USDCHF continues its downward movement from 0.9838, and the fall extends to as low as 0.9130. Resistance is located at the upper line of the downward price channel on 4-hour chart, as long as the channel resistance holds, the downtrend could be expected to resume, and another fall towards 0.9000 is still possible. On the upside, a clear break above the channel resistance will suggest that consolidation of the downtrend is underway, then further rise 0.9400 – 0.9500 area could be seen.
Remember to check your inbox this afternoon.
That’s when I’ll send you part one of a three part video series where I interview our new technology analyst, Sam Volkering.
In part one of this three-part series, Sam and I discuss some of the key revolutionary (and profitable) trends of the next 20 years.
These trends will change the way we live, work and communicate. And it’s within these trends that you’ll find the most innovative businesses!
I can’t adequately explain how excited we are about this project. It could be the greatest opportunity of my almost 20-year investment career.
Most importantly, it’s something I’m convinced will radically change where you invest and the kind of returns you make in the years to come. In short, despite all the negative news, it’s a great time to be an investor.
Look out for the email this afternoon. Until then, on with today’s Money Morning…
In the middle of last year we compiled a list of five beaten-down Aussie blue-chip stocks.
We said it was ridiculous that these firms – market leaders in their field – were trading at a huge discount to their peak levels.
They were (and still are) sustainable businesses with strong cash flows that should weather the current financial storm.
One of those companies is Qantas Airways Ltd [ASX: QAN].
This is a company we put on the junk pile a couple of years previously. But like one of the other stocks (Harvey Norman Ltd [ASX: HVN]), when the stock price fell so low, we took it out of the junk pile to give it a second chance.
The price gained 60% from that point until the market peaked in May.
But now with the stock market shedding 10% since May and Qantas shares down even further (-25%) we see the same kind of value in Qantas and other stocks as we did 12 months ago…
We know what you’re thinking. Didn’t we say to buy stocks two weeks ago when the S&P/ASX 200 index was at 5,000 points?
Yes, that’s right.
We said it was a great time to average in. We said you shouldn’t buy a full position because there was a chance the market could fall…but that there was also a chance the market could rise.
As it turns out the market has fallen. So now you should put the next part of your ‘averaging in’ strategy to work. That means adding to your position.
Of course, if you think there’s a chance the market could fall further, then you could hold off a while longer. If you do, that’s OK. If the market bounces and you missed the low point, at least you’ve already got some exposure.
Here’s our point – and we’ll keep making it until we’re blue in the face – you can’t afford to sit out this market completely.
Share prices always rise and fall. Sometimes they rise or fall for extended periods of time. What’s important is that you remember why you invest in the first place – to build wealth.
As we’ve said before, you can’t do that by keeping all your money in cash or gold. The best place to invest is in businesses, and especially innovative businesses…
to Sydney from Your Local Train Station
That’s why we mentioned Qantas. Not because Qantas is especially innovative, but because of the innovations happening in the aviation industry.
Two completely different aviation concepts caught our eye yesterday.
The first is the ‘Clip-Air’ project by the EPFL technical university in Lausanne. The simple idea is that cargo or passenger ‘pods’ could clip to a single wing structure, as in the diagram below:
These cargo or passenger ‘pods’ could be multi-use. For instance, let’s say you want to get from Melbourne to Sydney. You board a ‘pod’ train in South Yarra, it collects passengers on the way as it stops at Richmond, the CBD and Flemington. The ‘pod’ train continues to Melbourne Airport, where it goes straight to the runway and slips under the ‘Clip-Air’ wing.
Almost immediately (after receiving clearance by the automated air traffic control) the ‘Clip-Air’ plane takes off and lands at Sydney Airport an hour later.
Once there, the pod detaches from the wing straight on to rail tracks and takes passengers to their final destination.
Sound crazy? Maybe. But is it really any crazier than current modes of getting to and from an airport and flying between cities? This certainly strikes us as much more convenient and almost seamless.
The next concept is just as intriguing…
This one is developed by Airbus Industries:
Admittedly, the ability to see everything around you as you fly feels a little uncomfortable…especially if they take it one step further by having glass floors!
As the BBC technology website explains:
‘Inside the aircraft, Airbus engineers envisage new “zones” to replace the traditional seating, with “morphing” seats that are able to harvest energy from those sitting in them as well as change shape to fit the size of passengers.
‘At the front of the plane, the team suggested seating with integrated sensors that would be able to monitor health. And there could even be a gaming zone, where passengers could play virtual sports.
‘It was also suggested that instead of having small doors into the jet, as is currently the case, the planes of the future would have much wider entrances where people could leave their hand luggage.‘
But rather than us just telling you about it, you can check it out yourself by downloading for free ‘The Future by Airbus’ app from the iTunes Store.
Look, concepts are just that. They are a concept of what could happen in the future. But that isn’t always how things pan out. There’s a big distance between conceptual design and manufacturing reality.
Ideas dreamt up by a designer fiddling around with a software program may not be possible in the workshop. But that’s how innovations happen.
The innovators and entrepreneurs create the ideas, the engineers then create the reality.
But this is all part of the fun of forecasting future trends. You scour the market, study innovators and entrepreneurs, and then figure out which ideas and companies have the best chance of making it to the big time.
Like any investment, it comes with risks. Arguably the risks are the biggest when you’re trying to pick a trend and a company to profit from that trend.
But that’s why the returns can be so immense. The company that provides the market with the right product at the right time can make investors extraordinary returns.
It’s an exciting time to be in this market, and the technology sector in particular. That’s why we’re pouring so many resources into it. You’ll find out more in the first of the special three-part video series later this afternoon.
Cheers,
Kris
Join me on Google+
From the Port Phillip Publishing Library
Special Report: Buy These Four Yen Dive Stocks Now
Daily Reckoning: Are You One of the Market Elites?
Money Morning: The NSA May Know Your Hat Size, but They Can’t Take Your 3D Printer
Pursuit of Happiness: Government Spies: I Warned of This Trend More Than a Year Ago…
Australian Small-Cap Investigator: How to Make Big Money from Small-Cap Stocks
I was at a function on Wednesday night. The keynote speaker was talking about what it means to be a citizen of Australia. And during his speech he made a very interesting point.
He mentioned four names. Dr Victor Chang, Sir Gustav Nossal, Fred Hollows and Professor Elizabeth Blackburn.
Victor Chang was a pioneer of the modern heart transplant. He was one of the most influential people in modern medicine. He was an Australian, born in Shanghai, China.
