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At 8:30 AM Eastern time, the Consumer Price Index report for November will be released. The consensus is that CPI increased 0.1% last month, and there was a 0.1% increase in CPI when food and energy are removed.  Join the forum discussion on this post - (1) Posts
Sweet Keynes but the banksters just do not have a clue. Somehow, the FRB of New York has come to the hilarious conclusion that somehow, mysteriously, those who “flip” houses are the root cause of the recession. Talk about clueless. The question that the NY FRB is apparently too stupid to ask is: Why would some people suddenly decide to “flip” houses? Answer: because it’s generally profitable due to the increased demand for houses as a result of a)artificially low interest rates from The Fed, b) massive fraud among the banks in regards to loan application, c) the Federal Government’s willingness to subsidize market risk, and thus eliminate moral hazard, through the agencies Freddie Mac and Fannie Mae, and d) the general tendency of the government to encourage and subsidize home ownership through, among other things, federal income tax breaks. Basically, the government as at the root of most of the problem here, and the Federal Reserve played a major role. Of course, the FRB is not going to admit to wrongdoing, particularly since greedy businessmen make for a more compelling villain in this narrative. But blaming people for responding to incentives at the margin, as clearly happened in this case, is indicative of just how worthless mainstream macroeconomic analysis clearly is. Quite simply, it takes an astonishing amount of either dishonesty or short-sightedness to come to the conclusion that greedy businessmen are to blame for the current recession instead of the incentive system in which they operated. The shallowness of this analysis, if honest, is simply evidence that those who are currently in charge are simply too stupid to merit the power with which they’ve been entrusted. If, on the other hand, they are liars, the case for their removal from power is not in any way diminished. In sum, there is no excuse for those presumed to be intelligent, and thus deserving of power, to be offering analysis this putridly vapid; they must be summarily dismissed and the system must be dispatched with. * Cf. Dr. Sowell’s book Applied Economics.
The Gold Report: David, in August you predicted that the silver price could go as high as $75 an ounce (oz). It was recently at about $32/oz. Where is it along the path to $75/oz? TGR: What did you think of the recent move by central banks in the U.K. and Canada getting together to boost liquidity in the markets? It seemed to push up the gold price a bit. DM: It was what I call “old school.” I’m showing my age, but we used to avidly watch the U.S. money supply. When there was a significant increase in the money supply, the gold price would reflect that because it is more dollars chasing a fixed amount of goods. It’s a clear indicator that papering over the problem is not a solution and gold is shouting that loudly. The increase in M1, M2 or M3 (not provided by the Fed anymore) is looked at, but not with the intensity it was in the 1970s. TGR: In the November issue of Silver Investor, you report that China could become a significant holder of European debt. While any such move would devalue China’s significant holdings of U.S. Treasuries, it would provide leverage for China’s efforts to form a new global currency backed in part by gold. Could you expand upon that idea? DM: China as a nation has become the creditor of last resort because it has money to recycle. The more debt that it owns, the more control it has over the debt. China would have a lot of leverage in any default negotiations. There was a conference about a gold-backed yuan about a decade ago. The idea about a gold-backed currency is probably going to take place at some point in the future. China has bought more gold all along than they publicly admit, but the amount is far too small at this point to do any real gold backing to their currency. The country continues to buy gold slowly and quietly. It’s hard to say when China would have enough to make a viable gold-backed currency out of the yuan. That’s where the negotiations would come into play. TGR: Do you think it would take decades? DM: It would take decades to accumulate enough to make a gold-backed yuan in the fashion China is acquiring gold now. However, if China dumped a significant amount of its money (U.S. debt) into gold at once it would drive up the price thousands of dollars an ounce overnight. Gold would go ballistic. On the other hand, China has the leverage of the debt. In other words, it says, “U.S., you owe us this much money, so what we’ll do is we’ll discount the debt. You send us this much gold and we’ll cancel out part of the U.S. debt we hold.” That is a lot of power. Remember, “The borrower is servant to the lender.” TGR: You recently reprinted Ron Hera’s “23 Ways to Boost Silver Investment Profits.” It talks about risk versus growth. DM: The best place to be in this market, after establishing a physical metals position, is on the mining side by balancing risk with growth. I like the midtiers because this is where the greatest growth is along with mitigated risk. TGR: Hera also tells investors to take a 24- to 36-month time horizon. DM: All markets move up and down, including the silver market. Investors have to take the long-term view of this market. There is still a major trend to the upside, but there’s going to be more volatility. TGR: Hera tells investors to be greedy when others are fearful and be fearful when others are greedy. DM: I was getting fearful while others were getting greedy when silver was around the $35/oz level on its way to $50/oz. I cautioned investors that if they