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