GBPUSD remains in uptrend from 1.6252, the fall from 1.6822 is likely consolidation of the uptrend. Support is at 1.6670, as long as this level holds, the uptrend could be expected to resume, and another rise towards 1.7000 is still possible. On the downside, a breakdown below 1.6670 support will indicate that the uptrend from 1.6252 had completed at 1.6822 already, then deeper decline to 1.6435 area could be seen.
Provided by ForexCycle.com
So next week we’ll take a deep dive into the most dangerous economics paper written in a long time (that is perhaps only minor hyperbole on my part); but today, by way of setup, let’s think about central banks and liquidity traps and see if we agree that central bankers are driving the car from the back seat based upon a fundamentally flawed theory of how the world works. That theory helped produce the wreck that was the Great Recession and will have its fingerprints all over the next one. So this week we’ll have a preliminary round before putting on the sparring gloves next week.
Here is a part of chapter 7 from Code Red. By the way, the book has done very well and is getting great reviews, with 49 readers giving us five stars. And three people who apparently didn’t read the book gave it one star anyway. Check out the reviews on Amazon.
The 2014 Strategic Investment Conference: Investing in a Transformational World
But before we turn to the chapter, I want to note that this year for the first time we are not requiring Strategic Investment Conference attendees to be accredited investors. A change of venue that gives us a little more room and a shuffling of the speaking schedule allow us to open the event to everyone. If you are from outside the United States, you will not have as much trouble getting accepted into the conference as you may have encountered in the past. I am really excited about this change and hope that we have a significant contingent of non-US citizens at the conference. The speaker lineup is certainly international in breadth.
We sent out a note earlier this week encouraging you to register for the Strategic Investment Conference, which is coming up in mid-May. This is our 11th conference (cosponsored by Altegris Investments), and it will be our biggest and most comprehensive yet. Our attendees regularly say it is the best investment conference they attend anywhere. Click on this link to learn more. Rather than simply listing the names as we normally do, I have provided a little color about who the speakers are and what we can expect to hear. Register now to get the early-bird discount, which lasts for only a few more days.
From Code Red, by John Mauldin and Jonathan Tepper
Like a car, an economy has lots of moving parts; everyone thinks they know how to drive it when they’re in the back seat; and it crashes too often. But on a more serious note, the analogy of a car works especially well when you think of where large parts of the global economy are.
Today central banks can make money cheap and plentiful, but the money that is created isn’t moving around the economy or stimulating demand. They can step on the accelerator and flood the engine with gas, but the transmission is broken, and the wheels don’t turn. Without a transmission mechanism, monetary policy has no effect.
This has not always been the case, but it is today. After some credit crises, central banks can cut the nominal interest rate all the way to zero and still be unable to stimulate their economies sufficiently. Some economists call that a “liquidity trap” (although that usage of the term differs somewhat from Lord Keynes’s original meaning). The Great Financial Crisis plunged us into a liquidity trap, a situation in which many people figure they might just as well sit on cash. Many parts of the world found themselves in a liquidity trap during the Great Depression, and Japan has been stuck in a liquidity trap for most of the time since their bubble burst in 1989.
Economists who have studied liquidity traps know that some of the usual rules of economics don’t apply when an economy is stuck in one. Large budget deficits don’t drive up interest rates; printing money isn’t inflationary; and cutting government spending has an exaggerated impact on the economy. In fact, if you look recessions that have happened after debt crises, growth was almost always very slow. For example, a study by Oscar Jorda, Moritz Schularick, and Alan Taylor found that recessions that occurred after years of rapid credit growth were almost always worse than garden-variety recessions.
One of the key findings from their study is that it is very difficult to restore growth after a debt bubble. Central banks want to create modest inflation and thereby reduce the real value of debt, but they’re having trouble doing it. Creating inflation isn’t quite as simple as printing money or keeping interest rates very low. Most Western central banks have built up a very large store of credibility over the past few decades. The high inflation of the 1970s is a very distant memory to most investors nowadays.
And almost no one seriously believes in hyperinflation. The United Kingdom has never experienced hyperinflation, and you’d have to go back to the 1770s to find hyperinflation in the United States – when the Continental Congress printed money to pay for the Revolutionary War and so started a period of extremely high inflation. (That’s why the framers of the Constitution introduced Article 1, Section 10: “No state shall … coin money; emit bills of credit; make any thing but gold and silver coin a tender in payment of debts….”)
Japan and Germany have not had hyperinflation for over sixty years. Today’s central bankers want inflation only in the short run, not in the long run. As Janet Yellen recognized, central banks with established reputations have a credibility problem when it comes to committing to future inflation. If people believe deep down that central banks will try to kill inflation if it ever gets out of hand, then it becomes very hard for those central banks to generate inflation today. And the answer from many economists is that central bankers should be even bolder and crazier, sort of like everyone’s mad uncle or, more politely, to be “responsibly irresponsible,” as Paul McCulley has quipped.
In a liquidity trap the rules of economics change. Things that worked in the past don’t work in the present. The models of economies that we mentioned above become even less reliable. In fact they sometimes suggest actions that are in fact actually quite destructive. So why aren’t the models working?
Sometimes the best way to understand a complex subject is to draw an analogy. So with an apology to all the true mathematicians among our readers, today we will look at what we can call the Economic Singularity.
Singularity was originally a mathematical term for a point at which an equation has no solution. In physics, it was proven that a large enough collapsing star would eventually become a black hole, so dense that its own gravity would cause a singularity in the fabric of spacetime, a point where many standard physics equations suddenly have no solution.
