Monday, October 27, 2008

The Smartest Man Visits Canada - and Likes What He Sees

27 October 2008

Here is a Globe & Mail article that is too good to pass by.

The "smartest man" visited Canada last week, and commented favourably on the Canadian investment scene. (I will add that this is in spite of the incompetent Conservative Party of Canada's running the show!).

The smartest man is Krishnamurthy Narayanan, and he is the manager of the contrarian US Dollar CI Global Opportunities Fund. His sister, Indra Nooyi, is the current CEO of Pepsico.) For the full article, visit the Globe & Mail site here:

"Krishnamurthy Narayanan, and he goes by Nandu – showed up in town this week and was bullish.

“'I think we're ending the financial crisis now,' he said. 'There will be countries, like the U.S., that will go into recession. But this need not be a global recession. And there are some encouraging signs on that front.'

"In a different era, The Smartest Man might have been a rocket scientist, or an engineer, or a medical researcher, or maybe a university professor. The academic résumé says: MBA, PhD in finance and economics from the Massachusetts Institute of Technology, studied under Paul Krugman, who just won the Nobel prize for economics. But this is – or at least was – the age of finance, and The Smartest Man became a hedge-fund manager, placing money on his views rather than just writing them.

"Lately, that has worked out rather well. His CI Global Opportunities Fund has returned 57 per cent in the past year, 19 per cent (compounded) over the past five. Nice numbers, but once you've made your money calling the credit crisis and short selling Washington Mutual, what do you do then?

"You buy Canada, says Mr. Narayanan, who can't believe the way the Loonie has been savaged. 'The currency is ridiculously undervalued. I can't think of any country in the world that has no fiscal deficit, no trade deficit and no inflation – except Canada. I think the Canadian dollar should go through parity.

"'I like the whole Canadian market. I don't particularly dig the banks because I just don't know what's in there [on the balance sheet]. But I'd say virtually everything else is fine.'”

He adds...

"You buy uranium stocks: 'Ridiculously cheap.' Gold miners: 'Ridiculously cheap.' Pipelines, too: 'How bad a business is that? It's a fantastic business. You're just shipping gas. Why are people selling those?' Energy: 'Unless there's an absolute collapse in oil demand, you really can't see oil plunge all that much [more].'"

Here is a profile of Mr. Narayanan from the Globe Investor site:
Nandu Narayanan
Trident Investment Management, LLC

Start Date: January, 2005

Fund Return: 29.24%

Nandu Narayanan, founder and Chief Investment Officer of Trident Investment Management, LLC, has 12 years of investment industry experience. Prior to founding Trident, he worked as an independent consultant on emerging markets to Credit Suisse Asset Management, as well as managing CI’s Asian and emerging markets funds. He also worked as Chief Equity and Emerging Market Strategist at hedge fund manager Caxton Corporation, and as an investment analyst at Tiger Management, another hedge fund firm. He holds a Ph.D. in finance and international economics and a master’s degree in management, both from the Massachusetts Institute of Technology, as well as a bachelor’s degree with a double major in economics and computer science from Yale University (summa cum laude).

Also manages: CI Global Managers Corporate Class, CI Trident Global Opportunities

For more information about Mr. Narayanan, visit this site: An excerpt from the Morningstar article follows:

"Identifying himself neither as a bear nor a bull, but as an opportunist, Narayanan has long believed that credit markets were ripe for a fall, and hence offered lots of opportunities. But he was also prepared to take some small losses, positioning the funds to take advantage of the turmoil that eventually occurred last summer.

"'Our thinking is that credit markets are in serious trouble,' Narayanan says. 'The commercial paper market is locked up. We're in the third inning of what could be a very long baseball game.'"

By the way, here is what Mr. Naryanan stated in his Globe & Mail interview over a year ago (September 11, 2007):



YTD return: 40.4%

1 year: 37.1%

Three year: 14.3%

Anticipating the popping of the credit bubble in the United States helped the $62-million CI Trident Global Opportunities Fund to generate a 12.5 per cent positive return for August, according to a company spokesman (CI noted the fund is not valued daily.)

