By Ajay Shah, on October 13th, 2011
In response to the Second Micro Finance Crisis in Andhra Pradesh, which took place in October 2010, the Ministry of Finance has proposed a new “Micro Finance Institutions (Development & Regulation) Bill”. A new working paper by Shubho Roy, Renuka Sane and Susan Thomas analyses this bill from first principles of economics and law.
A great deal of traditional work in India, in the field of finance and public policy, has been poorly grounded in terms of logical thinking. A variety of government interventions are proposed, without fully showing the rationale for why a given intervention is valuable. I have often scented a socialistic impulse to intervene in the economy based on some vague notions of being a do-gooder. In addition, of course, there are interventions which cater to one special interest group after another.
I feel it is useful to work in a systematic way. The first task is to identify market failures (if any). All interventions must be considered guilty until proven innocent: an intervention must demonstrably tackle a manifestly visible problem. A useful classification scheme in finance is that all financial regulation falls under the three heads of consumer protection, prudential regulation and systemic stability. It is useful to pose problems under these three categories, then propose interventions which address them. At both levels, we need to move away from ex cathedra assertions towards logic and evidence that demonstrates that there is a problem, and logic and evidence that shows that the proposed intervention solves the identified problem without inducing collateral damage.
In the years to come, we need much higher quality drafting of law in India. This process will be assisted if independent analysis in the economy will critique draft law as has been done by the Roy, Sane and Thomas paper. We need more universities and think tanks who will subject all draft legislation and draft subordinate legislation to such scrutiny. On the government side, a greater effort on the formal rule-making process is required, whereby government is able to utilise such comments more effectively so as to strengthen the work. 
By B.P.T., on October 13th, 2011
At 8:30 AM EDT, the U.S. government will release its weekly Jobless Claims report. The consensus is that there were 405,000 new jobless claims last week, which would would be 4,000 more than the previous week.
Also at 8:30 AM EDT, the International Trade report for August will be released. The consensus is a deficit of $46 billion, which would be $1.2 billion more than the previous month.
At 9:45 AM EDT, the weekly Bloomberg Consumer Comfort Index will be released, providing an update on Americans’ views of the U.S. economy, their personal finances and the buying climate.
At 10:30 AM EDT, the weekly Energy Information Administration Natural Gas Report will be released, giving an update on natural gas inventories in the United States.
At 11:00 AM EDT, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update on oil inventories in the United States.
At 4:30 PM EDT, the Federal Reserve will release its Money Supply report, showing the amount of liquidity available in the U.S. economy.
Also at 4:30 PM EDT, the Federal Reserve will release its Balance Sheet report, showing the amount of liquidity the Fed has injected into the economy by adding or removing reserves.
By Simon Grey, on October 12th, 2011
I wonder if there is any way to get Americans to shed their lazy mindset: Another Times article published this week, however, challenges the idea of “perfect substitutes” advanced by the NBER study and paints an alternate picture of the economic reasoning behind Alabama’s legislation. John Harold, a Colorado farmer profiled by the Times, tried to hire some unemployed Americans to work on his ranch and paid them a wage of $10.50 an hour, like the migrant workers he usually employs from the federal H-2A program (Colorado’s regular minimum wage is $7.36). The American workers quit, citing the labor as too hard – something that didn’t happen with the Mexican laborers Harold traditionally used. [Emphasis added.]
I’m sure there are plenty of socio-cultural reasons why Americans view this sort of manual labor as too tedious for them.Americans are, by and large, a rather soft people, at least these days.
Personally, I blame video games for a good part of this* (all of the psychological rewards of work with none of the sweat!). But, I’m guessing that the social safety net plays a role in this as well. How many people would quit their jobs at the ranch if they knew that there was no guarantee of money if they quit (i.e. no welfare)? I’m guessing that number would be a little bit lower. It’s easy to quit because the work’s too demanding when you can live off of welfare until you find an opening at Target. It’s not so easy when quitting means that you lose your house and go hungry.Since it’s hard to tell how big a role state and federal social safety net programs have played in all this, it’s correspondingly difficult to figure how much blame the respective governments bear for this current mindset. At any rate, though, I think it’s safe to say that the government has certainly been complicit in sowing the seeds to America’s destruction.
* I kid, I kid.
By The Gold Report, on October 12th, 2011
 The rare earth sector has seen astronomical gains in recent years as Chinese export restrictions, short-sighted U.S. policy and investor interest combined to make front page news. In this exclusive article for The Critical Metals Report, Chris Berry, founder and president of House Mountain Partners, LLC, argues that a “Great Reset” is changing the face of the sector, rewarding explorers far more selectively.