had to buy silver at that level to only buy some because the market was temporarily overdone. I was getting a lot of blowback from even some of the better analysts for being too cautious. I called the top around $48/oz and I’m pleased with that call. In other words, looking from the perspective of this interview my call was a good one, yet you would not believe the flack I took from some in this business. TGR: Hera also says, “No excuses.” If a company isn’t progressing, just get out. DM: You have to hold every company’s feet to the fire. Ask what it plans to do next year and if it met its milestones last year. The idea is to strive to do everything it set out to, but if it can’t then it should report it honestly and move on. I don’t really like the junior sector that much. There are a lot of companies that have gone by the wayside early in the junior mining cycle. There are still some good values out there, but it’s pretty tough to call these days. TGR: He also advises that investors pay attention to value and don’t pay a premium to get on the bandwagon. DM: I agree. For example, we did an update on Royal Gold Inc. (RGL:TSX; RGLD:NASDAQ) sometime ago that showed how valuable it was—even at an extended stock price. A well-known Wall Street stockbroker took the time to call me to say it was an over-the-top, great report. That stock has done extremely well while so many have not. TGR: Hera also discussed the influence of inflation on real wealth. Given the hidden inflation in the market, he argues that to preserve or even grow wealth, investors have no choice but to seek higher gains of a minimum of 25% a year. What’s your perspective on it? DM: Markets are volatile. They wax and they wane. The market is in a period of consolidation. Very few stocks are reflecting their true value. It’s a good time to gradually get into these stocks. They could go lower over the next few months, but they represent one of the best places to put money right now. As far as what to expect in the future, let me just state that I agree with ShadowStats.com Editor John Williams’ prediction that we have 10% inflation. There will always be some dogs (stocks) that won’t move, but there should be some real gains in precious metals. If there’s truly 10% inflation, there could be 25% gains in a mining equity, which would be a 15% real gain versus the true inflation rate. Once the sector gets hot again, the gains could be huge. Presently, stocks are undervalued, which means be greedy when everyone’s fearful. This is the time investors should be buying. TGR: Some pundits are saying that the market’s going to go even lower before it heads higher. Do you believe that’s the case? DM: I do, but to think that you can pick an exact bottom is an amateur’s game. A professional tries to get in and accumulate while the getting is good. I’m looking at December through perhaps as late as April. TGR: If investors are trying to reach 25% returns per year, they’ve got to turn to the small-cap space. DM: Not necessarily. First, to expect those returns every year is unreasonable. However, investors could make 17% a year just by holding a good company, like Royal Gold, and writing the options on it. The options writers win 85% of the time and the option buyers lose 85% of the time. An investor could rent a stock like that out to people that want to play the options game and smile all the way to the bank—even in a downtrending market. TGR: Nonetheless, you have some speculative buys on a handful of small-cap silver plays. DM: Of course. Nothing is more exciting than getting a speculation right. We had Western Copper before it was renamed Western Silver, and eventually bought out by Glamis. Glamis was eventually bought out by Goldcorp Inc. (G:TSX; GG:NYSE). When you get a 4,000% gain on something, you can’t help but smile. We like some small caps. Silvermex Resources Inc. (SLX:TSX; GGCRF:OTC) is one that we’ve come back to. The stock did fairly well after our initial recommendation. Then we went into this financial situation that clobbered everything and Silvermex had to regroup. We sold it. We came back to it when it was very undervalued. I’ve done that on several companies. TGR: Silvermex is down about 26% year-over-year right now. Is that just the market or is that fallout from the deal with Genco Resources Ltd.? DM: It’s both. The Genco deal looks pretty good on paper, but the market is giving a different vote right now. Sometimes persistence pays off in stocks, however. I’ll give you an example. We owned First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:Fkft) for a very long time. We had it at $4/share, but it was under $4/share month after month. When that stock finally caught on it went like gangbusters. We could have missed a huge move in that stock if we weren’t persistent. Am I always right? No. Am I right on Silvermex? I don’t know yet. Does it look bad at this particular point in time? Yes, it probably does. But I know enough to know that there’s a strong probability that at some point the stock will catch up. TGR: What’s your view of Silvermex’s management? DM: It’s one of the better management teams out there. I know Mike Callahan, Silvermex’s president who was formerly an executive with Hecla Mining Co. (HL:NYSE). I also know Art Brown, who was also with Hecla. Silvermex has a strong board. They want to make this company viable. They have something to prove. TGR: It’s trading at about $0.40/share right now. Is that a good entry point? DM: We had it earlier than that, but it’s probably OK. Investors could slowly build positions between now and April to take advantage of any further market decrease. TGR: You’ve done pretty well with some of the midtiers, too. DM: Pretium Resources Inc. (PVG:TSX) stock is up 20% after it announced a much larger, higher-grade asset. We were into the stock at