Beyond the “event horizon” of the black hole, the models no longer work. In general relativity, an event horizon is the boundary in spacetime beyond which events cannot affect an outside observer. In a black hole it is “the point of no return,” i.e., the point at which the gravitational pull becomes so great that nothing can escape.
This theme is an old friend to readers of science fiction. Everyone knows that you can’t get too close to a black hole or you will get sucked in; but if you can get just close enough, you can use the powerful and deadly gravity to slingshot you across the vast reaches of spacetime.
One way that a black hole can (theoretically) be created is for a star to collapse in upon itself. The larger the mass of the star, the greater the gravity of the black hole and the more surrounding space-stuff that will get sucked down its gravity well. The center of our galaxy is thought to be a black hole with a mass of 4.3 million suns.
We can draw a rough parallel between a black hole and our current global economic situation. (For physicists this will be a very rough parallel indeed, but work with us, please.) An economic bubble of any type, but especially a debt bubble, can be thought of as an incipient black hole. When the bubble collapses in upon itself, it creates its own black hole with an event horizon beyond which all traditional economic modeling breaks down. Any economic theory that does not attempt to transcend the event horizon associated with excessive debt will be incapable of offering a viable solution to an economic crisis. Even worse, it is likely that any proposed solution will make the crisis more severe.
Debt (leverage) can be a very good thing when used properly. For instance, if debt is used to purchase an income-producing asset, whether a new machine tool for a factory or a bridge to increase commerce, then debt can be net-productive. Hyman Minsky, one of the greatest economists of the last century, saw debt in three forms: hedge, speculative, and Ponzi.
Roughly speaking, to Minsky, hedge financing was when the profits from purchased assets were used to pay back the loan; speculative finance occurred when profits from the asset simply maintained the debt service and the loan had to be rolled over; and Ponzi finance required the selling of the asset at an ever higher price in order to make a profit. Minsky maintained that if hedge financing dominated, then the economy might well be an equilibrium-seeking, well-contained system. On the other hand, the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy would be what he called a deviation-amplifying system. Thus, Minsky’s Financial Instability Hypothesis suggests that over periods of prolonged prosperity, capitalist economies tend to move from a financial structure dominated by (stable) hedge finance to a structure that increasingly emphasizes (unstable) speculative and Ponzi finance.
Minsky proposed theories linking financial market fragility, in the normal life cycle of an economy, with speculative investment bubbles that are seemingly part of financial markets. He claimed that in prosperous times, when corporate cash flow rises beyond what is needed to pay off debt, a speculative euphoria develops; and soon thereafter debts exceed what borrowers can pay off from their incoming revenues, which in turn produces a financial crisis. As the climax of such a speculative borrowing bubble nears, banks and other lenders tighten credit availability, even to companies that can afford loans, and the economy then contracts.
“A fundamental characteristic of our economy,” Minsky wrote in 1974, “is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles.”
In our previous book, Endgame, we explore the idea of a Debt Supercycle, the culmination of decades of borrowing that finally ends in a dramatic bust. Unfortunately, much of the developed world is at the end of a 60-year-long Debt Supercycle. It creates our economic singularity. A business-cycle recession is a fundamentally different thing than the end of a Debt Supercycle, such as much of Europe is tangling with, Japan will soon face, and the United States can only avoid with concerted action in the next few years.
A business-cycle recession can respond to monetary and fiscal policy in a more or less normal fashion; but if you are at the event horizon of a collapsing debt black hole, monetary and fiscal policy will no longer work the way they have in the past, or in a manner that the models would predict.
There are two contradictory forces battling in a debt black hole: expanding debt and collapsing growth. Raising taxes or cutting spending to reduce debt will have an almost immediate impact on economic growth. But there is a limit to how much money a government can borrow. That limit clearly can vary significantly from country to country, but to suggest there is no limit puts you clearly in the camp of the delusional.
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A Q&A with Casey Research
James Turk, founder of precious metals accumulation pioneer GoldMoney, has over 40 years’ experience in international banking, finance, and investments. He began his career at the Chase Manhattan Bank and in 1983 was appointed manager of the commodity department of the Abu Dhabi Investment Authority.
In his new book The Money Bubble: What to Do Before It Pops, James and coauthor John Rubino warn that history is about to repeat. Instead of addressing the causes of the 2008 financial crisis, the world’s governments have continued along the same path. Another—even bigger—crisis is coming, and this one, say the authors, will change everything.
One central tenet of your book is that the dollar’s international importance has peaked and is now declining. What will the implications be if the dollar loses its reserve status?
In a word, momentous. Although the dollar’s role in world trade has been declining in recent years while the euro and more recently the Chinese yuan have been gaining share, the dollar remains the world’s dominant currency. So crude oil and many other goods and services are priced in dollars. If goods and services begin being priced in other currencies, the demand for the dollar falls.
Supply and demand determine the value of everything, including money. So a declining demand for the dollar means its purchasing power will fall, assuming its supply remains unchanged. But a constant supply of dollars is an implausible assumption given that the Federal Reserve is constantly expanding the quantity of dollars through various forms of “money printing.” So as the dollar’s reserve status erodes, its purchasing power will decline too, adding to the inflationary pressures already building up within the system from the Federal Reserve’s quantitative easing program that began after the 2008 financial collapse.
Most governments of the world are fighting a currency war, trying to devalue their currencies to gain a competitive advantage over one another. You predict that China will “win” this currency war (to the extent there is a winner). What is China doing right that other countries aren’t? How would the investment world change if China did “win”?
As you say, nobody really wins a currency war. All currencies are debased when the war ends. What’s important is what happens then. Countries reestablish their currency in a sound way, and that means rebuilding on a base of gold. So the winner of a currency war is the country that ends up with the most gold.
