF₆ and enrichment markets alike. Russia's squeeze will be felt around the world – not only in regard to uranium supply but to enrichment as well.

It's difficult to say how Putin's squeeze on uranium will play out, but it's pretty certain to contribute to what is shaping up to be a spectacular bull run in this energy subsector. Investors who choose the right companies and get in early could see life-changing gains. To help with that process, the Casey Research Energy Team has put together an informative webinar with several nuclear-power and speculative investing experts. The Myth of American Energy Independence: Is Nuclear the Ultimate Contrarian Investment? is free, and will premier on May 21 at 2 p.m. EDT. Get more information and sign up today.

America’s Addiction to Foreign Uranium

2013-05-13T20:13:00Z

By Casey Research,

What most Americans don't realize is that dependence on foreign oil isn't the main obstacle to US energy autonomy. If you think America's energy supply issues begin and end with the Middle East, think again. One of the most critical sources of foreign energy is due to dry up this year, and the results could mean spiking electricity prices across the country.

In 2011, the US used 4,128 billion kilowatt hours (kWh) of electricity. Nuclear power provided 790.2 billion kWh, or 19% of the total electrical output in the US. Few people know that one in five US households is powered by nuclear energy, and that the price of that nuclear power has been artificially stabilized. Unfortunately for us, the vast majority of the fuel used for powering our homes must be imported.

In the chart below, you see where most of our uranium comes from:

The overwhelming majority of that Russian uranium comes from a 20-year-old agreement called "Megatons to Megawatts" that allows weapons-grade, highly enriched uranium (HEU) to be converted to reactor-grade, low-enriched uranium (LEU).

By December 2012, "Megatons to Megawatts" had produced 13,603 metric tons of LEU for US consumption and provided the fuel for nearly half of the US electricity generated from nuclear power.

In December 2013, that agreement expires, and Russia will be free to put its uranium out on the open market and demand higher prices. With 17 nuclear reactors in China and 20 in India – not to mention Japan, France, Germany, and others all vying for nuclear fuel – competitive bids are poised to drive prices higher, and early investors stand to make spectacular gains.

If this information is news to you, you are not alone. While the mainstream media focus on the US's "Middle Eastern energy dependence," the real story remains unnoticed. That's why Casey Research invited the field's top experts – including former US Secretary of Energy Spencer Abraham and Chairman Emeritus of the UK Atomic Energy Authority Lady Barbara Judge – for a frank discussion of what we think is America's greatest energy challenge.

Join us on Tuesday, May 21 at 2 p.m. EDT for the premiere of The Myth of American Energy Independence: Is Nuclear the Ultimate Contrarian Investment? to learn how the end of "Megatons to "Megawatts" will affect the US energy sector and how you can position yourself for outsized profits. Attendance is free – click here to register.

If Cyprus Is the Bellwether, then Canada Is the Red Flag

2013-05-09T20:16:00Z

By Jeff Thomas, International Man

An intriguing article titled "Canada Includes Depositor Haircut Bail-In Provision for Systemically Important Banks in 2013 Budget" was recently published in SD Bullion.

The somewhat lengthy title offers all the information necessary, but for those who – quite understandably – may not be able to accept that they have just watched Canada tumble down the Cypriot rabbit hole, here is a bit more detail from the approved budget itself:

"The Government proposes to implement a bail-in regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital."

Customer deposits could certainly fall under the label of "certain bank liabilities," and converting them into "regulatory capital" without permission is just a gentle way of describing confiscation. Though Canadian officials have denied that the term "certain bank liabilities" includes customer deposits, we must note that the government in Cyprus also promised that customer deposits would not be touched, only to renege on that promise at the onset of the crisis. Remember lesson #1 of the Cyprus debacle: "Do Not Trust Politicians."

As the recent events in Cyprus have been unfolding, each iteration has seemed to me to be not only logical, but almost predictable. As Jim Sinclair has recently been stating frequently, the EU has run out of options… The next step is confiscation.

There will, of course, be endless rhetoric and debate, followed by minor adjustments in method and percentage taken, but, ultimately, the powers-that-be have reached the confiscation stage. That is now carved in stone.

But at this point, if we are watching the horizon, we will spend less of our time mourning the fall of Cyprus and more of it anticipating which countries will be next in line.

Here, I confess, I have been surprised. There were quite a few countries that, logically speaking, might have been next. Canada was not even on my personal radar. This is not to say that it would not also be in the queue – only that I would have predicted its position in the queue to be quite a bit further back.

Those observing recent developments may have understandably been saying to themselves, "I realize that we live in difficult times and that, if I am to look after my family's future, I need to face up to the fact that we may be seeing dramatic change. But there are some things I can't accept, and one of those is the possibility that my savings could be confiscated by my bank. My government would never allow it!"

For those who very understandably may find this latest realization to simply be beyond the pale, it would be well to take a moment out to rise above the clouds for a bit of an overview at this juncture.

In most countries of what we grew up calling the "Free World," there has been a steady deterioration, particularly with regard to corporatism (the merger of state and corporate powers). One facet of that deterioration has been increasing legislation that allowed financial institutions to create Ponzi schemes with regard to lending, in which the bank goes broke in the end but the cost for the failure is passed to the taxpayer in the form of a bailout.

Put more simply, this means that after the fox has raided the henhouse, the government advises the public that the only way to save the situation is for the government to confiscate more hens from the farmers and give them to the foxes.

The public, desperate to return to "normal," will accept whatever the government says at this point, in the hope that it will all somehow turn out all right. Only a tiny percentage will be prepared to say, "We've been systematically raped and robbed by both our government and our banks, in full complicity with each other. It's high time I put what I have left in a sack and find a way to protect it on my own."

Those few who do so will turn to safe havens for wealth (however much or little that wealth may be). They may invest in overseas properties that cannot be confiscated by their own governments, buy precious metals and store them privately, and so on.

The objective will be simply to make it as difficult as possible for their governments to confiscate their wealth.

While there may be no guarantee that they will succeed, they would know that at the very least, they will not be the low-hanging fruit when their government enters the orchard to begin the picking.

However, as history shows, the great majority of the people of all countries will fail to act. They will watch in confusion as events unfold, as the banks continue to come up with schemes to further bilk the public of their wealth, while the governments assure the public that, "It's an emergency situation. We have to be willing to sacrifice a bit more to save the system, or we'll really be sorry." In the end, the majority of people will comply.

Cyprus is a bellwether of what is next for the world in general. A term has even already been coined for what is coming – a "bail-in." An event in which the public must accept that, in order to save the banks from collapse (which they have been told since 2008 is the absolute worst possible outcome), they must accept that they must make their "contribution" – confiscation of their deposits by the banks. First, it will be, say, 5%, then it will be announced that 5% didn't solve the problem and another transfusion will be needed. Then another.

Some people will figure out along the way that they are being robbed by both their government and the banks, working in concert, but most will regard that reality as impossible, as it has never happened before and surely can't happen now.

If Cyprus is the bellwether, then Canada is the red flag, showing that Cyprus is not an isolated situation. The damage wreaked by monumental debt is systemic, and it has taken place throughout the First World and beyond.

This latter statement will very likely be the most difficult to accept as reality. If so, here is something to consider: Canada has approved its bail-in on a national level just one week after a final decision was made in Cyprus. As we all know, the wheels of governments worldwide move slowly. The reader might ask himself whether he believes that the Canadian government has, in short order, approved its own bail-in, in reaction to the events in Cyprus. If this possibility is simply too far-fetched, he must accept that the plan for Cyprus has been known to the Canadian government for some time and that a similar bail-in for Canada has been in the works for a while. It was simply agreed that Cyprus would go first – to act as the litmus test.

If the reader finds himself agreeing that it is likely that the Canadian government had foreknowledge of the events in Cyprus, his next logical conclusion would be that other nations had the same foreknowledge and have very likely been getting their own ducks in a row.

Most countries in the First World have gone down the same road of monumental debt and have found that that road has led to a precipice. At this point, they have no other option left in their bag of tricks. They are all in the same boat and will play their last option – confiscation of wealth.

While many First World citizens think that events like those unfolding in Cyprus could never happen in their home country, the truth is precisely the opposite – and actions like the Canadian government's send a strong signal that the time to protect your wealth from governmental grabs is running out.

There are a number of diverse steps you can take to protect yourself and your wealth from being milked by your home government. Whether you're looking to stash some cash or precious metals in another country, interested in setting up an offshore LLC, or wanting to go completely international with your life and your assets, the comprehensive information in Going Global 2013 will provide you with sound strategies and trusted options for securing your financial future. Learn more and get started protecting your wealth today.

Porter Stansberry vs. Marin Katusa: Who Won the Bet?

