Gold & Precious Metals

A Contrarian's Guide to Volatile Markets

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Posted by Bob Moriarty via The Gold Report

on Tuesday, 15 May 2012 09:18

Trotting the globe in his unrelenting quest for investing opportunities, Bob Moriarty had just completed a 21,000-mile travel-a-thon when he picked up the phone for this exclusive interview with The Gold Report. He liked a lot of what he saw, found plenty of bargains along the way and is willing to name names. Ever the contrarian, he is picking up stocks when everyone else is dumping them; he plans to cash in when the mass of sellers morphs into a mass of buyers and drives prices up.


The Gold ReportWe're hearing many people these days warning that it's not a good time for investing in junior mining stocks. The TSX Venture Exchange has been experiencing some of its lowest volumes in six to nine months. What do you believe investors should do this summer?

Bob Moriarty: Anybody following my website for years will be familiar with me saying this: You can ignore technical analysis. You can ignore seasonality. You can ignore fundamentals. The only thing you can ever absolutely make money in is being a contrarian. Some very big names in the mining industry, including Rick Rule and Eric Sprott, have said, yes we're in the bottom but it'll be several months before you should invest. Where were they April 25 last year, when I said we'd reached the top in silver? For months afterward, the very best place to be was in cash. You have to look at what people say and when they say it. Very few people got it last year, but I clearly was one of them.

We are at a major bottom in gold and gold shares. The fact that some of the biggest names in the business are telling investors to bail out or keep their hands on their wallets if they're tempted to buy is a buy signal. If you have a hundred people in a room and every single one of them was a bear, the next trade would be up because you would have run out of sellers. The fact that the volume is so low speaks volumes all by itself. There are no buyers—only sellers, and we're about to run out of those. When that happens, the very next trade will be up.

It's a chicken-and-egg situation. Which came first? In this situation, was it the bottom or the news? Everybody hears, "The Dow went up 200 points today because of xyz." They try to connect news with action and it's exactly the opposite. When gold and gold shares go up, they'll say it's because of Iran, or Israel, or Osama bin Laden or Ron Paul. It's nonsense. It will go up because we're running out of sellers. When you have no sellers, you only have buyers. It's that simple. Too simple for most people to understand. But those who do will make a lot of money. Dawn follows the darkest hours.

TGR: But suppose the government announces quantitative easing (QE) 3, for instance, or some new European debt problems crop up. Wouldn't such news prompt investors to buy junior gold and silver shares?

BM: Absolutely not. What you hear on the radio, read in newspapers and most of what you see on the web is not news. It's propaganda. We have the equivalent of QE3 in Europe, something like $6.7 trillion, and gold, silver and equities have been going down. There's no connection between news and action. We have been spring-loaded to believe that the news is important and it's not. It's meaningless. Six people control 95% of the news media and you're being told what they want you to believe. That doesn't mean it's news.

TGR: So you have to divorce yourself from the news if you really want to be a contrarian in investing in mining stocks?

BM: Absolutely. Every time I call a silver or gold top and I'm perfectly correct, a hundred people immediately write to tell me how stupid I am in calling a top when in fact they're always dead wrong. They never tell me a month later; they always tell me as soon as I say it. Well, I've called tops and bottoms correctly for 10 or 11 years now. To be able to do that, either I have to know something other people don't or I have to be the guy doing the manipulation. And believe me, I'm not the guy doing the manipulation. All markets are manipulated and that makes manipulation as close to meaningless as you can get.

The mere fact that shares are hard to sell and there's very low volume is a buy signal all by itself. If you want to make a fortune in the junior mining segment, buy when nobody wants to buy and sell when everybody wants to buy. If that were all you did, you'd make 100% a year. Juniors have a 200–400% range every year. Buy when things hit a new low, sell when they hit a new high and ignore all the "gurus."

TGR: You talked about calling silver's high last April, and you've again been looking at silver and gold assets around the world. Do you consider yourself more of a silver bull or a gold bull? Or neither?

BM: I'm an agnostic. As for what I look for, I don't look for silver or gold or boron or natural gas. I look for opportunities. The Argentex Mining Corp. (ATX:TSX.V; AGXM:OTCBB) silver property we visited two weeks ago is a hell of an opportunity, and I said so.

TGR: That's in the Santa Cruz Province in Argentina, which has been a hotbed of exploration activity over the last several years.

