Gold outlook looks good

Here is a recent argument highlighting the upside of gold. People often look to gold as an inflation hedge. The reality however is that any tangible asset is a hedge against inflation, because whilst assets have a real value, paper is being debased in order to repay government debt, or private debt which governments are busily assuming.

Many tangible or physical assets have been falling or steady in recent times. These assets will eventually, or are already stabilising. Gold in contrast, has been a laggard because it offers no return on investment. This is why gold producers make a lot of sense. Unfortunately, because they make a lot of sense, they are already priced very high, so this takes off a great deal of the upside. I also don't like to carry the operating risk, as mines can under-perform, and there are other risks such as:

1. Governments adopting a gold tax or a mineral resource rent tax

2. Technical issues, say recoveries are bad, or grades overstated

3. Hedging issues

For these reasons, I actually prefer explorers of gold. A mineral explorer might only be capitalised at $10/oz, but once they prove up their resources, they will be valued closer to $100/oz. Add to that the spectre of takeovers or production, and you have realised a very appealing investment return. I discuss such stocks on my Speculators blog.

One of the big drivers of gold is going to be the current low interest rate environment. Governments are compelled not to raise interest rates because of the high debts, so they will be for years be trying to support property markets. They will be looking to non-rate ways of curtailing debt creation, i.e. Asking banks to only lend to solid investors. This is what happened in Japan. Its essentially fascism, but don't bother you pretty little minds about that...WikiLeaks Julian Assange is the only one who is going to be assassinated; all you common people are just going to be taxed. You will take care of the rest, as you engage in psychological repression in a vain attempt to pretend nothing is wrong. You will clammer after material evidence of your well-being to convince yourself. It is remarkable what humans will do to convince themselves that all is well. After telling my father there was going to be a financial crisis for 10 years, it was like trying to lance a boil, trying to get him to concede that I was right. Not that I needed his validation after 30 years of getting none, just I wanted to understand the nature of human delusion. Sadly, he has resumed the delusion. :)

Gold makes sense because it is a tangible and non-demand store of wealth. You might be scared to touch other precious metals like platinum and palladium because they have a strong demand component, but they have their own merits, i.e. These metals are used in battery and catalysts, so they have strong exposure to conventional petrol and electric cars. Those metals are also used in fuel cells, so the demand for these metals is good. There is no huge inventory of these metals, unlike gold. But that is part of the reason why the gold market is good. It is a large, liquid market. The reality is that the precious metals market is dwarfed by the stock market, the bond market, and the forex market. So rest assured there is going to be a bubble in precious metals. Also expect the currencies of precious metal producers to have an impact. i.e. South African platinum miners will struggle to remain profitable as their mines become uncompetitive as their currency takes off. You ought to be looking for South African producers who have unhedged precious metal positions, but fully hedged currency positions.

The argument is that 'quantitative easing' or printing money might cause inflation. The reality is that there is no question of that. In a recessed economy, such money cannot go into productive capacity because there is little demand; it can only go into assets. So one experiences a bidding way, as excess money pushes up asset prices. When asset prices are fully-priced, that money spills into debt repayment or consumption, and we get inflationary pressures. Only non-demand related assets like gold perform well, as well as property, once it forms a base. People with housing debts can struggle under interest repayments. We are not there yet, but in a few years inflationary pressures will build. It is not yet time to fix interest rates. I do not think we can get away with low interest rates like Japan because Japan had the fortunate position of loyal investors prepared to accept a 0.5% return on their Japanese bonds for years. Westerners would sell their mothers for a higher return, so this is going to bid up bond prices.

The situation is different however for countries like Australia, which are experiencing a commodities boom. The energy-precious metals boom is going to keep capital inflows strong. A strong currency will give the government some flexibility to absorb or retain relatively low interest rates. This will make Australia the flavour of the month. The question is what will happen to the manufacturing sector? Protectionism? By that point we might have a liberal government. Of well, they all sell out, when they ought to be reducing wages. Sadly, we do not have the same wage flexibility as Japan. It is sad because if we had their discretionary bonus system, we would be able to increase savings, but also allow businesses to easily withhold or cancel what is considered a right to a certain wage now. People would not be able to plan, i.e. people would not be able to develop ruinous levels of personal debts. That would be tragic. Commonsense would prevail.

"Adjusted for inflation, prices touched a high of about $2,423.8, according to figures from the World Gold Council".

Interestingly, this is the price that I got when I looked at the historical ratio of gold to the Dow Jones, which is a measure of tangible versus paper money. I am looking for a gold price of around $2,400/oz, so almost double the current price, but it will depend on future currency debasement. We might see even higher prices.

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Andrew Sheldon www.sheldonthinks.com

Some validation for mining executives

Among the very small number of you who read my blogs, will be the overwhelming majority of you who think I am too critical. Yes, for good reason. But alas, today I am out to offer some validation to ‘high flying’ corporate executives. I have been very critical of the mining industry for their poor decision making on the Resource Rent Tax and Emissions Trading issues. But my respect is hereby extended to the executives of uranium miners Paladin and Aquila who did not sell their souls for the sake of short term profits.

The executives of these companies, according to the SMH, “have rejected putting Australia's first climate change shareholder resolutions to their annual meetings”.

