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Memo to Central Banks: You’re debasing more than our currency


Posted by John Mauldin - Outside the Box

on Saturday, 27 October 2012 08:31

I can only pass on Societe Generale’s work to you once in a while, but the piece for today’s Outside the Box is important enough that its author, Dylan Grice, worked hard to convince his bosses to let me share it with you. Dylan is one of my favorite investments analysts, as well as just an all-around nice guy.

In a change from his usual fun-loving demeanor, Dylan issues a serious warning here.

I am more worried than I have ever been about the clouds gathering today (which may be the most wonderful contrary indicator you could hope for...). I hope they pass without breaking, but I fear the defining feature of coming decades will be a Great Disorder of the sort which has defined past epochs and scarred whole generations….

So I keep wondering to myself, do our money-printing central banks and their cheerleaders understand the full consequences of the monetary debasement they continue to engineer?

He runs through some of the Great Debasements of the past, starting with third-century Rome, running through Europe’s medieval inflations and the French Revolution, to the monetary horror story of Weimar Germany in the 1920s.

His key point is that inflations and hyperinflations don’t just hurt money, they hurt people and the societies they live in. Inflating money is less trustworthy money, and so people doing business trust each other less. Plus, those who are farthest from the source of artificially created money suffer the most (the “Cantillon effect”).

And now the social debasement is clear for all to see. The 99% blame the 1%, the 1% blame the 47%, the private sector blames the public sector, the public sector returns the sentiment  the young blame the old, everyone blame the rich  yet few question the ideas behind government or central banks ...

I’d feel a whole lot better if central banks stopped playing games with money….

All I see is more of the same – more money debasement, more unintended consequences and more social disorder. Since I worry that it will be Great Disorder, I remain very bullish on safe havens.

In just 10 days we will see how the US elections turn out. Depending on what happens after, the US will either remain as one of those safe havens (and perhaps become even more of one) or those of us who reside here will need to start thinking more globally. I know a lot of thoughtful people who are already contemplating (if not acting on) plans to make sure their life savings maintain their buying power through the coming decade. I remain optimistic that we will set ourselves on a course that ends in a safe harbor, although the sailing will be quite volatile. What Dylan describes are the unintended consequences of people who think they understand macroeconomics and who are well-intentioned but whose policies can be most disruptive.

Popular Delusions
Memo to Central Banks: You’re debasing more than our currency

by Dylan Grice, Societe Generale

At its most fundamental level, economic activity is no more than an exchange between strangers. It depends, therefore, on a degree of trust between strangers. Since money is the agent of exchange, it is the agent of trust. Debasing money therefore debases trust. History is replete with Great Disorders in which social cohesion has been undermined by currency debasements. The multi-decade credit inflation can now be seen to have had similarly corrosive effects. Yet central banks continue down the same route. The writing is on the wall. Further debasement of money will cause further debasement of society. I fear a Great Disorder.

I am more worried than I have ever been about the clouds gathering today (which may be the most wonderful contrary indicator you could hope for...). I hope they pass without breaking, but I fear the defining feature of coming decades will be a Great Disorder of the sort which has defined past epochs and scarred whole generations.

“Next to language, money is the most important medium through which modern societies communicate” writes Bernd Widdig in his masterful analysis of Germany’s inflation crisis“Culture and Inflation in Weimar Germany.” His may be an abstract observation, but it has the commendable merit of being true … all economic activity requires the cooperation of strangers and therefore, a degree of trust between cooperating strangers. Since money is the agent of such mutual trust, debasing money implies debasing the trust upon which social cohesion rests.

So I keep wondering to myself, do our money-printing central banks and their cheerleaders understand the full consequences of the monetary debasement they continue to engineer? Inflation of the CPI might be a consequence both seen and measurable. A broad inflation of asset prices might be a consequence seen, though not measurable. But what about the consequences that are unseen but unmeasurable – and are all the more destructive for it? I feel queasy about the enthusiasm with which our wise economists play games with something about which we have such a poor understanding.

102612-01

If you take a look around you, any artefact you see will only be there thanks to the cooperative behaviour of lots of people you don’t know. You will probably never know them, nor they you. The screen you watch on your terminal, the content you read, the orders which make the prices flicker … the coffee you drink, the cup you hold, the bin you throw it in afterwards  … all your clothes, all your accessories, all the buildings you’ve been in, all the cars … you get the idea. Without exception everything you own, everything you want to own, everything you need, and everything you think you need embodies the different skills and talents of a mind-boggling number of complete strangers. In a very real sense we constantly trust in strangers to a degree, as strangers trust us. Such cooperative activity is to everyone’s great benefit and I find it is a marvellous thing to behold.

The value strangers put on each other’s contributions manifests itself in prices, and prices require money. So it is through money that we express the extent of our appreciation for the many different talents embedded in each thing we consume, and through money that our skills are in turn valued by others. Money, in other words, is the agent of this anonymous exchange, and therefore money is also the agent of the hidden trust on which it depends. Thus, as Bernd Widdig reflects in his book (which I urge you all to read), money …

“… is more than simply a tool for economic exchange; its different qualities shape the way modern people think, how they make sense of their reality, how they communicate, and ultimately how they find their place and identity in a modern environment.”

