By Bron Suchecki, on August 24th, 2011
Nigel Moffatt, Treasurer of the Perth Mint, breaks from his leash with some really bullish statements in an interview with The Australian newspaper:
He said he could see no end to the gold boom.
“If you’re in the US or Europe, what on earth are you going to put your money into?” he said. “You wouldn’t touch the equity market at this stage. Interest rates are low, and frankly precious metals are a hell of a good way to go. I can’t see anything around to stop it. Bit it won’t go northwards in a straight line because people will always be taking profits.”
By The Gold Report, on August 24th, 2011
 Thomson Reuters’ Commodity and Energy Specialist Christopher Henwood believes bailouts of too-big-to-fail companies and countries addicted to entitlements have cast an ominous shadow over the global economy. Nevertheless, he finds room for optimism as global economic turmoil puts downward pressure on energy prices, which should give the economy some breathing room. In this exclusive interview with The Energy Report, Chris shares a bit of his market knowledge and economic philosophy.
The Energy Report: Chris, would you give me a brief roundup of what you perceive to be the issues surrounding the brutal market turmoil of the last week of July and into August?
Christopher Henwood: What we’re seeing is a cascading of events. If we go back even a little bit further into earlier July, it seemed like the market was at least temporarily hopeful during that time. But once it became clear that politics were going to trump and the economic well-being of the country was going to take a backseat, that really put the markets on their heels. We see the consequence of the debt ceiling debate and the lack of clear direction that came out of that. I’m a market-based guy, and I’ve lived my entire career in the markets. I think that there’s probably no better indicator of what the real result of any sort of policy or political wrangling is than how the markets interpret them. Now, they’re not always 100% right, but more often than not people who are very smart in general move their money accordingly. This is, I think, no exception to that.
TER: What about the S&P downgrade on August 5?
CH: The S&P downgrade is just the latest cascading element to this kind of waterfall of negative economic news we’re looking at. So, what we’re seeing is that the market is coming to the realization that the economic outlook here in the United States and globally is still pretty grim and that the oil markets in particular are taking a beating due, in large part, to their increased sensitivity to macroeconomic factors that are increasingly playing a dominant role in that marketplace.
Conversely, gold is an asset that’s soaring as traders and investors are flocking to what is a solid asset. I won’t say gold is a safe haven. I’ll say it’s a solid asset and one that is being looked to increasingly as a counterweight to economic risk. So, I think we’re seeing the markets play out the skepticism of what we have going on policy-wise and politically.
TER: We’ve seen Brent and West Texas Intermediate (WTI) crude prices weaken through this turmoil. I’m wondering if this disproves what some people have been saying that energy is something of a currency like gold has been.
CH: It is being treated by some as a currency. You have a lot more players outside of the pure oil industry who are influencing the price of oil and playing it as an economic barometer. I think that’s why you’re seeing oil taking such a beating. If that’s how you’re going to trade crude, whether it’s WTI or Brent, it really makes no difference, you’re taking a huge risk because crude is not a currency like gold. Crude is consumable. Does it have value? Yes. But, if you start to cross that line and move into currency-type status for WTI or Brent, I think you’re running huge risks and it’s entirely inappropriate.
TER: Do higher energy prices mean a stronger economy?
CH: I actually think it’s the converse. I think that the high energy prices we have seen have been largely event-driven moves. The Arab Spring has been a huge driver of increasing energy prices where the market had to price-in the uncertainty and the fear factor that the supply side of the equation was going to become disrupted over time, or even in the short-run. Now we’ve seen Libyan oil taken off the market, but we’ve also seen Saudi Arabia step in and fill that void to a large degree.
What I think has been driving oil prices to their current highs is on the supply-side of the equation. We saw this in the big run-up in 2007–2008. As a trader I fought that and went short crude on a number of occasions because I just didn’t see the justification from a fundamental perspective for the price of oil during that period. What was always being cited in the marketplace was this increased demand coming out of China and India that was going to drive crude oil prices over $200/barrel (bbl.) in the very near-term. Three months later we were trading down in the $30s. If the demand-side of the equation is driving that, how could that possibly change in just three months?
Steadily rising energy prices being reflected in increased demand in good economic times is a better characteristic of a healthy economy.
TER: What does this recent downturn mean to energy investors?
CH: Well, I think the term investor is broadly overused. I think it’s important to distinguish between the energy investor and the energy trader. I think they’re two distinct people. I never consider myself an investor. I always consider myself a trader. I think traders and investors operate under completely different risk parameters and completely different mindsets. So, toward your point for investors, I think obviously as price goes down, margins decrease and profits decrease for the energy companies. But as a trader, downside offers sometimes the greater opportunity because of that mindset to the successful bear trader in a falling market. So, I think the investor will probably take some lumps. But savvy traders will benefit as a result.
TER: As a trader you think in terms of over-bought and over-sold probably.
CH: Sometimes, yes.
TER: What about a term that traders probably don’t use, value. Do you see value in certain areas of the energies today?
CH: Sure. I was primarily a spread trader when I traded. So, you do see value. I’m not an equities specialist, and I don’t really follow energy equities as part of my role, but I actually did a show at the end of January on energy master limited partnerships (MLPs) for a lot of midstream assets. I think that sector probably has a lot of opportunity as infrastructure is continually and acceleratingly being built out because of the increased shale plays we’re seeing in various parts of the country such as the Marcellus, the Bakken in North Dakota, the Eagle Ford in Texas. All these new shale finds and these new increased natural gas finds are requiring increased infrastructure to deliver and to store it and to figure out how to best capture and transport all this new discovery. With that comes new infrastructure that needs to be built. So, the MLPs probably provide a nice value at this point and one that will continue to grow.
TER: What would a good trade be today in terms of shorter term and longer term?
CH: Shorter term, I think gasoline prices have found some support right here on this $2.77-$2.75/gallon level. A break below the 200-day moving average in gasoline would be a nice short-term play. Conversely, if it can struggle back above the $2.85 area, that would be a great short-term buy. So, in either direction there’s good opportunity. Looking at it economically, I’m more biased to the downside. I think gasoline prices will resist for a little bit longer but eventually they’ll fall under the weight of the underlying crude.
