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Why QE Can Never End

Posted by John Rubino - DollarCollapse.com

on Wednesday, 31 July 2013 21:47

The Fed just made an announcement that the markets liked:

Fed stays on track with bond buying, for now
WASHINGTON (Reuters) – The Federal Reserve said on Wednesday the economy continues to recover but is still in need of support, offering no indication that it is planning to reduce its bond-buying stimulus at its next meeting in September.

The central bank said after a two-day meeting that it would keep buying $85 billion in mortgage and Treasury securities per month in its effort to strengthen an economy that it said was still challenged by federal budget-tightening. It also pointed to a recent run up in mortgage rates.

In a post-meeting statement, policymakers described economic activity as having expanded at a “modest” pace in the first half of the year. They had called the recovery “moderate” after their last meeting in June.

In another departure, the Fed’s policy-setting committee signaled some concern about the low level of inflation.

“The committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term,” the Fed said.

 

Why the cautious tone when just a few months ago “tapering” was a sure thing by yearend? Because this morning’s GDP report was, as usual, much weaker than it looked. Here’s a quick summary from Consumer Metrics Institute: 

The new set of numbers for the 2nd quarter of 2013 in fact show weaker growth than previously reported numbers for the 1st quarter, but through the magic of historic revisions the headline (and the press release) can now tout quarter-to-quarter economic improvement — which should excite any markets that are blindly eager for good news, even if that good news is constructed from a revisionist history.

Unfortunately, we can’t ignore a pattern of significant downward revisions to recent past data — suggesting a deeply rooted positive bias in the BEA’s “real time” reporting, including each of the prior four quarters. Even the number published just last month was revised materially downward by -0.64% (i.e., over a third of the previously reported growth has vanished).

 

Among CMI’s other points:

 

  • The inflation number used to arrive at 2Q GDP is biased, and using a realistic deflator would yield a much lower growth number.
  •  A big part of 2Q growth came from rising government spending, which, in light of the debt ceiling debate, Detroit’s bankruptcy and Chicago’s recent downgrade probably isn’t a good bet going forward.
  • Rising inventories, which move growth from the future into the present. Higher inventories today mean less production tomorrow. See American automobile glut: cars are piling up.

 

Even if we accept all the fluff in today’s numbers, a chart of recent GDP growth shows a hard stall, not a take-off. The Fed knows all this and has now completely walked back its talk of lowering its asset purchases. QE will go on until the market, not government, puts a stop to it.

GDP-Q2-2013

 

Did Wall Street Miss A Bribe Payment?

It’s hard to know which aspect of today’s world future historians will find most appalling. But the fact that during the greatest financial crime spree ever, not a single major Wall Street executive has gone to jail has to rank right up there.

…..read more HERE

Investing After QE: Strategies for Profiting from a Distorted Reality

Posted by Chris Berry via The Gold Report

on Wednesday, 31 July 2013 19:59

Chris Berry’s Strategies for Profiting from a Distorted Reality: Investing After QE

Quantitative easing has created new problems for commodity investors—the systemic distortion of true supply-demand for commodities. What is a long-term investor to do? In this interview with The Gold Report, Chris Berry, founder of Mountain House Partners, explains what specific factors make a compelling junior miner in this market and lays out his strategy for profiting from a QE-distorted reality.

The Gold Report: After months of financial media coverage, investors are suffering from quantitative easing (QE) overload. At this point, what’s important for investors to know about QE?

Chris Berry: QE appears to be one of the last arrows in the quiver of central bankers in the U.S., the Eurozone and Japan to try and resuscitate the global economy. Successive rounds of QE have failed to ignite demand, which was the stated purpose. Currently, a great deal of economic data supports a deflationary rather than inflationary view.

The Federal Reserve would love to create inflation, as this is the intended effect of easy money from the QE programs. So far, however, the most prevalent inflation we have is asset price inflation rather than in wage growth. This is not what the Fed wants. We’re not seeing the “demand pull” inflation typically found when demand is outpacing supply. The two biggest overhangs in the U.S. economy right now are structurally high unemployment and a cratering velocity of money.

Berry7-31-chart1

This has implications for productivity and demand worldwide. Personal balance sheet deleveraging must continue and will not happen overnight. Fed Chairman Ben Bernanke has clarified his intention to taper QE with the eventual goal of ending it outright. So it’s less a question of “if” QE will end, but “when.” The Fed wants the U.S. economy to stand on its own two feet and Bernanke’s public jawboning is, I think, testing the market’s readiness for the official end to monetary easing.

