InvestMacro Forex News

By Laurynas Vegys, Research Analyst, Casey Research

It’s been one of the worst years for gold in a generation. A flood of outflows from gold ETFs, endless tax increases on gold imports in India, and the mirage (albeit a convincing one in the eyes of many) of a supposedly improving economy in the US have all contributed to the constant hammering gold took in 2013.

Perhaps worse has been the onslaught of negative press our favorite metal has suffered. It’s felt overwhelming at times and has pushed even some die-hard goldbugs to question their beliefs… not a bad thing, by the way.

To me, a lot of it felt like piling on, especially as the negative rhetoric ratcheted up. Last year’s winner was probably Goldman Sachs, calling gold a “slam-dunk sale” for 2014 (this, of course, after it’s already fallen by nearly a third over a period of more than two and a half years—how daring they are).

This is why it’s important to balance the one-sided message typically heard in the mainstream media with other views. Here are some of those contrarian voices, all of which have put their money where their mouth is…

• Marc Faber is quick to stand up to the gold bears. “We have a lot of bearish sentiment, [and] a lot of bearish commentaries about gold, but the fact is that some countries are actually accumulating gold, notably China. They will buy this year at a rate of something like 2,600 tons, which is more than the annual production of gold. So I think that prices are probably in the process of bottoming out here, and that we will see again higher prices in the future.”

• Brent Johnson, CEO of Santiago Capital, told CNBC viewers to “buy gold if they believe in math… Longer term, I think gold goes to $5,000 over a number of years. If they continue to print money at the current rate, I think it could be multiples of that. I see a slow steady rise punctuated with some sharp upward moves.”

• Jim Rogers, billionaire and cofounder of the Soros Quantum Fund, publicly stated in November that he has never sold any gold and can’t imagine ever selling gold in his life because he sees it as an insurance policy. “With all this staggering amount of currency debasement, gold has got to be a good place to be down the road once we get through this correction.”

• George Soros seems to be getting back into the gold miners: he recently acquired a substantial stake in the large-cap Market Vectors Gold Miners ETF (GDX) and kept his calls on Barrick Gold (ABX).

• Don Coxe, a highly respected global commodities strategist, says we can expect gold to rise with an improving economy, the opposite of what many in the mainstream expect. “You need gold for insurance, but this time the payoff will come when the economy improves. In the past when everything was falling all around you, commodity prices were soaring out of sight. We had three recessions in the 1970s and gold went from $35 an ounce to $850. But this time, gold is going to appreciate when we start getting 3% GDP growth.”

• Jeffrey Gundlach, bond guru and not historically known for being a big fan of gold, came out with a candid endorsement of the yellow metal: “Now, I kind of like gold. It’s definitely very non-correlated to other assets you may have in your portfolio, and it does seem sort of cheap. I also like the GDX.”

• Steve Forbes, publishing magnate and chief executive officer of Forbes magazine, publicly predicted an impending return to the gold standard in a speech in Las Vegas. “A new gold standard is crucial. The disasters that the Federal Reserve and other central banks are inflicting on us with their funny-money policies are enormous and underappreciated.”

• Rob McEwen, CEO of McEwen Mining and founder of Goldcorp, reiterated his bullish call for gold to someday top $5,000. “We now have governments willing to seize their citizens’ assets. We now have currency controls on the table, which we haven’t seen since the late 1960s/early ’70s. We have continued debasement of currencies. And the economies of the Western world remain stagnant despite enormous monetary stimulation. All these facts to me are bullish for gold and make me believe the price will bounce back relatively soon.”

• Doug Casey says that while gold is not the giveaway it was at $250 back in 2001, it is nonetheless a bargain at current prices. “I’ve been buying gold for years and I continue to buy it because it is the way you save. I’m very happy to be able to buy gold at this price. All the so-called quantitative easing—money printing—by governments around the world has created a glut of freshly printed money. This glut has yet to work its way through the global economic system. As it does, it will create a bubble in gold and a super-bubble in gold stocks.”

And then there’s the people who should know most about how sound the world’s various types of paper money are: central banks. As a group, they have added tonnes of bullion to their reserves last year…

• Turkey added 13 tonnes (417,959 troy ounces) of gold in November 2013. Overall, it has added 143.6 tonnes (4,616,847 troy ounces) so far this year, up 22.5% from a year ago, in part thanks to the adoption of a new policy to accept gold in its reserve requirements from commercial banks.

• Russia bought 19.1 tonnes (614,079 troy ounces) in July and August alone. With the year-to-date addition of 57.37 tonnes—second only to Turkey—Russia’s gold reserves now total 1,015 tonnes. It now holds the eighth-largest national stash in the world.

• South Korea added a whopping 20 tonnes (643,014 troy ounces) of gold in February, and now carries 23.7% more gold on its balance sheet than at the end of 2012.“Gold is a real safe asset that can help (us) respond to tail risks from global financial situations effectively and boosts the reliability of our foreign reserves holdings,” said central bank officials.

• Kazakhstan has been buying gold every month, at an average of 2.4 tonnes (77,161 troy ounces) through October. As a result, the country’s reserves have seen a 21% increase to 139.5 tonnes from a year ago.

• Azerbaijan has taken advantage of a slump in gold prices and has gone from having virtually no gold to 16 tonnes (514,411 ounces).

• Sri Lanka and Ukraine added 5.5 (176,829 troy ounces) and 6.22 tonnes (199,977 troy ounces) respectively over the past year.

