The market upside is looking a little 'tentative' in the short run

Asset prices are relatively high. In such times, you have to question when or what can undermine them, and what will not. The reality is that the stimulus of the previous few years has meant that conditions are rip for economic growth. There is however considerable concern about the sustainability of that growth given that a lot of the past growth was fuelled by debt finance in the West. You might wonder however why we cannot expect more of the same. The reason is that there is considerable concern about the prospects of higher interest rates. The reality is that there is no reason for central banks to raise interest rates more than modestly to end the 'ultra-easy' monetary policy. The reason not to do that is simply that the economy is not strong enough. Those fears are however positive in some respects because 'fearful' mortgagees are rapidly paying off their debts, and that is of course preparing the way for another cycle of spending moving forward

For these reasons, you can expect a sustained growth in the global economy, on the basis that:
1. The fundamentals are good, i.e. Asia and other emerging markets keep getting richer, with strong rates of economic growth, income growth, high rates of urbanisation, strong population growth. Its all good.
2. Interest rates are ultra-low, so moving back to neutral policy will not greatly affect spending since that nominal rise in interest rates will only be taken when it won't hurt spending. i.e. The Fed will wait for signs of an overheated market before it raises raises, to establish a sustainable growth outlook
3. There is no sign of inflation simply because there is no wages pressure. Moreover there will not be wages inflation for another 15 years or more, i.e. There will be no wages spiral for over a decade. So we don't need to worry about 'cost-of-living' inflation.
4. There is every reason to expect asset inflation. This process has been well-entrained since 2000. Ultra-easy interest rates have been around for a long time. The Fed and the Western governments were not interested in sustainable economic policy, they were interested in running the economy as 'fast or as hard as they could get away with', without paying the consequences. This might strike people as sensible. i.e. Its actually the same policy as applied on the Titanic. Now, do they understand the global economy so well? Well, you'd have to wonder. They simply can't know what can thwart it. The greatest threat would have been SARS. But they might well get away with it. In any respect, the fundamentals are good. So whilst you can expect bursting equity and property markets, you can expect them to rebuild or recover in the current market. You should however look to trade these positions however to maximise wealth. This means using 6mth or shorter charts to pick entries and exit points.

On that note, looking at the following charts for the Dow Jones, we can see that:
1. The long term trend for the market is at its highs, and that it has downside to 15,000 points. I'd even expect it to go to support at 14,810 points.
2. The short term 6 month trend has seen the market rise back above the Moving Average. We will be interested to see evidence that this trend continues. Certainly the 176 point rise today is a positive lead.
We should not however overlook the fact that the market is getting peakish, and there is a need for a little short term scepticism if we are going to trade this market efficiently.

I'm looking for a market peak around 17,100-17,300 points; from which I think you can expect a substantial correction .The most logical correction would see a fall back to the 14810-15,000 point level. One already gets some sense that one's buying is getting 'sold into'. i.e. One gets the sense that for every order one places, there is a 'bigger player' getting out. This is most apparent in the less liquid stocks. Looking ahead, I'm expecting a very lucrative recovery from any sell-off. I'm expecting the next rally will offer a lot of profits based around a lot of Mergers & Acquisition (M&A) activity. This next rally I think will get consumer spending momentum going again.

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Outlook for US & emerging equity markets - the next 6 months and beyond

There is some ominous news around of ebola virus spreading fears. It is improbable that such fears will manifest as any sustainable problem, however there is good reason for people to monitor the issue. There is some good news from China with growth in manufacturing. The job growth in the US was not as positive as expected, however we remain in a low interest rate environment, and the global context is largely stimulatory, even if economic activity is largely flat. The lack of spending is really just a concern that needs to feed its way through the economy. People are not going to start spending until skilled labour see wage gains, and then this will give unskilled wage earners more confidence despite 'wage restraint' at their end.
At the same time, strong employment and wage growth in the emerging markets mean these economies are going gang-busters. Its really just a patience game waiting for the economy to recover. The question is what will equities do in the meantime. I'm inclined to see the current sell-off as just a temporary correction. Using charts, I'm expecting a fall in the US S&P500 back to 1880 points, and a restoration of the rally. I'd not expect to see a collapse in earnings, and since yields are not overly high, then I'd expect more upside. You can however expect a bursting of high asset prices (including equities) at some point. In fact, I'm expecting a succession of 'small bursting bubbles' before a final 'serious burst' when we see higher interest rates.

