Oct 31

Solutions for Everything, Answers to Nothing

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

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

QE, War & Other Autopilot US Action

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

AMONG the many things still to be discovered is the effect of QE and ZIRP on the markets and the economy, writes Bill Bonner in his Diary of a Rogue Economist.
We can’t wait to find out.
The Fed has bought nearly $4 trillion of bonds over the last five years. You’re bound to get some kind of reaction to that kind of money.
But what?
Higher stocks? More GDP growth? Higher incomes? More inflation?
Washington was hoping for a little more of everything. But all we see are higher stock and bond prices. And if QE helped prices to go up, they should go back down when QE ends this week.
Unless the Fed changes its mind…
If the Fed makes a clean break with QE, it risks getting blamed for a big crack-up in the stock market. On the other hand, if it announces more QE, it risks creating an even bigger bubble…and getting blamed for that.
Our guess is we’ll get a mealymouthed announcement that leaves investors reassured…but uncertain. The Fed won’t allow a bear market in stocks, but investors won’t know how and when it will intervene next.
Last week, we were thinking about the reaction to the murder in Ottawa of a Canadian soldier who was guarding a war memorial.
There were 598 murders in Canada in 2011 (the most recent year we could find). As far as we know, not one registered the slightest interest in the US. But come a killer with Islam on his mind, and hardly a newspaper or talk show host in the 50 states can avoid comment.
“War in the streets of the West,” was how the Wall Street Journal put it; the newspaper wants a more muscular approach to the Middle East.
After a quarter of a century…and trillions of Dollars spent…and hundreds of thousands of Dollars lost…America appears to have more enemies in the Muslim world than ever before. Why would anyone want to continue on this barren path? To find out, we follow the money.
Professor Michael Glennon of Tufts University asks the same question: Why such eagerness for war?
People think that our government policies are determined by elected officials who carry out the nation’s will, as expressed at the ballot box. That is not the way it works.
Instead, it doesn’t really matter much what voters want. They get some traction on the emotional and symbolic issues – gay marriage, minimum wage and so forth.
But these issues don’t really matter much to the elites. What policies do matter are those that they can use to shift wealth from the people who earned it to themselves.
Glennon, a former legal counsel to the Senate Foreign Relations Committee, has come to the same conclusion. He says he was curious as to why President Obama would end up with almost precisely the same foreign policies as President George W. Bush.
“It hasn’t been a conscious decision. […] Members of Congress are generalists and need to defer to experts within the national security realm, as elsewhere.
“They are particularly concerned about being caught out on a limb having made a wrong judgment about national security and tend, therefore, to defer to experts, who tend to exaggerate threats. The courts similarly tend to defer to the expertise of the network that defines national security policy.
“The presidency is not a top-down institution, as many people in the public believe, headed by a president who gives orders and causes the bureaucracy to click its heels and salute. National security policy actually bubbles up from within the bureaucracy.
“Many of the more controversial policies, from the mining of Nicaragua’s harbors to the NSA surveillance program, originated within the bureaucracy. John Kerry was not exaggerating when he said that some of those programs are ‘on autopilot’.
“These particular bureaucracies don’t set truck widths or determine railroad freight rates. They make nerve-center security decisions that in a democracy can be irreversible, that can close down the marketplace of ideas, and can result in some very dire consequences.
“I think the American people are deluded…They believe that when they vote for a president or member of Congress or succeed in bringing a case before the courts, that policy is going to change. Now, there are many counter-examples in which these branches do affect policy, as Bagehot predicted there would be. But the larger picture is still true – policy by and large in the national security realm is made by the concealed institutions.”
Calling the Ottawa killing “war” not only belittles the real thing; it misses the point. There is no war on the streets of North America. But there is plenty of fraud and cupidity.
Here is how it works: The US security industry – the Pentagon, its hangers-on, its financiers and its suppliers – stomps around the Middle East, causing death and havoc in the Muslim world.
“Terrorists” naturally want to strike back at what they believe is the source of their sufferings: the US. Sooner or later, one of them is bound to make a go of it.
The typical voter hasn’t got time to analyze and understand the complex motives and confusing storyline behind the event. He sees only the evil deed.
His blood runs hot for protection and retaliation. When the call goes up for more intervention and more security spending, he is behind it all the way.
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Sep 05

$10 Billion for Snapchat?!

Gold Price Comments Off on $10 Billion for Snapchat?!
Insider secret of how Wall Street works to part you from your money…

WE ARE sitting in the lobby of the China World Hotel in Beijing, writes Bill Bonner in his Diary of a Rogue Economist.
It is a very large space and very unlike most hotels. 
Monday, we stopped into the lobby of the Marriott Opera Ambassador Hotel on Boulevard Haussmann in Paris. Like most lobbies, it was quiet, with just a few people having coffee. 
Here, there are hundreds of people – almost all young. I am the oldest person, a fossil from another continent and another time. The young people are dressed casually but well. They sit in groups talking…as though planning their next marketing campaign. 
There is scarcely anyone over the age of 40. We have started a small publishing business in China. It, too, is staffed by people in their twenties. 
What happened to the old people? Maybe they have not been able to keep up with the breathtaking changes in China. This is no country for old men…
“Everyone has great confidence in the future,” says a Chinese colleague. “Things have gotten so much better over the last 20 years. And we expect that to continue. 
“Our new president, Xi Jinping, is serious about trying to get rid of corruption, even at the highest levels. He is trying to deregulate whole industries. Regulations and licenses were just a way for officials to demand bribes and payoffs. So, Xi wants to get rid of a lot of this so we can do business more freely.” 
Whether he will succeed or not, we can’t say. But at least it sounds promising. 
The truth is we never know what will work. And here we take up an important subject: how you can invest intelligently in a world of ignorance.
It is so important and so weighty, it needs a real-world introduction. And it can be so tedious that we must offer you a reward for paying attention. 
Yes, dear reader, you will be the first to know about our new trading system. It’s guaranteed – almost – to beat the market. But first, let us turn to the “Wolf of Wall Street” – financial commentator Wolf Richter, that is:
“It was leaked on Tuesday [of last week] by ‘people with knowledge of that matter,’ according to the Wall Street Journal, that VC firm Kleiner Perkins Caufield & Byers had decided in May to plow up to $20 million into message-app maker Snapchat, for a tiny portion of ownership. An undisclosed investor also committed some funds. The deal, which apparently hasn’t closed yet, would give Snapchat a valuation of $10 billion.
“That’s a big step up from November last year, when the valuation was $2 billion. At the time, the company had raised $130 million in three rounds of funding. By now that would be closer to $160 million, after it was also leaked that Russian investment firm DST Global had put some money into it earlier this year, boosting its valuation to $7 billion at the time, once again, “according to two people familiar with the matter.”
“At a valuation of $10 billion, it joins the top of the heap: app makers Uber ($18.2 billion) and Airbnb ($10 billion), cloud storage outfit Dropbox ($10 billion), and Palantir, the Intelligence Community’s darling ($9.3 billion).”
What makes photo-messaging app Snapchat stand out is that it has no business model…no revenue…and no profits. 
It has, as near as we can tell, a lot of young users who send photos to one another…often explicit in nature. These photos – known as “Snaps” – then disappear after a number of seconds. 
How can Snapchat monetize that? Who knows? 
Perhaps a better question: Why would a bunch of rich, rational money-grubbers at KPCB want to invest good money in Snapchat? 
We don’t know. Maybe they know something we don’t. Maybe they have a lot of this kind of inventory in stock? And maybe they believe that pumping up the whole sector will be good for business. 
What’s their business? 
It is simple: Smart guys sell things to guys who aren’t so smart. The pros unload onto the amateurs. Wall Street touts IPOs to mom-and-pop investors. 
Putting a little VC money into Snapchat…giving it a nutty valuation…is like bidding up odd paintings by contemporary artists. Quirky works of art suddenly become valuable simply because someone paid a lot of money for them. 
With no earnings to guide prices, valuations can go to the moon. KPCB – with a lot more Snapchats where this one came from – is along for the ride. 
But do you, dear investor, want to be taken for a ride too?
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Sep 02

