Correction to media reports - coal exports

If you read the press, you will hear that "Queensland (Australia) is losing up to A$100 million ($131 million) a day in coal exports because of the unprecedented floods". The reality is far less tragic, for a number of reasons:

1. Coal exporters and consumers have come to expect disruptions to coal supply. For this reason most coal consumers have 60-90 days of inventory capacity to meet their immediate needs. The implication is that, if we assume they each have an average of 70 days capacity utilisation, then the consumers have over 2 months to receive supplemental coal supplies in order to ensure normal power, steel or cement plant operation.

2. Coal producers have long and short term contracts, and those contractual obligations are set at market price, so there is no incentive to go elsewhere.

3. Coals from different mines vary in quality, so consumers do not like to disrupt supplies necessarily unless there is some commercial or supply reason to do so, otherwise they are creating technical/operational difficulties they don't need.

The implication is that Australia is not losing that amount of money; those exports are simply being deferred, though not without cost. So what costs can we expect? Well, ships are going to sit idle for 2 weeks, and for the next few months after, they will be fully booked rebalancing consumer stockpile inventories. Money will need to be expended by Queensland Rail to rehabilitate those sections of track damaged by the flood. These companies might need to employ people on overtime, however they will also have insurance to cover them for such events. The media reported that 100's of kilometres of track were destroyed...more likely just submersed....though there will be considerable damage where there is flow because saturated soil loses its cohesion, so track is more easily ripped up by flowing water.

The biggest loss is of course to agriculture and the destruction of property. It strikes me as silly that insurance companies only cover people for the effects of rain, and not flooding. I know that there has been this response before by insurance companies when houses on the South Coast of NSW were flooded. Is not the intent of insurance to protect a person from unforeseen events, and that the insurance companies are the ones to identify them, since it is a technical risk, which they are in the business of assessing. i.e. They are not fulfilling the spirit of their role. This is where you get ambivalent court rulings, because the law does not clearly establish whether a judge should rule:

1. With the letter of the law, i.e. The law is a dogma, held out of context. This is the basis of statutory law, and explains why bureaucrats are so unthinking in your dealings with them. Its the policy, and they have no power to interpret it 'in context'.

2. With the spirit of the law, i.e. The law is a philosophical construct, that it is based on principles, and those principles are held in context. This is the basis of common law, where judges make new law by applying the law to specific contexts.

If you appreciate that statutory law is being called upon to fill the 'perceived gaps' in common law, it will be apparent that we are being a more unthinking society because of such creeping dogmatism. This can continue until we finally march 'with pride in democracy' towards fascism. I would already argue that we are already there, but its a matter of degree. Some of you might want to wait until Comrade Rudd is marching with the band down Anzac Parade, but I just consider that a huge opportunity cost, more of a concern than our 'deferred' exports.

You can read more about these issues on my political blog or even my judicial website.

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Andrew Sheldon www.sheldonthinks.com

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