2013-05-08T19:48:00Z

By Marin Katusa, Chief Energy Investment Strategist

On May 1, 2012, Porter Stansberry and I made a bet. Porter predicted that oil would go below US$40 per barrel within 12 months. I stated that there was no chance that this would happen (my reasons are presented at the link above).

Putting our money where our mouths are, we both agreed to bet 100 ounces of silver on the matter.

I have a lot of respect for Porter, who is a very smart man. When he talks, I listen. But when he discussed the reasons why he thought oil was going below US$40 per barrel, I knew I had him – this was going to be one of the easiest bets I have ever made.

One of Porter's main arguments was that a global shale-oil revolution would push volume way up and prices way down. It is definitely a sensible argument, yet it was missing something very critical: timing.

The shale gas boom that happened in the United States did not occur in a vacuum. Rather, it was built upon decades of experience in new technologies such as hydraulic fracturing and horizontal drilling. This was then based off of more than 150 years in conventional oil and gas exploration. Today in North America, there are thousands of rigs and hundreds of thousands of skilled oil and gas workers to work on the projects.

This simply does not exist in the rest of the world.

For a new shale discovery – however large it may be – it would take years just to prove up its commercial viability, another few years to get the infrastructure running, and even more years before it produces enough to matter.

This means there are tremendous opportunities to profit – for those who are in the know – while we wait for the rest of the world to catch up.

A similar situation is shaping up in the nuclear sector. Many countries rely on nuclear power and are planning to expand its use – the US among them – yet companies involved in the mining and refinement of uranium remain in a slump. We at Casey Research have created a webinar discussing these issues; it's titled The Myth of American Energy Independence: Is Nuclear the Ultimate Contrarian Investment?, and it will premier May 21 at 2 p.m. EDT.

Featured participants include Chairman Emeritus of the UK Atomic Energy Authority Barbara Thomas Judge, former US Energy Secretary Spencer Abraham, and former Canadian Minister of Natural Resources Herb Dhaliwal. We will provide an expert, insider's perspective on the global nuclear power scene, showing you how to leverage its rising importance in your portfolio for potentially life-changing gains. Learn more about the free webinar and reserve your place today.

How to Buy Annuities (and When Not To)

2013-05-07T21:17:00Z

By Dennis Miller

Annuities are more complicated than toy assembly instructions on Christmas Eve. How do we really know if we are getting a good deal? And are they ever a good investment?

An honest salesman would say, “That depends on when you die.” If you outlive your actuarial mortality rate, the answer is probably yes. The only way you can know is when you die, and at that point you won't care.

When shopping for an annuity, start with basic insurance. It is called a “single premium, immediate, lifetime annuity with death benefit.” Phew, that's a long name.

I received a quote for a 65-year-old man for a $100,000 premium, immediate, lifetime benefit policy with a death benefit. The policy provides monthly payments of $491.66 — or $5,900 every year. What about the death benefit? If the total monthly payments you received before death were less than $100,000, your beneficiaries receive the difference.

That sounds nice, so where's our risk? If you live for 10 years, you would have received $59,000 in benefits and your beneficiary would receive the remaining $41,000. So what's the problem? If you die before your expected mortality, you loaned the insurance company your money interest-free over that time period. If you live longer and receive more in benefits than the premium you paid, good for you.

Annuity salesmen point out that the $5,900 annual benefit is the same as 5.9% interest, with some additional tax benefits—not bad in today's low-interest-rate environment. But ultimately, your longevity will determine if it's a bad investment. Of course, it may still be a good idea.

Things get more complicated when an insurance company tailors a product to your needs. Ask for the quote I mentioned above, and then for others with only one rider at a time.

The most common concern about an annuity is inflation. I was quoted on the same policy with a guaranteed 3% inflation adjustment built in. By adding the inflation rider, the monthly benefit dropped over 27%, to $355.23 a month, or $4,262.76 annually. I asked the agent how long it would take for the lower monthly benefit to catch up in total benefits with the first policy; the answer is somewhere in the 22nd year.

So which would you prefer to protect you against inflation: A higher monthly benefit that works in your favor for 22 years, or a policy paying you a lower amount? I would opt for the larger amount and put some of the difference away every month in a high-yield investment.

Some folks opt for the inflation rider if they have a family history of longevity or a spouse without a lot of financial knowledge. OK, that makes sense.

Continue to get quotes, one option at a time. Always run the numbers yourself to understand the financial ramifications of each option.

Many companies now advertise bonuses and guaranteed rates of return. Generally, this is for an annuity that builds up equity before you draw benefits. Here is how you price compare: Ask your agent what the “five-year accumulation” will be. For example, if you paid a $100,000 premium and had a 5% guarantee, your total accumulation would be $125,000. Then ask how much your monthly check would be.

Now, compare that to another quote: Say you want a $125,000, single premium, immediate, lifetime annuity with death benefit, how much would you draw monthly? If that monthly benefit is more than the amount in the previous paragraph, this is the better option. You may get a 5% buildup with the former, but when you buy your insurance, you pay too much.

For those in the insurance industry who may be poised to send me hate mail, I offer this caveat: I am not licensed nor qualified to sell annuities. That is between a trusted annuity adviser and his or her client. Show the client your commission schedule on the products you are quoting. Then run the numbers and prove it is a good investment. Offer the best price for the insurance portion and a good return on the investment portion, and the client will likely buy. My goal is simply to help our readers shop wisely.

Before you start asking for quotes on annuity products, you’ll want to do some homework. To help you get started we’ve put together an easy-to-read report called Annuities De-Mystified. You’ll find our 8-point checklist to find out if an annuity is even right for you, our 9-point plan showing you what to look for when buying an annuity, and an important overview of the risks associated with annuities all within the pages of this timely, must-read report. Click here for your free copy today.

Handicapping the Potential Successors to Ben Bernanke

2013-05-06T18:46:34Z

By Paul Brodsky, QB Asset Management

[Ed. note: This article originally appeared as a guest contribution in the "Midweek Matters" Casey Daily Dispatch.]

A couple of days after the Fed announced Ben Bernanke would not attend the Jackson Hole summit, for the first time in twenty five years, the New York Times (on the first page, no less) ran an in-depth profile of Janet Yellen, the heir apparent to run the Fed. Beneath her profile there were three other candidates "being discussed": Roger Ferguson, Tim Geithner, and Larry Summers.

We at QB Asset Management normally do not spend time handicapping presidential appointments. In this case, however, we think the choice for next Fed Chair may have profound economic implications, and that it would not require expertise in econometric modeling, credit policy management, and maintaining the public perception of economic stability. We think the next Fed Chairman will oversee a conversion of the global monetary regime. A thick skin, diplomatic skills, and strong relationships with global banks and monetary policy makers will be the skill set most needed. We think Tim Geithner (with Bill Dudley as an alternative) will take over the Fed when Ben Bernanke steps down next January, and it seems by all indications that the table is already being set.

We attended a small dinner party a few years ago at which an iconic financier (and major Obama supporter) let it slip that he questioned one of Obama's most senior aides just prior to the 2008 Democratic convention about taking over the economy when it was imploding. The aide waived it off and exclaimed, "Oh, don't worry, Bobby has it covered!" Most of the table was relieved that Bob Rubin still had their backs and that banks would keep priority. Such was, and remains, US economic policy.

Neither growth nor austerity nor gloom of night will stay these currencies from their appointed devaluations. Bank balance sheets must be preserved; ergo sufficient inflation must be manufactured. We think the dull but persistent economic malaise amid increasingly aggressive monetary intervention policies will soon engender fear among the not-so-great washed – net savers. This happier band of brothers cannot maintain an edge when the real economy contracts and interest rates are already at zero. Base money is already being manufactured in the form of bank reserves, and the total money stock is not growing because there is very little natural economic incentive among the rest of us to consume (much) or take risk. Something and someone new is needed.

Ben Bernanke seems like a brilliant political economist and a decent guy, the top of his field in terms of comportment, academic credentials, and specific competence in understanding historical monetary policies during a countercyclical (i.e., deleveraging) period. Perhaps Janet Yellen is too? But such qualities are not what we think will be preferred by the powers that be now that global resource producers are openly questioning US, British, Euro, and Japanese monetary policies, and reserve holders are realizing their stash is being methodically turned to trash.

Meanwhile, aggregate leverage is growing and real economies are withering. Does anyone believe that Ben or any other monetary authority has been proactive, or that any fiscal authority has enacted legislation that promises to help achieve "escape velocity?" Can't we all agree that the rationale for economic policy may be boiled down to the counterfactual: "Yes, but imagine if they withdrew liquidity or enforced true austerity – it would be worse!"? Is there a serious analyst who still believes economies can grow their ways out of being overlevered without leveraging further?

