By Winton Bates, on May 23rd, 2011
I should begin by defining what I mean by a naïve economic model. The naïve model I have in mind is a conventional neoclassical model, with a few bells and whistles added. The bells and whistles are necessary because so called ‘rational economic man’ who is the basis of conventional neoclassical economics doesn’t practice altruism. There are probably still some economists who claim that everything everyone does is for a selfish reason, but I am not one of them. While I recognize that a lot of people do a lot of noble things for their own satisfaction, I see no reason to doubt people when they claim to be motivated by altruism.
So, in terms of the naïve model I have in mind, the objective functions that individuals follow in making choices take some account of the well-being of other people (i.e. I am assuming interdependent utilities). That means that individuals might volunteer to do something even if they perceive that this involves some cost to their own well-being. The extent that they do this would depend on the net cost in terms of loss of individual well-being and the extent that their actions affect the collective benefit they seek to obtain by volunteering. The main potential source of net loss of individual well-being would be the value to the individual of opportunities foregone from use of time in volunteering, which would be offset to the extent that the individual obtains satisfaction from volunteering, or from recognition of her efforts. The effect of individual actions on the collective benefit being sought would depend on the size of the group seeking the collective benefit. In a large groups the actions of each individual tend make a small contribution to the objective being sought, so there would be a greater incentive to free-ride on the efforts of others.
The naïve model suggests to me that people would tend to volunteer to a greater extent when they had fewer opportunities for paid employment. It therefore suggests that volunteering would tend to decline if workforce participation increased. It also suggests that volunteering would be a substitute for other forms of charitable giving – people with time on their hands would tend to volunteer their time and people in well-paying jobs that give them little leisure would be more inclined to put their hands in their pockets to make financial donations. It also suggests that people would tend to volunteer to a greater extent in small, well-defined communities (e.g. country towns) where their efforts are more likely to be recognized that in major urban centres where individuals are more likely to get lost in the crowd.
How well does this naïve model explain volunteering in Australia? Not particularly well. The first point I noticed when I looked at the relevant section of the Productivity Commission’s recent report on ‘Contribution of the Not-for-profit sector’, is that there has been a consistent upward trend in rates of volunteering across all age groups over the last decade, although this has been offset to some extent by a decline in the average number of hours volunteered. This has occurred at a time when labour force participation has continued to increase.
As might be expected, ABS data show that volunteering rates are higher among women than among men. The difference is confined mainly to the 35-44 year age group – when most female volunteering could be expected to be associated with school canteens etc. People with young children are the group most likely to volunteer regularly, but they spend fewer hours per week volunteering than do people with older children and older people without children.
Again, as expected, the rate of volunteering is higher outside capital cities than within capital cities. But the difference is not huge. The rate for regular participation in voluntary work was 19% in capital cities and 23% outside capital cities in 2006.
The naïve model would not predict that employed people would be more likely to volunteer than unemployed people. For women, although those in full-time employment had the lowest rates of regular volunteering, those who were employed part-time had higher rates of regular volunteering than those classified as unemployed. For men, rates of volunteering for those in full-time and part-time employment were the same and higher than for those who were unemployed.
The most surprising departure from the naïve model relates to donations of money as a substitute for donation of time. I know such substitution does occur, but it doesn’t show up in the ABS survey data. Volunteers are much more likely to have donated money or contributed financial assistance to someone outside the family in the last 12 months than non-volunteers.
In order to explain non-volunteering we seem to need a model of behaviour that recognizes that volunteers and non-volunteers have different personal characteristics. It seems that non-volunteers tend to have relatively weak links to the community in general. The evidence suggests that they are much less likely to have attended a community event recently. They are also less likely to agree with the proposition that most people can be trusted.
By The Gold Report, on May 23rd, 2011
 Blinded by the glare of gold’s rocketing rise over the last several years, investors may want to follow the leads of the Barricks, Thompson Creek Metals, Goldcorps and other major miners targeting the copper space, according to Kevin Puil, portfolio manager at Malcolm H. Gissen & Associates and senior analyst for its Encompass Fund. In this exclusive Gold Report interview, Kevin tells us that major gold miners increasingly want to diversify and are turning to the red metal on the opposite end of the economic spectrum.
The Gold Report: The biggest news to rock the copper world for quite some time hit late last month with Barrick Gold Corp. (TSX:ABX; NYSE:ABX) announcing a deal to buy Equinox Minerals Ltd. (TSX:EQN; ASX:EQN) for a cool $7.8B. What do you think about Barrick’s acquisition of Equinox, Kevin?
Kevin Puil: Although many view this acquisition as expensive and say that Barrick overpaid, I don’t think so. I think it’s a good move by Barrick. It was a friendly, all-cash bid of $8.15/share, which trumped Minmetals Resources’ hostile bid of $7/share. With this acquisition, I think Barrick management has clearly stated that its outlook for copper is bullish, and its outlook for the expansion potential at Equinox’s Lumwana deposit in Zambia is definitely bullish.
