By Christopher Briem, on March 26th, 2012
I was a bit distracted last month, so I missed the latest inflation data for Pittsburgh covering the 2nd half of 2011. The short story is gasoline is up in itself and you see the energy transportation costs filtering through a lot of other things. Other than gasoline, electricity costs over the year are +11 percent over the year. so even though “Utility (piped) gas service” is down 5.9% (the biggest drop in any category) overall household energy costs are up 7.5%.
Other than the natural gas costs coming down, the smallest price increase was in “Alcoholic Beverages” with an increase of 0.5 percent over the year. So in real terms, big drop in alcohol prices. What is up with that? It all adds up to the cheapest thing to do is to not travel and just drink at home.
Anyway, this is the overall inflation trend for the region:
By The Gold Report, on March 20th, 2012
 Mark Lackey, chief investment strategist with Pope & Company, sees particular promise among small-cap gold equities in West Africa. Burkina Faso and Mali offer good topography and stable, democratically elected governments with little interest in economic nationalism. Given Lackey’s view that gold will float between $1,600 and $1,800/ounce this year, he says in this exclusive Gold Report interview that now might be a good time for investors to look to Africa for upside potential.
The Gold Report: Mark, do you agree with Patricia Mohr, Scotiabank’s vice president of economics, that gold would need further reflation or another round of quantitative easing to rise above $2,000/ounce (oz) in the near term?
Mark Lackey: Higher inflation in the Western world would certainly help push gold over $2,000/oz in the next 18 to 24 months. But inflation is not the only factor underlying the price of gold. On the demand side, you have growing demand among the middle class in India and China. On the supply side, we are seeing that companies are not always getting to production as quickly as they anticipate. Given all of these factors, gold could top $2,000/oz even without a significant rise in the rate of inflation.
TGR: China recently lowered its gross domestic product growth forecast for 2012. That’s rarely good for commodities. If China’s economy sputters, how hard could gold be hit?
ML: The 7.5% number is actually China’s target rate. Looking back over the last 10 years, China has generally targeted its growth between 7% and 8%, and in almost every year, actual growth exceeded the target. In 2007, for example, the target was 8% and actual growth was 14%—an unusually big divergence. We think China will grow in the 8.5–9% range.
As to whether a weaker China would be good for commodities or gold, there are a few scenarios that have China growing only 4%. Clearly, that would have a negative impact on the price of commodities and the price of gold. But we do not believe that is a very likely scenario.
TGR: Where do you expect gold to trade this year?
ML: We put the low end around $1,600/oz and the upper end around $1,800/oz. We look at a trading range based upon a weekly average, but we see the price trending up as the year goes on.
TGR: You are a very seasoned observer of up and down markets with 30 years of experience. What are your observations on the gold market?
ML: Increasingly, gold is reacting to daily news more than other commodities. Changes in the European debt situation, a statement from Federal Reserve Chairman Ben Bernanke that differs from what the markets were anticipating, or numbers out of China and India that are stronger or weaker than expected—all this tends to move the gold market more on a daily basis than it did in the past.
We have also noticed greater strength from India and China as their middle classes grow. On the supply side, we see more economic nationalism. Some countries want a bigger slice of the pie. The result is often delays in getting gold mining projects into production.
TGR: Is economic nationalism here to stay?
ML: We saw a report the other day that listed 25 countries that the authors felt had become more nationalistic. I think economic nationalism lines up with a couple of things. One, some countries look at higher commodity prices and feel they should get a larger part of the revenues associated with these higher commodity prices. Two, in some countries you have opposition from environmentalists or the people who live nearby. I think this opposition will continue to rise in some parts of the world.
TGR: Will it be more prevalent in established jurisdictions or jurisdictions new to mining?
ML: One would anticipate more issues in the newer jurisdictions, but if you look around the world, even getting permits in parts of the U.S. is extremely difficult. Some states are very easy; others are quite difficult. Countries change over time. It has become easier to do business in some countries in the Americas. In others, political problems have created more difficult business conditions. The same is true in Africa.
Stability is in the eye of the beholder. You constantly have to stay on top of how countries and their regimes can change.
TGR: In late February, gold tumbled more than $100/oz in one day’s trading after Fed Chairman Ben Bernanke dismissed the notion of a third round of quantitative easing. Should gold investors expect more one-day tumbles or price spikes for the foreseeable future?
ML: I would not consider that $100/oz move typical; it was a somewhat overblown reaction. However, there is more volatility in the commodity markets and in the markets in general than in the last 5 or 10 years. Investors will have to learn to live with that.
TGR: Is volatility driving investors out of the space? And if so, is that a mistake on their part?
ML: I think it depends on the type of investor. If people want no or little volatility, they can gravitate to other sectors. I used to be in the pipeline business, where there is little volatility and limited returns.
In the commodities sector, specifically the gold sector, I try not to look at daily movements. It is just noise. Day traders will react to all the daily events. If you are more of an investor, daily events should not influence your decision making.
We at Pope have a view as to where we think commodities and relative companies are headed. We look out to the next 3, 6 or 12 months, as opposed to reacting to daily events.
Is it a mistake to pull out? For any investor experienced in the mining and commodities sectors over the years, it would be a mistake to pull out. Other people with no experience in the mining sector have to determine their own risk preference and comfort levels.
TGR: The buy-and-hold strategy has changed. Trading in and out is now much more commonplace. Does buy-and-hold still work in the mining space?
ML: I would not necessarily advocate the old buy-and-hold strategy over the course of three to five years. The world changes so much that you have to be on top of all the changes that can occur and what they might mean for your investments.
Having said that, investors can find themselves whipsawed trying to react every day to every piece of news. Try to have a view that gives you a position you can stay with for a period of time such as three to six months. Then, make decisions based on how you now feel about the stock’s performance and where the markets are actually going.
TGR: You follow a number of small-cap gold equities, a handful of which have projects in West Africa. Despite their promising gold projects, many investors are wary of the added risk of operating in what are often perceived as unstable countries. Why do you and your colleagues at Pope & Company follow these opportunities in West Africa?
ML: It is a mistake to suggest that all African nations are unstable. Burkina Faso has had a democratically elected government since 1987; Mali since 1991. These two countries perform differently than countries without democratic principles and both countries are pro-mining, which makes it easier to develop mines in these two countries.
We like the stability of Burkina Faso and Mali. We particularly like that they are not on the list of countries where economic nationalism is on the rise. They have recorded low political risk in recent mining surveys compared to the rest of the world. As a consequence, we feel that dealing in Burkina Faso and Mali is superior to many other places in the world.
TGR: Which companies do you follow in Burkina Faso?
