Oct 31

Tea Leaves & $2000 Gold

Gold Price Comments Off on Tea Leaves & $2000 Gold
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?

Gold Price Comments Off on Peak Oil? How About Peak Oil Storage?
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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Oct 03

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

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

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

Why Commodity Prices are Sinking

Gold Price Comments Off on Why Commodity Prices are Sinking
Natural resources from oil to food are falling fast in price. Why…?
 

Is the POST-COLD WAR global boom over? asks Donald Coxe, chairman of Coxe Advisors LLC, and a consultant to The Casey Report from Doug Casey’s research group.
 
Since the fall of Bolshevism, the world has seen remarkably sustained growth in international cooperation, brought about by freer trade and new technologies. Financial assets have generally performed well, increasing prosperity across most of the world. There were just two major interruptions – the tech crash in 2000, and the financial crash in 2008.
 
The world warmed up fast after the Cold War. Prices of most commodities rose, despite major corrections:
  • Oil climbed from $15 per barrel to as high as $140. It collapsed with the crash, but climbed back swiftly to near $100;
  • Corn climbed from $2 to as high as $8 before sliding to $3.60;
  • Copper climbed from 80 cents to $4.30 before sliding to $3
  • Gold shot up from $350 to $1900 before pulling back toward $1200.
So what’s happening with commodity prices now? Is this just another correction, or has the game really changed?
 
Commodity prices have risen against a backdrop of falling interest rates:
The US 10-year Treasury yielded 8% as recently as 1994, and as low as 2.1% during the crash. Recently the consensus target was 4% – before fears of outright deflation drove it to 2.4%. Bond yields have fallen below 1%. Even the bonds of the southern members of the Eurozone yield Treasury-esque returns.
 
Remarkably, those low yields persist even as major geopolitical outbursts have ended the mostly benign post-Cold War era. The foundations of global economic progress are being shaken by geopolitical earthquakes from Russia and Ukraine to Syria and Iraq, where a new caliphate has been proclaimed.
 
It seems bizarre, but the world is heading toward a revival of both the Cold War and the Ottoman Empire.
 
Unfortunately, these concurrent crises are occurring at a time when the great democracies’ leaders bear scant resemblance to those leaders responsible for the end of the Cold War and the launch of global cooperation and free trade: Reagan, Thatcher, and George H.W.Bush.
 
Mr.Obama won his nomination by voting against the invasion of Iraq. He ran on the promise of ending wars, not starting them. Now, faced with sinking popularity in an election year that could give Republicans complete control of Congress, he naturally fears dragging America into the ISIS chaos – or Ukraine.
 
Obama is also haunted by the collapse of his most daring and creative foreign policy achievement – the reset with Russia. Mr.Putin has doubled down on his Ukrainian attacks by warning that Russia should be taken seriously, because it is a major nuclear power and is strengthening its nuclear arsenal. Those with long memories recall Khrushchev banging his shoe at the United Nations and shouting, “We will bury you!”
 
Meanwhile, Western Europe’s leaders show few signs of being prepared for either crisis. Angela Merkel, raised in East Germany, is cautious to a fault. British Premier David Cameron is struggling to prevent Scottish secession and to deal with the likely return of hundreds of ISIS-trained British citizens. (Military analysts generally agree that well-funded returnees with ISIS training are much greater threats than Al Qaeda ever was…yet Cameron has failed to convince his coalition partner to support restraining their re-entry into British Muslim communities.)
 
The backdrop for long-term investing has, in less than a year, swung from promising to promises broken by wars and threats of more-terrifying wars.
 
Another unlikely threat is deflation. When central bankers have been running the printing presses 24/7…?
 
Most economists, strategists, and investors would have deemed deflation a near-impossibility with government debts at all-time highs, funded by money printed at banana-republic rates. Who thought that the Fed would quadruple its balance sheet? And who dreamt that such drastic policies would be sustained for six years and would be accompanied by outright deflation in much of Europe and minimal inflation in the USA?
 
So why have Brent oil prices fallen from $125 in two years despite production outages in Syria and Libya and repeated cutbacks in Nigeria? Are Teslas taking over the world?
 
