Month: July 2013

By MoneyMorning.com.au

We found yet another reason why the US retirement crisis will be uglier than many retirees are prepared for…

You see, while retirees were napping last year, Congress and President Barack Obama were quietly stealing from their pension plans by enacting a little-known law called MAP-21.

Hidden in the wording of a new transportation bill, the act allows big companies to slash their contributions to pension funds.

The upshot?

The number of companies defaulting on their pension plans could balloon and bankrupt the Pension Benefit Guarantee Corp. (PBGC) insurance program – leaving retirees out in the cold.

‘That smell of sulfur is what MAP-21 gives off,‘ Jeremy Gold, a pension consultant, told The Fiscal Times. ‘It’s got a smell about it of a deal made with devils.‘

That’s bad news for retirees – or those about to retire – who are counting on a lifetime of payments from a pension plan.

Here’s why…

MAP-21: A Wolf in Sheep’s Clothing

In 2012, the government faced a shortfall between current gas taxes and projected highway spending.

So how to raise the money?

Let corporations cut funding on their pension plans and generate taxes from higher wages. The bill – titled Moving Ahead for Progress in the 21st Century or MAP-21 – lets companies change how they calculate how much they need to fund pension plans.

MAP-21 lets employers put less money in their pension plans by allowing them to value their liabilities – what they have to pay in to fund pensions – using higher interest rates instead of current, low rates.

You see, pension plan liabilities are higher when interest rates are low because returns from bonds and other investments are expected to return less. When rates are high, the returns are expected to be higher and the liabilities are reduced.

Allowing companies to contribute less to their plans raises revenue for the federal government.

The government is assuming MAP-21 will raise $9.5 billion over 10 years because it will get more tax revenues from higher wages of current workers.

Defined Benefit Plans Targeted

MAP-21 is squarely targeted at traditional defined benefit (DB) pension plans. These are plans funded by the companies to provide employees with a source of income after retirement.

But the number of workers with DB pensions has been in steep decline for years. Fewer and fewer workers outside of the government sector have them.

Since the 1990s, DB’s have been replaced by 401(k)s, the employee contribution model that is now the main form of retirement plans.

Only about 18% of full-time private industry workers had a DB pension in 2011-down from 35% in 1990, according to the Bureau of Labor Statistics.

‘Companies want to get away from pensions totally,‘ Steve Pavlick, worker benefit specialist at the law firm McDermott Will & Emory told CNBC. ‘Most companies aren’t offering them anymore to new workers.‘

But pensions are still a key source of income for many current retirees, according to the Pension Rights Center. Only 52% of seniors receive income from financial assets. Half of those receive less than $1,260 a year.

And Social Security payments average a meager $15,179 a year, roughly 40% of retirees pre-retirement income.

Insurance Fund in Danger

Under federal law, DB’s are subject to minimum funding rules designed to make sure that plans have enough money to deliver promised benefits.

If a plan faces a funding shortfall, employers must make contributions to increase the plan’s assets and cover the shortfall.

But 94% of pension plans are currently under funded, according to a new study from Wilshire Consulting.

In fact, DB pension plans for S&P 500 Index companies are under funded by a whopping $342.5 billion, according to Russ Walker, a Wilshire vice president.

That means more and more companies are going to be relying on the PBGC, the government’s pension insurance fund, for assistance.

The PBGC is funded by companies with DB pension plans and steps in when plans go bust. Only problem is, the PBGC may run out of money.

The financial crisis and a slow economy have forced many plans into insolvency. As a result, PBGC’s deficit more than doubled from $11.2 billion in 2008 to $26 billion in 2011.

In fact, PBGC officials said that plans that are insolvent or ‘are likely to become insolvent in the next 10 years‘would likely exhaust the insurance fund within the next 10 to 15 years.

Even though MAP-21 provides for premium increases that will raise about $11.2 billion, it won’t be enough to keep PBGC afloat.

If it goes under, the ensuing retirement crisis will reduce many retirees’ benefits to an extremely small fraction of their original value, the PBGC says.

Now, under MAP-21, companies will be allowed to decrease their contributions even as millions of Baby Boomers hit retirement age.

‘This proves that pensions are pretty much dead,‘ Greg McBride, chief economist at Bankrate.com told CNBC. ‘The change is just another charade to mask the underfunding of pensions.‘

MAP-21 is scheduled to phase out in a few years, but companies are already plotting how to extend it.

‘There’s a lobbying effort to make this type of change permanent,‘ Pavlick said.