ML: One is Roxgold Inc. (ROG:TSX.V). Roxgold is unusual for this part of Burkina Faso, in that its geology is different from pretty well everyone else. It has very high-grade gold and excellent performance in the market. It continues to come up with excellent drilling results that have been reflected by the appreciation in its stock price.
TGR: A year ago, Roxgold was a $0.30/share stock, and is now at around $1.85/share. The project you are talking about is the Yaramoko gold project, which Roxgold used to share with Riverstone Resources Inc. (RVS:TSX.V). What did you think of Roxgold’s buy-out deal with Riverstone?
ML: The price was fair; it was a good deal for both sides. Riverstone had a lot of other great projects, and it decided that it would sell out here. Of course, it still owns 14% of Roxgold.
TGR: Roxgold just did a private placement financing for about $25 million. How much cash does the company have?
ML: I think that financing alone tells you how successful Roxgold is. That placement was originally at a lower level and was expanded given the demand. This is a classic case of a company that, while it is in exploration and may not have production, created significant investor demand by doing such an outstanding drilling job.
TGR: Riverstone is in Burkina Faso. Do you follow that company, too?
ML: Yes, and we like Riverstone. It has a mineral resource of 2.7 million ounces (Moz) and climbing. In addition to owning 14% of Roxgold, Riverstone has a 90,000-meter drilling campaign underway.
TGR: That is the Karma project.
ML: That’s right. It has a very solid resource, strong management and very good prospects.
TGR: What will Riverstone do with its 14% interest in Roxgold?
ML: That is a good question. Given the rising valuation of Roxgold, Riverstone could sell that ownership to fund itself down the road. Or, it can say: we like what we see here and we are going to maintain our position. It gives Riverstone more flexibility in that there is less potential for share dilution than there would be with many other exploration companies.
TGR: What other companies do you follow in Burkina Faso?
ML: We also like Goldrush Resources Ltd. (GOD:TSX.V). It has a resource estimate and is now doing more infill drilling and updating its resource estimate. Looking at its drilling results over the last year, you see some pretty good results. It is on the exploration side, has a resource and is moving forward. We like its prospects for the next year.
I should also mention Volta Resources Inc. (VTR:TSX). Volta has a 4.2 Moz mineral resource: 3 Moz Measured and Indicated, 1.26 Moz Inferred. Volta is on the same fault system that hosts Bomboré, which has 3.5 Moz, and Essakane, with 6 Moz.
We see this as another Burkina play that, more advanced than others, has a rising resource and significant potential.
TGR: Volta also has projects in Ghana.
ML: Yes, it has some very prospective land situations in Ghana. In the short run, we see the Burkina Faso play as its flagship, although the markets should recognize the potential it has in Ghana.
TGR: What about projects that the market is not giving the respect you believe is warranted because of their location?
ML: We like Mali, where Avion Gold Corp. (AVR:TSX; AVGCF:OTCQX) continues to grow its production. It reached 91,000 ounces (91 Koz) last year and has significant potential to expand its production with its Tabakoto and Kofi projects. It also has the Houndé project in Burkina Faso.
Avion is a bit different from the other companies we have been talking about, in that it is already producing and making money.
TGR: Avion has some good coverage from a number of quality analysts, including Tara Hassan at National Bank Financial, who gives it an Outperform rating. What do you make of that?
ML: As a strategist, I do not put out target prices per se. But Avion is well run. It all comes down to execution. Avion’s management has shown that it can execute and do what it says it is going to do.
TGR: Why is its share price lagging at around $1.30/share? Given the dramatic increases in production and the projected increases to 200 Koz this year, the stock could be higher.
ML: Quite frankly, it is lagging along with most of the Toronto Stock Exchange Venture-based stocks. In April 2011, the Venture was at 2,400, today it is at 1,600.
As to Avion specifically, for one thing, people have not paid enough attention to West Africa. I think that will change as more people become involved in the geographic neighborhood. Second, it is a function of people’s coming back to the small-cap companies, especially ones like Avion that already has production.
TGR: Regarding its Houndé project in Burkina Faso, in December 2011 Avion announced that its resource had grown to 1.6 Moz. Does its current share price account for that?
ML: It is hard to say whether people are taking the Burkina Faso numbers into account. Some people recognize Avion as a play in Mali, so it could very well be that the market is not taking into account what it has in Burkina Faso.
Frankly, there are a lot of very good companies that do not get the following and respect that they deserve simply because they are in West Africa. We believe that will change in the next couple of years.
TGR: What other West African plays are you following, Mark?
ML: African Gold Group Inc. (AGG:TSX.V) in Mali has the Kobada mineral resource of 1.1 Moz. We like it because drilling has extended the mineralization in the area over about 4 kilometers. One of its top management people was the chief geologist for IAMGOLD Corp. (IMG:TSX; IAG:NYSE), which has had a great run and done extremely well in West Africa.
TGR: African Gold Group is estimated to be a low-cost producer, with projected production around 125 Koz/year.
ML: That’s right. It also has a holding in Ghana. We think it has significant potential, given the estimated mineral resource.
The last one I would mention is Channel Resources Ltd. (CHU:TSX.V), a company in its early stages. Its Tanlouka gold project in Burkina Faso is on the same trend as the Volta play at Kiaka and Bomboré and Essakane. Channel Resources is a smaller company in somewhat earlier stages, but it has some very good drilling and will be another interesting player.
TGR: Channel Resources is trading around $0.15/share, clearly at a very early stage.
ML: Yes, and people need to remember that if they invest. The company will release a resource estimate in the near future.
TGR: Any advice on strategies for playing these companies?
ML: It all goes back to risk tolerance and what people feel comfortable with.
What I have tried to communicate here is that West Africa is one of the more stable parts of the world. Economic nationalism is not a problem. The topography is very positive; the projects are not 12,000 or 15,000 feet in the mountains with no infrastructure, no power and no water.
As to how to play these stocks, we tend not to buy positions all at once. We generally take partial positions and stay on top of what is going on. Obviously, we follow the gold market and the gold companies. We watch where their drilling results are going and react accordingly.
TGR: What are you noticing when it comes to financing for these companies? Are there fewer deals than six months or a year ago?
ML: At present there have been more financing deals than six months ago. I would say that, in terms of the ability to finance themselves, these West African companies are in a lot better shape than some companies located in difficult jurisdictions or with metallurgically challenged projects.
TGR: Thanks for your time today, Mark.
Mark Lackey, investment strategist at Pope & Company Limited, has 30 years of experience in energy, mining, central and corporate banking and investment research and strategy. He worked at the Bank of Canada, where he was responsible for U.S. economic forecasting. He was a senior manager of commodities at the Bank of Montreal. He also spent 10 years in the oil industry with Gulf Canada, Chevron Canada and Petro Canada.
