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Ten-Point Model for Picking Mining Winners

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Posted by Dr. Michael Berry Ph.D. - Morning Notes

on Wednesday, 13 June 2012 07:41

If this is a bottom, Dr. Michael Berry sees it as the ideal time to pick up bargains in the mining sector. In this exclusive interview with The Gold Report, the Federal Reserve Board expert gives his diagnosis for what ails the markets and names the companies from Alaska to Brazil that could survive the financial plague wiping out equities all over the world.

COMPANIES MENTIONED: ALEXCO RESOURCE CORP. - CARLISLE GOLDFIELDS LTD. - GALORE RESOURCES INC. - GOLDCORP INC. - GRANDE PORTAGE RESOURCES LTD. - MINES MANAGEMENT INC. - MONSTER MINING CORP. - NORTHERN GOLD MINING INC. - NORTHERN GRAPHITE CORPORATION -PERSHING GOLD CORP. - QUATERRA RESOURCES INC. - REVETT MINERALS INC. - SILVER WHEATON CORP. - SOUTHERN SILVER EXPLORATION CORP. -TERRACO GOLD CORP.

The Gold Report: The Gold/Philadelphia Gold and Silver Index (XAU) ratio recently surpassed its high in 2008, slightly crossing 11 and peaked in the high 10s at the bottom in 2008. Do you think we have put in a bottom?

Michael Berry: If I were 100% sure, I would be a very wealthy person. I think we're close to a bottom here. Gold is too important. The long-term secular bull markets, such as we've seen in gold and silver and in fact in many of the metals, do not end this way. They end with a parabolic move upward. That is why I don't think this is the end of the gold bull market at all. I think it's probably a welcome reprieve. But ultimately, if we are not at the bottom, we're fairly close to it.

TGR: You testify to the Federal Reserve Board twice a year. In the last meeting, was there any indication of more easing on the way?

MB: There is every indication of more easing; there is every necessity of more easing. But the Fed is divided. Some of the Federal Reserve Bank presidents and governors believe we should tighten, while others have followed the Bernanke line, pushing easing. I cannot even imagine how we could raise rates in this market. I'm not saying that we don't have food price inflation, but the Fed really wants to inflate out of this problem. So I think we'll have more easing. But for now, the Federal Open Market Committee is divided between hawks and doves in a way it has never been in the past. It is going to be very interesting to see what happens as we move forward.

TGR: Many of your preferred companies have significant byproducts, primarily copper. Is this because you think copper has a bright future or because having significant byproducts tends to lower cash costs for gold and silver miners?

MB: I think it's the former. If we are going to go into an irrecoverable economic depression, then there's no future for copper. But I'm an optimist, and even though these are very difficult days for global growth, I think companies that own copper deposits are going to be very valuable when we exit this down period.

Therefore, I like copper—not necessarily as a byproduct, but as a major primary product. And if you look around the world right now, many countries are nationalizing their copper deposits. Good copper deposits are hard to come by. Copper is clearly an indicator of global economic health, and we aregoing to continue to grow again. It's just going to take some time, perhaps a long time.

TGR: When it comes to silver and gold companies, what do you look for in a possible investment?

MB: I have developed a 10-factor model for discovery micro-cap and small-cap companies. First, in extractive resources we look for world-class deposits or at least the potential for world-class deposits. The second critical factor is management. There are a lot of good management teams right now. But it is a very difficult time. Many of these companies have been sold down. And some of them are not going to survive. It's a pity but that's just the way it is.

A number of companies that I would have said were good if we were speaking a few months ago are less good today, because a lot of them cannot access capital markets to raise money. One of the characteristics of all junior miners is that they are constantly raising money because, by definition, they don't have production and cash flows yet. There are some great bargains out there, but it is going to take a strong stomach to buy some of these companies.

One company that I think is really excellent is the silver company Alexco Resource Corp. (AXR:TSX; AXU:NYSE.A). The company is in the Yukon cleaning up the old silver dumps from the past century. There are 35 old mines up there with extraordinarily high-grade silver, 40 ounce (oz) silver that it is now beginning to mine. Clynton Nauman is the CEO; I really respect him and I think he has assembled a good team.