For the past decade, gold has been flowing to China—both newly mined gold as well as from existing stocks. But that flow from West to East has accelerated over the past year, and there are unofficial estimates that China now has the world’s third-largest gold reserve.
The implications for the investment world as well as the global monetary system are profound. Why should China use dollars to pay for its imports of crude oil from the Middle East? What if Saudi Arabia and other exporters are willing to price their product and get paid in Chinese yuan? Venezuela is already doing that, so it is not a far-fetched notion that other oil exporters will too. China is a huge importer of crude oil, and its energy needs are likely to grow. So it is becoming a dominant player in global oil trading as the US imports less oil because of the surge in its own domestic fossil fuel production.
Changes in the way oil is traded represent only one potential impact on the investment world, but it indicates what may lie ahead as the value of the dollar continues to erode and gold flows from West to East. So if China ends up with the most gold, it could emerge as the dominant player in global investments and markets. It already has become the dominant player in the market for physical gold.
You draw a distinction between “financial” and “tangible” assets, noting that we go through a recurring cycle where each falls in and out of favor. Where are we in that cycle? With US stocks at all-time highs and gold down over 30% since the summer of 2011, is it possible that the cycle is rolling over?
Our monetary system suffers recurring booms and busts because of the fractional reserve practice of banks, which allows them to create money “out of thin air,” as the saying goes. During booms—all of which are caused by too much money that banks have created by expanding credit—financial assets outperform, but they eventually become overvalued relative to tangible assets. The cycle then reverses. The fractional reserve system goes into reverse and credit contracts, causing a lot of promises made during the good times to be broken. Loans don’t get repaid, unnerving bankers and investors alike. So money flees out of financial assets and the counterparty risk these assets entail, and into the safety of tangible assets, until eventually tangible assets become overvalued, and the cycle reverses again.
So for example, the boom in financial assets that ended in 1967 led to a reversal in the cycle until tangible assets became overvalued in 1981. The cycle reversed again, and financial assets boomed until the popping of the dot-com bubble in 2000. We are still in the cycle favoring tangible assets, but there is no way to predict when it will end. We know it will end when tangible assets become overvalued, but as John and I explain in The Money Bubble, we are not even close to that moment yet.
You cite the “shrinking trust horizon” as one of the long-term factors that will drive gold higher. Can you explain?
Yes, this is an important point that we make. Our economy, and indeed, our society, is based on trust. We expect the bread we buy from a baker or the gasoline we buy for our car to be reliable. We expect our money on deposit in a bank to be safe. But if we find the baker is putting sawdust in our bread and governments are using depositor money to bail out banks, as happened in Cyprus last year, trust begins to erode.
An erosion of trust means that people are less willing to accept the counterparty risk that comes with financial assets, so the erosion of trust occurs during financial busts. People as a consequence move their wealth into tangible assets, be it investments in tangible things like farmland, oil wells, or mines, or in tangible forms of money, which of course means gold.
Obviously, gold has been in a painful slump since the summer of 2011. What near-term catalysts—let’s say in 2014—could wake it from its slumber?
We have to put 2013 into perspective, because portfolio management is a marathon, not a 100-meter sprint. Gold had risen 12 years in a row prior to last year’s price decline. And even after last year, gold has appreciated 13% per annum on average, making it one of the world’s best-performing asset classes since the current financial bust began with the popping of the dot-com bubble.
Looking to the year ahead, there are many potential catalysts, but it is impossible to predict which event will be the trigger. The derivatives time bomb? Failure of a big bank? The sovereign debt crisis returns to the boil? The Japanese yen collapses? It could be any of these or something we can’t even imagine. But one thing is certain: as long as central banks continue their present money-printing ways, the price of gold will rise over time to reflect the debasement of national currencies. The gold price might not jump to its fair value immediately because of government intervention, but it will rise eventually and inevitably.
So the most important thing to keep in mind is the money printing that pretty much every central bank around the world is doing. The central bankers have given it a fancy name—”quantitative easing.” But regardless of what it is called, it is still creating money out of thin air, which debases the currency that central bankers are supposed to be prudently managing to preserve the currency’s purchasing power.
Money printing does the exact opposite; it destroys purchasing power, and the gold price in terms of that currency rises as a consequence. The gold price is a barometer of how well—or perhaps more to the point, how poorly—central bankers are doing their job.
Governments have been debasing currencies since the Roman denarius. Why do you expect the consequences of this particular era of debasement to be so severe?
Yes, they have, and to use Rome as the example, its empire collapsed when the currency was debased. Worryingly, after the collapse of the Roman Empire, the world went into the so-called Dark Ages. Countries grow and prosper on sound money. They dissipate and eventually collapse when money becomes unsound. This pattern recurs throughout history.
Rome of course did not collapse overnight. The debasement of their currency cannot be precisely measured, but it lasted over 100 years. The important point we need to recognize is that the debasement of the dollar that began with the formation of the Federal Reserve in 1913 has now lasted over 100 years too. A penny in 1913 had the same purchasing power as a dollar has today, which, interestingly, is not too different from the rate at which Rome’s denarius was debased.
After discussing how the government of Cyprus raided its citizens’ bank accounts in 2013, you suggest that it’s a near certainty that more countries will introduce capital controls and asset confiscations in the next few years. What form might those seizures take, and how can people protect their assets?
It is impossible to predict, of course, because central planners can be very creative in coming up with different forms of financial repression that prevent you from doing what you want with your money. In fact, look at the creativity they have already used.
For example, not only did bank depositors in Cyprus lose much of their money, much of what was left was given to them in the forms of shares of the banks they bailed out, forcing them to become shareholders. And the US has imposed a creative type of capital control that makes it nearly impossible for its citizens to open a bank account outside the US. Pension plans are the most vulnerable because they are easy to get at. Keep in mind that Argentina, Ireland, Spain, and Poland raided private pensions when those countries ran into financial trouble.
