Oct 31

Tea Leaves & $2000 Gold

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Yes, some people are still forecasting $2000 gold by year’s end…
 

BOB and BARB Moriarty launched 321gold.com over 10 years ago, adding 321energy.com the better to cover oil, natural gas, gasoline, coal, solar, wind and nuclear energy as well as precious metals.
 
Previously a US Marine fighter pilot, and holding 14 international aviation records, Bob Moriarty here tells The Gold Report why he’s 100% certain that a market crash is looming… 
 
The Gold Report: Bob, in our last interview in February, we had currency devaluation in Argentina and Venezuela, interest rate hikes in Turkey and South America, and a cotton and federal bond-buying program. Just eight months later in October, we’ve got Ebola, ISIS and Russia annexing Crimea plus a rising US Dollar Index. We’ve also got pullbacks in gold, silver and pretty much all commodity prices. With all this news, what, in your view, should people really be focusing in on?
 
Bob Moriarty: There is a flock of black swans overhead, any one of which could be catastrophic. The fundamental problems with the world’s debt crisis and banking crisis have never been solved. The fundamental issues with the Euro have never been solved. The world is a lot closer to the edge of the cliff today than it was back in February.
 
About ISIS, I think I was six years old when my parents pointed out a hornet’s nest. They said, “Whatever you do, don’t swat the hornets’ nest.” Of course, being six years old, I took stick and went up there and swatted the hornets’ nest, which really pissed off the hornets. I learned my lesson.
 
We swatted the hornets’ nest when we invaded Iraq and Afghanistan. What we did is we empowered every religious fruitcake in the world. We said, “Okay, here’s your gun, go shoot somebody. We’ll plant flowers.” We are reaping what we sowed. What we need to do is leave them to their own devices and let them figure out what they want to do. It’s our presence in the Middle East that is creating a problem.
 
TGR: Will stepping back allow the Middle East to heal itself, or will there be continued civil wars that threaten the world?
 
Bob Moriarty: We are the catalyst in the Middle East. We have been the catalyst under the theory that we are the world’s policemen and that we’re better and smarter than everybody else and rich enough to afford to fight war after war. None of those beliefs are true. The idea that America is exceptional is hogwash. We’re not smarter. We’re not better. We’re certainly not effective policemen.
 
The Congress of the United States has been bought and paid for by special interest groups: part of it is Wall Street, part of it is the banks and part of it is Israel. We’re just trying to do things that we can’t do. What the US needs to do is mind its own business.
 
TGR: You’ve commented recently that you’re expecting a stock market crash soon. Can you elaborate on that?
 
Bob Moriarty: We have two giant elephants in the room fighting it out. One is the inflation elephant and one is the deflation elephant. The deflation elephant is the $710 trillion worth of derivatives, which is $100,000 per man, woman and child on earth. Those derivatives have to blow up and crash. That’s going to be deflationary.
 
At the same time, we’ve got the world awash in debt, more debt than we’ve ever had in history, and it’s been inflationary in terms of energy and the stock market. When the stock and bond markets implode, as we know they’re going to, we’re going to see some really scary things. We’ll go to quantitative easing infinity, and we’re going to see the price of gold go through the roof. It’s going to go to the moon when everything else crashes.
 
TGR: How are you looking at the crash – short term, before the end of this year? How imminent are we?
 
Bob Moriarty: Soon. But I’m in the market. Not in the general market, but I’m in resources. There’s a triangle of value created by a guy named John Exter: Exter’s Pyramid. It’s an inverted pyramid. At the top there are derivatives, and then there are miscellaneous assets going down: securitized debt and stocks, broad currency and physical notes. At the very bottom – the single most valuable asset at the end of time – is gold. When the derivatives, bonds, currencies and stock markets crash, the last man standing is going to be gold.
 
TGR: So the last man standing is the actual commodity, not the stocks?
 
Bob Moriarty: Not necessarily. The stocks represent fractional ownership of a real commodity. There are some really wonderful companies out there with wonderful assets that are selling for peanuts.
 
TGR: In one of your recent articles, “Black Swans and Brown Snakes“, you were tracking the US Dollar Index as it climbed 12 weeks in a row, and you discussed the influence of the Yen, the Euro, the British Pound. Can you explain the US Dollar Index and the impact it has on silver and gold?
 
Bob Moriarty: First of all, when people talk about the US Dollar Index, they think it has something to do with the Dollar and it does not. It is made up of the Euro, the Yen, the Mexican Peso, the British Pound and some other currencies. When the Euro goes down, the Dollar Index goes up. When the Yen goes down, the Dollar Index goes up. The Dollar, as measured by the Dollar Index, got way too expensive. It was up 12 weeks in a row. On Oct. 3, it was up 1.33% in one day, and that’s a blow-off top. It’s very obvious in hindsight. I took a look at the charts for silver and gold – if you took a mirror to the Dollar Index, you saw the charts for silver and gold inversely. When people talk about gold going down and silver going down, that’s not true. The Euro went down. The Yen went down. The Pound went down and the value of gold and silver didn’t change. It only changed in reference to the US Dollar. In every currency except the Dollar, gold and silver haven’t changed in value at all since July.
 
The US Dollar Index got irrationally exuberant, and it’s due for a crash. When it crashes, it’s going to take the stock market with it and perhaps the bond market. If you see QE increase, head for your bunker.
 
TGR: Should I conclude that gold and silver will escalate?
 
Bob Moriarty: Yes. There was an enormous flow of money from China, Japan, England, Europe in general into the stock and bond markets. What happened from July was the equivalent of the water flowing out before a tsunami hits. It’s not the water coming in that signals a tsunami, it’s the water going out. Nobody paid attention because everybody was looking at it in terms of silver or gold or platinum or oil, and they were not looking at the big picture. You’ve got to look at the big picture. A financial crash is coming. I’m not going to beat around the bush. I’m not saying there’s a 99% chance. There’s a 100% chance.
 
TGR: Why does it have to crash? Why can’t it just correct?
 