BM: Yes, I was actually down there visiting four years ago. I liked the stock when it was $1.34/share. It's trading at about $0.38/share now, but two weeks ago it was trading at $0.25/share. If you're buying shares in silver at $0.25, you're effectively buying silver equivalent at $0.11/oz. If silver goes down to $15/oz, you're still going to make money.

Argentex will release a new NI 43-101 any day now, and they've doubled the amount of drilling, so it wouldn't surprise me to see the resource almost double. But in any case, when silver was selling for $5/oz, there were silver company shares selling for $1/oz in the ground. So, $0.08, $0.11 or $0.20—that's pretty cheap for an ounce of silver.

TGR: Do you look at certain jurisdictions or provinces that are particularly good for mining activity and then bet on some of those areas? Or is it always company specific in your view?

BM: It's actually management-specific. You need to look at a lot of factors, of course, but the most important is management. The country or province is absolutely important. I'm going to write an article shortly and will call it "The Miners' Lament." It's about having a gold or silver or boron project and the price of the commodity goes up. As soon as the price goes up, governments get greedy. That's happened in Peru, Bolivia, Ecuador and Australia. To a certain degree it's happening in Argentina, because the government has started getting greedy and claiming a bigger piece of the miners' pie.

TGR: On May 4, Argentina's Congress passed a bill to nationalize Repsol YPF SA (REP:BMAD), the biggest oil company there, expropriating 51% of Repsol's shares. Although not entirely unexpected because President Cristina Kirchner had announced her decision to nationalize YPF a couple of weeks earlier, the action—pretty much effective immediately—sent shockwaves through the resource investing community. Do you think this news makes investing in Argentinian juniors more risky?

BM: There are a couple of different issues to address here. One is the stupidity of government in Argentina. In 1914, Argentina had the third-highest GDP in the world. Based on agriculture and metal wealth and the educational level of its people, Argentina still should be one of the wealthiest countries in the world. It's not, and hasn't been for 100 years now. The reason is 100 years of incredible stupidity in government.

The resources are there. The people are there. The climate's wonderful. The wine's good. Buenos Aires is a lovely city to live in. Yet Argentineans suffer economically. For the government to seize YPF is especially stupid. The excuse was it was not making enough money out of it—in much the same way that the power company in South Africa wasn't making a profit because the government imposed limits on what the power company could charge for the power it sold.

Governments believe they're smarter than the economy and they can repeal or modify the laws of supply and demand. They can't. The last 6,293 times governments have tried to show they're smarter than the economy, they've screwed it up. Governments just get in the way of people making money. If you go to Switzerland, you don't even see government. In Sweden, government's in the background and that's a welfare state. But, government doesn't figure into every newspaper article and everything you hear on the radio. In China, I don't have a clue how the government works; I just know it's an exciting place to make money.

So let's go back to whether it's safe to invest in Argentine juniors. I think it is because the juniors are in the exploration stage and they're bringing money into the country. It would be especially stupid for the government to get involved at this point. I don't think it will fool around with the production companies yet, either, but there's no limit to the stupidity of governments.

TGR: Santa Cruz Province in particular seems to be a fantastic jurisdiction for exploration—great roads, nearby power, supportive locals. I was impressed.

BM: I was quite impressed too. And I know that you went to see another project. I saw Netco Silver Inc. (NEI:TSX.V; NTCEF:OTCBB), which is on the Chilean border. It has a similar series of sheeted veins and high silver grades. The company has been totally ignored by the market.

TGR: Tell us a little bit more about Netco.

BM: When I look at a property, I try to figure out the limits. I saw a series of sheeted veins, similar to what we saw in Santa Cruz at Argentex. I think Netco found 10, 12 or 15 kilometers in strike length. Netco has two problems. First, it's one of the most god-awful names I've ever heard and, second, the management hasn't done or said anything for five years, so the market has totally ignored it. However, that's exactly what I look for—opportunity.

Every project I'm going to see now has low-hanging fruit just begging for somebody to come along and pluck it, take it home and eat it. How can you beat silver at $0.11/oz? Netco has 2,000–3,000 gram silver intercepts over meters and nobody's ever heard of them before, including me.

