By Simon Grey, on October 31st, 2011
GOP presidential candidate Rep. Ron Paul will unveil his economic plan Monday afternoon, calling for a lower corporate tax rate, cutting spending by $1 trillion during his first year in office and eliminating five cabinet-level agencies, including the Education Department, according to excerpts released to Washington Wire…
But Mr. Paul does get specific when he calls for a 10% reduction in the federal work force, while pledging to limit his presidential salary to $39,336, which his campaign says is “approximately equal to the median personal income of the American worker.” The current pay rate for commander in chief is $400,000 a year.
The Paul plan would also lower the corporate tax rate to 15% from 35%, though it is silent on personal income tax rates, which Mr. Paul would like to abolish. The congressman would end taxes on personal savings and extend “all Bush tax cuts.”
He would also allow U.S. firms to repatriate capital without additional taxes. Some lawmakers have recently proposed such legislation as a way to spur job growth. Its critics argue that a tax holiday for companies with money abroad has not historically led to domestic investment.
But the plan, at its heart, is libertarian. While promising to cut $1 trillion in spending during his first year, Mr. Paul would eliminate the Departments of Education, Commerce, Energy, Interior and Housing and Urban Development. When former Massachusetts Gov. MItt Romney unveiled his economic plan last month, he said he would submit legislation to reduce nonsecurity, discretionary spending by $20 billion.
Mr. Paul would also push for the repeal of the new health-care law, last year’s Wall Street regulations law and the Sarbanes-Oxley Act, the 2002 corporate governance law passed in response to a number of corporate scandals, including Enron.
I think this is a good start to addressing the problem. I also think this is the most serious proposal from any of the current candidates, Democrat and Republican alike.
Some may call for incremental changes. We’re past that point. We’re going to face an economic collapse. There’s no sense in strengthening federal power when this happens. And there is no point in continuing the policies that led to this problem.
Ultimately, Paul’s plan is the best out there, though it could certainly be improved upon. My proposal would be to cut all unconstitutional spending. I think that would solve a lot of problems in fell swoop.
By Bron Suchecki, on October 31st, 2011
Shall we count how many bloggers pick up on this news item Chinese silver imports decline 39% y/y; exports tumble 44% y/y:
Silver imports in China fell by 39% y/y and 16% m/m to 264.7 tonnes, the lowest level since February, while silver exports declined by 44% y/y to 83.5 tonnes, keeping China a net importer of the metal for two consecutive years on a monthly basis.
On a product basis, silver powder, unwrought silver, semi-manufactured silver, and silver jewelery all declined y/y in September with the latter two products suffering the steepest decline and silver powder only falling by 4% y/y. Indeed, silver powder is the only product that has grown for the year-to-date.
And from the “Chinese love paper more than physical” department, see China’s gold frenzy gives birth to small bourses:
The emerging exchanges offer a lot size as small as one ounce, which lowers the capital needed to begin trading, even though the margin requirements can be as high as 30 percent. With lot size set at 10 ounces and margins at 20 percent, the initial capital requirement to start trading is about half the amount required by the SGE.
Emerging exchanges claim to trade physical gold, but most investors are not interested in taking physical delivery. Some exchanges make it difficult and expensive to take delivery. …
“Who would want to take physical gold? People just want to speculate on price moves and make a profit,” said a customer service representative at the exchange who gave her last name as Chen.
Analysts compared the gold investment spree to the wave of retail stock market investors in the last decade, who rushed to a bull market with little know-how, only to suffer huge losses during later market turbulence. …
Although China’s central government has vowed to open up the market, and has made progress by allowing more foreign banks access to the two Shanghai exchanges, an open market for retail investors is yet to take shape. …
But it was unlikely to happen as long as the country’s foreign currency exchange remains tightly controlled. Until foreign exchange controls are lifted, Chinese gold bugs would continue to need tables to put down their bets. “The Chinese love gambling,” said Hou.
Doesn’t sound like China’s exchanges are any different from COMEX. If the Chinese Government wanted its people to buy physical gold you’d think all this paper gold would be shut down. I suppose we will have to wait until the much hyped PAGE is up and running [sarcasm]. 