Sir Gustav Nossal is a research biologist knighted in 1977 for his groundbreaking work in immunology. He too is an Australian, born in Bad Ischal, Austria.
Fred Hollows was a pioneering ophthalmologist who worked tirelessly in restoring sight to the blind. Because of his work, over one million people can see who would have otherwise been blind. Fred was an Australian, born in Dunedin, New Zealand.
Professor Elizabeth Blackburn is a research biologist. She co-discovered telomerase, a vital function of chromosomes. In 2009 she won the Nobel Prize in Physiology or Medicine. Professor Blackburn is an American/Australia born in Hobart, Australia.
The basis of the keynote speaker’s point was every one of those four is Australian and has made a significant contribution to the world of medicine and health. They each advanced their field through research, innovation and breakthrough technology…
But only one of them was actually born in Australia.
This however was almost typical of what it meant to be an Australian. One way of looking at it is that to be an Australian is to be a global citizen.
There are examples of other Australian’s doing great things in various industries. And it’s a credit to this country that no matter what your point of origin, a typical Aussie usually has heritage from other parts of the globe.
And being a global citizen is particularly relevant in today’s age. The world is advancing at an amazing speed and it’s one of the most exciting times to be alive.
Technology and the connectedness of our world mean that borders are slowly fading away. Companies look globally for growth, because they can and because that’s where opportunity is.
However when it comes to investing, Australians tend to be very narrow with where they look for investment opportunity. It’s quite rare to see an Aussie investing in overseas companies.
A fact that you might have heard a thousand times is the Australian market only accounts for about 2% of the world’s stock markets. That obviously means 98% of the world’s markets are still investable.
If you look at Dr. Chang, Sir Gustav Nossal, Fred Hollows and Professor Blackburn, between them all they span the globe from China, to Austria, New Zealand and America. Their families just chose to live in Australia. The impact they’ve had has also been global.
And when it comes to technology, it’s a global game too. As we push on through the 21st century we will only become more connected and the world will only (figuratively) get smaller.
When money is ready to invest into tech companies often the best place to look isn’t on the ASX. To find the best of the best when it comes to investable tech companies, more often than not you need to look abroad. That’s not to say there aren’t opportunities here, but they’re thin on the ground.
Look at some of the trends that are impacting the world today. Personalised Medicine, Regenerative Medicine, the Neurone Revolution, the Sensor Revolution, Energy Independence and the Commercialisation of Space.
None of these are exclusively Australian. There are many companies involved in each of these trends. Each one with a great technology or innovative approach that’s ready to change the world. But it’s New York, Tokyo, Shanghai or London where most of them list their stocks.
The difficulty lies in separating the good tech from the not so good tech. And that’s where the new Revolutionary Tech Investor service comes into play.
See we’ve been working tirelessly on expanding our horizon in the world of Revolutionary Tech breakthroughs. This has opened us up to companies located all over the globe with breakthrough technologies.
The technology advances happening in robotics, biotechnology, consumer technology, space, manufacturing and finance are world changing. And it’s the most exciting time to be an investor as these companies are poised to take off.
Yes there will be some Aussie based opportunities. But like Chang, Nossal, Hollows and Blackburn, we’re all citizens of the world. And that means we should also be investors of the globe when it comes to investing in technology.
Sam Volkering
Technology Analyst
Join me on Google+
From the Archives…
Bernankenstein’s Financial Monster
7-06-2013 – Vern Gowdie
Six Revolutionary Technology Trends for the Next 20 Years
6-06-2013 – Sam Volkering
The Incredible World of Graphene
5-06-2013 – Dr Alex Cowie
After the Correction: Gold Stocks Set for the Biggest Gains
4-06-2013 – Dr Alex Cowie
The Single Best Way to Build Wealth: Invest in Business…
3-06-2013 – Kris Sayce
By www.CentralBankNews.info
Peru’s central bank held its policy rate steady at 4.25 percent, as expected, reflecting “the fact that inflation remains within the target range in a context of economic growth close to potential.”
The Central Bank of Peru (BCRP), which has maintained rates since April 2011, said inflation was projected to converge to the midpoint of the bank’s target over the next months due to better food supply, production that is close to potential and inflationary expectations that are anchored to the target range, repeating its statement from last month.
Peru’s inflation rate rose slightly to 2.47 percent in May from 2.31 percent the previous month. The BCRP targets inflation of 1.0 to 3.0 percent.
Peru’s export sector is still weak, with volume and prices affected by the external market, the bank said. Lower global commodity prices are affecting countries like Peru.
In the first quarter of this year, Peru’s Gross Domestic Product rose by 2.1 percent from the fourth for annual growth of 4.8 percent, down from 5.9 percent in the fourth quarter.
Last month the central bank’s president, Julio Velarde, said he expected growth of 6.1 percent this year, down from an earlier forecast of 6.3 percent. In 2012 Peru’s economy grew by 6.3 percent.
By www.CentralBankNews.info Chile’s central bank held its benchmark overnight lending rate steady at 5.0 percent, as expected, and said future changes to its policy rate would depend on the “implications of domestic and external macroeconomic conditions on the prospects for inflation.”
The Central Bank of Chile, which has held rates steady since a 25 basis point cut in January 2012, said the economy was slowing down but this was mainly affecting investments while private consumption remained dynamic and the labor market was tight.
Headline and underlying inflation were close to 1.0 percent and inflation expectations were around the central bank’s 2-4 percent target, the central bank added.
In May Chile’s consumer prices were unchanged from April for an annual inflation rate of 0.9 percent, down from 1.0 percent, the lowest rate since January 2011 when a new method was introduced, while core inflation was 0.1 percent.
The central bank said global financial conditions had become more restrictive, especially for emerging economies, “in part due to the expectation of an early withdrawal of monetary stimulus in the United States.”
In addition, growth prospects for China were lower and recession continues in the euro zone.
The central bank did not make any specific reference to the Chilean peso, but said “the dollar appreciated in the international markets, particularly regarding the currencies of emerging economies.”
At its previous meeting on May 16, the central bank had made a specific reference to the depreciation of the peso. But in the two previous statement from April and February, the central bank had mentioned the appreciation of the peso.
In the central bank’s background paper to the policy meeting, it noted that the peso had declined by 5.6 percent from the May policy meeting to 504 per U.S. dollar.
Like other emerging markets, Chile’s currency has been hit by the prospect of a wind-down of asset purchases by the Federal Reserve, with the global flow of money moving back toward the U.S.
Chile’s economy has been slowing in recent months and minutes from the central bank’s May meeting in May showed that the policy committee for the first time since June 2012 had considering cutting its lending rate, locally known as TPM.