The answer is that the US is once again #1 in oil production, thanks to fracking (in states that allow it). Mr.Obama likes to boast about the new US oil boom, but he has been a bystander to this petro-revolution. According to an oil company executive interviewed in theNew York Times last week, without fracking, global oil prices might be at $200 a barrel, and the world would be in a deep recession. He’s a Texan and thus inclined toward hyperbole, but his point is directionally valid.
 
US frackers – deploying advances in science and technology with guts and skill – have averted fuel inflation. And farmers, using the tools of modern agriculture – GMO and hybridized seed, farm machinery equipped with GPS and logistics, and carefully monitored fertilizers – have combined with Mother Nature to unleash record crops of corn and soybeans. So much for food inflation.
 
Capitalism is doing its job: to expand output of goods and services, thereby preventing shortages from derailing recoveries through inflation. That success story means central bankers can keep printing away.
 
So what should investors do? The S&P’s rally has been sustained through near-zero-cost money used to:
  • buy back stock to enrich insiders and please activist hedge funds which have borrowed big to buy big; and
  • prop up the overall market because investors have learned that buying on margin when the costs are minimal – and below dividend yields – just keeps paying off.
Stein’s law says, “If something cannot go on forever, it will stop.” Too bad it doesn’t say when.
 
Gold loses its luster when inflation seems to be as remote as a pot of gold at the end of the rainbow. It also loses appeal if even a concatenation of crises fails to send investors rushing into the time-tested crisis consoler.
 
We had predicted in February that 2014 would be the year of increasing geopolitical risks that would challenge conventional asset allocations. We see geopolitical risks expanding from here – not contracting – and stick to our investment advice that the broad stock market is precariously valued. A range of options is available for those who wish to hedge themselves against even worse news.
 
Gold is part of any such risk mitigation. So are long government bonds.
 
Most importantly, we have entered an era when wise investors will devote as much time to reading the foreign news as they allocate to reading the investment section.
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Sep 03

Conflict-Led Commodity Squeeze Ahead?

Gold Price Comments Off on Conflict-Led Commodity Squeeze Ahead?
Tumultuous times in Europe and the Middle East point to tight supply…
 

The GEOPOLITICAL EVENTS of summer 2014 may go down in history as a decisive turning point in world affairs, writes Amine Bouchentouf – partner at Parador Capital LLC, author of the best-selling Commodities For Dummies, and also founder of Commodities Investors LLC – at Hard Assets Investor.
 
Tensions across the Middle East and the European continent are reaching a high point and may soon reach a point of no return.
 
In this report, we examine the global macroeconomic scenario and what impact this will have on the performance of commodities. This will allow us to pick our investment spots as we move into the final quarter of the year.
 
A storm is brewing in Europe and the Middle East that could drag the world’s superpowers into regional conflicts that could escalate into a much broader war encompassing several countries across several continents. Let’s start in Europe.
 
The last time events similar to those in 2014 happened in Europe were right before the outbreak of World War II in the late 1930s. In the summer of 2014, Putin-led Russia annexed Crimea, a province that had been part of Ukraine for decades.
 
The annexation took most of the international community by surprise, as much by its speed as by its effectiveness. Almost overnight, Russian troops entered the Crimea, and Moscow declared it a part of the Russian Federation. The annexation was so swift and complete that a few months later, Vladimir Putin signed a law legalizing gambling in the Crimea.
 
The response from NATO countries was to issue warnings and targeted sanctions against Russian individuals and companies. Those sanctions seem to have done nothing; in fact, the situation has only deteriorated since then.
 
During the last week of August, Russia sent 1,000 Russian soldiers into Eastern Ukraine, well inside Ukraine’s international recognized borders. This 1,000-man army came in with tanks and antiaircraft and heavy artillery military equipment.
 
Furthermore, Russian-backed militants have been inside of Eastern Ukraine for some time now. These militants shot down a Malaysia Airlines civilian aircraft that was flying from the Netherlands to Malaysia, claiming more than 200 victims.
 
The response from NATO has been to increase sanctions which, in a previous column, I argued didn’t have any real teeth and would do little to spur a change of behavior from the Kremlin.
 