Bob Moriarty: Because the world’s financial system is in such disequilibrium that it can’t gradually go down. It has to crash. The term for it in physics is called entropy. When you spin a top, at first it is very smooth and regular. As it slows down, it becomes more and more unstable and eventually it simply crashes. The financial system is doing the same thing. It’s becoming more and more unstable every day.
 
TGR: You spoke at the Cambridge House International 2014 Silver Summit Oct. 23-24. Bo Polny also spoke. He predicts that gold will be the greatest trade in history. He’s calling for $2000 per ounce gold before the end of this year. We’re moving into the third seven-year cycle of a 21-year bull cycle. Do you agree with him?
 
Bob Moriarty: I’ve seen several interviews with Bo. The only problem with his cycles theory is you can’t logically or factually see his argument. Now if you look at my comments about silver, gold and the stock market, factually we know the US Dollar Index went up 12 weeks in a row. That’s not an opinion; that’s a fact. I’m using both facts and logic to make a point.
 
When a person walks in and says, okay, my tea leaves say that gold is going to be $2000 by the end of the year, you are forced to either believe or disbelieve him based on voodoo. I don’t predict price; I don’t know anybody who can. If Bo actually can, he’s going to be very popular and very rich.
 
TGR: Many people have predicted a significant crash for a number of years. How do you even begin to time this thing? A lot of people who have been speculating on this have lost money.
 
Bob Moriarty: That’s a really good point. People have been betting against the Yen for years. That’s been one of the most expensive things you can bet against. Likewise, people have been betting on gold and silver and they’ve lost a lot of money. I haven’t made the money that I wish I’d made over the last three years, but I’ve taken a fairly conservative approach and I don’t think I’m in bad shape.
 
TGR: Describe your conservative approach.
 
Bob Moriarty: The way to make money in any market is to buy when things are cheap and sell when they’re dear. It’s as simple as that. Markets go up and markets go down. There is no magic to anything.
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Sep 02

Gold Investment Positive, But Only Just

Gold Price Comments Off on Gold Investment Positive, But Only Just
Summer 2014 sees larger accounts adding gold, but “safe haven” demand still missing…
 

GOLD INVESTMENT demand held positive last month, but only just, writes Adrian Ash at BullionVault.
 
Geopolitics has nothing to do with it. The lesser-spotted “safe haven” demand for gold is notable by its absence, despite the unholy mess in Ukraine, Gaza and Iraq.
 
Who says? Real investor activity does. Bullionvault is the world’s largest gold and silver exchange online. Our Gold Investor Index measures the number of people using BullionVault to grow their gold holdings over those who cut or sold entirely during the last month.
 
The index isn’t a survey of intentions or plans. It is calculated solely from real investment activity in physical gold bullion.
 
A reading of 50.0 would signal a perfect balance of net buyers and net sellers across the month. The peak to date was at 71.7 in September 2011. And in August 2014, the Gold Investor Index edged back to 51.7 from July’s rise to 51.9 – the first rise since February, and only a little above June’s 4.5-year low at 51.2.
Bullionvault's Gold Investor Index
 
Gold investment also stayed positive last month by weight. Indeed, BullionVault customers as a group added gold for the third month in succession – the longest such stretch since New Year 2013.
 
But while the quantity of client gold grew (with Far East storage the stand-out choice), it grew by only 50 kilograms. That took the aggregate across London, New York, Singapore, Toronto and Zurich to a new record for our 10-year old business of 33.1 tonnes.
 
So private investors do continue to grow their holdings. Coupled with that low reading on the Gold Investor Index however, it’s clear that larger accounts are leading – just as they did in June and July. The mass of private investment cash is leaving gold by the wayside, and continues to opt for equities at record or near-record prices instead.
 
Yes, concerns over the equity market are growing. Eurozone investors tell us they’re also increasingly anxious about the shift to money-printing QE set to start in Frankfurt this autumn. But contrary to newswire journalists (or rather, their headlining editors), both prices and gold investment demand remain unmoved by today’s geopolitics.
 
Argentina’s default, the death toll in Gaza, LOL jihadis in Iraq…nothing shook gold from its summer slumber. In case you missed it – because you passed out with boredeom – this is how tedious precious metals became in August 2014…
  • Gold traded in the narrowest monthly price range for five years, a mere $40 per ounce;
  • The monthly average price of $1296 was almost precisely the average gold price of the previous 12 months ($1297.50);
  • Speculators and commercial traders both cut their holdings of Comex futures & options. In fact, open interest (ie, the number of contracts now open) fell to a series of 5-year lows;
  • Investment funds also shrugged and took to the beach. The giant SPDR Gold Trust (NYSEArca:GLD) shrank by 6 tonnes, reversing July’s addition and erasing all 2014 growth so far at 795 tonnes – a 5-year low when first hit this January.
Why no gold investing surge on summer 2014’s geopolitical headlines?
 
History shows gold offers you financial insurance, not a speculation on other people’s troubles. So it’s worth noting that – while gold priced in Dollars ended August unchanged from July at $1285 per ounce – it rose 1.6% for Euro investors and 1.8% against the British Pound.
 
Trouble ahead for the UK and Europe? If only gold investment were that simple. But with geopolitics leaving prices and demand unmoved, longer-term investors…wanting to book a little of that financial insurance for their own savings…do continue to quietly and steadily accumulate metal.
 
That insurance is one-third cheaper now that it was at the peak of the financial crisis (2011 in Dollars and Sterling, 2012 for the Euro). Gold has been flat for the last year. A small group of investors are choosing to make their own decisions…instead of relying on headlines of death and destruction elsewhere for their cue.
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Aug 03

Only the Good Days, Please

Gold Price Comments Off on Only the Good Days, Please
Did Russia and Argentina just spook equity investors…?
 

WHAT was that sound? asks Bill Bonner in his Diary of a Rogue Economist. Did you feel a little bump?
 
Nah…don’t worry about it. Go back to your cabin and have a good sleep. 
 
Just when things were going so well! With all that GDP growth! All those new jobs! We were all set to believe that the US economy really had recovered from the shock of 2008. 
 
What does the stock market know that these happy numbers aren’t telling us? 
 
Yesterday, the Dow dropped more than 300 points. Gold fell $14 an ounce. There may be nothing more to this than a case of the jitters. 
 
