The Dow rally set to die - where to place your money - I say gold equities

We have long argued that the reason why there is no inflation evident in the Western world is because its being concealed by 'asset inflation'. We are close to a fall in asset prices judging by the Dow Jones Index. Just looking for the Dow to break that 15800 pt level convincingly. I like that the Dow failed to achieve a new high recently. So we have 2 positives:
(i) Gold is the only cheap asset class, unless you can find a dodgy third world economy to invest with 'good fundamentals,
(ii) Asset prices look like falling, so you can expect to see rising 'cost-of-living' inflation.

The appeal of gold or in fact any precious metal equity is that they represent 'cheap asset' when every other asset class is dodgy; that is overpriced at a time when inflationary pressures are building. The inflationary pressures are arising because of the collapse of over-priced assets themselves. Most people think asset prices are just the 'things we consume', but investments are 'products'. When we preferentially spend on securities, and consequently bid up the price of securities, we create one type of inflation, even if there is no blow-out in cost of living inflation, i.e. the price of fuel, vegetables and computers. If the only spending being done is on investments, that's because we are creating non-productive assets, or trading in secondary assets, and not creating new assets to serve as a foundation for the creation of new money. This is why, if money is divested from securities, either new securities need to be created, or debt needs to be liquidated. This derivative trading is netted off, but it leave a very real scar on the 'physical economy' where most spenders live, and this is where we are destined to see the inflation.

You need not buy gold though. In fact whilst gold is trading at $1260/oz, the price of gold equities is very cheap. I have long suggested a company like Gryphon Minerals (GRY.ASX) because it has $62mil in cash and investments useful for financing a gold mine development, as well as 4-5Mil oz of gold to underpin that investment. So we have an asset of $6-7 billion in-situ, that can be mined for say an Net Present Value of $0.5-1 billion, depending on your outlook for gold prices, and this company is trading at an enterprise value of zero as we speak (14c). It just doesn't seem fair. Where is the downside? None is imminent. That's not to say there are not future risks, say of political risk. I've not seen a nationalisation of assets for years now; the closest being Iran and Venezuela. But you might be scared of a gold project in Africa. I'm rather satisfied instead by the low mining costs and the lack of impact of Western largesse on the traditional values of Africans who could probably care less that Western financial markets are going through upheaval. Catch our stock picks on our mining 'SPEC' page, or you can find us on Facebook.

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Bitcoin exchange hacked in Australia and NZ

About 2 weeks ago I posted an article about Bitcoin, where I drew attention to its inherent weaknesses. No sooner had I done that than 2 problems emerged for these services:
1. A bitcoin wallet was hacked in Australia
2. A bitcoin exchange was hacked in Czechoslovakia

The problem I even raised was not even the foundation for the problem. The problem is that the exchange operators themselves can appear to be 'custodians', but once they have set up their systems, you would have to wonder why they can't just attack them themselves, as 'independent hackers'. They know the system; they dare I say, know how much traffic, or how much business they are doing. It would make sense for them if they realise:
1. We can thieve because we are anonymous
2. This system is destined to break down, so we need to 'extract' money and set it before others

This is the end of bitcoin in its current form. At some point in time we can expect a bitcoin exchange to be developed where the money is based on gold; where your electronic credits are redeemable for gold. That will not happen overnight, and there may well be some legal obstacles to prevent money laundering. Bitcoin - its going down. It has a problem with its business plan, as we alluded to in our YouTube post above.

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Bitcoins - inflation proofing or scamming?

There is growing support for Bitcoin and other crypto-currencies. Stefan Molyneux offers a good explanation of these crypto-currencies. I however am a little more critical of them....in fact a lot more. Whilst one can acknowledge that:
1. There is scarcity in terms of value of Bitcoin - the problem is that the scarcity is only in terms of its 'limited' volume. Even then, I would argue that there is the discretion of the operators to 'break that monetary discipline', however with competition, that prospect becomes less likely as competition becomes more pressing. Having said that, there is the prospect of competition giving greater 'marginal utility' for an 'near-anonymous' collection of holders from selling their 'intangible' currency.
2. There is vulnerability in terms of the lack of objective value in the coins
3. There is value in the prospect of competitors offering an alternative currency.

Frankly, I think the authorities would love it if these 'crypto-currencies' failed because they are destined to discredit the entire industry. The reality is that it is good that a monetary system has discipline. The problem is that Bitcoin discipline is backed by 'the arbitrary' whim of its managers. That is a 'threat'. The greater threat however is posed by its lack of tangible value. A value has value in use or exchange. The value in exchange however is a derivation of its 'utility'. Now, this becomes a circular argument, where its utility is trading, unless you can actually get some exogenous benefit from these units. This is the problem. Unlike gold, people don't wear 'bitcoins'. It won't even be an antique item in future. I therefore suggest that unless you are daytrading them to convert currency, then you are taking a risk. Such platforms, which are unable to offer a tangible store of value, like gold, are destined to turn simply into money exchanges where you trade foreign currency. I expect them to become 'insured guarantors' of currency conversion, since they can perform that service at a much lower cost than the banks. It actually makes for a nice 'regulatory' loophole if the value you offer is 'money insurance' rather than 'money transfer'. i.e. That arguably occurs if you charge for 'insuring' protection of your monetary value rather than the conversion. The question is how that might happen?

Now, at this point there might be a 'fixed' number of bitcoins - I believe 21 quadrillion possible units, which have been 54% mined. This obfuscates the problem of:
1. People can set up exchanges to sub-trade them; though that is a moot point
2. People can set up exchanges in competition
3. The demand for bitcoins can decline - since they are not entirely anonymous
4. They don't deal with the risk of being mugged trying to buy bitcoins
5. They ignore the risk of a better money system coming along offering better product & services. Remember, there is no tangible value in electronic money. The government's money might lack tangibility, but it has some tangibility. i.e. They are able to force people to pay tax at the point of a gun. Of course they undermine that value, which compels people to buy bitcoins in the first place. But you need to think about what you are buying. The reality is that its 'not a ponzi scheme', but its like one. Whilst you are impressed because the price is rising, the reality is that there will come a day when people will be abandoning it.