On a longer-term basis, I have to go back to what I’ve been talking for the past year and a half, gold. It’s something that, as I mentioned earlier, is being used as a counterweight to manage virtually any manner of financial risk right now in the marketplace, whether it be currency risk, inflation risk, deflation risk or sovereign debt risk. If I have risk exposure to grains in Russia, I’m going to buy gold against that currency risk and against everything else. Mexico has bought a ton of gold. South Korea and Thailand just added a significant amount of gold to their reserves as a hedge against what is perceived as global risk. I would wait until it dropped down to like the $1,650/ounce (oz.) area again. I think the next range you’re going to see in gold is $1,725–$1,800/oz. before it makes the next big move up. It’ll be driven by some sort of economic problem more likely coming out of the EU than anything else. We have Italy and Spain now moving to the fore because of their risk profiles and their being on the verge of bankruptcy, and that’s going to drive people to buy more gold to hedge against it.
So, longer term I think gold is where you have to go. Shorter term, as an energy play, I like gasoline on the short side.
TER: You’ve managed a natural gas floor-trading operation in the past. Are you bullish on gas?
CH: I managed an operation for Goldman Sachs up until 1998. In 1998, I opened my own operation and I traded for myself from 1998 until mid-2009. I was on the floor the day natural gas trading opened for the first time in 1991. It was a real watershed moment on the floor in the energy business and for natural gas.
Right now we’re seeing natural gas in a very stable supply environment. With the development and proliferation of shale gas, the natural gas supply curve has been redefined all the way out. And every time the market starts to rally, we’ve seen producers selling into that rally in order to hedge that production. I think they’re becoming a little bit aggressive in terms of hedging their production given the flat projections for natural gas prices. But one thing I’ve learned as a trader is that as soon as everyone thinks something’s going one way, you can almost invariably bet your bottom dollar that something’s going to crop up that’s going to change the equation and redefine how that market is viewed across the board. Conventional wisdom quickly becomes a trap in this environment. So, I think longer term there’s tremendous upside here. I think what we’re seeing here now with prices at sub-$4/thousand cubic feet (Mcf) is probably a very good opportunity for some upward movement. I could easily see natural gas prices in the next several months run back up to almost $4.50/Mcf, maybe even $4.60/Mcf.
TER: Natural gas is half as polluting and one-fourth the cost of gasoline. What would it take to bring natural gas online for vehicles?
CH: I would welcome it. I think the first step would need to be a demonstrable demand. I’m not a fan of governments decreeing and mandating virtually anything. So, private industry would need to determine that there’s a real market and a real hunger for natural gas for vehicles among the population. We’ve already seen a number of fleets convert, which is great, and it’s easy to do where you have a fleet that returns to a specific base or operates within a certain range. You can build the infrastructure to fuel those vehicles, and that’s been very successful. I think the air quality in some of the major cities has improved as a result of the aggressive adoption of natural gas. I think it would be a great boom for natural gas domestically. It would be another supply piece and a great environmental benefit.
TER: Where are you seeing innovations in the energy industries?
CH: The greatest area of innovation the last three years has been in the development and the ongoing evolution in fracking technology. It has made huge strides. There were original forecasts that fracking of shale would only be economical if we were looking at $6/Mcf natural gas, and before that it was $8–$10/Mcf. That number has now come down and it’s been demonstrated that at $4/Mcf natural gas these fracking operations can still make money. And we’re seeing it now being exported to other countries around the world. Poland, for example, has identified a huge amount of shale resources. It has actually brought over some major U.S. companies to help them retrieve it. As that technology is brought to new areas, adapted and developed, it’s going to evolve. It’s the same thing in South America, where a number of countries are developing these programs.
Now the next level of innovation is going to have to be in the safety aspect for these drillings. The last thing this industry needs is a BP plc (NYSE:BP)-like disaster in the space that will really have much farther reaching consequences than the immediate damage to whatever water source that they’ve unfortunately harmed. So, the safety aspect—the drillings, the casings, what is in the fluid—all these things are getting much greater scrutiny. You’re going to see a lot of that applied in crude because nobody wants to see another disaster in any waters anywhere in the world. I believe in private industry’s ability to develop, to innovate and to be creative, which is what has defined energy in our country. And I think that’s going to continue.
TER: Efficiencies in fracking and safety must certainly translate into a play on services.
CH: Absolutely. Services are definitely going to be key, and they’re probably going to play a more important role as we go on. A lot of people weren’t even aware of the service aspect until the BP disaster when a number of the companies were involved in the process. It became the focal point in the discussion. And, I think that the services are definitely going to play an increasingly important role.
TER: When we first began our conversation today you told me you were pessimistic—”grim” was the word. Where is your pessimism, and is there any room for optimism here?
CH: My pessimism is mostly policy driven right now. The policy coming out of the United States and the handling of the European debt crisis highlight how money is being put into losing propositions. Cost cutting seems to be almost toxic to some of these countries that have enjoyed large entitlement programs and have an entitlement culture. I think that’s what we’re getting to in this country. So, my pessimism is driven by the fact that it seems that there are very few people willing to make very hard decisions economically in this country and across the globe.
As a self-supporting trader for many years, if you make a bad trade, you feel the pain. You’ve lost money, and you learn accordingly. What we’re seeing is companies that are too big to fail and banks that have taken outsized risks that are not feeling the pain. When they get into trouble, they get bailed out. And when countries get in trouble, they get bailed out. They’re not expected to curtail their activities to any extent, but they get bailed out. That’s what’s fueling my pessimism on the global macroeconomic scale and where I see it hurting energy prices.
Now I think there’s always cause for optimism. There are always people fighting for and injecting common sense economics into policy and into politics. I’m always hopeful that things will turn around and change. I’m always hopeful that there can be a new viewpoint, but I’m skeptical. So, again, politics and policy have made me skeptical and pessimistic but private industry and innovation give me optimism.
