Jul 31

Finance: The Carthorse, Not the Cargo

Gold Price Comments Off on Finance: The Carthorse, Not the Cargo
And dishonest money is the root of all economic evil…
 

HAVING broadly tried to demonstrate where we differ from our monetarist and Keynesian rivals, and where we find their tenets most objectionable, you might be hoping that I will now be tempted to go into the details of what an Austrian economist might recommend by way of a remedy for our current ills, writes Sean Corrigan at the Cobden Centre in his series on the future of money.
 
But this would exhibit a clear infraction of Hayek’s admonition that “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design”!
 
So, rather than having me succumb to such a ‘fatal conceit’, let me instead sketch the outlines of what would, in an Austrian estimation, be a world in which we would be unlikely to repeat our present stupidities, certainly not on the Olympian scale on which we currently practise them.
 
Firstly, we should recognise that much of our success as a species comes from our adherence to that peculiar form of competitive co-operation which we Austrians term ‘catallactics’ – i.e., the business of exchange, of trading the fruits of our varying endowments, aptitudes, and accomplishments to the mutual benefit of both counterparties to what may well be a single-priced transaction but which is nonetheless never a zero-sum one (at least when it is undertaken voluntarily and in good faith).
 
As a direct consequence of this, we can assert in the strongest possible terms that we therefore tamper with the means by which we conduct such dealings – we meddle with our medium of exchange, our money – only at our peril. To us, dishonest money is the root of all evil, not ‘shadow banks’, ‘moral hazard’, ‘regulatory capture’ or any of the manifold offshoots of human cupidity in general, for the ability of such perennial failings to wreak widespread havoc in either financial markets or economies, per se, would be much more severely limited if money were not so easily corrupted alongside the men who use it.
 
A good deal of discussion has taken place at this gathering and many ideas have been thrown up – many of them earnest, most of them shrewd, some of them even practicable – as to how to improve our present modus operandi. But unless banking and finance better reflect economic reality – and by this I mean of course Austrian reality! – all of them will be in vain: not so much shuffling the deckchairs on the Titanic as pruning the vines growing on the slopes of Mt Vesuvius, perhaps.
 
It should be further recognised that a vital subset of our economic interactions consists of that swap of jam today for jam, not just tomorrow, but for a long succession of tomorrows that we might more grandly term ‘intertemporal’ exchange. Indeed, it can be argued that this process is even more intrinsic to our humanity: that the move away from such hand-to-mouth activities as scavenging, foraging, and predation and towards the rational provision for the future by means of forward planning is very much what put the sapiens into the Homo, way back when Also sprach Zarathustra was first ringing out as the soundtrack to Mankind’s great Odyssey from the campfire to the Computer Age.
 
It is in this devotion of forethought and its associated deferral of immediate gratification where the concept of ‘capital’ first comes into our story and while this opens up before us a vista of riches bounded only by the interplay of our imagination and our willingness to make a short-term sacrifice in order to gain a longer term advantage, it is intrinsically fraught not only with estimable risk, but with unknowable uncertainty, as well as being subject to the further proviso that our own actions’ influence may well serve to increase the range of possible outcomes far beyond what we had first thought likely.
 
Keynes himself waxed lyrical about the ‘dark forces of time and ignorance’ – even if his own teachings have done more than most over the intervening years to enhance the occultation and obscurity against which his fellow men would have to contend – so it should not come as a surprise when we next insist that none of our man-made institutions can be said to be well-crafted if they aggravate these difficulties.
 
Economic institutions should thus allow information to percolate in as uncorrupted a manner as possible and should allow for feedback signals to be generated in as direct and unequivocal a fashion as they can. These should clearly flag where both success and failure has occurred so that useful adaptations can proliferate while the ineffective ones are abandoned as rapidly as can be. In essence this means that we must not pervert prices and, since every price is necessarily a money price, the unavoidable inference is that we should not mess with money.
 
A corollary to this is that there should be the least possible impediment to any and all such adaptations being attempted; indeed, much Austrian ink was spilled during that dark decade of the 1930s in arguing that the surest remedy for the many ills then afflicting the West was to sweep away the obstacles to change and to lubricate the working of the machinery – to practice a policy of Auflockerung, in the phrase of the day.
 
Following on from this, it should be evident that property should be inviolate and the wider rules of contract should be both transparent and consistent in their application. The law should be concerned principally with equity, the courts with providing a cost-effective and disinterested forum for the arbitration disputes arising from any violations of the first and of any failure to fulfil commitments freely made under the second. Aside from the many ethical considerations attaching to such a demand, we would argue for it additionally in terms of the need to reduce all the uncertainties under which men must act to their achievable minimum if we are to encourage the widest degree of peaceful association, the richest web of commercial relations, and the greatest degree of capital formation that we can.
 
