Oct 28

"Peak Gold" Here to Stay

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But that won’t deflect a possible dip to $1000 per ounce first, says this leading German newsletter analyst…
 

OLIVER GROSS is a passionate resource expert, prudent investor and adviser with more than 10 years of experience in the mining and junior sector.
 
Chief editor and analyst of the newsletter Der Rohstoff-Anleger – which is published by Germany’s online GeVestor Financial groupm, and specializes in the global junior resource sector – Gross here tells The Gold Report why gold prices could get washed down to $1000 per ounce before the fundamental fact of “peak gold” drives a new bull market…
 
The Gold Report: Earlier this month, the broader equities markets suffered huge losses as gold made significant gains. Then, after the broader markets recovered, gold fell. Is there now an inverse relationship between the health of the broader markets and the price of gold?
 
Oliver Gross: This kind of inverse relationship between gold and the broader equity markets isn’t really new. It has been observed since fall 2011, when the price of gold peaked. Since then, gold has fallen more than 35%, while the S&P 500 has risen 70%.
 
The current situation resembles the early 2000s, when the broader equity markets were in the final phase of the dot-com bubble, while gold traded as low as $340 per ounce ($340 per ounce). Then, of course, the broader equities markets collapsed, while gold rose above $1900 per ounce.
 
TGR: Some analysts believe that the broader equities market is dangerously overvalued. To give one example, Netflix was recently trading at 144 times earnings. What do you think?
 
Oliver Gross: After a 5-year bull run leading to new all-time highs in the broader equity markets, there are many signs of bubble formations in the Internet, high-tech and biotechnology sectors. Again, this feels like the early 2000s. The extremely high price-to-earnings ratios in stocks such as Netflix indicate investor euphoria and huge amounts of speculative capital provided by the central banks.
 
It is shocking to compare valuations in the broader sectors of the equity markets to valuations in the precious metals space. 
 
TGR: How should investors react to this bubble?
 
Oliver Gross: Speaking for myself, as one who follows an anticyclical strategy, I like to invest when there is blood in the streets, and that is certainly what is happening with precious metal equities. Today, investors can buy gold and silver stocks at decade-low valuations and historically low bullion-to-equity valuations.
 
Nobody cares about precious metals equities today, but when the bubble in the broader markets bursts, we will see a massive shift in market sentiment and in the behavior of investors. That said, investors must stick to best-in-class stories and must demonstrate constancy and patience.
 
TGR: Could the collapse of the bubble lead to a crisis similar to that which occurred in 2007-2008?
 
Oliver Gross: Yes, the possibility of another Lehman Brothers event is there. When the largest and most influential players in the financial industry want to exit this market, we could see a 2008-like selloff very, very fast. I also think that it is only a matter of time before a further big player in our financial industry will go the same way as Lehman.
 
TGR: Geopolitical turmoil today is greater now than it has been for quite some time: Gaza, ISIS, Ukraine and now Ebola. Traditionally, this would have resulted in a significantly higher gold price, which has not happened. Is what we have seen this year an anomaly, or is the price of gold no longer affected by external events?
 
Oliver Gross: That is a question not easily answered. Traditionally, gold has been regarded as the ultimate crisis protection, so geopolitical turmoil usually resulted in a higher gold price. What has changed is the incredible power of the central banks. They have changed the rules of the game. This is a major financial experiment with no historical precedent. The combination of unlimited liquidity, historically low interest rates and historically high debt levels has, for the moment, mitigated geopolitical risk factors and guaranteed faith in the US Dollar as the world’s reserve currency.
 
Gold has fought incredible odds since fall 2011. It is the most hated asset class, the official enemy of the US Dollar reserve and our global monetary system. And so the biggest financial institutions have no interest in higher gold prices. They still control the gold futures and the paper-gold market, so it is easy for them to attack the gold price. But this can’t continue forever, and it’s just a matter of time before all the money created since 2008 will no longer simply inflate asset bubbles. Inflation will return, and gold will again respond positively to external crises.
 
TGR: Where do you see gold and silver prices going in the short term?
 
Oliver Gross: I see a 50% chance of a final panic selloff across the gold and silver space. In this scenario, gold could fall to $1000 per ounce, and silver could fall as low as $12 per ounce.
 
TGR: Wouldn’t such prices lead to widespread curtailment of bullion production?
 
Oliver Gross: The current all-in costs of gold producers are now above $1150 per ounce, even after massive cost reductions and a focus on higher-grade mining. Such expedients can have only a temporary effect. At a gold price of $1000 per ounce, there will be many shutdowns.
 