Chile’s Gross Domestic Product was rose 0.5 percent in the first quarter from the fourth, the slowest quarterly growth rate since the third quarter of 2011, for annual growth of 4.1 percent.
The central bank has forecast that the economy will expand between 4.5 and 5.5 percent this year, down from 5.6 percent in 2012.
The central bank’s own survey showed that analysts expect a rate cut in July with rates falling to 4.5 percent by December.
Source: George S. Mack of The Energy Report (6/13/13) – http://www.theenergyreport.com/pub/na/15368
The synergy of temperament and intellect has fostered much success for the father-son team of Michael Berry, editor of Morning Notes, and Chris Berry, founder of House Mountain Partners LLC. In this Father’s Day interview with The Energy Report, the Berrys reveal what they’ve learned from each other’s investment strategies over the years, and mull energy metals and emerging green technologies that could be “compelling investment opportunities.” They also reveal that, for all the familial camaraderie, there are energy issues about which they strongly disagree.
The Energy Report: Mike and Chris, it’s always a pleasure to talk with you. Thank you for joining us for this Father’s Day edition of The Energy Report. I want to start with that theme. Chris, what’s the single most useful thing your father has taught you about investing?
Chris Berry: That’s a difficult question to answer because so many things come to mind. I’ve been privileged to have learned about investing by following my father’s career as a professor at a top-tier business school and then as a portfolio manager for a mid-market cap value fund. I have been able to see both the “theoretical” and “practical” sides of investment analysis. The opportunity to hone my analytical skills through these two differing viewpoints has been invaluable.
I think the most valuable lesson I have learned thus far is in the approach to evaluating markets and publicly traded companies. There is no substitute for intellectual rigor and intellectual honesty. The ability to recognize and eliminate biases is crucial. Emotion is definitely your enemy in this business. It’s also vital to have a solid vetting process and to stick to it regardless of the volatility in the macro environment.
TER: Mike, today Chris is a standout analyst doing terrific diligence on his coverage, and I know that makes you proud. What has Chris taught you about investing?
Michael Berry: Chris is always on top of the issues. He has helped me develop and refine the 10-point grid we use in our Discovery Investing discipline. Chris gets down to the fine points and assesses each problem in very granular detail. In this respect we complement each other quite well. What I have also learned from Chris is that he has a very sharp memory and can keep several companies—say in the graphite or rare earth space—in close analysis. He is really good at differentiating the “wheat from the chaff,” and this just seemed to come naturally to him.
Chris also is very good at assessing detail, listening carefully and dissecting companies when he is in the field. I am always surprised by the next step he takes in his analytical career. It’s been a lot of fun working together. It is evident that Chris loves what he does and is good with people. I am learning from him!
TER: Chris, you just spoke at the Cambridge House Resource Investment Conference in Vancouver. Your focus seemed to be deflation. You presented a barrage of 10-year bond charts that showed consistent declining yields over the last two decades. What was your point? What will be the effect of this deflationary environment?
CB: A large part of the research I do is focused on the macro economy and where we are cyclically in the market. In the wake of the financial crisis and the central banks’ response to it, there has been a great deal of ink spilled surrounding the debate over the aftereffects of policies such as quantitative easing—specifically the implications for inflation or deflation in the economy.
While I think the U.S. economy is headed for inflation at some point in the future, based on expansion of the Federal Reserve’s balance sheet, I do not see enough evidence to lead me to believe that an inflationary episode is imminent. In fact, when I look at a broad array of data, I think deflation is the more pressing issue. Government bond yields are at historically low levels, inflation is “in check” (I know this can be manipulated), unemployment is at a structurally and historically high level, and various metrics like gross domestic product, industrial production and capacity utilization are all operating at levels below the historical trend. In my Cambridge House presentation, I said that the global economy is “treading water.” There is growth out there, but it is mostly sluggish—and in the case of the Eurozone, contracting.
This paints an ominous picture for many commodities in the near term. Slowing demand in countries like China, which has been the engine of the commodity supercycle, has put the prices of any number of commodities under pressure since mid-2011, when the commodity complex began its downward trend. With substantial slack in aggregate demand, it’s deflation that is the worry, and not inflation.
TER: Chris, you seem to lament the lack of investment in green energy. Is it your contention that we will not turn to alternative sources until there is a price crisis (oil at $250-300/barrel) or a climate crisis?
CB: I wouldn’t say I “lament the lack of investment,” as billions of dollars are being spent in research institutes, university laboratories and in the private sector globally on advancing green or sustainable technologies. I think it is unfortunate that people view a few poor investments in the space as a proxy for the success or failure rate of the entire burgeoning industry. It is undeniable the companies like A123 Systems LLC (manufacturer of lithium-ion batteries), Fisker Automotive Inc. (manufacturer of premium hybrid electric vehicles), and Solyndra LLC (maker of solar products) have proven to be taxpayer-funded disappointments.
However, are we really going to assume that all greentech research efforts are failures based on the results from these three? That is a very naïve and narrow-minded approach.
With population increasing globally, becoming more interconnected, and set to live a more commodity-intensive lifestyle, sustainability and efficiency in our progress as a society will be of paramount importance. I just do not believe that you can have as much intellectual capital and financial capital all working toward next-generation technologies and not have breakthroughs that provide compelling investment opportunities and also leave our children a lasting legacy.
An example of a recent success is Tesla Motors Inc. (TSLA:NASDAQ). This company was actually initially funded by private money. The company has just paid back a U.S. Department of Energy loan—nine years early, at a $20 million ($20M) profit to tax payers. This is not a failure. This is a success. It remains to be seen how Tesla performs going forward, but I view the company as a proxy for the commercial viability of next-generation technologies. I recently test-drove a Model S and I am more convinced than ever that vehicle electrification has a place in society, however small it may currently be.
TER: Mike and Chris, you have both addressed this question outside this forum: What is concealing the investment potential of energy metals? What are the factors obscuring demand for these vital elements—scandium, cobalt, tungsten and lithium? What are the drivers?
CB: I have already mentioned two—deflationary headwinds and the credibility problem with green technology. Obviously the challenging financing environment for junior mining companies is another huge issue. A final issue is the perceived “death” of the commodity supercycle. The good news is that I view each of these issues as temporary, which should give investors the opportunity to look for undervalued companies that can demonstrate financial sustainability and execute their business plans.
