Oct 31

Solutions for Everything, Answers to Nothing

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Could one day’s Financial Times be the best £2.50 humanity ever spends…?
 

WEDNESDAY we picked up an issue of the Financial Times, writes Bill Bonner in his Diary of a Rogue Economist – the so-called pink paper due to its distinctive color.
 
We wondered how many wrongheaded, stupid, counterproductive, delusional ideas one edition can have.
 
We were trying to understand how come the entire financial world (with the exception of Germany) seems to be singing from the same off-key, atonal and bizarre hymnbook. All want to cure a debt crisis with more debt.
 
The FT is part of the problem. It is the choirmaster to the economic elite, singing confidently and loudly the bogus chants that now guide public policy.
 
Look on practically any financial desk in any time zone anywhere in the world, and you are likely to find a copy. Walk over to the ministry of finance…or to an investment bank…or to a think tank – there’s the salmon-pink newspaper.
 
Yes, you might also find a copy of the Wall Street Journal or the local financial rag, but it is the FT that has become the true paper of record for the economic world.
 
Too bad…because it has more bad economic ideas per square inch than a Hillary Clinton speech. It is on the pages of the FT that Larry Summers is allowed to hold forth, with no warning of any sort to alert gullible readers. In the latest of his epistles, he put forth the preposterous claim that more government borrowing to pay for infrastructure would have a 6% return.
 
He says it would be a “free lunch” because it would not only put people to work and stimulate the economy, but also the return on investment, in terms of GDP growth, would make the project pay for itself…and yield a profit.
 
Yo, Larry, Earth calling…Have you ever been to New Jersey?
 
It is hard enough for a private investor, with his own money at stake, to get a 6% return. Imagine when bureaucrats are spending someone else’s money…when decisions must pass through multiple levels of committees and commissions made up of people with no business or investment experience – with no interest in controlling costs or making a profit…and no idea what they are doing.
 
Imagine, too, that these people are political appointees with strong, and usually hidden, connections to contractors and unions.
 
What kind of return do you think you would really get? We don’t know, but we’d put a minus sign in front of it.
 
But the fantasy of borrowing for “public investment” soaks the FT.
 
It is part of a mythology based on the crackpot Keynesian idea that when growth rates slow you need to stimulate “demand”.
 
How do you stimulate demand?
 
You try to get people to take on more debt – even though the slowdown was caused by too much debt.
 
On page 9 of Wednesday’s FT its chief economics commentator, Martin Wolf (a man who should be roped off with red-and-white tape, like a toxic spill), gives us the standard line on how to increase Europe’s growth rate:
“The question […] is how to achieve higher demand growth in the Euro zone and creditor countries. [T]he Euro zone lacks a credible strategy for reigniting demand [aka debt].”
It is not enough for people to decide when they want to buy something and when they have the money to pay for it. Governments…and their august advisers on the FT editorial page…need a “strategy”.
 
On its front page, the FT reports – with no sign of guffaw or irony – that the US is developing a “digital divide”.
 
Apparently, people in poor areas are less able to pay $19.99 a month for broadband Internet than people in rich areas. So the poor are less able to go online and check out the restaurant reviews or enjoy the free pornography.
 
This undermines President Obama’s campaign pledge of giving every American “affordable access to robust broadband.”
 
The FT hardly needed to mention it. But it believes the US should make a larger investment in broadband infrastructure – paid for with more debt, of course!
 
Maybe it’s in a part of the Constitution that we haven’t read: the right to broadband. Maybe it’s something they stuck in to replace the rights they took out – such as habeas corpus or privacy. 
 
We don’t know. We only bring it up because it shows how dopey the pink paper – and modern economics – can be.
 
Quantity can be measured. Quality cannot. Broadband subscriptions can be counted. The effect of access to the internet on poor families is unknown.
 
Would they be better off if they had another distraction in the house? Would they be happier? Would they be healthier? Would they be purer of heart or more settled in spirit?
 
Nobody knows. But a serious paper would at least ask.
 
It might also ask whether more “demand” or more GDP really makes people better off. It might consider how you can get real demand by handing out printing-press money. And it might pause to wonder why Zimbabwe is not now the richest country on earth.
 
But the FT does none of that.
 
Over on page 24, columnist John Plender calls corporations on the carpet for having too much money. You’d think corporations could do with their money whatever they damned well pleased.
 
But not in the central planning dreams of the FT. Corporations should use their resources in ways that the newspaper’s economists deem appropriate. And since the world suffers from a lack of demand, “corporate cash hoarding must end in order to drive recovery.”
 
But corporations aren’t the only ones at fault. Plender spares no one – except the economists most responsible for the crisis and slowdown.
“At root,” he says of Japan’s slump (which could apply almost anywhere these days), the problem “results from underconsumption.”
Aha! Consumers are not doing their part either.
 
Summers, Wolf, Plender and the “pink paper” have a solution for everything. Unfortunately, it’s always the same solution and it always doesn’t work.
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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 29

Don’t Get Bullish on Gold Below $1350

Gold Price Comments Off on Don’t Get Bullish on Gold Below $1350
This month’s “triple bottom” is not, repeat NOT, confirmed says this technical analyst…
 

WAYNE KAUFMAN is chief market analyst at Phoenix Financial in New York.
 
Regularly quoted in the media and interviewed on Fox, CNBC and the BBC, Kaufman produces a daily report for Phoenix, is a member of the Market Technicians Association, and has taught level 3 of the MTA’s three-level online course for Chartered Market Technician candidates.
 
Here Kaufman speaks to Mike Norman on behalf of Hard Assets Investor about how he sees the big picture right now…
 
Hard Assets Investor: We’ve seen some crazy gyrations in gold, in the Dollar, in oil, even in stocks. Summarize how it looks to you.
 
Wayne Kaufman: In terms of US equities, we’ve been watching a deterioration of underlying market breadth, that hasn’t shown up, or had not shown up in the major indexes until the last couple of weeks. But for the last three or four months, we’ve been watching small-caps get decimated. And then the midcaps followed. And then the large-caps, S&P 500, had a peak recently. But the breadth was terrible.
 
And now the stocks have rolled over. It’s to the point where you’ve only got about 18% of S&P 1500 stocks over their own 50-day moving average, less than one in five. About one in three are still over their 200-day moving average. So that underlying deterioration came through and pulled down the majors.
 
HAI: Now with small stocks weak like that, wouldn’t that suggest general economic weakness, or at least a tipoff to that effect, that we’re seeing basically small, medium-sized businesses not doing very well?
 
Kaufman: Definitely. You’re right. You’re talking about changes taking place. The question in the mind of investors right now is, we’re seeing the weakness in China, in Europe, in Germany suddenly rolling over. You’ve got the price of oil. It’s all of these things that are turning dramatically. Is this a long-term trend change? Or is this just going to be short term? Is it just typical October stuff, in the case of equities? That’s what we’re going to find out over the next few weeks.
 
HAI: But is there really a downside, when people know the central banks are going to be there, push comes to shove?
 