Or could it be something more? 
 
Remember, if we could just avoid our worst days…the ensemble of our lives would be much, much better. 
 
Think how nice Julius Caesar’s life might have been if he had just stayed home on the Ides of March, as his wife, Calpurnia, advised. Think how much better the passengers would have enjoyed their cruise if they could just forget the night the Titanic hit an iceberg. 
 
As for investors, had they just stayed in cash for the 10 worst days in the last 25 years, their annual rate of return would have been about 60% higher. 
 
Don’t worry. Yesterday was hardly one of the 10 worst days. It wasn’t a good day. But it wasn’t terrible. Just a bump. Which makes us wonder. Are our worst days behind us, like icebergs astern? Or ahead? 
 
And if so, where? 
 
The news this morning mentions two proximate causes of the selloff. The sanctions on Russia…and the default by Argentina. 
 
As to the default by Argentina, anyone who claims surprise must not be paying attention. Argentina has been a poor credit risk for a long time. The gauchos have a whole different attitude towards paying their bills. 
 
Down on the Pampas, when you stiff your creditors, you don’t hide your head in shame and look for a loaded revolver. No, you go on TV and explain why you are a national hero. 
 
That’s what Axel Kicillof did. He’s the country’s 42-year-old economy minister. And he’s angling to become the next president. Cristina Fernández de Kirchner, the present officeholder, is desperate to help him. 
 
Because if she can get Kicillof to fill her shoes, she can retain a bit of power herself…maybe enough to keep herself out of jail. 
 
Argentina deposited $539 million in interest payment on one of its bonds due in 2033 on time. The problem was that US District Judge Thomas Griesa ruled the payment illegal because it violated his ruling on the case. 
 
Griesa had made it clear that Argentina must include a court-ordered payment of $1.33 billion, plus accrued interest, to the “holdout investors” for the country to avoid default. 
 
All of which makes us wonder if a single investor was surprised by the default…and whether it really had anything to do with yesterday’s US stock market selloff. 
 
The same thing could be said for sanctions against Russia. Who didn’t see that iceberg? Who thinks his US stock – IBM, GE, AMZN, whatever – is worth less today than it was yesterday because Russian firms now face a less friendly world? 
 
Our guess is that these news items have little effect on the real value of US stocks. Instead, investors are worried about something else. 
 
Perhaps they fear that the outlook for the economy is not as bright as they had believed. Maybe they ask themselves why they pay so much money for companies whose profits must already be peaking and whose growth is in doubt. 
 
After all, even with the TARP, TALF, ZIRP, QE, “Operation Twist” – and every other stimulus measure the feds could think of – the real growth of the US economy has been only 0.9% per year for the last seven years. 
 
What will happen when US credit conditions “normalize”? And isn’t normalization on the way? 
 
“If the labor market continues to improve more quickly than anticipated,” says Janet Yellen, “then increases in the federal funds rate likely would occur sooner and be more rapid than currently envisioned.” 
 
In the White Sea…the South Atlantic? We don’t know where the iceberg is, but we have no doubt that this market will find it.
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Jul 22

No Gold Lessons from the Great Depression

Gold Price Comments Off on No Gold Lessons from the Great Depression
Gold Standard opponents point to its 1930s collapse. But why…?
 

WITHOUT question, the Great Depression was a time when the political consensus moved from a Classical “hard money” approach towards a Mercantilist “soft money” approach, writes Nathan Lewis at New World Economics.
 
That led, ultimately, to today’s “print until the pain goes away” reaction. But actually, this trend had started in the later 19th century, and was not fully expressed until the 1970s – an evolution stretching over a hundred years or more.
 
However, the experience of the Great Depression period of the 1930s still serves as justification, today, of all kinds of currency-jiggering nonsense.
 
Beginning with Britain in September 1931, currencies around the world were devalued. The British Pound was the world’s premier international currency at the time, and also the premier “reserve currency” in the sense that other central banks held British government bonds as reserve assets.
 
By some measures, this was a success: industrial production indeed improved in many countries, after they devalued their currency.
 
 
For some reason, this one statistic has taken on totemic significance. As an emerging markets macro analyst for several years, I saw the effects of several devaluations upfront, and I have to say it is not some kind of Economic Christmas where goodies fall from the heavens, and there are never any consequences.
 
Remember the Mexican devaluation of 1995, the so-called “Tequila Crisis”? How about the Argentina devaluation of 2001, or the Ukraine devaluation of 2008? The fact of the matter is, we have done this many, many times and the results are usually not too pretty.
 
They weren’t too pretty in the 1930s either, which is why these governments soon abandoned the strategy, and agreed not to engage in any more “currency wars.” This was formalized in the Bretton Woods agreement of 1944, in which 44 countries agreed to behave themselves, and return (mostly) to the Classical principles of pre-1930.
 
Governments have been devaluing currencies for literally thousands of years. Can there be short-term benefit? Of course. They wouldn’t do it otherwise.
 
There is a lot one could say about this one topic. Here are a few things to think about:
 
#1. This was not a floating currency policy. These were one-time step-devaluations. The US did not leave the gold standard system, but rather devalued the Dollar from 1/20.67th of a troy ounce of gold to 1/35th, the value it maintained until 1971. Other countries actually did introduce floating currencies, to their detriment. The US’s decision to remain on a gold standard system after 1934 is one reason the US Dollar usurped the British Pound to become the world’s primary international currency.
 
 
#2. This provides no justification for today’s floating currencies, interest rate management, and all the other funny-money games. That plainly did not happen here.
 
#3. This was a time of extreme crisis. During 1931-1932, there was a wave of sovereign defaults, on top of waves of bank and corporate defaults. It was a time of emergency measures. Might a currency devaluation be a tolerable emergency measure in a once-a-century catastrophe? Maybe. But it would be better to avoid such catastrophes to begin with. What does this have to do with the FOMC getting together to jigger interest rates every six weeks?
 