I must say, I would be more impressed if these and other executives used their ‘reporting opportunities’ to objectively challenge their counterparts...rather than just say its not a shareholder issue. This is nonsense. It’s a moral issue, and every person has moral agency or responsibility, at least anyone with active cognitive faculty.

These companies took these steps because “in September, The Climate Advocacy Fund, a joint initiative of The Climate Institute and Australian Ethical Investment, repudiated their failure to comply with its standards. i.e. “For failing to provide adequate information to share- holders about carbon footprints”.

The companies are perfectly free to repudiate these impositions by government; and to ignore any organisation which panders to the politick managers in order to have some power for themselves, or ‘economic relevance’. Carbon-linked funds is today’s scandal, but tomorrow’s forgotten issue.

Companies don't get much credit from the collectivists (socialists) despite being the organisations which facilitate the creation of wealth...the benefits of which we all enjoy. The flipside is that we have 'government-empowered' middlemen to parasitically canvas any agenda, legitimatised by illegitimate 'democratic' (aka 'tyranny of the majority', i.e. extortion) government, in order to gain some market relevance. So we want to credit these executives to the extent that they have justified it. We merely wish they could be more principled exponents of objectivities, rather than merely negotiating a legal minefield.

Nevertheless, where would we be without these 'practical people'. Determined to be a practical person someday myself...but only when its indeed practical to be myself..that is principled people! :)

Refer to our climate change blog for background on the climate issue and our Resource Rent Tax issue for my previous comments on the mining industry.

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Andrew Sheldon www.sheldonthinks.com

Merger of Australia's ASX and Singapore's SGX

There is an offer on the table by the SGX - Singapore's stock exchange, to merge with the Australian Stock Exchange (ASX). It would be ridiculous to merge the ASX and SGX because it only makes sense to the SGX if it resulted in higher fees. After all the SGX is worth twice as much for half the market capitalisation. Where is the`benefit for the ASX unless it is allowed to charger higher fees? That is a tax as far as the market is concerned.

The notion that competing exchanges will offset that is a nonsense. A duopoly is worse than a regulated monopoly....because its a pretense for worse practices.

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Andrew Sheldon www.sheldonthinks.com

The Fed to engage in monetary easying

Markets are expecting a correction. There is every reason to expect a correction, but by no means is the US, UK, EU or Japanese governments going to allow equity markets to collapse in any dire way. Of course we have come to expect monetary debasement....its what unaccountable governments do rather than increase tax. Why? Inflation is a far more cowardly tax, and politicians are cowards; well-matched with a psychologically repressed constituency which allows them to engage in all manner of 'economic persecution'.

Here is a good article on the problems confronting the USA. I will only add that I expect Japan and the EU to debase their currencies more. It will be a pooled effort by these governments, the USA and the UK. Because I think these other governments are going to do more debasing than the US, we can expect a 'relatively' strong USD, but of course it will be the commodity countries and emerging markets which will perform best. We might also expect the property markets in emerging Asian countries to do rather well. i.e. Thailand and the Philippines. The Philippines has the most liberal laws for foreign investment as well as most relaxed visa laws. You can stay 18 months without leaving the country on a tourist visa.

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Andrew Sheldon www.sheldonthinks.com

Nonsense about a currency war

In the media we are being told that a currency war is brewing in international markets because China is supporting its currency. We might ask - what are the ramifications of this?

In this blog however I want to focus on what is not said.

The yen is too high because over the last decade it has not engaged in the currency debasement that the USA and EU have...this has meant its currency has been resilient despite its weak local economy. It has also been supported by a current account surplus, however that benefit has declined in recent years, so that the surplus is all but gone. I would argue that this posturing against China's strong yuan is nothing more than a justification for the 'quantitative easing' which is about to follow. That has nothing to do with China, but everything to do with the poor economic management of Japan.

You might wonder why these countries keep blaming each other. The intent is to give the appearance that they are out there acting in your interests. They are not. Its all a 'serve-serving' show to make the international political debate look like a battlefield. These countries have never been more alligned in their desire to expropriate more wealth from you. Did the Chinese government object when the Australian government placed a resource rent tax on miners...no...it had done the same to its miners in the year previously.

You are not going to see the debasement of the USD for the most part because Europe and Japan will be debasing their currencies at the same time. The only strong currencies will be the commodity currencies. So expect an economic miracle in these countries. The reality however is that whilst people will look at commodity prices and say these countries are benefiting from high commodity prices. The reality is that commodity prices have not risen in real terms, so much as the USD in which they are denominated in as collapsed in value. We can show this by looking at the impact of commodity prices in Australian dollars - a hard currency. Hard by virtue of its monetary discipline. No one can match the capacity of the USA to debase its currency...since its debt is denominated in USDs. Of course the US will have to change its posture if debtor nations like China and the Middle East give pause to buying US bonds. It will be forced to raise rates, taxes. There is in fact no need for a new currency....just a rationalisation.

