Oct 30

Peak Oil? How About Peak Oil Storage?

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Here’s how cheap US energy promises an ‘epic’ turnaround in the US economy…
 

MATT BADIALI is editor of the S&A Resource Report, a monthly investment advisory focusing on natural resources from Stansberry & Associates.
 
A regular contributor to Growth Stock Wire, Badiali has experience as a hydrologist, geologist and consultant to the oil industry, and holds a master’s degree in geology from Florida Atlantic University.
 
Here he tells The Gold Report‘s sister title The Mining Report that cheap oil prices and the economic prosperity they bring can make politicians and investors look smarter than they are. Hence Badiali’s forecast that Hillary Clinton…if elected in 2016…could go become one of America’s most popular presidents. Yes, really.
 
The Mining Report: You have said that Hillary Clinton could go down in history as one of the best presidents ever. Why?
 
Matt Badiali: Before we get your readership in an uproar, let me clarify that the oddsmakers say that Hillary Clinton is probably going to take the White House in the next election. Even Berkshire Hathaway CEO Warren Buffet said she is a slam dunk. I’m not personally a huge fan of Hillary Clinton, but I believe whoever the next president is will ride a wave of economic benefits that will cast a rosy glow on the administration.
 
Her husband benefitted from the same lucky timing. In the 1980s, people had money and felt secure. It wasn’t because of anything Bill Clinton did. He just happened to step onto the train as the economy started humming. Hillary is going to do the same thing. In this case, an abundance of affordable energy will fuel that glow. The fact is things are about to get really good in the United States.
 
TMR: Are you saying shale oil and gas production can overcome all the other problems in the country?
 
Matt Badiali: Cheap natural gas is already impacting the economy. In 2008, we were paying $14 per thousand cubic feet. Then, in March 2012, the price bottomed below $2 because we had found so much of it. We quit drilling the shale that only produces dry gas because it wasn’t economic. You can’t really export natural gas without spending billions to reverse the natural gas importing infrastructure that was put in place before the resource became a domestic boom. The result is that natural gas is so cheap that European and Asian manufacturing companies are moving here. Cheap energy trumps cheap labor any day.
 
The same thing is happening in tight crude oil. We are producing more oil today than we have in decades. We are filling up every tank, reservoir and teacup because we need more pipelines. And it is just getting started. Companies are ramping up production and hiring lots of people. By 2016, the US will have manufacturing, jobs and a healthy export trade. It will be an economic resurgence of epic proportions.
 
TMR: The economist and The Prize author Daniel Yergin forecasted US oil production of 14 million barrels a day by 2035. What are the implications for that both in terms of infrastructure and price?
 
Matt Badiali: Let’s start with the infrastructure. The US produces over 8.5 million barrels a day right now; a jump to 14 would be a 65% increase. That would require an additional 5.5 million barrels a day.
 
To put this in perspective, the growth of oil production from 2005 to today is faster than at any other time in American history, including the oil boom of the 1920s and 1930s. And we’re adding it in bizarre places like North Dakota, places that have never produced large volumes of oil in the past.
 
North Dakota now produces over 1.1 million barrels a day, but doesn’t have the pipeline capacity to move the oil to the refineries and the people who use it. There also aren’t enough places to store it. The bottlenecks are knocking as much as $10 per barrel off the price to producers and resulting in lots of oil tankers on trains.
 
And it isn’t just happening in North Dakota. Oil and gas production in Colorado, Ohio, Pennsylvania and even parts of Texas is overwhelming our existing infrastructure. That is why major pipeline and transportation companies have exploded in value. They already have some infrastructure in place and they have the ability to invest in new pipelines.
 
The problem we are facing in refining is that a few decades ago we thought we were running out of the good stuff, the light sweet crude oil. So refiners invested $100 billion to retool for the heavier, sour crudes from Canada, Venezuela and Mexico. That leaves little capacity for the new sources of high-quality oil being discovered in our backyard. That limited capacity results in lower prices for what should be premium grades.
 
One solution would be to lift the restriction on crude oil exports that dates back to the 1970s, when we were feeling protectionist. It is illegal for us to export crude oil. And because all the new oil is light sweet crude, the refiners can only use so much. That means the crude oil is piling up.
 
Peak oil is no longer a problem, but peak storage is. If we could ship the excess overseas, producers would get a fair price for the quality of their products. That would lead them to invest in more discovery. However, if they continue to get less money for their products, investment will slow. 
 
TMR: Is everything on sale, as Rick Rule likes to say?
 
Matt Badiali: Everything is on sale. But the great thing about oil is it is not like metals. It is cyclical, but it’s critical. If you want your boats to cross oceans, your airplanes to fly, your cars to drive and your military to move, you have to have oil. You don’t have to buy a new ship today, which would take metals. But if you want that sucker to go from point A to point B, you have to have oil. That’s really important. There have been five cycles in oil prices in the last few years.
 
Oil prices rise and then fall. That’s what we call a cycle. Each cycle impacts both the oil price and the stock prices of oil companies. These cycles are like clockwork. Their periods vary, but it’s been an annual event since 2009. Shale, especially if we can export it, could change all of that.
 
The rest of the world’s economy stinks. Russia and Europe are flirting with recession. China is a black box, but it is not as robust as we thought it was. Extra supply in the US combined with less demand than expected is leading to temporary low oil prices. But strategically and economically, oil is too important for the price to get too low for too long.
 
I was recently at a conference in Washington DC where International Energy Agency Executive Director Maria van der Hoeven predicted that without significant investment in the oil fields in the Middle East, we can expect a $15 per barrel increase in the price of oil globally by 2025.
 
I don’t foresee a lot of people investing in those places right now. A shooting war is not the best place to be invested. I was in Iraq last year and met the Kurds, and they’re wonderful people. This is just a nightmare for them. And for the rest of the world it means a $15 increase in oil.
 
For investors, the prospect of oil back at $100 per barrel is not the end of the world. With oil prices down 20% from recent highs and the best companies down over 30% in value, it is a buying opportunity. It means the entire oil sector has just gone on sale, including the companies building the infrastructure.
 
As oil prices climb back to $100, companies will continue to invest in producing more oil. And that will turn Hillary Clinton’s eight-year presidency into an economic wonderland.
 
TMR: The last time you and I chatted, you explained that different shales have different geology with different implications for cracking it, drilling it and transporting it. Are there parts of the country where it’s cheaper to produce and companies will get higher prices?
 
Matt Badiali: The producers in the Bakken are paying about twice as much to ship their oil by rail as the ones in the Permian or in Texas are paying to put it in a pipeline. The Eagle Ford is still my favorite quality shale and it is close to existing pipelines and export infrastructure, if that becomes a viable option. There are farmers being transformed into millionaires in Ohio as we speak, thanks to the Utica Shale.
 
TMR: What about the sands providers? Is that another way to play the service companies?
 