By Eldon Mast, on October 31st, 2011
Last week stocks surged, extending the biggest monthly rally for the Standard & Poor’s 500 Index since 1974, and the euro strengthened as European leaders agreed to expand a bailout fund to stem the region’s debt crisis. The 20 percent monthly advance for the Dow Jones Transportation Average, a proxy for the economy, is the biggest since 1939. The S&P 500 rose to its highest level in almost three months and has rebounded 17 percent since Oct. 3.
In addition to remembering 1974, Economic growth strengthened in the third quarter and the component mix is more favorable than expected. GDP growth improved to a 2.5 percent annualized increase in the third quarter. The advance estimate matched market expectations for a 2.5 percent gain. (For once the majority was right!)
Optimism is clearly now appearing as the consumer sentiment index jumped to 60.9 compared to 57.5 at mid-month to imply a 64.3 level for the final two weeks of the month. The improvement the last two weeks is centered in the leading component of expectations which jumped 4.8 points to 51.8. The current conditions component also rose, up 1.3 points to 75.1. Inflation expectations show no change from mid-month, at 3.2 percent for the one-year outlook and 2.7 percent for the five-year.
And on the job front, initial jobless claims are holding steady in a narrow range just above 400,000. Claims came in at 402,000 in the October 22 week, a bit better than expectations. The four-week average of 405,500 is 10,000 below the month-ago period to point to continued improvement and a positive October employment report.
By B.P.T., on October 31st, 2011
At 9:45 AM EDT, the Chicago PMI Index for October will be announced. The consensus index value is 58.0, which is 2.4 points lower than last month, but is still above the break-even level at 50.
By The Energy Report, on October 28th, 2011
 Headlines scream gloom and doom, but Vikas Ranjan of Ubika Research sees brilliance on the horizon. As emerging markets develop, opportunities for profit abound: it’s only a matter of identifying the most in-demand commodities. Meanwhile, cleantech companies are creating commercial solutions to keep the lights on and the water flowing. In this exclusive interview with The Energy Report, Vikas discusses the new Ubika Mining 30 Index and some companies ready to feed the need.
The Energy Report: Vikas, Ubika Research launched its Mining 30 Index on October 1, during a time of less-than-robust projections for the global economy. Why commodities, and why now?
Vikas Ranjan: It is true that in the short term, the global economy does look sluggish. However, we are very optimistic about the longer-term health of the global economy, especially the emerging markets. Countries like China, India, Brazil, South Africa, Russia, Indonesia and Vietnam will continue to grow at a robust pace. Commodities are a big part of that growth story. At this stage, a slight economic downturn creates an opportunity to spot undervalued assets.
TER: How did you choose which commodities to focus on?
VR: Because our investment thesis concerns broad-based growth in emerging markets, we looked for commodities that are used in a range of industries. We asked ourselves what particular emerging markets will need the most in the next five to 10 years and which commodities will meet those requirements. Base metals like copper, nickel and zinc address the need to expand infrastructure, and agricultural commodities like potash and phosphate are key to feeding an increasing population.
TER: About 19% of the index is coal companies. Why did you allocate such a large percentage of the index to an energy source that governments are increasingly trying to phase out?
VR: Coal is going to be in use for a long, long time. More than two-thirds of the world’s energy still comes from coal. China sources 80% of its energy from coal, as does India. In fact, the largest market cap company in India is Coal India Ltd. (COALINDIA:NSE), which went public about a year ago. In the next five to 10 years I don’t see any energy source coming close to coal. Beyond electricity generation, coal is also used to produce steel. Coal may be phased out in the future, but that future is far, far away.
TER: Could the Ubika Mining 30 Index serve as an indicator of global economic health, similar to copper, the so-called barometer of global markets?
VR: Copper will still play its role as an early indicator, a bellwether, for the direction of the global economy. There really is no substitute. However, a broader index, like the Ubika Mining 30, may provide a more decisive indication of the health of the economy, though it may take time for its performance to reflect what is happening in the global economy.
