Can we get back to track on corruption now?

By Ajay Shah, on June 15th, 2011
Somewhere in 2010 or so, I personally started getting much more gloomy about India’s problem of corruption. For a snapshot of the zeitgeist, see this group of articles from August 2010. A large swathe of the economy operates in close contact with government. If government will not sensibly make rules, and then fail to impartially enforce rules, then the entire enterprise of the market economy is under threat.
In the months that followed, the topic of corruption exploded in the Indian public policy discourse. The two main events were the Commonwealth Games scandal and the 2G Spectrum scandal. But alongside these, many smaller events also played a role, such as the Adarsh Housing Society scandal.
The two spoilers I was, at first, hoping that this energy would be channeled into making progress on core issues of governance. But sadly, the first flush of interest in the field was wasted thanks to the Anna Hazare spoiler followed by the Baba Ramdev spoiler. These have provided comic relief, but more importantly they have taken the focus away from the genuine problem of corruption. They have helped increase an entrenched sense of pessimism that nothing can be done about corruption (given that these prominent efforts were irrelevant).
However, the lesson is not that nothing can be done about corruption. The lesson is that such spoilers are not the answer. Genuine institutional reform is. The problem of corruption will resist quick fixes proposed by people who only dimly understand it. Careful thinking in incentives and public administration is required, in diagnosing where corruption comes from and how it can be addressed. Now that the two spoilers seem to be getting out of the way, can we get back to this main quest?
The main quest Under the topic of `sensibly making rules’, we have had two kinds of problems. The first is the problem of old Indian thinking, where socialism and autarky have impeded good sense. But alongside the process of this obsolete economics being weaned out of the system, the new problem is that of hard-driving entrepreneurs rigging the system to make rules that favour themselves.

Under the topic of `impartially enforcing rules’, the puzzle is: How do we get humble civil servants in enforcement agencies (CBI / Police / SEBI / RBI / TRAI) to go about doing their job? This task is under fire from three points of view. On one hand, humble civil servants are often outgunned by the sophistication of hard-driving entrepreneurs. When the civil servant is presented with a sufficiently complex scheme, he might just not have the energy to unravel it and pinpoint the skullduggery. It requires an exceptional capability in government, by Indian standards, to hammer down the details of the shennanigans that firms might undertake [example]. The second problem is that politically powerful people might try to block investigations. The third problem is simple outright corruption, where the humble civil servant is bribed to not do an investigation properly. In the real world, all three elements are at work.
The Indian development project critically requires institution-building in order to address this. High quality rule making procedures are required, so that the rule-making process cannot be rigged. The hardest job is that of creating an organisational culture for enforcement, so that agencies like SEBI can write the top quality orders of the kind which came out in recent years.
And then, we need the surrounding infrastructure of courts such as SAT and the Supreme Court. These are required to play two kinds of rules. First, when a government agency tramples upon an innocent, the courts have to protect the innocent. Second, when these agencies smell an agency that is about to fold and not actually go through with an investigation or the following court process, they have to be tough about it, as the Supreme Court has been doing in recent months.
To make a difference to corruption, we have to go after these questions. This requires a slow careful process on three fronts:
  1. Recruiting top quality individuals, who combine high competence with the highest ethical standards,
  2. Modifying rules and procedures so as to make them more robust to corruption, and
  3. Strengthening the courts.
There will be no quick results, but over time, this hard work will yield results.

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Luke Burgess: Gangbuster Gold Equities in the Yukon

By The Gold Report, on June 15th, 2011

Luke Burgess Wealth Daily Editor Luke Burgess loves the word “gangbuster.” It makes him laugh, and it signals great opportunities for investors to make money. In his first exclusive interview with The Gold Report, he shares this take on Yukon gold plays and diversification among small-cap equities, be they gold, silver or rare earth plays.


The Gold Report: Luke, unlike many newsletter writers who stick to a specific genre, you discuss equities involved in all kinds of mined commodities—gold, rare earth elements (REEs), uranium, iron, etc. Why are you so diversified?

Luke Burgess: Diversity is key in any kind of investing. I like the supply and demand dynamics of natural resources and commodities. If there’s a supply deficit, there must be rising prices. When we’re talking about gold and specific resources, I go back and forth about when to invest. Right now, we’re loading up on silver. When silver dropped from US$50/oz. to US$30/oz., I felt that that was an oversell. I wanted to get into something specific, so I went to primary silver stocks.