We need a gold price of at least $1400 per ounce to support sustainable production, and that number will rise, as early as 2015 or 2016. We have reached Peak Gold, and it’s here to stay. The highest-grade and most-profitable deposits are gone. The bear market in the gold mining space has been so long and painful that the major producers have their backs to the wall. 
Most discoveries of the last five years need a far higher gold price to be mined. In addition, many recent discoveries are located in jurisdictions with high country or environmental risks and lack infrastructure, resulting in multibillion-Dollar capital expenditures (capexes).
 
TGR: As a result of the factors you’ve mentioned, can we now expect a big increase in mergers and acquisitions (M&As)?
 
Oliver Gross: Not so much among the majors. Most of them have weak balance sheets and too many in-house projects to risk expensive and dilutive takeovers. 
 
TGR: What are the attributes possessed by those companies likely to be taken out?
 
Oliver Gross: When the influential players in the gold mining space think that the gold price bottom is in, and a new bull market is likely, M&A interest will grow big time. Such a consolidation could create a perfect storm for the strongest junior gold producers and quality gold developers with robust, competitive projects.
 
Specifically, takeover targets will have financeable mine capexes with a good relation to the discounted net present value (NPV) of their projects. They will be profitable with gold at $1100 per ounce, and at least break even at $1000 per ounce. Their projects will be in pro-mining jurisdictions with stable laws, the sustainable support of regional and local communities, and solid infrastructure.
 
TGR: What about management?
 
Oliver Gross: Takeover targets must have managements with strong track records, or, failing that, existing investment from the larger precious metals companies or previously successful strategic investors. And, of course, healthy financials. There are many evaluations to be made, and there aren’t any “no brainers” here. Due diligence and continuous research are critical. When you think you haven’t spotted any weaknesses, you’ve likely missed something.
 
TGR: You are now more bullish on uranium companies, correct?
 
Oliver Gross: Uranium prices have just enjoyed their first recovery in years. We may have seen the bottom here, so I think investors should put uranium stocks back on their watchlists. 
 
TGR: Finally, given that so many current investors in gold companies want out, does the M&A flurry you’ve suggested offer a special opportunity for contrarians?
 
Oliver Gross: Absolutely. Both specific and general valuations are among the lowest for the last 30 years, so this could be the most attractive environment for contrarian investors in a couple of generations.
 
TGR: Oliver, thank you for your time and your insights.
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Oct 23

US Oil & Global Gold

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US oil stocks have soared as shale pushes crude prices down. But gold…?
 

The UNITED STATES is doing better than it has in years, writes Frank Holmes on his Frank Talk blog at US Global Investors.
 
Jobs growth is up, unemployment is down, our manufacturing sector carries the rest of the world on its shoulders like a wounded soldier and the World Economic Forum named the US the third-most competitive nation, our highest ranking since before the recession.
 
As heretical as it sounds, there’s a downside to America’s success, and that’s a stronger Dollar. Although our currency has softened recently, it has put pressure on two commodities that we consider our lifeblood at US Global Investors: gold and oil.
 
It’s worth noting that we’ve been here before. In October 2011, a similar correction occurred in energy, commodities and resources stocks based on European and Chinese growth fears. 
 
But international economic stimulus measures helped raise market confidence, and many of the companies we now own within these sectors benefited. Between October 2011 and January 2012, Anadarko Petroleum rose 58%; Canadian Natural Resources, 20%; Devon Energy, 15%; Cimarex Energy, 15%; Peyto Exploration & Development, 15%; and Suncor Energy, 10%.
 
Granted, we face new challenges this year that have caused market jitters – Ebola and ISIS, just to name a couple. But we’re confident that once the Dollar begins to revert back to the mean, a rally in energy and resources stocks might soon follow. Brian Hicks, portfolio manager of our Global Resources Fund (PSPFX), notes that he’s been nibbling on cheap stocks ahead of a potential rally, one that, he hopes, mimics what we saw in late 2011 and early 2012.
 
A repeat of last year’s abnormally frigid winter, though unpleasant, might help heat up some of the sectors and companies that have underperformed lately.
 
On the left side of the chart below, you can see 45 years’ worth of data that show fairly subdued fluctuations in gold prices in relation to the Dollar. On the right side, by contrast, you can see that the strong Dollar pushed bullion prices down 6% in September, historically gold’s strongest month. This move is unusual also because gold has had a monthly standard deviation of ±5.5% based on the last 10 years’ worth of data.
 
 
Here’s another way of looking at it. On October 3, bullion fell below $1200 to prices we haven’t seen since 2010, but they quickly rebounded to the $1240 range as the Dollar index receded from its peak the same day.
 