This is the era of moral relativism. A consequence of that value system is economic relativism, and that means in this context, currency relativism. i.e. If you don't see it, it does not exist. So its ok to have a debasing currency, as long as no one sees the problems associated with it. What will happen? Countries like Australia which have a hard currency will be forced to debase by either:

1. Engaging in quantitative easing

2. Increasing debt spending, i.e. Long term infrastructure projects which will make no returns in the short term.

See how it is. It is about sabotaging your economy, as by inefficiently making your economy as inefficient as possible, you can keep your currency competitive and your people happy. The reality is that only countries like China, which imports, processes and exports is immune from the effects of this economic relativism....and that will remain true as long as the country has a surplus of labour. Give it about 15-20 years before it is forced to adjust. In the meantime, Australia will be forced to debase its economy. We will have a welfare state as big as European stages in future. Don't say you were not warned. It will all be done in the name of the 'common good', so you won't see it coming. Of course they use different words these days. Even since '1984' was published the words have changes in each decade. Today its 'global competitiveness' and 'quantitative easing'....tomorrow it will be 'lifestyle preservation' and 'harmonic adjustments'. Well they are my suggestions.

So back to Japan. Does it have any alternative but to engage in 'quantitative easing'? Not unless it is prepared to raise its taxes, raise interest rates or reform the economy, or cut spending. But the government is not prepared to significantly do any of that because that would cause 'disharmony'. So its national delusion and currency debasement....which places it in tune with the global imperative. The excuse is that Japan's currency is too strong. The reality is that Japan needs to fund its debt by debasing its currency. By printing money to repay debts.

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Andrew Sheldon www.sheldonthinks.com

Reserve Bank trepidation signalling govt spending

Readers of our Japan Foreclosed Property blog will be aware that we have been expecting Japan to engage in an easy monetary policy for a time now, and now its coming through. The consequence is going to be good for Japanese property, but also for the commodity stocks, to which we are overly exposed. Copper, gold and tin are all at record highs, and even other metal prices fared better despite the rapid growth in their warehouse inventories over the last year. Clearly this is not simply about economic stimulus. Commodities are denominated in USDs, and since the USD is one of the three major currencies being debased - USD, Euro and Yen, you can expect more strength in the commodities, and also a corresponding strength in the commodity currency.

The Reserve Bank of Australia did not raise the Official Cash Rate at its last meeting, causing a big drop in the currency. We might expect it to do so at the next meeting. I have a more probable explanation for the lack of action. I think the Australian Labor government is going to go on a spending spree in order to keep the Australia dollar competitive. Expect it to announce a national campaign to build a mag-lev train network or some other scheme like that. I reckon Kevin Rudd will spend his time in China trying to develop a cozy partnership with the Chinese to supply the tracks, since they have been building such maglev systems lately.

The Australian currency is going to be strong, so expect such efforts as these to manage the currency so that manufacturers and farmers are not too disadvantaged.....even though its not its natural constituency. Its also about managing the volatility in an era of government financial intervention that really re-started in 1983 after a short hiatus. Like one year. Was there an Olympics that year?

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Andrew Sheldon www.sheldonthinks.com

Where to place your money during this recession

An article in the San Diego Tribune offers some investment advice in these hard times. I have some other advice for you, which you might like to consider after reading this article, which I find only modestly helpful.....mostly for its factual information.

Gold is far from over-valued based on historic measures. Based on the previous three cycles, the dow jones index vs gold price can go to 4, giving a gold price of over $US2,400/oz. Adjusted for inflation, gold is still cheap. In fact, it was only lasy year that it surpassed its old high of $780/oz – set 30 years earlier. But there has since been 30 years of inflation, compounding at 3% per annum.

Gold is not simply a hedge against inflation. It is a hedge against debasement of currencies. In a world where all major governments are debasing their currencies, we are looking at currency relativism. The only strong or 'hard' currencies are the commodity producers like Australia, Canada, NZ, Brazil and South Africa. Because of their cheap labour, resulting from structural liberalisation in the post-communist (liberalised collectivist) era, you can also consider China, India, Brazil as attractive emerging markets.

There is not going to be a collapse in China anytime soon because this is a 'super cycle'. China has plenty of cheap labour, and that will mean Western factories will continue to invest in their country. The softening of the global economy offers reason for China to stimulate domestic demand, as Western countries previously did. So these economies are attractive.

Why is Japan’s currency too strong? The US is simply debasing their currency at a faster rate than Japan. You can rest assured that Japan is going to change that very soon, as it contends with a public debt of over 200% of GDP and diminished export competitiveness. So this is more economic or simply currency relativism.

Bonds offer a poor yield in the USA, so you need to look at short term emerging market or hard (commodity) currency markets like Australia, NZ, South Africa and Canada, however even these markets are pretty volatile, so you have to trade opportunities.

Real Estate in the USA or Japan is ok, but gold stocks is by far the best opportunity.

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Andrew Sheldon www.sheldonthinks.com

Does Ben Bernacke give stock tips?

Want to know when to buy & sell stocks? Maybe you should ask the Fed, as their arbitrary injections of stimulus are pretty well what drives stock prices. We have managed exchange rates, now its managed stock prices....so much for free markets. I used to be a mining analyst, but now I have to read Ben Bernacke's mind to pick stocks. Adds new meaning to trading psychology.

I guess if Ben Bernacke is making stock tips, I guess he is recommending banks. If he gets his ideas from Obama, maybe he also likes hospitals and toll roads.

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Andrew Sheldon www.sheldonthinks.com

Not only gold glitters!