Matt Badiali: Absolutely. The single most important factor in cracking the shale code is sand. If the pages of a book are the thin layers of rocks in the shale, pumping water is how the producers pop the rock layers apart and sand is the placeholder that props them open despite the enormous pressure from above. Today, for every vertical hole, drillers create long horizontals and divide them into 30+ sections with as much as 1,500 pounds of sand per section. A single pad in the Eagle Ford could anchor four vertical holes with four horizontal legs requiring the equivalent of 200 train car loads of sand.
 
Investors need to distinguish between companies that provide highly refined sand for oil services and companies that bag sand for school playgrounds. Fracking sand is filtered and graded for consistency to ensure the most oil is recovered. Investors have to be careful about the type of company they are buying.
 
TMR: Coal still fuels a big chunk of the electricity in the US Can a commodity be politically incorrect and a good investment?
 
Matt Badiali: Coal has a serious headwind, and it’s not just that it’s politically incorrect. It competes with natural gas as an electrical fuel so you would expect the two commodities would trade for roughly the same price for the amount of electricity they can generate, but they don’t. The Environmental Protection Agency is enacting emission standards that are effectively closing down coal-fired power plants. And because it is baseload power, you can’t easily shut it off and turn it back on; it has to be maintained. That means it doesn’t augment variable power like solar, as well as natural gas, which can be turned on and off like a jet engine turbine. So coal has two strikes against it. It is dirty and it isn’t flexible.
 
Some coal companies could survive this transition, however. Metallurgical coal (met coal) companies, which produce a clean coal for making steel, have better prospects than steam coal. Along with steam coal, met coal prices are at a six-year low. 
 
Generally, I want to own coal that can be exported to India or China, where they really need it. Japan has replaced a lot of its nuclear power with coal and Germany restarted all the coal-fired power plants it had closed because of carbon emissions goals. We are already seeing deindustrialization there due to high energy prices. Cheap energy sources, including coal, will be embraced. I just don’t know when.
 
TMR: Thank you for your time, Matt.
 
Matt Badiali: Thank you.
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Oct 29

QE, War & Other Autopilot US Action

Gold Price Comments Off on QE, War & Other Autopilot US Action
Ready for a clean break with Fed money creation…?
 

AMONG the many things still to be discovered is the effect of QE and ZIRP on the markets and the economy, writes Bill Bonner in his Diary of a Rogue Economist.
 
We can’t wait to find out.
 
The Fed has bought nearly $4 trillion of bonds over the last five years. You’re bound to get some kind of reaction to that kind of money.
 
But what?
 
Higher stocks? More GDP growth? Higher incomes? More inflation?
 
Washington was hoping for a little more of everything. But all we see are higher stock and bond prices. And if QE helped prices to go up, they should go back down when QE ends this week.
 
Unless the Fed changes its mind…
 
If the Fed makes a clean break with QE, it risks getting blamed for a big crack-up in the stock market. On the other hand, if it announces more QE, it risks creating an even bigger bubble…and getting blamed for that.
 
Our guess is we’ll get a mealymouthed announcement that leaves investors reassured…but uncertain. The Fed won’t allow a bear market in stocks, but investors won’t know how and when it will intervene next.
 
Last week, we were thinking about the reaction to the murder in Ottawa of a Canadian soldier who was guarding a war memorial.
 
There were 598 murders in Canada in 2011 (the most recent year we could find). As far as we know, not one registered the slightest interest in the US. But come a killer with Islam on his mind, and hardly a newspaper or talk show host in the 50 states can avoid comment.
 
“War in the streets of the West,” was how the Wall Street Journal put it; the newspaper wants a more muscular approach to the Middle East.
 
Why?
 
After a quarter of a century…and trillions of Dollars spent…and hundreds of thousands of Dollars lost…America appears to have more enemies in the Muslim world than ever before. Why would anyone want to continue on this barren path? To find out, we follow the money.
 
Professor Michael Glennon of Tufts University asks the same question: Why such eagerness for war?
 
People think that our government policies are determined by elected officials who carry out the nation’s will, as expressed at the ballot box. That is not the way it works.
 
Instead, it doesn’t really matter much what voters want. They get some traction on the emotional and symbolic issues – gay marriage, minimum wage and so forth.
 
But these issues don’t really matter much to the elites. What policies do matter are those that they can use to shift wealth from the people who earned it to themselves.
 
Glennon, a former legal counsel to the Senate Foreign Relations Committee, has come to the same conclusion. He says he was curious as to why President Obama would end up with almost precisely the same foreign policies as President George W. Bush.
“It hasn’t been a conscious decision. […] Members of Congress are generalists and need to defer to experts within the national security realm, as elsewhere.
 
“They are particularly concerned about being caught out on a limb having made a wrong judgment about national security and tend, therefore, to defer to experts, who tend to exaggerate threats. The courts similarly tend to defer to the expertise of the network that defines national security policy.
 
“The presidency is not a top-down institution, as many people in the public believe, headed by a president who gives orders and causes the bureaucracy to click its heels and salute. National security policy actually bubbles up from within the bureaucracy.
 
“Many of the more controversial policies, from the mining of Nicaragua’s harbors to the NSA surveillance program, originated within the bureaucracy. John Kerry was not exaggerating when he said that some of those programs are ‘on autopilot’.
 
“These particular bureaucracies don’t set truck widths or determine railroad freight rates. They make nerve-center security decisions that in a democracy can be irreversible, that can close down the marketplace of ideas, and can result in some very dire consequences.
 
“I think the American people are deluded…They believe that when they vote for a president or member of Congress or succeed in bringing a case before the courts, that policy is going to change. Now, there are many counter-examples in which these branches do affect policy, as Bagehot predicted there would be. But the larger picture is still true – policy by and large in the national security realm is made by the concealed institutions.”
Calling the Ottawa killing “war” not only belittles the real thing; it misses the point. There is no war on the streets of North America. But there is plenty of fraud and cupidity.
 
Here is how it works: The US security industry – the Pentagon, its hangers-on, its financiers and its suppliers – stomps around the Middle East, causing death and havoc in the Muslim world.
 
“Terrorists” naturally want to strike back at what they believe is the source of their sufferings: the US. Sooner or later, one of them is bound to make a go of it.
 
The typical voter hasn’t got time to analyze and understand the complex motives and confusing storyline behind the event. He sees only the evil deed.
 
His blood runs hot for protection and retaliation. When the call goes up for more intervention and more security spending, he is behind it all the way.
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Oct 19

I See Two Horsemen

Gold Price Comments Off on I See Two Horsemen
Patience needed, but the Dollar has been rising with the Gold/Silver Ratio…
 

The BLACK LINE is where we have been, writes Gary Tanashian in his Notes from the Rabbit Hole. The blue line is a projection of what a typical correction (whether a healthy interim one or a bear market kick off) might look like.
 