 
There’s no need to worry just yet. This isn’t 2013, when the metal gave back 28%. And despite the correction, would it surprise you to learn that gold has actually outperformed several of the major stock indices this year?
 
 
As for gold stocks, there’s no denying the facts: With few exceptions, they’ve been taken to the woodshed. September was demonstrably cruel. Based on the last five years’ worth of data, the NYSE Arca Gold BUGS Index has had a monthly standard deviation of ±9.4, but last month it plunged 20%. We haven’t seen such a one-month dip since April 2013. This volatility exemplifies why we always advocate for no more than a 10% combined allocation to gold and gold stocks in investor portfolios.
 
Oil’s slump is a little more complicated to explain.
 
Since the end of World War II, black gold has been priced in US greenbacks. This means that when our currency fluctuates as dramatically as it has recently, it affects every other nation’s consumption of crude. Oil, then, has become much more expensive lately for the slowing European and Asian markets. Weaker purchasing power equals less overseas oil demand equals even lower prices.
 
What some people are calling the American energy renaissance has also led to lower oil prices. Spurred by more efficient extraction techniques such as fracking, the US has been producing over 8.5 million barrels a day, the highest domestic production level since 1986. 
 
We’re awash in the stuff, with supply outpacing demand. Whereas the rest of the world has flat-lined in terms of oil production, the US has zoomed to 30-year highs.
In a way, American shale oil has become a victim of its own success.
 
 
At the end of next month, members of the Organization of the Petroleum Exporting Countries (OPEC) are scheduled to meet in Vienna. As Brian speculated during our most recent webcast, it would be surprising if we didn’t see another production cut. With Brent oil for November delivery at $83 a barrel – a four-year low – many oil-rich countries, including Iran, Iraq and Venezuela and Saudi Arabia, will have a hard time balancing their books. Venezuela, in fact, has been clamoring for an emergency meeting ahead of November to make a plea for production cuts. 
 
 
Although not an OPEC member, Russia, once the world’s largest producer of crude, is being squeezed by plunging oil prices on the left, international sanctions on the right. This might prompt President Vladimir Putin to scale back the country’s presence in Ukraine and delay a multibillion-Dollar revamp of its armed forces. When the upgrade was approved in 2011, GDP growth was expected to hold at 6%. But now as a result of the sanctions and dropping oil prices, Russia faces a dismally flat 0.5%.
 
The current all-in sustaining cost to produce one ounce of gold is hovering between $1000 and $1200. With the price of bullion where it is, many miners can barely break even. Production has been down 10% because it’s become costlier to excavate. As I recently told Kitco News’ Daniela Cambone, we will probably start seeing supply shrinkage in North and South America and Africa.
 
The same could happen to oil production. Extraction of shale oil here in the US costs companies between $50 and $100 a barrel, with producers able to break even at around $80 to $85. If prices slide even further, drillers might be forced to trim their capital budgets or even shelve new projects.
 
Michael Levi of the Council on Foreign Relations told NPR’s Audie Cornish that a decrease in drilling could hurt certain commodities:
“[I]f prices fall far enough for long enough, you’ll see a pullback in drilling. And shale drilling uses a lot of manufactured goods – 20% of what people spend on a well is steel, 10% is cement, so less drilling means less manufacturing in those sectors.”
At the same time, Levi places oil prices in a long-term context, reminding listeners that we’ve become accustomed to unusually high prices for the last three years.
“People were starting to believe that this was permanent, and they were wrong,” he said. “So the big news is that volatility is back.”
On this note, be sure to visit our interactive and perennially popular Periodic Table of Commodities, which you can modify to view gold and oil’s performance going back ten years.
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Oct 03

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

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

KAL KOTECHA is editor and founder of the Junior Gold Report, a publication about small-cap mining stocks.
 
Kotecha has previously held leadership positions with many junior mining companies, and after completing a Master of Business Administration in finance in 2007, he is now working on his PhD in business marketing, and also teaches economics at the University of Waterloo.
 
Here Kal Kotecha tells The Gold Report‘s sister title, The Mining Report, that to obtain superior results, you cannot do what everyone else is doing. He maintains that much of the risk associated with junior resource equities has been beaten out by the herd mentality and that selectively buying what’s left presents opportunity…
 
The Mining Report: You’re the editor of Junior Gold Report, but you also follow similar-sized companies in the energy sector. Please give our readers an overview of the energy space.
 