History Says No

Gold Price Comments Off on History Says No
Where China went wrong, and the West led, we’re now reversing roles…

MUCH of what we think we know isn’t necessarily so, writes Tim Price on his ThePriceOfEverything blog.
The invention of the printing press with movable type ? Traditionally credited to fifteenth-century Germany and Johannes Gutenberg, it was actually invented in eleventh-century China.
Paper also originated in China long before it was used in the West. As did paper money and toilet paper (albeit today, these are pretty much interchangeable).
English agriculturalist Jethro Tull is widely credited with the discovery of the seed drill in 1701. It was in fact invented by the Chinese 2,000 years beforehand.
The first blast furnace for iron smelting is associated with Coalbrookdale – tragically close to schools in the West Midlands. It was actually introduced by the Chinese before 200 BC.
The Chinese were also first to use the fishing reel, matches, the magnetic compass, playing cards, the toothbrush and the wheelbarrow. Perhaps even golf. So how did a society apparently so dynamic and innovative by comparison with the West then enter a centuries’ long decline?
Niall Ferguson, in his excellent book Civilization (Penguin, 2012) puts forward six “identifiably novel complexes of institutions and associated ideas and behaviours” that account for the cultural and economic outperformance of the West between, say, the 16th and 20th centuries:
  1. Competition
  2. Science
  3. Property rights
  4. Medicine
  5. The consumer society
  6. The work ethic
Ferguson defines these trends as follows:
  • Competition: “a decentralization of both political and economic life, which created the launch-pad for both nation-states and capitalism”.
  • Science: “a way of studying, understanding and ultimately changing the natural world, which gave the West (among other things) a major military advantage over the Rest”.
  • Property rights: “the rule of law as a means of protecting private owners and 3. Property rights: “the rule of law as a means of protecting private owners and peacefully resolving disputes between them, which formed the basis for the most stable form of representative government”.
  • Medicine: “a branch of science that allowed a major improvement in health and life expectancy, beginning in Western societies, but also in their colonies”.
  • The consumer society: “a mode of material living in which the production and purchase of clothing and other consumer goods play a central economic role, and without which the Industrial Revolution would have been unsustainable”.
  • The work ethic: “a moral framework and mode of activity derivable from (among other sources) Protestant Christianity, which provides the glue for the dynamic and potentially unstable society created by “killer apps” 1 to 5″.
For our purposes we are most interested in Ferguson’s first “killer app”, Competition. But we will also refer to it in a slightly different context – “the lack of bureaucracy”.
As Fergsuon’s chart shows, from 1000 AD to its high water mark in the 1960s, UK GDP relative to China’s was a one-way bet. Since then, however, the trend has gone into reverse.
What can account for this dramatic reversal of economic fortunes? Economic reforms in China, led by Deng Xiaoping in the late 1970s, are likely to be responsible for at least part of the turnaround. But the relentless and sclerotic expansion of the State in Britain has also played a role.
At the turn of the last century, UK state spending accounted for roughly 10% of the economy and the private sector accounted for the rest. But as the welfare state has swelled, government spending has mushroomed to account, now, for something like half or more of the entire economy. And state spending, by and large, is inefficient spending – at least by comparison with the inevitably more disciplined for-profit sector. In other words, our relative economic prospects have declined in inverse proportion to the expansion (metastasis) of the State.
In turn, bureaucratic parasitism likely accounts for productivity differentials in the Eurozone; the German State accounts for roughly 45% of its economy, the French State 56%.
Politicians have been able to swell the State thus far only with assistance by two groups: with the involuntary support of taxpayers, and with the connivance of central bankers. Popular resentment of what is laughably termed ‘austerity’ threatens the ongoing indulgence of the first group; the almost terminal straining of market forces by the latter runs the risk of a disorderly collapse of confidence in bond markets, after which continued Western deficit spending would be virtually impossible. 
We seem to be close to the endgame. Even as perversely, record-low bond yields (indiscriminately across markets as diverse as Austria, Belgium, Germany, Holland, Finland, Ireland, Italy and Spain) have sent desperate investors scurrying into stocks instead, those same investors are, with extra perversity, displaying a similar lack of discrimination and not even attempting to locate relative value within markets.
Extraordinarily, the Wall Street Journal points out that:
“Investors are pouring money into Vanguard Group, the epitome of the hands-off approach to investing, flocking to funds that track market indexes and aren’t run by stock pickers or star managers. The inflow has pushed the mutual-fund giant to almost $3 trillion in assets under management for the first time. The surge is part of a sea change in the fund business in which investors are increasingly opting for products that track the market rather than relying on managers to pick winners…
“Investors poured a net $336 billion into passively managed stock and bond funds in 2013, handily beating the $53 billion invested in traditional mutual funds of the same type, according to Morningstar. So far this year through July, investors put a net $177 billion into those passive funds, compared with $74 billion in actively managed funds…Through July, passively managed stock funds have seen a net $128.4 billion in investor inflows, compared with $18 billion for traditional stock funds…” 
Nor is this lack of judicious investment a product of bullish US market sentiment. The same arbitrary index-following – at all-time highs – is being pursued in the UK. Trade magazine FTAdviser reports that “Retail investors put more money into tracker funds in July than in any other month since records began, according to the latest IMA data.”
Index-tracking may have merit at the bottom of the market, but at the top?
Having singularly failed to reform or restructure their dilapidated economies, many governments throughout the West have left it to their central banks to keep a now exhausted credit bubble to inflate further. Unprecedented monetary stimulus and the suppression of interest rates have now boxed both central bankers and many investors into a corner. Bond markets now have no value but could yet get even more delusional in terms of price and yield. Stock markets are looking increasingly irrational relative to the health of their underlying economies. The Eurozone looks set to re-enter recession and now expects the ECB to unveil outright quantitative easing.
If the West wishes to regain its economic vigour versus Asia, it would do well to remember what made it so culturally and economically exceptional in the first place.
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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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Jul 23

