Nov 29

Sumitomo Won’t Explore for Gold in Alaska

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Sumitomo Metal Mining (TYO:5713) has terminated its plan to explore for gold in Alaska, the Wall Street Journal reported.

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Nov 29

Rocmec Mining Welcomes New Major Shareholder

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Rocmec Mining inc. (TSXV:RMI) welcomed a new control person amongst its shareholders, 8431469 Canada inc., who also conducts its business in Canada under the name Nippon Dragon. Nippon Dragon is a newly-incorporated company owned by Mr. Yong Nam Kim, CEO of ES Plus, an East-Asian information technology company.

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Nov 29

Out-of-Favor Gold Has Reason to Give (Small) Thanks

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The precious metal managed to claw back a few dollars on Thursday after hitting a 4.5-month low on Monday due to the Iran-US nuclear deal.

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Nov 28

What Changed in March 2009

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Yes, QE mattered. But so did a little-seen accounting change for US stocks…
 

On MARCH 16, 2009, writes Doug French, former president of the Ludwig von Mises Institute, in the Casey Daily Dispatch from Doug Casey’s research team, the Financial Accounting Standards Board (FASB), a private-sector organization that establishes financial accounting and reporting standards in the US, turned the stock market around and at the same time motivated banks to become the worst slumlords and neighbors imaginable.
 
Most people believe accounting is conservative, the rules cut and dried. Accountants make economists look frivolous. But accountants are people too, and FASB succumbed to pressure from Capitol Hill in the wake of the 2008 financial crash.
 
The S&P 500 hit a devilish low of 666 on March 6, 2009. More major bank failures seemed a certainty. Somebody had to do something – and in stepped the accounting board prodded by the House Committee on Financial Services.
 
The board changed financial accounting standards 157, 124, and 115, allowing banks more discretion in reporting the value of mortgage-backed securities (MBS) held in their portfolios and losses on those securities. Floyd Norris reported at the time for the New York Times:
“The change seems likely to allow banks to report higher profits by assuming that the securities are worth more than anyone is now willing to pay for them. But critics objected that the change could further damage the credibility of financial institutions by enabling them to avoid recognizing losses from bad loans they have made.”
“With that discretion,” fund manager John Hussman writes, “banks could use cash-flow models (mark-to-model) or other methods (mark-to-unicorn).” And author James Kwak wrote on his blog The Baseline Scenario just after FASB amended their rules:
“The new rules were sought by the American Bankers Association, and not surprisingly will allow banks to increase their reported profits and strengthen their balance sheets by allowing them to increase the reported values of their toxic assets.”
Banks were loaded with securities containing subprime home loans. When borrowers stopped paying en masse, the value of these securities plunged. Until the change in March 2009, these losses had to be recognized. With financial institutions leveraged at upwards of 30-1 at the time, the sinking valuations made much of the industry insolvent…until March 16, 2009. 
 
Since then the S&P has nearly tripled.
 
Nobody has more friends on Capitol Hill than bankers, who are not wild about free-market capitalism when it works against them.
“Bankers bitterly complained that the current market prices were the result of distressed sales and that they should be allowed to ignore those prices and value the securities instead at their value in a normal market,” Norris wrote for the New York Times on April 2, 2009. 
The change in the rules first of all allowed banks to remain in business. Second, with banks having wide discretion in valuing mortgage-backed securities, they had little incentive to care for the collateral of the loans contained in those MBSs. It may even be in a bank’s best interest to leave houses in what the Sun Sentinel newspaper called “legal limbo”.
 
Last year the Florida paper devoted a three-part series to “Bad-Neighbor Banks”. When homeowners walk away, one would think it would be in the banks’ best interests to gain legal possession as soon as possible and either sell as is, or repair and sell quickly.
 
Apparently that’s not the case. All across Florida, banks “have halted foreclosure proceedings because the remaining equity in the properties is deemed inadequate to cover the banks’ costs to reclaim title and maintain, refurbish and sell them,” Megan O’Matz and John Maines wrote for the Sun Sentinel.
 
When pressed about weed- and rodent-infested abandoned properties, banks often pointed the finger at mortgage servicers. South Florida attorney Ben Solomon, who represents condos and community associations in foreclosure cases, stated:
“We see bank delays every day. They really continually have been getting worse. More and more time is going by.”
As banks sit on assets indefinitely without having to recognize a loss, homes get lost in vast bank bureaucracies. When the banks finally figure out what they have, “lenders also have been walking away from foreclosure actions involving homes with low market values, after their cool-headed calculation that the homes cannot resell for enough to offset the costs of foreclosing, repairing, maintaining and marketing them,” O’Matz and Maines wrote.
 
Now banks have rebuilt their balance sheets and are able to withstand losses from bad property loans. Enough banks are walking away from properties that the Treasury Department issued “guidance” in 2011, advising to do so cautiously.
 