What we do not want is to be inflicted with a shifting snowball of often retro-active regulation. We must avoid a diffusion or supersession of individual responsibility and desist from fuzzy, catch-all law-making – in fact, we should tolerate as little legal positivism as possible, especially of the kind enacted, often cynically, during periods of crisis. We must insist that the state offers neither explicit nor implicit guarantees, that no bail-outs, or back-door favours be extended to the privileged few at the expense of the disenfranchised many. Finally, it should be impressed upon our elective rulers that the politics of disallowing loss, however well-intentioned, is nothing more than a policy of disavowing gain.
 
Though there are wider ramifications, the worlds of money and finance should, of course, be subject to all the above strictures. Here, we would again emphasize that to interfere wilfully with the substance of our money is to put oneself in breach of most of these guidelines; indeed, that this is perhaps the most heinous of all infractions, since it entails the most pervasive attack upon both property and the sanctity of contract that there can be since it involves a post hoc and highly arbitrary change in the dimensions of the very yardstick by which the terms of all such agreements are drawn up.
 
We would further contend that the paving stones on our road to the future, on the intertemporal highway whose praises we have already sung, are nothing more than our investments. These should be funded with scarce savings, not financed by the paltry fiction of banking book entries and hence the business of investment should be conducted only in accordance with the balance we can jointly negotiate between our current ends and our ends to come; that is, on a schedule which naturally emerges to reflect our societal degree of time preference and which does not emanate solely from the esoteric lucubrations of some central banking Oz.
 
Progress may be less spectacular this way, unpunctuated as it will be by the violent outbreaks of first mass delusion and later disillusion which comprise the alternations of Boom and Bust. But it will be, by that same measure, steadier and more self-sustaining. Absent such a condition, the fear I have already raised is that all the well-meaning calls for better financial regulation and more condign penalties for banking malfeasance are so many straws in the wind as far as a better functioning financial apparatus is concerned.
 
In passing, the very fact that we are all gathered here to bring so much effort and expertise to bear on the problems thrown up by our contemporary methods of finance shows just how far we have strayed from a true appreciation of its abiding scope as what is effectively little more than a glorified, if somewhat disembodied, form of logistics.
 
Finance should be a record of the assignment of goods and property rights across time and space – a four-dimensional bill of lading, as it were. It would be better were it seen for what it is – a means and not an end; the flickering reflection of a deeper Reality on the wall of Plato’s cave, not a towering 3D IMAX rendition of a screenwriter’s imagining. It should once again be valued only as the carthorse and not as the cargo he pulls behind him.
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Jul 31

A Hard Look of Gold Miner Stocks

Gold Price Comments Off on A Hard Look of Gold Miner Stocks
Lower prices will reduce supply, benefiting the gold miner survivors. But meantime…

IF YOU’RE like some gold bugs I know, writes David Nadig at Hard Assets Investor, in an article first published at Index Universe, you thought buying gold miner stocks was a great strategy.
 
Unfortunately, you probably got killed.
 
The problem, of course, comes down to cost of production. According to Joe Foster at Van Eck (issuers of the popular gold miners ETF, GDX), the average cost of production across the industry is roughly $1050 per ounce, with the marginal cost for a smaller mine being much higher than that.
 
Unlike most industries, there’s very little a gold miner can do when the price of its product falls below the price of its manufacturing. The realities of the business are simply crushing: All the “easy” gold has long since been dug out of the ground, and any incremental new gold will come at a higher price, deeper in the ground, less pure and harder to process than what the miner dug out yesterday.
 
In fact, a new way of calculating the true cost of sustainable mining would put the average price of gold production closer to $1400, well below the current price.
 
This crippling environment has forced two things to happen in the gold miner space. Big firms made big investments based on an endless gold-bull market. Barrick started the trend in 2006 when it bought Placer Dome Inc. for $10.2 billion. But it didn’t stop there – virtually all the majors have used flush coffers to buy new mines or rival gold mining companies.
 
And virtually all of the major gold miners have been forced to take monstrous write-downs on those assets. And junior miners like Golden Minerals were forced to simply shut down until prices rebound.
 
The impact of declining prices on gold miners can’t really be overstated. Just look at the three-year performance of the two major gold mining ETFs versus the gold bullion trust fund, GLD:
 
 
The hate for the miners started long before the price of gold really came down, and for good reason.
 