How did CI Trident do it? By shorting selected areas of the credit markets, said portfolio manager Nandu Narayanan, chief investment officer of the subadviser, Trident Investment Management LLC in New York.

"First, we were short asset backed commercial paper and subprime loans," he said. "Those shorts produced positive impacts on our net asset value. Second, we were short on credit default swaps [debt insurance that loses value when there are defaults]. Third, we shorted U.S. mortgage insurers such as Radian Group Inc. and MGIC Investment Corp., whose stocks collapsed in the month. Over all, our bets that companies holding debt would see their shares fall generated about 65 per cent of our return in August. Year to date, these strategies have produced a 30-per-cent gain."

Mr. Narayanan is still holding his shorts, he said. He sees two crises ahead. The first is a continuation of the housing disaster that developed from speculative house flippers who did not even have money for down payments. The second is an unwinding of complex credit derivatives built on other derivatives.

"It is speculative excess on mathematical steroids," he said. "Asset-backed commercial paper created mismatches on length of loan and length of borrowing. It was a classic case for a collapse."

I can't seem to find much to disagree with in what Mr. Narayanan is saying.

Tuesday, October 21, 2008

Gold Tsunami III: James Kunstler's Use of the Analogy

21 October 2008

James Howard Kunstler also uses the tsunami analogy to describe our current situation.

In his view, the tsunami will be monetary inflation (the consequence of massive government spending and liquidity-generation in response to the current crisis):

"...let's say that we are witnessing the two stages of a tsunami. The current disappearance of wealth in the form of debts repudiated, bets welshed on, contracts cancelled, and Lehman Brothers-style sob stories played out is like the withdrawal of the sea. The poor curious...stand on the beach transfixed by the strangeness of the event as the water recedes and the sea floor is exposed and all kinds of exotic creatures are seen thrashing in the mud, while the skeletons of historic wrecks are exposed to view, and a great stench of organic decay wafts toward the strand.

"Then comes the second stage, the tidal wave itself -- which in this case will be horrific monetary inflation -- roaring back over the mud flats toward the land mass, crashing over the beach, and ripping apart all the hotels and houses and infrastructure there while it drowns the poor curious...who were too enthralled by the weird spectacle to make for higher ground....and the survivors are left keening amidst the wreckage as the sea once again returns to normal in its eternal cradle."

Mr. Kunstler's take on the coming tsunami emphasizes the complexity of our human emotional responses - particularly our tendency to be emotionally unprepared - for atypical events which depart from our normal experience.

Mr. Kunstler sees humans as passive observers who stand and watch as the sea level sinks, and are then left unprepared as it surges. Let us take this as a warning. The abnormal freeze in liquidity which we are now experiencing is likely very soon to submit to a gush in liquidity as the trillions of dollars poured by governments into the global financial ocean will inevitable make for some very big future waves (read massive upwards and downwards price adjustments, with attendant further financial dislocations)!

My advice? Ride the gold wave for safety and security in the upcoming inflationary upheaval.

My gold tsunami posts are as follows:

My gold tsunami posts are as follows:

There Is a Tsunami Coming in Gold

Gold Tsunami II: Anthropomorphizing Gold

Gold: Safe Haven in the Approaching Perfect Storm

Gold Tsunami III: James Kunstler's Use of the Analogy

Bond Prices: The Seismic Shift That Triggers the Gold Tsunami (IV)

Gold Tsunami V: The $23 Trillion Bailout... and Counting

Gold Tsunami VI: Looking for Patterns in Gold Price Advances

Gold Tsunami VII: This Is It

Gold Tsunami VIII: Gold Mining Stocks Now Participating

Thursday, October 16, 2008

Gold Stocks: Too Volatile To Buy or Sell at Their Exquisite Moment

16 October 2008

Another brief post.

The TSX Global Gold Index (SPTGD) has just collapsed to another multi-year low against a background of almost perfect fundamentals and a general market panic. At an index value now below the psychologically significant 200 level, the SPTGD index is revisiting early 2002 levels - at which time gold was still sitting flat in the $300 per ounce range.

Gold is now 3 to 4 times higher, but the Toronto gold stock index can't follow its lead.

