March 15, 2012

By Kevin Michael Grace

Gold was down (at press time) $42.50 (-2.5%) for the week to $1,658.70, and silver was down $1.41 (-4.2%) to $32.50. Reuters attributed gold’s decline to (narrative alert!) “removal of the premium attached to further quantitative easing, with prices giving up almost all of the gains made since January 25 when the Fed signaled the potential for additional policy stimulus.” In addition, “A modest upgrade of the [Fed's] economic outlook gave the dollar fresh impetus and investors an excuse to lighten holdings of bullion.”

This column has noted the MSM’s decision to ignore the substantial quantitative easing promulgated by the European Central Bank. Which was not enough, according to Ambrose Evans-Pritchard of the Telegraph: “M1 money supply growth in the big G7 economies and leading E7 emerging powers buckled over the winter. The gauge…peaked at 5.1% in November. It dropped to 3.6% in January and to 2.1% in February. This is comparable to falls seen in mid-2008 in the months leading up to the Great Recession.”

A Muppet is ready for her close-up

“Rightly or wrongly,” Evans-Pritchard asserts, “the US Federal Reserve does not intend to do anything about this. Time is running out for Ben Bernanke before the US election season closes the political window on fresh stimulus, yet he gave no hint of largesse in his latest testimony to Congress. He fretted about inflation instead, causing gold to crash over $100 (£64) an ounce within hours.”

Evans-Pritchard may well be right about the Ben Bernanke’s intentions, but given that President Obama is close to panic regarding rising gas prices, it seems unlikely he would risk having the nascent “recovery” strangled in its crib.

John Manfreda at Wall Street for Main St agrees. “There is no way the government will be able to finance its budget without more Quantitative Easing,” he writes. “So this year I expect the QE trigger to be pulled; now I am not sure if they will call it Quantitative Easing, but it will be done regardless.” Furthermore, “If the Euro gets devalued due to the crisis in Greece, the ECB will most likely fire up the printing press, and the Euro could come close to a one to one ratio with the US dollar. This scenario would make US exports very expensive in the Euro region and drastically hurt the US export market. As a response, the US would most likely issue another round of QE.”

Technically, QE refers to the issuance of Treasury bonds bought by the US Government. What most people don’t know about this is that the USG does not simply move the numbers from one side of the balance sheet to the other but rather employs investment banks such as Goldman Sachs, which make a tidy profit facilitating this switcheroo.

So further QE would be good news for Goldman Sachs, which could use some. Yesterday, Greg Smith, described as “executive director and head of [Goldman's] United States equity derivatives business in Europe, the Middle East and Africa,” resigned and dropped a bomb on his erstwhile employer in the New York Times.

Smith doesn’t beat about the bush. In the first paragraph of his essay, he describes Goldman as “toxic and destructive.” He explains, “Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.” And the best way to make money is to persuade clients to buy junk paper.

As might be expected, Goldman does not have a high opinion of its clients. Smith reports, “It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as ‘muppets,’ sometimes over internal email.”

Smith concludes with a call to reform. “I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist.”

At Minyanville, Christopher Witrak has assembled a variety of responses to Smith’s cri de coeur. Goldman Chairman/CEO Lloyd Blankfein and COO Gary Cohn characterized Smith as a “disgruntled” man whose “assertions…do not reflect our values, our culture and how the vast majority of people at Goldman Sachs think about the firm and the work it does on behalf of our clients.” They had no response to any of Smith’s specific assertions.

Others quoted by Witrak noted that Smith was at Goldman for 12 years, including 2007-2008, when its activities were the stuff of legend (or infamy, according to taste). So what are the reasons he didn’t speak out earlier? Cynics have it the reasons are green and numerous.

Karl Denniger calls Smith “disingenuous.” Smith claims, “I don’t know of any illegal behavior,” and Denniger responds, “The textbook definition of fraud is the act of intentionally misrepresenting a material fact to someone with the intent of inducing them to enter into a transaction they would otherwise not entertain, when that material fact (or facts) are then a proximate cause of loss.”

Denniger argues that Goldman Sachs is no worse and no better than any of the TBTF financial institutions: “We have over 100,000 admitted acts of screwing not just with people but with court process in the ‘robosigning‘ mess. That’s not ‘taking advantage,’ it’s perjury, and it’s not an allegation; it was admitted to by the act of withdrawing the affidavits.

Matt Taibbi, who has done more than anyone to popularize the case against Goldman, applauds Smith in Rolling Stone. He concludes, “This always had to be the endgame for reforming Wall Street. It was never going to happen by having the government sweep through and impose a wave of draconian new regulations, although a more vigorous enforcement of existing laws might have helped. Nor could the Occupy protests or even a monster wave of civil lawsuits hope to really change the screw-your-clients, screw-everybody, grab-what-you-can culture of the modern financial services industry. Real change was always going to have to come from within Wall Street itself.”