Kaufman: There, at a point, is only going to be so much that the central banks can do. I was recently asked by a news outlet to give my projections for the S&P, and my reasoning. My No. 1 reason for being bullish is central banks around the world will do everything possible to prevent a global recession. Are they really able to do much more? We know they’ll try. Are they going to wait too long before they do? How effective can they be?
 
HAI: Last time you were here, you were negative on gold. And that play worked out pretty well. How do you see things panning out from this point?
 
Kaufman: I see short-term, over-sold and over-bearish sentiment. So a bounce is definitely in the cards, especially if there’s some short covering by people who are short the futures. But when I was here last time, I said I couldn’t get bullish unless gold broke $1400 or so. Now that number is a little lower.
 
HAI: Where is it?
 
Kaufman: $1300. I need to see $1350 at least, because you do have a potential triple bottom. A lot of people say, “Oh, triple bottom.” It’s a potential triple bottom that doesn’t get confirmed until you break unimportant resistance. Unless we can get above $1350, I’m not going to start thinking about getting bullish, except for oversold, over-bearish bounces.
 
HAI: We had a guest recently talking about the death of gold. Reminds me of the death of equities back on the infamous 1979 Business Weekcover. What do you make of that?
 
Kaufman: I agree. That’s why I’m saying I could see a bounce here, because it’s oversold, and it’s over-pessimistic. Levels of pessimism are extreme. And when you see that, that’s a good time to take the other side of that trade. The question is, how much staying power? You’re talking about commodities going down. The Dollar has been strong, which is a little too much bullishness in the Dollar. That certainly can be capped here.
 
But oil is just amazing. For years, you always said that the Saudis controlled the price of oil. You were 100% right. Because they’re the only country that really has significant excess capacity. Right now, are the Saudis purposely trying to drive the price of oil down, so that they can try and put a cap on fracking and energy exploration and production here in the States?
 
HAI: The shale guys, the shale producers.
 
Kaufman: Potentially an amazing tactical war going on between the Saudis and the US, in terms of oil production.
 
HAI: I saw an example of that back in the ’80s, when I was an oil trader on the floor of this very exchange, when they crashed the price down. That was a message sent to the non-Opec producers, the North Sea guys in particular. So I think you’re absolutely right. 
 
You mentioned the Dollar. That was a surprise to most people, because we had this narrative, for a long time, about money printing, and central banks, and quantitative easing, and hyperinflation and the Fed doing all this. Yet, look at the Dollar.
 
Kaufman: I don’t want to seem like I’m complimenting you because you’re the host, but you said this a long time ago.
 
HAI: Don’t hold back…
 
Kaufman: You said a long time ago, all the inflation guys, that they were wrong, they were going to be wrong. You were 100% right. So it was a big surprise. Now, as a technician, I called the Dollar going up at a point when I saw it giving me buy signals. I don’t do it the intuitive or the economist way. It’s extremely overbought. And it’s extremely over-bullish. It has been taking a pause. I think it’ll continue to pause here. It’s just too many people on that side of the trade at this point.
 
HAI: We heard comments recently from New York Fed President William Dudley, to the effect that a Dollar that’s too strong might hinder our ability to achieve our goals. Hint, hint, a little bit of code words there…
 
Kaufman: You’re right. But the problem they have is that the strong Dollar is going to hurt exports, obviously. But you’ve got S&P 500 companies due in the neighborhood of 40% of revenues, 50% of profits overseas. So, whether it’s from the strong Dollar or just because the economies overseas are very weak right now, no matter how you go on that, it’s going to be a problem. And the world economy needs to clear up. We’re not an island unto ourselves; it will affect us. And I think that’s what equities are starting to show.
 
HAI: Good points. Wayne, always great to have you here. Thanks very much.
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Oct 28

"Peak Gold" Here to Stay

Gold Price Comments Off on "Peak Gold" Here to Stay
But that won’t deflect a possible dip to $1000 per ounce first, says this leading German newsletter analyst…
 

OLIVER GROSS is a passionate resource expert, prudent investor and adviser with more than 10 years of experience in the mining and junior sector.
 
Chief editor and analyst of the newsletter Der Rohstoff-Anleger – which is published by Germany’s online GeVestor Financial groupm, and specializes in the global junior resource sector – Gross here tells The Gold Report why gold prices could get washed down to $1000 per ounce before the fundamental fact of “peak gold” drives a new bull market…
 
The Gold Report: Earlier this month, the broader equities markets suffered huge losses as gold made significant gains. Then, after the broader markets recovered, gold fell. Is there now an inverse relationship between the health of the broader markets and the price of gold?
 
Oliver Gross: This kind of inverse relationship between gold and the broader equity markets isn’t really new. It has been observed since fall 2011, when the price of gold peaked. Since then, gold has fallen more than 35%, while the S&P 500 has risen 70%.
 
The current situation resembles the early 2000s, when the broader equity markets were in the final phase of the dot-com bubble, while gold traded as low as $340 per ounce ($340 per ounce). Then, of course, the broader equities markets collapsed, while gold rose above $1900 per ounce.
 
TGR: Some analysts believe that the broader equities market is dangerously overvalued. To give one example, Netflix was recently trading at 144 times earnings. What do you think?
 
Oliver Gross: After a 5-year bull run leading to new all-time highs in the broader equity markets, there are many signs of bubble formations in the Internet, high-tech and biotechnology sectors. Again, this feels like the early 2000s. The extremely high price-to-earnings ratios in stocks such as Netflix indicate investor euphoria and huge amounts of speculative capital provided by the central banks.
 
It is shocking to compare valuations in the broader sectors of the equity markets to valuations in the precious metals space. 
 
TGR: How should investors react to this bubble?
 
Oliver Gross: Speaking for myself, as one who follows an anticyclical strategy, I like to invest when there is blood in the streets, and that is certainly what is happening with precious metal equities. Today, investors can buy gold and silver stocks at decade-low valuations and historically low bullion-to-equity valuations.
 
Nobody cares about precious metals equities today, but when the bubble in the broader markets bursts, we will see a massive shift in market sentiment and in the behavior of investors. That said, investors must stick to best-in-class stories and must demonstrate constancy and patience.
 
TGR: Could the collapse of the bubble lead to a crisis similar to that which occurred in 2007-2008?
 
Oliver Gross: Yes, the possibility of another Lehman Brothers event is there. When the largest and most influential players in the financial industry want to exit this market, we could see a 2008-like selloff very, very fast. I also think that it is only a matter of time before a further big player in our financial industry will go the same way as Lehman.
 
TGR: Geopolitical turmoil today is greater now than it has been for quite some time: Gaza, ISIS, Ukraine and now Ebola. Traditionally, this would have resulted in a significantly higher gold price, which has not happened. Is what we have seen this year an anomaly, or is the price of gold no longer affected by external events?
 
Oliver Gross: That is a question not easily answered. Traditionally, gold has been regarded as the ultimate crisis protection, so geopolitical turmoil usually resulted in a higher gold price. What has changed is the incredible power of the central banks. They have changed the rules of the game. This is a major financial experiment with no historical precedent. The combination of unlimited liquidity, historically low interest rates and historically high debt levels has, for the moment, mitigated geopolitical risk factors and guaranteed faith in the US Dollar as the world’s reserve currency.
 