There are so many companies out there now that you could invest in the biggest piece of crap stock in the universe and it will be up 100% or 200% in a year. Really good stories, from Argentex and Netco in Argentina to Tembo Gold Corp. (TEM:TSX.V)Canaco Resources Inc. (CAN:TSX.V), Kinross Gold Corp. (K:TSX; KGC:NYSE) and Keegan Resources Inc. (KGN:TSX/NYSE.A) in Africa—you could name 100 companies and they're going to be up 400% to 500% in the next 18 months.

TGR: Well, Bob, let's go off and harvest some of that low-hanging fruit. You travel the world. Tell us about some of your favorites.

BM: One of the real low-hanging fruits has to be Canaco, which went from an $800 million (M) market cap a year ago to about $80M or $100M now. The stock has gone from $8/share down to $0.88/share and the company has only about $0.60/share in cash. But it's worth $800M. Its intercepts are fabulous. No question whatsoever, it's going to be a mine. It has no particular issues.

Tembo did a financing at $1/share last year, made its initial public offering in February, and its stock went up to $2.20 or $2.30/share shortly afterward. I think it's trading at close to $0.90 now. Tembo's project in Tanzania is located right next to Barrick Gold Corp.'s (ABX:TSX; ABX:NYSE) Bulyanhulu gold mine, and the same team that ran Bulyanhulu is now at Tembo. They're coming up with intercept after intercept and know exactly what they have. With a 97,000-meter drill program scheduled, Tembo's going to have millions of ounces. And the company's being given away.

TGR: How do you view Tanzania in terms of jurisdictional risks?

BM: The real issue there is the infrastructure. Mining provides most of the country's export income, so it's as important in Tanzania as it is in Peru. If you want to talk about jurisdictional risk, look at Peru and think again about "The Miners' Lament." Newmont Mining Corp. (NEM:NYSE) is trying to build a $4.8 billion mine in Cajamarca Province. The president of Cajamarca Province is demanding a $780M slush fund that only he has access to for "environmental" purposes. I can guarantee it's a bribe and he wants 1.5% of the purchase price to let Newmont get into business.

Peru's smart enough. It gets 60% of its export earnings from mining and now has a process in place whereby some of these idiots can be thrown out, and I think the local people in Cajamarca are about to throw him out. There's so much corruption in Peru. It's like Ecuador and Bolivia—there's no rule of law.

North of there, Corazon Gold Corp. (CGW:TSX.V) operates in Nicaragua. Its stock is going for one-third of the price from two months ago, and I'm picking up some for myself. Corazon was smart enough to walk away from the Santo Domingo concession in central Nicaragua because the terms weren't very attractive. But just a few weeks ago, the company picked up three excellent new properties, contiguous concessions along the Rio Coco in northern Nicaragua.

TGR: Going back to Africa for a moment, are there any other names you like there?

BM: Abzu Gold Ltd. (ABS:TSX.V; ABZUF:OTCQX) has some world-class projects in Ghana and absolutely fabulous management. In fact, it shares management with MAG Silver Corp. (MAG:TSX; MVG:NYSE), which is one of the big success stories of the last 10 years. I've not visited Abzu, but I've been to the adjacent mining property. And getting back to your earlier question, from geological and jurisdictional points of view, both Ghana and Tanzania are excellent places to work.

TGR: What are some of the North American stories you like, Bob?

BM: First, let's talk about the difference between Canada and the United States. Canada is a wonderful place to work. I think it's the most favorable mining community in the world. There's some invisible line you cross when you go from the U.S. into Canada and all of a sudden, you become sane. The people in the U.S. amaze me with their ignorance of politics, economics and everything that's going on in the world. They're so insular; they just don't pay attention.

Canada, on the other hand, is still an international country. The miners and geologists in Canada travel all over the world, and like Johnny Appleseed, they're spreading goodwill and knowledge wherever they go. There is no mining anywhere in the world without an abundance of Canadians, and by the same token, no mining area anywhere else in the world has an abundance of Americans except America.

That said, from a geological point of view, there's enormous opportunity in the United States, but the government's still being especially stupid. At some point, somebody will realize you can't keep spending more money than you take in. The United States is borrowing $0.41 out of every $1 it spends today. That's insane. Some 88 million Americans are unemployed or underemployed—88 million people who aren't working and we have only 64% employment among those who should be working. At some point, Americans will have to produce something besides hamburgers and new regulations and idiots in politics.

TGR: How does that relate to getting projects in Nevada, Montana and Arizona permitted and into production?