The real driver is that the commodity supercycle is not dead. I do think that it is changing, however—becoming somewhat less infrastructure-focused and more consumer-focused. But by no means has the emerging world stopped yearning for a higher quality of life. Furthering that idea, we here in the developed world haven’t given up trying to improve our lives either. As the consumer in the West deleverages his or her personal balance sheet, and countries like China shift development models from one that is export-led to one that is driven by internal demand, there will be renewed focus on many of the energy metals we are following.
MB: These metals, in my view, are very research intensive. They are also, in general, quite small markets, which tends to obscure them. Many companies just don’t want to get involved in small markets. The graphite market, for example, is totally different from the copper market on many dimensions. Yet when graphite became the discovery play of the day, dozens of companies “became” graphite companies. The market in graphite simply cannot sustain the attention.
Many of these energy metals must belong to a “supply chain.” It is not enough anymore to say you have a resource with a certain grade, you must show how the metal impacts the energy system. It is a fact that China controls the supply chains for many of these metals. There is more to energy metals than exploration and development. . .much more.
TER: Chris, what companies fit into this growth story?
CB: I’m focusing on just a few energy metals right now: uranium, scandium and cobalt. I like scandium, as it is one of those metals for which China doesn’t dominate production. Global production, such that it exists, is miniscule and there are a number of future uses—specifically solid oxide fuel cells—that could absolutely take off if a reliable and secure supply of scandium could be found. I have been watching EMC Metals Corp. (EMC:TSX) and Metallica Minerals Ltd. (MLM:ASX)in particular, as they are among the most advanced scandium exploration plays. The lack of scandium availability is a great example of industry being held back by a lack of secure supply. Let’s also not forget the potential military applications.
TER: Mike, you have been making a bullish case for energy based on the phenomenon of urbanization. Can you talk about that?
MB: Yes. I just finished presenting at a biotech symposium in Hong Kong. Even there, the participants speak of the healthcare tsunami we are now in. Urbanization is proceeding everywhere. According to Bloomberg, China must spend $8.1 trillion on urbanization in the next three decades. About 60% of her massive population will urbanize and live in cities not yet built, and they willconsume.
A vast new middle class is emerging. Just take a trip to Hong Kong and you will see it. These new city dwellers must have better nutrition and cheaper energy. The food chain is tied to energy, so energy metals and the advancement of cheaper energy modalities will be key.
With 440 new cities to be built in “Emergica” (a term we coined to represent the cities identified in a McKinsey Global Institute report), the commodity supercycle has barely even begun. But the new energy metals boom, in particular, will be fostered and catalyzed by research and development (R&D) and supply chain development; quite a different world from what we have seen in previous industrializations in history.
But get ready, because the new consumer in Emergica is evolving and will demand a higher quality of life. They will be meat eaters. Energy metals, water, arable land and fertilizers will all be part of that onslaught. This why we believe so fervently in Discovery Investing as a critical platform.
TER: Mike, you have been talking to investors about the impact of urbanization on commodity prices. I take it you believe natural gas and oil are about to turn upward? Kindly explain your thesis and, if possible, tell me when we could expect the upturn?
MB: I am not sure about prices turning upward. But a transformative technology has revolutionized the supply-demand equation for oil and gas, particularly in favor of U.S. domestic production. Canada is likely to be hurt most by this “fracking” revolution.
Domestic natural gas and oil production is the one really bright spot in the U.S. economy today. The Eagle Ford shale in Texas will produce 3 to 5 million barrels of oil per day within a very few years. Domestic supplies will turn upward, no doubt. I may disagree with Chris here, but I think that transformative technology like fracking is the death knell for domestic nuclear power. Gas for combined-cycle gas turbine power plants is cheaper, cleaner and much less risky for the environment. Much will come from this oil and gas domestic revolution.
TER: Mike, Chris tweeted out a June 1 column in Project Syndicate written by New York University economist Nouriel Roubini entitled “After the Gold Rush.” Roubini listed and commented on several factors favoring a bearish scenario for gold. To be fair, he did say that all investors should have a “very modest” exposure to gold as a hedge against extreme tail risks. But the gold rush is over, he said. What is your impression of Roubini’s thesis? Chris, do you and your father agree?
CB: With more evidence pointing toward deflation as opposed to inflation, I can see gold trading sideways until these dynamics change. That said, if you’re a believer in inflation getting out of control, perhaps sooner than many think, this is an ideal time to acquire both gold and silver bullion, as well as select junior mining equities involved in precious metal exploration.
MB: Roubini is wrong. Gold has stood the test of millennia. Since we discarded it in 1971, our economy has loaded up with debt and is now sick. I am not suggesting a gold standard or even a currency backed by gold, simply that gold will always hold its value in deflations (which I believe we are in now) and inflations (which is where we are likely going). I want gold in my portfolio under these circumstances.
TER: I’d like to ask about uranium. Its fate rests solidly on the nuclear power industry, which seems to be out of favor. I’ll ask you both, what is your case for uranium? What companies are interesting?
CB: I see uranium as the one contrarian opportunity among energy metals. The spot price of uranium has been hammered, excess supply has been dumped on the market and nuclear power is experiencing a crisis of confidence in the mainstream media in the wake of Fukushima.
That said, there are a number of reasons to be optimistic about nuclear power going forward and, by extension, demand for uranium. We are all aware of the fundamental reasons for this thesis, including the looming end of the Megatons to Megawatts Program, reactors in Japan coming back online over the next few years and the build-out of nuclear reactors in the emerging world.
In addition, we can’t forget that the nuclear power infrastructure in place today would be extraordinarily expensive to dismantle, and that process could last for years. I have seen estimates of anywhere from $500M to $1 billion to shut down and decommission a nuclear reactor. Who pays for this? Additionally, what will fill in for the base load power that a given nuclear reactor was generating? Wind and solar, with their intermittency challenges? What about the cost to build out a new infrastructure and integrate it into the existing electricity grid? Will governments pay for this? Utilities? Tax payers? The path of least resistance is to relicense existing reactors as a more cost-effective strategy for all involved.
Additionally, though this is debatable, the energy return on investment (EROI) is much more advantageous with nuclear than with most other forms of power generation. EROI essentially tells us what we “get” in energy returned for what we “put in” in investment. If economics come into question, nuclear power is, and will likely remain, a very compelling option despite some of the challenges that the industry faces.
Given this backdrop, we have seen a number of deals completed. Most recently, Energy Fuels Inc. (EFR:TSX) signed a letter of intent to acquire Strathmore Minerals Corp. (STM:TSX; STHJF:OTCQX). I have followed Strathmore Minerals Corp. for some time and always thought that the location of its deposits, plus the relationships it has with Sumitomo Corp. and Korea Electric Power Corp. (KEPCO) would make the company an ideal take-out candidate. Congratulations are in order for the Strathmore management team on its accomplishments.