around CA$8/share. It’s well above CA$10/share, but it’s still undervalued. We love the management. Robert Quartermain has a proven track record. Investors see a stock move and they’re scared to buy it. That’s incorrect thinking. A lot of these stocks that make big moves make new high after new high. How else does a stock go from $5/share to $50/share? TGR: Pretium is up about 45% so far in 2011. How much upside is left? DM: I think there’s plenty left. Think about buying $1,000 worth of Coca-Cola stock in 1928. People worry about how much is left, but what if the stock goes up 500% or 5000%? You have to let the stock tell investors how much upside is potentially left. You don’t want to sell your winners. You want to sell your losers. TGR: What other midtiers still have some upside? DM: Tahoe Resources Inc. (THO:TSX) is a great company on my watch list with a lot of upside. It’s not very well known. TGR: BMO Nesbitt Burns has a $26/share price target on Tahoe. It’s trading around $18/share now. Do you think that’s reasonable? DM: I do, but I don’t like to use price targets because it’s a no-win situation. If it makes a target and it stops at that exact price, you’re a genius. If it’s under that or over that then you get nothing but flack. Do I think Tahoe is undervalued? Yes. TGR: Tahoe is planning to produce about 316.9 million ounces of silver from its Escobal property in Guatemala over the next 18 years. Do you have any doubts that it will execute on that? DM: There are always doubts in the mining industry. There’s jurisdictional risk in many South American countries. Am I confident that it’ll happen? No, not today. Investors should spread out geopolitically. It’s very important in today’s financial climate to expect the unexpected. TGR: The company is run by Kevin McArthur, who was the president and chief executive of Glamis Gold, which was taken over by Goldcorp, and then headed Goldcorp. It’s hard to argue with that kind of track record. DM: I’m not. You have to put a great deal of credence into that caliber of management. But the best management in the world in the wrong jurisdiction can have problems. Robert Quartermain is one of my favorite examples. He was involved in a project in Russia and got burned slightly. TGR: Are there any other company stories you’d like to share with us? DM: Prophecy Coal Corp. (PCY:TSX; PRPCF:OTCQX; 1P2:Fkft) is undervalued. Prophecy Coal was two companies. It’s a coal company, but it also had a platinum group metals company that was spun off. I still like the Prophecy Coal side. It’s a long-term project with a lot of hurdles to overcome in the uncertain jurisdiction of Mongolia. However, I have been to Mongolia and met with some of the people heading up the project, which will be using the coal deposit to fuel a power plant. I got a pretty good feel for how serious they are. As a speculation, it’s one of the better ones. TGR: Do you follow 49 North Resources Inc. (FNR:TSX.V) at all? DM: Yes, it is on my watch list. TGR: It’s a different kind of play. It’s a little like the Pinetree Capital model where it takes positions in companies involved in many different resources. DM: What I like about that type of model is that it spreads risk out. These are run by professionals that know what they’re doing. That model is especially good for the retail investors who don’t have the time to understand what they’re buying. It’s a good way to play the market. TGR: In a response to a readers’ inquiry about the frightening possibility of deflation, you replied, “I do see a deflationary scare and suggest you buy all the way through it—three to six months. These mining stocks are cheap, but could get cheaper. I do not see it as being as bad as 2008.” How bad do you see it getting? DM: The mining equities market could drop another 10%. But it’s possible that the current market is as bad as it gets. I do not see the financial crisis of 2008 repeating in 2012. But something needs to be done that’s going to really strengthen the financial markets and confidence in the system on a global basis. If that isn’t done, I expect 2008 or worse to repeat at some point. But, again, I don’t think that will happen for a couple of years. TGR: Thanks for taking the time to share with us. David Morgan (Silver-Investor.com) is a widely recognized analyst in the precious metals industry and consults for hedge funds, high-net-worth investors, mining companies, depositories and bullion dealers. He is the publisher of The Morgan Report on precious metals, author of Get the Skinny on Silver Investing (Morgan James Publishing, 2009) and featured speaker at investment conferences in North America, Europe and Asia. Yunz thought I forgot. That or lost interest? Boiler has been building up steam is all. That and there seems to be quite a confluence of news in the nexus here: pensions, assessments, redistricting even migration. Damage Control teams being spread thin just trying to keep up. But let’s poke in on pensions for a minute. Let’s recap: we all declared victory just a few months ago it seemed. We ’solved this for the city’ was one quote. Total liability Jan 1, 2011 $1,012,027,241
Funding as of Jan 1, 2011 said to be 62% which gives me $627 mil
Funding as of Sept 30, 2011 said to be 54% so $549 mil
Value of notional asset said to be valued at $239 million which gives a net value of $307 mil
That in itself would give you 30% funding ratio. It has been worse. Still,, after all the extra $$ piled in and all the other machinations, in reality we are in my calculation below the 32% we were just about two years ago. No thanks to some big losses due to massive market timing bets. I really wonder if they have really gotten all the cash back into the market in a portfolio that make sense. Something tugging at me makes me wonder what is up with the investment. Anyone know more?
