Month: December 2013

By MoneyMorning.com.au

It’s no secret that politicians like raiding wealth. That’s probably how politics got started in the first place. A bunch of cavemen banded together on a hunting party figured out they could take other people’s wealth simply by outnumbering them. Beats having to chase woolly mammoths around.

Democracy today is little better. And still uses the party system. The big difference is that those getting raided seem to put up with it more obligingly. Apparently because they get to vote.

Usually wealthy individuals and big companies control accumulated wealth – the kind worth raiding. In Australia, it’s the mining industry that was a target these last few years. And so our politicians levied royalties, taxes, mining taxes and super profit taxes on those who provide resources. Meanwhile farmers, who also extract resources, get subsidised. For example, Australian farmers received flood relief while the mining companies operating in the same areas didn’t. The difference is in who has the wealth for raiding.

Now I don’t have a problem with helping the needy. In fact, I think we have to do it. But there’s a big difference between helping the needy and raiding wealth. Using government to transfer wealth is dangerous because of the power it gives those doing the distributing. First of all, they have the power to take. And second, they have the power to selectively give what was other people’s money. You’re a lot less careful with other people’s money. At least politicians are.

Retirees are where the money is now and where it is going to be in the future. Retirees may represent a growing voting bloc, but my bet is that your wealth is the politicians’ next target. They have to pay for their harebrained schemes somehow. And you’ve got the money.

$1.6 Trillion in Superannuation

The Australian government has created one of the biggest build-ups of politically controlled wealth ever by setting up the Superannuation system. The combined total assets in the system topped $1.6 trillion this year. Just think of the kind of government spending that could finance. We could have Abbott Airports, or Shorten Bridges all over Australia…or maybe in Afghanistan and Iraq.

You might think that the money you’ve been paying into Super all these years is yours. But you can’t get close to it without following the government’s rules. So is it really yours?

Either way, the irresistible pile of money is there, just waiting for the government to take it. But can they? Of course! The government already controls the Super system right down to its day to day operations. It is truly surreal to dig into the complexity and nuances of how Super works, as I’m required to do for ‘professional development’ at the moment. It’s the political equivalent of a peacock’s plume. Ridiculous complexity to convey power and control. It works on voters in the same way as the birds. They get ‘taken advantage of’.

The government is already using their power to skim off some of the cream from the Super system. Daryl Dixon in the Australian gave four examples:

• ‘the severe cut-back in the concessional contributions caps, even for older people with limited superannuation;
• ‘the additional 15 per cent contributions tax surcharge on taxpayers with annual incomes of more than $300,000;
• ‘the now abandoned 15 per cent tax on annual pension fund income above $100,000;
• ‘and the penalty tax levied on excess contributions.‘

In other words, the government is already using its substantial control over the Super system – where all this wealth has accumulated – to get its grubby hands on your cash. And you can’t escape because you can’t get your money out until you retire. The trap has long since snapped shut. In fact, you have to keep paying more money in each year of work, at an increasing rate in coming years as the compulsory contribution rises.

This is also why there’s a crackdown on lump sum payouts in the works at the moment. The government doesn’t want you escaping from Super too fast. My guess is that you’ll soon be forced to keep your assets inside the Super system in retirement so the government can keep control for longer. They’ve already added incentives to do so.

It won’t be difficult for politicians to make more amendments to the Super system so they can skim more cash off the top. For example, the government is sick of people reducing the liquidity of their Super by investing in property. You can easily sell shares and buy government bonds, as I expect the government will force retirees to do soon. But selling property to buy them is unreasonable. So the government wants to avoid letting retirees do so.

Changes like these won’t get much resistance. Unlike the miners, the Superannuation industry is very much in love with government. It created their industry in the first place after all. It set up the enormous regulatory complexity that Super workers make their exorbitant fees out of. And guarantees them business.

What about political opposition? Well, there will be no big company lobbyists to stop them. And whoever is in opposition won’t put up much of a fuss. Both political parties like their spending, after all. And because of an ageing population, life will be difficult enough for young people. It won’t be hard for a politician to argue that the older generation has left the younger with a huge demographic burden to bear. They have.

Click to enlarge

And so the young will need to manage the retirement system’s wealth for the good of the nation. How? Taxes, taxes, taxes. At least, that’s how things will end up. For now, things like banning Super lump sum payments are on the agenda.

Notice how policy makers are controlling your money when they tinker with Super. Because that will be forgotten as they take more and more control.

By the way, if you think my warnings on Super are over the top, just take a look at America’s Social Security system. The enormous amount of assets it collected out of taxes were invested in government bonds to pay for government projects. But that’s absurd because the people collecting Social Security payouts would show up on the government’s expense account anyway. In other words, the taxes paid into Social Security have already been spent by the government, instead of investing them for future payouts. And so now those collecting the payouts will get cash from the government anyway. Just in the form of debt repayments instead of direct transfers of wealth.

Despite the uncertainty of the future, whether it’s the government taking more and more of your super, financial markets crashing, property markets falling or personal troubles like your health deteriorating, Australian retirees don’t seem to be worried about retirement.

Taking Early Retirement

The Australian Bureau of Statistics is reporting that Australians are retiring earlier than anyone expected. The average retirement for men is 59 and 50 for women. That’s incredible. It’s completely surreal. But wait till you hear how they’re doing it, also from the Australian Bureau of Statistic’s new retirement survey:

• 46% of retirees listed ‘government pension or allowance’ as their main source of income
• 55% of retirees took their super assets as a lump sum payment
• Of those who took a lump sum, over 30% used it to pay off or improve their home, or buy a new one
• Over 10% used it to buy or pay off a motor vehicle.