#4. You don’t see the bad stuff. When the value of the US Dollar fell by 41%, from 1/20.67th of an ounce of gold to 1/35th of an ounce, the value of all wages was also devalued by the same amount. In other words, people were effectively paid 41% less. This is one reason employment and activity improved: corporations were given a gift of radically slashed labor costs. The unemployed were helped, but at the expense of the employed. While such measures might be tolerable in a crisis situation of soaring unemployment, a nation does not become wealthy by chronically making workers poorer. The world is full of cheap labor; the miracle of the developed economies is their high incomes, not low ones.
 
#5. It was effectively a type of government default. When the British Pound was devalued (by roughly the same 40%) in 1931, all holders of supposedly “risk free” British government bonds, worldwide, took a giant loss. Imagine that you were, for example, a foreign central bank holding British government bonds as reserve assets, or a commercial bank with British-pound-denominated debt as assets. The central bank would immediately have insufficient reserve coverage for its monetary liabilities, potentially inviting an echo devaluation. The commercial bank would be insolvent. Thus, these devaluations, particularly for international currencies like the British Pound or the US Dollar, led to waves of financial failures worldwide. That’s why they called it “beggar thy neighbor” devaluation.
 
 
#6. All savings in the devalued currency were also devalued. All bonds and bank deposits, denominated in the devalued currency, were also devalued. On the other hand, debtors such as corporations were given an artificial windfall, effectively lightening their debt burden. This is one reason why commercial activity improved – because creditors got screwed.
 
#7. It produced an artificial trade advantage – and an artificial trade disadvantage. The devaluing countries – by way of cheaper labor costs and devalued debt burdens, essentially – then had an artificial trade advantage versus countries that had not devalued. British and Japanese companies could use their now-cheap labor to either compete in the export market, or replace imports with low-cost domestic alternatives.
 
But what if you hadn’t devalued, like France? Now, exporters’ business was collapsing, due to no fault of their own. Domestic businesses found that they were uncompetitive with a wave of cheap imports, and closed down. Whatever advantage one country enjoyed in the “currency wars” was matched by hardship elsewhere. That is why countries tended to suffer until they too devalued, to bring exchange rates back in line.
 
When one country devalues today – such as Mexico – it doesn’t upset the overall situation that much. But, when major international currencies devalue, the resulting trade effects are such that governments around the world tend to get pulled into the devaluation vortex. This happened in the 1970s, when the US Dollar was devalued. Other countries ended up doing the same, so that exchange rates wouldn’t get too out of line.
 
 
After Britain devalued in 1931, other countries, including the US, devalued to normalize exchange rates. The “currency wars” of the 1930s added a new element of chaos and uncertainty in what was already a very difficult time.
 
#8. It is not just a question of devaluing or “doing nothing”. For some reason, people become fixated on the notion that the alternative to currency devaluation is to sit around and do nothing. Eh? The best thing would have been to avoid the catastrophic errors (mostly tariff wars and tax hikes, leading to sovereign default and systemic collapse) that created the crisis situation in the first place. Otherwise, you could do something to remedy the underlying cause of crisis. Why did Japan seem to do so much better than Britain or the US? One reason was that finance minister Takahashi Korekiyo avoided all the “austerity” tax hikes and tariff wars that had become fashionable in the Western world. As the Japanese economy was militarized in the 1930s this was accomplished in part by offering corporations various tax breaks if they participated – in effect, a series of tax cuts.
 
#9. There was more going on than just currency stuff. One major reason for the recovery of the US economy after 1933 was the stabilization of the financial sector, with the “bank holiday” which helped resolve insolvency concerns, and also the introduction of deposit insurance.
 
#10. Devaluation has different effects depending on the situation. For example, in most countries, corporate (and even government) financing is done in international currencies like the Dollar or euro, because nobody trusts the local fiat junk. What happens when the currency is devalued? Instead of debt burdens becoming lighter (as was the case in Britain in the 1930s), debt burdens become heavier! This can be quite catastrophic, as was especially the case in Thailand, South Korea, Indonesia, Brazil and Russia in 1997-1998. Unemployment didn’t go down and production didn’t go up – exactly the opposite.
 
You could add quite a few more points. My conclusions?
  • Avoid Great Depression-like situations in the first place. “Austerity” leads to disaster – in the 1930s, in 1980s Latin America, and in Europe today.
  • Take nonmonetary steps first. If preceding administrations have been blowing up the economy with “austerity,” maybe you should reverse these policies. Or, maybe deposit insurance is the immediate fix.
  • If you find yourself in a once-a-century crisis of 1932-1933 proportions, and you think that devaluation might help, then go ahead and do it. But stay on a Gold Standard system.
This is what the US did, and the result was plainly better than the alternative of transitioning to a floating currency. By “once-a-century” I mean once-a-century, or less. This is not a justification for devaluations every four or five years (France in the 1950s and 1960s), or for a policy of floating fiat currencies and continuous interest-rate jiggering (today), or printing money because someone thinks it will help get them re-elected (1971).
 
After the one-time devaluation in 1933, the US stayed with a gold-standard framework for 38 more highly successful years, until the transition to floating fiat currencies in 1971.
 
The fact of the matter is, once Britain and a host of other countries devalued, the situation tended to impel others to follow, to normalize trade relations.
 
What does a step-devaluation in the midst of crisis in 1933 have to do with floating fiat currencies in 1971, or today?
 
Nothing.
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Jul 10

PGMs, China & Gold

Gold Price Comments Off on PGMs, China & Gold

A view on tight supply in platinum group metals, plus the 3-year bear in gold…

DAVID H.SMITH is senior analyst for The Morgan Report, as well as a professional writer and communications consultant through his business, The Write Doctor Inc.

A regular on HoweStreet.com, Smith has visited and written about properties in Argentina, Chile, Mexico, China, Canada and the US. Also presenting investment conferences and workshops, he writes for subscribers on www.silver-investor.com and for the general public at Silverguru.

Now, after just 3 years of bear market, precious metals are already forming another secular bull market, says Smith. Here he tells The Gold Report how platinum group metals will lead the resurgence, plus his outlook for gold prices

The Gold Report: South African platinum group metals (PGM) miners have been plagued by a 21-week strike, which has cost those companies an estimated $2 billion in lost revenue. Is there an end in sight?