• China, of course, is the 800-pound gorilla that mainstream analysts seem determined to ignore. Though nothing official has been announced by China’s central bank, the chart below provides some perspective into the country’s consumer buying habits.

China ended 2013 officially as the largest gold consumer in the world. Chinese sentiment towards gold is well echoed in a statement made by Liu Zhongbo of the Agricultural Bank of China: “Because gold has capabilities to absorb external economic shocks, growth of its use in the international monetary system will be imminent.”

And those commercial banks that have been verbally slamming gold—it turns out many are not as negative as it might seem…

• Goldman Sachs proved itself to be one of the biggest hypocrites: while advising clients to sell gold and buy Treasuries in Q2 2013, it bought a stunning (and record) 3.7 million shares of GLD. And when Venezuela decided to raise cash by pawning its gold, guess who jumped in to handle the transaction? Yes, they claim the price will fall this year, but with such a slippery track record, it’s important to watch what they do and not what they say.

• Société Générale Strategist Albert Edwards says gold will top $10,000 per ounce (with the S&P 500 Index tumbling to 450 and Treasuries yielding less than 1%).

• JPMorgan Chase went on record in August recommending clients “position for a short-term bounce in gold.” Gold’s price resistance to Paulson & Co. cutting its gold exposure, along with growing physical gold demand in Asia, were cited among the main reasons.

• ScotiaMocatta‘s Sunil Kashyap said that despite the selloff, there’s still significant physical demand for gold, especially from India and China, which “supports prices.”

• Commerzbank calls for the gold price to enter a boom period this year. Based on investment demand from Asian countries—China and India in particular—the bank predicted the yellow metal will rise to $1,400 by the end of 2014.

• Bank of America Merrill Lynch, in spite of lower price forecasts for gold this year, reiterated they remain “longer-term bulls.”

• Citibank‘s top technical analyst Tom Fitzpatrick stated gold could head to $3,500. “We believe we are back into that track where gold is the hard currency of choice, and we expect for this trend to accelerate going forward.”

None of these parties thinks the gold bull market is over. What they care about is safety in this uncertain environment, as well as what they see as enormous potential upside.

In the end, the much ridiculed goldbugs will have had the last laugh.

We can speculate about when the next uptrend in gold will set in, but the action for today is to take advantage of price weakness. Learn about the best gold producers to invest in—now at bargain-basement prices. Try BIG GOLD for 3 months, risk-free, with 100% money-back guarantee. Click here to get started.

By MoneyMorning.com.au

In yesterday’s Money Morning we looked at negative interest rates.

We noted how the Danish central bank had cut the benchmark lending rate to minus 0.1% in 2012.

That means it costs banks to hold money on deposit at the central bank, thus removing the incentive for banks and consumers to save.

Instead, it encourages banks to lend money to borrowers, and it encourages borrowers to borrow money.

The Danish plan has ‘worked’, if working means that stocks have gone up. The OMX Copenhagen 20 index has climbed 160% since the 2009 low. We also mentioned how the US Federal Reserve was creating and would continue to create an asset bubble.

Based on the latest data, its plan is working too…

Yesterday we pointed out that central banks still have many more tricks up their sleeves. The idea that they can’t do anything more because interest rates are already low is false.

They can do plenty more.

One option is to follow the Danish lead and cut interest rates to below zero. That may work in what we could call a ‘second tier’ economy, but it may not cut it in one of the major economies.

After all, you’d think the one country to try such a policy after two decades of low interest rates would be Japan. But however tempted the Japanese may have been to do so, they haven’t yet cut the interest rate to below zero.

The other option, the option central banks seem to prefer, is to be more discreet (devious is probably a better word). That involves using inflation.

Two Reasons Why Central Banks ‘Print’ Money

The central bankers’ most well-known use of inflation in recent years is their policy of ‘printing’ new money in order to buy government bonds. This serves two purposes. First, it creates a guaranteed buyer for government debt.

That means the government doesn’t have to stop spending.

The second purpose is to induce inflation. If the central banks can push more money into the economy it should raise prices, which they hope will also raise incomes, which they hope will make it easier to repay loans, which they hope will make consumers more likely to take out new loans.

We say that it’s a devious trick because the truth about inflation is that it doesn’t increase wealth. In fact, it does the opposite. General price rises inflict harm on savers and income earners because, typically, wage rises lag price rises.

Furthermore, it harms people who stop working (such as retirees or those who become unemployed) because prices continue to rise even though their income earning capacity may have stopped. It’s why even in retirement, retirees still need to try to earn an income and take risks by investing because they know if they don’t inflation will gnaw away at their savings.

This is why we say investors have to invest in riskier assets (where you can get big returns) such as stocks, rather than just staying in cash. Proof of that is in the latest report from the Financial Times:

‘US inflation expectations have jumped to their highest since May, with central banks and investors seeking insurance against the prospect that a recovering American economy will stoke price pressures.

‘Inflation expectations, as measured by the difference between yields on 10-year nominal Treasury notes and Treasury inflation protected securities (Tips), have risen to 2.28 per cent from a low of around 2.10 a month ago.‘

Just remember that the typical US investor who would like to keep their money in a ‘safe’ bank account earns close to zero on their deposits. Thanks to the central banks, which are apparently seeking ‘insurance’ against inflation (the inflation they’ve created), savers have to take big risks in the stock market.