What the government has done by creating Super is create a lottery-like windfall of cash for people as they hit retirement. And as a result, Australians are confusing retirement with a midlife crisis. Now that’s fine if you’re doing it on your own money. But they’re not, because they end up broke and on the pension – precisely what Super was designed to avoid. Yes, that’s a reason to restrict lump sum payments. And that’s how the politicians will sell it to the voters. But it doesn’t change my point that the government is playing with other people’s money, which is what causes the problem in the first place.

Even before retirees tear through their Super, they’re optimising their financial affairs by making reckless investment decisions to get more money from the government. Of course, many financial advisors practically advocate this. I was shocked to see that one of the main goals of retirement planning, according to those educating finance professionals, is to get access to as much government funding as possible. I suppose if you’ve been taxed all your life, the feeling is that you’re entitled to the benefits. Which you are in my opinion. But it’s still a disastrous mindset to set yourself up with a lifestyle that’s reliant on the government budget. Does Joe Hockey look reliable to you? Call me a puritan, but I’m not going to advocate relying on the government to anyone.

The ‘she’ll be right’ and entitled attitude to retirement that Australians are taking could end up being a good thing…for those who don’t join them. By staying prepared and prudent, your lifestyle in retirement could be far better than that of your peers on an absolute and relative scale.

But how do you prepare? Well, a big solution is not to retire too early. It’s the big mistake that’s so easy to make. My suggestion is to phase yourself out of the workforce. Work fewer hours, or a less intense job. Then take on something that still earns you money, but you love doing. And only stop earning an income when you have to. It’s the secret to a long and healthy life anyway, as I’ve covered before. But continuing some form of work has enormous financial power too.

The point is that you should stay sceptical of the benefits of Super. It may seem like a good idea, but could turn out to be a trap. Putting cash into a politically controlled system is dangerous. It’s like playing a board game with that nephew who likes to change the rules halfway through. You always seem to end up losing.

That aside, we’ve seen how powerful the Super system is for accumulating wealth. We don’t yet know if it can handle the kind of outflow of wealth it will see in coming years as retirees begin to draw on their accumulated savings. My bet is that the system will fail to deliver on its enormous promise of a prosperous retirement for all, and the government will use this argument to step in and take control. All that cash is just too juicy for an elected caveman and his hunting party to ignore. That’s why in the meantime, you’ll see small changes like taxes, restrictions on lump sum payouts and increased contributions. They’re incremental changes towards a very specific goal – taking your money.

Nick Hubble
Contributing Editor, Money Morning

Ed Note: The above article is an extract from an update originally published in The Money for Life Letter.

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By MoneyMorning.com.au

By CentralBankNews.info
    Georgia’s central bank held its refinancing rate steady at 3.75 percent and said it was maintaining a relaxed policy stance given that inflation is expected to converge to the bank’s target in the medium term.
     However, the National Bank of Georgia also said it was monitoring economic development and would tighten monetary policy to ensure inflation remains on target.
    The central bank, which has cut rates 150 basis points this year, said price dynamics were developing according to central bank projection and moving closer toward its target by the end of 2014.
    In November Georgia’s inflation rate rose 0.5 percent from the previous month for an annual rate of 0.6 percent, up from 0.2 percent in October. The central bank targets inflation of 6.0 percent end-2014.
    Georgia’s economy expanded by an annual 1.50 percent in the second quarter but the central bank said economic activity had increased slightly in the fourth quarter, with imports in November up by 22 percent from last year and exports up 60 percent.

    www.CentralBankNews.info

Source: Brian Sylvester of The Gold Report (12/18/13)

http://www.theaureport.com/pub/na/junior-mining-stocks-that-will-let-you-sleep-at-night-ralph-aldis

The best time to buy gold is when the market hates it, especially when it comes to junior explorers with market caps under $1 billion, asserts Ralph Aldis, senior mining analyst with U.S. Global Investors. In this interview with The Gold Report, Aldis shares his main modeling themes and companies that fit the bill. He also explains the win-win-win advantages of flow-through stock issuance, a technique allowed by some noteworthy Canadian provinces.

The Gold Report: At the New Orleans investment conference, U.S. Global Investors CEO Frank Holmes reminded investors that gold is not a means to get rich quick, but should act as a diversifier in a portfolio, a form of insurance. Do you have to remind investors of that?

Ralph Aldis: We do. We always stress that no more than 10% of a portfolio should be exposed to precious metals. Given gold’s poor performance in the last two or more years, the trend has been to chase the market and the S&P 500. This is exactly when investors should be using gold plays to diversify and provide a bit of insurance. If they made good money in the market, they could take 5% or 10% off the table and deploy it in gold plays.

Right now, gold is one of the most hated sectors in the market. That’s when investors should buy it—when nobody loves it.

TGR: You and some of your colleagues at U.S. Global Investors pay a lot of attention to the economic data published by the U.S. government. Recent data suggest that the American economy is gathering strength. What’s your view?

RA: I think the economy overall is gaining strength. That’s what the Federal Reserve has wanted: low interest rates and for the long end of the Treasury curve to go down. The 10-year Treasury note was free money on the table even though it did reflect economic risk; it was crazy not to buy it.

The same thing is true of the S&P 500 these days. The Fed wants inflation, and that starts with inflation of asset prices. Again, it’s almost like getting free money.

If we look at Shadow Stats’ indexes—which calculate inflation the way the Fed and the government used to—inflation is running close to 8% or 9%.