If this is how we define success, you have to wonder what failure looks like? The only thing different today than a year ago is that an IOU was passed from one part of city government to another. The truth is that IOU existed legally, morally, and in the accounting long before the latest accounting trick. So what really is any different?
It really is worse than that. Realize also that there was what by definition was a one time transfer of the cash that was sitting in the not so locked ‘lock box’ built up from past budget surpluses. So just before the end of the year.. or so everyone is agreeing to even if the banks were closed, was the transfer of $45 million I believe it was to the pension fund. When thinking about trends, you really have to think about that as the one-time opportunity it was. No such surplus will be there for a long time again. If you were to net that out the city would most likely have been at ~$262 mil or less, or just under 26% funding ratio.
I won’t pile on and say another year has gone by and while the rate of increase in the calculated total liability has slowed a bit, it would still seem an obvious projection that the total liability is higher as well which would push that % lower. That or that parts of the system are less well funded than these cumulative averages would imply. But success.. keep saying it.. it all succeeded last year.
 At 8:30 AM Eastern time, the U.S. government will release its weekly Jobless Claims report. The consensus is that there were 390,000 new jobless claims last week, which would would be 9,000 more than the previous week. Also at 8:30 AM Eastern Time, the Empire State manufacturing index for December will be released. The consensus is that the index value will be 3.0, which would be 2.39 points higher than the value reported in the previous month. Also at 8:30 AM Eastern time, the Producer Price Index for November will be released. The consensus is that the index increased 0.2% last month, and was increased 0.2% when food and energy are excluded. Also at 8:30 AM Eastern time, the Current Account for the third quarter of 2011 will be released, which will provide information about the international trade balance with the United States. At 9:00 AM Eastern time, the Treasury International Capital report for October will be released, showing the flow of capital in and out of the United States economy. At 9:15 AM Eastern time, the Industrial Production report for November will be released. The consensus is that there will be an increase of 0.2% in production and no change in industrial capacity utilization. At 9:45 AM Eastern time, 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 10:00 AM Eastern time, the Philadelphia Fed Survey report for December will be released. The consensus is that the index will be at 5, which would be an increase of 1.4 points from the previous month. At 10:30 AM Eastern time, the weekly Energy Information Administration Natural Gas Report will be released, giving an update on natural gas inventories in the United States. At 4:30 PM Eastern time, 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 Eastern time, 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.  Leave a comment  U.S. Economics  Bloomberg Consumer Comfort Index, Current Account, economic calendar, Empire State Manufacturing Index, Energy Information Administration Natural Gas Report, Federal Reserve Balance Sheet, Federal Reserve Money Supply, industrial production, jobless claims, Philadelphia Fed Survey, Producer Price Index, Treasury International Capital If Tom from Metal Augmentor keeps on putting out great stuff like this post on negative lease rates, then I’ll be out of a (blogging) job.
It is heavy going but a comprehensive discussion of the issue with a dramatic speculation that “The selective collateral nature of the tri-party format may force bullion banks to eventually declare their unallocated LBMA gold accounts as backed by 100% physical bullion.” Other key points if you don’t have the time to read the 8500 word article: “leasing is probably done directly by the bullion banks on behalf of commercial banks for a fee. Instead of pledging the assets acquired with the sale proceeds of gold leased pursuant to a carry trade, the borrower of gold now pledges existing collateral that it could not otherwise sell without incurring a loss. The central bank accommodates the gold leasing by accepting a wide range of collateral that would be otherwise prohibited in conventional funding schemes” “An outright sale of gold could always be hedged by acquiring a gold forward contract. Therefore, even if gold leasing has not experienced a recent resurgence, the increase in the gold forward rate indicates that owners selling gold to generate liquidity still want their gold back once the funding need has abated. The combination of a falling gold price and rising forward rate is quite a bullish feature of the gold market that is lost in the reporting on negative gold lease rates.” “the persistence of negative lease rates could be accompanied by the emergence of something entirely new: The result could be negative gold “lease rates” as gold price expectations may create an entirely new phenomenon: cash borrowed to buy gold for future delivery (what I call “gold bonds”). In effect, this is the equivalent of gold owners forward selling their gold at higher and higher prices, and receiving cash up front to be used for current liquidity needs. The above scenario may appear a lot like the current futures market because it involves leverage but the difference is that “gold bond” transactions are 100% backed by metal.” A few of comments: Tom: “From the perspective of the borrower (typically a bullion bank or its customer, a hedge fund), gold was historically leased as a way to fund a gold carry trade under which excess returns could