TER: Do you believe markets will correct these global policy errors?
CH: I believe they should. Unfortunately, what I think sometimes happens is that government and government agencies try to rein in the markets to correct a situation of their own causing. I think that’s an inherently flawed approach.
TER: We’re seeing lower energy prices as a result of the selloff in July and August. Is this going to be good for the economy?
CH: In the short to medium term they’re definitely going to be good—a net positive for the economy. You don’t ever want to see any price get depressed and then stay depressed for a long period of time because that’s indicative of some major economic problems. But if oil prices can establish a range, such as between $75/bbl. and $80/bbl., I think you’ll see a significant amount of relief in gasoline and fertilizer prices and petrochemicals and a lot of the consumer products in the value chain, including grains, milk, meat, cheese and bread. That would be a welcome relief.
TER: Thank you, Chris. I’ve enjoyed this very much.
CH: Thank you.
After coming within 43 votes of winning the Republican nomination for his local township committee, Commodity and Energy Specialist Christopher Henwood is evaluating his campaign to discover what worked and what didn’t work in much the same way as he might assess a move in energy prices in his day job at Thomson Reuters. Each day Chris’ work pits him squarely against the nuance and volatility of markets as he evaluates energy markets from both a technical and fundamental perspective. Chris has a law degree from Rutgers University School of Law–Newark in 2010, and was admitted to the New York State Bar in January 2011. He earned his undergraduate degree at Dickinson College.
By B.P.T., on August 24th, 2011
The Mortgage Bankers’ Association purchase index will be released at 7:00 AM EDT, providing an update on the quantity of new mortgages and refinancings closed in the last week.
At 8:30 AM EDT, the Durable Goods Orders report for July will be released. The consensus is that there was an increase of 2.0% from June, and an increase of 0.1% from last July.
At 10:00 AM EDT, the FHFA House Price Index for June will be released, providing more information about the direction of the housing market.
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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By The Gold Report, on August 23rd, 2011
 It’s a good time to stock up on gold stocks, according to Charles Oliver, senior portfolio manager with Sprott Asset Management, who sees a number of the equities trading at their lowest prices of the decade. As he tells readers in this exclusive Gold Report interview, “Gold has gone up 20%. The stocks have gone down. They are very cheap. These companies are increasing their earnings, they’re increasing their cash flow, they’re increasing their dividends—what a great opportunity.”
The Gold Report: We recently witnessed violent market swings in the wake of U.S. officials reaching an 11th-hour agreement to raise the debt ceiling, the downgrading of the U.S. debt and a little positive news on the unemployment front. In fact, for the first time ever, the Dow recorded four straight days of ups and downs exceeding 400 points. What kinds of moves are you making in your funds during this upheaval, and what philosophies or strategies are governing your decisions?
Charles Oliver: I’m generally continuing to follow a long-term strategy. I believe we’re in a bull market in gold, so basically I’m pretty much staying long for the course in the Sprott Gold & Precious Minerals Fund. I’m trying to upgrade and improve the portfolio on a continuing basis. One of my themes for the last six to nine months has been increasing my large-cap component due to concerns about the overall economy and fear about pullbacks such as those we’ve been seeing, and improving liquidity prior to this occurring.
Today, I’m looking at all the names in the portfolio. Some of those I absolutely love have come under great pressure, presenting an excellent opportunity to add to these positions. I’ll probably take some profits also, or reduce the size of some of our other positions. It’s an ongoing process that occurs every day, whether it’s an up market or a down market.
TGR: What are some of the extraordinary values you’d like to take advantage of today?
CO: I’m a little reticent to mention names, but on a daily basis, I sort my portfolio by the best and the worst performers. The best, unfortunately, may get trimmed unless their performance can be justified relative to other stocks. On the worst performers, I look for stocks that have underperformed probably because somebody has been selling them or they have come under pressure for some reason, but their fundamentals are just as good as when they were significantly higher.
One example I can talk about because I’ve already done some transactions is Bear Creek Mining Corp. (TSX.V:BCM). Bear Creek was unduly hurt after the Peruvian election and it got cut in half, in fact, worse than half. My valuation work just said that this was an overreaction to the events in Peru.
TGR: Mutual funds have been hit pretty hard, equities pummeled and many commodities hammered too, albeit neither gold nor silver so far. Considering the status of these precious metals, should selling your fund to institutional investors be easier through the remainder of 2011 and into 2012? Or does the growing lack of faith in markets and mutual funds, in particular, make the pitch ever more difficult?
CO: The way you framed it almost answers those questions. The volatility in the marketplace absolutely does make people fearful of being fully invested, which certainly has a negative impact on any sales even if it’s an outperforming asset class such as gold.
I think the market is slowly growing to recognize that gold is an asset class that can’t be ignored forever and, for most of this decade, I’d say the populace has ignored it. For example, about a decade ago, gold represented about 2.5% of the S&P/TSX index. A lot of portfolio managers said, “Oh, I don’t have to bother with gold because it’s not going to make or break my performance.”
Today, gold and platinum constitute about 14% of the overall index and one of its best-performing sectors. So I think institutional investors are becoming very aware that gold can have a significant impact on their performance. Often, these institutional groups have an indexing bias, so by that nature these people are forced to look at investments in the gold market.
TGR: One might not think so looking at it over a 10-year stretch, but the haven motive certainly unleashed the flood of money into gold over the first couple of weeks in August. Will that sort of defensive posture continue to drive gold? And what other defensive positions do you expect people to stake out in this kind of climate?
CO: I think people are looking to gold for its defensive qualities, especially in a weak market. One of the themes that has occurred this year is a massive outperformance of gold bullion relative to gold stocks. In fact, if you look at the bullion, I think year-to-date (YTD) it is up more than 20%, whereas the index is down about 10%. Actually, that answers your question about how investors will look at gold and gold stocks. For the last YTD, a lot of money has been going into bullion without significant inflows into the gold stocks themselves. When you look at the valuations, you will see that these companies are trading at historic lows of the decade in many cases.