It is easy to become somewhat myopic about gold. I was historically like that a few years ago. I have been following gold since the 1980s, and in this uptrend since 2000. I have made some good profits from the start, with stocks like Gympie Gold, Red 5, etc. These profits were typically made in 1-3 monthly price surges.

At the time I was reading a lot of stories about the US debt. It took some time for me to expand my understanding of economics sufficiently that I was able to challenge some of the assertions made, because falsehoods abound both in support and against gold. In this article, there is some flawed analysis of gold. This article was addressed to NZ readers.

1. Gold is risky? What market traded asset is not. Volatility can actually work very well for you, so don't be too critical of it. Also dropping context, gold is one of the few assets which has an inverse relationship to other asset classes, so its a defensive policy. Did it collapse with housing and equities? No, and its currently at all time highs whilst those assets stagnate.

My favourite exposure are small explorers with exposure to potentially large scale gold mines because of the upside in returns. If you can find an explorer with $5mil in cash, 1-3 good projects, and you are confident in the trend. If you have a few of those stocks, and you apply some level of sound technical judgement by reading technical reports, then you can really make a hell of a lot of money. i.e. 1000% plus. These stocks are of course the subject of my spec blog and Mining Fundamentals eBook (2nd edition).

2. Its unpredictable - there is actually a VERY STRONG correlation between oil & gold prices, and the dow jones, i.e. gold ratio falls to around 4-5 in times of financial crisis, so we are looking at a gold price of at least $2500/oz if the Dow is around 11,000. Just watch the Dow. Hold that ratio in context, there is no paradox. Its not suggesting they are directly correlated, the ratio is changing.

3. Its not the only defense - NZ investors don't have much access to it, but being commodity producers, and with a strong China/India, the AUD and NZD are pretty hard currencies anyway, so NZ'ers don't really need it. NZ does not produce much gold, but food is hardly an invaluable commodity, and its government preserves a fairly disciplined monetary and fiscal policy, so cash is ok.

I don't advise people to buy physical gold. The best exposure is an ETF and gold explorers. Some ETFs are leveraged, so be aware. I don't expect a banking crisis, merely a debasement of currencies because the government (sorry that's you) will be obliged to cover all mistakes (yes 'you') have made. i.e. Trusting governments unconditionally being the most apparent.

I actually don't like gold miners, particularly the large ones because they are already fully-valued, they are priced at a premium, and as we have seen with Rio Tinto-BHP, they can only have their wealth purged by governments. Basically, only bad things can happen. In contrast, the long suffering explorer can only find upside in 'select' cases. A contrarian investment. When asset values have been so discounted, they are priced at cash value. i.e. Their projects have no value. Of course you want some idea of the project's value, whether its commercial gold in drill core, structural geology or geochemical indicators of mineralisation, preliminary ore reserve and production cost estimates.

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Andrew Sheldon www.sheldonthinks.com

Pilbara depletion of iron ore

I swear academics - ok 99% of academics - are not worth a cent, just like politicians who legitimatise their expense with 'accountable' dollars extorted from you, the taxpayer. The quality of their research has an inverse relationship to the intensity of their bed-wetting.

Geoscience Australia calculates that the country's "economic demonstrated resources" of iron currently amount to 24 billion tonnes. It is being used up at a current rate of 324 million tonnes a year. In the 1960's it was reportedly called "one of the most massive ore bodies in the world" by Thomas Price, then vice president of US-based steel company Kaiser Steel.

According to the Australian Bureau of Agricultural and Resource Economics, that resource is being used up at a rate of 324 million tonnes a year, with rates expected to increase over coming years. Experts Dr Gavin Mudd (Monash University) and Jonathon Law (CSIRO) expect it to be gone within 30 to 50 years (Mudd) and 56 years (Law).

Source: http://wapedia.mobi/en/Iron_ore

It is interesting how history repeats. In the 1960s when there was an international shortage of iron ore, the Australian government in its wisdom placed an embargo on the exploitation of iron ore. If they are saying there is 24 bil tonnes, I bet you there is probably 100 bil tonnes in the Pilbara alone. The implication of that embargo was that miners stopped looking for the stuff. It was not until Lang Hancock flew over the Pilbara and recognised that the rich iron ore deposits were causing his compass to send him off-course. He lobbied the government to end the embargo I understand.

The moral of this story is that governments are hopeless. They were hopeless in the 1960s, they are more hopeless in the 2000s, because they don't learn from their mistakes. They know only enough to make them dangerous. So why do you give them your power? Every year you finance their indulgences. Why? How little do you think of your lives?

You could almost accept it as a universal principle. So what is wrong with the current thinking? Well, there is absolutely huge amounts of iron ore in Australia. Huge amounts, whether its in Tasmania, South Australia, the Mount Isa region of Queensland, the Cobar & Broken Hill district of NSW.

Some of it might only grade 30%Fe, yet upgrading is often easy through beneficiation. Moreover if it were not, prices would adjust to make it economic. Do we need another silly fear? No. There is also the possibility of recovering scrap. The high steel prices go, the greater the incentive for people to visit your house asking if you have any scrap steel in your backyard rusting away.

But we ought to recognise how hopeless government-sponsored research is, and why you ought not to be funding it. When it is argued that 'there is not enough R&D', and some politician wants to fund it, recognise that its wasteful. The more detached from reality these govt agencies are, the more useless.