It’s a good way for Barrick to get back into African copper after having spun off African Barrick last year. The deal is definitely accretive. I saw the C-1 per-pound operating cost at about $1.90 with the average copper price Equinox sold this last quarter at about $4.30/lb. Those are good margins. The impact on net asset value (NAV)/share is negligible to Barrick, while it should increase per-share cash flow by almost 10% this year and close to 20% next year.
TGR: Given this acquisition, do you see more of the seniors that are heavily weighted toward gold following suit and adding more base metals to their portfolios?
KP: I definitely see more M&A in the copper sector, and I also can see more gold companies actively looking for projects that will give them exposure to both gold and copper.
TGR: Will that confuse investors who traditionally have a different reason for investing in copper than they do in gold?
KP: A lot of the senior gold producers have exposure to copper, whether investors know it or not. They typically produce a lot of copper as a byproduct. I don’t have the numbers in front of me, but I’d suspect that close to 10% of Barrick’s revenue comes from copper, especially with copper at $4/lb. At that level, it’s arguably more profitable than mining gold.
TGR: What are your feelings about copper? And where does Encompass Fund stand?
KP: I’m definitely bullish on copper over the medium and long term. The new world reality is increased consumption of raw materials by emerging classes in big countries with accelerated development. Demand is back on track, while supply isn’t. It’s taking longer to repair the damage to the supply side than to the demand side.
A few factors play into this. Companies are mining lower ore grades because new quality projects are scarce. In addition, political instability, as well as mining service and equipment supply problems are becoming major challenges for copper miners.
TGR: As you pointed out, with spot copper prices hovering around $4/lb., copper mining is still profitable for most of the seniors, and several seniors already have fairly significant copper credits or copper assets. Against that backdrop, will we see more juniors entering this space? And where would you expect to see more copper mining?
KP: Definitely. I do see more juniors getting involved in copper exploration and I think the majority of these projects will be found in Latin America, Canada and Australia. We’re seeing more activity—not just in the copper, but the gold/copper combination projects. We’ve already seen a number of acquisitions during the last year.
TGR: Aside from Barrick, what acquisitions come to mind?
KP: Thompson Creek Metals Company Inc. (TSX:TCM; NYSE:TC) acquired the Mount Milligan project in British Columbia from Royal Gold, Inc. (TSX:RGL; NASDAQ:RGLD). Goldcorp Inc. (TSX:G; NYSE:GG) acquired the remaining interest in El Morro, another Chilean copper project, from Xstrata PLC (LSE:XTA). And before Equinox, Barrick acquired the remaining interest in Cerro Casale in Northern Chile from Kinross Gold Corp. (TSX:K; NYSE:KGC).
TGR: Given the level of activity in the sector, could you tell us about any off-the-mainstream-radar companies that may have significant copper assets? Any compelling stories, particularly in mining-friendly jurisdictions?
KP: Yes, we’ve identified a few companies. Exeter Resource Corp. (TSX:XRC; NYSE.A:XRA; Fkft:EXB) has its Caspiche project. Again, it’s one of those copper/gold projects, with about 20 million ounces (Moz.) of gold and about 5 billion pounds (Blbs.) of copper. That comes with its own challenges, however, including lack of infrastructure and a large capital expenditure (capex) requirement.
Closer to home, Nevada Copper Corp. (TSX:NCU) has the Pumpkin Hollow deposit in the Walker Lane mineralized belt of Western Nevada. That deposit has about 9 Blbs. of copper with a couple million ounces of gold as well. Nevada Copper may be facing some permitting and financing hurdles, but it has good infrastructure in a stable political environment.
We also like Candente Copper Corp. (TSX:DNT). Its Cañariaco Norte deposit, with 7 or 8 Blbs. of copper has been significantly de-risked with the completion of a pre-feasibility study. Capex is probably going to be about $1.5B. Cañariaco Norte is in Peru, where the mining sector may see some instability in the post-election period, as both candidates have indicated an intention to increase taxes.
One of our favorites for potential acquisition is located in Arizona—Redhawk Resources (TSX.V:RDK; Fkft:QF7). Its Copper Creek project is located in a mining-friendly district in Arizona, which leads the U.S. as a copper-producing state, with 12 active mines. Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) and Rio Tinto (NYSE:RIO; ASX:RIO) are also operating in the area. The project is within eyesight of Grupo México’s (BMV: GMEXICOB) ASARCO Ray mine and Hayden smelter and BHP Billiton Ltd.’s (NYSE:BHP; OTCPK:BHPLF) now-closed Kalamazoo Mine.
The 100%-owned project is 7 sq. mi. and has had more than 400 drill holes and 160,000m of drilling to date, with more than 75% of the property still unexplored. Redhawk’s deposit has already been adequately de-risked, with an NI 43-101 compliant resource and scoping study identifying approximately 3.5 Blbs. of copper and 50 Mlbs. of molybdenum, with plenty of exploration upside remaining. In addition, more than 400 high-grade breccias appear on the property, although only three have been fully drilled. This definitely has the potential to be a world-class deposit the size of the legendary Resolution or Safford mines.