If you want a better store of value, might I suggest a diversity of emerging gold miners. Here is why.
1. Emerging gold companies with millions of ounces in the ground are worth $5-25/oz, when the cost of production is around $800-900/oz and the gold price is $1400/oz.
2. Gold has been valued and loved for 4500+ years
3. You can't steal gold until it is mined; and it won't be mined until it can be done so safely.

There is a risk of having gold in the wrong country with sovereign risk issues; so you need to spread your investments. The other nice aspect is that you can trade those positions in the interim. You are obliged under 'economic slavery' to pay capital gains tax. The nice point being that you only pay it on passive profits.

Now, there is essentially no 'fixed' unit of gold, but as I have shown, there is no fixed number of bitcoins either, if you can arbitrarily create new exchanges, and in that context, new exchanges are actually a source of diversification. The problem is that diversification diminishes the value of the exchanges. They need to find tangible value. Now, the infinite volume of gold is an issue, but consider:
1. You don't actually need to physically hold the gold; you just need a claim to it. It is kind of nice if its stuck in war-torn countries which can't attract technical operators or investors prepared to risk their capital.
2. The incremental addition of gold to the supply needs to be recovered at the marginal cost of supply, so that's an average of $800-900/oz, but some mine costs are $1300/oz. There is however the prospect of costs falling with new technology; however those are the types of gains upon which real wealth and the value of your money rises, i.e. the purchasing power of your gold increases against.

For this reason, I stay with gold; but you don't need to hold physical gold; you want to hold the 'intangible' claim to a potential source of gold, which offers you multiple bets on multiple currencies. For this reason, I like the idea of owning gold, but it can be demand-based commodities as well, like zinc, etc.

For these reasons, I believe bitcoins are a product that people poorly understand; and when people don't understand things, prices become volatile, or their price profile 'bubble like'. This does not preclude making a lot of money. The problem is that its simply a risk. You are playing with dangerous money. Its the type of speculation that governments don't create; its the type of speculation that only private sector spruikers create. Its not reason for regulation; its reason for education. i.e. Learn from the Dotcom bubble and the Tulip Bubble, because these were similar private sector bubbles.

The final point being that bitcoin does offer inflation proof. That is not however the point at issue. I can't even say you are buying a 'lemon' since lemons are worth $2.50/kilo. You are really buying a poorly conceived idea, and liking it because:
1. It seems to solve a problem - government fiat currencies
2. It seems to have credibility - because everyone else is buying

Don't be a sucker. If you use it, do so in small amounts for currency conversion to avoid the high fees of the banks. This is the proper use of such instruments. They are a risky/vulnerable source of medium-long term source of savings.

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Price price rally due - Are you ready - get your gold stocks!

For the last few months we have been waiting for a base support in gold. In fact a 2nd base after gold fell to $1180/oz in June 2013. This second base after some consolidation, marks a foundation for more upside for gold, at a time when there are strong fundamentals in terms of:
1. High asset inflation - Don't believe the 'cost-of-living' inflation numbers put out by governments because 'assets' are commodities as well. The reality is that the high price of assets makes gold attractive. i.e. The risk of weaker asset values, or more likely rally-bust-rally.
2. Low interest rates make gold more attractive because there is no return on debasing monetary units.

3. Emerging market risks make gold more attractive. Its not so easy to trade in these markets. They are small, illiquid, and there are few securitised plays.

4. Small gold market - By comparison to other markets, the gold market is really small, so it can move with enormous volatility. A $100/oz move in gold prices is not uncommon. 

At some point these high asset prices are simply not going to be sustainable because the yields on assets will be so poor. Governments however will not raise interest rates because that will undermine the debt market, as the real estate collateral is a source of market confidence. They will therefore take measures to keep asset prices high by debasing monetary units. This will effectively 'tax' holders of money/credit. Gold is really the only asset undervalued....simply because it offers no return. In fairness though, you can 'trade' other asset classes, but you will be 'carving' value out of other investors to do so; so in that game of 'financial relativism', you stand a good chance of losing. 

Now looking at the lower chart, you can see that gold is in the midst of a long-term uptrend, and we now see signs of that trend holding. This comes as no surprise to a lot of people, however, at least now, you have some evidence of a trend change. In all fairness, looking at the 'upper 60-day' chart, its not the most convincing of trend reverses, however, any uncertainty will be cleared as days pass. 

This prompts us to ask - what are the best ways to trade gold. Well, we go straight to the emerging gold stocks like GRY.ASX. We have often written about Gryphon Minerals (GRY.ASX) and continue to trade it off weakness, and sell when it is over-bought. Its a good story. We'll keep trading it until the company is acquired in a takeover, or it starts production. 

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Open Letter to the Australian Future Fund