By Simon Grey, on March 14th, 2012
Paul Krugman is aghast at this chart, which shows how the Pell Grant has declined in relative cost coverage:
This is pretty much how inflation works. In the early stages, its effects are not very noticeable because an incentive has not yet taken place. As the incentive shift takes place—marking the beginning of a bubble, the price of the bubble product begins to rise, mostly as a way to reflect the actual supply of the bubble product relative to the currency supply and actual demand. Over time, the price of the bubble product rises to roughly match the rate of inflation (although I suspect it’s slightly lower than that in reality as inflation encourages overproduction, which increases supply relative to demand, which is then realized in larger numbers because the price declines slightly, all relative to demand elasticity, of course). As such, subsequent rounds of inflation will never be as effective as the first round of inflation because the first-mover advantage disappears.
This is pretty much what this chart shows. At first, the Pell Grant can cover virtually all tuition costs. There are probably few recipients and minimal initial demand. However, these conditions won’t remin once people learn that the government will contribute X amount of dollars to their education. Everyone wants in on this, and so everyone applies for the Pell Grant. An increasing number of applicants receive the grant, and then college prices rise because, fundamentally, increases in supply cannot match the pace of increases in demand. In order to allocate the scarce resource of postsecondary inflation, an informal price floor takes effect, coincidentally hovering near the amount of the subsidy. When all is said and done, the initial round of inflation doesn’t change a whole lot in the short- or long-run because the fundamental problem is not high nominal costs but the small amount of supply.
Thus, there is no sense in complaining about the decreasing coverage of the Pell Grant. Inflation in the form of subsidies faces the same fundamental problem that normal inflation faces. Quite simply, the issue is a lack of supply, no amount of currency can fix that.
By Claus Vistesen, on March 13th, 2012
1. Variant Perception’s blog is up and running and while I realise there has been little or no macroeconomic analysis here for a while, there is plenty of top notch analysis over at VP’s blog. The three latest entries take a look at inflation in the UK, the divergence between Spain and Italy in sticking to the path of austerity and how money keeps trickling out of the eurozone periphery. If you think I have been running lean on analysis and commentary here, the VP blog is a good way to get a take on what me and my colleagues are looking at.
2. The debate on macroeconomics and microfoundations keeps in chugging along and there has been a lot of interesting contributions lately beyond the ones I pointed to in my latest discussion of the subject. Simon Wren-Lewis has posted two additional pieces after the first one. PhD student Jérémie Cohen-Setton has a very nice summary of the flurry up on the Bruegel Blog and I would also emphasize Noah Smith’s comment. I realise that all this is terribly wonkish, but it is at the heart of developing modern macroeconomics into something that can tackle the important problems and issues ahead. As such, it won’t be work wasted to take a dive into the deep end here and have a look.
3. Morgan Stanley’s global central bank team takes a look at the outlook for QE3 in the US.
We see a three-out-of-four chance that the Fed acts as the data on growth soften and the rally in the equity market fades. If the Fed is in a hurry or feels no need to push up inflation expectations, the action likely takes the form of sterilized asset purchases, i.e., the one-in-four chance of Operation Twist 2. Recent public comments by Fed officials, along with press comments, make it more likely we are underestimating, not overestimating, their willingness to execute OT2. If the Fed needs to see some slowing in the economic expansion either to get internal agreement or external insurance, the policy initiative waits until the April or May meeting and more likely entails asset purchases that are funded with reserve creation. This policy, Quantitative Easing 3, which we peg at a one-in-two chance, would also be favored if the Fed desired more significant currency depreciation.
The view above squares well in my view of a slight change in the consensus expectation of the Fed’s next move. As the US data has improved and as it has continued to come in with upside surprises in key areas such as the labour market and auto sales the expectations of outright QE3 have been paired. Instead, the consensus has moved towards the expectation of an extension of Operation Twist. Such a move would however has its limits. It OT II were to happen in an environment of an improving economy yield curve flattening could move into inversion if short term yields became unhinged. This would obviously be unacceptable and therefore an outright expansion of the balance sheet specifically aimed at MBS would probably be the least risky alternative for the Fed.
4. Elsewhere in CB land it was absolutely amazing to hear the ECB actually worry about inflation just days after having completed the largest balance sheet expansion in the ECB’s history.
European Central Bank President Mario Draghi signaled he’s done enough to battle the sovereign debt crisis, laying the groundwork for an eventual exit from record-low interest rates and emergency lending measures.Declaring that the environment “has improved enormously” and there are “many signs of returning confidence in the euro,” Draghi yesterday turned the spotlight on “upside risks” to inflation, which is now forecast to remain above the ECB’s 2 percent limit this year. That suggests policy makers don’t plan to cut rates further or add to their 1 trillion euros ($1.32 trillion) of long-term loans to banks, economists said.
So, let me get this straight. The ECB has just effectively backstopped the entire European banking system for 3 years effectively becoming a clearing house for the reshuffling of lending risk onto the ECB’s balance sheet in exchange of 3y loans over to now worrying about the inflationary effects of its policies?
What planet are they on?
Obviously, the single interest rate policy does not work and perhaps such statements are exactly a reflection of this, but if the market was looking for transparency and foresight from the ECB they are going to look a bit harder it seems. The sovereign debt crisis is merely a few 100 basis points short of reflaring and Portugal and Spain are about to re-enter the limelight. Not a time it seems to me to assure markets that everything is about to move back to normal.
5. Portugal seems to be the next in line as yields stay in double digit territory, but who can really claim to be surprised? Edward certainly isn’t.
So why would people think that Portugal might be the next to need a second bailout? Well, what the Greek historian Thucydides would have called the efficient cause would be the fact that it has a 9.3 billion euro bond redemption due in September next year and the despite initial Troika hopes, the markets remain closed tighter than the lips of Angela Merkel were to the supposedly amorous advances of Silvio Berlusconi. But the final (or underlying) cause which will send Portugal into a second bailout is the fact that the country has a high level of debt (both public and private) and a chronic growth problem which won’t simply be turned around by a bit of good will and a few “magic wand” structural reforms. So essentially the numbers just don’t add up.
6. It was a beautiful weekend in London this week and on Sunday I picked up the Independent and while I was not surprised, I thought their piece on cheating at UK universities disturbing.
Over the past three years, more than 45,000 students at 80 institutions have been hauled before college authorities and found guilty of “academic misconduct” ranging from bringing crib-sheets or mobile phones into exams to paying private firms to write essays for them.Some 16,000 cases were recorded in the past year alone, as university chiefs spent millions on software to identify work reproduced from published material, or simply cut and pasted from the internet. But officials last night warned they were fighting a losing battle against hi-tech advances – which means it is becoming increasingly difficult to detect the cheats.