Protecting one’s assets in today’s environment is difficult. John and I have some suggestions in the book, such as global diversification and internationalizing oneself to become as flexible as possible.
You dedicated an entire chapter of your book to silver. Which do you think will appreciate more in the next year, gold or silver? How about in the next 10 years?
I think silver will do better for the foreseeable future. It is still very cheap compared to gold. As but one example to illustrate this point, even though gold underwent a big price correction last year, it is still trading above the record high it made in January 1980, which was the top of the bull run that began in the 1960s.
In contrast, not only has silver not yet broken above its January 1980 peak of $50 per ounce, it is still far from that price. So silver has a lot of catching up to do.
Silver is a good substitute for gold in that silver, too, can be viewed as money outside the banking system, which is an important objective to keep wealth liquid and safe today. But silver may not be for everyone, because it is volatile. This volatility can be measured with the gold/silver ratio, which is the number of ounces of silver needed to equal one ounce of gold. The ratio was 30 to 1 in 2011, and several months later jumped to 60 to 1.
So you can see how volatile silver is. But because I expect silver to do better than gold, I believe that the ratio will fall to 16 to 1 eventually, which is the same level it reached in January 1980. It is also the ratio that generally applied when national currencies used to be backed by precious metals.
Besides gold, what one secular trend would you be most comfortable betting a large portion of your nest egg on?
Own things, rather than promises. Avoid financial assets. Own tangible assets of all sorts, like farmland, timberland, oil wells, etc. Near-tangibles like the equities of companies that own tangible assets are okay too, but avoid the equities of banks, credit card companies, mortgage companies, and any other equities tied to financial assets.
What asset class are you most bearish on?
Without any doubt, it is government debt in particular and more generally, government promises. They have promised more than they can possibly deliver, so a lot of their promises are going to be broken before we see the end of this current bust that began in 2000. And that outcome of broken promises describes the huge task that we all face. There will be a day of reckoning. There always is when an economy and governments take on more debt than is prudent, and the world is far beyond that point.
So everyone needs to plan and prepare for that day of reckoning. We can’t predict when it is coming, but we know from monetary history that busts follow booms, and more to the point, that currencies collapse when governments make promises that they cannot possibly fulfill. Their central banks print the currency the government wants to spend until the currency eventually collapses, which is a key point of The Money Bubble. The world has lost sight of what money is.
What today is considered to be money is only a money substitute circulating in place of money. J.P. Morgan had it right when in testimony before the US Congress in 1912 he said: “Money is gold, nothing else.” Because we have lost sight of this wisdom, a “money bubble” has been created. And it will pop. Bubbles always do.
As James Turk said, “near-tangibles like the equities of companies that own tangible assets” (i.e., gold stocks) are good investments—and right now, they are dramatically undervalued. In a recent online video event titled “Upturn Millionaires,” eight influential investors including Doug Casey, Rick Rule, Frank Giustra, and Ross Beaty gathered to discuss the new realities in the gold stock sector—and why the odds of making huge gains are now extremely high. Click here to watch the event.
Unemployment up, consumer confidence down.
The result?
The stock market goes up.
To the novice investor, or someone without an interest in financial markets, it doesn’t make sense.
This apparent paradox reminds us of a lunchtime chat we had 12 years ago with the managing director of a small Aussie medical company.
Despite being a PhD boffin, he didn’t understand how markets work either. We tried to explain it. But it wasn’t sinking in. But really, it’s quite simple…
The truth is that consumers and most of the general public are reactionary. They observe what’s going on around them, or what others tell them is going on around them, and then they assume things will continue that way into the future.
If things look fine today they assume they’ll be fine tomorrow. If things look bad today they assume they’ll be bad tomorrow.
That’s what makes most people bad investors.
We bring this up after stumbling across a five-day-old article in the Sydney Morning Herald.
It was the usual dull affair, but two paragraphs stood out from the dreary reporting:
‘The Westpac/Melbourne Institute consumer index slipped for the third-straight month for its February reading, as Australians’ expectations about the economy over the next year fell to the lowest level since March 2012.
‘Consumers’ expectations for the next five years along weakened to levels not seen since February 2009, the survey found.‘
It just so happens that the dates mentioned in the Sydney Morning Herald coincide with the date that markets were ready to hit rock bottom just before a major stock rally.
February 2009 was of course the month before stocks hit the bottom after the 2008 financial meltdown. From there the Aussie stock market gained 57.3% over the next year.
One tiny natural gas stock we tipped in the December 2008 issue of Australian Small-Cap Investigator had gained 458% by the time we issued a sell recommendation in June 2009…barely four months after consumers were reported to be at their most pessimistic.
It was the same in March 2012. If you recall, the stock market had been in decline since early 2011. This was when Greece and the rest of Europe were on the verge of collapse, and the US Federal Reserve’s first money-printing program (QE1) had ended.
According to the Sydney Morning Herald, that’s when consumers were again pessimistic about the future.
The outcome? Almost exactly one year later the Aussie stock market had gained over 20%. But the consumers and investors who were pessimistic about the future missed out on those gains.
That’s why most people make for terrible investors.
The important part is that the depths of the stock market didn’t happen until after these bearish consumer outlooks.
It’s important because as the stock market falls it confirms their bearish view – it’s ‘confirmation bias’.
The sad thing is that when the market turns upwards as it did in March 2009 and May 2012, those with a pessimistic view don’t believe in the recovery. They think they’re right to be negative about the outlook, and they’ve got the previously falling market as proof.
Except the stock market didn’t agree.