If that happens, many retirees will likely face an even tougher struggle to make ends meet in the future.

Don Miller
Contributing Editor, Money Morning

This article first appeared in US Money Morning on 3 July, 2013

From the Archives…

Why Your Financial Advisor Won’t Like This Investment Advice…
28-06-2013 –  Kris Sayce

Is This Your Last Chance to Sell Before the Stock Market Sinks?
27-06-2013 – Murray Dawes

Is This the Ultimate Contrarian Opportunity…Or a Death Wish?
26-06-2013 – Dr Alex Cowie

How Central Bank Zombies Control the Stock Market
25-06-2013 – Dr Alex Cowie

Why The ‘Asia-Zone’ Crisis Makes Australian Stocks a Buy…
24-06-2013 – Kris Sayce

USDCHF stays within a upward price channel on 4-hour chart, and remains in uptrend from 0.9130, and the rise extends to as high as 0.9583. Initial support is at the lower line of the price channel on 4-hour chart, and the key support is now at 0.9446, as long as this support holds, the uptrend could be expected to continue, and next target would be at 0.9650 area. On the downside, a breakdown below 0.9446 support will indicate that the uptrend from 0.9130 had completed, then the following downward movement could bring price back to 0.9000 zone.

Provided by ForexCycle.com

By Profit Confidential

Investors beware: the bond market is treading in very rough waters. The sell-off we have seen of U.S. bonds might just lead to more troubles ahead for the bond market. Just take a look at the chart below.

Thirty-year U.S. bonds look to be in a freefall. They have declined a little more than nine percent since the beginning of May—plunging from around $148.50 to below $135.00 now. As I have said before, the sell-off might just pick up speed as the losses of bond investors start to accumulate.

Chart courtesy of www.StockCharts.com

Keep in mind that long-term U.S. bonds are used as a benchmark on how other bonds (such as corporate bonds) will be priced. If the U.S. bonds decline in value, other types of bonds in the bond market follow suit.

Central banks, which normally buy U.S. bonds to protect their reserves, are selling them. Holdings of U.S. bonds held by the Federal Reserve fell by $32.4 billion to $2.93 trillion for the week ended June 26. That was the steepest reduction in their U.S. bonds holdings since August of 2007. And central banks have been reducing their U.S. bonds holdings for three out of the last four weeks. (Source: CNBC, June 28, 2013.)

That’s not all. Individual bond investors are running for the door as well. According to the Investment Company Institute, the long-term bond mutual funds have been witnessing a continuous outflow. For the week ended on June 5, bond mutual funds had an outflow of $10.9 billion; for the week ended on June 12, the outflow was $13.4 billion; and for the week ended on June 19, bond investors pulled out $7.9 billion worth of bond mutual funds. (Source: Investment Company Institute, June 26, 2013.)

While some are calling the recent plunge in the bond market a buying opportunity, some major problems still persist.

Fitch Ratings recently provided a credit rating for the U.S. economy, keeping the rating at AAA—prime investment grade—but remaining pessimistic about the country’s outlook. The credit rating firm reasoned that without cutting the budget deficit, the high national debt level will keep the country vulnerable. The firm said, “The outlook remains negative due to continuing uncertainty over the prospects for additional deficit-reduction measures necessary…over the medium to long term.” (Source: “Fitch affirms U.S. AAA rating but outlook still negative,” Reuters, June 28, 2013.)

Increasing national debt and the government’s expenses are making the country’s debt questionable, and the situation in U.S. bonds will be no different.

On top of all this, the Federal Reserve, which has provided the U.S. government with a line of credit by buying a significant amount of U.S. bonds, is becoming hesitant to buy any more. It has already hinted it will be slowing its U.S. bonds purchases later this year and will end its quantitative easing program by mid-2014.

If that does happen, a major buyer of U.S. bonds will be out of the market, and this departure—along with many other investors selling—will leave the bond market even more vulnerable.

I’ve been warning my readers about the risk of a bond market collapse for some time now. What does that mean for you? If the bond market continues to fall, it means interest rates are going up. Corporations that borrow heavily will see higher costs and lower profits.

One of my colleagues, George Leong, believes stocks will ultimately rise as investors leave the bond market and move into stocks. But from where I sit, I’ve never seen a stock market rise as interest rates rise. If you are invested in stocks, and I assume you are if you are reading Profit Confidential, my suggestion is to review each of your holdings to see how higher interest rates will affect them. I’d lower my exposure to companies sensitive to rate increases.

Michael’s Personal Notes:

The Chinese economy is showing traits that you should be watching. The country is experiencing an economic slowdown unlike any it has ever seen before.