Cheating in academia is as old as academic itself and even tenured professors have been known to fudge their results or even plagiarise their colleagues’ work. But what does it tell us when the problem is particularly severe among entry level students? Surely, the article’s rationale based on university leaders’ comments that higher tuition fees and pressure to do well mean that more students are pushed into wrongdoing is sound. However, there is an underlying problem, or an elephant in the room if you will, that is not being mentioned in particular detail. Specifically, I am talking about the chasm between the level of academic standards applied by UK (and European universities) and the academic standards brought into universities by the foreign students largely financing the UK education industry.
I have seen this with own eyes and I have been amazed. Yet, the way Western universities produce (and set standards for) knowledge is simply so foreign for many who come from abroad that they are compelled to cross corners. When these students are then exposed they often do not realise why they are being summoned to a disciplinary body.
Another and more disturbing trend however is the implied argument that some students cheat because they can. Take for example the industry which has emerged to furnish students in a tight spot with a tailor made essay on any topic they might wish for a fee. This seems to be absolutely mad to me and any student resorting to this must either be desperate or stupid (or both) since anyone would be able to tell you that the quality of such essays is likely to be poor, at best.
By The Gold Report, on February 23rd, 2012
 Even in an environment ripe for takeovers, finding and sticking with quality precious metals assets is the strategy that speaks loudest to James West, publisher of the Midas Letter. Read about his philosophical and practical switch from “trader” to “investor” and about which companies lead his list of favorites in this exclusive Gold Report interview.
The Gold Report: James, do we have to rely on a successful Greek bailout to push gold above $2,000/ounce (oz) in 2012, or will that happen regardless of events in Europe?
James West: I think the latter. The deterioration in European sovereign debt integrity is only one factor pushing gold up. Numerous other forces could push gold down. Foremost is the success U.S. dollar-backed interests in the banking sector are having in pressuring the government to induce positive pricing in commodities and in the markets in general.
The federal government, the Federal Reserve and the U.S. Treasury understand that investor sentiment is influenced by the metrics issued at the close and during the trading day. Influencing those metrics causes equities to be bought or sold; it creates or perpetuates up and down days.
In an election year, President Obama and his advisers are doing all they can to create the impression of a robust, recovering economy, jobs growth and S&P Index growth. The Republican element is more interested in portraying the president as an economic bumbler who has done nothing to spur recovery, is responsible for the continued economic malaise and is an enemy of economic recovery and growth. Those forces obviously are interested in negative economic metrics.
Markets seize up when broad global investor sentiment is negative. Everybody sits on the sidelines, financing and credit grind to a halt, as do hiring and business. Then layoffs start and the cycle becomes actively negative instead of just passively negative. The government understands that and is no longer willing to let markets be unfettered. That’s because, if left to a free market, the government’s massive debt problem would be interpreted as terminally negative.
TGR: Which would be more positive for gold, a Democratic administration or a Republican one?
JW: I do not think it matters. We measure gold in currencies or we measure currencies by their value in gold. The most direct metric comes down to the quantity of a currency vs. the quantity of gold. Global output of gold is stagnant or in decline, and the availability of dollars, euros, pound sterling and renminbi is in an ongoing, exponential growth cycle. As a result, the price of gold can only rise as measured by that metric.
TGR: The recent merger of Xstrata Plc (XTA:LSE) and Glencore International Plc (GLEN:LSE; 0805:SEHK) will create the world’s fourth-largest mining company with a market cap of about $92 billion. Will this precipitate more takeovers?
JW: Absolutely. BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) and Rio Tinto (RIO:NYSE; RIO:ASX) are constantly threatening to take each other over. Barrick Gold Corp. (ABX:TSX; ABX:NYSE) has an insatiable appetite. It would love to absorb Newmont Mining Corp. (NEM:NYSE) or Goldcorp Inc. (G:TSX; GG:NYSE). The problem is that those transactions would be just massive, especially in the face of the rising gold price.
TGR: Given Xstrata’s history of acquisitions—I am thinking of Alcan and Falconbridge—and Glencore’s cash reserves, will this merger create a predator on the hunt for takeouts?
JW: Absolutely. Consolidation is a function of market growth and evolution. The majors tend to go after smaller companies when prices drop. And prices are strong right now, so I think. . .
TGR: You think prices are strong?
JW: Certainly. Copper is heading to over $4/pound, gold is over $1,700/oz.
TGR: Commodity prices are strong, but share prices are not.
JW: That is true, share prices have not recovered fully from the Q411 slump, but they are starting to recover.
We have seen all the consolidation we will see from the Q411 slump. The question now is whether the companies that are acquisition targets can evolve or grow their assets enough to warrant higher valuations in the eyes of an acquirer.
I look at companies like Newstrike Capital Inc. (NES:TSX.V), my favorite gold company. It is well capitalized and has been drilling like crazy. It keeps coming up with great results. This would be a good acquisition target, except for one thing—it has not published an NI 43-101. There is no way to quantify the value of its resource, except through press releases, drill maps and back-of-napkin calculations.
A lot of companies intentionally avoid resource calculation because they know it will trigger the interest of predatory majors. For example, Ari Sussman, the chairman of both Continental Gold Ltd. (CNL:TSX) and Colossus Minerals Inc. (CSI:TSX), will not let the majors visit the properties because he does not want to be taken over. He wants to maximize shareholder value before he invites that kind of attention.
TGR: But majors often get around that by buying a significant amount of shares and using their voting clout to get a seat on the board, where they find out what is going on.
JW: That is true. However, in general they are disinclined to buy shares out of the market. For example, Newstrike Capital has $17 million (M) in the bank and a share price in the $3 range. It would be expensive to build a position warranting a board seat. Continental and Colossus are financed repeatedly by a group of associates close to those companies. It will be virtually impossible for a major to muscle into position there without having to buy in the market.
These three companies raise money intentionally, not from a position of weakness. They finance with people whose interest is cashing in on the future value of the asset, not flipping the stock for whatever they can squeeze out of it. I try to align myself with deals that have serious shareholders, real investors, not just paper flippers.
TGR: Are takeovers resulting from across-the-board lows in share prices a near-term thesis for buying equities?
JW: I focus on the asset. If it is a great asset and I can get a position cheaply enough, I don’t care if it is a takeout target. I don’t care whether it goes to production or enters a joint venture. I follow the asset over time. It does not matter who owns it, as long as some major does not come in and opportunistically buy it at a price lower than my average cost.
Quality assets will always be developed. Stick with the asset, and ignore the short-term economic noise.
