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By OilPrice.com
Until recently Tunisia was considered to be a minor league and relatively underexplored venue in Africa’s rapidly expanding oil & gas scene. This situation has quickly changed with new bid rounds and forced relinquishments creating an opportunity for new companies to come in.
Major American E & P companies like Shell have jumped at the opportunity to acquire ground that had been dominated for decades with little to no work conducted, mostly by European State oil & gas companies in this former French protectorate. For the first time major spending has been committed to test Tunisian basins which are arguably equally prolific as those in neighbouring environments with more work performed, such as Libya.
Tunisia is now in focus for investors because exploration is increasing within the producing Pelagian Basin, which leads us to ask the following questions:
Should Tunisia now be on energy investors watch list?
Is Shell just the start of “big oil” making inroads into the country? And which are the plays that people should be watching?
To help us look at the developing situation in the region we managed to speak with oil industry veteran John Nelson.
John Nelson is CEO of Canadian-listed Africa Hydrocarbons Inc. (NFK). A veteran geologist, Nelson spent much of his career in East and Central Africa—much of it for Mobil Oil–studying regional and mapping rift basins at a time when no one else was shopping around in Africa’s interior. Over his 27 years in the industry, Nelson has also had junior E & P experience, recently serving as CEO for Lion Energy Corp., which was bought out by Africa Oil Corp ‘AOI’ in 2011 as a way for AOI to gain access to their impressive Kenyan land package that John had put together.
Africa Hydrocarbons Inc has a 47.5% interest in the Bouhajla Block, located onshore Tun isia and surrounded by major Shell Oil.
In an exclusive interview with Oilprice.com, Nelson discusses:
Interview by. James Stafford of Oilprice.com
James Stafford: Is Tunisia right now a venue for the juniors or majors, and what makes Tunisia a good venue for small companies?
John Nelson: There is a good cross-section of different sized oil companies exploring and operating in Tunisia. Some of the majors are present such as ENI, Total, CNOOC and Shell; however, most of the activity is with the smaller companies.
Junior companies can be very successful on projects that may not meet the economic threshold of the majors, but can propel juniors quickly to mid-tier producers. This makes Tunisia a good place for smaller compan ies to explore.
The basins in Tunisia are well established and understood. Services for seismic and drilling are available. There is a capable work force and French rule of law. Infrastructure in the way of roads and pipelines can be found across the country. Fiscal terms are good and the government is stable and reasonable to deal with. There are a number of smaller Canadian companies already there.
James Stafford: Can you tell us a bit about Tunisia’s potential. What is the biggest field and what are the best exploration prospects?
John Nelson: There is a lot of geological diversity in Tunisia which creates a number of different play types to explore for. The biggest onshore oil field is the Sidi el Kilani field in north central Tunisia. This field has produced over 50 Million barrels of light sweet crude from a small number of wells. In fact it is the similarities in Africa Hydrocarbon’s targets to Sidi el Kilani that got me interested enough in the “home run” size of the first drillable target, to decide to come and run this company.
James Stafford: How does the geology compare to the East Africa and the East Africa Rift System?
John Nelson: The geology of Tunisia is not exactly like that of the great Tertiary rift system of east Africa. There are of course some geological similarities on a smaller scale where extension has caused the formation of horst and graben structures in some areas of Tunisia. In general what we are looking for is actually arguably more straight forward.
James Stafford: What’s the business atmosphere right now in Tunisia?
John Nelson: Business as usual. We have not seen any significant risks or changes in business practices since we have been involved there. In terms of North Africa, Tunisia is probably at the top as a jurisdiction in which to do business, and stability of the politics, etc. The economy seems to be doing well. There is construction going on in many of the cities. The country has not suffered at the same level from debt and poor fiscal mgmt like some of the Eurozone countries on the northern Mediterranean side. The country, like many countries these days, has unemployment issues especially with the younger generation.