Another company I am following and own shares in isUranerz Energy Corp. (URZ:TSX; URZ:NYSE.MKT). This company is a near-term uranium producer in Wyoming, and is particularly attractive due the fact that it is essentially derisked. Uranerz is exceptionally well managed and could be generating cash flow within a year. The company is fully permitted, has offtake agreements in place and should be receiving a $20M loan from the Wyoming Industrial Development Revenue Bond Program. The tolling agreement in place with Cameco Corp. (CCO:TSX; CCJ:NYSE) is another positive attribute for Uranerz. Given that the Russians (JSC Atomredmetzoloto or ARMZ) have taken Uranium One Inc. private, Cameco may look to consolidate the Powder River Basin in Wyoming and integrate Uranerz into its operations there.
Finally, European Uranium Resources Ltd. (EUU:TSX.V; TGP:FSE; EUUNF:OTCQX), another company I own shares in, continues to develop the Kuriskova deposit in Slovakia. This is a high-grade resource and its European location is ideal given the number of reactors in Europe and the fact that there is only one operating uranium mine in Europe. AREVA is a shareholder of the company, which is something we want to see—majors with “skin in the game.”
MB: No! I am against uranium-powered reactors. Uranium produces plutonium, which is toxic for thousands of years. It cannot be stored reliably. The Canadians had the correct idea with their CANDU reactor, in which the water is enriched and not the uranium. Uranium-powered reactor technology is old and dangerous. We must move to thorium technology in the next few decades if we plan to stay with nuclear energy as a prime source of power. There are more Fukushimas coming!
TER: Thank you, Mike and Chris.
CB: My pleasure.
MB: Thank you.
From 1982–1990, Michael Berry served as a professor of investments at the Colgate Darden Graduate School of Business Administration at the University of Virginia, during which time he published his book, “Managing Investments: A Case Approach.” He has managed small- and mid-cap value portfolios for Heartland Advisors and Kemper Scudder. His publication, Morning Notes, analyzes emerging geopolitical, technological and economic trends. He travels the world with his son, Chris, looking for discovery opportunities for his readers.
Chris Berry, with a lifelong interest in geopolitics and the financial issues that emerge from these relationships, founded House Mountain Partners in 2010. The firm focuses on the evolving geopolitical relationship between emerging and developed economies, the commodity space and junior mining and resource stocks positioned to benefit from this phenomenon. Chris holds a master’s degree in business administration (finance) with an international focus from Fordham University, and a bachelor’s degree in international studies from the Virginia Military Institute.
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DISCLOSURE:
1) George S. Mack of The Energy Report conducted this interview and provides services to The Energy Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Strathmore Minerals Corp., Uranerz Energy Corp., European Uranium Resources Ltd., Energy Fuels Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Michael Berry: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Chris Berry: I or my family own shares of the following companies mentioned in this interview: Uranerz Energy Corp., European Uranium Resources Ltd. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
5) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
6) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
7) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Streetwise – The Energy Report is Copyright © 2013 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.
Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.
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Source: Alec Gimurtu of The Gold Report (6/12/13) – http://www.theaureport.com/pub/na/15360
The recent drop in gold prices is a confirmation, or a revelation, to investors of the battle between the physical and paper gold markets. In this interview with The Gold Report, Brien Lundin, editor of Gold Newsletter, predicts the timing of a handoff from Asian physical demand to Western speculative demand and assesses the readiness of the junior market to respond to a revival in commodity prices. Plus, in a tip to Father’s Day, he discusses his efforts to groom the next generation of investors.
The Gold Report: In your latest newsletter, you advocate that gold investors pay close attention to the Federal Reserve meeting taking place on June 18. What are you looking for out of that meeting?
Brien Lundin: The main driver for gold right now is quantitative easing (QE). An investor trying to figure out where the gold market is heading in the near to intermediate term needs to focus on QE. Investors should look for clues to the future prospects of the Fed’s QE program—that’s what’s going to drive gold in the short and intermediate term. The question really is: To QE or not to QE? The next Fed meeting will be a prime indicator of that, and the one after that and the one after that.
My general view is that the reports of a resurgent U.S. economy are way ahead of themselves and some data points are indicating that the recovery is not that robust and may even be in danger. The jobs numbers will shed some light on this. If such a scenario develops, then the snap back for gold would be pretty dramatic. A weakening U.S. economy would be bullish for gold because it’s bullish for continued QE, and that’s the real factor for gold going forward.
TGR: Besides the jobs numbers and the Fed meeting minutes, what indicators are you watching to get some insight into whether the economy really is improving?
BL: People need to listen to the Fed. The Fed is trying to be more open and transparent, despite the typical central banker doublespeak. But it is looking at two numbers right now: jobs and inflation. The jobs number is predominant because every indicator that economists currently use to measure inflation is showing no significant inflation. Now, the consumer price index (CPI) is not the CPI of our fathers, and it has been jiggered here and there to underreport price inflation. Regardless, until we start seeing price inflation in the CPI, the Fed will be more conducive to easing. The unemployment numbers, however, are where we’ll see some real action or perhaps some tapering if the unemployment rate starts to improve.
TGR: What’s your take on the price behavior in the precious metals markets? Where do we go from here?
BL: I think the big price action that’s happened in gold over the last six weeks or so is a big revelation. It has revealed the character of the modern gold market, which has developed into a West versus East or paper gold versus real gold market. In the West, there are speculators who invest in the future exchanges primarily. They are more concerned about the short-term direction for gold and the other precious metals. The future exchanges are really nothing more than an opinion poll on the price of gold. It’s not really a place where real metal gets bought and sold but, rather, the futures market is a place to trade derivatives. In a real sense, it is fractional reserve investing.
In mid-April, when we had the big smackdown in gold, over 400 tons sold on the Comex. In a matter of an hour or two the amount of metal sold exceeded, by over 100 tons, the amount of gold in the Comex warehouse. The Comex trading on that day had no relation to the physical markets. Conversely, the price drop resulting from that selloff spurred physical demand throughout the world, but particularly in price-sensitive markets in Asia.
One of the things people looked at throughout all of this was the big drawdown in the exchange-traded funds (ETFs) of physical gold. Since the beginning of the year, the remarkable drawdown in the ETFs amounted to around 370 tonnes of gold. Over that same timeframe, I estimate that more than 600 tonnes of gold have been consumed in China alone. And that doesn’t include the huge demand in India or the rest of Asia. It also doesn’t include the surging physical demand for gold in the Western markets or the renewed central bank demand. If you add it all up, I think that price smash in April did nothing but increase global gold demand.