Bob Lefsetz strikes the same chord: “How long can an enterprise that puts its clients last and rips them off survive? Not long.” Lefsetz compares Goldman to the record labels which have perennially cheated their acts of royalties, and this is where his argument comes apart. No one is compelled to buy compact discs or MP3s. A world without (monetized) recorded music is perfectly feasible, but a world without financing is not. Goldman is part of the cartel that controls the global economy with the full support of all the politicians, including Mr Hope and Change himself, Barack Obama.

The proponents of internal reform are betting on Muppets against Mammon, and history is littered with the corpses of those who took that wager. In the event, Greg Smith will be forgotten in a matter of days, while Lloyd Blankfein will go on his merry way, “doing God’s work,” as he so modestly puts it. And as Bob Dylan sang, “I can’t think for you/You’ll have to decide/Whether Judas Iscariot/Had God on his side.”

And now to cases. Reuters reports March 15 that CIBC has cut Semafo’s TSX:SMF price target from $13 to $11 (currently $5.25), March 14 that RBC has cut NovaGold’s TSX:NG target from $11 to $10 (currently $7.03) and March 9 that Canaccord has cut HudBay’s TSX:HBM target from $14.50 to $14 (currently $11.67).

At Seeking Alpha, Aggressive Dividends calls Loncor TSXV:LN, a Congo miner 17.8% owned by Newmont TSX:NMC, “a little-known gold stock that could easily double in 2012.”

At the Globe and Mail, Martin Mittelstaedt advises, “For bulls on silver, there is a way to play the precious metal that’s literally dirt cheap: Buy it while it’s still in the ground, at the rock bottom price of only 51 cents an ounce.” He’s referring to Silver Standard TSX:SSO.

From the same source, David Parkinson employs the analysis of Brockhouse Cooper to identify the three mining stocks with the best return on investment over the last year. They are Nevsun TSX:NSU (46.1% ROE), First Majestic Silver TSX:FR (34.7%) and Pan American Silver TSX:PAA (23.1%).

And Reuters features innovator Nautilus Minerals TSX:NUS, which “has permission to explore massive sulphide deposits in the floor of the Bismarck Sea off the coast of Papua New Guinea for copper, gold, zinc and silver.” According to Andy Davidson of Numis, “If it works, it’s going to be a game changer for the mining industry in many respects because there is a lot of this stuff out there on the ocean floor… This is a high-risk, potentially very high-reward speculative play.”

Finally, jubilation reigns at Auguries Manor, with the return tonight (from forced hiatus) of Community, described previously in this space as “not only the greatest sitcom ever but quite possibly the greatest thing in the history of things.” Despite this authoritative pronouncement, ratings remained dismal. Unless they increase, the hiatus will become permanent. If that happens, the lovely and talented women at the heart of the show will once again be reduced to tears. You don’t want that on your conscience, do you?

March 25th

By Kevin Michael Grace

Sing a song of sixpence,
A pocket full of rye.

Bob Moriarty tells the Gold Report March 14 that the chaos in the Arab world has nothing to do with religion or democracy but is instead the result of the cost of bread. He blames Ben Bernanke: “He says that the Federal Reserve’s second round of quantitative easing, QE2, has nothing to do with the cost of fuel and food. Of course it does… When people are hungry, they start riots.”

Moriarty sees blackbird pie on the menu in America real soon and a governmental collapse to follow. He foresees stability returning only with the return of solid money: gold and silver. When it is put to him that “you can’t eat gold or silver,” he responds, “You could trade it for food.” And there are many other things you can do with it, as we shall see.

It’s easy enough to dismiss Moriarty as a hysteric. In the Globe and Mail March 23, Charles Lemonides, chief investment officer of ValueWorks sees gold falling to $400. He explains that with gold producers enjoying a $900 to $1000 profit on each ounce, supply will catch up with demand and burst the bubble. In other words, the price of gold has become “divorced from economic fundamentals.” But it would appear that baser motives, not Economics 101, are driving the prices of precious metal. Even Lemonides concedes that gold could reach a short-term high of $2,500.

At press time, gold was at $1,432 and silver at $37.42. As Reuters noted, March 24, gold reached a record high Thursday before falling back, and silver briefly reached a 31-year high. Both metals have fully recovered and more from the selloff after the Japan earthquake, which bears saw as the beginning of a substantial “correction.”