TGR: What other investment themes will play out in 2012?
JW: The key themes for 2012 are the elections and G8 governments printing money with abandon. More capital fabrication always means higher asset prices, a bull market.
TGR: But the elections are 10 months off and a lot could happen.
JW: As an investor, Q1 is the time to acquire positions in quality assets, when prices are coming off their lows. Then, you have to be prepared for post-electoral volatility. That is when they will seriously try to tackle the debt ceiling and will stop printing money. But that will not matter until 2013. This year, 2012, is all about the illusion of prosperity.
TGR: That sounds ominous.
JW: Our leadership has chosen delusion over hard reality. Down here on the street, we have no choice but to go along with it, capitalize on the opportunities and avoid the risks as much as possible.
TGR: In a recent interview, you said that the collapse of the junior mining sector in late 2011 made you “10 times more picky” about the equities you were buying. Are you doing anything differently now?
JW: I like to buy or participate in early-stage, pre-public opportunities based on management. If the stock is cheap, I will take positions in a wide variety of projects without necessarily knowing a lot about them, because it is a numbers game. If you take positions in 20 companies, one asset will emerge as a contender. Then, you lighten up on the other positions and add to the asset that seems to have real mine potential.
I used to be more of a trader, looking for the quick double. Now, I am more of an investor. I invest in the asset, sit back, let it grow, evolve, go through changes in management, whatever it has to do to get to production. That is what I am doing differently.
TGR: Let’s get into some of your favorite positions operating in Canada.
JW: One of my favorites is Prodigy Gold Inc. (PDG:TSX.V). The company is developing the Magino deposit in Ontario. Its Feb. 3 updated preliminary economic assessment (PEA) increased its resources and projected profitability.
TGR: It just did a financing, too.
JW: It just announced another 60,000 meters (m) of drilling and will issue a full feasibility study late this year updating the gold resource based on that drill program. It just keeps getting bigger and better. There is no longer much doubt that this will become a mine.
At this point, it has Indicated gold resources of more than 2.1 million ounces (Moz) at 1 gram per ton (g/t) and 1.7 Moz Inferred. At the end of the day, if it puts those Inferred ounces into an Indicated category, you are looking at a deposit of more than 4 Moz, going into production with a 250,000 ounce (Koz)/year production rate over 11 years.
TGR: What about some other names?
JW: Confederation Minerals Ltd. (CFM:TSX.V) now owns 70% of the Newman Todd project, and I believe it will eventually own 100%. Right now, it shares that with Redstar Gold Corp. (RGC:TSX.V). Every time Confederation drills a hole, it comes up with great news. On Jan. 23, it announced 27m of 5.95 g/t, including 1m of 139 g/t.
TGR: And it has only 45M shares outstanding.
JW: That’s right. It just raised almost $5M on the exercise of warrants from its last financing. In November, it announced 11m of 5.75 g/t. The sale of its potash division netted it 40M shares of American Potash LLC. In October, it announced 20 g/t over 2m and 22m of 5 g/t. It has consistent bands of high-grade mineralization over a 20m width.
Confederation is well priced, it has good structure, lots of room to grow, cash in the bank, drilling underway and the potential to own 100% of the resource; it definitely is a takeover candidate.
TGR: Maybe one more in Canada before we move on to another jurisdiction.
JW: Gold Canyon Resources Inc. (GCU:TSX.V) keeps coming up with great results. It has 50,000m of infill drilling underway and looks to me like it will be a 5–8 Moz resource at some point.
TGR: How about Prophecy Platinum Corp. (NKL:TSX.V; PNIKD:OTCPK; P94P:FSE)?
JW: Newstrike and Prophecy share equal billing at the top in terms of current and future value.
Prophecy just started a 20,000m drill program at its Wellgreen deposit in the Yukon, where it can drill through the winter on 4 kilometers (km) of historic underground drifts from when Hudbay had the mine in production back in the 1970s.
It has an 11 Moz resource of combined platinum, gold, copper and nickel on a portion of the strike that would constitute less than 10% of the whole geophysical signature. This has a very high potential to produce many millions of ounces of combined gold and platinum group metals (PGMs). Obviously, 20,000m of drilling starting underground will mean a lot of infill drilling, which will simply add to the quality of the resource.
The real excitement will begin when it starts step-out drilling after the snow melt. That will be at least 1km from the existing resource. If Prophecy hits the same mineralization to depth in 2012, it will be massive.
TGR: Deposits of PGMs plus nickel and copper are unusual. Are we looking only at drill results, or are there other catalysts?
JW: The catalyst is continued drilling. The company will do a resource calculation and issue a PEA this year. That will catalyze a major share price increase. There are metallurgical studies underway. With complex, combined metal output, those studies are a key ingredient. The company plans to ship a concentrate.
TGR: That keeps the capital expense lower, too. Will this be an underground mine?
JW: No, the concept is open pit. The mineralization is so widely disseminated, with high-grade lenses and massive sulphides, open pit is the right way to look at it.
TGR: Let’s head to the southwest U.S. Which companies do you see as potentials for takeover?
JW: I am waiting, almost minute by minute, for a takeout offer on Redhawk Resources (RDK:TSX; QF7:FSE; RHWKF:OTCQX). The company has 3.4 billion pounds copper in a resource, but it has been on a 30,000m drill program that will produce a new resource calculation in April. I think that will almost double the resource, triggering the interest of majors looking for high-value, safe-jurisdiction copper deposits with good production infrastructure.
There are all kinds of mines in this part of Arizona. Within a 25–50km radius of Redhawk, Rio Tinto (RIO:NYSE; RIO:ASX) is developing a copper mine and BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) has a producing copper mine.
TGR: ASARCO LLC (AR:NYSE) also has a smelter nearby.
JW: ASARCO butts up against Redhawk. ASARCO would be a good candidate to take over Redhawk, but the fact that it has not acted leads me to think it will not. I think a Chinese firm is a more likely takeover. They are a bit more aggressive in acquiring high-value copper deposits right now.
TGR: What do you know about Redhawk’s management?
JW: The company is sufficiently controlled by management to prevent an opportunistic major from taking it out at a discount. Redhawk’s largest shareholders are unanimously adamant that they will not take less than $2/share if they have to sit on it for a century. That is probably why you see a bit of weakness in the share price.
If the updated resource is doubled, the share price will reflect that in very short order. A rising share price will trigger the interest of a major who wants to get in before the price goes up too high. I think that will happen for Redhawk in 2012.
TGR: Are there some other names you’d like to tell us about before we let you go?