What Economic Uncertainty Means for the Rare Earth Sector
The competition among non-Chinese junior mining companies to successfully mine rare earth elements (REEs) began as a footrace and evolved into a full-on stampede. That race is now unraveling, thanks to slower global economic growth and the sheer number of exploration companies involved in rare earth exploration. We have seen estimates of over 300 companies involved in this global search, and when you factor in the relatively tiny size of the rare earth market (approximately 130,000 tons produced in 2010, according to the U.S. Geological Survey) we still stand by what we’ve said all along—there is room here for a few major players and not much else. We believe the rare earth industry is in the beginning stages of a phase we call “The Great Reset.” We base this theory on four ideas:
- Everything reverts to the mean. This includes rare earth oxide (REO) prices. While we believe we will see a permanently higher price for select REOs, this is not the case for the entire suite of oxides, and prices cannot continue rising indefinitely. The laws of supply and demand have proven this.
- Demand projections for REOs are being re-evaluated downward due to anemic global economic growth prospects. With a tremendous debt overhang in the United States and Europe and evidence of growth slowing in China (the three biggest economies in the world), lower aggregate demand for finished goods that use REOs is a given. We have seen forecasts for REO demand in 2015 that are higher than they are today, and don’t disagree, but the downward revision is indicative of lower demand for most REOs.
- Companies such as Toyota and General Motors are actively researching substitutes for REOs in their products. This type of research has been in progress for some time and we think that these companies would not be spending the R&D dollars if they didn’t want to avoid high REO prices.
- Demand projections for “green” or “clean tech” applications such as hybrid electric vehicles, wind turbines and solar cells are not factoring in whether or not manufacturers of these goods can ensure a steady supply of raw materials (specifically REOs) to meet their production forecasts. The rare earth industry is a customer-driven business in that the customer needs REOs of a highly specific type and purity. If a wind turbine manufacturer can’t procure a specific purity of neodymium oxide, for example, the wind turbine may get built without neodymium, implying demand destruction. We have seen estimates of the use of up to one ton of neodymium needed to produce one megawatt of generating capacity from a wind turbine. China alone has plans to install 100 gigawatts of generating capacity from wind (up from 12 gigawatts in 2009). When you factor in European and American projections for wind power (not to mention other parts of the world), this begs the question of whether or not there is enough neodymium to go around and if there currently is not, will there be enough to satisfy these growth targets in wind generating capacity? We are well aware of the benefits of neodymium-iron-boron magnets in miniaturization and efficiency, but think that if a product can be manufactured economically without REOs, then the manufacturer will choose that path or abstain from building the product at all.
To be clear—we have not “thrown in the towel” on REOs and the important role they play in certain sectors of the economy. What we are saying is that the role will be different from what many in the sector currently suggest. Like many other facets of life, the rare earth sector is Darwinian in nature and will evolve to equilibrate supply and demand. The gratification that comes along with healthy and growing demand for a product (in this case REOs) will be delayed, to the chagrin of investors and rare earth mining company CEOs alike. This “reset” shapes how we think about the rare earth space now and in the future and in deciding how and where to invest. Below is a price chart of the Bloomberg Rare Earth Mineral Resources Index and its one-year performance.
The One Sector Where Supply and Demand Don’t Matter
There is one area of the economy, however, which we think is immune to the vagaries of supply and demand of REOs: the military. While the potential for substitution exists with consumer products, we believe there is no such “wiggle room” when analyzing a country’s defense capabilities. The neodymium-iron-boron magnets we mentioned above are critical in actuators of precision-guided bombs and are designed specifically around these magnets. Actuators are responsible for control of the bomb, and this is just one of several products (lasers and radar being two significant other products) that must use rare earths to function optimally. Without the magnets in the bombs, performance is reduced—implying an inferior product—something nobody should be willing to accept. The U.S. Military is responsible for a small overall percentage of REO demand in the United States, but it is significant nonetheless.
