Thursday, June 26, 2014

The Four Horsemen of the Geopolitical Apocalypse

By John Mauldin


Ian Bremmer, NYU professor and head of the geopolitical consulting powerhouse Eurasia Group, consults at the highest levels with both governments and companies because he brings to the table robust geopolitical analysis and a compelling thesis: that we are witnessing “the creative destruction of the old geopolitical order.” We live, as his last book told us, in a “G-0” world. In today’s Outside the Box, Ian spells out what that creative destruction means in terms of events on the ground today. As Ian notes, the most prominent feature of the international landscape this year has been the expansion of geopolitical conflict. That expansion is gaining momentum, he says, creating larger-scale crises and sharpening market volatility. Hold on to the reins now as Ian take us for a ride with the “Four Horsemen of the Geopolitical Apocalypse.”

We’ll follow up Ian’s piece with an excellent short analysis of the Iraq situation from a Middle East expert at a large hedge fund I correspond with. Pretty straightforward take on the situation with regard to ISIS. This quagmire has real implications for the world oil supply. (It appears that the Sunni rebel forces are now in complete control of the key Baiji Refinery, which produces a third of Iraq’s output.)

Back in Dallas, it’s a little hard to focus on geopolitical events when seemingly all the news is about ongoing domestic crises. But the outrageous IRS loss of emails doesn’t really affect our portfolios all that much. What happens in Iraq or with China does. There’s just not the emotional impact.

One domestic humanitarian crisis that is brewing just south of me is the massive influx of very young children across the U.S.-Mexican border. When this was first brought to my attention a few weeks ago, I must admit that I questioned the credibility of the source. We have had young children walking across the Texas border for decades but always in rather small numbers. The first source I read said that 40,000 had already come over this year. I just found that to be non credible, but then with a little reasonable research it not only became believable but could be a bit low – it looks as many as 90,000 children will cross the border this year.

What in the name of the Wide Wide World of Sports is going on? First of all, how do you cover up something of this magnitude until it is a true crisis? When the administration and other authorities clearly knew about it last year? (The evidence is irrefutable. They knew.)

I am the father of five adopted children. In an earlier phase of my life, I was somewhat involved with Child Protective Services here in Texas. It was an emotionally difficult and heartrending experience. (One of my children came out of that system and three from outside of the United States). I have no idea how you care for 90,000 children who don’t speak the language and have no connection to their new locale. Forget the dollar cost, which could run into the tens of billions over time. These are children, and they are on our doorstep and our watch. You simply can’t ignore them and say, “They are not supposed to be here, so it’s not our responsibility.” They are children. Someone, and that means here in the U.S., is going to have to figure out how to take care of them, even if it is only to learn why they try to come and figure out where to send them back to. And frankly, trying to to send them back is going to be a logistical and legal nightmare, not to mention psychologically traumatic to the children.

Maybe someone thought that waiting until there was a crisis to let this information slip out (and we found out about it because of photos posted anonymously of children packed together in holding cells) would create momentum for immigration reform. And they may be right. But I’m not certain it’s going to result in the type of immigration reform they were hoping to get.

I have to admit that I’ve been rather tolerant of illegal immigrants over the course of my life. There are a dozen or so key issues that I think this country should focus on, but I’ve just never gotten that worked up about illegal immigration. The simple fact is that everyone here in the US is either an immigrant or descended from immigrants. It may be, too, that I’ve hired a few undocumented workers here and there in my life. As an economist, I know that we should be trying to figure out how to get more capable immigrants here, not less. What you want are educated young people who are motivated to create and work, not children as young as four or five years old who are going to need housing, education, adult supervision, health care, and most of all a loving environment where they can grow up.

It is one thing for undocumented workers to come across the border looking for jobs or for families to come across together. It is a completely different matter when tens of thousands of preteen children come across the border without parents or supervision. They didn’t get across 1500 miles of desert without significant support and a great deal of planning. This couldn’t be happening without the awareness of authorities in Mexico and the Central American countries from which these children come, and if this is truly a surprise to Homeland Security, then there is a significant failure somewhere in the system.

And if it was not a surprise? That begs a whole different series of questions.

This is a major humanitarian crisis, and it is not in the Middle East or Africa. It is on our border, and we need to figure out what to do about it NOW!

I don’t care whether you think we need to build a 20 foot high wall across the southern border of the United States or give amnesty to anyone who wants to come in (or both), something has to be done with these children. It is a staggering problem of enormous logistical proportions, and we have a simple human responsibility to take care of those who cannot take care of themselves.

And on that note I will go ahead and hit the send button, and let’s focus on the critical geopolitical events happening around the globe. Iraq is a disaster. Ukraine is a crisis. What’s happening in the China Sea is troubling. It just seems to come at you from everywhere. Even on a beautiful summer day.

Your stunned by the magnitude of it all at analyst,
John Mauldin, Editor
Outside the Box


(From Ian Bremmer)

Dear John,
We're halfway through 2014, and the single most notable feature of the international landscape has been the expansion of geopolitical conflict. why should we care? what's the impact; what does it mean for the global economy? how should we think about geopolitics? My thoughts on the topic, looking at the four key geopolitical pieces "in play"–in Eurasia, the middle east, Asia, and the transatlantic.

Geopolitics

 

I've written for several years about the root causes of the geopolitical instability the world is presently experiencing. a new, g-zero world where the united states is less interested in providing global leadership and nobody else is willing or able to step into that role. that primary leadership vacuum is set against a context of competing foreign policy priorities from increasingly powerful emerging markets (with very different political and economic systems) and a Germany-led Europe; challenges to the international system from a revisionist Russia in decline; and difficulties in coordination from a proliferation of relevant state and non state actors even when interests are aligned. all of this has stirred tensions in the aftermath of the financial crisis: instability across the middle east after a stillborn Arab spring; a three-year Syrian civil war; a failed Russia "reset"; rising conflict between china and japan; fraying American alliances with countries like Brazil, Germany, and Saudi Arabia.

And yet geopolitical concerns haven't particularly changed our views on global markets. each conflict has been small and self contained (or the spillover wasn't perceived to matter much). Geopolitics has been troubling on the margins but not worth more than a fret.

That's about to change. though perceived as discrete events, the rise of these geopolitical tensions are all directly linked to the creative destruction of the old geopolitical order. it's a process that's gaining momentum, creating in turn larger-scale crises and broader market volatility. we've now reached the point where near to mid-term outcomes of several geopolitical conflicts could become major drivers of the global economy. that's true of Russia/Ukraine, Iraq, the east and south china seas and U.S./Europe. in each, the status quo is unsustainable (though for very different reasons). and so, as it were, the four horsemen of the geopolitical apocalypse.

Russia/Ukraine

 

The prospect of losing Ukraine was the last straw for a Russian government that has been steadily losing geopolitical influence since the collapse of the soviet union over two decades ago. Moscow sees NATO enlargement, expanded European economic integration, energy diversification and the energy revolution as direct security threats that need to be countered. Ukraine is also an opportunity for the Kremlin...for president Putin to invigorate a flagging support base at home.

Putin intends to raise the economic and military pressure on Kiev until, at a minimum, southeast Ukraine is effectively under Russian control. the Ukrainian government's latest effort in response, a unilateral week long cease fire in the southeast, was greeted with lukewarm rhetoric by Putin and rejected by Russian separatists in the region, who escalated their attacks against the Ukrainian military. meanwhile, thousands of Russian troops recently pulled back from the Ukrainian border have now been redeployed there, bolstered by Putin ordering 65,000 Russian troops on combat alert in the region.

The choices for Kiev are thankless. if they press further, violence intensifies and Russian support expands, either routing the Ukrainian military, or taking serious losses and requiring direct "formal" intervention of Russian troops. if they back off, they lose the southeast, which is critical for their internal legitimacy from the Ukrainian population at large. all the while the Ukrainian economy teeters with much of their industrial base off line, compounded by Russian disruptions on customs, trade, and gas supply.

The growing conflict will lead to further deterioration of Russia's relationship with the united states and Europe: gas flow disruptions, expansion of defense spending and NATO coordination with Poland and the Baltic states, turbulence around Moldova and Georgia given their European association agreements this week...and "level 3" sectoral sanctions against Russia. that in turn means a serious economic downturn in Russia itself...and knock-on economic implications for Europe, which has far greater exposure to Russia than the united states does.

For the last several years, the major market concern for Europe was economic: the potential for collapse of the euro zone. that's no longer a worry. the primary risk to Europe is now clearly geopolitical, that expanded Russia/Ukraine conflict hurts Europe, in worst case pushing the continent back into recession.

