Oct 30

State of Emergency Declared as Protests Erupt in Burkina Faso

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Burkina Faso’s president has declared a state of emergency and dissolved the government in the country in the face of violent protests demanding his resignation. As the country is Africa’s fourth-largest gold producer, miners with gold projects in the region are no doubt watching the news unfold.

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Oct 23

US Oil & Global Gold

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US oil stocks have soared as shale pushes crude prices down. But gold…?
 

The UNITED STATES is doing better than it has in years, writes Frank Holmes on his Frank Talk blog at US Global Investors.
 
Jobs growth is up, unemployment is down, our manufacturing sector carries the rest of the world on its shoulders like a wounded soldier and the World Economic Forum named the US the third-most competitive nation, our highest ranking since before the recession.
 
As heretical as it sounds, there’s a downside to America’s success, and that’s a stronger Dollar. Although our currency has softened recently, it has put pressure on two commodities that we consider our lifeblood at US Global Investors: gold and oil.
 
It’s worth noting that we’ve been here before. In October 2011, a similar correction occurred in energy, commodities and resources stocks based on European and Chinese growth fears. 
 
But international economic stimulus measures helped raise market confidence, and many of the companies we now own within these sectors benefited. Between October 2011 and January 2012, Anadarko Petroleum rose 58%; Canadian Natural Resources, 20%; Devon Energy, 15%; Cimarex Energy, 15%; Peyto Exploration & Development, 15%; and Suncor Energy, 10%.
 
Granted, we face new challenges this year that have caused market jitters – Ebola and ISIS, just to name a couple. But we’re confident that once the Dollar begins to revert back to the mean, a rally in energy and resources stocks might soon follow. Brian Hicks, portfolio manager of our Global Resources Fund (PSPFX), notes that he’s been nibbling on cheap stocks ahead of a potential rally, one that, he hopes, mimics what we saw in late 2011 and early 2012.
 
A repeat of last year’s abnormally frigid winter, though unpleasant, might help heat up some of the sectors and companies that have underperformed lately.
 
On the left side of the chart below, you can see 45 years’ worth of data that show fairly subdued fluctuations in gold prices in relation to the Dollar. On the right side, by contrast, you can see that the strong Dollar pushed bullion prices down 6% in September, historically gold’s strongest month. This move is unusual also because gold has had a monthly standard deviation of ±5.5% based on the last 10 years’ worth of data.
 
 
Here’s another way of looking at it. On October 3, bullion fell below $1200 to prices we haven’t seen since 2010, but they quickly rebounded to the $1240 range as the Dollar index receded from its peak the same day.
 
 
There’s no need to worry just yet. This isn’t 2013, when the metal gave back 28%. And despite the correction, would it surprise you to learn that gold has actually outperformed several of the major stock indices this year?
 
 
As for gold stocks, there’s no denying the facts: With few exceptions, they’ve been taken to the woodshed. September was demonstrably cruel. Based on the last five years’ worth of data, the NYSE Arca Gold BUGS Index has had a monthly standard deviation of ±9.4, but last month it plunged 20%. We haven’t seen such a one-month dip since April 2013. This volatility exemplifies why we always advocate for no more than a 10% combined allocation to gold and gold stocks in investor portfolios.
 
Oil’s slump is a little more complicated to explain.
 
Since the end of World War II, black gold has been priced in US greenbacks. This means that when our currency fluctuates as dramatically as it has recently, it affects every other nation’s consumption of crude. Oil, then, has become much more expensive lately for the slowing European and Asian markets. Weaker purchasing power equals less overseas oil demand equals even lower prices.
 
What some people are calling the American energy renaissance has also led to lower oil prices. Spurred by more efficient extraction techniques such as fracking, the US has been producing over 8.5 million barrels a day, the highest domestic production level since 1986. 
 
We’re awash in the stuff, with supply outpacing demand. Whereas the rest of the world has flat-lined in terms of oil production, the US has zoomed to 30-year highs.
In a way, American shale oil has become a victim of its own success.
 
 
At the end of next month, members of the Organization of the Petroleum Exporting Countries (OPEC) are scheduled to meet in Vienna. As Brian speculated during our most recent webcast, it would be surprising if we didn’t see another production cut. With Brent oil for November delivery at $83 a barrel – a four-year low – many oil-rich countries, including Iran, Iraq and Venezuela and Saudi Arabia, will have a hard time balancing their books. Venezuela, in fact, has been clamoring for an emergency meeting ahead of November to make a plea for production cuts. 
 
 
Although not an OPEC member, Russia, once the world’s largest producer of crude, is being squeezed by plunging oil prices on the left, international sanctions on the right. This might prompt President Vladimir Putin to scale back the country’s presence in Ukraine and delay a multibillion-Dollar revamp of its armed forces. When the upgrade was approved in 2011, GDP growth was expected to hold at 6%. But now as a result of the sanctions and dropping oil prices, Russia faces a dismally flat 0.5%.
 
The current all-in sustaining cost to produce one ounce of gold is hovering between $1000 and $1200. With the price of bullion where it is, many miners can barely break even. Production has been down 10% because it’s become costlier to excavate. As I recently told Kitco News’ Daniela Cambone, we will probably start seeing supply shrinkage in North and South America and Africa.
 
The same could happen to oil production. Extraction of shale oil here in the US costs companies between $50 and $100 a barrel, with producers able to break even at around $80 to $85. If prices slide even further, drillers might be forced to trim their capital budgets or even shelve new projects.
 
Michael Levi of the Council on Foreign Relations told NPR’s Audie Cornish that a decrease in drilling could hurt certain commodities:
“[I]f prices fall far enough for long enough, you’ll see a pullback in drilling. And shale drilling uses a lot of manufactured goods – 20% of what people spend on a well is steel, 10% is cement, so less drilling means less manufacturing in those sectors.”
At the same time, Levi places oil prices in a long-term context, reminding listeners that we’ve become accustomed to unusually high prices for the last three years.
“People were starting to believe that this was permanent, and they were wrong,” he said. “So the big news is that volatility is back.”
On this note, be sure to visit our interactive and perennially popular Periodic Table of Commodities, which you can modify to view gold and oil’s performance going back ten years.
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Oct 10

Soft Money Paradigm Breaking

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Disaster. Catastrophe. Go on – admit it holds a certain appeal…
 

IT MIGHT seem that today we are deeply devoted to the Mercantilist paradigm in monetary affairs, writes Nathan Lewis at New World Economics.
 
That is the notion of a floating fiat currency managed by a panel of bureaucrats, to address an ever-changing menu of issues including unemployment, exchange rates, financial markets, government funding, and the interests of one group or another.
 
Some people call this the Soft Money paradigm, characterized by the “Rule of Man”.
 
But, I think it is important that quite a few governments have actually abandoned this paradigm. They do not attempt to manage their economies by jiggering their currencies.
 
Rather, they adopt a simple fixed-value system: the value of the currency shall be X. There is no domestic discretionary element. This is the Classical paradigm, the Hard Money paradigm, in which the “Rule of Law” is primary.
 
But what is “X”? In the past, it was gold. A “gold standard system” is a system in which gold is the “standard of value,” ie, “X”.
 
A “Dollar” was once worth 23.2 troy grains of gold. Today, lots of countries have the same sort of arrangement, but they use the Euro as “X” instead of gold. This includes the eighteen members of the Eurozone, all of which have given up any avenue of domestic money-jiggering.
 
It is true that the Euro itself is a floating fiat currency, and that the ECB does take into consideration the concerns of Eurozone member states during its funny-money decision-making process. However, we also know that the ECB doesn’t really take orders from any one state, not even Germany, which is a little miffed at the central bank’s latest money-printing scheme.
 
We also know that there are many Mercantilist economists who declare loudly that any state that gets itself into trouble should have its own independent currency, which can supposedly be jiggered by its own independent board of incompetents to make all the boo-boos better, really we promise.
 