Debasing money might be expected to have effects beyond the merely financial domain. Of course, there are many ways to debase money. Coin can be clipped, paper money can be printed, credit can be created on the basis of demand deposits which aren’t there ... the effects are ultimately the same though: the implied trust that money communicates through society is eroded.

To see how, consider the example of money printing by authorities. We know that such an exercise raises revenues since the authorities now have a very real increase in purchasing power. But we also know that revenue cannot be raised by one party without another party paying. So who pays?

If the authorities raise taxes explicitly and openly, voters know exactly why they have less spending power. They also know how much less spending power they have. But if the authorities instead raise money by simply printing it, they raise the revenue by stealth. No one knows upon whom the burden falls. People notice only that they can’t afford the things they used to be able to afford, or they can’t afford the things which everyone else can afford. They know that something is wrong, but they just don’t know what, why, or who is to blame. So inevitably they look for someone to blame.

The dynamic is similar to that found in the well-worn plot line in which a group of strangers are initially brought together in happier circumstances, such as a cruise, a long train journey or a weekend away. In the beginning, spirits are high. The strangers exchange jokes and get to know one another as the journey begins. Then some crime is committed. They know it must be one of them, but they don’t know who. A great suspicion ensues. All trust between them is broken down and the infighting begins....

So it is with monetary debasement, as Keynes understood deeply (so deeply, in fact, that it’s ironic so many of today’s crude Keynesians support QE so enthusiastically). In 1921 he said:

“By a continuing process of inflation, Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some …. Those to whom the system brings windfalls …. become “profiteers” who are the object of the hatred … the process of wealth-getting degenerates into a gamble and a lottery .. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

History is replete with Great Disorders in which currency debasement has coincided with social infighting and scapegoating. I have written in the past about the Roman inflation of the Third Century AD. The following chart shows the rapid turnover of emperors during what is known as the Third Century Crisis. As trade declined, crops failed and the military suffered what must have seemed like constant defeat, it wasn’t difficult for a successful or even popular general to convince the rest of the empire that he’d make a better fist of governing.

 102612-02

But this political turnover was accompanied by what may be history’s first recorded instance of systematic currency debasement. With the empire no longer expanding and barbarians being forced westwards by the migrations of the Steppe peoples, Rome’s borders were under threat. But the money required to fund defence wasn’t there. Successive emperors therefore reached the same conclusions that kings, princes, tyrants and democratically elected governments would later reach down the ages when faced with a perceived “shortage of money”: they created more by debasing the existing stock. In the second half of the third century, the silver content of a denarius had shrunk to zero. Copper coins disappeared altogether.

This debasement of currency also coincided with a debasement of society. Factions grew more suspicious of one another. Communities fragmented. And one part of the community bore the brunt of the fears: Christians. While Rome had always welcomed new religions and Gods, incorporating new foreign deities as their empire grew, Christians were altogether different. They rejected Rome’s gods. They refused to pray to them. They said that only their God was deserving of worship. The rest of the Romans concluded that this obstinacy must be a source of great anger for their own ancient Roman gods, and supposed that those gods must now be exacting their own great punishment in return.

 102612-03

So the Romans turned on their Christians with a great violence which lasted throughout the period of the currency debasement but peaked with Diocletian’s edict of 303 AD. The edict decreed, among other things, that Christian meeting places be destroyed, Christians holding office be stripped of that office, Christian freedmen be made slaves once more and all scriptures be destroyed. Diocletian’s earlier edict, of 301 AD, sought to regulate prices and set out punishments for ‘profiteers’ whose prices deviated from those set out in the edict.

A similar dynamic seems evident during Europe’s medieval inflations, only now, the confused and vain effort to make sense of the enveloping turmoil saw the blame focus on suspected witches. The following chart shows the UK price index over the period with the incidence of witchcraft trials. Note the peak in trials coinciding with the peak of the price revolution.

 102612-04

Were the same dynamics at work during the French Revolution of 1789? The narrative of Madame Guillotine and her bloody role is well known. However, the execution of royalty by the Paris Commune didn’t begin until 1792, and the Reign of Terror in which Robespierre’s Orwellian sounding “Committee of Public Safety” slaughtered 17,000 nobles and counter-revolutionaries didn’t start until well into 1793. In the words of guillotined revolutionary Georges Danton, this is when the French revolution “ate itself”. But the coincidence of these events to the monetary debasement is striking.

The political violence was justified in part by blaming nobles and counter-revolutionaries for galloping inflation in food prices. It saw ‘speculators’ banned from trading gold, and prices for firewood, coal and grain became subject to strict controls. According to Andrew Dickson White, author of “Fiat Money Inflation in France”, (echoing Keynes’ remark that“wealth-getting degenerates into a gamble and a lottery”) “economic calculation gave way to feverish speculation across the country.”

 102612-05

However, the most tragic of all the inflations in my opinion, and certainly the starkest example of a society turning on itself was the German hyperinflation. Its causes are well known. Morally and financially bankrupt by the First World War, the reparation demands of the Allies (which Keynes argued vociferously against) followed by the French occupation of the Ruhr served to humiliate a once-mighty nation, already on its knees.