Alexco is an example of a company that will have $20–30 million (M) on the balance sheet in cash, so it is sustainable. It probably will make $30M this year and next year. That is the kind of company we like, those with sustainability especially in this tough market environment.

TGR: Do you think Alexco might buy Monster Mining Corp. (MAN:TSX.V) since it owns the rest of Keno Hill?

CB: Alexco is in production and the management team is spending all its time right now trying to figure out how to expand the 8 million ounces (Moz)/year it is currently mining on its property. The company has about 22 targets that were old mines and adits. I would be surprised if it bought Monster. If it were to look for an acquisition, it would look for something a little bigger to move up into the next segment of silver producing companies.

And remember, Alexco is really two companies. It does environmental clean-ups and mining. It will likely split off the environmental side and either vend that out to shareholders or IPO it at some point.

TGR: You have mentioned Galore Resources Inc. (GRI:TSX.V), another Canadian company, before. Are you still following them?

CB: Yes. I really like the idea that Galore is in Canada. There is a lot of talk now about a possible mining unfriendly NDP government coming to power in British Columbia, but Galore is a really interesting play. It is right in the middle of several big developments. I like the company's Dos Santos Mexican project as well. It is just drilling it out now, but it has a lot of potential.

TGR: Galore is at $0.085 now. Are there any catalysts coming up that could move that company up?

CB: I don't think catalysts matter today because right now the Toronto Stock Exchange Venture Exchange is off approximately 50%. This isn't just a bear market, it is a disaster for these exploration stocks. All of these stocks have been taken out and shot, metaphorically. I am not sure such catalysts are going to do much until we unwind the sovereign debt problems. Companies are just learning how to survive through this. So would I be buying something like Galore for $0.08? Yes. It's a bet the company will survive and will be worth a lot more money.

TGR: Any other silver companies you like? Maybe in Mexico?

MB: Mexico is a country in a bit of turmoil right now. It is a little more difficult to work there. But Mexico and silver go hand in hand. The Faja de Plata, the plain of silver, is famous. The Peñasquito mine, which is now owned by Goldcorp Inc. (G:TSX; GG:NYSE), is the largest silver mine by net asset value in the world and the second largest gold mine by net asset value.

Southern Silver Exploration Corp. (SSV:TSX.V; SEG:FSE) is an exploration company down there. I think it is trading around $0.06 , but it has four deposits, two in Mexico and two in the United States. The best deposit is Cerro Las Minitas. The company is exploring that now. I think it has great potential. It is a very cheap stock, very cheap indeed.

Quaterra Resources Inc. (QTA:TSX.V; QMM:NYSE.A) has a property called Nieves, which is not very far from Southern Silver's property. It has about 80 million ounces silver at a 15 gram cutoff in Indicated and Inferred categories on that property, according to the NI 43-101. It has real potential.

Quaterra is also one of three companies working on the Yerington project in the former major copper mining district in Nevada. That project is a company-maker in itself. A preliminary economic analysis issued last week showed a 41 million pound/year copper mine for 18 years. It is oxide and calcacite, so it is acid-leachable. That district could add up to 20 to 50 billion pounds of copper over time. Yerington, MacArthur and the Bear deposits are the company's primary assets.

TGR: Doesn't Quatterra also have a joint venture with Grande Portage Resources Ltd. (GPG:TSX.V) near the Coeur d' Alene Corp. (CDM:TSX; CDE:NYSE) property in Alaska?

CB: Yes it does. Grande Portage and Quaterra have a 65/35 joint venture on Herbert Glacier. It is about 20 miles south of Coeur d' Alene's Kensington mine, just north of Juneau, Alaska. Herbert is very high-grade gold, a six-parallel vein system. The company will probably drill at the Herbert Glacier in June. I think it is possible that it could have 0.5 Moz of reasonably high-grade gold after this year's drilling program, a very nice discovery. Right now neither company is getting much credit for it in their share prices.

TGR: How is the U.S. doing getting project permits through bureaucracy and what projects are you looking at that might work?

MB: That's a great question. We are doing a lot of work in Washington D.C. now trying to educate the staff of various congressmen and senators on the importance of pending natural resource legislation. The Obama administration is trying to shut off mining for alternative energy solutions. And it is a huge mistake. But at least there is awareness in Washington that we have to have a transparent, faster permitting regimen. The Canadians are going to that. And we need to do it here, because we need to be developing some of our own natural resources. The good news is a pending senate bill could simplify the permitting process. If we have a Republican administration in January, it will be easier to get that passed into law.