TGR: So, you play different movements in the market. What else helps you determine which equities to write about?

LB: Right now, I’m interested in Yukon gold exploration because of the discoveries made a few summers ago. The Yukon has a long history of mining, but only a fraction of it is really explored; in fact, less than 3% of all the mineral occurrences there have been tested with modern techniques.

TGR: What do you consider modern techniques?

LB: That would include geochemistry, soil sampling, geophysics—things of that nature. The Yukon is the world’s largest deposit for placer gold. In the last 100 years of mining the Yukon, 15–20 million ounces (Moz.) of gold has been mined from the streams of Yukon rivers. Generally, geologists believe the source of this placer gold is 10 times larger, which means there could be up to 200 Moz. of gold in the source.

TGR: That means upstream because placer gold is gold that’s in rivers and streams.

LB: Correct. The source of Yukon gold has never been found. But the discovery of Kinross Gold Corp.’s (TSX:K; NYSE:KGC) Golden Saddle deposit and Kaminak Gold Corp.’s (TSX.V:KAM) Coffee Gold Project in the past two summers suggests that they’re getting close to finding the source. These two discoveries launched a new Yukon gold rush. In an average year, maybe US$20–US$30 million is spent on gold exploration in the Yukon. This year, spending estimates are between US$330 and US$350 million. With this amount of money being invested, I believe they’re going to find something. I believe the market will see this as big news, will be excited and will invest in it. The excitement alone will drive investors and the retail market into Yukon gold stocks.

TGR: Is this a situation in which the rising tide floats all boats?

LB: Well, you can’t take just any Yukon gold stock and expect it to go up. You need to find out where the property is located, who’s running the company, if it’s had past successes, who brought the project to the company—things like that.

TGR: How is the Yukon gold rush different from those in Northern Ontario, Mexico or even Nevada?

LB: It’s different because of its massive potential. I don’t think there’s all that much potential in Red Lake, Ontario or Sonora, Mexico. I mean, if there really are 200 million ounces up there, I don’t know why we’re not spending $1 billion to find it.

TGR: In a recent edition of Underground Profits, you wrote that Yukon gold stocks are “going to go gangbusters this summer.” What are some of the small-cap names operating in the Yukon that you put in the gangbusters category?

LB: My favorite Yukon gold stock right now is Ethos Capital Corp. (TSX.V:ECC; OTCQX:ETHOF), which did a very good job last summer tying up claims that are located around the Coffee and Golden Saddle deposits. Ethos is now the third-largest Yukon gold-claim landholder. I like Ethos specifically because of the man who brought these projects to the company, Shawn Ryan—the geologist who helped with the initial discovery of both Golden Saddle and Coffee. Shawn knows the area, and he’s succeeded in bringing companies quality projects. With his blessing on these properties, I think Ethos has a really good shot at finding something really good.

TGR: The Betty and Bridget Properties are two of Ethos’ Yukon projects. The Betty claims are 40 km. west of Kaminak’s Coffee project. Do you know when the company’s going to start working on or drilling those claims?

LB: Drilling won’t happen for quite a while. Right now, Shawn and his team are doing soil sampling. Most companies take soil samples every 100 meters or so, but Shawn will take a soil sample every 15m. He does a lot more work to find the best places to drill. Shawn and his team are doing 33,000 soil samples on the Betty claim to define drill targets.

TGR: Ethos is exploring the Bridget Property and already has almost 1,500 soil samples. The company must be getting a good idea of where to focus its drilling campaign. What is it about this area that makes it such a good prospect for gold?

LB: A few weeks ago, I went up to Vancouver and a few of Ethos’ geologists showed me some pictures. Two of the pictures were of dacite-rock drill core that came from Kaminak’s Coffee project. The drill grades were really good. Then they showed me another photo of dacite rock on Ethos’ Bridget property; similar rocks, similar geologic setting. This gives us a hint that there’s good potential for Ethos to find gold on the Bridget Property.

TGR: Bridget also is located along the Tintina Gold Belt, which has a number of significant deposits, including the Donlin Creek Project, owned equally by Barrick Gold Corp. (TSX:ABX; NYSE:ABX) and NovaGold Resources Inc. (TSX:NG; NYSE.A:NG) and is across the border in Alaska. Are you familiar with Ethos’ management team?