In fact, the ratio of the SPTGD index to the gold price is now lower than when gold traded at its then 30-year low of $255 per ounce.

What then are the positive fundamentals?

The gold price is holding strong and pointing upwards in a global environment of massive reinflation (coordinated government liquidity injections - read "fantasy cash") in order to rescue the world's moribund banking system. Gold does best when the money supply increases, and the world has probably never seen a multinational money supply increase such as that at present.

The costs of gold mining are falling rapidly against a background of anticipated international recession, during which it is expected that energy and materials costs will fall due to tepid demand. Wage pressures will also be weak under such circumstances, as job security is now also less certain.

Finally, the cash crunch that has been hurting the small miners and explorers for years is likely to be averted by world governments' costly decision virtually to guarantee bank reserves and loans so as to keep the banking system operating.

On the other hand....

Global market panic is forcing all stocks to be sold, and the stocks of precious metal miners are among the weakest across the board (probably due to their recent favour among leveraged speculators). Additionally, fund investors everywhere are seeking redemption of their invested cash, forcing fund managers to sell even their prize holdings.

Result - there is no reason to sell gold mining shares. Their fundamentals have literally never been better.

But... You also can't buy gold mining shares, because the market is too volatile and uncertain. We simply don't know when the forced selling is going to end.

The fact that some of the miners are now selling for less than their cash in the bank, not to mention at ridiculously low price-to-earnings metrics simply doesn't matter (consider Yamana Gold at a P/E ratio of less than 4:1!).

Stocks tend to fall to P/E ratios in the 7:1 range during depressions - and the gold stocks are in some cases running cheaper than that on anticipated forward earnings (which, due to positive fundamentals, can very easily be higher than presently estimated).

Gold mining is presently the best business in the world, but buying and selling gold mining shares is nonetheless an exercise in futility.

What can be done?

We'll just have to wait and see how long the forced selling of the best quality assets in all the world is going to last.

Sorry, nothing else I can say or do. I'm on holiday, and I'll be thinking of other things until the market returns to sanity.

Wednesday, October 15, 2008

The Other Fire in California: Foreclosures Constitute Half of All Residential Sales....

15 October 2008

My time is short, so this is another quick post.

At this time of year, the Santa Ana winds and fires rage across southern California. It is thus worthy to consider the other fire raging in this majestic, fragile and somewhat crowded state (where I too am a property owner and taxpayer).

I am cutting and pasting this data from one of the sites I visit daily (JS MineSet). Posted by a regular contributor (Monty Guild). Mr. Guild's comments follow:

Here are a few SFR (single family residence) statistics from a mortgage banker friend of mine.

This information is focused on California, but you can probably get the general US message.
Respectfully yours,
Monty Guild

Damaging though the winds of nature can be, the damage caused by government-sanctioned financial speculation and excess can be greater still.

In my view, the policymakers who pumped the economy full of easy money should bear the brunt of the responsibility for the damage caused, though all the way down the line, every participant knew better: from the bankers and lenders who knowingly signed mortgages with unqualified buyers, to the home-buyers who knew that they were stretching beyond their means to sign, to the speculators who broke the buyer/seller and lender/borrower relationships by slicing, dicing and repackaging the mortgage contracts as though they were commodities.

Canada Election 2008: Big Country, Small Minds

15 October 2008

Canada has held its 40th National Election.

The outcome?

More of the same.

Is it time for a change?


By speaking of small minds, am I referring to the intelligence of the electorate of Canada?


Am I referring to the intelligence of our elected representatives?


I am speaking about small imaginations.

And in this case, I believe it is the duty of our leaders to imagine a way of life that is bigger in one or more important ways than the way of life that we as a nation lead now.

I am thus referring to a failure of imagination at the leadership level of our country.

And I am coping with my disappointment at the outcome of the election by attempting to articulate more precisely what it is that has failed, and how Canada's 40th Federal Election has signalled that failure.

I will begin with the failure of imagination of the Conservative Party of Canada. But I will not end it there. The problem is bigger than the small minds of the leaders of the Conservative Party alone. As the discussion progresses, I will address the deficits of imagination of the other parties as well.