The Rare Earth Supply Chain: The Key to It All
So at this point, we believe two things: first, demand for most REOs will decrease in the near term, and second, that it will be exceedingly difficult for the majority of the junior mining companies involved in rare earth exploration to achieve commercial production of REOs. Despite this, the singular crucial issue that put the rare earth story on the front page of every newspaper around the world in the first place still haunts us—Western dependence on a critical resource from a strategic adversary. While a seemingly endless amount has been written about China’s control of the supply of REEs, what we think is most important (and most often missed by the pundits) is the fact that China also effectively owns the entire mine-to-magnet supply chain. This is the crucial vulnerability. The mining of rare earths is the easy part. It is the resulting steps where intellectual property is created that really matter. In 2010, the United States Government Accountability Office (GAO) was commissioned to deliver a report on the use of rare earth elements in the Department of Defense supply chain. Regarding military capabilities, the report states (Ed. Note: bold text is ours),
“For example, the M1A2 Abrams tank has a reference and navigation system that uses samarium cobalt (SmCo) permanent magnets. The samarium metal used in these magnets comes from China.”
Whether we’re discussing heavy rare earth elements (HREEs) or light rare earth elements (LREEs), a particular concern is the fact that the West is realistically years away from having a supply chain built that can diminish foreign dependence on REOs. Viewed that way, reduced demand for certain REOs could be a blessing in disguise in that it can give Western policymakers more time to formulate a viable strategy, though based on recent behavior in Washington DC (i.e., the debt ceiling debate), we’re not holding our breath. The chart below shows the supply chain for rare earth permanent magnets used in wind turbines and hybrid vehicle motors, among other products. China is responsible for the entire upstream portion of this chain and has designs through mercantilist export policies on owning the entirety of the downstream portion of the chain as well.
There are myriad issues surrounding China’s trade policies and her seeming inability to “play fair” on the world stage. The World Trade Organization recently found that China was in violation of international trade rules for curbing exports of rare earths. The Chinese government is likely to appeal this ruling, effectively kicking the can down the road and prolonging export curbs of rare earths from China indefinitely. Though one could, based on this factor, infer higher prices for REOs, we still believe that slower economic growth and potential for substitution point to lower REO prices going forward.
To get a sense of how Chinese export quotas of REOs have decreased in recent years and the resulting increases in prices of REOs, see the charts below:
Here are the YTD percentage increases in prices of select REOs. More than anything else, we believe, this makes the case for our thoughts on mean reversion and demand destruction described above:
What to Focus on in the Rare Earth Space Going Forward
There are numerous important factors to consider when undertaking due diligence of a mining opportunity (management capability, grade, tonnage, etc.) that we use in the Discovery Investing Ten-Point Factor Model, but we think that there are three keys one must consider initially before looking further at a given rare earth exploration company as an investment.
Despite the fact that we believe the “easy money” has already been made in this sector, we do believe that opportunities for profit exist. Much has been made in recent months of “critical” or “strategic” metals and what constitutes a metal joining this group. We would certainly include rare earths here and, in fact, take this one step further. We consider rare earths to be “political metals.” In the rare earth sector, geopolitics trumps all, and this is the first factor to consider when investing in the junior mining rare earth sector. It should be clear that we have our doubts about permanently increasing demand for REOs. However, due to the significant enhancements REOs provide in military applications, access to a reliable supply of these metals is now on the radar (pardon the pun) of politicians from Brussels, to Ottawa, to Beijing, to Washington DC. In the United States, Sen. Lisa Murkowski (R-Alaska) has been an ardent supporter of rebuilding the U.S. industrial base and supply chain for critical minerals, including rare earths. Rare earth deposits are of strategic significance. A deposit in a safe and stable political jurisdiction is an absolute must.
Second, when comparing rare earth deposits, a decidedly large slant towards HREE mineralization is also a must. After all, the HREEs are truly “rare,” and forecast to be in deficit going forward. In our opinion, investing in a large LREE deposit that promises tens of thousands of tons of REO production per year, when the Chinese dominate this portion of the market and are set to do so going forward, is not a wise move. In the price chart we printed above, dysprosium oxide and terbium oxide (two of the most sought-after HREOs) have increased in price by 704% and 439% respectively, year-to-date. We do not expect continued triple-digit gains in these REO prices, but do believe that deposits with a high percentage of HREEs have potential to outperform going forward.
Finally, while the geopolitics and HREE content are important, without a solid understanding of the metallurgy of a deposit, you could quite literally be investing in moose pasture. This is one of the ultimate differences between rare earths and other metals. Separating 17 metals from each other is an enormously difficult task both technically and financially. This is also a competitive advantage the Chinese have over the West—they have “cracked” the metallurgy of their primary rare earth deposits. While we don’t expect miracles, we do want to see Western rare earth companies making steady progress into understanding the mysteries of the metallurgy. This is one of the biggest risk factors when analyzing a rare earth exploration company.
