Nonsense about a currency war

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

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

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

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

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

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

1. Engaging in quantitative easing

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

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

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

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Andrew Sheldon www.sheldonthinks.com

Reserve Bank trepidation signalling govt spending

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

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

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

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Andrew Sheldon www.sheldonthinks.com

Where to place your money during this recession

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

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

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

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

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

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

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

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Andrew Sheldon www.sheldonthinks.com

Does Ben Bernacke give stock tips?

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

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

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Andrew Sheldon www.sheldonthinks.com

Not only gold glitters!

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

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

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

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

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

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

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

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

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Andrew Sheldon www.sheldonthinks.com

Pilbara depletion of iron ore

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

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

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

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

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

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

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

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

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

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

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

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

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Andrew Sheldon www.sheldonthinks.com

Australia in great shape - better without Gillard

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

Australia is benefiting from a combination of factors:

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

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

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

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

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

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

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Andrew Sheldon www.sheldonthinks.com

Watch the S&P - it might impact gold trend

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

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

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

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

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Andrew Sheldon www.sheldonthinks.com

The market outlook - for the next year

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

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

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Andrew Sheldon www.sheldonthinks.com

Late market watch - ASX

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

Currently travelling so don't expect speedy insights.

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Andrew Sheldon www.sheldonthinks.com