Timing & trends

Critical Issues in Global Economies: Dr. Berry’s Presentation to the Federal Reserve

The research for this presentation was the most difficult in  the past 8 years of giving this 3 hour lecture.  There are some bright lights at the end of the Credit Crisis tunnel but still some real challenges such as consumer spending, deleveraging and housing foreclosures. 

1. Banks, Reserves and the Economy 2. Interest Rates  3. Energy Impact: Perhaps the Most Important Factor today 4. Jobs: The Four Letter Word 5. BRICS and Emerging World Growth  6. China: To Be Or Not to Be 7. Critical Economic Players: Consumers and Industry •    8. Currencies: The Race to the Bottom •    9. U.S. Housing 10. Deficits, Debt, Deleveraging, and Moral Hazard 11. Commodities and Their Message 12. Impact on Quality of Life in the West and Emerging Markets 13. Europe on the Verge 14. The Entitlement Conundrum

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Peter Schiff – Gold, Oil & The Fed’s Greatest Fear

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With continued volatility in gold, silver, oil and stocks, today King World News interviewed Peter Schiff, CEO of Europacific Capital.  Schiff told KWN it’s inflation that is causing the move in stocks.  He also discussed gold and the mining shares, but first, here is what Schiff had to say about oil and the situation in Iran:  “I hope we don’t get involved in Iran.  Anytime we get more involved in the Middle-East we create more problems.  Maybe the administration is looking for something to blame the high oil price on, rather than admit it’s excess money printing causing the problem.”



Momentum and sentiment numbers are at levels associated with previous important tops. As noted last week, insider selling has also reached that level. We keep in mind the dramatic Outside Reversal in so many key items on March 8. Some thought it was triggered by Bernanke’s comments on that day.

Our view has been that markets were primed for change, and the reversal was a “heads up”.

Another such dramatic reversal will be critical.


Stock markets have had a very good run. But, in these times there are no long-term trends. Rallies become so compulsive – as do the inevitable sell-offs.

From the troubles of Summer 2010, the S&P rallied 31.7% in nine months.

From the troubles of last August-September the gain has been 30 percent, and counting, in only five months. Fears of October have been forgotten as the favourable season continues. Last week, we noted that firm crude oil prices would “sustain speculative interest in the general stock markets”.

Recent interest is focusing upon Apple, which is a phenomenon, and the banks, which is a caution. The latter (BKX) have enjoyed a sharp rally on almost certain knowledge that the “stress test” would be benign [1]. It should be stressed that the test is a computer model build on macroeconomic assumptions. For more than a decade, Mister Market has shown little regard for such models.

The 13 percent rally in a couple of weeks has driven the RSI to the level reached with the high at 59 last April. That was an important high and the subsequent low was 33 in the gloom of October.

One of the features of important tops is that all sectors may not peak at the same time. Base metal mining stocks (SPTMN) topped in late January and the Transports in early February. The recent high for the Oil Patch was at the end of February.

Overall stock market atmosphere is becoming rather heady.

Credit Markets

At the short-end, spreads stopped narrowing a month ago, but have yet to reverse. At the long end – corporate spreads continued to narrow.

Over in the dreadful world of sub-prime the strong rally from October ended in Early February. The price has declined to a narrow trading range. No break down.

The “saucering” bottom in the twenty-year yield has resulted in a distinctive rise in rates. In so many words, the top is in for the bond contract and the action has rolled over. Some of the decline could be due to firm economic numbers, but it is worth keeping in mind that the long bond has been a huge asset in play and the play appears to have ended.

However, the municipal sector has not been doing well. After registering an Upside Exhaustion in February, the MUB has suffered a sharp decline. Last week, the NPI accomplished a big test of the high set in early February. The three-day decline has been interesting.


Once again, the street is hot on commodities.

Base metals (GYX) enjoyed a good rally to an RSI in early February that has ended recent rallies. The chart is in a narrowing wedge that will likely fail and set the down trend.

Grains (GKX) are still in a modest rise.

Crude is in a favourable season that could run for a number of weeks.


Last week we noted that the dollar was still in the pattern that has led to important rallies. Rising through 80 would be an important step and the action yesterday almost made 81, but needed a little rest. This could run into next week.

Signs of the Times

Last Year:

“Economic Optimism Growing Amongst Brokers”

– Schawb Survey, March 8, 2011

“State of The Stock Market: Bullish Overall”

– Chart Swing Trader, March 21, 2011

“Better-than-expected data on confidence and manufacturing bolstered optimism on the economy.”