BM: It's going to get easier. I went to see Trueclaim Exploration Inc. (TRM:TSX.V; TRMNF:OTCQX) in Arizona. Silver nuggets, which are extremely rare, were supposedly found on its property, and the whole story about the Lone Ranger firing silver bullets apparently came from there. It's a perfect example of a wonderful project in a wonderful area. Arizona was settled because of mining in the first place. But the property is unfortunately on U.S. Forest Service land, which means jumping through 67 hoops and stumbling through a bureaucratic minefield to get anything done. That has to change.

TGR: Let's get back to some of the other names you like.

BM: I like Comstock Mining Inc. (LODE:NYSE.A). I was visiting its properties in Nevada about a year and a half ago. Of course, it has the Comstock Lode, enormously rich in both gold and silver, and a lot of money in the till. But Comstock isn't moving as fast as I'd like; I'd like to see things speed up there.

Evolving Gold Corp. (EVG:TSX; EVOGF:OTCQX; EV7:FSE) is really an interesting story. It has a joint venture on its Rattlesnake Hills project in Wyoming with a subsidiary of Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE), which has agreed to spend $75M to earn half the project. So if half of Rattlesnake is worth $75M, the other half owned by Evolving Gold should also be worth $75M. But you can buy the whole company including its Carlin properties for $29M. Go figure. I visited its Carlin project in December. I think it's very close to a major intersection where it has been drilling in the Carlin Trend.

I visited Gold Standard Ventures Corp. (GV:TSX.V; GDVXF:OTCQX) on the same trip, right next door to Evolving Gold. I said in December that Gold Standard may have already drilled a home-run hole on a major new deposit and not even realized it. In fact, that was the case, and its stock has gone from $1/share to about $2.50/share. Evolving Gold, on the other hand, is in the $0.22/share neighborhood, so cheap it's insane. It was as low as $0.15/share in 2008, but up to a couple of bucks in 2009–2010.

TGR: To have new discoveries cropping up in Nevada is pretty exciting when you consider how much exploration has been done there. It's amazing what Nevada is producing in terms of mining opportunity and wealth.

BM: I'm extremely familiar with the Carlin Trend and what's been going on there in the last five years, and it's the juniors who are making the bigger discoveries. I don't even bother talking to the majors. They aren't developing as many ounces as they're producing, and they're all going to be out of business in 10 or 15 years. You just can't conduct your business doing it that way. But with someone like Gold Standard's Vice President of Exploration Dave Mathewson doing the exploration, the juniors are coming up with these multimillion-ounce deposits that nobody dreamed of because they never tried drilling there before.

TGR: Obviously, you feel like it's a shopper's paradise in junior stocks. Are there any other opportunities that you're particularly keen on that you'd like to talk about?

BM: Anything related to energy is an opportunity. Natural gas is being given away. And, from a contrarian point of view, it's a gimmie. Potash is absolutely a big opportunity and graphite is another one.

TGR: So you don't think all the buzz about graphite means it's a bubble, a flavor of the month?

BM: It absolutely is the flavor of the month. But you get a bubble when about 450 companies are in a space, and now there are only about 30. I don't expect all 30 to succeed, but I own about five of them. I'm quite happy to because I think there's a wonderful opportunity there. When it gets to 450 companies, I'll probably start selling some of my shares. Every investor should be familiar with Hobson's Choice.

TGR: How so?

BM: Hobson was an innkeeper in rural England back in the 1700s. He was very lazy. If someone came to him asking for a trotting horse to ride around the village for an hour or two, he'd fetch the first horse nearest to the door of the stable. It might be a plow horse. So Hobson's Choice was no choice at all or the best of a bad lot.

We live in a financial environment in which every bank in the United States has been bankrupt for four years and everybody is still pretending they're going to survive. In Spain, 52% of the young people are unemployed. We are so close to a global revolution, it terrifies me. In that situation, you have to go to safety. So investors have no choice, really. And believe it or not, I don't see anything safer than juniors—gold or graphite or boron or natural gas or potash. If you are faced with a choice of investing in U.S. T-Bills or Greek bonds or Spanish bonds or resource juniors, what would you invest in?

TGR: People always have to eat and need a way to trade.