Banks that do foreclose with tenants living in a property are notorious for not maintaining their newly acquired properties. “Some banks are failing to follow local and state housing codes, leaving tenants to live in squalor – without even a number to call in the most dire situations,” writes Aarti Shahani for NPR. 
 
I’m not sure why anyone would expect banks to be good property managers. “Banks don’t want to take your home and own it,” Paul Leonard, senior vice president of the Housing Policy Council, told NPR. “They’re stuck with plumbing and electrical maintenance that is well beyond their mission. They have to hire a property manager to take care of the property.”
 
Global banking behemoth Deutsche Bank foreclosed on 2,000 houses in the Los Angeles area between 2007 and 2011. The big bank was such a bad landlord, the city filed suit and the bank recently settled the case by paying $10 million – which the bank didn’t even have to pay itself. According to Deutsche Bank officials, “The settlement will be paid by the servicers responsible for the Los Angeles properties at issue and by the securitization trusts that hold the properties.”
 
If banks, not to mention Fannie Mae, Freddie Mac, and FHA, had been allowed to fail, the housing market would have cleared and stories like these would be a thing of the past. However, one intervention begets another, and the market is held stagnate.
 
While there are housing booms popping up in various cities, Bloomberg just reported a failed auction by the US Department of Housing and Urban Development (HUD).
 
After successfully selling 50,000 non-performing, single-family FHA-insured loans since 2010, HUD deemed the bids for $450 million too low to accept at their October 30 sale.
 
(As an interesting aside, the FHA was a product of Roosevelt’s administration during the Great Depression and hasn’t required the help of taxpayers until this September when the agency asked for a $1.7 billion bailout to keep operating…a piece of news that got drowned out by the looming government shutdown, the slowly developing Obamacare train wreck, and the Breaking Bad series finale.)
 
HUD has another $5 billion auction scheduled and is currently qualifying bidders. The auctions run through the website DebtX, which has compiled a Bid-Ask Index to compare recent years’ buyers’ bid performance versus seller expectations. For the last three years, bids have come up short of sellers’ ask prices. The index prior to the failed auction was -5.7%.
 
Meanwhile, the banking industry purrs right along earning a record $42.2 billion in the second quarter.
 
For the banks, this was the 16th consecutive quarter of year-over-year increases. A primary driver of the record earnings is less money being socked away in loan-loss reserves. Banks put away the lowest loss provision since the third quarter of 2006. The banking industry’s coverage ratio of reserves to noncurrent loans is still only 62.3%, far below what was once the standard of greater than 100%. 
 
Remember when President Obama and the Treasury Department claimed the bank bailouts were generating a profit? Special Inspector General Christy Romero overseeing TARP said, “It is a widely held misconception that TARP will make a profit. The most recent cost estimate for TARP is a loss of $60 billion. Taxpayers are still owed $118.5 billion (including $14 billion written off or otherwise lost).”
 
Fannie Mae and Freddie Mac have turned things around and are generating huge profits, you say?
 
Not so fast.
 
According to bank analyst Chris Whalen, “If we were to implement the guidance from FHFA today, it is pretty clear that the profits of the GSEs [government-sponsored enterprises] would have been largely offset by the allocations needed to replenish the reserves.” GSE profits would disappear, and $10 to $20 billion would need to be added to reserves.
“Not only does FNM [Fannie Mae] seem to be unprofitable under the new FHFA guidance, but payments made to Treasury might need to be reversed,” writes Whalen.
A zombie government armed with accounting tricks has bailed out a zombie banking industry using even more financial phoniness. A few numbers pushed here and there, and the industry is earning record profits. But out in the real world where people live and work, things aren’t so rosy. Zombies make negligent landlords and dangerous neighbors.
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Nov 28

Stock Market Madness

Gold Price Comments Off on Stock Market Madness
Price is what you pay, value is what you get. Got gold yet…?
 

“VALUATION,” writes David Merkel, “is rarely a sufficient reason to be long or short the market,” says Tim Price on his Price of Everything blog.
“Absurdity is like infinity. Twice infinity is still infinity. Twice absurd is still absurd. Absurd valuations, whether high or low, can become even more absurd if the expectations of market participants become momentum-based. Momentum investors do not care about valuation; they buy what is going up, and sell what is going down.”
Merkel went on to warn, “you will know a market top is probably coming” when…
  1. Short sellers are “killed. You don’t hear about them anymore.” Anyone investing in short-only funds suffers “general embarrassment”;
  2. Long-only managers “are getting butchered for conservatism”. Merkel cites early 2000, when Julian Robertson, George Vanderheiden, Robert Sanborn, Gary Brinson and Stanley Druckenmiller all quit “shortly before the market top”;
  3. Value investors start to accumulate cash. “Warren Buffett is an example of this,” says Merkel. “When Buffett said that he ‘didn’t get tech,’ he did not mean that he didn’t understand technology; he just couldn’t understand how technology companies would earn returns on equity justifying the capital employed on a sustainable basis.”;
  4. Growth managers beat value managers. Because, “in short, the future prospects of firms become the dominant means of setting market prices.”;
  5. Momentum strategies “are self-reinforcing due to an abundance of momentum investors…Actual price volatility increases. Trends tend to maintain themselves over longer periods,” and sell-offs are quickly recovered;
  6. Markets start to “favour inexperienced investors,” who simply follow the trend. Merkel’s favourite sign is to check CNBC and “gauge the age, experience and reasoning of the pundits. Near market tops, the pundits tend to be younger, newer and less rigorous.” More experienced investors instead expect reversion to the mean.
Notwithstanding Merkel’s caveat about pricing, valuations still matter.
 