Stocks Go Up, What Could Possibly Go Wrong?

So, the plan is working.

Stocks are going up. Inflation is inflating. And governments can keep spending.

What could possibly go wrong?

OK. You know that’s a tongue in cheek comment. There’s plenty that can go wrong, which is why you need to be an active investor in this market, keeping a close tab on what’s happening to your investments.

The Aussie market gained 16% last year. It was a bad time to be in cash. A portfolio of individual stocks would have done even better, especially if you had bought into some good dividend payers when we told you to back in late 2011…and again when we suggested increasing your stock exposure at the end of 2012, the beginning of 2013, and mid last year.

Make no mistake. For all the stick we give central bankers, they’re working towards a plan. That plan isn’t necessarily beneficial for you or the economy.

But it is a plan that you can take advantage of to build your wealth, and fight back against the harm caused by inflation.

The way to do that is to pick a select portfolio of stocks priced at a good value, and where possible that pay a dividend.

As we pointed out yesterday and today, central banks have many tricks up their sleeves, so it’s premature to think this latest ‘Great Asset Bubble’ is about to pop anytime soon.

Cheers,
Kris+

From the Port Phillip Publishing Library

Special Report: Five Fatal Stocks You Must Sell Now

By MoneyMorning.com.au

By MoneyMorning.com.au

Actors never say the name of what they call the ‘Scottish Play’ inside a theatre. That’s because it brings down a curse on the play. Sandbags have been known to fall on actors, unoccupied cars run over people in the car park, and, according to legend, a real dagger was swapped for the retracting kind in the first ever performance. Some say the magic used in the opening scene by the three witches is real.

According to the actor Sir Donald Sinden, the truth is better than fiction. Macbeth was the default plan B of village theatre productions around England for many years. If the actual theatre production failed to draw an audience, swapping for Macb…the Scottish Play guaranteed a full house. So saying the name of the Scottish Play during a different theatre production was kind of like implying it wouldn’t be good enough and the troupe would have to use plan B.

Anyway, all this is very similar to today’s financial markets. It’s a tale of greed and delusion, and it won’t have a happy ending. The witches at the world’s central banks have brewed up a curse known as QE. Investors were sucked into the stock market hook, line and sinker, just as Macbeth was by promises of becoming king.

With the Federal Reserve’s first reduction of Quantitative Easing, we’ve reached a new act in the play. It’s the act where things get dicey. But let’s start at the beginning.

In the play, the witches tease Macbeth by saying that he can become king and his good fortune will last until the local forest comes to his castle at Dunsinane. ‘Forests don’t move’ reckons Macbeth, so he throws caution to the wind. I won’t ruin how the forest ends up moving, but I can tell you the financial market equivalent to the moving forest is moving interest rates. If interest rates begin to rise, the stock market’s good fortune will end.

Now interest rates have been in a steady downtrend since the 80s. That made debt steadily less expensive, which allowed people to borrow more and boost the economy. But, with the financial crisis, interest rates approached zero, especially once you take inflation into account. In other words, they can’t go lower.

The problem is that interest rates will rise eventually. And then all the debt incurred over the past few decades will become expensive.

So now that rates have hit zero and central banks are reducing their stimulus, the ongoing recovery is all about managing the increase in interest rates. If they rise too quickly, the recovery will stall because debt will be expensive. That would prolong the economic malaise many countries are still in. If they rise too slowly, the recovery could become inflationary. Inflation has the same effect on interest rates that screaming ‘Macbeth’ has on actors. They jump. And that leads us back to economic malaise, but with a bout of inflation mixed in.

In other words, the world’s central bankers have painted themselves into a corner. They could lose control. The lure of suppressing interest rates using QE gave them a short term gain, just as killing the king gave Macbeth his title. But now that decision could come home to roost.

So this year will be the year of watching interest rates around the world, just as Macbeth watched the forest from the top of his castle. That sounds mind-numbingly boring. But looking for cracks in a dam is probably boring too. Until it suddenly isn’t.

The most important interest rate to watch is the US 10-year Treasury bond yield. It is the rate that all others are influenced by. And it happens to be at its highest since 2011.

Did you see that tree move?

Nick Hubble +
Contributing Editor, Money Morning

Ed note: This article is an edited version of ‘A New Act in the Scottish Play’ which was originally published in The Money for Life Letter.

By MoneyMorning.com.au

Source: Brian Sylvester of The Gold Report  (1/8/14)

http://www.theaureport.com/pub/na/paolo-lostritto-outlines-the-lombardi-method-of-gold-investingDeflation, inflation and reinflation all play into scenarios for the gold price and precious metals equity markets, as outlined by Paolo Lostritto, former director of mining equity research at National Bank Financial. How to play good defense in this unusual market? Companies with free cash flow top his list, but high-leverage, midtier producers with great management teams can satisfy investors with more appetite for risk, says Lostritto in this interview with The Gold Report.

The Gold Report: Paolo, what three words would you choose to give our readers a sense of what to expect in the precious metals equity space in 2014?

Paolo Lostritto: Defense, defense and more defense.

TGR: The Vince Lombardi approach.

PL: Even though deflation risk is priced into most of the equities, it’s difficult to predict when inflation expectations will start to gain traction. While quantitative easing tapering efforts are being introduced with some signs of economic improvement in the U.S., we believe tapering could reignite deflation fears. The market was reassured after Janet Yellen’s nomination as Federal Reserve chair, but the bond yield-to-maturity suggests that deflation risk is still alive and well. There is more work to be done before inflation becomes a bigger concern, and as such, we believe the gold market will remain challenging. The challenge is centered on balance sheet risk in a market where margins are negative, thus resulting in many value traps that are out there right now.