be earned by using the sales proceeds from leased gold to purchase highly-rated securities meeting the central bank’s collateral requirements.” Bron: This is by far the major use of leased gold, but gold can also be leased by users/manufacturers of gold products to provide physical funding of their work in progress inventories, which does not involve any sale of the leased gold. Tom: “As just mentioned, the gold (or silver) lease rate does not represent the actual rate at which lease transactions are being done in the market. The published lease rate is simply an indicated value derived from two related variables, the gold forward rate and LIBOR.” Bron: In support I would say that the Perth Mint has always paid positive lease rates when borrowing gold, although it does so for inventory funding rather than carry trade etc reasons. Note Perth Mint borrows without posting ANY collateral because of the West Australian Government’s AAA rating. Tom: “a customer may execute a gold swap with a bullion bank pursuant to which the customer’s physical gold is initially stored in an unallocated account and used as the collateral for dollars loaned to the customer. The bullion bank then sells the gold from the unallocated account to replenish its funds and concurrently enters into a gold forward contract with a gold refinery. The forward contract is then used to back the gold liability to the customer.” Bron: My emphasis on “physical” in that. This sequence of transactions is what fractional bullion banking is. In this case the customer’s metal is “lent” to the refiner. Tom: “sane market participants will naturally demand that gold as a financial instrument retain its utility as the ultimate collateral for non-recourse funding. Under these circumstances, the appearance of 100% physical backed LBMA unallocated bullion accounts seems like a very good possibility” Bron: I note that some years ago balances in LBMA unallocated accounts attracted no fee, whereas now there is a very small account fee as % of value. Indication perhaps that bullion banks have had to increase the percentage of physical backing unallocated (and thus need to recover that cost) due to an increase in physical redemption/turnover on those accounts.  Newt Gingrich, alleged genius, has an imbecilic tax plan:
Here’s the thing: Federal expenditures are always paid for by productive people. Always. The options for funding are direct taxation, inflation, and debt. The taxing effects of direct taxation are obvious and well-known. The taxing effects of inflation, however, are a little more pernicious because they aren’t felt right away. In fact, some even find inflation to work as a subsidy. However, inflation causes the nominal price of goods to rise, generally before most people see their income rise at a corresponding rate, and the difference between increased prices and increased income is effectively a tax. And then debt is simply taxation deferred, wherein bonds are sold under the implicit promise that the government will pay them later, generally by direct taxation. The key to actually reducing taxes, then, is to first reduce real spending, elsewise taxes will never truly go down. At best, they will simply be time-shifted. Thus, Gingrich’s tax proposal is nothing more than a farce because tax cuts are not accompanied by spending cuts. And, until taxes and spending are cut in tandem, Gingrich should be viewed only as a slimy charlatan, and nothing more. In recent months, we’ve had a few slip-ups by the official statistical system in India:
These examples are part of a larger theme, of problems of the official statistical system. The Indian statistical system is afflicted by three levels of problems:
The mistakes that we’re seeing are merely a reflection of #2 (the lack of rugged enterprise IT systems). But there is much more going on which holds back the usefulness of official statistics.
Government officials in this field have pinned a lot of hope on the implementation of the report of the statistical commission (headed by C. Rangarajan, 2001). I am personally not optimistic about this. The report seems to emphasise an incremental agenda of building the statistical system, emphasising the interests of the incumbents. What is required is a ground-up rethink about the statistical system, from first principles, so as to address the three difficulties above.
Turning to the users of official statistics, most economists attach enormous prestige to phrases like GDP, IIP, CPI, etc. But in India, we cannot unthinkingly use some numbers just because they come with the label `GDP’ from some government agency. We have to always skeptically ask first principles questions about how the data is generated. All too often, the standard Indian government data is useless.
In the class of government data that I know of, I feel the CPI is reasonably okay. The WPI is a fairly useful database about prices but useless as a price index. The quarterly GDP data, IIP, NSSO, ASI are untrustworthy.
Decision makers in government and in the private sector need to struggle with these issues, carefully thinking about what statistics are allowed to influence their decision processes. Academic users of data need to be much more careful about avoiding garbage-in-garbage-out problems.
For more on this subject, you might like to look at the label `statistical system’ on this blog.
 The Mortgage Bankers’ Association purchase index will be released at 7:00 AM Eastern time, providing an update on the quantity of new mortgages and refinancings closed in the last week. At 8:30 AM Eastern time, the Import and Export Prices index for November will be released, providing some data that can be used to monitor the threat of inflation. At 10:30 AM Eastern time, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update on oil inventories in the United States.