Iraq

 

Like so much of the world's colonial legacy, many of the middle east's borders only "worked" because of the combination of secular authoritarian rule and international military and economic support. that was certainly true of Iraq–most recently under decades of control by the Baath party, beginning in 1963. Saddam Hussein's ouster forty years later by the united states and Great Britain, combined with the dismantling of nearly all of the military and political architecture that supported him (in dramatic contrast to, say, the ouster of Egypt's hosni Mubarak) undermined Iraq's territorial integrity. since then, Iraqi governance could still nominally function given significant American military presence and military and economic aid. once that was removed, there was little left to keep iraq functioning as a country.

Sectarianism is the primary form of allegiance in iraq today, both limiting the reach of prime minister nouri al maliki's majority shia government and creating closer ties between iraq's sunni, shia and kurdish populations and their brethren outside Iraq's borders. extremism within iraq has also grown dramatically as a consequence, particularly among the now disenfranchised sunni population--made worse by their heavy losses in the war against bashar assad across the largely undefended border with syria. the tipping point came with the broad attacks by the islamic state of iraq and syria (isis) over the past fortnight, speeding up a decade-long expansion of sectarian violence and ethnic cleansing between iraq's Sunni and shia. the comparatively wealthy and politically stable Kurds have done their best to steer clear of the troubles, seizing a long sought opportunity for de facto independence.

The American response has been cautious. domestic support for military engagement in Iraq diminished greatly as the war in Iraq continued and the economic and human costs mounted. obama repeatedly promised an end to the occupation and considered full withdrawal a major achievement of his administration. there's little domestic upside for taking responsibility in the crisis. obama's position has accordingly been that any direct military involvement requires a change in governance from the Iraqis--initially sounding like a unity government and increasingly evolving into the replacement of prime minister maliki. the pressure on maliki has gained momentum with shia grand ayatollah ali al-sistani calling on the iraqi prime minister to broaden the government to include more kurds and sunnis.

But Maliki, having successfully fought constitutional crises and assassination attempts, to say nothing of decisively winning a democratic election, is unlikely to go. isis poses a threat to the unity of the iraqi state, but not to maliki's rule of iraq's majority shia population, which if anything now stands stronger than it did before the fighting. and maliki's key international sponsor, iran, has little interest in forcing maliki into compromise as long as there's no threat to baghdad: they see themselves in far better strategic standing with a maliki-led iraqi government where they exert overwhelming influence, than over a broader government where they're one of many competing international forces. further, even if maliki were prepared to truly share power with iraq's kurds and sunni (something made more likely by the informal "influence" of 300 us military advisors now arriving in baghdad), he's unlikely to see much enthusiasm responding to that offer. the kurds are better off sticking to nominal (and a clearer road to eventual formal) independence; and sunni leaders that publicly find common cause with maliki would better hope all their family members aren't anywhere isis can find them.
absent american (or anyone else's) significant military engagement, the iraqi government is unlikely to be able to remove isis from leadership and, accordingly, reassert control over the sunni and kurdish areas of the country. that will lead to a significant increase in extremist violence emanating from the islamic world, a trend that's already deteriorated significantly in recent years (and since obama administration officials announced that cyberattacks were the biggest national security threat to the united states--a claim president obama overturned during his west point speech last month). since 2010, the number of known jihadist fighters has more than doubled; attacks by Al Qaeda affiliates have tripled.

The combination of challenging economic conditions, sectarian leadership, and the communications revolution empowering individuals through narrowing political and ideological demographic lenses all make this much more likely to expand. that's a greater threat to stability in the poorer middle eastern markets, but also will morph back into a growing terrorist threat against western assets in the region and more broadly. that creates, in turn, demand for increased security spending and bigger concerns about fat tail terrorism in the developed world, particularly in southern and western europe (where large numbers of unintegrated and unemployed islamic populations will pose more of a direct threat).

The broader risk is that sunni/shia conflict metastasizes into a single broader war. isis declares an islamic state across sunni iraq and syria, becoming ground zero for terrorist funding and recruitment from across the region. the saudi government condemns the absence of international engagement in either conflict and directly opposes an increasingly heavy and public iranian hand in iraqi and syrian rule. the united states completes a comprehensive nuclear deal with iran and declares victory (but doesn't work meaningfully with teheran on iraq), steering clear of the growing divide between the middle east's two major powers. the gulf cooperation council starts to fragment as members see opportunity in economic engagements with Iran. Iranian "advisers" in Iraq morph into armed forces; Saudi Arabia publicly opposes isis, but Saudi money and weapons get into their hands and an abundance of informal links pop up. militarization grows between an emboldened Iran and a more isolated, defensive Saudi Arabia. that's when the geopolitical premium around energy prices becomes serious.

East/South China Sea

 

Ukraine and Iraq are the two major active geopolitical conflicts. but there are two more geopolitical points of tension involving major economies that are becoming significant.

In Asia, it's the consequences of (and reactions to) an increasingly powerful and assertive china. the growth of china's influence remains the world's most important geopolitical story by a long margin. but, at least to date, china's growth is mostly an opportunity for the rest of the world. for the middle east, it's the principal new source of energy demand as the united states becomes more energy independent. for Africa, it's the best opportunity to build out long-needed infrastructure across the continent. for Europe and even the united states, it's a critical source of credit propping up currency, and a core producer of inexpensive goods. that's not to argue that there aren't significant caveats in each of these stories (or that those caveats aren't growing--they are), but rather that overall, china has been primarily perceived as an opportunity rather than a threat for all of these actors, and so it remains today.

for asia, a rising china has been seen more clearly as a double-edged sword. the greater comparative importance of the chinese economy has translated into more political influence (formal and informal) for beijing, at the expense of other governments in the region. meanwhile, china's dramatic military buildup has fundamentally changed the balance of power in asia; it's had negligible interest elsewhere.
china's military assertiveness has also grown in its backyard. in other regions, china continues to promote itself as a poor country that needs to focus on its own development and stability. in east and southeast asia china has core interests that it defends, and it is increasingly willing to challenge the status quo as its influence becomes asymmetrically greater.

that's been most clear with vietnam, where china first sent one oil rig to drill in contested waters directly off vietnam's shore--accompanied by several hundred chinese fishing vessels. they announced last week that they are repositioning four more. unsurprisingly, the vietnamese response has been sharp--anti-chinese demonstrations, violence, increased naval presence in the region, and coordination with the philippines.
none of that creates significant political risk on its own: vietnam isn't an ally of the united states and so engenders less support and response from washington than the philippines or japan...which is precisely why beijing has decided that's the best place to start changing the regional security balance.

but tokyo feels differently. the japanese government understands that a rising china is longer term a much more existential threat to its own security position in asia, and it isn't prepared to wait to raise concern until its position weakens further. so prime minister shinzo abe has declared his security support for vietnam. for america's part, obama has jettisoned the official "pivot" to asia. but the administration continues to believe that america's core national security interests, now and in the future, are in asia; and if china significantly escalates tensions in the east and south china seas, the united states is not likely to sit as idly by as they have on syria or ukraine.

the good news here is that--unlike with the countries driving the tensions in eurasia and the middle east--china has solid political stability and isn't looking for international trouble. but the realities of chinese growth, coupled with strong leadership from japan and (over time) india, along with the persistence of a strong american footprint are contributing to a much more troublesome geopolitical environment in the region.
the principle danger to the markets is what happens if the chinese government no longer holds that perspective. president xi jinping's commitment to transformational economic reform has been strong over the first year of his rule, and he has gotten surprisingly little pushback from the country's entrenched elites. but the uncertainty around china's near- to medium-term trajectory is radically greater than that of any of the world's other major economies. should significant instability emerge in china, very plausible indeed, china's willingness to take on a far more assertive (and risk-acceptant) security strategy in the region, promoting nationalism in the way putin has built his support base of late, would become far more likely. and then, the east and south china seas move to the top of our list.

U.S.-Europe

 

finally, the transatlantic relationship. advanced industrial economies with consolidated institutions and political stability, there's none of the geopolitical conflict presently visible in the middle east, eurasia, or asia.

geopolitical tensions have long been absent from the transatlantic relationship, the great success of the nato alliance. for all the occasional disagreement in europe on us military and security policy both during the cold war and since (the war in iraq, israel/palestine, counterterrorism and the like), european states never considered the need for broader security ties as a counterbalance for nato membership.

but the changing nature of geopolitics is creating a rift between the united states and europe.
american global hegemony had security and economic components, and it was collective security that had been the core element holding together the transatlantic alliance. that's no longer the case--a consequence of changing priorities for the americans and europeans, and an evolving world order (russia/ukraine a major blip, but notwithstanding). the transatlantic relationship is much less closely aligned on economics.

it's not the conventional wisdom. most observers say that, after bush, american policy looks more european these days--less militarist, more multilateralist. but actually, us foreign policy isn't becoming more like europe, it's becoming more like china. it's less focused on the military, except on issues of core security concern (in which case the united states acts with little need to consult allies), while american economic policy tends to be unilateralist in supporting preferred american geopolitical outcomes--which is seen most directly in us sanctions behavior (over $15bn in fines now levied against more than 20 international banks--mostly european) and nsa surveillance policy (with no willingness of the us to cooperate in a germany requested "no spying" mutual agreement)

transatlantic economic dissonance is also in evidence in a number of more fundamental ways: america's "growth uber alles" approach to a downturn in the economy, compared to germany's fixation on fiscal accountability. europe's greater alignment between governments and corporations on industrial policy, as opposed to a more decentralized, private-sector led (and occasionally captured) american policy environment. a more economy-driven opportunistic european approach to china, russia and other developing markets; the us government looking focused more on us-led/"universalist" principles on industrial espionage, intellectual property, etc.

as the g-zero persists, we will see the united states looking to enforce more unilateral economic standards that the europeans resent and resist; while the europeans look to other countries more strategically as counterbalances to american economic hegemony (the german-china relationship is critical in this regard, but that's also true of europe's willingness to support american economic policies in russia and the middle east). all of this means a much less cooperative trans-atlantic relationship--less "universalism" (from the american perspective) and less "multilateralism" (from the european perspective). more zero-sumness in the transatlantic relationship is a big change in the geopolitical environment; a precursor to true multipolarity, but in the interim a more fragmented and much less efficient global marketplace.