TGR: Will investing in bullion be something your fund may undertake?
CO: Yes. Back in 2008, in the peak of the crisis, we had about 20% of the fund in bullion. That was a time when stocks started to trade below their cash holdings. I took the weighting of gold down to the 3–5% level in a very short period because of the great values. I haven’t actually changed the bullion weighting since around March 2009.
TGR: Are you likely to add to your bullion position now?
CO: At this point, I see so much value in the stocks. It hasn’t happened yet, but one day the market will wake up and say, “Wow, gold has gone up 20%. The stocks have gone down. They are very cheap. These companies are increasing their earnings, they’re increasing their cash flow, they’re increasing their dividends–what a great opportunity.”
TGR: A terrific example of that is the large position your Sprott Gold & Precious Minerals Fund Series A has in Barrick Gold Corp. (TSX:ABX; NYSE:ABX). Barrick doesn’t seem to ever move much either way. Is this a long-term position because of the breakout that you envision?
CO: To qualify my ownership of Barrick. I didn’t own it for most of the last decade, and only bought it when it finally got rid of its hedge book in October 2009. But I look at this as a long-term position that I believe is going to materially outperform. Barrick’s stock is priced roughly the same as it was in 2007. Since 2007, its earnings have roughly tripled, its dividend has gone up several times and it is trading at about a nine times profit to earnings ratio. One analyst was just talking about its stock price trading at about six times cash flow. Barrick’s stocks are as cheap as chips.
TGR: Is the market still punishing Barrick for all those years of hedging?
CO: Absolutely. I believe that ultimately Barrick will move back in line with the other senior producers. It’s been a very slow process, and the market was not happy to see Barrick buy Equinox Minerals Ltd. (TSX:EQN; ASX:EQN), a copper company. The market spoke loudly, and the stock price came under great pressure. But I look at the price and the valuations, and I just think, “What a great opportunity to buy the stock right now today.”
TGR: Barrick just took a big position in a Romanian project, too.
CO: Now, Romania has been a very challenging place to operate. Gabriel Resources Ltd. (TSX:GBU) has been trying to permit and build its mine for most of the last decade. I’m keeping an eye on Certej, a European Goldfields Ltd. (TSX:EGU, AIM:EGU) development project in Romania. The company seems very optimistic that it will be permitted this year.
TGR: Now that gold has hit $1,800 per ounce (oz.), do you anticipate some producers thinking it’s time to lock in and set off another round of hedging, which basically boils down to selling gold in advance at a fixed price?
CO: It’s possible, but I don’t really expect it. I just know investors often punish companies when they hedge. Any big gold company that hedges just for the sake of hedging, as opposed to hedging to secure project financing, will be punished. Over the last decade, a lot of companies that have hedged have performed poorly.
However, the market is very accepting of hedging of any base metals that may be associated with the gold production. Barrick has hedged some of its copper in the past. Yamana Gold Inc. (TSX:YRI; NYSE:AUY; LSE:YAU) has hedged some of its copper in the past, too, although I believe they’ve taken that hedge off. Hecla Mining Co. (NYSE:HL), a silver producer, hedges a portion of its base metals just to help lock in its costs. But, generally speaking, I’m not expecting to see hedging become prominent in the near future.
TGR: That’s good to know. With gold and silver at or near historic nominal highs, the margins of producing gold and silver companies have rarely been so plush. What are some mid-cap names that will soon fatten their bottom lines with the boost in gold and silver prices?
CO: Gee, we can have lots of fun with that. A lot of the growing mid caps are development stories and margins can be awfully thin with low gold prices. Some of the companies in my portfolio that historically have had thin margins are companies such as Osisko Mining Corp. (TSX:OSK) and Jaguar Mining Inc. (TSX:JAG, NYSE:JAG). With these higher gold prices, these companies will start showing better profitability. When they are not making much money, all of that rising gold price can be gravy, which can greatly improve earnings.
TGR: At the same time, costs have gone up, too–increases in labor, oil and other things–but gold and silver prices seem to be appreciating a lot faster.
CO: Yes. In terms of input costs, energy is always a material portion for any mining company, but as you suggested, the gold price has outpaced those costs fairly significantly. If you go back a decade, the gold price bottomed out around $250/oz. and cash costs were somewhere around $200/oz. The gold price is up about sevenfold, at around the $1,800 mark today. The cash costs are up to around $500–$600/oz. So they’ve tripled against gold’s sevenfold increase. And again, that’s very good for the earnings and cash flow of the gold industry as a whole.
TGR: When we talked with you in March, you expected a larger company to take out Guyana Goldfields Inc. (TSX:GUY) at some point, given its measured and indicated resource of about $5.3 Moz. at the Aurora Gold Project in Guyana. Are you hearing anything about representatives of major companies visiting?
CO: I believe companies probably have been visiting Guyana on an ongoing basis, but I’m not privy to any specific information of that nature. In terms of the potential for a takeout, a lot of signs suggest that Guyana Goldfields is still a very attractive target, and the company has moved some of its assets into new shells, because I believe it’s trying to retain some residual assets when the takeout occurs.
TGR: What else does it have to do to derisk the Aurora Gold Project?
CO: It has a new resource update. I think it’s up to around 7 Moz., and hoping to get up to 10 Moz. It’s pretty hard for the majors to ignore a company once it hits that 10 Moz. spot. And it’s going to be coming out with a feasibility study by year-end, which will really start to put some numbers into it.
I should also add that I think Guyana Gold’s reasonably modest capital expenditure (capex) will be quite attractive in comparison to some of these giant capexes we’ve seen recently. A recent trend is higher capital costs on projects. Barrick’s Pascua Lama Project just came out with a revised capex, up from about $3.5B to $5B. Guyana Goldfields’ capex of around $500M or less can be a much more palatable play for a gold company when making its decision.