For decades, investors had used miners as a proxy for gold exposure – after all, once upon a time, you couldn’t legally own gold bullion. The companies ran enormous hedging operations and paid consistent dividends. But over the last decade, miners systematically got out of the futures market, and started relying on the open market for gold sales.
 
The theory is that this would tie their performance even more tightly to the price of gold. When gold went up, they looked like geniuses, but instead of using their flush bankrolls to pay big dividends, they bought mines at inflated prices.
 
And now here we are. With no hedged sales to rely on, there are over-inflated assets, extremely well-paid management (even by Wall Street standards), and minimal dividend payouts. In short, these look like battered and beleaguered companies, a fact which has everyone trying to call the bottom. Indeed, we saw phenomenal flows into GDX as things really turned south in June:
 
 
So why all the money piling in?
 
Obviously, there’s a classic story of trying to catch the falling knife and call the bottom. But there’s also an interesting dynamic at work. The worse things get for miners as a group, the more mines will shut down and the more assets will be written off.
 
This incredible accounting and operational purge guarantees pretty much one thing: supply shortages in the future. And with supply shortages come higher gold prices, and another opportunity for the surviving, financially viable miners to leg up faster than the price of gold.
 
Personally, I’m still not interested in owning the miners – as individual companies, I’m not convinced they’re particularly well run, having grown fat off the market in the last decade. They seem to get hedging exactly wrong, invest in hard assets at market-top prices, and overcompensate mediocre managers.
 
That’s always the problem with “buy-the-cow” commodities plays: At the end of the day, you’re still investing in people.
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Jul 30

Crisis First, FX Controls Next

Gold Price Comments Off on Crisis First, FX Controls Next
Get ready for currency controls; they look a certainty as liberty recedes…

IT’S A WISE MAN, writes Doug Casey, publisher of International Man, in The Daily Reckoning, who doesn’t allow himself to be limited by an accident of birth.
 
It’s most unfortunate (for them, anyway) that most people have a peasant mentality. They’re idiotically indoctrinated into thinking that their country is the best place in the world, simply because that’s where they were born. It makes sense in a way; their ancestors rarely ventured more than a day’s walk from the village where they were born. After all, there were stories of dragons and demons over the hill.
 
Things haven’t changed much, except people have exchanged the mud hut for a McMansion. But they’ve retained that medieval serf worldview. And the CNN and BBC newscasts on their widescreens only reinforce the notion that things are dangerous outside their borders; they’re probably even more scared than their primitive ancestors. Assuming they watch anything beside sitcoms and sports.
 
It’s certainly possible to be happy living your whole life in the place you were born and grew up. But unless you were born a member of the lucky sperm club, it’s almost always suboptimal, and sometimes it can be disastrous. I suspect now is one of those unhappy times.
 
We’re of the opinion that the world at large, and the US in particular, is heading into some seriously turbulent times. The diminution of personal and financial freedom looks like a hyperbolic curve, at first with an almost unnoticeable slope, then one that gets steeper and steeper, at an accelerating rate. I think an excellent case can be made that the current crisis is an inflexion point, beyond which it goes vertical. As one of Obama’s closest counselors (and he’s a very scary guy) has said, “One can’t let a good crisis go to waste.”
 
A crisis (and this will be a very real one) always draws exhortations from the authorities to “unite” and “pull together” – which usually boils down to following orders and turning in those who don’t. People will want, and will get, “strong leadership”. This does not bode well for libertarians, classical liberals, and free thinkers, in general.
 
As the crisis deepens, it’s likely to be dangerous for someone who doesn’t agree with groupthink. Things are likely to be much mellower if you’re living somewhere they consider you a tourist, than to stay on your home turf where questions will be asked if you don’t join the hooting and panting chimpanzees that will surround you. You can absolutely plan on unwelcome social pressure in the years to come, especially as the wars expand.
 
Coincidental with this is going to be the near destruction of the US Dollar; I just don’t see any realistic way around that eventuality at this point. The consequences of that are going to be disastrous, but it’s possible to insulate yourself from many of them. The biggest problem, and also the one most people just don’t see, is political. There is almost no way you can effectively insulate yourself if a government, and society as a whole, goes crazy.
 
You might argue that really tough times in the US are a long shot; the US is “different” from other countries. It’s certainly true the US has been particularly blessed for most of its existence, because it actually was different. The problem is that what made the US different from every other country – a Constitution that expressly limited the powers of the state, and an explicit acceptance of property rights and the free market – has evanesced. It’s why I refer to it as the US, which is just another country, rather than America, which was a unique and excellent concept.
 