I will not spare the question of the scope of imagination of the electorate.

And I will thus endeavour to stretch my own imagination as well, or my plaint will be of little benefit in lifting the level of the ongoing flow of the dialogue of the nation.

I'll have more to say later.

Saturday, October 11, 2008

Gold Should Be $1600 Now

3, 11 & 13 October 2008, 18 July 2011

September was a busy month, and I've been out of town this week.

I'd like to comment on the wild ride in financial markets since the summer.

The broad market has been trained to focus increasingly on financial gameplaying (and heroic government-led rescues) since the advent of the Greenspan era in 1987.

In essence, Mr. Greenspan played the hero in every crisis, rewarding the financial community for turning its focus to Federal Reserve monetary action and government fiscal policy rather than to the traditional concerns of the state of the business cycle and the health of the economy.

This growing dependency of the financial markets on central bank policy easing (and corresponding money creation) has led us to our present precarious position.

It is now rare to hear public discussion of such issues as long-term sustainable business plans, cost-benefit analysis, risk management and reduction, and above all, of the benefits of a competitive and unencumbered marketplace, as we now inhabit an environment where increasingly large-scale government-driven market interventions are viewed not only as desirable, but as necessary to avert the collapse of our financial system.

(If this sounds like an addictive cycle - don't be surprised - it is! Why else would we now be outlawing short-selling while legally-sanctioned accounting methods do not stop short of permitting full scale financial misrepresentation? The fraudsters are protected by the SEC while those who engage in critiquing and selling such practices short are punished. The regulatory system itself is operating in reverse - taking us further down the garden path through protecting the most egregious corporate risk-takers.)

All eyes are now on the Fed - and recently - on the government itself, as a source of answers to the perennial problem of the ebb and flow of financial markets. Business leaders expect no truly hard times and no sustained recessions. Executives can be rewarded with multi-million dollar pay packages for steering great companies into the ground. Consumers expect endless flows of borrowed cash, followed by government action to rescue them if they take on greater financial commitments than they can honour.

In short, something has gone fundamentally wrong with financial markets, as well as with our perception of prudence and risk. We believe that risky and unaccountable behaviours are without consequence, and that someone will always be there to fix any problem that becomes too large, whether for risk-taking financial dealmakers or for consumers and homeowners who have borrowed more than they can repay.

In the meantime, popular demand for gold is running at its highest levels in 30 years. Gold is returning to the hands of the public at such a torrid pace that the forms of physical gold most favoured by small investors (coins and small bullion products) are now in extremely short supply.

Kitco, Canada's largest bullion dealer, is presently posting the following announcement: "The following products have been temporarily removed from our Precious Metal Store until further notice due to production and delivery delays that retailers are currently facing; 1 oz Gold bars, 1 oz Kitco Gold bars, 10 oz Gold bars, 1 oz Silver Eagles, 1 oz Silver Maples, 1 oz Silver Philharmonic coins, 1 oz Olympic Silver Maples, 100 oz Silver bars and 1 oz Palladium Maples."

The phrase "too big too fail" has become a commonplace, creating a financial market predicament that is "too big to bail."

Two interesting tidbits this week.

(1) After several months of reining in monetary expansion in recognition of surging inflation, the adjusted monetary base of the US has soared to the sky in September. Monetary inflation is back bigtime. The US money supply has already doubled since the beginning of the millennium, which is the massive driver behind gold's price rise to date. To quote Ed Bugos, the ultimate guru on the matter,

"The Federal Reserve has just expanded its balance sheet more in one month than it has in almost all of its first 86 years of existence. I am not kidding. Its assets, which represent the cumulative reserves the Fed has "created," totaled less than $700 billion at the turn of the millennium and continued to expand by about $50 billion per year after that, up until this month. In September alone, reserve bank credit inflated by almost $600 billion. It is a record, and has already affected the monetary base.

"Up until September, the Fed had been careful to sterilize its liquidity provisions by selling Treasuries, reverse repos or simply by lending its securities off balance sheet. So while it has extended credit since August 2007, it has not monetized much of the liquidity.