In the meantime, Revett Minerals Inc. (RVM:TSX; RMV:NYSE.A) has the Rock Creek project in Montana, a potential world-class development near the Troy mine, a beautiful copper/silver mine. I think the general economic environment will push Rock Creek down the road. I have great faith in the efforts of John Shanahan, the CEO. The company has already jumped through every hoop to meet environmental demands.

Once that mine is built, the bigger boys, Rio Tinto (RIO:NYSE; RIO:ASX), BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) or Freeport-McMoRan Copper & Gold Inc. (FCX:NYSE), will want to have that company.

TGR: Any thoughts on Mines Management Inc. (MGT:TSX; MGN:NYSE), which has the Montanore deposit near there. What are its chances?

MB: It has more complex geology and will not be quite as easy to mine as Rock Creek. I am not sure it will ever be permitted. At some point I think that Revett will probably have an opportunity to take on Montanore as well. We will see.

TGR: Nevada seems to be a hot spot, both for silver and gold. Are there some plays that you like there?

MB: Nevada is a great place because it is a mining state. Utah, Nevada and Arizona are great places to find things and get permission to mine them. Terraco Gold Corp. (TEN:TSX.V) has the Moonlight deposit, which is in northern Nevada, not very far from Reno. It is in the same Black Ridge Fault zone with Pershing Gold Corp. (PGLC:OTCBB), a new company with a new management team led by Steve Alfers, formerly one of the key managers at Franco-Nevada Corp. (FNV:TSX). The company is consolidating the bottom of that trend in a land position around the Relief Canyon mine. I really like that management team. I have been out to see the property and spend time with management. I think it has a lot of potential. More than 150,000 oz of historical gold has been drilled out and I think both companies will find a lot more plus there is a fully commissioned gold plant that is not in operation at the present time.

Yes, I am bullish on Nevada. I think there is a lot of opportunity in gold, silver and copper there. Why go to Africa or China, when you can go to a place like Nevada and make great discoveries and subsequently mine?

TGR: Any other companies you would like to share that meet your model standards?

MB: Graphite has been a hot topic. One of the farthest along companies in this space is Northern Graphite Corporation (NGC:TSX.V; NGPHF:OTCQX) in Ontario. It has a great management team led by Greg Bowes. The company is on the road to getting into operation and has an NI 43-101 coming. It is in a great location halfway between Ottawa and North Bay. That is certainly a company to consider.

Northern Gold Mining Inc. (NGM:TSX.V) is also in Ontario. It is pretty close to production, has a great gold deposit and is a very cheap stock right now. I think it will get financed and back into production soon.

I really like the Canadian scene. Carlisle Goldfields Ltd. (CGJ:TSX; CGJCF:OTCQX) is in the Lynn Lake Greenstone Belt of Northern Manitoba. It has 2 Moz of Measured and Indicated that could grow to 5 Moz of Measured. That is bankable feasibility, but nobody cares about the stock. It is selling for around $0.20 right now. These stocks are way too cheap. Some of them will certainly survive. To be good stock pickers, we are going to have to recognize that and get in on these things.

TGR: What is next for Silver Wheaton Corp. (SLW:TSX; SLW:NYSE)?

MB: Silver Wheaton's business plan is absolutely brilliant. The company has executed it beautifully. These guys are smart. I wish I owned a lot more stock than I do. I think silver is at $29/oz today, plus or minus. I think it is going to be $200/oz before this is all over. It might take five years for that to happen, but it is going to happen.

The company is cashed up with over $1 billion, $400M revolving debt and approximately $125–150M in equity investments. Silver is off from its highs 33% in the short term. But it is going to go back up. It is a very strong story and a stock that should be owned.

TGR: Thanks for your insights.

