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Richard Russell: Austerity or Inflation


Posted by King World News

on Tuesday, 14 February 2012 02:24

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With investors globally wondering what central planners are up to next and how it will impact gold, today the Godfather of newsletter writers, Richard Russell, was discussing this very subject:  “A few months ago I wrote a piece about avoiding pain in the economy.  How do we do it?  We do it by turning away from austerity and embracing inflation.  And the question -- will the inflationary method of avoiding economic pain kill our economy, just as the drug (taking drugs) way of avoiding pain has killed so many talented musicians?  I think the results will be the same.”

Richard Russell continues:

“The world has drunk at the punch-bowl of good times and debt ever since World War II.  The world has avoided the discipline of pay-as-you-go and austerity for decades.  But sooner or later the piper must be paid.  Up to now, the piper has been ‘paid’ with vast amounts of fiat paper.

The politicians want to make the people happy.  The Fed is beholden to the politicians.  The voters want it all, and they don't like pain.  The Fed and the politicians want to make the voting public fat and happy causing as little pain as possible.

Examples: courtesy of Bill Gary's great publication, ‘Price Perceptions.’

Last week the Fed announced that they were extending the current near-zero interest rates out to the end of 2014.

The European central bank gave in and finally reduced interest rates to 1%.

The Bank of England is meeting next week to decide on another round of QE. (money printing).

This week the Bank of Australia will decide on whether to reduce rates again. 

The Swiss National Bank placed a currency floor of 1.2 francs per euro in September to prevent further strengthening of the franc.

Japan has been printing for years in an effort to keep the yen cheap and competitive against other currencies.

Every nation wants a cheap and export-friendly currency.  The result is a blizzard of (fiat) paper money blowing across the face of the earth.

Inflation is the central banks' method of avoiding the pain of austerity.  Inflation is the current economic narcotic that is used by modern nations.  It's the old ‘beggar thy neighbor’ system, and it will ultimately result either in all out hyperinflation and a collapse of the fiat currency system or a corrective deflationary crash.  Either way, the last currency standing will be gold.”

To subscribe to Richard Russell’s Dow Theory Letters CLICK HERE. 



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Gold & Precious Metals

The Market is Repeating Itself


Posted by The Gold Report

on Tuesday, 14 February 2012 02:03

The resource markets have weathered some death defying ups and downs lately. But Michael Ballanger, senior investment advisor with Toronto-based Union Securities, is looking for a renewed period of growth in the TSX Venture Composite Index. Is it too soon to see such a heady rebound? In this exclusive interview with The Gold Report,Ballanger makes his case for history repeating itself.

The Gold Report: The TSX Venture Composite Index reached a bottom of around 1,300 in October after it more than tripled from 2009 to early 2011. You believe the index is poised for another two-year gain. It's an interesting theory. Why should we believe that history will more or less repeat itself so quickly?

Michael Ballanger: It's all about mathematics. However, underneath that forecast lurks a much deeper premise. I'm a member of a very small minority that believes we're now in the continuation of a massive bull market in resources. The TSX Venture Exchange has had one sharp correction since 2008. It's now resuming its uptrend. 

I'm also looking for a resurgence of the "manic phase" of markets. During the last manic phase in 1978–1981, the Vancouver Stock Exchange quadrupled in an 18-month period as gold went into its final ascendancy. 

TGR: What were some characteristics of the market in the '70s that are comparable to what's happening now?

MB: Psychologically there are a lot of similarities to 1978 because investors have been behaving like scared rabbits. Fund managers were throwing things under the bus in October that I couldn't believe. It was mass liquidation for no reason. It was a generational buying opportunity.

TGR: There seems to be a lot more global instability now. Are you expecting "black swan" events in the next few years that could create further instability?

MB: I'm not looking for Armageddon at all. I think we are going to have a really good two-year run. There will be bumps along the way as the world financial system irons out its issues. Nothing cures debt levels better than inflation and growth, however. 