TGR: When were the tests completed at Redhawk?
KP: They were released last year, and we’re expecting an updated resource estimate, probably in a month or two. It’s a well-positioned resource with a grade of close to 1% copper, a projected operating cost of $1/lb. and capex of less than $500M. I believe Redhawk’s a very attractive acquisition target, too, because it’s well down the permitting path and has great infrastructure. It could be ready for production within 18 months. Not only that, but Redhawk is trading at less than $0.03/lb. copper in the ground, not counting the molybdenum credit, and acquisitions have been more in the range of $0.07–$0.10/lb.
TGR: Is it fair to assume that some of the seniors located in the same district would be interested in an accretive asset such as Redhawk?
KP: Yes, the natural suitors would be ASARCO, Freeport McMoran or Rio Tinto, but I wouldn’t discount foreign nationals such as China and India. Both of those countries have long time horizons and are looking now to nail down supply streams for concentrate 10 to 15 years out. I wouldn’t count them out at all.
TGR: Tell us a little bit about Redhawk’s management, treasury, market cap and so on.
KP: It has a market cap of about $90M, which I think is undervalued by at least 50%. Just by doing easy calculations of copper in the ground, the base case tells me that the project is worth at least $1.25/share, whereas it’s trading at about $0.65 a share.
Redhawk has very strong management, probably more than 40 years of mining experience with one of its top executives coming from BHP. It’s well-capitalized with more than $20M in the bank right now, no debt and no need to go to the market. I think it’s extremely well positioned.
TGR: But no U.S. listing to date?
KP: Not yet, but soon. I believe that they’ll be listing on the OTCQX within a matter of weeks.
TGR: With so much emphasis on gold as it continues climbing to new heights, it might be easy for investors to overlook copper, but you’ve made it clear that the copper space is heating up and there are some exciting stories to tell.
KP: As I said early on, I’m bullish on copper and so are a lot of senior miners. They’re looking to diversify, and for gold miners, copper is an easy way to do it. As companies have to look toward increasingly more difficult geography and geologies to meet demand, it’s going to take more time and a lot more money to bring new copper supply online. We can probably expect more senior miners to get involved with copper as the supply/demand structure holds up for different reasons than the supply/demand structure for gold.
TGR: Thank you Kevin, you’ve given us a lot to think about.
A Chartered Financial Analyst (CFA) with more than 15 years’ experience in the investment management business, Kevin Puil currently serves as portfolio manager at Malcolm H. Gissen & Associates Inc. in San Francisco, and as senior analyst for its Encompass Fund. The Encompass Fund, which focuses on global resource companies exploring for and producing gold and silver, copper, uranium and rare earth elements, racked up a healthy 60% return in 2010, following a spectacular 139% in 2009. Before relocating to California, Kevin worked in Canada, where he also studied economics at the University of Victoria and the University of British Columbia.
By Christopher Briem, on May 23rd, 2011
So the news headline is that the state’s unemployment rate dropped from 7.8% to 7.5%. If you look at the 6 month change it is a full percentage point decline from 8.5% just in October to 7.5% last month. So when was the last time the state saw a full percentage point drop in the unemployment rate over 6 months?
1984
So does that mean there is anything today comparable to 1984? Hmmm. Between April 1983 and April 1984 was probably the peak outmigration from both the Pittsburgh region and the state resulting from the recession and job destruction at the time. That was purely an economic migration generated by young workers fleeing the region. The apparent drop in the unemployment rate back then was all the result of workers looking for work elsewhere. Yet this period of dropping unemployment rate is a period when we think people are on net moving into the Pittsburgh region and most likely Pennsylvania as well. So of the two periods, in one the drop in the unemployment rate is a sign of severe economic weakness. In the other……….
So if you take out the 1983/4 miasmic period, when were the previous times when there was a comparable 6 month drop of a percentage point or more in the state’s unemployment rate? One single period ending in November 1975, and another period in the first quarter of 1973, both of which I suspect may have been the end of strikes or the reopening of whole mills as the nation came out of recessions. So there just aren’t a lot of recent (recent as in the last half decade or so) examples for the unemployment rate dropping so far so fast.
By B.P.T., on May 23rd, 2011
At 8:30 AM EDT, the Chicago Fed National Activity Index for April will be released, providing an update on economic activity and inflationary pressure in the United States.
 Join the forum discussion on this post - (1) Posts
By Christopher Briem, on May 20th, 2011
I regret to report what is awful news for the Pittsburgh region. By yet another metric out there, local real estate prices are growing faster than most anywhere else in the nation. If the folks who look at real estate data do not stop spreading such misinformation about the region than who knows what bad things may result. Once Pittsburgh housing markets gain much more against some of our regional competitors we will not be able to tout the low cost housing here in the region. Most rankings of regional quality of life or similar things place a disproportionate rank on housing affordability which certainly is going to suffer as a result. We will have to drop on all those rankings. It could be really bad. What can be do to stop this? Where is Richard Nixon when you need him? I am sure there is some form of price control that might be helpful.