Oil Unrest to Drive Gold Price Higher

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

BYRON KING writes for Agora Financial, editing their flagship Outstanding Investments plus two other newsletters, Real Wealth Trader and Military Technology Alert.
Studying geology and graduating with honors from Harvard University, King also holds advanced degrees from the University of Pittsburgh School of Law and the US Naval War College. He has since advised the US Department of Defense on national energy policy.
Now he says global unrest and inflation will play a role in improving fundamentals for gold and silver, as he tells The Gold Report here. But miners have to control costs and clean up their internal cash flow, too…
The Gold Report: Byron, gold is above $1300 per ounce – although not by much – and silver topped $20 per ounce. What was holding their prices down, and what are the fundamentals that will move the prices going forward?
Byron King: The short answer is that, for all its faults, the Dollar has strengthened, which holds down gold and silver prices. The longer answer is that gold and silver are manipulated metals. That is, the world’s central banks have an aversion to things they can’t control, and one of the things that they can’t control is elemental metals like gold and silver.
Let’s ask why the Dollar has strengthened. The US is probably in its weakest geopolitical situation in decades. The Wall Street Journal on July 17 had a front-page story about the confluence of crises across the world – Ukraine, Middle East, Southeast Asia – all of which are profound challenges to American power militarily, diplomatically and economically. But the Dollar is still holding up. Why?
I believe the dramatic recent increase in US energy production is what’s behind the stronger Dollar. With more oil and natural gas from fracking, the US is the world’s largest energy producer. In addition, we’re importing far less oil and exporting a lot more refined product. It helps the Dollar.
Still, when I look at the big picture for gold, I see a resource whose production is challenged on the best of days. Gold mining output is declining in the major traditional sources: South Africa is in decline; Australia is challenged; some of the big plays in Nevada are getting long in the tooth.
TGR: Is there a cycle that builds on itself? As the gold price goes down, companies – especially the majors – spend less on exploration and development, which depletes their reserves, production declines and their costs increase. Are we in that part of the cycle where lower prices are setting the stage for less supply and the need for a higher gold price later?
Byron King: Yes, exactly. Falling supply and static price makes a classic economic case. We are setting the stage for less supply and higher prices. The market is dancing around the reality, but it’s still the reality. Consider that, in the last year or so, gold has been as cheap as $1200 per ounce. In late March or early April, the price almost touched $1400 per ounce. That’s a 16-17% price swing in two months. Is this the sign of a well-balanced market?
Now consider how macro-events drive things. In the first half of 2014, geopolitical events – Ukraine, Syria, Iraq – drove the gold price. And to me, these locales bring it back to that Dollar-energy relationship.
Iraq produces 2.5 million barrels per day of exportable oil. In June, when it looked as if Iraq might not survive, the idea of those 2.5 million barrels being taken out of the market helped drive the price of gold from $1240 per ounce to over $1300 per ounce.
Or look at Ukraine. It straddles key gas export lines to Europe, and the situation involves Russia, which is one of the world’s largest energy producers. Problems with Russia, let alone sanctions and such, affect perceptions of future energy supply, which tends to benefit the Dollar.
All in all, where is the gold price headed? Long-term, I think the answer is up. Inflation is not going away. I think that the central banks of the world, and the people who run university economic departments and train the leaders of the future, really do believe that we ought to have long-term inflation. If that is indeed where they’re coming from, you need to own gold and silver.
I think the long-term prospects for demand – the long-term prospects for gold as money and as backing for money – are much better than they used to be.
TGR: Given the volatility that you discussed and the challenges of the US Dollar, is there significant retail and institutional cash on the sidelines waiting to find the confidence to jump back into precious metals, as commodities and mining equities?
Byron King: There is an immense amount of money waiting for the next step. In the last few years, the big indexes have done incredibly well; everything has gone up, from airlines to consumer electronics, Silicon Valley, aerospace. A lot of people have made a lot of money in the big markets and in traditional investments.
Now, where does it all go? All that recently minted money needs a new home. If you have balance sheet appreciation from the large caps and the big blue chips, you’re looking for something else. My sense is that a lot of people are looking at the basic resource sector.
We have already seen some of that money step back into the market in the first half of this year. Some of the highest-quality small and midsized mining plays have seen large moves.
TGR: The last time we talked, you explained that, in the context of history, we’ve just entered the early stages of the materials revolution, using advanced forms of graphite and rare elements. Can you give us an update on that revolution?
Byron King: When you get into the graphite space, you quickly realize that graphite is more of a technology play than a basic resource play. There is a materials revolution going on with carbon, certainly with graphite. It’s extremely investable, but you have to have patience, and be willing to learn some complex new science. If an investor doesn’t want to become educated on the high-end carbon chemistry that’s happening out there, this could become an uncomfortable space in a hurry.
Look at it this way. If I mine gold, silver or copper, I can sell it to pretty much anybody, from dentists to jewelers to wire makers to electronic makers. The end users will buy it as long as there is a basic spec or quality to it.
Graphite is different. Once you mine it, what you do with the graphite depends on who your user is. The end user has a specific use in mind – battery anodes, fire suppression, heat dissipation, high-strength materials – that requires an entire industrial chain that has to happen between the mouth of the mine and the end user.
TGR: Do you have any words of wisdom for investors who are trying to decide when to enter the market?
Byron King: We’ve seen several strong investment points for gold and silver in the last six months. Right now, I think we might be due for a summer correction, although geopolitical events seem to be exploding all over the place. Sorry, but I just don’t have a subscription to next week’s Wall Street Journal. My issue only comes every morning.
Still, we’ve got tremendous volatility. Just in the time we’ve been talking, the price of gold dropped $33 per ounce [Mon 14 July] which is a bit of an eye-opener. It makes you want to look at the rest of the world and see what’s going on, what might have prompted that drop.
The question for the investor is, what are you going to do? Well, if there’s a downdraft to gold and silver prices, then you want to be involved in companies that can get their costs down faster than the market can beat down the price. But whatever happens day to day, I think metal prices will go up over the long term, because of inflation.
When it comes to picking companies in which to invest, you need to be willing to diversify across many ideas. While it’s great to put a lot of money into a couple of plays and see one or two do really well, that’s usually not the way life works. In the small-cap resource space in particular, you need to find 6 to 10 quality plays – or more – and spread your investments around.
Then you need to watch carefully, and be willing to cut your losses. You also need to be ready for surprises on the upside. When a company gets a takeout offer or has a good piece of news from the drill rig, you can see fabulous gains flowing to patient investors. Just remember that, when good things happen, you need to sell some shares and take some of that gain off the table.
TGR: Byron, it’s always a pleasure. Thanks for your time and your insights.
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Jul 05