Whether or not contraction has to come a-knocking prior to a monetary reset is anyone's guess, but it would be difficult to imagine monetary system change without a generally recognized economic tragedy that precedes it. This implies disappointing GDP prints, declining corporate revenues, and maybe even a swoon in stock and real estate markets. We have already begun to experience the first two. Now that we read global central banks have begun buying equities, perhaps equity prices may be controlled too (as are the level of interest rates via large scale asset purchases like QE and relative currency exchange rates via timed interventions)? Negative output growth and asset price busts would certainly open the door for our hero to enter.

The role of a central banker in the late stages of deleveraging seems to be volume triage, as they say in intelligence circles – reacting to an increasing barrage of events as they occur, wherever they may occur. In economics as in policing, the bad guys always get to take the first shot. From the central banker's perspective, the bad guy in the current regime is the real economy. If it continues to shrink, as we think it must, then TPTB must change the way they do business.

We think the box we drew in our last write-up, contrasting inflation/deflation with leveraging/deleveraging (they are not the same thing), is the key metric in understanding the forces behind economic growth and market pricing. An inflationary leveraging perpetuates imbalances, while deflationary deleveraging threatens the survival of the banking system at large. Hopes for organic credit growth, which would promote the former, are now fleeting. This, in turn, engenders the threat of the latter. Continued ZIRP, increasing asset purchases, and a steep decline in the universal efficacy of it all suggests the time to press the reset button is quickly approaching. May to December 2013 may turn out to be the darkness before the dawn: a time we look back upon and choose to forget.

All in all, we think the most efficient Fed Chair in advance of a reset would be Paul Krugman. He seems willing to destroy the current global monetary system with swift dispatch, without consultation, declaration (or second drafts). Alas, capitalist economies in liberal democracies require level-headed responses to market forces. There is no place for rogue pro-actionists. Institutions like the Fed are meant to appear as first responders working on behalf of the societies their banks serve.

And so we think that circa 2070, our children will write and read (140-word) biographies about how Timothy Geithner saved the world from economic darkness. Geithner will save the day and bring glory to the Obama presidency by reducing the burden of debt repayment while maintaining the nominal integrity of debt covenants and bank balance sheets. The only way to accomplish this would be by destroying the currencies in which those debts are owed. Net debtors will rejoice and net savers (all 1% of them?) will suffer, finally realizing their unreserved currencies and levered financial assets were never sustainable wealth in the first place.

Our little narrative could certainly turn out to be wrong, but we discuss it here (against all political wisdom) because we cannot find another one that better fits current macro and market pricing trends. If we are wrong about Mr. Geithner, we think it would imply that TPTB (raise your hand if you think the Fed's shareholders do not choose/approve the Fed Chairman) believe a clear-headed and decent academic political economist can figure out what all past ones could not: how to support asset prices beyond ZIRP and central bank asset purchases. (Ben is gone, long reign Janet!) That is not our projection.

When and if it becomes clear that Tim Geithner will ascend the steps at Eccles, we think it would already be too late to buy physical gold and resources. The only play remaining for financial asset investors looking to get full value after the reset would be shares in precious-metal miners and natural resource producers holding reserves in nature's vault. Properly held bullion and shares in precious-metal miners would act as the most efficient store of purchasing power over the course of the devaluation and conversion. (Worst to first? Get 'em while they're cold!) Futures, ETFs, unallocated bullion holdings, and other fractionally reserved claims on physical reserves easily replaced with cash would not participate.

If our scenario comes to pass, then bank, government, and consumer balance sheets would be quite healthy following the reset and would be ready to expand. We would think consumable commodities and shares in their producers would lead equity markets higher and that interest rates would remain low, as further inflation would be mitigated by the discipline of a full or partial peg to precious metals. We think all should question whether we are 100% wrong. If not, then prudence dictates some allocation to properly held precious metals. (Presently, it is less than 1% of all global pensions.)

Paul Brodsky is a founding member of QB Asset Management Company, a New York investment manager.

Owning precious metals is a must in these troubled times, but you should also consider buying exceptional junior exploration companies – even the best-of-the-best juniors are down 50% or more over the last year. This situation is providing contrarian investors with a rare opportunity to literally make fortunes. To help you take advantage of this historic profit opportunity, Casey Research is offering a free viewing of Downturn Millionaires. This must-see online video features legendary resource speculators Doug Casey and Rick Rule, who reveal their personal strategies for creating life-changing wealth from troubled markets. You'll also discover actionable investment advice from Casey Research Chief Metals and Mining Investment Strategist Louis James. To learn more about Downturn Millionaires, click here now.

International Money Flow Is Tightening

2013-05-03T16:15:00Z

By Kevin Brekke, Editor: Metals & Mining Division

The EU continues its chainsaw juggling act. The austerity pledge from France is holding about as well as its Maginot Line, while Greece has sworn to meet its fiscal targets in 2014 2015 2016 soon, and the Italians promise they're going to kick some serious fiscal butt as soon as the country returns from holiday.

Spain reassures that it will squarely confront its need to raise worker productivity whenever the unions call an end to protests against austerity. And the Portuguese high court ruled it is unconstitutional for civil servants to work for less than twice the wages of their private-sector counterparts.

This chronic "the sky is falling" in the EU had induced investor news-cycle fatigue and rendered last year's black-swan threat level from red to this year's collective yawn…

… until Cyprus tossed another chainsaw into the act. The Cyprus looting of private wealth was a cold-shower reminder of the tenuous security of assets that are concentrated within reach of a single government – doubly true of nations in a desperate fiscal situation whose financial sector is about to topple.

DepositorCreditor

The blatant theft of depositor money in Cypriot banks was at first peddled as a one-off emergency measure. Then a Freudian slip by the head of the Eurogroup finance ministers, Mr. Dijsselbloem, suggested this would be the new pattern for similar future events. Much back-pedaling and "clarification" ensued.

But don't bother squinting as you try to read the lips of mumbling bureaucrats. Just follow what they're doing and you won't get blindsided.

What have they been up to? In October 2011, the Financial Stability Board (FSB) – a tentacle of the Bank for International Settlements, the central bank for central bankers – released a report that proposed a new regime to resolve financial-institution instability.

In the report, the FSB calls for solvency support for banks without taxpayer exposure and the allocation of losses to shareholders and unsecured and uninsured creditors. Deposits at a bank are considered a loan, and if a bank fails, its depositors become unsecured creditors for amounts that exceed the insurable limit.

It gets worse. To protect the integrity of the financial system, controls on both endogenous (the bank itself) and exogenous (other firms and cross-border cooperation) capital movement can be implemented. This is exactly what happened in Cyprus. To prevent capital flight out of the banking system, the movement of money out of or between banks was restricted, as well as capital sent outside the country.

The G20 has fully endorsed the plan, and its implementation is complete or under way in member jurisdictions. The US is a G20 member, so don't kid yourself into believing it can't happen in America. It can and will. The Cyprus event has been carefully framed as an anomaly when in fact it is part of a well-orchestrated script.

In the Year of Our Overlord 1 AF

January 1, 2014, will mark the start of Year 1 AF – "after FATCA." In the run-up to the US reporting regime's full implementation, many foreign banks have opted not to accept US persons as clients, and we can see why. FATCA is a huge burden on foreign financial institutions in terms of time and resources needed to identify, track, and report on their US clients.

Today, it is nearly impossible to find a foreign bank that will open an account for an American without them visiting the bank and delivering a stack of notarized paperwork to prove they are who they say they are. Other banks that had welcomed US persons have suspended doing so in anticipation that further demands on their time will be announced.

In fact, one bank we spoke with during our research on internationalization has done just that. Lloyds TSB has stopped opening accounts for Americans, pending a review of FATCA later this year. Our contact at the bank did not sound optimistic that the policy would be reversed. This is a trend we expect will gain traction.

And as if Americans seeking to internationalize weren't already facing stiff headwinds, a recent leak of internal documents linked to offshore entities will likely add some force. In early April, millions of emails and other records were leaked with information on thousands of account and company owners in the British Virgin Islands, a popular offshore banking center. The leak exposed several high-profile clients that are allegedly "hiding" assets from their home tax authorities.

This is just the kind of news that will embolden the offshore-means-tax-evasion governmenteers to twist the reporting screws a little bit tighter.

When Is Now

The incremental creep of crises continues to aggravate the financial landscape and provokes increasingly desperate responses from Western governments, particularly the US.

Yet in spite of all the words unleashed and regulations imposed against offshore investing, it remains unquestionably legal. How long it will continue to be legal is questionable.

Is it easy? No. But neither is getting your luggage and shoes through airport security. The situation for the easy movement of capital and assets across borders is dire, but it is not hopeless if you have the right information.

FATCA has effectively acted as stealth capital controls, as the regulations dissuade foreign financial institutions from doing business with Americans, discouraging all but the most persistent investors from pursuing an international wealth preservation strategy.