James Stafford: So if Big Oil is not looking in Tunisia, how does that help NFK?
John Nelson: It is hard to compete against majors when it comes to acquiring sizeable acreage and making commitments. It allows smaller companies to cost effectively get positioned and undertake exploration initiatives. However, if a significant discovery is made then Big Oil may appear back on the scene to partner with or acquire small companies like NFK. Sh ell Oil surrounds our Block now but we were there first and were able to position ourselves with over 130,000 acres.
James Stafford: Africa Hydrocarbons has a nice piece of contiguous acreage in Tunisia. Can you tell us a bit about the two blocks in question and where you are right now in the exploration process?
John Nelson: We have a 47.5% interest in two adjoining concessions, the Bouhajla and Ktititir blocks, located in north central Tunisia and only 25 kms west of the Sidi el Kilani oil field. The blocks were acquired approximately 3 years ago when the govt made them available for bidding after being off the market for over 25 years. Our local partners were there first, and that is the opportunity.
James Stafford: What are you chasing here? Conventional or unconventional plays? What do you think you’ll hit with drilling?
John Nelson: We have several conventional type prospects and leads on our blocks and that is what we will be targeting initially. Our first well will be testing a fractured carbonate chalk reservoir, which is very similar to what is found producing at Sidi el Kilani. Last year, Shell acquired a large land position around us and have committed to spending over $150MM on their blocks. We have heard that Shell and others have an interest in testing shale (also called “unconventional”) plays within the region. The possibility for an unconventional play type also exists on our acreage but we have chosen what we believe is the “low hanging fruit” to target first.
James Stafford: You’ve mentioned before the ability to “de-risk” exploration and development in Tunisia. Can you take us through the math here and demonstrate the economic feasibility of operating in Tunisia?
Jo hn Nelson: Our situation is somewhat unique compared to many others in Tunisia or exploring in other remote parts of Africa. Only 25 kms from our block is the facility and pipeline for the Sidi el Kilani oil field. The facility was built to handle up to 25,000 bbls/d but now is only handling 1000 bbls/d. So there is much excess capacity in this nearby facility. There is also a pipeline in place from the field all the way to the port facility on the coast that is also under-utilized.
That means it won’t take much time or money to get any future production on stream. As a result, we can still be profitable in the event of a smaller discovery size due to the infrastructure already being in place. It also allows the option to truck oil to the facility to obtain some cash flow while onsite facilities and a short pipeline are built to Sidi el Kilani if we make a discovery.
In other words if we are successful on our first well next month, we should be able to start cash flowing very very quickly.
James Stafford: Do you need a major operator in there like Tullow with Africa Oil in Kenya? What happens if you make a discovery? Can you develop it cost-effectively?
John Nelson: In our situation we do not need the expertise or deep pockets of a large partner. In the event of a discovery we would be able to adequately finance a development project. We anticipate that fewer than five wells would be needed to optimize drainage of our first target area, which is substantially larger than the area of production of 50 million barrels at Sidi el Kilani
James Stafford: How does the cost of drilling wells compare in Tunisia, Kenya, Somalia …?
John Nelson: Our costs to drill a 2500m well is in the area of $7 million. The cost seems excessive compared to drilling costs in North America, but on an interna tional scale it is reasonable. This actually isn’t very deep, and given the size of the target, not very expensive. We also have easy terrain and a network of roads in our area of Tunisia. Access is pretty easy and services are relatively close if needed.
In more remote projects such as in Puntland, Kenya, Ethiopia or other areas far from infrastructure, the drilling cost of a similar well may be well over $50MM.
James Stafford: Outside of Tunisia, where should smaller companies be looking? Can you rank the prospects for us here in terms of junior capabilities and potential?