BM: You've got it. But they must have something of value to trade. I don't know whether the gold price will be $500/oz or $5,000/oz or $50,000/oz, but I can tell you that in two, three or five years, if you have a 10-ounce bar of silver in one hand and a 1-ounce gold coin in the other, you'll know you're holding something of value. Marc Faber says everybody should buy a $1M T-bill, put it in a nice frame, hang it on the wall and in 10 or 20 years when the grandkids visit, they can point to it and say, "See that? That used to be money." Paper money is already a relic. It's not a prediction—it's here now. [Faber, who produces a monthly investment newsletter, Gloom Boom & Doom Report, chatted recently with The Gold Report.—Editor.]

TGR: You've given us some good stuff to chew on, Bob. Thanks so much for your time.

Convinced that gold and silver were at their bottoms, and wanting to give others a foundation for investing in resource stocks, Bob and Barb Moriarty brought 321gold.com to the Internet 11 years ago, and later added 321energy.com to cover oil, natural gas, gasoline, coal, solar, wind and nuclear energy. Both sites feature articles, editorial opinions, pricing figures and updates on the current events affecting both sectors. Before his Internet career, Moriarty was a Marine F-4B pilot and O-1C/G forward air controller with more than 820 missions in Vietnam. A captain at age 22, he was the youngest naval aviator in Vietnam and one of the war's most highly decorated. He holds 14 international aviation records, and once flew an airplane through the Eiffel Tower's pillars "just for fun."

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Gold & Precious Metals

Gold & Gold Miners Are Closing in on a Major Bottom

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Posted by Chris Vermulen - GoldandOilGuy.com

on Monday, 14 May 2012 08:00

“You can’t understand what lays ahead if you don’t understand the past”

            ~  Satellite,  Rise Against  ~

Members of my service as well as long time readers know that I do a lot of analysis based on the past. I am constantly looking at long-term historical price charts and data. As a trader, I am always looking for an edge.

Obviously the keys to long-term success involve proper position sizing, risk management mechanisms, and ultimately leveraging probability. Professional traders are masters of these tenets. These characteristics are what separate successful traders from average traders over the long haul.

Sometimes through my rigorous analysis I come across price charts and oscillators that help put together a picture that helps shape my view of the marketplace. The past few months have been some of the most difficult market conditions that I have seen in some time.

The “wall of worries” permeates the financial landscape as risk at present seems unprecedented. The list of macroeconomic concerns ranges from the European sovereign debt crisis to escalation of military action in the Middle East.

I could probably write an entire article about the various risks that plague global financial markets at present, but I try to focus on the positive in any situation. Right now remaining optimistic is a daily battle amid the constant barrage of depressed economic data. Instead of focusing on all of the various risks, I focus on finding opportunities where probabilities are favorable based primarily on historical price data, cycle analysis, and tape reading.

Back on April 9th I proffered an article that discussed my expectation that the U.S. Dollar Index would rally while risk assets such as equities and oil prices would collapse. Additionally I commented on my expectations for weakness in gold, silver, and the entire mining complex. I was wrong about the timing of the U.S. Dollar’s advance, but the ultimate price action analysis was correct.

The following quote came from that article, “As shown above, I believe that short term targets to the downside are likely somewhere in the 1,475 – 1,525 price range. I think gold will find a major bottom near these levels and a strong bounce will play out.” (Click here to view the entire article)

When I originally wrote that article referring to a decline in gold prices gold futures were trading around 1,630 an ounce. Price rallied sharply higher after my article went public, but fast forward to today and my concerns appear to be well founded. I am a long-term gold bull and I ultimately believe that new highs will occur in the future. However, gold and gold miner’s may have further to fall before they find major support.

As stated above, my original expectations for the Dollar Index did not happen in the time frame I was anticipating. However, the belief that a rally was forthcoming proved to be accurate as can be seen from the price chart of the U.S. Dollar Index shown below.


As can be seen above, the price action is confirming serious strength. The weekly close on Friday saw the Dollar close above a key short-term resistance level. Additionally I would point out the double bottom that has been carved out on the chart above which is also bullish. Should resistance near 80.76 give way to higher prices a test of the recent highs is quite possible.

The technical picture suggests higher prices in the near term for the greenback. From a fundamental  viewpoint, recent economic data also suggests that higher prices may await as one the largest weekly debt issuance of 2012 among sovereigns within the Eurozone will transpire next week. If any of the debt auctions go poorly it will reflect negatively on the Euro currency and help push the Dollar higher.