TGR: Earlier this week, I spoke with a U.S.-based analyst who believes that rising wage pressure, higher rent and food prices in the U.S. will lead to a slow climb in inflation in 2014 and beyond. Yet, you are talking about the risk of deflation. Other than bond yield rates, what else tells you that deflation is the bigger risk?

PL: Across the board, commodity prices have been under pressure, suggesting that the risk of deflation is still real. Another data point is the inflation expectations data set compiled by the Cleveland Federal Reserve. Right now, it shows that inflation expectations are muted at best.

We believe we are in a similar environment to the 1974–1976 midcycle correction in gold before the onset of inflation. During that period, gold fell from ~US$200/ounce (~US$200/oz) to ~US$100/oz before higher money velocity generated inflation in the Western world that drove gold to more than US$700/oz. While gold has nearly decreased by a similar percentage since the highs set in 2011, we have yet to see definitive evidence of higher money velocity. This, combined with positive real rates, results in our cautious stance. It is worth noting that if higher inflation were to materialize, it is likely to be driven by emerging markets, which would then begin to export said inflation.

I believe gold could go much higher in the long term, but in the meantime, we’ve got to take a position that a lower price is quite possible and that balance sheet risk remains high.

TGR: An October 2013 research report from National Bank Financial (NBF) suggests that there is inflation risk when the money multiplier increases beyond a 1:1 ratio. What will keep that ratio below 1:1?

PL: The money multiplier is a crude measure of money velocity. While it demonstrates that both the monetary base and M1 are growing, there has been enough to translate into higher inflation expectations. The government is giving mixed signals. The Fed’s policies are reinflationary. Government policies, in contrast, have been emphasizing austerity.

We need to see that the liquidity being provided is actually getting traction and is producing real economic growth. While there are early signs that this is starting to happen, I would like to see how the bond market reprices inflation expectations. We still believe the deflation risk remains high—you need to be defensive.

There are signs that the U.S. economy is turning around. But, our NBF economists don’t see inflation in the system, and that’s bad for gold. That will change only when the velocity of money starts to improve, leading to better capacity utilization, which translates to higher inflation expectations. It will take time for those signals to align.

TGR: In the event of another collapse, what weapons does the Fed have left?

PL: More money is all we’ve got left. The Fed can purchase more bonds, which effectively introduces more liquidity, but we would probably see monetary policies that would coincide with fiscal policy to allow for some infrastructure projects. We would want the new liquidity to show up in the real economy, as opposed to the coffers of Tier 1 banks.

TGR: Physical holdings in exchange-traded funds (ETFs) have fallen in lockstep with the gold price. Are Chinese and Indian gold imports enough to sustain the gold price, or push it higher?

PL: About 800 tonnes have sold out of the ETFs, and there have been a similar amount of purchases through Hong Kong into mainland China. Demand in India remains robust, despite elevated import taxes. There also are signs of more smuggling into India. However, we’re still dealing with a potential 1,800 tonnes of ETF supply.

The weak gold price is less a function of supply-and-demand and more a function of deflation risk. We see gold as another type of currency. If all the gold mines in the world shut down tomorrow, it would only equate to removing 0.1% of aboveground stocks.

TGR: What’s your projected trading range for gold in 2014?

PL: We’re using US$1,300/oz to value our stocks. If our worries are confirmed and the bond market starts to signal an increased risk of deflation, we could be dealing with a lower gold price deck.

The average all-in sustaining cost number may be the better number to use. That could drop to US$1,000–1,200/oz.

On the flip side, if we see velocity and inflation expectations start to go up and the real rates go negative again, that fair-value number is probably closer to US$1,600–1,800/oz. This is a very difficult time to predict the gold price.

TGR: When NBF calculates all-in cash costs for gold miners it uses a different definition than the World Gold Council. You omit non-cash remuneration and stockpiles/product inventory write-downs. On all-in sustaining costs, you also omit reclamation and remediation at operating and non-operating sites. Would investors be better served if these definitions were the same across the board?

PL: We, and the World Gold Council, are trying to define the true average cost of the industry. We are roughly in the same ballpark. You mentioned what we exclude, but we also include cash taxes. The World Gold Council excludes cash taxes and interest payments.

Remember, we’re tabulating this based on public data. Not every company breaks out its true sustaining capital in a given quarter versus growth capital. We approximate the sustaining capital number by using depreciation, depletion and amortization as a proxy. Of course, it won’t be accurate because it uses depreciated data dollars as a proxy, but it’s a good start.

TGR: Roughly what percentage of the producers you follow make money at today’s level of all-in cash costs or all-in sustaining costs?

PL: From an all-in sustaining cost perspective, the Q3/13 50th percentile is around US$1,050/oz. That means 50% of the industry is losing money, not from a growth perspective, but from a sustaining basis at US$1,050/oz and above. It was US$1,200/oz in Q2/13.

TGR: That’s shocking. Does that make you want to look for a different line of work?

PL: We’re in the midst of a once-in-a-century event. I believe there are two ways out of it. Scenario one: We have a deflationary recession, also called a depression. Scenario two: We repeat what happened in the 1970s and we inflate our way out. But this time it’s on a global scale.