John Nelson: Juniors provide a valuable service to the industry by often being the first entrants into a new area or applying new technology to older areas. There are niches in most parts of the world. Myanmar is opening up. New opportunities may now come up in Venezuela. The rift basins of Niger, Chad and Sudan are attracting n ew investment. The new discoveries off of Israel are opening up a lot of new exploration initiatives there that look quite attractive. There is not so much a shortage of ideas and opportunities as there is a shortage of capital to pursue them.
James Stafford: We understand that you have experience in Somalia—specifically in Puntland. Can you debunk any myths about working in Somalia and take us through the challenges?
John Nelson: There were a lot of concerns about security issues both onshore Puntland as well as piracy in the offshore. It took a lot of careful planning to mitigate much of the risk. Local communities were engaged, informed and employed. Our security people worked with the govt and contractors to remove any possible threats along transportation routes. The airstrip and drilling camp were well protected. In the end, all the people and equipment were mobilized and the drilling took place wi thout incident.
James Stafford: What about Ethiopia and Eritrea? Eritrea seems open for business now after preferring to focus on its mineral resources for so long–and thanks to the new technology on the scene–and it’s got Red Sea territory that is virtually unexplored.
John Nelson: Eritrea has been slow to open up to oil and gas exploration despite a fairly high level of interest. New laws and policy changes move slowly in many parts of Africa. Eritrea has been explored in the past and there are known oil seeps there. No major discoveries have been made yet.
James Stafford: How do you view prospects in Ethiopia, as a possible extension of finds in Kenya?
John Nelson: Ethiopia has a variety of play types throughout the country that are soon to be drilled. Africa Oil is currently drilling in SW Ethiopia along the Tertiary rift trend that extends north of Kenya. They may make the first significant oil discovery for Ethiopia in that area.
James Stafford: How close are we to commercial viability in Kenya, and what do you think the next year to year and a half will show?
John Nelson: Tullow and Africa Oil are close to determining commerciality. The recent testing suggests the rates and accumulations may be sufficient. Some additional drilling success in some of the other sub-basins on their acreage in blocks 10BA and 10BB as well as in Ethiopia will help initiate further development decisions. There is a lot of drilling and testing to be done over the next couple years. I am pretty sure the results will lead to major infrastructure plans for the area. It will take time–years–due to the remoteness and current lack of infrastructure in the area as well as political involvement of neighbouring countries.
James Stafford: So what can we expect by the end of the year from Africa Hydrocarbons? What do potential investors need to know?
John Nelson: We anticipate drilling our first well in April and should know the results in May. In over 27 years, I haven’t seen many wells with this kind of risk-reward—a $7 million well that is geologically so similar to a proven field only 25 km away where one well produced more than 20 million barrels.
We have worked up the target with 2-D and 3-D seismic that are remarkably clear, and that give us what we call in the business a “play chance” that is much much higher than your typical International exploration well. Usually with a target this size you are looking at a 10%-15% chance of success – we have heard our chances rated by third parties between 28% and into the low 30% chance of success. This is actually a geometric difference in probabilities – really an order of magnitude.
With success on our first well, w e would look to start production from Bouhajla North, and follow in that area by preparing to penetrate the reservoir again with new wells. We would also establish a reserve and resource calculation to highlight the size of the produceable reservoir in that area.
Concurrently we would develop an inventory of prospects all over our acreage which we would develop with additional seismic programs.
Real success just on our first well would turn us from an explorer into an intermediate producer immediately.
James Stafford: What happens if you hit—what kind of NPV do we get compared to current market cap.
John Nelson: Well James, if we don’t hit we are backstopped by cash in the treasury as well as our land position and additional targets which we would then set our sights on.
But with a discovery similar to a Sidi el Kilani well, our NPV10 based on our 47.5% working interest would be close to $100MM, which is about 10 times the current market capitalization of the company of $9 million – we will know within 8 weeks. .
James Stafford: Thanks for taking the time to speak with us John.