Assuming that one is investing as opposed to speculating, initial valuation remains the single most important characteristic of whatever one elects to buy. And at the risk of sounding like a broken record, “initial valuation” in the US stock market is at a level consistent with very disappointing subsequent returns, if the history of the last 130 years is any guide. Without fail, every time the US market has traded on a CAPE ratio of 24 or higher over the past 130 years, it has been followed by a roughly 20 year bear market
 
The evidence for the prosecution is visible below, for the peak years 1901, 1929, 1966 and 2000. And 2013? Of course, this time might be different.
 
 
But there is the stock market, and then there are individual stocks. We have no interest in the former, but plenty of interest in the opportunity set of the latter. We’re just not that interested in the US market, given general valuation concerns, and the malign role of Fed policy in distorting the prices of everything. As purists and unashamed value investors, we have plenty of other fish to fry.
 
Probably the biggest of those fish is that giant part of the world economy known as Asia. The chart below shows the anticipated growth in numbers of the middle class throughout the world over the next two decades.
 
The solid green circle is the current middle class population (or as at 2009 to be precise); the wider blue-fringed circle represents the forecast size of this population in 20 years’ time. The OECD definition of middle class is those households with daily per capita expenditures of between $10 and $100 in purchasing power parity terms. 
 
Note that in the US and Europe, the size of the middle class is barely expected to change over the next two decades. Central and South America, and the Middle East and North Africa, are forecast to grow a little. But one area stands out: the emerging middle class in Asia is forecast to explode, from roughly 500 million to some 3 billion people. 
In equity investing, the combination of a compelling secular growth story and compellingly attractive valuations is a very rare thing, the sort of investment opportunity that one might only see once or twice in a generation, if that. But it exists, here in Asia, today. Once again, however, we have to abandon conventional financial thinking in order to exploit it. 
 
Asian personal consumption between 2007 and 2012 – while the West was suffering from a little localised financial crisis – grew by 5% to 10% per annum. Industries likely to benefit from sustained growth in domestic consumption include food and beverages, clothes, cars and insurance.
 
But the index composition of Asian equity index benchmarks leaves much to be desired. Of the 10 largest companies in the MSCI Asia ex-Japan index, three are low margin exporters in Korea and Taiwan, one is a low margin Chinese telecoms business, three are state-run Chinese banks, one is an inefficient Chinese oil and gas producer, and one is an expensive Chinese internet business. 
 
That doesn’t leave much for value investors to go on. Asian equity funds more generally, tending to be index-trackers, are heavy in Chinese stocks of indeterminate value and clunky ‘old Asia’ exporters with far too much research coverage. 
 
Or one can ignore index composition (‘yesterday’s winners’) entirely and focus instead on ‘best in breed’ businesses throughout the region on an unconstrained basis. Which is exactly what Greg Fisher’s Halley Asian Prosperity Fund does. Stocks that make it into this tightly defined portfolio typically have historic returns on equity of 15% or higher, a history of dividend growth, little or no debt, price / book ratios of 1.5x or less, and price / earnings ratios ideally in single digits (its average p/e stands at around 8x). As Greg puts it, amid a world of worries, “keeping the discipline of holding lowly valued, under-owned and unleveraged companies is likely to continue to protect our capital and earn us both income and capital appreciation over the longer term.”
 
In terms of macro analysis, this interview with CLSA’s Russell Napier is one of the best we’ve heard this year, concisely addressing many of the major current concerns we really should be worried about, including the rising risk of emerging markets exporting deflation to the West, the next stage of government abuse of markets including the formal rationing of credit, and the growing attraction of gold (as a deflation and inflation hedge) at its current price.
 
On which topic, David McCreadie of Monument Securities suggests that “if gold is driven down to $1030, and there will be a lot of noise if it does, I think it will offer a very unusual and highly profitable P & L opportunity, both in the physical but especially in the mining shares. Upside of x 5-10 doesn’t come along very often and it’s definitely one for the SIPP and the kids’ education fund. 
 
