By Claus Vistesen, on September 26th, 2011
If investors were hoping that the strength of commodities was sign that decoupling, led by Asia and Latam, were running on course to help the global economy expanding, events last week must surely have extinguished such hopes. Indeed, it was always a question of commodities and emerging markets catching up to the ongoing slaughter in Europe.
Indeed, what seems to be main question now is whether the US economy will avoid a recession and, as a consequence, just how bad it has to get before the Fed starts another round of shock and awe QE. In this sense, I also always thought that expectations of emerging market foreign exchange reserves bailing out Europe and/or central banks easing aggressively to support the global economy were pinned on expectations that after all were too high.
(Quote Bloomberg)
The world’s largest emerging economies will not act as a bloc to ease Europe’s financial crisis, Russian Deputy Finance Minister Sergei Storchak said.“It’s impossible, I’m certain of that,” Storchak told reporters today in Washington. “If the BRICS are going to act to overcome the euro zone’s financial problems, then it will be based on the possibilities presented by working through the International Monetary Fund.”Finance ministry and central bank officials from Brazil, Russia, India, China and South Africa met before this week’s IMF annual meeting to discuss coordinating policy as Europe reels from a sovereign debt crisis and growth slows in the U.S. There is a “high” danger that Greece will not fulfill all of its debt obligations, Storchak said.
As for the EM tightening cycle I think that while we may certainly see an easing of pace or perhaps even a full stop of tightening measures I think a reversal is out of the question. This is especially the case as the recent strong correction in commodities and the global slowdown is likely to make inflation a non issue going forward. However, inflation lags the cycle and if the central banks are fixed on this measure it will take some time before the data allows decisive action unless of course the future is suddenly discounted in a radically different way due to rising downside risks.
In India, the tightening cycle is surely near its end with the yield curve already flat as a pancake, but with sticky inflation and fiscal policy continuously loose, there is limited scope to the central banks’ ability to maneuver.
(Quote Bloomberg)
India’s central bank is close to the end of its record series of interest-rate increases as inflation will probably slow next year, Deputy Governor Subir Gokarn said.“You could say that the cycle is nearing its end,” he said, “given the projection that inflation will start coming down and will continue to move down from December onwards.” He declined to specify when the Reserve Bank of India may stop raising rates.
Worryingly, recent news out of China appears that the country may be turning Indian or at least that the expected easing may not come as expected. Especially, it is bad news for the global economy in the near term (but perhaps good in the long run?) that Chinese authorities seem to be engineering a crack down on property developers which will not only lead to an acceptance of lower growth in order to effectively quell off balance sheet lending.
It seems that investors hoping for emerging markets to drive forward the global economy may, for the moment, be guilty of too high expectations.
By Claus Vistesen, on August 12th, 2011
I am handing the mike to my good friend and colleague Edward Hugh who has penned what I consider to be the most accurate analyses to date of the issues facing the European continent.
With fiscal union off the table, there are basically three possibilities. The first is to stay more or less where we are, expanding the ECB’s bond-purchasing program and simply trying to hang in there. The stability fund could be increased, but the more numbers start being accounted for in detail, the further away the various parties get from being able to agree. If this continues, the ECB is likely to reach a ceiling beyond which it will be more than reluctant to continue buying, because the bank takes the view that the resolution has to come from the politicians.
But with Italy and Spain’s combined sovereign refinancing needs between now and the end of 2012 totaling about 660 billion euros, and given the financing needs of the banks on top of this figure, reaching agreement to expand the bailout mechanism looks pretty improbable, especially when one considers that there’s no turning back once it starts. So, at some point, the spreads will start to widen again as markets force the issue, with the inevitable outcome that the monetary union is pushed toward the brink of breakdown.
The second possibility would be to disband the union entirely, leaving each member to go back to its national currency. This would be a disastrous outcome for all concerned and for the global financial system. Coordinating the unwinding of cross-country counterliabilities would be a nightmare given the level of interlocking corporate and sovereign bond markets. The sudden disappearance of one of the major global currencies of reference would also cause havoc in financial markets. The dollar would most likely be pushed to unsustainably high levels in the rush for safety, and it is only necessary to look at what is happening to gold, the Swiss franc, and the Japanese yen to catch a glimpse of what would be in store. Of course, this kind of violent unwinding would never be undertaken voluntarily, but that doesn’t mean that it is impossible — particularly if solutions are not found and the force of market pressure continues.
Fortunately there is a third alternative: The eurozone could be split in two, creating two separate (and unequal) euro currencies. Naturally, the composition of the groups would be a matter of negotiation because some countries do not easily belong in either one group or the other. The broad outline is, however, clear enough. Germany would form the heart of one group, along with Finland, the Netherlands, and Austria. It might even take Estonia, which has been making it pretty clear that it would also be up for the ride. Spain, Italy, and Portugal would naturally form the nucleus of the second group, with Slovenia and Slovakia being possible candidates. Some countries, Ireland and Greece for example, might simply choose to opt out.
Go read!
By The Gold Report, on July 28th, 2011
 ShadowStats Editor John Williams advises legislators to stop fooling around with the country’s credit rating. Regardless of the deal reached, he predicts that the Treasury and Fed will continue to print money to meet obligations and add liquidity to the economy. In this exclusive interview with The Gold Report, he explains how that will have the effect of pushing the price of gold and other commodities even higher.
The Gold Report: Unless Congress approves and President Obama signs an increase in the $14.29 trillion debt ceiling, the U.S. Treasury is set to begin defaulting on payments starting August 2. That threat launched months of competing big deals to cut spending and/or raise taxes. To add to the pressure, in mid-July the credit rating agencies Moody’s and Standard & Poor’s threatened to downgrade the U.S. credit rating from its historic AAA status if the debt limit isn’t raised in time to avoid defaulting on interest and bond payments. That could raise interest rates for the government and trickle down to consumer mortgage loan and credit card payments. John, what kind of deal would be good enough to satisfy bond rating agencies and avoid a double-dip recession?
John Williams: First of all, the chances are nil that the government actually will default. There is some talk that if the debt ceiling were not raised by the August 2 deadline, the government could avoid default for a while by playing games with its payments—pay interest and debt first instead of paying other obligations. That could trigger a rating downgrade, if one had not occurred otherwise. Also, I don’t think global investors would view non-payment of general obligations as a plus and could engage in dumping the dollar. I think Congress will agree, however, to something by the deadline. I have no expectation, though, that the deal will be of any substance; nothing that has been proposed would improve U.S. fiscal conditions meaningfully.
A country’s credit rating is a measure of the risk of debt default. The U.S. dollar, as the world’s reserve currency, is considered the benchmark instrument for an AAA rating. That generally is considered the riskless category. It would be very unusual for rating agencies to downgrade a benchmark. Yet the credit rating agencies now are seeing risk of a U.S. default and are talking a possible downgrade of U.S. Treasuries. A downgrade would have about as much negative impact as an actual default. You don’t want to see a downgrade. You don’t want to see a default. Those actions would have all sorts of implications, very negative implications for the financial markets, particularly for the U.S. dollar. You would see heavy U.S. dollar selling and dumping of U.S. dollar-denominated assets such as Treasury bonds. You would see a spike in dollar-denominated commodity prices such as oil. Gold prices would rally sharply, as would silver, as traditional hedges against inflation.
TGR: Is printing more money really what the government is going to do to pay its debt?
JW: That is what countries that spend beyond their means usually do if they can’t raise adequate tax revenues. I can tell you that the current government cannot raise enough taxes to bring the actual deficit under control. It could tax 100% of income, take 100% of income and corporate profits, and it would still be in deficit. In terms of generally-accepted accounting principles (GAAP) that include annual increases in the unfunded liabilities on a net present value basis, the U.S. is long-term bankrupt. A true balanced budget approach would require excessive overhaul—I’m talking massive cuts in the social programs because cutting every penny of government spending except for Social Security and Medicare would still leave the country in deficit. We are spending well beyond the bounds of reason in a number of areas. The country just does not have the ability to pay for all the services it provides.
TGR: In a July 14 commentary, you said that, “In the event of an actual default or downgrade, the United States position as the elephant in the bathtub of sovereign risk likely would cause the dollar to plummet against all major currencies irrespective of any ongoing concerns related to Euro-area debt.” What would this mean for the U.S. dollar and the price of gold going forward?
JW: Already stocks are down because the markets are frustrated with the lack of a deal. The U.S. is such a large player in the world markets that if the dollar is downgraded, the impact will be felt globally. The dollar should sink against most major currencies, including the euro, and gold prices would experience a big bump up. It should be very positive for gold long term. It doesn’t mean that Central Banks aren’t going to intervene and that the Treasury or IMF are not going to try to keep gold prices down. But, over the long haul, you’ll see much higher gold prices.
TGR: What would default or downgrading mean for the dollar?
JW: If the U.S. defaults or gets downgraded, that likely will end the U.S. dollar as the global reserve currency. That’s not a viable option for the United States. People involved with getting the country to that point should be removed from office. If you are the most financially powerful country on earth, you don’t fool around with your creditworthiness.
TGR: So, if the dollar isn’t the benchmark, would it be the euro? Would it be the yen? Would it go back to a gold standard? What would happen?
JW: It would probably revert to some kind of a basket of currencies, probably including gold. The dollar would tend to suffer against the new benchmark and gold would tend to increase relative to the dollar in such a circumstance. But I can’t tell you exactly what would happen.
TGR: The new European Union plan for reducing the debt burden for Greece, Ireland and Portugal offers longer-term and low-interest loans and allows some bonds to go into temporary default. Does that set a precedent? Will it contain Europe’s debt crisis?
JW: The euro never should have been put in place. Anyone who ever thought that the Germans and the Italians could coordinate fiscal policy didn’t know the Germans and the Italians very well. The euro would have been disbanded or at least realigned by now if we weren’t in the middle of a systemic solvency crisis. The European Union will do anything to keep Greece afloat, as long as it is viewed as a threat to systemic solvency. Once the system stabilizes, I’d expect to see a breakup of the euro.
