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Join the forum discussion on this post - (2) Posts Access to sources of real-world critical metals is in serious jeopardy. A variety of experts gathered recently in Vancouver to learn more about the reasons we’re at risk and what we can do about it. Join The Gold Report as we venture into the complex, complicated, cloudy, uncertain, conflicted world they explored. The same issues that have jolted U.S. officials awake to awareness about the nation’s vulnerabilities in the supercharged atmosphere of the critical metals space drew an eager, attentive audience to the world’s first-ever Critical Metals Investment Symposium, sponsored by Cambridge House, a Vancouver-based producer of resource investment conferences.
What Makes Them Critical?
Another point John makes about critical metals is that they “tend to be incremental but critical inputs to end products whose total value vastly exceeds their costs.” In other words, their importance to various applications is one factor that makes these inputs critical.” In addition to the importance of the critical metals to their components, the insecurity of supply is another factor that makes these metals critical. This is a highly charged, complicated issue that has triggered tremendous price volatility for some of these metals and, well, critical shortages. “We have a gathering storm in the supply chain with regards to supplies of critical metals,” Mike Berry says. “While rare-earths, for example, aren’t necessarily rare in the earth’s crust, their availability to end-users will become highly restricted over the next five to 10 years.” Among the metals of most concern for defense purposes are neodymium, samarium and yttrium. It isn’t just tanks and destroyers and smart bombs at risk. As cell phone users, automobile owners, airline passengers and in myriad other capacities, all of us stand to benefit from sorting out the critical metals issues. Lacking stable supplies of these ingredients, our ability to enjoy improvements in these conveniences will diminish—or vanish. Along with other nations struggling with slumping or stagnant economies, the U.S. finds itself on the brink of another crisis involving the availability of critical metals. A “most disturbing fact,” Mike says, is that the U.S. is “100% dependent on imports for 19 critical metals and dependent for 80% of its supply for 32 others.” Although using the word “materials” rather than “metals,” in the same vein, a U.S. Department of Energy Critical Materials Strategy Paper issued in December notes that China now provides 95% of the critical materials used in parts of the clean-energy sector—wind turbines, electric vehicles, solar cells and energy-efficient lighting, which the paper says collectively account for 20% of the consumption of critical materials.
According to Mickey, “A lot of past-producing graphite mines in the world have shut down because it’s cheaper to get the graphite from China,” With graphite, he adds, “infrastructure and transportation costs and proximity to market are very important because graphite is an industrial mineral.” He says that what’s expected to be in shortest supply is long flake graphite—a substance used to manufacture plates and brushes for the electrical industry.
According to John Kaiser, up to 97% of vanadium’s present use is as an alloying agent to strengthen steel for rebar, car axles and jet hulls and engines. He says that industry analysts predict a potential shortage of vanadium based on steel usage alone as early as 2013, driven by the incredible consumption of steel by China and India. Global steel demand is set to increase by about 6% over the next 5 to 10 years. If that projection pans out, and Chris’s vision materializes, he suggests that supplies will be available. “A handful of juniors in North America, as well as in some other parts of the world, are actively exploring for and planning to put vanadium mines into production over the next couple of years,” Chris says. “There are a number of deposits in Canada, the United States and even Brazil. They’re not ready for production, but the idea is to get the metallurgy figured out, determine the cost of production and have them producing vanadium over the next two to three years.” Mickey disagrees. He points out that most vanadium deposits currently being explored also contain titanium; they are iron-titanium- vanadium deposits. “For the most part,” he says, “titanium is produced from heavy mineral sands, beach sand. A big portion of that comes from the East Coast of the United States, where draglines scoop up sand and basically run it across a magnet on a conveyor—a magnetic separation process that draws out the titanium and the iron. Then they use the sand to build highways and make cement. It is much cheaper extracting titanium that way than from a hard rock mine in a remote part of the world with mining, crushing, milling, transportation of concentrates, etc. All the world’s current vanadium demand is met with production from steel smelters and as by-product of uranium mining. It takes a minimum of 5–10 years to explore, permit, develop and produce from new mines. Future increase in demand is dependent on currently unproven technologies. In my opinion, there will be no standalone vanadium mines in the foreseeable future.” Supply Chain Broken According to John Kaiser, one thing that makes rare earths particularly complicated is that the miners can crack the rocks but extracting the elements is another matter. Because rare earths are so similar to one other, extraction produces a mixed-oxide concentrate. To separate the rare earths into their individual oxides may take 50 tanks to separate light rare earths; it may take 1,000 tanks of sequential solvent extraction to properly separate then heavy ones. “This is a chemically intensive, very complex process,” John says, indicating that no such processing facilities exist in the U.S. at this time. In fact, he adds, “There is no knowledge base for doing it in North America right now.” Mickey concurs—to a degree. He agrees that “without a heavy REE separation facility we’re missing a key component. These facilities are very complex chemical plants, standalone entities that don’t have anything to do with mining.” But he says that Molycorp Inc. (NYSE:MCP) can currently separate the light rare earths. Part of the company’s “mine to magnets” business plan is to close gaps in the domestic supply chain. In December, Molycorp struck a deal with Japan’s Hitachi Metals Ltd. (TKY:5468, OTCPK:HMTLF) to produce alloys and magnets in the U.S., moving Molycorp a step closer to establishing a rare-earth manufacturing chain in the U.S. Molycorp also recently announced that its expansion plan is expected to enable annual production of up to approximately 40,000 metric tons of rare earth oxide (REO) equivalent at its Mountain Pass facility by the end of 2013, and is involved in a transaction with Sumitomo Corp. (TKY:8053, OTCPK:SSUMF) that will provide Sumitomo with “substantial quantities” of several rare-earth products over the next seven years.” In terms of the heavy rare earths, Mickey says, “There is no facility in North America to process heavy REEs. In fact, there is no functioning heavy rare earth separation plant anywhere in the world outside of China.” Well-funded and debt-free, Avalon Rare Metals Inc. (TSX:AVL; NYSE.A:AVL; OTCQX:AVARF) may be the first to bring separation capability to North America. Avalon President and CEO Don Bubar, who was among the speakers at the Critical Metals Investment Symposium, says that his company wants to complete the facility by 2015 or 2016, get “first mover” advantage and potentially do separation processes for other metals mining companies. Supply Risks We can expect supply pressure on critical metals from growing demand to come from the rising deployment of innovative existing technologies, and the emergence of new technologies, too—nanotechnologies, disruptive technologies and/or future sustainable technologies (FST) to replace obsolete technologies with greener, cleaner, faster, sturdier, stronger and/or more efficient ones. John Kaiser brings in Jevons Paradox, noting, “High prices stimulate innovation to make better, more efficient use of a product; ironically, as you make more efficient use of a critical input the total demand for it goes up. So, for all those worried about new innovations reducing use of REEs, the 