The HSBC Purchasing Managers’ Index (PMI) for China has been contracting for two consecutive months. In June, the indicator, which provides an overview of manufacturing in the Chinese economy, registered at 48.2—down from 49.2 in May. (Any reading below 50 on the PMI suggests a contraction in the manufacturing sector.)

New business from the global economy to China declined, and companies in China have slashed their workforces.

The country’s new export orders in June fell at the fastest rate since March of 2009. (Source: Markit, July 1, 2013.)

In 2013, the Chinese economy is expected to grow at a pace slower than its historical growth rate. For example, Barclays PLC expects the gross domestic product (GDP) in the Chinese economy to grow at 7.4% this year. If this turns out to be the case, then this rate of GDP growth would be the slowest since 1990. (Source: Bloomberg, June 13, 2013.)

But that’s not all. Other banks, like Morgan Stanley (NYSE/MS), have also lowered their expectations of growth in the Chinese economy as well. Morgan Stanley now expects the GDP of China to grow 7.6% in 2013, down from its original forecast of 8.2%.

The Chinese economy was able to show some improvement after the global crisis in 2009. The country’s central bank reacted fast and flooded the financial system with liquidity. But the effects of all those efforts seem to be dissipating.

What many don’t realize is that the Chinese economy can actually be considered an indicator of growth for the global economy.

Not only is China the second-largest economic hub in the global economy, but China also exports a significant amount of its products to the global economy. If the country experiences a GDP decline, it’s because there isn’t demand in the global economy.

An economic slowdown in China can have many consequences throughout the world. One of them is a toll on the growth of smaller nations. Consider this: in the first four months of this year, China consumed 12% of all exports from Thailand. If the economic troubles in China continue, then countries like Thailand—countries that depend on exports to the Chinese economy—will see their own GDPs decline. (Source: The Nation, June 26, 2013.)

A similar principle applies to the U.S. economy as well. China is one of our trading partners. If demand in the Chinese economy declines, our exports will be hurt as well—and this will have an impact on our GDP, as U.S.-based companies that depend on exports to China will suffer due to a persisting economic slowdown. Keeping a close eye on the Chinese economy can keep you ahead of the curve when it comes to investing—even in American companies.

What He Said:

“Recipe for Catastrophe: To me, the accelerated rate at which American consumers are spending, coupled with the drastic decline in the amount of their savings is a recipe for a financial catastrophe.” Michael Lombardi in Profit Confidential, September 7, 2005. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.

Article by profitconfidential.com

By Profit Confidential

The Chinese economy is showing traits that you should be watching. The country is experiencing an economic slowdown unlike any it has ever seen before.

The HSBC Purchasing Managers’ Index (PMI) for China has been contracting for two consecutive months. In June, the indicator, which provides an overview of manufacturing in the Chinese economy, registered at 48.2—down from 49.2 in May. (Any reading below 50 on the PMI suggests a contraction in the manufacturing sector.)

New business from the global economy to China declined, and companies in China have slashed their workforces.

The country’s new export orders in June fell at the fastest rate since March of 2009. (Source: Markit, July 1, 2013.)

In 2013, the Chinese economy is expected to grow at a pace slower than its historical growth rate. For example, Barclays PLC expects the gross domestic product (GDP) in the Chinese economy to grow at 7.4% this year. If this turns out to be the case, then this rate of GDP growth would be the slowest since 1990. (Source: Bloomberg, June 13, 2013.)

But that’s not all. Other banks, like Morgan Stanley (NYSE/MS), have also lowered their expectations of growth in the Chinese economy as well. Morgan Stanley now expects the GDP of China to grow 7.6% in 2013, down from its original forecast of 8.2%.

The Chinese economy was able to show some improvement after the global crisis in 2009. The country’s central bank reacted fast and flooded the financial system with liquidity. But the effects of all those efforts seem to be dissipating.

What many don’t realize is that the Chinese economy can actually be considered an indicator of growth for the global economy.

Not only is China the second-largest economic hub in the global economy, but China also exports a significant amount of its products to the global economy. If the country experiences a GDP decline, it’s because there isn’t demand in the global economy.

An economic slowdown in China can have many consequences throughout the world. One of them is a toll on the growth of smaller nations. Consider this: in the first four months of this year, China consumed 12% of all exports from Thailand. If the economic troubles in China continue, then countries like Thailand—countries that depend on exports to the Chinese economy—will see their own GDPs decline. (Source: The Nation, June 26, 2013.)