"Besides, usually, other factors offset the Fed's injection of 'liquidity,' such as cash withdrawals from the banking system (represented by an increase in 'currency in circulation') and other activities that may increase money flows back into the Fed... like the money raised by the Treasury for the Fed under its recently created 'Supplementary Financing Program.'

"Since announcing this new program two weeks ago, the Fed has received about $350 billion from the Treasury. Additional factors of decrease include about $80 billion in deposits that came into the Fed during September via reverse repos and 'other' deposits, a $26 billion decline in outstanding repos and about $4 billion in currency (cash) leaving the banking system. The NET factor of increase to reserve bank credit for the month of September was about $170 billion. That is money created out of thin air... unsterilized."

To translate... Mr. Bugos is saying that the Federal Reserve has been trying to keep money flowing without increasing the supply of money. The reason is that increasing evidence of inflation has been making it more difficult for the Fed to rationalize money supply growth, which of course is the primary driver of inflation. However, faced with "the end of the world as we know it," the Fed has become ever so willing to drive the money supply through the roof, once again creating massive inflation. Why? To prevent a probable financial meltdown. What caused the meltdown in the first place? Glad you asked! It was the Fed's money supply increase in the first place... which financed excessive government spending and the excessive accumulation (and disregard) of risk on both Wall Street and Main Street....

Folks, we have one big national and international dysfunctional family here!

Read Mr. Bugos' article in full here. For a commentary on his analysis, click here.

(2) Equally interesting.... We are now in the fifth year of the second 5-year Central Bank Gold Agreement. This is the agreement by which central banks determined, at the outset of the millennium (in 1999), to rid their coffers of gold, the archaic relic, to the tune of 500 tons per year. As is well-known, Gordon Brown, as treasurer, had already drained Britain's coffers of "unwanted" gold before the present millennium began. Most other countries have been quick to follow in his footsteps. Now, with broad classes of financial assets revealed to be much more risky than central bankers had previously pretended, gold has suddenly (as has been the case from time immemorial) become a necessary holding to preserve financial stability.

Read about it here:

"Sales of gold by European central banks are likely to be lower than expected over the next year as the global banking crisis boosts bullion's appeal as a 'safe' reserve asset.

"And banks elsewhere in the world, most notably in Asia and the Middle East, may even become buyers of gold in an attempt to diversify their reserves away from the dollar, analysts say.

"Under the terms of the Central Bank Gold Agreement, signed in 1999 by key European institutions including Germany's Bundesbank and the European Central Bank and renewed in 2004, members can sell up to 500 tonnes of gold a year.

"But in the fourth year of the latest agreement, which ended on Friday, sales fell well short of this ceiling, to just over 357 tonnes. (Ed: The lowest since 1999.)

"With banks worried by the outlook for the financial sector, sales could be even lower in the final year of the pact.

"'Given the damage done to a lot of other paper assets that were formerly considered secure, there will be greater risk aversion among central banks,' said Philip Klapwijk, executive chairman of metals consultancy GFMS. 'This will only boost gold's status within central bank reserves.'

"A key reason why central banks want to hold onto gold is the instability of their most common reserve asset, the dollar. "

Gold closed today at $834.80, down 2% for the week.

Given fundamental conditions, in my humble opinion, gold should in fact presently be trading at twice that price. Of course, "should" is usually a dangerous word. Gold has no obligation to have any price other than that assigned to it by the market. Therefore, I am alleging neither that gold nor the market is at fault. What I am saying is that the market will change when perceptions change. Fundamental factors suggest that gold's present inherent value is roughly twice what people pay to buy and sell it today. Therefore, those who are buying gold today are, in my opinion, making a better decision than those who are selling it. Why? The sellers are giving it away under distress at "half price." The buyers are obtaining it at half price. I know which side of that trade I want to be on.

Our thinking has not yet caught up to reality in my view - but don't worry - it will.

Why? Because reality will inevitably catch up to us!!!

We are in the earliest stages only of the unwinding of excessive risk. We are "whistling in the dark" if we believe that throwing taxpayers' (not yet earned) money at the problem will make it go away.

In fact, am not entirely opposed to the bailout scheme in the present context - it may help a great deal to maintain interbank liquidity by creating a temporary government-sponsored market for the purchase of unsaleable bank assets (many but not all of which are of bad quality).