400,000 ton prediction by 2040, I would say processes like the ones we are seeing now are going to create the demand to take up all the supply.” While a host of issues, such as these, surface when the security-of-supply subject comes up in critical metals conversations, though, one five-letter word dominates the discussion: C-H-I-N-A. 800-Pound Gorilla Back in the 1980s, rock-bottom production costs and low export prices on REEs from China led to its lock on the rare earths space, to the point that China now accounts for most of the world’s REE supply—between 95% and 97%. Now, though, China’s cutting back on exports in the interests of addressing its domestic needs. Molycorp CEO Mark Smith says that internal demand is growing so fast that China will be consuming all of the rare earths it produces by 2012. In fact, last July China reduced its rare earth export quotas for the rest of the year by 72%. “China cut its second-half 2010 export quota by 50%, and has just issued first-half 2011 quotas that are down yet another 11.4%,” says John. As he puts it, “The wakeup call for the rest of the world has happened.” Whether focused on creating strategic stockpiles for future use or simply conserving its reserves, when China shifts from producer/exporter to buyer/importer, it turns the entire market on its head. As Jack points out, “China used 55% of all of the world’s metals last year. If Chinese GDP continues to grow at 10%, in 6.4 years, China will require 100% of the volume of metals produced in 2010.” And then what? From Mike’s point of view, “There is much focus on China’s recent announcement of export limits on rare earths, but in reality, China will shortly become an importer of rare earths and are looking to the rest of the world to begin finding and mining and refining these metals.” Looking forward to continuing education on the critical metals front, John stresses, “We really need to solve these security-of-supply problems. Otherwise these are slippery slopes to war and other unhappy developments as countries take drastic steps to make sure that their needs are taken care of.” The Investment Case The changing China picture and the renewed focus on critical metals, coupled with exploding demand and efforts to rebuild a supply chain and technological advances—many directed toward environmental protection—contribute to a picture that suggests upside potential in critical metals markets. Last summer, John observed that prices for some high-demand metals derived from REE deposits continued to reach new heights, almost daily. About the same time, Molycorp’s IPO filing indicated that prices for rare-earth oxides, which had plummeted about 50% during the global economic crisis, climbed an average of about 70% since October 2009. More recently, John says, price increases have been significant for tungsten, rare earths, tin, antimony and others all have seen significant price increases. “China is in the process of creating a cartel—they call it now the unified pricing system. They want to see higher process for rare earths. The high prices are now the new reality.” Valuations of some of the companies in the critical metals space, likewise, have soared. Look at Rare Element Resources Ltd. (TSX.V:RES; NYSE.A:REE), for example—which doesn’t even anticipate initial production from its Bear Lodge Project in Wyoming until 2015. Last summer, an investor could have picked up its shares for less than $2 each. In mid-October, it was CAD$7.65 and on February 4 it closed at CAD$13.88. Along with Molycorp, which will be in production in 2012, Mickey considers Rare Element Resources most likely the next company to have a mine in the light rare earth element space in North America. At this time, the property has 17.5 million tons of about 3.5%, dominated by light—but he says that the key to Rare Earth Elements is they also have significant metals that Molycorp doesn’t: significant dysprosium, a higher grade of europium and significant terbium.” Sector consolidation might also bode well for investors. The supply chain dynamic seems to make combinations and integrations a strong possibility in the case of the critical metals, and as John points out, the sector is not only dominated by small players but the sector itself is very small. Our symposium sources pretty much agree that there’s a bubble in the critical metals space. “Yes, we’re in a bubble,” Mickey says. “But I think this bubble has a long way to go.” He opines that most of the rare earths stocks are valued “way above the fundamental metrics that would be supported by current market capitalizations, so there is extreme downside risk—but the upside is still tremendous over the next two to five years.” Now Is the Time As Cambridge House’s Joe Martin suggests, the junior resource sector has a track record for seizing opportunities, securing the necessary financing, and demonstrating solutions. “These junior explorers are very reactive to market conditions and commodity changes, and if a commodity is in demand, they’re out in the field, looking at properties and projects around the world to meet that demand.” He fully expects the sector to help overcome the security-of-supply problems in the critical metals space. With China’s shifting exporter-to-importer status imminent, “This year the sector goes critical,” John Kaiser says, “because serious money has to come in and fast-track the major projects that are in the running to deliver new supply by 2015.” The next Cambridge House Critical Metals Conference is June 3 & 4 in Vancouver, preceding the World Resource Investment Conference. Want to learn more about REES? Check out Jon Hykawy’s interview, REEs Explained, (6/25/10) and Jack Lifton’s North America Doesn’t Need China’s Rare Earths (6/21/10). Ila Patnaik, Giovanni Veronese and I have a paper titled How to Measure Inflation in India?. The abstract reads:
Inflation measurement in India may just get significantly better, with the release of the new CPI. The paper should help in evaluating this new CPI and in evaluating its applications. In the monetary metals there has been sustained gold backwardation and silver backwardation. This esoteric subject distills into two main elements: (1) interest rates and (2) risk management. The backwardation implies abnormalities in the interest rate structure and/or heavy demand for physical bullion driven by either averseness to counter-party risk or exchange rate risk that could result in the currency event of hyperinflation or the paranoid gold and silver bugs have recently mutated into much larger organisms. READER QUESTION – WHERE ARE YOU? I have not written for a few weeks and received a rather funny email from a reader: “Did you call this about 15 months ago? POT NYSE You sly Mofo. Where are you? Did someone threaten you like Lindsay Williams was?” I figure the response may be helpful to all. Yes, about 18 months ago on Business News Network in Canada I did make a buy call on Potash Co. (POT). It has since rocketed higher. I have been bouncing around in the clouds flying around tiny islands, including Saint Kitts and Dominica, with Bill Rounds, my co-author of How To Vanish. I was only threatened by one person, an attractive female Customers and Border Patrol agent in Puerto Rico. Because ATC diverted us around a military exercise we were late arriving and I did not call. Then on the way back through Puerto Rico I failed to call again and while searching our plane she actually got out a Geiger counter, seriously! What is it with women always wanting you to call them back? So, next time I am headed through Puerto Rico and since my smile did not work to appease her if anyone knows where I can get a cell phone like Gordon Gekko so that I can call CBP next time I would be extremely grateful. SILVER BACKWARDATION AND INTEREST RATES The monetary metals have an interest rate which is the percentage difference between the future price and spot price. Currently the market treats only gold as a primarily monetary commodity. Silver, platinum and palladium are treated as quasi-monetary commodities. Gold is produced primarily to be hoarded while most silver, platinum and palladium demand is for a wide variety of industrial uses like a Gordon Gekko cell phone. In early 2009 I wrote about the silver backwardation. James Turk, Chairman of GoldMoney, made several insightful observations about silver’s backwardation in his 4 December 2010 article about the Scramble For Physical Metal.