Kal Kotecha: I’ve been involved in the space since 2002 and I’ve never witnessed anything like what is currently happening. In the energy sector, I see the price of uranium increasing, but to see price appreciation across energy stocks, the price of oil must remain near $100 per barrel. That benchmark could prove challenging, given the growing supply of shale oil in the US Texas produces as much oil as Iraq or about 3 million barrels of oil per day. Most of it comes from two sources: the Eagle Ford Shale in southwest Texas and the Permian Basin in west Texas. Chris Guith, senior vice-president of policy for the US Chamber of Commerce’s Institute for 21st Century Energy, estimates that recoverable resources amount to 120 years of natural gas, 205 years of oil and 464 years of coal at current demand levels.
 
Fracking has lowered the price of natural gas by about 70% over the previous seven years or so. The price of oil, especially in the US, should decrease to $60-70 per barrel on average because of shale oil. US dependency on imported oil should lessen, too.
 
TMR: Is that a near- or medium-term forecast?
 
Kal Kotecha: That’s a medium- to longer-term forecast. I don’t believe in peak oil theory. The US’ savior in the oil industry is going to be shale oil, and there is a lot of it. Ultimately, that’s going enhance the US economy. Basically everything runs on oil. The US won’t have to import as much oil from Saudi Arabia or even Canada.
 
TMR: What’s your price forecast for natural gas?
 
Kal Kotecha: Natural should stay between $4-6 per thousand cubic feet (Mcf). It’s more expensive in Europe, but in North America the floor should remain around $4/Mcf. I don’t think it’s going to go back up to $12 or down to $3.
 
TMR: You mentioned earlier that you expect uranium prices to rise.
 
Kal Kotecha: Uranium is an interesting space. As oil prices slowly decrease, the demand for uranium seems to increase. Geopolitical tensions, especially in Russia and Ukraine, could lead to much higher prices. Russia is a large uranium producer and Western nations might stop importing uranium from Russia if political fires burn much hotter.
 
As of last month, China had 21 nuclear power reactors operating on 8 sites and another 20 under construction. China’s National Development and Reform Commission intends to raise the percentage of electricity produced by nuclear power to 6% by 2020 from the current 2% as part of an effort to reduce air pollution from coal-fired plants. Ultimately, uranium demand will triple inside six years.
 
In India, the government is expected to spend nearly $150 billion to develop nuclear power over the next 10-15 years. India now has nuclear energy agreements with about a dozen countries and imports primarily from France, Russia and Kazakhstan.
 
TMR: In a recent note on Junior Gold Report you wrote, “I smell smoke, but where’s the fire?” in relation to the current sentiment in the junior precious metals market. What’s your conclusion?
 
Kal Kotecha: The current pessimism surrounding the junior precious metal space has largely contributed to the fall in price of the commodities, but the beautiful thing about pessimism and hate towards a market sector is that there is plenty of room for error. Fantastic opportunities arise when great companies have been undervalued due to negative news that does not have a long-term impact on the company. So how do you determine which stocks, in a beaten up resource market, are great buys?
 
TMR: Do you have an answer?
 
Kal Kotecha: One must understand the essential principles of intrinsic value and the margin of safety. The principle of intrinsic value determines the worth of a stock through a combination of the price and the condition of the company. So no matter how great a company is, it may not always be a good investment. As Howard Marks wrote in The Most Important Thing: Uncommon Sense for the Thoughtful Investor, investment success doesn’t come from buying good things, but rather from buying things well.
 
The principle of the margin of safety involves minimizing risk and then, therefore, minimizing the potential loss of one’s money. Dealing with risk is a necessary part of investing, as stock price fluctuations occur and are often unpredictable. If the risk perceived by the herd – general investors who follow the majority – is less than the actual risk, then the returns will outweigh the risks. So when consensus thinks something is risky, the general unwillingness to buy it pushes the price down to where it is no longer risky at all, given it still has intrinsic value, because all optimism has been driven out of the price.
 
TMR: What are some metrics to help investors?
 
Kal Kotecha: A junior mining company’s ability to produce resources at a cost below its market price is essential for its sustainability. Junior mining companies should be judged by their ownership of mines, the quality of these mines and how management has executed similar projects in the past. Determining whether this data has been incorporated into the stock price is essential when seeking undervalued companies. I think this is where a lot of resource investors get duped.
 
Do you smell the smoke? I suggest investigating the source. I’d say that the herd is done shouting fire, and smart investors are filling up their baskets with goodies. But don’t forget to do your research, check the facts and invest in a contrarian fashion. To obtain superior results, you cannot do what everyone else is doing.
 
TMR: Many investors have heard the adage “buy when there’s blood in the streets.” When should investors reasonably expect to start making money again, given the current market conditions?
 