Gold has fought incredible odds since fall 2011. It is the most hated asset class, the official enemy of the US Dollar reserve and our global monetary system. And so the biggest financial institutions have no interest in higher gold prices. They still control the gold futures and the paper-gold market, so it is easy for them to attack the gold price. But this can’t continue forever, and it’s just a matter of time before all the money created since 2008 will no longer simply inflate asset bubbles. Inflation will return, and gold will again respond positively to external crises.
 
TGR: Where do you see gold and silver prices going in the short term?
 
Oliver Gross: I see a 50% chance of a final panic selloff across the gold and silver space. In this scenario, gold could fall to $1000 per ounce, and silver could fall as low as $12 per ounce.
 
TGR: Wouldn’t such prices lead to widespread curtailment of bullion production?
 
Oliver Gross: The current all-in costs of gold producers are now above $1150 per ounce, even after massive cost reductions and a focus on higher-grade mining. Such expedients can have only a temporary effect. At a gold price of $1000 per ounce, there will be many shutdowns.
 
We need a gold price of at least $1400 per ounce to support sustainable production, and that number will rise, as early as 2015 or 2016. We have reached Peak Gold, and it’s here to stay. The highest-grade and most-profitable deposits are gone. The bear market in the gold mining space has been so long and painful that the major producers have their backs to the wall. 
Most discoveries of the last five years need a far higher gold price to be mined. In addition, many recent discoveries are located in jurisdictions with high country or environmental risks and lack infrastructure, resulting in multibillion-Dollar capital expenditures (capexes).
 
TGR: As a result of the factors you’ve mentioned, can we now expect a big increase in mergers and acquisitions (M&As)?
 
Oliver Gross: Not so much among the majors. Most of them have weak balance sheets and too many in-house projects to risk expensive and dilutive takeovers. 
 
TGR: What are the attributes possessed by those companies likely to be taken out?
 
Oliver Gross: When the influential players in the gold mining space think that the gold price bottom is in, and a new bull market is likely, M&A interest will grow big time. Such a consolidation could create a perfect storm for the strongest junior gold producers and quality gold developers with robust, competitive projects.
 
Specifically, takeover targets will have financeable mine capexes with a good relation to the discounted net present value (NPV) of their projects. They will be profitable with gold at $1100 per ounce, and at least break even at $1000 per ounce. Their projects will be in pro-mining jurisdictions with stable laws, the sustainable support of regional and local communities, and solid infrastructure.
 
TGR: What about management?
 
Oliver Gross: Takeover targets must have managements with strong track records, or, failing that, existing investment from the larger precious metals companies or previously successful strategic investors. And, of course, healthy financials. There are many evaluations to be made, and there aren’t any “no brainers” here. Due diligence and continuous research are critical. When you think you haven’t spotted any weaknesses, you’ve likely missed something.
 
TGR: You are now more bullish on uranium companies, correct?
 
Oliver Gross: Uranium prices have just enjoyed their first recovery in years. We may have seen the bottom here, so I think investors should put uranium stocks back on their watchlists. 
 
TGR: Finally, given that so many current investors in gold companies want out, does the M&A flurry you’ve suggested offer a special opportunity for contrarians?
 
Oliver Gross: Absolutely. Both specific and general valuations are among the lowest for the last 30 years, so this could be the most attractive environment for contrarian investors in a couple of generations.
 
TGR: Oliver, thank you for your time and your insights.
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Oct 21

Swiss Gold Vote: Should You Be Worried?

Gold Price Comments Off on Swiss Gold Vote: Should You Be Worried?
Switzerland’s gold referendum will force the SNB central bank to buy more than it sold in 2000-2008…
 

The SWISS GOLD VOTE in November – “Should I be worried?” asks a BullionVault user owning metal in Zurich, writes Adrian Ash at the world-leading physical gold and silver exchange online.
 
It’s no idle question. Governments do nasty things when they need to buy or keep hold of an asset.
 
Witness the United States’ compulsory gold purchase of April 1933 for instance…and its ban on hoarding, exporting or trading gold. 
 
Big difference here is that the Swiss public gets to vote on what drives such measures. Thanks to their petition system, the country’s junkies get junk on prescription…while minarets are banned. The changes proposed for 30 November would compel the Swiss National Bank to:
  • hold all its gold reserves in Switzerland; 
  • raise gold holdings to 20% of the SNB’s total assets; 
  • never sell gold ever again. 
This is a Swiss decision, and with the Franc effectively “backed” by gold again if this passes, it’s really not for us British turkeys…earning and holding British Pounds Sterling…to say whether or not a foreign nation should vote for Christmas.
 
But personally speaking, I’m no fan of central-bank gold hoarding. It tends to mark dark times, and still darker plans on the part of government.
 
The Swiss government is in fact pitted against this new gold plan. But still, it’s better by far to let gold circulate freely, I believe…outside state vaults and in private hands…just like the truly classical Gold Standard worked.
 
But let’s put my hopeless idealism, and the economic wisdom (or otherwise) of this 1930s-style Gold Standard proposal aside (for that is what it is). Just how desperate might the Swiss authorities become if the vote passes? Put another way, what impact might it have on the supply/demand balance worldwide, and hence prices?
 
First, the security of gold property held in Zurich or Bern, under the tarmac at Kloten or beneath the Gotthard mountains. Switzerland is a highly open economy, with financial services earning a huge portion of its tax revenues and employing nearly 6% of the working age population. Its banking reputation may have been dented in recent years (and its hard-won bank secrecy laws look set to be crushed by the European Union kowtowing to the US juggernaut). But physical gold storage, alongside refining imported gold bullion for export, continues to be a crucial industry.
 
By our reckoning, the world’s investors added 1,400 tonnes of gold to private and bank vaults in Switzerland between 2009 and 2013. For non-bank storage of physical property, it remains by far the most popular choice amongst BullionVault users, holding nearly 75% of the current record-high levels of client gold. To the best of our knowledge, no country enjoying such revenue – nor any state enjoying such confidence from foreign wealth – has ever turned it away. 
 
Even during the UK’s balance of payments’ crisis of the 1970s, foreign-owned bullion was allowed to enter and leave freely, sidestepping both VAT sales tax and the exchange controls blocking private British ownership of gold. London of course remains the centre of bullion dealing worldwide, just as Switzerland remains the No.1 choice for investment storage. It’s very hard indeed to see Switzerland attempting any kind of expropriation, compulsory purchase, exchange controls or punitive taxation – most especially of foreign-owned gold. 
 
So, with theft highly unlikely (especially against the popular pro-gold backdrop of a successful referendum), might the SNB rush to buy gold in December after the 30th November vote? Complicating factors start with the referendum process itself. Next month’s question gives no time limit for completing the extra gold buying, nor for repatriation of existing stock from foreign central-bank care. But if voters look harder (and they’ll be urged to think hard by the pro-gold billboard campaign set to start mid-November), then supporting documents set a deadline of 2 years for bringing the current gold home, and 5 years for reaching that 20% target. However, the clock will start running from the date of “acceptance”. But is that acceptance by voters (ie, November 30th) or by parliament and thus the regional cantons (ie, into Swiss law)?
 