Thus, I would argue that the Euro is basically serving as an external monetary benchmark for these states, much as gold did in the past.
 
In addition, there are another ten small states and territories that use the Euro but are not officially part of the Eurozone. Also, there are twenty-eight countries, mostly in Africa, that have some sort of Euro link, mostly via a currency board system.
 
In total, there are fifty-five states and territories that have a Classical fixed-value system based on the Euro. The only difference between these “Euro standard systems” and a “gold standard system” is the choice of the “standard of value.”
 
The Classical ideal in money is very common today. But why use the Euro as a “standard of value” instead of gold?
 
The most basic reason is stability of exchange rates, or what I call the “terms of trade.” The smaller countries of Europe have always had a high degree of trade with each other. This does not only include imports and exports, but also financing and investment. Whatever the potential benefits of using gold as the “standard of value,” the fact is that to do so would introduce a lot of chaos into exchange rates with other Euro-using states, and other countries as well, which would be completely intolerable to businesspeople.
 
One of the primary attractions of a Classical fixed-value arrangement, rather than an independent floating fiat currency, is to gain all the advantages of stable trade relationships. That’s why Europe gave up their independent currencies and created the Euro in the first place.
 
This problem did not exist in the past. Before 1971, the major international currencies, and most minor currencies, were fixed to gold. Thus, a country that adopted gold as a “standard of value,” or “X” in a fixed-value system – the role the Euro plays today – would also have stable exchange rates with most major trading partners. There was no conflict.
 
At some point, the Euro may be so debauched as to render it completely unacceptable as a benchmark of value in a Classical fixed-value system. At that point, a government might either adopt another major international currency as its monetary “standard of value,” or it might use gold.
 
If the Euro reaches such a state – ECB chief Mario Draghi recently said he intends to make another trillion Euros appear out of thin air, I kid you not – then other major currencies would also likely be close behind, except for the Japanese Yen, which would be far ahead.
 
Thus, other major currencies would not likely satisfy those fifty-five former Euro enthusiasts either.
 
Then they might turn to gold – which actually has a rather lovely track record, and which actually was the monetary benchmark for most of those countries for a very long time already.
 
But when might that happen? History suggests that such a changeover does not happen until the former benchmark currency has been abused beyond all hope of renewal.
 
Disaster. Catastrophe. I admit it holds a certain appeal.
 
However, there is an alternative: to introduce gold-based currencies today, but to make them optional instead of mandatory. Thus, the present Euro-based and other fiat currencies would continue, but there would also be a gold-based alternative.
 
At first, this gold-based alternative might not be very popular. It would have a lot of exchange-rate volatility with the fiat Euro, Dollar, Yen and pound. Let’s be a bit Germanic and call it the goldmark, and give it the traditional value of 2790 goldmarks per kilogram of gold.
 
As today’s fiat currencies gradually lost their viability, people might decide, incrementally, that they want to keep at least part of their savings in terms of goldmarks, not Euros or Dollars. Borrowers find that they cannot issue debt or borrow money unless denominated in goldmarks; suppliers want to be paid in goldmarks; workers demand wages in goldmarks; and producers demand goldmarks in payment for their goods and services.
 
As more and more people use goldmarks (and other similar currencies that emerge), for their own personal interests, they find that they can also engage in trade with all the other people that use goldmarks, without the issue of unstable exchange rates. Thus, the issue of chaotic trade relationships gradually melts away.
 
But what if everything is fine? What if there is no disaster? People can still use goldmarks as they see fit – perhaps as an investment product much like the gold ETFs popular worldwide – but perhaps they would continue to use fiat Euros for most commercial situations. It works both ways. There is no downside.
 
The only problem, it seems, is that people are not aware that such a thing is possible, and in fact rather easy to do. Also, they don’t know how to do it. But, these are minor issues, really.
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Sep 03

Ponzi Population Dynamics

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Social security schemes can’t work if population is shrinking…
 

PERHAPS one of the silliest myths around today, in my opinion, is the notion that a shrinking overall population naturally causes or leads to economic decline, writes Nathan Lewis at New World Economics.
 
This is gradually becoming more immediately relevant, as the fertility rate is below replacement on every continent except for Africa today.
 
It’s true that a larger population will have a higher total GDP, simply because you are counting more people. However, you can have a large population with a relatively low per-capita GDP (all of Africa, 1.1 billion), or a small population with a high per-capita GDP (New Zealand, 4.5 million). So, obviously, just piling people together doesn’t create wealth and personal abundance.
 
As most any economist should know, per-capita incomes – what we usually mean by “wealth” – are largely a factor of productivity. Of course this includes the productivity of the employed, but it also includes productivity within the household or in other nonmonetary realms – the real-life economy, not the “economy” of statistical abstraction.
 
Let’s take, for example, Japan. The country has had a lowish fertility rate (1.42 births per woman) for some time, although not all that much lower than Thailand (1.50) or Germany (1.43), and higher than Poland (1.33) and Hong Kong (1.17). However, someone has to be first in these matters, and it just happens to be Japan.
 
The population of Japan is estimated to have peaked in 2008 at 128,083,960 people, and was estimated for 2014 at 127,220,000. So, it declined an estimated 0.7% total over six years.
 
The total population is projected to fall to 95.2 million in 2050. Which is still a lot of people for a smallish island, without much flat land. It is roughly the population of 1960. New Zealand is actually only 29% smaller than Japan by land area, and almost the same size if you omit Japan’s sparsely-populated Hokkaido island. If New Zealanders can be reasonably prosperous on about the same size island with 4.5 million people, why can’t Japanese be prosperous with “only” 95 million people? Or 50 million, or ten million?
 
The picture gets a little more interesting when looking at the working-age population (15-64). It peaked at an estimated 86,908,333.3 in 1995 (sorry if I chuckle at estimates that go down to the partial-human), and had declined to an estimated 79,144,166.7 in March 2013. This is a total decline of 9% over eighteen years, or 0.53% per annum. The present rate of decline is about 1% per year in working-age population.
 
This is not a particularly fast rate of change. Why can’t those working-age people be productive and prosperous, and perhaps become more productive and prosperous? A 2-3% annual increase in real productivity is common in economic history, and in the best of times it can reach 5% or more. In other words, the variance between “high growth” and “stagnation” in the productivity of the working-age population is far more important than these modest trends in population.
 
At the same time, the population over 65 has been growing, as a percentage of total population. In 1989, 11.6% of the population was over 65; in 2006 it was 20%; and in 2055, it was estimated to climb to 38%. Unlike most wildly-incorrect economic projections, these demographic projections are likely to be fairly accurate.
 
This is a real issue, and a rather novel one. Care of elderly has been a part of human society from prehistory. However, most people died before 65, so there were never so many elderly.
 
But, I see no reason here why those who are in their productive years, 15-64, can’t be as productive as they are today, or more so. The fruits of production (in practical terms, income) will be used for whatever the highest-priority goal is, and care of elderly will probably rank high on that list.
 
We have two basic conclusions thus far: first, that working-age people can continue to be productive, or become more productive, no matter what the overall demographic trends are; and second, that there is a real demographic shift here which is somewhat new in all of human history. This will involve some challenges and changes, but the pace is actually rather slow, and an excellent solution can be found.
 
The main problems are, in my view, related to existing government policies and programs, which are based, overtly or implicitly, on expanding population. Basically, they are Ponzi schemes, which need to grow or die. This includes public pensions (“Social Security” in the U.S.), existing healthcare programs, and patterns of government debt and deficits. Many of these were conceived in the late 19th century, and expanded during the mid-20th century. They may have been appropriate for 1960 or 1970, but are not appropriate today.
 
For example, a pattern of continuous government deficits and growing total debt can be sustained for some time if nominal GDP is also growing quickly. The “debt dynamics” allow debt/GDP ratios to maintain some semblance of sustainability, at least until a politician’s term of office is ended. Alas, this continuous-growth Ponzi doesn’t work well in an environment of population shrinkage.
 
