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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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 23

US Oil & Global Gold

Gold Price Comments Off on US Oil & Global Gold
US oil stocks have soared as shale pushes crude prices down. But gold…?
 

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

The Bells, the Bells!

Gold Price Comments Off on The Bells, the Bells!
From high art to Russia and US housing, the bells are ringing out…
 

TALK about ringing a bell! says Bill Bonner in his Diary of a Rogue Economist.
 
This ring-a-ding-ding comes from the New York Observer:
“Sales of contemporary art at public auctions surpassed $2 billion for the first time last year, the Paris-based arts-data organization Artprice said.
 
“The report tallied auction sales between July 2013 and July 2014, and it found that contemporary art sales grew 40% from the previous year. The number of big-ticket items that sold for over 10 million Euro ($12.8 million) more than doubled in the period.
 
“Those who follow the art market will remember the record-breaking Christie’s auction in November that saw buyers walk away with the most expensive publicly auctioned piece of art ever, Francis Bacon’s $142.4 million Three Studies of Lucian Freud (1969). That auction also minted Jeff Koons’ $58.4 million Balloon Dog (Orange) (1994-2000) as the most expensive piece by a living artist ever sold at auction…”
That’s another bad thing about being rich – you have to live with this stuff.
 
Even if you don’t own it, your new friends and neighbors will.
 
Unless you’re autistic – or a savant, like Warren Buffett – you’ll find it hard to avoid. Contemporary art and big, expensive houses are hugely popular among the wealthy elite. And most people are very susceptible to peer influence.
 
That is what creates investment opportunities, too. The lumpen investoriat – like the lumpen electorate – does not do much serious thinking.
 
Instead, it reacts emotionally and primitively.
 
It takes up positions that are too expensive. And then, in a panic, it stampedes away from them…leaving them too cheap. That’s when the bells start ringing.
 
Monday’s Financial Times, for example, chimed loudly.
 
It reported on page one that US private equity group Blackstone “calls it a day in Russia.”
 
This followed a withdrawal from Russia earlier this month by DMC Partners, a private equity group founded by former Goldman Sachs executives.
 
Further reporting revealed that the European Bank for Reconstruction and Development had “also suspended investments in the country.” And if that weren’t enough, “US group Carlyle has retreated from the market twice.”
 
Over on page 15, the FT continues to ring the bell, telling us that “Russia’s Gazprom could lose 18% of its revenues as a result of competition from US liquefied natural gas exports.”
 
On Tuesday, the bell ringing went on. A front page revealed that even the Rockefeller fortune was pulling out of fossil fuels.
“The effort to make oil, gas and coal investments as unpopular as tobacco stocks…gathered momentum…” the paper declared.
Geez, you’d have to be crazy to invest in Russian energy stocks now, right?
 
Yeah…crazy like a fox. Any time the newspapers give you nothing but reasons to sell, it’s time to buy. You can buy Gazprom for less than three times earnings…with a 5% dividend yield.
 
“And that’s post-theft,” says Rob Marstrand, chief investment strategist at our family wealth advisory, Bonner & Partners Family Office.
“You don’t have to worry about corruption…or politics…or sanctions,” he says. “It’s all in the price already.”
The news about Russian energy companies is all bad. It’s time to buy.
 
Meanwhile, what are people almost universally in favor of buying?
 
A house!
 
Poor people buy cheap houses. And when they get more money, they believe they should “trade up” to an expensive one.
 
Both rich and poor:
  • take advantage of mortgage deductions…
  • lock in low interest rates for the long term…
  • build equity…
  • improve their credit scores.
All by buying a house. But is it true? Is housing a good deal? Now? Ever?
 
A year ago, housing was one of our favorite investments. But our lead researcher at The Bill Bonner Letter, EB Tucker, thinks he hears the bell ringing for housing too.
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Sep 24

And the Rain It Raineth…

Gold Price Comments Off on And the Rain It Raineth…
Climate change is a divisive topic. But nothing like how it will divide investors from their money…
 

The RAIN poured at a rate of one inch an hour, writes Addison Wiggin in The Daily Reckoning.
 
By the time dawn broke, five inches had fallen. Much of the water had nowhere to go. Basements were flooded for miles around.
 
What happened in the Chicago area on April 18, 2013, was no ordinary downpour: It was the leading edge of a financial storm front that will alter the flow of billions of Dollars in the years to come. Your assets need to seek shelter…and today we’ll show you exactly where that shelter is.
 
Beware, dear reader: We are tiptoeing around the edges of “global warming”.
 