Kal Kotecha: That’s a billion-Dollar question. A lot of colleagues have predicted prices that have not come true yet. The big upswing in gold in the late 1970s was followed by a collapse and we had to wait 20 years for another upswing. It’s already been three years. I don’t think we have to wait another 5 or 10 years, but there is going to be a time very soon where investors will be rewarded. I think when the upswing happens it’s going to be very parabolic. I think it’s going to take wings on its own. Patience will be rewarded.
 
TMR: What gold price are you using in your analysis?
 
Kal Kotecha: $1200 an ounce. Many factors go into determining the price of commodities, especially gold and silver. Some of these factors include price manipulation, which cannot be foreseen; geopolitical strife; and import quotas, which are happening in India. However, I remain very bullish on precious metals in the long-term.
 
The best buy right now is silver. Silver is a screaming steal at $18 per ounce. I first started buying silver at around $7 per ounce in 2003 and I sold quite a bit in the $48 range a few years ago. I’m starting to accumulate silver quite heavily again. The ratio of gold to silver prices is currently around 68:1. I see that going to 50:1. If there’s another precious metals mania, perhaps 25:1. Silver demand is also very high. A record 6,000 tonnes silver was imported into India last year – roughly 20% of global production.
 
TMR: What’s your advice for investors in the current junior resource market?
 
Kal Kotecha: I think a combination of five or six stocks in a portfolio with a mix of junior energy and mining equities is probably a good start. That’s what I do. It’s difficult for the average investor to follow more than five companies. 
 
TMR: Thank you for your insights, Kal.
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Sep 24

Consciously Shifting to Precious Metals

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Resource-stock fund manager explains his current outlook and strategy…
 

JASON MAYER joined Sprott Asset Management LP in November 2012 with more than 10 years of investment industry experience as lead portfolio manager on a number of funds with a focus on growth-oriented resource equities.
 
Now Mayer tells The Gold Report‘s sister title, The Mining Report, how miners are having a tough time getting funded, and although Canadian oil and gas has performed well over the last few quarters, some companies might be overvalued…
 
The Mining Report: In February, you gave a speech at The Vancouver Club that acknowledged the impact of investor fatigue on the junior mining equity space. Seven months later, are investors starting to get excited again about the space?
 
Jason Mayer: Investors have been reacting in fits and starts, and everyone is still very cautious. I track a number of funds, and I watch how they perform on a day-to-day basis. What I have found interesting is that a number of resource funds in Canada continue to be underweight, particularly in gold equities. I notice they underperform on days that gold stocks have good moves. The generalists out there among the institutional money have little to no presence in various gold equities. For the most part, people have abandoned the space.
 
TMR: What will it take to get them excited again?
 
Jason Mayer: They’ll want to see some upward trajectory. I don’t know if it’s going to be a couple of data points that confirm the arrival of an inflationary environment, or the cessation of this disinflationary environment that we’ve been in since 2009, but people would have to feel comfortable that the gold price isn’t going to resume the decline it experienced in 2013. There are still a number of analysts and commentators out there who are calling for gold in the $800-1000 per ounce range.
 
TMR: Is it the seemingly never-ending rise of the blue chip stocks that makes people less likely to look at the juniors, whether energy or precious metals?
 
Jason Mayer: I don’t know how much it has to do with that, but, certainly, the very strong US Dollar is influencing the gold price and precious metal equities. Everyone has their own opinion on what drives gold. Mine is pretty simple. I look at it as a currency investors can choose from among a number of currencies worldwide, the US Dollar being the primary driver of gold, because gold is typically quoted in US Dollars. The strength of the US Dollar has led people to doubt the need to hold either gold or gold-related equities in their portfolios.
 
TMR: What about the impact on energy stocks?
 
Jason Mayer: We’ve had a pretty good run for a number of the energy companies here in Canada. In fact, our energy fund that is run by Eric Nuttall is up 40+%. That is an overall reflection of how the energy equities have done, both the exploration and production (E&P) companies and the service companies.
 
TMR: The lack of excitement has also impacted financing. You estimated that in 2011, miners raised $1 billion in flow-through funds, and in 2012, that number was down to $700 million. In 2013, it was $350m. So far this year, it is even 15% lower than that. Why has it been so hard to raise money right now?
 
Jason Mayer: When we look at it over a multiyear horizon, we’re at a 10-year low. The companies that have been hit the hardest are the miners. They’re the ones that have seen the appetite for flow-through decrease the most, certainly much more than energy companies, where the appetite for flow-through continues to remain pretty healthy.
 