Dear Mr David Gonski AC (Chair)
cc: Hon Peter Costello AC

13th September 2013

I would like to criticise your investment philosophy. I appreciate that the organisation has some legislative 'rationale' for investing in bonds and the like, but I want to suggest that your organisation has a wonderful opportunity to enrichen Australians. As a mining analyst, I watch as world class resource assets being development by small Australian mining companies are being taken over by offshore interests. Even poor African states are doing better than us. Let me cite some examples to you before I explain the reasons why.
1. Union Resources held an offshore phosphate resource in Namibia with a NPV of $220mil. It was sold for $US50mil, the first tranche (45%) was bought from MAK.ASX for $25mil, the second from UCL.ASX in a takeover for $33mil. A slight premium because it was after the feasibility study was released, and also because it held 35% stake in the world's largest undeveloped zinc-lead deposit in 'hostile' Iran - worth billions. They bought just before the recent election in Iran. The 'predator' in this case was Merwaid Mining, a London-based enterprise backed by an Oman state enterprise, funded by gas money. I'd say they got a bargain. Union Resources was of course between a rock and a hard place because it had no alternative funding.
2. Acacia Coal is capitalised at $A11mil, and it has a 60Mil tonne coal resource in Qld, and $5mil in cash, so enterprise value about $6mil. This company will be forced to farm-out its project. It will be 'bankable' by Feb 2014, but a Chinese/Indian company will get most of the gain. I might mention that there is little coal in Asia; no coking coal, but we give ours away. Haven't you ever wondered why Asian 'tigers' are buying  advanced projects rather than exploring for these resources themselves. What was Gillard's decision? A tax. Why don't we just appreciate our our assets? Why do we treat the mineral sector with such disdain given that for more than 'half a century' we have ridden on its back.
3. Gryphon Minerals (GRY.ASX) sits languishing in the market. I was able to buy at 12.5c but it since rallied to 25c. I should have sold all of my holdings but because of the tax system which discriminates against me, because I don't invest in our flawed super system, I sold only half to defer tax obligations. It is now 17c. This company has $55mil of cash & investments, plus 4Moz of gold worth billions. Its a takeover target given its resource base, strategic exploration leases, and its still exploring for more gold at a cost of $20/oz. I'd not be surprised to see it taken over for $100mil, or $20/oz. The Australian govt of course, in its infinite wisdom sold Australia's gold reserves at around $330/oz to invest in debased foreign bonds. The price of gold went to $1900/oz, and its just about to take off again, as it finds support at $1200/oz. I believe that decision was made by the 'best treasury in the world'.
4. Consider Global Minerals GBE.ASX, it has a large niobium resource in Africa. Another set of Chinese investors just bought in for 4.5c. I did I mention that the company has 4.5c in cash alone, and that this is a strategic asset for the Chinese because 80% of niobium comes from Argentina. Also it has a promising rare earths project.
5. Consider graphite resource developer Archer Resources AXE.ASX, its developing a high grade graphite resource in Sth Australia. It is destined to be given away to foreign investors, despite the fact that graphite will contribute to the emerging industries of battery technologies. Have you heard of carbon nanotubes. Might I suggest this is the future feedstock. Australia should be retaining these assets.

I'm surprised the mining industry is not complaining. Rather than get support from the government, they get taxed. Mining companies in Australia pay as much as 65% of their revenue in tax (according to the mining industry. This may have changed of late), but compare it to what other companies pay. 'Not their resources"? Fine, owned by the Australian public? Then complain and demand that we retain ownership of these public resources. Frankly, I think we are 'turning Japanese'...and 'I really think so'. This is the travesty of our governance, that our custodians are absolute idiots, and their idiocy demands explanation. Might I suggest the fact that its because of the lack of accountability of the Australian public. After all, the major parties in this last election, if you judge them by the candour of their election content, really think you Australian voters are pretty stupid. And to be sure some of you really are. But mostly the problem is you are just badly educated by them. When I compare my capacity to make money with the fact that Japanese investors are encouraged to buy Japanese bonds offering 1% per annum, I think Australians appear to be trending in the wrong direction. I think we are looking like 'dumbed down' Japanese investors every day, thanks to our government.

These companies are forced to go overseas because:
1. The govt gives tax subsidisation/incentives to super funds who don't invest in these companies because they are too small. Why? To encourage saving. But they don't give a thought to the quality of that saving. Japan has witnessed its savings rate fall from 40% in 1990 to 2% today. Might that have something to do with the low returns. Australia does better of course, with a savings rate of 9%. I would suggest it could be even higher if we valued our resources, and the resource companies which develop them.
2. The Australian govt is dumbing down the Australian investor by taking control of their money away, then forcing them to invest in low-yield, over-priced offshore enterprises, and forced to pay the associated fund manager commissions besides.
3. By the time they discover me and my book 'Global Mining Investing', they are so dumbed-down, that they don't believe its possible to make the 100% gain I made on UCL in 3 months, even though I told them about it, and wrote about it in the book. Our government is modelling 'scepticism' through the education system. The steep learning curve when people leave school leaves them jaded.

If the Australian govt truly wants to benefit Australians, maybe it ought to think about 'land-banking' world-class resources which foreigners are taking over. I'm suggesting that the Australian Future Fund should act as a 'support' for undervalued projects by investing in 'equity of last resort' so the private banks carry the debt. A mining project needs 30% equity to get a bank to finance the 70%. For small companies, the dilution is so severe that these companies give up the bulk of their value through takeover or 'farm-out'. These assets mentioned are world-class. There is no question they are viable projects. Its just a matter of timing. If the Australian Future Fund invested the nominal $20-40mil in each company, they would be taking a passive return of anywhere between 30-150%, depending on the state of the commodity market. Its really a 'no brainer'.

Based on the GRY example - current value of $20/oz (with takeover premium) versus the current gold price of $1400, with gold charts and QE suggesting gold going to $2400/oz, you people 'must be dreaming' investing in foreign bonds. What is more sensible than supporting Australian investors (shareholders), companies and employers make money, as well as making for the fund itself. Why are we giving money away to foreigners? Why are Oman intellectuals smarter than our dumb-nut bureaucrats controlling billions. The mind boggles. China, India and a raft of emerging markets will need resources, and we are giving away our expertise for a song.

Disclosure: I'm an investor in the companies above because dumb-nut investors are not.

Regards,

Andrew Sheldon

Mining Analyst, Investor, Critical Analyst

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Understanding inflation in the current context

David Gallaher: "I'd like opinions on the future of inflation in US dollars".'

You won't see inflation (as its measured through the Consumer Price Index) since wage levels are low (because of global wage disparity causing jobs offshoring) and low interest rates. Interest rates are not just to generate new credit/loans, its to keep asset prices high. High asset prices mean less spending on non-assets, more saving, so avoids current account issues. That's why they subsidize interest rates. The question is what can undermine asset prices which they can't control?  Bird flu? The government doesn't care where the money goes, as long as it keeps asset prices high. So it's invested in derivatives. For financial institutions this is appealing for a number of reasons:
1. They expand earnings
2. They can defer taxation by not selling,   but simply opening a contrary position.
Credit keeps growing as long as asset prices are stable and that means low interest rates.

