Month: September 2011

Norway’s central bank, Norges Bank, kept its key policy rate at 2.25%, and signaled no changes.  The Bank’s Deputy Governor, Jan F. Qvigstad, said: “The prospects for the world economy have weakened considerably in the course of summer. External developments and the turbulence in financial markets are also affecting the domestic outlook. Against this background, we have chosen to leave the key policy rate unchanged at this meeting,” and further noted: “The turbulence and uncertainty abroad, combined with lower inflation and weaker prospects at home, suggest that the key policy rate should be kept low for a longer period.”

At its previous meeting the Bank held the key policy rate unchanged, after increasing the interest rate by 25 basis points to 2.25% in March.  The Bank expects inflation to remain relatively low, but to progress towards the 2.5 percent inflation target (but with due upside inflation risks); Norway reported annual inflation of 1.6% in July, up from 1.3% in June, 1.6% in May, and 1.3% in April this year.  The Norwegian krone has gained about 3% against the US dollar this year, while the USDNOK exchange rate last traded around 5.65

The Croatian National Bank increased the bank reserve requirement rate by 100 basis points to 14.00% from 13.00% previously; effective from the 12th of October.  The Bank said of the move: “Through this measure the central bank intends to withdraw from the banking system about 3.1 billion kuna (2.6 billion from the kuna component and 0.5 billion from the foreign exchange component of the reserve requirement).The purpose of withdrawing excess liquidity from the system is to stabilise the kuna vs. euro exchange rate, i.e. to ease depreciation pressures.”  The Bank also noted it would “take measures to prevent excessive exchange rate fluctuations not based on real economic movements.”

Sept. 21 (Bloomberg) — Richard Grace, chief foreign-exchange strategist at Commonwealth Bank of Australia, discusses the outlook for the U.S. dollar and euro. He speaks from Sydney with Owen Thomas on Bloomberg Television’s “First Look.”

Sept. 21 (Bloomberg) — Tony Tyler, chief executive officer of the International Air Transport Association, discusses the outlook for the global airline industry and cargo business. He speaks from Singapore with Francine Lacqua on Bloomberg Television’s “Countdown.” (Source: Bloomberg)

Why Gold Mining Stocks Are About to Skyrocket…

by Dr. Mark Skousen, Investment U Contributing Editor
Wednesday, September 21, 2011: Issue #1605

Are you frustrated by the failure of gold mining stocks to keep up with gold?

I am.

While gold and silver are up 30 percent this year, the mining stocks continue to lag. Barrick Gold (NYSE: ABX) and Newmont Mining (NYSE: NEM), the two largest gold producers in North America, are break-even for the year.

Hecla Mining (NYSE: HL), the country’s largest silver producer, is down 35 percent even though earnings have doubled.

The major South African gold stocks, like Gold Fields (NYSE: GFI) and AngloGold (NYSE: AU), are down for the year.

The Gold Miners ETF (NYSE: GDX) has been extremely volatile and is break-even for the year.

There are exceptions, but the overall trend is… well, trendless.

What gives?

5 Reasons Why Gold Mining Stocks Are Lagging

To find out, I called the world’s expert on gold mining stocks, Rick Rule. Rick is President of Global Resource Investments (www.gril.net), a broker firm specializing in natural resources, and wholly owned by Sprott Inc, one of the world’s preeminent natural resource investment firms. I’ve known Rick for more than 30 years as a friend and valuable advisor… After our conversation, I came away with five reasons why mining stocks have lagged.

Typically, if gold and silver are rising, mining stocks are a leveraged way to profit. If gold goes up 30 percent, mining stocks could rise by 100 percent or more, because operating margins expand and profits skyrocket.

That’s not been the case, however. During the 10-year bull market in metals, gold increased six times its value, while major gold stocks maybe doubled. In the past year, you can see that gold ETF GLD is up more than 40 percent, while mining stocks, such as GDX, lag, up only 12 percent. (See chart below.)

Rick Rule offers five reasons for this disparity:

1. The introduction of the gold ETF made it easier for investors to invest in pure gold. Before GLD was available, investors had to buy physical gold through coin dealers or foreign banks.

2. Gold equities anticipated the run-up in gold prices five years ago, and the metal had to “catch up” to expectations already built into the equity markets.

3. Mining companies disappointed investors; they failed to perform in increasing free cash flow and profitability, relative to the rapid rises in commodity prices.

Rick ties this lack of leadership to the 20-year bear market in gold (1980 to 2000); the best managers went to more profitable opportunities (high tech, etc.).

4. The mining industry went through its own version of inflation, through share dilution. Market capitalization rose much faster than share prices, as companies resorted to issuing new stock to raise capital. (We’re seeing this share dilution especially in the rare earth and uranium stocks in the past few years.)

5. Up to 90 percent of all junior mining companies – all heavily diluted – are “no good,” according to Rule, and investors heavily discounted their value.

Why the Gold Market is About to Change

But Rick Rule has good news. While the competition with gold and silver ETFs will continue, mining companies are now inexpensive relative to bullion and investors will be rewarded accordingly.

Here are the four reasons why gold mining stocks are about to soar in the next few years:

1. After a 10-year bull market, good managers have finally returned to the mining sector.

2. Top mining companies are finally generating dramatically higher profit margins. Free cash flow is now “gushing” and will double in the next year as huge capital investments by the majors pay off.

3. Expect enormous consolidation as majors start buying up smaller producers, at startling premiums to current market prices.