* * *

so that's where i see geopolitics emerging as a key factor for the global markets--much more than at any time since the end of the cold war. there's some good news and bad news here.

the good news is none of these geopolitical risks are likely to have the sort of market implications that the macro economic risks did after the financial crisis. there are lots of reasons for that. a low interest rate environment and solid growth from the us and china--plus the eurozone out of recession--along with pent up demand for investment is leading to significant optimism that won't be easily cowed by geopolitics. the supply/demand energy story is largely bearish, so near-term geopolitical risks from the middle east won't create sustained high prices. and markets don't know how to price geopolitical risk well; they're not covered as clearly analytically, so investors don't pay as much attention (until/unless they have to).

the bad news...that very lack of pressure from the markets means political leaders won't feel as much need to address these crises even as they expand, particularly in the united states. this is another reason the world's geopolitical crises will persist beyond a level that a similar economic crisis would hit before serious measures start to be taken to mitigate them. these geopolitical factors are going to grow. now's the time to start paying attention to them.

* * *
every once in a while, it's good to take a step back and look at the big picture. hope you found that worthwhile. i'll surely get back in the weeds next monday.

meanwhile, it's looking like a decidedly lovely week in new york.
very best,
Ian

From intel sources:

Dislodging ISIS Will Be a Difficult Task

 

The ISIS advance toward Baghdad may be temporarily held off as the government rallies its remaining security forces and Shia militias organize for the upcoming Battle for Baghdad. There is a rather clear reason why the ISIS leader has renamed himself Abu Bakr al-Baghdadi, meaning the Caliph of Baghdad . ISIS will at a minimum be able to take control of some Sunni neighborhoods in Baghdad shortly and wreak havoc on the city with IEDs, ambushes, single suicide attacks, and suicide assaults that target civilians, the government, security forces, senior members of government, and foreign installations and embassies. Additionally, the brutal sectarian slaughter of Sunni and Shia alike that punctuated the violence in Baghdad from 2005 to 2007 is likely to return as Shia militias and ISIS fighters begin to assert control of neighborhoods and roam the streets.

Even if Iraqi forces are able to keep ISIS from fully taking Baghdad and areas south, it is unlikely the beleaguered military and police forces will be able to retake the areas under ISIS control in the north and west without significant external support, as well as the support of the Kurds.

ISIS and its allies are in a position today that closely resembles the position prior to the US surge back in early 2007. More than 130,000 US troops, partnered with the Sunni Awakening formations and Iraqi security forces numbering in the hundreds of thousands, were required to clear Anbar, Salahaddin, Diyala, Ninewa, Baghdad, and the "triangle of death." The concurrent operations took more than a year, and were supported by the US Air Force, US Army aviation brigades, and US special operations raids that targeted the jihadists’ command and control, training camps, and bases, as well as its IED and suicide bomb factories.

Today, the Iraqis have no US forces on the ground to support them, US air power is absent, the Awakening is scattered and disjointed, and the Iraqi military has been humiliated badly while surrendering or retreating in disarray during the lightning fast jihadists' campaign from Mosul to the outskirts of Baghdad. This campaign, by the way, has been remarkably and significantly faster than the U.S. armored campaign advance to Baghdad in 2003 . The US government has indicated that it will not deploy US soldiers in Iraq, either on the ground or at airbases to conduct air operations.  Meanwhile, significant amounts of US made advanced armaments, vehicles, ammunition, and diverse military equipment have fallen into ISIS jihadists’ hands .

ISIS is advancing boldly in the looming security vacuum left by the collapse of the Iraqi security forces and the West's refusal to recommit forces to stabilize Iraq. This has rendered the country vulnerable to further incursions by al Qaeda-linked jihadists as well as intervention by interested neighbors such as Iran. Overt Iranian intervention in Iraq would likely lead any Sunnis still loyal to the government to side with ISIS and its allies, and would ensure that Iraq would slide even closer to a full-blown civil war and de facto partition, and risk a wider war throughout the Middle East.

Like Outside the Box?
 
Sign up today and get each new issue delivered free to your inbox.


It's your opportunity to get the news John Mauldin thinks matters most to your finances.





Get our "Beginner's Guide to Trading Options"....Just Click Here!


Wednesday, June 25, 2014

The Only PGM Stock You Should Buy

By Jeff Clark, Senior Precious Metals Analyst

It’s quite the dilemma.

One of the major reasons my colleagues and I are so bullish on platinum group metals (PGM)—palladium, in particular—is because of the intractable problems with supply. But most of the producers are backed into corners, with few options for improving their outlook. There’s simply no way for these metals to avoid a long-term production deficit due to the deep seated problems with the companies that produce them.

So, how to invest?

Since we’re talking about profiting from a metals bull market, we could just buy bullion—and we have indeed recommended doing so to our readers. But to really maximize your leverage to the upside (and avoid more risky futures and options), a stock in a company that produces the metal is normally the way to go. Unfortunately, as above, the pickings are slim.

For us to invest in a PGM producer, the company would have to be:
  • Outside of South Africa and Russia. The problems with miners in both countries are numerous and difficult.
  • Making money. Many producers are not profitable at current prices because production costs are so high. And they won’t come down just because the strikes ended—they’ll go up, due to higher wages.
  • Have a strong growth profile. We want a company that can capitalize on burgeoning demand, which would add further leverage to our investment.
  • Have strong management (of course!). The last thing we want is a team with no experience navigating a volatile market such as this.
Does such a stock exist?

It’s a tall order, but the answer is yes. The company we recommend in this area meets all the criteria above—and is the safest speculation in this space. We consider it so safe, in fact, that we just “graduated” it from the International Speculator to BIG GOLD.

How’s This for Leverage?

 

This profitable mid-tier producer is perfectly positioned: it’s not so small that we’re purely speculating on some uncertain game changing event, and yet it’s small enough to generate much larger share price gains than would be possible for one of the major mining companies. On the other hand, it’s big enough to catch the attention of mainstream investors.

Here are seven reasons why we’re excited about this company and the leverage we think we’ll get by owning shares…...

#1: Large, High-Grade Assets

The company has two distinct but closely related mine sites. These alone will support the company’s growth for many years. However, only nine miles of an estimated 28 miles of known mineralization has been developed between them—essentially one third of one giant mineralized structure. Management thinks it has an additional 102 million tonnes of undeveloped resources waiting to be dug up.

And get this: the average grade of their proven and probable reserves is 0.45 ounces per tonne, the world’s highest grade PGM deposit. Of these, 78% is palladium, a very attractive figure since we’re even more bullish on it than platinum. At the right metals prices, this company could double or triple production and still maintain a very long mine life.

#2: Growing Production and Low Costs

The company grew 2013 production by 10,000 ounces, but has yet to use all its milling capacity. It currently uses about 3,600 tonnes per day (tpd) of its 6,000 tpd total capacity. The company is working to increase ore production this year, which is good timing for us.

With a much cleaner balance sheet and a forecast of $800-$850 per ounce for all-in sustaining costs (AISC) in 2014, the company looks poised to make money in the current price environment—and a lot of money in the supply squeeze we anticipate.

#3: Recycling Business

In addition to mining, this company recycles depleted catalyst materials to recover palladium, platinum, and rhodium at its smelter and base metal refinery. It’s been doing this since 1997, and business is booming. Pre-tax earnings last year rose a whopping 233% over 2012. And management says it will expand this end of their business over the next few years.

#4: Strong Financial Performance

This company reported over a billion dollars of revenue last year, up nearly 30% from 2012. It finished the year with a very strong working capital position of almost a half billion dollars.

#5: Unique North American Operations

The company is one of only a few PGM producers in North America. Nearly all other PGM mines operate in South Africa (Impala, Amplats, Lonmin, etc.) or Russia (Norilsk). Therefore, this company is more stable than most that mine in other jurisdictions.