As the pieces come together, a clear picture emerges: Americans are just one financial crisis away from triggering the provisions of the G20-backed FSB financial resolution regime. And that almost certainly will include restrictions on the movement of capital. Once your money is trapped inside the US, any type of concocted emergency "tax" can be imposed on your wealth.

Additional taxes are just one of many steps your home government can take to grab a share of your hard-earned wealth. Wise investors disperse their assets internationally to minimize this risk, and though it's getting late in the game, there's still time for you to join them.

You can learn about moving your cash offshore... setting up an offshore LLC... investing in international stock markets... and internationalizing yourself, including getting a second passport. It's all available in an information-packed special report titled Going Global 2013. You won't find a better resource for internationalizing your life and your assets. Get started today.

Reaching for Yield

2013-05-03T16:13:00Z

By Dennis Miller

With the Fed buying $85 billion in government debt every month, effectively holding interest rates far below the rate of inflation, many seniors are struggling to make ends meet. It is no wonder the Dow has hit an all-time high. But for the stock market, where else can we expect to find any return?

The Fed can go on all it wants about how business is turning around. I'm not buying it one bit. Bring back the 6% CDs of yesteryear, and we will see just how much money seniors and baby boomers pull out of the market to reduce their risk. Frankly, I don't know one person in my real life who is euphoric about the market. The only enthusiasm I see or read comes from the television or the Internet.

Staying proactive amid the media hoopla is always a challenge. But it's a necessity for investors who actually want to profit. Every time a member of the Federal Reserve speaks, it's a clue waiting to be revealed.

In a recent Bloomberg article, the author shared some strong clues from Federal Reserve Vice Chairman Janet Yellen:

"I view the balance of risks as still calling for a highly accommodative monetary policy to support a stronger recovery and more-rapid growth in employment. … At this stage, there are some signs that investors are reaching for yield, but I do not now see pervasive evidence of trends such as rapid credit growth, a marked buildup in leverage, or significant asset bubbles that would clearly threaten financial stability. … Ending the asset purchases before observing a substantial improvement in the labor market might also create expectations that the amount of accommodation provided would not be sufficient to sustain the improvement in the economy."

It doesn't take a Little Orphan Annie decoder ring to understand Yellen's message. The Fed is going to continue to clamp down on interest rates, forcing us to invest in the market. While it is at an all-time high, there are just "some signs" that investors are reaching for yield. Things aren't going to change anytime soon. Just keep pouring your savings into the market.

It's time to take off the rose-colored glasses and look at reality. Inflation is not 1.7%, despite what our last Social Security cost of living increase would have us believe. Yet, there is no point in bickering about the real number. Whether it's 5%, 6%, or 7%, our main concern is growing our portfolio ahead of inflation so our net worth doesn't decrease every year. We don't want to lose money by default even if we never take out a dime.

Social Security and the trickle of interest income available from traditionally safe investments won't pay the bills. Frankly, most folks can no longer afford to live off of interest, so we need to adjust our expectations of what retirement looks like.

Essentially, we're back to the same "needs versus wants" lesson most of us taught our children. Only now we have to re-teach it to ourselves. Letting go of unnecessary expenses is difficult, but ultimately quite freeing.

Also, we should avoid withdrawing money from our nest egg if it isn't at least earning enough to keep pace with inflation. If we tap into the principal to pay our bills, we are getting poorer. Make it a habit, and we'll soon be broke.

Personally, one of my biggest challenges is keeping my investment emotions under control while I reach for yield. Jumping into the hottest new technology stock is a good idea sometimes, but I never risk more than I can afford to lose. Safe investments with decent yields are out there. Tap into as much expert advice and high-quality research as you can.

I have a friend who calls himself a professional stock picker – something we all need to be. He reads several paid investment newsletters, and invests in the recommendations that best suit his needs. There is plenty of helpful information available, but we have to actively manage our own money. The stakes are too high not to.

The Fed has made it very clear what our challenge is: finding new sources of yield to provide us with income. But how do you find them and how do you get started?

With the team here at Casey Research, we’ve recently released a report outlining how to create a steady stream of monthly income to address this exact challenge facing us today. In it you’ll find out just how easy our strategy is to set up, which investments to hold (and which to avoid), and even their expected payout dates so you can budget accordingly. Click here to read this brief letter giving you all the details and explaining exactly how our plan works.

How to Profit from Risk

2013-04-30T21:22:00Z

By Dennis Miller

Live off the interest, and never touch the principal. Today's retirees had this drummed into their minds long ago. It is, after all, a laudable goal, and something every retiree and person approaching retirement should aspire to. But how in the heck are we supposed to do it?

A friend recently told me he rolled over a five-year CD paying 1.2% because his banker said it was a good rate. Ah! I nearly fell out of my chair when I heard that. A 1.2% interest rate won't even keep up with inflation, let alone allow someone to live off the interest. He may think he's investing conservatively by keeping his money in FDIC-insured CDs, but his buying power is quickly slipping through his fingers.

So, what interest rate does it take? About 12%, that's all. According to over 3,000 readers of my regular weekly column, our cost of living has risen about 8% in the last year. If that number is anywhere close to accurate — and I'm inclined to believe it is — our portfolios need to earn 8% to cover rising costs and 4% to supplement those measly Social Security checks.

My CD-investing friend is taking the biggest risk of all: ignoring the reality of the times we live in. Maybe he's too paralyzed by fear to step away from the familiar. Maybe he doesn't know where to find better options. And maybe he's like so many of us who just want to bury our heads in the sand. Doing nothing, however, is a decision, and a particularly poor one during times of high inflation.

Like an ostrich pulling his head out of the sand

I advised my friend to start doing his homework. He can still take a conservative approach to his overall portfolio, but he should also consider putting up to 10% of it into a mix of speculative investments. Retirees certainly shouldn't go overboard and risk more than that, but he won't be wiped out if something goes wrong with a small portion of his nest egg. In reality, he's already taking a much bigger risk without the chance of reward that speculative investments offer.

So where should we put our 10%? First, do not put it all into one company. Slice it up into smaller pieces; the exact number varies according to the size of your portfolio and your personal risk tolerance. Then, pinpoint a few well-researched speculative investments, and get your toes wet. There are many specialty, sector-focused newsletters out there to help.

One newsletter I subscribe to focuses on the extraordinary profit potential in the technology sector. Many of the investments it recommends have one of two outcomes: investors see windfall gains, or they lose a little money. I'm excited about one recommendation in particular, a small pharmaceutical company that's developing cutting-edge medical tests. Companies like this one function as research and development for the whole industry. Once the tests receive FDA approval, they will likely be purchased by a much larger company, and investors may see life-changing profits.

But before you start decorating your new beach house, remember, we must do our homework. High-quality newsletters have several pages of research explaining each of their recommendations. Read them carefully and be very selective.

And start slowly. Limit any one investment to no more than 5% of your portfolio. If it gains 50%, that's a 2.5% gain for your entire portfolio. If it doubles, that's a 5% gain. That takes a lot of pressure off the other 95%, and puts you a few steps closer to truly living off the interest.

Also, read the updates and constantly monitor your positions. Yes, retirees must take risks, but only educated and extensively researched risks with a small portion of your nest egg.

One final tip: mutual funds and exchange-traded funds stress diversification. That works for the low-risk portion of your portfolio, but their spreadsheet analyses won't do the trick for speculative investing. I prefer to invest my speculation capital strategically, where I have a thorough understanding of the company, product, industry, and profit potential.

So how do you get from where you are today to where you need to be?

A good way to start is to build a portfolio based on dividend income. Speculative stocks are great (and fun if they’re giving you good returns), but the core of your portfolio needs to be stocks you can rely on for stability; and a little extra cash through dividend payments is a bonus. To that I end I’ve put together a new report called Money Every Month outlining for you exactly how to build a portfolio that pays out each and every month and even tells you which stocks you should consider owning. If you want a copy just click here.

Buy Gold NOW

2013-04-30T18:16:00Z

By Jeff Clark, Senior Precious Metals Analyst

You've undoubtedly read about the dramatic increase in demand for gold and silver bullion products since the big correction two weeks ago. Supply has gotten tight, premiums are rising, and inventory is hard to come by, especially for certain silver products.

But it's worse than you may know. Many of these reports come from the retail side of the business, including those from sovereign mints. This information is indicative, but more important is the activity among the wholesalers. It's possible the retail trade is just experiencing a giant bottleneck, which would come with a different set of conclusions than if behind the scenes the wholesale industry is seeing net sales.

So we decided to talk to the wholesalers directly: the bullion banks, traders, and refiners. These entities typically deal in wholesale trades only, exclusively in large amounts, and solely with major entities that include dealers and investment funds.

There was a catch, however. In speaking with these entities, we realized one thing: they won't publicly reveal themselves. So we can't tell you who they are, and in fact, they wouldn't speak by phone, only in person. This means you have to take our report on trust – or not – as you wish; we simply don't have permission to reveal names (we did ask). We can say this, though: we spoke with almost all the major ones.