Nonetheless if you own it here or above then I think you take the pain in this final phase. Nor do I believe shorting is sensible; the main money has been made on the short side and in these metals, the biggest and most explosive profit potential is always on the upside.” 
 
Or to put it more plainly, and in the words of Warren Buffett, price is what you pay; value is what you get. US stocks may be expensive, but you can get better economic fundamentals and cheaper valuations selectively throughout Asia. And as insurance against the sort of disorderly currency moves that seem to be almost inevitable courtesy of so many central banks behaving badly, we still maintain you can’t do better over the medium term than gold.
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Nov 28

The Biggest Malinvestment of All

Gold Price Comments Off on The Biggest Malinvestment of All
The extent of today’s wealth destruction is hidden by government debt…
 

STILL unnoticed by a large part of the population, we have been living through a period of relative impoverishment, writes Philipp Bagus, professor for economics at University Rey Juan Carlos in Madrid, at the Cobden Centre.
 
Money has been squandered in welfare spending, bailing out banks or even – as in Europe – bailing out fellow governments. But many people still do not feel the pain.
 
However, malinvestments have destroyed an immense amount of real wealth. Government spending for welfare programs and military ventures has caused increasing public debts and deficits in the Western world. These debts will never be paid back in real terms.
 
The welfare-warfare state is the biggest malinvestment today. It does not satisfy the preferences of freely interacting individuals and would be liquidated immediately if it were not continuously propped up by taxpayer money collected under the threat of violence.
 
Another source of malinvestment has been the business cycle triggered by the credit expansion of the semi-public fractional reserve banking system. After the financial crisis of 2008, malinvestments were only partially liquidated. The investors that had financed the malinvestments such as overextended car producers and mortgage lenders were bailed out by governments; be it directly through capital infusions or indirectly through subsidies and public works.
 
The bursting of the housing bubble caused losses for the banking system, but the banking system did not assume these losses in full because it was bailed out by governments worldwide. Consequently, bad debts were shifted from the private to the public sector, but they did not disappear. In time, new bad debts were created through an increase in public welfare spending such as unemployment benefits and a myriad of “stimulus” programs. Government debt exploded.
 
In other words, the losses resulting from the malinvestments of the past cycle have been shifted to an important degree onto the balance sheets of governments and their central banks. Neither the original investors, nor bank shareholders, nor bank creditors, nor holders of public debt have assumed these losses. Shifting bad debts around cannot recreate the lost wealth, however, and the debt remains.
 
To illustrate, let us consider Robinson Crusoe and the younger Friday on their island. Robinson works hard for decades and saves for retirement. He invests in bonds issued by Friday. Friday invests in a project. He starts constructing a fishing boat that will produce enough fish to feed both of them when Robinson retires and stops working.
 
At retirement Robinson wants to start consuming his capital. He wants to sell his bonds and buy goods (the fish) that Friday produces. But the plan will not work if the capital has been squandered in malinvestments. Friday may be unable to pay back the bonds in real terms, because he simply has consumed Robinson’s savings without working or because the investment project financed with Robinson’s savings has failed.
 
For instance, imagine that the boat is constructed badly and sinks; or that Friday never builds the boat because he prefers partying. The wealth that Robinson thought to own is simply not there. Of course, for some time Robinson may maintain the illusion that he is wealthy. In fact, he still owns the bonds.
 
Let us imagine that there is a government with its central bank on the island. To “fix” the situation, the island’s government buys and nationalizes Friday’s failed company (and the sunken boat). Or the government could bail Friday out by transferring money to him through the issuance of new government debt that is bought by the central bank. Friday may then pay back Robinson with newly printed money. Alternatively the central banks may also just print paper money to buy the bonds directly from Robinson. The bad assets (represented by the bonds) are shifted onto the balance sheet of the central bank or the government.
 
As a consequence, Robinson Crusoe may have the illusion that he is still rich because he owns government bonds, paper money, or the bonds issued by a nationalized or subsidized company. In a similar way, people feel rich today because they own savings accounts, government bonds, mutual funds, or a life insurance policy (with the banks, the funds, and the life insurance companies being heavily invested in government bonds). However, the wealth destruction (the sinking of the boat) cannot be undone. At the end of the day, Robinson cannot eat the bonds, paper, or other entitlements he owns. There is simply no real wealth backing them. No one is actually catching fish, so there will simply not be enough fishes to feed both Robinson and Friday.
 
Something similar is true today. Many people believe they own real wealth that does not exist. Their capital has been squandered by government malinvestments directly and indirectly. Governments have spent resources in welfare programs and have issued promises for public pension schemes; they have bailed out companies by creating artificial markets, through subsidies or capital injections. Government debt has exploded.
 