 
We used real charts of the Dow, S&P 500 and Nasdaq 100 to gauge the entry into the current correction and now the resistance points to the expected bounce off of the US market’s first healthy sentiment reset in quite some time. But our cartoon above gives you the favored plan on how the correction could play out.
 
Last week, the market bounced on what can only be viewed as a sad attempt by a Fed member (a perceived Hawk, no less) to jawbone a stop to the impulsive bearishness. The strength of the US Dollar and first decent correction since 2011 seems to have spooked the folks over at Policy Central and suddenly they are talking QE again. That does not inspire confidence, if you are a bull.
 
Be that as it may, we have been due for a bounce to clean out the over bearish and over sold conditions. We are making no claims to know whether or not this is a bear market kick-off because when the process is complete per the sketch above, a trade-worthy rally should materialize when a notable low is ground out.
 
An impulsive straight line drop, to support though it is in many cases (ref. the real charts of the Semiconductors and the Banks), and recovery on policy makers’ jawboning is not usually a path to sustained recovery.
 
NFTRH is managing a bounce (the first ‘up’ phase of the blue line above) until/unless it proves it is more than that. Traders should be nimble. If the projection proves out, a renewed decline into November could follow, which should come out of a good setup for bearishly inclined traders.
 
Moving on, volatility is back and while it seemed to come out of nowhere, it was easily readable in advance by steadily declining junk vs. quality bond yields spreads, declining index and sector participation rates and of course, the strong US Dollar (which is decidedly not on the favored agenda of asset-friendly policy makers), among several other indicators we tracked into and through the first part of the correction.
 
Per the scenario above, in the likely event a bottom has not yet been registered, one will eventually be ground out and it should be good for a trade at least. Personally, I have positioned for a bounce right here but that is not recommended for anyone who is not willing to trade on a dime, in-day and in-week. The answer to the question ‘cyclical bull ender or not?’ does not need to come yet, but there is going to be data galore going forward. We’ll work the data as it comes in. Meanwhile, an intermediate bear trend is in force.
 
We had gauged the outperformance of the Emerging Markets (EEM vs. SPY) for much of this year, but when the ratio broke down we noted it in real time. So we shorted the EM’s and prepared for coming bearishness in US markets. We have been charting Europe’s decline for months now, initially shorting Spain, which had previously been our guide to the upside speculative impulse that took hold in Europe.
 
Global markets are nearly but not yet broken with Europe and the World index at key big picture support, the Emerging Markets having made a false breakout and failure, China actually looking interesting here, Japan playing the ‘push me, pull you’ game with its currency and Canada doing some bearish things as the TSX not only loses its blue sky breakout, but starts snapping support levels. The TSX-V (CDNX) is leading the way down and is flat out destroyed right along with any speculative spirits in the world of scammy little Canadian ‘resource’ plays.
 
Early in 2014 we charted the CCI index of commodities, and its hold of critical support at 500 as well as its resistance to the breakout and rally that followed. More recently we managed the decline to and through that support level while maintaining a “not interested” stance the whole way. Commodities can bounce with any ‘inflation trade’ bounce (watch TIP-TLT and other inflation expectations indicators) that may manifest.
 
We were not interested in commodities because we were given no reason to have a favorable view of inflation expectations, which through the TIP-TLT ratio were gauged to be burrowing through the floor week after week. This was also another negative for the US stock market, which had been feasting like Goldilocks on the bears’ porridge.
 
Foremost among the indicators have been Yield Curves generally favoring US stocks and hurting gold, until the curve burst upward beginning last week. This has not surprisingly come with the US stock market correction. If the market bounces, the curve can decline and junk-quality bond spreads can bounce. Also, the VIX needs a rest.
 
The big daddy of indicators however, has been the Two Horsemen, i.e. the Gold-Silver ratio and the US Dollar rising together. This was an indicator of failing liquidity which NFTRH and indeed our public website, noted in real time.
 
It is the indicators even more so than straight up technical analysis that will help us decide whether or not the bull market has ended as we move forward through coming data points.
 
Deflationary and economic growth troubles across the globe are blamed for the recent strength in the US Dollar and to a degree that holds merit. The other support has been the very real economic recovery in the US (beginning with the Semiconductor sector) born of very unreal (i.e. unnatural and unsustainable) policy inputs.
 
Naturally, it stands to reason that if Dollar compromising policy is promoted to keep assets aloft, then a strong Dollar is unwelcome. Because not only would it begin to eat away at exporting sectors like manufacturing, but it would also make assets less expensive. But that should be a good thing, no? Declining prices in things like oil, food and services? Not on the one-way street that is our current system of Inflation onDemand.
 
The Yen is strong lately and the Euro can gain a bounce bid. This means that the USD can continue to weaken from its impulsively over bought and over loved levels. But on the big picture USD has been moving upward from a long-term basing pattern.
 
Gold is meantime favored over silver, given the move in the Gold/Silver Ratio and diminishing global liquidity. Beyond that, gold’s fundamentals have not been constructive for some time now, no matter how often idealists click the heels of their ruby slippers.
 
That was then, this is now. Gold is counter cyclical per the Gold-Commodities chart in this post. This one chart is the very reason that NFTRH never did take its focus off the biggest picture view of an ongoing global economic contraction in progress. This would be the gateway to a real bull market in gold mining stocks, but it is also the more difficult pathway because the inflationists get weeded out along the way as silver does not go to the moon and lazy analysis gets punished, not rewarded.
 
Gold stocks are counter cyclical and macro indicators, and they say we may be at the start of grinding out a counter cyclical phase. But note the word grind. That’s what it has been and what it could continue to be for a while yet. As gold slowly asserts itself vs. cyclical commodities, cost-input fundamentals gradually improve in the industry and as gold slowly asserts itself vs. stock markets an important component of investor psychology slowly comes into place.
 
Patience…the macro does not pivot over night.
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Oct 03

Silver "a Screaming Buy", Crude Oil "Going to $60"

Gold Price Comments Off on Silver "a Screaming Buy", Crude Oil "Going to $60"
The beautiful thing about pessimism towards junior precious metal miners…
 

KAL KOTECHA is editor and founder of the Junior Gold Report, a publication about small-cap mining stocks.
 
Kotecha has previously held leadership positions with many junior mining companies, and after completing a Master of Business Administration in finance in 2007, he is now working on his PhD in business marketing, and also teaches economics at the University of Waterloo.
 
Here Kal Kotecha tells The Gold Report‘s sister title, The Mining Report, that to obtain superior results, you cannot do what everyone else is doing. He maintains that much of the risk associated with junior resource equities has been beaten out by the herd mentality and that selectively buying what’s left presents opportunity…
 
The Mining Report: You’re the editor of Junior Gold Report, but you also follow similar-sized companies in the energy sector. Please give our readers an overview of the energy space.
 