Dr. Michael Berry served as a professor of investments at the Colgate Darden Graduate School of Business Administration at the University of Virginia from 1982–1990, during which time he published a book, Managing Investments: A Case Approach. He has managed small- and mid-cap value portfolios for Heartland Advisors and Kemper Scudder. His publication, Morning Notes, analyzes emerging geopolitical, technological and economic trends. He travels the world with his son, Chris, looking for discovery opportunities for his readers. His new, free Discovery Investing Scoreboard software covers all companies on all exchanges using a 10-point grid.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

DISCLOSURE:
1) Chris Marchese of The Gold Report conducted this interview. He personally and/or his family owns shares of the following companies mentioned in this interview: Alexco Resource Inc., Silver Wheaton Corp. and Colossus Minerals Inc. 
2) The following companies mentioned in the interview are sponsors of The Gold Report: Pershing Gold Corp., Terraco Gold Corp., Northern Graphite Corporation, Colossus Minerals Inc., Revett Minerals Inc., Grande Portage Resources Ltd., Goldcorp Inc., Southern Silver Exploration Corp. and Galore Resources Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Dr. Michael Berry: I personally and/or my family own shares of the following companies mentioned in this interview: Northern Graphite Corporation, Goldcorp Inc., Revett Minerals Inc. and Terraco Gold Corp. I personally and/or my family am paid by the following companies mentioned in this interview: N/A. Michael Berry was not paid by Streetwise for participating in this story.




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Gold & Precious Metals

(Why) Spanish Bank Bailout Sets Up $2,000 Gold & $60 Silver

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Posted by Peter Cooper - Resource Investor

on Tuesday, 12 June 2012 12:31

Euro-zone finance ministers panicked this weekend and agreed to a preemptive announcement of a $125 billion bailout for the Spanish banks, bringing the grand total for bank bailouts to $600 billion when Ireland, Portugal and Greece are added.

Money printing on this scale has only ever been good for precious metal prices by historical precedent. The bank bailouts are an example of money creation at the source with banks able to lend more against this new capital injection and sterilizing bad debts.

Precious Metal Prices

It sets gold up to power above the $1,923 all-time high of last September and hit $2,000 an ounce this fall, while silver will as usual outperform to the upside and cross the 1980 all-time high of $50 and go to $60. This is only what we heard in the Dubai Old Souk earlier this year (click here).

Of course the euro-zone politicians have been panicked by the upcoming Greek election on June 17 to do something now rather than wait for the contagion to hit Spain. It remains to be seen whether preempting market fears has actually put them ahead of the curve.

Nobody really knows the likely course of events after the Greek election. Watching the TV programs with politicians lashing out at each other smacks more of anarchy than a stable democracy. But many have begun to question the practicality of leaving the euro.

The single currency was not designed for countries to come and go. Liquid assets in euros have already fled Greece but going back to an independent currency would still mean huge losses for the rich, although it would also create a buying opportunity.

Perhaps then the euro zone will bite the bullet and accept even bigger losses on Greek debt, and create money to save its banking system as an alternative. The sudden cave in over Spain at the weekend certainly suggests that is the way the wind is blowing.

Monetary Inflation

More and more paper money in the system, more and more sovereign debt, it can only end badly and most certainly with much higher inflation levels. Inflation in China jumped last month as the world’s third largest economic bloc slowed down.

Investors who want to beat inflation are left with fewer and fewer options. Central banks cannot print gold, they can only buy it themselves as an inflation hedge and help to push up the price. Silver is a tiny market that will follow and outperform gold as a sister monetary metal.

There are few win-win scenarios for global investors in these markets, expect more and more investors to jump on this train. That is why prices are going higher.

 

About the Author

Peter Cooper


ArabianMoney.net editor and publisher Peter Cooper is based in the Dubai Media City, and has been working as a senior journalist in the region since 1996. He was then the founding editor of the Gulf Business, the first-ever business magazine published in Dubai. In the year 2000 he was a founding partner in the business news and information website ameinfo.com.

His book about ameinfo.com, ‘Opportunity Dubai: Making a Fortune in the Middle East’ was No.1 in The Daily Telegraph Book Club for six months. An Oxford graduate in politics and economics, Cooper spent a decade in London as a financial journalist specializing in real estate and construction. He is also the author of ‘Dubai Sabbatical: The Road to $5,000 Gold’.

ArabianMoney.net editor and publisher Peter Cooper is based in the Dubai Media City, and has been working as a senior journalist in the region since 1996. He was then the founding editor of the Gulf Business, the first-ever business magazine published in Dubai. In the year 2000 he was a founding partner in the business news and information website ameinfo.com.