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A person that watches the movie “21” is greeted with the sight of a great plan to use math to bilk casinos out of their money. Based on a true story, these students were shown to be human calculators that simply played the numbers game at the blackjack tables to devastating effect. The first problem is the phrase “based on a true story”. That can mean any number of things, and like in the movie “21”, it does mean many things. They omitted little details such as the MIT team spending several months in the red and the high roller losing $120,000 in three hands. Thus, an unrealistic expectation was born.
But what is Gambler’s Ruin? It certainly does not sound very pleasant. A little bit of hunting around finds the definition to be something along the lines of the following, paraphrasing:
“Gambler’s Ruin is the idea that a player with a finite amount of money will eventually lose everything to a player with an infinite amount of money given a long enough period of time.”
Quite a few people look at activities like blackjack, poker, or market investing as gambles. They do not view these activities as the highly mathematical beasts that they are. The exceptional poker player is not just throwing cards and hoping to get a good hand. Instead he is paying attention to what is already on the table, what the other players are doing, and formulating the odds of getting the cards he needs to produce a winning hand. If he does not feel his odds are at a comfortable level, he cuts his losses and folds out of the hand. Granted, he loses his ante money and whatever was already bet; but that is still preferable than trying to compete in a race he already lost.
For just a moment, consider the relationship between the investor and the stock market. The investor is a player with a finite amount of money. The stock market is a player with an infinite amount of money. What is going to happen according to Gambler’s Ruin? Eventually, the investor will lose everything to the stock market given enough time.
That does not happen often though, does it? Plenty of people participate in the stock market and walk away with dollars in their pocket. Why? These savvy investors equip themselves with the knowledge they need to identify when it is time to step into the game. More importantly, they are able to identify when to fold, or step back out. That methodology requires a calm, collected strategy with a solid basis on the foundation of what it is to gamble or invest.
The investor that simply shoves their money into an investment with no understanding of the performance, any idea of predictions for it, or an idea of how to gauge success and failure has already lost. They are throwing away their money. That person might as well pour their money into a hearth and burn it. At least doing that will provide some heat for a few minutes.
Effective gambling and investing is not about blind luck. It is about considering your probabilities and attempting to strike while the iron is hot. Minimize your losses by trying to maximize the favourable circumstances you have established before setting foot into the arena.
Investing can be a bit more difficult to prepare for. Ideally, you will want to have a good grasp of what is going on with whatever you are investing in. Find reliable news sources and proactively look for new developments that might have an affect on your investment. As a general example in the forex market; a person that invests in USD pairs is going to be very interested in hearing things such as plans for economic growth, announcements from the Federal Reserve, employment rates, and then information on whatever the second half of their pairs are. All of these things and more matter for the USD value.
The other side of the coin with Gambler’s Ruin is the idea of time as an equalizer. Eventually, time is going to level the playing field and then losses will build. Avoiding those losses is done by stepping out of, or folding from, the game before they mount too high. There is no reason to step straight into a bad run. If your market pairs have been trending weakly just bide your time. Step into the game when it is beneficial for you.
The only people that take blind chances in the market or gambling are people that have already lost. They will soon be parted from their money and hopefully learn a valuable lesson from the experience. Don’t be mistaken, you will lose money. The difference is in how you are losing your money. Do you want to be the player that sacrifices his buy in, knowing that things are taking a turn for the worse? Or, would you rather be the player who is left sitting in a state of shock, wondering how he managed to lose?
Know how you are going to win, lose, and prevent major losses before ever playing the game; else Gambler’s Ruin will steal away your wealth too.
EURUSD – The EURUSD Consolidating Above 1.3020
The EURUSD has entered a consolidation phase. The pair managed to increase and stay above the 1.3020 resistance, though it happened during the Asian session which was pretty quiet. However, the 20-day MA crossed the 50 and 100-day moving averages upwards on the 4 hour chart and this time, it will be the support level which currently runs at 1.2956. The loss of this support would weaken the pair bulls and its drop below 1.2880 would mean the downtrend resumption.