The companies that have very high-quality projects have been able to access the capital markets and issue equity. In some cases, they have turned to royalties and, in very rare cases, private equity, but for the most part, the juniors are very challenged, especially the exploration companies. They’re hanging on by a thread. Essentially, a lot of their expenditures are really on just keeping the lights on, so they’re no longer advancing projects because the capital is just not available to them.
 
TMR: Will this lack of capital lead to more mergers and acquisitions?
 
Jason Mayer: I thought that would have happened by now. But that is the logical conclusion. There are two major impediments. In many cases, we see management teams that are entrenched – just there to collect a salary and a bonus. The second issue is with the acquirers, especially the majors. These are companies that went on spending sprees in 2009 and 2010. Although there are a number of very solid acquisition opportunities in this environment, some of these companies are gun shy because of their experience over the past couple of years, and support among the shareholder base can also be quite tentative.
 
TMR: You manage the Sprott Flow-Through Limited Partnership and the Sprott Resource Class Fund. The 2014 $11.7m Flow-Through L.P. is 90% in cash, correct?
 
Jason Mayer: The 2014 fund initially raised north of $17m. It’s a process of identifying candidates, engaging them to issue flow-through and then actually consummating the transaction. So, in fact, right now, I’m 100% invested – a bit of an update, which the public documents don’t reflect at the current time. I am approximately 60% invested in energy names, 40% in mining. 
 
TMR: You mentioned that the Sprott Flow-Through L.P. is 60% in energy. The Sprott Resource Class Fund flipped, from 56% energy and 42% minerals to 54% minerals and 46% energy. The energy and non-energy percentages flipped. Was that a conscious shift or a result of changes in equity valuations?
 
Jason Mayer: That was a conscious shift. I started reducing my exposure to Canadian energy names. It was a function of both profit-taking and repositioning. Some of these companies’ valuation multiples had expanded quite dramatically. I took some profits and deployed a significant portion of that into some gold-weighted equities.
 
TMR: What are your projections for oil and gas prices?
 
Jason Mayer: Gas is a tough one to call, but I think it will bounce around $3-4 per thousand cubic feet (Mcf). The upside will be predicated on very cold weather, which will drive additional demand. Without that, it’s going to be mired in a $3-4/Mcf trading environment. The part of the equation that’s a little more transparent is the supply side. The bottom line is North American natural gas production continues to hit record highs. It’s going to continue to hit record highs based on a number of projects that are in the process of being commissioned and developed. That’s going to bring new gas to market. A lot of this new gas that’s coming onstream is highly economic, so even at $3/Mcf gas, the operators of these projects are going to continue to drill.
 
The wild card is the demand side of the equation. There are some longer-term developments that are going to be bullish for demand, such as gas-fired electrical generation, utilizing natural gas as a transportation fuel and liquefied natural gas exports. The problem is that these are very long-dated and uncertain demand initiatives. Because of that uncertainty, I don’t want to invest now based only on whether I think it’s going to be a cold winter or not.
 
TMR: That makes sense.
 
Jason Mayer: For oil prices, I’m expecting $90-110 per barrel. The Brent benchmark is what we use. I think the demand backdrop is pretty positive. China seems to be back on track. There was a lot of concern over the past few months on where its economy was going. It looks as if the Chinese central planning authorities are committed to a 7.5% growth target, and its most recent gross domestic product number was just that.
 
In the US, the numbers have been just spectacular. The economy appears to be picking up speed and momentum, whether you’re looking at manufacturing activity, employment figures or job openings. There really don’t seem to be many negative data points right now. The one area of concern is the European Union. It looked as if it was coming out of its recession, and then it had a bit of a hiccup. The whole Russia/Ukraine situation could have an impact. But generally, demand is pretty solid.
 
On the supply side, it just costs a lot of money to produce oil. Some 96% of the supply growth outside of Opec in 2013 came from the US If you’re looking at the US full-cycle costs, they’re about $60 per barrel. You really need $70-80 a barrel as an absolute floor to ensure that the US will continue to drill.
 
TMR: Do you see energy services as a less volatile way to leverage the energy space?
 
Jason Mayer: The short answer is no. It’s a very volatile group. There are a lot of different specialties within the energy services, so it’s really dependent on which particular area you’re talking about. But if you want to get leverage to the energy space through services, then you’re probably buying something that is quite leveraged to the energy space and will do very well if the whole space does well, but it’s a double-edged sword. That leverage can also work against you if things don’t work out according to plan.
 
Earlier this year, I pared back some of my services holdings; I felt that these companies really got ahead of themselves. Personally, if I want that torque and leverage to energy, I’ll just play the E&P companies.
 