Many people believe the paper wealth they own in the form of government bonds, investment funds, insurance policies, bank deposits, and entitlements will provide them with nice sunset years. However, at retirement they will only be able to consume what is produced by the real economy. But the economy’s real production capacity has been severely distorted and reduced by government intervention. The paper wealth is backed to a great extent by hot air. The ongoing transfer of bad debts onto the balance sheets of governments and central banks cannot undo the destruction of wealth. Savers and pensioners will at some point find out that the real value of their wealth is much less than they expected. In which way, exactly, the illusion will be destroyed remains to be seen.
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Nov 28

Factory Workers of the World, Compete!

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China’s sweatshops were never that. Now they’re competing on quality still further…
 

GREETINGS from Shenzhen, China, writes Steve Sjuggerud in his Daily Wealth.
 
If you’re an American, I have some big news for you…
 
China is no longer the source for cheap labor in the world.
 
The brutal reality is, China simply can’t compete on price going forward.
 
For most Americans, that news will come as a shock. So let me explain. First, a little background…
 
I first visited Shenzhen in 1996. At the time, the American view was that China was full of sweatshops…where Chinese workers earned just $50 a month, working in terrible conditions at unsafe factories.
 
But once I saw things for myself in China, I learned that the reality was much different.
 
The first company I visited in 1996 in Shenzhen was Konka Electronics. I was amazed.
 
Most of the workers at Konka had actually traveled hundreds or even thousands of miles to take that job. And at the end of the month, they sent most of their paycheck back home. They didn’t have many expenses, since food and accommodations were included in their pay.
 
Even better, Konka’s factory was so clean, you could have eaten off the floors. Konka’s operation was modern, and working conditions seemed excellent – a far cry from the American image of “sweatshops”.
 
At Konka, factory workers earned about $100 a month. Of course, $100 a month sounds terrible by US standards. But the reality was, in 1996, $100 a month was a lot more than the $2 or $3 a month they could have earned back home on the farm. It was worth it to travel to Shenzhen to work for Konka.
 
Fast-forward to today…and my, how things have changed in Shenzhen!
 
The pay for factory workers has soared. (More on that in a minute.) And the city’s population has exploded, from 1 million in 1990 to over 10 million today.
 
I thought that huge population explosion would mean chaos – a city bursting at the seams.
 
The reality is much different. Here’s Shenzhen…through my car window…in 2013:
 
 
Somehow, they pulled it off. It seems the Chinese managed the growth of Shenzhen pretty darn well.
 
The highways are nicer than at home. The skyscrapers are nicer than at home (and they go on for miles and miles). Heck, even the country clubs are nicer than at home!
 
We ate lunch at the Mission Hills country club. Check it out:
 
 
I can tell you, the Chinese have studied the best of what the Americans have done – and they have copied it well (with Chinese characteristics, of course). I urge you to check out Mission Hills for yourself.
 
My host on this trip was Peter Churchouse of the Asia Hard Assets Report. Peter has lived in Hong Kong for the last 35 years and is one of the top investment guys in Hong Kong.
 
Peter arranged for us to visit a clothing factory in Shenzhen. My expectations were already high. But I was shocked by the quality of the factory and the quality of the products…
“We HAVE to compete on quality,” the factory manager explained. “We have no choice.”
What did he mean? He went on to say…
“I can’t compete with Bangladesh. We pay our factory workers $600 a month. In Bangladesh, the pay is closer to $60 a month. How can we compete on price with that?
 
“We only produce high-end clothing brands here, and we have close working partnerships with them.”
We saw the brands he produced at his factory…and they were MOST of the high-end men’s clothing brands in America. (Yes, MOST of them.) I asked if we could take pictures. He said we could take pictures of anything, but he asked us to leave out the labels.
 
So here’s a look inside his Chinese factory today for you. This picture shows the final assembly of one type of shirt…The guy on the left irons the shirt, the girl on the right folds it:
 
 
It isn’t glamorous work. But working conditions looked pretty good – way better than working in America washing dishes at a restaurant, for example.
 
Employees seemed pretty happy. They were chatty and smiling on their way to lunch. In general, they behaved like clean-cut Americans in their early twenties. (The manager told us the average employee age is about 25.)
 
Looking ahead, the factory manager explained to us that China has no chance at competing on cost in the future…
 
Bangladesh and Vietnam have China beaten on price, he explained, and Africa could become a low-cost producer in maybe 20 years. The issue in those places, he explained, will be human rights. They are poor countries.
 
Shenzhen, China on the other hand, is just as modern as any city in America. Don’t get me wrong. I wouldn’t want to live here. I love where I live in Florida. But I’d be a blind fool not to admit what I saw with my own eyes…
 
Look, China is way more advanced than you think…Americans don’t know this, and they are underinvested.
 