GBPUSD – The GBPUSD Decreases to Support 1.5240
The GBPUSD was also consolidating yesterday, but it was decreasing at the same time that was first influenced by the upward correction in the EURGBP. Thus, the pair moved away from the 1.5363 high reached on Friday and dropped to the support level at around 1.5240. The GBPUSD should consolidate above 1.5240-1.518 in order to continue the upward correction. Its drop below the last level, where the 100-day moving average runs on the 4-hour chart at the moment, would mean that the bears handle the situation.
USDCHF – The USDCHF Approaches Figure 93
After Friday’s decrease to 0.9312, the USDCHF pair continued trading just above that level. The rate’s fluctuations on top are limited by the resistance at 0.9360. Thus, the pair bears managed to keep it below that level which had been the support before it decreased and thus, it is a negative factor for the bulls. The level of 0.9290, where the 100-day moving average runs on the daily chart, is likely to become another reduction target for the pair. Its decrease below would worsen the pair’s outlook.
USDJPY – The USDJPY Sets Fresh Highs
As expected, the USDJPY continued hiking. This time, the pair has reached the resistance at 99.64 and pulled back to 99.11. Obviously, the Japanese currency is in the midst of a downtrend and the pair bulls cannot but be limited by the 100th figure. There are the 100.40 and 101.45 levels above it, the latter is the high of April 2009. Thus, the pair came close to the critical levels and the RSI on the 4-hour, daily and monthly charts has entered the overbought zone, but it is still there on the weekly chart. Consequently, it is wise to refrain from purchases at current levels – they are quite risky. The nearest potential target of the downward correction is the 96th figure.
London Gold Market Report
from Adrian Ash
BullionVault
Tues 9 Apr, 08:55 EST
The PRICE of GOLD and silver was little changed Tuesday morning near last week’s finish,
while European stock markets rose but Japan’s Nikkei stalled its 5-day surge as the Yen
bounced higher from 4-year lows on the currency market.
Silver prices ticked higher to $27.40 per ounce, while gold regained $1574.
Energy and industrial commodity prices also edged higher. Major government bonds eased
back, nudging up the interest rate offered to buyers.
The US Treasury will this week auction $66 billion in new debt, according to Bloomberg
data.
“The [quantitative easing] actions of the Bank of Japan are having a profound effect on bond
yields,” notes the commodities team at Standard Bank today, “across especially emerging
markets.”
Because the BoJ’s promise of $1.4 trillion in new money creation by 2015 is weakening the
Yen, sats Standard Bank, “some gold-consuming countries, such as Thailand, [are] seeing
their currencies stronger against the Dollar.”
So “there’s been fairly strong gold buying interest from South East Asia…which should partly
offset the ongoing ETF liquidation.”
China’s net imports of gold through Hong Kong doubled in February from January’s 3-month,
new data showed today, rising to more than 60 tonnes.
New York’s $61-billion SPDR Gold Trust meantime ended Monday with the quantity of
bullion backing its shares unchanged from Friday’s new 21-month low of 1205 tonnes.
“Physical demand [has been] offset by professional investor liquidation,” says the latest
quarterly review from German refining group Umicore.
Swiss bank and major bullion dealer UBS today cut its average 2013 gold price forecast from
$1900 to $1740 per ounce.
“We continue to expect the price of gold to moderate over the year ahead,” says a note
from Australian retail bank NAB, forecasting a 2014 average of $1410 and citing economic
recovery and lower risks in the developed world.
“Partly offsetting this is our expectation for central bank purchases by the emerging
economies [plus] continued strong consumer demand from India and China.”
Germany’s Deutsche Bank today cut its 2013 price forecast by one eighth to $1637, saying
that the forces pushing gold prices higher over the last 10 years “have all moved into
reverse”.
Danske Bank analysts are more aggressive, cutting their 2013 gold price forecast below
$1500 and targeting $1294 per ounce for next year.