#6: Upgraded Management

A prior management team made a poor investment in Argentina a few years back, which led to major changes in the board of directors and top management last year. The new president and CEO is a 21-year industry veteran and has experience in both M&A and mine optimization. He’s already corrected past mistakes, and we’re happy with the direction he’s taken the company. The technical people on the ground seem competent and are getting admirable results.

And finally…...

#7: We’ve Been There!

Our Chief Metals Investment Strategist Louis James, who conducted a due diligence trip to the company’s operations last year, says:

I liked the story when I visited and considered it to be the company to buy in a safe mining jurisdiction. But I didn’t want to bet on the team in place at the time. Flash forward and now it’s under new management, which is very focused on cutting costs and expanding the core business. The company’s results for 2013 were quite impressive, and I expect them to get better going forward. I’m convinced this company is uniquely positioned to benefit from potential supply shortages. Coupled with a likely rise in demand from the global auto industry in the years ahead, this stock is a very attractive play.

Here’s a picture from his visit.

Pay dirt: this is what the company’s palladium-platinum mineralization looks like before blasting. You can see the closely spaced holes that will be blasted a fraction of a second before the surrounding ones—in successive waves—so the ore is blasted inward. This high-grade resource in a safe and stable jurisdiction is the heart of our speculation.

 

The Only Stock to Buy, in a Market Backed into a Corner

 

Johnson Matthey, the world’s leading authority on PGMs, estimates the platinum market will register a deficit of at least 1.2 million ounces this year. This would be the largest shortfall since it first compiled data in 1975.

While it will take an enormous amount of time and expense to recover from the strikes in South Africa, that’s only the first layer of problems for the industry:
  • According to consultancy GFMS, 300,000 ounces of platinum and 165,000 ounces of palladium could be lost after the strikes end, as it will take time and money to ramp up to full capacity—if that’s even possible since some mines have been damaged. The Implats CEO said it will take his company at least three months to return to full production, and they’ve already put the development of three new replacement shafts in the Rustenburg area on hold. Anglo American announced just last week that it plans to sell its platinum operations.
  • Holdings of physically backed palladium ETFs continue to hit record highs. In less than two months, a half million ounces were added to ETFs. Fund holdings will likely continue to climb and push the palladium market further into deficit.
  • The Russian government has been reportedly buying palladium from local producers, since it appears its stockpiles are near exhaustion. Exports ticked higher last month, but that was likely in anticipation of potential sanctions.
  • Some recyclers announced they are holding back on sales, as they believe prices will move higher.
  • Platinum demand in India is expected to grow 35% this year.
  • Reports have surfaced that tout replacements to platinum and/or palladium. However, these are mostly research projects and are at least two to three years away from commercial viability (some will never make it).
  • Auto sales in the US, China, and Europe, the three biggest regions by consumption, were up 12% through May over 2013.
  • Existing stockpiles of these metals have dwindled. Based on prior estimates from Citigroup, only nine weeks of palladium and 22 weeks of platinum supplies remain—and half of those are in Russia. Standard Bank projects that stockpiled material from South African producers will run out in a month or less.
The key point is that platinum and palladium supply is in a structural deficit. Prices will pull back now that the strikes have ended—and that is your opportunity. The bull market in these metals is really just getting underway.

And we have the primo pick in the space. The shares of this stock would have to climb 50% just to match its 2011 highs—and that’s without the platinum/palladium supply crunch we’re speculating on. As you’ve surmised by now, I can’t give away the name of this stock in fairness to paid subscribers. But you can get it by giving BIG GOLD a risk free try. You’ll receive our full analysis and specific buy guidance, along with an exclusive discount on a popular gold coin in the June issue. And, if you want the absolute safest way to invest in PGMs, check out the options recommended in the May issue.

If you’re not 100% satisfied with the newsletter, simply cancel during the 3-month trial period for a full refund—no questions asked. Whatever you do, though, don’t miss out on the best stock pick in the PGM bull market. Click Here to learn more about BIG GOLD or Click Here to go straight to the order form.

The article The Only PGM Stock You Should Buy was originally published at Casey Research


Check out our "Beginner's Guide to Trading Options"....Just Click Here!
 


Friday, June 20, 2014

WTI Crude Oil on the Move $112 Next Stop

The energy sector has surged during the last two months which can be seen by looking at the XLE Energy Select Sector Fund. If crude oil continues to climb to the $112 level, XLE will likely continue to rally for another few days or possibly week as energy stocks are considered a leveraged way to play energy price movements.

Another way to look at this info is through the USO United States Oil Fund. This tracks much closer to the price of oil. The only issue is that many ETFs that “try to track” an underlying commodity is in how the funds are built. They own multiple contracts further into the future which does not exactly provide us with the short term news/event driven price movements in the current front month contract as they should.

What does this mumbo jumbo mean? Well, it means funds like USO and the highly respected UNG, and VIX ETFs… (just joking about the highly respected part), fail to track the underlying commodity or index very well when it comes to short term price movements. This means, you can nail the timing of a trade, and the commodity or index will move in your favor, yet your fund loses money, or goes nowhere...

Let’s Focus on the Technicals Now….

 

WTI crude oil has formed a bullish ascending triangle pattern from March to May of this year. The breakout to the upside is bullish and should be traded that way until the chart says otherwise. This breakout and first pullback must hold, or I will consider it a failed breakout. So if price dips and closes 2 days below the breakout level, it will be a major negative for oil in my opinion.

The range of the ascending triangle provides us with a measured move to the upside which is $112. Typically the first pullback after a breakout can be bought. The first short term target to scalp some gains would be $109, and at that point moving your stop to breakeven is a wise decision. Trading is all about managing capital and risk, if you don’t, then the market will take advantage of your lack in discipline.

Looking further back on the chart, you can see the double bottom formation also known as a “W” formation. Once the high of the “W” formation is broken the trend should be considered neural or up.

Also note that the RSI (relative strength) has been trending higher for some time now. This means money is rotating into this commodity. This is in line with my interview this week with Kerry Lutz and my recent article talking about the next bull market in commodities and the TSX (Toronto Stock Exchange).

clfutures

 

WTI Crude Oil Trading Conclusion:

 

In short, oil has some extra risk around it. The recent move has been partly fueled by news overseas. So at any time oil could get a lift or take a hit by news that hits the wires. I tent to trade news related events with much less capital than I normally do because of this risk.

Happy Trading,
Chris Vermeulen

WANT MORE TRADE IDEAS? GET THEM HERE: THE GOLD & OIL GUY.COM

 


Thursday, June 19, 2014

Commodities Are Building Bases and About To Rally – Steel Market

Commodities in general have been under pressure for the last couple years. This can be seen by looking at the GCC Greenhaven Continuous Commodity ETF which holds a basket of resources. The weekly chart has formed a bullish bottom pattern, and as of last January it looks as though it’s now building a basing pattern. Overall commodities are in the very early stages of a stage 1 basing pattern and it looks as though it will be a few more months before any significant breakout will occur. But there could be some early entry points if you know what to look for…

A few days ago I talked about how commodities tend to perform well near the end of a bull market in the United States stock market. I also pointed out which hot index was going to benefit from this. In this article I want to bring your attention to the steel market. Using the SLX Steel ETF you can clearly see the bottoming pattern and basing pattern for this commodity. Currently steel is underperforming the stock market and is vulnerable to lower prices. But if we see a few things come together in the coming days or weeks, this could be a screaming buy.

My technical take on steel is this:

 

SLX has formed a bottoming pattern from January – mid March. It has since put in a strong impulse rally to make a higher high, and is now consolidating above key support. The RSI (Relative Strength) remains in a down trend, but if this starts to rise and SLX breaks above its recent highs around the $47.75 level I feel steel will start to rally with $50 being the next major whole number and previous high for steel to find some resistance.

Also price has been riding along the 200 day moving average which is acting as support. If price closes a couple of days below the 200 moving average I would consider this to be a bearish sign.

SLX

 

Steel Trading Conclusion:

 

In short, we are looking for the relative strength to start making new highs. Also we want to see a reversal bar on the SLX chart to the upside which we got on Tuesday. Or you can wait for a breakout and close above $47-48 area. Stop would be somewhere around the $45.75 area to start, then raise it as price rallies using intraday pivot lows on the 30 minute chart.

GET THESE REPORTS DELIVERED TO YOUR INBOX FREE > The Gold & Oil Guy.com


Sign up for one of our Free Trading Webinars....Just Click Here!


Tuesday, June 17, 2014

Solar Energy Sector ETF Breaking Out – How to Trade It

During the past couple months several indexes, sectors and commodities have sold off more than 10 – 20%. But now some are looking like new buying opportunities. Over the next week I will bring a few of these trades to your attention as they start to unfold.