JW: Corazon Gold Corp. (CGW:TSX.V) is a great opportunity when you look at what is happening in Nicaragua. Calibre Mining Corp. (CXB:TSX.V) just made some porphyry discoveries there and B2Gold Corp. (BTO:TSX; BGLPF:OTCQX) has had success with its Jabali vein. Corazon is drilling madly on vein structures. It has great potential to do very well in the near term.
TGR: Is Nicaragua a safe jurisdiction?
JW: Absolutely. There has never been any indication of government interference or political problems. Everything gets permitted. There are no problems with the investor split to the government.
TGR: And one more company?
JW: Inter-Citic Minerals Inc. (ICI:TSX) is very interesting to me. Last year, the company turned down an unsolicited bid from a major Chinese company that management viewed as excessively opportunistic. Since then, it has announced great results from its drilling at Dachang and has increased the value of its deposit.
Inter-Citic is a great entry-level stock now. It is lower than before the takeout offer, and we know that the company that wanted to take it out is still watching it. I think we will see an improved offer from the same or another Chinese company.
TGR: Is it an advantage that Inter-Citic has a large gold deposit in China?
JW: Absolutely. For five years, China as a sovereign entity has been the largest acquirer of gold in the market and the Chinese people are among the world’s most aggressive consumers of gold for investment purposes. Inter-Citic’s proximity to that market is a direct advantage.
TGR: Why has Inter-Citic’s share price lagged?
JW: The fact that it’s in China. There is a perception that only a Chinese major or a Chinese mining company could put it into production successfully.
Some investors saw the failure of the last takeover bid as a lost opportunity. But if you look at the deposit, I think management did the right thing. Drilling aggressively while improving the deposit is the right move.
I think the share price is directly a result of the failed takeover bid. I think the share price will rise dramatically as the value of the deposit is improved and the inquiring company will return with a better offer.
TGR: Any parting thoughts for us, James?
JW: I would emphasize that volatility in the market on a day-to-day and week-to-week basis is the new norm. To consider yourself a real investor who does well, you must ignore the economic noise. That is to say the volatility caused by mainstream media coverage of issues like sovereign wealth and sovereign debt. Investing in a quality asset and a quality management team is all that counts.
TGR: James, thank you for your time and your insights.
Midas Letter is the Journal of Investment Strategy of the Midas Letter Opportunity Fund, a Luxembourg-based Special Investment Fund that specializes in Canadian-listed emerging companies in the resource sector with a focus on precious metals explorers and miners. James West is the portfolio and investment adviser to the fund. West’s Midas Letter Premium Edition deconstructs the economic and political events of the past and upcoming week and identifies risks and opportunities to investors seeking to profit while the majority of investors are losing money.
By Claus Vistesen, on February 21st, 2012
The ECB and BOE have shown their intent with their recent aggressive balance sheet expansions and the Fed is trying hard to keep the door open for more QE even as the data in the US continues to defy the general global slowdown.
In Asia however sticky inflation in India, a desire to nail property developers to the wall in China and a belief in a post earthquake recovery in Japan have kept the big Asian central banks from providing additional easing. Even in Australia where the economy has been teetering on the brink of a recession for 6 months, the central bank has refrained from any decisive moves.
In three out of the four cases above however things may slowly be about to change.
In India, the central bank recently opened the door for considerable easing in 2012 as headline inflation comes in. The market has already heavily discounted such a move with Indian equities up about 25% since mid December 2011 and some big ticket single names such as Tata Motors up more than 50%.
Quote Bloomberg
Reserve Bank of India Deputy Governor Subir Gokarn said the monetary authority will cut interest rates once it’s confident inflation will keep slowing.“The stance now is that we have reached the peak and any further action will be toward easing,” Gokarn, 52, said in an interview at his office while discussing the rupee, the government’s budget deficit and bond repurchases. The central bank isn’t concerned about the currency’s record monthly advance in January “because in a sense it’s a correction,” following last year’s 16 percent decline, he said. Emerging-markets have stepped up efforts to shield growth from the impact of Europe’s debt crisis, with Brazil, Russia and the Philippines cutting rates in recent months.
The road is not entirely clear for easing by the RBI where two issues may still derail the central bank’s intention to start an easing cycle.
Firstly, the government’s budget deficit continues to increase and while borrowing to invest in infrastructure etc in India is certainly worthwhile, monetary policy may still have to lean against excessively and essentially structural deficit spending by the government. This is particularly the case as supply side constraints may mean that such deficit spending adds substantially to inflation.
Secondly, the INR may be subject to substantial weakening on a resurgence in global volatility. The Fed’s USD swap lines as well as the the ECB’s efforts to backstop the European banking system have so far calmed things down. Nevertheless, should another period of strong and sudden INR weakness ensue, it means the RBI would not be able to reduce the yield difference to the rest of the world in any meaningful way.
In China, the economy is now visibly slowing. Foreign exchange reserve accumulation have ground to a halt and M1 growth is negative on the year. Even if the desire to cool down excessive credit growth and nailing property developers to the wall might still constitute top priorties, the balance is shifting towards easing.
Quote Bloomberg
China is seen making more cuts to banks’ reserve requirements to fuel lending and sustain economic growth as the housing market cools and Europe’s sovereign-debt crisis weighs on exports.The proportion of cash that lenders must set aside will fall half a percentage point from Feb. 24, the central bank said Feb. 18 on its website. Standard Chartered Plc forecasts at least three more reductions this year, while HSBC Holdings Plc (HSBA) sees a minimum of two.
So far, Chinese authorities seem content to use the reserve requirement ratio (RRR) as the main tool to provide easing. This makes sense in a command market economy where the government can be fairly sure to control the supply side of credit through loan quotas. I think however that the calls for no interest rate cuts until mid 2012 may turn out to be wrong if China is about to slow to the extent that our leading indicators show. Property prices have fallen (or failed to rise) for some time now in China and as growth slows further, the authorities may rightfully begin to argue that their near term objectives have been achieved.
Perhaps the most interesting development this week however came in Japan where the BOJ apparently got my memo as they restarted QE.
Quote Bloomberg
Japan’s central bank unexpectedly added 10 trillion yen ($128 billion) to an asset-purchase program and set an inflation goal after an economic slide fueled criticism it has been slower to act than counterparts.An asset fund increased to 30 trillion yen, with a credit lending program staying at 35 trillion yen, the Bank of Japan said in Tokyo today. The BOJ also said that it will target 1 percent inflation “for the time being.”
This decision appears to have gone completely under the radar, but I think it is very significant. Two points are particularly important to emphasize. Firstly, the entire 10 trillion yen added to the asset purchase program has been earmarked to JGBs which signals the BOJ’s willingness (or the MOF’s orders) that budget deficits in Japan are now to be directly monetised to a much higher degree than has earlier been the case. Secondly, the BOJ has now committed itself to an inflation target (1%) and will use balance sheet expansion to reach this goal.