“Gold is in our view still in bubble territory,” they write, “despite the extended price drop
seen since the autumn [and] the signs of global currency war earlier in 2013.”
Commenting on the price action in gold, “I can say the chart doesn’t look good,” Reuters
quotes a Hong Kong trader at Lee Cheong Gold Dealers.
“I think $1585 is the crucial point. If it can break above this level, another bull run or short
covering will push up the market to $1600.”
Reviewing the relative moves in gold and silver meantime, “The gold/silver ratio’s
rally picked up the pace last week,” says technical analyst Axel Rudolph at Germany’s
Commerzbank.
The number of silver ounces you can buy with one ounce of gold “has so far reached 57.85,
a nine-month high,” Rudolph goes on. If the peak of 58.72 from June 2012 is broken, he
says, “the psychological 60.00 region will be targeted as well.”
Gold price chart, no delay | Buy gold online
Adrian Ash is head of research at BullionVault, the secure, low-cost gold and silver market
for private investors online, where you can buy gold and silver in Zurich, Switzerland for just
0.5% commission.
(c) BullionVault 2013
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best
place for your money, and any decision you make will put your money at risk. Information
or data included here may have already been overtaken by events – and must be verified
elsewhere – should you choose to act on it.
Forex Daily review brought to you by REAL FOREX | www.Real-forex.com
In yesterday’s column, I debunked the myth that the stock market is long overdue for a pullback.
You might not believe it, but it’s true!
That being said, I’m afraid many of you walked away thinking that it’s simply a matter of (more) time passing by before a pullback or correction materializes.
That’s not the case, though.
You see, the mere passage of time doesn’t usher in pullbacks. It takes something specific to trigger them.
Or, as Deutsche Bank’s David Bianco says, dips might be inevitable, but “they don’t happen in absence of bad news or emerging risk.”
And right now, there are no emerging risks on the horizon. Don’t just take my word for it, though.
“We’ve got low inflation, improving domestic and global trends, [an] accommodative Fed, and it all adds up to a package that is a constructive backdrop for equities,” says Jim Russell, Senior Equity Strategist at U.S. Bank Wealth Management.
Indeed. That only leaves really bad news as a possible catalyst for a pullback or correction. So what type of bad news could ultimately trip up the stock market?
The opposite of what’s propelling it higher, of course!
Don’t Forget the Golden Rule
Forget a 5% pullback or a 10% correction. Some pundits and investors believe we’re in store for a massive 25% meltdown.
Fear mongers! Or maybe they’re just afraid of violating Warren Buffett’s golden rule of investing to “never lose money.”
Whatever their motivation, it doesn’t matter. The reality is, it’s going to take a sudden drop in corporate profits to collapse the stock market.
After all, stock prices ultimately follow earnings. I know I’ve told you that countless times already. But I’m afraid many of you still don’t believe it.
Maybe you just need to hear it said differently? If so, consider Larry Kudlow’s phrasing: “Profits are the mother’s milk of stocks.”
Too National Geographic for you? Ok. On second thought, maybe you just need additional proof.
Well, here it is, courtesy of Dr. Mark Perry at American Enterprise Institute (AEI).
As Perry explains, a one-to-one relationship exists between stock prices and after-tax corporate profits. For every increase of $1 billion in profits, the S&P 500 rises about 1 point. That is, with two notable exceptions: the dot-com bubble and the Great Recession.
As you can see, stock prices got too far ahead of corporate earnings during those periods. Sure enough, the market restored the relationship between corporate profits and stock prices by collapsing.
Or, put simply, stock prices ultimately followed earnings.
Here’s why all this matters…
According to Perry, “In the current bull market rally… corporate profits are consistent with stock market levels.” So the one-to-one relationship is in full effect. And that means there’s nothing abnormal about the current bull market. Corporate profits are driving stock prices.