And it really was on its knees. Germany simply had no way to pay. The revolution following the flight of the Kaiser was incomplete. Concern was widespread that Germany would follow the path blazed by Moscow’s Bolsheviks only a year earlier. A de facto civil war was being fought on the streets of major cities between extremist mobs of the left and right. Six million veterans newly demobilized, demoralized, dazed and without work were unable to support their families ... the great political need was to pay off the “internal debts” of pensions, life insurance and welfare support in any way possible. The risk of printing whatever was required was well understood. Bernhard Dernberg, vice chancellor in 1919, found himself overwhelmed with promises to pay for the war disabled, food subsidies, unemployment insurance, etc., but everyone knew where the money was coming from:

“A decision of the National Assembly is made. On its basis, Reich Treasury bills are printed and on the basis of the Reich Treasury bills, notes are printed. That is our money. The result is that we have a pure assignat economy.”

But print they did. Prices would rise by a factor of one trillion. At the end of the war, Germany owed 154bn Reichmarks to its creditors. By November 1923, that sum measured in 1914 purchasing power was worth only 15 pfennigs.

 102612-06

It is difficult to comprehend the psychological trauma inflicted by this episode. Inflation inverted the efficacy of correct behaviour. It turned the ethics of thrift, frugality and notions such as working hard today to bring benefit tomorrow completely on their heads. Why work today when your rewards would mean nothing tomorrow? What use thrift and saving? Why not just borrow in depreciating currency? Those who had worked and saved all their lives, done everything correctly and invested what they had been told was safe, were mercilessly punished for their trust in established principles, and their inability to see the danger coming. Those with no such faith who had seen the danger coming had benefited handsomely.

Everything, in other words, was dependent on one’s ability to speculate, recalling what Dickson White observed of the French Revolution and Keynes reflections more generally. Erich Remarque is best known for his anti-war novel “All Quiet on the Western Front” but perhaps his best work was the “The Black Obelisk” set in the early Weimar period, and a penetrating meditation on the upside-down world of inflation. The protagonist Georg poignantly captures this speculative imperative when he sits down and lets out a long sigh:

“Thank God that it’s Sunday tomorrow … there are no rates of exchange for the dollar. Inflation stops for one day of the week. That was surely not God’s intention when he created Sunday.”

Perhaps the most eloquent chronicler of the Weimar hyperinflation was Elias Canetti, whose mother moved him from the security of Zurich to Frankfurt in 1921 to take advantage of cheaper living. Canetti never forgave her, and his life’s work shows what a lasting impression the move from heaven to hell made:

“A man who has been accustomed to rely on (the monetary value of the mark) cannot help feeling its degradation as his own. He has identified himself with it for too long, and his confidence in it has been like his confidence in himself … Whatever he is or was, like the million he always wanted, he becomes nothing”

More tragic still was what German society became during the inflation. Like other Axis countries on the wrong side of the War and now in the grip of hyperinflation, Germany turned viciously on its Jews. It blamed them for the surrounding evil as Romans had blamed Christians, medieval Europeans had suspected witches, and French revolutionaries had blamed the nobility during previous inflations. In his classic “Crowds and Power”, Canetti attributed the horror of National Socialism directly to a “morbid re-enaction impulse”.

“No one ever forgets a sudden depreciation of himself, for it is too painful … The natural tendency afterwards is to find something which is worth even less than oneself, which one can despise as one was despised oneself. It is not enough to take over an old contempt and to maintain it at the same level. What is wanted is a dynamic process of humiliation Something must be treated in such a way that it becomes worth less and less, as the unit of money did during the inflation. And this process must be continued until its object is reduced to a state of utter worthlessness. … In its treatment of the Jews, National Socialism repeated the process of inflation with great precision. First they were attacked as wicked and dangerous., as enemies; then, there not being enough in Germany itself, those in the conquered territories were gathered in; and finally they were treated literally as vermin, to be destroyed with impunity by the million.

All this is very disturbing stuff, but testament to a relationship between currency devaluation and social devaluation. Mine is not a complete or in any way rigorous analysis, I know. I emphasize that it’s not in any way meant as some sort of crude mapping on to today’s environment. My point is to show that money operates in many social domains beyond the financial, and that tying currency devaluation to social devaluation might have some merit.

Consider some recent and less extreme currency inflations. The 1970s bear market in equities saw relatively mild inflation which was also characterized by relatively mild but nevertheless real factionalization of society. An ideological left vs right battle played out between labour and capital, unions and non-unions and perhaps most bizarrely, betweenrock and disco. As already stated, money implies a trust in the future. It implies that today’s money can be used in the future. So in the era of punk, did the Sex Pistols provide the most concise commentary of the malaise?

 102612-07

Which brings us to today. Despite the CPI inflation of the 1970s receding, our central banks have continued to play games with money. We’ve since lived through what might be the largest credit inflation in financial history, a credit hyperinflation. Where has it left us? Median US household incomes have been stagnant for the best part of twenty years (chart below)

 102612-08

Yet inequality has surged. While a record number of Americans are on food stamps, the top 1% of income earners are taking a larger share of total income than since the peak of the 1920s credit inflation. Moreover, the growth in that share has coincided almost exactly with the more recent credit inflation.

These phenomena are inflation’s hallmarks. In the Keynes quote above, he alludes to the “artificial and iniquitous redistribution of wealth” inflation imposes on society without being specific. What actually happens is that artificially created money redistributes wealth towards those closest to it, to the detriment of those furthest away.