I would also point out the friction in the economy regarding wages. Wages will likely be the next step on the road to inflation. Worldwide, corporate balance sheets are flush with cash. Organized labor is gaining traction on the idea of a living wage. Not every industry will see wage growth all at once, but we will see a series of wage increases across the board.

Another interesting factoid: A recent report from the Harvard Joint Commission on Housing showed rents are up significantly because of the number of houses that have been bought by investors. In some cases, more than 50% of peoples’ income is going toward rent. With rents rising and incomes remaining static, wage inflation will become a real driver.

TGR: Over the last five years, gold has outperformed the bond index, but not the S&P 500 Index. Will that pattern hold over the next five years?

RA: No. In the current economic picture, there is a potential for gold to outperform the S&P 500. If we look at a chart of the last 10 years, it’s only in the last 18 months that the S&P 500 started to outperform gold.

TGR: We’ve seen some dramatic volatility in the gold price over the last few weeks. Should investors expect more volatility in the resource sector as the U.S. moves to exit quantitative easing in 2014?

RA: To the contrary, I think the volatility will subside somewhat. We’ve been in a period of uncertainty about when the Fed is going to act. There have been lots of big trades taking place at unusual hours of the night, when a billion dollars worth of gold futures hit the market and knock it down. I think the people who are bearish on gold have been hitting the markets at unusual hours when there’s actually no liquidity out there.

Players on both sides have been trying to knock the price down. When that happens, China or India comes in and buys to keep the price up. There certainly seems to be a floor under gold right now.

Once we’ve had sufficient tapering to get people to start reassessing the future, there will be more price direction. Volatility tends to go down during a trending market.

TGR: Janet Yellen is in line to become the next Federal Reserve chair. Will she be better or worse for gold than Ben Bernanke?

RA: From what I’ve read, Yellen tends to believe that markets are very inefficient and that the Fed needs to have a hand in it. To some people, that means more stimulus is coming.

In my opinion, the more the Fed gets involved, the greater the chances for policy mistakes. That is probably a positive for gold. When the Fed decides to intercede it just causes more dislocations and puts the markets out of whack.

With the Fed wanting interest rates to remain low, Treasury bills are riskless right now, but that has to correct itself. The market has gone up strongly because the Fed wants asset price inflation to create a wealth effect. However, if corporate profit margins don’t expand as rapidly because of wage growth, that could be a surprise.

TGR: If there is less volatility in 2014, how will that affect how you manage the World Precious Minerals Fund (UNWPX) and the Gold and Precious Metals Fund (USERX)?

RA: It won’t change anything to any major degree. We try to stick with the main themes of our models: growth in resources per share, growth in production per share, growth in the cash flow.

Regarding the volatility of cash flow, we’re looking at whether the market will pay a higher multiple for a cash flow that’s less volatile. This can be a case of contrarian thinking; some people would advise buying the company that’s the most out of the money because it will have the biggest move. That may work in the short term, but it’s not sustainable.

We look at management’s track record in managing the volatility of cash flow and the margins. Companies with more stable margins tend to outperform for longer; you can sleep at night with those types of stocks in your portfolio.

Another factor we look at is the relative performance of each stock to its peers to see what the market is saying about the stock. We also look at the stock price of each company and judge it against its resource statement. When we look at the resource statement, we monetize it into equivalence, treating all companies the same. We look at the company’s actual market capitalization against our proprietary resource statement valuation. That is one way to really understand where there are financing needs. Obviously, if a company needs external money, we have to immediately dilute its current share price down to account for the monetization of the assets.

We’re looking for what is catalyst driven. That’s where we’re trying to get our knowledge about processes and events to actually have that additional value for our stock picking.

TGR: That leads me to think that U.S. Global would buy on the dips in the volatility. And if volatility decreases, you would adjust your strategy. Is that the case?

RA: Well, 18 to 24 months ago, when the markets seemed to be losing momentum, we started thinking about which names we did not want to be in. We weeded out a lot that didn’t have the right people, the right project or that would be exceptionally challenged in some way. Now, we have a portfolio of names that we want to own.

We always take advantage of volatility and do a little trading on the margin, but we want a core portfolio of names that we believe will not give us any big surprises.

But sometimes surprises happen. Pretium Resources Inc. (PVG:TSX; PVG:NYSE) is an example. The stock was knocked down hard because of a difference of opinion over the initial quality of its bulk sample. We took advantage of that and increased our exposure in the stock. The gold output from a bulk sample program topped its target by about 47%, producing 5,865 oz gold from 10,302 dry tonnes of ore from the Valley of the Kings deposit.

TGR: How would a hypothetical $10,000 investment in the World Precious Metals Fund have performed versus the New York Stock Exchange’s Arca Gold Miners Index over the last 10 years?

RA: On a total price change percentage basis, from November 2003 through November 2013, we would be down 11.91% and our benchmark would be down 21.05%.

We started at the bottom and ran up as high as 175% in 2007–2008. Then both the fund and our benchmark fell. We accelerated again in 2011, outpacing the benchmark, and are now back to just below where we started 10 years ago.

TGR: According to the most recent data, 80% of the World Precious Metals Fund is mining equities with market caps under $1 billion ($1B). Why do you lean so heavily on that space?

RA: Looking at what the companies do over time, you get the best price returns—the tenbaggers—among the micro caps in the less than $100–500 million ($100–500M) range.

It’s much easier to grow a production profile or resource statement substantially at that lower peer level. That also is where there are more takeovers by majors.