We’re not taking a stand about whether global warming is occurring, or whether human activity is causing it. Rather, we’re approaching the topic with a quote attributed to Trotsky in the back of our mind: “You might not be interested in war, but war is interested in you.”
 
To be sure, global warming is interested in you – or, more precisely, the widespread belief in global warming by movers and shakers.
 
For starters, imagine a “climate change surcharge” tacked onto your sewer bill.
 
Wealthy elites are already shifting money flows based on a belief in global warming.
 
One year after the metro Chicago floods, Farmers Insurance Group filed an unprecedented lawsuit against 200 local governments. The lawsuit’s premise? Farmers incurred losses because the cities failed to expand their sewers and stormwater drains…and the cities should have known better because climate change had been making Chicago-area rainstorms more frequent, more intense and longer lasting since the 1970s.
 
For real.
 
In the end, Farmers backed off the suit. Legal experts said it didn’t have a prayer: Governments are usually immune from this sort of litigation, dontcha know.
 
“We hoped that by filing this lawsuit,” said a Farmers spokesman, “we would encourage cities and counties to take preventative steps to reduce the risk of harm in the future.” Farmers says it is satisfied this has now taken place.
 
Still, the suit is “the first loud shot in what I think will be a long-term set of litigation battles over failure to prepare for climate change,” says Michael Gerrard, director of the Center for Climate Change Law at Columbia University. Governments may be immune…but private companies are not. “One could easily imagine architects and engineers being accused of professional malpractice for designing structures that don’t withstand foreseeable climate-related events,” Gerrard tells NBC News.
 
The world’s wealthy will become interested in global warming when it starts costing them money, says the celebrity astrophysicist Neil deGrasse Tyson.
 
“The evidence will show up when they need more evidence,” Tyson told MSNBC in June. “More storms, more coastlines getting lost. People beginning to lose their wealth. People, if they begin to lose their wealth, they change their mind real fast, I’ve found – particularly in a capitalist culture.”
 
Tyson is behind the curve. Wealthy elites are already shifting money flows based on a belief in global warming.
 
“Global warming will be the most important investment issue for the foreseeable future,” wrote celebrity asset manager Jeremy Grantham in 2010.
 
In early 2014, The New York Times reported Coca-Cola “has embraced the idea of climate change as an economically disruptive force” that’s limiting access to the water it needs for its beverages. What’s more, “Coke reflects a growing view among American business leaders and mainstream economists who see global warming as a force that contributes to lower gross domestic products, higher food and commodity costs, broken supply chains and increased financial risk.”
 
But it’s not all grim: “I met hundreds of people who thought climate change would make them rich,” writes journalist McKenzie Funk in his 2014 book Windfall: The Booming Business of Global Warming. Funk traveled to 24 countries over six years.
 
Along the way, he met people who expected to profit from drought – like Avraham Ophir, a Holocaust survivor who founded the firm Israel Desalination Enterprises. Its reverse-osmosis techniques can produce snow in warm climates. Thanks to Ophir’s firm, the slopes at the Winter Olympics in Russia this year had a steady supply of fresh powder despite temperatures approaching 50 degrees Fahrenheit.
 
Funk also met people who expect to profit from rising sea levels – like Koen Olthuis, a Dutch architect who’s used his country’s extensive experience with seawalls to develop solutions for island nations that might be threatened with inundation, like the Maldives in the Indian Ocean. Still other entrepreneurs are cooking up solutions to prevent another Hurricane Sandy from doing a number on New York City.
 
And he met people who expect to profit from melting polar ice – like Mininnguaq Kleist, who runs Greenland’s department of foreign affairs. With the ice cap melting, he’s looking for ways Greenland’s population of 57,000 can prosper from fossil fuels and minerals that were previously inaccessible.
 
“Hot places will get hotter. Wet places will get wetter. Ice will simply melt,” writes Funk.
 
Even the aforementioned Farmers Insurance makes an appearance in his book, based on the first of those three assumptions. Farmers has contracted with a private firm called Firebreak Spray Systems. Its co-founder Jim Aamodt made a name for himself developing the automatic sprayers in the produce section of the grocery store. His next big thing was a way to coat houses with a chemical retardant offering eight months of fire protection.
 
Firebreak swings into action in Southern California hot spots, spraying down Farmers-insured homes even as wildfires bear down on the neighborhood. It’s a throwback of sorts to 17th-century London, when insurance companies were the ones offering fire protection, not governments.
 