These supply and demand differences is a primary reason why I am extremely bullish on platinum and recommended accumulating it in July 2009 around $1,118 per ounce. My opinion is that during The Great Credit Contraction the monetary demand for silver, platinum and palladium will increase for all the same reasons why gold functions as money. It will no longer be fiat currency, such as FRN$, Euros, Yen, British Pounds, etc. versus only gold but instead versus gold and every other commodity. This paradigm shift from a debt-based consumption cycle to an equity based savings cycle will be a sea change like an upside down house to many. The real interest rates of the commodities are a function of their storage and attrition costs. Thus, silver, platinum and palladium will have tremendous advantages over alternative commodities like rice, corn, oil, etc. The New York Sun reported Alan Greenspan’s 15 September 2010 remarks to the Council on Foreign Relations: If all currencies are moving up or down together, the question is: relative to what? Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central banks should pay attention to it. … Fiat money has no place to go but gold. Like Mr. Greenspan I favor using gold as one’s numeraire but my prognostication is a little broader. Not only does fiat currency have gold to move into but also silver, platinum and palladium unless he knows something about future worldwide monetary policy that has not been publicly released. With quantitative easing and the zero interest rate environment the fiat currency interest rate structure is extremely distorted. This increases demand for silver in the immediate term because the cost of fiat currency is so low while demand is waning and storage fees are perceived to be less expensive than the estimated counter-party risk cost. It takes a bailed out zombie to know a bailed out zombie! The net effect are negative real interest rates. So long as negative real interest rates are persistent the gold bull market, with silver and platinum having an R-squared correlation coefficient of about 98%, will remain intact. But as Adrain Douglas has astutely observed if there is increased monetary demand for silver then this correlation can be disrupted or change completely.
INCREASED SILVER MONETARY DEMAND So an important issue becomes has there been a material increase in silver’s worldwide monetary demand? The United States Mint recorded January 2011 sales of American Silver Eagles to be 6.42 million which easily surpassed the previous monthly record of 4.26 million in November 2010. This increase in demand was in spite of the price of silver increasing by about $2 per ounce in November while it declined about $3 per ounce in January. Increased demand for silver in India was about 70 million ounces in 2010 while China went from exporting about 40 million ounces in 2009 to importing 40 million ounces in 2010. Then there is John Embry’s revelation that it took about two months to stock the Sprott silver trust. Additionally, there appears to be shortages developing for 100 ounce silver bars. Because of the increased demand for silver as a monetary instrument by Americans in the form of legal tender coins and 100 ounce bars, the incredible increase in demand from India and China of about 150 million ounce difference between 2009 and 2010, about 25-30% of worldwide production, and the creation of the Sprott silver trust (PHYS) therefore it appears that there is a material and consistent increase in the worldwide demand for silver as a monetary instrument. Because of the deficiencies of the GLD ETF and similar unusual activity with the SLV ETF it is interesting to note that significant redemptions are being made which implies the ETFs are being tapped as a source of physical bullion to meet immediate delivery demands. The aboveground stockpiles of silver are tiny compared to gold. On the other hand, central banks around the world have created $20-50 trillion of new currency digits over the past few years. To remain liquid and risk-free in terms of either (1) counter-party or (2) hyperinflation, the value represented by these imaginary units sometimes printed on colored coupons have primarily nowhere to go in regards to monetary commodities but gold, silver, platinum and palladium. CONCLUSION Monetary demand for silver is primarily from savers who consume less than they produce and want a liquid and safe store of value while they are engaged in other activities, like flying around in the clouds. The current interest rate structure is likely causing headaches for the arbitrageurs dealing in large amounts who are attempting to squeeze profits off a penny or two per ounce because of the tremendous amount of risk they expose themselves to as savers demand delivery physical metal. With the worldwide bailout of the financial system, the Irish central bank printing billions of Euros, the Federal Reserve engaged in quantitative easing and general competitive currency devaluations worldwide it appears the current fiat currency and fractional reserve banking system has been duck taped together and is not at significant risk of imminent failure; largely because there is no significant alternative. With demand from the American and European public, India, China and the Sprott silver trust therefore it appears that the gold and silver bugs have mutated into much larger organisms and are preparing for currency upheaval and perhaps even a new worldwide currency system. There is a high probability that gold, silver, platinum and palladium will continue to increase in price relative to fiat currencies. After all, fiat currencies are merely a confidence game and it is hard to have confidence in a figment of the imagination that is being rapidly increased in amount. Thus, a prudent saver should continue accumulating the monetary metals on a regular and consistent basis from reputable firms like Apmex or GoldMoney as gold, silver, platinum and palladium have become performing insurance against fiat currency failure. At 7:45 AM EST, the weekly ICSC-Goldman Store Sales report will be released, giving an update on the health of the consumer through this analysis of retail sales. At 8:55 AM EST, the weekly Redbook report will be released, giving us more information about consumer spending. Join the forum discussion on this post - (1) Posts
The Gold Report: Hi David, welcome back to The Gold Report. David Skarica: It’s good to be here. Thank you for having me back. TGR: You’re quite welcome. You tend to look at macroeconomic trends and draw conclusions based on your observations. What are you observing in the gold market that has led to about a 6% drop in January? DS: I think there are just two factors for me. First, gold was overbought. When gold topped in early December, we were far above the 200- or 150-day moving averages. And if you get too far above these moving averages, gold tends to pull back toward them. Secondly, there are seasonal trends. Gold tends to bottom in the summer or fall and rallies at year-end; it sees another pullback early in the year (January or February) and continues the seasonal rally into the spring. For example, in 7 of the 10 years since bullion bottomed in 2001, the low for gold for the year has occurred in January or February. There is an early year pullback, and then the rally resumes afterward. Another point I should make is that a lot of hedge funds were short the euro and long in gold, with the idea that the euro could get out of control. But then the Portuguese bond offering went well and those hedge funds had to get out of that trade, which meant they had to cover the euro short. That’s why the euro rallied so quickly from $130 to $136, which is a huge move for a major currency just in a week or two. Hedge funds were also long on gold, so they had to sell. Gold stocks aren’t quite as liquid or as large as the bullion market, so they fell even more. But this is a very short-term phenomenon. I don’t expect it to last any longer than a month or two. TGR: Goldman Sachs was originally predicting that gold would top in 2012 but now says it will top in 2011. Do you believe that? What advice are you giving your readers either way? DS: In addition to my newsletter, I just published