This is textbook QE and should be bearish for the Yen and bullish for the Nikkei, but things may not be so simple of course. Chris Wood adds to the discussion in the latest version of Greed and Fear [1].
The second point is whether the latest news is a signal to short the yen. On the face of it, it should be. But the issue is whether the BoJ Governor Masaaki Shirakawa is going to follow the previous examples of his conduct of unorthodox monetary policy; whereby he raises thequantity of the so-called asset purchase programme but does not exactly accelerate the pace ofthe buying to fulfil the programme. Thus, the Bank of Japan has so far purchased ¥10.3tn of assets since the latest programme was first announced on 28 October 2010, amounting to only 52% of the previous target of ¥20tn set in October 2011.
In other words, how serious is this inflation target and over what horizon does the BOJ intend to reach it? Only time will tell, but given the persistence of deflation in Japan I would argue that any semi-serious adherence to this inflation target would require substantial balance sheet expansion by the BOJ.
As Chris Wood aptly puts it, the move by the BOJ is merely the latest evidence of the bull market in central bank balance sheet expansion and more importantly, relative central bank balance sheet. In a world where export driven growth is seen as everyone as the way out of debt purgatory you need expand and print more than your peers. On this, I also slightly disagree with Chris that Japan does not need a weaker JPY. My own analysis suggest that corporate margins in Japan are very sensitive to changes in the Yen. But that is a discussion for another time. For now, I will agree with Chris that we have seen the beginning of a sea change in Japan, but we need to see the BOJ backing up intentions.
Ultimately though, the most significant piece of news from Asia last week was the indication from both Japan and China that they would stand ready to offer their full support for the euro zone. The idea is simple; China and Japan would use the IMF as conduit to create the only real bazooka (apart from ECB monitisation).
Quote Bloomberg (my emphasis)
Japanese Finance Minister Jun Azumi said his nation and China will work together to help Europe solve its debt crisis through the International Monetary Fund.Europe needs a bigger so-called firewall of added funding to contain the crisis, even as Greece shows some improvement in solving its financial woes, Azumi told reporters in Beijing yesterday after meeting Chinese Vice Premier Wang Qishan. Azumi, who met Chinese Finance Minister Xiu Xuren during his visit, also said he asked China to make its currency more flexible.“We shared the view that Europe needs to make more efforts to create a bigger firewall,” Azumi said. “We also agreed to act together as the IMF will probably ask the U.S., Japan and China” to help boost its lending capacity.
This would indeed be global monetary relief from Asia.
By Ajay Shah, on February 9th, 2012
Economics is a rich and fascinating subject. But all too often, the teaching process forces young people in the field to look at the tail
of the elephant, to think about macroeconomics as the game of solving dynamic models. There is actually much more going on. (On a related note, you might like to see Books that should be read before starting a Ph.D. in economics on this blog, 18 May 2011).
In this blog post, we walk through the evolution of the key ideas in historical order, and offer suggestions to interesting readings,
which will help you see the fuller picture. Many of them are on your reading list, but some are not.
The old paradigm
Nobody tells it better than The age of uncertainty by John Kenneth Galbraith.
The old paradigm is now in the dustbin of history. But in order to comprehend the revolution in macroeconomics, it is rather useful to start from there. One encounters these arguments from time to time, so it’s worth knowing about the furniture of that mind.
The revolution of modern macroeconomics
The starting point is a speech : The role of monetary policy by Milton Friedman, American Economic Review, 1968, which had enormous influence in arguing that the mainstream Keynesian paradigm was fatally flawed, and that it was not going to work as a guide to policy on a sustained basis. By the early 1970s, the empirical evidence was showing that Friedman was on the right track, which led to everything that followed. This speech is arguably the beginning of modern macroeconomics. At the same time, this was only an argument conducted in English, and not a model.
The next big milestone was the Lucas critique: Econometric policy evaluation: A critique by Robert Lucas, Carnegie-Rochester Conference Series on Public Policy, 1976. This devastated traditional macroeconomics. In addition, it’s a remarkably elegant idea.
Lucas, Sargent and others mapped out a work program in a series of non-technical pieces, which were enormously influential. They set a generation of economists going to build a class of models that were rooted in the intuition of Friedman, 1968, and were invulnerable to the Lucas critique. You should read: Understanding business cycles by Robert Lucas, Carnegie-Rochester
Conference Series on Public Policy, 1977; After Keynesian Macroeconomics by Lucas and Sargent, Federal Reserve Bank of Minneapolis Quarterly Review, 1978; Methods and problems in business cycle theory by Robert Lucas, Journal of Money, Credit and Banking, 1980.
As important as the Lucas Critique was Rules rather than discretion: The inconsistency of optimal plans by Kydland and
Prescott. An accessible set of materials on this work is found in their 2004 Nobel Prize page.
This work came to fruition in the early 1990s in the form of the NK-DSGE model with a policy rule. Important tools got developed in a
classical setting (the RBC model), and then Keynesian frictions were put in, to give the NK-DSGE model. It has many problems, but with this, the Lucas program did work out. Nice readings on the NK-DSGE model are The science of monetary policy: A new Keynesian perspective in the JEL by Clarida, Gali, Gertler (1999), and their Monetary policy rules and macroeconomic stability: Evidence and some theory in the QJE in 2000.
The new macroeconomics is nicely showcased in Technology, employment, and the business cycle: Do technology shocks explain aggregate fluctuations? by Jordi Gali in AER, 1999. This is a wonderful example of confronting empirics with theory, plus a fundamental (if highly controversial) contribution in the eternal quest for the sources of business fluctuations.
On the other side, there is a powerful critique of the micro-founded approach to macroeconomics: The scientific illusion of empirical macroeconomics by Larry Summers, Scandinavian Journal of Economics, 1992.
By the late 1990s, there was a lot of progress to report. There is a nice article: Thirty-Five Years of Model Building for Monetary Policy Evaluation: Breakthroughs, Dark Ages, and a Renaissance by John B. Taylor, Journal of Money, Credit and Banking, 2007. There is the best single book on monetary policy: Monetary Policy Strategy by Frederic S. Mishkin, 2007. And, there are two other nice articles: A stable international monetary system emerges: Inflation targeting is Bretton Woods, reversed by Andrew K. Rose, Journal of International Money and Finance, 2007, and How the World Achieved Consensus on Monetary Policy, by Marvin Goodfriend, Journal of Economic Perspectives, 2007.