So there’s no shortage of money flowing because people believe in global warming. Alas, for you, the retail investor, catching some of those flows for your own portfolio can be a dicey proposition.
 
Funk opens his book with “The Investment Climate Is Changing” – a lavish dog and pony show put on by Deutsche Bank replicating Amazon jungle on Wall Street when it was 39 degrees outside. It was the launch event for the DWS Climate Change Fund, trading under the symbol WRMAX.
 
Missing from Funk’s book is the follow-up: The fund had the ill fortune of debuting in September 2007. The broad stock market topped a month later, and then came the Panic of 2008.
 
Unlike the broad market, WRMAX never came back. A new manager arrived in 2011 and the fund was spiffed up with a new name – DWS Clean Technology Fund. No matter: In October 2012, Deutsche Bank pulled the plug.
 
Hmmm…Surely, there’s something you could do to take advantage of this trend, no?
 
After all, “the impact is across many industries,” writes our friend Barry Ritholtz, money manager, blogger extraordinaire and author of Bailout Nation. (It was Barry who planted the seed in our head for this essay. Understand he is an unabashed believer in global warming caused by human activity. Again, we’re taking a strictly apolitical follow-the-money approach, but if you’re still offended, write him a nasty email. He’ll be sure to delete it before going out to engage in his carbon-spewing hobbies of high-end sports cars and boats. Heh…)
 
The investing implications, he says, “go far beyond energy, to include agriculture, insurance, transportation, construction, recreation, real estate, energy exploration, food production, health care, minerals and even finance.” Among the possibilities he urges us to consider…
  • “Insurers stand to make larger payouts because of more severe weather and more frequent natural disasters. However, this will inevitably lead to appreciably higher insurance premiums and potentially rising profits
  • “The travel and hotel industry is facing specific challenges. Ski resorts that were in prime snow-making areas may find themselves no longer ideally located; warm weather destinations boasting access to reefs for snorkeling and scuba diving have troubles as reefs die out
  • “Energy exploration and mining is about to get a huge boost as formerly inaccessible Arctic regions are soon to have huge untapped resources exposed. Shipping across formerly unnavigable seas could alter transportation costs and ship designs
  • “Agriculture is turning to genetically modified crops to create drought-resistant and heat-tolerant varieties. Disease-carrying insects are now traveling farther north, creating a potential health care problem.
“Farmland, oil and mineral exploration rights, timber and water are the commodities of the future,” declares Mr. Ritholtz.
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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 05

Crisis Investing, Again

Gold Price Comments Off on Crisis Investing, Again
Short Japan, beware the TSX – how Doug Casey is investing today…
 

DOUG CASEY, chairman of Casey Research, LLC, has written several books on crisis investing, including the groundbreaking Crisis Investing: Opportunities and Profits in the Coming Great Depression of 1979.
 
A renowned mining-stock and international investor, he has appeared on NBC News, CNN and National Public Radio, and also been featured in periodicals such as Time, Forbes, People, Barron’s and The Washington Post. 
 
Now he sees what he calls a “crisis economy” created by trillions of Dollars of debt, a bond bubble on the verge of bursting, and economic distortions that make it difficult for investors to know what is going on behind the curtain. Casey is planning to make the most of this coming financial disaster by buying equities with real value – silver, gold, uranium, even coal.
 
Here, speaking to The Gold Report‘s sister title The Mining Report, Casey shares his formula for determining which of the 1,500 “so-called mining stocks” on the TSX actually have value.
 
The Mining Report: This year’s Casey Research Summit is titled “Thriving in a Crisis Economy“. What is the most pressing crisis for investors today?
 
Doug Casey: We are exiting the eye of the giant financial hurricane that we entered in 2007, and we’re going into its trailing edge. It’s going to be much more severe, different and longer lasting than what we saw in 2008 and 2009. Investors should be preparing for some really stormy weather by the end of this year, certainly in 2015.
 
TMR: The 2008 stock market embodied a great deal of volatility. Now, the indexes seem to be rising steadily. Why do you think we are headed for something worse again?
 
Doug Casey: The US created trillions of Dollars to fight the financial crisis of 2008 and 2009. Most of those Dollars are still sitting in the banking system and aren’t in the economy. Some have found their way into the stock markets and the bond markets, creating a stock bubble and a bond superbubble. The higher stocks and bonds go, the harder they’re going to fall.
 
TMR: When Streetwise president Karen Roche interviewed you last year, you predicted a devastating crash. Are we getting closer to that crash? What are the signs that a bond bubble is about to burst?
 