TGR: This does seem to be a very friendly environment for commodity prices and resource companies. But aren't we just one negative macroeconomic data point away from being right back where we were? 

MB: The problem with the media is that it continues to use European and North American data as its guidepost. Developing nations are creating demand for resources like I've never seen before. The population is growing and resources are being used at an increasing rate despite Europe, Japan and the U.S. struggling. 

A lot of these populations approach gold and silver differently than the West does. They're not looking to trade it. It is part of their legacy that they pass down to generations. That's where the demand for the precious metals will come from. It's a shift in demand. 

TGR: Most of the junior mining companies listed on the TSX Venture Exchange are gold companies. If you believe the TSX Venture Index is going up, you have to believe the gold price will head higher, too. What's your trading range for gold in 2012? 

MB: Industrial metals, like zinc, copper and nickel, are going to outperform the precious metals in 2012. Just as the base metals got hammered violently in '08, the same occurred in the latter half of '11. The resultant rebound should show a greater percentage move based on the global recovery. 

Silver could outperform gold in 2012 due largely to the supply-and-demand situation. However, gold and silver could both take out their 2011 highs this year. Gold at $1,525/ounce (oz) and silver at $25/oz will be seen as the correction lows in this multi-decade bull market. Those are two levels I wouldn't want to see violated. 

TGR: What's the upside for gold and silver prices?

MB: Gold and silver could both take out their 2011 highs, but I don't like picking numbers. It just gets meaningless. It is an absolute breeding ground for gold and silver bugs. Not that I'm one of them, but it is a very favorable environment for the metals. If you're on the right side of the trend, you make money in the junior mining stocks.

TGR: You created a 2012 list of your top value plays. Could you tell our readers about some of those names?

MB: We emphasized Yukon stocks last spring and our two picks, Kaminak Gold Corp. (KAM:TSX.V) andATAC Resources Ltd. (ATC:TSX.V), hit record highs in July. The bright spot for this summer was the relatively superb performance of Tinka Resources Ltd. (TK:TSX.V; TLD:FSE; TKRFF:OTCPK), which closed 2011 above the July 2011 financing crisis of $0.35. 

Another favorite that we've been involved with for four years and participated in multiple financings for is Explor Resources Inc. (EXS:TSX.V). It reported an NI 43-101-compliant 800,000 oz resource recently. It has been one of our top five companies since 2007. 

Kaminak is still our darling of the Yukon. There's a lot of wannabes running around, but Kaminak is superbly run by Rob Carpenter. 

Our junior penny stock in the Yukon is Stakeholder Gold Corp. (SRC:TSX.V). It is sandwiched between Kaminak and Kinross Gold Corp. (K:TSX.V; KGC:NYSE) in the Ballarat Creek area, which is located on Thistle Mountain. 

TGR: Tinka's Colquipucro silver-lead-zinc project in Peru looks promising. What do you know about what's happening there?

MB: I must confess, Tinka has been a nice surprise. It was orphaned after the 2008 meltdown despite having drilled off an NI 43-101-compliant silver resource of 20.3 million ounces (Moz). It has two drills working about 1 kilometer apart at its deposit and at a new discovery, Ayawilca. 

It's all open-pittable. Just move the top of the rock off, throw it on a crusher and you're away to the races. It's an engineer's dream. The first game plan is to get that resource up to north of 30 Moz. Now the blue sky becomes what is happening at depth underneath this oxide cap. 

Just to the south is Cerro de Pasco, which is owned by Peruvian mining company Volcan Compania Minera SAA. It's the fourth biggest mine in Peru, one of the largest in South America and it is a massive epithermal. What's interesting about Cerro de Pasco is that the mineral rhodochrosite is prevalent there. Rhodochrosite isn't prevalent except in an epithermal. Tinka recently indicated that it has rhodochrosite at Ayawilca. There isn't enough drilling into it yet to confirm it's an epithermal, but Ayawilca's blue sky just lights up like a Christmas tree when you look at it.