TMR: You mentioned that you are consciously shifting to the materials companies, the precious metals. What number are you using for gold and silver prices in your estimates? What companies are you picking up?
 
Jason Mayer: I’m using around $1300 per ounce. For the most part, my focus is on companies that are all-in cash flow positive. To try to capture the full picture, I like to look at the margin after adjusting not only for cash costs but also for royalties, taxes, general and administrative expenses and sustaining capital. If the gold price is under pressure, I try to pick companies that have the best chance of surviving if things get ugly.
 
TMR: Do you have any words of wisdom for investors who are feeling stock fatigue right now from the resource space?
 
Jason Mayer: I think the biggest thing you need to have is conviction and fortitude when a lot of these names are volatile, and try to keep your wits about you. Try not to trade based on emotion; trade based on your logic and thought processes. If your logic has not changed, stick to the tune.
 
TMR: Thank you for talking with us today.
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Sep 23

Gerald Celente Talks About the Biggest Bubble in Modern History

Gold Price Comments Off on Gerald Celente Talks About the Biggest Bubble in Modern History

Gerald Celente, publisher of the Trends Journal, spoke to Palisade Radio on trends that will move gold higher in the coming decade, and about the Ukraine.

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Sep 16

Russian Stocks: Betting on the Now

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Moral rules meet simple logic in the search for cheap assets…
 

OCTOBER is coming. Excess liquidity is disappearing. And with the S&P 500 on a trailing P/E of 19.7, the index is fast approaching “sell territory”, writes Bill Bonner in his Diary of a Rogue Economist
 
Watch out. 
 
Having finished with investment theory, now we turn to practical application. 
 
There are three parts to the investment world. The first part is Aristotelian, Cartesian, Pythagorean. It is a world of logic and calculations. He who calculates best wins. 
 
The second part is Socratic and Emersonian. The investment world, like the rest of the world, follows moral rules. When you do something “wrong” you will pay the consequences. 
 
For example, when you forget to pay a parking fine…you will probably regret it. Leave a rake lying in the yard, turned up the wrong way, and you will almost surely step on it. Buy an expensive “story stock”, recommended to you by a broker you’ve never met, calling from Boca Raton, and you will most likely lose money. 
 
That is true in a larger sense, too. An economy that goes too deeply into debt will have to bear the consequences. No amount of QE or negative real interest rates will make those consequences disappear. They can only distort and displace them. 
 
This is not to say that moral rules will play out the way you expect in every instance. It is wrong to kill. But had you snuffed a certain housepainter in Vienna at the turn of the last century, the world might not necessarily be a worse place. 
 
Likewise, not every foolish bet goes bad. Still, you’re probably better off believing it will. 
 
The third part of the investment world is completely unpredictable and unfathomable. Mr.Market gets up to mischief from time to time; he drives moralists mad and logicians to drink. 
 
The numbers we presented last week show that the average investor does not beat the indexes…not even close. 
 
According to data from Dalbar, he consistently lags just about every asset class there is. This leads the Efficient Market Hypothesis crowd to say: Just buy an index fund. You can’t beat the market. 
 
But our Simplified Trading System (STS) tells us there’s a good time to buy and a bad time. 
 
“Buy low and sell high,” is the basic rule. US stocks are now expensive. The trailing P/E for the S&P 500 is 19.7. The 10-year cyclically adjusted P/E ratio (Shiller P/E of CAPE) for the index is even higher – at 26.3. 
 
What do you do when when US stock valuations are so high? 
 
Well, you need to find markets that aren’t so pricey. Such as the Russian stock market! 
 
There, the trailing P/E is under 6.
 
You’re thinking: “Hmm…Russian stocks are treacherous. Everybody says so. And with the war in Ukraine and the sanctions regime, they could go much lower.” 
 
One of our own clever readers, Bradley P., warns:
“The downside on Russian stocks is still 100% from here. Mathematically that is the maximum loss one can have buying Russian stocks. 
 
“Once in the last hundred years that happened; when the Bolsheviks closed the stock market in 1917 […] 
 
“Since US stock markets have never lost 100%, while Russian ones have, by a historical perspective US stocks, even at 20 times earnings, are likely a better investment than Russian stocks (never mind whether they use an accounting system you can trust). 
 
“Just wait until Russia closes the market to foreign investors, issues capital controls and the ADRs and ETFs go to zero.”
Bradley may be right. But we don’t presume to know – neither what is really going on now…nor what it will mean for the future. Neither in Russia nor in the US. 
 
All we know is that our calculations (as primitive as they are) tell us you get more value per Dollar in Russia. 
 