Hard Choices

Gold Price Comments Off on Hard Choices
Read Hillary Clinton’s book first? Or just bad-mouth it anyway…?

HILLARY’s smiling face has looked up from the desk for two weeks, writes Bill Bonner in his Diary of a Rogue Economist.
We wanted to read her book, if only to mock and jeer, but we couldn’t bring ourselves to open it. It was too big. Too earnest. Too carefully put together. There would be no surprises.
Like Hillary’s photo on the cover, every detail had been checked by pollsters and approved image consultants. No facts that didn’t support the uplift of the narrative were allowed. No ideas that don’t appeal to the majority voter were permitted.
Hillary is made appear tough, but fair…well-informed…hard working…with a razor-sharp intellect and a heart like road kill on a hot, sunny day: warm, soft and overpowering.
Finally, we had to do our duty, on your behalf, dear reader. We opened the book so you don’t have to. The book, called Hard Choices, is hard to pick up. And easy to put down.
Not because you will disagree with its ideas; there are no ideas to disagree with. Instead, the book is full of self-serving and empty blah blah. It wallows in the glory of the US Empire…and of course, the incredible, gracious tenacity of Hillary Rodham Clinton.
All you have to do is to look at the photos. There you find Hillary shaking hands with every corrupt, incompetent leader the world has to offer…as well as demonstrating all the qualities the dim voter may look for.
In one she is compassionate towards children. In another she is an activist for women. She is a fun-loving secretary of State, too. There’s a photo of her at the piano with Bono. Another of her dancing at a party in Cartagena, Colombia. And there’s Joe Biden whispering in the ear of a giggling Hillary.
What a gal!
The premise of the book is that leaders have to make tough decisions. Her first was her decision to leave a promising career as a Washington lawyer to go to Little Rock and help Bill with his political career.
On the evidence, this paid off. Bill hit it big in politics. Hillary became his partner – like Evita to Juan Perón. Or Christina to Néstor Kirchner. Now, Hillary is in line to be the first woman president.
This seems not only alarming, but also likely…
The Wall Street Journal reported on Wednesday that she and Bill had raised more than $1 billion from corporate donors during their two decades on the national stage. Zombie industries and crony capitalists know Hillary can be bought…and at a reasonable price.
The voters will fall in line. They don’t have a hard choice or an easy choice. Most likely, they will have no choice at all. The Republicans will probably field a candidate with essentially the same policies.
The next hard choice Hillary faced was whether or not to accept President Obama’s offer to head up the State Department. She always says and does the right thing. So she took the job because “when your president asks you to serve you should say yes.”
So far, we are only in the opening pages of the book, and already Hillary is nauseating. She says she’s been doing “public service” for her entire adult life. But what possible service is it? In every post she has held, she was more served than serving.
When she was first lady, for example, who put the bread on the table? Who baked it? Who washed the dishes? Not Hillary!
As secretary of State she says she spent 2,000 hours and flew a million miles. Airborne, at taxpayer expense, she and her friends would “enjoy a glass of wine.” And “watch movies.”
How did the public get anything out of it?
“I didn’t enjoy playing the bad cop,” she says of a conversation with the Israeli prime minister, “but it was part of the job.”
Speaking for ourselves, we didn’t ask her to say anything at all…and we’ll make our own choices, thank you very much.
One of the hardest choices she had to make was whether or not to send Navy SEALs “to bring Osama bin Laden to justice.” In the event, they didn’t even try. They assassinated him on the spot.
But around and around the world she went, a dervish diplomat. Asia, the Middle East, the Far East, the Arab Spring, the Russian winter, the European fall. Blah after blah…well-meaning public servant after well-meaning public servant…human rights, women’s rights, children’s rights. Six hundred pages.
How does she remember so many details? Why does she bother, except to glorify her own mastery of pointless detail?
She says something to somebody who says something else…bumbling from one scene of mischief to another of mayhem. Involving the free and independent citizens of the United States of America in dozens of conflicts in which they have no interest of any kind.
Hillary has been on the government payroll since she was 13 years old, she tells us, when she had a summer job “supervising a small park.”
We don’t know how much supervising a 13-year old can do. But heck, Hillary can do anything. On one page she’s rescuing children from a brothel. On another, she’s cleaning the air. On another, she’s preventing a war.
We are suspicious of people who stay up too late. Stalin worked until 5am. Hitler was a night owl, too. Staying up late is linked to addictions – alcohol, pornography or video games. But over and over, Hillary tells us that she was up until the “wee hours” talking to someone.
Good God, what awful calamity would have happened if she had just gone to bed and turned off her cellphone?
And now, the poor woman must be tired. So many hard choices! So much public service!
She needs a rest. Retire her.
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Jul 03

Barrick Gold Selling Golden Sunlight Mine in Montana

Gold Price Comments Off on Barrick Gold Selling Golden Sunlight Mine in Montana

The Wall Street Journal reported that gold giant, Barrick Gold, is continuing with its two-year long endeavor to shed non-core assets with the sale of the Golden Sunlight mine in Montana after more than thirty years of operation.