LB: I am familiar with the management. I only do business with people I believe are on the level. I watch how they work and ask everybody I know about them. The Ethos management team has been successful in the past. CEO Gary Freeman had a company called Pediment Gold Corp., which was acquired by Argonaut Gold Inc. (TSX:AR). I was a Pediment investor, and I recommended it in my newsletter. I think we walked away with a 250% gain. Gary’s past success speaks for itself—he knows how to work with people, how to raise money and he’s been successful with geological teams. The geologist at Pediment, Mel Herdrick, did a fantastic job of putting the Pediment information together, compiling it and ramping-up the company’s resource to get it sold. I’m confident that Ethos’ new geologist, Peter Tallman, is just as capable.

TGR: Another interesting connection is that, when Gary was with Pediment Gold, the company had a gold/silver play in Mexico. Ethos also has gold and silver plays in Mexico. At one point, people might have thought of Ethos as a Mexico play. Now, more people likely consider it a Yukon play. Would you agree?

LB: When Ethos was an empty shell, it rolled the two northern Mexico properties into it. Those are actually silver-lead-zinc carbonate-replacement deposits or carbonate replacement targets, and they were the company’s only projects when it first started. So, when the initial investors came into ECC, it was a silver-lead-zinc exploration company.

I believe that the plan had always been to acquire a Yukon asset, because Ethos stressed its desire to diversify. It mentioned Shawn Ryan and the Yukon, so the company knew what it was doing. I think this is beneficial for shareholders because, in the Yukon, you can explore only during the summer months. With only three or four months of exploration, you get only three or four months of news. But Ethos can work and explore its Mexican projects in the winter, which gives it projects to work on year-round.

TGR: What are some other gangbuster small-cap names in the Yukon?

LB: I like Radius Gold Inc. (TSX.V:RDU) and Ryan Gold Corp. (TSX.V:RYG). I like Ryan Gold simply because of its name. I think Shawn Ryan will be one of these guys we hear a lot about, which will drive people to the stock.

TGR: Well, Ryan did receive the Prospectors & Developers Association of Canada’s 2011 Prospector of the Year (Bill Dennis) Award. He’s certainly gaining a lot of notice for the incredible work that he’s done discovering gold properties in the Yukon. Are Radius and Ryan at the same stage as Ethos?

LB: No, Radius is a little bit more advanced. It has some drilling. I’m not sure exactly what Ryan Gold is doing now, but I would say Ryan Gold is more of a grassroots play.

TGR: As I noted earlier, you don’t limit yourself to any one specific commodity—you write about whatever suits your fancy. In Wealth Daily, you wrote about Wealth Minerals Ltd. (TSX.V:WML; OTCQX: WMLLF) being beat up in the market because it was considered a uranium play, even though it has the largest rare earth project in South America. What’s going on there?

LB: I really like the story, even though the events surrounding it are unfortunate. After the earthquake and tsunami disaster at Japan’s Fukushima Dai-Ichi nuclear plant, uranium prices took a dive—and uranium equities got hurt even worse. The market perceives Wealth Minerals as a uranium miner because that’s the way the company started. It remained a uranium company for a very long time, but recently acquired the Rodeo de Los Molles REE-uranium deposit, which not many people know about.

When uranium prices fell, the market punished Wealth Minerals, even though the company is not exploring for uranium as much as it is for rare earths. REE stocks have gone higher and higher, yet WML remains in the gutter due to market perception.

TGR: So, as Wealth Minerals begins to rebrand itself as a rare earth play, it could start to see some of the same appreciation a number of the REE equities have experienced over the last two or three years.

LB: That’s exactly what it’s trying to do right now. The company is about to drill the Rodeo de Los Molles Project in Argentina, if it hasn’t started already. The last time I talked with the guys there, they planned 30 holes of 2,000m each. As you said, this will rebrand the company for the better. I believe the retail market will realize that Wealth Minerals is not a uranium play anymore—it’s a rare earth play.

TGR: Wealth Minerals is one of the Cardero Group of Companies, based in Vancouver. With the resources at their disposal, it shouldn’t take them long to rebrand the company.

LB: No, it won’t. CEO and President Henk Van Alphen is a very sharp guy. I like him a lot. In addition, the project already has a historic resource of, I believe, 5 million tons (Mt.) at 2% rare earth oxide (REO). But the historic resource isn’t NI 43-101-compliant. Wealth Minerals needs to go in and bring it up to NI 43-101 compliance to find out what it really has.