a new book, The Great Super Cycle: Profit from the Coming Inflation Tidal Wave and Dollar Devaluation. Part of the reason I wrote it was to dispel myths like those calling for a top in gold when, really, we’re in the midst of a 15- to 20-year mega-super cycle for gold and gold equities. Essentially, I think we’re going to see a continuation of this move higher for a number of years, caused by factors like the deficit and the lack of political will to cut spending and get rid of these deficits. The current cycle started in 2001 for gold stocks, and they tend to last 15–20 years, which means the cycle should continue through the 2015–2020 period. Another reason I think Goldman is wrong is that most of the major bull gold markets tend to end when the Dow Jones Industrial Average (DJIA) to gold ratio—or how many gold ounces it takes to buy one share of the Dow—is roughly 1:1 or 2:1. With the Dow at 12,000 and gold at $1,355/oz., we’re nowhere near that ratio. I think we’re going to see gold headed much, much higher. With that said, I think that after the next rally we’re going to see a significant pullback in gold probably in the 2012–2013 period, but that will just be a buying opportunity. TGR: Why should we believe David Skarica over Goldman Sachs? DS: Quite frankly, it is because I am looking at the big picture over the long term. Brokerage houses tend to make money trading the short term and only have a quarter-to-quarter outlook. There is no way Goldman Sachs is looking 5–10 years ahead; 10 years ago, I don’t think Goldman was calling for $1,000/oz. gold by the end of the decade. I am also a contrarian in gold. I have never really looked to the mainstream “big broker” teams for their opinions on gold. I have never taken them seriously because I think there is a lack of understanding of the gold market. And, finally, I don’t think gold is a trade. This cycle could spell the end of the U.S. dollar as the reserve currency of the world. I don’t think that’s something Goldman Sachs would predict. TGR: That certainly would be unpopular. You said in the December issue of Addicted to Profits, “We’re going to see a good old rate spike, South American-style crisis in the United States, accompanied by the twin evils: 1) Out of control inflation and 2) Currency declines.” Could you talk about that pending inflation crisis and its ultimate effects? DS: There are always fundamental underpinnings behind these cycles, but I’ve come to the conclusion that what is most important is the cycle itself. And interest rates run in really, really long cycles. For instance, the bond bull market lasted from 1981–2008. It was a 27-year bull market for bonds. Despite all the hoopla that bonds have done well, long-term bonds actually peaked in 2008. I think we’re building a massive top in bonds here. Now, that doesn’t mean we can’t rally some in the short term, but within the context of building this massive secular top, the Fed is going to issue $1–$1.5 trillion of debt per year for the next five to seven years. That debt is going to put a huge amount of supply on the market and, at some point, foreign investors are going to demand a higher rate of return because they don’t think the U.S. can repay its debts. At some point, the bond vigilantes will move across the Atlantic and force rates higher. The austerity measures in Europe will probably begin to reap rewards late this year or early next year, and at that point we will probably see the UK, the Irish, and the Greek debt come down. You will see it come down from 10%–12% of GDP to 6%–7% of GDP. Whereas I don’t think the U.S. is going to undertake any concrete cost-cutting measures, especially this fiscal year. If a major state has to do a debt restructuring, or if a major municipality goes into bankruptcy, that would clearly focus attention on the U.S. I think there is going to be a trigger point that turns the debt worry from Europe toward the U.S., and that would trigger bonds to go higher. TGR: You talk about the “bond vigilantes” coming across the ocean and imposing their will on the U.S., but couldn’t the Fed go into the secondary market, buy those bonds, set the rates and terms and handle it that way? DS: At some point, the Fed loses its ability to do that. Is the Fed going to go into the day-to-day market? Sure, it could come in and buy the 30-year bonds when the options come up, but are they actually going to go into the trading market? That’s the question because the day-to-day trades in the market still set long-term interest rates. So, are they going to go into the day-to-day market and start trading? The currency will be totally destroyed if that happens. I think the market has more power than the Federal Reserve. If the Fed truly had all this power, we never would have had a crisis in 2008 because it would have done everything it could to keep the Dow above 10,000 and the S&P above 1,000. TGR: How does this fundamental weakness in the U.S. economy—and the U.S. dollar, in particular—affect gold in the long term? DS: It’s really positive for gold because gold is one of the alternatives to the U.S. dollar as the reserve currency of the world. When Fed Chairman Paul Volker fought inflation by raising interest rates in the early 1980s, we saw the stabilizing of the U.S. economy and very good economic growth in fundamentals for 20 years. There was no reason to own gold when the reserve currency was stable and the economy was booming. But when the reserve currency gets in trouble, gold simply becomes an alternative. Gold has stood the test of time. Obviously, other currencies, including the Asian currencies, benefit from this as well. TGR: What are you telling your readers in terms of a range for the gold price in 2011? DS: Conservatively, I have been saying $1,500–$1,600/oz. by year-end. I think at some point there will be a big spike, and that scenario plays out when the bond vigilantes move their attention to the United States and away from Europe. That’s when I think you might see the big spike in gold. The real problem for the gold price is that the mainstream public, especially in the U.S., just won’t buy it. They just don’t believe in it even if they’re worried about what’s going on. Some bank credit analyst recently said that only 1% of financial assets are in gold and gold stocks. But at a typical top in gold, that number is 5%–7%. At the bottom of the gold market, only 0.5% of financial assets were gold related. So, even with gold moving from $250/oz. to over $1,300/oz., we’ve seen only a 0.5% increase in the amount of total financial assets that people have in gold. For example, mainstream fund managers in the U.S. won’t buy gold because they’re the ones telling us it’s in a bubble (even though they have never bought an ounce). The gold market is so small that when the public finally starts to accumulate gold, it could cause a big breakout. I am not just looking at a 20% rally in gold; I am looking for a 50%–60% rally that will happen over just a few months because people are finally buying it en masse. TGR: One upside of the gold price correction that occurred in January is that it’s a lot easier to find value now in the small-cap gold names. What are some companies that you’re following that offer value at $1,355/oz. gold? DS: I think the midtiers and the large caps are really the ones that have sold off. The Small Cap Index has come off the last few days, but it’s held up a lot better than the large caps. And now you have very good values in the large caps. I was recently looking at Royal Gold Inc. (NASDAQ:RGLD; TSX:RGL), which is a big royalty company. With a roughly 6% or 7% drop in the price of gold, Royal Gold has dropped from $55 to $46. That looks like good value to me. A stock like San Gold Corporation (TSX.V:SGR), which has a producing gold mine in Manitoba, has dropped from $4 –$2.76, or 32%, on this small move down in gold and no real negative news on the company. Another is New Gold Inc. (TSX:NGD; NYSE.A:NGD), which dropped from $10–$7.50, or 25%. Of course, it had a huge run before that, but those are some names I would look for. Additionally, I would look for newer junior deals. I look for deals that have just been put together—those that are new to the market. Those companies