The spike in government bond yields and the increased volatility in the equity markets are signals that market participants are concerned about the end of QE. I still think the huge slack we see in the U.S. economy in aggregate demand has not diminished enough to end QE or similar programs like Operation Twist. Bernanke is walking a tightrope, as QE must end at some point but not too soon as to choke off a tenuous recovery in the U.S. economy.

Berry7-31-chart2

TGR: Do you believe in “QE to infinity”? Or do you take him at his word that QE will be withdrawn at some point?

CB: QE will end in its current form because it has to. QE distorts the markets in many ways. One example is artificially low interest rates that give a false sense of security to market participants. The Fed’s stated target is unemployment below 6.5% or inflation above 2.5%. We’re not near either and Bernanke has acknowledged as much in recent statements to the U.S. Congress. Depending upon which Fed governor is speaking, there are different interpretations of where to go from here. This idea of a divided Fed vis-à-vis monetary policy is only adding to uncertainty in the markets.

TGR: What do you expect from the commodity markets as QE is removed?

CB: The only certainty is increased volatility until market participants can clarify the supply and demand dynamics in the absence of QE distortions. As an example, if aggregate demand remains subdued in the absence of QE, this will be negative for industrial metals like lithium, copper or graphite. Similarly, energy prices would also likely remain subdued. Conversely, if QE successfully increases demand and ignites inflation, we could see energy price spikes, which could hamper a global economic recovery.

I realize that I’m waffling a little bit here. Commodity pricing is dependent upon numerous factors, but the ultimate success or failure of QE is crucial to the health of the commodity markets, for sure.

TGR: QE has created several feedback loops that investors could react to in the short term, but that longer term investors might want to ignore. Is that why you’re writing about heading to the sidelines as a commodity investor for a few months?

CB: Yes. I recently wrote to subscribers that I was taking a pause in actively investing, and I’m going to re-evaluate this call in late Q3/13, so this is not an indefinite move. It’s also undeniable that there are some extraordinarily cheap companies in the junior mining space right now, but it doesn’t mean that they can’t get cheaper. Coupled with the fact that I view the global economy as essentially treading water right now, I’m just not compelled to aggressively buy shares in the market. Later this year, we’re going to know more from the Fed about its intentions on tapering QE and the trajectory of China’s slowdown in growth. These are two major catalysts in the marketplace.

Looking to year-end, investors should remember tax-loss selling may pressure the sector. Things may be cheap now, but they could get cheaper. If you’re a longer term investor, there is no harm in being on the sidelines. Rather than actively accumulating shares, my current focus is due diligence on a number of companies and metals. That includes reviewing economic data, technological advancements, and listening to clues from CEOs on earnings calls.

TGR: Besides low geopolitical risk, what does your ideal mining investment look like?

CB: Given the challenging environment for the junior mining industry today, it is critical that a company focus on its financial sustainability. A strong balance sheet and the ability to prudently manage cash in the face of declining or stagnant metals prices are absolutely crucial. Management must be able to execute its plans effectively and push forward with an effective exploration or development program—despite the current market sentiment. Management teams can’t control the price of gold or copper, for example, and therefore need to focus on cost control and finding opportunities in parts of the world with a record of being mining friendly. Nevada, which produces 80% of U.S. gold, is an excellent example.

TGR: What are the most important factors in selecting a junior mining investment?

CB: First and foremost is the management; its depth of experience is crucial. Second, as I mentioned, is the financial sustainability of the company. Third is the geopolitics. I like Nevada because of the well understood permitting process and respect for the rule of law. I have three favorites in Nevada that I like for different reasons—Terraco Gold Corp. (TEN:TSX.V), Midway Gold Corp. (MDW:TSX.V; MDW:NYSE.MKT) and Pershing Gold Corp. (PGLC:OTCBB).

TGR: Let’s start with Terraco. What is the opportunity?

CB: Terraco has sound leadership in CEO Todd Hilditch, as well as very experienced geologic knowledge in Charlie Sulfrian and Dr. Ken Snyder. Terraco is focused on two projects, one in Nevada called Moonlight, which is 8 kilometers north of Coeur Mining Inc.’s (CDM:TSX; CDE:NYSE) Rochester mine, and one in Idaho called Almaden, which contains a Measured resource of 239,000 ounces (239 Koz) gold, an Indicated resource of 625 Koz gold and an Inferred resource of 84 Koz gold.