The rhetoric has become so heated that Vladimir Putin explicitly warned to “not mess with Russia” because of its status as a nuclear power with thousands of nuclear warheads at its disposal.
 
While tension is increasing on Europe’s eastern borders, troubles in the Mideast are also continuing. There are so many regional conflicts that it’s quite hard to decide which one to begin with, or which one is more important.
 
Let’s start with the conflict that garnered the most international media attention. The Israeli-Palestinian conflict reached a dangerous point in the third quarter of this year as fighting erupted in Gaza. Israeli warplanes pursued a campaign of heavy bombardment into the Gaza territory, while Hamas-led fighters attacked targets inside of Israel.
 
In the meantime, the conflict in Syria only continued to escalate; so much so that the United Nations now estimates that there are more than 7 million Syrian refugees in a conflict that has claimed hundreds of thousands of lives. At the same time, rebels in Libya have continued disrupting oil supplies amid continued civil strife. Iraq is no better, as fighting has erupted between Sunni and Shia.
 
Troubles in the region are so high that the United Kingdom raised its threat level to “severe,” meaning a terrorist attack on British soil is “likely” as a result of all the regional infighting. Amid the backdrop of all these regional conflicts has been the rise of the terrorist organization ISIS, which is wreaking havoc across the Mideast, and which many are now calling Al-Qaeda 2.0.
 
Aside from a full-fledged world war, the global geopolitical situation could not be bleaker as we move into the fourth quarter. The United States, which has played the role of regional policeman since the end of World War II, decided to retreat from its traditional posture in world affairs earlier this year when it did not act in Syria and allowed events in Eastern Europe to escalate. That policy is now under urgent review as these regional conflicts threaten to push countries into a heightened global conflict.
 
The bottom line is that the geopolitical situation is very bleak, and this will have a direct impact on markets, economies and commodities. As the situation continues to escalate regionally and globally, I expect investors to pile into gold. Gold has stabilized in recent months and may hit $1400 per ounce in the coming weeks. Investors still see gold as a safe-haven asset, especially during times of conflict.
 
I also expect oil prices to increase as regional conflicts create supply-side disruptions in major producing countries such as Iraq, Libya and even Algeria. While demand from Asian countries remains robust, supply is being curtailed due to armed conflict, and this will push prices higher. In this geopolitical storm, investors can find save haven in traditional hard asset commodities.
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Sep 02

Gold Investment Positive, But Only Just

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

GOLD INVESTMENT demand held positive last month, but only just, writes Adrian Ash at BullionVault.
 
Geopolitics has nothing to do with it. The lesser-spotted “safe haven” demand for gold is notable by its absence, despite the unholy mess in Ukraine, Gaza and Iraq.
 
Who says? Real investor activity does. Bullionvault is the world’s largest gold and silver exchange online. Our Gold Investor Index measures the number of people using BullionVault to grow their gold holdings over those who cut or sold entirely during the last month.
 
The index isn’t a survey of intentions or plans. It is calculated solely from real investment activity in physical gold bullion.
 
A reading of 50.0 would signal a perfect balance of net buyers and net sellers across the month. The peak to date was at 71.7 in September 2011. And in August 2014, the Gold Investor Index edged back to 51.7 from July’s rise to 51.9 – the first rise since February, and only a little above June’s 4.5-year low at 51.2.
Bullionvault's Gold Investor Index
 
Gold investment also stayed positive last month by weight. Indeed, BullionVault customers as a group added gold for the third month in succession – the longest such stretch since New Year 2013.
 
But while the quantity of client gold grew (with Far East storage the stand-out choice), it grew by only 50 kilograms. That took the aggregate across London, New York, Singapore, Toronto and Zurich to a new record for our 10-year old business of 33.1 tonnes.
 
So private investors do continue to grow their holdings. Coupled with that low reading on the Gold Investor Index however, it’s clear that larger accounts are leading – just as they did in June and July. The mass of private investment cash is leaving gold by the wayside, and continues to opt for equities at record or near-record prices instead.
 
Yes, concerns over the equity market are growing. Eurozone investors tell us they’re also increasingly anxious about the shift to money-printing QE set to start in Frankfurt this autumn. But contrary to newswire journalists (or rather, their headlining editors), both prices and gold investment demand remain unmoved by today’s geopolitics.
 