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Jun 27

3 Question Marks for a New Bretton Woods

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Paul Volcker helped end the gold-backed post-war system. Now he suggests reviving it…

SETH LIPSKY, editor of the storied New York Sun (a brand distinguished by the long residency of Henry Hazlitt), recently in the Wall Street Journal brought to wider attention certain remarkable recent comments by Paul Volcker, writes Ralph Benko at the Cobden Centre in an article first published at Forbes.com.
Volcker spoke before the May 21st annual meeting of the Bretton Woods Committee at the World Bank Headquarters in Washington, DC. Volcker’s remarks did not present a departure in substance from his long-standing pro-rule position. They nonetheless were striking, newly emphatic both by tone and context.
Volcker, asked by the conference organizer for his preferred topic, declared that he had said:
“What About a New Bretton Woods??? – with three question marks. The two words “Bretton Woods” still seem to invoke a certain nostalgia – memories of a more orderly, rule-based world of financial stability, and close cooperation among nations. Following the two disasters of the Great Depression and World War II that at least was the hope for the new International Monetary Fund, and the related World Bank, the GATT and the OECD.
No one here was actually present at Bretton Woods, but that was the world that I entered as a junior official in the US Treasury more than 50 years ago. Intellectually and operationally, the Bretton Woods ideals absolutely dominated Treasury thinking and policies. The recovery of trade, the opening of financial markets, and the lifting of controls on current accounts led in the 1950’s and 60’s to sustained growth and stability.
The importance, especially from a speaker of Volcker’s stature presenting among the current heads of the two leading Bretton Woods institutions, the IMF’s Christine Lagarde, and the World Bank Group’s Jim Yong Kim, among other luminaries, potentially has radical implications. Volcker provided a quick and precise summary of the monetary and financial anarchy which succeeded his dutiful dismantling of Bretton Woods:
Efforts to reconstruct the Bretton Woods system, either partially at the Smithsonian or more completely in the subsequent negotiations of the Committee of 20, ultimately failed. The practical consequence, and to many the ideological victory, was a regime of floating exchange rates. Somehow, the intellectual and convenient political argument went, differences among national financial and economic policies, shifts in competitiveness and in inflation rates, all could be and would be smoothly accommodated by orderly movements in exchange rates.
How’s that working out for us? Volcker played an instrumental role in dutifully midwifing, as Treasury undersecretary for monetary affairs under the direction of Treasury Secretary John Connally, the “temporary” closing of the gold window announced to the world on August 15, 1971 by President Nixon. Volcker now unequivocally indicts the monetary regime he played a key role in helping to foster.
By now I think we can agree that the absence of an official, rules-based cooperatively managed, monetary system has not been a great success. In fact, international financial crises seem at least as frequent and more destructive in impeding economic stability and growth.
The United States, in particular, had in the 1970’s an unhappy decade of inflation ending in stagflation. The major Latin American debt crisis followed in the 1980’s. There was a serious banking crisis late in that decade, followed by a new Mexican crisis, and then the really big and damaging Asian crisis. Less than a decade later, it was capped by the financial crisis of the 2007-2009 period and the great Recession. Not a pretty picture.
Volcker fully recognizes the difficulties in restoring a rule-based well functioning system both in his speech and in this private comment to Lipsky made thereafter. Lipsky: “It’s easy to say what’s wrong,” Mr. Volcker told me over the weekend, “but sensible reforms are a pretty tough thing.”
The devil, of course, is in the details. What rule should prevail? There is an almost superstitious truculence on the part of world monetary elites to consider the restoration of the Gold Standard. And yet, the Bank of England published a rigorous and influential study in December 2011, Financial Stability Paper No. 13, Reform of the International Monetary and Financial System. This paper contrasts the empirical track record of the fiduciary Dollar standard directed by Secretary Connally and brought into being (and then later administered by) Volcker. It determines that the fiduciary Dollar standard has significantly underperformed both the Bretton Woods gold exchange standard and the classical Gold Standard in every major category.
As summarized by Forbes.com contributor Charles Kadlec, the Bank of England found that…
  • When compared to the Bretton Woods system, in which countries defined their currencies by a fixed rate of exchange to the Dollar, and the US in turn defined the Dollar as 1/35 th of an ounce of gold:
  • Economic growth is a full percentage point slower, with an average annual increase in real per-capita GDP of only 1.8%
  • World inflation of 4.8% a year is 1.5 percentage point higher;
  • Downturns for the median countries have more than tripled to 13% of the total period;
  • The number of banking crises per year has soared to 2.6 per year, compared to only one every ten years under Bretton Woods.
That said, the Bank of England paper resolves by calling for a rules-based system, without specifying which rule. Volcker himself presents as oddly reticent about considering the restoration of the “golden rule.” Yet, as recently referenced in this column, in his Foreword to Marjorie Deane and Robert Pringle’s The Central Banks (Hamish Hamilton, 1994) he wrote:
It is a sobering fact that the prominence of central banks in this century has coincided with a general tendency towards more inflation, not less. By and large, if the overriding objective is price stability, we did better with the nineteenth-century Gold Standard and passive central banks, with currency boards, or even with ‘free banking.’ The truly unique power of a central bank, after all, is the power to create money, and ultimately the power to create is the power to destroy.
There is an active dispute in Washington between Republicans, who predominantly favor a rule-based monetary policy, and Democrats, who predominantly favor a discretion-based monetary policy. The Republicans have not specified the rule they wish to be implemented. The specifics matter.
There is an abundance of purely empirical evidence for the Gold Standard’s effectiveness in creating a climate of equitable prosperity. The monetary elites still flinch at discussion the gold option. That said, the slow but sure rehabilitation of the legitimacy of the Gold Standard as a policy option was put into play by one of their own, no less than the then World Bank Group president Robert Zoellick, in a Financial Times op-ed, ‘The G20 must look beyond Bretton Woods’. There he observed, in part, that “Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.”
There are many eminent and respectable elite proponents of the Gold Standard. Foremost among these Reagan Gold Commissioners Lewis E. Lehrman (with whose Institute this writer has a professional association) and Ron Paul, and Forbes Media CEO Steve Forbes, coauthor of a formidable new book, Money, among them. There are many more, too many to list here.
In the penultimate paragraph of his remarks to the Bretton Woods Committee Volcker observes:
“Walter Bagehot long ago set out succinctly a lesson from experience: ‘Money will not manage itself.’ He then spoke from the platform of the Economist to the Bank of England. Today it is our mutual interdependence that requires a degree of cooperation and coordination that too often has been lacking on an international scale.”
As the great Walter Layton, editor of The Economist, wrote in 1925, “the choice which presents itself is not one between a theoretical standard on the one hand and gold with all its imperfections on the other, but between the Gold Standard…and no control at all.” “No control at all” anticipates Volcker’s own critique.
If Chairman Volcker overcame his aversion to considering the Gold Standard as a respectable option for consideration he just might find that his his stated concern “We are long ways from (a new Bretton Woods conference)” may be exaggerated. A golden age of equitable prosperity and financial stability is closer than Mr. Volcker believes.
The corollary to Volcker’s dictum, “ultimately the power to create is the power to destroy” is that the power to destroy is the power to create. It is time, and past time, Mr. Volcker, to give full and respectful consideration to the Gold Standard which served the world very well indeed and would serve well again.
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Jun 19