Based on the behavior of the central banks of Japan, the U.K. and the U.S., they seem to be trying to inflate their way out. The question then becomes, when will inflation gain traction?

TGR: A recent NBF research report compared takeover transactions among senior producers, midtier producers, developers and explorers. Where are investors getting the best bang for their buck?

PL: Historic transactions have to be considered in the context of the market at the time. Today’s market resembles 2008. One could argue that this is a great time for free cash flow entities to acquire assets. In a market where cash is king, it’s all about doing bite-size, tuck-in type acquisitions that allow companies to take advantage of a challenging market.

Structurally, some large companies are set up to mine gold at a rate that Mother Nature cannot support. Deposit discoveries are not the size or frequency that can support them. There’s an opportunity for the smaller companies, like B2Gold Corp. (BTG:NYSE; BTO:TSX; B2G:NSX), to acquire good assets that can be developed to create tremendous value when the market turns.

TGR: On net asset value (NAV) and enterprise value per ounce, which of those four spaces provides the best return to investors?

PL: There’s a lot of value out there, but investors want to avoid being caught in a value trap. For example, a company may be cheap on a price-to-NAV and price-to-cash flow basis, but it also could have lots of balance sheet risk. If it goes bankrupt before the market turns, investors are caught on the wrong side of the trade, despite the fact that it’s great value.

I would rather buy something that generates free cash flow, like a Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) or a Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX). (Royal Gold is covered by Shane Nagle.) “Be defensive” has been our thesis since early 2013. Free cash flow companies will yield, even if this market lasts four more years; the NAV continues to grow. When the market rerates, investors are actually up.

TGR: NBF’s Oct. 13 report noted that producer transactions were completed at an average of 1.13 times NAV and $155/oz enterprise value. Senior gold producers were 1.2 times NAV and $125/oz enterprise value. Developers were 0.84 times NAV at $102/oz, and exploration transactions were 1.1 times NAV at $55/oz.

PL: No question, there’s tremendous value out there. The questions become: How long does this market last? How does an investor stay solvent? I would buy Franco or Royal Gold, knowing that I’m solvent.

TGR: What is your 2014 investment thesis in the precious metal space?

PL: We remain defensive. Our top picks are Franco-Nevada and Royal Gold because they’re generating free cash flow yield even at lower gold prices and because we don’t know how long this deflation period may last.

For people interested in taking on a little bit more risk we start outlining companies like Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) and New Gold Inc. (NGD:TSX; NGD:NYSE.MKT). (Yamana and New Gold are covered by Steve Parsons.) Both companies have strong balance sheets and a little bit more leverage to the gold price.

If you really want to look at names that offer some opportunity if gold goes to $1,500/oz, that group includes B2Gold, SEMAFO Inc. (SMF:TSX; SMF:OMX) and a myriad of names that give you that higher torque.

TGR: Let’s talk about the royalty plays for a moment. Does Franco-Nevada now transcend mining equities? Is it competing with yield-providing equities outside the mining space?

PL: It’s a bit of a hybrid. It’s not the same as owning physical gold. It provides some dividend exposure. It also gives investors torque to the actual underlying commodity, which is another good thing.

TGR: Is Franco-Nevada attracting investors that typically wouldn’t be in the gold mining space?

PL: People who are sprinkling a bit of exposure to gold in their portfolio feel more comfortable with larger companies. Franco-Nevada is a larger company and is more defensive than some of the pure torque names with exposure to the cost side of the equation.

TGR: What did you make of Franco’s deal with Klondex Mines Ltd. (KDX:TSX; KLNDF:OTCBB) of $35 million over five years, or roughly 38,000 oz gold?

PL: That is the type of deal that you can do in this market where you’re tucking in an acquisition. There’s a discovery value to being in a camp and having exposure.

The real value proposition with owning a company like Franco-Nevada is getting the exploration opportunity without having to use your dollars.

TGR: Are there any milestones ahead for Yamana and New Gold?

PL: We expect New Gold to incorporate the recently acquired Rainy River deposit into its development plan.

Yamana recently made some tuck-in acquisitions. Management is focused on defense, keeping the company’s cash costs low and maintaining free cash flow yield.

TGR: In the past, B2Gold’s management has developed assets and sold them off. It’s currently a junior partner in a couple of Colombian projects. Where is B2Gold’s growth coming from?

PL: In the short term, there are two projects: Masbate in the Philippines and the Otjikoto mine in Namibia.

In addition to a great operating team, B2Gold is known for its great geological team. The geological team can find incremental ounces near existing infrastructure, thereby creating value through the drill bit.

TGR: Will B2Gold get to a point where it can compete in the next tier down from the biggest majors, say with Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) and Yamana?

PL: I don’t see why not. They’re all competing for the same growth profile. It becomes a matter of which projects are available, how much they cost and where the opportunity is for incremental value added through the drill bit or reengineering.

TGR: What is SEMAFO up to?

PL: SEMAFO has done a good job of retrenching. It’s focusing on higher-grade material—not ounces for ounces’ sake, but ounces that provide a better internal rate of return and better margins with the Siou and Fofina discoveries and recent anomalies identified in and around this trend.

SEMAFO has spun off or ceased production at some of its higher-cost mines to focus on locations where the company can get the best bang for the buck.

TGR: Let’s shift to silver. The fortunes of South American Silver Corp. (SAC:TSX; SOHAF:OTCBB) are well documented. Are there other small-cap companies with exceptional management teams developing world-class deposits that most investors probably aren’t aware of?