The Future Is Never Certain, but There Will Always Be a Place for REOs
It appears to be a rather hazy future for the rare earth sector as slow economic growth, potential for substitution, manufacturers potentially misreading demand for their own products that use REOs and price mean reversion all come together to take some of the “froth” out of this market. We think this is a good thing. Regardless, the big picture issues surrounding the need for REOs in various military and clean tech applications are going to keep the industry front and center, but it will evolve much differently than many expect. The Great Reset will ensure that.
By Doug Gentry, on October 12th, 2011
So, who cares about the Greek debt crisis? It’s a small country, a long ways away.
Answers:
Greece as a Country: “We care!”
The Euro currency countries: “We care!”
Europe Generally: “We care!”
U.S. and International Financial Community: “We care!”
Stock Investors: “We care!”
All right, already. Here’s why they care.
The background
Through a series of missteps over the last 10 years the Greece government amassed a large government (or sovereign) debt, and then disguised it from its citizens, lending institutions, its Euro partners, and international financial organizations. The recession exacerbated the problem, threatening to push the Greece government into bankruptcy. Annual deficits as a percent of GDP or total national debt as a percent of GDP are higher but not that different from the United States, but in contrast to the U.S. the global investment community has very little confidence in Greek bonds and the ability of the government to repay them. That means Greece has to pay much higher interest rates on its debt, if it can borrow money at all.
What Can Greece Do?
When faced with larger government deficits, policy makers typically turn to two economic “levers” – fiscal policy and monetary policy. On the fiscal side the government can cut spending and/or raise taxes. Both of these actions have met strong resistance in a country used to heavy subsidies of middle class citizens and notoriously poor tax collection records.
Monetary policy can be an effective tool – often because it does not require the approval of the legislature or the voters. Normally a central bank can inject funds into the economy (electronically “printing” money) and use that to pay debts. This injection of money can also lead to the devaluation of the local currency. While devaluing doesn’t sound appetizing it can be very effective, since it encourages more exports and more tax revenues, and because it makes it easier to pay off debts denominated in the local currency.
BUT, Greece can’t execute its own monetary policy. It is a member of the Eurozone – using the Euro as its currency rather than the drachma. As a result Greece cannot unilaterally change the supply of its currency. It does not have control over monetary policy. To make matters worse for Greece, the Euro has held a fairly high value against other world currencies – just opposite of the direction Greece needs to help with its problems.
 Euro
How Does the Crisis Affect the Euro?
The Euro is a common currency, currently used by 22 European countries. Decisions on the supply of the Euro are made by a representative body at the European Central Bank.
When a member country, like Greece, threatens to default on its loans, global investors pull funds out of Greece and the Eurozone. This reduces the demand for euros, and causes the value of the euro to fall. This is a mixed blessing. Countries often prefer a strong currency, but a weaker one can encourage exports. Europe is an export driven continent.
Joining the Eurozone initially, countries have to prove that their economies and government budgets are healthy. It is like welcoming someone new onto a lifeboat. You prefer the new person to be healthy. It appears that Greece hid or obscured its economic reports when applying for membership and now its fellow lifeboat members are not happy.
Commentators, such as Paul Krugman, have argued that Greece should never have been allowed in the Eurozone. They also argue that the Euro common currency is flawed if monetary policy is directed centrally, but fiscal policy remains with individual countries. Macroeconomic theory suggests that both need to work in concert, and the slow, deliberative and political style of the European Central Bank is not well suited to crisis management. Here’s one of many Krugman posts on the crisis.
Why the Large Bailouts by European Governments?
Other European countries, particularly those who share the use of the euro currency, want to stabilize the currency in their own self-interest. In additional many of the large banks and financial institutions in Europe hold Greek debt. If Greece defaults on that debt, those institutions are in trouble. France and Germany have been two of the largest contributors. French voters have been relatively quiet about the bailout, but German politics are much more sensitive to the issue. Chancellor Merkel of Germany has to balance the need to preserve the Eurozone economy against the indignation of German taxpayers who feel little affection for Greece.
European policymakers also worry about other members of the Eurozone – including Spain and Ireland. These two countries have stressed economies for reasons different than Greece. Neither of them had profligate government spending, but both have been hit particularly hard by the recession. Additional stresses on Europe could tip these countries further into trouble.
Why the International Community and Stock Investors Worry
The source of concern in the stock markets and among international investors is mostly fear of default. Large financial institutions and other holders of Greek debt would be seriously hurt. If a Greek default pushed other European countries like Spain and Ireland over, the impact grows significantly.