Doug Casey: One indicator is that so-called junk bonds are yielding on average less than 5% today. That’s a big difference from the bottom of the bond market in the early 1980s, when even government paper was yielding 15%.
 
TMR: Isn’t that a function of low interest rates?
 
Doug Casey: Yes, it is. Central banks all around the world have attempted to revive their economies by lowering interest rates to all-time lows. It’s discouraging people from saving and encouraging people to borrow and consume more. The distortions that is causing in the economy are huge, and they’re all going to have to be liquidated at some point, probably in the next six months to a year.
 
The timing of these things is really quite impossible to predict. But it feels like 2007 except much worse, and it’s likely to be inflationary in nature this time. The certainty is financial chaos, but the exact character of the chaos is, by its very nature, unpredictable.
 
TMR: Casey Research precious metals expert Jeff Clark recently wrote in Metals and Mining that he’s investing in silver to protect himself from an advance of what he calls “government financial heroin addicts having to go cold turkey and shifting to precious metals.” Do you agree or are you more of a buy-gold-for-financial-protection kind of guy?
 
Doug Casey: I certainly agree with him. Gold and silver are two totally different elements. Silver has more industrial uses. It is also quite cheap in real terms; the problem is storing a considerable quantity – the stuff is bulky. It’s a poor man’s gold. We mine about 800 million ounces per year of silver as opposed to about 80 million of gold. Unlike gold, most silver is consumed rather than stored. That is positive.
 
On the other hand, the fact that silver is mainly an industrial metal, rather than a monetary metal, is a big negative in this environment. Still, as a speculation, silver has more upside just because it’s a much smaller market. If a billion Dollars panics into silver and a billion Dollars panics into gold, silver is going to move much more rapidly and much higher.
 
TMR: Are you are saying that because silver is more volatile generally, that is good news when the trend is to the upside?
 
Doug Casey: That’s exactly correct. All the volatility from this point is going to be on the upside. It’s not the giveaway it was back in 2001. In real terms, silver is trading at about the same levels that it was in the mid-1960s. So it’s an excellent value again.
 
TMR: In another recent interview, you called shorting Japanese bonds a sure thing for speculators and said most of the mining companies on the Toronto Stock Exchange (TSX) weren’t worth the paper their stocks were written on, but that some have been priced so low, they could increase 100 times. What are some examples of some sure things in the mining sector?
 
Doug Casey: Of the roughly 1,500 so-called mining stocks traded in Vancouver, most of them don’t have any economic mineral deposits. Many that do don’t have any money in the bank with which to extract them. The companies that I think are worth buying now are well-funded, underpriced – some selling for just the cash they have in the bank – and sitting on economic deposits with proven management teams. There aren’t many of them; I would guess perhaps 50 worth buying. In the next year, many of them are likely to move radically.
 
TMR: Are there some specific geographic areas that you like to focus on?
 
Doug Casey: The problem is that the whole world has become harder to do business in. Governments around the world are bankrupt so they are looking for a bigger carried interest, bigger royalties and more taxes. At the same time, they have more regulations and more requirements. So the costs of mining have risen hugely. Political risks have risen hugely. There really is no ideal location to mine in the world today. It’s not like 100 years ago when almost every place was quick, easy and profitable. Now, every project is a decade-long maneuver. Mining has never been an easy business, but now it’s a horrible business, worse than it’s ever been. It’s all a question of risk/reward and what you pay for the stocks. That said, right now, they’re very cheap.
 
TMR: Let’s talk about the US. Are we in better or worse shape as a country politically and economically than we were last year?
 
Doug Casey: It’s in worse shape now. The direction the country is going in is more decisively negative. Perhaps what’s happening in Ferguson, Missouri, with the militarized police is a shade of things to come. So, no, things are not better. They’ve actually deteriorated. We’re that much closer to a really millennial crisis.
 
TMR: Your conferences are always thought provoking. I always enjoy meeting the other attendees – it’s always great to talk to people from all over the world who are interested in these topics. But you also bring in interesting speakers. In addition to your Casey Research team, the speakers at the conference this year include radio personality Alex Jones and author and self-described conservative paleo-libertarian Justin Raimondo. What do you hope attendees will take away from the conference?
 
Doug Casey: This is a chance for me and the attendees to sit down and have a drink with people like Justin Raimondo and author Paul Rosenberg. I’m looking forward to it because it is always an education.
 