TGR: Guyana’s geology is reasonably well known because of what’s happening at IAMGOLD Corporation’s (TSX:IMG; NYSE:IAG) Gross Rosebel gold mine that is not too far away. What about the jurisdiction though? How would you handicap the risk there?
CO: I think people have forgotten that gold is a very significant asset in Guyana, which actually had a very significant gold mine, called Omai, back in the 1980s and 1990s. It went through one of the worst periods of the gold price. But Guyana is a place where you can permit and build mines, so I’m actually very comfortable with it.
TGR: What is happening with Sandspring Resources Ltd. (TSX.V:SSP) as a result of what’s going on in Guyana?
CO: Yes, and I’m a shareholder of Sandspring as well. It has about 6 Moz. in a resource and did a preliminary economic assessment (PEA) this past May with a potential 5.4 Moz. resource, so it’s starting to get fairly big and fairly significant. Sandspring’s market cap is a fraction of the value of most gold companies of its size. If someone comes in and takes out Guyana Gold, which I do believe will happen, Sandspring probably will get a bump in its valuation and lift in its share price, as will most gold companies operating in Guyana.
TGR: You mentioned higher capital costs on projects as the recent trend. How do you expect that to affect merger and acquisition activity?
CO: We haven’t seen much M&A in the first six months this year, but it could pick up with these rising costs.
TGR: NovaGold Resources Inc. (TSX:NG; NYSE.A:NG) has two big projects that require massive capital costs. What do you foresee happening there?
CO: It could be a slower process than some expect, but I believe next year NovaGold will come out with a feasibility on a natural gas pipeline, which should be a positive for the stock and may be a potential catalyst. Still, some companies—again using Barrick as a good example—will be wary and may look for lower-cost operations.
TGR: Could you envision anyone other than Barrick buying NovaGold’s interest in Donlin Creek in Alaska?
CO: I don’t think Goldcorp Inc. (TSX:G; NYSE:GG) or Newmont Mining Corp. (NYSE:NEM) want to play second fiddle to Barrick in that situation.
TGR: NovaGold’s been playing up the copper and silver byproduct credits in its resource. Certainly Barrick had rosier second-quarter earnings this year due to copper credits at a number of its operations. When they look at possible acquisitions, are companies saying, “This isn’t just about the gold. The copper here is worth X, too?” Is that becoming more and more of a factor?
CO: Yes. I think it definitely is. Goldcorp and Yamana, for instance, have significant earnings and cash flow coming from copper, silver and other byproducts so there’s certainly recognized value for these other metals within a deposit when looking at the equation.
Probably one of the best ways to exemplify this was the increased and renewed interest in some of the giant copper-gold porphyrys, which we saw displayed in the battle that Goldcorp and Barrick made when buying Cerro Moro from Xstrata PLC (LSE:XTA). New Gold Inc. (TSX:NGD; NYSE.A:NGD) is a joint venture partner in that. New Gold had a right of first refusal on the Xstrata block, and when Xstrata offered to sell its portion to Barrick, New Gold came in and exercised its right of first refusal at the last minute and then sold that piece to Goldcorp. It is actually still going through the legal system.
TGR: Another company you talked about in March was working to bring the Nixon Fork Gold Mine back into production in Alaska’s Tintina Gold Belt. What’s the story there?
CO: I must say I scratch my head on this company, Fire River Gold Corp. (TSX.V:FAU; OTCQX:FVGCF), because this small-cap miner is a screaming buy from everything I can see, and I sometimes wonder if I’m missing something. It just started production. Potentially next year it could produce up to 50,000 oz. of gold and at current gold prices, it could cash flow the market share, in one year. I think it’s one of those names that is just flying under the radar. At some point investors will wake up and say, “Wow, what a great price and opportunity.” I do expect a revaluation of this company as it goes into production and starts producing cash flow.
TGR: As I understand it, Fire River plans to be cash-flow positive in the fourth quarter, and it’s currently trading below $0.40 per share. The timing couldn’t be much better.
Before we let you go, Charles, how long do you expect this incredible market volatility that we’re experiencing to last? What sage advice can you give readers looking to invest in this environment?
CO: If you look at the macro-picture, I continue to believe the next decade will be a period of deleveraging, which will mean bear market pullbacks will cause some pain periodically. I also believe the market is going to be weak going into the fall, with a risk of a pullback of 20% or more from current levels. The Federal Reserve may come out and announce Quantitative Easing 3 (QE3) this fall in order to curtail weakness in the market. Much like QE1 and QE2 did in the past, it will create lots of easy money, probably help support the stock market and get it back on track.
TGR: Are you expecting lows below those of 2008–2009?
CO: I am not expecting the same type of pullback as we saw in 2008. The main reason I say that is because I believe the Fed is very fearful of having a repeat of 2008. It will do anything to prevent that from happening, so it will embark upon another money-printing episode.
TGR: That would bode well for gold.
CO: It would be very good for the gold price. And I think the Fed will act more quickly than it did in 2008 to prevent the same types of results that we saw back then.
TGR: After all, there’s an election in 2012.
CO: Which means that politicians are going to be making all sorts of promises to their constituents for which we’ll need to pay. It continues to look as if the debasement of currencies is going to persist for quite some time.
Armed with more than 21 years of investment industry experience, Charles Oliver joined Sprott Asset Management (SAM) in January 2008 as senior portfolio manager focusing on the Sprott Gold and Precious Minerals Fund. He is co-manager of that fund, as well as the Sprott All Cap Fund, Sprott Global Equity Fund, Sprott Opportunities Hedge Fund L.P. and Sprott Opportunities RSP Fund. Before signing on with SAM, he led the AGF Management Limited team that earned Canadian Investment Awards Best Precious Metals Fund honors in 2004, 2006 and 2007, and a finalist spot for the best Canadian Small Cap Fund in 2007. At the 2007 Canadian Lipper Fund awards, AGF’s Canadian Resources Fund was recognized for the best 10-year return in the Natural Resources category, with its Precious Metals Fund capturing honors for the best five-year return in the Precious Metals category.