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By B.P.T., on October 12th, 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 2:00 PM EDT, the FOMC Meeting Minutes will be released, which will provide insight into how the Federal Reserve board governors and bank presidents view the economy.
By Simon Grey, on October 11th, 2011
The other day, my brother emailed me to ask if it was wrong to play the stock market. Since I was going to take the time to write him, I thought I’d share my response on my blog.
In the first place, it’s important to note that the stock market is inherently neutral, morally. By this I mean that the stock market, as a non-human entity, cannot go to heaven or hell and, as such, cannot be inherently moral or immoral by its own state of nature.
In the second place, it’s important to note the sources of immorality within the stock market. Karl Denninger has documented massive amounts of fraud among traders, particularly among firms that engage in automated trades. Furthermore, many companies traded on the stock exchange engage in illegal and immoral business practices. Many trades are based on fraud (think of businesses that lie about their balance sheets and income statements). Also, many people engaging stock trades are highly immoral.
Does this then mean that one can never trade stocks? Of course not. If it were immoral to trade with those who are immoral, then no one could buy groceries or clothes, or engage in any kind of trade. And it is not inherently immoral to be the victim of fraud (though it is foolish). Interacting with those who are immoral does not cause their immorality to transfer to you by the merits of trade.
However, those who are immoral can end up having an influence simply by the virtue of your continued interaction with them. This does not mean that the venue of your interaction is immoral. Rather, your decision to allow those who are immoral to drag you down to their level is immoral, and it is you who will bear the guilt and blame for that decision, not the stock market.
It is worth noting, though, that if playing the stock market troubles your conscience then you should refrain from playing the stock market (cf. Romans 14). And it is also worth noting that there are many major players in the stock market who are simply looking for a sucker of which to take advantage, and that the government has often turned a blind eye to the fraud that usually accompanies this. As such, though it is perfectly moral to play the market, it is at this point in time quite foolish to do so.
By The Gold Report, on October 11th, 2011
 After leaving the securities brokerage industry in 2009, Ian Gordon founded Longwave Analytics and Longwave Strategies to focus on protecting investors from what he believes is a global macroeconomic meltdown that is already underway. Gordon proposes that physical gold and certain gold stocks will be investors’ best hedge and overall solution to the worst financial crisis the world has seen. In this exclusive interview with The Gold Report, Gordon shares his thoughts on the current economic mess and how investors can take action now.
The Gold Report: You founded this firm based on your long wave theory that is based on the Kondratieff Cycle. How is this same or different from Kondratieff?
Ian Gordon: We have gone significantly beyond Kondratieff’s original thesis published in 1925. I am very proud that we have made the cycle far more encompassing than Kondratieff would have ever envisioned. For instance, one of the key things we have done is identify an investment cycle within the long cycle. This is an extremely valuable tool for investors, which allows them to make appropriate investment decisions in each quarter of the cycle.
TGR: Do you feel that you have legitimized the Kondratieff Cycle beyond theory and as a general principle?
IG: Well, I think we have. The proof is in the pudding. We have been able to recognize exactly where we are in the cycle and envision what the implications are likely to be. I think we have been able to pinpoint that with a great deal of accuracy the critical aspects of the cycle and how these relate to the economy and to investing.
TGR: You obviously can’t expect investors to wait through an 80-year super cycle. You’ve managed to isolate the bull and bear markets. Is that what you are saying?
IG: Yes, we have not only been able to isolate the bull and bear markets, but also we have been able to identify the best and most appropriate investments for each quarter of the cycle, and they generally work throughout that quarter. We have broken the cycle into the four seasons. We call it a lifetime cycle because it is 60–80 years, and each of its seasons is approximately 15–20 years, a quarter of the cycle. By the way, this is the fourth cycle, and it has always repeated pretty well the same in every cycle. Certainly essential investment decisions have been the same for each of the seasons in the cycle.
TGR: Take it from the beginning.
IG: Spring essentially renews economic growth. It is the rebirth of the economy following the winter of the cycle, which is the time when the economy dies and when debt is wrung out of the system. Because spring is the rebirth, stocks and real estate make appropriate investments and do very well for investors. We can show from our current cycle, which we maintain began in 1949, that the Dow Jones Industrial Average rises from 161 points at the beginning of spring and ends at 995 points at the end of spring. Of course, real estate also does exceptionally well during this period.