TGR: How does an investor get data on increased physical consumption worldwide?
BL: It’s tough. I’ve tried to compile these numbers many times before. You get some information from the World Gold Council. Now, you get some information from the Shanghai Gold Exchange, which, although it’s a futures market, represents more of a physical market in China. You look at imports through Hong Kong into China. Indian import data is more difficult. And you have anecdotal reports of demand. The World Gold Council is the only group that actually tries to sum up all of these totals, and it doesn’t offer much in the way of real-time information. So it’s really tough, but there are seasonal trends that investors or retail investors need to keep in mind.
Unfortunately, although we’ve had tremendous physical demand providing an underpinning for the market recently, we’re entering the seasonal slow period of early to mid-summer for physical gold demand. One of my concerns is that as physical demand lessens, we may see some resulting price weakness in gold.
TGR: That was the commodity, but what about the miners? During this pullback, have most miners mirrored the underlying commodity?
BL: Yes, mirrored and magnified. The good thing about the mining equities is that they tend to leverage the moves in gold and silver. The bad news is that they tend to leverage the moves in gold and silver. In this cycle, as the metals have dropped, the equities have absolutely been lambasted. I tell my readers that there is too much uncertainty in the near term.
The longer-term picture remains very bright for the metals because the world’s governments are going to continue to float their economies on an ocean of new liquidity for the foreseeable future. So the fundamental economic backdrop for gold and, ultimately, the equities remains bullish. But in the near term, especially as we get into the seasonal slow period for physical demand, too much risk exists out there. I’m advising people to keep their heads low, be patient and wait for mid to late summer before they make any new purchases.
TGR: It’s a little bit of a risk-off trade for the mining equities. Does that mean you are weighted toward producers rather than explorers?
BL: In a very general sense, the producers will benefit much more quickly from a rebound in the precious metals. With that said, there are specific juniors that are hot on the trail of big, new discoveries and/or are expanding discoveries with the drill bit right now. The juniors have always been more of a news-driven sector. So looking at the broad sector, it will take a while for enthusiasm to filter down through the producers, through the majors and down to the juniors, but specific companies could have significant and company-making news in that meantime.
TGR: You mentioned juniors and then producers. One company that has attributes of both that you have followed for a long time is New Gold Inc. (NGD:TSX; NGD:NYSE.MKT). It was a junior several years ago, and grew into a midtier. It recently acquired Rainy River Resources Ltd. Is this the start of a new trend in consolidation in the sector?
BL: I hope so, but New Gold is kind of a special case. It’s a very well-run, very aggressive company. Our readers in Gold Newsletter have benefitted from that for years, as that company has been one of our recommended producers. It is much more aggressive than the rest of the producer flock, but that’s really not saying a lot because nobody has been very aggressive recently. I hope it’s the beginning of a trend, but New Gold has always been a bit of a special case. It has been able to move quickly to secure companies and projects that have turned out to be very economic. You see the opposite by some of the larger majors having reached, in the past, too far and too aggressively and paid too high a price for projects that did not turn out to be as economic. I’m very bullish on New Gold, and I do hope it’s the beginning of a trend.
TGR: What are your thoughts on silver?
BL: I’m very bullish on silver. Silver offers optionality to gold. Silver equities offer optionality to silver, so you can really get a lot of bang for the buck through some really well-run, well-positioned silver producers.
I like Silver Standard Resources Inc. (SSO:TSX; SSRI:NASDAQ), SilverCrest Mines Inc. (SVL:TSX.V; SVLC:NYSE.MKT), Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE) and Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.MKT). There is a nice selection of companies out there on the smaller end of the scale, companies that have good, solid production growth profiles.
TGR: Do you have a forecast or an expectation of silver prices?
BL: Not to any decimal places, but silver will track gold. And silver will move more quickly than gold in whatever direction gold is headed. I’m bullish on gold, so I have to be bullish on silver.
TGR: Across the industry, pundits are talking about the death of the junior mining sector. Is the death of the junior mining sector exaggerated?
BL: I don’t think the junior sector is dead, although it may be comatose. The thing that will surprise the people who are waiting for further and further levels of capitulation in the junior market is how quickly this market can wake up. I’ve seen worse days. If you look in the late 1990s and even the very early 1990s or late 1980s, you’ll see times when the market was comparatively worse off. In those days, the financing infrastructure was limited relative to where it is today. Since then, capital markets have matured. With the money available from the previous rounds of QE, a lot of money is available to come into the junior market when that market turns around.
TGR: Positives include financial infrastructure, a large investor community, positive fundamentals and money on the sidelines.
BL: Absolutely, but first we need a turnaround in prices to start a rally.
TGR: For juniors, where do you see good risk-reward opportunities now?
BL: I see the best investments in the sector on a case-by-case basis. I don’t do a lot of macro-level analysis because once you start off with the big picture, then drill down to a more focused picture and down to the project level, there are lots of places to make false assumptions. Rather than top down, I like to take things on a story-by-story basis and see if a company, particularly in the juniors, has a shot at finding an economic deposit. That analysis is somewhat independent of the global economic picture. A good deposit or a great deposit can overcome a lot of other problems.
With that said, I’m turning more bullish on uranium lately. After looking at that story, I believe that we’re going to go into a supply deficit toward the end of this year or early next year. That’s a very powerful story that we’ll start seeing develop over the coming months.
TGR: The big player in uranium is Cameco Corp. (CCO:TSX; CCJ:NYSE), which has a large majority of the production globally. Apart from it, most of the other players are explorers. Does that mean that you’re interested in uranium explorers?
BL: To some degree, as I say, the ones that have very good individual stories. The last time we had a really rollicking bull market in uranium and uranium juniors was about five years ago. They called it uranimania back then, and any company that had some version of the word uranium in its name and its property position could have a $20 million ($20M) market cap. The companies that have survived from then are the better-run companies with the better prospects, and a number of them are in production or are about to get into production. So they are very highly exposed to the uranium price.
Uranium Energy Corp. (UEC:NYSE.MKT) is one, as is Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.MKT). On the exploration front are the Alpha Minerals Inc. (AMW:TSX.V) and Fission Uranium Corp. (FCU:TSX.V)stories. And I think that’s going to get much bigger. One of the better stories out there, and a story many are overlooking, is Kivalliq Energy Corp. (KIV:TSX.V).