Most of the debt issuance is outside of the 3 year maturity window so the LTRO justification to encumber risk does not apply. Next week we will find out just how serious investors are about accepting default risk on European debt instruments. I would be shocked if the ECB sits idly by, but the sheer amount of capital required to safeguard debt issuance next week is extreme, even for a major central bank.

The Euro currency continues to fall and has broken key resistance around the 1.30 price level on the EUR/USD currency pair. Price is not collapsing as of yet, but we are seeing a slow and steady slog lower for the Euro. This price action serves to boost the Dollar which ultimately places downward pressure on risk assets such as equities and oil. Additionally, it reduces the valuation of gold. The daily chart of gold futures is shown below.


The recent price action in gold has been quite ugly and price is resting at key support stemming from an intermediate-term descending channel shown above. Should the lower bound break to the downside a sharp move lower could play out.

It is important to remember that gold is coming off a monster multi-year bull run and it only serves to make sense that a nasty pullback that shakes out the bulls would be forthcoming. I continue to believe that strong support and buyers will come back into gold around the 1,450 – 1,550 price range as significant long-term support levels should hold up prices. The key support zone is clearly illustrated in the chart above.

I continue to wait for price to reach that key support level and based on the current proximity those support levels are magnetizing price toward them. When long-term support / resistance levels are near price a test is a common occurrence. The most important question to ask is whether the support zone shown above will hold, or will even lower prices ultimately play out?

Gold and silver both are starting to become oversold on the daily time frame. While the gold bugs have been feeling pain the past few weeks, the gold miners have been taken out back to the woodshed for a good whipping. The miners have been absolutely crushed in 2012 .

My long term analysis revealed something quite extraordinary on the longer term weekly chart of the HUI gold mining index which I believe is critical for readers to watch and monitor. We are nearing valuation levels based on the true strength index that have not been seen since the market crash that took place back in 2008. The weekly chart of the gold bugs index is shown below.


As can be seen above, the Gold Bugs Index (HUI) has been under considerable selling pressure since early September of 2011. However, note how low the True Strength Index is based on 5 years of price data. We are nearing the same level that we saw back in 2008 which marked a major bottom that ultimately resulted in a monster move to the upside for the gold miners.

I am of the opinion that this chart demonstrates quite clearly that a great buying opportunity for gold, silver, and the miners is likely going to present itself in the near future. I will be watching this price relationship over the next few weeks waiting for a strong entry point for a longer-term purchase. After this pullback concludes, the potential returns that could occur in gold, silver, and the miners could be breathtaking.

With 3 clear support levels, a defined risk approach could be used in order to scale in or to reduce market risk should prices continue to move below each support level. While the time is not right just yet, more than likely a solid long-term risk / reward trade may very well present itself in the precious metals and mining space. I am likely a bit early, but the ultimate end game as it relates to fiat currency is documented throughout history. The final result has a finality that few truly comprehend.

If you enjoyed this article and analysis, you can get our detailed trading analysis videos every Sunday, Monday, Wednesday and Thursday here risk free: http://tradersvideoplaybook.com/risk-free-30-day-trial/

Happy Trading and Investing!
JW Jones & Chris Vermeulen


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This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals.com website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.



Gold & Precious Metals

The Golden Rule Reinterpreted

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Posted by Peter Schiff - Europacific Capital

on Monday, 14 May 2012 05:59

In an April speech in Berlin, Dr. Andreas Dombret, a member of the Executive Board of the Deutsche Bundesbank (the German central bank), offered a startlingly frank assessment of the current problems in Europe.  Although his comments were meant to apply to the tensions and imbalances that exist between the northern and southern tier of the 17-member eurozone, they shed inadvertent light on the broader global economy.

Rebuffing calls that Germany do more to support the faltering southern economies, Dr. Dombret said:

...Exchange rate movements are usually an important channel through which unsustainable current account positions are corrected....In a monetary union, however, this is obviously no longer an option. Spain no longer has a peseta to devalue; Germany no longer has a deutsche mark to revalue. Other things must therefore give instead: prices, wages, employment and output.

The question now is which countries have to shoulder the adjustment burden. Naturally, this is where opinions start to differ. The German position could be described as follows: the deficit countries must adjust. They must address their structural problems, reduce domestic demand, become more competitive and increase their exports.