However, to me the most interesting asset is a royalty Terraco has. This is a net smelter return (NSR) royalty of which Terraco has an option on and owns a portion of up to 3% on the Spring Valley deposit, which Midway Gold and Barrick Gold Corp. (ABX:TSX; ABX:NYSE) are jointly developing. Valuing a royalty is a subjective exercise. My analysis indicates that the value of the Spring Valley royalty could be larger than Terraco’s current market cap. To be clear, this is based only on my own assumptions, but it’s one of the main reasons I think Terraco is undervalued. It is early days for the company, and I see a lot of unrealized value here.

TGR: Why is Pershing a favorite?

CB: Pershing is to the south of both Terraco and Midway on the Humboldt range. Pershing is substantially derisked relative to a number of other gold exploration and development plays. The company is consolidating a land package with a past-producing mine called Relief Canyon. It’s run by Steve Alfers, who has a background as chief of U.S. operations at Franco-Nevada Corp. (FNV:TSX; FNV:NYSE). He has a wealth of experience across the entire mining value chain. Relief Canyon was a past-producing, open-pit mine with low operating costs. The processing facilities at Relief Canyon are fully permitted and refurbished, which lowers the capital expenditures (capex) to get to production.

Relief Canyon has an NI 43-101 in-pit resource of approximately 463 Koz gold in the Measured and Indicated (M&I) categories and approximately 101 Koz in the Inferred category, with additional growth potential. For those investors who take solace in a “major” investing in a junior, one should not overlook the strategic partnership Pershing has initiated with Coeur Mining, which owns over 10 million (10M) shares in the company.

TGR: Do you have any concerns with Pershing’s limited cash position?

CB: That is obviously a real challenge for any junior. But given that we know a great deal about the economics of production, and the company has just started a new drill program to increase the size of its resource, this is currently not a concern.

TGR: The other one you mentioned is Midway. Speaking of cash, Midway did a financing at the end of last year and raised at least $70M, so doesn’t that put it in a strong position?

CB: Midway is a great story. This is a company with a pipeline of properties, most of which are in Nevada. It has a fantastic cash position and near-term production in the Pan deposit. Pan has a projected capex of about $99M. The deposit is at surface and suited to open-pit mining methods. The Proven and Probable reserves are approximately 864 Koz gold. It will be a low cost producer. Midway is targeting putting Pan into production in 2014. Additionally, Midway has a joint venture with Barrick at Spring Valley, which I alluded to when discussing Terraco.

Barrick has earned into a 60% interest in the joint venture and has stated that it will spend another $8M to earn up to 70%. The deposit has 2.2 Moz gold M&I and approximately 1.97 Moz gold Inferred. Recent additional drilling has potential to increase the size of this resource in the future. Midway has strong, experienced management in all aspects of mining from exploration through development into production. It also has strong institutional support, attractive project economics and the geopolitical stability of Nevada.

TGR: What is the exit strategy for the juniors that we just discussed? Do they require majors with lots of cash?

CB: The exit strategy hasn’t changed. The typical junior mining company will explore, make a discovery, develop it to a point and then typically try and position it to a major who is looking to add ounces or pounds to its own pipeline at an attractive, economic price point.

What has changed is how the juniors raise the adequate funds to execute this model. Raising small amounts (say $200,000 at a time) through the traditional equity channels is a recipe for failure and a sure way to slowly dilute shareholders into oblivion. Junior mining companies today must become much more creative in how they raise adequate capital. This may include funding from strategic investors such as life insurance companies looking to increase their overall rate of return or investing in royalties.

Failed mergers and acquisitions are a large part of the reason for many mining companies’ CEOs walking the plank recently. Capex on projects got out of hand, and the majors are writing off these projects. Going forward I expect the majors to continue retrenching and writing off assets. That does not bode well for the junior mining sector, but I do believe this is a short-term phenomenon. Ultimately, the major mining companies will need to replace mined ore. That’s why the junior mining sector is a critical part of the whole value chain.

TGR: Thanks for taking the time to talk with us. We look forward to checking in with you in the near future.

CB: It has been a pleasure.

Read Chris Berry’s ideas on investing in rare earth elements and graphite.

Chris Berry, with a lifelong interest in geopolitics and the financial issues that emerge from these relationships, founded House Mountain Partners in 2010. The firm focuses on the evolving geopolitical relationship between emerging and developed economies, the commodity space and junior mining and resource stocks positioned to benefit from this phenomenon. Berry holds a Master of Business Administration in finance with an international focus from Fordham University, and a Bachelor of Arts in international studies from the Virginia Military Institute.

Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

DISCLOSURE: 
1) J. Alec Gimurtu conducted this interview for The Gold Report and provides services to The Gold Reportas an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Terraco Gold Corp., Pershing Gold Corp. and Franco-Nevada Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Chris Berry: I or my family own shares of the following companies mentioned in this interview: Terraco Gold Corp. I personally am or my family is paid by the following companies mentioned in this interview: Pershing Gold Corp. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent. 
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

 

Gold, silver & Newton’s Third Law

Posted by Jan Skoyles - The Real Asset Company

on Wednesday, 31 July 2013 19:28

Paper Gold will soon be priced differently from Physical Gold

J1

Gold, silver & Newton’s Third Law

In the last couple of months we have worked hard to study the gold market and illustrate to readers all of the different parts that make it up. The overriding conclusion is that demand for paper gold and demand for physical gold are two very different phenomena and we believe soon, they will no longer be priced under the same umbrella.

When will this be? Who knows, says Michael Noonan, author of today’s Best of the Web, but should it make any difference to when you decide to buy gold bullion or silver? The futures market, which, for so long as driven the gold price appears to be ‘fraying at the edges’ meaning that the number of chances of getting gold and silver whilst they are so low, are falling each month.

Our clarion call is for the physical market to soon take over the actual price for buying and selling. When, we do not know? Timing is now less critical than actual possession, from this point forward.

The probability of a new low, in futures, may be 50-50. It was much higher a month ago. The odds of successfully picking a bottom are remote. Not to pick on Richard Dennis, but he is a poster boy for losing big time when he tried to pick a bottom in sugar, to the extent of decimating one or a few of his funds. How hard could it have been to lose so much money buying sugar when it was under 5 cents, at the time?

The point is, never think you know more about the market than the market itself. It is for that reason we always say to follow the market’s lead. Too many try to get ahead of it, speculating that it will catch up to one’s brilliant “market timing.” Margin departments are usually the first ones to let the ego-driven speculators know that their [questionable] prescience has gotten a little more expensive, in the process.

The odds of being able to buy physical gold and silver, at current levels, diminish with each passing month. In terms of pricing for buying physical precious metals, [PMs], we are more than likely looking at the lows. The timing for buying and holding as much gold and silver as you can will not be much better than at current prices for a few generations. If anyone wants to pick a bottom in physical gold and silver, the odds are against them.

If silver were to go to $140 the ounce, will it matter if you paid $20 or $24? Same for gold.

Here is how we see it.

If there is one law that is not on any known government’s books, but one that none of them can avoid, it is Newton’s Third Law of Motion: To every action there is always an equal and opposite reaction. All government, Keynesian, and central planner idiots abuse this law profusely, and at the expense of the masses, throughout history. Every once and awhile, it catches up to them, and we stand fortunate enough to be the beneficiaries for decades suppressed prices.

Decades, we say, and not just since the 2011 highs. The New World Order, [NWO] has had marching orders for their central bankers to keep gold prices low, especially since the United States was placed into their receivership hands by Socialist Franklin Delano Roosevelt, in 1933. Price has been steadily rising, ever since, with a few upside bursts that the NWO has tried to contain. That is about to come to an end.

The fiat game has run its course. We also said there is no evidence of a change in trend. That was last week. This week is different.

JPMorgan has been the recognized culprit for suppressing the paper market by naked shorting by the tens of thousands of contracts. It does not matter if others were acting in concert, the intervention was intentional: Scare everyone out of the gold and silver market. It worked, in a small part, pretty much destroying the futures market, and it failed on a grand scale by attracting world-wide pent-up demand for bargain prices of the physical metals. Unprecedented demand!

The natural law of supply and demand has been unnaturally distorted, and the fiat buzzards are about to have their paper asses handed back to them, with their heads still up there. The final push to keep PM prices artificially low has created such a tightly coiled spring that once the pressure lets up, or is forced up, the reaction is going to push gold and silver to levels unknown that will be equal and opposite to the misplaced energy spent keeping them down.

….read page 2 HERE


What’s most significant about the Federal Reserve’s latest statement is what it did not address: tapering bond-buying and future policy guidance.

FORTUNE — After the discomforting volatility of May and June, the Federal Reserve opted today for market tranquility. As a result, two (if not three) consequential decisions are now pushed to September — raising the question of whether the current pursuit of market calm will develop deeper roots in the interim or, instead, come at the cost of greater instability down the road.

The three main things that the Fed told us this afternoon at the conclusion of a two day policy meeting can be read about HERE