This matters, because Swiss referenda, when approved by the public, can take up to 3 years to become law. So the whole process…if the SNB accepts its fate and doesn’t work with the government to refuse, reject or somehow revoke the Swiss public’s decision…could last up to 8 years.
 
Expect delays. SNB president Jordan has long spoken against the vote, and vice-chair Danthine did so this month (invoking the threat of deflation and Euro-led recession). Those policymakers are unelected, so Switzerland’s referendum pits popular, if not populist will against the technocrats. But elected politicians also oppose the move (and by a wide margin). Even if passed, in short, the spirit of the new rules will likely be hampered by those people charged with enshrining and then enacting them. 
 
The SNB is also a signatory to the fourth Central Bank Gold Agreement. Running for 5 years from 27 Sept. this year, it obliges the 22 central banks involved to “continue to coordinate their gold transactions so as to avoid market disturbances.” The expected transactions were of course sales (the first CBGA was signed after the UK’s sudden and clumsy gold sales announcement of mid-1999), but this treaty only offers further cover for delaying, going slow, or otherwise tempering the impact of buying.
 
An object lesson in central-bank recaltricance is the repatriation of Germany’s gold. Wanting some 300 tonnes from New York and 374 from Paris, the Bundesbank’s plan announced in January 2013 is scheduled for completion in 2020. Yet last year, only 5% of that total was shipped, barely one-third the average run rate required. Whatever the reasons, there really isn’t any hurry, not for the central bankers involved at either end of the transfer.
 
As for retrieving Switzerland’s current overseas gold holdings, we’re given to believe the Bank of England can “dig out” a 20-tonne shipment every two days. So if 20% of the SNB’s metal is still there in London, it could expect to get back the UK holdings inside 1 month. But only if the Bank of England devotes its entire vault staff to that task alone (it holds another 5,000 or so tonnes belonging to other customers besides the UK Treasury), and only if central-banking’s “old world” handshakes and winks are thrown over to appease public opinion.
 
Again, don’t bet on it. Central bankers have fat brass necks when it comes to defending themselves under cover of mutual independence from national governments and their voting publics. So might history offer some clues to the timing of Swiss buying?
 
Sucking in foreign money around WWII, and with exchange controls blocking many citizens abroad from buying investment bullion, Switzerland’s own gold reserves grew from 450 tonnes to 1,940 between 1940 and 1960. The sales starting 2000 took eight years to dispose of that much again, this time into a bullish free market (and again, after a public vote). Now something around 220 tonnes per year might be wanted – sizeable quantities to be sure, but in line with recent sources of demand like gold miners buying back the huge forward sales they’d made to insure against lower prices at the turn of the century (dehedging averaged 260 tonnes per year between 2000 and 2012) or the growth rate of new Chinese consumer demand (100 tonnes per year 2004 to 2013).
 
That extra demand, however, came during a strong bull market in prices. Miner dehedging in particular put a strong bid in the market, helping drive prices higher both mechanically (see the spike of early 2006 for instance) and psychologically (if gold-miner hedging had been bad for investor sentiment, then de-hedging could only be good). Many people now believe that forcing the SNB to hold 20% of its assets as gold will clearly drive market prices higher. Added to the repatriation of all Switzerland’s existing gold reserves…which could catch the cosy world of central banking asleep as Swiss law demands the gold is returned…it is expected to spark a huge squeeze on physical supplies worldwide.
 
We’re not so sure. Heavy central-bank gold sales during the 1990s are widely held to have pushed gold prices down. But those sales continued until the financial crisis began. By then, gold prices were 3 times higher from their lows of 2001, replaying what happened in the late 1970s, when the US Treasury was a big seller. Relatively heavy purchases – this time by emerging-market states – then coincided with the 2011 peak. But again, those purchases have continued as prices fell steeply.
 
Yes, back in 1998-2000, the Swiss gold sales discussed and then begun at the turn of this century helped drive the final nails into gold’s coffin-lid. But sandbagging the price, and dismaying dealers (as well as “bitter end” investors enduring the two-decade bear market starting with 1980’s peak at $850 per ounce), those huge sales in fact laid the floor for the 12-year bull market which followed.
 
Free from central-bank vaults like no time since before the First World War, gold rose and kept rising as private Western households, then Asian consumers, money managers and emerging-market central banks joined the gold miners themselves in buying bullion.
 
Gold is nearly as rich in irony as it is in politics. If the Swiss pro-gold campaign is trying to gerrymander a price-rise by forcing the SNB to turn buyer, history may yet – we fear – have the last laugh.
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Oct 14

Goldbug Apocalypse

Gold Price Comments Off on Goldbug Apocalypse
US growth doesn’t play well for the “apocalyptic goldbug” narrative. But for Asian demand…?
 

JOHN KAISER joined Continental Carlisle Douglas as a research assistant in 1982. Six years later, he moved to Pacific International Securities as research director, and also became a registered investment adviser.
 
Kaiser moved to the US with his family in 1994, and now produces The Kaiser Report of mining-stock analysis. Here he tells The Gold Report‘s sister title The Mining Report why “goldbugs” still expecting a US economic apocalypse might get their own disaster…
 
The Mining Report: At the Cambridge House Canadian Investment Conference in Toronto, you talked about escaping the resource sector swamp. Why do you call the current market a swamp?
 
John Kaiser: There are four key narratives that dominate the resource sector, in particular the junior resource sector.
 
One is the supercycle narrative where a growing global economy catches the mining industry off guard with the result that higher-than-expected demand results in higher real metal prices. That then unleashes a scramble to find deposits that work at these higher, new prices and put them into production. The juniors played an extraordinary role during that cycle in the last decade; however, global economic growth has slowed. Therefore, we are looking at a period of sideways, possibly weaker, metal prices for a number of years, which puts the supercycle narrative on hold. That is one factor keeping the sector in a swamp.
 
Another important narrative is the goldbug narrative, where a soaring gold price is going to make deposits much more valuable. We did see that play out. Gold reached $1950 per ounce briefly, but has since retreated 40%. Even though that’s still 400% off the low from just over a decade ago, it has turned out to be a wash in real prices. Now, growth projections in the US are having negative implications for the prevailing apocalyptic goldbug narrative. That does not bode well for an escape from the quagmire.
 
A third key narrative is security of supply, which we saw manifested in the rare earth [RE] boom in the past five years. However, the RE prices have come back to earth as substitution and thrifting has kicked in. The anxiety that China is going to eclipse the US anytime soon has diminished, and the concern that there will be supply squeezes around the world has diminished.
 
The fourth narrative, which has dominated the junior sector for two of the past three decades, is that of discovery exploration. Unfortunately, there have not been many very good discoveries in the past decade that have inspired confidence in the retail sector. Add to that the structural changes in the financial services sector that make it increasingly difficult for junior public companies to source retail investor capital.
 