PL: We cover several exploration/development companies that offer tremendous value: Lydian International Ltd. (LYD:TSX), Pilot Gold Inc. (PLG:TSX), True Gold Mining Inc. (TGM:TSX.V), Romarco Minerals Inc. (R:TSX) and Mountain Province Diamonds Inc. (MPV:TSX).

These are phenomenal assets that deserve more attention than they’re getting. They will have their day; slow and steady wins the race. For example, True Gold announced the results of the feasibility study for the Karma project, which supports a low capital intensive, relatively simple and scalable gold project. The recent exploration results have also been encouraging and have the potential to add to current mine life. We believe the next catalyst for the company would be approval of exploitation permits and receipt of project financing for construction, which should further derisk the project and help in rerating of the stock.

TGR: Mountain Province is unlike the others in that it is a diamond play. Since when does NBF cover diamonds?

PL: We started covering Mountain Province in 2010. The company just finished permitting, and it has tremendous upside. It looks a lot like Aber Resources back in 2000–2003. Diamonds are a different animal. The commodity price beta is not as high as gold.

TGR: What is the tonnage? The carat grade?

PL: A new feasibility study is due in Q1/14, so all the data out there right now is a bit dated. Basically, Mountain Province is looking to produce approximately 4.5–4.8M carats/year.

TGR: What value are you using per carat?

PL: We’re using $130/carat, but it could be as high as $140–145/carat.

Two exceptionally large stones found in the drill core were not included in the valuation. That would suggest a population of special diamonds that could take the average value per carat much higher once in production.

The same thing happened at Aber, where the value of the stones was boosted 15–20% in a larger sample set. There’s no guarantee that will happen here, but the data are eerily similar in that regard.

TGR: Do you use a deeper discount rate with diamond equities than gold equities, given that the Ekati and Diavik diamond mines in northern Canada both have run close to 10% below feasibility projections to date?

PL: I used an 8% discount rate when I valued Mountain Province. We will reassess the risk/reward profile using the new feasibility study.

Based on what I know now, I like the name. There may be an opportunity for the company to rerate in the range of 10 to 12 times operating cash flow. That would suggest a stock price, when it’s built by 2017, in the range of $13 to $15 per share.

TGR: Do you have a parting thought for investors as we usher in 2014?

PL: It’s been a challenging market on multiple fronts. There are a lot of moving parts and it has been frustrating for everybody in the mining space. A lot of exuberance has been flushed out of the system.

Nonetheless, there are good people doing some good things. There are value propositions out there. Solid management teams will be able to take advantage of this market to drive value in the longer term.

TGR: But you’re still preaching defense?

PL: Correct.

TGR: Paolo, thanks for your time and insights.

At the time of this interview, Paolo Lostritto was director of mining equity research for National Bank Financial. He has also worked with Wellington West Mining, Scotia Capital and MGI Securities. He holds a Bachelor of Science degree in geological and mineral engineering from the University of Toronto.

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DISCLOSURE:
1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as 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: Klondex Mines Ltd., Pilot Gold Inc. and True Gold Mining Inc. Franco-Nevada Corp. is not affiliated with The Gold Report.Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Paolo Lostritto: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. 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.
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By Mitchell Clark, B. Comm.

We won’t really get into the heart of the fourth-quarter 2013 earnings season until late January into early February. Smaller companies typically take longer to report, as they don’t have the large accounting departments that blue chips have.

I’ve noticed that quite a number of Wall Street research analysts have been boosting their 2014 full-year earnings expectations. They’re playing the same old game of cat and mouse with corporations and research analysts. Corporations always want to “outperform” if they can, so they deliberately keep their outlooks pretty conservative.

Companies getting a boost to their full-year earnings outlooks include: Wal-Mart Stores, Inc. (WMT), Microsoft Corporation (MSFT), Colgate-Palmolive Company (CL), Oracle Corporation (ORCL), E. I. du Pont de Nemours and Company (DD), Exxon Mobil Corporation (XOM), and Verizon Communications Inc. (VZ). Even Intel Corporation (INTC) is having its earnings outlook nudged higher by the Street for several upcoming quarters, including all of 2014.

According to FactSet, eight out of 10 S&P 500 market sectors are expected to report an increase in fourth-quarter earnings; these sectors are led by a strong expected gain in financials, followed by the telecom and industrial sectors. Energy is expected to produce a decline, comparatively.

While revenue growth from financials should be lackluster to negative on a comparative basis, a strong expected gain in earnings will be market-boosting news. Countless financials have been doing very well on the stock market since last November.

Over several of the last quarters, companies reported they were able to increase their selling prices without materially affecting demand. Sales growth has been a combination of increased volumes and rising prices.

Extreme monetary expansion wreaks havoc with the natural ebb and flow of capital markets, as we’ve seen. The share price performance of stocks in 2013 dramatically exceeded the amount of earnings growth as compared to 2012; therefore, the case can be made that stocks may sell off on a good fourth quarter.

Regardless, I still see a positive disposition to the equity market and, combined with certainty on short-term interest rates, we could very well get another positive year in the key stock indices.

Now is the time for corporations to live up to expectations. The earnings-multiple expansion last year now needs to be fulfilled and it will be a daunting task, as there is a lack of consistency among industries in terms of business conditions.

Equity market price strength in the financial sector always bodes well for the rest of the market. I would use the Dow Jones Transportation Average and financial stocks as two important indicators for the rest of the market.