Today we are looking at the TAN solar ETF. This sector recently had a 23% hair cut in price. A 20-25% correction in price is a typical intermediate correction for a fast moving sector. The price correction has pulled the sector down to its 150 and 200 simple day moving averages. These levels tend to act as long term support for investors, a buying point.

Many of the individual stocks within this sector are starting to pop and breakout of bullish price patterns. These individual stock prices point to higher prices for TAN going forward. Be aware of crude oil…. I do think that as long as the price of crude oil stays up solar stocks will continue to rise overall. But if oil starts to roll over and break down, TAN will struggle.

My Technical Take on The Chart:
 
Big picture analysis shows a powerful uptrend with bullish consolidation.

Intermediate analysis shows a falling bullish wedge, test of moving averages, and a reversal breakout pattern.

tan

Short term analysis shows we are at a resistance level and we will likely see a pause of pullback over the next few days before it goes higher.

TANshortterm

TAN Trading Conclusion:
 
If price closed back below the $39.00 I would consider this bounce/rally failed.

Get My Trade Ideas Delivered To Your Inbox FREE: Gold & Oil Guy.com


See you in the markets,
Chris Vermeulen
Founder of  Technical Traders Ltd. - Partnership Program


Get our "Beginner's Guide to Trading Options....Just Click Here!
 


Monday, June 16, 2014

I Owe My Soul—Why Negative Interest Rates Are Only the First Step

By Jeff Thomas, International Man

In 1946, an American singer, Merle Travis, recorded a song called "Sixteen Tons." The song told the story of a poor coal miner in Kentucky, who lived in a small coal mining town. The town's economy revolved entirely around the mine.

The mining company owned a "company store," which had a monopoly on the sale of provisions. It charged rates that were designed to use up the weekly paycheque of the miner, so that the miner, in effect, was a slave to the mining company. As the song states,

You load sixteen tons, what do you get
Another day older and deeper in debt
Saint Peter don't you call me 'cause I can't go
I owe my soul to the company store

Negative Interest Rates

 

Let's put the song aside for the moment and have a look at a concept that has been bandied about by the European Central Bank (ECB) for a while now. Since the collapse of the central banks would doom the world (their claim, not mine), it is essential that the banks be saved no matter what else must be sacrificed. Efforts to "save" the situation have been implemented through quantitative easing (QE) and the setting and continuation of low interest rates.

Unfortunately, in spite of record profits by banks and staggering bonuses handed out to senior bank executives, somehow the QE and low interest rates have not created the prosperity desired. The economy is still in the tank. What to do?

A solution being considered is to create "negative interest rates." Sounds logical, doesn't it? If low interest rates have kept the economy from crashing but haven't fixed it, surely, negative interest rates can only be more positive.

And what are negative interest rates? Well, it simply means that, if you keep your money in a bank, instead of the bank paying you interest, you pay the bank to hold your money.

No central bank has ever done such a thing, so, not surprisingly, it sounds like a bitter pill to swallow. However, the ECB will present it as an "unfortunate necessity."

Electronic Currency

 

Let's once again change subjects for the moment. If the fiat currencies, such as the euro and the dollar, collapse (as I believe is all but inevitable), the EU and US are likely to immediately come up with an alternate currency (or currencies), since if an alternative is not made readily available, people will turn to whatever currency is handy in order to be able to continue to purchase goods and to trade.

We are in the electronic age. We are also seeing the EU and U.S. heading in a direction that is marked with increasing controls on the capital held by their citizens. Therefore, the ideal currency would be an electronic one. No more paper notes in the wallet, no more coins in the pocket; just a plastic debit card to take care of all purchases.

All purchases. Whether the purchaser buys something as major as a car or as insignificant as a Cadbury bar, the card would be used for every monetary transaction.

This, of course, is a handy solution to the fuss of dealing with what was formerly regarded as money. But there is an extra advantage—quite a major one, in fact—to the government. It now has a record of every single transaction that you make. There could be no "under the table" transactions, as only the debit card would represent currency.

Of course, a bank would be needed to handle the transactions. The bank would receive your electronic paycheck directly from your employer, and you would spend what you had in your account. The bank would be the central clearing house though which all your financial transactions took place.

An extra advantage to the government would be that they would no longer need to chase their citizens for taxation. Since they had a full record of every penny you earned and spent, they could advise you of the amount of your tax obligation and simply deduct it periodically. If you presently pay tax annually, the deductions could be broken up—say, monthly, or even weekly.

And the tax need not be under one heading. Just as your bank now lists a host of confusing charges on your credit card, so the government may have a wide variety of confusing and even redundant taxes that it deducts on a regular basis. Just as with the bank, the rates for each tax might go up or down (but mostly up) without explanation. (The more numerous the tax categories and the greater the frequency of deductions, the more confusion and, therefore, the fewer the complaints.)

How Does All This Fit Together?

 

Let's go back to the ECB. If a negative interest rate exists, the bank no longer pays you interest to encourage you to keep your money with them. They now control all your monetary transactions, and you cannot function without them. The servant has become the master. Therefore, it would not be possible to cease to use the bank for your transactions, should their "negative interest rates" start to climb.

At this point, the government and the bank would, between them, control your money totally. You would find yourself, in effect, "owned by the company store." It's even possible that bank fees and tax rates could be increased as your income increased, so that you might never be able to truly save money, invest, or indeed, act independently of your "owners." The flow of your money would have become centralized, and you could not function without them.

Of course, this is all theory. Surely, this could not come to pass, because people inherently do not wish to be enslaved.

And yet it happened on a wholesale basis in Kentucky and other mining areas in the US. So the question really is, "How did it become possible that people in mining towns volunteered for their own slavery?"
First there was a depression. Many people lost their jobs and their incomes and were prepared to do anything in order to feed their families. So they signed up for the only game in town: the mines. It was dangerous work, there were no benefits, and the coal dust would kill a miner after a time. But as long as he lived, his family had enough to eat. He accepted the deal, because (again) it was the only game in town.

So, back to the present day, where the Greater Depression will soon be on us in full force. A large percentage of jobs will be destroyed, but in addition, this time around, the currency will also be destroyed. In order to pay for goods, particularly food, people will do whatever they have to, to obtain currency. Desperate times, indeed.

But there's a light at the end of the tunnel! The government has chosen to eliminate bank notes and coins, as they ultimately proved to be so destructive. Never again will this be allowed to happen. The new Electronic Currency System will ensure that all money is centrally managed.

The press will declare the new system brilliant, and the harder an individual has been hit by the Greater Depression, the more quickly he will jump on board. The greedy rich have all but destroyed his life, and his government, like a knight in shining armour, has come to save him. Like the miner, he will not be musing on how this will all play out over the decades; he will opt for the promise of relief for his family now.
If this all plays out as described above, it will not be just Kentucky, but entire nations.

Editor's note: The day after this article was written, the ECB announced the introduction of a negative interest rate: 0.1% on deposits. As predicted, the media have already begun to the praise the measure.

To see what the consequences of economic mismanagement can be, and how stealthily disaster can creep up on you, watch the 30-minute documentary, Meltdown America. Witness the harrowing tales of three ordinary people who lived through a crisis, and how their experiences warn of the turmoil that could soon reach the US. Click Here to Watch it Now.



"How the 'World's Worst Trader' Went from Crippling Loss to Consistent Daily Profits...And How You Could Do It Too!"


Sunday, June 15, 2014

The Age of Transformation

By John Mauldin


One of the many luxuries that my readers have afforded me over the years is their willingness to allow me to explore a wide variety of topics. Not all writers are so blessed, and their output and responses to it tend to stay focused on specific, often quite narrow topics. While this approach allows them to dig very deep into particular subject matter, it can reduce the total scope of their research, vision, and advice. But don’t get me wrong; these types of letters are very important. I benefit greatly from being a subscriber to a number of letters that give me detailed analysis for which I simply don’t have the time to do the research. There’s just too much going on in the world today for any of us to be an expert in more than a few areas.

I seem to find the most enjoyment and elicit the best response when I try to give my readers the benefit of my broad scope of reading and research as I try to figure out how all the various and sundry pieces of the puzzle fit together. For me, the world is just that: a vast and very complex puzzle. Trying to discern the grand themes and detailed patterns as the very pieces of the puzzle go on changing shape before my eyes is quite a challenge.

To try to figure out which puzzle pieces are going to have the most influence and impact in our immediate future, as opposed to languishing in the background, can be a frustrating experience. I often find myself writing about topics (such as a coming subprime crisis or recession) long before they manifest themselves. But I think it is important to see opportunities and problems brewing as far in advance as we can so that we can thoughtfully position ourselves and our portfolios to take advantage.

Today I offer some musings on what I’ve come to think of as the Age of Transformation (which I have been thinking about a lot while in Tuscany). I believe there are multiple and rapidly accelerating changes happening simultaneously (if you can think of 10 years as simultaneously) that are going to transform our social structures, our investment portfolios, and our personal futures. We have had such transformations in the past. The rise of the nation state, the steam engine, electricity, the advent of the social safety net, the personal computer, the internet, and the collapse of communism are just a few of the dozens of profound changes that have transformed the world in which we live.