By extension, as long as corporate profits keep increasing, stock prices should, too. And that’s exactly what analysts expect to happen…
After rising for more than three years, the consensus estimate calls for profits for S&P 500 companies to keep climbing to hit a record of $109.30 this year.
Bottom line: Absent a sudden drop in corporate profits – or the Fed unexpectedly pulling the plug on its quantitative easing initiatives – a pullback or correction is not going to magically materialize.
Stay tuned for tomorrow, though. I’ll share three key metrics to help you detect any deterioration in earnings – well ahead of the average investor.
Ahead of the tape,
Louis Basenese
Article By WallStreetDaily.com
Original Article: Move Over Warren Buffett, Here’s the New Golden Rule for Investing
If you’ve ever thought about buying gold, but never quite got round to it — in the space of a week, the market just gave you three huge reasons to ‘back up the truck’.
The incredibly bullish set up is at direct odds with the poor price performance, which saw gold dip as low as US$1540 last week.
This dip in the price is our friend: after all we’re meant to buy gold ‘on the dips’.
So when gold pulled back last week, I put my money where my mouth is…
Here’s part of the latest addition to the Cowie retirement fund:
And if it gets cheaper still, I’ll buy more.
Let me explain what I’m seeing that makes me think a turning point is getting close…
Back in late 2008, institutional analysts were tripping over themselves to downgrade their forecasts on gold…right before gold started a 180% rally.
The fact is that consensus institutional forecasts on gold have been consistently wrong for the last ten years. You could trade gold perfectly by doing the exact opposite to what the big investment banks recommend.
In other words, when they say ‘sell’…you should buy.
So it’s exciting to see more and more big banks are calling gold a ‘sell’.
Last week, the gold forecast that got all the attention was from Societe Generale (SocGen), a French multinational banking company with a market cap of around $20 billion.
They called for gold to drop to $1375/ounce.
Frankly I’m surprised that the market paid so much attention to the SocGen report. But it popped up across the mainstream financial media, as well as financial blogs and other newsletters. It was emailed to me about twenty times.
Most commentators quoted it as though it was gospel! Yet no one seems to have checked out SocGen’s insanely bad track record on gold…
I’d like to share with you what I wrote about this in a snippet from the Diggers and Drillers weekly update from last Thursday:
‘The 27 page [SocGen] report was called ‘The end of the gold era’, making the case for gold to fall as far as $1375/ounce.‘Everything about today’s gold market reminds me of late 2008: the fundamentals, the technicals, the bearishness, the institutional downgrades, and the market action.
‘And now we have Jesper Dannesboe, who co-authored this week’s Soc Gen report, who also got it tragically wrong back in 2008. I’ve dug into the archives for you to show you what he was saying back then.
| Oct 31 2008 | Context: Eight days after gold bottomed out at an intraday low of $680, and at the start of a monster rally that took gold to $1920 over the next three years: ‘The most likely scenario for gold is it goes down a lot, especially if it is trading at historically high levels … Because the fears of inflation will be replaced by fears of disinflation and that is a killer for gold … I think gold is going below $600 in this cycle.’ Source |
| Nov 18 2008 | Context: Gold was at $740, and would jump 11% to $820 within a week: ‘The bullish story on gold based on fears of inflation is dead,’ Source |
| Jan 6th 2009 | Context: Gold was at $840: 24% above its intraday low of $680, and at the start of a three-year rally that would see gold gain 182%. ‘Gold should be sold into rallies’ Source |
‘Well…there were three years of rallies to sell into, which should have been plenty! This is what SocGen’s calls look like on the chart.
‘Then last year they called gold to soar to $8500, and it fell.‘So, their latest call for gold to fall could well be the best reason to buy that we’ve had so far!’
In short — SocGen taking another swing against gold with the same weak argument that it had back in 2008 is a clear warning signal that a rally could be imminent.
Since I wrote the above, the guys at Sprott Asset Management took SocGen’s argument to pieces. Part of their rationale brings me to the second big reason to start buying gold now.