4. New discoveries are expected as 10 years of new exploration is paying off, and the gains accruing to successful exploration efforts can be explosive.

How to Invest in Gold Mining Stocks

Rick is constrained by regulation from making recommendations.

However his clients report a fondness for:

• Barrick Gold (NYSE: ABX), Goldcorp (NYSE: GG) and Kinross Gold (NYSE: KGC), among the majors;

• Royal Gold (Nasdaq: RGLD) and Franco Nevada (NYSE: FNV) among the royalty companies;

• Perseus, Lydian and Esperanza among the developmental juniors;

• And Vista Gold (AMEX: VGZ) as an undervalued takeover target.

From my perspective, I like Newmont Mining (NYSE: NEM), which announced earlier this year that it would start paying out a substantially larger dividend and link its dividend to the gold price. It doubled its dividend to $0.30 per share two weeks ago. If gold exceeds $2,000 an ounce, it will raise its dividend to $0.50 a quarter, a 3-percent yield, the highest in the industry.

Good investing,

Mark Skousen

Article by Investment U

Sept. 21 (Bloomberg) — Charles Dumas, director at Lombard Street Research, discusses the long-term outlook for the U.S., Chinese and German economies. Dumas, co-author of “The American Phoenix,” talks with Maryam Nemazee on Bloomberg Television’s “The Pulse.”

Sept. 21 (Bloomberg) — Full Tilt Poker paid board members more than $440 million using funds that it pledged to make available for withdrawal by its online poker players at any time, U.S. prosecutors said. Manhattan U.S. Attorney Preet Bharara’s office yesterday asked U.S. District Judge Leonard B. Sand for permission to add the new allegations to an April civil forfeiture case against Full Tilt, PokerStars, Absolute Poker and other businesses. Erik Schatzker reports in today’s Movers and Shakers on Bloomberg Television’s “InsideTrack.” (Source: Bloomberg)

London Gold Market Report
from Ben Traynor
BullionVault
Wednesday 21 September, 08:30 EDT

THE DOLLAR gold price fell to $1789 an ounce Wednesday lunchtime in London – still a 1% gain on yesterday’s low – while European stocks also fell as investors and policymakers weigh up their response to a sluggish growth outlook.

“The risk remains for another drop towards last week’s low of $1763,” say technical analysts at bullion bank Scotia Mocatta.

In recent weeks, every time the gold price has approached $1760 “the size of physical demand was large enough to take gold higher,” adds Afshin Nabavi, head of trading at Swiss precious metals group MKS.

Commodity markets were flat Wednesday morning, while US Treasury bonds rose ahead of today’s Federal Open Market Committee announcement in Washington.

The silver price dropped back below $40 per ounce – down nearly 2% for the week so far. On the currency markets, the Pound Sterling fell sharply following the publication of the latest Bank of England Monetary Policy Committee minutes.

The MPC voted unanimously to leave its interest rate at 0.5% earlier this month, the minutes reveal. Every member but one voted against increasing the size of the Bank’s £200 billion asset purchase program – known as quantitative easing.

However, “a continuation of the conditions seen over the past month would probably be sufficient to justify an expansion of the asset purchase programme at a subsequent meeting,” the minutes note, adding that there have been signs of “a synchronised slowing in global growth”.

“The MPC has collectively started to prime the public and its policy cannons for the launch of QE2,” said a note from economists at Nomura this morning.

The International Monetary Fund meantime cut its global growth forecast on Tuesday to 4% for 2011 – down from its 4.5% prediction made earlier in the year.

The IMF predicts 2011 growth in the Eurozone will be 1.6% – with US growth forecast at 1.5% and UK growth at 1.1%.

“Worries about sovereigns have translated into worries about the banks holding these sovereign bonds,” said IMF director of research Olivier Blanchard.

“These worries have led to a partial freeze of financial relations with banks keeping high levels of liquidity and tightening lending.”

Lloyds of London – the world’s leading insurance market – confirmed Wednesday that it has withdrawn deposits from several European banks, citing sovereign debt fears.

“If you’re worried the government itself might be at risk, then you’re certainly worried the banks could be taken down with them,” Luke Savage, finance director at Lloyds, told news agency Bloomberg.

Over in Athens, Greece will “have to take supplementary measures” to cut its budget deficit, finance minister Evangelos Venizelos told the Greek parliament on Wednesday, following talks
with the IMF, European Central Bank and European Union, the three lenders overseeing the country’s bailout.

The Greek government expects to run out of money in October unless it receives an €8 billion bailout installment.

The US Federal Reserve meantime is due to announce its latest monetary policy decision later today.

“Unless the Fed announces significant quantitative easing… our stance on gold remains neutral,” says Marc Ground, commodities strategist at Standard Bank – adding that were the Fed to announce QE it would “surprise the market” and be “extremely positive” for the gold price.

Press reports suggest the Fed is widely expected to announce measures designed to lower the interest rates on longer-dated US Treasury bonds – dubbed ‘Operation Twist’ after a similar policy of the early 1960s.

In Montreal meantime, the average forecast from delegates at the annual London Bullion Market Association conference – which ended Tuesday – was for an 11% rise in the gold price over the next 12 months.

This is the same percentage gain forecast by LBMA conference delegates at both the 2010 and 2009 conference. On each occasion the gold price outperformed the average forecast – with outcomes of 22% and 39% respectively.

Ben Traynor
BullionVault

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Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

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