A similar principle applies to the U.S. economy as well. China is one of our trading partners. If demand in the Chinese economy declines, our exports will be hurt as well—and this will have an impact on our GDP, as U.S.-based companies that depend on exports to China will suffer due to a persisting economic slowdown. Keeping a close eye on the Chinese economy can keep you ahead of the curve when it comes to investing—even in American companies.

What He Said:

“Recipe for Catastrophe: To me, the accelerated rate at which American consumers are spending, coupled with the drastic decline in the amount of their savings is a recipe for a financial catastrophe.” Michael Lombardi in Profit Confidential, September 7, 2005. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.

Article by profitconfidential.com

By Profit Confidential

There is still a solid resilience to the stock market; and it’s based on global monetary stimulus combined with a sprinkling of economic news that institutional investors like.

The willingness that institutional investors have to be buyers is still quite remarkable. But then again, with bond yields creeping up, there really isn’t anywhere else to go. Investors know there’s no reason to keep money in cash.

The pronounced stock market breakout at the beginning of the year has shown very little willingness to experience a meaningful correction and, historically, that bodes well for the rest of the year.

Institutional investors don’t need a lot of motivation to buy in this market, aside from the certainty that things aren’t coming apart.

There is a Wall Street expectation that the bottom half of the year will be stronger economically, and institutional investors are buying this with the continued expectation of quantitative easing going into 2014.

The doom-and-gloomers certainly have some valid points, but they haven’t proved to be profitable in relation to the stock market or gold recently.

The Dow Jones Transportation Average looks to be experiencing a mini head-and-shoulders technical trading pattern, balancing itself out after a run of more than 6,500. There still remains a potential for rising share prices if earnings can be maintained or bettered.

It’s far too early into second-quarter earnings season to draw conclusions. It’s been a mixed bag of overperformance and underperformance.

This stock market continues to be a big hold from my perspective. There’s no particular reason to buy or sell. There continues to be difficulty in precious metal stocks as miners are experiencing much higher costs. I think the gold trade is over for quite a while, as institutional investors continue to avoid the sector.

Oil and natural gas are trading range-bound, but many big oil stocks are holding up well and yields are robust.

I favor dividend-paying blue chips, but I’m not a big advocate of buying this market given the current information.

The shine has come off the utility sector, but there are some worthy buys for new money.

Because of all the monetary manipulation around the world, this is an extremely tough environment for making forecasts. While the case can be made on both the bullish and bearish sides for the stock market, the old rule applies: it typically doesn’t pay to fight the Federal Reserve. Institutional investors have definitely taken this to heart.

The gyrations in the bond and currency markets seem to have settled down and full on corporate earnings will soon be the main catalyst. (See “The Only Way to Protect Your Investments from the Turmoil in China.”)

Wall Street analysts have brought down earnings expectations at many large-cap companies, but this hasn’t affected the resolve of institutional investors.

Sectoral stock market strength is still pronounced in biotechnology and healthcare—pullbacks in what have become the market’s strongest positions have been minimal.

The expectation for a meaningful stock market correction has diminished on the part of institutional investors.

Wall Street is still a direct conduit for Federal Reserve policy. The stock market remains a hold.

Article by profitconfidential.com

London Gold Market Report
from Adrian Ash
BullionVault
Thursday, 4 July 09:15 EST

GOLD PRICES held steady in Dollars on Thursday in London, trading around $1250 per ounce as US markets were closed for Independence Day.

 European stock markets rose sharply however, and the gold price for both UK and Euro investors rose over 1.0%, as the European Central Bank and Bank of England kept their interest rates at record-low levels.

 Commodity prices rose overall, while silver prices were little changed in Dollar terms at $19.58 per ounce.

 Weaker Eurozone bonds meantime recovered from this week’s drop, easing interest rates back slightly from multi-month highs.

 “The physical market for gold remains firmly in buying mode,” says Marc Ground at bullion dealers Standard Bank in London, “providing a strong element of support in the absence of investor participation.

 “Amid the current negative investor sentiment” towards gold however, “we don’t think that that physical buying alone could push prices significantly and sustainably higher,” says Ground.

 Central-bank gold bullion buying continued in May, new data compiled by the World Gold Council show, but the pace slipped to an 8-month low beneath 30 tonnes.

 Gold coin sales by Australia’s Perth Mint meantime halved last month from May, despite the sharp drop in prices, matching only 42% of sales in April – the previous crash in world gold prices.

 US Mint gold coins sales last month fell to 27% of April’s level, Bloomberg notes.