Here's a summary of what they told us occurred during the week of April 15-19 (the 15^th was gold's 9.3% selloff)…

Bullion Banks. As a group, there were roughly four times as many buy orders as normal. Generally speaking, the buy/sell ratio was nine to one. Inflows (buying vs. selling) were net positive across the board.
Bullion Traders: There were twice as many trades placed as usual – and the buy/sell ratio was a whopping 95:1. One anonymous dealer told us it had 995 buy orders that week and just five sell orders. Reports like this were consistent among the group. What's interesting is that all traders reported higher volume. That the increased buying occurred on large volume instead of small volume means the buying was not a fluke. It also confirms the bull market isn't over.
Precious Metals Refiners: These entities deal in large trades only. None would reveal the quantity of their orders, but two stated they had no sell orders. A third told us they had one sell order out of 100 transactions.

What we learned from these big players is that no one was a net seller. There was across-the-board purchasing, and on significantly increased volumes. We heard more than once that "We've never seen anything like this." And that includes the 2008-2009 period.

While some of this may sound familiar to what we've heard on the retail side, keep in mind that these are the entities that supply your local dealer. So if your favorite shop found it difficult to access product last week, their woes are unlikely to let up.

What we conclude from this research is that the availability of bullion is likely to get worse before it gets better. If so, it also means premiums will continue to rise. Remember that in early 2009, at the peak of the last big supply deficit, premiums for silver Eagles reached as high as 90-100% before coming back down. In that light, a 25% premium for a silver Eagle today doesn't look so bad.

The disconnect between the paper price of gold and the demand for physical metal is so great that we want to bring this to your attention so that you can make an informed decision about whether or not to buy gold now. You should know that supply among wholesalers is as every bit as tight as the retail side, that dealers will probably continue having difficulty meeting demand, that premiums will likely continue to rise, and that delivery times aren't going to shorten right away. If you're a bullion buyer, purchasing now could save you some money and hassle over waiting.

The catch is, where do you go? Delays are commonplace; we're hearing five to six weeks from some dealers, and a few websites show certain products are "out of stock." Further, premiums are still climbing, in some cases daily.

Because of its extensive network, bullion is still available at the Hard Assets Alliance for a reasonable premium with minimal delays. Access to a greater number of dealers has increased the Alliance's ability to continue accessing metal (when one dealer is low it can turn to another one) as well as maintain low premiums, since there's competition for your order. You can check out premiums by opening an account, which only takes about five minutes. You'll probably be pleasantly surprised.

HAA is seeing record demand, too, but so far, it's been able to meet it. As of Friday, orders are being filled in about a week, and about two weeks on the more popular products. Premiums remain among the lowest in the industry. Note that some dealers are using the supply crunch to raise their fees, so be careful of anyone who's charging more than the rest of the industry. I can tell you that HAA's markup is from the wholesaler only. And news flash: HAA lowered the minimum to $5,000 (from $10,000) for US vaults or delivery.

The important thing to realize that if gold and silver were to see another leg down, we fully expect buying physical metals to get more difficult and expensive, not better. At this point, there is no evidence that supply is easing up. Even – or perhaps especially – at lower spot "paper gold" prices, it could become very difficult to get your hands on bullion. And you'll pay even higher premiums on items with the tightest supply. We don't care to predict how long delivery times could get.

Don't be fooled by what happened in the futures market. The retreat is a buying opportunity for physical metal. If you wish you'd bought tech stocks in 1990 or real estate in 2000, you now have a moment like that in gold.

So yes, we are buying right now, and recommend it to our readers, too.

We also recommend storing some of your gold and other assets outside of your home country. To help you get started, Casey Research has produced Internationalizing Your Assets, a timely web-based investors' summit that features Doug Casey, Peter Schiff, and other experts in international diversification. The event premiers tomorrow – April 30 – at 2 p.m. Eastern time. Registration is free. For more information, please visit this web page.

Doug Casey on Internationalizing Your Cash

2013-04-29T21:05:00Z

By Doug Casey, Chairman

(Interviewed by Louis James, Casey Research)

L: Doug, we talked previously about getting assets out of your home country, especially the US, where to take them, and what to do with them. In so doing, you touched on the inevitability of currency controls just ahead, especially for Americans. Can you tell us more about that?

Doug: Yes. I'm quite serious about what I said about "the grim reality of impending currency controls." As the global economy continues to deteriorate, governments will have to appear to be "doing something." It's going to become very fashionable to institute some sort of foreign exchange control.

Why might that be? Because obviously, people who are taking their money out of the country are unpatriotic…

L: Those bastards.

Doug: That's right. Jingoistic Americans naturally, but stupidly, see taking money out of the country as being unpatriotic. They don't understand that it's mainly those prudent people who will be able to supply the capital to rebuild a devastated economy later. Besides, getting money abroad is obviously something that only rich people would do… and of course, it's time to eat the rich, as well. For those two reasons, there won't be much resistance to controls. And the state gets to appear to be "doing something."

And when they do, more people – at least those with any sense – will get scared and really try to get their money out, which will exacerbate the run to the exits. The bottom line is that if you want to get your money out, the time to do it is now. Beat the last-minute rush.

I don't know what form the exchange controls are going to take, but there are two general possibilities: regulation and taxation.

The regulations might take the form of a rule prohibiting you from taking more than X thousands of dollars abroad per year without special permission. No expensive vacations, no foreign asset purchases without state approval.

As for the taxation, if you want to, say, buy foreign stocks or real estate, you might have to pay an "Interest Equalization Tax" or some such. So you could do it, but it'd cost you a lot of money to do it.

Something like either of these, or both, is definitely in the cards.

L: But aren't FX controls something from the past? I mean, where do they exist today?

Doug: Well, FX controls have been used since the days of the Roman Empire. A country debases its currency, raises taxes beyond a certain level, and makes regulations too onerous – and productive people naturally react by getting their capital, and then themselves, out of Dodge. But the government can't have that, so it puts on FX controls. They're almost inevitable at this point.

Almost every country – except for the US, Canada, Switzerland, and a few others –had them until at least the '70s. I remember leaving Britain once in the '60s, and a border guy searched me to see if I had more than 50 pounds on me. In those days, currency violations in the Soviet bloc countries could get you the death penalty. Things liberalized around the world with Reagan and Thatcher, and then the collapse of the USSR. But you have to remember that that was in the context of the Long Boom. Now, during the Greater Depression, things will become much stricter again.

Right now, the US just has reporting requirements. But some places, like South Africa, make it very expensive and inconvenient to get money out. South Africa, perversely, may serve as a model for the US.

L: Okay, so we talked previously about Americans at least setting up a Canadian bank account and safe deposit box, and better yet going in person to Panama, Uruguay, Malaysia, or a similar place to do the same. And once there, you advised getting with a lawyer, either referred by someone you trust or found through an interview process, to set up a corporation that can handle your assets and investments for you. This all needs to be reported, but it's wise to do it in advance of the higher costs or other limitations to come.

Doug: Yes. While US persons must report foreign bank and brokerage accounts, safe deposit boxes are not – at least not yet – reportable. This leads me to the biggest and best "loophole" when it comes to potential foreign exchange controls, and that's foreign real estate.

I'm of the opinion that, broadly speaking, real estate as an asset class is going to be a poor performer for a long time to come – but that won't be equally true across all countries. Real estate in countries that rely on mortgage debt to buy and sell will continue to be the worst hit.

People don't understand that buying property with a mortgage is just the same as buying stocks on margin. It's caused speculative bubbles and malinvestment. Until the malinvestment in those countries is entirely liquidated, you don't want to invest in real estate in them. But a lot of countries, especially in the Third World, have no mortgage debt whatsoever. Zero mortgage debt. You want a piece of property, you pay for it in cash. That keeps prices down and the market much more stable. And it makes for more interesting speculations, because if a mortgage market develops in the future, it could light a fire under prices.

But, from the viewpoint of FX controls, the nice thing about real estate is that there is no way they can make you repatriate it. Other than owning a business abroad, real estate is the only sure way to legally keep your capital offshore.

L: I suppose it would be difficult for even Uncle Sam to seize your estancia in Argentina… not without starting a war.

Doug: Yes. Although I don't doubt he'll be starting more wars as well… [Laughs]

L: So, part of your thinking here isn't just speculative. You're talking about strategies for wealth preservation, not just in the face of foreign exchange controls, but more aggressive, predatory taxation and confiscation by the state – they can seize your assets, even real estate, in the US, but not abroad.

Doug: Exactly. Argentina is excellent from that point of view; rights to real property are, if anything, better than those in the US. In many ways, Argentina is culturally and demographically more like Europe than Europe. Uruguay is also excellent, although culturally it's like a backward province of Argentina. Paraguay is quite secure – but a bit weird as a place to live.