TER: Since its launch, the Ubika Mining 30 is up roughly 12%. Which companies on the index do you believe will continue to outperform the broader market?
VR: All 30 companies are highly prospective, with solid fundamentals and strong management. We’re pretty optimistic about most of them. Of course, we will keep a close eye on their performance and make changes as needed.
Having said that, we have more in-depth research on a few of them: Allana Potash Corp. (AAA:TSX; ALLRF:OTCQX), Rodinia Lithium Inc. (RM:TSX.V; RDNAF:OTCQX), Glen Eagle Resources Inc. (GER:TSX.V) and Champion Minerals Inc. (CHM:TSX).
TER: As of June 20, you had a model price of US$2.56 on Allana Potash. At that time, the company had about US$60 million (M) in cash. How much does the company have now, and will it be enough to carry it through the bankable feasibility study?
VR: Allana is our top pick in the junior potash exploration field. It has a strong prospect for a potash mine in Ethiopia.
Its price has come down quite a bit; it’s now trading at US$1.02. This is what happens when expectations run ahead and when markets in general tumble, causing more high-profile stocks like Allana’s to get impacted negatively. But we will stay by our model price. The resource estimate far exceeded our expectations. It has more than 1 billion tons (Bt) of potash resource at its projects, most of it in the measured and indicated (M&I) category. We think that Allana has close to US$50M in the bank, and it’s fully funded to move forward with a bankable feasibility study. If anything, Allana is less risky than it was 18 months ago.
TER: In your research report, you note the possibility of a takeover. Do you expect that to happen before the bankable feasibility study or after?
VR: At current levels, I suspect Allana would probably not consider a takeover offer because the price does not reflect its true value. I think it will continue to build value in its assets and its share price will reflect that.
After the bankable feasibility study, once the value of those deposits are proven, bigger players will start to show serious interest in Allana’s exploitable potash.
TER: Let’s move on to Rodinia Lithium. Its flagship project is the Salar de Diablillos Project in Argentina. Rodinia recently had positive brine processing reports, yet the stock, which is trading at US$0.21, didn’t move at all. Why is that?
VR: Lithium is a little out of favor right now. Although it has other uses, lithium’s major role is in electric vehicle batteries. Demand is generally down now, and this is reflected in lithium exploration stocks. General economic conditions have also impacted stock valuations.
Rodinia is moving ahead. It has been getting very good exploration results and has had some good results on the processing side. We believe in Rodinia’s prospects; it has good projects and a good management team. The company is focused on its Argentinean project right now, but it also has land in the U.S. The stock will likely bounce back once the general sector regains strength.
Another advantage for the company is the strategic investment from Shanshan, China’s largest lithium-ion battery materials provider. It shows that the company is attracting right type of interest. Rodinia has a good technical team with previous experience in lithium projects and process development. So we remain optimistic about Rodinia’s prospects.
TER: There are quite a few salars in that region of Argentina, and other companies are working on brine projects there. Do you foresee consolidation?
VR: I would assume so. That is typically what happens when junior companies like Rodinia develop these assets. It’s much less likely that it will produce the deposits. If a company has built a good deposit base, has moved the project along and advanced it, it will have better chances of attracting outside interest. Rodinia is in the right place, in one of the most prolific belts for lithium deposits.
TER: Glen Eagle Resources has several projects based in Québec, Canada; a very safe jurisdiction.
VR: We’re very excited about Glen Eagle. The company is focused on phosphate. It also has a reserve on a lithium project next to Canada Lithium Corp. (CLQ:TSX; CLQMF:OTCQX).
Glen Eagle recently announced an option agreement to acquire 100% of the Moose Lake phosphate property. It’s immediately adjacent to a phosphate property called Mirepoix, which is controlled by Arianne Resources Inc. (DAN:TSX.V; DRRSF:OTCBB; JE9N:Fkft). A grab sampling and initial work were very promising. Glen Eagle is currently developing its Lac Lisette phosphate project. It is presently drilling on it. The Lac Lisette property is 40 km away from Arianne Resources’ Lac à Paul property, and shares the same main road.