Today’s calls for increased immigration and so forth are, I find, mostly motivated by the urge to keep the Ponzi running and thus maintain the status quo. The solution is rather to establish an arrangement that is appropriate for demographic realities. Japan’s deficit and debt problems will be resolved either via currency depreciation or formal default. But, this is just a shuffling of paper. Who cares. In 1949, Japan’s government made it illegal to run a deficit or issue government bonds; this lasted until 1965. At that time, the existing debt had already been eliminated by postwar hyperinflation.
 
The Japanese government thus had no debt and no deficits. Perhaps such a time will come again. Perhaps it would be a very prosperous time, as the 1950s and 1960s were for Japan. Perhaps the working-age population would become more and more productive, and thus enjoy higher and higher real incomes, even though there happens to be slightly fewer of them each year.
 
Public pensions and healthcare are another system that worked fine in 1970, but aren’t working today. The total cost of both programs, plus other welfare-related programs, was 5.77% of National Income (similar to GDP) in 1970; in 2012 it was 31.34%. Obviously, the programs which worked fine in 1970 aren’t working today.
 
This just means you need some new solutions. Japan will eventually have new health and welfare-related arrangements of some sort. We know this because the existing ones will obviously perish at some point.
 
Unfortunately, the attempt to maintain these existing, inappropriate arrangements itself is leading to the impoverishment of working-age people, whose productivity is indeed the “economy” itself.
 
For example, taxes have been rising continuously. The recent increase in consumption taxes (national sales taxes) has gotten a lot of attention. However, one of the biggest taxes in Japan is what we would call a payroll tax on income. It was apparently 14.42% for companies in 2013, and 13.94% for individuals, for a total of 28.36%. And, there is no upper limit on income.
 
I don’t have good data on historical payroll tax rates in Japan, but as a percentage of National Income, the revenue from the tax was 5.4% in 1970, 13.6% in 2000, and 17.1% in 2012. The consumption tax did not exist in 1988; in 1989, it was introduced at 3%. It is scheduled to rise to 10% in 2015.
 
The secret to making people prosperous is what I call the Magic Formula. It is: Low Taxes, Stable Money. This is actually what Japan did in the 1950s and 1960s, as I documented in my book Gold: the Once and Future Money. The government is doing the opposite today, and getting the opposite result. This has nothing to do with demographics, but is the simple cause-and-effect of government policy.
 
If Japan is going to have another period of prosperity, with a graying population, the eventual solution will be the same: to make working-age people as productive as possible.
 
This means the Magic Formula, combined with other government policies that address the realities of our time, rather than relics of the past that should be abandoned before they cause any more problems.
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Jul 17

Deflation Theory & Fact

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When the financial crisis MkII shows up, expect 1930s-style deflation…
 

SOFT inflation numbers. Australian interest rates are at a fifty year low. Possibly going lower. This is not how the script was meant to go, writes Vern Gowdie, editor of Gowdie Family Wealth in Dan Denning’s Daily Reckoning Australia.
 
The Australian market will be waiting with bated breath on second quarter CPI numbers. Perversely, a softer number could see the market rise. Lower interest rates makes fully franked dividends look even more attractive.
 
However, a lower number means our economy is stuck in a lower gear and cannot produce enough revs to change to a higher gear. 
 
The sixth anniversary of the Lehman Brothers collapse is fast approaching. And after all the central bankers’ antics since then – suppressed interest rates and trillions of newly minted electronic money – the global economy is still barely treading water.
 
Time after time, nearly every growth forecast from the RBA, the Fed, the ECB, JCB, IMF, etc. is eventually wound back to a lower number. This cycle of optimism followed by realism has become a joke.
 
Here’s the Australian telling…
“Australia’s first quarter inflation surprisingly soft”
CNBC 22 April, 2014
“RBA boss Glenn Stevens hints official interest rates could drop lower than record low of 2.5%”
The Daily Telegraph 4 July, 2014
And the latest rolling joke…
“US GDP expanded at a 0.1% annual rate Q1” – Reuters, 30 April, 2014
“US GDP Dropped 1% In The First Quarter 2014, Down From First Estimate” – Forbes.com, 29 May, 2014
“US GDP Dropped 2.9% In The First Quarter 2014, Down Sharply From Second Estimate” –  Forbes.com, 25 June, 2014
A 3% difference in US GDP first quarter growth in the space of two months. How can you get it so wrong? Leave it to the government.
 
Even in Australia we are constantly revising our expectations on when the economy may gain sufficient traction to warrant an uptick in interest rates.
 
The following graph (courtesy of The Guardian) shows the market’s continual revision on when rates may rise. In February 2014, the expectation was for a rate rise around November 2014. With each passing month, the timeline has been extended. The latest bet is on a May 2015 rate rise. We’ll see.
 
 
My forecast several years ago was for rates to fall well below 2% by the time the GFC had run its full course.
 
The reason for this interest rate prediction was twofold. Debt contraction and demographics (aging boomers) combining to create The Great Credit Contraction – a deflationary scenario not witnessed since The Great Depression.
 
Much like a balloon, the economy inflated when debt was ‘blown in’ and it’ll deflate as the debt ‘escapes out’.
 
The following chart from the Reserve Bank of Australia website shows Australia’s GDP growth rate since 1993.
 
 
From 1993 to 2008 (with the exception of 2000 due to the dotcom bust), GDP growth remained in the 2 to 5+ percentage range. During the latter part of this period, the Howard Government was paying down public debt. Therefore, the growth was being achieved largely by the private sector through debt funded consumption and the escalating mining boom.
 
Since 2008, those driving factors have softened. GDP growth has generally fallen into a lower band of 1.5 to 4%. A good deal of this ‘growth’ was on the back of our former treasurer’s carelessness with the public cheque book. Government expenditure via the Rudd/Gillard/Rudd era of harebrained stimulus schemes – $900 cheques to dead people, school halls, pink batts, etc. – gave a quantitative boost to our economic growth numbers. But not enough to get us back into the higher range of the 1993-2008 period.
 
The prospect of deflation is something most economic commentators dismiss. The common belief is inflation will once again reignite the global economy, and it’ll back to business as usual. In 2002, Ben Bernanke thought he could create inflation by simply ‘dropping money from a helicopter’. The GFC taught Bernanke the difference between theory and reality.
 
In spite of Bernanke’s unprecedented and epic money printing efforts, inflation has not yet reared its head. However, there are those who believe the Fed’s relentless money printing is bound to eventually unleash high inflation, even hyperinflation. In their opinion, we are destined to experience a 1970s style (or even worse, a Weimar Republic) period of double digit inflation.
In my opinion, the high inflation scenario is unlikely. The current period has some distinct differences to the 1970s.
 
For starters, the 1970s experienced two distinct oil shocks from the Middle East – both times sending the oil prices north of US$150 per barrel. The high cost of energy fed into every nook and cranny of the economy. Prices and wages rose in tandem to offset the rising cost of oil.
 
This contrasts sharply with 2014. The US is set to become a net exporter of light crude. The US is no longer beholden to the Middle East for oil supply. The alternative energy sources – wind, solar and nuclear – also make us less dependent on oil.
 
Second, the 1970s was a period of high wage growth (see chart below). The post-WWII manufacturing boom still meant employees and unions held sway over employers who needed workers to man the machines. Rising energy costs provided the platform for wage increase demands.
 
 
The employment scene in 2014 is vastly different. China has suppressed incomes in the manufacturing sector. Technology has driven workplace efficiencies. Union membership is at record lows. The social security safety net – unemployment benefits, disability payment, food stamps – has enabled more people to opt out of work force engagement. This explains why the right hand side of the FRED chart shows post-GFC wages growth tanking. Globalisation means we are competing against the labour costs from emerging and emerged economies of China, India, South Korea, and soon to be, Africa. The prospect of a 1970s style wages outbreak against these very powerful forces is unlikely.
 