So what would end this state of affairs?
Well, there are a number of potential sources for a financial collapse:
1. Evaporation of wage disparity - When third-world labour is fully absorbed this will result in a rebalancing of labour costs. It will make sense to work. This could however be expected to result in more workers in the West, with the discretion not to work, deciding to re-enter the workforce. Of course people don't at the high-end work just for the money, but they tend to at the 'low end', and it can be construed as partially resulting in the casualisation of labour, as well as the employer's desire to avoid 'added costs' of medical care, super contributions.
2. Serious collapse of confidence. Hard to think of what might cause this other than a run on the banks and a bird flu. If people stopped spending for a sustained period, this would cause a loss of jobs. Personally, I don't see this because of inability to undermine confidence, and the inability for a viral outbreak to get far. i.e. Its too easy for people to hoard food and stay at home. It would have to be a 'well engineered' pathogen with a long latency in the human body. i.e. Like AIDs but airborne.
3. Computer hacking of banks. Might some foreign government or anarchist undermine the Western banking system by plundering them through the international banking system. Hard to believe. Crisis of confidence? Govts would probably just guarantee the paper, which is of course backed by tangible assets, which greatly outweigh the 'paper'.
4. Rise in interest rates. You might wonder whether there might be some reason for interest rates to rise. It would be hard to believe that the banks don't know what the governments are doing; indeed I'd expect that the govt would have orchestrated its current policy with the banks. Basically, governments are favouring the banks with current policy because its injected funding into banks, who have used that funding for portfolio investment rather than home loans. Why? Because interest outlook can only deteriorate, because lack of confidence means jobs at risk. Institutional financing made more sense because derivatives gives investors long & short exposure to the market. Those positions get unwound when interest rates rise. There is however a 'systematic risk' caused by this since institutions pay tax on profits. In a trending market, they are destined to 'sell' losing positions to cover profits.
It is mooted that Chinese, Arab withdrawal of financing would be a possible cause for a collapse. I don't see that because China and Arabs have a vested interest in persisting with such support. Might they invest in their own countries? Yes, but that is the next phase, pursued by Japan to the extent that Japan's depopulation makes investing locally possible or plausible. The same issue for China. It cannot just spend money on infrastructure if there are insufficient Chinese people able to afford those expenditures. That just creates an expensive maintenance burden on the govt. Instead they have financed US government debt. Wise move? You could consider it a diversification strategy.
5. Financial failure is considered to be a reason for higher interest rates. I would doubt that unless precipitated by 'systematic tax' issue because these instruments are destined to 'balance risks', so it will take a systematic risk to undermine them. This government imposition is not something they can avoid; particularly as these large institutions can't so readily expand interest deductions to offset tax.

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Markets set for another correction - Dow going down but less so for ASX

The global market is taking a bit of a hit. Metal prices are collapsing, and this is across the board. Industrial metals are going to take a little time to recover because ultimately the miners of those commodities will need to curtail production, and start undermining their inventories. We can therefore expect 'industrial commodities' like copper, lead and zinc to take some time. I actually expect a broad-based sell off in industrial stocks. You can see from this chart that the Dow Jones had a recovery overnight. I believe this will not stop the market falling. We can see that the market rally settled below its moving average, so I expect it to resume its fall. Gold will unquestionable fall with it over the next few days, but I would expect gold stocks to be the first to recover in the midst of that correction, which could actually be quite fast. Note the nature of the trading action over the last few days. The Dow settled at a support/resistance. Its going down, and I'm expecting a fall back to 14,000 point support in the next month.
I suggest the Australian market has realised the worst of its falls, but will probably find support around 4400 points. One can see a support line from the 6th March 2009.
The best action is to be had in the gold market. The reasons are:
1. Emerging miners are trading at below their cash value. I particularly like GRY.ASX because it has $62mil to find development of a $200mil treatment plant to produce 150,000oz of gold from its 4Moz resource, and  its trading at just $52mil. Crazy market prices.
2. The indebtedness of global markets is ultimately going to result in more tax and currency debasement. There is also growing unrest and distrust in governments, and these are the conditions ripe for gold. Gold is close to support levels. Check out this chart, and note that we are close to the market bottom for gold. I'd actually not be surprised to see gold fall to $1000/oz, but recover to $1100 quickly.
3. So I am expecting to see the Dow and gold fall for the next few days, but for gold to recover whilst the Dow keeps falling. Gold will unquestionably consolidate for a time.

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Investing in uncertain times - diversification not necessarily good

Conventional wisdom is that investing is hard. The reason its hard is that:
1. Timing and term - its not just a question of buying at a good time, but buying at the optimum time so one is validated in uncertain times by subsequent market action.
2. Ignorance - None of us know the entire market. There is always going to be something we don't know. The good news is that we don't need to know everything, but we do need to know the substantial stuff, and we have the flexibility of being able to change our mind, usually before we lose our shirts.
3. Competitive - Markets are relative price mechanisms. The pricing of securities are relative to other things in terms of relative yields, and the objective veracity of our knowledge is assessed relative to the knowledge and money of other people. As questions are answered, money flows towards truth, and in the process tends to overcome even the richest and most obstinent buyers taking the wrong position.

It ought to be apparent in this context that those in the best position to make money from investing are those who know the most, whether in terms of the breadth of their knowledge, or the specialisation, depending on their value proposition, and also in terms of their liquidity. The importance of liquidity is that:
1. Small investors can take positions in stocks that the big players struggle to get a position
2. Small investors have ready access to companies that the majors struggle to get a foothold

Now fund managers can manipulate the market by using 'trading psychology' to accumulate large positions...but they have to be satisfied that they are not going to get caught be a change in market conditions. The implication is that:
1. The majors are able to use their market power to assemble a large stake - they are nevertheless vulnerable to sudden adverse news releases
2. The small investor is more readily able to secure a stake, but they are 'blown around' psychologically by any manipulation by the majors simply because there are few majors and minor stocks to invest in. Its not so much that there are a litany of great small stocks so much as many underloved small stocks which are always going to be appealing 'at a price'.