Phosphate, like potash, has tremendous use in agriculture and is in high demand. Glen Eagle is very undervalued because not many people know about that resource. Its market cap is about US$18–20M. Right next door, Arianne Resources is roughly a US$140–150M market cap company. We see Glen Eagle closing that valuation gap once it starts to prove up the deposit. We have a model price of US$0.96 on that stock. It trades at about US$0.43. We started covering Glen Eagle when it was about US$0.30.
TER: The last company you mentioned is Champion Minerals. That’s trading at about US$1.25. What’s your model price for that one?
VR: We don’t have a model price, because Champion Minerals isn’t part of our in-depth research. We had it as a stock-watch list pick.
This is an iron-ore exploration company with some very good properties in the Labrador/Québec area. It has been getting some really good results and management is good. They’re in a very prospective area for iron ore exploration, near other majors and prospective companies. For example, Consolidated Thompson Iron Mines Ltd. (CLM:TSX) acquired Quinto Mining Corp., which had properties next to Champion Minerals’ property. We feel this project could be a prospective inclusion candidate.
TER: You also operate the Ubika Cleantech 30 Index. As of December 31, 2010, the combined market cap of the companies on that index was US$7.8B. By October 14, 2011, the value had fallen to US$5.8B. Why is this sector underperforming?
VR: It has been a rough year for cleantech. Our index has fallen along with other benchmark indexes, in similar proportions or even more, for various reasons. Most of the companies in our index are very early-stage companies. Most have no revenue because they are at a pre-commercial stage, and they fluctuate more widely. It’s a classic case of market euphoria and high expectations taking hold and running ahead of fundamentals.
Cleantech is a very broad sector, so not everything is performing badly. The energy side of it, such as solar and wind, has not proven to be as commercially viable as anticipated. Investors are getting disillusioned, wondering if these companies will become commercial. It’s a classic research-and-development (R&D) situation. Some of these companies come out well, but many will fall by the wayside. It hasn’t helped that there have been some high-profile failures.
TER: Has Solyndra’s bankruptcy hurt the credibility of the renewable energy/cleantech sector as a whole?
VR: It has tarnished the industry. It was certainly not good for the cleantech sector. It also shows you that it is risky for the government to get too involved, for example, in selecting prospective winners or losers in a sector that is still at such an early stage. The better approach is to provide a conducive environment, one that spurs more innovation and R&D, but that ultimately lets the market decide.
TER: What’s your outlook for the sector?
VR: Winners will emerge. Investors are looking for companies that can solve a particular problem countries face, especially emerging countries. Examples are companies that have solutions for water pollution, for helping countries improve the livelihood of their population.
TER: Which companies fit this description?
VR: Westport Innovations Inc. (WPT:TSX) is developing fuel technology to reduce emissions by reconfiguring diesel engines to use compressed natural gas (CNG) or liquefied natural gas. That is an example of a company with clean technology that is both retrofitting and allowing new commercial vehicles to use CNG-based engines. Natural gas is still a fossil fuel, but it’s a lot cleaner than, say, diesel. In the last year or so, Westport’s stock has gone up 40%–45%. It’s a good example of a commercial company with rapidly rising revenue that will continue to do well.
Clearford Industries Inc. (CLI:TSX.V) is another example. The company developed a patent for a small-bore sewer system. Centralized sewage systems push everything to a single location for treatment. These centralized systems place heavy demand on water, and they are inefficient and costly for emerging countries like India, China and Peru.
Clearford developed a solution that treats sewage in a localized environment, suitable for a small community or a collection of small communities. It has anchored its technology in India, where it won a major contract with a large real estate developer that will use the technology for a development of something like 6,000-plus houses or apartments. Once Clearford gets that commercial proof, it should do very well. Getting the first contract under the belt is the biggest challenge. On August 11, 2011, Clearford announced that it has signed a memorandum of intention with Engineers India Ltd., a major engineering consulting firm owned by the Indian government, to jointly pursue projects using Clearford technology in India. This clears the path for the company’s growth among municipalities and cities.