Even if you discount the fact that most real estate markets nationally are continuing to decline, it is remarkable news for Pittsburgh. Most other markets are not expected to see rebounds until 2014!? Yet Pittsburgh is on the opposite tract altogether. At +3.9% over just the first part of the year, you are really talking a really rapid rise in prices at an annual clip. Not sure Pittsburgh has seen that in some time. If you then account for the low inflation of late compared to past decades, you have to ask yourself if real estate is the fastest period of real housing value for the region since ???
And then there is the impact on property assessments in Allegheny County which generally have been showing some of the stronger gains within the region. It means, among other things, that any delay in property assessments will only result in ever larger jumps in assessed values. Right now the county must be using recent sales price transaction data through the end of 2010 and going back a couple years I bet. If that window of data gets pushed to the right it could mean significantly higher assessed values.. especially for some homeowners since I am sure the appreciation is not uniform across the region.
By Ajay Shah, on May 20th, 2011
Thomas E. Ricks (in Foreign Policy) and Lawrence Wright (in New Yorker) on Pakistan.
C. Rangarajan on the debate about the debt management office and about inflation targeting (the latter is an interview with Tamal Bandyopadhyay).
Saurabh Mishra, Susanna Lundstrom and Rahul Anand have a fascinating piece on the sophistication of India’s service exports. Many people suffer from what I call `the widget illusion’, where somehow it is good to make tangible things, and making intangible things is considered wrong. It is high time we get away from such notions.
Kenya’s experience with mobile phones and payments is important for us in India. Read William Jack and Tavneet Suri on this, on voxEU.
I found there are interesting links between this article in The Economist, and the ideas on system-driven credit in a UID world in
this committee report.
Do you use up the power of monetary policy to stabilise inflation, or do you use up this power to manipulate the exchange rate? Some
people think that manipulating exchange rates, and thus fueling export growth, is a shortcut to high GDP growth. Nicolas Magud and
Sebastian Sosa (on voxEU) say that the potential payoff from exchange rate misalignment is small.
A working paper: Liquidity considerations in estimating implied volatility by Rohini Grover and Susan Thomas.
A working paper: Improving the legal process in enforcement at SEBI by Dharmishta Raval.
A working paper: Has India emerged? Business cycle facts from a transitioning economy by Chetan Ghate, Radhika Pandey, and Ila Patnaik.
Mobile trucks that sell food, and link up to customers using twitter: is India is ready for this? See Caroline McCarthy on CNet News.
A first response on the killing of UBL by Steve Coll.
Robert S. Boynton has an article in the Atlantic about how modern communication technology is actually making a small difference to breaking down the North Korean government.
Henry Shukman has a great story in Outside magazine about the 3000 square kilometres of `Chernobyl Exclusion Zone’ which has turned into a miracle for biodiversity. I often wonder what would happen if 3000 square kilometres of prime Gangetic land became true forest.
Perhaps 10% of blind men can teach themselves how to see.
Michael Lewis has a persuasive sounding article, about how a Richter 7.9 earthquake that hits Tokyo will devastate the world
economy. This was written in 1989. By and large, these things did not happen in the recent Richter 9.0 earthquake. Yes, the
recent quake did not frontally hit Tokyo, but then Richter 9.0 is way bigger than 7.9 (this is log scale). It is a useful exercise,
for everyone interested in finance, to read this article and understand how such journalistic thinking goes wrong.
Is research funding going into randomised trials yielding a good bang for the buck? My personal view is that a better use of money is to build datasets like this which are then placed into the public domain, and used by hundreds of researchers.
By Simon Grey, on May 20th, 2011
I’ve often criticized IP from both philosophical and utilitarian grounds, but I haven’t often addressed some of the specific benefits that would come from abolishing IP. Anyhow, here’s a story that offers a glimpse of a future without IP: As companies compete to digitize the textbook market, there is one approach that shakes the traditional publishing business model: open source textbooks, whose proponents believe online educational tomes should be free.
Many universities, including MIT and Carnegie Mellon, post course lectures online for free use. A New York Times article last year explained some of the barriers to applying the same approach to textbooks.
For one thing, the textbook authors must agree to have them distributed online without charging royalties — something that may work well in the software world, where engineers often work on projects while keeping a day job, but typically avoided by writers who put their sweat equity into one book at a time. Also, books for K-12 classrooms must meet state standards, and most states don’t have procedures in place for approving open source textbooks.
Open source textbooks are a step in the right direction. If you follow the link, you will see that there are serious savings offered by the open source book model. If IP were abolished, these effects would be even greater, for students could buy cheap bootlegs or “pirate” digital copies for free which, as anyone currently in college knows, would offer extremely serious savings.