Therefore, in one sense, these periods of transformation are nothing new. I think the difference today, however, is going to be the simultaneous nature of multiple transformational trends playing out within a very short period of time (relatively speaking) and at an accelerating rate.

It is self evident that failure to adapt to transformational trends will consign a business or a society to the ash can of history. Our history and business books are littered with thousands of such failures. I think we are entering one of those periods when failing to pay close attention to the changes going on around you could prove decidedly problematical for your portfolio and fatal to your business.

This week we’re going to develop a very high-level perspective on the Age of Transformation. In the coming years we will do a deep dive into various aspects of it, as this letter always has. But I think it will be very helpful for you to understand the larger picture of what is happening so that you can put specific developments into context – and, hopefully, let them work for you rather than against you.

We’re going to explore two broad themes, neither of which will be strange to readers of this letter. The first transformational theme that I see is the emerging failure of multiple major governments around the world to fulfill the promises they have made to their citizens. We have seen these failures at various times in recent years in “developed countries”; and while they may not have impacted the whole world, they were quite traumatic for the citizens involved. I’m thinking, for instance, of Canada and Sweden in the early ’90s. Both ran up enormous debts and had to restructure their social commitments. Talk to people who were involved in making those changes happen, and you can still see some 20 years later how painful that process was. When there are no good choices, someone has to make the hard ones.

I think similar challenges are already developing throughout Europe and in Japan and China, and will probably hit the United States by the end of this decade. While each country will deal with its own crisis differently, these crises are going to severely impact social structures and economies not just nationally but globally. Taken together, I think these emerging developments will be bigger in scope and impact than the credit crisis of 2008.

While each country’s crisis may seemingly have a different cause, the problems stem largely from the inability of governments to pay for promised retirement and health benefits while meeting all the other obligations of government. Whether that inability is due to demographic problems, fiscal irresponsibility, unduly high tax burdens, sclerotic labor laws, or a lack of growth due to bureaucratic restraints, the results will be the same. Debts are going to have to be “rationalized” (an economic euphemism for default), and promises are going to have to be painfully adjusted. The adjustments will not seem fair and will give rise to a great deal of societal Sturm und Drang, but at the end of the process I believe the world will be much better off. Going through the coming period is, however, going to be challenging.

“How did you go bankrupt?” asked Hemingway’s protagonist. “Gradually,” was the answer, “and then all at once.” European governments are going bankrupt gradually, and then we will have that infamous Bang! moment when it seems to happen all at once. Bond markets will rebel, interest rates will skyrocket, and governments will be unable to meet their obligations. Japan is trying to forestall their moment with the most breathtaking quantitative easing scheme in the history of the world, electing to devalue their currency as the primary way to cope. The U.S. has a window of time in which it will still be possible to deal with its problems (and I am hopeful that we can), but without structural reform of our entitlement programs we will go the way of Europe and numerous other countries before us.

The actual path that any of the countries will take (with the exception of Japan, whose path is now clear) is open for boisterous debate, but the longer there is inaction, the more disastrous the remaining available choices will be. If you think the Greek problem is solved (or the Spanish or the Italian or the Portuguese one), you are not paying attention. Greece will clearly default again. The “solutions” have so far produced outright depressions in these countries. What happens when France and Germany are forced to reconcile their own internal and joint imbalances? The adjustment will change consumption patterns and seriously impact the flow of capital and the global flow of goods.

This breaking wave of economic changes will not be the end of the world, of course – one way or another we’ll survive. But how you, your family, and your businesses are positioned to deal with the crisis will have a great deal to do with the manner in which you survive. We are not just cogs in a vast machine turning to powers we cannot control. If we properly prepare, we can do more than merely “survive.” But achieving that means you’re going to have to rely more on your own resources and ingenuity and less on governments. If you find yourself in a position where you are dependent upon the government for your personal situation, you might not be happy. This is not something that is going to happen all of a sudden next week, but it is going to unfold through various stages in various countries; and given the global nature of commerce and finance, as the song says, “There is no place to run and no place to hide.” You will be forced to adjust, either in a thoughtful and premeditated way or in a panicked and frustrated one. You choose.

I should add a note to those of my readers who think, “I don’t have to worry about all this because I am not dependent on Social Security.” Wrong. A significant majority of the retiring generation does depend on Social Security and also on government controlled healthcare, and their reactions and votes and consumption patterns will have an impact on society. Ditto for France, Germany, Italy, and the rest of Europe. The Japanese have evidently made their choice as to how to deal with their crisis. If you are a Japanese citizen and are not making preparations for a significant change in your national balance sheet and the value of your currency, you have your head in the sand.

There’s no question that the reactions of the various governments as they try to forestall the inevitable and manage the crisis will create turmoil and a great deal of volatility in the markets. We have not seen the last of QE in the U.S., but Japan is going gangbusters with it, and it is getting fired up in Europe and China.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best selling author, and Chairman of Mauldin Economics – Please Click Here.



Sign up for one of our Free Trading Webinars....Just Click Here!


Thursday, June 12, 2014

Too Good to Be True? Legally Avoid Paying Income Tax

By Louis James, Chief Metals & Mining Investment Strategist

When you hear about strategies that claim to legally allow U.S. citizens to avoid having to pay income tax, the first thing that probably comes to mind is that it’s some sort of cockamamie scheme.The U.S. government is no slouch when it comes to shaking down its citizens for every penny. It would be foolish in the extreme to think you could slip one past them.

There really was no sure way to legally escape the suffocating grip of the U.S. government besides death and renouncing your U.S. citizenship…...until recently. A new option has emerged that allows Americans to significantly reduce or eliminate income tax altogether. At first it sounds impossible, but as Casey Research’s Chief Metals and Mining Strategist Louis James has found out for himself, this is 100% real and legitimate.

And for many Americans, including individuals operating on a modest scale, it could really be game changing. The video below is a recent presentation Louis gave on this jaw dropping opportunity. If you are at all interested in keeping more money in your pocket, you won’t want to miss it.




Puerto Rico’s Stunning New Tax Advantages is the authoritative guide on the Puerto Rico option. It’s been reviewed by dozens of professional sources in Puerto Rico and the mainland U.S., including top law firms and accountants. It’s an A-Z guide with information you won’t find anywhere else. If you’re considering taking advantage of these incentives, get started with this guide. It will save you a lot of time and money in the process. Click Here to Learn More.



Sign up for one of our Free Trading Webinars....Just Click Here!


Wednesday, June 11, 2014

What Casey Research Staff Are Buying This Summer

By Jeff Clark, Senior Precious Metals Analyst

I ran across a business show last week that advertised that its guests would give out stock picks. That piqued my curiosity, so I watched to see what they would recommend. For disclosure purposes, a chart was shown that listed if the speaker, his family, his fund, or his clients owned the stock. By the end of the show, I was flabbergasted—not one speaker owned any stock they recommended!

Anyone can go on television and tell investors company X is a great investment, but how much should you trust them if they don’t follow their own recommendations? The counterargument is that the speaker could be biased if they recommend stocks they already own because then they’re just “talking their book.” True enough.

But consider a more personal situation: If you got specific investment advice from a professional you hired and found out he never bought what he told you to buy, how seriously would you take his advice?
What if a newsletter service recommended you buy gold and gold stocks, but their editors didn’t follow their own advice? And what if the market retreated and they encouraged you to average down—but they didn’t?
In the June BIG GOLD, I told subscribers to put the final touches on their precious metals portfolio over the summer, to take advantage of low prices. Do I take my own advice? What about the rest of our staff? And what about those at Casey Research who write non gold publications?

I decided to poll our editors to see if they follow the advice in BIG GOLD and International Speculator and what they plan to buy this summer in the precious metals arena. Here’s what they told me…
Doug Casey, Chairman: Most everything is overpriced, thanks to the Fed’s unprecedented money printing. That includes stocks and property, and bonds are in a bubble. So I continue to buy the metals consistently, and do private placements in deserving companies. The metals and mining stocks are about the only value out there.

Olivier Garret, CEO: I am definitely not reducing my exposure to precious metals [PMs] and stocks. I will add to my positions in PMs at Hard Assets Alliance. Our funds, of which I am a large shareholder, continue to deploy capital in the best-of-breed resource companies.

David Galland, Managing Director: Over the last year, I have been taking full advantage of the softness in the precious metals sector by concentrating my purchases only on the best of the best precious metals stocks, deciding on a price I am thrilled to pay and then waiting for the price to come to me. I have also been very selective in participating in private placements. If a private placement doesn’t come with a very favorably priced warrant with an expiration date at least three years out, giving the company time to take its business to the next level, then I’m simply not interested. That’s the beauty of periods of consolidation—you can afford to be selective.