 102612-09

Richard Cantillon (writing decades before Adam Smith) was the first to observe this effect (hence “Cantillon effect”). He showed how those closest to the money source benefited unfairly at the expense of others, by thinking through the effects in Spain and Portugal of the influx of gold from the new world as follows:

“If the increase of actual money comes from mines of gold or silver …  the owner of these mines, the adventurers, the smelters, refiners, and all the other workers will increase their expenditures in proportion to their gains. . . . All this increase of expenditures in meat, wine, wool, etc. diminishes of necessity the share of the other inhabitants of the state who do not participate at first in the wealth of the mines in question. The altercations of the market, or the demand for meat, wine, wool, etc. being more intense than usual, will not fail to raise their prices … Those then who will suffer from this dearness … will be first of all the landowners, during the term of their leases, then their domestic servants and all the workmen or fixed wage-earners ... All these must diminish their expenditure in proportion to the new consumption …

(Quoted in Mark Thornton, “Cantillon on the Cause of the Business Cycle”Quarterly Journal of Austrian Economics Vol 9, No 3 [Fall 2006])

In other words, the beneficiaries of newly created money spend that money and bid up the price of goods with their higher demand. Those who suffer are those who have to pay newly higher prices but did not benefit from the newly created money.

The credit inflation analog to the Cantillon effect has played out perfectly in recent decades. Central banks provided cheap money to banks, the cheap money artificially inflated asset prices, artificially inflated asset prices made anyone connected to those assets rich as we became a nation of speculators, those riches were achieved at everyone else’s expense, and ‘everyone else’ has now realized what has happened and is understandable enraged … as Keynes explained, “Those to whom the system brings windfalls …. are the object of the hatred.

And now the social debasement is clear for all to see. The 99% blame the 1%, the 1% blame the 47%, the private sector blames the public sector, the public sector returns the sentiment … the young blame the old, everyone blame the rich … yet few question the ideas behind government or central banks ...

 102612-10

I’d feel a whole lot better if central banks stopped playing games with money. But I can’t see that happening anytime soon. The ECB has thrown the towel in, following the SNB last year in committing effectively to print unlimited amounts of money for the greater good. The BoE and the Fed have long since made a virtue of what was once considered a necessity, with what was once the unconventional conventional. As James Bullard told everyone a few weeks before the last Fed meeting, lest there be any doubt:

"Markets have this idea that, there's QE1 and QE2, so QE3 must be the same as those previous ones. It's not that clear to me that this is the way this is going … it would just be to do balance sheet policy as the exact analogue of interest rate policy."

In other words, the central banks’ balance sheets are the new policy tool. As interest rates embarked on a multi-year decline from the 1980s on, central bank balance sheets are set to embark on a multi-year climb ...

102612-11

So as Nobel Prize winning experts in economics punch the air because inflation expectations have been rising since the policy was announced, “It’s the whole point of the exercise” (Duh!) the BoE admits that QE has mainly benefited the rich, but vows to continue anyway.

All I see is more of the same - more money debasement, more unintended consequences and more social disorder. Since I worry that it will be Great Disorder, I remain very bullish on safe havens. The next few issues of Popular Delusions will outline some thoughts on what exactly that means.

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Gold & Precious Metals

The Sky's the Limit in Saskatchewan


Posted by Tom MacNeill via The Gold Report

on Friday, 26 October 2012 16:27

Saskatchewan's unique political history has created a modern-day last frontier for exploration. Within its borders is a treasure trove of early-stage resources, so many that Tom MacNeill, president and CEO of 49 North Resources, says his Saskatchewan-focused natural resources company can't tackle every project it wants to. As an incubator enterprise to raise capital for early-stage projects throughout Saskatchewan, MacNeill's company is capitalizing on the build-out of capital markets in the province. Read why MacNeill says Saskatchewan is wide open in this exclusive interview withThe Gold Report.

COMPANIES MENTIONED : 49 NORTH RESOURCES INC. : BHP BILLITON LTD. : DNI METALS INC. :NOVAGOLD : OMINECA MINING AND METALS LTD. : POTASHCORP. : RIO TINTO PLC : TEMBO GOLD CORP.: VALE S.A. : WESTCORE ENERGY LTD. : AROWAY ENERGY INC. :EQUAL ENERGY LTD.FORAN MINING CORP.:NEW MILLENNIUM IRON CORP.
 

The Gold Report: Tom, few if any Canadian provinces are booming the way Saskatchewan is. Québec used to be Canada's top province for mineral exploration and now some believe the recent election of the Parti Quebecois could curtail resource investment in the province. Is Saskatchewan just an election away from boom to gloom?

Tom MacNeill: I seriously doubt that. Saskatchewan is fundamentally different than Québec in that Saskatchewan doesn't politicize as many things.

More important, a lot of the changes happening under the current Saskatchewan administration were initiated by a left-wing government starting with the Roy Romanow and Lorne Calvert Saskatchewan New Democratic Party (NDP) administrations. We've come out of the dark ages here. We had very left-leaning governments that led us on a path to overt nationalization of certain parts of industries in the 1970s. In the 1980s, the pendulum started swinging in the other direction. A big part of the changes with leveling the royalty playing field in oil and gas and becoming friendly to mining development and business started in the 1990s and 2000s under NDP administrations.