Finally, although interest rates were high in the 1970s household balance sheets were still in the debt expansion phase. The following chart shows US household debt expanded threefold during the 1970s, from around $440 billion in 1970 to $1.3 trillion in 1980.
 
 
Since 2008, US household debt accumulation has taken a breather. The likelihood of a 300% expansion in household debt from current levels is remote. After four decades of heaping loan upon loan, there’s debt fatigue out there – even with the lowest interest rates in history.
 
The 1970s has been defined as a period of stagflation (high inflation with moderate growth). We do not appear to have either of these components in today’s economy. And as outlined above, we are unlikely to witness them.
 
When the artificial US share market bubble pops and GFC MkII unleashes its fury, the era it’ll most likely resemble is that of the 1930s. So stay tuned for the latest CPI numbers and listen for more talk of subdued trading conditions making the road back to recovery more difficult than expected.
 
The Great Credit Contraction is an unrelenting force the authorities are struggling to contain and outmaneuver. Nearly every trick in the central bankers playbook has been thrown at this vice like force, yet nothing has permanently altered the low inflation and possible deflationary course we are on.
 
The only inflation out there is in the egos of central bankers and IMF officials who think they can control markets. When the secular bear market wakes from its slumber, it is certain to deflate these as well.
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Jul 03

Gold Conspiracy? Nope, Janet Yellen

Gold Price Comments Off on Gold Conspiracy? Nope, Janet Yellen
Real interest rates drive the gold price. Falling mine reserves help, too…
 

RICK MILLS is the owner and host of Aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 400 websites.
 
Today he says juniors can’t fund their projects, which means that the majors’ reserves will continue to shrink. Rick Mills here tells The Gold Report‘s sister title, The Mining Report, that this process can have but one result: higher metals prices across the board…
 
The Mining Report: Last month, the price of gold rose over 3% in one day. Can we ascribe this to the conflicts in Ukraine and Iraq or the unraveling of Chinese commodity financing deals?
 
Rick Mills: I don’t think those things had anything to do with it. The unraveling of Chinese commodity financing deals was mostly about copper. While the situation in the Middle East is certainly affecting the price of oil, I believe that Federal Reserve chair Janet Yellen has more to do with the price of gold than anything else going on in the world today.
 
TMR: You’re referring to her press conference of June 18?
 
Rick Mills: Yes. She confirmed that the tapering of bond buying will continue, but more important was her announcement that the Fed’s zero interest rate policy will continue. Real interest rates are going to remain low for a while yet; that news caused gold’s price to increase. Below is a chart created by US Global Investors. It shows in stark clarity the relationship between real interest rates and gold’s price.
 
 
TMR: Many goldbugs believe gold and silver prices are manipulated downward by central banks. Do you agree?
 
Rick Mills: No, I don’t. I almost wish it were true. If it were, I could sit back and play the markets knowing exactly what was going to happen next. This claim of manipulation is just an excuse for being constantly wrong. It’s a business model to sell gold off your website and expensive newsletter subscriptions. Learning about sector rotation and macro events will make you a much better investor than clinging to conspiracy theories.
 
TMR: Do you have any thoughts on where the prices of gold and silver will go in the second half of 2014?
 
Rick Mills: Higher sooner rather than later. That goes for copper, nickel, tin, zinc and pretty much any mineral. It’s a question of supply and demand. Junior resource companies own the world’s future deposits. They buy claims from prospectors, work the projects and advance them to where they are bought by larger companies. And these mining juniors cannot get funding. So how will the majors replace their reserves? The answer is that they can’t. It’s just a matter of time before metals prices react to physical shortages. Think about it, when was the last time you heard of a major mining company making a discovery?
 
TMR: You’ve written at length about rising global scarcity of resources. What effects will this have on metals prices?
 
Rick Mills: We live on a planet with a finite resource base with a growing population. We reached 7 billion people in October 2011. The United Nations says we can probably expect upward of 10 billion people by 2050. Other reports claim that world population will reach 11.4 billion by the 2060s. Norman Borlaug, the father of the green revolution, said if we do everything that he has shown us, and there are no black swans, the earth could support 10 billion people at most.
 
Ecological overshoot is coming. Our freshwater aquifers, probably our most important treasure, are being sucked dry by industry and unsustainable drybelt agriculture, and poisoned at the same time through fracking. We’re rushing headlong into shortages of resources and the resulting conflicts over them. The low-hanging mineral fruit has been picked. Metallurgy is becoming more complicated, energy is becoming more expensive, and labor shortages loom. The baby boomers are starting to retire en masse, and the resource-orientated talent pool is thinning out.
 
At the same time, massive urbanization is ongoing in Asia and Africa. As people there move into the cities, they climb the protein ladder and eat more dairy products and chicken and beef. They get cell phones and maybe a washer and dryer, air conditioning and a motorcycle. All this puts an enormous strain on supply. Metals are going to get much scarcer, and prices are going to get very dear.
 
TMR: You’ve also written about the return of economic imperialism. Do you foresee superpowers invading countries to secure resources, or will they apply pressure indirectly?
 
Rick Mills: I like Lenin’s take on the morphing of early 19th-century imperialism that he called monopoly capitalism – an alliance between big business and banking capital that dominates the state to gain exclusive control of raw materials and control of foreign markets. And both direct and indirect pressure are being applied. Russia has applied force directly in the Crimea and is applying it directly and indirectly in Ukraine. Look at what China is doing to the other stakeholders in the China Seas and what the US did in Libya for control of both water and oil. Countries need to access secure sources of minerals, energy and just basic materials. If they don’t, we can expect more Arab Springs, even in developed countries.
 
TMR: When we last spoke, you noted the significantly higher cost of new nickel and copper projects. Where do we stand a year later?
 
Rick Mills: Things have gotten worse. We have not seen the demand destruction that would facilitate a drop in prices, and we’re not going to.
 
Even after the unraveling of Chinese commodity financing deals, copper is still over $3 a pound. If you’re searching for new copper deposits, you must go farther and farther afield into dangerous country.
 
Nickel is the same. Indonesia, one of the biggest suppliers, has decided to stop exporting raw ore. Nickel comes increasingly from laterites, and the metallurgy just doesn’t seem to work on them. As a result, cost overruns are ballooning out of control.
 
TMR: Do you worry that environmentalists could attempt to fence off Greenland as “the world’s last great unspoiled wilderness?”
 
Rick Mills: You should talk to the people of Greenland and ask them what they want. That sort of talk more amuses me than anything else. It’s easy to preach about freezing somebody else’s economic development when you already enjoy a high standard of living. I think most Greenlanders understand that when you have natural resources, you need to exploit them responsibly for the betterment of all.
 
Greenland has one of the world’s best reporting and permitting systems. Work is going ahead.
 
TMR: What effect has the new royalty/tax regime had on miners in Mexico?
 
Rick Mills: The cost of doing business, mining, in Mexico has risen; there’s no doubt about that. So much will depend on what happens to the price of silver.
 
TMR: Which so-called critical or strategic metal is most interesting to you?
 
Rick Mills: Right now, cobalt. I think a lot of attention is being focused on this metal, and rightly so, with Tesla’s “Gigafactory” talk. There’s no cobalt production in the US, and I personally don’t believe there will be any. Investors will have to start looking farther afield. In Russia, for instance.
 
TMR: Junior miners saw a big surge in share prices last winter. Then there was a big fall off. Might we see another surge this year?
 
Rick Mills: We’re not going to stop using metal; we’re not going to suddenly stop valuing gold and silver as precious. Majors do not find the worlds mines, juniors do. Juniors’ share prices have to go up; the sector has to revive for majors to replace mined reserves.
 
TMR: Rick, thank you for your time and your insights.
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Jun 04

Mining Is Good for You

Gold Price Comments Off on Mining Is Good for You
And for the environment, says this mining research analyst…
 

“I WOULD NEVER invest in a mining company – they destroy land, pollute our water and air, and wreck the habitat of plants and animals.”
 