George Topping, who was at Stifel Nicolaus & Co. and is now in the private sector, did a study for us that looked at how much money Newmont Mining Corp. and Barrick Gold Corp. (ABX:TSX; ABX:NYSE) spent over the last 10 years and what had happened with their production. Both had spent more than their market capitalization to try to grow their production. Newmont’s production is down a third; Barrick’s down 15% or so.

You won’t get the growth in the large-cap space. What you do get is volatility, in the sense that when the gold price moves, money tends to go in and out of the most liquid names the fastest.

TGR: How do you manage the lack of liquidity in the sub-$1B space?

RA: We try to spread our investments out. There are 2,000-odd mining companies listed in Canada. We spread investments across the 100 that are good projects run by good people.

As we do more research and get more comfortable with one company, we may raise its percentage or back off another that’s not working out. We don’t do a lot of rocket trading, blowing in and out of positions. That kind of trading affects the liquidity cost. When we find something isn’t working, the weighting is small enough that we can work our way out of it over time. When we find something that’s really good, we’ll start to raise our weighting as we increase our certainty as to what’s developing with that company.

TGR: You mentioned that the sub-$1B space is where the tenbaggers are. How do you balance that get-rich-quick potential with advising investors to take a long view?

RA: Diversification. In a portfolio of 100 companies, I can’t diversify away the gold risk, but I can diversify away some of the company risk by holding a variety of names. Individual investors are often overweight in a single name, thereby increasing company risk. If the risk profiles are structured correctly, the portfolio volatility should be less volatile than our benchmark.

TGR: Klondex Mines Ltd. (KDX:TSX; KLNDF:OTCBB) is a top 10 holding in the World Precious Metals Fund. It recently worked out a financing arrangement with royalty and streaming company Franco-Nevada Corp. (FNV:TSX; FNV:NYSE). Klondex sold 38,250 ounces (38,250 oz) of gold to Franco over five years for $35M. After that time, Franco will have a 2.5% royalty on Klondex’s production. That amounts to $915/oz. What did you make of that deal?

RA: This was structured largely as a forward sale on the gold with a slight discount. That calculation that you just did—dividing the ounces by the money coming in by the ounces going out—is something many people in the industry don’t do, but should.

Take a look at Perseus Mining Ltd. (PRU:TSX; PRU:ASX), which sold 230 Koz for $85M; $367/oz. The company is supposed to deliver 25% of its production into that, at a price below cost.

Klondex had been toll mining. This deal gives the company the Midas mine and mill. Other players in the area will want to send concentrate to Klondex’s mill. This is a transformational step that will give Klondex a lot of credibility in the market.

I visited Klondex in September. Paul Huet and the management team know what they’re doing. The management team is buying stock, even in the market. It believes in what it is doing.

Klondex is doing almost its entire market capitalization with this deal. The stock is still trading above the deal price. I think this really sets it up to have a stronger production profile and better margins.

TGR: What will Klondex do with the money?

RA: For starters, Klondex will buy the Midas mine and mill. Roughly $83M is earmarked for Midas: $55M is being turned over to Newmont to buy the property and Klondex is putting up $28M for the reclamation bond.

In terms of liquidity, Klondex’s November 2012 warrants, 8.49 million, are exercisable at $1.75. When those expire next year, it will bring in $14.8M. The company has 13–15 Koz already on the surface at the Klondex mine waiting to be processed. At current gold prices, that’s $17.5M. The company also will be able to borrow against the $28M bond. That gives Klondex, say, $22M at 3–5% interest. The company has almost enough cash liquidity or financial resources to pay off that debt, which I assume it wants to do soon.

Klondex has a clear path to retiring its debt and issuing $30M of new equity. That would not be very dilutive and would be positive for the price.

TGR: Can you update our readers on some of the companies you discussed in July?

RA: Rye Patch Gold Corp. (RPM:TSX.V; RPMGF:OTCQX) has about $9M from a $10M cash transfer it got from Coeur d’Alene Mines Corp. (CDM:TSX; CDE:NYSE). The company also will have royalty streaming payments on its Rochester mine in 2014. Rye Patch is in a fine position to continue its work plan. Bill Howald is a good steward of the capital.

Pilot Gold Inc. (PLG:TSX) had good results in Turkey and at Kinsley Mountain in Nevada, where one hole returned 8.53 grams/ton (8.53 g/t) over 36 meters (36m). With Pilot’s overall portfolio, the company has a lot of flexibility to actually add some value.

TGR: Investors were initially excited about what Pilot was doing in Turkey. Does Kinsley Mountain shift the focus?

RA: It probably augments the story. Turkey can be slow on the permitting side and Pilot has had some very good results there. If a company has two good projects, it can just chip away at both of them if it has the cash. I am pretty pleased with Pilot.

Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE) has 101m of 1.92 g/t gold and 113 g/t silver—basically 4.2 g/t gold equivalent on its property in Mexico. Almaden CEO Morgan Poliquin is lamenting that Almaden has good results but no one seems to care much about gold, but he keeps chipping away and drilling it out. Almaden will probably release a preliminary economic assessment (PEA) in 2014.

TGR: Do you have other junior precious metal stories to share with our readers today?

RA: Virginia Mines Inc. (VGQ:TSX) has a great management team. André Gaumond found the Éléonore mine, sold it to Goldcorp Inc. (G:TSX; GG:NYSE) and maintained a royalty on it. He even managed to negotiate preproduction royalties before the project is in production.

One of our people visited recently and learned from Goldcorp that there may be another parallel ore shoot running right next to the deposit that is already outlined. That could double the size of the resource.