TGR: In our conversation with you last January, you talked about the difference between the true deficit and the cash-based deficit published by the government. What is the true deficit and what can be done to deal with that?
JW: The GAAP-based deficit is running around $5 trillion a year right now. That includes the numbers popularly looked at in the press and the year-to-year change in the unfunded liabilities for Social Security and Medicare adjusted for the present value of money.
To bring the true deficit into balance, there is nothing that can be done short of slashing Social Security and Medicare programs, and I see that as a political impossibility. Again, I mention the entitlement programs here, because you could eliminate every penny of government spending except for Social Security and Medicare, and the government still would be in deficit.
TGR: One of the other things that we’ve discussed with you before is quantitative easing (QE). Federal Reserve Board Chairman Ben Bernanke said there will be no more quantitative easing. In your July 8 commentary, you said the Fed will likely find the markets and banking system pressuring it into some form of QE3. What form might that take? And, how might that impact the dollar and precious metals?
JW: Well, Mr. Bernanke hemmed and hawed about the status of QE3 at his Congressional testimony earlier this month. The economy is weak enough; he will use that as an excuse. I can’t tell you exactly what the Fed is going to do. I imagine it will go back to buying Treasuries, once the debt ceiling is raised. That will cause weakness in the dollar and strength in gold. Generally, anything the Fed does to debase the dollar, which it continues to do on an ongoing and very deliberate basis, means higher gold.
TGR: So, what is your prediction for the final solution?
JW: In terms of the debt ceiling, the solution is going to be to continue raising the debt ceiling. Either that or eliminate the debt ceiling. I don’t know what can be done politically on either side there. But, the government is committed to certain obligations. It doesn’t make sense that it wouldn’t follow through and borrow the funds to pay what it has already committed to spend. As to bringing the U.S. fiscal circumstance under control at present, there simply is no political will by the president or by the aggregate sitting Congress to do so.
TGR: Isn’t it strange that instead of having this debate when they were voting about the budget and whether to spend the money, they are talking about it when it is time to pay the bill for the spending decisions already approved?
JW: No, we’re just dealing with a group of individuals in Washington who are politicians first, second and last. Most of them have very little real interest in the nation’s fiscal condition. They are looking at getting reelected and serving their special interests wherever they can. That has been evident to anyone who has watched the system in recent decades. There are some new, good people in Congress, but not enough to change things, yet. As Congress stands right now, there is no chance whatsoever of putting the U.S. fiscal house in order.
TGR: You look at a lot of numbers. We have really only talked about the debt limit. Anything else that you would like to leave us with that could impact the price of gold?
JW: Well, I think you have covered them. You are going to see ongoing weakness in the economy. The government is going to respond with more stimulus before the 2012 election, despite the so-called efforts at reducing the deficit. The Fed is going to ease liquidity more. All those actions to address the economic problems will tend to be inflationary, and that is generally positive for gold.
TGR: Thank you John.
Walter J. “John” Williams was born in 1949. He received an AB in economics, cum laude, from Dartmouth College in 1971, and was awarded a MBA from Dartmouth’s Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar. During his career as a consulting economist, John has worked with individuals as well as Fortune 500 companies. For 30 years he has been a private consulting economist and a specialist in government economic reporting. His analysis and commentary have been featured widely in the popular media both in the U.S. and globally. Mr. Williams provides insight and analysis on his website, www.shadowstats.com.
By The Energy Report, on July 27th, 2011
 Self-professed contrarian and 321Energy Founder Bob Moriarty expects energy and food prices to follow oil on an upward trajectory, fueling more and more turmoil, unrest and violence around the planet, including the Western world. Read on for more insights in this exclusive interview with The Energy Report.
The Energy Report: The markets don’t appear to have slowed for the typical summer doldrums this year. Instead, they seem to be returning to their pre-May highs, testing the 200-day moving averages. What do you think of this rally?
Bob Moriarty: So many factors affect it that it’s really difficult to figure out exactly what the market’s saying. I suspect that much of this rally stems from a belief in QE3 (quantitative easing), and that’s not a particularly good sign.
TER: Didn’t Fed Chair Ben Bernanke indicate in testimony to Congress that QE3 isn’t on the table at this point?
BM: Well, that was on an even day. On even days, he says, “No QE3.” On odd days he says, “Yes, QE3.” The government’s gone crazy. The market is schizoid because it has no idea what will happen. He said some things that would absolutely lead you to believe that QE3 is going to happen, and he’s said other things that indicate it is not going to occur.
It’s not only the U.S. government; it’s the Greeks, the EU (European Union), the Spanish, the Portuguese, the Japanese, the English—everybody’s painted themselves into a corner, and we no longer have good alternatives. We only have bad ones.
TER: With only bad alternatives, why wouldn’t the market reflect that negativity?
BM: That’s what I don’t understand. I think the market’s going to fall out of bed shortly because QE1 and QE2 didn’t add anything to employment. They cost an enormous amount of money and didn’t accomplish anything. So while I believe it would be pretty stupid to do QE3, the fact of the matter is that Bernanke’s totally run out of options that make any sense.
TER: Another thing that doesn’t seem to make sense is that the price of oil has generally been lower than it was six months ago. The last time we spoke about energy you indicated your belief that peak oil happened a few years back. Why then aren’t we seeing higher oil prices?
BM: As for peak oil, it’s no longer a theory; it’s an absolute. We’ve passed peak oil. When oil hit $146/barrel (bbl.) back in 2008, that was based purely on speculation. It wasn’t based on real demand; it was the flavor of the day. At $90 and $100/bbl., oil is pretty expensive. Even though the world is in a depression—and people are starting to recognize that it is a depression—we’ve got pretty expensive oil, and it’s going to continue to go up.
TER: Some argue that oil prices will be mitigated by the fact that as people have to pay more for gas at the pump, they drive less. Plus, we now see the U.S. trying to spark an international effort to release barrels of crude reserves. Would such a release have an effect or would it just be a Band-Aid?
BM: It’s strictly a short-term Band-Aid based on Obama trying to win votes for 2012.
TER: In the peak oil context, then, if oil starts going up, will we see a corresponding decrease in demand?
BM: It means that for the next 20 years the price of energy and food will go up on a continual basis. It’s very dangerous because everything that’s going on in the Middle East is a function of the price of fuel.
TER: How will the toppling of governments during the Arab Spring affect food and energy prices?
BM: In the first place, there is no quid pro quo. One is an analog for the other. The cost of corn and wheat caused the revolutions, but the revolutions aren’t going to affect the price of corn and wheat. It works one way, but not the other way.
TER: Can’t we reduce the rate of increase in food prices by increasing production?
BM: Of course. You can be much more efficient in producing food if you use fertilizer. You get more bang for the buck. But then the increases in energy and food prices will translate into a direct increase in the price of potash.
TER: Potash has been increasing over the last couple of years. Where’s the top?
BM: Well, the earth has seven billion people to feed.
TER: Are you implying that using potash will make food available in places where people are now going hungry?
BM: Here’s what people need to understand. If the price of oil doubles overnight, you can drive less. But what if the price of food doubles overnight? Eat half as much? That will be the source of much turmoil for the next 15 years. We need to match what we’re capable of producing to the number of mouths we have to feed.
TER: Over the years, you’ve always said that eventually it will be food that has people rioting in the streets. That scenario has now started to unfold.
BM: People must have wondered whether I was in touch with reality, but everything that’s happening in the Middle East, and indeed in Europe, is related. The riots in Spain, Greece, England, Italy—those riots are coming to the United States. You’re seeing flash mobs start up now and I think the government’s hiding a lot of the fighting.
TER: You’ve been investing in potash for a couple of years. What prompted you to pick potash as opposed to another form of food production innovation?
BM: There are other areas of food production to invest in and certainly water would be one of them. But I happen to know some good potash companies and I just can’t see how potash could be anything but a really good investment.
One of the best—and it’s a company I’ve been invested in for three years—is Passport Potash Inc. (TSX.V:PPI, OTCQX:PPRTF). It was at $0.10 for the longest time due to some substantial management issues. Those were corrected, and the stock shot up to $1.86. It’s dropped back down to the $0.55–$0.66 range now, which is healthy, and it’s a pretty good investment. Passport Potash has a giant basin out in Arizona, and will be producing potash for years to come.
TER: Given that the U.S. is pretty well-endowed with food, how much higher can it go?
BM: It doesn’t make any difference if the U.S. is endowed with food or not, lots of countries aren’t, and it’s easy enough to ship potash to the growing areas. But it’s interesting that you mention the U.S., because the U.S. always had a tremendous competitive advantage over the rest of the world due to its high percentage of arable land. Ironically however, the U.S. is now actually a net importer of food due to screwed-up government policies.
TER: When did we become a net importer of food?
BM: In the last two or three years.
TER: A recent feature about new immigration laws in some of the states was focusing on the fact that Georgia’s losing immigrant farm workers and can’t replace them. The commentator asked why there’s a farm-worker problem with 10% unemployment in Georgia. They said because “the U.S. people won’t take these jobs.” He summarized that food production, and the jobs that go with it, will go overseas because Americans won’t work in the fields.
BM: That’s true, and U.S. people who are unemployed need to rethink their attitudes. We have 44 million people on food stamps, and at some point, the government isn’t going to be able to feed everybody. We need to reset our goals and start understanding where we are. One of the best things we could do is eliminate the ethanol subsidy. It’s caused revolutions all over the world, and eventually it will destroy the United States. It’s totally stupid, totally insane. It takes 81,000 calories of energy to produce 75,000 calories of ethanol, yet we’re still subsidizing corn.
TER: With the U.S. now a net importer of food and the chances of more food production moving offshore, does it make sense to be looking at potash production overseas as well?