 David  H.Smith : It’s the end of the beginning rather than the beginning of the end, because this is a systemic issue between the miners and companies. The companies are trying to recoup their costs because they are producing PGMs below the cost of production, whereas the miners are still not getting much money for doing a dangerous job. During that five-month strike the mining companies were losing 5,000-10,000 ounces per day of production. It certainly didn’t help the supply side of the equation for PGMs.

TGR: Spot platinum prices have witnessed steady support above $1400 per ounce since January and roughly $1450 per ounce more recently. Would an end to the strike bring with it price weakness?

David H.Smith: Yes, because it’s a buy-the-rumor, sell-the-fact situation. On the day that the strike was said to have concluded, PGM prices dropped $40-50 per ounce because that was the expectation. I look at it as a buying opportunity for people who believe the PGM story has upside. Both platinum and palladium are in a deficit situation but platinum is still more than $400 per ounce from its five-year high, whereas palladium penetrated its five-year high a few weeks ago. Of the two, palladium has a higher percentage profit potential, in my view, given that it can be substituted for so many of platinum’s uses and yet sells for $500-600 per ounce less.

TGR: You have written on what you call “The Precious Metals Four”. As part of that you see platinum and palladium being the frontrunners in the eventual price rebound in precious metals. Tell us more.

David H.Smith: The precious metals four are gold, silver, platinum and palladium. Investors interested in precious metals should focus on all four even if they don’t hold all of them because of how they relate to each other and how their chart patterns correlate.

My premise is that platinum and palladium – and this has been documented by Sprott Asset Management, Rick Rule and several others – are going to be in a long-term supply deficit because the primary producers in South Africa and Russia are not going to be able to ramp up production any time soon, whereas catalytic converters, exchange-traded funds and individual PGM purchases (physical metal, jewelry) continue to sharply move demand. Meanwhile, gold and silver have been in a three-year cyclical bear market until just a few weeks ago when they made a large reversal on high volume in what looks to be the start of the next leg of the secular bull market in precious metals.

TGR: But the PGM market is relatively small, so one new producer can instantly change the market.

David H.Smith: Yes, the PGM market is about 7 million ounces annually for both platinum and palladium, whereas the gold market is about 80 Moz annually. The PGM market is infinitesimal, yet those metals have a lot of critical uses. It may take a little longer than I would like to reach a certain target, but the bull run in precious metals is underway and I think it’s going to last a long time.

TGR: How do investors get in on the run? Is it about being in bullion or equities or both?

David H.Smith: I have worked for more than a decade with David Morgan at The Morgan Report and he suggests buying the physical metal first. Once you’re comfortable with your allotment of physical precious metals, then start looking at equities. Shares can offer two or three times the upside potential on a percentage basis to the metal, but some go bankrupt and others underperform. Look at producers and royalty companies first, and if you have some money left over, buy a couple of exploration stocks with the hope of 10 or 20 times gains, knowing that they also represent a potential 100% risk to the funds you commit to a given position.

TGR: What are your near- and medium-term forecasts for platinum and palladium?

David H.Smith: It’s really difficult to put a time and price on any commodity. It’s more important to look at the risk/reward ratio. Over the next two or three years, in my opinion, the risk for having a platinum/palladium position is probably about one and the reward is four or five. I like those metrics.

If people are looking for a certain price target in a given timeframe and it doesn’t happen, they lose faith and believe that the premise is wrong. The premise might still be accurate; it just may take more time to get there. For example, for some time I believed we would see a breakout in PGM prices. It took longer than I expected, but the premise was valid. The same thing is going to happen with uranium. It’s taking longer than most people expect, but when it happens I think it’s going to be a very powerful breakout.

TGR: Are there other PGM development plays or are there some producers that are producing PGMs as a byproduct?

David H.Smith: There are some, most notably in South Africa but, frankly, due to country risk I don’t follow them. (Interestingly, in looking at Russia’s massive Norlisk project, the primary metals harvested there are nickel and copper – with palladium as a byproduct!) My primary interest is the gold and silver market, but I’m also interested in PGMs in the sense that their chart patterns will inform us as to how gold and silver will look when they move into a public mania phase.

Some years ago palladium went to $1090 per ounce after Ford Motor Co. bought a lot of supply. At one point, as David Morgan has stated publicly – at the time he was involved in that futures market – the exchange demanded two times the total value of a palladium contract as margin money, a 200% margin call. That’s eventually what we could see in all four of the precious metals.
NORLISK TICKER

TGR: Does the current precious metals rally have legs?

David H.Smith: Over the last few weeks we have seen, in some cases, a record volume turnaround in the physical metals and the buying of mining shares, which started about a week or two before metals prices turned. We have touched this area twice before over the last year or so and each time it’s held. Anything is possible. We could see weakness and surprise announcements that could cause new lows in gold and silver, but I think they’ll be short-lived. I think the risk/reward ratio is very favorable. If you’re trying to find zero risk, you’re not going to be involved. With great reward there’s always great risk. It’s how you manage that risk that determines how well you do.

TGR: Another big theme is China’s growing influence on the gold market. Tell us about that.

David H.Smith: China always has a long-term strategy. China’s gold strategy involves several aspects, one of which is thought to be a gold-backed yuan. Another is to diversify out of US Dollars in its trade account balances, if for no other reason than currency diversification. If there’s a rift between China and the US, China doesn’t want to have its money hostage in US Treasuries. And China is going to keep acquiring gold and silver, most of it under the radar. State-owned enterprises have bought some major gold companies, and last week China established a trading office in Vancouver to expand its reach into the mining sector.

There’s a Chinese game – the Japanese call it Go – that’s played with black and white stones on a table. The object is to surround your opponent and keep him or her from moving. That’s what the Chinese are doing – but for them it’s not a game.

TGR: Some recent news reports suggest China plans to introduce vending machines so that Chinese people have better access to gold.

David H.Smith: That shows how widespread the idea of gold ownership is. Last year China was the world’s largest gold consumer but India will probably retake the top spot this year. People buy gold in Asia for different reasons than you or I. They’re not trying to sell it when it goes up $50 per ounce. They look at it for the accumulation of wealth and for security.

TGR: You also see it as an extension of central bank gold buying.