TGR: Van Alphen is the former president of Pacific Rim Mining Corp. (TSX:PMU; NYSE.A:PMU)—another guy with a lot of experience.

LB: Yes. Like I said, I want to invest with management that has had past successes. They always have good friends in the market, friends that are willing to give them money for bridge financing.

TGR: What’s the next step at Rodeo de Los Molles?

LB: For Wealth Minerals, I think the next step is to find out what resources it has from the drill results. That’s going to drive the company’s next step. It’s a waiting game right now.

TGR: Any other small-cap names you’d like to mention today?

LB: Earlier this month, I recommended what was, until recently, a silver exploration company, and now it has a gold deposit. The company is Orex Minerals Inc. (TSX.V:REX), and it’s a story similar to Wealth Minerals and Ethos in that it has successful management. Gary Cope is the CEO of both Orex and Orko Silver Corp. (TSX.V:OK), which also share Chief Geologist Ben Whiting as the geologic leader.

In 2004, Orko Silver acquired its La Preciosa project, which has inferred silver resources of 3 Moz. Over the next several years, the company used its technical expertise to ramp-up the deposit to close to 150 Moz. In the meantime, it tied up some land just to the northwest of the Preciosa project and put it into a company called Orex. The property sat there for quite a while doing nothing. Orko’s getting started now because, in 2009, it penned a deal with Pan American Silver Corp. (TSX:PAA; NASDAQ:PAAS) to do a joint venture (JV) on the La Preciosa project. Now that the project is on cruise control, management can focus more on Orex and develop its projects down there.

In a 2010 interview, Gary Cope told Al Korelin that the company had six JV offers on the table without drilling a single hole. A few months later, it came out that Fresnillo wanted to be a partner. It has a non-binding letter of intent to do the JV, which gives it a huge partner in Mexico. I like this project because of its proximity to La Preciosa in what it calls the “Mexican Silver Trend.” It is continuous to Orex’s Coneto gold-silver exploration project. I see this as a clear sign that we need to play our hand in it.

Orex has a similar property to the northwest, and it recently acquired a 1 Moz. deposit, 300,000 of which is indicated and the rest is inferred. This is a $0.82 stock with 30 million shares. That makes it a $27M company with a 1 Moz. of gold resource in its pocket. Then there is this incredible potential in Mexico, where the company has targeted a +1 Moz. resource; and it also has one of the world’s biggest silver mining companies as a partner. At $0.82 for a $27M company, I don’t think we can go wrong.

TGR: Before we let you go, on the broad-stroke level, do you expect good buying opportunities over the summer months?

LB: The expected summer low for juniors tends to become a self-fulfilling prophecy. Sell in May and go away happens every year; but this year, I think that there will be a low. But there are particular markets—specifically, the Yukon gold stocks—that won’t experience that low. And, if we see silver spike up to $50/oz., we’ll see silver equities go up along with it.

TGR: So, the summer low may depend on specific plays and commodities. Luke, thank you for your time and insights.

Luke Burgess is one of a new generation of investors who has come to understand the intrinsic fundamental value of natural resources as commodities. Luke serves as investment director to two high-end investment advisory services, Underground Profits and Hard Money Millionaire. He is a weekly contributor to Wealth Daily, Energy & Capital and Wealth Wire and has been published on investment sites like Kitco, Stockhouse, Seeking Alpha and GoldSeek. Luke’s been a featured guest on countless radio programs, including Trader’s Nation, the Bill Meyer Show, Sound Investing Radio, the Brent Clanton Show, Stock Doctor, the Economic Contrarian, On the Money, the Andre Eggelation Show, KXYZ Biz Radio and Investments Advisor Review.



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On Free Trade

By Simon Grey, on June 15th, 2011
Vox has recently leveled his formidable intellectual barrels at free trade (see here, here, and here). The conclusion that he has reached has been that free trade has had negative effects on the American economy for the past several years, and that the Ricardian theory upon which the defense of free trade rests is largely bunk. He is correct in both these assessments. However, there are a few things that need to be clarified.