By Ajay Shah, on August 23rd, 2011
The Anna Hazare silliness is depressing. Writing in the Indian Express, Shekhar Gupta has an interesting angle on why there is so much interest in this snake oil.
India’s $2 trillion economy means we have to reform faster by R. Jagannathan on FirstPost.
Meera Subramanian has a beautiful story about how Diclofenac, fed to cows, is killing off India’s vultures. We’re down from 50M vultures to 60k. The consequences are bigger than we think.
Former Sebi member Abraham?s claims under CVC lens by Appu Esthose Suresh in Mint.
China’s port in Pakistan?, by Robert D. Kaplan, in Foreign Policy.
The 10 most corrupt Indian politicians.
A promising band: Menwhopause. Listen.
The decline of Asian marriage, in the Economist.
Vinayak Chatterjee on ten projects that matter in India today.
The new draft Microfinance Bill. Back story.
Nirvikar Singh in the Financial Express on the CCI order about NSE.
Think again: War by Joshua S. Goldstein in Foreign Policy.
Hegemony with Chinese characteristics by Aaron L. Friedberg, in the National Interest. Arab Spring, Chinese Winter by James Fallows, in the Atlantic. The South China Sea is the future of conflict by Robert D. Kaplan, in Foreign Policy.
The problems of dogs in Iran.
By Simon Grey, on August 23rd, 2011
Stephan Kinsella details just how much trouble one can get into because of IP laws. Please note that this doesn’t even include file-sharing:
In his paper Infringement Nation: Copyright Reform and the Law/Norm Gap, law professor John Tehranian explains how the normal activities (see pp. 543-48) of a typical Internet user–he takes an “average American, …take an ordinary day in the life of a hypothetical law professor named John”–someone who does not even engage in P2P file sharing–could result in up to $4.5 billion in potential liability annually, for copyright infringement. The acts include:
-having his email program “automatically reproduce the text to which he is responding in any email he drafts. Each unauthorized reproduction of someone else’s copyrighted text—their email—represents a separate act of brazen infringement, as does each instance of email forwarding….” (twenty emails in an hour: $3 million in statutory damages);
-distributing in his Constitutional Law class copies of three just-published Internet articles presenting analyses of a Supreme Court decision handed down only hours ago;
-absentmindedly doodling a sketch of the Guggenheim museum on a notepad during a boring faculty meeting, i.e. making an unauthorized derivative work;
-reading a 1931 e.e. cumming poem to his Law and Literature class, an unauthorized public performance;
-emailing to his family five pictures his friend took of a local football game–his friend owns the copyright;
-having a Captain Caveman tattoo and revealing it while swimming at the local university pool: violating Hanna-Barbera’s copyright by the reproduction and public display;
-singing Happy Birthday to a friend at a restaurant and recording it on his smartphone videocamera, an unauthorized public performance and reproduction of a copyright-protected work–as is the painting on the wall of the restaurant that is captured in the video footage; and
-reading on his email a magazine that itself has clips of interesting items from other publications, a contributory infringement leading to up to $7.5 million of liability.
Obviously, some of the scenarios are a little more far-fetched than others. However, the very first item is very concerning: copyright violations occur when you reply to an email?! Are you serious?
Now, I realize that a lot of people view the opposition to IP as simply a bunch of nerdy white guys wanting to get out of paying for music. And while this typecasting is undoubtedly true in some cases, it doesn’t change the fact that IP is a gargantuan monopoly system that presents a large number of problems for ordinary citizens who act in good faith. Most people aren’t trying to rip someone off by responding to their emails, yet the laws in place operate under this very assumption.
It is obvious, then, that something needs to change. You don’t have to support file-sharing to make a coherent objection to the current system. Given that the laws ensure that every American is a lawbreaker, a good response would be to simply say that certain things shouldn’t be given automatic copyright protection (like email replies, for example). Better yet, one could argue that copyright should be opt-in, which would minimize most people’s liabilities. There is simply no sense in having a system that makes everyone a lawbreaker in order to further the economics interests of an elite, politically-connected few.
By B.P.T., on August 23rd, 2011
At 7:45 AM EDT, 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 EDT, the weekly Redbook report will be released, giving us more information about consumer spending.
At 10:00 AM EDT, the New Home Sales report for July will be released. The consensus is that 313,000 new homes were sold last month, which would be 1,000 more than last month.
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By The Gold Report, on August 22nd, 2011
The week of August 15 was one of the most volatile stock market performances in years. Negative news about the global economy, gloomy forecasts and mixed signals on the jobs front battered stocks and sent gold repeatedly above $1,800/ounce. The Gold Report asked an analyst, two newsletter writers and an economist the following: What should be a precious metals investor’s next move?
The Gold Report: John Williams, government economist and editor of ShadowStats, put it this way: “The financial markets remain unstable and the U.S. dollar is viewed increasingly as the investment currency of last choice. . .Any cosmetic actions taken pre-2012 election likely only will add to the long-term inflation and dollar-debasement problems.” Considering these market conditions, is this a buying opportunity for equities or a good time to take refuge in gold and silver bullion as they continue their climb north? How are you adjusting your investing positions in light of global geopolitical and financial unrest?
Nana Sangmuah, Clarus Securities analyst: All indicators point to weakening global macro-economic framework that has stoked the safe haven demand for the bullion. Despite the good run so far, I expect to see some volatility going forward and there will be some pullbacks in the near term. To stay a winner depends on when you jumped on the bullion band wagon. A better way to reap this upside is to move into gold equities with production and immediate leverage to rising gold prices. Most of these have not re-rated to the $1,500/oz. gold price environment so pose little risk to the downside, but a lot of upside, as they continue to report record quarterly results.