David H.Smith: Yes. China is still an authoritarian society and if the government said tomorrow that it’s illegal to hold gold and that Chinese citizens must turn it in, most Chinese people would. I think this is a kind of Plan B for the central bank, if it is indeed trying to accumulate as much gold as possible – and all indications point to that.

TGR: At about this time last year you told investors to set aside some money for what you called “stupid cheap” prices.

David H.Smith: It’s time to look at prices in relation to where you think they’ll be in a few years. A few weeks ago, the prices were stupid cheap.
 
The idea of setting aside extra money is not only for stupid cheap prices, but also for something that comes out of the blue that is undervalued in relation to everything else. Having the money and courage to take advantage of those opportunities is what I call psychological capital. If you lose that, you can actually lose your ability to trade effectively.

TGR: What’s your view on Colombia?

David H.Smith: I don’t think you can eliminate country risk. Colombia is a much better place to do business than it was a few years ago. Investors have to continually look at where they are investing and ask: Am I willing to accept the risk in relation to the reward that I hope to get from holding stocks in that country?

TGR: Do you have any parting thoughts for precious metals investors?

David H.Smith: The last three years have been incredibly difficult. No one, myself included, thought it would take three years to spin out of this. I still believe the potential is so large over the next few years that a modest position in the better precious metals stocks and holding some of the physical metal will result in outsized gains for people who really understand what’s driving this market. This is a global bull market. The one in 1979-1980 was largely confined to North America. Asia wasn’t even a component. Asia is driving this market and at some point everybody is going to be on that bandwagon, as David Morgan and Doug Casey and a few others have said. Investors willing to accept the volatility with what’s going on are going to be very happy they did.

TGR: Thank you for talking with us, David.

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May 29

Samco Gold Announces Option on El Dorado-Monserrat Project With PAS

Gold Price Comments Off on Samco Gold Announces Option on El Dorado-Monserrat Project With PAS

Samco Gold Limited (TSXV:SGA) stated that it has signed a binding letter of intent with Pan American Silver Corp. that will grant PAS the exclusive option to acquire a 60 percent interest in the El Dorado- Monserrat project in Santa Cruz, Argentina. Both parties plan to participate in the exploration and development of EDM leading to the commencement of mining activities at El Dorado.

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May 02

Che Guevara Reads Piketty

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Thomas Piketty doesn’t seem a big fan of capitalism. But then, who is…?
 

On SUNDAY, we became godparents to a six-month-old girl, writes Bill Bonner in his Diary of a Rogue Economist.
 
A cute little girl, with dark skin, dark eyes, dark hair…and chubby cheeks. Her mother, as near as we can tell, is a descendant of the local Diaguita tribe. The history books tell us that the Spanish tried to exterminate them…but they seem to have failed.
 
Up here in Argentina’s Salta province, according to local tradition, landowners are often asked to be godparents to children born on their farms. Who could refuse? We’re not sure what to make of this new and totally unexpected responsibility. But heck, you take things as they come…and do your best.
 
Meanwhile, we’re dissing a book we haven’t read. Paul Krugman calls Thomas Piketty’s Capital in the Twenty-First Century a blockbuster. We can’t wait to get our hands on a copy, just to see if Piketty is really the blockhead he seems to be.
 
Already we pointed out that real capitalism is self-correcting. Piketty is worried that capitalists are making too much money. The returns from investing, he says, are outstripping the rewards to working stiffs.
 
Piketty expresses this as r > g…where r stands for the average annual rate of return on capital (including profits, dividends, interest, rents, royalties and other forms of income from capital) and g stands for the rate of growth of the economy.
 
He really shouldn’t worry about it. When rates of return are high, investors pile in. Then, with too much money chasing too few good investments, the rate of return – r – falls.
 
Often, investment returns fall so hard investors cry out in pain. But that is just the way it works. You can’t enjoy the pleasure of profits without the pain of losses from time to time.
 
Thomas Piketty doesn’t seem like a big fan of capitalism. But then who is?
 
“I guess you’re having your crisis of capitalism in the US,” said the woman who runs a nearby welfare program. She rode up on a motorcycle (a two-hour drive) so she could help the locals improve their lives. Dressed in khakis, she is the sort of woman you could be marooned with on a desert island and not break your marriage vows. A round face…a round body…she nevertheless seemed to have a sharp edge.
 
“I hope you Americans are holding up okay,” she said with the cheerfulness of a vegetarian in an abattoir.
 
For her, capitalism is a doomed creed. It is just a matter of time before it is replaced by well-meaning, correct-thinking vegetarians who make sure the chips fall where they want, not where they may.
 
We figured her out when we visited her headquarters and found a picture of Che Guevara on the wall. She is no fan of capitalism either.
 
But she is not alone. Capitalism has so few real aficionados they could all probably be rounded up and shot in an afternoon.
 
The poor don’t like it because they think it – rather than their own bad luck or bad habits – keeps them from getting rich. The rich don’t like it because it threatens to ruin them with crashes and bankruptcies. Businessmen don’t like it because its process of “creative destruction” threatens to make their industries obsolete. Intellectuals don’t like it because it is inherently unpredictable and uncontrollable. The media doesn’t like it because it gives no press conferences and provides no “talking points” for lazy journalists. Investors don’t like it because it punishes their mistakes.
 
And of course, professors of economics hate it more than anyone. Why? Because it refutes their claptrap ideas about how an economy works.
 
And so they all – rich, poor, mighty and miserable – turn to the government for succor. Why the government? Because it is the only institution that can lawfully stop capitalists from creating wealth.
 
Piketty’s observation – that the richest have gotten much richer over the last three decades – is not wrong. It’s too bad that he can’t think more deeply about how it happens.
 
He believes when wealth is concentrated in few hands there follows a phenomenon he calls “state capture.” Rich people are able to get control of the government and use it like amafioso with a baseball bat: to whack their challengers and skim the profits.
 
But the state is no chaste and innocent participant. It is not “captured” at all. Those with control of the police and the military are no strangers to the baseball bat; they use it regularly. In fact, they often take the rich hostage and demand as much ransom (taxes…bribes…campaign contributions…payoffs to special interests) as they can get from them.
 