In any event, I suggest you at least consider the possibility of transplanting yourself, or at least start by transplanting some assets. Don’t look at it as a negative thing. The world is your oyster. Make the most of it. This is directed not only at Americans, but at everybody, everywhere. It just seems a little more urgent for Americans, as well as for Europeans, at this point.
 
In many ways the world seemed to turn over a new leaf in the ’80s. Not just with the election of Reagan and Thatcher, but with the appearance of many more like them, almost everywhere.
 
Whether it’s the “hundredth monkey” hypothesis, or whether there really is such a thing as the “spirit of the century”, the majority of people tend to hold similar views at the same time. It’s strange. From about 1980-2000, all over the world, tax rates went down, regulation was relaxed, markets were freed up. The Soviet Union collapsed, apartheid in South Africa nonviolently disappeared, New Zealand fired two-thirds of its government employees, China liberalized. Even the constipated continents of Europe and South America loosened up. It looked like freedom was in the ascendant. But it couldn’t last.
 
Now, certainly since September 11, 2001, the tenor of the world has changed again – radically. And the negative new trend has been supercharged by the financial crisis that began to unfold in 2007. Now practically everywhere, much higher taxes, onerous new regulations, border controls, and capital controls (to prevent the make-believe crime of money laundering), among other things, are the new order. It seems as if the clock has been turned back to the 1930s, but much worse, in that governments are much more powerful. And I fear a redux of the 1940s is in store. 
 
The whole world acted pretty much the same in the ’30s and ’40s as well, you’ll recall. One thing I think you can plan on is foreign exchange controls. A government turns to FX controls during a currency crisis, to prevent its citizens from swapping the local currency for something foreign – transactions that would further weaken the local currency. FX controls, in effect, force people to stay with a sinking ship. But they are politically popular, for a number of reasons. They allow the government to “do something” during a crisis. They appeal to the average yahoo, partly because he doesn’t travel abroad and tends to question the patriotism of those who do. Only the rich (especially the “unpatriotic” ones) have assets out of the country, and it’s now time to eat the rich.
 
We’re heading into a currency crisis for the record books, and I think you can plan your life around some type of FX controls. If you don’t get significant assets out of your home country now, you may soon find it costly and very difficult to do so. Already, very few foreign banks and brokerage firms will take accounts from US persons. But although there are reporting requirements, there’s currently no law against Americans having overseas accounts, and no laws against foreign banks and brokerage firms accepting American business. Many institutions find that it’s simply not worth the aggravation and worry to deal with Americans.
 
At a bare minimum, you should have a meaningful amount of gold bullion in a foreign safe deposit box. In addition, you should own some foreign property, preferably in a location where you would enjoy spending some time. It would be impractical for the government to get you to repatriate that capital.
 
The ideal scenario, of course, is to have your main residence in one country, your assets in another, your business in a third, and your citizenship in a fourth. That isn’t practical for most.
 
But you can certainly get assets abroad. And you may want to consider acquiring a second citizenship, which can considerably expand your options. The International Man has a lot on this topic. It’s not necessary, and often not even desirable, to establish official residency in the country where you’d like to spend time, because that risks getting stuck in its tax system. It’s usually smarter just to leave every 90 days to renew your tourist visa and not spend more than six months per year in any one country. That way you’ll be treated as a valued tourist, who should be courted, rather than as a citizen, who can be milked like a cow.
 
Once you do acquire another passport, the next question is whether you should renounce your US citizenship, which could give you huge tax and regulatory benefits. As everyone knows, the US is one of the few countries in the world that taxes its citizens regardless of where they may live – although it must be said that other governments seem to be moving in this direction.
 
The problem with renouncing your US citizenship is that the US assesses what amounts to an exit tax on Americans who do so. Since 2004, any high-net-worth individual who renounces his citizenship is automatically assumed to have done so for tax reasons. And any individual deemed to have expatriated for tax reasons is deemed to have sold all his assets at fair market value on his last day as a US citizen. And, if the expatriate spends more than 120 days per year in the US, he can be taxed on his worldwide income and potentially is subject to estate tax.
 
In the near future, however, even that option may not be feasible. So let’s plan ahead.
 
An essential element of planning ahead is finding the best place for your wealth to go outside your home country, as well as what form it should take: gold bullion, offshore bank account; real estate; an offshore trust; and a foreign limited liability corporation are a few of the possibilities. And of course, internationalizing your life is something you’ll want to research as well.
 