Argentina’s default, the death toll in Gaza, LOL jihadis in Iraq…nothing shook gold from its summer slumber. In case you missed it – because you passed out with boredeom – this is how tedious precious metals became in August 2014…
  • Gold traded in the narrowest monthly price range for five years, a mere $40 per ounce;
  • The monthly average price of $1296 was almost precisely the average gold price of the previous 12 months ($1297.50);
  • Speculators and commercial traders both cut their holdings of Comex futures & options. In fact, open interest (ie, the number of contracts now open) fell to a series of 5-year lows;
  • Investment funds also shrugged and took to the beach. The giant SPDR Gold Trust (NYSEArca:GLD) shrank by 6 tonnes, reversing July’s addition and erasing all 2014 growth so far at 795 tonnes – a 5-year low when first hit this January.
Why no gold investing surge on summer 2014’s geopolitical headlines?
 
History shows gold offers you financial insurance, not a speculation on other people’s troubles. So it’s worth noting that – while gold priced in Dollars ended August unchanged from July at $1285 per ounce – it rose 1.6% for Euro investors and 1.8% against the British Pound.
 
Trouble ahead for the UK and Europe? If only gold investment were that simple. But with geopolitics leaving prices and demand unmoved, longer-term investors…wanting to book a little of that financial insurance for their own savings…do continue to quietly and steadily accumulate metal.
 
That insurance is one-third cheaper now that it was at the peak of the financial crisis (2011 in Dollars and Sterling, 2012 for the Euro). Gold has been flat for the last year. A small group of investors are choosing to make their own decisions…instead of relying on headlines of death and destruction elsewhere for their cue.
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Aug 29

Gold’s $1200-1400 Trading Range

Gold Price Comments Off on Gold’s $1200-1400 Trading Range
Gold fund manager talks technical and fundamental state of market…
 

JOE FOSTER is investment team leader for Van Eck’s flagship gold fund, the Van Eck International Investors Gold Fund.
 
He also serves on the investment teams for the Van Eck Global Hard Assets Fund and the Van Eck VIP Global Hard Assets Fund, and is an advisor to the Market Vectors ETF Trust – Gold Miners ETF (NYSEArca:GDX) and Junior Gold Miners ETF (NYSEArca:GDXJ).
 
Working in the gold mining and investment business for more than 25 years, Foster is now frequently quoted in the Wall Street Journal and Barron’s as well as being a frequent guest on CNBC and Bloomberg TV. Here he speaks to Hard Assets Investor‘s managing editor Sumit Roy about his latest outlook for gold…
 
HardAssetsInvestor: Gold zoomed higher during the first quarter, but it hasn’t really done much since then. Do you expect volatility to return to gold at some point this year?
 
Joe Foster: Gold has been range-bound. It’s basically been hanging around the $1300 level since March. Normally, we see strength in the fall for a variety of reasons. Seasonally, the price of gold seems to pick up as we move toward year-end. We could test the highs again later in the year, which would be around $1400 an ounce. If we do that, we’ll probably see a little more volatility. And then if something happens in the market that gets it through that $1400 level, certainly I would see it becoming more volatile.
 
HAI: Do you follow that technical picture at all? Is $1400 a key level?
 
Joe Foster: Yes, technically speaking, $1200 to $1400 is the range we’ve been in since the middle of 2013. We’ve been in this range for a year now.
 
HAI: Is it surprising to you that gold is holding in there despite the fact we’re seeing the US Dollar rally?
 
Joe Foster: No, it’s not surprising, because we saw gold collapse last year. That was a historic collapse in gold price. Any negativity in the market toward gold was already priced in last year. This year, even though we’re seeing Dollar strength, gold is standing up to that because pretty much everyone who wanted to sell got out last year.
 
That other thing that is supporting gold is the geopolitical risks we’re seeing around the world. And that’s also supporting the Dollar. Both gold and the Dollar are being used as safe-haven investments in this environment.
 
HAI: Seemingly every day we’re getting some headline about the geopolitical situation either in Iraq or Russia or Ukraine. Are these going to be drivers of gold going forward, or are they merely an excuse to trade on a day-to-day basis?
 
