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 21

Russia’s "Too Many Rubles" Problem

Gold Price Comments Off on Russia’s "Too Many Rubles" Problem
After finally getting it right in 2009, Moscow is replaying a currency crisis terribly…
 

ARE YOU getting that “It’s kinda like 2008 again” feeling? I am! says Nathan Lewis at New World Economics.
 
In November of 2008, the Russian Ruble was collapsing vs. the Dollar, the Russian central bank was intervening in the foreign exchange market, Russian interest rates had risen to high levels, and I was writing an op-ed about it.
 
“On the surface, it appears that Russia’s central bank is doing what it should to support the value of the Ruble. Rubles are being purchased on the foreign exchange market, using foreign reserves. The central bank’s interest rate targets have been raised, with the main overnight credit rate now at 12%.
 
“However, a closer inspection reveals that the central bank – like most central banks in these sorts of situations – is neglecting to address the most important factor, the number of Rubles in circulation. The supply of Rubles is largely unchanged. If the demand for Rubles declines, and supply is unchanged, then a lower Ruble value is the inevitable result. Indeed, once market participants notice that the central bank is not properly managing the supply of Rubles, it is common for demand to fall even more.
 
“The ‘supply of Rubles’ is known as base money. As of November 10, the central bank reported that Ruble base money was 4,416 billion Rubles. At 27 Rubles/Dollar, that is worth about $163 billion. On September 1, the monetary base was 4,508 billion Rubles. We see that, despite the apparent frantic efforts of the central bank, Ruble base money has barely changed.”
Well, here we are six years later. The value of the Ruble has fallen from 32 per Dollar at the start of 2014 to about 41 per Dollar today. The central bank’s policy rate is at 8.00%, and the central bank has intervened in October by buying a total of $9.262 billion of Rubles (about 370 billion Rubles at 40 to the Dollar). It hasn’t accomplished much.
 
This follows a total of $39 billion of Dollar-selling and €3.8 billion of Euro-selling earlier this year.
 
And the monetary base? Unfortunately, we don’t have data yet for what has happened in October, but it was 9.351 trillion Rubles on 1 February 2014 and 9.947 trillion on 1 October 2014.
 
There is a certain amount of seasonal variation in the monetary base, but particularly in a crisis situation, what should have happened is that the monetary base should have contracted by about the same amount as the amount of forex intervention. The forex interventions before October should have resulted in a shrinkage of the Ruble monetary base by about 1.54 trillion Rubles, a contraction of about 15%. But, that didn’t happen. Instead, the monetary base actually expanded by 6% over that time.
 
This “too many Rubles” problem got worse, with the usual consequences. I’ll guess that the same thing has happened during October as well, as we should see in the statistics soon.
 
Here’s what I wrote in 2008:
“When the central bank sells Dollars, it receives Rubles in return. To support the value of the Ruble, these Rubles should disappear from circulation. In other words, base money should decline by an equivalent amount. If this had been done, base money would have declined by about 60%, or 2,646 billion Rubles. Only 1,770 billion Rubles would remain. If necessary, the central bank could buy every last remaining Ruble in existence with an additional $66 billion.
 
“A 60% decline in base money is very large. In practice, it would hardly take such a dramatic effort to support the currency’s value, if the central bank is properly addressing the problem. A 20% reduction should be more than enough. That would require the use of about $33 billion of foreign reserves, a relatively small sum.
 
“At least until the crisis passes, base money should not be allowed to expand via some other open-market operation, such as an interest-rate target. In technical terms, the Ruble-buying operation should be ‘unsterilized’.”
I don’t know if anyone in the Russian government read this, but I do know that, in early 2009, they took exactly the measures described.
 
In February 2009, the monetary base shrank by 22%, with an exactly corresponding quantity of sales of foreign currency. And it worked: the Ruble rose in value, and the crisis passed. I documented it in my 2013 book Gold: the Monetary Polaris, which is available in free eBook (.pdf) version here. The part about Russia begins on page 133.
 
So, we know it works.
 
The appalling thing is that Russia’s central bank should know this, because they are the ones that did it, and it worked for them. But, they seem to have forgotten. (Presumably there are new people there now.) Monetary affairs, today, is in the hands of doofuses, in Russia and everywhere else. People don’t believe this when I say it. But, what else would you call it?
 
Looking at the Russian central bank’s balancesheet, it has a number of options here. It could sell foreign reserves, and reduce the monetary base by the equivalent amount – as it did in early 2009. But, it could also sell domestic assets (government bonds), and reduce the monetary base by the same amount. This way, they wouldn’t have to give up any foreign reserve assets at all. I suggest starting with a 10% contraction in base money, and going to 20% or even 30% if necessary. It doesn’t really matter what kind of asset you sell. The important thing is that there are less Rubles in existence than when you started.
 