His book about ameinfo.com, ‘Opportunity Dubai: Making a Fortune in the Middle East’ was No.1 in The Daily Telegraph Book Club for six months. An Oxford graduate in politics and economics, Cooper spent a decade in London as a financial journalist specializing in real estate and construction. He is also the author of ‘Dubai Sabbatical: The Road to $5,000 Gold’.



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Gold & Precious Metals

Save Us, Ben Bernanke, You're Our Only Hope -Praying for Monetary Elixir

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Posted by BillL Bonner Via The Bullion Vault

on Monday, 11 June 2012 03:44

Investors barely care if growth is real or not...

 

WE YEARN for clarity. For a day of reckoning. But it seems far in the future. Yesterday, the world waited for Mr. Bernanke to reveal his intentions. Instead, he said he was keeping his options open, writes Bill Bonner for the Daily Reckoning.

That was good enough to keep some steam in the stock market. But not enough to keep Gold Prices going up.

Both gold bugs and stock market bulls are counting on the Fed to come through. And it probably will.

We saw yesterday how the 1% got to be so rich. The feds — aided and abetted by consumers and the financial industry — bubbled up the amount of cash and credit in the US by 50 times in the last 50 years.

"That explosion of credit changed the world," writes Richard Duncan in his new book, The New Depression.

Yep...for one thing it made the rich richer. That money didn't go to wage earners. It went into stocks and bonds — the assets owned by the 1%.

The stock market began its epic march up the mountain in 1982. Since then, it's gone up 13 times (as measured by the Dow).

US GDP is up about 13 times too.

But much of the "growth" in stocks and GDP in this period was phony. The tape measure, used to track growth, was calibrated in Dollars. And the Dollars — stretched by the feds — lied.

Just look at what has happened in the last ten years. From its low in the early 2000s, stocks are up about 50%. Investors might think they are ahead of the game.

But measure that increase in terms of gold...and the gains disappear. Instead, stocks are DOWN 16%. In terms of oil, stocks are down even more — 43%.

And now the feds tell us the economy is in 'recovery.' Yes, they admit, it's not a great recovery. But the economy is growing. And if we wait long enough everything will be put right.

Oh yeah? At this rate the US will never reach full employment. Because, each month, more people are looking for work than finding it. Why? Because little of this 'growth' is real. It's just what you get when you put an extra $2 trillion of cash and credit into the system.

But investors don't seem to care whether the growth is real or not. Instead, they're waitin'...prayin'...hopin' for another round of MONEY! They want that old elixir...more cash and credit...that Miracle-Gro that the feds use to turn the economy green.

Oh yes, dear reader, we are five years into the Great Correction crisis...and once again, the world (and especially Barack Obama) turns its weary eyes to Dr. Bernanke.

"Touch us...heal us... Take away our pains. Lift us up to paradise."

Or, at least put us back in the White House!

And word on the street is that Ben Bernanke is getting ready.

"Fed considers more action..." says The Wall Street Journal.

"Stocks rise on hopes of more stimulus," reports The Financial Times.

But not all the Fed team is on the same page. Richard Fisher, of the Fed bank of Dallas, is clearly not:

"I believe that were we to go down the path to further accommodation at this juncture, we would not simply be pushing on a string but would be viewed as accomplice to the mischief that has become synonymous with Washington."

Our guess is that Mr. Fisher will be left behind. If not now...later.

Matthew O'Brien, writing in The Atlantic, explains why.

Save Us, Ben Bernanke, You're Our Only Hope

By Matthew O'Brien

This may not be our darkest hour, but the disappointing May jobs report showed the US economy once again slowing towards stall speed. It's not just the anemic 69,000 jobs the economy added last month. More disconcerting were the sharp downward revisions to previous months. It looks like we could be in for an unwelcome rerun of the summer doldrums we have gotten to know all too well in 2010 and 2011.

Markets have a bad feeling about this. It isn't just about the deteriorating US outlook. Europe and China are turning to the dark side of growth too. The Euro is continuing its game of Schrödinger's currency: At any moment it is both saved and doomed. Right now, it's looking more and more doomed. Then there's the slowdown in China — along with India and Brazil. These economies powered global growth during the dark days of 2008 and 2009, but seem certifiably wobbly now.