TGR: How does its valuation compare with other companies at similar stages?

MB: It's too early to value Ayawilca, but you can value Tinka's silver. Tinka's got 20.3 Moz Inferred, but I have confidence it's going to move to 30 Moz. 

With a rising silver price and the investment public warming to juniors again, it could reach a market cap of around $60–75 million (M) up from $38M today. That's based on the known. The unknown is where you accelerate your return. Ayawilca is the blue sky. If Mother Nature and Lady Luck bless us then we're going to be looking at the Ayawilca zone adding a lot more upside in the future.

TGR: Kaminak just recently optioned some potash properties in Michigan. Do you have any idea why?

MB: Shareholder value. Rob Carpenter knows that the ultimate rate of return for Kaminak is going to be the Coffee gold project in the Yukon. Kaminak has other assets that aren't being paid much attention. The best way to get shareholder value out of those is to let somebody else go to work on them while maintaining focus on a flagship property like Coffee. Let other people bear the risk and costs of exploring those properties.

TGR: Kaminak and ATAC shares have started to climb higher this year. ATAC reported a nice intersection in early December of 44 meters at about 4.5 grams/ton gold at its Osiris zone. Is ATAC going to return to its 2011 high?

MB: When a stock like ATAC, which moved to $10/share in July, is thrown irreverently under a bus, I have to ask why. I still can't figure that out. It wasn't the retail public. It had to be quasi-professional investors. ATAC has an excellent chance to get back to the midrange between where it bottomed around $2/share and its high of $10/share last year. 

I think Kaminak is a takeover waiting to happen. The way that the Coffee property is being developed, there could be 6–8 Moz there. It has only drilled off 15% of the land package. 

TGR: Stakeholder Gold is a micro-cap company with a market cap of just a few million dollars. Are they going to be drilling anything soon? 

MB: Stakeholder had originally planned to drill the Ballarat property in July, but through some unfortunate developments it wasn't able to. I've looked at all the soil and trenching analysis. Various creeks flow down the sides of the mountain into the Yukon River. Where theses creeks flow is where the Klondike Gold Rush was. The source of that mineralization was in the upper elevation where Stakeholder's Ballarat property is. Stakeholder has excellent soils. It has good trenching results. It has two anomalies there. That property's got to get drilled. It's got every bit as much of what I call "geochem evidence" as Kaminak did before it drilled the Coffee property. 

Yes, Stakeholder is a micro cap. But some Yukon juniors had $35M market caps when they didn't have any discoveries two years ago. I view Stakeholder as a bottom-feeding expedition now that it has dropped down to $5M. Stakeholder has got an excellent land package. It's compelling. That's why we like it.

TGR: Some market pundits feel that the junior exploration and mining sector has been hurt over the past decade as it moves from being a retail investor sector to an institutional investor sector. 

A share price would jump on news and the retail investor would cash out and watch the stock come back down and buy back in. The retail investor would make money two or three times while supporting the stock price. Now the institutional investors get in, make their money and get out and stay out. What are your thoughts on that?

MB: If a management group executes its plan, the company gets rewarded whether it has an institutional, retail or a combination shareholder base. Take Kaminak as an example. Despite the recent correction, Kaminak has been a very successful company. 

People have asked me, "Why aren't the juniors attracting the same kind of dominance they had in the '90s and the late '70s?" There are other reasons than the institutional involvement, such as the advent of exchange traded funds (ETFs). I'm going to get into hot water, but I absolutely detest ETFs. They're a financial product developed by and for the express benefit of the financial industry as opposed to the investor. I don't believe in them, I don't agree with them and I don't use them. 

The problem with ETFs is they create this risk on/risk off attitude that the junior mining sector is a basket and it doesn't matter what Tinka's got or Explor's got or Kaminak's got. That's what happened in the latter part of 2011. Investors said, "Oh, we better get out! We'll sell everything." They didn't care that Kaminak's last three drill holes were spectacular. It didn't matter. They sell their ETF associated with junior mining companies and all the companies that are covered by that ETF get blown off. 