As we’ve mentioned before, stock prices reflect future expectations of profits. If profits are better than expected, then stock prices should go up. If profits are worse than expected then stock prices should go down.
The key word is ‘expectations’. It doesn’t mean that the economy has to be powering full steam ahead. It just means that the economy may only have to be ‘less worse’ than expected in order for stocks to rise.
That was the point the PhD wielding managing director couldn’t understand as we stabbed at our food with chopsticks at Chinatown’s Dragon Boat restaurant all those years ago.
He just didn’t get why a stock price would rise when a company had just announced a loss. The answer of course, was that the loss was less than investors expected and so the outlook for the company was potentially better than expected.
But it wasn’t sinking in. So we gave up and went back to stabbing at prawn dumplings and pork buns…
It would be great if the economy was in the sweet spot where unemployment fell, consumer confidence rose, and asset prices climbed nicely.
However, that’s also exactly the kind of market that should make you cautious about the future. Because when everyone feels confident, it generally means that stock prices are priced for perfection.
In that instance investors start to have unrealistic expectations about where stocks could go next. That’s when you start to get crazy stock valuations and commentators begin saying that stock prices can never fall.
That’s the exact opposite of where the market stands today. Unemployment is the highest in four years, the local car making industry is almost dead, and amazingly, analysts are still fretting about a slowdown in China…even though China has just imported a record amount of raw materials during January. (That has resource analyst Jason Stevenson smiling from ear to ear. You can see why here.)
In short, if you’re after a sign that the market is primed for another bull market run, just ask the average consumer. If they tell you the outlook is terrible, there probably hasn’t been a better time to buy stocks in the last five years.
Cheers,
Kris.
Special Report: 2014 Predicted
Recent positive economic news about surging exports was blunted by last week’s jobs report from the Australian Bureau of Statistics (ABS). Australia’s jobless rate hit 6% in January, the highest in a decade. And it came in the same week that we learned Toyota would cease making cars in Australia by 2017.
Toyota joins Mitsubishi, Ford, and GM in packing its bags. You can blame the strong Aussie dollar if you like, or the unions, or the government. But the fact of the matter is, manufacturing is dying in Australia. In Scoops Lane last week, I speculated that the decline of manufacturing is also the decline of the middle class (and arguably the decline of an egalitarian society). When you can’t raise a family on the basis of lifelong skilled employment with rising real wages, the economy (and society) become more unstable.
Mind you, this is a local instance of a global phenomenon. Labour costs around the developed world have been pushed down by the emergence of Chinese and other low cost emerging Asian manufacturers in the last 30 years (Thailand, the Philippines, Vietnam). It’s not so much bad policy as reality.
It could be that my analysis of Australia’s economic future is clouded by my American background. Just because things have played out poorly for America doesn’t mean that Australia will automatically be the same. But in economic terms, the same forces that have led to a decline in American economic power also affect Australia.
In geopolitical terms, the Pacific is rapidly becoming a contest between America and China. This puts Australia in an awkward spot; having to choose between a security patron (America) and an economic patron (China). That’s a tough choice.
US President Barack Obama heads to the Pacific in April. He’ll visit Japan, South Korea, Malaysia, and the Philippines. He will probably bring up the issue of China’s ’9 dashes’ map. That’s China’s map which demarks what it considers to be its offshore territorial waters in the South China Sea. You can see below that the 9th dash, at the top right, encroaches on what is currently considered territorial waters belonging to the Philippines.
The territorial dispute in the East China Sea between Japan, China, and South Korea has captured everyone’s attention in recent months. It creates the possibility of increased conflict (economic, but also armed) between Asia’s two biggest powers. But in commercial terms, especially when it comes to shipping, oil and gas, and fishing, the South China Sea is much more important.
Incidentally, US Secretary of State John Kerry is in the region this week. This comes after one of his undersecretaries told the US Congress that China’s ’9th dash’ could be illegal. China’s Foreign Ministry promptly responded, saying, ‘Relevant comments made by the U.S. official in congressional testimony are not constructive. We urge the US to be rational and fair and play a constructive role for peace, stability, prosperity and development of the region, rather than the opposite.‘
Also incidentally, Chinese warships passed through the Sunda Strait earlier this month. They were on their way to the Indian Ocean, by way of the passage between the Indonesian islands of Java and Sumatra. Two Chinese destroyers were accompanied by new amphibious vessels that can carry helicopters, troops, and armoured vehicles. They returned to Chinese waters after passing through the Lombok strait near Bali.
The US promised a ‘Pacific Pivot’ in 2011 and followed up with the deployment of 2,500 US Marines in Darwin. But this is a much longer game. In the February issue of The Denning Report I’ll take a look at the military aspects of the power struggle between the US and China. And I’ll explore some ‘alternative scenarios’ for Australia.
Dan Denning,
Editor, The Denning Report
Ed note: The above article is an edited extract from The Denning Report.
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Source: Brian Sylvester of The Gold Report (2/17/14)
You scan the menu and notice that the prime rib and the hamburger are the same price. What do you order? The precious metals market isn’t so different, according to “Mexico Mike” Kachanovsky, consultant to hedge funds and mining companies and contributor to SmartInvestment.ca. The market has pulverized the price of top-notch mining stocks to the same level as the struggling names. So, which would you buy? In this interview with The Gold Report, Kachanovsky reveals how to find the prime rib of the gold market.
The Gold Report: Mexico is a mining jurisdiction where mining investors have made a lot of money, especially over the last decade. Mexico recently passed a 7.5% royalty on earnings before interest, depreciation and amortization (EBIDA) for mining companies operating there. Are the salad days over for miners in that jurisdiction?