Joe Foster: I call them supporters, not drivers. They’re supportive of the market and they generate short-term gains in gold. But I don’t regard them as longer-term drivers.
 
HAI: You manage gold mutual funds for Van Eck, and of course Van Eck is also the issuer of the very popular ETF, Market Vectors Gold Miners ETF (NYSEArca:GDX). Of course, there’s also a host of other ETFs tied to physical gold out there. How should an investor decide what to buy to get exposure to the gold that they want?
 
Joe Foster: Whether it be physical gold, gold bullion ETFs or gold equities, they all give you exposure to gold. There’s a very high correlation between gold equities and gold. They really are proxies for gold itself; that’s why you invest in these things.
 
Gold equities have had a very tough time for several years, up through 2013. When you look at the fundamentals as far as what’s the right type of gold investment in this environment, we like equities because a lot of the things that caused the gold stocks to underperform have gone away.
 
The companies are better run now than they were several years ago. They’re hitting their targets, they’re meeting expectations and that’s allowing the gold stocks to outperform gold.
 
HAI: Given that they’ve done better than gold this year, could that be an early sign that perhaps the bottom is in for that sector?
 
Joe Foster: Yes, I think so. It’s not just a reversion to the mean, it’s based on fundamentals. The companies have had serious problems with controlling their costs, and now they’re bringing their costs under control. They’re much better businesses now, so fundamentally they’re a more attractive investment today than they were a year or two ago.
 
HAI: Is silver a metal you cover? Do you see it performing in line with what gold does?
 
Joe Foster: Yes, we invest in silver stocks too. Within the gold funds, we have a number of silver stocks. I invest in the silver for the same reason as gold. Silver is also a monetary metal and it moves on the same fundamentals as gold.
 
HAI: Finally, much has been written about the marginal cost of gold production, or the level at which gold mining becomes unprofitable for the industry. Analysts at Goldman recently said they thought that level was $1200. Do you have any thoughts on that?
 
Joe Foster: $1200 is definitely a critical level. We talked about the technicals, but looking at the fundamentals of the gold price, one of the reasons I think $1200 is a firm base is that that’s where these companies have geared their business. And if it were to drop below $1200, we would see a significant increase in the number of mine closures and cutbacks due to low gold prices.
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Aug 28

War Comes Home

Gold Price Comments Off on War Comes Home
New targets for all that surplus military hardware…
 

AMERICA’s attention recently turned away from the violence in Iraq and Gaza toward the violence in Ferguson, Missouri, following the shooting of Michael Brown, writes former US Congressman Ron Paul.
 
While all the facts surrounding the shooing have yet to come to light, the shock of seeing police using tear gas (a substance banned in warfare), and other military-style weapons against American citizens including journalists exercising their First Amendment rights, has started a much-needed debate on police militarization.
 
The increasing use of military equipment by local police is a symptom of growing authoritarianism, not the cause. The cause is policies that encourage police to see Americans as enemies to subjugate, rather than as citizens to “protect and serve.” This attitude is on display not only in Ferguson, but in the police lockdown following the Boston Marathon bombing and in the Americans killed and injured in “no-knock” raids conducted by militarized SWAT teams. 
 
One particularly tragic victim of police militarization and the war on drugs is “baby Bounkham”. This infant was severely burned and put in a coma by a flash-burn grenade thrown into his crib by a SWAT team member who burst into the infant’s room looking for methamphetamine.
 
As shocking as the case of baby Bounkham is, no one should be surprised that empowering police to stop consensual (though perhaps harmful and immoral) activities has led to a growth of authoritarian attitudes and behaviors among government officials and politicians. Those wondering why the local police increasingly look and act like an occupying military force should consider that the drug war was the justification for the Defense Department’s “1033 program”, which last year gave local police departments almost $450 million worth of “surplus” military equipment. This included armored vehicles and grenades like those that were used to maim baby Bounkham. 
 