First, the macroeconomic approach to free trade is different from the microeconomic approach. Vox’s argument rests on determining the ratio of imports to exports, which is the mainstream view. The microeconomic approach is to simply acknowledge that there is an exchange takes place, usually of currency for a good or service. The exchange is considered to be equivalent, in that the two parties consider that which is traded to be of at least equal value to what is being received in exchange. Thus, trade is always in a state of balance. It should be noted that the microeconomic view of trade balance is a tautology.


In the second case, Vox’s argument is based on macroeconomic reality, not microeconomic theory. The reality of American trade is that we are running what is defined to be a trade deficit, due in no small part to being willing to import cheap goods into the country. This has, in turn, shifted manufacturing jobs overseas. This is a matter of fact. Furthermore, Vox would be correct in recommending a tariff or a quota system as a way to remedy the trade deficit.


Third, it should be noted that it is economically foolish to pursue international free trade while maintaining a high degree of domestic market interventionism. If the government is going to mandate, say, a minimum wage for all workers, then domestic workers are legally prohibited from competing with foreign labor on price, to a limited extent. Having partial market freedom is just as distortive as complete market intervention. As such, it is entirely reasonable to hold all producers to the same production standards, whether said producers happen to be foreign or domestic. Karl Denninger, for one, has recommended wage and environmental parity tariffs, which are the entirely logical response to domestic market interventionism. Quite simply, it is utterly asinine to support free international trade without also supporting free domestic trade. And it is even more foolish to show stronger support for foreign trade than domestic trade, especially if the one showing support is the government.


Fourth, it should be noted that “free trade” is a bit of a misnomer. “Foreign trade” would be a more accurate description, for most of what passes for free trade today is actually governmental interference. One of the most famous examples of “free trade” of the last two decades, the North American Free Trade Agreement, begs the question: if this is really free trade, why are the governments in three different countries involved? Tautologically, free trade needs no governmental interference, regulation, or oversight. In fact, it only requires that the government get out of the way. Getting out of the way does not require prolonged discussion with foreign governments.


Professor Hale objected to Vox’s claims, saying essentially that people should be free to trade with whomever they want. I agree with this assertion as well. However, there are a few things that need pointed out here as well.


First, using microeconomic theory to argue macroeconomic policy can be troublesome, especially if one does not account for the relevant alternative variables. I cannot tell if this is the case with Professor Hale, mostly because I have only been reading his blog for a rather short amount of time. I assume that he supports a free domestic market as well. I will simply say, then, that if one is going to support free foreign trade than one must first support free domestic trade.


It should also be noted that most online arguments do not easily lend themselves to hyper-qualified, highly nuanced arguments. Trying to explain how one’s foreign trade prescriptions are identical to one’s domestic trade prescriptions takes time, and doesn’t always strike directly to the heart of the matter. In Professor Hale’s case, it appears that he supports market freedom both internationally and domestic. Unfortunately, given the nature of online debate, his defense of freedom comes across as supporting international trade.


At any rate, these are my thoughts, thus far, on international trade. I’ve addressed this subject before, but since the debate seems to be breaking out again, I decided to revisit it. One other thing that I think is worth mentioning is that ideals should be given their proper place. In this case, freedom and prosperity are the ideals. These ideals should neither be ignored nor used as a substitute for reality. Instead, they should be principles by which one makes policies in light of the current reality.


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Interesting Readings for June 15, 2011

By B.P.T., on June 15th, 2011

The Mortgage Bankers’ Association purchase index was released at 7:00 AM EDT, and there was a week to week increase of 4.5% in the Purchase Index and a week to week increase of 16.5% in the Refinance Index.

At 8:30 AM EDT, the Consumer Price Index report for May will be released.  The consensus is that CPI did not change last month, and there was a 0.2% increase in CPI when food and energy are removed.

At 8:30 AM EDT, the Empire State manufacturing index for June will be released.  The consensus is that the index value will be 14.0 which would be 2.12 points higher than the value reported in May.

At 9:00 AM EDT, the Treasury International Capital report for April will be released, showing the flow of capital in and out of the United States economy.

At 9:15 AM EDT, the Industrial Production report for May will be released.  The consensus is that there will be an increase 0f 0.2% in production and an increase of 0.1% in industrial capacity utilization.

At 10:00 AM EDT, the Housing Market Index for June will be announced.  This index is created from a survey of home builders, so it shows the confidence that the sector has in the overall economy and their business.

At 10:30 AM EDT, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update on oil inventories in the United States.



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