TER: Any others?
VR: I still like H2O Innovation Inc. (HEO:TSX.V), a major player in Canada’s water treatment industry. It designs and produces environmentally friendly water treatment systems, especially for wastewater and industrial processed water. It has been performing relatively well even in the downturn. This is one of the fastest-growing companies in Canada. Its revenue has grown through acquisition, and it has a client base of over 500 installations worldwide. This is a good example of a commercial company solving a real problem.
TER: Do you have any parting thoughts for us?
VR: I would conclude by saying that we don’t believe the global economy is dipping into a double-dip recession, which was a major concern in the summer and early fall. We believe the markets made their lows for the year in August, and we see better times ahead. Yes, there is a slowdown, and developed countries are struggling, but the growth story in emerging markets is intact.
TER: Excellent. Thank you.
Vikas Ranjan, a principal of Ubika Research, has over 15 years’ experience in investment management, finance, customer analytics and research. His experience includes management positions with TAL Global Asset Management and Bank of Montreal. He holds a Bachelor of Arts in economics, a Master of management studies from University of Mumbai, and a Master of Business Administration in finance from McGill University. Vikas co-founded P2P Systems Inc., which was acquired by Microforum Inc.
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By Christopher Briem, on October 28th, 2011
I recently brought up the location quotient methodology and looked at what some location quotients were for Pittsburgh. You can use the LQ methodology in lots of ways. You most often see it used to measure industry concentration, but no reason it can be used to measure occupation concentration as well. For both LQ’s are typically benchmarked against the nation, but could be used lots of different ways. Again, a LQ of 1.0 means that the concentration of something locally is the same as for the nation. A LQ of 2.0 would mean we are twice as conentrated as the nation.
So I was just looking at some occupational employment numbers for Pittsburgh and see that the BLS is now doing what a lot of us used to have to calculate on our own and has an occupational employment LQ for most all occupations they report data on at the MSA level.
The obvious question is what occupations have the highest LQ’s here in Pittsburgh. For years I used to say that it was in Nuclear Engineers where in the past I had calculated an unbelievable LQ of over 8.0. Here is what I get now for the top LQ’s by occupation in Pittsburgh:
So Nuclear Engineers are not number 1 technically any longer. Not because of any slowdown at Westinghouse of course, but I think over the last decade there has been a drawdown in the workforce at Bettis which is really what is driving that number. Still a lot of nuclear engineers, possibly the largest absolute numbers in any MSA for the nation, just a slip in the local concentration.
Still a lot of interesting factoids popping out of that one graphic. I think my colleagues maybe single handedly responsible for the high LQ for ”Survey Researchers“. The “Private Detectives and investigators” I was going to say I have no idea about, but I think its the OPM contractors who do work for DoD out of Butler County are impacting that. Still you see the core steel occupations in there including “Metal Pourers and Casters“. Pittsburgh as sports town results in our overconcentration of “Locker room, coatroom and dressing room assistants“. Finally… at the bottom, but “Title examiners, abstractors and searchers“. Our big Marcellus Shale impact? A few other occupations might be Marcellus induced as well: wellhead pumpers? Mining still having an impact, but remember this still is coal country and I bet some of those occupational numbers are being driven by NETL.
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By Simon Grey, on October 28th, 2011
Like A Financial Analysis of al-Qaeda in Iraq, this book is rather technical and highly academic in approach. Unsurprisingly, it is a rather boring read for the most part. Furthermore, the book isn’t particularly insightful.
There were some who apparently claimed, presumably around the time this book was written, that capitalism was responsible for causing and perpetuating apartheid and racial division. Williams seeks to correct this misconception, and does so quite adequately by pointing out how it was government legislation that created, enabled, and perpetuated apartheid and the corresponding racism.Williams’ arguments are not unique or original, in a sense, because racial biases can, and have been, easily corrected on the free market by the “inferior” race offering lower prices for their labor. The reason this didn’t happen in South Africa was because the government forbade competition, or elsewise severely hindered it.