Basically, publishers and authors would not be able to artificially restrict supply; their monopoly would effectively be ended. Competing publishers could copy the text and produce it cheaply, forcing the original publisher to either update the books every quarter/semester/trimester or drive down the price of their own books to be competitive. Of course, it’s a hassle for professors to change books every quarter, so students would, more likely than not, be able to get their books on the cheap. Therefore, those currently in college should support the abolition of IP as it will help them save money.
By The Gold Report, on May 20th, 2011
The Gold Report: Clive, in a recent note on your website you said, “The general investing public are sheep, they like to move together in large groups, have a kind of vacant stare, are routinely fleeced and eventually slaughtered. That’s why when they are very confident, it’s time to get scared, and vice versa.” Further to the point, you suggested that the investing public is confident in gold and bearish on the dollar, and that those two factors could result in a rebound in the greenback and a fall for gold. Please expound upon your theory.
Clive Maund: The main basis of my theory is sentiment, during the first week of May, before the dollar started rallying, only about 16% of the public was bullish on the dollar—almost a record low. Sentiment hasn’t been this bad since 2003. An article pointing this out was posted on my site on April 28. It also pointed out the danger posed by this to commodity stocks, especially to silver. Adam Hamilton, of Zeal Research, picked up on this too, and also is calling for a big dollar-countertrend rally. The papers have been full of stories about how the dollar is set to collapse, and when that happens we are usually on the verge of a rally. The dollar index rose sharply from the 5th of May and has broken out of its downtrend in force from the start of the year and could get as high as 79 on this move. While this is certainly not good news for commodities, we should be presented with a major buying opportunity once the dollar rally has run its course.
TGR: You believe that the Federal Reserve ultimately will unleash quantitative easing (QE3) to help prop up the dollar. Will that be the buying opportunity you’re talking about, or will it come sooner than that?
CM: Right now, it’s in the Fed’s interests to encourage investors to believe there will be no QE3 in order to panic them out of commodities and stocks and into the dollar and Treasuries. This will buy it time and help reduce inflationary pressures. After the Fed has achieved this result, it will need to backpedal quickly, do QE3 anyway to prevent the economy stopping dead in its tracks and continue ringfencing the derivatives problem.
TGR: How far off is this buying opportunity?
CM: I believe that the corrective phase in commodities is likely to take the form of a 3-wave zigzag. Gold and silver, and copper too, look to be shaping up for a tradable short-term relief rally soon, which will be driven by bargain hunting combined with oversold technicals. This should be followed by a more sedate decline than that of early May to a lower low than that which occurred about a week ago, which may see silver drop as low as $28, with seasonal factors suggesting that this low may occur about late July, give or take a few weeks. I believe such a low will present a major buying opportunity.
TGR: In a previous interview with The Gold Report, you said, “As long as inflation has the upper hand, which the recent action of the commercial banks and institutions in scaling back their short positions demonstrates to be the case, investors can look forward to advancing commodity and stock markets. The big danger for investors is deflation.” Are we any closer to deflation now?
CM: I don’t believe we are. The fundamental reason for this is that the consequences of deflation in a debt-saturated world would be so catastrophic—especially for business leaders and politicians—that the Fed will move heaven and earth to prevent it and will even choose hyperinflation above deflation because it buys the Fed more time. The plunge in silver during the first two weeks of May was largely due to the successive raising of margin requirements, which was a deliberate and successful tactical move by the powers that be to pop the silver bubble that was shining a revealing spotlight on its inflationary policies, though the drop in silver also is thought to have been partly due to the market anticipating a dollar rally.
TGR: Let’s talk more about silver. A note on your site said, “After last week’s devastating plunge, the silver battlefield is littered with the corpses of silver longs with those who are still breathing being exhorted to “put their shoulder to the wheel” again by the undismayed silver cheerleaders hailing a ‘fantastic buying opportunity’ for the ride of a lifetime.” Is it still a fantastic buying opportunity?
CM: Although a significant and tradable relief rally is to be expected after silver’s brutal plunge in early May, silver is not thought to have completed its corrective phase yet. This is because a substantial dollar rally is believed to have already started; so if you wait a little while, you should be presented with a better buying opportunity. More aggressive traders may want to play the relief rally expected soon, but average investors may want to wait for the expected lower low later.
Silver could drop back to the high $20s before this dollar rally is done and that should present a great buying opportunity, higher margin requirements or not. This is because inflation is expected to continue to build in the direction of hyperinflation, as QE is the only way out due to the massive debt and derivatives overhang. The game plan is to inflate away the debt and backstop the big Wall Street banks to whatever extent necessary because they are, as we have been told repeatedly, “too big to fail.” This means gold and silver are eventually set to go much, much higher.
TGR: How should investors mitigate risk in their portfolios when the possible outcomes of our economic situation are quite dramatically different?