Kal Kotecha: I’ve been involved in the space since 2002 and I’ve never witnessed anything like what is currently happening. In the energy sector, I see the price of uranium increasing, but to see price appreciation across energy stocks, the price of oil must remain near $100 per barrel. That benchmark could prove challenging, given the growing supply of shale oil in the US Texas produces as much oil as Iraq or about 3 million barrels of oil per day. Most of it comes from two sources: the Eagle Ford Shale in southwest Texas and the Permian Basin in west Texas. Chris Guith, senior vice-president of policy for the US Chamber of Commerce’s Institute for 21st Century Energy, estimates that recoverable resources amount to 120 years of natural gas, 205 years of oil and 464 years of coal at current demand levels.
 
Fracking has lowered the price of natural gas by about 70% over the previous seven years or so. The price of oil, especially in the US, should decrease to $60-70 per barrel on average because of shale oil. US dependency on imported oil should lessen, too.
 
TMR: Is that a near- or medium-term forecast?
 
Kal Kotecha: That’s a medium- to longer-term forecast. I don’t believe in peak oil theory. The US’ savior in the oil industry is going to be shale oil, and there is a lot of it. Ultimately, that’s going enhance the US economy. Basically everything runs on oil. The US won’t have to import as much oil from Saudi Arabia or even Canada.
 
TMR: What’s your price forecast for natural gas?
 
Kal Kotecha: Natural should stay between $4-6 per thousand cubic feet (Mcf). It’s more expensive in Europe, but in North America the floor should remain around $4/Mcf. I don’t think it’s going to go back up to $12 or down to $3.
 
TMR: You mentioned earlier that you expect uranium prices to rise.
 
Kal Kotecha: Uranium is an interesting space. As oil prices slowly decrease, the demand for uranium seems to increase. Geopolitical tensions, especially in Russia and Ukraine, could lead to much higher prices. Russia is a large uranium producer and Western nations might stop importing uranium from Russia if political fires burn much hotter.
 
As of last month, China had 21 nuclear power reactors operating on 8 sites and another 20 under construction. China’s National Development and Reform Commission intends to raise the percentage of electricity produced by nuclear power to 6% by 2020 from the current 2% as part of an effort to reduce air pollution from coal-fired plants. Ultimately, uranium demand will triple inside six years.
 
In India, the government is expected to spend nearly $150 billion to develop nuclear power over the next 10-15 years. India now has nuclear energy agreements with about a dozen countries and imports primarily from France, Russia and Kazakhstan.
 
TMR: In a recent note on Junior Gold Report you wrote, “I smell smoke, but where’s the fire?” in relation to the current sentiment in the junior precious metals market. What’s your conclusion?
 
Kal Kotecha: The current pessimism surrounding the junior precious metal space has largely contributed to the fall in price of the commodities, but the beautiful thing about pessimism and hate towards a market sector is that there is plenty of room for error. Fantastic opportunities arise when great companies have been undervalued due to negative news that does not have a long-term impact on the company. So how do you determine which stocks, in a beaten up resource market, are great buys?
 
TMR: Do you have an answer?
 
Kal Kotecha: One must understand the essential principles of intrinsic value and the margin of safety. The principle of intrinsic value determines the worth of a stock through a combination of the price and the condition of the company. So no matter how great a company is, it may not always be a good investment. As Howard Marks wrote in The Most Important Thing: Uncommon Sense for the Thoughtful Investor, investment success doesn’t come from buying good things, but rather from buying things well.
 
The principle of the margin of safety involves minimizing risk and then, therefore, minimizing the potential loss of one’s money. Dealing with risk is a necessary part of investing, as stock price fluctuations occur and are often unpredictable. If the risk perceived by the herd – general investors who follow the majority – is less than the actual risk, then the returns will outweigh the risks. So when consensus thinks something is risky, the general unwillingness to buy it pushes the price down to where it is no longer risky at all, given it still has intrinsic value, because all optimism has been driven out of the price.
 
TMR: What are some metrics to help investors?
 
Kal Kotecha: A junior mining company’s ability to produce resources at a cost below its market price is essential for its sustainability. Junior mining companies should be judged by their ownership of mines, the quality of these mines and how management has executed similar projects in the past. Determining whether this data has been incorporated into the stock price is essential when seeking undervalued companies. I think this is where a lot of resource investors get duped.
 
Do you smell the smoke? I suggest investigating the source. I’d say that the herd is done shouting fire, and smart investors are filling up their baskets with goodies. But don’t forget to do your research, check the facts and invest in a contrarian fashion. To obtain superior results, you cannot do what everyone else is doing.
 
TMR: Many investors have heard the adage “buy when there’s blood in the streets.” When should investors reasonably expect to start making money again, given the current market conditions?
 
Kal Kotecha: That’s a billion-Dollar question. A lot of colleagues have predicted prices that have not come true yet. The big upswing in gold in the late 1970s was followed by a collapse and we had to wait 20 years for another upswing. It’s already been three years. I don’t think we have to wait another 5 or 10 years, but there is going to be a time very soon where investors will be rewarded. I think when the upswing happens it’s going to be very parabolic. I think it’s going to take wings on its own. Patience will be rewarded.
 
TMR: What gold price are you using in your analysis?
 
Kal Kotecha: $1200 an ounce. Many factors go into determining the price of commodities, especially gold and silver. Some of these factors include price manipulation, which cannot be foreseen; geopolitical strife; and import quotas, which are happening in India. However, I remain very bullish on precious metals in the long-term.
 
The best buy right now is silver. Silver is a screaming steal at $18 per ounce. I first started buying silver at around $7 per ounce in 2003 and I sold quite a bit in the $48 range a few years ago. I’m starting to accumulate silver quite heavily again. The ratio of gold to silver prices is currently around 68:1. I see that going to 50:1. If there’s another precious metals mania, perhaps 25:1. Silver demand is also very high. A record 6,000 tonnes silver was imported into India last year – roughly 20% of global production.
 
TMR: What’s your advice for investors in the current junior resource market?
 
Kal Kotecha: I think a combination of five or six stocks in a portfolio with a mix of junior energy and mining equities is probably a good start. That’s what I do. It’s difficult for the average investor to follow more than five companies. 
 
TMR: Thank you for your insights, Kal.
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Sep 24

Consciously Shifting to Precious Metals

Gold Price Comments Off on Consciously Shifting to Precious Metals
Resource-stock fund manager explains his current outlook and strategy…
 

JASON MAYER joined Sprott Asset Management LP in November 2012 with more than 10 years of investment industry experience as lead portfolio manager on a number of funds with a focus on growth-oriented resource equities.
 
Now Mayer tells The Gold Report‘s sister title, The Mining Report, how miners are having a tough time getting funded, and although Canadian oil and gas has performed well over the last few quarters, some companies might be overvalued…
 
The Mining Report: In February, you gave a speech at The Vancouver Club that acknowledged the impact of investor fatigue on the junior mining equity space. Seven months later, are investors starting to get excited again about the space?
 