These subjects can be overwhelming to consider, but their importance means that your research must not be delayed. That’s why Casey Research created a free webinar titled Internationalizing Your Assets; in it, I and other internationalization experts will share what they’ve done and what they see as the best options for those beginning to internationalize now. Watch the presentation and start on your road to greater freedom for your wealth and yourself today.
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Jul 29

Dead at 32, the US Bond Bull Market

Gold Price Comments Off on Dead at 32, the US Bond Bull Market
The end of the US bond bull market will see rising interest rates hurt mortgage REITs…

I AM announcing that the 32-year bull market in bonds is officially dead, writes Martin Hutchinson at Money Morning.
 
Be prepared for the consequences from rising interest rates in 2014. They could be catastrophic for bond market investors.
 
Higher bond rates look enticing, like they’ll provide you with more income. But as interest rates move up, the value of bonds goes down. It’s an inverse relationship. The value of your fixed-income portfolio could be devastated if rates rise rapidly beginning next year. Start protecting your portfolio today.
 
Interest rates will gradually rise this year, but watch out next year. Here’s what we see right now.
 
Falling since 1981, 10-year US Treasury bond yields are now up from 1.76% to 2.53%. On that basis, by the end of 2013, if market behavior repeats itself, 10-year Treasuries could be yielding 3.30%. That has important implications for the US economy, for the Fed and for investors in every sector, in almost every country.
 
But this bond market bonanza’s end isn’t a shocking development. Knowing now that interest rates aren’t coming back down will give you an advantage in protecting your portfolio.
 
Some kind of turn in interest rates was inevitable and is healthy. The 2012 year-end yield of 1.76% was the lowest year-end yield for the 10-year Treasury since records began in 1962. It also gave investors approximately a zero real yield after inflation, which translated into a negative real yield for investors paying taxes, since interest payments are taxable and the inflationary erosion of the principal’s value is not tax-deductible.
 
It is however remarkable that interest rates turned only after the Fed had begun buying $85 billion of bonds per month, split roughly equally between Treasuries and housing agency bonds.
 
It also coincided with the first significant action on the Federal deficit, with the “fiscal cliff” at year-end increasing top-bracket taxes and employees’ Social Security payments, and the March “sequester” making modest cuts in spending.
 
The combined effect of these two acts was to being the federal deficit down from just over $1 trillion in 2011-12 to around $650 billion in 2012-13, which doesn’t solve the deficit/debt problem but at least makes a dent in it.
 
In the second half of 2013, the forces holding down interest rates will be weaker. The Fed’s Ben Bernanke has more or less committed to beginning to reduce the pace of bond purchases in the latter part of the year, while there’s certainly not going to be any more useful action on taxes or spending.
 
Judging by the pork-bloated agriculture bill recently passed by the House, spending could even increase again in the new fiscal year, which begins October 1.
 
Since the economic forces pushing up interest rates were strong enough to overcome the Fed’s $85 billion a month of bond purchases plus a sudden outbreak of fiscal sanity by the politicians, it’s likely they’ll be even stronger when those two special factors are reduced or absent.
 
So my simplistic projection of 3.3% for the 10-year Treasury yield on December 31 may, if anything, be on the low side.
 
Now, it’s unlikely that the rise in interest rates will cause a crisis before December, although a crisis is certainly very possible next year. At 3.3% we’re below the average of interest rates in the second half of 2009 and the first half of 2010, so banks and financial market participants should adjust to it fairly easily.
 
The economy as a whole should also adapt fairly easily, although the recent exceptional strength in the housing sector may very well diminish as mortgage rates rise and housing affordability falls.
 
Where to beware? The biggest strains will come in the mortgage REIT sector, where some companies depend crucially on a high degree of leverage and a substantial gap between short-term and long-term rates to sustain their very high dividend yields.
 
In the scenario I envisage, the gap between short-term and long-term interest rates will even increase, because the Fed isn’t likely to raise short-term rates. That will increase the mortgage REITs’ operating profits. However, a rise in long-term rates would reduce the value of their mortgage portfolios, eating away at their capital and possibly even making them insolvent when their balance sheets are “marked to market” at year-end.
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Jul 29

Gold Prices Climb in New York to $1,335 an Ounce

Gold Price Comments Off on Gold Prices Climb in New York to $1,335 an Ounce

A weaker dollar caused gold prices to rise July 29. Gold futures for December delivery hit $1,335 an ounce around 8 a.m. on the Comex in New York, Bloomberg reported – an increase of $13.35, or 1 percent.