BM: You’re trying to connect things that don’t have a connection. The United States and Canada are among the main potash producers in the world, and everywhere you raise crops for food, you need to increase efficiency. The price of food being where it is now, you can afford potash. The demand will continue to go up, and whether we use it domestically or export it is relatively meaningless.
TER: But isn’t it true that Brazil is trying to produce food and potash operations located there, and thus these operations would have a distinctive advantage?
BM: Yes and no. Verde Potash (TSX.V:NPK) has high-grade deposits there as well as government support. But the big issue in Brazil is the cost of transportation. It’s very expensive, and probably cheaper to dig potash in Arizona and ship it to Brazil than to ship it within Brazil. Brazil lacks infrastructure. Therefore, even though we’ve seen amazing gains in its soybean production, trying to get potash from one place to another is very difficult.
TER: Another commodity you’ve been interested in is uranium. Since the Japanese tragedy, a number of countries have said—or at least implied—that they’re going to reduce their reliance on nuclear energy. How much of an impact would that have on the uranium price?
BM: As far as the disaster in Japan goes, it’s like an iceberg with 90% of the problem below the surface where we don’t see it. I think it’s a lot more serious than anybody wants to admit, and that we’ll end up with tens of millions of people dying of radiation-caused problems. Consequently, I think nuclear is dead for 50 years.
We do need nuclear energy, but at the same time we need safe nuclear energy. With Fukushima, every bad thing that could happen happened, and every bad decision that a country could make was made. When people in Vancouver and Seattle start dying left and right from radiation poisoning, we’ll certainly reevaluate how we feel about nuclear.
TER: So you expect more backlash?
BM: We haven’t seen anything yet. People on the West Coast of the United States inhaled 30 particles of radioactivity a day for two or three months, and one particle can cause lung cancer down the road. It may be shocking how many people ultimately die as a result of that disaster, but it’s going to be 10 or 15 years before we figure it out. I think it’s a disaster of a magnitude that’s never before occurred in history.
TER: Perhaps due in part to the renewed focus on alternative energies in the wake of that disaster, the rare earth sector has commanded quite a bit of attention this past year. Is this sector one that appeals to you?
BM: No. I think it’s a very dangerous place to invest, and a lot of people stand to lose a lot of money. Jim Dines came out two years ago with the glowing recommendation for the rare earth elements and created a monster. While I have a world of respect for Jim Dines—the guy is absolutely brilliant—he’s brought $50 billion worth of investment into a $5 billion industry. While it’s true that China has a stranglehold on rare earths, it’s also true that supply-and-demand does work, and at some point, if the price goes high enough, it will suck the metals out of the ground.
I am a contrarian, and you’re never going to find me believing what everyone else believes. Too many people believe rare earths is a slam-dunk, and every slam-dunk investment I’ve seen in 65 years has been a loser.
Bob Moriarty’s 321energy.com covers oil, natural gas, gasoline, coal, solar, wind and nuclear energy. It’s his second site on the internet; convinced that gold and silver were at their bottoms and wanting to give others a foundation for investing in resource stocks, he and his wife, Barb, launched 321gold.com almost 10 years ago. Both sites feature articles, editorial opinions, pricing figures and updates on the current events affecting both sectors. Before his Internet career, Bob was a Marine F-4B pilot O 1C/G forward air controller with more than 820 missions in Vietnam. A captain at age 22, he was the youngest naval aviator in Vietnam and one of the war’s most highly decorated. He holds 14 international aviation records, and once flew an airplane through the Eiffel Tower’s pillars “just for fun.”
By Doug Gentry, on July 20th, 2011
This is a time of the year when I meet new people or get reacquainted with old friends, and once we run out of the usual “status update” conversation, someone often asks about the economy and the current crisis about the debt ceiling. I’m going to break a self-imposed guideline for this blog, and actually represent my opinions in a pretty straightforward manner. Usually my goal is to help students reach their own, informed opinion. This time – straight to the punch line…
- The 2011 deficit (estimated at $1.5 trillion) and the accumulated national debt (over $14.3 trillion) are not the most pressing economic issues facing the country right now. They are important, but several notches down from the top of the list. This year’s deficit is just over 10% of GDP, which is high, but not crushing. There are ways to deal with these issues, as I’ll share further down. They are presented as a crisis only because the Republican Party and the Tea Party are using them to push a small government agenda. While I don’t agree with that goal, it’s fine for some to support it, but holding the economy hostage by manufacturing a crisis tied around the debt ceiling makes no sense.
- Investment in economic growth has slowed dramatically. This is particularly true in education – at all levels. It is also true in basic research. Up until the last 20 years or so the U.S. has surfed the wave of economic change, by investing in new thinkers, and making infrastructure and other investments that will improve productivity. These seem left out of current debate options.
- The slow recovery and weak demand for goods and services is the number one problem facing the country. The Federal stimulus is winding down, the Federal Reserve has decided that they don’t need more quantitative easing, and government at all levels is cutting employment. All the while personal consumption dropped in the most recent quarter, along with the fixed asset portion of Investment (inventories increased as a partial offset.) The uptick in unemployment and the very slow growth in employment drags down demand for goods and services. We are sliding down the same hill that the U.S. economy did in 1937-38, when Congress and President Roosevelt worried more about public concern for the debt than about sustained growth. Then we slid into a quick, nasty recession. That’s a danger now, too.
- Inflation is not a pressing problem. The inflation we have seen this year is in food/commodities and energy. The food price spiral might well continue for awhile – I don’t have an independent sense of the true drivers. Even if food prices rise there are other elements of the Consumer Price Index that are holding steady. The rising energy prices are probably related to uncertainty about political conditions in the Middle East. Those concerns should soften soon.Inflation is something to watch out for, particularly with all of the money created by the Federal Reserve in the last three years – money created to help stabilize the economy. It is important that the Fed watch for signs of incipient inflation, driven by very high money supply, but I am confident they will act correctly and aggressively when that happens. That point is not now.
- Bond investors are not abandoning US Treasuries for fear of default. US bonds respond to typical market forces, though they have an element of future gazing in them. If you hold a 10 year bond, and a potential buyer thinks the US might default on that bond, then the buyer will expect a higher yield (lower price/higher interest rate). That isn’t happening now. The bond market for US Treasuries is not showing signs of investors being worried about US debt.
So, what to do….
- To tackle the most pressing problem – the slow recovery – the Federal government should be stimulating demand, through more government spending (on the part of Congress) and more quantitative easing (on the part of the Federal Reserve). Tax cuts can be part of this but they should not be across the board. The most effective, stimulative tax cut on the Federal level is the payroll tax for Social Security and Medicare. Those funds need help, and there are ways to fix them, but a payroll tax benefits mostly working people who will use the increased take home pay to consume.
- To help with the deficit, we should remove the Bush tax cuts, and speed our exit from Iraq and Afghanistan. The Bush tax cuts disproportionately benefited higher income families, who use the extra money for non-consumption activities. When some politicians complain that raising taxes on the wealthy takes money away from job creators, there is no empirical evidence and scant theoretical basis for that claim. Along with repealing those tax cuts there are plenty of opportunities to strengthen the tax code and reduce the dreaded loopholes. Despite what many politicians say and the media parrot, this is not hard. It just takes clear headed thinking and political courage.
- The real budget deficit challenge, at the Federal and State levels primarily, is the cost of healthcare. Increasing costs and inefficient uses of services put pressure on Medicare, Medicaid (which impacts states as well), the VA, the Dept. of Defense, and government employment costs at all levels. We should be strengthening and extending the healthcare reform efforts beyond just extending coverage – to include incentives for cost efficiency and efficacious treatments.
- Restore and enhance funding for education at all levels. Resist the temptation to make education accountable on a short term basis, while hobbling it from producing the long term benefits derived from basic research and liberal arts education. This is an area in particular where Federal spending, even if they result in deficits, is a good investment. Cutting taxes on the wealthy is not a good use of a deficit. Deficit spending should support short term stimulative needs and long term productivity enhancements.
By The Gold Report, on June 21st, 2011
 To Gold Stock Trades Editor Jeb Handwerger, there is an intriguing purpose in the relationship between the national mindset and the intended purposes of economic establishment. “Are we being programmed for QE3?,” he ponders in this Gold Report exclusive, ultimately proclaiming, “It’s sowing time—not selling time.”
While the media is customarily thought to disseminate news, there is a far more intriguing purpose in the role of the relationship between the national mindset and the intended purposes of economic establishment.
It has ever been thus, going back to Shakespeare’s Salanio character in “Merchant of Venice.” Upon meeting colleagues, the characters would greet each other with the question: “Now, what news on the Rialto?”
The Rialto was a place where the powers that be would meet in the morning and exchange ways to use the day’s news to establish desired policy. The Roman baths were also venues in which senators and policymakers would formulate strategies. Of course, Joseph Goebbels and the Stalinists also realized the pivotal role played in the intermarriage of news and economic policy.
Similarly, today we observe the fine “Roman hand” in planting stories to influence a kind of Orwellian mindset in the furtherance of establishing desired fiscal objectives—the doublethink, paranoia, deception and delusion.
It is more than coincidental that, when the elites wish to formulate their desired goals in such matters as quantitative easing (QE), bailouts and Keynesian pump priming, negative economic data will be released. It’s the same old story.
The Obama team is dedicated to Federal Reserve Chairman Ben Bernanke’s philosophy of avoiding depression through the printing press to proliferate cheap money. We are being set up for the acceptance of quantitative stimulus by whatever means and guises necessary.
Until now, everything was coming up roses. National recovery was in the air. Then, all of sudden this week, data turned on a dime. Economists were compelled to rethink hitherto positive figures. Are we being programmed for more QE?
It would not be surprising if we were finessed into acceptance of inflationary policies. Bills could be paid with cheap dollars. Moribund local and state governments could pay off their strangling debts. Think of our swollen budget being paid with cheap dollars. A seemingly simple solution to a complex problem. However, there may be another side to the seesaw.