Jason Mayer: Investors have been reacting in fits and starts, and everyone is still very cautious. I track a number of funds, and I watch how they perform on a day-to-day basis. What I have found interesting is that a number of resource funds in Canada continue to be underweight, particularly in gold equities. I notice they underperform on days that gold stocks have good moves. The generalists out there among the institutional money have little to no presence in various gold equities. For the most part, people have abandoned the space.
 
TMR: What will it take to get them excited again?
 
Jason Mayer: They’ll want to see some upward trajectory. I don’t know if it’s going to be a couple of data points that confirm the arrival of an inflationary environment, or the cessation of this disinflationary environment that we’ve been in since 2009, but people would have to feel comfortable that the gold price isn’t going to resume the decline it experienced in 2013. There are still a number of analysts and commentators out there who are calling for gold in the $800-1000 per ounce range.
 
TMR: Is it the seemingly never-ending rise of the blue chip stocks that makes people less likely to look at the juniors, whether energy or precious metals?
 
Jason Mayer: I don’t know how much it has to do with that, but, certainly, the very strong US Dollar is influencing the gold price and precious metal equities. Everyone has their own opinion on what drives gold. Mine is pretty simple. I look at it as a currency investors can choose from among a number of currencies worldwide, the US Dollar being the primary driver of gold, because gold is typically quoted in US Dollars. The strength of the US Dollar has led people to doubt the need to hold either gold or gold-related equities in their portfolios.
 
TMR: What about the impact on energy stocks?
 
Jason Mayer: We’ve had a pretty good run for a number of the energy companies here in Canada. In fact, our energy fund that is run by Eric Nuttall is up 40+%. That is an overall reflection of how the energy equities have done, both the exploration and production (E&P) companies and the service companies.
 
TMR: The lack of excitement has also impacted financing. You estimated that in 2011, miners raised $1 billion in flow-through funds, and in 2012, that number was down to $700 million. In 2013, it was $350m. So far this year, it is even 15% lower than that. Why has it been so hard to raise money right now?
 
Jason Mayer: When we look at it over a multiyear horizon, we’re at a 10-year low. The companies that have been hit the hardest are the miners. They’re the ones that have seen the appetite for flow-through decrease the most, certainly much more than energy companies, where the appetite for flow-through continues to remain pretty healthy.
 
The companies that have very high-quality projects have been able to access the capital markets and issue equity. In some cases, they have turned to royalties and, in very rare cases, private equity, but for the most part, the juniors are very challenged, especially the exploration companies. They’re hanging on by a thread. Essentially, a lot of their expenditures are really on just keeping the lights on, so they’re no longer advancing projects because the capital is just not available to them.
 
TMR: Will this lack of capital lead to more mergers and acquisitions?
 
Jason Mayer: I thought that would have happened by now. But that is the logical conclusion. There are two major impediments. In many cases, we see management teams that are entrenched – just there to collect a salary and a bonus. The second issue is with the acquirers, especially the majors. These are companies that went on spending sprees in 2009 and 2010. Although there are a number of very solid acquisition opportunities in this environment, some of these companies are gun shy because of their experience over the past couple of years, and support among the shareholder base can also be quite tentative.
 
TMR: You manage the Sprott Flow-Through Limited Partnership and the Sprott Resource Class Fund. The 2014 $11.7m Flow-Through L.P. is 90% in cash, correct?
 
Jason Mayer: The 2014 fund initially raised north of $17m. It’s a process of identifying candidates, engaging them to issue flow-through and then actually consummating the transaction. So, in fact, right now, I’m 100% invested – a bit of an update, which the public documents don’t reflect at the current time. I am approximately 60% invested in energy names, 40% in mining. 
 
TMR: You mentioned that the Sprott Flow-Through L.P. is 60% in energy. The Sprott Resource Class Fund flipped, from 56% energy and 42% minerals to 54% minerals and 46% energy. The energy and non-energy percentages flipped. Was that a conscious shift or a result of changes in equity valuations?
 
Jason Mayer: That was a conscious shift. I started reducing my exposure to Canadian energy names. It was a function of both profit-taking and repositioning. Some of these companies’ valuation multiples had expanded quite dramatically. I took some profits and deployed a significant portion of that into some gold-weighted equities.
 
TMR: What are your projections for oil and gas prices?
 
Jason Mayer: Gas is a tough one to call, but I think it will bounce around $3-4 per thousand cubic feet (Mcf). The upside will be predicated on very cold weather, which will drive additional demand. Without that, it’s going to be mired in a $3-4/Mcf trading environment. The part of the equation that’s a little more transparent is the supply side. The bottom line is North American natural gas production continues to hit record highs. It’s going to continue to hit record highs based on a number of projects that are in the process of being commissioned and developed. That’s going to bring new gas to market. A lot of this new gas that’s coming onstream is highly economic, so even at $3/Mcf gas, the operators of these projects are going to continue to drill.
 
The wild card is the demand side of the equation. There are some longer-term developments that are going to be bullish for demand, such as gas-fired electrical generation, utilizing natural gas as a transportation fuel and liquefied natural gas exports. The problem is that these are very long-dated and uncertain demand initiatives. Because of that uncertainty, I don’t want to invest now based only on whether I think it’s going to be a cold winter or not.
 
TMR: That makes sense.
 
Jason Mayer: For oil prices, I’m expecting $90-110 per barrel. The Brent benchmark is what we use. I think the demand backdrop is pretty positive. China seems to be back on track. There was a lot of concern over the past few months on where its economy was going. It looks as if the Chinese central planning authorities are committed to a 7.5% growth target, and its most recent gross domestic product number was just that.
 
In the US, the numbers have been just spectacular. The economy appears to be picking up speed and momentum, whether you’re looking at manufacturing activity, employment figures or job openings. There really don’t seem to be many negative data points right now. The one area of concern is the European Union. It looked as if it was coming out of its recession, and then it had a bit of a hiccup. The whole Russia/Ukraine situation could have an impact. But generally, demand is pretty solid.
 
On the supply side, it just costs a lot of money to produce oil. Some 96% of the supply growth outside of Opec in 2013 came from the US If you’re looking at the US full-cycle costs, they’re about $60 per barrel. You really need $70-80 a barrel as an absolute floor to ensure that the US will continue to drill.
 
TMR: Do you see energy services as a less volatile way to leverage the energy space?
 
Jason Mayer: The short answer is no. It’s a very volatile group. There are a lot of different specialties within the energy services, so it’s really dependent on which particular area you’re talking about. But if you want to get leverage to the energy space through services, then you’re probably buying something that is quite leveraged to the energy space and will do very well if the whole space does well, but it’s a double-edged sword. That leverage can also work against you if things don’t work out according to plan.
 
Earlier this year, I pared back some of my services holdings; I felt that these companies really got ahead of themselves. Personally, if I want that torque and leverage to energy, I’ll just play the E&P companies.
 