 “With disinflation, even deflationary tendencies, we don’t need that insurance any more,” said Dominic Schnider, head of UBS bank’s commodities research in Singapore told the newswire overnight.

 “People are thinking the era of QE in the US is over, and so [they’re] going to get out.”

 Gold bullion outflows from the SPDR Gold Trust – the world’s largest exchange-traded gold fund, and the world’s biggest ETF bar none at 2011’s value peak – totaled 381 tonnes in the second quarter alone.

 That’s equal, notes CIMB Research in Kuala Lumpa, to 122% of 2012’s entire gold bar and coin demand from India, the world’s largest gold consumer market.

 “There is no demand at all and there are no supplies,” said one Mumbai wholesale gold dealer to Reuters this morning, commenting on the typically quiet summer season as well as the government’s recent curbs on new gold imports.

 The Rupee fell again to a new record-low against the US Dollar yesterday, prompting investors to send bond prices lower – and interest rates up – on fears of inflation according to newswire reports.

 Latest data on Wednesday also showed inflation in Turkey – the world’s fourth-largest gold consumer market – rising to 8.3% in June, a 9-month high.

With demonstrations continuing against what some call the “creeping Islamisation” of Turkish law under AKP prime minister Recep Tayyip Erdogan, Turkey’s government bond yields rose this week to 7.8% on two-year debt, the Wall Street Journal notes, up from 4.6% less than two months ago.

 The Turkish Lira has meantime lost 10% against the US Dollar since the start of this year, capping the drop in gold bullion prices for Turkish investors.

 Earlier this week Turkey’s central bank – now holding the official sector’s 13th largest gold reserves, up from 26th place in 2011 thanks to a policy of accepting gold bullion from commercial banks – injected funds into the domestic money market in a bid to reduce interest rates.

 “The jump in Portuguese yields is reminiscent of previous euro-zone crises,” notes HSBC precious metals analyst James Steel, “which proved to be very positive for gold.”

 Portuguese bond prices edged higher on Thursday, nudging yields lower from yesterday’s 7-month high above comparable German Bund rates.

 “With the European Central Bank refusing to ease monetary policy enough,” says Standard Bank FX strategist Steven Barrow, “and with the OMT [bond-buying program] not the bazooka that it’s made out to be, the scope for the Euro to slide and bond spreads to widen is significant.”

Following the ECB’s announcement, the Euro currency fell hard during ECB president Draghi’s monthly press conference.

The policy team “discussed extensively” the idea of cutting interest rates, he said, from their current 0.5%.

The British Pound also dropped hard, down nearly 2¢ to a 5-week low, after the first policy meeting under new Bank of England boss Mark Carney ended with a warning to investors that the recent rise in UK gilt yields “was not warranted by developments in the domestic economy.”

Adrian Ash

BullionVault

Gold price chart, no delay | Buy gold online

Adrian Ash is head of research at BullionVault, the secure, low-cost gold and silver market for private investors online, where you can buy gold and silver in Zurich, Switzerland for just 0.5% commission.

(c) BullionVault 2013

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

By www.CentralBankNews.info     The European Central Bank (ECB) said it will maintain an easy monetary policy stance for “as long as necessary” to boost economic growth and that it may even cut rates further.
    The ECB, which earlier today held its benchmark refinancing rate steady at 0.5 percent, said the risks surrounding its economic outlook remain on the downside and the recent rise in global bond yields “may have the potential to negatively affect economic conditions.”
    Low interest rates will help “provide support to a recovery in economic activity later in the year and in 2014,” ECB President Mario Draghi told a news conference, adding:
    “The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time,” signaling that the central bank may cut rates if growth fails to improve.

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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.

By www.CentralBankNews.info     The European Central Bank (ECB) held its benchmark refinancing rate steady at 0.50 percent, as expected, along with its interest rate on the marginal lending facility at 1.0 percent and its deposit rate at 0.0 percent.
    As in the past, the ECB said it would comment on the decision by its Governing Council at a press conference later today.
    At its previous meeting in June, the ECB revised downwards its 203 forecasts for growth and inflation and said that it expects the 17-nation euro area to recover during the year, though at a subdued pace.
    The euro zone’s Gross Domestic Product contracted by 0.2 percent in the first quarter from the previous quarter – the sixth quarterly contraction in a row. On an annual basis, the GDP shrank by 1.1 percent, up from a 1.0 percent drop in the fourth quarter.
    Inflation in the euro ara rose to 1.6 percent in June, the third monthly rise since falling to a low of 1.2 percent in April.
    Last week, ECB President Mario Draghi said the economic outlook for the euro zone still warranted an accommodative policy stance and an exit from that was “still distant.” In May the ECB cut its refi rate by 25 basis points.