I also like to build large positions in companies which I know have the right stuff, including a significant and feasible project as well as the money and the management needed to get the job done. When those companies pull back—as they invariably do in markets such as these—I have no reservations about buying more. Pretium Resources falls into that category. My personal upside target is over $15, so buying at these levels is a no-brainer for me. That said, I’m not greedy, so when I get a solid double-digit return on a stock, I’m happy to take a profit.

I guess when it comes down to it, now that I live most of the year in my version of paradise—La Estancia de Cafayate—and dedicate much of every day to fully enjoying the place, I try to keep things simple. Primarily, by setting aside a couple of hours each month to review my portfolio in order to make sure I still understand why I own all the investments I own and to rebalance any positions that have grown outside of my comfort zone, or pulled back, allowing me to continue to build a position. In the case of precious metals-related investments, I am very comfortable with them totaling about 25% of my overall portfolio.

Dan Steinhart, Managing Editor, The Casey Report: I have all the physical metal I want for now, and I averaged down on a couple junior miners in the last few months. For this summer, I’m looking hard at mid- and large-tier dividend payers. I want more exposure to gold because I’m confident it’s going to the moon, but I have no idea how long it will take to get there. Collecting dividends helps offset the opportunity cost while I wait. I already own a good amount of Goldcorp, so Yamana is my next target… I’m watching its chart for signs that the price has stabilized, and once I see that, I’m ready to buy.

Marin Katusa, Chief Energy Investment Strategist: I am looking to build positions in certain stocks but don’t want to advertise which ones.

Bud Conrad, Chief Economist: Gold is my largest personal position. As I wrote in the April issue of The Casey Report, the world’s financial system is approaching an important rebalancing. New political alignments will undermine the dollar’s special privileges and in turn will elevate gold’s importance.

The petrodollar arrangement will not last forever, and cracks are beginning to form that suggest it may decline faster than most expect. Since the 1970s, Saudi Arabia and OPEC have only accepted dollars for oil. The new $400 billion agreement between Russia and China does not use dollars, and this is a major geopolitical shift that could eventually undermine the reserve status of the dollar. The price of gold could rise into the thousands of dollars very quickly if the petrodollar system fails.

In the meantime, investors should understand that current price weakness comes from short term, big, institutional influence rather than from economic fundamentals. There are big forces that are able to move markets—interest rates, commodities, and stocks. The key movers are the central banks and their closely related big banks. Some international banks are being indicted for illegal activities in LIBOR, foreign exchange, and most recently London bullion fixings. Employees are being fired, some are leaving, and firms are closing some of their trading desks. We even have suspicions about some bankers’ deaths.

The Fed’s massive and not completely revealed actions have been used along with the truly massive derivatives and futures markets as developed and traded by the big banks to distort the traditional economic forces so that big deficits can be managed by keeping rates low. Prices can thus be managed in the short term, and the media continues to support the government’s policies. That high-frequency trading is tolerated as described in Michael Lewis’ book Flash Boys is only the tip of the iceberg of all that is going on.
In the long term, I agree with Doug Casey: we still face the greatest financial collapse ever when the current machinations hit their limits and the deception becomes widely understood.

Dennis Miller, Senior Editor, Miller’s Money Forever: I have a full allocation to precious metals, but I have a growing concern that Obamacare, by design, will ration care for seniors. Pity the poor senior that goes to Panama for treatment because he can’t get it in the US, or the wait is too long, or it’s too expensive—only to realize currency controls have been instituted and he can’t get money out of the country! As a result, I have been using some of the strategies in our Going Global 2014 report to assure that this won’t happen to me or my wife. And gold is part of that strategy.

Nick Giambruno, Senior Editor, International Man: This summer I plan to continue with steady purchases through MetalStream® for gold bullion held in Singapore. I’m also keeping a higher than normal cash reserve for stink bids on juniors. I already have adequate exposure to silver and large producers.

Shannara Johnson, Chief Editor: I buy silver every week through SilverSaver, a metals accumulation program that allows you to save as little as $25 per week. When I get extra money, such as bonuses, I often use a lump sum to buy a larger amount of silver on dips. As Doug Casey says, only metal that you can hold in your hand is really yours, so whenever my SilverSaver account reaches a certain level, I have some of the bullion delivered.

The reason I’m buying silver instead of gold is that it’s more affordable, and also because of the “divisible” part of Aristotle’s criteria for money. If there ever comes a crisis so devastating that paper dollars become worthless and precious metals are used for trade and barter, I imagine that silver bullion coins will be easier to, say, buy food with than gold coins or bars.

I’m very wary of the cancer that is eating away at the heart of America—call it crony capitalism or neo-feudalism—and everything the government and Wall Street do seems to be designed to separate the little guy from his money. I believe precious metals are manipulated, the markets are manipulated, and we saw in Cyprus that nothing is sacred anymore, not even our own bank accounts. I don’t plan to sell my silver unless I have to—it’s a safety net in case things go from bad to worse.

Doug Hornig, Senior Editor: I think quality numismatic coins are the best buy right now, which I’ve focused on, because they’re down 50% or more from their highs, which is a lot more than gold itself. If collectibles rebound as they always have, I’ll do very well. But if not, I still have the value of the underlying asset, gold, which provides a powerful amount of downside protection, and that’s not to be sneezed at.
I don’t buy gold as a speculation; just as an heirloom (hopefully, provided I don’t need it myself) for my kids. So I couldn’t care less about the gyrations of the gold price. Anyone who wants to play those ups and downs is welcome to, and it could be very profitable to do it. It’s just not for me. I’m strictly buy and hold.

Ed Steer, Editor, Gold & Silver Daily: I’m full up on stocks, as I’m still “all-in,” with virtually all of them junior silver producers from BIG GOLD. Right now I’m buying silver—physical metal in hand—as it won’t be at this price forever.

Chris Wood, Senior Analyst, Casey Extraordinary Technology: I just used the bulk of the cash I had budgeted for investing this summer to buy several of the Casey Extraordinary Technology stocks we recently recommended. So I probably won’t do much in the way of precious metals investing this summer, but I definitely plan on it this fall: buying physical gold and silver bullion coins, and setting up an account with the Hard Assets Alliance.

The short term technical picture for gold doesn’t look great, coupled with the dollar strengthening over the past month and yen declining, which is generally bearish for gold. But I honestly don’t care about that at all. The long-term fundamental picture has only improved, save for the small bit of tapering that the Fed has initiated in its bond buying program. Central banks around the world continue to create currency units at a record pace.

And the mid-term outlook for gold looks good too. Even though the dollar has strengthened over the past few weeks, the beginning of the end of the petrodollar system (shown most recently by the China/Russia gas deal) and China’s desire to essentially create a new UN without the US and EU but with Russia and Iran, has to be bullish for gold.

Kevin Brekke, Managing Editor, World Money Analyst: The post-2008/09 financial crisis run-up in gold had everyone from die-hard gold bugs to momentum jockeys riding the price wave. It seemed the trend would never end. Then came the countervailing realities of monetary, currency, and economic interventions, deflationary forces, and—gasp!—profit taking.

The ensuing price volatility in the precious metals sector had the myopic, trade for today crowd scamper to the next hot trade. Yet, the consequences of misguided policies remain unknown, and the excesses that were deployed to resolve them have simply been repressed. The underlying fundamentals are unchanged, and I will not sell my gold and render myself unarmed against the eventual fallout from a delayed day of reckoning.

Louis James, Chief Metals & Mining Investment Strategist: Our household is tight on cash this summer, as we just poured much of our liquidity into buying our new home in Puerto Rico. Still, my wife and I have been going over our budget and plan to buy some stocks, maybe more bullion as well. Which ones will depend on what looks best when we pull the trigger, but adding to our position in BOZ is a high priority, and we’re thinking about SWC, too, as we’ve yet to add exposure to platinum/palladium, and our diversification into that sector in the newsletters seems to be working out even faster than expected.

If the market correction continues and we see the capitulation this summer that was close but never really fully developed last December, I will do all I can to scrounge up more cash to deploy, because I think it will be both life-changing and a once in a lifetime event.

What About Me?

I have been buying tubes of silver Eagles and Maple Leafs every time silver dips to $19.50 or below. I plan to buy the discounted bullion offered in the June BIG GOLD, as well as the new Canadian Howling Wolf. I have full exposure to equities in the precious metals space—but then Louis or Marin will recommend a compelling speculation and off I go turning over couch cushions.

What I have found very rewarding is that by just sticking to a regular accumulation plan, my stash has steadily grown. Given the crises I see ahead, I want to be sure my household can withstand the fallout, which could be ugly if Doug Casey, Bud Conrad, James Rickards, and Jim Rogers are right. The financial crisis in 2008 was a wake up call, and I realized then I probably didn’t have sufficient monetary protection. I feel differently today, thanks to my regular buying habits.