Today, the war on drugs has been eclipsed by the war on terror as an all-purpose excuse for expanding the police state. We are all familiar with how the federal government increased police power after September 11 via the PATRIOT Act, TSA, and other Homeland Security programs. Not as widely known is how the war on terror has been used to justify the increased militarization of local police departments to the detriment of our liberty. Since 2002, the Department of Homeland Security has provided over $35 billion in grants to local governments for the purchase of tactical gear, military-style armor, and mine-resistant vehicles.
 
The threat of terrorism is used to justify these grants. However, the small towns that receive tanks and other military weapons do not just put them into storage until a real terrorist threat emerges. Instead, the military equipment is used for routine law enforcement. 
 
Politicians love this program because it allows them to brag to their local media about how they are keeping their constituents safe. Of course, the military-industrial complex’s new kid brother, the law enforcement-industrial complex, wields tremendous influence on Capitol Hill. Even many so-called progressives support police militarization to curry favor with police unions.
 
Reversing the dangerous trend of the militarization of local police can start with ending all federal involvement in local law enforcement. Fortunately, all that requires is for Congress to begin following the Constitution, which forbids the federal government from controlling or funding local law enforcement. There is also no justification for federal drug laws or for using the threat of terrorism as an excuse to treat all people as potential criminals. However, Congress will not restore constitutional government on its own; the American people must demand that Congress stop facilitating the growth of an authoritarian police state that threatens their liberty.
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Aug 19

Long-Term Gold, Starting in 1999

Gold Price Comments Off on Long-Term Gold, Starting in 1999
Fundamentals look very much like 15 years ago, says Tocqueville’s Hathaway…
 

JOHN HATHAWAY is senior managing director of Tocqueville Asset Management, managing all gold equity products and strategies.
 
Hathaway holds a bachelor’s degree from Harvard University, a Master of Business Administration from the University of Virginia and is a Chartered Financial Analyst. He began his career in 1970 as an equity analyst with Spencer Trask & Co. In 1976, he joined investment advisory firm David J. Greene & Co., where he became a partner. In 1986, Hathaway founded Hudson Capital Advisors and in 1988, he became chief investment officer of Oak Hall Advisors.
 
Here, John Hathaway and his colleague Douglas B. Groh – portfolio manager and senior research analyst at Tocqueville Asset Management, with 30 years of investment experience – speak to The Gold Report about their outlook for bullion and mining equities as 2014 moves to its close…
 
The Gold Report: In a 4th of July investor letter, you wrote that the precious metals complex, both mining shares and bullion, appear to be in the process of completing a major bottom, and you’re more comfortable with the proposition that the downside potential has been fully exhausted. What are the signs that it’s really turning this time?
 
John Hathaway: The gold futures chart is showing that we are in the process of a reverse head-and-shoulders pattern, which is a sign that a bottom has been completed. It means that downward momentum has been exhausted. This bottom will be confirmed when gold trades above $1400 per ounce, which is a stretch from where we are. At least we can say fairly credibly that it’s shaping up to be a bottom, but we may test it over the summer.
 
TGR: Headlines about conflicts in the Ukraine, Iraq and Gaza have bumped gold prices visibly lately. Can these events act as long-term fundamental supports or do they represent short-term volatility that will fade just as quickly as the headlines?
 
John Hathaway: Anything geopolitical always has a knee-jerk impact. I would never recommend gold based on today’s headlines, yesterday’s headlines or speculation about future headlines. Having said that, geopolitical issues away from the headlines influence the demand for gold. Europeans are probably more conscious of gold today than they might have been six months ago. People want to get their wealth in a safe place. That will reinforce demand for gold as time goes by.
 
TGR: You have compared gold’s fundamentals today to the situation in 1999. What were the fundamentals 15 years ago?
 
John Hathaway: Fifteen years ago, we were at the end of a 20-year bear market, so the psychology was very negative. Gold was never mentioned in polite discussions. We’re not that different today from where we were then. Considering the drop from a high of $1900 per ounce to slightly less than $1200 per ounce, that’s a pretty big decline in the space of two and a half years. That makes the setup similar to what we experienced in 1999. Back then, the markets were flush with optimism, and I would say that’s the case today. I think there are many parallels.
 
TGR: One unique thing that is happening right now is that the mining share valuations seem to be leading the commodity prices. What’s causing that?
 