These were the points made to me by a woman at a social gathering after I told her what I do for living, writes Laurynas Vegys, research analyst at Doug Casey’s investment advisory.
 
She prided herself on her moral high ground and looked upon me with obvious disdain. It was clear that as a mining researcher, I was partly responsible for destroying the environment.
 
I knew a reasonable discussion with her wouldn’t be possible, so I opted out of trying. (As Winston Churchill said, “A fanatic is one who can’t change his mind and won’t change the subject.”) She left the party convinced her position was indisputably correct. But was she?
 
Not at all.
 
In fact, with few exceptions, today’s mining operations are designed, developed, operated, and ultimately closed in an environmentally sound manner. On top of that, considerable effort goes into the continued improvement of environmental standards.
 
My environmentalist acquaintance, of course, would loudly disagree with those statements. Many people may feel uncomfortable investing in an industry that’s so closely scrutinized and vehemently criticized by the public and mainstream media – whether there’s good reason for that criticism or not. This actually is to the benefit of those who dare to think for themselves.
 
So let’s examine what mining REALLY does to the environment. As Doug Casey always says, we should start by defining our terms…
 
In modern mining, the term “environment” is broader than just air, water, land, and plant and animal life. It also encompasses the social, economic, and cultural environment and, ultimately, the health and safety conditions of anyone involved with or affected by a given mining activity.
 
Armed with this more comprehensive view of the industry’s impact on the environment, we can evaluate the effects of mining and its benefits in a more holistic fashion.
 
According to a study commissioned by the World Gold Council, to take an example from mining of our favorite metal, the gold mines in the world’s top 15 producing countries generated about US$78.4 billion of direct gross value added (GVA) in 2012. (GVA measures the contribution to the economy of each individual producer, industry, or sector in a country.) That sum is roughly the annual GDP of Ecuador or Azerbaijan, or 30% of the estimated GDP of Shanghai, China. Here’s a look at the GVA for each of these countries.
 
 
Keep in mind that this doesn’t include the indirect effects of gold mining that come from spending in the supply chain and by employees on goods and services. If this impact were reflected in the numbers, the overall economic contribution of gold mining would be significantly larger.
 
Also, it’s evident that gold mining’s imprint on national economies varies considerably. For countries like Papua New Guinea, Ghana, Tanzania, and Uzbekistan, gold mining is one of the principal sources of prosperity.
 
Another measure of economic contribution is the jobs created and supported by businesses. The chart below shows the share of jobs created of each major gold-producing country.
 
 
The four countries with the highest numbers of gold mining employees are South Africa (145,000), Russia (138,000), China (98,200), and Australia (32,300). The industry also employs 18,600 in Indonesia, 17,100 in Tanzania, and 16,100 in Papua New Guinea. (As an aside, it’s quite telling that South Africa employs more gold miners than China, but China produces more gold than South Africa.)
 
Note that these employment figures don’t include jobs in the artisanal and small-scale production mining fields, nor any type of indirect employment attributable to gold mining – so they understate the actual figures
 
For many countries, gold mining accounts for a significant share of exports. As an example, gold merchandise comprised 36% of Tanzanian and 26% of Ghana’s and Papua New Guinea’s exports in 2012. Below, you see a more comprehensive picture of gold exports by 15 major gold-producing countries.
 
 
Other, often-overlooked ways in which the mining industry supports the economy include:
  • Foreign direct investment (FDI): The three mining giants – Canada, the United States, and Australia – have been dominating this category for a number of years, both as the primary destinations for investment and as the main investor countries.
  • Government revenue: All mining businesses, regardless of jurisdiction, have to pay certain levies on their revenue and earnings, including license fees, resource rents, withholding and sales taxes, export duties, corporate income taxes, and various royalties. Taken all together, these payments make up a large portion of overall mining costs. For example, estimates suggest that the total of mining royalty payments in 2012 across the top gold-producing countries worked out to the tune of US$4.1 billion. This, of course, doesn’t account for other types of tax normally applied to the mining industry.
  • Gold products: Gold as a symbol of prosperity and the ultimate “wealth insurance” is very important to many nations around the globe – especially in Asia and Africa. Gold jewelry is given as a dowry to brides and as gifts at major holidays. In India, the government’s ban on gold purchases by the public led to so much smuggling that the incoming prime minister is considering removing it. Chinese, Vietnamese, and peoples of India and Africa may all be divided across linguistic lines, but they all share the view of gold being a symbol of prosperity and ultimate insurance against life’s uncertainties.
It’s also important to note that jobs with modern gold mining companies are usually the most desirable options for poverty-stricken people in the remote areas where many mines are built. These jobs not only pay more than anything else in such regions, they provide training and health benefits simply not available anywhere else.
 
Let’s now have a look at the most debated and contentious side to mining. The impact on the physical environment.
 
In previous millennia, humans labored with little concern for the environment. Resources seemed infinite, and the land vast and adaptable to our needs. An older acquaintance of ours who grew up in 1930s Pittsburgh remembers the constant coal soot hanging in the air: “Every day, it got dark around noon time.” Victorian London was famous for its noxious, smoky, sulfurous fog, year-round.
 
Initially, the mining industry followed the same trend. Early mine operations had little, if any, regard for the environment, and were usually abandoned with no thought given to cleaning up the mess once an ore body was depleted.
 
In the second half of the 20th century, however, the situation turned around, as the mining industry realized the need to better understand and mitigate its impact on the environment.
 
The force of law, it must be admitted, had a lot to do with this change, but today, what is sometimes called “social permitting” frequently has an even more powerful regulatory effect than government mandates. Today’s executives understand that good environmental stewardship is good business – and many have strong personal environmental ethics.
 
That said, mining is an extractive industry, and it’s always going to have an impact. Here’s a quick look at some of the biggest environmental scares associated with gold mining and how they are confronted today.
 
Mercury (Hg): Rare in earth’s crust, highly toxic
Mercury, also known as quicksilver, has been used to process gold and silver since the Roman era. Mercury doesn’t break down in the environment and is highly toxic for both humans and animals. Today, the use of mercury is largely limited to artisanal and illegal mining. Industrial mining companies have switched to more efficient and less environmentally damaging techniques (e.g., cyanide leaching).
 
Developing countries with a heavy illegal mining presence, on the other hand, have seen mercury pollution increase. The United Nations Industrial Development Organization (UNIDO) estimates that 1,000 tonnes of mercury are annually released into the air, soil, and water as a result of illegal mining activity.
 
To help combat the problem, the mining industry, through the members of the International Council on Mining and Metals (ICMM), has partnered with governments of those nations to transfer low- or no-mercury processing technologies to the artisanal mining sector.
 
Sodium Cyanide (NaCN): Common, highly toxic
This is one of the widely used chemicals in the industry that can make people’s emotions run high. Historically considered a deadly poison, cyanide has been implicated in events such as the Holocaust, Middle Eastern wars, and the Jonestown suicides. Given such associations, it’s no wonder that the public perceives it with alarm, without even adding mining to the equation.
 
It is important, however, to understand that cyanide:
  • is a naturally occurring chemical;
  • is not toxic in all forms or all concentrations;
  • has a wide range of industrial uses and is safely manufactured, stored, and transported every day;
  • is biodegradable and doesn’t build up in fish populations;
  • is not cumulative in humans and is metabolized at low exposure levels;
  • should not be confused with acid rock drainage (ARD; see below); and
  • is not a heavy metal.
Cyanide is one of only a few chemical reagents that dissolves gold in water and has been used to leach gold from various ores for over a hundred years. This technique – known as cyanidation – is considered a much safer alternative to extraction with liquid mercury, which was previously the main method used. Cyanidation has been the dominant gold-extraction technology since the 1970s; in Canada, more than 90% of gold mined is processed with cyanide.
 
Despite its many advantages for industrial uses, cyanide remains acutely toxic to humans and obviously is a concern on the environmental front. There are two primary environmental risks from gold cyanidation:
 
Cyanide might leach into the soil and ground water at toxic concentrations. A catastrophic spill could contaminate the ecosystem with toxic levels of cyanide.
 