We don't have any fear that we could go back with a swing in government. That was obvious in the election last fall. Dwain Lingenfelter, the leader of the New Democratic Party at the time, started making noise about creating a Saskatchewan oil and gas company again, using old party rhetoric from the 1970s and 1980s. He was rebuffed even by his own party because things are good here because business is getting done. We're not going to go back.

Also, Québec didn't have the mandate to change as much as one thinks. Anything the Parti Quebecois wants to do will take budgeting. Since they have a minority government, there will be a confidence vote the first time they try to do anything rash. Their rhetoric is mostly hot air because the party is going to be compromising on a whole range of issues or else it will not be able to govern. We don't have that problem in Saskatchewan.

TGR: Do politics play too much of a role in resource development?

TMacN: It can play a good role in resource development by staying out of it unless necessary. In the 1970s, we created three of the most detrimental things to our capital market in Saskatchewan history: SaskOil; Saskatchewan Mining Development Corp., the forerunner of Cameco Corp. (CCO:TSX; CCJ:NYSE); and Potash Corp. of Saskatchewan [PotashCorp] (POT:TSX; POT:NYSE), which was formed in 1975 through legislation.

At that time, the government gave itself the right to back into any project it wanted by recouping 50% of the capital costs to the explorers and developers that expended it. The effect was similar to what we see in other jurisdictions that lean that way—it scares away external capital. People don't want to deal with government because they feel that it can change the rules at any time.

More important, the average taxpayer was burdened with the risk of resource development. Taxpayers were saddled with the risks of the downtimes. The Saskatchewan government jumped headlong into the resource business because resource prices had gone up 400% between 1969 and 1974. It's a very volatile business, as we all know. The commodity cycle goes up and down. By the time it went down, taxpayer dollars were being expended on capital projects and investments that were underwater.

TGR: Let's get into a tangible example of politics playing a role in investment in Saskatchewan. In fall 2010, Anglo-Australian mining powerhouse BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK) made a bid for Potash Corp. of Saskatchewan, but the bid was killed by Prime Minister Stephen Harper, his conservative government and Saskatchewan Premier Brad Wall. Did that send the wrong message to the investment community?

TMacN: It probably wasn't helpful from Saskatchewan's perspective. The whole world is getting sensitive about trade barriers and international capital flows and that didn't do us a lot of favors. It didn't particularly hurt us either because we're wide open for business, which is clear. We had the unique situation where a very high-profile transaction happened leading into an election year and that really got the fervor going.

TGR: Saskatchewan remains fairly top heavy when it comes to publicly traded resource companies. There is Potash Corp., Cameco and not a lot else. Why is that?

TMacN: It's a function of our history. Both of those were Crown corporations. Since they've been unshackled, they have become the best companies in their leagues in the world. As Crown corporations, they were sterilizing the rest of the capital market beneath them because capital fled.

Saskatchewan has early-stage prospectors and senior mining companies that are absolutely behemoth, but we have no capital market supporting that because our capital market left in the years when socialism was the flavor of the day.

Capital markets are just starting to come back. We've got one investment banking group in Saskatchewan. Jeret Bode and Kevin Thompson at MGI Securities in Saskatoon have done in excess of $500 million (M) in core finance activity, maybe more, in the last few years. There's also 49 North Resources Inc. (FNR:TSX.V), two labor-sponsored venture capital funds and Lex Capital Management, which operates a couple of funds out of Regina. That's our entire institutional capital market. . .still very, very small.

We're still living the hangover. However, that hangover is an opportunity that's similar to our neighboring province Alberta a half-century ago. There's a big void between the top-heavy senior mining companies and the bottom end of the scale where we work, but we're happy to watch that fill up over the coming decades.

TGR: You've been able to take advantage of that paucity of capital.

TMacN: We get to deal directly with the majors once we prove something up. We can deal directly with the senior mining companies. All the major ones are in Saskatchewan now. Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK)Vale S.A. (VALE:NYSE) and BHP are all here and looking for the large-scale projects that this province is filled with.

Our advantage is that there is no one else here doing it. We see everything that's happening on our landscape. Once we get to the point where we've developed an asset that would be of interest to a large integrated miner or oil and gas enterprise, we can deal with it directly.

TGR: Have you had any trouble raising funds?

TMacN: We haven't tried in the last two years. We've been working internally with our own generated cash flow because the capital market has been abysmal. From July 2010 to July 2011, there were about $4.3 billion (B) in financings on the TSX Venture Exchange. The following 12-month period had just $1.2B. We've been keeping our powder dry waiting for things to turn. We saw a false market bottom in 2010–2011 because the companies had enough money to limp along. That's finally been drained out of the system.

TGR: You don't believe we've seen the bottom?

TMacN: We're heading to it now. The most recent bottom was this summer, but things haven't improved enough for me to confidently say it was the bottom. There's too much at play right now.

TGR: Are there some tangible financing advantages for a company operating in Saskatchewan?

TMacN: There would be some real advantages if there were others besides us. They would have a wide-open playing field. We have a backlog of resource projects in our own offices here in Saskatoon. There are reams and reams of projects. We simply cannot develop every high quality project that we see. The Saskatchewan Geological Survey has been around for about 75 years and it does some of the best work in the world to get explorationists a head start. Government is very supportive. We have infrastructure everywhere. It's still wide open here.

TGR: Are there any other publicly traded companies that are operating exclusively in Saskatchewan?