TGR: You’re not concerned, with the names that you just mentioned, that near-term or short-term new production will come on-line to flood the market?
BL: No, I don’t think that a big flood of new production will swamp the market, at least not enough to overcome the deficit position. The Highly Enriched Uranium agreement with Russia that’s ending this year is going to take 15–20 million pounds off the market and most likely put the global market into a significant deficit position.
TGR: Besides uranium, you like the fundamentals for platinum. Do you want to talk about that?
BL: I cover Prophecy Platinum Corp. (NKL:TSX.V; PNIKF:OTCPK; P94P:FSE). Where else in the world do you have a high-grade, bulk mineable, platinum-palladium project? There isn’t one, especially in a geopolitically reliable region. Wellgreen is an extraordinary project; plus, platinum and palladium have positive fundamentals that are tremendously powerful right now. The key to that project is that the preliminary economic assessment (PEA) that came out was good and was economic.
However, the size of the project assumed in the PEA presented challenges. It was neither small and quick to production nor large enough to bring long-term production forward. It was right in the middle and showed a mine life of 37 years. For Wellgreen to work best, it needs to be either much larger or significantly smaller than what the PEA showed. In this market, I think it needs to rework that plan to show it as a smaller project with lower capital expense and, therefore, a much higher rate of return. With that said, it’s still very large and still has the potential to grow significantly with this season’s drill targets. The deposit has a lot of allure for a major company.
TGR: What would Wellgreen’s path to production look like?
BL: Prophecy itself could develop and finance a smaller project focused on some higher-grade starter pit scenarios, and it has gone a long way in trying to identify those starter pits. It could end up joint venturing with a major to develop a slightly larger scenario or it could get sold off to a major for a much larger scenario.
TGR: You also cover several companies with projects in Mexico. What are the highlights there?
BL: Mexico is a great place geologically and a fairly good place politically. The country has a long history of mining and mining laws are well established. The business climate helps companies work and secure land title. Its more streamlined path to production is a great benefit to the smaller producers. Mexico offers a lot of great opportunities and many discoveries are yet to be found.
TGR: Any specific names?
BL: I like Cayden Resources Inc. (CYD:TSX.V; CDKNF:NASDAQ). For a junior, Cayden offers a lot to like, including a good share structure and money in the bank. The company sold a small portion of its project in the Guerrero Gold Belt to Goldcorp Inc. (G:TSX; GG:NYSE) for approximately $16M. That will fund exploration on its primary projects for the next two years. One highlight is the El Barqueño project, which is showing impressive trench results, including 21 meters at 8.3 grams per ton. Cayden should be able to start drilling that target in the near term.
TGR: You also watch companies in the Yukon. The latest Yukon gold rush, which started in 2009, brought high expectations that haven’t been fulfilled. Can you give us an update? Are there some exploration opportunities that have stood the test of time?
BL: When the Yukon erupted with Underworld Resources Inc.’s Golden Saddle discovery, Gold Newsletter was the only publication to recommend Underworld, and we did it before that discovery. It turned out to be a very profitable experience for our readers. Along with a couple of other projects, Golden Saddle really ignited a gold rush in the Yukon.
Along the way, there were some speed bumps. People didn’t realize how long it takes to develop prospects and get them to drill-ready status. In that environment, the shortened drill season affects project speed—you can only explore one season a year. As a result, development has taken longer, and it is much more difficult than people had imagined. When you combine the slow project progress in the Yukon with the correction in the junior market, the net result is that some companies that have already made discoveries are selling for fractions of what their ultimate worth will be.
One example of this is Kaminak Gold Corp. (KAM:TSX.V) with its Coffee project. At today’s prices, it represents real value. Eventually, I believe it will be taken out at a multiple to today’s price.
I’m interested in and have been recommending Comstock Metals Ltd. (CSL:TSX.V) as well. I’m a fairly large shareholder in the company. Comstock’s project is interesting for many reasons, including that it may be an extension off the same structure as Underworld’s Golden Saddle discovery. It had interesting drill results last year. Comstock is following up with its VG zone this year and, hopefully, will be able to advance some of other targets to drill-ready status before the season is over.
TGR: If investors were looking for, in the best possible sense, the next Yukon or the next underappreciated region that has potential to be a world-class district, where would they look?
BL: Let me share some of the key takeaways of going through a few cycles in the precious metals market. One of the things we saw in the early 1990s was the perception of a revolution of freedom across the world. New regions opened to modern mineral exploration. Two examples were Southeast Asia and Indonesia—and then came the Bre-X scandal. Another example was Venezuela—and then came the leftist Hugo Chavez. The Next Big Thing is a moving target. Success breeds, in some cases, envy and expropriation. I stress to investors that they don’t need to be pioneers—it’s the pioneers who get the arrows in the back. Investors don’t have to take on added geopolitical risk when we have well-positioned companies with proven deposits and proven exploration teams that are selling at huge historic discounts.
TGR: Is there anything else you want to say?
BL: Looking at the general market, the concern I have right now is that we’re beginning to see speculative demand in the West come back into gold. We’re beginning to see some short covering by Western speculators. While that is positive in the short term, we may see a falloff in physical demand as we get into summer. I’m not sure that the strong physical demand that we’re seeing now will be handed off in an orderly fashion to the Western speculators. If so, we could have some further weakness in gold going into midsummer. And that’s why I am targeting around the end of July as a good time for investors to come back into the market and pick up some bargains.
TGR: I noticed that you have expanded the scope of attendees that you are welcoming to the next New Orleans Conference. As Father’s Day approaches, can you talk about this?
BL: A few weeks ago, I was on the phone with Frank Holmes, the CEO of U.S. Global Investors, discussing ideas for the next New Orleans Investment Conference. Frank came up with an idea that hit me like a thunderclap: Let parents bring their kids to the conference for free. I love the idea. This would encourage more attendees to bring along their kids, to show them the benefits of free markets, expose them to the constant threats to their liberty, reveal the hidden dangers of on-going monetary debasement and teach them how to protect their money and freedoms. I’m always searching for ways to expand our unique experience and outlook to younger people who rarely get exposed to the free market ideals that we promote.
We wrapped up the idea as a limited-time special opportunity between Mother’s Day and Father’s Day, but I decided to extend it through the end of June. And, incidentally, it also applies to children who want to bring along their parents.
Interested investors need to call our offices at 800-648-8411 to take advantage of this special opportunity.
TGR: That’s a great way to get the next generation introduced to the investment markets. We look forward to speaking with you again.