    www.CentralBankNews.info

Source: Alec Gimurtu of The Metals Report (7/2/13)

http://www.theaureport.com/pub/na/15415

“Obvious” or “huh/what?”—these are the two types of merger and acquisition deals, according to Hallgarten & Co. Principal Analyst Chris Ecclestone. In this wide-ranging interview with The Metals Report, Ecclestone discusses the anatomy of a mining deal, a few strategic metals stories flying under the radar and Soros Fund’s latest maneuver in the metals market. Along the way, he skewers management teams that cut costs everywhere except the corner office while spending billions on mega-mines with no future.

The Metals Report: In the 2013 Review of global trends in the mining industry, PwC describes the “crisis of confidence” in the mining sector. Does that analysis apply to the specialty metal miners? Are there opportunities in this small sector that might be missed?

Chris Ecclestone: Every metal and mineral has a different story. At this moment, some precious metals—like gold and silver—are in a crisis, but platinum and palladium are not. A big-brush approach to these markets can lead to errors. For example, if iron is weak, to conclude that coal is weak would be wrong. That might be true for metallurgical coal, but not for coal used for energy generation. Mid-month, the lead price got above $1 per pound ($1/lb), which was a significant recovery from its lows. The zinc price has been creeping up again. The copper price is not bad at levels about $3/lb. But the iron ore price totally plunged. So there isn’t just one thing going on here.

In the specialty metals, it’s all about the market conditions for each particular metal. You can have a situation where a primary metal is out of favor, but the alloying specialty metal is not if the specialty metal is in temporary short supply or under political export pressure. Another example of each metal having its own story is the major base metals—lead, zinc, nickel—they were already kicked in the teeth a long time ago. Zinc is nowhere near its 2008 highs, neither is lead, and nickel peaked years before that. It’s invalid to lump them all together; they need to be analyzed separately.

Reviewing the rare earth element (REE) metals situation is instructive. What looked to be a situation of mixed shortage and surplus among this large group of metals was turned into a big drama. Enormous expectations developed, as did “certainties” of shortages for some REEs, and that sent some of the prices through the roof. The trouble with REEs is you can’t divide the pack. You have to take the whole suite—the good, the bad and the ugly. That’s what sabotaged the story for the REEs. Lanthanum and cerium, which were the two biggest components of any REE mix, were in oversupply. So again—each metal has a story.

TMR: What is the most compelling specialty metals story right now?

CE: Antimony, though it’s technically a metalloid. The antimony market has seen little investment for years because of waning China dominance. Now, new applications for antimony are shaking out the old producers and changing the market dynamic. Most Western mines closed down decades ago, but recently, a few Western mines have reopened, although not enough to make up for reduced Chinese exports. As a result, I expect antimony to be strong. A similar situation exists with other metals like gallium, germanium, selenium and some REEs.

TMR: What is the new application driving demand?

CE: Antimony’s biggest rising usage is as a flame retardant in plastics used by the auto industry. After years of having the price of antimony at $2,000 ($2K), $3K and $4K per ton, now it’s at $10K/ton and itwas as high as $15K/ton. That’s a good example of a new technology but not a sexy technology, like the REEs used in cell phones. By comparison, antimony is boring but absolutely vital.

TMR: How can an investor get exposure to antimony?

CE: There are a couple of options. One is Toronto-listed Mandalay Resources Corp. (MND:TSX). It’s a gold-antimony mine in Australia. Another option is the South African company Village Main Reef Ltd. (VIL:JSE), which has the Consolidated Murchison (Cons Murch) gold-antimony mine in South Africa. Gold deposits often are associated with antimony, so it has a double-whammy positive effect because both elements have high value. Given the choice between a gold deposit and a gold-antimony deposit, I would take the latter.

TMR: Lately, you’ve written a lot about mergers and acquisitions (M&A). You categorize M&A deals as either “obvious” or “huh/what?” You dubbed the potential deal between HudBay Minerals Inc. (HBM:TSX; HBM:NYSE) and Thompson Creek Metals Co. Inc. (TCM:TSX; TC:NYSE) “obvious”. How did you come to that conclusion?