The paradox is that investors actually sabotage their prospects of making money by investing only in the major fund managers. This results in the under-valuation of small stocks, which tends to leave these companies vulnerable to takeover. This is not so much the problem. The problem is the willingness of shareholders to accept low prices for the assets if they get cash.

Much is made of people picking market trends. Journalists tend to 'romanticise' these people. This is certainly not valid 'selective' thinking. There are however cynics who simply conclude that no one can.

Alan Clarke: "Where is the person who can consistently make correct predictions? Certainly I have not met him or her, and I'm guessing you haven't either. Furthermore I doubt that you and I ever will".

There are actually a great number of people who are recognised for picking market trends or stocks. If anyone bothered to perform an analysis on my picks, they would probably see a positive, but its not all good, and most of the analysis is 'one-sided' in the sense that one is destined to recommend entries, but not recommend selling points. That is how recommendations go. That does not discredit the person. The reality is that markets are long-trending which makes it really easy to pick trends at certain times. It is harder to make money in a bear market, but then that is only so if you are going against the trend. One can trade short. What of an investor who actually anticipates what eventually occurs. Just a few months ago I picked the takeover of Union Resources by Marawid Mining Plc, making me 200%. This is not guess work; there was a lot of evidence to expect this.
I even ventured to pick RIM at one point because it looked undervalued. I didn't follow the stock beyond that recommendation, and it did recover, before falling further. This does not make me right or wrong, as much as inconclusive. Since I did not buy any, and did not follow the stock, its inconclusive to say whether I am wrong. You can't an advisor who recommended at $C85 would have held the stock until $C12. They do challenge their views - unlike a great many investors who want to be proven right.

At the moment, since the price of 18c I have been recommending GRY.ASX. Its recently reached 16.5c. A sure sign that I was wrong? Not at all, its evidence that I'm not a fortune-teller. My advice now is that they are an even better buy? They make more sense because the company is valued at its cash holdings only, and yet they have 4Mil oz of gold in the ground. I can't say that the project will not be seized by some militia in Burkina Faso, but then that's not the market's concern. The market is just negative about gold stocks. I look at gold prices and think, even if they fall to $1000/oz, there is tangible value there.

The roll of an investment advisor is not simply to generate 15-20% returns for you; its to understand the market to make as much as possible for you. Now, I can say that on numerous occasions I've made, or come close to making profits of thousands of percent. Of course if I was more actively researching, I could do better. The reality is that I don't have the time. The stocks I have such gains are Aquarius Platinum (3200% over 3 years on options), Minotaur Resources (missed out on 6000% gain over 3 months because of poor disclosure), and many others.

Now, when we have sceptics like Alan Clarke who really mislead the market. One factor need not malign your investment objectives. In fact investing is really a process of assembling a great many beneficial factors. If one or two don't come to bear, or if there is a delay etc, then you just make less money. The greatest risk posed to market investing results from:
1. Fraud in the market place
2. Poor disclosure
3. Government intervention

These are sources of risk which can be difficult to close, but there is 'gain' in those risks as well, assuming the 'ignorance' is evenly spread.

Alan Clarke:"Correct forecasting requires an ability to predict news before it happens (how silly is that?) It doesn't matter how smart an analyst might be, things can still happen out of left field that can wreck their careful analysis. This is why we should diversify widely - across stocks, asset classes, industries and countries. We need to lessen the impact of the unexpected".

That is precisely what it is, and people do it. The problem with Alan is that he seems to think that 'good forecasting' is a causeless phenomenon. The reality is that success takes work. A bad forecast is the result of inadequate work. For some that forecast might be the result of success, or not being invested in it. That's why you can't simply accept another person's forecast. You need to be in control of your money. It is silly to argue that 'diversification' will protect you. If there was a bird flu that killed 100 million people, a diversified investor would lose a lot of money. That's called systematic risk. If you invested 100% in a vaccine manufacturer, you might profit from other's misery. You might however expect a law that says vaccines must be offered free, so you might also invest in coffins. No guarantees, but there is reasons that 'diversification' ignores. These are called 'systematic risks'. The risks Alan doesn't know he doesn't know. His position is a position of mindless passivity. He doesn't encourage you to learn; in effect he implies its pointless to learn because you can't pick fortunes. Alan gets paid to advise people to diversify. The fact is that your mind is not a tool to mislead that. We do that when we don't respect facts.
When Alan implores you to diversify, he is locking you into a low-return strategy in the hope that the future will be like it was in the past. In a sense he is 'pragmatically' or implicitly accepting a 'world view' shaped by his previous life experience. In 10,000BC, his strategy would have been to invest in rocks, shells and sand. Obvious to their lack of value for centuries, until he gets lucky with the discovery of irrigation in 7,000 years later. Obvious to the fact that we arose from the cave because of the mind. This is no straw argument; this is the implication of the mindless rationalisation to diversify. Its the mindlessness that sees governments controlling our fate. Its the mindlessness that has a maid in the Philippines investing in the education of numerous people, hoping that they will take care of her when they are better able. She is oblivious to the risk that each of them might rationalise that it was not a loan, or that it would not be repaid if they never got a job. The first one can't repay because she got married. This is 'diversification' devoid of mental engagement.
Does this mean there is no place for diversification. No, it means where you have the opportunity, know your investments. If you have a 'sure thing', that is not enough, you need to know that your learning curve is very mature. Market experience can tell us that. So the problem is not diversification, its the mindlessness that accompanies it. After all, why sabotage returns by something you know is going to be a poor performer. You don't do that. You diversify against real risks, but you still attempt to find value, otherwise the huge opportunity cost you are paying is costing you money. Imagine the impact on your portfolio if you invested in bonds through the 2000s. Crazy! Was there reason to? No, only in the late 2000s did the risk of an equity market collapse arise. Reason for bonds? Why not just another great investment to position for the counter-market outcome. Why not Asian emerging market property? The problem is ultimately that people turn investing into a dogma that is destined to cause losses for people. I'd prefer to see people lose money in the process of learning, because they are at least getting an education. Mind-numbing diversification is the advice of a financial advisor who does not want an investor to question what they do with their money. How many investors have been ripped off by 'advisors'. I might also suggest that this ignores the most important issue - that you derive pride or a sense of efficacy and reward from investing. I don't know many people who get that from finding a financial planner.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Market poised for a correction - Dow Jones and ASX equities

The Australian, US and other global equities have enjoyed a very positive and persistent rally over the last few years. The US Dow Jones reached a new high of 18,865 points, and its otherwise been a monumental rally from 6,626 points set in the first quarter of 2009. The market was of course buoyed by stimulus, but in actual fact there are some underlying positive fundamentals which apply to the global market.