Williams’ book, then, is useful primarily as an academic resource. It is not easy or enjoyable to read, part of which is due to the structure of the book. For me, it only reinforced my beliefs in the general equitability of the market. I imagine that the same will be true for those who are inclined to read this. My recommendation is to only read this book if you are doing research on South Africa or apartheid.
By B.P.T., on October 28th, 2011
At 8:30 AM EDT, the monthly Personal Income and Outlays report for September will be released. The consensus for Personal Income is an increase of 0.3% over the previous month and the consensus Consumer Spending index change is an increase of 0.3%.
Also at 8:30 AM EDT, the Employment Cost Index for the third quarter of 2011 will be released. The consensus is that the index increased 0.6% during the quarter.
At 9:55 AM EDT, Consumer Sentiment for the second half of October will be announced. The consensus is that the index will be at 58.0, which is 0.5 points higher than the value reported in the first half of the month.
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By Ajay Shah, on October 27th, 2011
I was at a meeting in London recently, organised by the IGC, on the subject of the research agenda in macroeconomics for developing countries. This made me think about how to make progress.
The US as the shared dataset for mainstream macroeconomics
All existing knowledge on macroeconomics is rooted in data about the US economy. The US is seen as a canonical developed
country. Economists all over the world have treated it as a common object of study, when building macroeconomics. It is a shared
dataset. Researchers and Ph.D. students routinely pull out a paper from the literature, and replicate the results, as a first stage of
offering innovations: all this is rendered convenient by using the US as a shared dataset. New work is generally obliged to demonstrate value-add in the context of the US dataset.
The US works as a shared dataset because it has high quality data. Good quality data starts right after 1945, because there was no
destruction within the country, hence the early post-war years are not distorted by unusual reconstruction. There was a steady shift away from dirigisme from 1945 onwards, but for the rest there has been no regime change: events like the breakdown of communism or the rise of the European Union or the Euro have not taken place.
In the US, a high quality statistical system has produced good aggregative data. Organisations like NBER have processed this data
nicely to create datasets about the business cycle. High quality datasets are available about households, firms and financial markets. Household- and firm-level data has been nicely utilised to obtain numerical values for parameters in macroeconomic models: why
estimate something using macro data when you know it using gigantic and well trusted micro datasets? Finally, the major question
for macro today is the fusion with finance, and the US has nice data for the financial system.
As a consequence, facts about the US are the shared dataset used in all mainstream macro research across the world.
The insights developed in this literature, which has examined the US economy, have been transported with fair success, into other
developed countries. Thus, this emphasis on the US as a common dataset has delivered good results. As an example, the revolution in monetary policy which was thought through by Friedman, Lucas, etc. was created using US data. It has usefully reshaped central banks worldwide. US data was essential for inventing inflation targeting, but inflation targeting has worked well outside the US.
The major obstacle on building a macroeconomics for developing countries
The major obstacle that interferes with doing macroeconomics in developing countries is data.
India is a good example of what goes wrong. The standard GDP data is in bad shape. The annual GDP data is deplorable, and the quarterly GDP data that is so essential for doing macroeconomics is worse. The IIP is untrustworthy. Put these together, and we don’t have an output series, really.
The BOP data is measured fairly well. Some plausible inflation data is now starting to come together. The statistical system run by the government does not produce seasonally adjusted data [succor]. Given the absence of the Bond-Currency-Derivatives Nexus, the bulk of data about interest rates that is required is missing; policy makers are flying blind. The standard household survey (NSSO) is in bad shape: it does not produce panel data, surveys are only conducted once in a few years, and there are incentive issues about the front-line staff who interact with households.
The large firms are observed using the CMIE database; the small firms are not observed using the ASI dataset. The CMIE household
survey is starting to generate knowledge about households, but this only got started a few years ago. While the CMIE datasets (on firms and households) can be aggregated up to create many interesting macro series, so far this process has only begun in a small way.
Faced with these problems, it is not surprising that little is known, at present, about macroeconomics in India. We know numerous
important questions, and we know that we don’t know the answers. The roadmap to progress is often, though not always, blockaded by data constraints.
Many such problems bedevil the statistical system in other developing countries also.