TMacN: There are very few of those. Typically, a Saskatchewan project is brought into a company that exists with assets elsewhere.

We have a large holding in Westcore Energy Ltd. (WTR:TSX.V), a Saskatchewan-headquartered company developing coal. It's a long-term project with the intention of defining a substantial resource in thermal coal for conversion to crude oil and other high value carbon products. It has a partnership with Quantex Energy Inc. in Calgary, has defined a number of deposits and is in the process of putting together the initial NI 43-101 calculation of the size of the coal deposits it has identified so far.

TGR: You're a contrarian investor. What are some recent investments you've made?

TMacN: We haven't made a lot of new investments this year. We've been trading the companies in our portfolio. We'll continue to buy shares of Tembo Gold Corp. (TEM:TSX.V; TBGPF:OTCQX) because it's been so beat up. We buy Westcore Energy when it's been beat up. We have been cultivating the investments that we do have and making sure that those companies have enough cash to keep moving through this dry spell in the capital market to keep projects advancing.

That's why we created 49 North. Until we came on the scene, when things got really lousy, companies had nowhere to turn. 49 North supplies capital when the times are very lean so the companies within our portfolio can avoid hyper dilution. The companies that are near and dear to us, we care about their health and welfare and can help them with their cash flow by taking a financing down at reasonable prices and they can view that as an untouchable part of their float until markets turn. We're a bit of a lender of last resort or an investor of last resort in the bad times, not just there to exploit things in the good times.

TGR: What is Tembo doing?

TMacN: It's caught in the crossfire of a downward gold market. However, everything that it's been working on is going as planned—it defined a series of new targets, did a broad-based exploration program and is now homing in on the Nyakagwe and Ngula targets, which look prospective and are continuations of the structure that comes off of Bulyanhulu, the largest mine in Tanzania, which is owned by African Barrick Gold Plc (ABG:LSE).

Tembo has been crucified on the back of bad news from other companies in the region. For example, Canaco Resources Inc. (CAN:TSX.V) announced results in May on a resource calculation that was much less than what the market expected. Hana Mining Ltd. (HMG:TSX.V) had the same experience in that the market was very disappointed with the resource calculation on its copper project in Botswana. Investors typically buy in a jurisdiction. If they own Canaco, they were likely to own Tembo. Some institutions said, "Whoa! We're getting scared by some of the things that are happening here." Ironically, Hana just received a takeover offer at twice its recent trading price. Things can happen fast.

It's the early days for Tembo. It has been doing great work with lots of exploration and drilled many holes, nearly all of which are hitting exactly what one would expect to hit. There are more than 2,000 artisanal miners in more than 100 shafts and lateral workings on the property, mining gold anywhere from 8–50 grams per ton (g/t). In this sense there's already an active gold mine on the property. Tembo is drilling underneath where the artisanal workings are and hitting the same type of structural material as Bulyanhulu, and Bulyanhulu typically gets better at depth.

TGR: Does it have the cash to drill more holes?

TMacN: Tembo is in the midst of a $4M fundraising right now. There isn't a lot of money going around, but there always is money for good projects. In a down market the investment community likes the dust to settle first and then look around to see who's still alive.

Tembo is definitely one of those enterprises that is worth paying attention to because once things turn, it should turn quickly. I've said to Tembo's management that my expectation is that once they put 100 more holes into the project they will probably have proved up the region's next mine. We will continue to buy at these extremely cheap levels and support the company any way that we can as it moves forward.

TGR: You recently bought back about 10% of your share float. What's the thinking behind that?

TMacN: We renewed our normal-course issuer bid because our stock is grossly undervalued. Our stock trades at less than $2/share with a $30M market cap. That's significantly less than the gross value of our oil and gas alone, which we carry at book value. We've got significant cash flow from our oil and gas operations. We have the ability to farm out to those with deeper pockets because we have so much development land. We end up with a big hunk of free oil for doing that because we've spent the money upfront derisking it. We're a very deep value play at these prices. Buying our own stock back is one of the best deals out there.

TGR: You recently sold CVG Mining Ltd. Tell us about that deal.

TMacN: Omineca Mining and Metals Ltd. (OMM:TSX.V), a group that we've worked with for a very long time, is taking over CVG Mining. Omineca is the product of a spinout from the sale of Copper Canyon Resources to NOVAGOLD (NG:TSX; NG:NYSE.MKT). We were significant institutional investors in Copper Canyon with the resulting sale to NOVAGOLD working out very well for all involved.

It's a way to give CVG the profile needed to raise the capital that's necessary for start up. The cash flow should be extraordinary in a short period of time and it likely will take much less than $10M to put into production. Omineca's associations, high quality management team and excellent track record, combined with our connections provide it a number of avenues to raise capital.

The group at Omineca is very good. The company is based in British Columbia, has very close connections in industry and government and is familiar with the permitting environment. The project is nearly fully permitted and ready to go.

TGR: You have a position in DNI Metals Inc. (DNI:TSX.V; DG7:FSE), which plans to use bioleaching to recover various metals from black shale in Alberta. What's happening with that company now?