BL: Thanks, it was great to speak with you.
With a career spanning three decades in the investment markets, Brien Lundin serves as president and CEO of Jefferson Financial, a highly regarded publisher of market analyses and producer of investment-oriented events. Under the Jefferson Financial umbrella, Lundin publishes and edits Gold Newsletter, a cornerstone of precious metals advisories since 1971. He also hosts the New Orleans Investment Conference, the oldest and most respected investment event of its kind.
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DISCLOSURE:
1) J. Alec Gimurtu conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Silver Standard Resources Inc., SilverCrest Mines Inc., Great Panther Silver Ltd., Cayden Resources Inc., Prophecy Platinum Corp. and Goldcorp Inc. Uranerz Energy Corp. and Fission Uranium Corp. are sponsors of The Energy Report. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Brien Lundin: I or my family own shares of the following companies mentioned in this interview: New Gold Inc., Fission Uranium Corp., Kivalliq Energy Corp., Uranerz Energy Corp., Prophecy Platinum Corp., Cayden Resources Inc., Kaminak Gold Corp. and Comstock Metals Ltd. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Streetwise – The Gold Report is Copyright © 2013 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.
Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.
Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.
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By JW Jones – OptionsTradingSignals.com
Risk assets and financial markets around the world have been supported by central bank action for several years. Performing financial alchemy on a scale larger than has been seen in the history of mankind, central banks have hijacked global financial markets. Mountains of liquidity, artificially low interest rates, and the creation of future asset bubbles has been their calling card for the past few years.
Unfortunately, time is starting to run out and these great Keynesian minds are on the verge of encountering a series of problems. While central banks can create fiat currency out of thin air, they cannot create real wealth. In fact, central banks cannot print jobs, earnings growth, or an increase in wages.
Furthermore, in a paper put out by the New York Federal Reserve in 2012 and covered by zerohedge.com (“Fed Confused Reality Doesn’t Conform to Its Economic Models, Shocked Its Models Predict Explosive Inflation”) the Fed openly admits that forward outcomes cannot be predicted with accuracy by their economic models. Furthermore, one of the models known as the Smets and Wouters Model has predicted significant inflation if interest rates were held near zero for more than 8 quarters.
For inquiring minds, I would forward readers to the zerohedge.com article for a more in depth explanation. Ultimately the Federal Reserve is performing a gigantic experiment in real time while admitting their economic models do not accurately portray outcomes in the future. Nowhere can this be seen more than in recent price action in U.S. Treasury prices.
Since mid-November of 2012, the 30 Year Treasury Bond has seen prices go down by roughly 9% in value. When Treasury prices are falling, interest rates are rising as there is an inverse relationship between bond prices and yields. When longer term Treasury bonds are demonstrating rising interest rates it is a signal that the bond market is expecting higher inflation levels out into the future. The weekly chart of the 30 Year Treasury Bond is shown below.
As can clearly be seen above, prices have been coming down for several months and we have initiated a price pattern with lower highs and lower lows. This is not a bullish pattern by any means and should the 30 Year Treasury bond take out key support around the 135 price level the Federal Reserve will be in an awkward position.
The Fed’s problem lies in the fact that the Federal Reserve is printing nearly $85 billion dollars of fiat currency to purchase U.S. Treasury and agency bonds and rates have still risen. It would only make sense that at some point, the Federal Reserve will have to ratchet up their program to defend Treasury prices.
If the printing presses fire up fast and furiously to help put a floor under Treasury bonds (cap rates), what is going to happen to commodity prices such as oil? As shown below, the oil futures daily chart illustrates a coiled price pattern that ultimately will lead to a strong move in price.
A move in oil prices above the $96 – $98 / barrel level will likely lead to a powerful move higher in oil prices toward the $100 – $112 / barrel range. Obviously a big move is coming and we could see a move lower just as easily. I have no idea where price is going, but what I do know is that oil prices are staged up for a fast, large move in price.
Interestingly enough, gold futures are also in a basing pattern after selling off sharply earlier this year. Similar to oil futures, gold futures prices are coiling up as well and could go either direction as shown below:
As can be seen above, gold futures are trading in a consolidation pattern which could lead to a strong breakout in either direction. While the upside seems more likely, it goes without saying that lower prices are always a possibility. However, the point I would make to readers is that a large move in the near future seems likely in both gold and oil futures.
Gold is simply a hedge for inflation and acts as a senior currency, however if inflation increases gold will protect owners from a reduction in purchasing power. From an economic standpoint, oil and energy prices are far more important than gold prices. If the Federal Reserve’s Smets and Wouters Model is accurate in its expectation of strong inflation pressure in the future, I would anticipate seeing a strong move higher in both oil and gold prices.
However, the real point is that the Federal Reserve will likely find itself in a precarious position in the future. On one hand, they have to print money to backstop Treasury bonds through additional quantitative easing machinations. On the other hand, the additional liquidity may start pouring into commodities if inflationary pressures begin to mount.
Ultimately the Federal Reserve may attempt to hold down interest rates to help the economy but if their activities cause energy prices to spike the U.S. economy will begin to move toward recession quickly. In addition to that scenario, it should leave many readers unsettled that it would appear Treasury rates are rising while the Federal Reserve continues to print vast sums of fiat currency to buy more government debt.
Ultimately, the Federal Reserve does not have a great answer about the future since they publicly admit many of their models do a poor job of predicting future economic conditions based on actions that they are taking. At the end of the day, this is just one gigantic Keynesian experiment worldwide and the outcome will follow historical trends.
It does not take an economic genius to understand that the vast amounts of fiat currency created by the unprecedented recent actions of the Federal Reserve will have to find a home somewhere. This process will likely manifest as dramatically higher prices for a host of necessities in the future. In fact, the recent parabolic rise in stock market prices can be viewed not as higher prices for equities, but simply lower valued U.S. dollars.
Perhaps instead of concocting models with large names which simply do not work, why doesn’t the Federal Reserve open a few history books. Regardless of what central bankers believe or what their models produce, history’s version of the outcome is simply unpleasant. Ultimately the Federal Reserve should focus on the old adage that those who ignore history are doomed to repeat it.
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JW Jones
This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals.com website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.
By www.CentralBankNews.info Here’s today’s Central Bank News’ link list, click through if you missed the previous link list. The list comprises news about central banks that is not covered by Central Bank News. The list is updated during the day with the latest developments so readers don’t miss any important news.
Watch Charles Sizemore chat with CNBC’s Oriel Morrison about the Japanese markets and the potential for a full-blown capital markets meltdown.