CM: The two methods that we use are traded options and inverse ETFs. For example, we used ProShares Ultrashort Silver ETF (NYSE:ZSL) during the early May plunge to insulate ourselves from the drop in silver and actually gained by also buying calls in this ETF, which we later sold. A word of caution about leveraged ETFs—they should only be employed where the potential is thought to exist for a big move contrary to your open positions. The reason for this is because they have an options component, they are prone to price erosion in a flat market. So, most of the time, it is better to use non-leveraged ETFs, which are held for only a short time until the danger has passed. Options are a simple, fair and cheap way to buy protection and thus favored—a great thing about them is that even when trading is thin, market makers have to both make a market and honor the intrinsic value of the option; this is what is meant by fair. Used in this capacity, they are not speculative at all. On the contrary, they should be viewed as insurance.
TGR: A lot of your investment decisions seem to rely on charts and technical analysis. A) Where do you get your charts? B) Which ones are you most partial to?
CM: I get my charts from stockcharts.com where I have a subscription. It provides a good free service, but the subscription service is even better with many options. Bigcharts.com’s charts are good for quick reference, and they show volume to advantage. A key point to remember with all these services is that, while they provide a vast amount of data, it’s how you use it and what you do with it that counts.
TGR: What sort of patterns are you looking at in these charts? Are there some basic things our readers can look for that will help them find companies that are about to break out?
CM: There certainly are. The main thing you want to see is the price rising away from a clear basing pattern and the longer and more definite the base pattern, within reason, the better, and you also want to see a favorable moving average alignment. You should seldom invest against the direction of the long-term 200-day moving average—when you have this on your side your odds of failure are greatly reduced. There are various patterns that we employ to advantage, such as Ascending Triangles, Double and Triple Bottoms, Fan Corrections, Falling Wedges etc. and we pay close attention to trading volume and volume indicators, principally the Accumulation-Distribution and On-balance Volume lines. Never forget that volume is the lifeblood of the market so studying volume patterns can help you gauge whether money is flowing into or out of a stock, especially as volume action precedes price movement. Knowing this enables us to position ourselves AHEAD of breakout moves.
TGR: In a recent research note, you said, “I have been in this business more years than I care to mention. . .in all that time, I have very seldom come across a chart that looks more bullish than that of Alix Resources Corp. (TSX.V:AIX).” What are your charts telling you about Alix?
CM: Alix is at about the same price as when it was recommended on the site back in March, and its technical condition remains about the same—it looks very bullish. Even as it dropped with the sector in early May, its accumulation/distribution line rose so sharply that this indicator is at about the same level it was when Alix was priced at CAD$2.60 back in spring of 2009. Looks attractive here, though it may be held back for a while longer if the sector drops on the building dollar rally, as expected.
TGR: You operate out of Chile. Please tell us about that country and the investment climate for mined commodities there.
CM: Chile is generally a pleasant place to live. Politically, it is stable and liberal. Housing and land is cheap compared to countries like Canada and the U.S. The income tax rate is low, though taxes are collected in other ways like a high vehicle road tax and high taxes on gasoline and other purchase taxes. The food is abundant and cheap, especially in the south of the country, and wine also is cheap and excellent. There are limitless beaches and mountains because, of course, the country is sandwiched between the mountains and the sea. There are good air and bus services up and down the country but hardly any railroads. Internet coverage is good now, too.
TGR: What about the Chilean economy, especially as it pertains to mining?
CM: Chile is actually a far more fiscally prudent country than the U.S. It does not have careening deficits, and the workforce is obliged to contribute to a private pension scheme that has in fact grown in value far more than government schemes in countries like the U.S. That means the Chilean government is not on the hook for massive pension obligations, as many other governments around the world are. Those governments will probably renege on these obligations, at least in part, by a combination of inflation and fiddling the inflation statistics.
Chile is very mining friendly and has a sophisticated infrastructure to support mining companies conducting operations. In addition, environmental factors are not such a concern here as most of the mining operations and prospects are located in northern Chile. The north is a rather sparsely populated desert but with towns dotted around to provide amenities, logistical support and a skilled workforce. It is still not widely appreciated that there is a line of hills or low mountains between the Andes and the coast that harbor massive as-yet-undiscovered copper-gold deposits that will be relatively easy to mine and much less complicated and expensive than Barrick Gold Corp.’s (TSX:ABX; NYSE:ABX) massive Pascua-Lama operation. That project is perched on Chile’s border with Argentina, high in the Andes. To get an idea of the potential of these deposits located in this line of hills, you need only look at Codelco’s (Corporacion Nacional del Cobre de Chile) massive Chuquicamata open-pit copper mine near Calama, which is the biggest open-pit copper mine in the world, or Freeport-McMoRan Copper & Gold Inc.’s (NYSE:FCX) giant Candelaria open-pit and underground mine near Copiapo.
TGR: You have an on-the-ground view of what’s happening in Chile. Are there some small-cap names with favorable projects in Chile?
CM: One that is coming along very nicely and continues to look most promising is Samex Mining Corp. (TSX.V:SXG; OTCBB:SMXMF). I have personally inspected its properties north and south of Copiapo with the company’s chief geologist. I started the current bull market in this stock by recommending it to subscribers at $0.12 almost two years ago and, after a steady advance, it spiked for about a month on positive drilling results. Samex has tied up two nice parcels of excellent properties on that line of hills I mentioned earlier, which are actually very close to Freeport’s Candelaria operation. These properties have huge potential, so there’s a lot more upside for this stock with the company now undertaking a drilling program to define the potential of the properties.