There is even another class of iron ores called titanomagnetites which are lower grade, but which are supplemented by titanium and vanadium, which are valuable high strength steel alloys. What if in the next (I say) 300 years a better process is found to recover iron and alloying agents from those ores. That would be another 100 billion tonnes. Why? Because where I live in NZ there is a 400km stretch of beach covered in 30% iron sands. They are typical in volcanic regions, easily mined as well with dredges, easily moved from one site to another.

I have an old friend from university. He does not read my blogs because they are applied. His job is to develop soil maps for the NSW government. They develop these maps for farmers, who after decades of experience I suggest have greater insights into soil quality. Certainly there is a value in having systematic data for the country's soils, but there needs to be a customer or value to the proposition. Where is the value in mapping national parks if you intend to preserve what is there? Perhaps reconnaissance mapping is all that is required. Not in governments ruled by dogma and detached from reality by the generosity of your cheque book.

You don't need to be told this....and yet you keep doing nothing. My role is as an educator. Here is the education. You have heard it before...the Club of Rome prediction in the 1800s pointing to a dire depletion of resources.

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Andrew Sheldon www.sheldonthinks.com

Australia in great shape - better without Gillard

In the last week there has been a raft of news confirming our views of the last year that Australia will weather the current global economic storm very well. In fact it always does. Any collapse in commodity prices is accompanied by a collapse in the $A. The current scenario is even better. We can see from several announcements that Australia's trade surplus is not just good, but excellent. Its at record levels - see article 1 and article 2 to that effect.

Australia is benefiting from a combination of factors:

1. Higher export volumes of minerals - particularly gold, iron ore and coal I suspect, maybe alumina.

2. Higher export prices - for this year anyway - so expect trade surpluses of another $3bil per month, rising to $3.8bil in 9 months, before they fall back to $3billion.

3. Strong population growth. Did you know immigration numbers have doubled from 140,000 to 300,000 between 2007 and 2010. Its part of the stimulus.

4. Business investment in mining and energy is strong - despite the tax applied by Gillard - which destroyed our credibility. There is already a lot of work in progress, so it will take a few years for our loss of credibility to show up in stats. In the meantime, the govt will need to beg for the forgiveness of foreign investors.

5. Chinese stimulus in the wake of the 2008 Sichuan earthquake and more recent Chinese government stimulus of RMR 4 trillion is going to benefit Australia. You can almost expect $500 billion of that money to make its way to Australia in terms of mineral purchases and mine investments. In reality, it might come from a different pot, but its all good. Except for Labor. They go to purgatory.

If you want to profit from mining buy a mining stock - don't encourage government parasitism.

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Andrew Sheldon www.sheldonthinks.com

Watch the S&P - it might impact gold trend

The S&P is at a fairly critical point at this time. We can see that the market can either fall back to its previous lows, or it can resist such moves and fight another today. The question is - to what extent is the Fed and other central banks going to support this market.

This market has ceased to be a product of supply and demand. Its all about Fed decisions. You can't be a good market analyst in this market; you would need to be Ben Bernacke's psychotherapist.

I suspect it is ultimately the break of that long term downtrend, i.e. a break in the S&P above 1178points, which is ultimately going to stimulate the market, or see the market fall back to its lows. Bernacke has stated that they will support the market. Just how much he does though is up to his arbitrary whim. That is what happens with highly interventionist (statist) market regimes. The idea that you can know the market, and respond to price signals is the rhetoric, but the reality is that, like the stock market, pricing is being determined by some guy with a lever somewhere. General prices that is. You would think the Australian market is strong at the moment. There is a shortage of housing stock...and yet no one is building. Its all a facade. But that is one facade which will not be allowed to collapse because too many of you believe and depend on it. Just as a lot of junkies depend on their daily heroin dosages. Is now the time to question your principles? Probably, as we role through another election of conspicuous stagnation, but at the very least the time to think was in your school years when you debated public policy and economics, and alienated the libertarians among you.

At this point gold is at a support level. There might be some consolidation at this point.

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Andrew Sheldon www.sheldonthinks.com

The market outlook - for the next year

Here is a good argument for a 'double dip' in the broader equity markets. Eventually this will be good for gold. Another story someone sent me raises the spectre of $2.6 trillion in municipal bonds in the USA which will hurt investors as their returns evaporate. The goods news is that these investments are unlikely to be as troublesome as home loan excesses, as there is probably not the same excessive valuations attached to municipal assets, as say houses in the USA.

This is the type of news that I see taking the Dow to another bottom, then we can expect another recovery. So you need to trade these opportunities. In case no one told you; you ought to hold no broad equities at this point, and I would be selective in your specific or strategic assets. Even gold equities will be hit.

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Andrew Sheldon www.sheldonthinks.com

Late market watch - ASX

The Dow Jones and ASX appear set to fall back to supports. There might be some measure by central banks to support the market. See ASX chart attached. ASX going to 4286 otherwise lower. We can expect some selling of gold positions if this gets serious. It is apparent that this market will take a serious hit soon and gold equities with it. The wil recover though, but you might want to stay away from any intangibles. I' inclined to keep MGK. AAM will probably hold 19c support. There is the risk that funds will sell gold to cover other positions though perhaps funds are better prepared this time. :) What do you think? They are playing with your money. :)

Currently travelling so don't expect speedy insights.