The Fed is our last hope — and there isn't another. Republicans in Congress continue to block further fiscal stimulus, despite historically low borrowing costs and a clear need for better infrastructure. So that leaves Ben Bernanke & Co. as the last and only line of defense.

Will the Fed be an accomplice to Washington's mischief? You bet. Because this is an economy that has depended on more cash and credit for at least 30 years. It can't stop now.

Here's another Fed governor, more in sync with the times. The Wall Street Journal has the report:

The Federal Reserve must stand ready to do more if the US growth outlook worsens, a top central banker said Wednesday.

If the outlook deteriorates such that the unemployment rate doesn't fall to levels consistent with the central bank's mandate and if the medium-term outlook for inflation falls significantly below the Fed's 2% target, "then additional monetary accommodation would be warranted," John Williams, president of the Federal Reserve Bank of San Francisco, said in prepared remarks to Seattle-area community leaders in Bellevue, Wash.

Mr. Williams is a voting member of the policy-setting Federal Open Market Committee.

You heard it here first, dear reader: There's no reverse gear in this car. It won't back up to correct its mistakes. Instead, it races along until it hits a brick wall.

Buying Gold? Get the safest gold at the lowest prices at BullionVault...

Bill Bonner08 Jun '12
Bill Bonner is founder and owner of Agora Inc., one of America's largest consumer newsletter publishers. Editor of free The Daily Reckoning email – now read by more than 500,000 worldwide – he is also the author of three best-selling investment books, most recently Mobs, Messiahs & Markets (John Wiley, 2007).

 



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Gold & Precious Metals

WORLD’S DUMBEST POLITICIAN & Gold, the Euro and Resource Stock Despair

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Posted by Eric Coffin: HRA Journal

on Friday, 08 June 2012 00:00

"A country that represents less than 2% of the Euro block and a tiny fraction of the world economy continues to be the tail that wags the dog. If it is resolved favourably there should be a fairly strong rally in precious metals prices.   This would translate into gains for juniors though the current level of fear in the market would take time to dissipate."

WORLD’S DUMBEST POLITICIAN

A country that represents less than 2% of the Euro block and a tiny fraction of the world economy continues to be the tail that wags the dog.  We’ll all have to wait until June 17th to see whether Greeks vote with their emotions or with their heads.   Currently it looks like it could be the former, which would not bode well for markets.

 

The US and Germany have both released  decent economic readings but that won’t be enough to overcome fears of yet another debt meltdown unless the Greek vote goes the right way.  Negative news out of Europe pummels the Euro and the correlation between the value of the Euro and commodities is currently very high.  Metals prices aren’t going anywhere until the issue is resolved.

 

If it is resolved favourably there should be a fairly strong rally in precious metals prices.  This would translate into gains for juniors though the current level of fear in the market would take time to dissipate.    If things go well small producers, advanced developers and the occasional strong drill play would get some traction.  Many others will need to rebuild their markets and balance sheets which wouldn’t start until autumn in many cases.

 

Keep an eye on the Euro chart and the polls out of Athens.  It will be a volatile and none too predictable market until the polls close (again).

Everyone has a favorite in this race.  The World’s Dumbest Politician contest never has a lack of entrants and some days it’s tough to choose between all the contenders.   No longer, however.  The events in Greece have lifted one contestant so far above the rest that we simply have to declare him the winner.

You may think this is a reference to Alexis Tsipras, the leader of the left wing Syriza party.  We’ll get to him later.  No, without a doubt the mantle of Dumbest of the Dumb Politicos has to go to Antonis Samaris, the leader of the “winning” New Democracy party in Greece.

You may recall that New Democracy was the party in power in Athens before Pasok which was just voted out.  New Democracy was mainly responsible for cooking the books and hiding deficits (with the help of Goldman Sachs) so that Greece could gain entry into the Eurozone.  

Having been caught out and tossed from office Samaris later agreed to vote with Pasok on the latest bailout agreement. The condition of his agreement was to force an election on the Greek populace rather than have the government of technocrats under the Pasok banner keep running things.

Even though largely responsible for worsening the mess in Greece, New Democracy apparently thought they would get voted back into office with a higher seat count.   Can you say “in denial”?

To give Samaris some credit, he at least has enough sense to understand the repercussions of reneging on the bailout agreement, which is more than can be said for all of the other party leaders other than Pasok. 