In response to these concerns, gold mining companies around the world have developed precautionary systems to prevent the escape of cyanide into the environment – for example, special leach pads lined with a plastic membrane to prevent the cyanide from invading the soil. The cyanide is subsequently captured and recycled.
 
Further, to minimize the environmental impact of any cyanide that is not recycled, mine facilities treat cyanide waste through several processes that allow it to degrade naturally through sunlight, hydrolysis, and oxidation.
 
Acid Rock Drainage (ARD): Target chemical Sulfuric acid; common, varying toxicity
Contrary to popular belief, ARD is the natural oxidation of sulfide minerals such as pyrite when these are exposed to air and water. The result of this oxidation is an increase in the acidity of the water, sometimes to dangerous levels. The problem intensifies when the acid comes into contact with high levels of metals and thereby dissolves them, which adds to the water contamination.
 
Once again, ARD is a natural process that can happen whenever such rocks are exposed on the surface of the earth, even when no mining was involved at all. Possible sources of ARD at a mine site can include waste-rock piles, tailings storage facilities, and mine openings. However, since many mineral deposits contain little or no pyrite, ARD is a potential issue only at mines with specific rock types.
 
Part of a mining company’s environmental assessment is to conduct technical studies to evaluate the ARD potential of the rocks that may be disturbed. Once ARD has developed, the company may employ measures to prevent its spread or reduce the migration of ARD waters and perhaps even treat the water to reduce acidity and remove dissolved metals.
 
In some places where exposed sulfide minerals are already causing ARD, a clean, modern mine that treats all outflowing water can actually improve water quality.
 
Arsenic (As): Moderately common in earth’s crust, highly toxic
Similar to mercury, arsenic is a naturally occurring element that is commonly found as an impurity in metal ores. In fact, arsenic is the 55th most abundant element in the earth’s crust, and is widely distributed in rocks and soil, in natural waters, and in small amounts in all living things. Unfortunately, it can also be toxic in large doses.
 
The largest contribution of arsenic from the mining industry comes from atmospheric emissions from copper smelting. It can also, however, leach out of some metal ores through ARD and, when present, needs to be removed as an impurity to produce a saleable product.
 
Several pollution-control technologies have been successful at capturing and removing arsenic from smelting stacks and mine tailings. As a result, between 1993 and 2009, the release of arsenic from mining activities in Canada fell by 79%. Similar figures have been reported in other countries.
 
Now, here’s our quick stab at dispelling the three most widespread myths environmentalists commonly bring up in their rants against the mining industry.
 
Myth 1: Mining Uses Excessive Amounts of Land
Reality: Less than 1% of the total land area in any given jurisdiction is allotted for mining operations (normally far less than that). Even a modest forestry project affects far more trees than the largest open-pit mine. Mining activities must also meet stringent environmental standards before a company can even get a permit to operate.
 
The assessment process applied to mining operations is very detailed and based on a long string of policies and regulations (e.g., the National Environmental Policy Act in the US). Environmentalists may claim that the mining industry is rife with greedy land barons, but there’s more than enough evidence to the contrary.
 
Myth 2: Mining Is Always Detrimental to the Water Supply
Reality: Quite the opposite, actually. Before mine operations start, a mining company must submit a project proposal that includes detailed water utility studies (which are then evaluated by scientists and government agencies). Many companies even install water supply systems in local communities that lack easy access to this basic resource. It’s also common for the rocks to be mined to be naturally acid generating – a problem the mine cleans up, by its very nature.
 
Some die-hard zealots blame the mining industry for consuming huge amounts of water, but in fact it normally only uses +1% of the total water supplied to a given community, and 80% of that water is recycled continuously.
 
Myth 3: Mining Is Invasive to the Natural Environment
Reality: Yes, mining activity in certain countries has led to negative outcomes for certain plants and animals – not to mention the rocks themselves, which are blasted and hauled away. However, the industry has progressed a long way in the last few decades and, apart from rare accidents, the worst is behind us now.
 
The key determinant here is compliance. All mining activity must comply with strict environmental guidelines, leading up to and during operations and also following mine closure. After mining activity ends, the company is required to rehabilitate the land. In some cases, the land is remediated into forests, parks, or farmland – and left in better condition than before.
 
It’s worth reiterating that in some cases – where there’s naturally occurring ARD or where hundreds of years of irresponsible mining have led to environmental disasters – a modern mine is a solution to the problem that pays for itself.
 
So can you be pro-mining and an environmentalist? Absolutely. Gold mining (and mining in general) is extractive and will always leave some mark on our planet. Over time, however, the risks have been mitigated by modern mining technologies. This is an ongoing process; even mining asteroids instead of planet Earth is now the subject of serious consideration among today’s most visionary entrepreneurs.
 
Meanwhile, the (vastly diminished) risks associated with mining are far outweighed by the economic contribution and positive effects on local communities and the greater society. This net-positive contribution is here to stay – unless our civilization opts for collective suicide by sending us all back to the Stone Age.
 
Right now, gold and gold stocks are so undervalued that you can build a sizable portfolio at a fraction of what you would have had to spend just a few years ago. To discover what we think are the best ways to invest in gold, read Casey Research’s 2014 Gold Investor’s Guide.
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May 28

Gold Miners Building Their Own Momentum

Gold Price Comments Off on Gold Miners Building Their Own Momentum
With gold prices quietened for 2014, mining stocks need their own momentum…
 

JEFF WRIGHT of H.C. Wainwright & Co. has more than 15 years’ capital markets experience.
 
Previously with Global Hunter Securities, Wright has also worked as a managing director and head of the natural-resource practice at Shoreline Pacific LLC. Prior to that he was vice president at Montgomery & Co. and was a leader on the team that launched a capital markets business in a historically mergers and acquisitions-focused investment bank. 
 
Now, and because Jeff Wright doesn’t anticipate a major shift in the price of gold near-term, he doesn’t expect the gold price to provide momentum for mining company stocks. Instead, he’s looking at companies that can provide their own upward movement in this interview with The Mining Report, sister title of The Gold Report
 
The Mining Report: Jeff, when we talked three years ago, $2000 per ounce gold seemed to be within reach. The Toronto Stock Exchange was full of cash-heavy juniors. What is your forecast for gold’s prospects for the rest of 2014 based on today’s fundamentals?
 
Jeff Wright: Gold should stay centered around $1300 per ounce, not moving more than $50 in either direction, through the end of the year. Forces holding gold prices within that narrow band include the US Federal Reserve tapering quantitative easing to a point where, possibly in mid-October, asset purchases will end and interest rates will increase. Also, the macroeconomic environment’s improvements are still fairly soft.
 
The one area of concern that could drive gold either much higher or much lower is the continuing crisis in the Ukraine. There is safe-haven demand around the world to avert exposure to what is now viewed as a soft conflict. If the conflict between Ukraine and Russia escalates, gold could go above $1350 per ounce. If there is a peaceful resolution, gold could dip lower before coming back up $1250-1300 per ounce.
 
TMR: Do you think the Federal Reserve is willing to counterbalance if the price of gold goes way up?
 
Jeff Wright: No, the Federal Reserve’s mandate isn’t aligned with the macro-political situation in Europe. The Federal Reserve would be much more concerned about the economic impact of a conflict in Europe and its impact on gross domestic product, employment and inflation, than on the price and movement of gold.
 
TMR: Even when the price of gold was a lot higher three years ago, we were talking about the flight of investors to larger companies. With gold in the range that you predict, are some juniors standing out as value plays?
 
Jeff Wright: There was a flight from mining equities to the large-cap and the mid-cap companies a few years ago. Generalist investors left the gold and mining space as momentum dissipated. There are quality juniors out there that are in production or advancing large-scale, high-growth projects, but it becomes a stock picking exercise versus investing in a basket of juniors or large-cap mining companies.
 