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Andrew Sheldon www.sheldonthinks.com

Escalating signs of economic peril

Taking a look at the EuroZone, I can see why my earlier expectancy of support for the Euro has not been achieved. I do not give a lot of time to this market....not as much time as I should. Consider the following skit by the guys at the 7:30 Report in Australia. Rather amusing actually. I was not aware of the level of ndebtedness if these figures are true. In any respect it highlights that the EuroZone is as negative as the USA, in fact more so. I would however caution people that the most probable response to this problem will be the break up of the EuroZone into two currencies - the current Euro and a new currency for the southern mediterranean countries. This will be necessary to establish new levels of accountability.

The implication of these developments is that gold is going to perform very well in future as these countries struggle for credibility. There will come a time when people will stop flipping between 'relativist' standards of value like currency, and they will abandon growth-based forms of asset value, in favour of precious metals like gold, silver and platinoid metals. i.e. Platinum and palladium, even rhodium.

Such news comes as no surprise as we and others have been warning of such problems as early as 2000. We started blogging about it around 2005. We maintain our belief in gold, and we expect a rally in precious metals in coming months. See our commodities and Speculators blogs.

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Andrew Sheldon www.sheldonthinks.com

Your gold market options

[QUOTE=Scot27;827520]Why buy actual gold? Why not just buy an ETF that tracks the price of Gold? Im not very clued up by precious metals (I have always bought ETFs for them), so was wondering what are the reasons for buying actual coins? [/QUOTE]

Each option has their merits:

1. Exploration shares - if you are a geologist they have more upside, depending on when you buy, very little downside. My best bet on this strategy was 6800% increase on Minotaur Res when they intersected 600m of base metal mineralisation. Porphyry-copper type deposits offer this potential if a small $5mil company is testing the target.

2. Emerging or new producers - less upside, moderate risk. Real potential for cashflow, upside to gold price, but technical risk that reserve grade not as good as expected, or mining costs blow out because of unforeseen issues like poor plant design, strikes, etc. These are really nice if you can get options related to them, i.e. Aquarius Platinum opts - bought at 25c, sold at $8.95 in 2001 I think.

3. Established long life miner - trade at a premium, so harder to find upside, just prospect of increased reserve life, and higher gold price.

4. Standard ETFs - good exposure to gold, only risk is a price risk, no financial risk or technical risk.

5. Leverage ETFs - greater exposure, but its not physical, so if counterparty to ETF fails, you don't get your money back. This is I would suggest a high standard. We don't need to be this careful yet, at least not with all your money. Maybe 10-30% of funds here.

6. Futures - specific closing out date but you can roll over. Leveraged price exposure.

7. Options - time premium which diminished over time, no technical risk, but price risk, leverage upside, limited downside offsets time premium.

8. Contracts for Difference - one of the better ways. They are derivatives so counterparty risk. Many companies use these now, as can trade many products. Don't over-leverage.

9. Physical gold - less appealing because product storage/insurance costs, less upside

10. Jewellery - least appealing as poorer resell value, security issues, less upside.

Gold has broken out into new highs - going to $2400/oz. This is a gold bubble. Why? Govt debt issuance and printing of money is debasing currencies, subdued growth outlook and prospect of low interest rates means negative returns on bonds and money. Where can it go but in emerging property markets and commodities for returns. There is a historic relationship between gold & oil, gold & the Dow Jones, which tells us that gold is going to around $2400/oz. Its not luck, its based on pricing ratios between 1897-present. So when Dow index-gold price ratio gets to around 5, its a good time to sell. The Dow is a measure of excess money in the market relative to real money (i.e. gold). The Dow is priced on equilibration of financial assets, and its the biggest market, so good representation. This is early days still. I have been investing in gold since 1991 at $258/oz low I think, but there is a lot of upside because in real terms, inflation has debased all financial assets since that previous low of $850 in 1986 (I think). So in 30 years, a lot of inflation - and its getting worse.

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Andrew Sheldon www.sheldonthinks.com

The delusion continues...Dow going to 12,000pts

The Dow Jones rallied 3.6% overnight as the various monetary authorities launched coughed up USD1.1 trillion to support the EuroZone. Confidence had been underpinned by fears of defaults on sovereign debts in the backwaters of the EC economy. These countries are hardly the centres of capitalism, but perceptions are more important than facts when credit markets are suffering a lack of confidence. Money cures all....it doesn't matter that these governments are just substituting one form of debt for another. Its interesting isn't it. We can't allow some 'backwater' like Greece to go broke, but we can pile up all these debts upon the international credit card because surely the combined resources of the Fed Reserve, the European Development Bank and Bank of England, as well as IMF members is sufficiently strong to bail out everyone. Right! Right??? You believe it don't you!! Don't you!!!! hehe, just make sure you are holding something tangible like 'your shirt' and a change of underwear, and your toothbrush, and lots of canned vegetables with added vitamin C. Don't go living in some high class suburb. That is where the mob will be coming first. Close all windows and pretend like there is no one home. :)

Chart for Dow Jones - I suspect the next stop is 12,000pts.