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Jul 26

Eco Oro Minerals’ Angostura Project Named Project of National Interest by Colombian Mining Authorities

Gold Price Comments Off on Eco Oro Minerals’ Angostura Project Named Project of National Interest by Colombian Mining Authorities

Eco Oro Minerals Corp. (TSX:EOM) that their Angostura Project, has been named a project of national interest by the Colombian Mining Agency.

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Jul 26

Reasons for Higher Gold Prices

Gold Price Comments Off on Reasons for Higher Gold Prices
Gold prices look set to rise for clear reasons, says this mining stock analyst…
 

RALPH ALDIS CFA rejoined US Global Investors as senior mining analyst in November 2001. A geology graduate with a master’s in energy & mineral resources from the University of Texas at Austin, he was director of research for 10 years before moving to Eisner Securities’ high net-worth group and overseeing its mutual fund operations.
 
Returned to US Global Investors as senior mining analyst, and now manager on several of the group’s leading funds, here he gives The Gold Report his reasons for expecting higher gold prices later in 2013…
 
The Gold Report: The CEO of US Global Investors, Frank Holmes, recently told gold investors to “keep calm and invest on.” I hope you have the T-shirt royalties for that. But for what reasons do you say it?
 
Ralph Aldis: We like this phrase because it reminds investors not to let their emotions get the best of them. Instead, investors need to plan an investment strategy and make sure it includes all their assets. Investors need to think about what the weightings are in those assets, track quarterly performance numbers to make sure assets aren’t correlated with each other, make sure there is diversification and rebalance the portfolio every year.
 
TGR: What’s a good asset allocation mix through at least the end of the year?
 
Ralph Aldis: The asset mix will be a function of age, investment objectives and how soon liquidity is needed. Generally, a maximum of 5-10% in gold and gold stocks, 50% in equities, 30% in fixed income and the balance in some other asset, such as real estate or home value.
 
TGR: US Global Investors recently reported that gold has 30% upside potential over the next 18 months. What reasons do you believe will specifically move the gold price?
 
Ralph Aldis: A 30% rebound is well within the normal volatility swings of gold for a given year. Right now, we have the seasonal rally in the gold market. Buyers, like jewelry manufacturers, return to the market usually in late July or August and start restocking to get gold into the pipeline.
 
Another reason is the employment data that recently came out. It beat expectations, and people got excited. But most of the gains came from part-time jobs, which were up 360,000, and we lost 240,000 full-time jobs. The full U6 unemployment rate actually climbed to 14.3%, up from 13.8% in May. The quality of the employment numbers was dismal, but people saw the headline number and thought “Woohoo, go long equities!” Macquarie Research released a study on July 11 that said the Federal Reserve tapering is much further out than expected – Q4/16 not Q4/14.
 
TGR: Can a climbing gold price and a strong US economy coexist?
 
Ralph Aldis: Yes. Some economic growth and a little inflation could get the gold price and the economy growing in sync. But you need the Dollar to weaken, which is a function of US interest rates going down. The Federal Reserve doesn’t want a rising interest rate because that stifles some of the economic activity and makes the US debt burden greater.
 
TGR: What about central bank buying by emerging market countries? If their economies are stronger, will some of the spoils go into gold?
 
Ralph Aldis: We’ve had seven months in a row of central banks buying gold. The US Dollar isn’t as significant to official holdings as it used to be. It has lost a lot of influence, and emerging markets don’t feel they need to own Dollars instead of gold.
 
TGR: But if the American economy is rolling, chances are the global economy is doing well. If these emerging market economies buy more gold, won’t that put pressure on the gold price?
 
Ralph Aldis: That would be the hedge that I would want to be making, too, trying to diversify some of that risk as some countries, like China, probably have way too many Dollars in their official reserves.
 
TGR: What are some signs for investors that it’s safe to return to the precious metals sector?
 
Ralph Aldis: We look at the year-over-year changes in the gold price to indicate whether the price has moved up two standard deviations from its mean, which means that gold may soon correct, or whether the metal has moved down two standard deviations from its mean, in which case, gold is due for a rally.
 
Also, look for the exhaustion of money flows out of the gold sector, which is happening now. We’re just beginning to see positive money flows come into some of our gold funds now.
 
We’re also seeing gold analysts capitulate. These people get paid to love stocks, and they capitulated. When analysts do that, I believe it’s a sign to buy.
 
TGR: Has the slide in precious metals prices and the recent selloff exposed flaws in precious metals exchange-traded funds (ETFs)?
 