TMR: How do you decide what goes in the basket?
 
Jeff Wright: It comes down to if a company has a worthy project. Is the project going to be a true mine or is it a mine that’s in production that has expansion possibilities versus one with a short mine life and a small project? We’re not looking for small projects with limited mine lives.
 
Second, we want to be in good jurisdictions with stability. That being said, there are projects outside of the usual suspects in Canada or Nevada that make sense in today’s price environment. We’re not very positive on Africa based on the geopolitical risk and the lack of interest from US institutions, but we also recognize there are some noteworthy large-scale projects there.
 
We still like Nevada. We like Mexico. We like Brazil. We like certain parts of Canada.
 
TMR: Are other small to midsized companies buying projects that have been deeply discounted?
 
Jeff Wright: There are additional opportunities out there – other projects and companies are in play. A number of high-quality projects either have lower capital costs to get to production or a reasonable permitting timeline. These projects have substantial ounces and good grade, but are at a point where the existing management team, either through lack of ability to raise capital or with geologists who have done a great job on discovery but are not production-minded, can’t take the company further. We see that transition all the time in mining and we’re certainly at one of those points right now in the cycle.
 
TMR: What will set the stage for the next rally in the juniors and how can readers prepare themselves to play a part in that?
 
Jeff Wright: It comes down to identifying companies that have a path toward advancing a project. Either they have the capital or they have the skill set. It’s going to be a very selective rally through 2014. I don’t see a broad market rally of all the juniors. There is going to be a number of companies that have good-quality projects that don’t go anywhere, or that people aren’t very excited about. A lot of that comes down to what’s the next step on this project becoming an actual mine that can show production – and profitable production at that. Investors really have to do their homework and understand that a lot of projects aren’t going to advance. They’re going to be on the shelf for a while until either costs come down or commodity prices go up.
 
TMR: Thanks for your time.
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May 01

African Politics Change, But Not Its Geology

Gold Price Comments Off on African Politics Change, But Not Its Geology
No, things might not be so secure. But short-life gold mining may be profitable…
 

DUNCAN HUGHES has been head of research for RFC Ambrian Ltd. in Perth, Australia, since 2010. A geologist, he has more than 15 years of experience in the resources industry and managed the discovery and development of the Prospero, Tapinos and Alec Mairs ore bodies for Jubilee Mines/Xstrata.
 
Now, with gold prices hovering around $1300 an ounce, there’s not much room for error, says Duncan Hughe. In this interview with The Gold Report, Hughes counsels that investors should seek high-grade, low-cost projects with exploration upside in stable jurisdictions…
 
The Gold Report: After hitting $1380 an ounce in March, gold fell below $1300 and has hovered around there since then. Do you expect the price to change much either way in the next few months?
 
Duncan Hughes: That’s not easy to predict. I think $1300 per ounce seems a sensible assumption for 2014. If it were to fall much below that, most of the sector would be operating at a loss.
 
TGR: Assuming a gold price of $1300 per ounce, what are the qualities that will distinguish the junior gold companies that become successful?
 
DH: In the recent past, companies paid too much attention to the size of resources and potential scales of production. The focus now is profitable production scenarios. Low-cost producers and undervalued developers that look likely to become low-cost producers are the key for investors.
 
One way to achieve stronger profit margins is through higher-grade ore bodies. Grade has always been king but is now even more so. Low-cost producers are not only most likely to survive this difficult market; those making profits may also pay dividends. Given that share-price appreciation is more challenging than previously, dividends have become more attractive.
 
TGR: To what extent should investors restrict themselves to companies with management teams with winning track records?
 
DH: If I were an investor, I’d look for management with a track record. If management doesn’t have that track record – not only finding mines but bringing them to production – then the asset is the overriding factor. If the asset is strong enough, I’d want board members with a nice mix of technical skills – a geologist, an engineer, perhaps even a metallurgist – complemented by members with financial skills and access to equity and debt finance.
 
TGR: Which type of company is most likely to be taken out?
 
DH: Because funding is much harder to secure than it once was, the main focus will be developers with strong projects that require significant initial capital expenditures.
 
TGR: How should investors balance potential reward and risk in West Africa, specifically with regard to the various gold-producing jurisdictions?
 
DH: Several years ago, gold companies in West Africa traded at a premium because of the excellent exploration opportunities engendered by the geology. Since then markets have changed, and investors have become risk averse. In Africa, we have seen the Arab Spring, a push for nationalization and the coup in Mali. These events remind investors that the African political landscape is not as secure as some other parts of the world.
 
But the geology of the Birimian Greenstone Belt hasn’t changed. A number of countries, such as Côte d’Ivoire, Liberia and Burkina Faso, have vast fortunes in land that is still relatively underexplored. Ghana has a track record of political stability and stable gold production. Next door, in Côte d’Ivoire, which lacks this stability, there is the same geology but many fewer mines. Guinea is working through a new mining code, and I would say that it is still a risky place to consider.
 
Burkina Faso, on the other hand, is a great place. It has got seven gold mines coming into production there.
 
TGR: Liberia was considered a failed state for decades. How great has its recovery been?
 
DH: I see real opportunity there. It’s like Burkina Faso, at an earlier stage of development, obviously. I visited after the 2011 election, which was peaceful. Ellen Johnson Sirleaf, who won the Nobel Peace Prize that year, was re-elected.
 
I met the minister of mining and came away with the feeling that the Liberian government is very supportive of mining. Before the political strife began in 1980, Liberia was a significant iron ore producer and retains that infrastructure.
 
TGR: What’s the size of the resource at New Liberty?
 
DH: It is 924,000 ounces (Koz) at 3.4 grams per ton (g/t) and a quite high strip ratio. According to the definitive feasibility study, the mine is expected to produce 119 Koz annually for the first six years of production at $900 per ounce. This should be a profitable operation.
 
TGR: That’s a short mine life. How much exploration potential do you see?
 
DH: A lot. Not necessarily at New Liberty itself. In that part of the world, that’s probably a bit too far to truck to New Liberty, but what’s exciting about Ndablama is that it is shaping up to be another standalone gold operation. New Liberty is the present, but Ndablama is probably the future.
 
TGR: We recently did an interview with analyst Richard Karn and he pointed out that 200 of the 700 ASX-listed mining and resource companies are effectively moribund.
 
DH: You could make a similar judgment about the TSX Venture Exchange.
 
TGR: Certainly. Karn argued that the culling of these “zombie” companies would be a positive step. Do you agree?
 
DH: Yes. Many companies on the Australian Stock Exchange, the TSX Venture Exchange and London’s AIM exchange are not going to make it, and that consolidation will be a good thing. As I mentioned earlier, investors in the recent past just looked at the size of a resource and said, “Wow. There’s 2 Moz there, and this stock looks cheap.” But they weren’t looking at the quality of those ounces. I think investors have since wised up. Too late, however, for many companies.
 
TGR: Some 12 months ago, when it seemed that gold might fall to $1000 per ounce, financing pretty much dried up. Now that gold seems to have stabilized around $1300 per ounce, has the funding picture improved?
 
DH: I don’t think it has improved that much yet. You said that the gold price seems to have settled, but let’s face it, this stability has only existed for a very short time. I think major financiers and the equity markets need to be persuaded that there is a floor of perhaps $1200-1,300 per ounce. When this occurs, funding will improve.
 
TGR: Duncan, thank you for your time and your insights.
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Apr 23

The Big Currency Reset

Gold Price Comments Off on The Big Currency Reset
Buying gold & silver miners in anticipation of “the big reset”…
 

The NETHERLANDS-based Commodity Discovery Fund focuses on mining discoveries and start-up producers in precious, base and specialty metals.
 
Founded by author, entrepreneur and publicist Willem Middelkoop, and with senior researcher Terence van der Hout also studying critical metals, the Commodity Discovery Fund‘s key belief is the world’s reserve currency will “reset” away from the US Dollar in the next decade, forcing gold prices to rise and mining equities to follow.
 