Since I’m in the public eye, I don’t keep any bullion at home—except for a dummy stash. I use several of the services recommended in our Bullion Buyers Guide, that you don’t have to be a high-net-worth investor to use.

Conclusion

What you see above started out as a survey but ended up becoming a great set of precious-metals-related investment advice. I hope you find it helpful.
If you’re interested in precious metals investments, but don’t know where to start, read our free special report, the 2014 Gold Investor’s Guide. It tells you how and when to buy gold and silver bullion… what to watch out for when investing in gold stocks… and much more. Click Here to Get it Now.

The article What Casey Research Staff Are Buying This Summer was originally published at Casey Research


Great new video "E-Mini Success 2.0 Formula"....Just Click Here!


Tuesday, June 10, 2014

Can Central Planners Revive China’s Economic Miracle?

By John Mauldin

For years, when asked whether I thought China would experience a hard landing, I would simply answer, “I don't understand China. Making a prediction would be pretending that I did, so I can’t.” The problem is that today China is the most significant macroeconomic wildcard in the global economy. To understand both the risks and the potentials for the future you have to reach some understanding of what is happening in China today. Last week we started a two part series on what my young associate Worth Wray and I feel is the significant systemic risk that China poses to global growth.

The first thing in my inbox this morning here in Tuscany was a note from a friend about the growing scandal in Quingdao. For a long time many of us have known that there has been “double counting” in the commodities trade sector in China, where local “entrepreneurs” create multiple warehouse receipts on which to borrow money cheaply, and then invest in what are essentially subprime securities that pay higher rates. Everyone “knows” that the government is not going to let anyone lose money on investments, so what could possibly go wrong? It turns out that Chinese warehouse officials are now emigrating in significant numbers to parts unknown around the world, armed with only their passports and whatever money they made through producing such bogus receipts.

My sources suggest that the size of the problem is approaching $1.3 billion (far greater than the number being bandied about in public reports). Since one of the guiding principles operative in any scandal is that there is never just one cockroach, I expect the ultimate losses to be far larger. And it appears that the People’s Bank of China is finally going to let people lose money on these fraudulent schemes. Good for them. But to suggest there is no risk in cleaning up corruption and fraud misses the point of our own subprime crisis. In a world where global economic trade and international banks are so intricately linked, trying to determine the actual risk to the system is difficult. And as I will note in my “final thoughts” section, corruption is a very real issue.

We are going to try gamely to finish with China today, having left at least three or four letters worth of copy on the editing floor. There is just so much information and misinformation to cover. I’m going to turn it over to Worth and then follow up with a few final thoughts of my own. (Please note that this letter will print exceptionally long as there are a number of charts and other graphics.) Now let’s do a deep dive into part two.

Can Central Planners Revive China’s Economic Miracle?

By Worth Wray
In my Thoughts from the Frontline debut this past March (“China’s Minsky Moment?”), I highlighted the massive bubble in Chinese private-sector debt and explored the near-term prospects for either (1) a reform-induced slowdown or (2) a crisis-induced recession. Unfortunately, it was not an easy or straightforward analysis, considering the glaring inconsistencies between “official” state compiled data and more concrete measures of all real economic activity, which is why I suggested that China is simultaneously the most important and most misunderstood economic force in the world today.

With the stakes now higher than ever, I returned to Asia’s “miracle” last week (“Looking at the Middle Kingdom with Fresh Eyes”) and probed deeper into the shadows (including China’s shadow banks) with the help of my new friend Leland Miller and a few illuminating excerpts from his Q1 2014 China Beige Book (the largest and most comprehensive survey series ever conducted on a closed or semi-closed economy).
Pulling back the Bamboo Curtain, Leland’s data revealed aspects of the Chinese economy that John and I could have only guessed at before, giving us a rare opportunity to explore regional contrasts in Chinese economic activity, to survey the modest (but still insufficient) rebalancing among sectors, and to identify a series of pressure points within the credit markets that suggest last summer’s interbank volatility may return in 2014.

Unfortunately, Leland’s key insights confirmed our fears that China’s consumption-repressing, debt-fueled, investment-led growth model is slowing down and starting to sputter… but not collapsing (at least not yet). 

What happens next – with huge implications for global markets – depends largely on the economic wisdom and political resolve of China’s central planners, who must find a way to gradually deleverage overextended regional governments and investment-intensive sectors while also rebalancing the national economy toward a consumption driven growth model.

Finessing the challenges will require not just one but a series of miracles.

Like Every Other Investment-Driven Growth “Miracle” 

After 34 years of booming economic growth averaging over 9% per year (the longest sustained period of rapid economic growth in human history), China’s credit-fueled, investment-driven growth model is exhausted and increasingly unstable. As you can see in the chart below, the Middle Kingdom’s credit boom is well past the point of diminishing marginal returns; and no one can deny that the misallocation is widespread, with capacity utilization now below 60%. (I should also note that Societe Generale’s Wei Yao has consistently published some of the best research on China in recent quarters; personally, I won’t be surprised to see her vault to rock-star status as the People’s Republic decelerates.)


Source: Wei Yao & Claire Huang, “SG Guide to China Reform.” Societe Generale Research, May 14, 2014.

Moreover, state perpetuated distortions in the cost and availability of financing are (1) funneling huge amounts of capital toward increasingly unproductive, state directed investments, and (2) pushing household and private business borrowers into the shadows, where the burden of substantially higher interest rates drags on household consumption.


Source: Wei Yao & Claire Huang, “SG Guide to China Reform.” Societe Generale Research, May 14, 2014.

It doesn’t require much imagination to connect the dots. Structural distortions in Chinese financial markets are a major cause of debt fueled overinvestment; and without sweeping structural reforms (along with a major crackdown on corruption at all levels of government), captive capital will continue to flow toward unproductive investments, capacity utilization will continue to fall, and China’s investment boom will continue its march toward a mega Minsky moment.

This kind of structural distortion is a classic symptom of an overextended investment boom and a warning sign that rebalancing – whether it’s induced by voluntary reforms or an involuntary debt crisis – will not be easy. The critical adjustments – gradual deleveraging and structural rebalancing – will require a greater slowdown in economic growth and a sharper fall in still-bubbly asset prices than China’s policymakers are letting on.

“This is not an easy task,” The Daily Telegraph’s Ambrose Evans Pritchard says, in a truly brilliant article published this week, “not least because land sales and taxes make up 39% of state revenue in China, and the property sector employs 20% of workers one way or another. It is clearly a bubble of epic proportions and already losing air. Mao Daqing from Vanke – China’s top developer – says total land value in Beijing has been bid up to such extremes that is on paper worth 61.6pc of America’s GDP. The figure was 63.3pc for Tokyo at the peak of the bubble in 1990.” Yikes.

As Peking University professor Michael Pettis explains in his 2013 book, Avoiding the Fall: China’s Economic Restructuring, “Every country that has followed a consumption-repressing, investment-driven growth model like China’s has ended with an unsustainable debt burden caused by wasted debt-financed investment. This has always led to either a debt crisis or a lost decade of very low growth.”
China’s “miracle” is no different from any other investment-driven growth binge where high levels of leverage (directly or indirectly paid for by the household sector), combined with high levels of fixed investment, eventually result in excessive and unsustainable debt loads. Pettis elaborates:

While these policies can generate tremendous growth early on, they also lead inexorably to deep imbalances. As demonstrated by the history of every investment-driven growth miracle, including that of Brazil, high levels of state-directed subsidized investment run an increasing risk of being misallocated, and the longer this goes on the more wealth is likely to be destroyed even as the economy posts high GDP growth rates. Eventually the imbalances this misallocation created have to be resolved and the wealth destruction has to be recognized. What’s more, with such heavy distortions imposed and maintained by the central government, there is no easy way for the economy to adjust on its own…. [Furthermore], Beijing [will] not be able to raise the consumption share of GDP without abandoning the investment-driven growth model altogether.

In other words, the world’s second largest economy is approaching its debt limit and the end of the line for investment led growth… but China’s financial system is structurally designed to prevent capital from flowing freely toward more productive uses. One way or another, the world’s largest contributor to global economic growth must slow down – either because Beijing has the foresight, resolve, and political capital to pursue aggressive economic and financial market reforms or because party elites fail to address the country’s structural imbalances and policy-induced distortions before the credit bubble pops. “Debt,” Pettis explains, “as we will learn over the next few years in China, has always been the Achilles’ heel of the investment-driven growth model…”

Which Way to Sustainable Growth?

Among the various reforms set forth in last November’s Communist Party Third Plenum, ranging from financial liberalization to a crackdown on corruption and pollution, the most challenging is the gradual deleveraging of the Chinese economy while simultaneously rebalancing the national economy toward a more sustainable, consumption-driven growth model.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics – Please Click Here.



Sign up for our new "2.0 Mentoring Program"....Just Click Here!


Stock & ETF Trading Signals