Ralph Aldis: If you’re a US citizen, the biggest drawback is a tax liability issue. The SPDR Gold Trust ETF is taxed as a collectible, so if you recently sold and made a gain, you actually have to make twice as much than you would on a gold stock investment. It’s liquid and gives you exposure, but it’s just not tax efficient.
 
TGR: You said investors should have 5-10% of their portfolios in gold and gold equities. Why should they hold Canadian or American gold equities versus gold futures or gold ETFs?
 
Ralph Aldis: Tax efficiency is a consideration. Plus gold equities can move two to three times the magnitude of the underlying gold price. And our research has found that a small weighting of gold stocks in a portfolio of US companies historically increased return with the same amount of risk.
 
TGR: But some of the names you’re following have limited liquidity. How do investors deal with that?
 
Ralph Aldis: Sometimes people look at our mutual fund holdings and marvel that there are 150 names there. But we want to have enough liquidity to adjust positions. Maybe we’d like to have a bigger position, but if investment conditions change for that particular stock, you could compromise your liquidity. If we can build a portfolio out of 10 or 20 junior names that meet our criteria, then we’re insulated from some of the extreme price moves.
 
TGR: What is price leadership?
 
Ralph Aldis: We look at price performance over a period of time and for statistical significance of outperformance relative to others in that model. When the market knows more than you do, you can see it through price leadership. Ask why a stock is outperforming and see if it makes sense. 
 
TGR: Do you have some parting thoughts for us, Ralph? Maybe something to bolster the hopes of the retail crowd?
 
Ralph Aldis: Gold investors are seeing two newer trends in gold. One has to do with a move out of paper gold to the physical holding of gold. Chinese gold imports from Hong Kong have more than tripled since 2012 and premiums for gold physical delivery in Shanghai jumped above $30 per ounce. In addition, the US Mint suspended sales of its smallest American Eagle gold coin after it sold off its entire inventory.
 
The second trend is the extreme pessimism toward gold, with speculative short positions hitting a record level. As of the beginning of July, the number of outstanding gold short contracts was close to 140,000. These are reasons why I think investors will see some higher gold prices later this year.
 
TGR: Thank you for your insights.
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Jul 26

Colossus Minerals Announces C$33 Million Equity Financing

Gold Price Comments Off on Colossus Minerals Announces C$33 Million Equity Financing

Colossus Minerals Inc. (TSX:CSI,OTCQX:COLUF) has entered into an underwriting agreement with a syndicate of underwriters, co-led by GMP Securities L.P. and Dundee Securities Ltd., together with Canaccord Genuity Corp., Clarus Securities Inc., and TD Securities Inc. to sell 44,000,000 units at $0.75 per unit, for aggregate gross proceeds of C$33,000,000. The Offering is expected to close on or about August 13, 2013.

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Jul 24

Gold Investing: "Not Stupid"

Gold Price Comments Off on Gold Investing: "Not Stupid"
And that from the man who’s cut his giant fund’s allocation from 15% to 1% gold…
 

AFTER TWELVE consecutive years of increases in the gold price, anyone investing in gold may have expected some kind of market correction, writes Paul Amery at Hard Asset Investors in an article first published by IndexUniverse.eu.
 
But the speed and extent of the metal’s spring sell-off still took many people by surprise. And 2013 has been a traumatic period for the whole commodity tracker market, the lion’s share of whose investing assets is in gold.
 
During the six months, exchange-traded gold products lost more than 20% of their assets under management: ETP holders redeemed $19 billion of gold trackers in the second quarter, following $9 billion of sales in the first quarter.
 
And while commodity ETPs have seen a fall in assets before, most notably during the financial crisis of 2008, when the prices of many raw materials collapsed, gold had historically held up well in comparison. This year, things changed.
 
According to ETF Securities, which specialises in providing commodity trackers to investors, the about-turn in gold prices was signalled by a rise in US real interest rates that began late last year.
“We’ve seen inflation expectations in the US fall and nominal interest rates rise,” the firm’s head of research, Nick Brooks, told IndexUniverse.eu.
 
“As a result, real interest rates have shown quite an aggressive change in direction since October 2012. Unsurprisingly, that’s also coincided with a rise in the Dollar. Tactically, this is possibly the worst environment for gold you could imagine.”
ETF Securities has mapped the change in real interest rates in the chart below, which we have reproduced with the firm’s permission. The gold price (in yellow, recorded on the left scale) is shown together with US 10 year real interest rates, as derived from the market for inflation-protected treasuries (in red, inverted, on the right scale).
 