                                Source: Google Finance

There is another reason to expect higher equities. There is a great deal of Chinese and Japanese money that it destined to pursue foreign markets. i.e. Japan bonds will experience a sell-off in favour of higher-yielding growth assets. The same for China. This will raise interest rates somewhat, but there will be a corresponding rise in economic growth. 

In the chart above, I'm expecting a large drop in equities to 1880 points on the S&P500, however I'd expect it to recover strongly in intra-day trading. 

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

Rebuttal of Krugman's inflation critique

Paul Krugman is an annoying person. He is annoying because his entire modus operandi is attacking neo-conservative idiots on the right, whilst ignoring his own shortcomings. His short comings arise from his:
1. Gross ignorance about economics as a compartmentalised irrelevant economist
2. Engagement in straw arguments, or false dichotomies between left and right when the real game is the ascension of libertarianism.

Liberals love this game because it keeps them 'self-important'. The world will not miss Paul Krugman. He will fade into obscurity. But before he does, lest we be criticised for attacking the man without argument, let us focus on his arguments for asserting that there is no inflation, and that its not coming. Well, in truth, he is 'right'....yes 'right' in a sense, and wrong in a sense. There is bugger all 'cost-of-living' inflation. The problem with his arguments is:

1. Krugman does not understand inflation
Krugman thinks inflation is a 'cost-push' phenomenon caused by excess demand for goods and services. He thus celebrates the lack of demand for goods evident in the absence of evidence for inflation, measured empirically by CPI indices. The problem is that the 'goods and services' measured by the CPI are not exactly a useful basket, as some indices exclude the 'volatile' items in order to give a seasonal account. The greater issue however is the 'qualitative' adjustments governments make to inflation numbers, as they are not always comparing like items, i.e. A 286 computer in the 1980s bears no easy comparison to the modern computer. How do you account for the fact that you no longer need anti-virus software as an bundle of inflation costs. Finally, Krugman ignores the 'asset inflation' that exists in many countries. If these assets were to collapse, thanks to higher interest rates or correction to an impending asset bubble, then you would indeed expect inflation. The problem is 'not that the conservatives are wrong', but that their concerns are misplaced. i.e. Inflation is not in the short term from costs, but in unsustainable asset prices. The problem is that 'the problem' is concealed as a 'benefit' for some, because people in the cities like to see their property prices rise. Those buying late are happy as long as the correction in asset prices doesn't show. i.e. They are not concerned until there is a collapse, and even then they might not care if the collapse does not send them broke, precipitate the loss of their job, or their interest repayments does not exceed what they would otherwise have paid in rent.

2. Krugman cannot forecast inflation
Krugman is akin to the environmentalist who points at 'evidence' and decries how bad or wrong people are. He is a tragic soul who understands nothing. He has no credible analytical proscription for how the world works. This is why he cannot offer an explanation of the world; only criticism when others are wrong. He cannot tell us when inflation will appear; if it ever will, and he cannot offer an explanation of why. Firstly, we need to deal with what inflation is.

Inflation is a broad indicator of price movements relative to purchasing power; which is itself tied to the productive capacity of any economy and the supply and demand for money. 

The Austrian School is correct insofar as they regard there to be a relationship between the supply of money and the productive capacity of the economy. Their failure is to not convey an understanding of the dynamics that actually drive price movements. i.e. There is a tendency to speak 'broadly' (by definition) and not see the differentiated foundation for supply and demand in the economy. They fail to see that there are several pertinent factors, namely:
a. Wage restraint prompting an overweight investment in investments like productive property, productive capacity and securities that help finance that capacity, prompting an excess of savings over consumption, i.e. we see a deferment of spending. They fail to realise that this is caused by the autocrats of developing countries causing a pent up supply of labour, suddenly released in the 1980s. It will take us another 15-20 years to balance this global labour distortion, but the impact will be 'mass stimulus' to the global economy, the persistent of the 'super cycle', and low inflation. There will be no wages spiral, though we might expect some unionisation in Asia. There is however no culture of this, and Asia will need to compete with Africa, South Asia on labour costs.
b. Low interest rates prompting speculation in assets.

For these reasons, we can say that the global market place will be under low inflationary pressures for another 15-odd years. In that time, we can expect corresponding asset price bubbles. Its inflation, but not the type described by Krugman. He, like the Fed Reserve, like Alan Greenspan, are simply not looking at asset prices as a vulnerability. It is the prospect of asset price collapses that will demand further QE programs. These are forms of taxation rather that cost-of-living inflation. They are destined to recapitalise the value of money; but not cause the type of inflation spiral that is associated with cost-of-living inflation. In fact, the dearth of specialisation and economies of scale, along with productivity gains are destined to see costs under control. So that's the explanation and forecast.