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Andrew Sheldon www.sheldonthinks.com

The cost of one really bad 'resource tax' decision

It is worthwhile doing an analysis of exactly what PM Kevin Rudd has done to Australia. Even if he backs down from this policy, I think he has done permanent damage to the reputation of Australia as a safe place to invest. You need to understand that Malaysia pays a higher cost of capital than Australia. The reason is that its a smaller country, developing country, with relatively undeveloped capital markets, unpredictable public policy framework. The implication is that when the Malaysian government pegged its exchange rate back in 1993 Asian Currency Crisis, it was the type of policy you would expect from a 'recalcitrant' leader of a third world economy.

The implications of Rudd threatening or planning to raise taxes on miners has the same impact on investors. He is doing something without warning, with huge detrimental implications to investors, which stretches far beyond mining companies. I estimate that his actions will cost Australia in net present value terms the equivalent of $A2o billion a year. This is a rough figure, though it is very conservative. Consider our risk exposure:

1. Lost mining investment: I would expect some $A300 billion of mining investment over the next 20 years. I believe it would fall by around 16% per annum if Rudd adopts his policy. If we assume national income is half of this investment, in terms of wages, royalties, taxes, and we prepare a NPV for this money stream, then we are looking at a loss of $A10 billion.

2. Lost general investment: Foreign investors will look at this decision and wonder whether they ought to invest in Australia, so the implications will extend beyond Australia's mining sector. The implication is that Australia's reputation will be damaged for a long time. The damage has already been done in fact because there is always the possibility of it happening again. The fear is not in people's minds; it will take years to erode. This can be expected to have a smaller impact I think because most will recognise that this is an opportunistic policy - say a cost of $1 billion a year.

3. Higher interest rates: It is probable that Australia's sovereign credit risk rating will rise if this policy is adopted, particularly on the corporate debt of miners. It will also have an impact on the cost of capital of households. The increase because of it might be of the order of 0.1%, however given the large size of Australia's household and corporate debt, this is going to be a lot of money leaving the country because of Rudd. I think household debt is around 102% of GDP, which is around $750 billion annually, so 0.1% of $A750 is another $0.75 billion.

4. Capital loss: Consider the implication of his decision on the value of all Australian mining stocks with investments in Australia. He has also opened up the prospect of similar policies being adopted overseas. Of course if his policy is copied that would be relatively good for Australia, but absolutely worse for everyone. We don't want govts controlling the money, as they are hopeless. So direct investors have probably lost $3 billion, portfolio investors and fund managers have probably lost $7 billion, and that's just to date. Another $5 billion when the policy is legislated.

5. Investment loss: What about the opportunity cost of write off's for project values which would otherwise have been sold to investors. e.g. MLX has a world class nickel resource. A Chinese company was likely to have bought a stake in the mine through development funds. The project is no longer worth as much because of the new tax imposts. Impact probably $1 billion a year, rising to $2 billion in 10 years.

6. Legal suits: Also consider the prospect of a law suit by these foreign and domestic companies which have spent money acquiring projects, only to find out that the government has overnight changed the tax regime. So taxpayers will be paying out another $5 billion in law suits.

Decades ago security of supply was a 'BIG' consideration for Japanese investors in Australia's mining sector. I actually think this fear has died because of the more globally liberalised markets evident today. Removal of tariffs has helped achieve a seamless integration of markets. The Chinese market is 10x bigger in terms of population than Japan, so they mean a great deal of investment to Australia. We are in the front seat to supply these countries, but because of Rudd, we will miss out on some of this investment. I suggest there will be more interest in Indonesian, PNG, NZ iron ore, coal, oil & gas. Oman and Yemen will become appealing to companies like Shell and Woodside. That is the impact of Rudd. He will be on par with President Chivez (?) of Venezuela, who nationalised the local oil industry. What is the difference to investors? A capital loss because of some arbitrary government policy is a loss one way or another. That is a lot of damage to Australia's balance sheet. I guess its good to know this before some 'sorry' people consider him a nation's leader for another term of government. Learn more about this issue on my taxation blog.

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Andrew Sheldon www.sheldonthinks.com

Gold close to $1220/oz previous high after $40/oz gain

The gold price has rallied to the $1200 level, very close to the $1220/oz level we anticipated about a week ago. We await the next moved, as the gold price approaches its previous high.

In the wake of the Rudd governments taxation announcement it could be expected that the gold stocks with overseas exposure will perform better than those with local exposure. I would also expect established producers to do better than those companies which are more than a year away from production. We also would like to avoid hedged producers. Most gold producers are actually unhedged.

The reality however is that gold might not yet break out to higher levels, so I would be looking for confirmation of that. I think the Greece financial crisis is not so significant in the grand scheme of things. I think its more significant in highlighting the fact that governments are inept, that they cannot be trusted, that they have a gross conflict of interest; that they have as much integrity as a murderer on death row. No, for those who might err, there are no good politicians. They are dishonest by necessity, otherwise they would not participate in a system which dispenses with integrity, honesty and objectivity. They are unthinking sheep which ought not be listened to. Why do you give them moral standing? Oh that's right, there is a 'metaphorical gun' pointing at your head.