can really move; for example, Golden Phoenix Minerals, Inc. (OTCBB:GPXM). The company has interests in a few properties, including a 20% interest in a producing mine. It trades at around $0.15 and it has a $39 million market cap. One other stock I really like is Kiska Metals Corp. (TSX.V:KSK), which is developing a big project called the Whistler Project in Alaska. Essentially, it’s focusing totally on Whistler and is going to spin out its other projects. That stock dropped from $1.70–$1.10. TGR: Yes, Kiska put out a resource estimate that somewhat disappointed the market. Do you believe the other gold deposits in that play have the potential to significantly boost the resource estimate down the road? DS: Yes. I don’t want to get too technical here, but Kiska did a lot of geophysical surveys to determine where it could expand the deposit. I would expect the fruits of that labor to come to bear this year. On top of that, the company stated that it’s going to announce further resource increases from other areas of that property in the coming months. I like to buy companies like Kiska when they’re small and frothy hot. I actually like consolidation from $1.70–$1.10 or so. The problem is that the market is very shortsighted. Everyone wants huge deposits, but plenty of companies that have developed huge mines have produced disappointing results along the way. TGR: David, could you give us a couple of other small-cap names you like? DS: I talked about Aberdeen International Inc. (TSX:AAB) the last time I was interviewed for The Gold Report. The thing I like about Aberdeen is that it has interests in numerous gold and resource companies. It had a big run from $0.35 to over $0.80, and I have been looking for it to decline into the $0.60s before I would consider purchasing it again. The net asset value (NAV) is probably in the $1.30 range, so it’s still trading at a big discount to NAV. Most merchant banks or investment-type companies tend to trade right at NAV. It’s really frustrating when Aberdeen’s NAV is $1.30 and the stock is trading at $0.76. Although you don’t want to be greedy, as an investor you ask yourself, “When is this thing going to finally represent the value that it has in the ground?” TGR: Could one of the problems be the company’s ongoing dispute with Simmer and Jack Mines Ltd. (JSE:SIM)? DS: To my knowledge, it has not been settled and that’s got to be a big overhang on the stock. But when Aberdeen reports its NAV numbers, it does so excluding assets related to Simmer and Jack. Aberdeen just did a lot of share buybacks, as well. TGR: Yes, CEO David Stein told me Aberdeen tries to buy back its shares whenever possible. DS: But I would prefer it to pay a dividend to shareholders. Right now, investors are starved for income. We talked about the interest rates heading higher in the long term, but 10-year bonds are giving you only 3.5%. If Aberdeen has roughly 90 million shares outstanding, and it’s paying one cent per share each quarter, you would be at about a 6% dividend; a half-cent per quarter would be a 3%–4% dividend. I think that would be much more effective for gathering shareholder interest than would share buybacks. TGR: Maybe you should talk to David about that. Aberdeen is a Forbes and Manhattan (F&M) company; and as a merchant bank within that fold, F&M Chairman Stan Bharti uses Aberdeen to help finance other companies in the F&M stable. Aberdeen has significant positions in Sulliden Gold Corp. (TSX:SUE; OTCQX:SDDDF), Avion Gold Corp. (TSX:AVR; OTCQX:AVGCF) and Allana Potash (TSX.V:AAA), among others. You once recommended Avion Gold. What’s happening with that company now? DS: Well, Avion is probably my best recommendation ever because I got in right at the bottom in 2008–2009, but I don’t know if I would be chasing that name at these levels. I know Avion is coming in with really good production and cash flow numbers and I would really like to see it consolidate here before I would even consider looking at it. Avion was $0.50 last summer. TGR: Yes, but Avion wasn’t in production in the summer. DS: No, it wasn’t in production. But we were talking about Aberdeen as a merchant bank, and part of the reason you buy Aberdeen is so you don’t buy those stocks individually. It gives you nice exposure to all of them. One other Forbes & Manhattan stock that’s interesting is Dacha Strategic Metals Inc. (TSX.V:DSM; OTCQX:DCHAF). I really like Dacha, but I don’t like most rare earth companies because most of them are just moose pasture, right? There’s nothing really there; they’re just taking advantage of a hot market. What I like about Dacha is that it actually owns a lot of physical rare earths, and the long-term outlook for rare earth prices is really bullish. Dacha is an interesting way to play it; I don’t think it has as much downside as some of these other rare earth names that have kind of spiked up based on nothing. TGR: What should our readers watch for in the gold market in 2011? DS: I am still really bullish on gold. I would be absolutely shocked if this seasonal decline we’ve seen, which is very similar to the decline in January/February of last year, turns outs to be anything more than just a short-term pullback. I’ve been really bullish on the equity markets for the past two years. I would look for a really significant top to occur in the equity markets because of the short-term effects of the tax cuts in the U.S. and the increased economic output for a quarter or two. Then, later in the year, you’re going to see pressure on the U.S. to start reining in the deficit. In the second half of 2011, I’m worried about the dollar accelerating that long-term downtrend because all the bad news out of Europe will be making its way here. We could certainly see an all-time low on the dollar here in 2011. TGR: Thanks, David. Interesting as always. Raghuram Rajan has an interesting piece on what went wrong with the economics profession in the years that led up to the global crisis. His big issues: specialization, the difficulty of forecasting, and the disengagement of much of the profession from the real world.
I think these, in turn, are directly related to the incentives of academic publishing. It’s a recurring theme in agency theory: When the principal rewards the agent for performance in a certain direction, an excessive focus upon that comes about, and performance in other directions gets contaminated. When universities created an incentive structure linked purely to peer-reviewed journal pubs, economists focused on performing for each other, instead of performing for the world. So in our diagnosis of the crisis, just as we criticise the HR policies of banks, we should also criticise the HR policies of universities. While I’m quite aware of the narrowing of the mind that comes about from the Western-style process of focusing on pubs and tenure, it is not easy to find an alternative HR framework. George Stigler had a fascinating little article on this (which I was unable to find: do you know it?). In India, in particular, the economics profession suffers from the twin maladies of low pressure and the historical baggage of development/socialist economics. On average, if an Indian economics department was given strong incentives to publish more, it would be an improvement. Performing for economists is better than not performing. At the same time, on the scale of mankind, it does seem that economists need to do more in terms of performing for the world. Why does the publishing+tenure process work well in science and engineering? I have an opinion of one element that is in play there. In science and engineering, bringing in resources through research contracts is essential for doing research because research requires expensive equipment, staff, etc. There is, then, a joint production of academic publications alongside performing for the world (which allocates research funding). Hence, when the principal asked for academic publications, this did not generate a closing of the mind. In contrast, most research in economics in the top departments worldwide does not require bringing in external funding. So that source of pressure for performing for the world is absent.  Another post by FOFOA that will get you thinking. My response below.