More often, they simply connive and conspire with any group that can help them – rich and poor, labor unions, business groups, lobbyists and so forth – always subverting capitalism and undermining the public welfare.
 
Our old friend Jim Davidson tells the story of the “sugar daddies” who have gotten billions of US Dollars in direct and indirect subsidies over the years.
 
They learned their trade – bribing politicians – in Cuba before Castro took over. In the 1960s, they brought their techniques to the US. They managed to get much of the state of Florida drained at taxpayer expense, so they could plant cane and sell sugar at artificially high prices.
 
You have to admire “Pepe” and “Alfy” Fanjul; they know how the game is played. Alfy is so well connected, according to the Lewinsky affair report, that he had President Clinton’s ear when Monica had another of the president’s parts.
 
Crony capitalism is just a part of the way the economy is twisted and corrupted. Health care, finance and education – the biggest industries in America – have been largely captured by Washington (or vice versa).
 
You might say, too, that the feds acted after the crash of 2008-09 to protect the wealthy. Without their intervention the problem of inequality wouldn’t exist; as much as half of their stock market wealth would have been wiped out…and probably would have stayed wiped out.
 
The feds might just as well have wished to spread the wealth among more voters. But the goal was not so much to make the rich richer. Instead, the feds just wanted to keep capitalism from doing its thing. Stephen Roach explains:
“The Fed’s strategy [has been] to get the share markets up, get risky assets up, [and] stimulate the economy through ‘wealth effects.’ One problem: ‘wealth effects’ are for wealthy people. What about the real problem in America, which is middle-class, structurally unemployed, workers and their families? Are they benefiting from the ‘wealth effect’?”
They’re not?
 
Well, then rant about inequality…and crony capitalism. Write a bestseller. And find more ways to stop real capitalism from taking place.
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May 01

r > g

Gold Price Comments Off on r > g
Got that? It’s a publishing and political sensation…!
 

THOMAS PIKETTY is the sort of man history might otherwise forget. And the economics profession might be better off if they’d never met him, writes Bill Bonner in his Diary of a Rogue Economist.
 
He is a French academic…and perhaps the luckiest economist in the world.
 
Picketty has written a book that is probably not worth reading – a book that is apparently wrongheaded and shortsighted…a book with no reported original insights other than the obvious: that accumulating capital is a sensible way to grow wealth.
 
All of this is, admittedly, hearsay. We are still out in the boondocks of Argentina’s pampas. There are no bookstores within hundreds of miles. But we are eager to get a copy of Piketty’s tome just to see if it is as lunkheaded as we suspect.
 
In the meantime, we turn to our expert on French economists, Simone Wapler in Paris, for an insider’s view:
“Piketty sticks with the old Marxist clichés. And the success of his book rests on a stupid little equation: r > g. This makes you sound like you know what you’re talking about at dinner parties. It tells us that when the returns to rentiers [the return on capital investments] is greater than economic growth it’s a bad thing, and we have to take money away from the rentiers in order to make the world a more beautiful and happy place. Of course, g is not clearly defined…and neither is “capital,” which is today mostly debt anyway.
 
“But I only say that because I’m jealous. I’d like to come up with an idiotic equation and get rich, too!”
Looks like there’s nothing too surprising about Piketty’s book. Au contraire, it’s just what you’d expect: a 21st century look at the imaginary struggle between rich capitalists and the working stiffs. What’s astonishing is that it is No. 1 on the Amazon.com bestseller list. The L.A.Times reports:
“Move over, Fifty Shades of Grey. Instead of romance, a book by French economist Thomas Piketty on income inequality and capitalism is the No. 1 best-selling book on Amazon.com.
 
“Piketty’s Capitalism in the Twenty-First Century is generating so much interest among economists and policymakers that it’s temporarily out of stock on Amazon.
 
“At nearly 700 pages, it’s not a book for beach reading by casual readers – unless a mix of dense economic data and history is your thing.
 
“Piketty examined decades of historical data from 20 countries to compare income inequality over time and concluded that the US economy has seen the wealth of the 1% grow to dizzying new heights.
 
“Wealth isn’t trickling down as some argue, Piketty said. Moreover, he warns that rising inequality will undermine democracy and generate discontent…”
Which makes us wonder. What is wrong with the pornographers…the romancers…the fat-fighters…and the political liars? How could they let a scarcely-readable economist, whose mother tongue isn’t even English, get ahead of them?
 
Yes, dear reader, we are jealous, too. Piketty’s book offers little new. From what we can tell, he misunderstands the most important lessons of economics. Yet his book gets widely reviewed, widely purchased, and widely praised. Our books rarely get noticed.
 
(That will change with the publication of our next book – out next month! Watch this space.)
 
The gist of Piketty’s tome is that capitalists have made a lot of money lately…and that something needs to be done about it. Surprise, surprise – he believes wealth “inequality” is a problem…and that market economies need the wise hands of professional economists, policymakers and central bankers to help even things out.
 
We only have press reports to go on. But none mention any serious effort on the part of Piketty to explain just how the rich got so rich in the first place. Mightn’t those same economists and policymakers have had a hand in it? We’ll come back to that tomorrow…
 
On the surface of it, his concern that r > g seems absurd. When r is high it means that investments are good ones. That is they produce more wealth than they cost. The higher r goes, the more wealth is created.
 
If you invest in a new technology, for example, the investment only produces positive r if the technology proves successful. The more r you get the more successful it is…and, theoretically, the richer our species becomes.
 
Also, when r is high, people are encouraged to save more money and invest it in newer technology and more productive output. The amount of stuff increases…people are, generally, wealthier.
 
The other thing that happens is that when more people save and invest (motivated by the high r) more and more investments necessarily lower r. The first investments produce high rates of return. This draws more marginal investors into more marginal investments…and the rate of return goes down.
 
Piketty’s problem solves itself. If it is allowed to…
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Apr 23

Gold in Crisis

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A study of prices during the Syria, then Ukraine crises, plus the real crisis facing US investors…
 

TODAY I want to talk about crises, writes Laurynas Vegys, research analyst at Doug Casey’s eponymous research group.
 