These are the forces that are keeping gold – and junior mining equity – prices bogged down.
 
TMR: Let’s look at each of those narratives a little bit closer to determine what they mean for junior mining companies. If China’s growth is slowing and the US recovery remains hesitant, what does that mean for base metals – copper, nickel, iron and zinc?
 
John Kaiser: In the last decade, juniors have made a career of picking up deposits found in past exploration cycles and discarded as marginal because the grade wasn’t high enough. The juniors did a tremendous job of reevaluating their potential based on new prices and technology. That led to $140 billion worth of takeover bids, compared to the $5bn per decade in the 1980s and 1990s. These deposits now sit as inventory in the big mining companies.
 
That means when we get another price boom, the big mining companies will develop these projects to supply the demand surge, not acquire juniors that claw a new batch of discarded deposits out of the closet. Investors interested in juniors with advanced deposits will have to focus their attention on an existing pool of juniors that will shrink as they disappear through buyouts or mergers with very modest premiums off cyclical market lows.
 
TMR: Would you apply that scenario to all of the base metals?
 
John Kaiser: Copper and iron are the ones that are faced with oversupply in the next couple of years. Nickel is a special situation because it was being oversupplied until Indonesia imposed an export ban on raw laterite ore. The Philippines is contemplating doing something similar. Should this come to pass, then we will have temporary shortages of nickel, and we could see nickel prices going higher. But if Chinese capital builds the capacity to smelt the nickel laterite ore in Indonesia and the Philippines, then we will see weak nickel prices.
 
The one metal I think will realize higher prices in the next few years is zinc. That is because major mines have started to shut down, and what is coming onstream is considerably less capacity than what is shutting down. Normally, that doesn’t really matter because China has been the elephant in the room, the largest zinc producer. China has nearly doubled its production in the past decade. The prevailing view is that if we get a higher zinc price, China will move quickly to put more mines into production. However, I believe, due to a new environmental focus, the country could actually shut down some of its capacity, worsening the supply situation.
 
TMR: Let’s go back to your themes. The second one was the goldbug theme. The Federal Reserve is betting that the US economy is good enough to handle rising interest rates as part of a push to jumpstart the global economy. What could this mean for the supercycle we talked about and the apocalyptic goldbug narrative and the companies in the metals space?
 
John Kaiser: If the Fed successfully finesses the transition from quantitative easing and low interest rates to an economy based on positive real short-term interest rates, then we will see the consumer start to feel more comfortable with the future and spend money. Businesses would then start spending the trillions of Dollars they are now hoarding or spending on share buybacks to prop up stock prices.
 
If they shift to building stuff again for the long run, which employs people with quality jobs and signals optimism about America’s economic future, then the banks become happy and will start lending money to consumers. It creates a virtuous circle where the economy grows organically rather than artificially. This is also good for the rest of the global economy because it will enable emerging markets to hitch their wagon back to the US as a primary export destination and, ultimately, as a flow of capital back to their own economies to fund self-sustaining economic growth.
 
A smooth transition to real growth is bad news for the goldbug narrative because if we have higher interest rates and, thus, better yields, that makes gold – which yields nothing – not very competitive. A strong Dollar also clashes with the idea that everything is falling apart and, therefore, gold is going to go up due to resulting hyperinflation and fiat currency debasement.
 
But if the Fed is wrong and it merely succeeds in popping a stock bubble and the Dow Jones drops more than the 10-15% that would qualify as a healthy correction, unleashing another asset deflation spiral similar to 2008, then we end up in a very negative scenario for the global supercycle narrative and for the goldbug narrative because gold goes down in a liquidity crunch. Either outcome creates an argument for gold dropping through that $1180 per ounce resistance level and touching $1000 per ounce on the downside.
 
TMR: Are you predicting $1000 per ounce gold?
 
John Kaiser: I see $1000 per ounce as a temporary aberration except in the worst case scenario of a global depression. Today 1980’s $400 per ounce gold adjusted for inflation is $1120 per ounce, so $1200 per ounce is just a 9% real gain. That is sobering when you consider the mining industry extracted 2.3 billion ounces over the last 30 years on the back of gold’s big move during the 1970s. As this low hanging fruit got harvested, mining costs rose, even more so than general inflation during the past five years.
 
All-in cost estimates average $1350 per ounce for new gold, partly due to higher mining costs, but also due to lower grades, more difficult metallurgy and social license costs. A gold price in the $1000-1200 per ounce range implies that the world going forward will be content with the existing 5.4 billion ounce aboveground gold stock plus the billion extra ounces existing mines will produce as they deplete over the next decade.
 
As an optimist about global economic growth, I find that hard to believe. If the end of quantitative easing and the arrival of higher real interest rates gives the American economy organic growth legs, rather than sending it into a tailspin that requires the Fed to put it back on life support, it will pull the global economy back into an uptrend with resource-hungry emerging economies with large population bases as the long-term growth engines.
 
While your typical North American goldbug owns gold to hedge against catastrophe and a possible capital gain trade, new wealth in emerging nations seeks gold ownership as a form of saving and wealth insurance. This gold is not generally for sale. In my view, global economic growth is a plausible driver for higher real gold prices. The question is how long can gold hang around at price levels where it does not make economic sense to mobilize new gold mine supply?
 
What would jumpstart an uptrend in gold is China announcing its actual reserve holdings, which were last reported in 2009 as 1,054 tonnes. Since then China has produced about 2,000 tonnes and because the central bank is the official buyer of domestic gold production, China’s official gold holdings are likely over 3,000 tonnes, just behind Germany at 3,384 tonnes. China has also been a heavy importer of gold since its breakdown in 2013, possibly over 1,000 tonnes. That would put China in second place, halfway to America’s official holdings of 8,134 tonnes. China sees as the long game the eventual end of the US Dollar as the world’s single reserve currency.
 
For now China is more than happy to see weak gold prices and is unlikely to harm its gold accumulation agenda by updating its official reserve holdings. But if it did, that would make investors think twice about selling the gold they already own and increase demand for more, which would lead to a higher gold price. A shortage could push gold to $1500 per ounce without excessive inflation or fiat currency debasement. It would also underpin a new bull market in the juniors, especially if the American economy is back on track and the dominant gold narrative is no longer one that just promises higher gold prices without enhanced mining profitably.
 
TMR: We’ve talked before about the fact that during this downturn, a lot of companies were going to either disappear or be reduced to walking dead on the Toronto Stock Exchange and the TSX Venture Exchange. Is one of the bright spots of the market today that it’s easier to tell the good companies from the bad?
 
John Kaiser: Yes and no. Just under 600 companies out of 1,700 have more than $500,000 working capital and aren’t in the big mining company league. Some 300 have between $0 and $500,000 working capital, and about 700 have negative working capital of about $2B. The negative working capital ones are pretty much dead in the water because no one wants to give them real money to replace money that’s already been spent. You may find a few companies among them with interesting stories that are worth salvaging. But most of the indebted companies are going to wither away and disappear.
 