The Gold Report: We’re now into year-end tax-loss selling season. How do you think 2011 will compare with previous years as far as the performance of resource stocks in the next several weeks and into 2012? Many good stocks are down because the market is down—not necessarily because companies have underperformed or failed to deliver as intended. Some people want to establish losses in stocks they like with the idea of buying back in January. I do like to warn investors, especially new resource investors, that this tax-loss strategy is a dangerous one. When people take losses, it’s often psychologically difficult to buy back into the same story. If you’re done with a stock and think it’s time to realize the loss, that is one thing. But, if you are selling now to buy back in the next year and the stock happens to move back up between the time you sell and when you might have bought back in, you might wait, hoping it will come back down. If it never comes back, you can end up short and having realized an unnecessary loss on a stock you really wanted in your portfolio. TGR: Are you seeing any different patterns this year than in past years? LJ: Some of the selling that we’re seeing now and will see during the next few weeks is certainly going to be tax-loss selling. One thing that’s worth noting is that there is typically a lot of this activity on the last trading days of the month. People will realize a loss if they have to, but they don’t want to lose more than they need to, so, if they think the market might turn up in December, many will wait until the last moment. All kinds of potential news out there could cause precious metals to turn up in these last few weeks of the year, so we may see the most intense tax-loss selling at the very last part of the year. TGR: For buyers, there’s usually limited availability of stocks at bargain prices, so once the low priced inventory is gone—it’s gone. LJ: That’s right, and that can be good or bad, depending on which way you’re going in the trade. Some of these juniors have tiny floats and are not very liquid. If just a handful of investors decide to get out at any price and they all hit the bid on the same day, you can see very dramatic moves, providing tremendous buying opportunities. This is something to watch out for at the close of 2011. TGR: Are there better bargains this year than there were last year and in previous years? It seems this market has been pretty sick. LJ: You have to remember that metals are not all the same. Precious metals, particularly gold and silver, are not just industrial commodities. Silver has its industrial uses but gold and silver are monetary metals and have different dynamics. So, if you’re thinking that the economy is looking worse in 2012, which we at Casey Research are, then you’re not terribly excited about base metals plays. Their prices may be down, but that doesn’t make them bargains we want to load up on now. The bargains we see now are in precious metals stocks. There’s opportunity when you think you know what’s ahead—higher prices for gold and silver, in this case—and the market seems to be discounting that or is betting in the wrong direction. If you’re right, you can win big. The caveat is that old saying that the market can remain irrational longer than you can remain solvent. But, if you can bet with money you can afford to leave on the table for as long as it takes, with assurance in your mind that you will be right and with the patience to wait until you are, then buying when others are selling is exactly how you “buy low to sell high.” TGR: Why do you think there’s been such weak upside market reaction to positive news releases? In the last few months, it seems that most stocks have been immune to good news. LJ: We’re seeing that, too. But, we’re seeing it as an opportunity. If you have confidence in the underlying trends, then the fact that the market doesn’t care when a company has good news is great for us. It allows us to build a position at lower prices with the benefit of added value that has not been factored into the share price. If a story gets better and the stock gets cheaper, that’s a good deal. I tend to think that prices are signaling disbelief in the market that the rally in precious metals is sustainable. In industrial metals, I’d say the market is quite right to be skeptical about their prices. If you’re looking at the so-called economic recovery unraveling, there’s good reason to be skeptical as to whether copper can and should stay at $3.50–4.00, or whether it’s more likely to retreat in 2012. Gold at $1,000/ounce (oz) was a big deal and $1,500/oz seemed unimaginable to many before it happened. Even industry insiders and goldbugs thought gold wasn’t likely to hit $1,500/oz, except maybe as part of a brief spike, as in 1980. When we spoke about $2,000/oz gold a couple of years ago, people thought we were being silly and exaggerating. But we came pretty close this year, topping $1,900/oz. A lot of people are saying, “Wow, gold’s gone way up. Gold’s really expensive. Why should I buy something that’s up?” We think that’s wrong; the fact that something has gone up does not, by itself, make it expensive. You have to ask, expensive relative to what? If you look at what’s been done and continues to be done to the U.S. dollar, which gold is priced in, there’s every reason to think gold’s rise will continue and accelerate. We’re quite happy to take the other side of the gold bears’ bet and take shares off of weaker hands. TGR: Gold has traded well above $1,300/oz for over a year now. What’s it going to take for people to finally realize that it’s staying there and to start buying some of these juniors that are just trading back and forth? LJ: The move usually starts with the producers. Goldbugs and many people in the industry are already long and some are cashing in. Much of the energy going forward will come from new people realizing that gold is holding when other asset classes are tanking. Then the people who thought that gold was a “barbarous relic” will suddenly discover that those gold miners are making big money when nobody else is. Above $1,500/oz, just about everybody in the gold mining business is making a bunch of money. Even the more expensive ones are producing at close to $1,000/oz. The global markets have many trillions of dollars looking for profitable places to hide from the storm, and the entire gold market is only worth a few hundred billion dollars. Even a small shift to gold on the global scale will put on a lot more demand