Judging from the following indices, we can expect the US Dow index to fall back to a support level of 13,610 points, and possibly even 13,228 points, however I suspect that would only be a short term intra-day phenomenon. It can also be expected that the 14,000 psychological level will also be important, as it was a difficult level to exceed.

Do I expect this uptrend to break? This is an interesting issue given that the market until now has been held using stimulus. Do I think the US will continue with the stimulus? Undoubtedly the answer is - if necessary. I would however expect the US to be aided by a recovery in property markets, as new home buyers enter the market. There has been some level of job creation in the US, and its probable that this will continue as property prices are actually not so high in 'unemployment' zones. So this is a favourable basis for growth in US jobs and economic activity. For this reason, I would fully expect a recovery from the US market, but its probably doubtful that it would exceed 14,865 points. I would be looking for a double-top, and a lot of short term rallies for the next few years before we see the development of a new trend, or the next phase of the cycle.


You might wonder if matters are any better for the Australian market. Australia is of course strongly tied to Asian markets. The Asian markets have strongly relied on strong US consumption in recent years, and given that these economies remain strongly export-orientated, you can expect that to continue, though to a declining degree. It will take time for Asia to purge its 'US-centric' reliance, even though intra-regional trade is being encouraged. They remain competitors more than compatible exporters.
Australia is of course a major exporter of minerals, energy and food. You might expect strong volumes growth to offset weaker prices in coming years. This will mean a relatively strong Australian economy, and thus one can expect a resilient AUD currency, as well as only subtle weakness in the ASX-200.
It seems unlikely that the ASX-200 will collapse as low as 4,000 points. I would expect a fall back to 4,400 points, with some resilience at 4,600 points.

 Two serious threats posed to markets could be a game-changers in terms of their effects:
1. The prospect of a military intervention in the Middle East (Iran) or North Korea.
2. The prospect of bird flu in China spreading to other countries. Those "preppers" might just be on to something. Expect there to be a huge crisis if consumers stop going out because they are concerned about contracting bird flu.

Clearly the bird flu event is the more serious 'vulnerability'; as war is stimulus because its more spending and because its contained in parts of the world which will not impact industrial output. North Korea and Iran have no industrial activity, and there is every reason to think these countries can be contained without serious threat to other countries in their regions, or to freight movements.
The bird flu crisis threat will ultimately depend on the extent of its virility (i.e. how deadly), its communicability (i.e. how easily it spreads), and how well the threat is managed. There is every reason to think that it will be able to spread internationally. If that is the case, then that means people staying home and not spending money. That has to hurt confidence. It takes 6 months to develop an anti-viral and another 6 months to produce sufficient quantities to contain the threat. The implication is that its a year of 'vulnerability' allowing for:
1. The worst market conditions you have seen for a long time - given the high levels of indebtedness
2. The best rally you will ever see after the virus is contained

If there is a serious viral threat, you might expect the ASX to collapse to its historic low of 3,145 points (set on March 2009, and perhaps 10,000 points for the Dow Jones. There is a lot of 'economic grey' in between, but consider that it might be difficult for the market to anticipate the extent of the threat. That means that the carnage to unfold would be self-fulfilling, and there is no prospect of government stimulus working. i.e. You can't force people to go out for a 'killer latte' - at least not when they think it will kill them within the week. Otherwise 'radium lattes' would be all the rage.

I am a trader in the 'spec mining' end of the market, so given the spectre of 'upside' in the mineral explorers and emerging miners that I follow, you might at least expect 'company-specific' news. This is sadly little protection for two reasons:
1. Emerging miners carry some forward-looking value that is not going to be realised in terms of earnings in the short term, i.e. They are not going to be paying dividends, but repaying debt, or exploring to prove up more resources. This is reason to sell until there is light at the end of the tunnel.
2. Developers will be adding value to resources, and whilst that is 'tangible' in the sense that it exists as 'bankable resources', its not 'realised' in the sense of generating cashflow, with the double-edged problem of 'costing' you in terms of dilution to fund exploration. In these conditions, you are inclined to be conservative. Under these conditions, even positive exploration results get forgotten. Tangibility of say a JV partner committing money to project spending bodes well, but its still a bad market outlook, so that's a mixed signal, but still negative.

Appreciate that the market has not yet priced in war or bird flu. These are still peripheral issues at the moment. It is therefore critical that people follow North Korea, Iran and China (bird flu) for news, whether they are looking for an exit or entry point. Want to learn more about mining investment - read our book. There is no better time to learn that in these types of market conditions. You can trade in these types of markets as well, but that requires more skill; particularly if you are trading against the trend.

Happy trading!