According to Dennis Gartman, publisher of the Gartman Letter, “The world wants to own any kind of hard assets. There is plenty of liquidity in the system created by the Fed and by the Bank of Japan. That money, in the interim, is finding its way into equities and into gold.” BNP Paribas analyst Anne-Laure Tremblay added, “The gold price is currently supported by safe-haven demand, stemming from three current crises–Libya and more generally unrest in the Middle East/North Africa region, Japan and renewed concerns over the periphery of Europe, particularly Ireland and Portugal.”

European stocks rose when Portugal’s Premier Jose Socrates resigned Thursday, raising hopes for a bailout. Be careful what you wish for. In Ireland, the Examiner reports March 25 that its government “is facing weeks of delicate negotiations to convince the EU to share the crippling cost of the banks and reduce the interest rate being charged for the bailout loan.”

In America, Bernanke’s helicopter continues to disgorge money, but little of it is finding its way into real estate. Reuters reports March 23 that February new home sales fell 16.9% “to a seasonally adjusted 250,000 unit annual rate, the lowest since records began in 1963.” Thankfully, economists “did not believe a new downturn in the housing market was under way.” Some, apparently (and curiously) “suggest[ed] bad weather might have been a factor.

CNBC suggests a different reason March 24: “The US ranks near the bottom of developed global economies in terms of financial stability and will stay there unless it addresses its burgeoning debt problems, a new study has found.”

Gold and silver may be safe havens for investors, but Latin America is increasingly no longer a safe haven for miners. “Canadian miners under siege in Colombia,” a Globe and Mail headline shouts March 21, referring to the failure of Greystar Resources’ Angostura gold-silver project to win environmental approval. The story also notes the takeover of Ventana Gold by a Brazilian company and that “Inmet Mining took a hit after the Panamanian government announced its plan to repeal a mining law that allows foreign ownership of mining projects within its borders.”

West Africa remains mining-friendly, and Darcy Keith writes in the Globe March 18, “If you’re placing bets on who may be the next company to be snapped up, Desjardins Securities Inc analyst Brian Christie suggests considering Semafo Inc …Christie… rates the stock a ‘buy’ with a price target of $14.75.”

At Seeking Alpha March 24, Rougement names six gold takeover targets—”solid companies that appear undervalued and likely to rise whether or not they are acquired”: Northgate Minerals, Yamana Gold, Crocodile Gold, Kinross Gold, Golden Star Resources and Taseko Mines.

Finally, the Financial Times reveals March 21 the name of the world’s biggest and most controversial gold bug: Colonel Muammer Gaddafi. According to the IMF, he holds 143.8 tonnes of it, “although some suspect the true amount could be several tonnes higher.” A sanction-proof investment, this is “worth more than $6.5bn at current prices, enough to pay a small army of mercenaries for months or even years.” The FT adds that Iran is also stocking up on the metal that has become the mandatory accoutrement for today’s embattled despot. A safe haven, indeed.

February 7th

By Kevin Michael Grace

US Department of Education researcher Dr Donald Leu has reported he could not shake the belief of students in the existence of the endangered Pacific Northwest Tree Octopus, even after he explained he had directed them to a hoax website. He concluded of “digital natives,” “Anyone can publish anything on the Internet and today’s students are not prepared to critically evaluate the information they find there.” At this point, we can cue an army of codgers growling, “Kids today… And stay off my lawn!” But where is the evidence that those of us not educated by computers are any better at critical thinking?

Gold ended the week at $1,350, with silver at $29.11. Bloomberg News reported February 4, “Gold declined in London, trimming the first weekly gain this year, on expectation that an economic recovery will curb demand for the metal as an alternative investment.” The expectation arrived Friday. As Alix Steel of The Street reported, “Gold prices had been shielding themselves for a good jobs number with the unemployment rate expected to rise to 9.5% because more people entered the labor force while the private sector is expected to add 160,000 jobs. However, the U.S. economy added only 36,000 jobs and the unemployment rate dropped to 9%. Still, Wall Street seemed to shrug off the data which put some pressure on gold prices.”

Perhaps Wall Street, which enjoyed its best January in 14 years, is too giddy to notice there is something distinctly curious about American labour statistics. As Mike Shedlock wrote on his blog, “The unemployment rate (based on the household survey), unexpectedly fell from 9.4% to 9.0%. How did that happen? Based on population growth, the labour force should have been expanding over the course of a year by about 125,000 workers a month, a total of 1.5 million workers. Instead, (for the entire year) the BLS reports that the civilian labor force fell by 167,000. Those not in the labor force rose by 2,094,000. In January alone, a whopping 319,000 people dropped out of the workforce.”