– Bloomberg, April 15, 2011

“Temperatures Lowest For Time of Year Since 1940s”

– CBS Chicago, April 20, 2011

This Year:

“Global mining industry remains optimistic that the commodity boom is going to run for years.”

– Financial Post, March 6

“The outlook for global growth is very good for commodities…it’s a good story.”

– Business Day, March 8

“The [stock] bull market that no one believes”

– Huff Post, March 14

Look Out: We can’t expect China to be the engine of global growth


Since 2007 savings have climbed from 50% of GDP to nearly 53% in 2010. During this time investment has climbed from just over 40% of GDP to nearly 49%.  The difference between the two has declined from just over 10% of GDP to just under 4%, and this of course is just another way to say that China’s current account surplus has dropped from just over 10% of GDP to just under 4%.” – Jack Crooks



The department [China’s Organization Department] is plagued by constant tension that bedevils most political systems. The Politburo has striven to professionalize the selection of top officials through the department, while undermining the process at the same time by fixing appointments in favor of loyalist and relatives. Powerful officials presiding over local fiefdoms have swept aside the rules even more crudely, establishing marketplaces in which government positions are bought and sold for huge financial gain.”  

– Richard McGregor, The Party: The secret world of China’s communist rulers


I got a bit of a chuckle out of IMF Chief Christine Lagarde. She recently praised China for its “rebalancing efforts.”  What a pain it must be to have to lie publicly on a regular basis in an effort to keep the key players agreeable so you can attempt to conduct coordinated global policy.      

There is a big gap between Ms. Lagarde’s public PR and reality when it comes to China’s “rebalancing.”  This if from Professor Michael Pettis’ latest missive [my emphasis]:  

China is not rebalancing and the decline in the surplus was driven wholly by external conditions.  In fact until 2010, and probably also in 2011, the imbalances have gotten worse, not better.  

For proof consider China’s total savings rate as a share of GDP relative to China’s total investment rate.  The current account surplus, of course, is equal to the excess of savings over investment – any excess savings must be exported, and by definition the current account surplus is exactly equal to the capital account deficit.  This is the standard accounting identity to which I have referred many times in my newsletters.  

The savings and investment numbers show that the last time investment exceeded savings was in 1993-94, and during that time China of course ran a current account deficit.  This was just before Beijing sharply devalued the RMB, after which it immediately began running a surplus, which has persisted for 17 years.  Since 2007 savings have climbed from 50% of GDP to nearly 53% in 2010. During this time investment has climbed from just over 40% of GDP to nearly 49%.  The difference between the two has declined from just over 10% of GDP to just under 4%, and this of course is just another way to say that China’s current account surplus has dropped from just over 10% of GDP to just under 4%.  

According to Dr. Pettis:  


  • A declining savings rate in China would indicate consumption was rising; which is what everyone seems to want and Ms. Lagarde was likely hinting at.  A falling savings rate would indicate China would not be so highly dependent on investment and export growth.  This process would effectively represent a transfer of wealth back to the household sector i.e. Chinese consumers.


Guess what Ms. Largarde?  China’s savings rate is increasing, not declining.  This is the opposite of rebalancing.   

But many analysts point to the fact that China is pursuing policies to stimulate consumption.  Oh really?  Back to Dr. Pettis:  

Beijing is trying to increase the consumption share of GDP by subsidizing certain types of household consumption (white goods, cars), but since the subsidies are paid for indirectly by the household sector, the net effect is to take away with one hand what it offers with the other.  This is no way to increase consumption.  

Meanwhile investment continues to grow and, with it, debt continues to grow, and since the only way to manage all this debt is to continue repressing interest rates at the expense of household depositors, households have to increase their savings rates to make up the difference.  So national savings continue to rise.  

So why is the current account surplus declining if China’s consumption isn’t taking its place?  Investment continues to increase.  State Owned Industries (SOEs) still enjoy access to cheap credit (this is an effective subsidy by the household sector, i.e. transfer of wealth due to below-market interest rates on deposits; same thing happening in the US in order to subsidize the banking system).  But because SOEs have increased capacity so much in key industries, and profitability has vanished, they are using this cheap credit to move beyond their core businesses, i.e. increasing investment.  This is why many, including us, continue to warn about malinvestment and the hidden ticking debt bomb inside China’s financial system that will be a key reason why Chinese GDP numbers will continue to disappoint in the quarters ahead.     