Low Gold & Silver Prices "Disrupting Mining"

Gold Price Comments Off on Low Gold & Silver Prices "Disrupting Mining"
Mineable properties will dry up from demise of exploration companies…

MICHAEL BERRY was professor of investments at the Colgate Darden Graduate School of Business Administration at the University of Virginia, and the Wheat First Professor of Investments at James Madison University.
Managing small- and mid-cap value portfolios for Heartland Advisors and Kemper Scudder after that, he now co-edits The Disruptive Discoveries Journal with his Chris, who founded House Mountain Partners in 2010 to focus on the evolving geopolitical relationship between emerging and developed economies.
Together Mike and Chris Berry analyze the commodity space and junior mining and resource stocks. Here they talk to The Gold Report‘s sister title, The Mining Report, about the importance of disruptive discoveries to help companies beat sideways commodities markets…
The Mining Report: Do you think investing is a skill that is learned or inherited?
Chris Berry: I suppose there’s some sort of a gene for analytical ability, but there’s no substitute for real-world experience. While my father taught at the Darden School at the University of Virginia, I received a good grounding in theory-based finance and investing. Being out in the investing world for the last 15 years, I’ve seen what works and what doesn’t compared to what you read in a textbook. If the last few years have taught us anything, it’s that markets aren’t as efficient as academic theory would have us believe.
TMR: Mike, when did you first know that Chris had the knack for investing?
Mike Berry: When I realized that Chris was interested in what I was doing, I sent him to see a good friend to talk to him. I wanted to stand back. Chris came back and said this is what he wanted to do. We have all heard Chris say he loves what he does now. If you love what you’re doing, you’re going to put a lot of effort into it and you will be successful.
I think it’s more environmental than genetic. If you’re in a family where everybody’s reading The Wall Street Journal all the time, it probably comes more naturally.
In 2000, I came up with the idea of discovery as a different kind of investing discipline. Chris and I have worked together now for four years and he’s adapted that into the idea of one of disruptive discovery. This is more defining and in the current market a lot more powerful. We reinforce each other’s work. It’s a really good relationship in that we’re in sync and yet we cover different interests in the destructive or disruptive discovery space.
TMR: You recently changed the name of the publication you co-edit to Disruptive Discoveries Journal. Which industries are being disrupted by macro forces, and how can investors profit?
Chris Berry: A number of macro forces have combined to deliver compelling challenges to the global economy. Globalization has increased trade among countries and benefited many people through higher living standards. The globalization of technology gives a farmer in an emerging market access to the same amount of information that, say, the president of the United States would have had 15 years ago. These two forces are leveling the playing field between East and West. As a result, both challenges and opportunities are presented. This means that as many more people live what I call “commodity-intensive” lifestyles, we’re starting to see living standards converge. This has been one of the main factors in stagnant real wage growth in the West in the past decade.
However, the confluence of globalization and technology has begun to raise a number of issues for us in the West. One challenge is an excess of labor. Hundreds of millions of people globally are joining the middle class, which is flattening wage growth. China’s middle class is forecast to grow by 200 million in the coming decades. Other countries like India, Indonesia and Mexico are experiencing similar phenomena. Greater access to technology, for example free online education through Coursera or edX, has exacerbated this issue by allowing anyone with an Internet connection to learn what a better life can be. This will continue to have far-reaching consequences for us in the West as the global labor pool expands and can grow at a relatively lower cost of living. Technology, specifically disruptive technology like online education, is simultaneously our best friend and worst enemy. A number of industries are set to be upended and herein lies the opportunity.
We broadened our reach because to thrive in the commodities markets of the future, investors will have to be much more selective about the sectors, the companies and the commodities they look at. I look for companies anywhere along the value chain that have a disruptive technology or unfair competitive advantage. Maybe it’s a deposit, maybe it’s a technology. These companies offer the opportunities in a global economy awash in labor and capacity.
TMR: Mike, which commodities could benefit from today’s disruptive technologies?
Mike Berry: Oil and natural gas come to mind first. Fertilizers and potable water also will benefit. Mineral exploration and recovery will also be revolutionized with new technology. There will be a revolution in energy use, food production, clean mineral production and, therefore, quality of life here and around the world.
It took a decade for hydraulic fracking to take hold, but now it has almost completely restructured the global geopolitics. In the second quarter of 2014 the US produced 8.4 million barrels of oil equivalent, the highest in 26 years. By 2016 the US will produce 12 million barrels of oil a day and will become an exporter of natural gas; it’s just a matter of time. That’s the best, most recent example of a global disruptive discovery.
It’s not about discovering a mine; it’s about discovering a technology. I talked recently with someone about plasma torch technology for processing minerals. That technology is still very early in its development, and many in the mining industry don’t believe in it, but it has the same potential as fracking has had to oil and gas production to change the economics of the mining industry and impact the geopolitics of the world.
TMR: Many of these technologies are costly. You’ve said that society needs access to cheap commodities to sustain a high quality of life. Many commodities are now being sold at below the price it takes to produce them. That can’t be sustainable. With these new technologies, will prices catch up with the cost of production?
Mike Berry: It takes time to perfect these disruptive discoveries. In the Eagle Ford Shale, the cost of producing a barrel of oil is around $40. The best the Saudis can do using traditional finding and recovery technology is $45 or $50 a barrel. New exploration technologies and recovery technologies in mining will dramatically reduce costs. So the answer to your question is yes.
Chris Berry: Selling commodities below the cost of production is obviously not sustainable. We’ve seen countless companies either mothball mines or abandon projects altogether in recent months. However, every commodity is different and I think it’s important to look individually at the distinct supply-demand dynamic for each. As an example, lithium and rare earth elements (REE) offer different opportunities. Lumping them together and saying ALL energy metals are bad bets now is patently false.
Take uranium, for example. By some accounts, 60% of the uranium being produced today is produced below cost. That can’t continue because companies have shareholders who invest based on the capability of management teams to generate profits and cash flow. You can only produce something at a loss for so long before you lose the trust of the markets.