John Kaiser, producer of Kaiser Research Online: The valuation lag for gold and silver equities relative to the prices of gold and silver bullion reflects an embedded pessimism about the medium- to long-term global economic outlook, which has been exacerbated by the recent debt ceiling debacle. Private sector deleveraging has been underway since 2008, and it now appears that political pressures are forcing a cycle of public sector deleveraging called “austerity.” China’s fiscal stimulus response to the 2008 curtailment of consumption demand depended on the American economy regaining traction by 2011, but it is now clear that American fiscal stimulus efforts have been ineffectual and China’s slowing economy will not receive a boost from a recovery in American demand. This crimps expectations that China’s growing economy will continue to incur a rising cost structure as domestic consumption assumes a greater share of Chinese GDP and boosts the competitiveness of American-produced goods and expands the Chinese market for them. A slowing Chinese economy, in turn, reduces the willingness of the private sector to invest in American production capacity and boost employment through manufacturing jobs. That will further encourage private sector deleveraging and result in scaled-back consumption, in effect putting in place an economic death spiral accelerated by ongoing job losses at the state and local government levels as the tax revenue base shrinks.
While the prospect of a dysfunctional global financial system boosts demand for gold and silver prices, the arrival of a double-dip recession possibly deteriorating into a full-blown depression has deflationary implications that will “pop” the so called bubble in gold and silver prices. Equities are not tracking the short-term rise in gold and silver, which could exceed $2,000/oz. and $50/oz. respectively, because markets are anticipating a serious medium-term retreat in gold and silver prices. We could see gold and silver head higher while gold and silver equity prices head lower. The buying window would emerge after gold and silver have spiked in the midst of “panic” conditions, with the speculation being that current prices plus or minus 20% are the new long-term reality for gold and silver prices. However, for that to happen there must be signs that the American economy is on a growth track, and that the Eurozone will avoid disintegration. The sharp sell-off in gold and silver prices in the medium term, which current equity prices are discounting, would not happen if the American economy continues its current trend of relative decline within a growing global economy. The latter requires the United States to adopt a fiscal stimulus program that produces assets that flow value to future generations expected to pay off the associated debt.
The negative scenario for gold would be one where the United States, in an effort to postpone or suspend its relative economic decline, engineers a downturn that inflicts considerable suffering on its citizens, but utterly demolishes emerging economies such as China, which represents the biggest displacement threat to the United States. The political discourse seems to suggest that the best way for America to save itself is to submerge itself and drown dependent economies before they are advanced enough to swim on their own.
Ian Gordon, economic forecaster and chair of the Longwave Group: The majority of gold investors are there because they can see the impending collapse of paper money, but some investors, including many hedge funds, are in the gold market simply because they are trend-followers. In ugly markets, such as the one now unfolding, these trend-followers sell their gold. During the stock bear market, which commenced in October 2007, the price of gold continued to rise into March 2008, even though the Dow had lost about 17.5% from October 2007 to March 2008. But after March, gold sold off into October 2008, losing about 35% of its value. We feel that something similar could happen to gold, this time, in the wake of falling stock prices. As for silver, prices fell by 60% between March 2008 and October 2008. A 35% drop from current prices would see the price of gold fall to something like $1,200/oz. As for the stock market, we are extremely bearish and believe that in the Elliott Wave market cycles, we are entering the third downswing, which should take the Dow Jones Industrial Average well below the March 2009 low of 6,470; perhaps 4,500 will be the target by September 2012.
Jason Hamlin, president of Gold Stock Bull: I am going to continue holding precious metals and buying the dips. The Gold Stock Bull portfolio has been short general equities and long precious metals for the past few months, which has paid off handsomely from both angles. Having already hit my 2011 target of $1,800, I now think gold could end the year above $2,000 rather easily. I have not closed my short positions against emerging markets and the Nasdaq, despite the current correction. I do not anticipate a healthy rebound anytime soon, only dead cat bounces unless and until a much larger QE3 program is announced. But even with the massive liquidity injections, we are seeing the law of diminishing return take hold. Eventually, the house of cards must tumble. I have been allocating more towards physical metals and towards funds that hold the physical metal such as Central Fund of Canada (AMEX:CEF). I have also increased my allocation of gold versus silver, as I think gold will outperform under weak economic conditions.
By Doug Gentry, on August 22nd, 2011
This is a time of the year when I meet new people or get reacquainted with old friends, and once we run out of the usual “status update” conversation, someone often asks about the economy and the current crisis about the debt ceiling. I’m going to break a self-imposed guideline for this blog, and actually represent my opinions in a pretty straightforward manner. Usually my goal is to help students reach their own, informed opinion. This time – straight to the punch line…
1. The 2011 deficit (estimated at $1.5 trillion) and the accumulated national debt (over $14.3 trillion) are not the most pressing economic issues facing the country right now. They are important, but several notches down from the top of the list. This year’s deficit is just over 10% of GDP, which is high, but not crushing. There are ways to deal with these issues, as I’ll share further down. They are presented as a crisis only because the Republican Party and the Tea Party are using them to push a small government agenda. While I don’t agree with that goal, it’s fine for some to support it, but holding the economy hostage by manufacturing a crisis tied around the debt ceiling makes no sense.
2. Investment in economic growth has slowed dramatically. This is particularly true in education – at all levels. It is also true in basic research. Up until the last 20 years or so the U.S. has surfed the wave of economic change, by investing in new thinkers, and making infrastructure and other investments that will improve productivity. These seem left out of current debate options.
3. The slow recovery and weak demand for goods and services is the number one problem facing the country. The Federal stimulus is winding down, the Federal Reserve has decided that they don’t need more quantitative easing, and government at all levels is cutting employment. All the while personal consumption dropped in the most recent quarter, along with the fixed asset portion of Investment (inventories increased as a partial offset.) The uptick in unemployment and the very slow growth in employment drags down demand for goods and services. We are sliding down the same hill that the U.S. economy did in 1937-38, when Congress and President Roosevelt worried more about public concern for the debt than about sustained growth. Then we slid into a quick, nasty recession. That’s a danger now, too.