3. Krugman offers no clarity over 'excess money'
Concerns about "excess money and a devalued dollar" is not a problem (as Krugman argues) because there is no such thing as excessive money. Even in the context of a 'balanced labour' market, the problem is not wage demands; the problem is that they able to be extorted from business by unionised labour. We are however under the illusion that unions are good, because they lead to better worker conditions. They don't. They take what business would have been forced to give (belatedly) or they extort that which business cannot afford to offer, so being forced to close business and go overseas, or go broke.
Krugman suggests that the USD is not weak, but in fact it is relative to hard currencies in Asia. He does not realise this because he selectively compares USD value with other major currencies, like the Yen and Euro, which are also weak, or those economies whose pricing is tied to the USD, whether its the managed 'mercantilist' currency regimes of Asia, or even the USD-denominated currencies of commodity producers like Australia, South Africa, Canada et al. It does not help that these countries borrow in USD. The implication is that all these currencies become immutably tied to the USD. The fact is that there is no country pursuing a 'productivity' based wealth strategy to prompt higher currencies. They are pursuing an 'economic stimulus' strategy, which attempts to create the illusion of wealth creation. Observe that households are working harder than ever, with two or more contributors to income, and they still struggle to live. Home prices are 10x average earnings in many cities. Unskilled labour is having a harder struggle still. This is the constituency that 'applaudes' Krugman's negativity, but he is unable to offer a solution. He can only knock down straw arguments.

It is true that many free marketers and conservatives have been expecting inflation. His argument is not entirely invalid; but this is not a man with much interest in truth; so much as disparaging counter-thesis to his own delusion.

In conclusion, we can expect more asset bubbles, with the prospect of more bail outs by government of banks or maybe creditors. We can expect no sign of inflation for more than a decade. We can expect those traditional indicators of inflation, the precious metals, like gold, silver, palladium and platinum to rise in price slowly, as they are among the cheapest assets. They will not however do as well as demand-based commodities in the short term, or as well as emerging market property. The reason being of course the low-yield on these asset classes. They will however be helped in time by the low yield on equities and property. This will take time to unfold. This is a super-cycle...so don't be tragic. Though it will be harsh times for unskilled workers in the West. They live in an over-priced, high cost markets, and without exployment opportunities in the third world, they are really between a rock and a hard place, with no preparedness to address their problem.

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Gold price forecast-outlook 2014

An analyst at the Overseas Chinese Banking Corp has released a subdued outlook statement for gold prices in 2014. The research note highlights the prospects for stronger global growth and sees tapering from 2015 as buoying the USD. These facts are not in despite, however it is worth noting that:
1. Asset prices are a nascent or hidden form of inflation or deflation. i.e. Inflationary if the market needs to be recapitalised in order to refloat under-performing asset prices, or deflationary if asset prices were to collapse. Of course the Fed and no government is going to allow asset prices to collapse terribly, at least not in the property market because that would destroy credit. Credit or derivative transactions in equities are equally split, long and short, so no problem.
2. The threats to the global growth outlook, whether in the form of war or disruptions like oil shocks. We have in recent weeks seen ISIS in Iraq challenging the home security forces of the Iraw government. If these are destined to have the upper hand, we might expect Iraqi oil exports (4% of the export market) to be hit. This is not a huge market, particularly given the soft market conditions, however it will lift prices as a sepculative issue. Would it prompt a re-entry of the US? I suspect it would result simply in air strikes, with drones and targeted missile attacks.

Now, the prospect of cheap credit and an endless pool of super savings going into global markets is destined to lift stocks. Japan is planning to plant some huge some of domestic savings into the global market place to lift earnings. This is destined to lift interest rates in Japan, though given that rates are soft elsewhere, its not going to be excessive. Of course we are going to see higher equity and international bond prices. This is going to drive asset prices higher, and of course, in these conditions, gold will start looking appealing, simply because all other asset prices will be high. Is this reason to hold gold? No, but there will come a point when it wll, and of course there is equity exposure that can make more sense. i.e. Miners who are low-cost producers.
Asset bubbles tend to correct rather quickly; so its not the 'inflation story' which is sustained with a wages spiral (which we are not going to see for over a decade). People will tell me wages are rising quickly in the third world, but this is tied to productivity gains (like in the West). Where you can expect some rallies in gold will be with the expectation of market corrections, when only gold looks cheap. In these times, gold makes sense. Even if it falls off with a crash, its destined to be the sector that recovers first...assuming that its assets offer tangible value. i.e. Not blue sky exploration.

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

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

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

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