than supply can meet. We believe it will start with the producers, then it will go down the feeding chain as people realize that the midtiers have better growth profiles, and then to the juniors, which provide the greatest leverage. And even if investors in general don’t get this, the producers still need to replace depleting resources, so they’ll be buying the successful juniors. So, one way or the other, successful juniors end up winners. TGR: So where are we in the cycle as far as when it filters down to the juniors? LJ: We’re seeing a very risk-averse market right now. People who already know about gold mining are much more interested in production and leery of junior exploration plays. Even juniors with excellent exploration results are not getting a lot of market respect. But, as the profitable quarters continue coming in for the reporting producers, I think we’ll see greater interest moving down the food chain to successful juniors in 2012. Plus, if we have the economic malaise ahead that we think we’ll have, the fear factor will come more into play too. Gold really is a barometer of fear. There’s a lot of supply of refined gold out there, tucked away in vaults all over the world. What keeps that supply off the market is people thinking that they need the security of owning gold and, secondarily, people speculating that gold is going to go up. So, if we’re right about what’s ahead economically in 2012, that fear barometer should go even higher. The coming year should be a very good year for precious metals investors. The one caveat I would stress very strongly is that there’s a risk the economy won’t just falter or weaken, but could actually go into a tailspin. There could be some big scary event like Lehman Brothers in 2008, which reportedly brought the entire banking system within hours of not working. Then everything gets hit, even gold, because people become illiquid and are forced to sell anything they can get a bid on. People who follow this logic should be prepared for that. Don’t go all in now, but participate in the market so you can take advantage of the opportunities, in case there is no crash. But keep some powder dry to be able to back up the truck, as Doug Casey says, for great companies at fire sale prices if there is a crash. We may very well see such opportunities in 2012. And, you’ll be kicking yourself if you didn’t keep any funds in reserve for those low prices. TGR: Talking about fear, one of the more recent concerns in the resource sector has been the fear of political risk regarding property locations. How serious a concern is political risk? LJ: It’s very serious. It’s happening now in Peru, where a good chunk of the gross domestic product and the bulk of direct foreign investment in the country come from mining. Yet the current government came to power stirring up anti-mining sentiment. Now they find themselves in the unenviable position of trying to defend mining against the population they stirred up, and it’s getting ugly. And it’s not just Peru. It’s a big risk all around the world. As mining profit margins go up, cash-strapped governments in a global economic crisis are going to look at increasing their take. A profitable sector like mining is going to see windfall taxes, tax and royalty increases, permitting fee increases and anything else the governments can do to take advantage of the situation. Even in Canada, Québec had a sliding tax scale and they slid it on up. That can happen anywhere. If you see that a country is going to take a turn for the worse, you may want to exit before the harm is done. But, if you’ve got really great projects that can take any reasonable level of taxation in a good area, then you may have to take a stand. You can’t move a mine to another country, and you can’t go running from country to country at every alarming bit of news, or you’ll end up nowhere. In provinces like Québec or countries like Chile where they understand mining, when they raise the taxes, they do it within the existing legal structure with an eye to avoiding killing the goose that lays the golden eggs. One place we’re more alarmed about now is Argentina, which has shown a willingness to break deals that it has made. It had a no-changes-in-mining-taxes-for-30-years pledge on the table to encourage investment in mining, and they’ve already broken that. Moves made by the recently re-elected government of Cristina Fernandez de Kirchner are quite alarming. We see that writing on the wall and are minimizing our exposure to Argentina risk. TGR: Mexico seems to be a pretty favored and stable location. There are a lot of companies that have some pretty interesting projects going on there. Tell us about some of your favorites. LJ: Politically, Mexico has remained wonderfully stable and we’re very pleased with it. It has a past history of nationalizing left and right, but for some time now, it’s been quite business friendly. Pretty much everybody in the ruling class gets it. It understands that if it nationalizes and socializes things, the crowds may cheer, but soon industry declines. It knows it has a huge problem with Pemex, the nationalized oil company, for example. However, Mexico has an escalating drug war problem. Fortunately, this has largely remained between the government forces and the narco forces—it has not yet turned more generally predatory against all targets, including civilians and industry, as happened in Colombia. That’s the reality to be aware of in Mexico. There are places that are dangerous and you need to be careful. But, the good news is that in the safer places, at least, the government has remained solidly pro-business. And, even in the more dangerous places, there are miners working with no problems. There are good companies we like a lot working in Mexico. One of those would be First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:Fkft). It has a lot of growth on tap. The stock corrected sharply from highs earlier this year and we see a lot of upside. It has robust economics and profitable production that’s growing. It’s a good story. Another one we like a lot in Mexico is Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BLV). Its new San Jose mine is in Oaxaca, southern Mexico, far from most of the drug problems in northwest Mexico. Instead of being the typical silver mine, which is a lead mine with silver in it, this is a gold-silver mine. Gold as a byproduct is much more attractive to us than lead. We also like Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.A) and Endeavour