CE: That’s a good example of a deal that makes sense to everybody except current management. The companies’ managements say “no, no, no” because it theoretically means someone is going to lose their seat at the table. They don’t want to fall into the funeral procession of some of their colleagues they used to hang out with at PDAC (Prospectors and Developers Association of Canada) conference with their ancient whiskeys and big cigars. There are other deals that could make sense— Lundin Mining Corp. (LUN:TSX) and HudBay, which was a deal proposed back in 2008 and didn’t happen. Or Mercator Minerals Ltd. (ML:TSX) and First Quantum Minerals Ltd. (FM:TSX; FQM:LSE). However, First Quantum is currently digesting the acquisition of Inmet Mining Corp. (IMN:TSX).

Instead of buying a company, Capstone Mining Corp. (CS:TSX) bought a mine by purchasing Pinto Valley from BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK). The market thought the deal was expensive, but to Capstone (and to us), it made a lot of sense. The purchase turned Capstone in a multi-mine copper company. There are other examples of sensible and obvious M&A examples in the gold sector. More interesting to me is when mid-sized diversified miners join together and create companies that have the critical mass to become majors.

Costs are the talk of the industry right now—energy, labor, etc. Yet costs at head offices are much less discussed. If you combine two head offices, it’s like 1+1=1 because you only have one management team surviving. You don’t need to have two investor relations people. You don’t need all the flimflam. One head office gets the chop, and that saves money. In some cases, you cannot save more money at the mine, but you can save money at the head office. There are an awful lot of overpriced, overpaid midtier mining people. When you put two companies together, you can make economies of scale.

Good deals also diversify companies across metals. A company can be all zinc and if zinc goes bad, you’re really done for. Merging a copper mid-tier with a zinc or nickel producer makes sense for a lot of reasons. You get geographic and product diversification. Geographic concentration brings risks. A good example of that is Centamin Plc (CEE:TSX; CNT:ASX, CEY:LSE), which operates in Egypt and saw its market cap wilt from $3.5 billion ($3.5B) down to $600 million ($600M). It is easy to find examples of companies that are down 80%, but not many $3.5B companies are down 80%. Another example of a company that has had issues due to geographic concentration is Centerra Gold Inc. (CG:TSX; CADGF:OTCPK). Centerra has had problems with its main mine, Kumtor, which is in the Kyrgyz Republic. If you run into problems and you only have one mine, you have a big problem. There is no other story to tell investors. The pattern is a familiar one and has happened in all sorts of different places.

TMR: Of the potential mergers you mention, most have geographic diversity as well as a mix of nonferrous base metals. Is that a theme for you going forward?

CE: If there is an economic recovery, you have to bet on base metals. If risk goes down, the appetite for gold goes down. With recovery, the chance of Quantitative Easing (QE) being extended goes down. The inflation fears abate. It’s not looking good for gold, though it may have a floor.

TMR: Is the current financing climate putting the brakes on bad or high-risk mergers?

CE: It’s the bad past examples more than the financial crisis that has curbed high-risk mergers. If we hadn’t had these bad examples, companies would be out there doing the same dumb deals. Many potential acquiring companies have cash. Some of the worst companies have piles of cash. They might have had big write-offs of what they bought in the past and since then, they’ve generated a lot more new spending money. Many mining executives seem to think a $7B property is a great bargain. But why not buy three diversified, million ounce properties for $50M each, rather than buy one 3 million ounce (3 Moz) mega-mine property for $2B? Same amount of ounces, big difference in price. The trouble is many majors would rather pay $1B to buy a 3 Moz mine that’s in one location. This gigantism has now come back to haunt them. The Seabridge Gold Inc. (SEA:TSX; SA:NYSE.A) KSM project, Novagold’s Galore Creek and Barrick Gold’s (ABX:TSX; ABX:NYSE) Pascua Lama project will all be in the history books. No one is going to do a $10B, 20-year project even in the mid-term future in the gold mining sector.

TMR: Do you have any examples of recent good deals?

CE: New Gold Inc. (NGD:TSX; NGD:NYSE.MKT) recently made a really great deal, but the market slapped the stock down because the market says any deal is a bad deal. Capstone got slapped down when it did Pinto Valley. I think that after a few weeks, they recover. But a bad deal is obvious. Everyone just looks at it and says, “huh/what?” Those mining companies are the ones whose CEOs are gone a few months later if they haven’t already bit the dust. The surviving group has been getting smaller and smaller.

TMR: In your most recent monthly letter, you describe rotations. Most investors rotate from hot sectors into perceived growth opportunities looking for the next big thing. You’re proposing investors outside the mining sector are going to look at this beaten up sector as an opportunity. Are new investors rotating into the mining sector soon?