That leaves about 900 companies with potential to survive. Among those, I gravitate toward the ones that have real management teams – technical personnel who know something about exploration – and projects with a story indicating that the brains of management are actually at work and that they are not just going through the motions of pretending to explore. Some companies are sitting on piles of money where management is collecting big salaries but because they have large shareholders who are treating the company simply as a keg of dry power for extremely bad times, they do not have the go-ahead to do anything along the lines of serious exploration that would risk the capital but also put the company in a position to deliver a substantial reward. One also has to be careful about those companies because they represent opportunity cost.
 
But, in general, it is now easier to see companies that are doing something and distinguish those from the rest because the inability to finance and the poor financial condition of most of the resource juniors make it very clear that they have nothing and are doing nothing. There is no reason to invest even a penny in such zombie companies.
 
TMR: Thank you for your time.
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Oct 10

Central Bank Gold Agreement No.4

Gold Price Comments Off on Central Bank Gold Agreement No.4
“We, the undersigned, aren’t selling gold anyway. But just so you know…”
 

In MAY 2014, the European Central Bank and 20 other European gold holders announced the signing of their fourth Central Bank Gold Agreement, writes Julian D.W.Phillips at GoldForecaster.
 
This agreement, which applies as of 27 September 2014, will last for five years and the signatories have stated that they currently do not have any plans to sell significant amounts of gold.
 
Collectively, at the end of 2013, central banks held around 30,500 tonnes of gold, which is approximately one-fifth of all the gold ever mined. Moreover, these holdings are highly concentrated in the advanced economies of Western Europe and North America, a statement that their gold reserves remained an important reserve asset, a statement made in each of the four agreements since then.
 
After 29 years of implied threats that gold was moving away from being an important reserve asset and the potential sales of central bank gold the gold price had fallen to $275 down from $850 in 1985. But the sales that were seen were so small that with hindsight they were seen as only token gestures. Today the developed world’s central banks continue to hold around 80% or more of the gold they held in 1970.
 
It only became clear subsequently that the real purpose behind these sales (from 1975) were to reinforce the establishment of the US Dollar as ‘real money’ and the removal of gold as such. The US government would brook no competition from gold, but continued to hold gold (as money ‘in extremis’) in ‘back-up’.
 
Then in 1999 the Euro was to be launched. It too needed to ensure that Europeans, who had a long tradition of trusting gold over currencies, would not reject the Euro in favor of gold and turn to gold and its potentially rising price. So it was decided that while gold was to be retained as an important reserve asset, its price had to be restrained for some time, while Europeans were made to accept the Euro as a reliable, functioning money in their daily lives.
 
To that end, major European central banks signed the Central Bank Gold Agreement (CBGA) in 1999, limiting the amount of gold that signatories can collectively sell in any one year. There have since been two further agreements, in 2004 and 2009. Now the fourth Central Bank Gold Agreement is in operation.
 
Together, the European Central Bank, the Nationale Bank van België/Banque Nationale de Belgique, the Deutsche Bundesbank, Eesti Pank, the Central Bank of Ireland, the Bank of Greece, the Banco de España, the Banque de France, the Banca d’Italia, the Central Bank of Cyprus, Latvijas Banka, the Banque centrale du Luxembourg, the Central Bank of Malta, De Nederlandsche Bank, the Oesterreichische Nationalbank, the Banco de Portugal, Banka Slovenije, Národná banka Slovenska, Suomen Pankki – Finlands Bank, Sveriges Riksbank and the Swiss National Bank say that…
“In the interest of clarifying their intentions with respect to their gold holdings, the signatories of the fourth CBGA issue the following statement:
  • Gold remains an important element of global monetary reserves;
  • The signatories will continue to coordinate their gold transactions so as to avoid market disturbances;
  • The signatories note that, currently, they do not have any plans to sell significant amounts of gold.
“This agreement, which applies as of 27 September 2014, following the expiry of the current agreement, will be reviewed after five years.”
The first clause confirms the ongoing role of gold as an important reserve asset. The most important part of the statement is the third part, where the signatories confirm “they do not have any plans to sell significant amounts of gold.”
 
In other words they have completed their sales. We do not expect them to resurrect their sales as they have fulfilled their purpose. Their sales stopped in 2010 in effect, bar some small sales by Germany of gold to be minted into coins. We did not consider these a part of these agreements.
 
The statement clarifies that none of the signatories will act independently of the rest and sell gold. They will coordinate any future transactions with the other signatories should a situation arise where a signatory wishes to sell again. We believe that this will not happen because of the financially strategic and confidence building nature of their gold reserves.
 
This agreement in lasting for five more years reassures the gold market that none of the signatories will sell gold for five years and even then they will likely make a further agreement for five more years.
To us this statement and agreement removes the specter of central bank gold sales in the future. As we have seen since these sales were halted in 2010, emerging market central banks have been buyers of gold steadily and carefully, without chasing prices.
 
We have the impression that the bullion banks go to prospective central bank buyers and ‘make the offer’ of gold available on the market, which the central bank then buys. They do not announce their intentions and act so as not to affect the price barring taking stock from the market.
 
This not only reassures gold-producing countries and companies, who can be reassured that there will be no policy of undermining the price of gold with uncoordinated sales of gold, but tells the rest of the world including emerging central bank buyers that there will be no supplies from them put on sale. Such buyers will have to find what gold they can on the open market or from their own production.
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Oct 10

Soft Money Paradigm Breaking

Gold Price Comments Off on Soft Money Paradigm Breaking
Disaster. Catastrophe. Go on – admit it holds a certain appeal…
 

IT MIGHT seem that today we are deeply devoted to the Mercantilist paradigm in monetary affairs, writes Nathan Lewis at New World Economics.
 
That is the notion of a floating fiat currency managed by a panel of bureaucrats, to address an ever-changing menu of issues including unemployment, exchange rates, financial markets, government funding, and the interests of one group or another.
 
Some people call this the Soft Money paradigm, characterized by the “Rule of Man”.
 
But, I think it is important that quite a few governments have actually abandoned this paradigm. They do not attempt to manage their economies by jiggering their currencies.
 
Rather, they adopt a simple fixed-value system: the value of the currency shall be X. There is no domestic discretionary element. This is the Classical paradigm, the Hard Money paradigm, in which the “Rule of Law” is primary.
 
But what is “X”? In the past, it was gold. A “gold standard system” is a system in which gold is the “standard of value,” ie, “X”.
 
A “Dollar” was once worth 23.2 troy grains of gold. Today, lots of countries have the same sort of arrangement, but they use the Euro as “X” instead of gold. This includes the eighteen members of the Eurozone, all of which have given up any avenue of domestic money-jiggering.
 
It is true that the Euro itself is a floating fiat currency, and that the ECB does take into consideration the concerns of Eurozone member states during its funny-money decision-making process. However, we also know that the ECB doesn’t really take orders from any one state, not even Germany, which is a little miffed at the central bank’s latest money-printing scheme.
 