FOFOA, There would be many within the Mint who would be amused at you categorising me as a “mainstream” view. I understand you are using my explanations as representative of the mainstream view but I would like readers to be clear that my personal view is different. To clarify this, some comments on your piece. While I have no direct evidence of the bullion bank’s (BB) activities, I am not as sure as others that the BBs are massively financially short gold (this is not to say they don’t run short term speculative positions). My reasoning for this is that gains and losses on such positions impact their reported profit and loss. If they were as massive short for as long as some claim, their losses would have been visible. I would also suggest readers ask why a BB would take on hundreds and hundreds of tonnes of short gold positions over time in some attempt to suppress the gold price. You only do this if you have a philosophical hatred of gold. I understand that gold ownership is a political action, a rejection of fiat currency and banking, but would (at this time) a bank with a BB division really be threatened by the pathetic fraction of a percent of those investors who hold gold? Threatened to the extent that they would of their own accord take on a massive short position? Now the above does not mean I think everything is OK. On my fractional fubar post you mentioned, I commented “ It troubles me as well. The Mint has been under no illusions about London unallocated as the legals say we are an unsecured creditor and the bullion banks would never make any statement one way or another about what they did with it. We have operated accordingly.” Bankers make money by intermediating – buying from one, selling to another, borrowing from one, lending to another – and taking their cut along the way. I would suggest readers consider the theory that BBs would be willing to intermediate for someone else with that philosophical hatred of gold and take their riskless cut along the way. Why risk your own money when someone else is willing to do so, with the bonus that their activity protects your banking “franchise”? This then leads on to your statement that “there is no clearly defined lender of last resort to cover the risks”. Is this really the case? You mention two risks the BBs have. 1. Default – Borrowing gold doesn’t solve this problem, as the act of borrowing gives you an gold asset but also a gold liability. The only way to solve this problem is to buy the gold, which results in a loss because you have to give up dollars to acquire the gold asset. 2. Liquidity – Buying gold doesn’t solve this problem as while it gives you gold to give to your creditor but also gives you price exposure as you have technically bought your gold asset which is due in the future. The solution is to borrow gold directly, repaying it when your gold asset comes due. Alternative, you can borrow synthetically by buy spot gold and then selling forward (using the gold from your gold asset to deliver into this forward sale). I would therefore agree that BBs have “exchange rate risk” for the default situation but not for the liquidity situation. This assumes that holders of gold (which in cases of large volume really just means central banks) are willing to sell (in case of default) or lend ( in case of liquidity) to BBs. I therefore suggest the question is not whether central banks are lenders of last resort, but whether they have the capacity, or willingness, to fulfil that role now or in the future. In my previous post I stated that central bankers are the gold market’s lenders of last resort. The fact that central banks hold gold as a physical asset (and only gold) in addition to fiat currencies is clear indication to me that gold is not just another commodity. However, the other side of this is that central banks can be lenders of last resort of this “money”, just as they are of dollars. Central banks have been more than willing to lend dollars to banks to help them out with their liquidity problems, eg taking on their crappy mortgages etc, rather then have them fail and to avoid a systematic collapse of the banking system. Consider the situation where a bank comes to its central bank and say “Hey, I’ve got all these pesky unallocated gold holders wanting physical but all I have is these long term loans. Can you lend me some of your physical gold and I’ll replace it later when those borrowers repay their leases? If you don’t I’ll have to declare bankruptcy, the gold price will rocket up, this will cascade through the gold market and we will have a systematic collapse of the banking system.” Why would a central bank not be willing to support a bank’s BB division in such a situation, especially when they would do the same for dollars? For me this is not the issue, I think they will do (are doing?) it. You mention the CBGA as proof that (some) central banks are “are no longer going to be the lender of last resort to this system”. I think it is therefore very interesting that the 2009 statement makes no reference to leasing as the previous two statements did. Why the change? To me then the key issue is whether the central banks have the capacity”.The interesting thing about capacity in respect of gold of course is that you can’t print it! Easy to do if your bank has a dollars problem, not so if they have a gold problem. Questions to consider: a. How much gold would central banks be willing to lend to prop up banks? All of it? Or would they balk in the case of gold? Who cares about dollars, just print more – but risk the country’s only real asset? b. Out of the total they are willing to lend, how much has already been lent? A speculation: maybe the reference to no more leasing in the 1999 and 2004 CBGA statements was a message to the BB to clean up their books. However, around 2008-09 the banks said they will fail without the backstop, need more time to unwind, have increasing physical redemptions, so CBGA drops the leasing reference to enable them to continue the “extend and pretend that there is not a run on the bullion bank reserves.” In conclusion, I would like to suggest the following in respect of the two risks 1. Default – This is most likely to happen if the BB lend to a short seller who is now bust. In this case we should see buying and thus an increase in the gold price. 2. Liquidity – As agreed, this will happen if unallocated holders are calling for physical. In this case we should see an increase in the lease rate. Note that in the past the lease rate was around 1% to 2% with low gold prices, during gold’s bear market. This was because of the large amount of miner forward selling that was going on. What we have seen in recent times with miners closing down their hedging is low lease rates and high gold prices (see this post for a chart). So there is a very general relationship between short selling and lease rates over the long term. What would be interesting would be sustained increasing gold prices AND higher lease rates, as it may indicate buying to cover defaults and borrowing to cover liquidity.  At 3:00 PM EST, the Consumer Credit report for December will be released. The consensus estimate is that there will be an increase of $2.0 billion in the consumer credit available from November to December, after an increase of $1.4 billion last month. Join the forum discussion on this post - (1) Posts
The Energy Report: Michael, a recent Wells Fargo research report said that master limited partnership valuations looked “full, relative to historical valuations.” Does that mean there’s nowhere to go but down? Michael Blum: Hopefully, there’s somewhere else to go. I think what the report is trying to say is that MLPs look fairly valued, relative to historical levels. Our outlook is for mid-single-digit total return, maybe 6% to 8%. We think investors will continue to receive an attractive yield, but that price performance is probably going to be choppy for a while. I don’t know if that’s necessarily a negative outlook. On the face of it, relative to other investment alternatives, if you can get a 6%–8% return, along with the tax advantages MLPs afford, that’s a pretty decent investment. It’s not that MLPs are necessarily going to go down or trade down, but we do think that the upside in price is limited in the near term. TER: Is it fair to say that you expect MLPs to go sideways this year after a relatively impressive 2010? MB: That’s right. The last two years have been a pretty strong run. In 2010, MLPs generated a total return above 30%; in 2009, they were up over 50%. I think maybe we’ll take a breather this year. TER: In that same report, you wrote about the two prevailing camps, in terms of MLP performance in 2011. One camp believes a new paradigm is being brought to bear that will revalue MLPs and drive down yields. You are in the other camp, which believes MLPs are just going through another cycle, that they are fairly valued and yields will grow slightly. What explains the different positions and why do you believe you’re right? MB: There’s always been an argument that MLPs, on a risk-adjusted basis, are