Economists have complained about bad data in developing countries for decades, and that hasn’t changed things. And there is a uniquely perverse problem. Incremental progress with a gradually improving statistical system does not get the job done for us: By the time a country gets to good institutions and thus a good statistical system (e.g. Taiwan, South Korea, Israel, Chile), the country is not a developing country anymore and is thus not a useful dataset for studying the macroeconomics of developing countries. Chile has world class databases on households and firms, but you can’t extract microeconomic facts using these datasets and use them in
calibration if your object of inquiry is the canonical developing country.
A proposal
How can we make progress? I feel the first idea that we need to agree on is that we do not need many developing countries to build a
great literature. We need a shared dataset, a lingua franca, a replication platform, using which we will build a literature. We need
a country that will play the role, for the macroeconomics of developing countries, that has been played by the United States in
conventional macroeconomics.
The second idea is that we should be a little more ambitious. We should not merely sit around hand-wringing, complaining about a
problem that isn’t going to solve itself. When scientists in other disciplines identify questions that call for evidence, they write
funding proposals (sometimes running to billions of dollars) and organise themselves to create those datasets. Could we do similarly?
Specifically, imagine that we pick one canonical developing country. It’s got to be a typical developing country in most respects. And, it should not be a conflict zone, it should have the basics of law and order and physical safety so that operations can be mounted in it. Christopher Adam of Oxford suggests that Tanzania is a good choice.
Imagine that, the system of interest (a developing country) keeps running, but it gets instrumented up to world class. In essence, we
try to place first world instrumentation into a third world country. (To the extent that this data improves decision making in the
country, we would suffer from `Heisenberg’ effects).
This will call for financial resources and, more importantly, organisational capability. The physicists know how to organise themselves to build the Large Hadron Collider. Most of the time, economists do not organise themselves as laboratories or teams doing complex projects. This will be a bridge that we will have to cross.
As with the Large Hadron Collider, this is not a short-term project. It is a project that needs to run for 25 years, in order to
generate a strong dataset.
At first, the project will generate useful facts for calibration, drawing on household survey and firm databases. Gradually, as the span
of the time-series builds up, the full picture will start becoming clear.
If this works, it can ignite a literature where researchers from all across the world do replicable work off a common dataset. Perhaps
Tanzania could then play a role, for the macroeconomics of developing countries, that is comparable with the role played by the United States in mainstream macroeconomics.
By The Gold Report, on October 27th, 2011
 The end of 2011 is a golden opportunity to participate in an anticipated upside for mining equities, says Tocqueville Asset Management Senior Managing Director John Hathaway. We caught up to him at the Casey Research/Sprott Inc. Summit “When Money Dies” for this exclusive interview with The Gold Report. Hathaway predicted that once investors realize higher gold prices will stick, they will take a chance on the big upside waiting in the junior and senior space.
The Gold Report: In your recent article “A Golden Mulligan,” you called gold mining equities “a rational way to participate in what appears to be the end game for paper currencies on an attractive risk-adjusted basis.” After trailing the metals prices substantially since 2010, why do you think they are ready for a turnaround?
John Hathaway: Gold mining stocks have underperformed for a number of reasons. Gold ETFs created competition for gold stocks even as it made owning physical metal more attractive. Also, as gold flirted with $1,900 an ounce (oz), investors may not have priced that into the stocks as they weren’t convinced it would stick. Now that we have had a correction, investor analysis will show that the average price over time, as opposed to variable spot prices, is steadily rising—proof that industry profitability should also be on the rise. The best is yet to come for gold mining earnings as confidence in government monetary policy continues to erode.
TGR: We have seen a lot of volatility lately. What price do you predict for gold going into 2012?
JH: From years of experience, I have learned never to combine a price prediction with a specific point in time. The gold price will continue to rise until the fiscal and monetary policies of Western democracies undergo severe alteration in the direction of sanity.
TGR: What role do operating costs play in equity price challenges?