TGR: Would Virginia’s royalty apply to that new find?

RA: Based on André’s excitement about it, I would say yes.

TGR: Virginia already has close to $40M in cash.

RA: Yes. The share price is over $10 and André could do a flow-through financing at $20.

TGR: Could you explain what you mean by flow-through for our readers?

RA: Certain Canadian provinces let companies raise money for exploration by issuing shares at a premium to their share price. For the initial buyers of the shares, who don’t hold onto the shares, it’s an opportunity to lower their taxes.

Here’s how it works using Virginia, whose benchmark share price is $10, as an example. The company issues flow-through shares at $20. Investors who buy at $20 don’t intend to hold on to the shares. Rather, they sell them that same day, at $9. This crystallizes a loss for the initial buyers, which helps them manage their tax situation. This benefits Virginia because it can issue shares at a premium and get less dilution.

It’s a win-win-win. The company gets money. The initial investors get tax relief. The company working in that province gets money to explore for new mines. It’s a great way for the province to encourage development of its resource base.

TGR: What are you thinking about as we close out 2013 and head into 2014?

RA: I think pessimism has reached a maximum, particularly in the gold space. Historically, when pessimistic consensus is this strong and gold stocks are hated this much, these are turning points.

The opportunity is here; don’t get discouraged. I think we are going to see inflation, driven by wages, housing, rents—things that the Fed can’t substitute away in its calculations.

I see profit in the pipeline. The S&P 500 will probably do okay, but investors need to remember that in the 1970s, when adjusted for inflation, gold stocks did much better than the overall market.

TGR: Ralph, thank you for your time and insights.

Ralph Aldis, CFA, rejoined U.S. Global Investors as senior mining analyst in November 2001. He is responsible for analyzing gold and precious metals stocks for the World Precious Minerals Fund (UNWPX) and the Gold and Precious Metals Fund (USERX). Aldis also works with the portfolio management team of the Global Resources Fund (PSPFX) to provide tactical analyses of base metal, paper, chemical, steel and non-ferrous industries. Previously, Aldis worked for Eisner Securities, where he was an investment analyst for its high net worth group and oversaw its mutual fund operations. Before joining Eisner Securities, Aldis worked for 10 years as director of research for U.S. Global Investors, where he applied quantitative skills toward stocks, portfolio tilting, cash optimization and performance attribution analysis. Aldis received a master’s degree in energy and mineral resources from the University of Texas at Austin in 1988 and a Bachelor of Science in geology, cum laude, in 1981, from Stephen F. Austin University. Aldis is a member of the CFA Society of San Antonio.

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DISCLOSURE:

1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Reportas 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: Pretium Resources Inc., Klondex Mines Ltd., Rye Patch Gold Corp., Pilot Gold Inc., Almaden Minerals Ltd. and Virginia Mines Inc. Franco-Nevada Corp. and Goldcorp Inc. are not affiliated with The Gold Report. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Ralph Aldis: 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.

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By CentralBankNews.info
    The U.S. Federal Reserve will reduce its purchase of assets by $10 billion starting in January 2014  due to the improved situation on the labour market and then probably continue to reduce the pace of asset purchases in coming months if the jobless rate continues to fall and inflation rises towards the central bank’s 2.0 percent objective.

By George Leong, B.Comm.

The market demand for initial public offerings (IPOs) is strong, as investors search for additional sources of opportunities to make money.

While there have been some poor-performing IPOs this year, there have also been numerous stocks that have debuted to stellar gains. With strong market conditions for new issues, we are seeing a rise in the flow of companies wanting to come to the capital markets and take advantage of the current euphoria for IPOs. The reality is that the increase in IPOs also suggests some froth in the stock market that investors need to be careful about.

The biggest and most highly anticipated IPO this year was, of course, Twitter, Inc. (NYSE/TWTR), which has made many of its early investors rich. The stock was priced at $26.00, surged to $45.00 on its first trading day, and is currently trading at a new high above $50.00. The amazing thing is that Twitter doesn’t make money, and there’s no timeline as to when this will happen, as the company tries to monetize its users. (Read my take on Twitter in “How Small Investors Can Still Get a Piece of Twitter.”) Apparently, the stock market doesn’t really care if an IPO makes money, as long as the theoretical potential is there.

Facebook, Inc. (NASDAQ/FB) was another hyped-up social media IPO that had more than a billion users when it first debuted but hadn’t figured out how to make money from them. The stock actually fell down to the $17.00 level from its $45.00 IPO high, but this was a great buying opportunity, especially if you believe the company could turn its massive users into revenues. What Facebook did do was focus on the mobile advertising market, which is turning out to be a good strategy; albeit, the company still trades at an extremely high valuation compared to Google Inc. (NASDAQ/GOOG), which continues to be the “Best of Breed” in the Internet services space. Facebook was just added to the S&P 500—a move that will add buying support for the stock.

Another Internet services stock that faced some tough hurdles but appears to have found its path and is now heading higher is Groupon, Inc. (NASDAQ/GRPN). The stock has gone up nearly 400% in just a little more than a year, and in my view, it could continue to move higher in 2014.

The stock market needs more IPOs, especially the big names.

Chinese IPOs have been slow to come, given the changes in reporting requirements in the U.S. capital markets and the desire of Chinese companies to list in Hong Kong and China instead. The Hang Sang exchange in Hong Kong could see more than one hundred new issues in 2014, including the highly anticipated Shuanghui International Holdings Limited, which is looking at a massive $5.0 billion IPO in 2014. Shuanghui was the Chinese company that acquired U.S.-based pork producer Smithfield Foods, Inc. It’s too bad the company is not listing in the U.S., as it could be a great investment opportunity.