Real US interest rates, which had spent most of the time in negative territory since late 2011, switched back to positive in the second quarter, reflecting a drop in long-term inflation expectations and a rise in ten year bond yields.
 
Reflecting the sudden turn-around in market sentiment, gold exchange-traded product investors withdrew their money at the fastest rate since the market for bullion trackers started over a decade ago. At the peak of the withdrawals, two tumultuous days in April saw a 13 percent, $200 price crash in the yellow metal.
 
Market observers put the scale and speed of the selling down to the exit of leveraged, hedge fund investors, particularly from US-listed gold ETFs.
 
“Around 90 percent of the selling in April was in North American ETPs, notably State Street’s SPDR Gold ETF (NYSE Arca: GLD),” said ETF Securities’ Brooks, “whereas these ETPs have around a 60 percent global market share. There’s a heavy hedge fund presence in GLD and the sudden exit of leveraged long investors may have been behind the sharp gold price sell-off we saw on April 12 and 15.”
 
Recent price volatility has cooled the former bullishness surrounding gold investing and served to make many investors reassess the size of their precious metal holdings, said MJ Lytle, chief development officer at ETP provider Source.
“Very few investors have taken gold out of their portfolios altogether,” Lytle told IndexUniverse.eu, “but many have brought their holdings back to core positions, whereas they previously were overweight in the metal.”
Some funds investing in gold have made more dramatic reductions in their gold holdings. Charles Morris, London-based head of absolute return at HSBC Asset Management – according to ETP traders, historically one of the biggest European buyers in gold trackers – told IndexUniverse.eu that he had reduced his fund’s weighting in gold substantially from a peak of 15% in 2011.
“We’ve been reducing the weighting steadily over the last two years,” said Morris. “Our final cut was in February and we’re now down to just over 1%.”
Gold’s first-half fall has caused market commentators to reexamine the sources of supply and demand for the precious metal.
“The big question for everyone now is where gold goes in the next three to six months,” said Source’s Lytle. “People still have conviction that gold provides a good hedge for their portfolios, and there’s been a lot of physical buying by Indian and Chinese jewellery manufacturers, but people are waiting to see if this is sufficient to stabilise the market and to provide an upwards movement in prices.”
Those looking for a reason to buy may take some comfort from a change in the composition of gold ETP holders, said ETF Securities’ Brooks, since the recent downdraft may have forced recent, more speculative buyers out of the market.
“Total holdings of gold ETPs are now back at mid-2010 levels,” said Brooks. “Over the last couple of years gold had become a hot asset, attracting hedge funds and more tactical and less specialist players. Many of these investors may now have been cleared out.”
And measures of negative sentiment, which often act as a a contrarian indicator, also provide encouragement for gold investing bulls, Brooks added.
“Short positions in gold, expressed via the futures market, are near all-time highs. A lot of the bearish views on gold investment have already been expressed.”
Longer-term, however, said Brooks, gold investors will be focussing on the same key macroeconomic variable that has been behind recent price movements: inflation-adjusted interest rates.
“If US inflation expectations start to pick up again, gold could do better,” Brooks told IndexUniverse.eu. “Conversely, if it looks as though investors have overestimated US growth prospects and nominal bond yields start to come down again, that would also be supportive of the gold price.”
 
“Combined with the amount of negative sentiment out there, I think we’re getting close to a bottom. We may not have hit it, but we may not be far off.”
According to HSBC’s Morris, gold may not yet have reached truly cheap levels, but that those looking to invest longer-term could do worse than buy at the prevailing price.
“We compare gold with other long-term, value-oriented metrics such as inflation, other commodity or housing prices,” Morris told IndexUniverse.eu. “On that basis we get a sense of when the gold price is behind events, as it was in 1999, and when it’s ahead of events, as it was in 2011.”
“We’re still about 10% above fair value,” says Morris, “which we think is around $1100 an ounce, whereas gold would be cheap under $1000. $800 an ounce would take us back to equivalent levels of cheapness to 1999,” said Morris.
 
“But there’s no guarantee that we’ll get back to those lower levels,” Morris added. “On a ten-year view, if you buy gold now, it’s not stupid.”
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Jul 24

Besra Announces 2014 Guidance, Plans to Cut Costs

Gold Price Comments Off on Besra Announces 2014 Guidance, Plans to Cut Costs

Besra (TSX:BEZ,ASX:BEZ,OTCQX:BSRAF) announced production guidance for 2014 of 65,000 – 70,000 ounces.

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