Post-election there are now seven parties in parliament and five of them are “anti-bailout” or “anti-austerity” as they would prefer to be called.

The leader of this pack is Tsipras, former communist and student activist who is now the man with the momentum in Greek politics.  This party came in second place on May 6th but more recent polls indicate he’ll be number one in the next election that should take place in mid-June.

In a second vote, Tsipras could leach votes from both minor parties that have little chance of being in government as well as from the two “major” old line parties. Small party leaders eyeing spots in a new coalition after a second vote don’t want to be seen as disagreeing with the probable coalition leader.

Where to from here?   A second election campaign will be dominated by a leader who insists the EU is bluffing when it says Greece could be ejected from the Euro. 

In fact, all anti-austerity parties insist Greece will be keeping the Euro, come what may.  This makes one wonder just how reality challenged these politicians might be.  They seem either incapable of grasping that Euro membership has conditions or are so cynical they are ignoring it.

Canadian readers of a certain age will be familiar with the phrase “sovereignty-association”.  This was the twofaced slogan of the Parti Quebecois during the late 1970’s and early 1980’s. 

The PQ insisted that Quebec would be able to vote for sovereignty and then negotiate an agreement that would give them everything they wanted from Canada.  The wish list included keeping current borders and access to whatever federal programs were advantageous and, of course, continued transfer payments from Ottawa. 

Even those who remember the economic mismanagement of Pierre Trudeau’s administrations appreciate how much of an impact he had on the Quebec sovereignty debate.  As a respected Francophone Quebecer who also happened to be Prime Minister of Canada he was one of the few with the credibility to face down the separatists.  He was able to convince enough Quebecers that the deal PQ followers were dreaming of was just that—a dream. 

It’s unknown if there is someone with similar credibility in Greece, though there seem no obvious candidates.  The Greek electoral system will not allow enough time for someone new to take over either old line party before the next vote.

Polls indicate that 70% of Greeks want the last bailout package to be renegotiated. Ironically, that is exactly the same percentage of respondents that want Athens to do whatever it takes to stay in the Euro.  Clearly, a lot of Greeks hope both of these diametrically opposed agendas can be run in tandem. Is this possible?

An Greek anti-austerity politicians are betting that the last debt workout actually strengthens their hand.  That agreement effectively transferred the bulk of Greek sovereign debt from banks to EU institutions. 

Tispras has alluded to this ownership change but is seriously misreading the situation.  The EU is far more worried about financial system and bond market contagion than it is about taking a write-off itself.  The EU is a large economy.  Writing off $3-400 billion will not be the end of the world as long as the situation is containable. There is more willingness to force Greece out of the EU and take the loss on its debt now than at any time since the crisis erupted.

While the Greeks may still want a free lunch most remember just how much lower the standard of living was before the country joined the Euro block.  Those with even longer memories understand that a return to the Drachma will mean a huge loss of purchasing power and probable bankruptcy for anyone unlucky to have large foreign currency debts. 

All that said, the austerity measures taken by Greece, Spain, Portugal and Ireland are pretty extreme.   It’s easy to watch this unfold from the other side of the Atlantic (or Berlin for that matter) and say “they need to do more”.  To put the situation in perspective, the annual cuts that Athens has pushed through in each of the last two years as a percentage of GDP is five times the level of budget cuts that politicians in Washington could not agree to last August.  It’s true governments in the debtor nations have to do more but you can’t say they aren’t trying. 

Ultimately debtor countries DO need to do more, but cutbacks have reached levels that are extinguishing hope in these countries.  There is real danger a negative growth spiral, which Greece is already in, will make it impossible to balance budgets. 

You can’t fix debt with more debt but it may be time for the creditor countries in Europe to come up with some extra cash for infrastructures programs or something else that generates a bit of hiring.   Money should be focused on the countries that are making structural changes—like Ireland and Spain—in the hopes this lightens the mood some. Getting the debt levels down is obviously critical but making structural changes that make debtor economies more flexible is the only thing that will have a lasting impact.

In the broader Euro Zone, statistics just released indicate that the region scraped by in Q1 with zero growth, avoiding a recession but only just.   That is wholly due to a much stronger performance by Germany which posted 0.5% growth as opposed to the 0.1% consensus estimate.  These figures will sharpen the debate between Germany and France.  Newly elected President Francoise Hollande is demanding a “growth pact” that provide some new spending funded by EU institutions.  