For the U.S. market, there is some hope that China-based Internet giant Alibaba Group may list in the U.S. next year, but the odds are in favor of the company listing in Hong Kong instead.

Another interesting IPO that could debut next year in the U.S. is coupon-clipping site Coupons.com.

Whatever the case, the flow of IPOs next year will be largely dependent on the strength of the equities market, but there will be some intriguing issues that investors will want to keep an eye on.

This article Top IPOs to Watch for in 2014 is originally publish at Profitconfidential

By Mitchell Clark, B.Comm.

One of the bigger problems I find when identifying and highlighting great stocks is the fact that the most desirable investments have already been bid up tremendously by institutional investors. It is not an easy time to be a buyer of equities in this market, with valuations elevated and share prices at or near their highs.

But a professional investor or fund manager is constantly buying and selling stocks, because that’s what they’re paid to do. Clients don’t pay fees to have money sit in cash; they pay for performance.

One of the largest private equity investors is Bill Gates. His private investment firm, Cascade Investment LLC, holds a vast array of stocks, and he also has significant holdings in the Bill and Melinda Gates Foundation Trust.

One of the top holdings in both these entities is Berkshire Hathaway, Inc. (BRK). The other is Canadian National Railway Company (CNI), of which Bill Gates is the largest individual shareholder.

Just as in the healthcare sector, exposure to the transportation sector is a must in any equity market portfolio. I like Canadian National and Union Pacific Corporation (UNP), but I would likely lean toward Canadian National, if I had to favor just one. Among the group of railroad stocks, this company has outperformed them all over the last 15 years. (See “Winning Railroad Stock a Buying Opportunity?”)

The company’s rail transportation system is unique in that it crosses all of Canada, from the east coast to the west coast, but it also heads straight down through the heart of America to the Gulf Coast. It is a unique infrastructure, with extraordinary economies of scale. Canadian National’s long-term stock chart is featured below:

Chart courtesy of www.StockCharts.com

The company’s third quarter of 2013 was another success. Management said that revenues increased eight percent to a record CAD$2.7 billion, based on a four-percent gain in revenue ton-miles and a three-percent gain in carloadings.

Quarterly earnings came to CAD$705 million, or CAD$1.67 per diluted share, compared to CAD$664 million, or CAD$1.52 per diluted share.

Of note were the significantly higher freight volumes from the energy sector along with market share gains, which management cited as reasons for the increase in sales. Third-quarter revenues for petroleum and chemicals grew 17% over the same quarter last year.

Investment risk with railroads stocks has to do with two principal factors: the first is the general trend in the North American economy, and the second is the degree to which investors want to be involved in the sector. Because it is old economy, it can fall out of favor with investors who may want to rotate into growth stocks.

Regardless, railroads are the backbone of the North American economy and are a worthwhile component of a long-term equity market portfolio. Canadian National is my second highlighted position that is a worthwhile addition to a long-term investor’s wish list as a core holding in any stock market portfolio. (See “My First Pick in a Series of Core Investment Portfolio Holdings” for the first core holding I profiled.)

This article Railroad Stock to Own for 10+ Years the Next in Series of Core Holdings? is originally publish at Profitconfidential

By Doug French, Contributing Editor, Casey Research

For investors having a rooting interest in the price of gold, the catalyst for a recovery may be in sight. “Buy gold if you believe in math,” Brent Johnson, CEO of Santiago Capital, recently told CNBC viewers.

Johnson says central banks are printing money faster than gold is being pulled from the ground, so the gold price must go up. Johnson is on the right track, but central banks have partners in the money creation business—commercial banks. And while the Fed has been huffing and puffing and blowing up its balance sheet, banks have been licking their wounds and laying low. Money has been cheap on Wall Street the last five years, but hard to find on Main Street.

Professor Steve Hanke, professor of Applied Economics at Johns Hopkins University, explains that the Fed creates roughly 15% of the money supply (what he calls “state money”), while the banks create “bank money,” which is the remaining 85% of the money supply.

Higher interest rates actually provide banks the incentive to lend. So while investors worry about a Fed taper and higher rates, it is exactly what is needed to spur lending, employment, and money creation.

The Fed has pumped itself up, but not much has happened outside of Wall Street. However, the Federal Open Market Committee (FOMC), during their October meeting, talked of making a significant policy change that might unleash a torrent of liquidity through the commercial banking system.

Alan Blinder pointed out in a Wall Street Journal op-ed that the meeting minutes included a discussion of excess reserves and “[M]ost participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage.”

Blinder was once the vice chairman at the Fed, so when he interprets the minutes’ tea leaves to mean the voting members “love the idea,” he’s probably right. Of course “at some stage” could mean anytime, and there’s plenty of room in the word “reduction”—25 basis points worth anyway. Maybe more if you subscribe to Blinder’s idea of banks paying a fee to keep excess reserves at the central bank.

Commercial banks are required a keep a certain amount of money on deposit at the Fed based upon how much they hold in customer deposits. Banking being a leveraged business, bankers don’t normally keep any more money than they have to at the Fed so they can use the money to make loans or buy securities and earn interest. Anything extra they keep at the Fed is called excess reserves.

Up until when Lehman Brothers failed in September of 2008, excess reserves were essentially zero. A month later, the central bank began paying banks 25 basis points on these reserves  and five years later banks—mostly the huge mega-banks—have $2.5 trillion parked in excess reserves.