The second stage
Once the basic plan was laid, important work emerged in connected fields. A critical issue that came to fore was the role of finance in macroeconomics. Agency costs, net worth, and business fluctuations by Bernanke and Gertler, AER 1989, is the most elegant illustration that financial structure matters for macroeconomics.
We close this off with a canonical reference about fiscal policy from a macro perspective. A good recent treatemnt is Activist fiscal policy to stabilise economic activity by Auerbach and Gale, from the 2009 Jackson Hole symposium.
Post-crisis revisionism?
On this, see Monetary policy and financial stability: Is inflation targeting passe? by Takatoshi Ito, July 2010.
By Simon Grey, on January 30th, 2012
Make no mistake, the problem does not lie with The Fed per-se. The Fed’s “low interest rates” are there to permit the profligacy of the government, yet the longer it goes on and the more the government abuses this deadly embrace the further into the coffin corner The Fed and Congress go. As the debt accumulation rises the maximum interest rate that can be absorbed goes down until finally you reach the boundary where even a slight increase in rates results in instantaneous bankruptcy.
Denninger is a smart man—well-versed in the law, particularly constitutional law, and has an immense knowledge of politics and economics. And yet, here he is once again calling for enforcement of the laws governing The Fed even though history has shown repeatedly and conclusively that it is politically impossible to manage inflation through a central bank. In theory, it is possible that a central bank will act prudently and responsibly, and not inflate the currency. In reality, though, a central bank is nothing more than yet another mechanism by which the government can tax the people.
This is why the solution to inflation is ending the fed, or at least government-mandated fiat currencies, and to allow multiple competing currencies. Relying on the government to properly manage a monopolistic money supply is an exercise in futility. Though it would be theoretically better to do it this way, history has shown quite clearly that a competitive currency market is preferable to a government-controlled currency, and it is therefore better to accept the fluctuations of market-based currency system over the guaranteed degradation of a government monopoly.
By Ajay Shah, on January 27th, 2012
Reportage by Robin Harding and Michael Mackenzie in the Financial Times:
The rate-setting Federal Open Market Committee predicted low interest rates until late 2014 and set a formal inflation objective of 2 per cent, reflecting chairman Ben Bernanke’s long-held goal of providing greater transparency.
The FOMC downgraded its estimate of growth in the coming quarters from “moderate” to “modest” and Mr Bernanke indicated that another monetary boost for the economy – most likely another round of quantitative easing, or QE3 – remained an option.
“We are prepared to take further steps in that direction if we see that the recovery is faltering or if inflation is not moving toward target,” Mr Bernanke said.
The Fed also published its first detailed forecasts of future interest rates.
…
Adopting the 2 per cent objective is a historic move that binds the whole FOMC to a defined goal that will endure after Mr Bernanke leaves. It means the FOMC can easily justify more easing if it wants to because its inflation forecast for 2014, of between 1.6 and 2 per cent, is below target.
The FOMC voted for Wednesday’s decision by 9-1. The only dissenter was Jeffrey Lacker, president of the Richmond Fed, who wanted to leave the late 2014 date out of the policy statement.
The US suffers from legacy legislation, which predates modern monetary economics, which places the burden upon the Fed of pursuing both price stability and low unemployment. The evolution of the US Fed has been led by human energy within the Fed. Starting from Paul Volcker, who took charge in August 1979, the US Fed has run a Taylor rule with a nice strong above-1 inflation coefficient. In a recent column in the Indian Express, Ila Patnaik tells us about Paul Volcker’s story and how it matters to us. In effect, from Volcker’s chairmanship onwards, the behaviour of the US Fed has been that of an inflation targeting central bank. This was the de facto reality. Everyone knew that the US Fed targets inflation at 2%. What is new now is that the Fed has put greater credibility behind this, by going closer to de jure inflation targeting.
A key dharma of good central banking is to say what you will do, and then do what you just said. By saying that there is an inflation target, there is now full alignment between the words and deeds of the US Fed.
The day will come when India will enact high quality legislation which puts monetary policy on a sound institutional foundation. But we should not accept mal-performance by RBI until that day. It is possible for RBI to do much better, when compared with the present, even though the present legislation is really badly written. The US Fed is a good example of how technical capabilities within the Fed, and not an external legislative mandate, have driven improvements in the functioning of the Fed. This sort of progression is what RBI can and should aspire to, and this does not require waiting for a high quality RBI Act.
By Simon Grey, on January 24th, 2012
In many ways the monetary policy issue is even more important, simply because we are running out of rope on our national debt-addiction rappelling adventure and the floor is still 100′ down. That’s a serious problem — and “gold standards” do not (in fact cannot!) fix it. The only fix that works is to demand and enforce a zero-CPI standard with honest statistics, along with an end to federal government borrowing — period. “Hard money” .vs. “Fiat money” is immaterial; if you permit fraud in the monetary and credit system, as we have, the rest simply does not matter and yet if you put a cork in the frauds and lock up the scammers then you quickly come to the conclusion that allowing a handful of producers of some metal, the majority of which are foreign entities, is the last group you want running your monetary policy!
The Paulites get this wrong and so does Ron Paul himself despite the historical fact that the United States had massive inflationary bubbles and detonations of them during the time it was on the Gold Standard. 1873 anyone (as just one example.)
The real problem in 1873 as with all other similar blowups was the issuance of bogus debt instruments unbacked by anything. In the case of 1873 concentration was in railroads and related construction all financed by long-duration bonds (and therefore subject to high degrees of price risk due to their duration) but which were entirely-speculative and in fact for which there was no actual demand in the economy for the services (transportation to be provided by said railroads) at a level sufficient to meet the intended expense. It didn’t help that we were playing games with our exports (and Europe with its imports) much as China and the US are today, effectively hiding the bubble’s impact for a period of time and allowing it to inflate to ridiculous size. When the over-leveraged positions became exposed the game collapsed and the Long Depression followed. [Emphasis original.]
Denninger correctly notes that a gold standard, in and of itself, is not enough to prevent a bubble of any sort. He also correctly notes that enforcing a zero-CPI standard would fix the current currency mess. However, what he seems to neglect in his analysis is that the real problem is not with the proposed solutions, but the fact that the government has to enact and enforce them.
This then begs the obvious question: given the government’s obvious failures to prevent bubbles by keeping money honest, regardless of the money is metal or digital, why then even bother to put the government in charge of the money supply? They can’t manage it properly when gold is money, and they certainly can’t manage it properly when paper is used as money. Why then trust them with it?
The better solution is to simply allow currencies to freely compete with each other, which will have a strong tendency to ensure that currencies remain sound, strong, and free from inflation. By the way, there is one presidential candidate who has proposed legislation that would do exactly this. We all know who he is.
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