TGR: Thank you for talking with us today, Clive. This has been very informative.
Clive Maund has been president of http://www.clivemaund.com, a successful resource sector website, since its inception in 2003 early in the sector bull market. He has 30 years’ experience in technical analysis and has worked for banks, commodity brokers and stockbrokers in the City of London and holds a diploma in technical analysis from the UK Society of Technical Analysts. Clive now lives in southern Chile.
By The Gold Report, on May 19th, 2011
 In last week’s EI letter we commented on the parabolic rise in the silver price and made the observation that, although the mining equities don’t always participate in the “up” move in metal prices they seem to always “enjoy” the down moves. This week proved the rule, as the commodity sector got a good shellacking. Although we have been quite cautious and have noted several times that we, and the market, were pricing a fair bit of success into an inherently high-risk investment sector, it still hurt. Little more needs to be said about this week’s two by four to the head that the charts below don’t illustrate.
(Figs. 1 and 2: 7 month charts for Silver and TSX-Venture index)
Of more significance is the longer-term underperformance of equities versus metals prices. As the chart below illustrates, the mid-tier and development-stage gold mining sector (as represented by the S&P/TSX Gold Index) has underperformed gold since at least 2006. Specifically, the gold price has gained 193% versus the Gold Equity Index’s 75% gain. This data point validates the complaint of many funds that, despite getting the macro picture right (gold) they missed out on the leveraged gains they expected from the mining equities.
(Fig. 3- Gold vs. the S&P/TSX Gold Index since 2006. 193% gain vs. 75%)
With regards to the index itself, it is comprised of a number of “troubled” companies. These troubles stem from permitting and geopolitical issues (Gabriel Resources Ltd. (TSX:GBU), Centerra Gold Inc. (TSX:CG), OceanaGold Corp. (TSX:OGC; ASX:OGC), Kinross Gold Corp. (TSX:K; NYSE:KGC), etc.), operational issues (Minefinders Corp. (TSX:MFL; NYSE:MFN), Gammon Gold Inc. (TSX:GAM; NYSE:GRS), Great Basin Gold Ltd. (TSX:GBG, NYSE.A:GBG), Jaguar Mining Inc. (TSX:JAG, NYSE:JAG), NovaGold Resources Inc. (TSX:NG; NYSE.A:NG), etc.) and just plain cost overruns and bad luck. These are inherent and inevitable in the mining industry—so much so that a sizeable portion of the money that might have gone into the sector in the good old days now ends up in Exchange Traded Funds (~67 million ounces of gold is held by ETFs).
Another major and often overlooked problem with the mining (and more specifically exploration) sector relates to the low cost of capital. There are two prime reasons for this availability of easy money. First, “investment” demand for a sexy exploration story far exceeds the number of legitimate and potentially successful exploration properties on Earth. Secondly, my experience is that maybe 80% of the people investing in junior exploration and mining companies have no real idea what the hell the geologist is talking about and therefore, what they are actually buying.
The result is that there are virtually no real barriers to entry in the exploration business. Nearly anyone with a bit of moose pasture, an anomaly, a story and a geologist can raise money. The fictional dream of an easy discovery and instant riches (sold to an overzealous audience) far outweighs the reality that the actual odds of discovery on any exploration property are about 1 in 1,000.
Aiding and abetting this demand for dreams and instant riches are 25 international and 80 Canadian brokerage firms based in Canada alone, all staffed with eager brokers looking to buy that new black Bentley. Last year on the TSX Venture exchange, $5.3 billion was raised by way of 2,110 financings, while the Venture’s big brother (TSX) raised another $12.5 billion for the mining sector. So far in the first quarter of this year, another $2.1 billion has been raised on the Venture Exchange by way of 617 financings and, another 32 new mining companies were born. Last year the two exchanges saw 208 new mining companies, all of them “on the verge of a discovery.”
That dear reader is a lot of money, or put another way, a lot of paper (stock) looking for a new home. It’s also $7.4 billion over 16 months that didn’t go into buying your favorite junior company.
Most of the “intelligent money,” the high net-worth investors who participated in these financings, know the odds of success (FYI- not good). That means that much of that new paper is destined to hit the market as soon as someone can pump the story to a commodity-crazed public. The current bludgeoning in the commodity space is overdue and quite honestly welcome. We have been living in la-la land with pure high-risk exploration plays priced at hundreds of millions of dollars and virtually worthless mineral resources attracting the attention of large hedge funds and media pundits. With luck, the junior market will retrace some of its gains, and over the summer we will come across a few good buys.
On a More Positive Note. . .