Eventually, I hope that Russia will show some leadership in the creation of a new monetary order based on gold. However, before then, they are going to have to learn a few things about how to manage a currency correctly.
 
You can’t manage a currency based on gold, or anything else for that matter, if you act like a doofus.
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Oct 09

Central Banks "Face a Mess" Buying Gold, Platinum & Palladium

Gold Price Comments Off on Central Banks "Face a Mess" Buying Gold, Platinum & Palladium
Swiss gold referendum held as Kremlin looks to buoy platinum and palladium prices with state purchases…
 

The CENTRAL BANKS of Russia and Switzerland are weighing the merits of buying gold and other precious metals, but for very different reasons.
 
Now holding the world’s 5th largest state gold reserves, Russian central bank chiefs plan to meet with officials from South Africa – the world’s No.1 platinum mining nation – to discuss buying platinum and palladium in the open market to support prices, according to a Kremlin official.
 
Moscow’s precious metals and gems repository, Gokhran, already holds unreported quantities of palladium, of which Russia is the No.1 mine producer. Gokhran’s director, Andrey Yurin, last month repeated comments he made in May about returning to buy palladium in 2015, after focusing on buying gold this year.
 
The Swiss National Bank meantime faces a popular vote on buying gold – aimed at re-instating the Franc’s bullion backing – but is campaigning against the move.
 
Voters in Switzerland in 1999 approved an end to the legal requirement for gold reserves to back the Franc’s value, and approved large sales starting at what proved two-decade lows, now some 70% below current prices.
 
To win a place on Switzerland’s next referendum, scheduled for 30 November, the “Save Our Swis Gold” initiative secured over 100,000 signatures on a petition. Its proposals risk the central bank’s ability to ensure price stability and stable economic growth, finance minister Eveline Widmer-Schlumpf said Tuesday. Peter Hegglin – head of the Swiss cantons’ conference of finance directors – also joined SNB president Thomas Jordan’s repeated calls for voters to reject the move.
 
“A gold supply that can’t be touched isn’t an emergency supply,” Hegglin told a press briefing in Bern.
 
The Swiss National Bank would on one estimate need to buy perhaps 1,500 tonnes of gold to meet the referendum’s terms, which set a minimum 20% gold target for the SNB’s balancesheet, swollen through quantitative easing to buy Euros and maintain the Franc’s peg against its weak, neighboring currency on the forex market.
 
“Palladium is not a gold and currency reserve,” said Russian palladium miner Norilsk’s CEO Vladimir Potanin this spring, when Gokhran hinted it was considering buying the precious metal. “It should be sold rather than bought by the state…We could help, and not only by buying those volumes, but by marketing the deal.”
 
Named by Moscow’s minister for natural resources Sergei Donskoi as being involved with the proposed Russian-South African cartel, Norilsk said in late September it is raising funds to buy palladium from the Russian government, according to Bloomberg.
 
Neither the Russian central bank nor Norilsk have yet confirmed Donskoi’s remarks.
 
“My initial reaction is they could probably do it,” says US law professor Harry First, commenting to specialist site Mineweb on the proposed Russia-South Africa cartel. Apparently aimed at buoying metal prices after platinum and palladium hit multi-year lows in the open market, such a move would however face strong opposition from PGM consumers led by auto-makers, not least in China.
 
Between them, Russia and South Africa account for four-fifths of the world’s known platinum-group reserves as yet unmined.
 
But “They’d really be stepping into a mess,” says First.
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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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Oct 01

Gold Prices Killed by Not-So "Super" Dollar

Gold Price Comments Off on Gold Prices Killed by Not-So "Super" Dollar
Gold prices have been hammered by the rising US Dollar. What might October hold…?
 

DOLLAR UP, gold down, writes Adrian Ash at BullionVault.
 
That’s pretty much the lesson for precious metals investors looking at any long-term rise in the US Dollar since exchange rates began floating in 1973.
 
And now in late 2014, says former chief economist at Swiss bank UBS, George Magnus “It looks as though the third US Dollar uptrend of the post-Bretton Woods era may be underway.” Just so long as you also ignore his warning against “extrapolating” short-term noise into long-term forecasts…
Gold price vs. US Dollar Index, 1973 to 2014, daily data
Might Magnus be right? For gold prices, as the chart shows, it’s less the absolute level than the Dollar’s direction of travel that counts. Starting from all-time lows in spring 2011, today’s greenback hardly matches the “Super Dollar” of the early 1980s. Yet the background rhymes…
  • Commodities glut after a long bull market? Check…
  • Disinflation in consumer prices? Check…
  • Weak competitor economies in Europe? Check…
  • Over-borrowed emerging markets? Check…
  • Strong US monetary policy, raising rates on the Dollar? Well, no. Not by a long way.
Even with the Federal Reserve still sticking however to its “considerable” delay for raising rates from zero, the third-quarter of 2014 proved ugly for Dollar investors holding non-US assets.
 