Yet, uranium is a critical component of our energy infrastructure, and it will remain a critical component, despite its challenges. In an environment where the uranium spot price is $28 per pound and the term price is $45/lb, you must find the companies that can exist in low-price environments. Right now, that means in-situ and near-term production plays in the western United States and Kazakhstan. The Athabasca Basin has great grade, but that kind of hard rock isn’t economic right now, and won’ be until we reach much higher uranium prices.
If you want to invest in uranium right now, I would look at the lowest-cost producers in the industry. Another strategy would be investing in hard rock plays that aren’t economic now, but will be at higher uranium prices. I have been discussing this theme of optionality frequently.
TMR: In last year’s father-son interview you were sharply divided on the prospect for uranium. Mike, you were adamant that we should be moving to thorium to avoid more Fukushimas. Do you still feel that way?
Mike Berry: One of the great things about our relationship is that we don’t always agree, or disagree. We go back and forth. It’s a very healthy relationship because you can avoid “drinking your own bathwater.” We’re still divided on uranium long term.
Uranium is not the best nuclear fuel, thorium is. Thorium is more plentiful and easier to store. The burnt material doesn’t give off much plutonium. Its byproducts decay faster and are safer. The problem is that we spent billions of Dollars building and retrofitting uranium-based nuclear plants, as have the Chinese. We’re unlikely to move to thorium anytime soon. We’ll probably have green energy before we have thorium reactors, although both China and India are working on them.
As to what Chris said about uranium not being ready for a turn, I agree. I don’t see a turn for two to five years. That’s why we’re looking up the value chain for disruptive discovery investment opportunities in technologies, as well as the natural resource discoveries. In the nuclear space small modular reactors provide a disruptive technology. They are in their very early development stages.
TMR: Is that partnership new?
Chris Berry: No. I think it’s been overlooked by the market. Lithium Americas is a well-run company with a great asset in a region of the world with history of lithium production. It could be producing a commodity whose demand looks to remain steady and growing. Despite some of the excess in the global economy I spoke about above, lithium has dodged this bullet. Lithium Americas has partnered with one of the more influential multinational companies in the world in the commodity space. It’s a really positive story.
Also, as a brief aside, Tesla’s recent announcement to not enforce its patents on its Supercharger technology will likely be more revolutionary to the electric vehicle industry in the long run.
TMR: Mike, are you as excited about lithium?
Mike Berry: Yes, very much so, although I’m skeptical about Tesla’s plans for its Gigafactory. Battery technology has not yet found its steady-state niche. I am looking for disruptive battery technology today. You can’t build a battery factory – or a car factory to use all those batteries – until you’re sure you’re at the point of sustainability.
Lithium-ion battery technology is clearly important. Whether or not it uses graphite anodes is another issue. It’s evolving. We may or may not have the expected demand for lithium and graphite; that’s another issue.
I also want to comment on graphene, which is a one-atom thick extract from graphite. In my view disruptive graphene technology is coming but it is a decade or two away from serious cash-flow generation. It will definitely be a disruptive technology when it develops.
TMR: You’ve emphasized that not all critical metals are alike. There has been lots of volatility among the REEs. Could China’s recent announcement of its plan to tax REE producers and require environmental protections be good for non-Chinese companies?
Chris Berry: I hate to sound cynical, but probably not. Every quarter, China makes an announcement about how it’s going to change this or that. I don’t expect the pronouncements out of China to benefit non-Chinese REE exploration and development plays in the near-term. Remember, this entire supply chain from mining to manufacture now takes place almost exclusively in China. This has been in place for years and we can’t expect to change this overnight. Trying to use rulings from entities like the World Trade Organization to get China to dismantle its supply chain in the name of “fairness” is a wrong-headed strategy. Both the private and public sectors in Western economies need to garner the political and economic will to comprise a strategy that can compete with a dominant low-cost Chinese production scenario.
I have a five-year view on the REE space outside of China. That is how long I anticipate it will take an REE junior to achieve commercial production.
An investor has to be very patient and have a long window to make money in the REE junior space.
TMR: Mike, do you agree?
Mike Berry: I certainly agree that the US has given up on supply-chain development. It takes billions of Dollars and lots of time to build a workable and economic supply chain. The Chinese have worked pretty hard at that. They made mistakes, but they learned how to do it. We need to be focused downstream, as well as upstream.
TMR: Mike, you’re going to give your biannual talk to the Federal Reserve on the economy next week. What will you say?
Mike Berry: The overriding issue now is the battle among the central banks of the world trying to generate inflation, escape velocity growth and avoid deflation or shrinking of the money supply and their own economies.
I think the world is much more disinflationary or perhaps deflationary than it has been since the Great Depression. The Fed is printing a lot of money. Yes, it’s tapering its quantitative easing, but the real money supply in the real economy is not growing. The Fed’s money supply is. The Fed has $4.5 trillion of bonds in its portfolio. The real question now is, “How does the Fed raise interest rates without imploding the economy?”
The European Central Bank recently said it was worried about deflation. It instituted a $100 billion program to buy bonds and make loans. So the ECB is now embarking on its own quantitative easing program.
We don’t have an economy of robust, sustainable growth. Since 1970 GDP growth has averaged 3.4% coming out of recessions. Here we are 70 months down the road and we can barely sustain 2% growth. Without escape velocity growth, you cannot deal with the amount of debt that was incurred back in 2000-2008. I’m worried that we have three to five years of growth capped by the slow deleveraging process we are in today. That will affect how quickly the capital markets can turn and a new credit cycle evolves to support needed economic growth.
The equity markets are much overvalued. I expect a correction. I think we’re facing two to five years of deleveraging. It’s not an optimistic presentation in the short term. Longer term, of course, we will recover.
Chris Berry: All of that underpins our disruptive discovery thesis. It’s not a viable strategy to hide your head in the sand and not participate in these markets. Rather, you need to find those opportunities that can provide above-average returns in what looks to be a very muted growth profile over the next couple of years. You do this through finding those opportunities that can produce an attractive product either through a disruptive force in their business model or another element. Tesla has done this in the automotive business. Uber (though privately held) has done this in the mass transportation business. Netflix has done this in the streaming video business.