TGR: Do you have any parting thoughts for us on this sector?

MB: In 2009, I predicted higher gold and silver prices and a booming mania-driven junior mining sector. We got the move in the precious metals. We have yet to experience anything close to the mania that we saw in 1978–1980. The TSX Venture Exchange traded to a new low on Oct. 4 relative to the gold price. It was absurd by any measure. Companies are taking the risks to find new deposits. That's precisely where the big upside is moving forward into 2012.

TGR: Thanks, Michael.

Michael Ballanger currently serves as an investment advisor at Union Securities, Ltd. He joined the investment industry in 1977 with McLeod Young Weir Ltd. His substantial background in financing junior resource companies is further informed by his 30 years of experience as a junior mining and exploration specialist. Ballanger earned a Bachelor of Science in finance and a Bachelor of Arts in marketing from Saint Louis University.

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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Stocks & Equities

Two Short-Term Scenarios for the S&P 500 Index


Posted by Chris Vermulen - GoldandOilGuy.com

on Tuesday, 14 February 2012 01:55

scFor the first time since the last week of December of 2011, the S&P 500 Index closed lower on the weekly chart. Recently I have been discussing the overbought nature of stocks based on a variety of indicators. However, the real question that should be asked is whether last week was just a short term event or if we see sustained selling in coming weeks.

The issues occurring in Greece spooked the markets somewhat on Friday as Eurozone fears continue to permeate in the mindset of traders. The U.S. Dollar Index is the real driver regarding risk in the near and intermediate term future. If the Dollar is strong, market participants will likely reduce risk. However a weakening Dollar will be a risk-on type of trading event which could lead to an extended rally in equities, precious metals, and oil.

Friday marked an important day for the U.S. Dollar Index futures as for the first time in several weeks the Dollar held higher prices into a daily close. The U.S. Dollar appears to have carved out a daily swing low on the daily chart from Friday. Furthermore, the potential for a weekly swing low at the end of this week remains quite possible. The chart below illustrates how the 100 period simple moving average has offered short term support for the past few weeks.

 

....read more and view charts HERE



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Timing & trends

Keynesians Jump The Gun on Inflation


Posted by Peter Schiff - Europacific Capital

on Tuesday, 14 February 2012 01:52

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Advocates of government stimulus are running victory laps on recent developments that appear to vindicate their strategy. In particular, Paul Krugman compares the sluggish growth in Europe to the somewhat-less-sluggish growth in the US to prove that stimulus was more effective than austerity. Other economists are using government inflation measures to defend Fed Chairman Bernanke's easy-money policy. The only problem is, they're calling the race before the finish line is even in sight.

As usual, Paul Krugman overlooks basic economics (which, despite his Nobel Prize, is a science about which Mr. Krugman really knows very little). The reason stimulus is so politically popular is that it appears to work in the short-term. However, appearances can often be deceiving, as they are right now in the US. Stimulus merely numbs the pain of economic contraction, as the underlying trauma gets worse. Austerity might slow an economy down, but at least the wounds are able to heal. America has chosen the former and Europe the latter, albeit not quite as large a dose as needed. The fact that in the short-run Europe is suffering more than the US does not vindicate Washington's approach. On the contrary, this is exactly what is to be expected.

What we're seeing is like a race where each runner has a broken ankle. One has a coach who tells him to pace himself and not worry so much about winning this one, while the other coach gives his runner a shot of painkillers and tells him to give it all he's got. Of course, early in the race, the doped-up runner is going to be flying down the track like nothing's wrong, while the other runner might be limping at half his normal speed. However, when the drugs wear off, the sprinter is liable to collapse from pain, leaving the better-coached runner to limp across the finish line. 