I'm not currently up to date on the Chilean real estate market, but Chile is definitely now the richest and most advanced South American country, and an excellent choice. Brazil is fine. Colombia is improving greatly. Ecuador has a goofy president, but parts of it are very nice, and it's about as cheap as Argentina. Eastern Bolivia is interesting, actually, despite Morales. Only Venezuela is out of the question in South America. It's just a pity they have all that oil, which is always a corrupting influence.

L: Well, then, what about Central America? I know you prefer South America for speculative purposes, but what if someone wants to park a lot of wealth by buying a couple miles of beautiful beachfront property in Costa Rica, or some place like that?

Doug: I was a big fan of Costa Rica for many years… The first time I went down there was 35 years ago – but it's a different place now. Then it was very cheap, and now it's very expensive. And it's totally overrun with gringos. So, Costa Rica is not of that much interest to me at this point; it's pleasant, but there's limited upside.

I think an excellent place to be in Central America is Belize. Although culturally and ethnically, it's not really part of Central America; it's part of the Caribbean.

L: And they speak English there.

Doug: They do indeed, though things are changing. The Guatemalan government has always regarded British Honduras, which is what Belize used to be called, as part of Guatemala. There have actually been confrontations between Britain and Guatemala over this. But that's in the past; now there's a different problem. Guatemalans are rolling over the border in much the same way that Mexicans are in Texas, New Mexico, Arizona, and California.

So, the character of Belize is changing, but for the foreseeable future, it's still going to be Belize, and I rather like it. Aside from Panama, Belize would be my first choice in Central America.

The problem with Central America, however, is that it's a bunch of small countries that have historically been very unstable. And culturally backward. Most are under the thumb of the United States… there's a long history of US invasions, most recently in Panama with Noriega. There are "Frito banditos" running around these places…

The most culturally advanced country in Central America – not counting México, of course, since it's in North America – is Guatemala. But Guatemala has had huge troubles with violence, which has only recently come to an end… I hate going through checkpoints at night, manned by jumpy, uneducated, heavily armed teenagers.

Nicaragua is the low-cost alternative, but it's relatively backward. Panama is probably the best choice. It's very international, very urban (in Panama City), and it's very sophisticated, infrastructure-wise.

If I didn't like Argentina and Uruguay so much, I would put Panama at the top of my shopping list.

L: Got it. Back to the exchange controls themselves. Do you think people will have any warning at all? It seems to me that this is the sort of thing the Powers that Be would want to spring on people.

Doug: I think it's going to come out of left field. It always does, with at most an official denial just before it happens. In August 1971, Nixon devalued the dollar, which immediately dropped against gold and all foreign currencies. I think there's a reasonable probability that the government will do that again. Gold may not be part of the equation, but they may decide to put in some sort of fixed exchange rate between the dollar and various foreign currencies.

The reason for thinking this is simple: with all the dollars outside the United States devalued by that much, that much of a liability just vanishes into thin air. And in the short term – it's never a long-term fix – US exports would go up. This would "stimulate" the domestic economy. Imports to the US would go down, which would make for fewer dollars leaving the US.

L: I know you hate making predictions, but can you tell us if your guru sense is tingling on this so strongly that you think it could happen soon?

Doug: The timing on this is really unpredictable. These people don't have a plan. They're acting ad hoc to whatever seems most urgent. All the so-called economists around government today are really just political hacks. Their world views are totally unsound.

L: With all the problems the US has, do you think this could happen now? Could we be reading about new exchange controls on CNN.com this afternoon?

Doug: Sure. Although they typically pull these stunts over a weekend. I expect something of this nature to happen any time between tomorrow morning and two years from now. If some form of currency controls are not instituted within two years, I'm going to be genuinely surprised.

So if you're going to take action, you should start heading for the exits now. Not next month, and certainly not next year.

L: For those who don't take action until it's too late, under the scenarios you mentioned, they'll still be able to get money out. It's just that it might be more difficult, time consuming, humiliating, and certainly more expensive to do. For every $100,000 they move, only $90,000, or $70,000, or whatever will get to where it's supposed to go. Can you foresee a more Stalinesque alternative, where they simply can't get anything out at all?

Doug: Hopefully not. Anything is possible, and things can change so rapidly… but I'd hate to think of what conditions would be like if they ever became that draconian. It'd be so bad on other fronts that there would be all sorts of even more urgent things on your mind – Americans would get a very quick and unpleasant education in the real meaning of Maslow's hierarchy.

L: Like the Mad Max-style neobarbarians at the door with a battering ram.

Doug: Exactly – that's when you'll definitely want to be in more pleasant climes. I'd want to be watching it on my widescreen, in comfort, not out my front window.

L: We're talking about extremes here…

Doug: You know, back in the 1970s there was a spate of books published on financial privacy. In those days, financial privacy was still possible. Now, it's not only no longer truly possible, short of embracing a completely outlaw lifestyle, it's very dangerous to write about it or even talk about it. I kid you not. These days, people who ask too many questions about privacy techniques may well be government stooges…

There's lots of handwriting on the wall. All those books on financial privacy were published in the '70s – if you look on Amazon, you can still find them. But there's nothing really worth reading that's been written on the subject in 20 years. It's actively discouraged by the government. I could name – but I won't – at least two authors who got themselves into a real jackpot this way. Forget about the First Amendment.

In fact, I even feel uncomfortable talking about it in this interview.

So let me once again emphasize that I advise everyone to stay fully within the bounds of the law.

That's not for moral reasons, of course; there is no morality to the law. It's strictly for reasons of practicality. Risk-reward ratio.

L: Understood. Loud and clear. Any more investment implications, besides foreign real estate, that you want to draw attention to here?

Doug: Yes – and it's another reason for those so very clever boys in Washington to embrace currency controls. They will be disastrous for the US economy, but there's a very good chance that, in the short run, they'll be very good for the stock market. That's partly for the reasons I already mentioned about it temporarily boosting US exports, and hence earnings of US exporters, but also because all that money that can't leave the US will have to go into something.

Investors will probably want to put it into equity rather than debt while the dollar is depreciating. Again, it's disastrous over the long term, but as a short-term play, buying the blue chips the day the exchange controls are instituted could be a good move.

L: You'd buy the Dow?

Doug: I might, if I couldn't think of anything more intelligent or original to do. We'll just have to see what the situation is like.

L: Thanks again, Doug – you've given us a lot to think about.

Doug: My pleasure.

You can learn more about expatriating your wealth from Doug Casey, as well as four other economic experts, at 2 p.m. EDT on Tuesday, April 30. Casey Research will premier a special web video, Internationalize Your Assets. This webinar is a must-see event for anyone interested in protecting at least some of their assets abroad. For details and to sign up, click here.

When to Buy a “Buy”

2013-04-28T11:10:00Z

By Dennis Miller

Buy, sell, hold, or pass altogether? This is the dilemma we face as investors, particularly if we subscribe to one or more investment newsletters. If a company was recommended in a previous issue, are we too late? Did the price escalate rapidly, or is it still a good choice? I subscribe to many newsletters myself, so it's an issue I deal with often. Fortunately, the answer is likely the same no matter how many different publications you read.

Navigating Limitless Options with Limited Funds

Most of us do not have enough capital to buy into every recommendation we read about. I know because I tried (and wrote about it in my book Retirement Reboot). When all of my CDs were called in back in 2008, I felt a tremendous urgency to do something. I needed to invest, and I needed to make money.

After a few months of indescribable anxiety, I started reading about cool opportunities but found I didn't have the cash to buy them. For a short period, I made the sad mistake of selling last month's good idea for this month's great find. I was a nervous investor, but all that buying and selling simply compounded my frustration – and wasted some money in transaction fees.

Most stocks do not skyrocket within the span of a month. Unless you are very lucky, even the most speculative investments usually take quite some time to bear fruit. Personally, I had to come to grips with the idea of doing my homework, investing for the right reasons, and then sitting still. Patience was a lesson I had to... ahem… patiently learn. I recall a particularly frustrating moment when I said to myself, "I want patience, and I want it now!" If only it were that easy.

To exacerbate the problem, one of "Miller's laws" seemed to be at work. No matter what investment I read about, if I decided to pass, a few months later I would read that it had skyrocketed. If I bought in late at a slightly higher price than when it was first recommended, it would stop going up, and soon the newsletter would tell readers to sell. OK, I'm exaggerating; this didn't happen every time, but it sure seemed like it.

Plan Your Attack

Most investment newsletters bring readers up to date on each stock in its model portfolio each month. For the Money Forever portfolio, we use three codes, Buy (or Buy Under $X), Sell, and Hold. Our Buy and Hold recommendations are updated monthly, based on the current price of the stock relative to the individual company and the market.

