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Global Mining Investing is a reference eBook to teach investors how to think and act as investors with a underlying theme of managing risk. The book touches on a huge amount of content which heavily relies on knowledge that can only be obtained through experience...The text was engaging, as I knew the valuable outcome was to be a better thinker and investor.

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Friday, May 14, 2010

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.
Andrew Sheldon

Monday, May 10, 2010

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 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.
Andrew Sheldon

Thursday, May 06, 2010

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.
Andrew Sheldon

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.
Andrew Sheldon

Monday, May 03, 2010

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.
Andrew Sheldon

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