In economics it is axiomatic that positive and negative current account balances will ultimately be offset by changes in relative currency valuations. The currencies of surplus countries are supposed to rise and the currencies of the deficit countries are supposed to fall. But the current global political alignment has altered this process. Like many of his German and continental peers in government and finance, Dombret is likely in favor of maintaining a common currency at all costs. But as he outlines, when currencies fail to adjust something else has to give. He insists that the giving come from those who have been getting.

Given their weak economies and strained fiscal positions, it should be evident that citizens of Greece, Portugal, Spain and Italy have been living beyond their means. Their relative prosperity over the last decade has largely been maintained by the purchasing power of the euro which itself has been buoyed by the strong German economy. Rather than forcing Germans, whose savings rates and current account surplus results from years of fiscal prudence, to lend even more money and suffer higher inflation so that the southern tier can receive more monetary stimulus, Dombret argues the citizens of deficit economies must spend less while working, producing and saving more.  In other words, their living standards must match their productivity.

Economic dynamics do not change with scale. And as it happens, there is a much bigger and equally flawed currency bloc in the world than the one Dr. Dombret is seeking to cure. In that larger bloc, the exact same dynamic of surplus and deficit nations is playing out within an inflexible monetary straightjacket.

In order to maintain exports and to manage economic expectations, many nations (most notably China) have instituted fixed exchange rates between their own currencies and the U.S. dollar. Although this system is not governed by a formal treaty like the one that binds the 17-nation eurozone, it has given rise to a virtual bloc of currencies that are unnaturally tethered, even while the underlying economics are drifting apart. And although there has been some recent flexibility from China on exchange rates, there is nearly universal consensus that these movements would be far more pronounced absent significant central bank manipulation.

Like the nations of southern Europe, the United States consumes far more than it produces. But rather than closing the gap by producing more and consuming less, both have followed a far less painful path. They have borrowed instead. Who can blame them? After all, it's far more enjoyable to consume than produce. And as we have seen in many financial arenas, a borrower will tend to borrow for as long as a lender is willing to lend, especially if there are no immediate adverse consequences.

Both Germany and China produce more than they consume. It is from these resulting surpluses that the deficit nations are borrowing. But these two creditor nations are currently showing different policy drifts with respect to their hard-earned savings. In Europe, German leaders are showing increasing reluctance to sacrifice the living standards of their own citizens to perpetuate an imbalanced economic system. The Chinese on the other hand appear to heartily encourage such a policy. This difference can be attributed to their respective political systems. In Germany, public opinion matters. In China, not so much.

The currency peg of the Yuan against the dollar, which China has enforced with varying degrees of exactitude over the past few decades, has helped the Chinese government exert greater influence over the growth and contours of its economy. But the policy has created hardships for Chinese citizens (such as disproportionately low rates of consumption and high rates of inflation). But lacking any means to overtly influence public policy, Chinese citizens have had little choice but to take it on the chin. German citizens on the other hand are much freer to voice their discontent. And in fact, fears of a voter backlash have been determinative in setting Berlin's agenda.  

The question for the global economy is whether China will become more like Germany, or Germany more like China. From my perspective the answer is clear. German leaders are unlikely to risk the scorn of voters by repudiating their cultural aversion to overly accommodative monetary policy. In China, the decisions will be more pragmatic.  Currently Beijing perceives advantages in the status quo. But ultimately the costs, in terms of increasing foreign exchange reserves and rising inflation, may force its hand. When that happens, the United States and Southern Europe will be in the same boat.  

To many, the "Golden Rule" is an idea that underscores the value of civility and fair dealing. But there is another, less magnanimous definition: "He who has the gold makes the rules." In the current global economy, the surplus countries have the gold and sooner or later we will be living by their rules. 

Gold & Precious Metals

Approaching a turning point?

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Posted by Peter Grandich - Grandich.com

on Saturday, 12 May 2012 12:42

"I think lots of things that have changed since 1984. Despite metal prices being substantially higher than they were 10 or 20 years ago, we’ve really haven’t seen those prices reflected in mining equities". Peter Grandich

Peter Grandich, author and publisher of The Grandich Letter, which can be read by visitingwww.grandich.com, says the bottom is close and that the 180-dregree turning point could be at hand. In this Smallcappower.com exclusive Mr. Grandich says the market odds are stacked against the retail investor but still names a few companies that he owns and believes are completely undervalued in this incredibly bearish market for junior resource equities.