Then, following spring we move to the summer, which began in 1966 in our current cycle. We have always had inflation in summer because there has always been a war in this part of the cycle, and that war has always been financed through a huge expansion of the money supply. In the first cycle, it was the War of 1812. In the second cycle, it was the U.S. Civil War. In the third cycle, it was the First World War from 1914 to 1918. And, in the fourth cycle, it was the Vietnam War. With that inflation, stocks do not do that well and essentially make no gains. If anything, stocks end summer about 30% below the point from where they began. Conversely, gold performs exceptionally well, as do all commodities. Gold goes from $35/ounce (oz.) in 1966 to $850/oz. in 1980, and the Dow goes from 995 at the end of spring and ends the summer at 777 points. Real estate continues to do well in the summer of the cycle.
Four things always anticipate the onset of autumn in every cycle: These are the peak in interest rates; the peak in the consumer price index; the bear market in stocks such as the one that occurred between 1981 and 1982; and a recession. Now, autumn is always the point from which stocks, bonds and real estate perform the best in the cycle. It is the most speculative period in the cycle, and it is when debt really starts to build exponentially, and so gold performs very poorly in this portion of the cycle. In fact, gold prices go from that $850/oz. peak at the end of summer to $250/oz. at the end of autumn, and the Dow goes from 777 to 11,750 and real estate continues to perform very, very well. So, real estate has a three-season growth period and stocks have a two-season growth period, to the end of autumn, while gold has a one-season growth period.
The winter of the cycle, which we call the payback period, is when the economy dies. It goes into a deflationary depression overcome by the overwhelming debt in the system that has built-up principally through autumn. When we get into winter, we get very defensive and we move into gold, which performs exceptionally well, as do gold stocks. The general stock market performs abysmally. Between 1929 and 1932, the Dow lost 90% of its value. And, real estate also performs very, very poorly on account of the economic depression and the fact that homeowners have assumed huge mortgage debt to purchase their homes. During this time many people lose their homes because they are unable to make the mortgage payments. House prices decline to very low levels and in many cases mortgage debt is significantly higher than the value of the home.
TGR: Where are we in the cycle now?
IG: We are in the winter. The signal of the onset of winter was the peak in stock prices in January 2000 for the Dow and March 2000 for the NASDAQ. That was the end of autumn. And, yes, the Dow was higher than that in October 2007, but, again, that was really an abnormality created by paper money systems. The Federal Reserve was able to print copious amounts of money, pump it into the economy and revive the stock market after 2000 and into 2007. That money printing also contributed to the greatest real estate bubble in history and we know what the outcome of that bubble is.
TGR: I’m looking at your dire wintery target prediction that the Dow Jones Industrial Average will descend by more than 90% to 1,000 from current levels that are around 11,000. It sounds like a global economic meltdown of unseen proportions.
IG: Politicians are desperately trying to revive the economy by printing even more money. So, this bear market that started in 2000 continues in 2011. Normally bear markets last about one-third the time of the preceding bull market; obviously that has not been the case this time. So, we think when the end does come, it is going to be very traumatic. Eventually the Federal Reserve will lose control and will not be able to get the stock market reignited because it will reflect the reality in the economy. We think the Dow at 1,000 is probably a little optimistic. We think it could go below that to something like 500 if we were to emulate the 1929–1932 experience.
TGR: That translates into massive unemployment, does it not?
IG: It translates into an economy that’s basically a disaster: massive unemployment, huge bankruptcies, breadlines and a government that, in fact, can’t raise the cash to support the depression. Remember, going into the last depression the U.S. government was extremely wealthy, and America was the world’s largest creditor nation by a huge margin. The U.S. government debt had been paid down all the way through the 1920s, and it went into the last depression with government debt of only $16 billion. When the depression hit, the government had oodles of cash to throw at it to get the economy going. Yet it was never effectively able to do that. The Second World War brought us out of the depression.
TGR: Ian, I know you said gold will perform quite well in this kind of environment, and so I assume you believe there is much more upside yet for gold.
IG: Well, I do. One of the ways that we’ve always been able to measure where we think gold is going to go is simply using the Dow/Gold ratio, the value of the Dow Jones Industrial Average divided by the price for an ounce of gold. When this ratio reaches extreme highs, stocks have performed exceptionally well. So, we would anticipate that it would reach an extreme high at the end of spring of our current cycle, and so it did when it was about 28:1. In other words, it took 28 ounces of gold to buy the Dow Jones. And at the end of summer, gold performs well, and stocks don’t. It went down to a 1:1 relationship that was the lowest low, which we have seen twice. But, we are envisioning that we are going to go below 1:1 simply because we made an all time high at the end of autumn of 44:1. The decline must be in proportion to the advance. So, we think the decline is going to take us to something like a quarter to one (0.25:1), which is $4,000/oz. gold and a Dow of 1,000. We’re currently at about 6:1 on the ratio.