Here, Van der Hout and Middelkoop tell The Gold Report that by focusing on producers, near-producers and turnaround stories, they plan to capitalize on opportunities in North America, Africa and beyond.
 
The Gold Report: Willem, your first book predicted the collapse of the global financial system a year before the 2008 fall of Lehman Bros. In your new book The Big Reset: War on Gold and the Financial Endgame, you’re predicting the demise of the Dollar as the reserve currency by 2020. You said it can occur as a carefully planned event or as the result of a crisis. What would these two scenarios look like?
 
Willem Middelkoop: Authorities always prefer to act within a well-planned scenario. The US and the International Monetary Fund understand that the US Dollar has to be replaced one day. It could be 2020. It could be 2018. It could be 2023. It has to be replaced by another anchor to support the worldwide monetary system.
 
Both the US and the IMF will try to stay in the driver’s seat as they propose the transformation of the worldwide financial system. They could introduce special drawing rights, an international reserve asset created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies. The US and the IMF could propose that the SDRs be used to replace the Dollar as the anchor for the worldwide financial system. 
 
However, the IMF and its partners, the central banks around the world, will need at least five more years to prepare the system for such a change. A crisis of confidence around the Dollar could occur before the IMF and its partners are ready for a reset operation. If a crisis of confidence occurs, the IMF would have to mount a rescue operation to save worldwide trade, as we saw in early 2009. We had some similar, but smaller, resets following the crisis in Germany after the Weimar hyperinflation in 1923 and, more recently, in Cyprus. 
 
The SDRs could act like a monetary umbrella and consist of Dollars, Euros, British pounds and Chinese Yuan after a monetary reset.
 
TGR: A lot of this plan is going on backstage. Most people don’t know about it. What signs should we look for to signal the shift so we can adjust our portfolios?
 
Willem Middelkoop: This is a very important question. Investors need to understand that such a transformation in our monetary system might be introduced over a weekend. In Cyprus, there were not many warning signs. That’s why I started thebigresetblog.com, where I follow the latest information, and I’m publishing the latest signs pointing toward such a reset. On March 17, I published a story that was based on an interview with George Soros. In that interview with the Financial Times, Soros said the system is broken and needs to be reconstituted. I also published an interview with Christine Lagarde, head of the IMF. She used the term “reset” multiple times in interviews during the World Economic Forum.
 
Another important sign is an editorial by the Chinese state press agency recently saying that the time has come for a new international reserve currency to be created to replace the dominant US Dollar. 
 
Both East and West sent out specific signals pointing toward this transformation. Of course, it’s important to watch the gold and Dollar charts on a daily basis, because when a reset is close, you can expect major moves.
 
TGR: What does this mean for gold? The signs are out there – why is the price hovering around $1300 per ounce?
 
Willem Middelkoop: It’s quite easy to understand why central banks would like to revalue gold to devalue the Dollar at a certain stage of this reset. The US’s official gold reserves, which are still 8,000 tonnes, are valued at the historical cost price of $42 per ounce. A revaluation toward $4,200 per ounce would grow the value of these gold reserves from the current $11 billion to $1.1 trillion. Without such a revaluation, gold prices will have to rise as well given the structural deficits in the gold market. Worldwide gold production can’t keep up with the growing demand for physical gold. Recent figures by the World Gold Council show a deficit of 700 tonnes physical gold.
 
We have seen lots of manipulation of the gold price, similar to the 1960s when the London Gold Pool was keeping gold prices at $35 per ounce. Central bankers have done this for a number of years by selling large amounts of gold from the official reserves of Western central banks. We’ve seen another round of manipulation of the gold price in the last few years. This can’t go on for another 5 to 10 years. 
 
TGR: If the gold price went up, would the precious metals mining stocks follow or, because of the manipulation, would there not be a connection?
 
Willem Middelkoop: The gold price started to rise at the end of December. When the gold price went up 10%, precious metal mining stocks went up sometimes as much as 30%. Investors will come to understand that the gold price might trade higher in the following weeks and months, and precious metal mining stocks should also go higher. 
 
Countries like China and Russia are also growing their gold reserves enormously. With estimates for yearly deficits in the physical gold market up to around 1,000 tons/year, more investors see precious metal companies as the only ones that own huge amounts of physical tons still in the ground. When they can be sold at higher prices, these companies will become hugely profitable. 
 
We’ve seen that in the past. In the 1970s, we had the last gold rush and lots of free cash flow was generated by gold and silver producers. In the late 1970s and the early 1980s, these amounts were enormous. Senior producers had gains of 200-300% in the last two years of the gold bull market. The junior producers and the exploration companies showed gains of more than 1,000% on average.
 
TGR: What markets do you think are good right now? What commodities do you like?
 
Willem Middelkoop: We still have 60% of our equity investments in gold-related equities, 20% in silver-related and the last 20% in base metals and specialty metals. The only change in the last two years has been that we decreased our investment in exploration companies and increased our investment in royalty companies and senior producers.
 
TGR: Why was that?
 
Willem Middelkoop: Because of the low valuation in the correction since the middle of 2011. The valuation for gold producers became almost laughable. Of course, a producer, which is creating cash flow and is still profitable at these prices, has only upside in the current market. It was a defensive move. 
 
Terence van der Hout: Technically, an exploration company that has no assets can just go to zero – there are a number that are doing that – whereas producers will always be worth something, even at fire sales. 
 
That’s another consideration that we’ve been looking at on the downside. Very recently, we’ve been subtly shifting from producers and near-producers to advanced developers. We see a turn in the markets. Those companies are well leveraged to the gold price and have a fairly extreme undervaluation to catch up with. Normally, they will be revalued to something relating to the amount of resource they produce.
 
TGR: A number of the companies in your fund are in Africa. How do you assess risk for a given region in Africa?
 
Terence van der Hout: There are various types of risks in Africa. There is a cost risk in West Africa because power is expensive and infrastructure is lacking. South Africa has energy issues and social and labor unrest. We have 70% of our portfolio invested in less risky areas, like North America. We used to avoid South Africa entirely, but something has changed in the way that we look at platinum. For one thing, we very much like the future for platinum group metals given that the Chinese automobile market is exploding and will need all the PGMs that the world can provide.
 
TGR: Considering South Africa has posed risks in the past, what do you look for in a successful miner?
 
Willem Middelkoop: A strong, proven, successful mine manager or entrepreneur can build companies time and again. The longer we are in this business – we’re investors for more than 10 years now – the more we try to follow the good management teams.
 
Terence van der Hout: That’s a derisking aspect of the business: management. Management is one of the prime parameters for us.
 
Willem Middelkoop: However, we’re quite fed up with the high salaries being paid to executives running companies that don’t perform. The industry has to understand that investors are taking these compensation packages into consideration when they decide if they should invest or not.
 
TGR: Do you predict an impact from the conflict in Russia as it is a supplier of PGMs?
 
Willem Middelkoop: Only if more sanctions are applied. Russian president Vladimir Putin understands how vulnerable the US and the Dollar have become. If strong sanctions were applied against Russia, it would be very easy for the Russians to stop selling oil in Dollars and start selling it in Yuan, rubles or even in gold. The US knows it should be careful not to make Putin too mad because the Dollar is too vulnerable. This is why no strong sanctions have been implemented until recently. 
 
TGR: Any final advice for our readers as we’re going into this shifting world?
 
Willem Middelkoop: I would like to talk a little about silver. We talked a lot about gold, and gold is very important. It’s my opinion that gold will come back in the monetary system. I don’t expect a full gold standard, but gold will become more important. But silver is poor man’s gold. When the gold price goes up too much, more people start to buy silver instead. However, there are no large, above-the-ground stockpiles available anymore. Silver was still used to produce coins until the 1980s. These above-the-ground silver stockpiles are almost completely gone. We’re very interested in great silver companies with lots of ounces in the ground.
 
TGR: Thank you both for your time.
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