Take one of our speculative picks, for example. When we published our January issue, it was up 19%; we recommended investors Hold because it is a thinly traded stock with the potential to swing in either direction. Compare that to another stock in our portfolio, a major corporation up 18% in January but still recommended as a Buy. It is now up a total of 47%, and we couldn't be more pleased. In a nutshell, we make our recommendations in real time, and always send a special alert if we are stopped out of a position midmonth.

Most good investment newsletters do the same thing. If a previously recommended stock catches your eye and is still recommended as a Buy, do your homework. In the Money Forever portfolio we make this easy by listing the initial recommendation date and price. From there, subscribers can jump to the archives and read the initial write-up on the company, something we strongly recommend doing. At that point, they can decide if and where the company fits in their personal portfolio.

Regardless of the publication, subscribers should always have access to past issues. That's part of what you pay for, so use it!

Personally, when I add any company to my portfolio, I go into the trading platform of my online broker, usually after 10:30 a.m. Eastern Time, when the market has settled down. I check the high and low price for the day and compare those to the current price. I normally put in a buy order below the current price and let it sit. More often than not, the price will move back down and my order is executed. If the trade hasn't been executed by around 3:00 p.m., I may adjust my order. Sometimes I have to raise it a bit, but in the majority of the cases, my system ensures that I get in at a slightly better price.

Consider the Source

Note that these principles apply to investment newsletter recommendations, and not to the ratings of major brokerage firms. At one time, I did business with a brokerage firm that used the following ratings: Strong Buy, Buy, Hold, and Sell. On one particular occasion, the firm dropped the rating of a stock I owned from Buy to Hold. When my broker called and suggested I sell, I asked why. After all, they had downgraded it to a Hold, not a Sell.

She explained that many brokerage firms really serve two masters – their clients and the major corporations who issue the stock. Whenever there are new stock issues, they have a tendency to rate stocks a bit higher to curry favor with their "other master."

So, I sold the stock and tracked it for a few weeks. I did notice a lot more activity, and the price continued to decline.

We only serve one client: our subscribers. If we recommend that you buy, sell, or hold a stock, then that is what we mean. If we have a position in a particular stock, as a matter of both company policy and personal ethics, we won't make a trade until after our publication has been out for several days, allowing our subscribers to trade ahead of us.

A good company is just that, a good company. But not every good company is a good buy on any given day. If, after doing your homework, you like a stock that we recommend as a Buy, try to get in below the most recent price at publication. Good deals come along all the time. The best way to turn something into a bad deal is to overpay.

At Money Forever both Vedran and I are diligent about our research and judicious about what we add to the portfolio. Like a good baseball player, we don’t swing at every pitch. And that’s how you want to approach adding stocks to your portfolio. Or you can let me and Vedran do it for you and instead spend your time enjoying yourself. Vedran and I feel so strongly about giving readers high quality research that we’re offering Money Forever for half price with a full 100% Money Back Guarantee for the first 90 days. If you don’t feel the service is going to be right for you then I want you to demand your money back: we like to earn our keep. For more on our half price Charter Membership offer and 90 day refund click here.

A Blueprint for Internationalizing Yourself

2013-04-26T03:21:00Z

By Jeff Thomas, International Man

The countries of the developed world are experiencing a new class of refugee – members of the middle and upper class. These rungs of the socioeconomic ladder are realizing that their countries of residence are in many ways going rapidly downhill without much hope of a short- or medium-term reversal. This is particularly true for national economies, taxes, and regulations, and in terms of deteriorating individual liberty.

As a result, many are seeking permanent expatriation, or a "back door" destination, should a sudden move become necessary. In fact, after internationalizing your assets, establishing a back door is the next most important diversification strategy for most. This article will provide valuable insights toward that goal.

The first big hurdle is determining which destination is the right fit for you and your family. This task can be time-consuming and frustrating.

Many in the developed West contemplating personal internationalization (particularly Americans) are saying, "There's nowhere to go – the whole world is falling apart." This is far from the truth. Although much of the developed world is in serious decline, there are exceptions. Further, some of the world's developing countries are on the rise both socially and economically. However, some of the greatest opportunities for those hoping for a better life outside of Europe or America lie in less-developed countries.

The less-developed countries are generally perceived by dwellers of the developed West as impoverished nations, where ignorance and disease are the norm. This is certainly true of some countries such as Somalia, which is the far extreme. However, it is certainly not the case with other locales that technically fit in this category, such as Uruguay, which is almost entirely unaffected by the present First World crisis.

Perhaps your idea of a new home is on a beach in the Caribbean where there is minimal violence, and where your wealth is relatively secure. Possibly you would prefer a home where there are old-world values and traditions, where you can frequent cafés and surround yourself with the arts. Whatever fits your tastes and needs, such a destination is likely to exist. However, finding the right combination of ingredients is time-consuming and requires some research and a bit of travel.

Our first recommendation is that you begin with a list of what is important to you. This can include such items as low taxation and limited government. However, it may also contain gourmet food and good hair salons. While the latter may seem frivolous, it may not be. Many have expatriated to a new jurisdiction only to discover that it's the "frivolous" things that they miss most. Therefore, create a table that covers all these things for all who will be going with you. Below is an example of how you might go about this.

Possible Exit Destinations

The table shown here was used by a Scottish acquaintance of mine when he began his search for a second residence. In the end, his final choice was not even a country on this table. He decided on Chiang Mai, Thailand, also now home to the well-known contrarian investment advisor Marc Faber.

Using a table similar to the one above and ranking your priorities for each contending country is an extremely valuable exercise. While not entirely scientific and obviously subject to personal biases, by conducting extensive due diligence and applying the results to such a document, the person or family looking for a second residence will be less prone to making a commitment that is later regretted. You can ensure you cover all bases before making a decision.

Once the list of contenders has been decided, a bit of travel will be in order. While research can reveal information about any potential destination, getting a feel for the country and how things actually work requires personal experience. By planning a vacation at the place of interest, the priorities in the table can be confirmed and new ones added. Some time on the ground taking notes and refining the table will assist you in determining if a potential choice is a good fit for you and your family.

Once the decision on where in the world to settle is reached, other choices will surface over time: do you wish to work, start a business, or retire in the new location?; will you pursue citizenship or legal residence? As the answers to these questions surface, you will need to set the appropriate process in motion. In many countries, accomplishing some or all of these goals can take a long time, so plan accordingly and expect a few hurdles along the way.

Finally, you will need to rent or purchase property and set up a residence whether you plan to relocate fulltime or establish a backdoor destination as a nice place to vacation. If you select a destination where the economy is on the upswing, chances are even if you never need to move there, you can sell the property later at a profit. In the meantime, purchasing foreign real estate gives you diversification beyond one economy and one currency

Purchasing foreign property is one of the best wealth-protection strategies there is, but it's far from your only option. You can buy precious metals and store them abroad… invest in other countries' currencies… move your IRA to a foreign jurisdiction… or implement any number of other measures that your government would prefer you not know about. If you're at all interested in learning more about this increasingly important subject, you need to see Internationalizing Your Assets, a new Casey Research web video that premiers on Tuesday, April 30 at 2 p.m. Eastern time. This free event features some of the world's foremost experts on international diversification, including Casey Research Chairman Doug Casey, World Money Analyst Editor Kevin Brekke, and Euro Pacific Capital CEO Peter Schiff. For more information and to register, click here.

Investing in REITs Instead of Property: Our Pick

2013-04-24T17:05:00Z

By Dennis Miller

I get a lot of questions from readers about holding real estate as an investment. Indeed, many are in response to another newsletter editor who was recently advocating that the only way for retirees to make decent income was to own property.

Personally, I wouldn’t hold physical property in our portfolio for three reasons.

First, it’s very illiquid; that makes it an instant failure on our Five-Point Balancing Test.

Second, you won’t get yield from a property for three to five years, but will instead pay to own it.

And third, depending on the size of your portfolio, an investment in physical real estate could throw off your balance. Allocating too much of a portfolio to a single industry is never a good idea. With a piece of property worth $100K, $200K, or more, you can suddenly find your retirement very dependent on the outcome of a single asset class.

However, at the same time, it’s hard to ignore that something is happening in real estate. The post-crash taboo around it is starting to disappear as prices increase. Are we so bullish on real estate that we would buy properties in Las Vegas? No, we’re not there; but at the same time, we wouldn’t mind dipping our toe into the shallow end of the pool with some more conservative opportunities.

Furthermore, rather than invest in physical properties directly, we’d rather invest in real estate investment trusts (REITs), which are traded on stock exchanges like any other stock. REITs are corporations that buy, sell, and rent real estate for their shareholders.

To be considered a REIT, 75% of a corporation’s income must come from real estate in some form. Furthermore, REITs can deduct their dividend payments from taxable income. Here are a few more of their key advantages over physical property:

• First, there’s the liquidity. You can buy shares this morning, change your mind, and sell them by the end of the trading day. Try that after signing a purchase agreement and the checks have gone through on physical property.