The true test is not the immediate effects of stimulus or austerity, but the long-term results. For that reason, Krugman’s conclusions are meaningless. The apparent success of stimulus simply results from spending more borrowed money on government programs and consumption. But don't we all agree now that this is exactly what caused the financial crisis in the first place?

As far as inflation is concerned, a vindication of Federal Reserve Chairman Ben Bernanke is equally premature. First of all, it’s not that Quantitative Easing will lead to inflation; it’s that QE is inflation. Secondly, there is a lag between QE and rising consumer prices, so the jury is still out as to how high consumer prices will ultimately rise as a result of current and past Fed policy mistakes.

But even more fundamentally, it is absurd to look solely at government price measures, which are built to understate inflation, and conclude that QE has not already produced an elevated cost-of-living. For example, the 2.4% rise in the Personal Consumption Expenditure (PCE) Index in 2011 is more of an indictment of the accuracy of the index than a vindication of Bernanke. In fact, of all the ways the government purports to measure inflation, the PCE is perhaps the most meaningless, as it relies on built-in mechanisms like goods substitution to hide a lower standard of living. As an example of how this works, imagine you are used to eating farm-fresh butter but have to switch to cheaper but also less-healthy margarine from a factory; the PCE would say you are no worse off. That's exactly why the Fed chooses to use this uncommon metric.

Mark Gertler, an economics professor at New York University, argues that even the Consumer Price Index, which rose at a more vigorous 3.2% in 2011, proves Bernanke’s critics wrong. According to Gertler, the CPI has risen at an average annual rate of 2.4% thus far under Bernanke’s tenure, significantly less than the 3.1% average under Alan Greenspan, and the 6.3% under Paul Volcker.  However, Gertler overlooks two key points. First, the methodology used to calculate the CPI was much different during the Volcker era. If we still calculated the CPI the way we did then, the numbers would be much higher for both Greenspan and Bernanke. Second, given the huge economic contraction that has taken place under Bernanke, consumer prices should have fallen– significantly. The fact that they rose anyway indicates tremendous inflation.

Of course, the Fed’s ability to stimulate the economy with inflation only works as long as bondholders remain ignorant of its plan. For now, the seemingly hopeful news reports are giving the Fed cover to keep stimulating. As long as the market remains convinced there is no inflation, the Fed can continue to create it. However, once the effects are so pronounced that even the PCE can no longer hide them, the Fed will be in a real bind.

Think of our two runners again. Even after the race is over, the fellow who chose to dope up likely injured himself even further. He might have even ended his career. So, the early dash and the cheer of the crowd in that one race was clearly not worth the many years of misery he would incur in the future.

Regardless of what the triumphant Keynesians would have you believe, my analysis continues to be that the current combination of monetary and fiscal stimulus is driving us toward disaster. Instead of a real recovery, the US will experience an inflationary depression. Europe, on the other hand, will suffer much less, precisely because it was not seduced by the short-term appeal of stimulus.


For an in-depth look at the prospects of international currencies, download Peter Schiff's and Axel Merk's Five Favorite Currencies for the Next Five Years.

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday.

For a great primer on economics, be sure to pick up a copy of Peter Schiff's hit economic parable, How an Economy Grows and Why It Crashes.



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Energy & Commodities

Oil Patch & The Multi-Billion Dollar Water Services Industry


Posted by Keith Schaefer - Oil & Gas Investments Bulletin

on Tuesday, 14 February 2012 01:48

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There is a multi-billion dollar water industry forming before investors’ eyes in the oil patch.

It’s a huge opportunity for some great capital gains — but changing regulations, and a very attentive mainstream audience questioning business practises which have been in effect for decades, will will make it choppy water for investors.

“In 2008 there were 25 billion barrels of water handled (by the oil and gas industry) in the US—even at 60 cents a barrel it’s a multibillion dollar business,” says Jonathan Hoopes, President of GreenHunter Energy Inc. (GRH-AMEX). “With the big growth in unconventional since then, it’s likely another 5-6 billion barrels.”

 

.....read more HERE



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