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
    Profit from mining with Global Mining Investing eBook

    Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

The "Gillard effect" is a global phenomenon

Judging by the latest difficulties Rio Tinto is having with the Mongolian government, one might conclude that the propensity for governments to expropriate more wealth from shareholders is becoming a more popular policy initiative. The Rudd/Gillard government of Australia can take the credit for their 'initiative' in leading the  mob mentality towards expropriation.
The clear undesirability of this policy is that it entails theft of property from shareholders. It must be conceded that a legitimate case can be made for the public taking a cut in the development of a project, and for the state to act as a conduit for that. The problem is that this initiative has to be undertaken at the start; before a company has commenced exploration and established terms. They cannot arbitrarily breach terms and retain any credibility. That would constitute theft, and governments are supposed to protect people from theft, not be systematic exponents of theft. Otherwise:
1. Governments are no better than thieves
2. Provide a moral sanction for thieves in the broader community

Investors in mining stocks, particularly those with world-class projects, and most particularly the largest companies in the world, who tend to be the object of such 'revision' of terms - they are the most vulnerable. They risk being exposed to a systematic threat of sweeping reform of royalties. I call this the 'Gillard effect' after Julia Gillard, although Kevin Rudd should probably taken more credit; not to forget the  petty academic who lives on government-extorted taxpayer funds, who actually dreamed up the theme. In fairness, it was Rudd & Gillard who executed it, but he gave it the moral sanction. As John Maynard Keynes proved, a government only needs one ambivalent or misguided academic to justify a systematic extortion racket.

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Profit from mining with Global Mining Investing eBook

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Dow Jones - a great performer?

Reading the NZ Herald, you could be forgiven for thinking that the US economy has re-emerged 'transformed' from the global financial crisis. In the last few weeks, we heard that in the month of January, that the US deficit was positive for the first time in years. A seasonal aberration  however it did denote a positive trend. The problem with such news is that:
1. Asia is still growing and spending
2. Unites States is still saving, not spending, by paying down mortgages

The problem is two-fold:
1. Corporations are still strongly incentivised to take jobs offshore because emerging market wages are still very competitive
2. Once confidence returns, Americans will resume spending. This will create some 'domestic service' jobs, but it will also restore to some degree the spending which caused the problem in the first place.

The focus of this NZ Herald article however was the strength of the Dow Jones. The problem with the Dow Jones as a measure of financial well-being is:
1. The US has greatly depreciated in the time since it bottomed; and some of those economies to which it trades, have therefore been impacted. The USD has likely bottomed I would suggest to you. Its at an all-time low against the Philippine Peso.
2. The Dow has benefited from a significant amount of monetary stimulus by the Federal Reserve
3. Interest rates are very low - so of course equities will out-perform the bond market.

The issue is whether yields are attractive; whether the stimulus will be sustained. Investors apparently think it will be; or are they going to capitulate in coming days, and send the Dow crashing back down? Time will tell. There is no reason to say that Americans will not resume spending at some time. There is every reason to think that the softer currency and immigration will not effectively recapitalise the nation, that higher taxes a nd restored activity will result in a budget surplus as well as more jobs. The question is whether confidence has returned. We'll see.

Is the time to 'invest in stocks' destined to come after a doubling in the market? Apparently Robert Pavlik, chief market strategist at Banyan Partners, thinks so. We are told that these equity price gains can be sustained because earnings have risen drastically. Well, we need to factor in whether:
1. Those earnings came from consolidation gains - taking over the competition - remembering that corporations entered the recession cashed up
2. Higher prices due to weaker US
3. These earnings can be sustained if there is an increase in taxes

The implication is that now is a great time for American Filipinos to move their savings to the Philippines if they are looking to retiring there, or simply to paid off any investments in property there. The USD is I suggest going to be stronger from herein, or at least after that support is reached.

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Profit from mining with Global Mining Investing eBook

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Significance of Dow Jones record high

Overnight the Dow Jones broke the previous 2008 high of 14,140 points (end of day data), rising to a new intra-day record of 14,278.87 points. This is positive news for long investors, however it is not yet a convincing break, so I'd not be surprised to see the index collapse back under 14,000 points. It is noteworthy that the S&P 500 index is still 2.2% below its all-time high. The important distinction is that the Dow Jones Industrial Average is constituted by just 28 stocks, so its hardly a representative sample of the US equity market. These 28 stocks are 'huge' enterprises to be sure, like GE, but it tends to ignore stocks like Facebook, which pertains is a representative for the 'new economy'. The other aspect is that the Dow Jones Industrial Average gives greater consideration to offshore activity. GE for instance is a global enterprise with greater exposure to Asian economic activity. This is 'exposure' which would be less pronounced in the S&P-500 Index. So, if we are looking for a proxy for global economic activity, then the S&P is a better measure.
For this reason, whilst I was confident of a 14,000 point break, after a discussion with a colleague, I am inclined to wonder how sustainable this 'bull' is. I am instead inclined to wait for a more compelling trend indicator, whether short term price action. The reason for the concern is:
1. The chart below
2. The promise of stimulus
3. The relatively small size of the emerging markets in terms of their contribution to economic activity.

Having said that, this could change with:
1. A preparedness by Westerners to resume spending. At the moment they are paying off debts or under-utilised on welfare. Stronger property prices, low interest rates can change that, but it needs spending to build confidence. This is the role of stimulus and low interest rates; but are people so confident? At the first hint of confidence, are Western governments going to be forced to raise interest rates. There is no risk of wage demands. Asian offshoring has scared unionism out of existence (for the next 2 decades).
2. Further stimulus.

The market is making tentative steps at this point...I think so should you.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Market outlook - Dow not going to break