In my newsletters, we are heavily invested in China and emerging markets. Based on this trip so far, I am extremely happy with those positions.
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Nov 28

T-Minus 4 Months for Stocks

Gold Price Comments Off on T-Minus 4 Months for Stocks
Inflation-on-demand looks likely yet again as US stocks near the end of this 5-year run…
 

LATELY we have been working a theme about the mania going on in US stocks, writes Gary Tanashian in his Notes from the Rabbit Hole.
 
Some valuations are not overly manic but policy sure is. The mania is also going on in the mirror (a fun house mirror at that) of the ugly precious metals sector.
 
We are in a time of utter reverence for great and powerful Oz-like people doing not so great things to the rates of interest that would be paid to savers and prudent people (Zero Interest Rate Policy or ZIRP), and doing wonderful things for leverage (substance) users, speculators and asset owners (MBS and long-term T bond buying).
 
It’s a bail out of the type of people who put the financialized economy at risk in the first place and a bail in of those that cannot afford to take risks and gamble as the Fed seems to so desperately want the masses to do. How are they bailed in you ask? By continuing to follow the prudent conventions of the last century into a new era of ‘Inflation onDemand’, which was instigated by the Greenspan Fed and has been carried to new extremes under the Bernanke Fed after Greenspan’s mess unwound in 2007-2008.
 
Slowly but surly things are coming around to policy makers’ wishes. Grandma may still be holding out with her shrinking passbook at the local bank, but more and more regular people are joining the bull party going on in stocks. It is a ‘new secular bull market’ after all! Best of all, ‘it just started this year and there’s plenty of time for it to run’ thinks a newly bullish public. As of the Fiscal Cliff drama 1 year ago, the public was firmly bearish and convinced that ‘the bear market’ and ‘the great recession’ from 2008 had not yet ended. 3.5+ years into the bull cycle, no less.
 
Look at the beautiful chart below with its monthly MACD ripening and its RSI doing something that has only resulted in market crashes on the last 4 occurrences, including the crash of ’87. Hopeful bulls will proclaim how long the RSI remained over bought while the stock market rose unabated from 1995 to 1998. Yes, you are right sir. But that was the mania stage of a secular bull market born by the way, of relatively sound monetary policy. This one is a cycle, just as the one that blew out in 2007 was a cycle.
 
 
T-minus 4 months…? Come March 2013, the cyclical bull market in US stocks (a series of higher highs and higher lows, uninterrupted since March 2009) will be 5 years old. The manic phase of the secular bull that ended in 2000 lasted roughly 5 years. The inflation-fueled and cyclical bull market instigated by the commercial credit bubble that ended in 2007 lasted roughly 5 years.
 
Now the current specimen rises ever higher carrying new sponsorship that basically sat out what it thought was a bear market from 2009 through 2012. They have bought the ‘new secular bull’ promotion hook, line and sinker. How do you think this is going to end, eh Bueller? Well, probably with a blow off as manias tend to do.
 
Blow offs never end well. Ship of Fools, thy name is the US stock market. Yet for now, the ship sails happily through calm waters.
 
In the mirror we have the mess that is the HUI Gold Bugs index. The inflation mania that ended in spring of 2011 loaded the precious metals boat. The boat got heavier with refugees from the acute phase of the Euro crisis and then HUI got technical warnings 1, 2 & 3 with the critical warning being a loss of 460 (2) as silver built up a huge commercial short position in its Commitments of Traders data, and a final warning being a loss of the neckline (3) to a massive topping pattern.
 
 
Technical damage has been done on all but the biggest pictures as we watch for secular bull market down leg 4 to be put in. The trend line break (shaded yellow) is probably freaking people out right now. We have been allowing for that ugly event for many weeks now as we cover multiple bottoming scenarios that are in play. Trend lines are less important than bull market ‘higher lows’, which in this case can come anywhere above 150.
 
A complicating matter is the measurement of the big topping pattern, which is roughly to 100. Could that level be reached in a final puke fest and clean out of gold bugs? Yes, and it could be epic. But the index is a candidate to bottom any time now and shorter term management will help tell that story. The monthly chart above is just a big picture for perspective.
 
So it is getting near time to think about selling the cyclical US stock bull and buying quality situations in the counter cyclical gold stock sector because there is this quaint old notion in the financial markets; buy low and sell high and because we have a clock ticking on the S&P 500, the economy and most importantly, the policy making that has propped them.
 
Everyone now loves the US stock market bull and utterly detests the ugly image of the gold stocks in the fun house mirror as the public has finally decided to run with the aging US stock bull and the final holdouts are throwing in the towel in the precious metals. Wall Street is running another errr, operation, with the Fed behind it with supporting policy. Within the next half a year I’d expect a long anticipated macro pivot to be engaged and a counter cyclical phase to begin taking shape.
 