Germans will view today’s figures as a vindication of their fiscal conservatism. There is some truth to that but it’s also arguable that Germany’s success shows the value of an open trading block. Germany is an export powerhouse and the cheap Euro has been a boon to it. Just as the peripheral countries would see their currencies plunge if they went back to pre-Euro days Germany would see its scrip balloon in value. 

This doesn’t belittle Germany’s great strengths when it comes to quality, innovation and its relentless drive for higher productivity.   Those are the long term reasons for its success and qualities other Euro countries need to emulate.  Nonetheless, being in the Euro zone has been very good to Germany and other nation states know this.   Germans have good self-interested reasons to be accommodating, at least to a point.

Gold, the Euro and Resource Stock Despair 

A gold chart would be redundant since the Euro chart on the right says it all.   The next month will be dominated by an unnecessary election in a minor country that represents 2% of the EU economy.

6-7hra

The Euro has been crashing and will swing wildly with every Greek opinion poll until the next election. Yields are rising in Spain and Italy and this trend will continue as long as bond traders expect Greece to be ejected.

Although some European economies are victims of real estate bubbles, many of the region’s troubles are self-inflicted.   The EU has been dithering about how to handle the crises for three years and providing nothing but half measures and stopgap “solutions”.    This has to end or things will continue to get worse before they get better.

As soon as the campaign in Greece restarts the rest of the continent has to make it clear and be unequivocal that the vote is about being inside or outside the Euro zone and nothing else.  Even if there is room to give Greece some breathing space on austerity measures it must be made clear that loosening of conditions will only apply if there is a pro-bailout government.   Even then, Greece may breach some debt covenants before it has time to complete a new vote, assuming that vote results in some sort of coalition.

Many of the debtor nations have been and are making large strides in dealing with their debt overhangs.  The market won’t care about this if bond traders get to play “who’s next?” if there is a Greek exit.   Greece should have been ejected from the EU three years ago. That didn’t happen so northern Europeans and particularly Germans will have to be prepared to do what it takes to hold the zone together or face the consequences.

Most Greek debt is no longer held by banks.  There would be fallout in the swap markets but if the February deal is anything to go by it will be smaller than many fear.   The important thing is to ensure the bond markets for other peripheral countries are protected.   The ECB should be prepared to extend unlimited (and we mean unlimited) buying power in defense of Europe’s bond markets.  It’s far more important t ensure Spanish, Italian and French bonds don’t crash than it is to save Greece.  Tough sledding, but that’s just how things are.

Until there is some visibility in Europe gold and other commodities will track the Euro and resource stocks will continue to see fear and liquidity generating selling.   It’s depressing to see and avoidable problem blow up yet again.  Time really has run out for Greece and for Europe.  Let’s hope cooler heads prevail—very soon.

Ω

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The HRA – Journal, HRA-Dispatch and HRA- Special Delivery are independent publications produced and distributed by Stockwork Consulting Ltd, which is committed to providing timely and factual analysis of junior mining, resource, and other venture capital companies.  Companies are chosen on the basis of a speculative potential for significant upside gains resulting from asset-based expansion.  These are generally high-risk securities, and opinions contained herein are time and market sensitive.  No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer, solicitation or recommendation to buy or sell any securities mentioned.  While we believe all sources of information to be factual and reliable we in no way represent or guarantee the accuracy thereof, nor of the statements made herein.  We do not receive or request compensation in any form in order to feature companies in these publications.  We may, or may not, own securities and/or options to acquire securities of the companies mentioned herein. This document is protected by the copyright laws of Canada and the U.S. and may not be reproduced in any form for other than for personal use without the prior written consent of the publisher. This document may be quoted, in context, provided proper credit is given. 

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Gold & Precious Metals

“Grandich: Gold Will Take Out Its High From Last Year”

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Posted by Peter Grandich at World Resource Investment Conference

on Thursday, 07 June 2012 00:00

Al Korelin chats with Peter Grandich at the 2012 World Resource Investment Conference in Vancouver BC about the future of gold, the conventional stock markets, and the fed going into a ‘crisis easing mode’.



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