TGR: What about gold equities versus physical gold? Will gold equities climb this wall of fear into this winter cycle?
IG: Well, we know that between 1929 and 1936 gold equities performed exceptionally well. I think that the reason that they haven’t performed that well recently, particularly in the junior sector, is that [non-gold] stocks have generally performed pretty well aided and abetted by the Federal Reserve. If the bear market had followed its normal course, it should have ended in 2006, but it did not follow that normal course. So, once that bear market begins in earnest and once the Federal Reserve loses control of the stock market, we believe that the gold stocks will begin to mirror the actual price of gold, for which our forecast is $4,000/oz. And, that may be conservative because we believe that when the whole debt bubble continues to unravel that you won’t be able to obtain gold at any price. But at $4,000/oz., the gold stocks will perform exceptionally well.
TGR: This would be a dramatic divergence between gold equities and non-gold equities. What are your recommendations for investors?
IG: Well, we have always believed that you should definitely own the physical metal as well as the equities. And we have always had a big belief in the performance of the juniors because of the leverage that they provide to the price of gold.
TGR: Where do investors go? Which equities?
IG: Well, one that we like very, very much is Barkerville Gold Mines Ltd. (BGM:TSX.V). The reason we like the company is that it is in production. It’s producing 25 thousand ounces (Koz.)/year of gold from its QR deposit in central British Columbia, Once it receive its permits to mine the Bonanza Ledge deposit, and that should be very soon, production will increase to 50 Koz. per annum. This makes the company very positive on a cash-flow basis. Barkerville is also finding and adding quite dramatically to its ounces in the ground position. It is going to bring in a second mill, and once that is permitted, production will rise to about 150 Koz./year. It is targeting 2013 for the second mill to be up and running.
TGR: Over the past 12 weeks, Barkerville is down 30%, and yet it still has a market cap of $100 million. It looks like shares have sufficient liquidity.
IG: I own a lot of it; it could be 30% of my stock portfolio.
TGR: So Barkerville would be your favorite?
IG: It’s my favorite, but there are also others that I like an awful lot. I love PC Gold Inc. (PKL:TSX) which I own. The company is in Pickle Lake, Ontario. I sort of trust Canadian mining, not because I’m a Canadian, but just because I feel it has been our heritage for so long. The Canadian government is always going to be a party to it. PC Gold has a very, very rich underground mine at Pickle Lake, and it has outlined about 1.2 million ounces (Moz.). PC Gold has also discovered a surface zone. It’s going to be a lower grade, but this gold in the ground has got to be worth something.
PC Gold hit $1.80 in April 2010, and I think it’s trading at around $0.47 right now. The other thing about PC Gold is that it has about $7.5 million in cash in the bank. So, even if we are in a major credit crunch, and I suspect we are, PC Gold has money to outlive a credit crunch and then get back on track and eventually be able to put its mine back into production.
TGR: The $7.5 million on its balance sheet represents about a third of its market cap.
IG: Right. We’re very keen on it and we own a lot of shares, all of which I bought in the market. I’m very happy to own this company.
Another one that we think a lot of is Colibri Resource Corp. (CBI:TSX.V). All of the Colibri properties are in Sonora, Mexico. One of its properties is very near La Herradura, which is owned by Newmont Mining Corp. (NEM: NYSE) and Fresnillo PLC (FRES:LSE). It’s a 12 Moz. deposit that consistently seems to stay at 12 Moz. In other words, as fast as the joint-venture partners mine the deposit, they replace it with new found gold. The Colibri property is about 12 km. from La Herradura and it has almost the identical geology to La Herradura. Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) is doing a joint venture earn-in on that property. So, you’ve got a major producer earning into that property and, if successful as Newmont and Fresnillo have been at La Herradura, it will take Colibri into production and hopefully find the 12 Moz. plus that they’ve found at La Herradura. I think it is very, very cheap. Agnico owns just under 20% of the company and Sprott Asset Management owns just under 20% and my wife and I own just under 10%. So, effectively, that’s half of the company’s shares. Colibri has about $2 million cash, and it has an excellent board.