Another highlight is that instead of staging hundreds of booths of desperate companies that ought to be put out of their misery, we limit the presenting mining companies in the map room to the best in the business with the most upside potential. That makes this a rare opportunity to talk to these selected companies about their projects.
 
TMR: We recently interviewed Marin Katusa, who was also excited about the companies that are going to be at the conference. He was bullish on European oil and gas and US uranium. What’s your favorite way to play energy right now?
 
Doug Casey: Uranium is about as cheap now in real terms as it was back in 2000, when a huge boom started in uranium and billions of speculative Dollars were made. So, once again, cyclically, the clock on the wall says buy uranium with both hands. I think you can make the same argument for coal at this point.
 
TMR: You recently released a series of videos called the “Upturn Millionaires”. It featured you, Rick Rule, Frank Giustra and others talking about how you’re playing the turning tides of a precious metals market. What are some common moves you are all making right now?
 
Doug Casey: All of us are moving into precious metals stocks and precious metals themselves because in the years to come, gold and silver are money in its most basic form and the only financial assets that aren’t simultaneously somebody else’s liability.
 
TMR: Thanks for your time and insights.
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Jul 24

100 Years to the Day Since the Gold Standard Died

Gold Price Comments Off on 100 Years to the Day Since the Gold Standard Died
Gold Standard payments through London look awfully like US Dollar clearing a century later…
 

GOLD loves nothing if not irony, writes Adrian Ash at BullionVault.
 
And here, 100 years to the day after the approach of World War I killed the Gold Standard stone dead, the world’s monetary system risks breakdown again.
 
Again you could blame war in a poor corner of Europe. Again, that war could be cast as a big power demanding a small neighbor says “sorry” – then Serbia for the murder of a fat-necked Austrian prince, now Ukraine for ousting its fat-headed Moscow-backed president.
 
If irony suits, it only tastes richer when you think this week also marks 70 years since the Gold Standard’s replacement was put together as the war that followed the war to end all wars finally slaughtered itself to a close. But that shadow system…of invisible gold and all-too visible paper…didn’t quite die when the Dollar-Exchange system lost its link to bullion. US president Richard Nixon “closed the gold window” at the New York Fed in August 1971, yet the Dollar still rules today. So like world trade needed access to the City of London a century ago, clearing funds through a US bank is vital for world trade today.
 
Say US clearing becomes unavailable – or untrusted for credit-default or political reasons. Either trade will shut down (see the post-Lehmans’ crisis of 2008), or it will find other systems to use. Comic little pops like bitcoin might suggest that’s where apolitical free trade is headed, onto Silk Road and elsewhere.
 
Back to 1914, and “It may be,” one merchant banker noted before the July Crisis hit London, “that hides and rabbit skins are being sold from Australia to New York, or coffee from Brazil to Hamburg.” Either way, and whatever was being shipped to wherever, in every such cross-border deal “the buyers and sellers settle up their transaction in London.”
 
That remains true of wholesale gold and silver today. Lacking any mine production, and with no consumer demand or refinery output to speak of, the UK still hosts the world’s physical bullion market, settled in London’s specialist vaults and ready for “digging out” onto a forklift truck before being shipped to the new owner should they ever want it. From Arizona to Beijing, Perth to Qatar, the world trades market-warranted London Good Delivery bars. Those same standards apply in most local non-London markets as well. Great Britain still rules in gold, an echo of the high classical Gold Standard shot dead a century ago.
 
Europe’s second 30-year war destroyed Britain’s empire, but London’s role as the centre of money was already ruined. US banks moved into the rubble to settle the world’s business, and the US Dollar took over from Sterling as Washington hoarded central-bank gold to win the peace as well as the war at that Bretton Woods conference of July 1944.
 
What had stopped the world’s financial heart pumping in London? Scalded in late June 1914 by unknown Serb teenager Gavrilo Princip shooting dead the unlikable Archduke Franz Ferdinand, Austria handed its “belligerent ultimatum” to Belgrade on the evening of Thursday 23 July. Vienna’s 10 outrageous demands made rejection look certain. (Serbia agreed to four, only to find Vienna dismiss its reply and start shelling regardless). Financial markets finally panicked the next morning, at last. They had been slow to take fright, as Niall Ferguson notes of the bond market, distracted by more trouble in Ireland and the coming summer vacation. But now London’s bankers…creditors to half the world’s cross-border transactions, according to Jamie Martin in the London Review of Books…awoke to find their debtors unable to pay. Because “it suddenly became difficult for foreign borrowers to remit payments” anywhere, London would not extend fresh credit. So the world couldn’t raise the loans it needed to settle its debts, and the Sterling bill of exchange – “the world’s premier financial instrument” – went entirely offline.
 