Our erstwhile allies, such as China and Russia, have been making noise about setting up an alternative currency. Witness Greece and the PIIGS nations (Portugal, Italy, Ireland, Greece and Spain). They are desperate for money to extricate themselves from their financial quicksands. More bailouts anyone?
Foreign governments are buying gold at levels not seen in 30 years due to risk of further declines in the U.S. dollar.
Goldman Sachs is under subpoena in Manhattan as possibly playing a major role in the housing market fiasco. The Manhattan District Attorney is investigating “activities in creating and selling mortgage-based securities designed to allow the bank to profit from the collapse of the housing market.”
One cannot but hope to consider that many of these dramatis personae are some of the very same folks that are steering our national financial ship of state. Prayer anyone?
All these roads lead clearly to the validity of Gold Stock Trades’ essential message. Precious metals, either mining stocks or physical bullion, may be the requisite ports in the upcoming storm.
One need not be a weather forecaster to see the gathering dark clouds and approaching black swans. Hard money is real money. Look only to the best-managed and -financed miners as safe harbors in the gathering tempest. The storm takes time to form. To paraphrase Louis XV, “Après moi, le deluge,” (after me, the deluge).
Sophisticated readers don’t have to be regaled by today’s headlines. They are well aware of the economic syndrome that afflicts our economy by such current headlines as Market Stumbles as Factories, Hiring Slows Down; Biggest Drop in Stocks in a Year; State and Local Governments Going Broke; Unemployment Rises, etc.
The voice of Cassandra is heard across the land. Where does all of this negation leave the intelligent investor who is seeking a life preserver with which to ride out the storm?
The U.S. economic system, which had been the jewel of the world, is in crisis. How long can even the healthiest of systems continue being raped by CEOs that walk away with millions from institutions that are crowned “too big to fail?” They have been bailed out by monies contributed by the great American middle class, which is rapidly being disenfranchised by having to pay for a violated economy.
There is talk of QE3 coming to rescue this sick patient—this may be a placebo that does not cure the ailment. After all, Bernanke instituted QE2 only after deciding that the system was too weak to stand on its own. The treatment has always been in front of our very eyes—sound money in a healthy economy. Instead, we relied on the economists for fiat cures.
Indeed, among the few areas that have held up during this recent liquidity selloff have been gold and silver bullion. Both gold and silver bullion continue to move higher as equity markets decline, showing its relative strength. In fact, as of this writing, gold bullion is challenging record levels, while gold miners are hitting new 2011 lows.
The current market acts as if it was a skillful boxer—bobbing, weaving and full of head fakes designed to confuse us. We have entered into the summer doldrums (or should I say, “goldrums”) in mining stocks.
Do not be fooled. Precisely at such time is a beehive of footwork occurring beneath the surface. The miners are planting the seeds in what has always been a seminal season before the harvest. They are entering into the drilling and exploring period, which will hopefully lead to pay dirt in the autumn.
What does this imply for astute investors who are aware of the territory? It’s sowing time—not selling time. There is fear in the land that may be the antecedent to panic. Nightmarish scenarios of a repeat of the 2008 financial crisis lurks in our subconscious. Good paper may have to be sold to cover bad mistakes.
Gold is continuing toward our $1,600 June target, while the miners continue their nine-month consolidation. These extended formations potentially lead to explosive breakouts. Don’t forget August 2010, when silver broke out from major resistance at $20 and we saw its historic move. Could August 2011 be similar for the undervalued miners?
Miners tend to lag the price of bullion, as many of the industry analysts use a trailing three-year bullion (average) price to value projects. The velocity of gold’s price ascent this past year is not reflected in current valuations.
Once these higher metrics are updated in the fall, many of the miners may see gains to reflect the more-accurate values of their assets. I will publish new gold and silver mining stock recommendations when I see a clear recovery and reversal in the miners.
Patience and fortitude are our constant marching orders. We are in the midst of a correction in mining stocks that may be short-lived, albeit breathtaking. Heretofore, gold bullion has pretty much kept in lockstep with the miners. In this summer season, we have seen a divergence between the two. Such an anomaly is seasonal and transient.
I believe we may see miners catch up in the second half of the year, which, historically, has been an annual occurrence. We have entered the summer “goldrums,” which has become an annual event. Many mining stocks are extremely undervalued and oversold.
Actually, we are at the most divergent level from the mean between miners and the metal in many years. There may be a reversion to the mean between miners and the gold price during the second half of 2011. This period could be setting up an updated base for miners.
The low-volume selloff in miners to long-term support levels indicates shrewd precious metal investors may not have sold their mining equities. Many have reported that they’ve reallocated their holdings in bullion and repositioned into out-of-favor mining stocks while they are on a “fire sale.”
This year, I expect very exciting third and fourth quarters for mining equities as investors realize the potential of gold and silver discoveries during this secular dollar bear market and global currency crisis.
Remember that the arc of precious metals moves to confuse us, but it continues to ascend upward. Presently, our service is in a holding period, waiting for a potential signal for a reversal to add or initiate a position in the best-managed and well-financed mining stocks.
Only the most adroit of traders can manage to exit, and then enter again. The U.S. dollar, while seemingly a safe haven, is acting questionably at this time. Understandably, investors are nervous and deciding, to use the old boxing analogy, to ‘throw in the towel’ prematurely. Careful monitoring of the markets is required. Volatility has significantly increased as we come closer to the expiration of QE2 at the end of June.
Many imponderables await us that could constructively affect our precious metals portfolio, such as elections in North Africa, turbulence in Syria and Iran, instability in the PIIGS nations, U.S. credit downgrades, QE3 uncertainty, etc. The list is endless and abounds with reasons that validate adherence to our policy of precious metals, which includes well-managed and positively financed mining stocks in friendly jurisdictions. To actively monitor these developing stories on a daily basis, click here.
Gold Stock Trades Editor Jeb Handwerger is a highly sought-after stock analyst who is syndicated internationally and known throughout the financial industry for his accurate and timely analysis of the equities markets—particularly the precious metals sector.
By Claus Vistesen, on June 10th, 2011
Of all the permutations of growth stories, scares and soft patches investors should remember that when all is said and done, the economy and market can only do three things; move down, up or sideways. Of the three, the last state is often the most interesting and challenging since while in such a state the debate will be centered on two main themes. Firstly, the reasons for said sideways movement that broke and otherwise upward or downward trend and secondly whether the market and economy will eventually will break this sideways movement by launching a new or resuming the old trend.
As far as goes the market’s erratic movement in the first half of 2011 the immediate reason for the abrupt halt to the positive trend was the devastation of the earthquake in Japan and the subsequent (short term) slump of global equity markets. While the SP500 did have a sniff at new highs at the end of April and into May this level could not be held and we have since poodled back down below support levels.
One of the problems in the current environment is that while the immediate macroeconomic outlook is one of a slowdown, the question of whether it will turn into a more lasting double dip is more difficult to determine.
(click on charts for better viewing)
On the face of it, we should now be approaching the point at which the global economy reveals to us just what level of growth that we can expect to be “normal” and crucially; where this growth is supposed to come from.
What might be starting to creep up on investors’ screen is that the answer to the question above might not be what they anticipated.
On the basis of the data I am looking at, the upward momentum of global leading indicators peaked a year ago (in Q4-09) and momentum has since steadily declined to reflect growth returning to “normal” after the sharp recovery following the global financial crisis. The most recent soft patch in the middle of 2010 gave way to a rebound, but the key is whether the recent relative decline in growth momentum is a messenger of a more sustained downturn or simply another so-called mid cycle soft patch. OECD’s leading indicators point to a definite slowdown but also to a rebound towards the end of the year. The main point really is one of divergence between economies.
In Europe it has become almost unbearably painful to watch the charade which surrounds the slowmotion default in Greece and the frantic attempts by policy makers to suggest that all is well and the next loan tranche is coming. Everyone can understand why politicians, of all people, should not give way to short term panic and whims of the market but we are way past the point of no return and we need a credible long term solution to not only Greece but indeed the debt overhang in the entire so-called periphery.
Not surprisingly, the macroeconomic backdrop of the ongoing fiddling while Rome (or was that Athens or Madrid?) burns is deteriorating. Morgan Stanley recently noted then that;
We see increasing evidence that the euro area business cycle has reached a turning-point. This verdict comes very clearly from our Surprise Gap Index, which plunged deep into negative territory in May. Our Surprise Gap Index is our long-standing favourite proprietary indicator to pick out the turning points in the euro area business cycle.
My only quibble would be that some economies in the Eurozone never experienced an upturn in the first place. It must now be clear for everyone that choosing to put faith entirely in a process of internal devaluation with little or no additional help from the ECB (and even interest rate hikes to boot) has put us in a situation which is far more dangerous than the one we set off from.
A sovereign default was always going to be costly and the main channel of transmission to the real economy will the capital shortfall at banks and who essentially should pay to recapitalise them. Yet, the continuing steadfast position that any form of restructuring is out of the question pushed us further towards the point where events overtake policy makers to such an extent as to foster a collapse of sentiment and trust which will ricochet far beyond the growing queues in front of Athens’ banks.
In emerging markets, growth will remain strong but policy makers in key countries such as India and China have grown weary over inflation and especially in the former seems to be content on accepting short and perhaps even medium term slowdowns in order to tackle inflation. There is no risk of a recession in emerging markets (and thus the global economy) at this point but any slowdown in emerging markets will be an important litmus test for the developed world and thus just how dependent we may now be on a continuing expansion in the so-called developing world.
Even in the face of mounting inflation problems as a result of importing low interest rates from the US I remain constructive on emerging markets and especially on China. Quite simply, I am working under the assumption that while authorities may move clamp down on inflation and excess growth in credit the main bias is thoroughly towards letting the boom continue. If I see signs that this assumption may be wrong I will duly change my views, but so far so good.