Silver Corp. (EDR:TSX; NYSE:EXK), both of which have projects in the historic Guanajuato area, source of more than a billion ounces of silver production over the last 400 years. Profitable, growing producers operating in safer parts of Mexico are stories we like a lot. TGR: Do you have some prognostications as to where you think the stocks might be going from where they are now? LJ: With two steps forward and one step back, we think they’ll end up significantly higher than they are. All of these have potential to be at twice the price they are now by the end of 2012—or higher, depending on what the precious metals do. They all have profitable, growing production, so I’d expect all of them to progress upward, even if the price environment remained unchanged. We could, however, see tax-loss selling on all of these, except Fortuna, at the end of this year from people who bought the peaks earlier this year. And, as I mentioned earlier, we’re not going all in on anything because there will be lower prices ahead if there is a meltdown in 2012. We recommend that people buy in tranches. Buy a first slice now. If it gets cheaper, you buy a second slice and then you wait. You wait for that big sale to come on and you buy a big chunk at a great price that you know you’ll be very excited to have. And if that doesn’t happen, you still have the lower cost-base position you built with the first two tranches. TGR: Are there any other companies you particularly like at this point that you think may be super bargains? LJ: The best of the best are not down in the dumps the way the earlier stage companies are. The ones that people have confidence in have corrected much less or not at all. Fortuna is up for the year. Other ones I like include Silver Wheaton Corp. (SLW:TSX; SLW:NYSE). If you believe in precious metals, the Silver Wheaton model is just a phenomenally great business idea. It’s one to buy on the dips. We should probably throw some gold names out, also. TGR: That would be good. LJ: One of my favorites is an Australian company called Medusa Mining Ltd. (MML:ASX; MML:AIM; MLL:TSX.V). The mine is in the Philippines. The stock’s gone on sale. There’s been some scary news out of the Philippines, guerilla activities on some of the islands, but this has not been near Medusa. It has the cheapest gold production costs that I know of anywhere—less than $200/oz, which at $1,700/oz gives a $1,500/oz margin. It’s an unbelievably profitable production with continuing exploration success. So, if you have access to the London Stock Exchange or Australian Securities Exchange, I really like that one. Another great opportunity for bargain hunters is a company operating in Mali, West Africa, called Avion Gold Corp. (AVR:TSX; AVGCF:OTCQX). Avion had some operational difficulties resulting from some of its supplies and equipment taking longer than planned to get to the mine, which affected its production and profitability. It’s still highly profitable. It’s in the process of doubling plant capacity while developing higher-grade underground material and more open pit to simultaneously feed that expanded mill. The disappointing news recently made it cheaper, but I see strong growth ahead. TGR: In parting, what you are basically saying is people should buy on dips and hold onto cash for bigger opportunities. Is that right? LJ: Yes. I think it’s really important to stress that if the wheels come off the financial system and things come to a crunch, it will create fantastic buying opportunities. If you go all in before then, it won’t look like a fantastic buying opportunity because your portfolio will be off by very large, alarming fractions. However, we are not recommending that people wait for that. You don’t want to be short in this market because nobody knows the future. The governments of the world may throw enough money at the problem that they may ignite massive inflation, which will hit commodities hard and precious metals even harder—on the upside. It’s possible that we will see another enormous reflationary boom, perhaps even Zimbabwe-style hyperinflation. So, as before, we are recommending that people buy in tranches. One other parting thought is that the stocks are the way to play this market with leverage. The precious metal stocks are, hands down, the best bet for what’s going on in the world today. That’s your speculation on what’s going to happen in the future. But for prudence, for financial peace of mind, you want to own the physical metals. As Doug Casey likes to say, gold is the only financial asset that is not simultaneously someone else’s liability. If you don’t own any of the physical metals, you definitely want to start building a position now, because nobody can tell you things will not get seriously bad—chaotically bad—in the months and years ahead. Whether that happens or not, an ounce of gold will always be an ounce of gold. An ounce of silver will always be an ounce of silver. And, someone, somewhere will take that off your hands and give you something of value in exchange for it. TGR: Thanks for all your insight and taking the time to talk with us today. LJ: Thanks for having me. Louis James is the master of metals at Casey Research, where he’s the widely read and well-respected senior editor of the International Speculator, Casey Investment Alert and Conversations with Casey. Fluent in English, Spanish and French, James regularly takes his skills on the road, evaluating highly prospective geological targets and visiting explorers and producers at the far corners of the globe and getting to know their management teams. |
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David Morgan, publisher of Silver Investor, likes the balanced risk and growth that midtier companies provide, but even he can’t resist the pull of having a speculative pick pay off. In this exclusive interview with The Gold Report, Morgan talks about the tenets he lives by when investing in mining companies, be they small-cap or midtier or billion dollar companies.
Christmas sales are not just for retail shoppers. Tax selling season is here, and one man’s stock loss may be another man’s super bargain opportunity. In this exclusive interview with The Gold Report, Casey Research Master of Metals Louis James talks about year-end investment strategies in the current market environment, factors to consider next year as the global economic situation may affect precious metals and mining stocks and some of his current year-end favorites.
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