I heard a bank stock analyst tell an investment crowd this past summer the banks don’t really benefit from the 25 basis points, but we’re talking $6.25 billion a year in income the banks have been receiving courtesy of a change made during the panicked heart of bailout season 2008. This has been a pure government subsidy to the banking industry, and one the public has been blissfully ignorant of.

But now everything looks rosy in Bankland again. The banks collectively made $36 billion in the third quarter after earning over $42 billion the previous quarter—showing big profits by reserving a fraction of what they had previously for loan losses.

The primary regulator for many banks—the FDIC—is even cutting its operating budget 11%, citing the recovery of the industry. The deposit insurer will have one short of 7,200 employees on the job in 2014.

That’s a third of the number it had in 1991 after the S&L crisis, but almost 3,000 more than it had in 2007 just before the financial crisis.

So with all of this good news, the Fed may indeed be thinking they can pull out the 25bp lifeline and the banks will be just fine. What Blinder thinks and hopes is the banks will use that $2.5 trillion to make loans. After all, one-year Treasury notes yield just 13 basis points, while the two-year only kicks off 31bps. Institutional money market rates are even lower.

Up until recently, banks haven’t been active lenders. The industry loan-to-deposit ratio reflects a tepid loan environment. During the boom, this ratio was over 100%. Now it hovers near 75%. It turns out that what the Fed has been paying—25 basis points—has been the best source of income for that $2.5 trillion.

However, banks won’t be able to cut their loan loss reserves to significant profits for much longer. Loan balances have grown at the nation’s banks the last two quarters and this will have to continue. If the Fed stopped paying interest on excess reserves and bank lending continues to increase, those $2.5 trillion in excess reserves could turn into multiples of that in money creation.

Banks create money when they lend. As Blinder explains, Fed-injected reserves are lent “creating multiple expansions of the money supply and credit. Bank reserves were called ‘high-powered money’ because each new dollar of reserves led to several additional dollars of money and credit.”

Fans of the yellow metal, like Mr. Johnson who sees the price going to $5,000 per ounce, have likely been too focused on the Fed’s balance sheet when it’s the banks that create most of the money.

When the Fed announces it won’t pay any more interest on excess reserves, and banks start lending in earnest again, the price of gold will be very interesting to watch.

And when that happens, you’ll want to be prepared. Find out all you need to know about the best ways to invest in gold—in the FREE 2014 Gold Investor’s Guide. Click here to read it now.

Source: A Fed Policy Change That Will Increase the Gold Price

London Gold Market Report

from Adrian Ash

BullionVault

Weds 18 Dec 08:50 EST

The US DOLLAR price of gold held flat Wednesday morning, ticking above $1230 per ounce in very quiet trade ahead of today’s much-awaited decision on monetary policy from the US Federal Reserve.

 Starting to cut its $85 billion in monthly asset purchases is a 60% shot today, says Mohamed El-Erian, CEO of the giant Pimco asset-management company.

 A poll by Bloomberg in early December found only 1-in-3 economists thought the reductions would start today.

 Reuters last week said half of 60 analysts it surveyed think the Fed won’t start tapering until March, when new chair Janet Yellen will replace Ben Bernanke.

 “Precious metals are [meantime] continuing their rollercoaster ride,” says a note from Commerzbank.

This week so far has seen a 2.5% trading range in gold and 4% in silver.

 “Gold price action of late,” says UBS analyst Joni Teves, “has been driven by the cross-currents of short-covering and lingering interest to sell rallies, which have contained prices within a $60-range over the past few weeks.”

 “There continues,” agrees Japanese trading house Mitsui’s Singapore desk, “to be a lack of positive catalysts for gold prices to rally, and many [participants] remains convinced of selling into the short covering rallies.”

“The bear trend remains in place,” concludes London market maker Scotia Mocatta’s latest technical analysis of price charts.

 “Thus there is still risk of a test of the major $1180 low” hit at the end of June.

 Looking ahead to Wednesday’s key US central-bank decision, “There is little reason for the Fed to delay tapering,” reckons Deutsche Bank’s chief US economist Joseph Lavorgna, quoted by Bloomberg and citing strong jobs data and GDP growth above 3%.

 But while “there’s no doubt that the doves feel more comfortable,” counters RBS Securities’ economist Guy Berger in Stamford, Connecticut, “it’s certainly not enough that it makes you think [it’s] is imminent.”

“We suspect,” says broker-dealer INTL FCStone in a note “that most markets have discounted the Fed’s tapering to start sooner rather than later.

 “But we still expect gold to be on the defensive given its poor chart picture and the lack of any support…from increased investment or physical buying.”

 Giant gold ETF trust fund SPDR Gold yesterday shed another 2 tonnes of bullion from the metal needed to back its shares, dropping to a new 5-year low beneath 817 tonnes and extending this year’s decline from record-high levels to 40%.

 “Despite the decline in ETF holdings,” says ANZ Bank, “some support for gold was found from Asian buyers at the $1230 level.”

 For Western investment managers, says the Buttonwood column at The Economist, “Gold’s resurgence may require a moment when central banks explicitly agree to a higher inflation target or when they declare that inflation is now subordinate to their unemployment mandate.”

 “That moment may yet come.”

 US inflation was last pegged at 1.2% on the headline CPI measure. The Fed has restated its target of 2.0% throughout 2013.

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 fully allocated bullion already vaulted in your choice of London, New York, Singapore, Toronto or Zurich 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.

Article by Investazor.com

Can we consider today to be the beginning of the end of the Quantitative Easing program? Well looking backward to the economic data we could see some reasons for Fed ti start tapering from today, after the FOMC meeting. But even if we were to be sure of a tapering it wouldn’t be enough to know for sure the direction market will take.