Mike Berry: Remember, there are two kinds of deflation. One comes from excess supply and insufficient demand. That is part of what we’re facing now. For example, there is lots of supply of iron, aluminum and copper, but the Chinese have scarfed it all up. Who knows when that will come back and hit us on the head? That’s bad deflation: excess supply and stagnant demand. Prices fall, expectations are formed and people start to save, because they can buy the washing machine cheaper next month. As a result, growth spirals into a decline.
The other kind of deflation comes from disruptive discovery. That’s where new technological discoveries tend to replace labor or at least cap labor’s real disposable income. That’s happening in the labor market now. It is struggling to maintain growth in real wages and get people back to work.
The US announced the creation of 217,000 new jobs in May, equal to the number of jobs lost in 2008. Everybody cheered. The problem is there are 15 million more people in this country than in 2008. We still have tremendous excess and underproductive labor. Labor is not being rewarded; productivity, through new discoveries, is being rewarded.
We have both kinds of deflation right now, and we have to clear them out. I just don’t see anyone in Washington DC being willing to do what is needed to make that happen.
TMR: A lot of people turn to gold when things are disrupted. The gold price is down from the beginning of the year. What do each of you think of the prospect for gold and silver?
Mike Berry: In terms of the real inflation rate, gold is going to be capped. I think it will test $1200 per ounce, or maybe $1100 per ounce. Wall Street is arrayed against gold right now, and the futures market is the tail that wags the dog in both gold and silver. At $1200 per ounce, we’d be buyers.
I suppose the good news, although it’s not really good news, is that exploration is stopping. This will also be disruptive. It’s very difficult to raise money for exploration now. There will be very few new gold or silver mines coming on stream. Some of the midtier silver producers will have real problems as silver finds its bottom.
We might have to wait one to three years, but at some point we will run out of mineable gold properties as a result of the demise of exploration companies. I think gold and silver will find the bottom when we start to see marginal costs equal to the price of gold and silver. Then, there will be a bounce.
TMR: Chris, do you agree?
Chris Berry: I still maintain that most commodities will go sideways for a while. It is difficult to say how long this will last, but I can’t see many macro catalysts at all auguring for explosive demand in the near-term. You must find low-cost production or disruptive technology stories.
In the precious metals sector, in particular, perception is reality. If you’re hearing a lot about disinflation or a lack of inflation, you stop thinking about some of the traditional reasons to buy and hold gold or juniors and producers. That’s one of the main reasons they’ve been pushed down hard and will probably stay there for a while. The perception is that there is no inflation in the economy and economic growth is now stable. The reality is quite different if you’ve been to a grocery store or filled your car with gas recently.
That doesn’t mean gold might not explode to the upside based on world events in the short term. We saw what happened to gold when Vladimir Putin started saber rattling and invaded Ukraine. Gold hit $1380 per ounce, but fell once things calmed down. We are now seeing a similar phenomenon as Iraq devolves into a civil war. I’m unconvinced these singular events can push precious metals prices dramatically higher in the near-term.
You want to watch traditional factors such as supply and demand and exchange-traded funds inflows or outflows.
It’s unfortunate that in the past 10 years, gold and silver have turned into asset classes in and of themselves and we’ve forgotten their traditional roles as stores of value and insurance policies against inflation. As a result, we’ve seen a lot more volatility with gold and even more with the price of silver.
Mike Berry: In my mind, gold and silver have decoupled. Silver has a huge industrial application; gold does not. With a mere 2% growth rate in the world’s economy, industrial uses will shrink until we can get to 3-5% GDP growth.
There are a lot of silver investors out there. Some 245 million ounces of silver coins and bars were purchased in 2013 – 76% more than 2012 and triple the silver purchased by investors in 2009. When you add in jewelry and silverware purchases, almost 500 Moz silver were purchased in 2013. That does not include industrial usage, investment only. Last year we incurred a 113 Moz deficit in silver supply.
Two years ago, the silver price averaged $35 per ounce; today it is $19 per ounce. Investors must seek companies that can sustain their silver production. They have to be sure that companies can maintain their properties. I think we will find a lot of great silver properties that come free.
We see a lot of private equity players now. They’re rolling up properties for pennies on the Dollar when they can. Will silver turn? Yes. When will it turn? I don’t know, probably a ways off.
TMR: Chris, in addition to being a son, you’re also a father, which, of course, Mike, makes you a grandfather. Is there an investment in a commodity or a stock that you could make now when your children are young that would be worth enough 20 years from now to pay for their college degree?
Chris Berry: I can’t think of a single investment or a commodity. You can’t control financial markets or the performance of the economy. You have to a have a flexible strategy and a plan in place to weather these storms. Buy and hold is not the only strategy to employ and has been a losing strategy in recent years.
I focus on energy metals and I have a thought process, a timeframe and a strategy for each one of them. The convergence of lifestyles is a real and credible phenomenon. It’s not a parabolic boom; it’s slow and steady and it will continue. We think that convergence only happens to the extent that people can live more commodity-intensive, more affluent lifestyles. If you’re going to invest in the commodity world, whether it’s juniors or anywhere along the value chain, you need to have a strategy, a plan and a philosophy that you stick to, but you have to stay flexible enough to adapt when times change. It’s not 2006 anymore and you should not be investing as if it is.
The ability to adapt is probably the most important lesson that I hope I can leave to my kids.
TMR: Mike, do you agree?
Mike Berry: One of the things Kate and I did was to make sure that we put stocks in trust for the kids. In the discovery sphere, landing on one major discovery – I’m thinking a world-class Peñasquito, which was one of our big early discoveries – can make you millions. These also increase wealth for everyone. Not all of them work, but you learn so much from every single discovery opportunity, disruptive or not.
I think it is incumbent upon parents to teach their children to understand implications of disruptive discoveries. In terms of a single investment that will put my grandchildren through college, that’s a question I would rephrase. What can I teach my grandchildren to focus on as they approach college and life beyond?
The point I would make is the necessity for disruptive discoveries in food production and healthcare. These are areas that we are heavily involved in. Cancer technologies and therapies, stem cell technology and medical device innovations, as well as nutritional discoveries, are of great interest to both of us. (Editor’s note: Click here to read Michael Berry’s ideas on life science investing).
TMR: Thanks for your time and insights.
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