TMacN: DNI Metals has been doing everything it said it was going to do and has been having great success with it. The initial resource on the Buckton Zone, which is a shale that runs 10–20 meters (m) thick with polymetallic material in it, was defined at 250 million tons (Mt). It also is abundant in rare earth elements, which makes the per-ton value very attractive. The LaBiche formation, another black shale that was assumed to be barren cover rock, turned out to have better rare earth element content than the Buckton pay zone.

The LaBiche formation is so thick, up to 100m, that it has a multiple of the tonnage of the 250 Mt initial Buckton resource. The company should be able to expand the gross Inferred resource in short order to 3.5 billion tons (Bt) and once all of the work from drilling is processed, likely in 2013, it should be able to report on a resource of about 5 Bt. Let's look at the metrics: 5 Bt of $30 rock, maybe even $50 rock with scandium credits, and costs of $5–15/ton based on other projects like Talvivaara in Finland, creates a profit somewhere around $20/ton. It costs about $1B to build the plant. Even if it only profits $10/ton and metals prices stay where they are, there's $50B in potential profit sitting in the ground.

TGR: Why isn't the project getting more attention?

TMacN: People don't understand it. In 1967, when Suncor Energy Inc.'s (SU:TSX; SU:NYSE) first operating mine started processing bitumen into synthetic crude oil, they cracked the champagne bottle. But the oil sands were misunderstood by the investment community. It took a long time. Quite frankly, it was not until the late 1990s that the international investment community perked up to what was going on there. It's a process. . .given the success of the oil sands, the timeline for DNI Metals should be much shorter.

DNI Metals has been doing a great job of going through all of the scientific work, making sure that it is professional, confirming and reconfirming that drilling is where it needs to be. The preliminary economic assessment (PEA) is underway. The company should be able to finish up the processing work on the drilling that's been done so far very shortly. It is striving to hit a 5 Bt resource at grades that should provide rock values in the $30–50/ton range. This suggests an enormous quantity of profit in the ground that is an analog to the neighboring oil sands mining that started 40 years ago. The beautiful thing for DNI Metals is all of the roads, power, manpower, infrastructure and experience with strip mining in the area—it's all there.

DNI Metals is a small junior exploration company that doesn't spend its budget on beating its drum. It spends it on good science and that's good for us because we love massive resources that are being developed at low costs. It will catch on.

TGR: Investors want something that's more near term, maybe?

TMacN: This is very near term. DNI Metals is going to have a PEA and a resource calculation that's huge. The next steps will be to either finance its way into or partner up for a test facility. If you do good science, you end up with good projects, and then the capital market comes knocking.

TGR: When we spoke in February you said that it would take a few more years to see where the macroeconomic policy of the world's financial leaders takes us, but that it would ultimately prove positive for gold. Is that picture any clearer now?

TMacN: It's not a lot clearer because there hasn't been much traction in world economies. Central bankers are going to keep their foot on the gas pedal until the car fires.

If you've ever owned a car that's carbureted, during a cold winter you go out and try to start it by pumping the pedal a couple of times. That's the first round of quantitative easing (QE). But it doesn't start, so you try it again. You pump it a few more times and it fires, but it stalls out. That is QE2. So, you put your foot right to the floor. You hold the choke all the way open until it fires and when it fires it runs a like a son of a gun because there's so much fuel coming through it and you can't even contain the revving for a while, even when you take your foot off the gas. That's QE3.

Central bankers have said that they're going to hold the gas pedal all the way down until the car starts. Great, because you will, at some point, have a period of inflation that cannot be contained no matter how much they try. All of this macroeconomic QE is likely to result in inflation at some point, which is going to be very good for gold.

Let's say that all of this macroeconomic QE doesn't cause rampant inflation, but instead sticks the way the central bankers want and that it creates real economic growth. That's going to be good for oil because it's at supply/demand capacity right now and an expanding economy on the back of QE will drive up the price of oil. That is going to be inflationary. There will be a follow-on that will bring the price of gold up.

Oil trading volume is up 25% in the last quarter, which means that institutions and investment bankers are trading it as if it were just another financial asset. That adds volatility to it. We've seen oil go up to $110/barrel (bbl) and down to $79/bbl in the last 12 months, and then back and forth and anywhere in between. That means the world doesn't know which way it's going yet.

TGR: Are you more bullish on Saskatchewan or gold?

TMacN: I can predict Saskatchewan a little bit better than I can predict the price of gold. We're going to do fine because we're in the very early stages of economic development in Saskatchewan. Saskatchewan is going to do great over a very long period.

However, there are likely going to be much higher gold prices very quickly. There's too much implied risk in the system and too much desire for competitive currency devaluation worldwide in order to get rid of debt on government balance sheets. It's coming. I will not predict when because things are too volatile at this stage but we can see those clouds on the horizon.

TGR: Thanks, Tom.

Tom MacNeill established 49 North Resources Inc., an incubator enterprise to raise capital for early-stage projects to develop resources throughout Saskatchewan, in 2006; he serves as president, CEO and director of the company. His 25+ year career includes positions as an investment adviser with a major Canadian brokerage firm, management accountant within the mining industry, CFO of a Canadian trust corporation and extensive resource portfolio management.

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.

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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: 49 North Resources Inc., Tembo Gold Corp., NOVAGOLD and DNI Metals Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Tom MacNeill: I personally and/or my family own shares of the following companies mentioned in this interview: 49 North Resources Inc., Tembo Gold Corp., DNI Metals Inc., Omineca Mining and Metals Ltd., Westcore Energy Ltd. I personally and/or my family am paid by the following companies mentioned in this interview: 49 North Resources Inc. I was not paid by Streetwise Reports for participating in this interview.