Mike Kachanovksy: There are still a lot of unknowns on how this new royalty is going to affect mining companies in general and how it’s going to be applied within the country.
The majority of the producers I talk to don’t feel it is going to be that disruptive because it’s a royalty on earnings, not a gross smelter royalty. The way it is structured, companies that aren’t making a lot of money right now won’t be paying a lot of extra taxes. There are also going to be deductions that companies can put in play that would lower their overall tax spike from the new royalty.
For the companies that are already in production and that have been established in Mexico, it’s really not going to doom their operations. However, it is discouraging retail investors from participating and buying up Mexico-related stocks. There’s uncertainty and fear in the market until people start to understand it’s not going to devastate the bottom lines of miners.
TGR: Could the tax be lowered?
MK: I don’t think the Mexican government will change the actual total amount, but it will probably allow more leeway and flexibility on what counts as earnings and what deductions will be allowed against that royalty. One thing to keep in mind: Part of the rationale for bringing this new law into place was that it would force companies to pay a certain amount of money back. It would go to the immediate local domestic or regional government. That money could be used to pay for schools or road construction or a lot of the things that the mining companies are doing now voluntarily.
Perhaps some of these companies that already have scholarship programs and are building playgrounds and schools for their local communities will be able to deduct that money they’re spending already in goodwill. My feeling is that there will be enough pressure behind the scenes that the structure of this royalty will be less restrictive than how it stands right now.
TGR: Do you think companies are going to avoid Mexico as a result of this royalty?
MK: I’ve heard some saber rattling from certain companies that say they are going to restrict investment within Mexico and start looking at other jurisdictions. I think it’s a lot of political brinkmanship. The arguments for continuing to operate in Mexico are still more positive than negative. Even with this new royalty, Mexico is still one of the most favorable and lowest-cost mining jurisdictions in the world.
TGR: Timmins Gold Corp. (TMM:TSX; TGD:NYSE.MKT) and Torex Gold Resources Inc. (TXG:TSX), which both operate in Mexico, were among a handful of junior mining companies that recently completed bought-deal financings. Does this signal a warmer financing environment for junior mining companies—especially those operating in Mexico?
MK: I consult for a number of funds that are saying now is the time to start investing in these junior mining stocks. The stocks are so beaten down that a firm can put $2 million ($2M) down on a financing and end up owning a third of the company. I believe that we’re going to see bought-deal financings and more appetite for private placements that will allow companies to get funded and move forward.
However, there are still companies that have extremely attractive projects that are not able to get financing just yet. The market is still too weak for them to attract funding. I think we’re still at the much earlier stage. At some point we’re going to see a lot of money flowing into the sector. Right now, the lowest-hanging fruit is being picked. We’re still a long way from a healthy speculative market.
TGR: SNL Metals Economics Group, which is based in Halifax, Nova Scotia, estimated that the total worldwide budget for non-ferrous metals exploration dropped about 30% to $15.2 billion ($15.2B) in 2013 from $21.5B in 2012. Yet Mexico remained a top-five destination for exploration spending. What keeps the drills turning in Mexico?
MK: Mexico is still relatively underexplored and it has a treasure trove of prospective geology. There’s always going to be that discovery potential that makes the risk/reward balance in favor of continuing on with exploration. Even in an environment where metals prices have come down, the chance of finding a brand-new high-grade deposit in Mexico that could be economic to develop will have companies spending money.
The cost of exploration in Mexico is still much lower than many other places in the world. Exploration spending has dropped now that a lot of junior mining companies have access to high-quality consulting firms and drilling contractors. A company can get a lot more meters of drilling done today for less than it would have cost two years ago.
TGR: Mexico is known more for its silver than gold. Which are you more excited about right now?
MK: I’m a silver bull, but investors need to have leverage to both. We’re at the latter stage of a very long and severe correction for both metals. As things roll over into a more bullish posture, silver tends to outperform gold on the upside. If I were going to be putting new money into a metal today, I would probably put a little bit more weight toward silver.
TGR: Mining magnate Rob McEwen, who’s well known in mining circles, told Mineweb.com that consolidation will pick up this year. He added that his namesake company, McEwen Mining Inc. (MUX:TSX; MUX:NYSE), is likely to grow through mergers and acquisitions (M&A). Do you see an uptick in M&A coming?
MK: Absolutely. The urgency and likelihood that it’s going to pick up this year is just that much higher because there’s less exploration spending and existing mines are being depleted. If these companies want to stay in business they’re going to need to either find more minerals or buy them. The severity of this correction means there are a lot of very attractive projects available that have lost half or even 90% of their market value. It’s cheaper to buy late-stage defined deposits than it is to look for them and drill them.
TGR: What are some companies producing silver and gold in Mexico that finished the year strong and are poised for further gains this year?
MK: Investors have to look for the companies that survived the downturn intact with prospects for growth. I’d select a company like Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.MKT), where production is increasing 19% on a silver equivalent basis year-over-year and guidance for 2014 is for a further 10% increase in total metals output. Great Panther has $24M in cash on the books with no long-term debt. It has a very strong financial position and the market cap is a fraction of where it was a couple of years ago when there was a lot more risk in the story.
TGR: Do you think that Great Panther is likely to attract an acquirer?
MK: A lot of companies have been saying they want to do acquisitions and are looking at possible targets for mergers. The problem is that a lot of the acquisitions won’t be acquired at current market value. Companies are going to have to pay a premium to get them. All of a sudden it doesn’t look as if a project is an accretive acquisition any more. Sure, assets are cheap, but some of these companies that are in a position to do a deal are gun shy because by the time they pay a premium to take over something, it looks expensive in hindsight. We’re going to need to see a rebound in the price of the metals and locking in the cheap market caps of some of these acquisition targets. We may be just on the cusp of that. It’s too early to say.