Sterling bills had been crucial. These bits of paper turned the Classical Gold Standard into that “period of unprecedented economic growth, with relatively free trade in goods, labor and capital” which misty-eyed gold bugs might think came thanks, between about 1880 and the rude end of July 1914, to physical metal alone. Promissory and transferable notes, typically with a 3-month maturity as Martin explains in the LRB, Sterling bills were accepted by traders on one side of the world in payment for goods sent to the other, and then sold to a local bank for cash. Merchant bankers in London then accepted and sold the bills on again, with the original debtor perhaps buying and sending another Sterling bill – rather than shipping physical gold – to settle the deal. Around it all went again. Until Austria’s ultimatum to Serbia stopped it.
 
Yes, the Sterling standard limped on, and yes, so did something like the Classical Gold Standard after the guns of August finally fell silent in 1918. But private gold had underpinned the whole system before. You could convert cash into gold at your bank, giving them every reason to offer good rates of interest instead. A universal equivalent for all major world currencies, it was vital that the gold was mostly privately owned, rather than trapped in government or central-bank hands (although that was already changing, with fast-growing national hoards announcing the rise of the warfare- and welfare state in the decade before Princip shot the Archduke, much like the political earthquake of WWI had already struck Britain with the People’s Budget five years before). But shipping bullion bars or coin remained clumsy, slow, risky, and thus expensive. So it was paper bills which released the value of the 19th century’s torrent of gold, first Californian, then Australian and finally South African, to grease the first era of globalization.
 
By the eve of Austria’s ultimatum to Serbia, the bill on London offered to some “a better currency than gold itself,” as a Canadian banker put it, “more economical, more readily transmissible, more efficient.” The City of London, capital of the world, stood ready to buy and sell whatever was wanted.
 
Nevermind. As Professor Richard Roberts explains in his excellent new Saving the City (free sample here), come 27 July – the Monday after the Serbs got Vienna’s demands – London’s money market was effectively shut. On Tuesday, with major shares like copper-mining giant Rio Tinto dumping 25% in a week, the London Stock Exchange suspended trade for the first time since it opened in 1801. From Wednesday 29 July, commercial banks in Britain stopped paying gold to the long queues of savers pulling out their deposits. But the banking run simply moved to the Bank of England itself, as people lined up on Threadneedle Street to swap the paper £5 notes they’d been given for Sovereign gold coins instead, sucking out £6 million of bullion in three days.
 
To stall the outflow, the annual Summer Bank Holiday was extended to nearly a week, from Saturday 1 to Friday 7 August. Ahead of the banks reopening, politicians desperate to lock down more gold for the national hoard “vociferously denounced the [private] hoarding of gold in speeches in the House of Commons,” says Professor Roberts. But by then, Great Britain had already declared war on Germany on Tuesday the 4th. The Gold Standard would never recover, built as it was on free trade, Britain’s imperial Navy and those Sterling bills of exchange on London’s credit.
 
Yes, London’s role as gold clearing house continues today (for now). But total war needed endless state spending. So the free-trade basics – and bullion limits – of the global Gold Standard could no longer apply. Private gold shipments were replaced by government-to-government transfers inside the Bank of England, the Bank for International Settlements, and the New York Fed…before French warships hauled metal to Paris, and Russian Aeroflot jets swapped Kremlin gold for Canadian wheat. London’s Sterling bills have meantime long rotted as the world’s key means of exchange. Which brings us to the US Dollar here in 2014.
 
French bank BNP Paribas now faces a $9 billion penalty “and a one-year suspension in 2015 of direct US Dollar clearing on its and gas, energy and commodity finance businesses,” explains Pensions & Investments Online, after pleading guilty to $30 billion of transactions “with countries that are under US government sanction.”
 
That’s some slapdown. “Temporarily restricting its ability to handle transactions in Dollars,” says Bloomberg, “would present BNP with administrative costs and could test the willingness of clients to remain with the bank.”
 
Where else might those clients go? Forget the Yuan for the foreseeable future. The Dollar accounts for 41% of global payments by value, with the Euro at 32% and the British Pound in third place with 8%. The Chinese currency is way off the pace with just 1.5%. The Yuan accounts for only 23% of China’s own direct trade with the rest of Asia!
 