I've been doing some reflection over the last few days. I had previously thought the Dow Jones was tentatively going to break 14,000 points, and that it would be a precursor to a rally. This view was underpin by some positive fundamentals inherent in the market. The problem is the negatives, which I see as these:
1. Market support - The Fed Reserve has been pumping a lot of liquidity into the market in the last few years to sustain the market - the market is fully valued, and I expect the Fed to ease that support, in an attempt to draw the market into more sideways movement.
2. Emerging markets - The strength in Asian markets rests upon expatriated earnings, passive foreigner investment funds, stronger construction and rapidly growing emerging service economies in their own right, but they are still dominated by 'food'. The Asian economies have their Gucci stores, but most still cannot afford these items. When they go shopping, its mostly to look, and mostly to eat, because that is all they can afford at this time. It will be different in a few years.
3. Dow Jones trend - The Dow Jones has historically been a trending market - see the log-linear chart below. This chart offers 115 years of history. So what can we garner from the current trend. There appears to be further evidence for consolidation for a number of years in the Dow before it is able to grow again. The question is why? Property markets in the US are already starting to recover, but everyone is still highly indebted, they are focused on rebuilding savings, and without really a substantive basis for upside, and perhaps some apprehensions about higher taxes, we are not going to see a rapid return of 'big spend' USA. So what if the US government increases taxes and gave the poor tax relief. The problem with that is that it would result in the sucking in of imports. The moral of this story is that this would be great 'stimulus' when the world is really to sustain it, because they are growing as well. Japan is talking stimulus, but perhaps they might wait before they do so. Perhaps its not going to be a sudden injection, but spread over a number of years. I don't expect Japanese stimulus however to result in a substantive rise in imports, and anyway, it would be offset by a competitive yen, so the net effect would be positive. Japan does not have a high reliance on imports because Japanese people consume products 'particularised' for Japan, i.e. Cute TVs and refrigerators.

4. Techically, the market action is telling me the Dow Jones is going to fall. See how the Dow has encountered strong resistance at 14,050 points. That was to be expected; its a major psychological hurdle to break 14,050 and previous 2007 high of 14,140 points as well. The issue for me was the break of the low of 15th Feb, followed by its failure last night to recover sufficiently to break above that low. It remains on a downtrend, and I am expecting a very convincing break of the 13,850 point level will occur tonight. In fact, I'm expecting a fall back to 13,650 points, with a nominal recovery. That will be a 230 point correction; before stabilisation. 

Source: Google Finance.

Lastly, I am not going to be a hero, so I was inclined to take golden profits - sold Gippsland for 1.4-1.5c, having bought for $0.08c. I believe this company is positioning for a capital raising around 1-1.2c. Its not the best climate to do this. The rest of my stocks are longer term - UCL and GBE. I also have a number of other stocks, and the rest is cash to buy on weakness. GBE has a buy-back provision in place, and has a lot of cash. UCL is just great exposure to great (2) projects.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Outsourcing and offshoring

If I listen uncritically to these clowns at The Economist I might be forgiven for thinking that the Universe is about to tilt on its axis. Again? Well, I think not. Listen to this video post by The Economist and think about what they say. I acknowledge that there is some truth, and certainly value in what they say, if only by being wrong, but I'll offer the following rebuttal.


There are some problems with these arguments:
1. Guangzhou is expensive - there are still rural China and other countries like India, Pakistan, Bangladesh, Africa.
2. Just land costs can be a big factor for some companies in West
3. Western labour prices are cheap because they have not been used...so unskilled labour is cheaply priced in West compared to the runaway high cost of skilled labour.
4. The productivity upside in emerging markets is greater
5. Automation is not a new benefit - it will always be there.
6. There are strategic reasons why you invest in third world - accessing new growth markets
7. A great many components are still made in China...so don't you want to establish near your component source? If not your market for strategic reasons.
8. They take a case of a Lenovo plant to be built in USA - ignoring the fact that Lenovo will have many plants around the world, and its parts will mostly come from China/Taiwan/Malaysia. They ignore the strategic motivation for US basing for US customer customised assembly. This is not common, and true for high-value, customisable product.
9. The high cost of shipping is reason for localised production and the focus of global growth is towards Asia & emerging markets, not back to uncompetitive, cost-stripping developed countries, which have zero-population growth. If they greatly expand their immigration programs, this will make a difference. My guess though is that these Asian immigrants will buy much of their products from Asia on their annual trips there.

I acknowledge that this trend is occurring. I would however suggest that it will take 20 years rather than 2015 as they suggest. It is in fact in the service sector where this is happening the greatest. Now consider that Asians are increasingly being allowed to come to Western countries on a work visa if they are under 30yo. This is a great opportunity to develop language skills and cultural appreciation. Of course the appeal is lost if you end up speaking your native language in a souvenir shop. Certainly the ready access to global cable is not enough for people to speak English well. But its a big start on their parents. The biggest obstacle for the people in these cultures is values I would suggest....and the internet is transformational. The Philippines is a clear leader in this regard.


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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Equity market outlook and retirement

The Dow Jones Index is currently trading at 13,896 points. For some of you, this number is not so significant, and fair enough, but its important because you need to consider the implications for your future savings & investments. This point is just 100+ points short of the record Dow index level of 2008, when the market went into recession. There are of course analysts projecting trouble. Most however are not expecting a setback in the market.
I suggest the Dow Jones will struggle to break through the 14,000 level. I think it will be a tentative break, but ultimately the outlook for the US and the global market place is rather good. We have Japan about to embrace stimulus, we have a buoyant Asian market, reasonably buoyant commodity prices. Get ready for the next leg of this 'boom'. Not ready for a boom? Well, you will end up paying high prices if you wait for your apprehensions to be comforted. Anyway, the fundamentals for the global market place are very good. Care though that Western markets are struggling because:
1. Higher costs of living
2. Wage restraint for the low income earner

You therefore need to ensure you invest in the right stocks; thats stocks with resource exposure; Asian exposure, and indeed all emerging markets. Property in emerging markets makes sense, and you might do ok in Western property markets in the cities as well, as long as you buy in sought-after areas. There will be a lot of people who simply cannot afford to buy into the cities because of wage restraint. No problem, there will be plenty of emerging market retirees, whether doctors, professionals or their parents, as Western immigration standards relax for these people. Expect outer-city development as well as large cities get bigger.

I would suggest this is a great time to capitalise your homes for future retirement by investing in things like solar power, growing your own vegetables. There is no hurry; but there are incentives around to do these types of things, and in the next 20 years it will become more popular as emerging market labour rebalances its pricing with Western pricing. In the interim however, expect low-wage earners to struggle. This is why I say, capitalise your costs if you are retiring in the next 20 years because you will otherwise be impacted by higher food prices. You won't be able to absorb these costs with higher income, unless you work beyond the nominal retirement age.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com