mispriced. That’s because, relative to their underlying fundamentals, one could argue that the yield is too high considering the growth rate. As an example, if you compare MLPs to real estate investment trusts (REITs)—another yield product—REITs typically have lower yields. But they also have lower growth rates in their dividends. Arguably, the fundamentals are less attractive than the MLP business model. Why shouldn’t an MLP yield less than a REIT, given that it has higher growth trajectory with better business fundamentals? The other side of that argument is that MLPs trade at some discount to their intrinsic value because there are tax, liquidity and administrative burdens to owning MLPs. The pool of capital that can own MLPs is more limited because some investors can’t or don’t want to deal with the tax issues associated with owning them. In addition, it’s still a relatively small group. The market cap is right around $200 billion. That’s relatively small in the grand scheme of things. Liquidity for MLPs is not that great. And some funds won’t invest in the sector, simply from a liquidity standpoint. I think those two factors will limit how much capital can ultimately flow to the group. That’s why I think MLPs will continue to trade at healthy valuations, but perhaps not tighter than REITs. TER: A chart in a recent Wells Fargo report showed Merrill Lynch high-yield, investment-grade bonds yielding 7.2%, whereas the Wells Fargo Securities MLP Index yielded only 6.1%. How do you convince an investor seeking yield securities to choose your offering? MB: I think there are several reasons that an MLP investment could be more attractive than a high-yield bond. First, from a tax perspective, about 80% of the distributions received will be tax deferred until the security is sold. So, relative to the income received from a high-yield bond, more of that investment will go into the investor’s pocket on after-tax basis as an MLP. Secondly, because MLPs are equities, there is upside in the price. An investor may or may not have that with a bond, especially if it is held until maturity. Lastly, the distribution can grow with an MLP, but it is a fixed rate with a bond. We’re forecasting about 5% medium distribution growth for the MLP sector in 2011 and the next three years. In addition to the current yield, there is growth in that distribution rate. TER: So, in addition to price upside there is also price downside. MB: That’s correct. It’s an equity so the price can go up and down, but the same is true of a bond. High-yield bonds now are trading at spreads to the Treasury that are much tighter than the historical rates. So, you have the same risks as with high-yield bonds—interest rates go up or high-yield credit spreads widen. TER: In a January 7, 2011 research report, you wrote: “We would continue to own MLPs but would wait for dips before adding positions.” How far off are those dips? MB: It’s really hard to predict dips. If there was a good way to predict them, we’d all do it. There are always unforeseen events. You could have a large seller that decides to be in the market and puts pressure on the price. You could have a confluence of secondary equity offerings in a short time span that could create an oversupply or a situation where equity supply is greater than demand. That could create a pullback in the stock. You could have an exogenous event; for example, when Greece had sovereign credit issues last summer. That impacted credit markets and spreads, as well as MLPs, on a short-term basis. There’s a whole host of factors that could create these dips. The reason we recommended continuing to own MLPs and to look for dips is that the underlying fundamentals for MLPs are quite good right now. Regardless of the macro factors that could push valuations up and down in the short term, we still think the MLP sector is very attractive on a long-term basis. TER: MLPs depend heavily on lines of credit to borrow money for business expansion. The consensus is that interest rates are set to rise somewhat, which would increase the cost of capital for MLPs. Please tell us about that and some other potential headwinds that MLPs could be sailing into this year. MB: Because MLPs pay out the majority of their cash flow every quarter, they do rely on access to capital markets. Because they invest significantly, either to acquire assets or to build new assets, they do have to access the debt and equity markets relatively frequently. MLPs also are sensitive to interest rates, though not as much as one would imagine. The correlation between interest rates and MLP price performance is only about 0.4. When there is a sudden spike in interest rates or an unexpected increase in interest rates outside of consensus, MLPs will underperform much like other yield- or spread-based securities. That’s certainly a risk. I think a steadily rising interest rate environment will be manageable for MLPs. Those that can grow their distributions more quickly will probably better offset some of the increases in interest rates. For MLPs with limited or no growth in their distributions, you’d expect to see some erosion in price performance as interest rates rise. Commodity price is another big risk. Oil is now over $90/barrel. To the extent that a number of MLPs have direct or indirect exposure to oil or natural gas liquids (NGLs), which are highly correlated to crude oil prices, a pullback in commodity prices would impact the cash flow. Right now, the correlation between MLP prices and crude oil prices is north of 0.7—the highest correlation of any product or commodity. Certainly that would be another potential headwind for the sector. TER: MLP general partners (GPs) and gas processors were the best-performing subsectors in 2010. Are those subsectors likely to continue to perform in 2011? What other subsectors do you expect will do well? MB: I’m not sure the gathering and processing subsector as a whole will outperform. I do think the gathering and processing MLPs that either have good exposure to shale-play development or very high growth rates will probably perform well. We’re thinking about the group more thematically. We think you want to own the higher-growth names, and then own the names that have exposure to crude oil and NGLs as opposed to natural gas. That’s because those subsectors have a lot of growth around them. Commodity prices are strong. The fundamentals are very good. In terms of the general partners, I do think you could continue to see outperformance. There were six transactions this year in which an MLP acquired and eliminated a GP. That means there are now roughly half as many publicly traded GPs as there were a year ago. From a scarcity-value perspective, investors who want exposure to the GP asset class have a lot fewer choices. I think you could continue to see those move higher just from a scarcity-value perspective. TER: What are some of those higher-growth names you mentioned? MB: I would highlight El Paso Pipeline Partners, L.P. (NYSE:EPB), the pipeline MLP for El Paso Corporation (NYSE:EP), which has been selling pipeline assets into the MLP and will continue to do so as they fund development of its E&P business and other resources that it needs at the parent level. We are forecasting +10% growth per year for the next four or five years at El Paso Pipeline Partners. In 2010, the company grew the distribution 19% and sold assets to the MLP worth $2.1 billion. There’s a steady visible growth rate there. TER: The yield for El Paso Pipeline Partners was 4.9% in 2010 and distributions were $1.64. What are your 2011 projections for El Paso? MB: We’re forecasting a distribution rate of $1.89 and a yield of 5.3% for 2011. TER: So, there is a little bit of growth on that one. MB: Yes. The second name I would highlight is a stock we initiated today, Targa Resources Corp. (NYSE:TRGP). This is the general partner of Targa Resources Partners, L.P. (NYSE:NGLS). Due to where it is in its incentive distribution rights (IDRs), the growth rate at the GP is roughly three times that of the underlying MLP. We’re forecasting a three-year distribution growth target of about 23%. That robust growth comes from the underlying MLP, Targa Resources Partners. We’re forecasting about a 7%, three-year compounded annual growth rate at the MLP level. That’s driven by organic expansions of the natural gas liquids infrastructure. Targa is very well positioned in that business. The partnership has a large footprint in the Gulf Coast. As assets are being built to accommodate growing liquids production and demand, we think Targa will be able to grow the distribution at a pretty nice clip. That translates into a roughly 3:1 ratio of growth to the GP. TER: You just published your top picks for 2011. What are some of those names? MB: We’ve already talked about El Paso Pipeline Partners. I would also highlight Enterprise Products Partners, L.P. (NYSE:EPD). Enterprise is involved in the same market as Targa, the NGLs, natural gas pipeline and fractionation and infrastructure markets. The company has a market-leading position in NGL logistics. Based