For now I am personally both long and short certain US stocks but managing the arduous process of a coming pivot, where the idea will be to lock and load positions and then sit into the next cycle. NFTRH will be managing this process every step of the way as it has done since inception in September of 2008. If you are so inclined, check out this service that never predicts, but always keeps the analysis in alignment with macro themes.
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Nov 28

Junior Gold Miners’ Mistake

Gold Price Comments Off on Junior Gold Miners’ Mistake
Analyst Eric Coffin says the junior gold strategy of the last decade was a big error…
 

ERIC COFFIN is editor of the Hard Rock Analyst family of publications. Coffin has a degree in corporate and investment finance and has extensive experience in merger and acquisitions and small-company financing and promotion.
 
For many years, Coffin tracked the financial performance and funding of all exchange-listed Canadian mining companies and has helped with the formation of several successful exploration ventures. Coffin was one of the first analysts to point out the disastrous effects of gold hedging and gold loan-capital financing in 1997. He also predicted the start of the current secular bull market in commodities based on the movement of the US Dollar in 2001 and the acceleration of growth in Asia and India.
 
Now he says that, as the gold price rose upward over the last decade, junior miners chased ounces at all costs. This was a huge mistake, says Coffin, because it resulted in unexciting projects, low margins and a depressed market. Whereas, he explains here to The Gold Report, the essence of the junior gold miner should be new discoveries with high margins…
 
The Gold Report: Federal Reserve of Dallas President Richard Fisher gave a speech in Australia declaring that quantitative easing (QE) must end or it would “fuel the kind of reckless market behavior that started the global financial crisis.” If the Fed isn’t going to end QE until employment improves, how will this end?
 
Eric Coffin: Fisher gets to voice his opinion at Federal Open Market Committee (FOMC) meetings, but he won’t be a voting member until January. He hasn’t been comfortable with QE from the start and has said so repeatedly. There isn’t any news in that quote.
 
I don’t think you’ll see much change when the FOMC gets four different members next year. Janet Yellen, who will become chairman, is more dovish than Ben Bernanke. I think she was the right choice, not because she loves creating money from nothing but because she’s probably been the most accurate forecaster of the bunch.
 
TGR: What about the bubble that Fisher fears?
 
Eric Coffin: If you want to be cynical, you can make the argument that a bubble is exactly what the Fed has been trying to create. It wanted to get equity markets to go up because that increases wealth and raises consumer confidence. About half of the Fed’s QE program is buying mortgage bonds. It is trying to keep mortgage rates down and resuscitate the housing sector.
 
Fisher is right in a sense, but I don’t think we’re at the point where I’d be terribly concerned about things running out of control. I have to admit, though, that based on the growth of the economy, the US equity markets are probably getting a little bit ahead of themselves. Most consumer inflation measures have been trending down, not up. Personally, I’m more worried about deflation, which is far harder for a central bank to fight than inflation.
 
TGR: The Q3/13 gross domestic product (GDP) report shows 2.8% growth.
 
Eric Coffin: Right now, I’m kind of neutral on the economy. The data quality is going to be crappy for a month or two because of the government shutdown. The economy grew 2.8% because there was big growth in inventories, which is not the reason you want. Without that it came in at 2%, which was the expected number. You’re probably going to see production cut a little bit this quarter because more stuff was made than could be sold.
 
TGR: Karl Denninger pointed out that the gross change in GDP from Q2/13 to Q3/13 was $196.6 billion, but the Fed’s QE program injected $255bn. So the economy actually shrank during Q3/13.
 
Eric Coffin: I think he’s oversimplifying a little bit. QE is really swapping paper, creating money out of thin air and using that to buy bonds that inject money into the economy. But the velocity of money has been very low since the crash. It’s not as if the banks are taking that $85bn per month and lending it all. That’s where the real multiplier effect is. Right now a lot of the money created through QE has ended up in bank’s excess reserves, not in the wider economy. Karl is a bit of a permabear, but I would agree with him that it wasn’t that great a report.
 
TGR: Let’s assume that QE continues at its present rate until June 2014. How will that affect gold and silver?
 
Eric Coffin: When the Fed starts tapering, we have to assume gold and silver prices will get hit. Of course, if it doesn’t actually start tapering until well into next year, we could see gold and silver go up for two or three months before that. That doesn’t preclude later increases in the gold price based on physical demand, but the short term traders are completely fixated on QE (or lack thereof) and will be sellers once the taper starts, and the market will have to get past that before recovering.
 
TGR: What if it becomes clear we are going to get QE forever?
 
Eric Coffin: Then I think gold goes to $2000 per ounce.
 
TGR: At the Subscriber Investment Summit in Vancouver last month, you compared the 10-year chart for gold prices, rising to 2011 and holding above 2010 levels today, to the 10-year chart for junior resources. The first chart looks good, but this second chart of junior gold miner stock prices looks terrible. Why?
 