Although the paper available for Canadian equities is limited only by the number of trees between Victoria Island and Newfoundland, the number of economic mineral deposits and legitimate exploration properties is very limited. The net effect of this naturally limited supply of mineral deposits is playing out in real time. We have entered a period of history in which metal supply, as a function of time, can no longer keep up with demand, as a function of time. These two concepts are truly important ideas and will drive our long-term investment thesis in this risky sector here at Exploration Insights. As stated many times: Quality deposits will remain highly desirable and command a premium from the major mining companies. Bogus properties will ultimately revert to their intrinsic value—nada. Which do you want to own?
The photo below shows the Bingham Copper mine near Salt Lake City, Utah. This was the first open pit bulk mining operation in the world and has been actively mined since 1906. Total production is approximately 18 million tonnes (40 billion pounds of copper)—about one year of global demand! In effect, we need to find, drill, permit and mine one Bingham deposit every year just to stay even. The same holds true for gold: we are mining about 80 million ounces a year. That is equivalent to depleting Nevada’s entire Carlin Gold Trend every year.
(Fig. 4- Bingham Copper mine. Second largest open pit mine in the world: 1 a year!)
In summary, there is serious money to be made in the junior exploration sector if you can differentiate an ore deposit from moose pasture before the crowd. Given the two year bull run in this sector valuations are quite high and do not reflect the inherent exploration and mining risks. Companies have been financed by investors with no real chance of a discovery success by speculators with no real knowledge of what an ore deposit looks like or doesn’t. Caution is advised right now as reality sets in. There will be some very good companies with legitimate mineral properties coming to a market near you at a significant discount. Keep your powder dry, do your due diligence and good luck.
That’s the way I see it.
By Ajay Shah, on May 19th, 2011
The #1 problem of Indian macroeconomic policy is the inflation crisis. From February 2006 onwards, in every single month, inflation has exceeded the target zone of four to five per cent. I’m measuring inflation as the year-on-year change of the CPI-IW. The latter is the best measure of inflation in India today.
This macroeconomic instability is damaging the ability of economic agents to plan and invest for the future, because it’s hard to envision interest rates and prices when faced with such high uncertainty. High inflation thus damages growth.
Many people in India like to make excuses about inflation. One day, inflation is about the price of onions. Another day, inflation is about a global commodity shock. Many people like to open up the sub-components of WPI and explain away inflation by saying “but it’s only concentrated in a few things which make up x% of the overall basket”. And so on. While each of these idiosyncratic factors can generate relative price changes, they cannot explain sustained price rise of the overall household consumption basket.
Sustained and persistent inflation is not an act of god. It is made by mistakes in macroeconomic policy. It can and should be contained by solving these problems of macroeconomic policy. On May 3, Dr. Subbarao announced a fairly good policy statement. It continued to talk about WPI while the best inflation measure is the CPI. But for the rest, it was the first time that RBI was starting to take the inflation crisis seriously. And that was good. Also see an Indian Express column by Ila Patnaik on May 6. Sadly, RBI’s commitment to the problem of inflation lasted for six days. On 9 May, Dr. Subbarao did a speech in Switzerland which essentially robbed RBI’s stance of credibility. Ila Patnaik has a column in the Indian Express about the damage that this speech has caused. You might like to also see this old column of mine on the problems of RBI. Consider the date on which the rate hikes began. Compare two alternative worlds:
- In one world, RBI says: “We care about inflation, we will do what it takes to get y-o-y changes of the CPI-IW back to the target zone of four to five per cent”. And the rate is hiked by 25 bps. And this is repeated a short while thereafter. And so on. In this world, the expectations of economic agents get modified alongside the rate hikes.
- In another world, every time RBI raises rates, RBI says “actually we are not so serious about inflation”. In this world, the expectations of economic agents do not get modified alongside the rate hikes.
Monetary policy works by directly crimping aggregate demand (e.g. driving up the EMIs that people pay, or the cost paid by firms for working capital) and by reshaping expectations and thus the decisions about wage / price hikes. By damaging the latter, RBI has imposed more of the heavy lifting upon the former.
What does it take for RBI to persuade us that they are serious about inflation? Commitment to the floating exchange rate (thus removing this conflict of interest that can damage monetary policy), movement on the DMO (thus removing another conflict of interest that can damage monetary policy), and sound monetary economics going into speechwriting (and future monetary policy formulation). By failing on all three scores, RBI is generating a situation where there is no commitment that in the future, RBI will fight inflation.
Whether RBI wants it or not, India will fight this inflation crisis, which is the #1 cloud on the horizon of India’s macroeconomic policy. The politicians require CPI-IW inflation to be back to the four-to-five per cent zone by late 2013, well in time for the elections in 2014. The pressure is simply going to ratchet up. The only question is about how monetary policy will fight inflation. If the instrument of monetary policy is refashioned to fight inflation, then the amount of pain that has to be inflicted through rate hikes, that is required to get the job done, will be lower. If the instrument of monetary policy is mis-managed, then a bigger set of rate hikes are required to get the same thing done.
In the medium term, RBI needs to build a team of top quality economists, who gain street cred by exuding knowledge of monetary economics. In the short term, the least that is required to be done is to stop the flow of low quality speeches.
 
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