on those same trends in the NGL market, there is growth in liquids production, as well as growing demand for liquids from the petrochemical industry. Enterprise is building its asset base to handle that growing supply and demand. We think you could see distributions grow about 6% per year for the next several years with a yield of about 5.5%. Enterprise is also one of the most liquid names in the sector. TER: Last year, Enterprise’s distributions were $2.33 and the yield was 5.6%. You’re saying it’s going to be about 5.5%. And what’s the distribution going to be? MB: We’re looking for $2.45 for 2011. TER: You said Enterprise’s distributions were going to grow. What are the catalysts for that growth? MB: The catalysts really are the organic growth projects. As an example, fractionation capacity is very tight right now because NGL supply is up, and you need to fractionate the NGLs to get them to market. Enterprise has a dominant position at Mont Belvieu, Texas, which is the hub for NGL fractionation. As a result of all this pent-up demand, the company is building three new fractionation facilities in Mont Belvieu. Because there’s such demand, it’s been able to increase its rates by almost double what they have been historically. In addition, what used to be a spot business is turning into a long-term contract business. Shippers are now contracting for long-term agreements to reserve space in the fractionator. That affords Enterprise a long-term, fee-based cash flow stream. TER: What are some other top picks? MB: The other one I would highlight is Exterran Partners, L.P. (NASDAQ:EXLP). This one’s a little different; it owns compression assets. The general partner is Exterran Holdings Inc. (NYSE:EXH). The story here is that utilization of compression has stabilized and is starting to improve. On top of that, the parent company will be selling assets into the MLP over time to support growth. We think this will create very stable distribution and growth. Our three-year distribution prediction is 6.6%. The stock has a pretty healthy yield of 6.8%. This is a name that hasn’t run as much as others but has pretty good underlying fundamentals and should do well over time. TER: My MLP chart shows a total return of 12.7% from early November to the end of December 2010. That’s quite phenomenal; such a return would have outperformed just about anything on the market, certainly in this type of investment. Are there any non-investment-grade MLPs poised to become investment-grade names in 2011? MB: That’s a great question. I don’t know if there are any for 2011, but there are a couple of MLPs that have the potential to get there by 2012. One is Regency Energy Partners, L.P. (NASDAQ:RGNC). Its stated goal is to achieve an investment-grade credit rating. The company’s been transforming its business by adding pipeline and fee-based cash flows, to the extent that almost 80% of its cash flow will come from fee-based activities, and only 20% from commodity-price exposure. As it grows and achieves critical mass, you could see Regency Energy Partners achieve an investment-grade credit rating by 2012. Similarly, as Targa Resources Partners grows its business to achieve critical size and to add fee-based cash flow, as well as organic growth projects, you could see it hit investment grade in a couple of years. TER: Any parting thoughts on the MLP sector as of mid-January 2011? MB: It’s been an extraordinary run. Certainly, the MLP asset class has a higher profile than it probably ever has. You see articles in The Wall Street Journal, there are MLP ETFs, etc. A lot of new funds have been created to own MLPs. So, we still think there should be place in an investor’s portfolio for MLPs. Even after the strong run, they still offer a pretty attractive yield. MLPs have good, solid underlying business fundamentals, so we think the future is still very bright for the MLP sector. TER: Michael, thank you for your time. Michael J. Blum is a managing director and senior analyst at Wells Fargo Securities covering energy master limited partnerships. He began his Wall Street career in 2000 at First Albany Corp. as an associate analyst covering alternative energy securities, and joined Wells Fargo in 2001. Since 2003, he has been following MLPs and integrated natural gas securities at Wells Fargo. Before joining the sell side, he spent a year as the investor relations manager for a publicly traded Internet startup during the dot-com boom. Michael has been recognized twice as a Wall Street Journal “Best on the Street” winner, ranking in two categories in 2010: No. 3 for the oil and gas producers sector and No. 5 for oil equipment, service and distribution. He also ranked No. 4 for oil equipment, services and distribution in 2007. In 2010, Michael was ranked the No. 1 MLP analyst in the Greenwich Associates survey of institutional investors. In 2009, he was named the No. 1 oil and gas pipelines analyst by Forbes and was ranked as the No. 3 analyst for the master limited partnership sector in a survey conducted by Institutional Investor. Michael graduated magna cum laude from the University of Pennsylvania with a BA in English literature and a minor in economics. |
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Morning Notes publisher Mike Berry, who co-chaired the two-day gathering, credits Cambridge House with taking an innovative approach by catering to the needs and interests of a wider-than-usual audience, including end-users and government authorities and financiers as well as junior explorers and institutional investors. As Cambridge House Chairman Joe Martin tells The Gold Report, “The manufacturing sector normally doesn’t pay much attention to the supply side, and maybe it’s time that those who in the past have just been buying these critical metals should take a look at where they coming from—and where they may come from.”
The “critical metals” space isn’t the exclusive domain of Block F on the periodic table. Rare earth elements (REEs) are part of it, but not all of it. The critical metals also include molybdenum, vanadium, manganese, lithium, niobium, cobalt, tantalum, tungsten, indium and others. Most of them “used to be called minor metals, “but they are not so minor anymore,” says Kaiser Bottom Fishing Report Publisher John Kaiser, who was billed as symposium strategist. “These are metals required for the economic development and national defense, thus essential for industry and national security.”
According to Metals Consultant Jack Lifton, “Alternate energies for a green future are impossible to build and operate without rare metals. These include cadmium, tellurium, selenium, indium, gallium and germanium for solar; rare earths for wind power and electric cars; and uranium and thorium for nuclear generation of electricity.”
Nor is clean energy technology by any means the only sector facing supply shortages. For instance, The Gold Report caught up with Mercenary Geologist Mickey Fulp at the symposium and discussed graphite, one of the materials that came up during a presentation. As it turns out, China is the most significant graphite-producing nation, providing nearly one-half what the U.S. uses annually, much of it going into the graphite electrodes that give conductivity to the mass of manganese dioxide in dry-cell batteries.
Vanadium is another metal on the critical list for which the U.S. has no domestic supply. While Mickey isn’t on the vanadium bandwagon, House Mountain Partners founder Chris Berry—who joined his father at the symposium—is a big believer in the potential of vanadium-redox batteries (VRBs) for mass energy storage. Chris says that 100% of the vanadium used in the U.S. comes from China, Russia and South Africa. “If you’re a believer in mass energy storage associated with wind and solar generation, VRBs are vital. One of the knocks against clean power generation like solar and wind energy,” he explains, “is that it’s very uneven and can’t be stored easily. VRBs are the answer” for storing energy for use during either on-peak or off-peak demand.
Addicted to Profits Editor David Skarica predicts that in the second half of 2011, Europe’s “bond vigilantes” will make their presence felt in the U.S. by driving up interest rates and driving down the dollar. That’s one of the reasons he remains bullish on gold. “I think we’re going to see gold headed much, much higher,” David says in this exclusive interview with The Gold Report. To learn about David’s investment thesis for the gold market and a few names that offer better value post correction, read on.
Noting that 2009 and 2010 provided an “extraordinary run” for master limited partnerships (MLPs), Wells Fargo Senior Energy MLP Analyst Michael Blum still sees plenty of potential, including strong business fundamentals, distribution growth and attractive yields. Learn what might take the wind out of an MLP’s sails, which sectors are positioned to run ahead of the wind and which MLPs have set their sights on achieving investment-grade status in this exclusive interview with The Energy Report.
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