But the real issue which may decide whether sideways movement in growth and market returns gives way to continued upside or renewed downside is what happens in the US and specifically, whether the Fed is readying a new round of QE3.
Priming the Pumps for a New Round of QE?
Bernanke is famously on record for linking success of QE to the ongoing strength in the stock market and while I have myself given support to this notion on the basis of simple empirical fact that the wealth effect seems to be increasing over time, it is the effect on the real economy we should rather be focusing on. John P. Hussman recently posed the following simple question;
My intent is not to argue strongly that the economy cannot continue to expand as fiscal and monetary stimulus comes off, but instead to at least ask why this should be expected as a foregone conclusion. On the basis of leading indices of economic activity, we observe more indications of economic slowing worldwide than we observe growth. Moreover, strong periods of employment growth have historically been preceded by high, not low, real interest rates. This is far from a perfect relationship, but it is clear that historically, high real interest rates are far more indicative of strong demand for credit, new investment, and new employment than low real interest rates are.
We will never know what kind of independent momentum the economy in the US (or elsewhere) is able to maintain without actually pulling back stimulus, but the question is whether now is the time to take the chance.
The question of further QE would seem to currently be a mute point. Almost all analysts I have been reading and the general message droning in off the wires of Bloomberg and CNBC is that QE3 won’t happen. Recently, I watched a small clip in which chief economist at Goldman O’Neill simply noted that there wouldn’t be QE3 because there was no need for it. In a recent post at his new blog my friend Edward Hugh also parses the entrails of the potentials of QE3 and while some analysts are beginning to pencil in the prospects of another round of QE it seems that it is a much more difficult call this time around.
For example he quotes a recent analysis by BNP Paribas;
“With equities, credit and commodities all continuing to trade in a range disconnected from weaker economic realities being transmitted via surveys, hard data and the interest rate markets, we arrive at the same conclusion as we have over the last month, primarily that financial assets are fully expecting further quantitative easing if the need arises”.
This would seem to be reasonable conclusion and essentially stipulates how the break down of any sideways trend would be contingent on whether the Fed decided to provide a further dose of QE. However, I reiterate that the general sentiment I get is that the current slowdown is different and that no further QE is needed. A lot here obviously depends on how believe inflation and inflation expectations to evolve. Edward quotes analysts noting that since the labour market is improving, core inflation edging up as well as inflation expectations taking off from sub-zero deflation territory QE3 is not needed. Yet, as I say, none of this is clear cut. Here is Edward;
Really I don’t buy these latter two arguments, and I don’t buy them for a number of reasons (I am not sure inflation expectations won’t be coming down, indeed I don’t see why they shouldn’t), but number one among them would be the danger of “event risk” in Europe. Basically it is important to understand the global mechanisms that are at work here, and the global implications of local decisions. If the global economy has been growing reasonably well over the last six months it is because what Nouriel Roubini once called a “wall of liquidity” is seeping out of the United States, where solvent domestic demand for credit is flat and will remain flat due to the private indebtedness problem (remember US “over consumption” (the high proportion of GDP which has been consumption driven) has only been the mirror image of Chinese “over investment” and we that live in a world which badly needs to rebalance).
This argument is interesting to consider in itself in the sense that it suggests how the mechanism by which carry trade flows funded in USD has been the main source of the incipient global recovery. The flipside to this argument obviously is that the continuing ultra loose liquidity adds considerable volatility to commodity prices which, in itself, is detrimental to growth. In addition, strong surges of headline inflation may also lead to stagflation which is evident e.g. in the UK.
The main issue however is that that the data in the US is turning sour and the housing market has not yet made it to the party. This week’s job report was poor and, apart from an improving trade deficit, a faint hue of gloominess is returning to the US economy. But, are we looking at a real recession risk? The data I am looking at and the, after all, still positive momentum of leading indicators suggests no and I am moving in behind a general consensus. Hussman synthesizes the main position in his latest column;
In recent weeks, and particularly in last week’s ISM, employment claims and unemployment reports, we’ve observed a substantial weakening in measures of economic growth. At present, the evidence of economic deterioration is not severe – as I noted in 2000, 2007 and last summer, recession evidence is best obtained from a syndrome of conditions, including the behavior of the yield curve, credit spreads, stock prices, production, and employment growth. While all of these components have weakened, they have not deteriorated to the extent that has (always) accompanied the onset of recessions.
So far, so good then. I would reiterate the point on the ISM indices which have turned decisively down lately with especially the manufacturing ISM shifting down considerably both in terms of the coincident activity index and new orders. The same goes for the non-manufacturing ISM which even eeked out a bright spot in May with an increase in the new orders component.
The latest from Morgan Stanley’s Gerald Minack also suggests that we should be sanguine on the US economy going into the second half of 2011 even if he merely postpones the deflation/growth scare 6 months.
Investors again are worried about the expansion faltering. However, better second-half growth data – notably, in the U.S. – should help risk assets, particularly DM equities. The 2012 outlook remains problematic, however, with growth set to slow in most major blocs, bar the special case of Japan.
All this then seems to indicate that while the Fed certainly will be committed to low interest rates it might be more difficult for investors to genuinely expect a new round of full fledged QE3. This should also be seen in the context of the ongoing debate of whether QE works at all and whether the associated volatility in commodity prices is worth it. In his recent column Hussman puts his thumbs down;
Rather, the policy [QE] has failed because it focused on easing constraints (bank reserves, short-term interest rates) that weren’t binding in the first place. Very simply, neither the Fed’s policy, nor the fiscal policy initiatives to date, address the central challenge that the U.S. economy faces, which is the debt burden on households.
This raises the central question of just what policy tools that should be applied in the context of a (global) balance sheet recession baring the case in which one simply lets the economy spiral into debt deflation and eventual widespread private and sovereign defaults. One obvious solution would be give some form of debt relief on a national scale and then let Fed re-capitalise the financial sector through equity or debt purchases, but just how much would be needed and what would this imply in terms of the Fed becoming an owner of capital rather than a custodian of the Greenback and its value. Besides, this solution has been tried in Ireland where it was merely the government who assumed a guarantee of its bad banks only then to have neatly forgotten the fact that monetary policy (and thus the ability to actually hone up to the guarantee through issuance of liabilities (i.e. currency)) had been ceded to Frankfurt a long time ago. The US naturally would be in a different situation but it would require the Fed to drastically shifts its QE towards private sector securities rather than government bonds.
James Hamilton is also lukewarm regarding the end of QE2 for the same reasons as Hussman. The basic message is that QE2 has only had a modest effect, but also more importantly that the Fed can not be expected to exert much of an effect in the first place. While this may be true Hamilton does point us towards one key point which relates to the fact that although the Fed might not actually be starting off a new round of Treasury purchases, this does not mean that the Fed’s balance sheet will actually shrink.
A more technical issue then is another hotly debated question in relation to who the marginal buyer of treasury bonds will be once the Fed steps back from the fray. The interesting thing about the effect of QE is that while one would expect QE to help keep a lid on yields, the opposite has actually occured as e.g. QE2 has led to an increase in yields (which now looks about to reverse) on the back of the improving economic outlook. Conversely, one should then expect yields to go down (to reflect expectations of lower inflation?) as QE2 tapers off.
According to Morgan Stanley’s David Greenlaw and absent the Fed as a marginal buyer the US Treasury will need, once again, to call upon an old faithful buyer.
Given that Treasury issuance is expected to continue at an extremely elevated clip for the foreseeable future, how will the market adjust to the loss of most Fed buying? In other words, who will be the marginal buyer of Treasuries going forward? Our analysis suggests that heavy buying by the largest foreign holders of Treasuries will be needed to avoid a back-up in yields.
Indeed, on this reading the end of QE2 looks very significant indeed.
I would re-emphasize here that despite Greenlaw’s main argument that there is little scope for further purchases by domestic actors a steadily deteriorating macroeconomic landscape should be bullish for treasuries all things equal, but I concur that without the Fed the market may start to get a little more attached to the supply side story.
On balance it would then seem that the consensus remains weighed towards no QE3 either because it is not needed or because it does not work in the first place. I think it is very simple in the end though. If sideways movement gives way to a new downside in the market below key support levels it will be very easy for the Fed to argue for a new round of QE which I will they will deliver in due time.
By The Gold Report, on May 31st, 2011
 Gold is in the midst of a 20-year upward climb, according to The Great Super Cycle Author David Skarica. In this exclusive interview with The Gold Report, he points out the emerging market small caps that could profit from global economic swings.
The Gold Report: In a February interview with The Gold Report, you said, “We’re in the midst of a 15- to 20-year mega-supercycle for gold and gold equities.” You predicted $1,500/oz. gold prices and that gold would move higher through 2015 or 2020. Do you still believe that to be the case?
David Skarica: $1,500 was hit. Yes, nothing has changed my long-term view. These cycles usually move in 15- to 20-year periods. If you look at gold bottoming in 2001 or 1998, depending on your view, you can see we at the very least will move higher in 2013 and more probably into 2015 to 2020. The fundamentals back it up as the problems with unfunded liabilities and the U.S. deficit will continue to put long-term pressure on the dollar and upward pressure on gold.
TGR: In that interview and your book, The Great Super Cycle: Profit from the Coming Inflation Tidal Wave and Dollar Devaluation, you predicted out-of-control inflation due to pressure from overseas bond vigilantes. Do you see signs that that has begun and what does that mean for gold prices?
DS: We are seeing inflation. However, we have yet to see big spikes in interest rates. On the inflation front, the U.S. government is probably the biggest group of liars in the world when it comes to reporting inflation. If you look inside the metrics, the calculations they use are all designed to keep inflation as low as possible. Housing also has not been adjusted for the recent bust and is very over weighted in the Index. It is about the only thing not going up at the moment. In addition, the U.S. is about the only country in the world that just uses core prices. I find it interesting at the moment that everywhere in the world from China to India to the U.K. to the Eurozone is reporting higher inflation, but the U.S. has no inflation worries! Gap recently had terrible earnings due to increases in costs from commodities and costs that the Chinese had to pass on.