4. Inflation is not a pressing problem. The inflation we have seen this year is in food/commodities and energy. The food price spiral might well continue for awhile – I don’t have an independent sense of the true drivers. Even if food prices rise there are other elements of the Consumer Price Index that are holding steady. The rising energy prices are probably related to uncertainty about political conditions in the Middle East. Those concerns should soften soon. Inflation is something to watch out for, particularly with all of the money created by the Federal Reserve in the last three years – money created to help stabilize the economy. It is important that the Fed watch for signs of incipient inflation, driven by very high money supply, but I am confident they will act correctly and aggressively when that happens. That point is not now.
5. Bond investors are not abandoning US Treasuries for fear of default. US bonds respond to typical market forces, though they have an element of future gazing in them. If you hold a 10 year bond, and a potential buyer thinks the US might default on that bond, then the buyer will expect a higher yield (lower price/higher interest rate). That isn’t happening now. The bond market for US Treasuries is not showing signs of investors being worried about US debt.
So, what to do….
1. To tackle the most pressing problem – the slow recovery – the Federal government should be stimulating demand, through more government spending (on the part of Congress) and more quantitative easing (on the part of the Federal Reserve). Tax cuts can be part of this but they should not be across the board. The most effective, stimulative tax cut on the Federal level is the payroll tax for Social Security and Medicare. Those funds need help, and there are ways to fix them, but a payroll tax benefits mostly working people who will use the increased take home pay to consume.
2. To help with the deficit, we should remove the Bush tax cuts, and speed our exit from Iraq and Afghanistan. The Bush tax cuts disproportionately benefited higher income families, who use the extra money for non-consumption activities. When some politicians complain that raising taxes on the wealthy takes money away from job creators, there is no empirical evidence and scant theoretical basis for that claim. Along with repealing those tax cuts there are plenty of opportunities to strengthen the tax code and reduce the dreaded loopholes. Despite what many politicians say and the media parrot, this is not hard. It just takes clear headed thinking and political courage.
3. The real budget deficit challenge, at the Federal and State levels primarily, is the cost of healthcare. Increasing costs and inefficient uses of services put pressure on Medicare, Medicaid (which impacts states as well), the VA, the Dept. of Defense, and government employment costs at all levels. We should be strengthening and extending the healthcare reform efforts beyond just extending coverage – to include incentives for cost efficiency and efficacious treatments.
4. Restore and enhance funding for education at all levels. Resist the temptation to make education accountable on a short term basis, while hobbling it from producing the long term benefits derived from basic research and liberal arts education. This is an area in particular where Federal spending, even if they result in deficits, is a good investment. Cutting taxes on the wealthy is not a good use of a deficit. Deficit spending should support short term stimulative needs and long term productivity enhancements.
By Claus Vistesen, on August 22nd, 2011
The Calafia Beach Pundit raises an interesting question in relation to the recent surge in the US money supply which he suggests might be a reflection of a scramble into USD assets. More specifically, the argument would seem to be that a silent run on European banks is in the works as money is moved into perceived safe USD liquid assets.
As this chart of the M2 measure of money supply shows, it has gone on to experience a gigantic surge in the past seven weeks. M2 has risen almost $420 billion since the week of June 13th, on average almost 60 billion per week. To put this in perspective, annual M2 growth has averaged about 6% per year since 1995, and growth at this rate would translate into about $10 billion per week. In other words, M2 normally would have grown by $10 billion a week, but instead has grown six times faster. M2 has never grown this fast in a seven week period for at least the past 50 years. No matter how you look at it, this is a major event.
Where is the growth in M2 coming from? Virtually all of the increase can be traced to savings deposits (up $267 billion) and checking accounts (up $148 billion). Now we know why several large banks have announced they will now begin to charge customers who have over $50 million on deposit—they don’t know what to do with all the money coming in.
Clearly, the theoretical argument is sound here. In a world populated by different paper currencies a surge in liquid deposit assets of the reserve currency in times of crisis reflects preference for liquidity and safety. However, the idea that money is now systematically fleeing Europe is new and disturbing. The news last week that the ECB had to supply 500 million USD to an un-named Eurozone bank has added further to the speculation.
However, there are two problems here. Firstly, as Simon Ward points out, the data does not quite support the idea of capital flight from the Eurozone. Especially, one would have expected the EUR/USD to have reacted strongly on a flight of the Eurozone to USD assets.
Scott Grannis, for example, argues that US money demand has been boosted by massive capital flight from the Eurozone as investors anticipate a break-up of the single currency. The US money supply gain, however, has not, to date, been fully offset by Eurozone weakness – G7 monetary growth, therefore, has risen. Eurozone figures for July, released next week, could conceivably change the story but would need to show a large decline to offset US strength.
The Grannis theory of a huge capital inflow to the US from Europe, in any case, is inconsistent with the stability of the euro / dollar exchange rate in recent weeks.
Of course, someone else could be doing the bid on the EUR/USD (Voldemort?) but more specifically we should also observe a blow out in the Eurozone interbank spreads and while we may still see this in the coming weeks we have not seen anything resembling 2008 levels of panic.
Secondly, Simon Ward points out that even if you adjust for a plausible measure of liquidity preference money growth in the US is still strong which suggests that we cannot linearly equate a spike in the US money supply with capital flight from the Eurozone.
Another point worth considering here is that while the USD certainly must still be considered a safe haven other currencies have taken up this role especially in the wake of the debt ceiling debacle which saw the US lose its triple A rating from S&P. The CBP points out in the comments section;
(…) it’s true that the euro isn’t falling against the dollar, but both are falling against gold, the swiss franc, and the japanese yen. With currencies, everything is relative.
Especially the ascend of the CHF has seen the Swiss National Bank retort to more or less desperate measures to rid its currency of its safe haven status as it deems the Swissie to be severely overvalued.
At the end of the day, the answer must be found in deposit growth in the Eurozone. We have observed for a while how the periphery has been bleeding deposits which logically have been moving to the core (or so I assume). But generally, the total stock of money in the Eurozone has been volatile around a flat trend since 2008 which makes it difficult to interpret spikes and dips in the data. I will be looking closely at Eurozone deposit data next and will report back if I find something interesting.
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