Financing crooks or clearing their deals is a bad thing, of course. But the list of countries wearing “US goverrnment sanction” only gets longer. Parking or trading your money only gets tougher if your home-state doesn’t suit what Washington thinks. Yes, a London government spokesman when asked Wednesday said there is a link – “a correlation” indeed – between the UK’s new sanctions against Moscow and outflows from London of Russian oligarchs’ cash. “That is certainly the case,” as money scared of being frozen or seized gets out while there’s still time. But London or Frankfurt today is nothing next to the United States’ place in clearing global finance.
 
“No international bank,” as the Financial Times noted last week, “can operate without access to the US money markets.” And with access now restricted, claims FTfm columnist John Dizard, thanks to “dangerously stupid punitive actions and fines levied on banks using the international Dollar clearing system [means] the world is finding ways to get along without the Dollar.”
 
Chief amongst them, according to Dizard’s shadowy “sources”, is gold – “the most expensive and least convenient of all monetary alternatives to the Dollar.” Is he kidding? Perhaps not.
 
“Gold is very heavy to carry and often has to be re-assayed by the person accepting it as payment,” Dizard goes on, “since there is often a lack of trust among participants in the off-the-books transactions that use it.” No London Good Delivery and its chain of integrity here, in short. But where the rules roll over the trade, as India’s surging gold smuggling proves, the trade will find a way if it must.
 
“Not many transactions or investments are actually invoiced in gold as such,” says Dizard. “Instead gold is used as the settlement medium rather than for the price quotation.”
 
So welcome to our neo-Classical Gold Standard. “Gold’s popularity as a medium of international exchange,” Dizard says, “has been soaring.” The US might yet adapt, and accept that everyone pays who uses the Dollar, rather than inviting the world to find a replacement instead. Legal drug dealers in the United States, after all, need somewhere to bank their profits too.
 
Happy 100th birthday meantime to the death of gold money.
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Jul 23

Oil Unrest to Drive Gold Price Higher

Gold Price Comments Off on Oil Unrest to Drive Gold Price Higher
Summer correction ahead amid geopolitical uptrend…
 

BYRON KING writes for Agora Financial, editing their flagship Outstanding Investments plus two other newsletters, Real Wealth Trader and Military Technology Alert.
 
Studying geology and graduating with honors from Harvard University, King also holds advanced degrees from the University of Pittsburgh School of Law and the US Naval War College. He has since advised the US Department of Defense on national energy policy.
 
Now he says global unrest and inflation will play a role in improving fundamentals for gold and silver, as he tells The Gold Report here. But miners have to control costs and clean up their internal cash flow, too…
 
The Gold Report: Byron, gold is above $1300 per ounce – although not by much – and silver topped $20 per ounce. What was holding their prices down, and what are the fundamentals that will move the prices going forward?
 
Byron King: The short answer is that, for all its faults, the Dollar has strengthened, which holds down gold and silver prices. The longer answer is that gold and silver are manipulated metals. That is, the world’s central banks have an aversion to things they can’t control, and one of the things that they can’t control is elemental metals like gold and silver.
 
Let’s ask why the Dollar has strengthened. The US is probably in its weakest geopolitical situation in decades. The Wall Street Journal on July 17 had a front-page story about the confluence of crises across the world – Ukraine, Middle East, Southeast Asia – all of which are profound challenges to American power militarily, diplomatically and economically. But the Dollar is still holding up. Why?
 
I believe the dramatic recent increase in US energy production is what’s behind the stronger Dollar. With more oil and natural gas from fracking, the US is the world’s largest energy producer. In addition, we’re importing far less oil and exporting a lot more refined product. It helps the Dollar.
 
Still, when I look at the big picture for gold, I see a resource whose production is challenged on the best of days. Gold mining output is declining in the major traditional sources: South Africa is in decline; Australia is challenged; some of the big plays in Nevada are getting long in the tooth.
 
TGR: Is there a cycle that builds on itself? As the gold price goes down, companies – especially the majors – spend less on exploration and development, which depletes their reserves, production declines and their costs increase. Are we in that part of the cycle where lower prices are setting the stage for less supply and the need for a higher gold price later?
 
Byron King: Yes, exactly. Falling supply and static price makes a classic economic case. We are setting the stage for less supply and higher prices. The market is dancing around the reality, but it’s still the reality. Consider that, in the last year or so, gold has been as cheap as $1200 per ounce. In late March or early April, the price almost touched $1400 per ounce. That’s a 16-17% price swing in two months. Is this the sign of a well-balanced market?
 
