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