TMR: You mentioned that you are consciously shifting to the materials companies, the precious metals. What number are you using for gold and silver prices in your estimates? What companies are you picking up?
 
Jason Mayer: I’m using around $1300 per ounce. For the most part, my focus is on companies that are all-in cash flow positive. To try to capture the full picture, I like to look at the margin after adjusting not only for cash costs but also for royalties, taxes, general and administrative expenses and sustaining capital. If the gold price is under pressure, I try to pick companies that have the best chance of surviving if things get ugly.
 
TMR: Do you have any words of wisdom for investors who are feeling stock fatigue right now from the resource space?
 
Jason Mayer: I think the biggest thing you need to have is conviction and fortitude when a lot of these names are volatile, and try to keep your wits about you. Try not to trade based on emotion; trade based on your logic and thought processes. If your logic has not changed, stick to the tune.
 
TMR: Thank you for talking with us today.
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Sep 20

Chinese Zombies in Global Real Estate

Gold Price Comments Off on Chinese Zombies in Global Real Estate
Coming to your neighborhood soon…?
 

I WANT to bring the spectre of zombies before your eyes, writes Callum Newman in Dan Denning’s Daily Reckoning Australia.
 
Not some half-mad, limping, flesh eating army. I’m talking about a different type of zombie. Pay attention – one day it might be in your neighbourhood.
 
Imagine an area of new developments, well located and catered for with inviting restaurants and retails shops. Everything seems wonderful. But something is amiss. The place is a bit lifeless. There’s less foot traffic. It’s not dead, but it’s not thriving. Welcome to Zombietown.
 
You can credit Canadian urban planner Andy Yan with the idea. This was the effect, he argued, that offshore (Chinese) money was having on parts of the city of Vancouver. The money was coming, but the people weren’t. Areas of empty living spaces and lifeless streetscapes were emerging. The real estate buyers never actually moved in.
 
They just wanted a secure place to park their cash and the privileges that come with a Canadian passport. They could simply visit once or twice a year to meet the visa requirements. This absentee owner phenomena is one reason Canada has since scrapped its ‘millionaire visa scheme’.
 
The economic benefits to the investors were actually very few. And ice hockey and maple syrup never had much to do with it from the beginning. Wealthy Chinese were hedging their position at home. They wanted a getaway plan locked in overseas should they ever need to flee China.
 
Now, if you happened to catch the front page of the Australian Financial Review on Wednesday, you can see how this ties in to Australia. The cage of the Foreign Investment Review Board is being rattled. From the article:
“Wealthy foreigners are illegally buying property because of Foreign Investment Review Board ineptitude, according to the federal MP leading an inquiry into the huge surge in property prices that has split Treasurer Joe Hockey and the Reserve Bank of Australia.
 
“Coalition MP Kelly O’Dwyer said evidence given to her inquiry suggested restrictions on foreign buyers – who cannot buy established homes without approval – are not being adequately enforced by the board.”
An experienced property investor who works with developers told me the other week that, plain and simple, Chinese money is making its way into Australia, regardless of the rules. All it takes is an un-ticked form, a look the other way or a title in the name of a relative. And he thought the Canadian decision to ban the millionaire visa was sending even more money our way.
 
Cashed up overseas buyers blur the link between property prices and normal valuation metrics such as wages and rental yield. In the case of millionaire foreign investors, those have very little to do with their prime motivation. One would think this money is going to keep coming, so we better get used to it.
 
Of course, nobody knows how much Chinese money is leaking in because there’s no conclusive data. There is the concern rising property prices might be increasing the chances of a crash.
 
You’d think that if we’re dealing with wealthy Chinese, they’re more likely to pay cash than use credit. That would seemingly make a crash less probable – for now. That’s what the real estate cycle suggests as well – if you know where we are. It’s always a question of timing.
 
There are, however, a mighty lot of residential towers going up or planned in Melbourne right now.
 
Tall buildings are something we track in Cycles, Trends and Forecasts for clues for timing the cycle as it progresses. Economic forecaster BIS Shrapnel warned that Melbourne was likely to be oversupplied with apartments in the next few years, citing slower population growth and a brewing oversupply of stock. Something to keep an eye on.
 
Regardless, despite the opinions and comments of all the experts, THE absolute best thing to know is where we are in the real estate cycle. That should be your starting point to put everything in perspective.
 
It’s not as if all this is particularly new in history. I picked up a good book called Owning the Earth the other week. Besides my colleague Phil Anderson’s book, The Secret Life of Real Estate and Banking, not many books make the connection between the land market and the boom and bust cycle. This one does.
 
Here’s Andro Linklater, author of Owning the Earth, on the real estate cycle in the nineteenth century:
“The pattern of was most obvious in the United States, where five abrupt busts in 1819, 1837, 1857, 1873 and 1893 brought ends to periods of boom. Within each boom, there was a general upward rise in land prices over the period, at first gradual but then steepening as mortgage-lending accelerated to keep up, thereby fuelling an unsustainable burst of demand, and a final price explosion.”
Linklater notes that 1873 was the first ‘global’ crash, known at the time as the Great Depression. The savage downturn of 1893 eclipsed it later. In turn, the Great Depression of the 1930s overrode that bust in popular memory. Doesn’t seem like we’ve learnt much from this, have we?
 
We’ve now been living through what the Americans call the Great Recession since 2007. Where did it all start? Real estate. My suggestion: Learn about the cycle first, then make your moves.
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Sep 18

US Dollar Index Still Rising

Gold Price Comments Off on US Dollar Index Still Rising
When the you-know-what hits the you-know-where, people buy what the…? 
 

“WE CONTINUE to believe that we are moving into a ‘strong US Dollar world’,” wrote Louis-Vincent Gave, the investment strategist, in a recent note to his investors, says Chris Mayer in The Daily Reckoning.
“This makes for a very different set of winners and losers, and very different portfolios, than what most investors have been used to over the past decade or so.”
I think there is a good case for a strong US Dollar for the rest of this year and into next. We’ll look into the argument here and what its chief effect is likely to be.
 
Gave’s comments inspired me to set down my own. In his note, Gave shared a chart showing the Dollar Index since circa 1985. The Dollar Index measures the value of the Dollar against a basket of foreign currencies. The Euro makes up more than half the index (and European currencies did before the creation of the Euro). The Yen, Pound and Canadian Dollar fill out the bulk of the rest of the basket.
 
I share the chart because I think the pattern shown might surprise you. After all, didn’t the US government run widening deficits after the crisis? Didn’t the central bank engage in “money printing”? And wouldn’t you expect these would drive the Dollar lower?
 
You might’ve. Plenty of people did. And they were (and are still) wrong. “As things stand,” Gave wrote, “we are basically trading roughly at the same levels that have prevailed for most of the post-2008 crisis period.”
 