I retain my belief that it will be some action related to Iran which will really get the price of gold moving. That will of course raise fears of inflation. Western governments will of course attribute all the impending ruinous inflation upon the Iranians, just like they blamed the financial crisis on banking CEOs. Makes you wonder why the banking CEOs are not more outspoken. Evidence of collusion? Hmmm...maybe, or maybe they are just scared.

Financial booms and resulting crises in the modern era are created by governments, particularly in the larger markets, where they are destined to have greater impact. Banking CEOs benefit from this, but they also benefit from governments not legislating to prevent 'inflated' profit growth prospects as a basis for remuneration. Of course bankers ought to have their 'sustainable' performance compared to other bankers, just as they compare their salary package to other CEOs. i.e. A CEO ought to get a base salary plus 2 x the % gain of the 200-day moving average of his bank share price relative to a nationwide bank index. If the bank has more than 50% of its business overseas, maybe he ought to be compared to an international index.

For more thoughts on the ethics of 'mixed economies' refer to my politics blog - where I have been very busy of late.

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Andrew Sheldon www.sheldonthinks.com

Australian market outlook - May 2010

You may have read that the Australian housing market is in for an 'implosion'. Read this article in The Australian. I disagree with this analysis by a US investment banker.

The guy who emailed me this story also made the point:

"Is the Australian house market a bubble? The Australian money supply (M3) has gone up 10% per year, the last 10 years. It is not an issue of if, but when".

Here are the reasons why I think there will be no collapse. But I do expect higher interest rates, and I do not expect much growth (if any) in prices. Yields need to rebuild in property.

The increases in the money supply have occurred because of huge capital inflows and investment, so matched by increases in productive capacity in mining. The outlook is for more mining investment in iron ore, coal, oil & gas. The outlook for commodity prices is rather good. Expect $300 billion of mining investment in the next 20 years.
Property prices are high because govt artificially keeps them high by restricting land releases, so they can keep taxes high, keep you working hard, and minimise the cost of local services, i.e. roads to nowhere, buses servicing no communities. High rates of immigration can be expected to assist with property demand. Where are all the NZ'ers going to go for a job. Sorry, you are right, they are all already there. :)
Many argue that China is a bubble, but again with huge capital inflows boosting labour productivity and productive capacity, I think there is fundamentally strength there. They are on an exponential growth path, along with India. I think this is one of those magical times where the world does REALLY WELL. Afterall 3 billion people have had their markets deregulated.
The US and EU are more of a basket case, so I think there will be a short term impact from those countries performing poorly and as he suggests 'boosting their money supply', but the long term looks good for Australia and the world, and govt spending will raise demand in the short term, as much as it might be inefficient expenditure.
I think markets will fall, and activity subdued only for the next few years...sideways more than anything. There was no huge capacity overhang when the US tanked, so the slack will be absorbed in a few years.

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Andrew Sheldon www.sheldonthinks.com

Market correction underway - DJIA leads

Based on the following chart, it is evident that the Dow Jones Industrial Average is undergoing a sell-off. There has for a long time been talk of a 'double-dip' recession. This has always been our expectation, and I would suggest we are seeing evidence of it now. If you look back to our early 2009 forecasts, we actually anticipated that the market would rally to its current level, and that it would be sold off. I would suggest that the Dow Jones is going to fall back to the 8800 level. I don't think it will fall below that because ultimately it will be supported by the Fed. Basically this '5 year' period was always going to be about consolidation.

Bear in mind that the Dow is not convincingly in downtrend yet. It silly is hanging on the 11000 level. It closed the day at 10,991 points, which is only slightly below the support. The trend will be set by tonights trading.

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Andrew Sheldon www.sheldonthinks.com

The future of the EuroZone

There are a lot of people making a lot of fuss about the prospect of Greece defaulting on its debt. It sounds serious because Greece is a sovereign country, so we are bombarded with dire scenarios. The reality is that there are three prospects which can result from this predicament:
1. Loss of membership: Greece and countries which adopt lower standards of financial discipline are kicked out of the monetary union. They are forced to establish their own currency, or establish a common 'Mediterranean' currency, which might even become a popular standard by countries in the Euro Area which are not able to join the Euro Union. This is not a silly idea. The values which divide Northern and Southern Europe are significant.
2. Euro support: The Euro Zone is concerned about the collapse of its member countries, and so it offers unconditional support for Greece and the other dubious Euro countries.
3. Negotiated settlement: The Euro Union talks up the notion of supporting Greece and other Euro countries in "dire straits", then engages in a protracted process of negotiating a set of conditions for retention of inclusion in the Euro Union. The political party looks good because they resolved the problem, they are forgiven by the Greek people because their austerity measures are a necessary price to pay, because everyone understands the importance of being in the Euro Union.....or don't they?

Either way, it makes no difference to the Euro Union. Whether Greece and the others are kicked out makes no difference. It would be a logical divide if these countries ended up going their own way. The Mediterranean countries have different values, so its appropriate they have a different values, so they can remain the industrial backwater they want to be, where lifestyle means more than money-making. Either way, whether they decide to adopt austerity measures or adopt a diminished currency, who needs to worry, they account for such a small portion of global GDP, why care? The Greeks will do what they do best....eat and drink.....and chat.
For more background info on this issue - here is a good article.
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Andrew Sheldon www.sheldonthinks.com