• Second, REITs are required to pay out 90% of their net income to their shareholders or they lose their special tax status. Where physical property doesn’t usually provide yield right away, REITS will start paying right off the bat.

• And last, you can invest to match your portfolio, whether that’s purchasing only $1,000 or $1 million worth of shares.

These are some of the advantages of REITs, but there are drawbacks as well. I asked our senior analyst, Vedran Vuk, to find us a REIT worth adding to the portfolio. His pick is a little more conservative than most REITs, but its great way to pick up steady dividend income with capital appreciation potential as well.

HCP Inc. (HCP) – BUY

As just noted, we’re not looking to dive into the Florida condo market nor to start flipping houses in Vegas. Nonetheless, we still want to dip into the real-estate market... just not in the deep end of the pool.

Healthcare REITs are a more stable area in the real-estate investment world. While they took a hit in 2008 like many other real-estate investments, many bounced back a lot quicker than other REITs. Along with being more defensive, healthcare REITs offer a unique opportunity for retail investors. While most of us could afford a single-unit investment property or even an apartment building, only the wealthiest could even think about investing in a hospital or a retirement home on their own.

While researching the choices in the healthcare sector, HCP stood out. From the firm’s core operating principles, you can quickly see why:

1. Opportunistic investing;

2. Portfolio diversification;

3. Conservative financing.

Opportunistic Investing

HCP only invests when a good opportunity presents itself. In a recent earnings call, an analyst asked why HCP was making fewer acquisitions than many others (although the company is still making plenty). One of the executives answered that you don’t swing at every ball the pitcher sends your way. That’s our perspective as well. It’s not just about hitting home runs, but knowing when not to swing as well.

Portfolio Diversification

This item is very important to us too. Since this is our entrance into the real-estate sector, we don’t want to put our whole bet on a single part of the country. The map below shows the concentration of properties. While some places like California aren’t our favorite locations, within a diversified portfolio with strong allocations in Texas, Pennsylvania, Ohio, and Florida, among other states, the portfolio is diversified enough to mitigate the risk.

In addition to geographic diversification, we don’t want to get stuck in just one type of property, such as hospitals or medical offices. With more and more healthcare regulation coming through, certain types of buildings will be more affected than others.

For example, for all of the types of healthcare properties, Obamacare will have the most negative impact on nursing homes. The impact isn’t enough to crush those operators, but I certainly wouldn’t want a portfolio of 100% nursing homes in light of the new law. With a diverse mix of properties, HCP protects itself from being exposed to any single change in legislation.

Let’s break down these individual types of properties. “Post-acute/skilled nursing” facilities are essentially nursing homes with skilled professional nurses assisting residents with continuous therapy.

“Senior housing” includes communities designed to help with the requirements of aging. They are not, however, necessarily staffed with skilled nurses. Senior housing includes assisted-living facilities, independent-living facilities, and continuing-care retirement communities. Some of HCP’s primary property operators in this space include Brookdale Senior Living and Sunrise Senior Living. The demographics pushing for these two properties are overwhelming. With 10,000 baby boomers reaching 65 every day for the next 19 years, these facilities won’t be running out of customers anytime soon.

“Life sciences” represents office buildings with modifications for pharmaceutical companies and other biotech firms. Currently, almost the entire life-sciences division is located in Mountain View, California (AKA the San Francisco suburbs). However, the company is developing a few new life-sciences projects in Durham, North Carolina.

And last, the “medical offices” classification is self-explanatory. However, note that these physicians’ offices are not scattered around remote shopping centers. Instead, 83% of them are located on hospital campuses. With an almost $21 billion market cap, HCP ownership totals in these properties are: 447 senior housing communities; 313 skilled nursing facilities; 274 medical office buildings; 108 life sciences properties; and 21 hospitals.

Conservative Financing

Perhaps even more important than diversification is the company’s conservative financing. S&P rates HCP’s credit toward the lower end of investment grade with a BBB+ rating. That’s not bad, but not perfect either.

Beyond the credit ratings, a REIT’s loan structure is a key point to take in to consideration, because interest rates are the Achilles heel of the industry. That’s why we’re putting HCP in our moderate risk category.

When interest rates rise, REITs are sometimes squeezed on two or even three fronts. First, with higher interest rates, there will be fewer buyers in the market, meaning real-estate prices will drop. Second, if the REIT wishes to purchase new properties, it will have to pay higher rates to do so. And third, if the REIT was borrowing with variable-rate loans, costs will go up regardless of what happens.

Unfortunately, there’s not much one can do about the first two factors. However, the third can be avoided by staying clear of variable-rate instruments, and that’s exactly what HCP does. 93% of its portfolio is in fixed-rate loans, with only 7% represented by variable rates.

If interest rates rise, does that mean HCP is toast? Not necessarily; REITs are not like bonds. When rates go up, bond prices must go down. On the other hand, higher rates will put pressure on REITs, but will not necessarily crush them. We could have a scenario where there’s a really strong real-estate recovery matched with rising rates – the surge in demand could possibly offset the higher rates. This is a possibility, but we wouldn’t necessarily bet on it.

When rates start to rise, we’ll likely look for the exit door. Also, be aware of the interest-rate risk in your overall portfolio. If you’re already very heavy in CORP, our PIMCO investment-grade bond fund, consider buying a little less HCP or selling a little CORP prior to adding another asset with interest-rate risk.

Some Other Benefits of HCP

The fact that the medical industry is steadily growing – in good times and bad – seems to be the obvious reason for a conservative investment in HCP. But the structure and terms of leased medical properties make them even more secure.

Think about it. Obviously, a hospital or retirement home isn’t going to sign a one-year lease like an apartment tenant. Instead, they often sign for a decade or more. Furthermore, while a tenant in an apartment building expects the landlord to handle most issues, medical buildings are often leased under triple-net leases. In short, a triple-net lease is a landlord’s dream. The tenant pays his rent, along with the property taxes, the insurance, and the maintenance of common areas.

Since the tenant takes care of so much, the actual rent is typically less than in a normal lease agreement. However, this works perfectly for medical REITs, as it takes risk off the table. If a landlord leases a property for over ten years, there’s a significant risk of unexpected costs along the way. In most cases, property taxes and insurance will be more expensive in the future, not less. However, it’s hard to predict how much more. With a triple-net lease, the landlord can enter into long-term contracts without the uncertainty of future costs.

Nearly every single property owned by HCP is leased on a triple-net basis. The only segment excluded from this is the medical-office segment, which has only 48% of properties in triple-net leases. Since these leases take a lot of the risk off long-term contracts, around half of HCP’s leases will expire in 2022 or later. It’s nice to have revenues locked in so far in advance. Below is a chart showing the lease expirations:

You might be thinking to yourself: “Wait, aren’t you missing one of your five points: inflation? Isn’t holding a long-term fixed lease a bad thing in the face of inflation?”

Of course, that’s right. However, HCP’s leases are written to either adjust to the CPI or sometimes to include a fixed annual increase. Here’s an example of one of its recent contract provisions to protect against inflation:

“The contractual rent will increase annually by the greater of 3.7% on average or CPI over the initial five years, and thereafter by the greater of 3.0% or CPI for the remaining initial term.”

We’ve noted our issues with the CPI before, but nonetheless this is better than nothing. If inflation is tame, real rents will actually increase. If it gets worse, they will at least adjust.

Dividends, Yield, and Pricing

Here’s a pleasant surprise to finish off our analysis. HCP is a member of the S&P 500 Dividend Aristocrats Index. To be part of this Index, a company must have consistently increased dividends for at least 25 years. HCP has done so for 27 and has no plans of stopping now. (Note also that it is the only REIT on the Index.)

As you can see in the chart, the dividend increases aren’t always very large, but they are consistent. Last year, the firm paid out $2.00. In 2013, we wouldn’t be surprised to see around $2.07 per share, which would give us a 4.5% dividend yield.

HCP has been in our portfolio for a few months now, and even before then the company was mentioned in our special report Money Every Month, but we hadn’t officially pulled the trigger at that point.

While we still think the company is a solid pick, there isn’t too much meat on the bone here under current conditions. For the stock to move upward, something new needs to happen, like another push up in the real-estate market. Looking at the trend thus far, there’s a good chance of that happening.

The good news is that the downside isn’t particularly large. The stock could retrace its steps a bit, but I don’t see it dropping 20% overnight. So put in a 20% trailing stop, pick up some regular dividends, and keep an eye on this stock.

If you’re interested in solid, stable dividend stocks then I suggest you check out our recently updated Money Every Month report. You’ll find out how easy it is to get dividend payments every month and I’ll even tell which stocks to start with. Click here to find out more.