Peter, in late April during an interview with the Korelin Economics Report, hosted by Al Korelin, you said that certain entities are manipulating or “influencing” the gold and silver markets. Obviously, the gold market, given its sheer size, is more difficult to influence, but the silver market is relatively small and has been manipulated in the past. Should retail investors be alarmed?

Peter Grandich: They shouldn’t be alarmed, but I can’t think of any financial market that hasn’t had at least had one person convicted of some form of market manipulation. So why do people think that doesn’t happen in the gold and silver markets?

I don’t believe it happens hour-to-hour or even day-to-day but I think that there are people who try to take advantage of the market and move it in a certain way. And while they likely don’t all get together and discuss it on the phone before they actually do it, there are certain groups that know when other groups are attempting something. And within the silver market it tends to happen more because the market is much smaller in size and thus more easily manipulated.

SmallCapPower: What are some of the ways these larger players move precious metals markets?

Peter Grandich: They tend to move it at certain times. For instance, there are certain dates when options are about to expire. And the vast majority of time on option days, in the metals market in particular, markets tend to go down below those option prices because so many of the option writers are the professionals who dominate the market, therefore wrote with the hope of not having to deliver. If they can pressure the market below a certain strike price, then they don’t have to deliver or cover their sales. And because that happens, most buyers refrain from buying around those known timeframes; and those who are trading the market kind of push it lower because they know it can almost become a self-fulfilling prophecy.

It also seemingly tends to happen around big announcements like the monthly employment numbers. If someone were to look back at a chart monitoring the gold and silver prices 24 hours before those announcements, I would say three out of four times those markets go down. When in reality it should be more like a 50-50.

I think there are other periods of time, too, but I don’t think it’s every day or every hour.

SmallCapPower: Would you avoid trading when those U.S. economic numbers come out?

Peter Grandich: If I was strictly a trader and certainly from the long side, I would refrain from that. I would actually look to buy any sell-offs because the market almost inevitably rebounds shortly after that.

....read more HERE

Gold & Precious Metals

Michael Campbell: Very Interesting Read. Big Concept

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Posted by John Mauldin via Michael Campbell

on Friday, 11 May 2012 03:47

A Leaderless World

I recently had a chance to speak at a conference where Dr. Ian Bremmer spoke after me. I was very impressed with his thought process and asked him to give me an outline of his speech to share with you for this week's Outside the Box. It's a shorter version of his powerhouse book, Every Nation for Itself: Winners and Losers in a G-Zero World. I highly recommend it.

And what, you're asking, is a "G-Zero world"? In a word, it's a leaderless world. A world in which, as Bremmer says, "Not so long ago, America, Western Europe and Japan were the world's powerhouses. Today, they're struggling to recover their dynamism…. But nor are rising powers like China, India, Brazil, Turkey, the Gulf Arabs and others ready to take up the slack…. If not the West, the rest, or the institutions where they come together, who will lead? The answer is, no one."

And that means the world's big problems won't get addressed as effectively as they should, as long as the leadership vacuum persists. Talk about Muddling Through!

This book by Bremmer is going to make a difference, and I'm not the only one who thinks so–

"Ian Bremmer combines shrewd analysis with colorful storytelling to reveal the risks and opportunities in a world without leadership. This is a fascinating and important book." –FAREED ZAKARIA

"Every Nation for Itself is a provocative and important book about what comes next. Ian Bremmer has again turned conventional wisdom on its head." –NOURIEL ROUBINI

Tonight I am in Chicago, where I spoke at the CFA conference this morning. It went well. I will try to get a link for you later. It hasn't been all work, either. David Rosenberg, Barry Ritholtz, and I all had dinner gigs, but we met up at the bar and just hung out for about three hours. Got to love O'Doul's NA beer. Not quite the same as a good chardonnay but healthier for me.

I will hit the send button as I have to get up for a breakfast meeting with Sam Zell. We have never met and I am looking forward to it. He is quite the legend. I will give you an update on the conference next weekend. The reviews are coming in quite strong. It was interesting to see the European elections after the analysis we were given. There is so much that seems up in the air. You can almost feel the changes coming. I feel like the kid in the back of the car on a long road trip: "Are we there yet?"

Your holding out for a world that works analyst,

John Mauldin, Editor
Outside the Box

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