Sure, we all got excited when Wen Jiabao (considered by the West to be in the “reform” camp)  and his eight other pals, who run China through the Politburo Standing Committee, jettisoned rising star princeling Bo Xilai, a ruthless climber who was quite happy with the current Chinese growth model.  To many, this very public purging indicates the reformers are in charge and a swift change in the Chinese model of export and investment dependence is now in play.   

Well, even if the so-called reformers are in charge, the transition to a consumption model, which by its very nature will require increased individual freedoms, will likely be a much slower process than we would wish for. Any transition will produce a lot of political blowback as the existing order protects its turf, and the Party itself has to worry about being marginalized if it allows its citizens to make their own decisions across the economic sphere.  

The point is this: we can’t expect China to be the engine of global growth given the export-cum-investment model is running out of gas.  And we can’t expect some type of overnight smooth transition to a domestic consumption-driven growth model to save the world.   

China may soon be heading down the right path. It seems they are; and I think that path will be to the economic benefit of all concerned.  But as always, the proof is in the pudding. 

What’s hot, what’s not and loving volatility: Top Analyst Mickey Fulp sounds off at PDAC

 Bullish Uranium ‘We’re using something like 20 to 30% more uranium than we mine and we’re running out of sovereign and utility stockpiles”, Graphite Copper & Gold & Volatility.

 Mickey Fulp, who topped the site’s list of recommended mining bloggers and newsletter writers. In this brief interview on the sidelines of the PDAC convention in Toronto, Fulp touches on gold stocks, current market volatility, and two metals he likes best right now: uranium and graphite.

Andrew Topf: I heard a lot of commentators saying at PDAC that the rally we experienced in January is looking more like a deadcat bounce. Where are we in the markets right now?
Mickey Fulp: It does look like that, but if you look at the venture exchange index it’s up 14% on the year and 2% in February, so we’ve seen a flattening of the market. A lot of that I think has to do with the price of gold, it was down $12 over the course of February. Gold really drives our market, and we were really having a good performance in gold till Bernanke did his little thing and the massive selloff came last week and the price of gold dropped $80 in one day. But anybody that’s unhappy with $1700 an ounce gold shouldn’t be in the gold mining business. There’s plenty of room for margins at $1700 gold.

Andrew Topf: You said recently that investors shouldn’t be afraid of the current volatility. So how should investors play mining stocks right now?
Mickey Fulp: In 2011 it was very common for gold to be up or down $50 in a day, same with the New York Stock Exchange, the Dow to be up 100 points or down 100 points, so that sort of volatility is often driven by fear and panic and greed. Daytraders and professional investors welcome volatility, the lay investor is the one who is intimidated by it, but from my point of view volatility gives multiple exit or entry points in a stock, so my new mantra is embrace volatility. Take emotion out of your trading and embrace the volatility and use it to your advantage.

Andrew Topf: Gold mining stocks are still lagging the price of bullion. Why is that the case and what is it going to take for the disparity to narrow?
Mickey Fulp: What’s really changed in the market is the ETFs. The Gold ETF (GLD) is now the third largest gold holder on the planet. At 2400 tons of gold, that’s a lot of gold. That’s not much less than the yearly supply of mined gold (2800 tons). What that has done for a lot of people is offered a new way to invest in the gold market. Before you either owned physical gold or you played gold stocks. Now you can hold physical gold, you can play gold stocks or you can own the ETF, so I think it’s sucked a lot of money away from the gold stocks and decreased liquidity, decreased volume and decreased prices.

Andrew Topf: You mentioned in your presentation that you like open pittable operations and insitu uranium and copper oxide projects. On the latter, is it simply the lower-cost of these operations that attract you?
Mickey Fulp: They’re environmentally benign, and they’re the lowest cost operations around. All you’re moving around is mineral-laden water and you’re actually cleaning up aquifers so they’re easier to permit, they’re quicker into production. It’s a wellfield not a hole in the ground.

Andrew Topf: How are you feeling about uranium these days?
Mickey Fulp: I remain a uranium bull and it all comes down to uranium fundamentals.We’re using something like 20 to 30% more uranium than we mine and we’re running out of sovereign and utility stockpiles, and the Russians are going to quit converting nuclear bombs to fuel, so there’s a pending shortage of uranium. What Fukushima did is it created supply disruption more than deamdd destruction so if anything the supply is going to decrease.