The markets are waiting for a good reason to take a certain direction. The expectations for today are for the Fed to:

–          Take no action. Fed could not start the QE tapering nor say nothing about a certain date when it will happen. This could trigger high volatility and the market could become bearish on the US dollar.

–          Not start tapering, but announce a certain date when they will and turn to a hawkish tone. This could have a higher impact on the market and the dollar could spike.

–          Start tapering the QE with less than 10B a month. This action is pretty expected by the market, so it might not have a very big impact, but on short term the US dollar might gain.

–          Start tapering heavily with more than 10B. This would be a big surprise and the volatility might get through the sky. The dollar could rally from the first seconds to the end of this week.

These are the market expectations as for now.

17 of the main commercial banks (Citi, BNP, Barclays, Goldman, Nomura, Credit Suisse, DBank, JPM, BOFAML, RBS and Soc Gen are only a bunch of them) have announced their expectations for today’s meeting.

Two of these are expecting a tapering starring from today, six are betting on a January tapering, three of them are going for March and the rest are holding back. So from what we see the higher probability remains somewhere around the middle. There are equal chances for starting the tapering with less than 10B or no taper but some details regarding when it will start.

For the technical point of view we are looking at the most traded currency pair in the Forex market, EURUSD. Its price has consolidated in a symmetrical triangle right under 1.3800 and above the up channel trend line. If we stick to probabilities we would then think that is better to get with the bulls and wait for an upside breakout, followed by a rally above 1.3820 (latest high).

On the other hand the sceptics would say that a surprise could get the dollar back on its feet and 1.3700 support will be broken and a drop wouldn’t be stopped until 1.3600.

We are telling you to play it safe. If you would like to have a higher probability for your trade wait for the FOMC meeting, see where the market is heading and take action. If you would like to take a risk, then take it smart. Our favorite play for this event would be a Long Outside European Option, especially on the FX market.

Set a range of 1.5 or 2x the daily average of the FX (this way you will have a pretty nice risk reward for you option) and an expiry date for tomorrow, this way you will keep your premium as low as possible  and get a pretty nice payout. For an example we took a Long Outside E.O. for the EURUSD with the Trigger Price 1 at 1.3820 and the Trigger Price 2 at 1.3680. Outside this range we will have a payout 5 times higher than the Premium we paid. If the price will remain inside the range, our risk is limited to the amount we already paid.

The post What are the Investors expecting from the FOMC Meeting? appeared first on investazor.com.

By Moe Zulfiqar for Daily Gains Letter

“Just give up being so negative; there’s economic growth in the U.S. economy.”

These were the exact words of my good old friend, Mr. Speculator. Over the weekend, when I received a call from him, he added, “You see the average American is better off than before. There are jobs; and no matter where you look, you won’t find much negativity. Look at the stock markets; they probably will show a 30% increase for 2013.”

Sadly, Mr. Speculator has become a victim of the false assumptions that seem to prevail in the markets these days. He’s basing his conclusion on just a few indicators that he looked at from just the surface, not looking much into the details. For example, the stock market doesn’t really portray the real image of the U.S. economy, but it’s used as one of the indicators.

Here’s what is really happening in the U.S. economy that keeps me skeptical.

First of all, jobs growth in the U.S. economy has been center stage for some time. I agree that the unemployment rate has gone down, but I ask where the jobs were created. In November, for example, we saw the unemployment rate in the U.S. economy reach seven percent, and it sent a wave of optimism across the mainstream. Sadly, a major portion of the jobs created for that month were in the low-wage-paying industries. Mind you; this has been the trend for some time now. (Source: “Employment Situation Summary,” Bureau of Labor Statistics web site, December 6, 2013.) In periods of real economic growth, you want equal jobs creation, which we are clearly missing in the U.S. economy.

Secondly, Americans really aren’t better off than they were before—incomes are declining. Consider this: between 2007 and 2012, the real median household income in the U.S. economy has fallen by more than eight percent. In 2007, the median household income registered at $55,627. In 2012, it declined to $51,017. (Source: Federal Reserve Bank of St. Louis web site, last accessed December 13, 2013.) In times of real economic growth, you want to see increasing incomes.

Thirdly, more and more individuals in the U.S. economy are seeking the help of food stamps. In September, there were more than 47.3 million Americans on food stamps. This number has grown significantly over the past few years. (Source: United States Department of Agriculture, “Supplemental Nutrition Assistance Program,” United States Department of Agriculture, Food and Nutrition Service web site, December 6, 2013.)

Last but not least, over the past few years, consumer confidence in the U.S. economy has increased, but it is nowhere close to where it was before the financial crisis. Take a look at the chart below of the University of Michigan Consumer Sentiment index, which is an indicator of consumer confidence in the U.S. economy.

Chart courtesy of www.StockCharts.com

To me, what I have mentioned aren’t indicators of economic growth in the U.S. economy, and this is what keeps me skeptical. On the surface, the indicators are creating a sort of mirage that suggests a false truth—the reality of which is very unpleasant.

For investors, this means the key stock indices, whose performance relies on the overall state of the economy, are running beyond reality. They may face turbulence ahead if the economic factors remain bleak. Investors seeking to profit from the decline in key stock indices may want to look at exchange-traded funds (ETFs), like the ProShares Short Dow30 (NYSEArca/DOG).

Source: http://www.dailygainsletter.com/economy/the-mirage-called-a-u-s-economic-recovery/2241/