At this specific point in time, I don’t see a lot of action to take in terms of a new portfolio strategy. (See “These Two Proven Wealth Creators Should Be at Top of Investors’ Wish List.”)

A well-balanced portfolio, including dividend-paying blue chips, would be well positioned for more gains this year, as large-caps have the earnings power. If anything, the current environment is a great time to re-evaluate your exposure to risk and perhaps lighten up on some winning speculative positions.

Fourth-quarter earnings season is just around the corner, and it should be decent like the last three. This market, however, is looking for a catalyst to sell. It hasn’t found one yet, but there definitely is one on the horizon.

This article Top Market Sectors for 2014 was originally published at Profit Confidential

By George Leong, B. Comm.

There’s a significant cold spell out there in the Mid-East and Northeastern parts of the country. At the same time, the stock market has cooled down a little, beginning the year on a cautious note.

I recently discussed my views for the stock market going forward and while it’s early on, the ability to move higher will largely depend on the economic renewal and its impact on what the Federal Reserve does. New Fed Chair Janet Yellen will be the focal point as Ben Bernanke departs.

Yellen will receive her first piece of key economic data this Friday when the non-farm jobs report for December is due. A decline in the unemployment rate to below seven percent and the creation of 200,000-plus jobs will clearly drive the Fed to seriously continue to taper. What happens to the stock market this year will be dictated by the rate of jobs growth and the number of unemployed.

We also need to see corporate America deliver stronger revenue growth to drive earnings. In the past few years, aggressive cost cuts have driven earnings, which is not sustainable.

If the tapering continues, bond yields will continue to rise to levels that will be difficult for stock market investors to ignore. Look for an initial break at the three-percent level for the 10-year bond to gauge its impact on the stock market.

Should yields rise, I would look at the higher dividend paying stocks, especially those in the small-cap sector that offer great opportunities for dividends and capital appreciation.

The reality is that, given that the stock market was able to rise as much as it did in the past year, the upside moves will likely be more limited and not at the same pace.

Also keep in mind that the stock market has yet to have a major stock correction, which I define as 10% or more, since this current bull market began in March 2009. Into the fifth year of the bull market and looking at the longer-term charts, I still feel the S&P 500 is vulnerable to a stock market correction that could be in excess of the seven-percent maximum we have seen.

But what makes me confident is that a major stock market correction would open up buying opportunities for traders and investors. (See “Five Profitable Plays for the Coming Stock Market Correction.”) It may be this expectation that helps to limit any strong upside advances, at least early on in the year.

The key is to look for opportunities and to look at what I call “chaos” as a buying opportunity.

Be careful with the housing sector, as much of the easy money has been made in this area. The housing market is much stronger than it was in 2008, but you should expect some stalling as mortgage rates begin to rise. I would look at the home supplies companies as an alternative, such as The Home Depot, Inc. (NYSE/HD) in the large-cap area and Builders FirstSource, Inc. (NASDAQ/BLDR) in the small-cap segment.

Should the economy continue to improve, watch for small-cap stocks to advance, but don’t expect them to rise at the same pace as 2013, when the Russell 2000 led the broader stock market with a gain in excess of 30%. Small companies tend to have the flexibility to more easily adapt to changes, so this group should be a key area to monitor this year.

Overall, I remain optimistic that the performance of the stock market will largely be dependent on the fundamentals and less on the flow of easy money into the economy.

This article Stock Market’s Dependence on Easy Money Weakening? was originally published at Profit Confidential

By Michael Lombardi, MBA

All of a sudden, auto sales are declining…

Auto sales in the U.S. economy declined to an annual rate of 15.4 million units in December. In November, this number stood at 16.41 million units—a decline of more than six percent. (Source: Motor Intelligence, January 3, 2014.) Analysts were caught off guard by the decline in December auto sales; they were expecting an increase!

I see the decline in auto sales as being directly related to rising interest rates. And it’s not going to get any better.

For years now (since the Credit Crisis), auto sales have been increasing due to low interest rates. It’s very similar to what happened to the housing market prior to 2007. More and more people went on a house-buying spree when the mortgage rates were at record lows. When mortgage rates started to increase in 2007, the already-inflated housing market got hit hard. The same thing is happening to auto sales now.

Interest rates are rising again. Look at the chart below of the bellwether 10-year U.S. Treasury. Since November, the yield on the 10-year U.S. Treasury has gone up roughly 20%. The higher interest rates go, the weaker auto sales will get. (And we can already see the impact on the auto stocks. The stocks of America’s major car makers are off five percent from their 2013 peak, but key stock indices are near their peaks.)

Chart courtesy of http://stockcharts.com

Rising interest rates will have the biggest impact on auto loans given to subprime borrowers (those who have a lower credit standing).

My readers should note that the delinquency rates on auto loans have been continuously increasing since the second quarter of 2012. TransUnion, a credit information company, expects delinquency rates on auto loans to continue rising right through to the end of 2014. (Source: TransUnion, December 17, 2013.)

I’m just not that bullish on the economy for 2014. Soft auto sales are just one factor to look at. But when we have a stock market that is topping out, a housing rebound starting to get sluggish in certain key markets (again, because of higher interest rates), and corporate earnings growth under pressure, I don’t see consumer confidence improving in 2014 to the point that it will positively impact consumer spending. In fact, I see the opposite: I see a pullback on consumer spending coming in 2014.