CE: I don’t think the rotation is coming; I think it is here. People look at the U.S. equity market and feel skittish. Between inflation and index changes, the market hasn’t gone anywhere since 2008. But, at the same time, people like to be moving. Brokers don’t make money by investors hanging on to stocks. They make money out of persuading clients to rotate. It becomes a bit of a self-fulfilling prophecy. There is something for each member of the financial community; the brokers, the strategists and the hedge funds guys. For example, the hedge fund guys get itchy fingers if they’re sitting at the desk and haven’t done a trade for half an hour.

But they don’t want to be buying just more of the same old Apple or index fund. They want to be buying something novel. They want to be seen to be doing something. That’s why there will be a rotation. The rotation should mean that the largest miners will see stronger share prices. They’ll benefit because they’re in indexes. Ask your average hedge fund manager who’s never done mining, “name me a mining company”, and he’ll say, “Barrick” or “BHP.” Ask your average hedge fund manager about Agnico-Eagle, and the response will be “What? Is that a brand of Swiss watch?” He won’t know what that stock is unless he’s been there, done that in the past.

It is interesting that Soros Fund’s reduced heavily their expsoure to physical gold ETFs. It’s quite clear that the physical gold exchange-traded funds (ETFs) are suffering. Soros bought options on the Gold Miners ETF (GDX). Buying options on GDX is an interesting trade because the ETF operator is not actually buying the underlying stocks. Someone else is taking the risk, whoever the option writer is. As we know, many mining stocks are now illiquid. If George Soros ever goes to exercise his options and they have to deliver him ETF shares, then they have to go to the ETF manager, which is Van Eck. Van Eck would then have to race out into the market and start buying all the stocks that make up the ETF so that it can create the units that it would then deliver. Soros could create a squeeze—and remember, George Soros’ middle name is “Squeeze”—and really blow that whole dead zone of the ETFs out of the water. Whoever wrote those options is crazy because they are on the wrong side of George Soros in a small market. There is a trade there for a smart fund manager.

TMR: Are there any other strategic minerals investors should take a look at?

CE: Fluorspar is nice. It’s not in exceptionally short supply, but there are very few companies exploring for or mining it. Canada Fluorspar Inc. (CFI:TSX.V) is still moving forward, though not as fast as many people would like. The financing is tough. The only way to do most of these projects is with an offtake agreement. Canada Fluorspar has one. An offtake agreement is not the solution to everything, but it is a big step in the right direction.

TMR: Any strategic minerals to watch?

CE: There are lots of other interesting materials like tellurium, selenium, gallium and germanium. Gallium and germanium are both high-tech elements that the Chinese have a total headlock on at the moment and have had for a long time. Very few Western companies are making any effort to get out there and find those minerals.

TMR: They’re generally byproducts of zinc refining?

CE: Some of them are, but you can find primary mines. Many gold deposits contain a little antimony, a bit of bismuth and whatever else. The minor metals weren’t really considered much. With tellurium, for example, there are no primary tellurium mines, but there are gold deposits with tellurium byproduct. I would focus not on pure gold deposits now. I would focus on gold deposits where you get something else in the mix. A polymetallic deposit is a safety net. I’d rather have a silver-zinc mine than a pure silver mine.

TMR: What is the single most important theme for metals investors at this point in the strategic metals space?

CE: The idea is to be cheap. Look for companies that buy assets cheap. It’s as simple as that. I think many of the managements of the big miners wouldn’t know cheap if they fell over it. They’ve been overpaying for deposits and overpaying themselves in the process. Avoid companies where “cheap” isn’t in their vocabulary. Avoid management with a track record of blowing away your capital while they blow away their credibility. It is an unfortunately common pattern in the mining industry.

TMR: It has been interesting and entertaining to speak with you. We look forward to talking to you again.

CE: Thanks.

Christopher Ecclestone is a principal and mining strategist at Hallgarten & Co. in New York. He is also a director of Mediterranean Resources, a gold mining company listed on the Toronto Stock Exchange, with properties in Turkey. Prior to founding Hallgarten & Co. in 2003, he was the head of research at an economic think tank in New Jersey, which he had joined in 2001. Before moving to the U.S., he was the founder and head of research at the esteemed Argentine equity research firm, Buenos Aires Trust Company, from 1991 until 2001. Prior to his arrival in Argentina, he worked in London beginning in 1985 as a corporate finance and equities analyst and as a freelance consultant on the restructuring of the securities industry. He graduated in 1981 from the Royal Melbourne Institute of Technology.

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