Two of the most notable ones that have been in the public eye over the course of the past 6-8 months are obviously the conflicts in Ukraine and Syria. The two are very different, yet both seemed to cause rallies in the gold market.
 
I say “seemed” because, while there were days when the headlines from either country sure looked to kick gold up a notch, there were also relevant and alarming reports from Argentina and emerging markets like China during many of the same time periods. Nevertheless, looking at the impressive gains during these periods, one has to wonder if it actually takes a calamity for gold to soar.
 
If so, can the yellow metal still return to and beat its prior highs, absent a major political crisis or a full-blown military conflict? My answer: Who needs a new crisis when we live in an ongoing one every day?
 
More on this in a moment. Let’s first have a quick look at what happened in Ukraine and Syria as relates to the price of gold. Here’s a quick look at the timeline of some of the major events from the Ukrainian crisis, followed by the same for Syria.
 
 
There seems to be a fairly clear pattern in both of these charts. Gold seems to rise in the anticipation of a conflict; once the conflict gets going, or turns out not as bad as feared, however, it sells off.
 
 
We see, for example, that as the news broke that chemical weapons were being used in Syria and Obama was threatening to intervene, gold moved up. But when the US did not wade into the bloodshed and Putin proposed his diplomatic solution, gold slid into a protracted sell-off, ending up lower than where it began.
 
It’s impossible to say with any degree of certainty how much of gold’s recent rise was due to anticipation of the Ukraine/Crimea crisis, but there were certainly days when gold seemed to move sharply in response to news of escalation in the conflict. And again, after it became clear that the US and EU would do little more than condemn Russia’s actions with words, gold retreated. As of this writing, it’s down about $85 from its high a little over a month ago. (We think many investors underestimate the potential impact of tit-for-tat sanctions, but they are not wrong to breathe a sigh of relief that a war of bullets didn’t start between East and West.)
 
In sum, to the degree that global crisis headlines do impact the price of gold, the effects are short-lived. Unless they lead directly to consequences of long-term significance, these fluctuations may capture the attention of day traders, but are little more than distractions for serious gold investors betting on the fundamentals.
 
You have to keep your eye on the ball.
 
Major financial, economic, or political trends – the kind we like to base our speculations upon – don’t normally appear as full-fledged disasters overnight. In fact, quite the opposite; they tend to lurk, linger, and brew in stealth mode until a boiling point is finally reached, and then they erupt into full-blown crises (to the surprise and detriment of the unprepared).
 
Fortunately, the signs are always there…for those with the courage and independence of mind to take heed.
 
So what are the signs telling us today – what’s the real ball we need to keep our eyes upon, if not the distracting swarm of potential black swans?
 
The big-league trend destined for some sort of major cataclysmic endgame that will impact everyone stems from government fiscal policy: profligate spending, leading to debt crisis, leading to currency crisis, leading to a currency regime change. And not in Timbuktu – we’re talking about the coming fall of the US Dollar.
 
The first parts of this progression are already in place. Consider this long-term chart of US debt.
 
 
Notice that government debt was practically nonexistent halfway through the 20th century, but has seen a dramatic increase with the expansion of federal government spending.
 
Consider this astounding fact: The government has accumulated more debt during the Obama administration than it did from the time George Washington took office to Bill Clinton’s election in 1992. Total US government debt at the end of 2013 exceeded $16 trillion.
 
Let’s put that in perspective, since today’s Dollars don’t buy what a nickel did a hundred years ago.
 
 
Except for the period of World War II and its immediate aftermath, never before has the US government been this deep in debt. Having recently surpassed the threshold of 100% debt to GDP, America has crossed into uncharted territory, getting in line with the likes of…
  • Japan: “leading” the world with a 242% debt-to-GDP ratio
  • Greece: 174%
  • Italy: 133%
  • Portugal: 125%
  • Ireland: 117%
The projection in the chart above is based on the 9.4% average annual rate of debt-to-GDP growth since the US embarked on its current course in response to the crash of 2008. If the rate persists, the US will be deeper in debt relative to its GDP than Ireland next year, deeper than Portugal in 2016, Italy in 2017, Greece in 2019, and even Japan in 2023 (and the US does not have the advantage of decades of trade surpluses Japan had).
 
Granted, the politicians and bureaucrats say they will slow this runaway train, but we’re not talking about Fed tapering here. Congress will have to embrace the pain of living within its means. We’ll believe that when we see it.
 
But let’s take a more conservative, 10-year average growth rate (an arbitrary standard many analysts use): 5.3%. At this rate, the US will still be deeper in debt than Ireland and Portugal in 2017, Italy in 2019, Greece in 2024, and Japan in 2030.
 
Either way, this is still THE crisis of our times; all of the countries mentioned above are undergoing excruciating economic and social pain. It’s no stretch to imagine the kind of social and political turmoil that has resulted from the European debt crisis coming to Main Street USA, as American debt goes off the charts.
 
It’s also important to understand that the debt charted above excludes state and local debt, as well as the unfunded liabilities of social entitlement programs like Social Security and Medicare.
 
This ever-growing mountain – volcano – of government debt is a long-term, systemic, and extremely-difficult-to-alter trend. Unlike the crises in Ukraine and Syria (at least, so far), it’s here to stay for the foreseeable future. While some investors have grown accustomed to this government-created phenomenon and no longer regard it as dangerous as outright military conflict, make no mistake – in the mid to long term, it’s just as dangerous to your wealth and standard of living.
 
Still think it can’t happen here? To fully understand how stealthily a crisis can sneak up on you, watch Casey Research’s eye-opening documentary, Meltdown America.
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Apr 22

Malbex Resources Enters Earn-in Agreement with Barrick Gold on Del Carmen Project in Argentina

Gold Price Comments Off on Malbex Resources Enters Earn-in Agreement with Barrick Gold on Del Carmen Project in Argentina

Malbex Resources Inc. (TSXV:MBG) has entered into an agreement with Barrick Gold Corp. (TSX:ABX) regarding Malbex’s Del Carmen project in San Juan Province, Argentina. Under the agreement, Barrick will have the option to earn a 51-percent interest, and later a 75-percent interest, in the Del Carmen project based on the meeting of certain expenditure requirements.

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