In the US, people who stop looking for work, the “chronically discouraged,” are no longer considered “unemployed.” At Zero Hedge, Tyler Durden reports, “At 64.2%, the labour force participation rate (as a percentage of the total civilian noninstitutional population) is now at a fresh 26-year low, the lowest since March 1984… Those not in the Labor Force has increased from 83.9 million to 86.2 million, or 2.2 million in one year!” One Zero Hedge reader comments, “That’s odd. I don’t hear much about this number in the MSM.” No, indeed. As it turns out, from a statistical point of view, it is very much in the interest of the US government for the chronically discouraged to remain so. Should that 2.2 million start looking for work again, the official unemployment rate would skyrocket.

The BLS (Bureau of Labor Statistics) publishes an “alternative” unemployment figure, one that includes all those working part-time not by choice. January’s rate was 16.1%. According to Gallup, which surveys 30,000 Americans on this question, the rate is 19.2%.

So it is entirely possible to conclude that the biggest economic stimulus in American history has little to show for it. Except perhaps a reckoning. On that score, Nassim Taleb is withering. Bloomberg reports February 3, that the author of The Black Swan told a Moscow conference, “We have a very dire situation in the United States, and every day that goes by it gets worse. Every day that goes by, we’re spending money. We’re increasing that cumulative debt.” He compared the United States to basket-case Greece and said investors should at all costs avoid US treasuries and the US dollar. Why so down on the dollar? “Euros have Germany, the dollar has nothing.”

It was not reported whether Taleb had anything to say about gold, but the Financial Times reported February 2 that the Chinese are mad for it. “China’s gold imports are estimated to have more than doubled from a year ago in the run-up to Chinese new year, putting the country on track to overtake India as the world’s largest consumer of the precious metal… Precious metals traders in London and Hong Kong said on Wednesday they were stunned by the strength of Chinese buying in the past month. ‘The demand is unbelievable. The size of the orders is enormous,’ said one senior banker, who estimated that China had imported about 200 tonnes in three months.”

Despite the slight fall on Friday, the gold market is bullish again. Even before Newmont bought Fronteer for $2.3 billion, Derrick Penner wrote in the Vancouver Sun February 1, “Mining … is expected to dominate M&A [mergers and acquisitions] in a year that could surpass 2010. This is, of course, to quote a bad cliché, the time to ‘make hay while the sun shines’ for mining firms… It’s a good time to be mining, or opening a mine. Or, if you don’t have a mine to open, as one analyst once told me, it is perhaps easier to buy someone else’s mine than try to discover a new one of your own.”

Colombia, Reuters reported February 1, “is hot again,” both in terms of exploration and M&A. “Seemingly overnight, its nearly dormant gold-mining industry has stirred to life, and the country has become a mecca for junior miners searching for the next big find.” The story quotes Medoro Resources board member Robert Doyle, who enthuses, “It has a good, clean, democratic government. …And it has very clear, well-defined mining laws and environmental laws.” Other companies mentioned here are Continental Gold, Ventana Gold and Greystar Resources.

One hot Canadian explorer is Detour Gold. Martin Mittelstaedt wrote in the Globe and Mail February 2 that Detour “likes to bill itself as the exploration company holding Canada’s largest undeveloped gold deposit. This week, the estimates of the size of that deposit got significantly larger, causing analysts to upgrade their stock targets while renewing speculation that the company could be in line for a takeover by a major producer.” Blyth has “nearly tripled his target price to 40¢ (from just 14¢)” and concludes, “This is a [1.5-million-ounce] gold reserve, feasibility complete, permitted and ready to build–all held within a company with a current market cap of $112-million.”

Shirley Won reports in the February 2 Globe and Mail that the Top 10 equity holdings in the BMO Precious Metals fund as of December 31, 2010, were Rainy River Resources, Sandspring Resources, Trelawney Mining, Allied Nevada Gold, Keegan Resources, Orezone Gold, Semafo Inc, Tahoe Resources, Kinross gold and Goldcorp Inc.

At Seeking Alpha January 31, Michael Bryant responds to the question, “Will silver outperform gold?” with, “Can’t you own them both?” He argues that “Paramount Gold and Silver appears to be ideal for this.”

Also at Seeking Alpha, Kurtis Hemmerling touted the following silver stocks February 3: Silvercorp Metals, Pan American Silver, Silver Wheaton, Silver Standard Resources, First Majestic Silver, Coeur d’Alene Mines, Endeavour Silver, Hecla Mining, Mines Management and Mag Silver.

Finally, those who believe the Internet is responsible for raising a generation of suckers are invited to familiarize themselves with the Great Spaghetti Tree Hoax of 1957. Reactionaries of that time were wont to blame contemporary gullibility on the then-new media of television, but a truer villain is human nature, which is eternal.