John Hathaway: It’s not an ironclad relationship, but when the shares outperform the metal, which they’ve done this year and by a fairly substantial amount, that’s generally a favorable setup for a better phase in the gold market. In 2011, the opposite occurred. Gold reached a new high and was in the headlines in every newspaper on the planet, yet the shares were conspicuous by their underperformance. That was a sign that the shares were not confirming the new highs in gold, and we’ve seen the result. A lack of confirmation between the shares and the metal prices can sometimes indicate the future direction of the gold price, or vice versa, of the share prices.
 
TGR: One thing that you and I have talked about before is the impact of quantitative easing (QE) on the Dollar and the gold price. QE never did seem to weigh down the Dollar. Are investors on the sidelines waiting for the impact of liquidity to buy gold?
 
John Hathaway: I think the rationale for owning gold is as strong as ever. Radical monetary policy probably won’t end well and any thinking person should be concerned about it. That’s why we believe you need to have some exposure to gold. Markets today are over-exuberant: pumped up equity valuations, nonexistent spreads between quality and junk, record issuance of low-grade paper, all of these things are typically indicative of an endgame in financial assets. Gold is not at that party. It’s conspicuous by its absence. In our view, it’s pretty hard to say that anything represents value these days except precious metals. Gold is wealth insurance.
 
TGR: Last year was a challenging year for gold mining companies. How are you adjusting based on those challenges?
 
Douglas B. Groh: We’re emphasizing those companies that are well managed with good assets and quality balance sheets. Explorers are not as attractive today as they were a few years ago. Right now, we’re focused on companies in the mid-cap sector of the gold industry.
 
TGR: Are there more mergers and acquisitions (M&A) coming?
 
Douglas B. Groh: M&A of varying sizes has been going on for some time. Many were just not quite as significant in terms of market cap. I think we will see more deals, whether it’s actual corporate takeouts, joint ventures or property sales.
 
The decline in the gold price these last three years has been destructive for mining companies. It has caused them to rethink their business models and their capital spending plans. It’s become more difficult for companies to raise capital to move forward. That is why consolidation is underway. That is the nature of the industry. A lot of explorers and developers are good at doing just that. Meanwhile mining companies need to replace the reserves they’re producing. They may be good at operating a mine but not quite as agile at doing exploration, making discoveries and developing ore deposits. So we should see more M&A.
 
TGR: When you are considering adding a company to the portfolio, do you place a value on the chances of it being an acquisition target?
 
Douglas B. Groh: Yes, in a form and fashion. Ultimately we are looking at the assets of a company and the merits of those assets to expand and to attract other investors into the company’s register. The potential to get bigger is always of interest to us. If something is getting bigger, it will attract capital, whether it’s investors or corporate entities.
 
TGR: Company guidance is for 20 million ounces of silver per year. Is that realistic?
 
Douglas B. Groh: Yes, and I expect beyond that. It is a high-grade deposit with a geometric shape, in terms of its width, that enables bulk-style mining methods, and thus relatively low costs per unit of production. Once it gets momentum, we should see some robust output. Tahoe has been a good performer, and we expect it will continue to be a good performer.
 
TGR: What words of wisdom do you have for investors who may have been in the gold space over the last three years or are just thinking about getting back into it?
 
Douglas B. Groh: We believe that investors should consider gold and gold exposure as an alternative asset class and as part of an overall portfolio. While there are attractive values in the gold space, investors should think about having broad exposure to the gold sector, whether it’s through bullion, mining companies in different stages of development, or producers. Each avenue carries different opportunities and risks. That is why a group of precious metals stocks mixed with an exchange-traded fund or a gold mutual fund can serve an investor better than having just one name.
 
Additionally, I would recommend that investors average their investment over time instead of buying all at once. The gold price is volatile and it’s very difficult to get the low points. Averaging over time when the price dips can help financially and mentally even out the ups and downs.
 
Finally, consider gold as a very long-term investment, not just a two- or three-year investment. We believe it should be a permanent part of an overall portfolio as a non-correlated asset. It doesn’t really have counterparty risk and it trades to a different type of profile than other financial instruments. That’s why we recommend having a portion of a portfolio allocated to gold and gold mining equities.
 
TGR: Thank you, John and Doug.
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