We also know that there are many Mercantilist economists who declare loudly that any state that gets itself into trouble should have its own independent currency, which can supposedly be jiggered by its own independent board of incompetents to make all the boo-boos better, really we promise.
 
Thus, I would argue that the Euro is basically serving as an external monetary benchmark for these states, much as gold did in the past.
 
In addition, there are another ten small states and territories that use the Euro but are not officially part of the Eurozone. Also, there are twenty-eight countries, mostly in Africa, that have some sort of Euro link, mostly via a currency board system.
 
In total, there are fifty-five states and territories that have a Classical fixed-value system based on the Euro. The only difference between these “Euro standard systems” and a “gold standard system” is the choice of the “standard of value.”
 
The Classical ideal in money is very common today. But why use the Euro as a “standard of value” instead of gold?
 
The most basic reason is stability of exchange rates, or what I call the “terms of trade.” The smaller countries of Europe have always had a high degree of trade with each other. This does not only include imports and exports, but also financing and investment. Whatever the potential benefits of using gold as the “standard of value,” the fact is that to do so would introduce a lot of chaos into exchange rates with other Euro-using states, and other countries as well, which would be completely intolerable to businesspeople.
 
One of the primary attractions of a Classical fixed-value arrangement, rather than an independent floating fiat currency, is to gain all the advantages of stable trade relationships. That’s why Europe gave up their independent currencies and created the Euro in the first place.
 
This problem did not exist in the past. Before 1971, the major international currencies, and most minor currencies, were fixed to gold. Thus, a country that adopted gold as a “standard of value,” or “X” in a fixed-value system – the role the Euro plays today – would also have stable exchange rates with most major trading partners. There was no conflict.
 
At some point, the Euro may be so debauched as to render it completely unacceptable as a benchmark of value in a Classical fixed-value system. At that point, a government might either adopt another major international currency as its monetary “standard of value,” or it might use gold.
 
If the Euro reaches such a state – ECB chief Mario Draghi recently said he intends to make another trillion Euros appear out of thin air, I kid you not – then other major currencies would also likely be close behind, except for the Japanese Yen, which would be far ahead.
 
Thus, other major currencies would not likely satisfy those fifty-five former Euro enthusiasts either.
 
Then they might turn to gold – which actually has a rather lovely track record, and which actually was the monetary benchmark for most of those countries for a very long time already.
 
But when might that happen? History suggests that such a changeover does not happen until the former benchmark currency has been abused beyond all hope of renewal.
 
Disaster. Catastrophe. I admit it holds a certain appeal.
 
However, there is an alternative: to introduce gold-based currencies today, but to make them optional instead of mandatory. Thus, the present Euro-based and other fiat currencies would continue, but there would also be a gold-based alternative.
 
At first, this gold-based alternative might not be very popular. It would have a lot of exchange-rate volatility with the fiat Euro, Dollar, Yen and pound. Let’s be a bit Germanic and call it the goldmark, and give it the traditional value of 2790 goldmarks per kilogram of gold.
 
As today’s fiat currencies gradually lost their viability, people might decide, incrementally, that they want to keep at least part of their savings in terms of goldmarks, not Euros or Dollars. Borrowers find that they cannot issue debt or borrow money unless denominated in goldmarks; suppliers want to be paid in goldmarks; workers demand wages in goldmarks; and producers demand goldmarks in payment for their goods and services.
 
As more and more people use goldmarks (and other similar currencies that emerge), for their own personal interests, they find that they can also engage in trade with all the other people that use goldmarks, without the issue of unstable exchange rates. Thus, the issue of chaotic trade relationships gradually melts away.
 
But what if everything is fine? What if there is no disaster? People can still use goldmarks as they see fit – perhaps as an investment product much like the gold ETFs popular worldwide – but perhaps they would continue to use fiat Euros for most commercial situations. It works both ways. There is no downside.
 
The only problem, it seems, is that people are not aware that such a thing is possible, and in fact rather easy to do. Also, they don’t know how to do it. But, these are minor issues, really.
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Sep 18

Bad News for Gold from the Strong Dollar

Gold Price Comments Off on Bad News for Gold from the Strong Dollar
Expect a drop to $1200 near-term, says a man who called the bull market in 2001…
 

ERIC COFFIN is the editor of the HRA (Hard Rock Analyst) family of publications.
 
With a degree in corporate and investment finance, plus extensive experience in merger and acquisitions and small-company financing and promotion, Coffin has for many years tracked the financial performance and funding of all exchange-listed Canadian mining companies, and has helped with the formation of several successful exploration ventures.
 
One of the first analysts to point out the disastrous effects of gold hedging and gold loan-capital financing in 1997, he also predicted the start of the current secular bull market in commodities based on the movement of the US Dollar in 2001 and the acceleration of growth in Asia and India. 
 
Now Coffin tells The Gold Report how the continuing strength of the US Dollar is bad news for the price of gold, and believes that in the short term a price of $1200 per ounce is possible, though there is room now for an oversold bounce…
 
The Gold Report: You told us last year you were “neutral” on the state of the US economy. Since then, the headline unemployment number has improved. Even so, as David Stockman, former director of the Office of Management and Budget, says, there have been no net new jobs created since July 2000, and jobs paying over $50,000 per year have disappeared by 18,000 per month since 2000. What is your view of the health of the US economy?
 
Eric Coffin: I’m more positive than neutral these days, but I do agree somewhat with Stockman. As unemployment falls toward 6%, we would expect an increase in wage gains. But we’re just not seeing that. And five years into the latest expansion, we’re not seeing the economic growth spurts that tend to occur coming out of a really bad recession. I don’t see how the US economy keeps reproducing the 4% growth of Q2 2014 if we don’t see higher wage gains and higher paying jobs created.
 
TGR: You’ve used the term “smack down” with regard to the recent falls in the gold price. What do you mean by this?
 
Eric Coffin: It’s a wrestling term and means being thrown to the mat. This is what has happened to gold time after time, after every uptrend. The current smack down is due more to strength in the US Dollar than anything else. Gold does trade as a currency sometimes and for the past few weeks it has held a strong inverse correlation to the US Dollar. I think physical demand will ultimately determine the price level, but ultimately it can be a long time when you’re trading.
 
TGR: Why isn’t physical demand determining the price now?
 
Eric Coffin: It’s because of trading in the futures market. When somebody dumps 500 tons there, gold has to drop $200 per ounce. The futures market can overwhelm the physical market in terms of volume and often does. Most traders in the futures market (NYMEX or COMEX) are not buying gold and taking delivery. They are trading as a hedge, or just trading. The physical market, the place where people actually buy bullion, coins and bars, is not predominantly in London or New York but rather in China and India. And because of the smuggling that has arisen in India to circumvent increased tariffs, and imports moving to cities that do not release import statistics in China, it is difficult to know how much bullion Asia is buying right now.
 
TGR: Large short-term trades in paper gold could be used to manipulate the market, and an increasing number of people believe gold is being manipulated downward in this manner. Do you agree?
 