However, the problem on the rate front is that the Federal Reserve is manipulating the market through their QE program. They are the majority of the long-term bond market and a bit of the short-term bond market. Even when QE2 ends, they will just rotate the $1.2 trillion of securities they put into the market the past two years back into the bond market. I call it QE infinity. That money is never coming out. Now, at some point rates will spike as debt approaches near-Greece levels. However, because they have bought so many of their own bonds, it looks like reality will take longer than I initially thought to hit, but it will have an impact eventually.
TGR: What impact will economic instability in Europe, the Arab Spring and the specter of a new IMF chair have on gold prices?
DS: Firstly, let me get something out of the way. The United States is a bigger economic basket case than Europe. The entire European debt crisis is way overblown. Places like Portugal, Ireland and Greece are tiny. They would be the equivalent of Rhode Island and Alabama going under; that wouldn’t exactly take down the U.S. economy. In addition, Europe has such a bloated social welfare system that it can easily cut these expenditures. Also, Europeans, unlike Americans, are willing to pay taxes for government services. However, Europe’s policy of printing money to take care of some of these problems is another positive factor for gold.
Conflict in the Middle East is positive because gold is a flight to safety during times of turmoil. Also, problems in the Middle East cause oil to go out, which is inflationary and positive for gold.
The new IMF chair is irrelevant; one empty suit replaces another.
TGR: In recent trading, gold and the dollar both trended higher, how does that fit with your model that gold gains when the dollar tanks?
DS: Gold can trade up with the dollar. It did in 2005. The problem we have at the moment is no paper currencies are very solid. The dollar’s recent gains have more to do with Euro weakness. When people overblow the Euro debt crisis, the result is a rush to gold. The same dynamic can cause the dollar to rally up against the Euro. In the long term, the big trend for the gold cycle is the U.S. debt crisis and the printing of money to inflate its way out. Even if the dollar doesn’t eventually drop against the Euro, it will devalue against real assets such as gold, oil and other commodities.
TGR: In your blog, www.addictedtoprofits.net, you talk about the cycles that impact gold prices. Where are we in the current cycle and what can we expect next?
DS: The next part of the cycle is going to be very interesting, in my opinion. Because of the 2008 market and gold price crash the fact that everything rebounded together from 2009 to 2011, people think that gold moves with the market. However, I really think the next bear market in U.S. stocks will be caused by the weakening of the dollar and inflationary pressures. Therefore, I expect a situation where bonds go down in price, stocks overall go down in price and gold and gold stocks go up. In addition, I think that once people see that precious metals are the only game in town, this will allow the sector to attract more money.
TGR: In that February interview, you were bullish on small caps in general. What companies are you watching now in that space?
DS: I really like Tinka Resources Ltd. (TSX.V:TK; Fkft:TLD; Pksheets:TKRFF), a small exploration company in Peru that is in the midst of drilling. I was in Peru last August and met with the head geologist—a real old-school Peruvian who spent the 1980s risking his life by prospecting in the middle of a brutal revolution. Today, the stock trades around $0.50.
I also like Pebble Creek Mining Ltd. (TSX.V:PEB). They are developing their Indian copper project in the Himalayas. Things have gone slowly and they have had some management problems. However, the stock trades at $0.10 and there is virtually no downside, especially in a company that is expecting to go into production in the coming years.
TGR: You talked about Aberdeen International Inc.’s (TSX:AAB) role as a merchant bank that allows investors to have exposure to a number of gold and resource companies. Is their stock price representing their value yet?
DS: The blunt answer is no. Aberdeen continues to trade at a huge discount to their net asset value (NAV). The stock is trading at $0.80 as I write and the last report had their NAV at $1.37. So, you are getting the stock at around 60% of what it is actually worth. In addition, they recently announced a biannual dividend of $0.01 a share. That may not sound like a big deal. However at $0.80, that is a yield of 2.5%. So, you can buy a great company at a 60% discount to its NAV, which has huge upside potential and get more than what you get on 10-year U.S. Treasury bond in terms of yield.
TGR: Any other tips on companies to look at that might take advantage of the macroeconomic cycles pressuring stock prices?
DS: I would really look at Peruvian or Indian stocks here. Both have been whacked for different reasons. India gets hit because of worries over inflation and rising rates. Peru is neglected because of worries over the recent election where the socialist candidate was leading. However, it looks like Fujimori, the right-of-center, more business-friendly candidate, is now neck and neck in the runoff polls. If she wins, Peruvian stocks will probably rise quickly from their current levels.
I think one thing you have to understand is these emerging markets are growing fast and are leveraging, not deleveraging, like western economies. I was in Peru last summer and the growth there was amazing. I plan on visiting India in 2012. The India Fund (NYSE:IFN) and Ishares MSCI All Peru Capped Index Fund (MXPECAPD:EPU) are simple ways to play these economies.
At the tender age of 18, David Skarica became the youngest person on record to pass the Canadian Securities Course. Skarica, a Canadian and British citizen, is the author of Stock Market Panic! How to Prosper in the Coming Bear Market (1998), which provided thought-provoking arguments on why a great bull market would end in the most vicious bear market of all history. He is also the author of The Contrarian Who Saved the World, which explains how markets work. His new book, The Great Super Cycle: Profit from the Coming Inflation Tidal Wave and Dollar Devaluation, was published by John Wiley & Sons in November 2010.
In 1998, Skarica started Addicted to Profits, a newsletter focused on technical analysis and psychology of markets. From 2001 to 2003, Stockfocus.com ranked Addicted to Profits third out of over 300 newsletters in terms of performance. He is also the editor of Gold Stock Adviser and The International Contrarian services, which focus on gold and global investing. Dave has also been a contributing editor to Canadian MoneySaver and Investor’s Digest of Canada.
By The Energy Report, on May 26th, 2011
 Platform Advisors Founder Adam Michael searches the globe for oil and gas discovery stories with established cash flows that support share value in reasonably secure political environments. In this exclusive interview with The Energy Report, Adam reveals some names from his own portfolio holdings that he believes could generate considerable upside production growth to return significant multiples for investors, even if oil prices hover at $90/bbl for the next year.
The Energy Report: We’ve had a 10% correction in Brent crude since the end of April, and oil has been a bit weak as we’re starting to see some real signs of improvement in the U.S. economy where it really counts—employment. What factors are putting downward pressure on oil?
Adam Michael: I think the biggest factor over the last year has been quantitative easing (QE), which has led to speculators entering into the crude futures market in proportions that I haven’t seen before. For instance, the net long in crude oil futures by speculators is more than twice as high as it was back in 2008. This has gotten the attention of Congress, and recently we’ve seen the Chicago Mercantile Exchange, CME Group (NASDAQ:CME), begin to raise margin requirements for crude futures. I think the goal is to get some of the speculative money out of crude futures, and that’s one of the reasons we’ve seen a decline over the last month.
TER: Sounds like a healthy thing that could dampen the potential for a bubble.
AM: I think so. Crude oil dropped $20 in a matter of a couple of weeks. That’s a pretty sharp correction, but I think it was healthy because it helped wipe out some of the excess speculation. There could be some more downside to go but, historically, crude kind of tops out sometimes during the summer and maybe late June and early July. I don’t see any reason why that wouldn’t play out this year. We’re still in a kind of historically strong period for crude oil. I’m not sure how much down side there is from here.
TER: In terms of oil price per barrel, is there a sweet spot where the macroeconomy can remain vigorous? What is the upside price-per-barrel limit on commodity oil?
AM: Well, I have read various opinions on this and I have to think that a good price for oil right now would be somewhere in that $90–$100/bbl range. That would allow the economy to keep taking steps and provide for improvement in global industrial production and gross domestic product (GDP) without choking off too much demand. So, I think $90–$100 is a great price for crude oil, and that is kind of a sweet spot. The kind of volatility we could see is $80–$120/bbl. I don’t know how long it will remain there at those swing points. So, I think $90–100 is the right price.
TER: Do you have a forecast for oil?
AM: I don’t really have a forecast, but for the longer term I use $90/bbl crude in my models and for my sensitivity analysis. I look at what kind of cash flow a company can generate with $100 or $80 oil. I think $90 is a good, safe number to use.
TER: Do you feel that $90 oil is a conservative enough estimate to build your models for the next 12 months? The next 24 months?
AM: Well, I think it is a good number through the end of 2011. As global demand continues to creep higher, eventually, we’re going to soak up that spare capacity that OPEC has, and that’s when things will get a little more interesting. That’s probably a 2012 event, but then we’re talking $110–$120/bbl oil. At some point, the price will get high enough that it will support some demand destruction—but we’re not there yet.
TER: The U.S. just ran up against the federal debt ceiling of $14.3 trillion back on May 16, and the credit and equity markets really want that ceiling to be exceeded (at least temporarily). But it seems pretty obvious that something must be done to reduce debt to a lower percentage of GDP. What impact would this kind of austerity have on the economy? Will it strengthen the U.S. dollar? Will it hurt oil? Will it hurt energy companies?
AM: Obviously, the debt ceiling is a hot topic right now. I am guessing that Congress will probably negotiate with the president, and the negotiations might go all the way up to the deadline on August 2. I’m not sure how big of an effect it’s going to have, and one of the reasons is that there seems to be a shortage of bonds because investors are having a tough time finding yield. So, there’s a really healthy credit market out there right now.