 
I think there is a good case for a strong US Dollar for the rest of this year and into next.
 
In fact, the US Dollar Index recently put in an 11-month high. There are a few reasons I’d point to for that strength against foreign currencies to continue.
 
First, the US trade deficit continues to shrink. According to the latest readings in June, the deficit shrank by 7%. When the trade deficit shrinks, that means fewer net Dollars flow overseas. Hold that thought.
 
Second, the federal deficit is also shrinking. For the fiscal year ending September 2014, the deficit will be around $500 billion. That’s less than one-third of what it was in 2009 – the recent peak. Lower deficits means fewer Dollars injected into the system.
 
Now put the two together. You know basic economics. What happens when the supply of something gets tighter? Its value rises, assuming demand stays the same.
 
Aye, what about Dollar demand? There is steady demand for US Dollars from abroad, because it is the world’s reserve currency. Meaning just about everyone uses it to settle up international trade.
 
As Gave writes in his book, Too Different for Comfort, it’s not easy to unseat a reserve currency. After running through some history, Gave concludes:
“A reserve currency is thus a bit like a computer operating system – it pays to use the one that everyone else is using, and the more people use one system, the less incentive there is to switch. Once a reserve currency gets entrenched, therefore, it is exceedingly difficult to dislodge, because the benefits of the new currency have to outweigh those of the old one, not by a little, but by a lot.”
Of course, the Dollar’s standing won’t last forever. But I think we can safely say the US will remain the standard for years yet. There is simply no competitor on the near horizon. Not even one that’s close. True, a variety of emerging markets and other countries have learned to use other currencies to settle transactions. That’s just good sense. They’ve been caught short of Dollars before and had to endure a crisis of some sort as a result. But these transactions are small in the scheme of things.
 
Meanwhile, those foreign markets are growing and the demand for Dollars ought to remain at least stable. Thus, the Dollar Index is putting in that 11-month high.
 
Part of the US Dollar strength also comes from the fact that there are lots of attractive assets in the US that foreigners like to buy and own. They have to pay for them in Dollars. Gave makes this point in his book, too. When the US Dollar gets cheap, Brazilians rush in to buy condos in Miami. Canadians pick up second properties in Arizona. Russians buy New York condos. Foreign pension funds buy up US debt, stocks and real estate.
 
And whenever there is a crisis, what do people do? They go to cash, and that means US Dollars. They buy US T-bills. When the you-know-what hits the fan, it is still the Dollar they retreat to. They’re not buying Chinese Yuan. Gold is another asset seen as a safe haven, but the gold market is tiny and off the radar of the big pools of money out there. When a big fund wants safety, it turns to cash – US Dollars.
 
So let’s say the Dollar stays strong. What effect could it have?
 
It could drive US interest rates even lower. If you look at the 10-year securities of the big EU countries, Japan, Canada and other developed nations, you find that interest rates are all lower than in the US But as Gave asks, “Why own 10-year bonds yielding 1%, or Japanese government bonds yielding 0.5% in falling currencies, when you can own 10-year US Treasuries denominated in a rising Dollar yielding 2.5%?”
 
This is the question the market will be asking itself soon, especially as/if that Dollar Index continues to make highs. Then you can expect to see US Treasury yields falling to levels where these other developed markets already sit.
 
All is to say that if you are looking to get out of the US Dollar, cool your jets. As long as the trends above are in place, the Dollar Index might be on the verge of a bigger rally.
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Aug 15

Ready for Rising Uranium?

Gold Price Comments Off on Ready for Rising Uranium?
Japan’s nuclear shutdown continues to weigh, but look further ahead…
 

DAVID SADOWSKI is a mining equity research analyst at Raymond James Ltd., and has been covering the uranium and junior precious metals spaces for the past six years.
 
Here he tells The Gold Report‘s sister title, The Mining Report, why the current bear market in junior uranium miners will prove only temporary…
 
The Mining Report: In past interviews with Streetwise Reports, you predicted that the price of uranium will rise this year. But that has not panned out. Why not?
 
David Sadowski: Simply put, there is a short-term supply problem in the uranium industry. We believe, however, in the long term, supply will not be able to keep up with demand growth. The point at which we previously expected demand to outstrip supply has been pushed out by a couple of years. That development has impacted the price in recent months, as well as Raymond James’ outlook for the price going forward.
 
The three main reasons for continued global growth of uranium mine production are the persistence of long-term fixed-price sales contracts, the intransigence of government producers who believe that security of supply is more important than mine economics, and byproduct uranium production. Secondary supply sources also remain robust.
 
TMR: Would you explain how these situations interrelate?
 
David Sadowski: Demand is lagging because Japan has been slower than expected to resume operations at its nuclear reactors. The Japanese reactors are not consuming uranium at the moment, but the Japanese utilities are continuing to take delivery on many of their supply agreements, causing their inventories to rise. A belief in the market that uranium might be dumped has, in part, kept other global utilities on the sidelines, resulting in lower levels of uranium buying and lower prices. And while uranium oxide “yellowcake” deliveries have continued to Japanese buyers, those buyers have slowed the movement of that material into the rest of the fuel cycle, which has decreased demand for conversion and enrichment products.
 
On the enrichment side, excess capacity has resulted in “underfeeding”. The centrifuges at the enrichment plants are always spinning. The plants are paid to supply a certain level of enrichment to their customers. And during times of lower demand, they can utilize otherwise empty centrifuges to squeeze out more uranium product.
 
An apt metaphor for this process is orange juice. Imagine that you are running a juice bar with 10 juicing machines that are always spinning. Your customers bring you oranges and sign a contract to take delivery of a set amount of juice from those oranges. But suddenly you lose 20% of your customers. They stop bringing you oranges and they no longer pay you for the juice. What are your options to make up for that lost revenue? Given that all 10 juicing machines must continue to run, you can take the oranges that would under normal circumstances be squeezed by eight machines and instead run them through 10 machines, squeezing more juice out of each orange. The juice in excess to what the eight remaining customers have agreed to buy is available to the juice bar owner to sell to other customers.
 
That is the same type of activity that is going on in the uranium space. Enrichers with excess capacity especially during a period of relatively weak enrichment or “SWU” prices can squeeze more enriched product out of the material being provided to them, which generates excess uranium that the enrichers sell to others. Given the protracted outage of Japanese nuclear reactors, this squeezed source of supply has been greater than expected. In part due to our revised estimate that only one-third of Japan’s nuclear fleet will return to operations, we expect underfeeding to continue to exacerbate oversupply for some time.
 
TMR: What about the uranium extracted from Russian nuclear warheads?
 