Now consider how macro-events drive things. In the first half of 2014, geopolitical events – Ukraine, Syria, Iraq – drove the gold price. And to me, these locales bring it back to that Dollar-energy relationship.
 
Iraq produces 2.5 million barrels per day of exportable oil. In June, when it looked as if Iraq might not survive, the idea of those 2.5 million barrels being taken out of the market helped drive the price of gold from $1240 per ounce to over $1300 per ounce.
 
Or look at Ukraine. It straddles key gas export lines to Europe, and the situation involves Russia, which is one of the world’s largest energy producers. Problems with Russia, let alone sanctions and such, affect perceptions of future energy supply, which tends to benefit the Dollar.
 
All in all, where is the gold price headed? Long-term, I think the answer is up. Inflation is not going away. I think that the central banks of the world, and the people who run university economic departments and train the leaders of the future, really do believe that we ought to have long-term inflation. If that is indeed where they’re coming from, you need to own gold and silver.
 
I think the long-term prospects for demand – the long-term prospects for gold as money and as backing for money – are much better than they used to be.
 
TGR: Given the volatility that you discussed and the challenges of the US Dollar, is there significant retail and institutional cash on the sidelines waiting to find the confidence to jump back into precious metals, as commodities and mining equities?
 
Byron King: There is an immense amount of money waiting for the next step. In the last few years, the big indexes have done incredibly well; everything has gone up, from airlines to consumer electronics, Silicon Valley, aerospace. A lot of people have made a lot of money in the big markets and in traditional investments.
 
Now, where does it all go? All that recently minted money needs a new home. If you have balance sheet appreciation from the large caps and the big blue chips, you’re looking for something else. My sense is that a lot of people are looking at the basic resource sector.
 
We have already seen some of that money step back into the market in the first half of this year. Some of the highest-quality small and midsized mining plays have seen large moves.
 
TGR: The last time we talked, you explained that, in the context of history, we’ve just entered the early stages of the materials revolution, using advanced forms of graphite and rare elements. Can you give us an update on that revolution?
 
Byron King: When you get into the graphite space, you quickly realize that graphite is more of a technology play than a basic resource play. There is a materials revolution going on with carbon, certainly with graphite. It’s extremely investable, but you have to have patience, and be willing to learn some complex new science. If an investor doesn’t want to become educated on the high-end carbon chemistry that’s happening out there, this could become an uncomfortable space in a hurry.
 
Look at it this way. If I mine gold, silver or copper, I can sell it to pretty much anybody, from dentists to jewelers to wire makers to electronic makers. The end users will buy it as long as there is a basic spec or quality to it.
 
Graphite is different. Once you mine it, what you do with the graphite depends on who your user is. The end user has a specific use in mind – battery anodes, fire suppression, heat dissipation, high-strength materials – that requires an entire industrial chain that has to happen between the mouth of the mine and the end user.
 
TGR: Do you have any words of wisdom for investors who are trying to decide when to enter the market?
 
Byron King: We’ve seen several strong investment points for gold and silver in the last six months. Right now, I think we might be due for a summer correction, although geopolitical events seem to be exploding all over the place. Sorry, but I just don’t have a subscription to next week’s Wall Street Journal. My issue only comes every morning.
 
Still, we’ve got tremendous volatility. Just in the time we’ve been talking, the price of gold dropped $33 per ounce [Mon 14 July] which is a bit of an eye-opener. It makes you want to look at the rest of the world and see what’s going on, what might have prompted that drop.
 
The question for the investor is, what are you going to do? Well, if there’s a downdraft to gold and silver prices, then you want to be involved in companies that can get their costs down faster than the market can beat down the price. But whatever happens day to day, I think metal prices will go up over the long term, because of inflation.
 
When it comes to picking companies in which to invest, you need to be willing to diversify across many ideas. While it’s great to put a lot of money into a couple of plays and see one or two do really well, that’s usually not the way life works. In the small-cap resource space in particular, you need to find 6 to 10 quality plays – or more – and spread your investments around.
 
Then you need to watch carefully, and be willing to cut your losses. You also need to be ready for surprises on the upside. When a company gets a takeout offer or has a good piece of news from the drill rig, you can see fabulous gains flowing to patient investors. Just remember that, when good things happen, you need to sell some shares and take some of that gain off the table.
 
TGR: Byron, it’s always a pleasure. Thanks for your time and your insights.
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Jul 17

Deflation Theory & Fact

Gold Price Comments Off on Deflation Theory & Fact
When the financial crisis MkII shows up, expect 1930s-style deflation…
 

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