TGR: Great Panther exceeded its 2013 production guidance. Are you willing to go out on a limb and say it might beat its guidance for 2014?
MK: It will at least be in the ballpark. Great Panther’s president has done a very good job of underpromising and overachieving. Companies that have missed expectations get severely punished in the market. Just this week, Alamos Gold Inc. (AGI:TSX), which is a very successful midtier producer in Mexico, missed expectations and issued lower guidance for 2014. The stock is down by more than 30% in one week on numbers that are not that bad. It makes more sense to be very conservative with guidance and then go out and surprise the market.
TGR: What are some other companies that you like in 2014?
MK: Excellon Resources Inc. (EXN:TSX; EXLLF:OTCPK) has operational and financial strength. It had about 2.1 million ounces (2.1 Moz) of silver equivalent output in 2013, but plenty of spare capacity in its mill. It has a defined resource with more than 10 years of mine life. Its cash costs are extremely low. It has $9M in cash. It’s positioned to move forward even if the market remains unmoved.
Another junior I’ve liked for a long time is Avino Silver & Gold Mines Ltd. (ASM:TSX.V; ASM:NYSE.MKT; GV6:FSE). Even in this market, it reported a 260% increase year-over-year in silver production numbers. Gold output increased by 162% and its all-in costs are still below $11 per ounce of silver net of byproduct. This is the kind of company one can buy right now. It’s still very cheap relative to its peers, but it’s not likely to surprise anybody or get in trouble with weak margins if metals prices don’t start rebounding in the next little while. It gives investors that extra degree of confidence.
The final company I should talk about is Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE), which is one of those companies that year after year, good conditions or bad, has always been able to report increases in production. This most recent year is no exception. Endeavour Silver has been able to lower its costs and increase profit margins. Its production was 6.8 Moz silver in the most recent year. It has $35M on the books. Endeavour Silver is a proven winner and has been able to build shareholder value year after year.
TGR: What about some other juniors that are having exploration success but are not yet producing?
MK: A producer that I would categorize as more of an explorer—the best exploration story in all of Mexico—is IMPACT Silver Corp. (IPT:TSX.V). The company has identified literally thousands of historic mine workings within the property holdings that it controls. These are high-priority exploration targets that the company can look at to outline new resource zones that were overlooked in the past. It’s not just a theoretical model. Over the last five years IMPACT put several new mines into production that it discovered just through advancing exploration around old workings.
IMPACT advances an extremely aggressive exploration budget year after year. This year, the company is planning on drilling between 15,000 and 20,000 meters, funded by cash from its current production levels. It has more than $6.5M in cash on its balance sheet. IMPACT has an enormous inventory of high-profile targets and a fantastic track record of achieving exploration success and then rapidly advancing to new mine development. To me, IMPACT is head and shoulders above the pack in being able to demonstrate strength in exploration.
TGR: What are your thoughts on IMPACT’s management?
MK: I’ve known CEO Fred Davidson for about 10 years. I first started investing with his other company,Energold Drilling Corp. (EGD:TSX.V). Energold is another superb story with financial flexibility and diversified operations into geotechnical and petrochemical drilling. Davidson has done a good job of building growth and maintains a conservative financial posture, which is hard to do. Usually a company has to take on a lot of risk if it wants to grow quickly. I still own a personal position in both companies and they will probably remain core holdings for me as long as I’m investing in the sector because they’re such solidly run companies.
TGR: Is it a big advantage for IMPACT to have a relationship with a drilling company?
MK: It’s not an advantage right now because so many drillers have inactive rigs that are being offered at a discount. As drill rigs become harder to get on contract as prices start going up, it will become a much bigger advantage to have an in-house relationship with a company like Energold.
TGR: Which strictly explorers do you like?
MK: There are two companies that have seen a nice rebound in the last month. Garibaldi Resources Corp. (GGI:TSX.V) has a core group of holdings in Mexico that the company is currently drilling in proximity to large-scale mines in Mexico. Any drill-bit success that it accomplishes could become a very attractive takeover target. Garibaldi is unique in that earlier in the cycle it did just that. It found a large gold and silver deposit, which it successfully vended to another company, making a lot of money for its shareholders. The company has done a very good job of managing its cash position.
Garibaldi also has an asset in British Columbia that I originally wondered why it even bothered to keep when Mexico was doing so well for it. However, this part of British Columbia has recently become more active, with two other companies at the limits of the property. Speculation is coming into the stock on the basis of “closeology”—that there may be a significant discovery next to its Grizzly property in British Columbia that could suddenly be a much more attractive asset for a transaction. Garibaldi’s share price has more than doubled in just a few weeks based on that speculation.
Another explorer that I like is Minaurum Gold Inc. (MGG:TSX.V). The company had a fund come in and put some money on the table that will enable it to drill on a gold-copper prospect in Mexico that shows a lot of promise.
TGR: You’ve had success as an investor by getting in on a big move at the beginning of a cycle. As an investor, what signs will signal that the next move is close?
MK: I’m encouraged by the fact that the junior miners as a group are outperforming the metals. In the beginning of this correction, the metals were still moving higher but the stocks had started to sell off. They stayed in this bearish posture for more than two years.
A big part of what drives the overall performance of a sector is what big money investors are doing. There were a lot of mutual fund redemptions and hedge funds selling across the board in the mining space during the last several years. A great many of them I suspect were positioned net short. That is now starting to unwind and they’re starting to aggressively accumulate sector leaders that have been beaten down. When I start seeing high-volume accumulation off the lows, the bottom is in for the entire sector.