Gold for US investors marked the end of Q3 by hitting new 2014 lows, losing 5.8% on the London PM Fix for the month of September alone. Silver fell to the lowest Dollar price since May 2010…down more than 12% from the end of August.
 
Yet gold priced in Euros, in contrast, remains near the top of its 12-month range. Even in the British Pound…flattered by Tuesday’s GDP revisions…gold has held 3% higher from New Year.
 
Gold’s recent drop, in other words, is entirely relative. And this split between Dollar and non-Dollar gold prices might widen in October.
 
First there is the European Central Bank’s meeting concluding Thursday. Mario Draghi and his team have long hinted at some kind of QE-style money printing. The latest inflation print of just 0.3% per year across the 18-nation union will loom large.
 
Then, in the last week of October, the US Federal Reserve will face the opposite problem. It is set to taper the last $15 billion of its monthly QE printing. That leaves rising inflation, and strong GDP, begging for an end to the “extended time” promised for zero US interest rates. 
 
Before then, we’ve got US jobs data Friday (with an early look in ADP’s private-sector estimate mid-week). Then, mid-month, the European Court of Justice will hear a legal challenge to the Eurozone central bank’s Outright Monetary Transactions (OMT)…the 2012 plan which finally stemmed the single currency’s debt crisis. 
 
Mario Draghi hasn’t actually fired any OMT money at weak-economy bonds yet. But if the Court decides the plan is illegal (insomniacs will enjoy reading the arguments here. Or better still here) it could spark fresh panic…out of Greek, Spanish and other debt-heavy markets…pulling the Euro lower again. 
 
Analysts are of course aligned with the Euro bears betting against the currency in the forex market. Barclays Bank today cut its 12-month forecast for EUR/USD from $1.25 to $1.10 – a move which, if matched by the Dollar’s other major crosses, would take the trade-weighted index to a decade high of 90 or so. Gold prices in 2004 were trading below $400 per ounce. So a blunt analysis, never mind the momentum in gold futures and options betting, says a fall in the Euro must push bullion prices lower again as the US Dollar surges. After all, it worked like clockwork in the other direction.
 
Gold up, Dollar down” was so solid between 2002 and 2008, it became a no-brainer trade for no-brain hedge funds. The US currency fell 30% against its major trading peers on the forex market. Gold meantime rose 160% in Dollar terms. But this relationship broke down during the financial crisis. Because gold kept rising…and rising…while the Dollar whipped higher.
 
What are the odds today? Playing the averages, and reviewing the last 40 years (daily data, 12-month change), gold has been twice as likely to rise when the US currency is weakening on the forex market than when the Dollar Index is getting stronger. And when gold drops hard…down 10% or more from 12 months before…the Dollar has been rising 91% of the time.
 
No-brain traders are betting this rule-of-thumb will hold firm as 2014 ends, and gold will keep falling in Dollar terms as the US currency gains versus the Euro, Yen, Pound and the rest. 
 
But watch out. Because since 1974, gold and the Dollar have also moved in the same direction some 30% of the time. And when gold rises as the Dollar also goes up (21% of the last 40 years), its gains have been markedly better on average than when the Dollar is falling. 
 
Yes, really. When gold has risen against a background of Dollar strength, gold priced in Dollars has gained 24% year-on-year on average. It’s averaged 18% gains when the Dollar’s been falling. 
 
Of course, investors tend to buy gold and the Dollar together when crisis hits. Not only, but not always either. You could cite any number of crises where gold failed to rise with the Dollar, and pitch them against the gold price surge of Soviet Russia invading Afghanistan in 1979, the 2008 Lehmans crash, or the 2010 Eurozone meltdown.
 
Never mind if those events sound at all familiar here in late 2014. Ignore the fact that a rising Dollar…plus rising gold…adds up to 30% more fun for non-US investors trying to defend their money against crisis. Financial markets have avoided seeing any trouble ahead all year. So far. As an investment banker puts it to the Financial Times today…applauding this year’s surge in global mergers and acquisitions…”I have never seen a market more resilient than it is today, in terms of absorbing geopolitical and financial risk.”
 
Such complacency is the reason gold investing exists, whatever the outlook for the Dollar (and “Everything seems to be Dollar positive,” says another forex strategist…also tempting fate).
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Sep 28

The Bells, the Bells!

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

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

And the Rain It Raineth…

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

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

Consciously Shifting to Precious Metals

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

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