TGR: I’m looking at Colibri’s market cap of about $7.2 million. I’m thinking that would scare a lot of people off.
IG: Well, I’m not scared off because Agnico is not going to allow this company to flounder. I’m sure it’s going to support it. And I don’t think Sprott is going to allow this company to flounder given the fantastic assets that it has.
Another company that has just gone on our website is Terraco Gold Corp. (TEN:TSX.V). I own shares in the company and I really like Terraco. It owns 100% of a property in Idaho called the Almaden Project, which it bought from a company in financial distress. The property has just under 1 Moz. already defined in an NI 43-101. Again, this company has a very, very strong board. Terraco has another property in Nevada, the Moonlight Project, which adjoins the north side of Barrick Gold Corporation (ABX:TSX; ABX:NYSE) and Midway Gold Corp.’s (MDW:TSX.V; MDW:NYSE.A) Spring Valley Project. We think that this company will do exceptionally well for shareholders.
TGR: Was there one more you wanted to mention?
IG: Actually there are several other companies that I like, but let me mention a couple more and give you the names of some other companies that I own. I am particularly fond of Temex Resources Corp. (TME:TSX.V; TQ1:FSE), which has all its properties in Ontario. One of the properties has outlined an NI 43-101 resource of about 1.2 Moz. of gold. It is also now drilling and being very successful on a property that it has in the Timmins gold camp, of which it owns about 60%. Goldcorp Inc. (G:TSX; GG:NYSE) owns 40%. So, that particular mine was the richest mine in the Timmins camp. I own a lot of shares, and I have just purchased more shares in a private placement that the company is now doing.
Another company that I have long owned and think will ultimately perform very well for shareholders is Golden Goliath Resources Ltd. (GNG:TSX.V; GGTHF:OTCPK). The properties are all in Mexico and several have had significant past producing gold and silver mines on them. Agnico-Eagle owns about 8% of the company’s shares and Sprott Asset management owns a little less than 20%. The company is working toward a joint venture agreement with Agnico-Eagle on its Las Bolas property.
Other companies that I own and like are African Queen Mines (AQ:TSX.V), Fire River Gold Corp. (FAU:TSX.V; FVGCF:OTCQX), Freegold Ventures Limited (FVL:TSX), and Northern Freegold Resources (NFR:TSX.V). All these companies have significant gold in the ground assets. Fire River Gold is in production. I would encourage prospective investors to visit the companys’ websites and read through the corporate presentations and even to phone the presidents of companies before they make a decision to purchase shares.
TGR: My final question is, how long will winter last?
IG: It will last until the debt has been eradicated from the economies of the world. So, to give it a date is difficult. If the whole world monetary system collapses under the massive mountain of debt that has accumulated worldwide, then it will happen reasonably fast, and a new world monetary system will evolve. I think that new system will be based on gold.
TGR: Ian, this has been very valuable. Thank you.
IG: Thank you very much for having me.
A globally renowned economic forecaster, author and speaker, Ian Gordon is founder and chairman of the Longwave Group, comprising two companies—Longwave Analytics and Longwave Strategies. The former specializes in Ian’s ongoing study and analysis of the Longwave Principle originally expounded by Nikolai Kondratiev. With Longwave Strategies, Gordon assists select precious metal companies in financings. Educated in England, Gordon graduated from the Royal Military Academy, Sandhurst. After a few years serving as a platoon commander in a Scottish regiment, he moved to Canada in 1967 and entered the University of Manitoba’s History Department. Taking that step has had a profound impact because, during this period, he began to study the historical trends that ultimately provided the foundation for his Long Wave theory. Gordon has been publishing his Long Wave Analyst website since 1998. Eric Sprott, chairman, CEO and portfolio manager at Sprott Asset Management, describes Gordon as “a rare breed in the investment-advisor arena.” He notes that Gordon’s forecasts “have taken on a life force of their own and if you care to listen, Gordon will tell you how it will all end.”
By Christopher Briem, on October 11th, 2011
The Infrastructurist has a list of the most underutilized airports in the world.
Yup.
Though I have to say the ‘reason’ they give is pretty misleading. No mention at all of a few bankruptcies for USAirways and a terminal built to spec for a hub operation they abandoned.
By B.P.T., on October 11th, 2011
At 7:30 AM EDT, the NFIB Small Business Optimism Index for September will be released, providing information regarding the health and confidence of small businesses in the United States. The consensus is that the index is at a level of 88.5, which is 0.4 points higher than the previous month’s value.
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.
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