There is a parallel to 2003 when I first started to make money in these mining stocks. There was a long, painful bear market that had driven a lot of the mining stocks down to extreme lows. Then there was this uptick. The first hint was that metals started to increase in value and mining stocks were increasing at a faster pace than the metals. There were fewer exchange-traded funds in 2003, but some of the larger junior mining ETFs that are available today, like Market Vectors Junior Gold Miners ETF (GDXJ:NYSE.Arca), are showing much faster gains than overall metals. That tells me that investors are starting to buy a basket of these undervalued stocks and position themselves for the next bull market.
TGR: Could the big funds just be coming in to take advantage of a short-term rally?
MK: I don’t think so. The liquidity isn’t there to flip these stocks. Companies are buying these stocks because they’re at extreme low valuations and it’s unlikely that they’re going to trade them after a short bounce.
TGR: Do you have any final thoughts for us?
MK: Investors have to be very systematic. In the more speculative days of the sector, an investor could just about buy any name and make money on it—hype and speculation ruled the day. In this market, investors need to spend more time doing research before putting money on the line to identify the stronger companies, the ones that have the best management, projects that will still be producing years down the road, and that have been able to meet the challenges of lower metals prices by lowering their costs and improving their profit margins. Those are the kind of companies that it takes a little extra time to find and those are the ones that you could buy with confidence now.
The advantage of this terrible correction is that top-quality companies are now priced in the same range as the junk. You’re buying prime rib and paying the price of hamburger. You might as well go and sort through and find where these prime-rib candidates are and load up. You might as well buy the best companies and be positioned to make the most money instead of just picking up some of the weaker performers that are also trading at their lows.
TGR: Thanks for your time today.
MK: It’s always my pleasure.
Mike Kachanovsky is a consultant providing analysis of junior mining and exploration stocks. His work is published on a freelance basis in a variety of publications, including the Mexico Mike column inInvestor’s Digest of Canada. He is a founder of www.smartinvestment.ca, which serves as an online community for the discussion of all topics relating to junior mining stocks.
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DISCLOSURE:
1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Timmins Gold Corp., Great Panther Silver Ltd. and Excellon Resources Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Mike Kachanovsky: I or my family own shares of the following companies mentioned in this interview: Great Panther Silver Ltd., Alamos Gold Inc., Excellon Resources Inc., Endeavour Silver Corp., IMPACT Silver Corp., Energold Drilling Corp., Garibaldi Resources Corp., and Minaurum Gold Inc. Great Panther Silver Ltd., IMPACT Silver Corp., Garibaldi Resources Corp. and Minaurum Gold Inc. currently supportwww.smartinvestment.ca with paid advertising. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
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AUDUSD has found a support in the past two weeks and rallied more than 300 pips from 0.8650 which can be wave C as part of a flat correction in wave B). The reason is a three wave decline from above 0.9080 that we think it’s corrective wave B as a part of a bigger complex correction. If we are on the right track then pair will rise up to 0.9080-0.9170 resistance zone in the next few trading days where a completion of a contra-trend pattern may occur.
AUDUSD Daily Elliott Wave Analysis
AUDUSD Four Hour
AUDUSD is testing last week highs, so it seems that pair is still moving up in wave (v) of C, final leg of the pattern that is expected to form a top for AUDUSD in this week. We are tracking a flat correction labeled since mid-December that is a contra trend movement, thus it suggests more weakness for AUDUSD in weeks ahead. Ideally price will turn impulsively back to 0.8900 that will put pair in bearish mode.
AUDUSD 4h Elliott Wave Analysis
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EUR USD, “Euro vs US Dollar”
Euro continues moving upwards. Main target is still the same, close to upper fibo-levels near 1.3800. Later, pair is expected to start continues growing up and reach new maximums.
As we can see at H1 chart, market is being corrected, but may start new ascending movement in the nearest future. According to the analysis of temporary fibo-zones, bulls may reach their main target by Tuesday.
Franc reached one of intermediate fibo-levels and started local correction. Most likely, this correction will finish during the day. I’m planning to increase my short position after price starts falling down again.
As we can see at H1 chart, current correction may be quite short. Pair may reach new minimum during the day. Main target for bears is close to several fibo-levels near 0.8800.
RoboForex Analytical Department
Article By RoboForex.com
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Forecasts presented in this section only reflect the author’s private opinion and should not be considered as guidance for trading. RoboForex LP bears no responsibility for trading results based on trading recommendations described in these analytical reviews.
The 18-block euro currency edged higher against the US dollar on Monday as market participants focus on the Eurogroup meeting in Brussels.
The euro climbed to its highest level since in three weeks during the Asian trading hours, as it rebounded from $1.3724 to trade nearly flat at $1.3702 against the US dollar at the time of writing.
Finance ministers are meeting in Brussels for the Eurogroup meeting on Monday; the ongoing economic crises in Greece and Cyprus are expected to be discussed at the meeting, as well as further developments regarding the European Stability Mechanism (ESM).
On Monday, the New York Stock exchange will be closed for the President Day holiday.
Market participants will be expecting housing and inflation reports as well as minutes from the Federal Open Market Committee’s (FOMC) meeting.
The US Federal Reserve released the factory output report on Friday, which revealed a 0.3% contraction, compared to analysts forecast of a 0.2% growth.
An Executive Board member of the European Central Bank, Benoit Coeure said the ECB would be ready to take action against the euro zone low inflation. “We are very vigilant regarding risks to our baseline scenario, which envisages inflation slowly going back to 2% over the medium term,” Coeure told the Slovenian newspaper Delo.
The European Central Bank kept its benchmark interest rate unchanged following its latest meeting. The ECB President Mario Draghi said the bank is ready to cut interest rates further if needed.
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