Clearly, a default by the U.S. Treasury on government bonds would be a very bad thing, but I think there’s about a 0% chance of that happening. There will be much talk over the summer as it’s negotiating. Cooler heads will prevail, and I’m sure we will do what needs to be done on the debt ceiling with a combination of austerity measures; but the bottom line is that there’s a healthy economy out there. If it weren’t, credit spreads would not be this tight. So, I’m actually pretty positive on the economy right now. This summer could be a little tricky as we hear more about the debt ceiling and as, you know, investors can be short-term minded sometimes. Ultimately, I think this plays out well for the economy. The dollar is probably due for a rally, but it doesn’t necessarily mean that commodity prices will go down. Sometimes they go up with a stronger dollar; it doesn’t happen often, but it can. So, the bottom line is I am positive on the global economy. I think we will get our debt ceiling figured out and we will just keep humming along.
TER: Aside from buying small caps for your portfolios, what is your general investment thesis?
AM: I like to look at companies that have a proven reserve, cash flow or something else that I can get my hands around for a base-case evaluation. In addition to that, I like to see some kind of embedded call option in the form of a large land package—that is at the top of the learning curve where there’s a lot of leverage for upside.
TER: Is it hard to find stable cash flows and rising production, especially in politically stable jurisdictions?
AM: I don’t think so. Domestically, in this latest cycle, we’ve seen the emergence of unconventional oil through the development of the Bakken Shale, which is probably the most widely known unconventional oil play. But other plays are developing now that have a lot of upside running room. And it’s very much analogous to what we saw in the last cycle with the emergence of unconventional shale gas. Now, I think we’re just seeing the same thing as history repeats—or let me say, ‘as history rhymes’—this time it’s the emergence of unconventional oil, where I think there’s a lot of running room. And there are other sources out there besides the Bakken that are starting to emerge, which also have good running room.
TER: Where are you finding these characteristics right now?
AM: Not to be confused with the Bakken Shale in North Dakota, there’s an emerging play called the Alberta Bakken that stretches through Montana and into Southern Alberta. I think it’s going to see a lot of drilling and appraisal work done over the summer. You can’t do much over the winter. In Alberta, a lot of the roads are closed for spring break up, and now we’re just getting on the other side of that.
Rosetta Resources Inc. (NASDAQ:ROSE) and Newfield Exploration Co. (NYSE:NFX) are the two big players south of the border in Montana, and they’ve been doing science and vertical wells to test the Alberta Bakken. From what we’ve heard on recent conference calls, both companies are pretty excited about it and are going to start horizontal wells.
On the northern side in Southern Alberta, you’ve got a handful of micro-cap players with good land positions. Just in the last couple of weeks, we’ve seen the first results come out that were made public by DeeThree Exploration Ltd. (TSX.V:DTX). I think we’re at the top of the learning curve, and the initial results look really good. So, there’s a lot of running room here for these guys.
TER: Is DeeThree a company that you own?
AM: It is.
TER: DeeThree is mostly natural gas, which is expected to be stable over the next 12 months at best. Where does the upside come from here?
AM: Well, it is currently doing a couple thousand barrels oil equivalent per day (boe/d), and most of that is gas—probably 70% gas and the rest a mixture of light oil and liquids—so you have a little bit of cash flow there, which I like to see. It also has a couple hundred thousand acres in the Southern Alberta Bakken play, and I think, at least 70,000 acres in what I call the “sweet spot.” So, there’s a lot of running room there. DeeThree just drilled its first well and completed a frack. The average one-day test rate was 250 boe/d. The company is now removing the frack string and putting in production pipe. That’s a very positive first result for its first horizontal well. And there are other excited players also in the play—big players, at that.
Murphy Oil Corp. (NYSE:MUR) signed a joint venture (JV) with DeeThree and has drilled a couple of wells that are rumored to be pretty good. Murphy has committed to drilling four wells on DeeThree’s acreage by year-end to earn a 60% working interest in about 15,000 acres. DeeThree is being carried on the wells and will receive revenue from first production.
TER: Is that JV with Murphy on the Lethbridge property?
AM: It sure is.
TER: You sound optimistic about this play.
AM: Well, I’ve seen the cycle repeat over and over wherein you have an unconventional play that’s in its drilling stages, and it takes a few months for industry to crack the right science to produce the most assets in the most optimal way. The wells should become more prolific with time, and drilling cost should trend lower.
TER: Where else are you looking?
AM: Well, there’s a company I mentioned in my interview a year ago with The Energy Report that I really like over in Egypt called TransGlobe Energy Corp. (TSX:TGL; NASDAQ:TGA). Since then, the company has identified a new play called the Nukhul Fairway, and it extends across several of TransGlobe’s acreage blocks in Egypt. The wells cost $1M–$1.5M, and some of them are coming on at 1,000 barrels per day (bpd) and holding up fairly well. It’s become more of a developmental play where the company just keeps punching holes, and production is going to increase pretty rapidly this year.
Last year, about 30% of TransGlobe’s production came from Yemen—most of which has been shut down due to the political turmoil there, but the Egyptian production has ramped-up so strongly that it’s already eclipsed the Yemen production. This has allowed the company to keep its guidance that originally included Yemen. I expect that to continue this year, and I like the strong cash flow that’s associated with the wells TransGlobe is drilling right now. There’s just a lot of upside there and a lot of strong cash flow backing up the stock. So, TransGlobe is a company I am still very excited about.
TER: Amazing that the stock could be up 76% over the past 52 weeks with the shutdown in Yemen, which was producing 2,300 bpd.
AM: The Egyptian play has a lot of running room, and it has more than made up for the Yemen shortfall. Eventually, Yemen will become straightened out. I don’t know if it will be three months from now or six months from now, but that production will come back. I am not counting on it, and I can get a good valuation without it at the current stock price level. So, I think there’s a lot of upside for TransGlobe based on the rapid production increase in Egypt and possibly bringing Yemen back online later this year.
TER: Ok, you’re in Egypt and the Alberta Bakken in Canada. Where else in the world are you currently looking?
AM: Well, the Colombian oil companies have been hit hard over the last six months, after having been a little frothy last year. We’re now starting to figure out which ones are the real players and which ones are not. The premier oil company in Colombia is Pacific Rubiales Energy Corp. (TSX:PRE; BVC:PREC). I still think it has the best land package with more than 10 million acres for exploration upside. But what I really like about Pacific Rubiales is that the stock has been beaten down a bit and there are some very strong cash flows. It will increase production by about 20% to more than 110,000 boe/d by year-end, and I have it generating over $2B in EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) this year. It has a very strong, healthy balance sheet and it’s proven the premier operator in Colombia. So, for Colombia, I’m going to stick with the “best of breed” and that’s Pacific Rubiales.
TER: The company has a $7B market cap and is buying back up to 4.3% of its outstanding equity. That shows some confidence, I would think.
AM: Yes, Pacific Rubiales has a strong balance sheet, which gives it the ability to buy back stock when its value is not reflected in the market. I agree with management, and I think the stock has tremendous value here. It’s going to generate $2B in EBITDA this year, and it’s trading at about one-half the multiples that we see here in the States. I like the stable production profile, strong cash flow, management team and, like I said, I think this is the blue chip of Colombia and a great way to play Colombia.
TER: Is there any place in the U.S. that you’re looking?
AM: Well, I like to go back to the old Permian Basin. It’s been a long-standing producing region for Texas. We still keep finding new ways to get more oil out of the ground, as technology gets better and we do horizontal drilling and multistage fracking. One company I like, in particular, is Approach Resources Inc. (NASDAQ:AREX), which has some good reserves on the books.
What’s gotten me excited is its new 130,000-acre Wolffork oil shale play. The first wells have just recently been announced and the horizontal wells are producing 200–300 bpd. I think the ultimate recoveries on these wells could be as high as 200,000–300,000 bpd. I should also mention that EOG Resources (NYSE:EOG) is just north of that play and is seeing a little better rates in the 400- to 500-bpd range on its first producers, and it’s also rumored that Apache Corporation (NYSE:APA) is acquiring acreage in the area. So, there’s a lot of running room with 130,000 acres in Approach’s portfolio, and the company believes it has derisked about 70,000 acres of it—more than 1,000 locations. The returns on these wells are going to be good, and they’re only going to get better as Approach works down the learning curve. It fits my preferred profile, as you have some base reserves to kind of get a conservative valuation of maybe $20/share. You have a lot of upside and running room as this new play is being developed.
TER: Is there anything else interesting you’d like to hit on?
AM: Well, I would like to mention one speculative name in Colombia. I know we already talked about one with a larger market cap, Pacific Rubiales, but the other one that has gotten my attention is Canacol Energy Ltd. (TSX:CNE), which has about 10,000 bpd light oil production. That is good for both cash flow and funding for growth initiatives. But it also has one of the best heavy oil land packages that I’ve seen in the Putumayo Basin, and that’s something that’s going to take some time to derisk. Once the company derisks this, there’s a lot of upside to the heavy oil component of the company—and it makes it an extremely attractive acquisition target. I do like the fact that Canacol has some good cash flow to back up its valuation. I think it’s an excellent acquisition candidate.
TER: It’s been a pleasure speaking with you today, Adam.
AM: Thank you.
Adam R. Michael, 36, founded Platform Advisors, a California registered investment advisor that manages the Platform Energy Fund. Mr. Michael has over 10 years of experience in the energy industry in various capacities. With the majority of his career based in Houston, Texas, he is able to use his energy background and industry contacts alongside his investment experience to identify energy investment opportunities in geopolitically stable countries with attractive geological prospects and fiscal regimes. Mr. Michael has a bachelor’s degree in industrial distribution from Texas A&M University (1997) and an MBA from Rice University (2004).
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By The Gold Report, on May 20th, 2011
The Gold Report: Clive, in a recent note on your website you said, “The general investing public are sheep, they like to move together in large groups, have a kind of vacant stare, are routinely fleeced and eventually slaughtered. That’s why when they are very confident, it’s time to get scared, and vice versa.” Further to the point, you suggested that the investing public is confident in gold and bearish on the dollar, and that those two factors could result in a rebound in the greenback and a fall for gold. Please expound upon your theory.