And our “moral” rule tells us that you don’t make money speculating on the future. You make money by buying wisely in the present. 
 
Our guess is that Mr.Market aims to make fools of as many investors as possible. And right now, there are far more investors who are short or out of Russian equities than there are those who are long.
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Sep 15

Why Commodity Prices are Sinking

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Natural resources from oil to food are falling fast in price. Why…?
 

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

Gold Prices Take Slight Climb Over Tension in Ukraine

Gold Price Comments Off on Gold Prices Take Slight Climb Over Tension in Ukraine

Gold prices slightly moved up on Wednesday morning due to lingering concerns about the conflict in Ukraine.

Continue reading…

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Sep 03

Gold Losing to Stocks, Rising vs. Commodities

Gold Price Comments Off on Gold Losing to Stocks, Rising vs. Commodities
Gold is losing badly to the S&P stock index. Its rise vs. commodities might signal trouble…
 

I WAS listening to Martin Armstrong talk about his ‘economic confidence’ model and realized that the way he views gold is similar to the way I do, writes Gary Tanashian in his Notes from the Rabbit Hole.
 
That’s very dis-similar to the way inflationists and ‘death of the Dollar’ promoters do.
 
I don’t love the way Armstrong writes, and I usually avoid these weird interview sites, but having checked it out anyway, I found him enjoyable to listen to. It also prompted another big picture look at gold vs. the S&P 500 stockmarket index.
 
As with the shorter-term views, the picture is not pretty…
 
 
Well, it is pretty if you have patience and no need to promote gold as a casino play. Gold will be ready when gold is ready and that will not be until confidence in policy making and by extension the stock market, starts to unwind.
 
Gold vs. SPX has meandered out of a long Falling Wedge (blue dotted) with 2008′s Fear Gap still lower. On the big picture the risk vs. reward is with gold over the stock market. But it is a funny thing about big pictures; they move real sloooow. A fill of that gap may not feel so good to anyone vested in an immediate conclusion to gold’s bear market vs. SPX.
 
Gold bugs ruled the financial asset world for 10 years from 2001 to 2011. But gold is not an asset so much as it is a barometer to the climate in the asset and currency worlds. Its function is to provide liquidity when confidence erodes in the traditional sources of liquidity, which in our system, is centrally planned interest rate policy. It is not supposed to do well when policy is working as planned.
 
This chart is the Gold-Commodities ratio, which has broken upward over the last 3 months, in line with the nominal S&P 500 (green line).
 
 
Gold-CCI says that short-term trouble could be coming for the stock market, but it is not clear whether this would be a terminal event or a healthy correction of excesses paving the way for higher stock prices in 2015.
 
General commodities (oil, gas, grains, base metals, etc.) are assets and building blocks in correlation with society in general and its growth prospects in particular. Gold is the counter weight or the thing that the progress of positively correlated things is measured against.
 
Gold-CCI is turning up and indicating caution. Yet US and some global stock markets remain bullish. I think the weeks post-Labor Day are going to bring a knock down of some kind. Gold-CCI brought US stock market destruction in 2008 (US financial meltdown) but only a healthy correction in 2012 (Euro meltdown).
 
For the US stock markets to invalidate the upside potentials noted in this post, market disruptions would probably have to originate in the US. The US economy is fine, credit markets are on mixed signals and stocks are obviously fine in the face of QE tapering, but with ZIRP’s end point still way out on some hazy horizon.
 
If disorder were to center on Europe again, as it did in 2011/2012, the ‘safe haven’ US would probably only take a healthy variety correction, as it did in 2011. If the disruptive force is Russia and Ukraine or some combo platter of geopolitical events, bears should book gains nimbly because stocks would likely be headed directly for new highs when the hype wears off.
 
Once again a post starts out one way and just rambles on until it exhausts itself. The thing with today’s complex markets is that there is so much to write about and so many different angles from which to view and write about the markets. So on a day when I am not watching closely, a rambling post tries to make a bunch of points and hopefully makes some sense to you.
 
There is plenty time to sort it all out if you do not lean too strongly one way or the other. Time and perspective are good things in a complex environment because they keep you free from the grips of firmly embedded viewpoints based on outmoded information. Or something like that.
 
One thing for sure, the environment is getting fun (fun for me being an environment in which I feel totally engaged) for me personally because the stock market’s current robo trend aside, it appears that going forward people committed to doing real analytical work – as opposed to assumptions based stuff – will get by just fine as the bearish and bullish turns to come play out.
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Sep 03

Conflict-Led Commodity Squeeze Ahead?

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Tumultuous times in Europe and the Middle East point to tight supply…
 

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