(NB: you can watch my recent interview with legendary investor, Eric Sprott, by taking out a subscription with any Port Phillip Publishing paid investment service. Check out our latest offer here… )
You see, last week we heard that the Bank of Japan will DOUBLE their balance sheet over the next few years.
This is quite simply a game changer for the entire market: everything from bonds to foreign exchange, commodities, and equities.
But it’s gold I want to focus on today. There is a tight relationship between gold and the collective size of central banks’ balance sheets.
As balance sheets swell, gold rallies. You can see how closely the two track each other below in the chart from the guys at Sprott Asset Management.
Right now the major central banks have $9 trillion on their books — and Japan wants to add $1.4 trillion to that number by the end of next year.
If the relationship holds true, this would convert to a 15% increase in the gold price.
But hang on…didn’t we use the same rationale about the US Fed last year? Wasn’t the growth of their balance sheet meant to push up gold?
Well, the Fed has bought $85 billion worth of US Treasuries and mortgage-backed securities a month, and gold has gone nowhere fast. But you’ll get your explanation if you look closely at the chart above. You’ll see that the total balance sheet has actually pulled back slightly in the last few months.
Surprisingly, it’s because the European Central Bank’s (ECB) balance sheet has in fact shrunk by 10% this year.
This would explain why gold has had a rough start to the year. The ECB’s contraction cancelled out the Fed’s expansion.
However, the ECB’s balance sheet has stabilised now, and with Slovenia and the Netherlands lining up to be the next Cyprus, it could be on the way back up very soon.
Even if it shrunk at the same pace again, it would be easily exceeded by the combined growth in the balance sheets of Japan ($75bn) and the US ($85bn) of $160 billion/month.
Assuming no change from the ECB, and that the Fed and the Bank of Japan keep going at the current pace for another two years, this would equate to a balance sheet expansion of $3.8 trillion. This would add over 40% to the current global balance sheet of $9 trillion. As gold moves so closely with this, you could expect a roughly 40% rise in gold.
It’s dangerous to look exclusively at fundamental drivers, and ignore the positioning in the futures market.
And this is where we get the third major reason to buy gold today.
This report analyses the positioning in the futures market, which — right or wrong — determines the price, at least in the short-term.
And there is a keg of dynamite under the price here right now: there are a near record number of traders (‘managed money’) trying to short gold.
Just like journalists, these guys basically get it wrong every time. You can use them as a good contrarian indicator.
To show you their near perfect record of getting it wrong, I’ve highlighted (in red circles) the times they have stacked on the biggest short positions in the last five years. Then I’ve highlighted the corresponding periods on the gold chart (green circles on pink line). You can see that each spike in shorts has signalled a rally in gold.
Take another quick look at the chart. The two big spikes in shorts back in 2008 preceded the three year rally in gold. And you can see that today’s short position is at far higher levels than back in 2008. It’s at record levels, and has been for a few weeks now. This is a highly explosive situation.
I suspect we’ll see volatility both ways at first as they defend their trade, but almost certainly this ends in a big move up.
Because there is a real chance these guys are going to have to ‘cover their positions’ if gold rallies just a little bit. Each trader doing this will raise the price, and cause another trader to follow suit. They are like a large group of mountaineers all tied together with the same rope. When one falls, the rest will follow in spectacular style. It would be enough to cause a massive move in gold.
Watching the gold price trending calmly down, you’d never imagine a war was waging below the surface of the market.
But a war it has been — and one that gold bulls are about to win.
Dr Alex Cowie
Editor, Diggers & Drillers
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From the Port Phillip Publishing Library
Special Report: TORRENT SIGNAL 3
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Money Morning: A Better Inflation Bet Than Gold…Stock Market Investing
Pursuit of Happiness: Why the NBN is Dead Before it’s Begun
Diggers and Drillers:
Why You Should Invest in Junior Mining Stocks