Clive Maund: The main basis of my theory is sentiment, during the first week of May, before the dollar started rallying, only about 16% of the public was bullish on the dollar—almost a record low. Sentiment hasn’t been this bad since 2003. An article pointing this out was posted on my site on April 28. It also pointed out the danger posed by this to commodity stocks, especially to silver. Adam Hamilton, of Zeal Research, picked up on this too, and also is calling for a big dollar-countertrend rally. The papers have been full of stories about how the dollar is set to collapse, and when that happens we are usually on the verge of a rally. The dollar index rose sharply from the 5th of May and has broken out of its downtrend in force from the start of the year and could get as high as 79 on this move. While this is certainly not good news for commodities, we should be presented with a major buying opportunity once the dollar rally has run its course.
TGR: You believe that the Federal Reserve ultimately will unleash quantitative easing (QE3) to help prop up the dollar. Will that be the buying opportunity you’re talking about, or will it come sooner than that?
CM: Right now, it’s in the Fed’s interests to encourage investors to believe there will be no QE3 in order to panic them out of commodities and stocks and into the dollar and Treasuries. This will buy it time and help reduce inflationary pressures. After the Fed has achieved this result, it will need to backpedal quickly, do QE3 anyway to prevent the economy stopping dead in its tracks and continue ringfencing the derivatives problem.
TGR: How far off is this buying opportunity?
CM: I believe that the corrective phase in commodities is likely to take the form of a 3-wave zigzag. Gold and silver, and copper too, look to be shaping up for a tradable short-term relief rally soon, which will be driven by bargain hunting combined with oversold technicals. This should be followed by a more sedate decline than that of early May to a lower low than that which occurred about a week ago, which may see silver drop as low as $28, with seasonal factors suggesting that this low may occur about late July, give or take a few weeks. I believe such a low will present a major buying opportunity.
TGR: In a previous interview with The Gold Report, you said, “As long as inflation has the upper hand, which the recent action of the commercial banks and institutions in scaling back their short positions demonstrates to be the case, investors can look forward to advancing commodity and stock markets. The big danger for investors is deflation.” Are we any closer to deflation now?
CM: I don’t believe we are. The fundamental reason for this is that the consequences of deflation in a debt-saturated world would be so catastrophic—especially for business leaders and politicians—that the Fed will move heaven and earth to prevent it and will even choose hyperinflation above deflation because it buys the Fed more time. The plunge in silver during the first two weeks of May was largely due to the successive raising of margin requirements, which was a deliberate and successful tactical move by the powers that be to pop the silver bubble that was shining a revealing spotlight on its inflationary policies, though the drop in silver also is thought to have been partly due to the market anticipating a dollar rally.
TGR: Let’s talk more about silver. A note on your site said, “After last week’s devastating plunge, the silver battlefield is littered with the corpses of silver longs with those who are still breathing being exhorted to “put their shoulder to the wheel” again by the undismayed silver cheerleaders hailing a ‘fantastic buying opportunity’ for the ride of a lifetime.” Is it still a fantastic buying opportunity?
CM: Although a significant and tradable relief rally is to be expected after silver’s brutal plunge in early May, silver is not thought to have completed its corrective phase yet. This is because a substantial dollar rally is believed to have already started; so if you wait a little while, you should be presented with a better buying opportunity. More aggressive traders may want to play the relief rally expected soon, but average investors may want to wait for the expected lower low later.
Silver could drop back to the high $20s before this dollar rally is done and that should present a great buying opportunity, higher margin requirements or not. This is because inflation is expected to continue to build in the direction of hyperinflation, as QE is the only way out due to the massive debt and derivatives overhang. The game plan is to inflate away the debt and backstop the big Wall Street banks to whatever extent necessary because they are, as we have been told repeatedly, “too big to fail.” This means gold and silver are eventually set to go much, much higher.
TGR: How should investors mitigate risk in their portfolios when the possible outcomes of our economic situation are quite dramatically different?
CM: The two methods that we use are traded options and inverse ETFs. For example, we used ProShares Ultrashort Silver ETF (NYSE:ZSL) during the early May plunge to insulate ourselves from the drop in silver and actually gained by also buying calls in this ETF, which we later sold. A word of caution about leveraged ETFs—they should only be employed where the potential is thought to exist for a big move contrary to your open positions. The reason for this is because they have an options component, they are prone to price erosion in a flat market. So, most of the time, it is better to use non-leveraged ETFs, which are held for only a short time until the danger has passed. Options are a simple, fair and cheap way to buy protection and thus favored—a great thing about them is that even when trading is thin, market makers have to both make a market and honor the intrinsic value of the option; this is what is meant by fair. Used in this capacity, they are not speculative at all. On the contrary, they should be viewed as insurance.
TGR: A lot of your investment decisions seem to rely on charts and technical analysis. A) Where do you get your charts? B) Which ones are you most partial to?
CM: I get my charts from stockcharts.com where I have a subscription. It provides a good free service, but the subscription service is even better with many options. Bigcharts.com’s charts are good for quick reference, and they show volume to advantage. A key point to remember with all these services is that, while they provide a vast amount of data, it’s how you use it and what you do with it that counts.
TGR: What sort of patterns are you looking at in these charts? Are there some basic things our readers can look for that will help them find companies that are about to break out?
CM: There certainly are. The main thing you want to see is the price rising away from a clear basing pattern and the longer and more definite the base pattern, within reason, the better, and you also want to see a favorable moving average alignment. You should seldom invest against the direction of the long-term 200-day moving average—when you have this on your side your odds of failure are greatly reduced. There are various patterns that we employ to advantage, such as Ascending Triangles, Double and Triple Bottoms, Fan Corrections, Falling Wedges etc. and we pay close attention to trading volume and volume indicators, principally the Accumulation-Distribution and On-balance Volume lines. Never forget that volume is the lifeblood of the market so studying volume patterns can help you gauge whether money is flowing into or out of a stock, especially as volume action precedes price movement. Knowing this enables us to position ourselves AHEAD of breakout moves.
TGR: In a recent research note, you said, “I have been in this business more years than I care to mention. . .in all that time, I have very seldom come across a chart that looks more bullish than that of Alix Resources Corp. (TSX.V:AIX).” What are your charts telling you about Alix?
CM: Alix is at about the same price as when it was recommended on the site back in March, and its technical condition remains about the same—it looks very bullish. Even as it dropped with the sector in early May, its accumulation/distribution line rose so sharply that this indicator is at about the same level it was when Alix was priced at CAD$2.60 back in spring of 2009. Looks attractive here, though it may be held back for a while longer if the sector drops on the building dollar rally, as expected.
TGR: You operate out of Chile. Please tell us about that country and the investment climate for mined commodities there.
CM: Chile is generally a pleasant place to live. Politically, it is stable and liberal. Housing and land is cheap compared to countries like Canada and the U.S. The income tax rate is low, though taxes are collected in other ways like a high vehicle road tax and high taxes on gasoline and other purchase taxes. The food is abundant and cheap, especially in the south of the country, and wine also is cheap and excellent. There are limitless beaches and mountains because, of course, the country is sandwiched between the mountains and the sea. There are good air and bus services up and down the country but hardly any railroads. Internet coverage is good now, too.
TGR: What about the Chilean economy, especially as it pertains to mining?
CM: Chile is actually a far more fiscally prudent country than the U.S. It does not have careening deficits, and the workforce is obliged to contribute to a private pension scheme that has in fact grown in value far more than government schemes in countries like the U.S. That means the Chilean government is not on the hook for massive pension obligations, as many other governments around the world are. Those governments will probably renege on these obligations, at least in part, by a combination of inflation and fiddling the inflation statistics.
Chile is very mining friendly and has a sophisticated infrastructure to support mining companies conducting operations. In addition, environmental factors are not such a concern here as most of the mining operations and prospects are located in northern Chile. The north is a rather sparsely populated desert but with towns dotted around to provide amenities, logistical support and a skilled workforce. It is still not widely appreciated that there is a line of hills or low mountains between the Andes and the coast that harbor massive as-yet-undiscovered copper-gold deposits that will be relatively easy to mine and much less complicated and expensive than Barrick Gold Corp.’s (TSX:ABX; NYSE:ABX) massive Pascua-Lama operation. That project is perched on Chile’s border with Argentina, high in the Andes. To get an idea of the potential of these deposits located in this line of hills, you need only look at Codelco’s (Corporacion Nacional del Cobre de Chile) massive Chuquicamata open-pit copper mine near Calama, which is the biggest open-pit copper mine in the world, or Freeport-McMoRan Copper & Gold Inc.’s (NYSE:FCX) giant Candelaria open-pit and underground mine near Copiapo.
TGR: You have an on-the-ground view of what’s happening in Chile. Are there some small-cap names with favorable projects in Chile?
CM: One that is coming along very nicely and continues to look most promising is Samex Mining Corp. (TSX.V:SXG; OTCBB:SMXMF). I have personally inspected its properties north and south of Copiapo with the company’s chief geologist. I started the current bull market in this stock by recommending it to subscribers at $0.12 almost two years ago and, after a steady advance, it spiked for about a month on positive drilling results. Samex has tied up two nice parcels of excellent properties on that line of hills I mentioned earlier, which are actually very close to Freeport’s Candelaria operation. These properties have huge potential, so there’s a lot more upside for this stock with the company now undertaking a drilling program to define the potential of the properties.
TGR: Thank you for talking with us today, Clive. This has been very informative.
Clive Maund has been president of http://www.clivemaund.com, a successful resource sector website, since its inception in 2003 early in the sector bull market. He has 30 years’ experience in technical analysis and has worked for banks, commodity brokers and stockbrokers in the City of London and holds a diploma in technical analysis from the UK Society of Technical Analysts. Clive now lives in southern Chile.
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