JH: Some companies have cited increased operating costs as a limiting factor in stock price growth, but the facts don’t support that argument. Energy prices, one of the most variable costs in gold production, are almost half of what they were four years ago. The same is largely true in everything from steel and chemicals to labor. Margins have steadily increased since 2008 and, unless declines in head grades or increased resource nationalism take their toll on future mine profitability, that margin expansion trend should continue. One of the biggest factors weighing on mining stock prices is probably investor risk tolerance. It goes without saying that mining stocks are riskier than physical metals and a lot of investors are looking for a safe haven right now.
TGR: At the end of September, the Tocqueville Gold Fund reported a three-month average return of -8.49% compared to -13.87% for the S&P 500 and a three-year average annual return of 32.24% compared to 1.23% for the S&P 500. Your top 10 holdings include (5.43% of assets) Goldcorp Inc. (G:TSX; GG:NYSE), (3.75% of assets) Randgold Resources Ltd. (GOLD:NASDAQ), (3.33% of assets) Silver Wheaton Corp. (SLW:TSX; SLW:NYSE), (3.07% of assets) Royal Gold Inc. (RGL:TSX; RGLD:NASDAQ) and (2.98% of assets) IAMGOLD Corp. (IMG:TSX; IAG:NYSE). What will be the catalyst that gets investors looking at mining stocks again?
JH: I think the release of third-quarter earnings will amaze people. I am very bullish on the future of the price of gold and gold equities. Equities represent extraordinary opportunities because they offer organic growth in resource production and bumps from merger activities that aren’t possible holding inert metal.
Ratio of Gold Stocks to Metal Price Near All-Time Low
XAU & HUI as ratios of spot gold ($/oz)
Chart: Toqueville
TGR: How will companies that are not making profits at $1,900/oz be profitable going forward?
JH: If a company can’t make money at $1,300/oz gold, it shouldn’t be public. Companies have to find a way to make a profit. An example is Osisko Mining Corp. (OSK:TSX) (which is one of the top 10 in the Tocqueville Gold Fund at 4.49% of assets). It had a $200 million market cap five years ago when we invested; the market cap is now $5 billion. It has a large, low-grade deposit and the price could rise further as they ramp up production.
TGR: You mentioned seniors as a bright spot in the investing scene. Please explain the rationale for your portfolio diversification between bullion, small-, mid- and large-cap companies.
JH: I have about 7% invested in bullion because it is an anchor of value. Physical gold helps protect against currency depreciation. I have about 10–20% in small-cap companies, 20–30% in mid-caps and 30–40% in large caps. The percentages can vary as the valuations change even though we don’t trade very often. Turnover is usually less than 10% in a year.
Big caps benefit most from high gold prices because they are actually producing and selling the metal today. It therefore offers compelling valuations, attractive current returns and virtually a free ride on future gains. We own 11 companies accounting for about 40% of global gold production.
TGR: Are higher dividend payouts going to be the rule going forward?
JH: I hope so. Newmont Mining Corp. (NEM:NYSE) (another Tocqueville Gold Fund top 10 holding at 4.74% of assets) took the lead and linked its dividend to the gold price in April when gold was trading at $1,458/oz. For each $100 increase or decrease in the gold price, the dividend adjusts $0.20 a share. We expect similar announcements to follow from other producers.
TGR: For those who choose to invest in physical gold, where is the best place to keep it? In the U.S., out of the U.S.?
JH: Any good vaulting service will work. Where it is physically located doesn’t matter as long as it is secure, accessible and not in a bank.
TGR: Thank you for sharing your insights.
For the complete audio collection of the Casey Research/Sprott Inc. Summit “When Money Dies,” click here.
John Hathaway, senior managing director of Tocqueville Asset Management, manages all gold equity products and strategies at Tocqueville Asset Management. He holds a bachelor’s degree from Harvard University, a Master of Business Administration degree from the University of Virginia and is a chartered financial analyst. He began his career in 1970 as an equity analyst with Spencer Trask & Co. In 1976, he joined investment advisory firm David J. Greene & Co., where he became a partner. In 1986, he founded Hudson Capital Advisors and in 1988, he became chief investment officer of Oak Hall Advisors.
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