This article Why Are Car Sales Down So Much? was originally published at Profit Confidential

By CentralBankNews.info
    Poland’s central bank, which earlier today kept its reference rate steady, said it still expects to keep rates unchanged “at least until the end of the first half of 2014” as the gradual economic recovery is likely to continue in coming quarters while inflationary pressures remain subdued.
    The National Bank of Poland (NBP), which cut rates by 225 basis points from November 2012 through July 2013, said economic data from November indicates “a continuation of the gradual recovery” and the past rate cuts “supports recovery of the domestic economy, gradual return of inflation to the target and stabilization in the financial markets.”
    After its last rate cut in July, the NBP said the cycle of easing and then in November it pushed back any rate rise until at least the end of June 2014 and today repeated this guidance.
    The central bank said data on industrial output and retail sales suggest that activity in these sectors remain on an upward trend while the decline in construction and assembly output has eased, indicating some improvement. Business climate indicators also signal further growth in economic activity.
    But employment growth remains too weak to bring down the still elevated unemployment rate, which reduces wage and demand pressures.

    Poland’s inflation rate fell to a five-month low of 0.6 percent in November from 0.8 percent in October, well below the NBP’s 2.5 percent target. The central bank said most core inflation indices also fell along with producer prices, which indicates low cost pressures in the economy.
    The central bank said the euro area was slowly recovering, yet the pace was limited and diversified across member countries and with moderate growth in global economic activity, inflation should stay low in many countries.
    Poland’s Gross Domestic Product expanded by 0.8 percent in the third quarter from the second quarter for annual growth of 1.9 percent, up from 0.8 percent. In November the Organisation for Economic Co-operation and Development (OECD) raised its forecast for Polish growth in 2013 to 1.4 percent and the 2014 forecast to 2.7 percent. In 2012 Poland’s economy grew by 1.9 percent.

    www.CentralBankNews.info

By HY Markets Forex Blog

The US dollar climbed to a five-year high against the yen on Wednesday, as investors focus on the release of the Federal Reserve (Fed) minutes which is expected to be released later in the day. The minutes are from the Fed’s last month’s meeting, where the Fed Chairman Ben S Bernanke confirmed the central bank would begin to reduce its monthly asset purchases.

The Japanese yen weakened against a basket of 16 major currencies, falling from its two-week high of ¥103.90 on Monday. The yen was weakened by the strong performance in the equities market in Tokyo, with the benchmark Nikkei and Topix index trading higher, adding over 1%. The Japanese yen lost 0.5% to 143.08 per euro, as the euro climbed 0.1% higher to $1.3632.

“Underlying yen sentiment remained bearish on the view that Japan would lag behind its counterparts in tightening monetary policy,” an analyst from Western Union said on Tuesday.

Following the Fed’s decision to reduce its monthly bond purchases, San Francisco Fed President John Williams said yesterday that the US central bank could possibly end the program this year if the US economy continuous to show signs of recovery and stability.”Faster or slower tapering will depend on the economy,” Williams said.

Last month, the Fed policymakers said they will begin to reduce its monthly purchases from $85 billion to $75 billion starting this month.

Japan

The yen weakened against the US dollar, while the Topic index advanced 1.4% higher.

“The stronger dollar, weaker yen trend remains intact,” said Akira Moroga, manager of currency products at Aozora Bank Ltd. “The gain in Japanese stocks is spurring risk-on sentiment” he added.

The Bank of Japan (BoJ) meeting is scheduled to take place January 22, with predictions that investors will continue to sell their positions to make profits on speculation of new quantitative easing measures from the BoJ.

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By HY Markets Forex Blog

Crude oil traded higher for the second day on Wednesday on predictions that the government data will reveal that crude stockpiles dropped for the sixth week in the US, the world’s biggest oil consumer.

The North American WTI crude for February delivery added 51 cents to $94.18 per barrel on the New York Mercantile Exchange stood at $94.15 at the time of writing. While the European benchmark Brent crude for February settlement rose 0.4% higher to $107.76 a barrel on the ICE Futures Europe exchange. Brent crude oil was at a $13.56 premium to WTI.

The strong cold weather in North America also had an effect on oil prices as oil refineries reported production disruptions.

Crude Oil – US Crude Inventories

Crude oil stockpiles in the US dropped by 7.3 million barrels in the week ending January 3, according to reports from the American Petroleum Institute (API).

According to a separate survey compiled by the Energy Information Administration (EIA), US crude inventories dropped by 2.75 million barrels last week. EIA are expected to release the data later in the day.

Crude Oil – Fuel Supplies

Analysts are expecting to see a rise in Distillate inventories, including heating oil and diesel by 2.25 million barrels in the week ended Jan 3, according to a survey. Investors are also expecting to see a rise in gasoline stockpiles by 2.5 million barrels.

Crude Oil – Libya

Libya has restarted its largest oil fields, El Sharara on Monday, with an initial output of 60,000 barrels a day after protesters in the area agreed to end their blockade which has been disrupting production in the country for weeks, the state National Oil Corp (NOC) confirmed.

Production in Libya dropped to 250,000 barrels a day, down from 1.43 million barrels per day in July 2012.

In Sudan, the ongoing crisis continues as the country’s government has rejected the rebels’ demands after meeting each other for the first time on Tuesday.

All eyes are focus on the release of the Federal Reserve’s minutes from the December meeting, which will be released later during the day.

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