The Germans took 8 reactors off and now 2 of them are back on. The Japanese have only 2 of 54 reactors currently producing electricity. A lot of that was because of scheduled maintenance and also stress tests and some safety upgrades. There are brownouts in Tokyo and how long can that go on? That whole northeast coast of Japan lost all its industrial capacity so there has been demand destruction but that will come back. I think they’re locked into nuclear power and so my prediction is by the end of the year a significant number of reactors will be back online.

Andrew Topf: What metals are you bullish on right now?
Mickey Fulp: Copper, gold and uranium, and I’ll put graphite into that too.
Andrew Topf: Right, graphite seems to be the belle of the ball right now.
Mickey Fulp: It is, it’s the next big thing it reminds me very much what happened with REEs in 2009. We’re building a bubble in graphite, every snake oil salesman, shark and charlatan is swimming aorund in Coal Harbor in Vanouver right now. Every Vancouver promoter is scurrying around trying to find a shell to throw a graphite project in, so it looks very much like the next big thing. Like other area and commodity plays the juniors will rush in and 95% of them will fail and the ones with good deposits and good business plans will succeed.

Andrew Topf: Do you see any issues with mining and processing graphite?
Mickey Fulp: Well, it doesn’t have any of the processing confusion that happens with the rare earths sector, it’s at all-time high prices right now, and we have a shortage of graphite particularly large flake graphite which is needed in certain applications. The Chinese who supply 70% of the world’s graphite are running out of large flake graphite so the world needs more graphite and the mining and marketing and processing are very straightforward compared to the REE sector.

Andrew Topf: But you mentioned it’s a bubble.
Mickey Fulp: Yes it is a bubble. Let’s go back to the way this business works. 95% of these companies that are listed are doing nothing more than mining the stock market. Look at the Yukon gold play. That’s last year’s story isn’t it? Ultimately there will be successes coming out of the Yukon and we were sitting here last year hearing Yukon gold Yukon gold, and they had a horrible year. We want to wash a bunch of those pretenders out. That’s the way this market works. Anything where there’s a rush in, the good companies realize at first, get the best prospects, the best deposits, then the herd comes running in and becomes the next big thing and everybody has to have an REE project or graphite project or gold play in the Yukon. They rush in and then in a year or two they rush out because they’ve been unsuccessful and then they’re on to the next big thing. The key is to get the contenders. Go in early and find the contenders.

Andrew Topf: Think there will ever be a gold mine built in the Yukon?
Mickey Fulp: Oh sure there will be one or two gold mines built out of this, but it’s a harsh place and there’s little infrastructure, so we’re looking probably 10 years down the road.

Andrew Topf

Andrew Topf

Email: atopf@mining.com“>atopf@mining.com

Andrew Topf on   Google+

Andrew Topf is an editor at MINING.com. With a background in newspaper and trade magazine reporting, Andrew specializes in writing about mining and commodities. He has written for the Black Press newspaper chain in British Columbia, Business in Vancouver, and Baum Publications.

Gold & Silver: Timing and Targets From One of the Best



Continue to look to take delivery of the physical metals on further weakness. The gold/silver snake is coiling. The ‘gangsters’ at the Plunge Protection Team, JP Morgan Chase, and the CME will do their best to drive prices lower, but will get ‘bit’ by a venomous and revengeful market. There will be no tears here.

Gold and silver were recently knocked down to distract from the Greek bond default and that there is a huge movement away from the U.S. dollar as a trade settlement currency. The United States is waging economic nuclear war against Iran and threatening to do the same against India and is likely to suffer similar counterattack against its own vulnerabilities, and a lot more.

We may have hit support levels in both gold and silver, but I am awaiting further confirmation that lows are in place. Such lows may only be trading lows. Recall, we’ve entered a negative ‘seasonal’ time of year for gold and silver that could carry into the summer. There is, however, the possibility of another shot higher into May, but I would hope upside volume would confirm the advent of that move. Except for those of us who are long-term holders or for those who have no positions whatsoever, there is nothing to do here without a renewed upside trigger.

I urge you to subscribe to my VR Gold Letter for much greater detail at www.vrgoldletter.com. Call our office, we can offer you a discount for subscribing to more than one service.

For now, I am as psychologically prepared to see silver at 20 as to see it at 60 in the next twelve months. The big numbers for silver are 26 support and 37.60 resistance. The big numbers for gold are 1521 support and 1792 resistance – above which we could see 2500. As Ed Hart used to say on the old Financial News Network in the 1980s, ‘we will know in the fullness of time’.

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