David Sadowski: Similarly, with respect to Russia, the end of the Megatons to Megawatts high-enriched uranium (HEU) deal was long anticipated to usher in a new period of higher uranium prices. But the same plants that were used to down-blend those warheads can now be used for underfeeding and tails re-enrichment. In this way, the Russian HEU-derived source of supply that provided about 24 million pounds to the market did not disappear completely; the supply level was just cut roughly in half. Meanwhile, uranium mines, in aggregate, have increased their output – even though prices are now well below average production costs. Kazakhstan, for example, has continued to grow its uranium industry, despite recent guidance from officials in Kazakhstan to the contrary.
 
Furthermore, since Fukushima, only one major uranium mining operation has closed down due to weak prices. The high-cost Ranger mine in Australia, which has been processing its stockpiles since 2012, has defied protests from locals and restarted production following a major accident in late 2013. And Cigar Lake in Canada and Husab in Namibia are charging into production, even in this oversupplied environment. The bottom line is that oversupply will persist until 2020.
 
TMR: How will that solemn reality affect future prices?
 
David Sadowski: Current prices are untenably low and some producers are refusing to sell at rock-bottom prices. Upward pressure on prices into the $35 per pound range should occur as utilities buy more uranium in the marketplace, and as secondary trading activity among financial entities picks up. The biggest factor is the behavior of the end-users of uranium, the nuclear utilities. Given what we know from available data, global utilities are going to have to sign a lot of new supply contracts to meet their uncovered reactor requirements in the years 2017 and beyond.
 
But looking at current utility-held inventories and the global supply/demand picture over the next five years, we predict that the utilities will not be rushing to sign new deals. A major upswing in prices toward mine incentivizing levels of $70/lb is thus at least a couple of years down the road. The spot price is $28/lb today. It should average $35/lb in 2015 – a 20% rise and we see US$70/lb in 2018. Furthermore, it should be noted that this outlook can change in a split second. A flood at Cigar Lake, sanctions against Russian nuclear fuel exports, a major mine shutdown – if any of these events occur, the equation changes and prices could rise a heck of a lot faster, comparable to the rise in 2006–2007 and in late 2010.
 
TMR: What do you look for in a uranium mining junior?
 
David Sadowski: The best junior opportunities are to be found in companies with best-in-class assets, access to capital, and the potential for value-added news flow. Solid management teams, clean capital structures and trading liquidity are also key.
 
TMR: Is there synergy in going after both uranium and gold?
 
David Sadowski: Uranium deposits can occur alongside other metals, improving mine economics. In South Africa and Australia, uranium is mined as a byproduct of gold with a positive impact at those mines. In other cases, gold, nickel, molybdenum, and other metals can be an encumbrance to primary uranium production and can negatively impact costs.
 
TMR: Thanks for your time, David.
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Jul 20

Gold: The "Worst" Currency of Them All

Gold Price Comments Off on Gold: The "Worst" Currency of Them All
Here are monthly views of the basket cases we call major currencies…
 

WE HAVE NOT checked in on the motley crew of major currencies in a long time, writes Gary Tanashian in his Notes from the Rabbit Hole.
 
Uncle Buck and his reserve status were leveraged to the hilt by “The Hero” and now his successor is trying to gently talk the Fed out of its policy stance over time. In other words, tightening is going to come one way or another and Janet Yellen is trying to go the orderly route.
 
When this process becomes disorderly, the USD is likely to benefit from the liquidations elsewhere in the asset world.
 
 
Technically, USD is in a long basing pattern. There are those who think it is basing before a renewed decline, reading a Symmetrical Triangle (continuation) pattern into poor old Unc. I think the odds are it is bottoming over the post-2008 years when inflation – try as they might to have promoted it – simply has not taken root. Leaning bullish, watch support and resistance.
 
 
Long ago we projected a rally in Uncle Buck’s chief competitor, the Euro. This was due to a bottoming pattern (formed on shorter term charts) and unsustainable negative hype about the Euro crisis. The target was around 140, which is the top of the post-2008 downtrend channel.
 
Euro remains in a big picture downtrend and if global asset markets start to come unwound in the coming months, it is not Euros people are going to run to, I can tell you that. Bearish below the upper trend line.
 
 
Canada…oh Canada. For many months NFTRH has been noting the thick cap of resistance on the Canada Dollar. For the last few it has been rising to test this resistance. On the big picture, the state of CDW (a ‘commodity currency’) is a bearish omen for commodities as long as it remains below resistance.
 
There is a ton of hot air between the current level and any notable support. Inflationists better hope CDW negates resistance. Bearish. Fellow commodity currency the Aussie is also bearish as it dwells below a thick cap of resistance. As with Canada, get above resistance and we’ll change our tune. But not until.
 
 
The Swiss Franc seems to benefit in the run ups to global monetary crises owing to Switzerland’s reputation as a sound money haven and sound economy. I am not sure if that reputation is as well founded as it once was, but the Swissy continues in a long-term uptrend channel (with a channel buster up in the Euro crisis).
 
 
Going strictly by the chart, the XSF seems to be the best long-term bet of all the major currencies over the span of what we call the ‘Age of Inflation onDemand’ © (ie, post-2000).
 
But wait, there is another sound currency in circulation and it is called the Indian Rupee. This may not be considered a major currency, but it denominates a large emerging economy and most importantly, it is stewarded by a central banker (Raghuram Rajan) with the rarest of things, integrity.
 
 
Lately Rajan has been open to easing his firm grip in the fight against inflation and he has been working with Modi. The result has been an India with a launching stock market and a still firm currency, which looks by the way, like a buy right here.
 
Last but never least in ‘confidence paper’ sweepstakes, the Japanese Yen. The chart says what it needs to say regarding resistance and support.
 
 
If global liquidity becomes constrained we’d look for Yen to rise to some degree along with the USD (both being anti-markets to varying degrees, with the rest of the asset world on the other side of the trade). If a continued asset market party is to be the play, expect the Yen to tank to support. Yen is neutral at the current level.
 
Finally, the worst currency of them all…gold. This heavy metallic relic has proven useless to all those people who flooded into the supposed safe haven in refuge from the Euro crisis (a global knee jerk into gold). Various developed nations have been able to leverage their currencies to economic or at least stock market gains, after all. What has gold done?
 
 
Why, gold bullion just sat there retaining value and not only paying out nothing, but erasing the principle of the Knee Jerks and other assorted casino patrons who thought it was as easy as “Run to gold, be safe”.
 
It doesn’t work that way. When you are holding value (in this case monetary value) you are holding something that will lose assigned value when confidence in official policy making is high (it has been since 2012) and it will gain value when the angry mobs come after the policy hacks after the magic wears off (it will).
 
Lecture aside, gold is trying to bottom here. The disasters that are the Middle East and Ukraine are not helping gold’s case. Don’t fall for it. Just as the 2011 ‘Knee Jerks’ hurt gold’s investment sponsorship greatly on a large scale, the small scale panics can be damaging on a short-term basis.
 
But if that is a bottoming pattern, we are on a count down to a time when the most boring currency of them all starts to slowly gain respect in the eyes of rational value seekers.
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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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