Eric Coffin: I’m not really a conspiracy guy. That said, when we see things like the sale in August of 400 tons in about 10 minutes, we have to wonder what’s going on. Again, when Germany requests its gold from the US and is told delivery will take seven years, it makes you wonder how much of that gold has been hedged or lent already.
 
TGR: Where do you see gold going for the rest of the year?
 
Eric Coffin: I think we are going to be trapped in this currency trade cycle for a little while. The European Central Bank (ECB) cut its rates. One of its deposit rates is now negative. Mario Draghi, the president of the ECB, is talking about starting up quantitative easing. If that happens, or if traders believe it will, the Euro, which has already fallen from $1.40 to about $1.28 to the Dollar, could fall to $1.20 or $1.10. And this strengthening of the Dollar is not good for gold.
 
The other factor of gold being traded on a currency basis is the possibility of Scottish independence, fear of which has already resulted in a significant decline in the British Pound.
 
TGR: Will $1250 per ounce gold lead to gold miners suspending production?
 
Eric Coffin: If gold stays at $1200-1250 per ounce for an extended period, there will be mine closures. Obviously, not all mines have the same costs, but the average all-in cost per ounce for gold miners is about $1200 per ounce. Already, some mines are high-grading to keep profit margins up.
 
Most of the large miners have already cut exploration budgets pretty significantly. We can assume that the pipeline is going to get smaller and smaller when it comes to new projects, even high-quality projects.
 
TGR: How badly will this gold price decline hurt the junior explorers?
 
Eric Coffin: It’s hurt a lot of them already. It’s much more difficult to raise money than it was two or three years ago, although it’s probably slightly better now than early this year. That could change on a dime, of course, if the gold price falls to $1200 per ounce or rises back through $1300 per ounce. Already, quite a few companies are keeping the lights on but not much else. We desperately need a few good discoveries – companies going from $0.20 to $5/share and getting taken out. 
 
TGR: You’ve been visiting mine sites in the Yukon. What do you like about this jurisdiction?
 
Eric Coffin: It’s a great area geologically, but it has some challenges. It can be an expensive place to work, so being close to infrastructure or designing an operation that doesn’t require a huge amount of nearby infrastructure is critical. Power costs are a big item. There’s no end of places in the Yukon where hydropower could be generated fairly cheaply, but that is not going to happen on a large scale unless the federal government steps up, and that would be nice to see.
 
TGR: How does Alaska compare to the Yukon as a mining jurisdiction?
 
Eric Coffin: They’re similar in many ways. Alaska, like the Yukon, is not low-cost, but it is mining friendly and even farther down the road when it comes to settling aboriginal issues. The key to success in Alaska is being close to the coast or major population centers or infrastructure.
 
TGR: How do you rate copper’s prospects?
 
Eric Coffin: There are several large producers that have either recently come onstream or will come onstream in the next few months. So copper is probably going to be in at least a small surplus for the next year or two. The price could fall back to $2.50-2.75/pound ($2.50-2.75/lb). I’m not terribly concerned about that. Copper should be fine in the long term and a good copper operation can make plenty of money at those prices.
 
TGR: The bear market in the juniors is now 3.5 years old. Should investors expect a general upturn any time soon?
 
Eric Coffin: I doubt it if you mean a broad market rise that lifts all boats. My expectation at the start of this year, which is looking fairly dodgy right now admittedly, was for a 30% TSX Venture Exchange gain for 2014. That is possible with only a small subset of companies doing very well, which is my expectation. Investors always want to look for the tenbaggers. It doesn’t matter what the market is like and, obviously, potential tenbaggers often turn into actual one and a half or two baggers, which is just fine. You want to find the projects with the highest potential for resource growth or new discovery and management teams that know how to explore them and finance them on the best possible terms. That is the combination that gives you the potential biggest wins.
 
TGR: Eric, thank you for your time and your insights.
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Sep 16

Switzerland’s Gold Vote

Gold Price Comments Off on Switzerland’s Gold Vote
What’s at stake in Switzerland’s referendum on SNB gold policy…
 

On NOVEMBER 30th, writes former US Congressman Ron Paul, voters in Switzerland will head to the polls to vote in a referendum on gold.
 
On the ballot is a measure to prohibit the Swiss National Bank (SNB) from further gold sales, to repatriate Swiss-owned gold to Switzerland, and to mandate that gold make up at least 20% of the SNB’s assets.
 
Arising from popular sentiment similar to movements in the United States, Germany, and the Netherlands, this referendum is an attempt to bring more oversight and accountability to the SNB, Switzerland’s central bank.
 
The Swiss referendum is driven by an undercurrent of dissatisfaction with the conduct not only of Swiss monetary policy, but also of Swiss banking policy. Switzerland may be a small nation, but it is a nation proud of its independence and its history of standing up to tyranny. The famous legend of William Tell embodies the essence of the Swiss national character. But no tyrannical regime in history has bullied Switzerland as much as the United States government has in recent years. 
 
The Swiss tradition of bank secrecy is legendary. The reality, however, is that Swiss bank secrecy is dead. Countries such as the United States have been unwilling to keep government spending in check, but they are running out of ways to fund that spending. Further taxation of their populations is politically difficult, massive issuance of government debt has saturated bond markets, and so the easy target is smaller countries such as Switzerland which have gained the reputation of being “tax havens”.
 
Remember that tax haven is just a term for a country that allows people to keep more of their own money than the US or EU does, and doesn’t attempt to plunder either its citizens or its foreign account-holders. But the past several years have seen a concerted attempt by the US and EU to crack down on these smaller countries, using their enormous financial clout to compel them to hand over account details so that they can extract more tax revenue. 
 
The US has used its court system to extort money from Switzerland, fining the US subsidiaries of Swiss banks for allegedly sheltering US taxpayers and allowing them to keep their accounts and earnings hidden from US tax authorities. EU countries such as Germany have even gone so far as to purchase account information stolen from Swiss banks by unscrupulous bank employees. And with the recent implementation of the Foreign Account Tax Compliance Act (FATCA), Swiss banks will now be forced to divulge to the IRS all the information they have about customers liable to pay US taxes. 
 
On the monetary policy front, the SNB sold about 60% of Switzerland’s gold reserves during the 2000s. The SNB has also in recent years established a currency peg, with 1.2 Swiss francs equal to one Euro. The peg’s effects have already manifested themselves in the form of a growing real estate bubble, as housing prices have risen dangerously. Given the action by the European Central Bank (ECB) to engage in further quantitative easing, the SNB’s continuance of this dangerous and foolhardy policy means that it will continue tying its monetary policy to that of the EU and be forced to import more inflation into Switzerland. 
 
Just like the US and the EU, Switzerland at the federal level is ruled by a group of elites who are more concerned with their own status, well-being, and international reputation than with the good of the country. The gold referendum, if it is successful, will be a slap in the face to those elites.
 
The Swiss people appreciate the work their forefathers put into building up large gold reserves, a respected currency, and a strong, independent banking system. They do not want to see centuries of struggle squandered by a central bank. The results of the November referendum may be a bellwether, indicating just how strong popular movements can be in establishing central bank accountability and returning gold to a monetary role.
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