 

 

 


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Timing & trends

Gold Mining Margins To Expand


Posted by Jordan Roy Byrne - Daily Gold

on Friday, 26 October 2012 13:09

Longtime readers know that we are a fan of intermarket analysis. The movement of certain markets influences other markets so it is always wise to analyze a handful of markets rather than just a single market by itself. Several years ago we learned from others before us how intermarket analysis can help us get a handle on the margins of gold (and silver) miners. Generally, Oil (energy) represents about 25% of the cost of mining while industrial metals prices can be a proxy for the costs of trucks, chemicals and blasting agents (like cyanide). It has been a while since we’ve looked at these charts but with the gold stocks having put in a major bottom it is time to analyze whether it is sustainable or not.

Simply put, we look at Gold relative to oil (bottom) and Gold relative to industrial metals (top). These ratios were quite low in 2007 when share prices were driven more so by positive sentiment and high valuations then by positive fundamentals. As you can see, the financial crisis was a major catalyst for the gold mining industry. Gold surged against oil and industrial metals. During the weak recovery these ratios held their ground and are reaching higher levels once again.

oct26goldvscosts

Next, we want to look at these markets by themselves. Industrial metals prices are on top while oil is on the bottom. Do these markets appear to be any threat to move much higher? Industrial metals have substantial resistance at 500 and have made obvious lower highs and lower highs in the past year. GYX is threatening a move below 350. Oil has also made lower lows and appears far more likely to test $78-$80 then to rebound above $95.

oct26edoilgyx

Meanwhile, Gold continues to hold up quite well within a consolidation. Predictably, its rebound ended at $1800. Yet, the market has a very strong bottom in place and has good support just below $1700.

oct26edgold

As you can see, according to this simple straightforward analysis, Gold mining margins should continue to expand. The commodities that represent mining cost inputs are not only trending bearish but are little threat to move much higher anytime soon. Meanwhile, Gold is trading in a healthy range and once it breaks $1800 will be within a month or two of breaking to a new all time high.

In the early years of the boom, gold stocks performed quite well even as cost inputs surged. The reason was the market was willing to pay more and more for gold stocks. Presently we have a very different situation. The fundamentals for gold producers are improving yet the market is attaching low valuations to these companies. Our view is that if Gold breaks to and sustains a new high then the current valuations of these companies will increase materially.

All this being said, it is important to understand that gold mining is an extremely difficult industry. Despite this positive analysis, a fair portion of the industry will struggle. It is geologically and mathematically impossible for major producers to grow consistently. Small miners often lack the expertise and manpower to be successful. Most are aware of the 80-20 rule. We just returned from a tour of one of the best producer’s projects. We heard that this management team believes in the 95-5 rule. In other words, in the gold mining industry, 5% of the people produce 95% of the profits. You should keep this in mind when evaluating producers and potential producers. This is also why we focus on stock selection. In this sector, it is crucial to achieving great returns.  If you’d be interested in professional guidance in uncovering the producers and explorers poised for big gains then we invite you to learn more about our service.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com



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Stocks & Equities

Chart of The Day: PE ratios at 20 year Lows


Posted by ChartoftheDay.com

on Friday, 26 October 2012 10:40

Today's chart illustrates the price to earnings ratio (PE ratio) from 1900 to present. Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1900 into the mid-1990s, the PE ratio tended to peak in the low to mid-20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s), surged even higher during the dot-com bust (early 2000s), and spiked to extraordinary levels during the financial crisis (late 2000s). Since the early 2000s, the PE ratio has been trending lower with the very significant but relatively brief exception that was the financial crisis. More recently, the PE ratio has moved slightly higher. It is worth noting, however, that even with this recent uptick, the PE ratio still remains at a level not often seen since 1990.

20121026

Quote of the Day
"I conceive that the great part of the miseries of mankind are brought upon them by false estimates they have made of the value of things." - Benjamin Franklin

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Find out which stocks investors are focused on with the most active stocks today.
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Notes:
Where's the Dow headed? The answer may surprise you. Find out right now with the exclusive & Barron's recommended charts of Chart of the Day Plus.

 



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Currency

THE CURRENCY WAR


Posted by John Rubino - DollarCollapse.com

on Friday, 26 October 2012 08:24

Corportate Revenues Plunge. 

The Eurozone meltdown has sent capital pouring into (temporarily) safe haven currencies like the US dollar, which rose by nearly 12% between October 2011 and August 2012.

Dollar-Index-600-dpi3

This sounds like a good thing for the US but it’s not, because US multinationals lose big when the dollar pops. Assume, for example, that you’re making computers in California and selling them to Germany, and the dollar goes up by 10%. Suddenly your computers are 10% more expensive, which makes it hard to sell as many as you expected. And those that you do sell are paid for with euros, which are now worth 10% less than they were a few months ago. When you convert those euros to dollars in order to pay your bills, your revenues are 10% lower than they should be. Your costs, meanwhile, are mostly in dollars, so your profit ends up being far lower than you expected.

Now combine this margin squeeze with an order slowdown in Europe and China, and extend it to the whole S&P 500 and you get the following:

.....read more HERE



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