 
Eric Coffin: For all the money thrown at exploration – and, of course, that number has been tumbling dramatically for the past two years – not many good discoveries resulted, especially in the last couple years. That’s one reason. The chart below shows the amount of gold discovered each year since 1990, counting only new gold discoveries above 2 million ounces. You can see how few discoveries there have been in the past couple years. Compared to the 1990s the numbers are tiny.
 
 
The other reason is that when the gold price was rising continuously many companies were looking for what I referred to in Vancouver as “crappy ounces”. Their intentions were good. They weren’t trying to hoodwink anybody. They made the reasonable assumption that with gold going up and up, economic cutoff grades would keep dropping. But you can’t produce gold at ever-lower grades with difficult metallurgy and infrastructure and make more money. 
 
As it turned out, costs rose almost in lockstep with the gold price. A lot of the ounces that were marginal at $500 or $700 or $900 per ounce haven’t been salvaged by the gold price going to $1300 per ounce. Many of those resources are still uneconomic and would require more capital expenditures with longer payback periods than larger producers are willing to accept.
 
TGR: You said that junior gold miners have a major credibility issue, specifically, that preliminary economic assessments (PEAs) and feasibility studies do not match production realities.
 
Eric Coffin: There are a couple reasons for that. I’ve already mentioned costs. And when the gold mining sector recovered after 2000, there was a real capacity issue. There weren’t enough geologists or engineers. There weren’t even enough people who make truck tires.
 
Many NI 43-101s, PEAs and feasibility studies have been written by people who lacked experience. To be fair to the engineering companies, miners can have cost overruns of 20% and still be within the stated margin of error, but people never read the fine print. They just look at the production cost, so when it comes in $100-200 per ounce higher, everybody freaks out.
 
TGR: Juniors chased lousy projects because gold was soaring, and money flooded into the market. Now that gold has fallen 30%, will this engender the return of old-fashioned values?
 
Eric Coffin: I think it already has. The large mining companies, having spent huge amounts of money on capital expenses (capexes) that didn’t add to their bottom line, are now saying, “Show me margin.” Large and medium companies will now pick up deposits smaller than what they would have touched 10 years ago because they have the grades, the geometry and the metallurgy to enable low-cost production.
 
TGR: So is margin now more important than grade?
 
Eric Coffin: Grade is king, but margin is the key. Majors are focused on margin per ounce produced. You can get high margins with a lower-grade deposit if everything goes right but, by and large, the higher grade the better the margin should be. It comes down to net present value (NPV) and internal rate of return (IRR).
 
Companies now want gold projects that can be built for $100-150 million, with NPVs of $300m or $400m and all-in cash costs of $600-800 per ounce – assuming they’re big enough. They don’t want to go too small because they can spread themselves only so thin. I don’t see majors picking up 50,000-ounce-per-year deposits, but we might see them picking up 100-150,000 per year projects, when a few years ago few majors would look at a deposit unless it was capable of generating 250,000 ounces per year or more.
 
In Sonora, Mexico, half a dozen mines that began production in the last five years don’t have grade. They’re 0.8, 0.7 or 0.6 grams per ton, but they have fantastic combinations of logistics, costs, workforces, metallurgy and geometry, and they produce at $500-700 per ounce cash costs.
 
TGR: Why are new discoveries so important to the junior sector?
 
Eric Coffin: That’s what the juniors exist for. The market wants something new, with blue-sky potential. The companies with really big runs in the last year or two are, almost without exception, companies that made discoveries. They don’t always work out, but that’s the risk you take.
 
If you go back to the pretty spectacular bull market in the mid-1990s, it was driven by companies going international for the first time in a long time, juniors going to South America and Africa and finding 3, 5 and 10 million-ounce deposits. Gold prices rose in the mid-1990s, but discoveries drove the bull market.
 
TGR: Eric, thank you for your time and your insights.
 
Eric Coffin: You’re welcome. I have a new report available for your readers that is free to download – it is actually an interview with one of the companies I’m tracking, which I think is a very worthwhile read. We also have a special subscription offer included in this report.
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Nov 27

Mines Management Reports Q3 2013 Results

Gold Price Comments Off on Mines Management Reports Q3 2013 Results

Mines Management Inc. (TSX:MGT,NYSE:MGN) released its financial and operating results for the third quarter, which ended on September 30th, 2013. The Final Environmental Impact Statement is advancing, and the 404 Permit to be issued by the U.S. Army Corps of Engineers advanced with a detailed mitigation plan sent to the U.S. Environmental Protection Agency “EPA”, USFS, and Montana Dept. of Environmental Quality for review. The Biological Consultation between the U.S. Fish and Wildlife Service and the U.S. Forest Service also continued during the third quarter, which resulted in the completion of an internal working draft of the Biological Opinion for aquatics and terrestrial species.

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