But the bailout will not resolve the fundamental economic weakness that is now upon us. Our present broad economic problems are a consequence of nothing less than financial exhaustion. Every conceivable means of creating, slicing, dicing, and repackaging debt has now been tried - and the most ludicrous of them have utterly failed, undermining in turn even the considered plans of the most financially cautious and responsible of our citizenry.

We are all impacted by the present financial epidemic. Despite the failures of multiple banks, the end of the government sponsored enterprises, and the end of investment banking on Wall Street, we still don't seem to have recognized this most fundamental fact....

There is much more to come in the way of economic weakness and difficulties. This is what happens when the extremes of the business cycle are amplified on both the upside and the downside by rampant speculation and recklessness at all levels of the economy.

That is, bigger upside - bigger downside. It is fairly symmetrical.

Consequences exist, and there is no simple way around them, other than simply paying the price of our prior irresponsible economic decisions.

At such historic junctures, citizens have always turned to gold to preserve wealth. This time will be no different.

At some point, therefore, the gold price will begin to reflect how deep and far-reaching the present risks actually are. My estimate is that an appropriate gold price right now would be approximately twice gold's present monetary exchange rate of roughly $800 per ounce. And that proposed doubling, in turn, is in all likelihood merely a stepping stone along the way in a greater historic process involving the fundamental revaluation of gold for decades to come.

We remain in the very earliest stages of placing an appropriate financial value upon the ability of gold to preserve value in a world that has fundamentally lost sight of what value actually is. Gold's price is as low as it is today (roughly equivalent to 1980s peak price level, disregarding 28 years of roaring inflation) because those who hold it have not yet fully considered its worth in their hands. When continued financial crisis makes that understanding more clear, the monetary amount we pay for gold is very likely to double from today's price in the $800 range.

The time frame for the present revaluation is likely to be quite brief in historical terms, though I lack the ability to predict when this price adjustment will occur. Obviously I believe that gold should be priced at $1600 today, and that is not yet the case. But do not doubt gold's power to accrete value to itself in times of crisis. It will come soon enough.

October 11, 2008: Note that the price of gold has moved $100 in a day twice in the past month (September 17 and October 10).

I take the recent volatility as evidence of the capability of gold to sustain price readjustments in increasingly larger steps. Gold has its enemies, and these powerful moves will not always be in favour of short-term oriented gold traders (as was certainly the case on October 10 - and will be again). But gold's increased recent volatility fundamentally equips the metal of kings to undertake the sort of powerful price revision that I am now suggesting. Note, however, that in my experience, gold rarely takes on value in other than unsettling ways to those who trust in its enduring power to preserve hard-won savings.

Gold is to some degree a wild beast that cannot be tamed by any single human interest group. Gold marches to its own drummer, and perseverance is required to reap the benefits of its undeniable strength relative to all other classes of investment. In fact, gold is in a category of its own. It cannot be likened to any other holding. Those who are unfamiliar with its unrestrained behaviour are as likely to be unsettled as as to be rewarded by owning it. So take this as a cautionary note! Riding the gold bull has never been easy, but it has inevitably been rewarding for those who have perceived correctly when its time to outshine all other investment options has come.

Inevitably, at some point over the next one to three years, gold will startlingly readjust our concept of what it is and of what it is able to do for those who choose to hold it. It is possible that no more than one more year will be required for this fundamental readjustment to occur.

This readjustment will constitute the first wave of the golden tsunami that I am quite certain is on its way even now.

Oh, and here's an interesting note. The 40-point percentage drop in the Dow over the past year is now the greatest on that index since 1900, including 1929-1930, the one-year period that kicked off the great depression. Note also how the present decline is at almost four times the magnitude of the 11% year 2000-2001 decline.

Of course, when you analyze the performance of the Dow in gold terms, the drop is greater still, reinforcing the failure of the Dow against gold that in fact began in the year 1999. Based on historic indicators, the Dow could still lose 80-90% of its value in gold terms from here. At Dow bottoms, the index is usually at or near parity with the gold price. The primary question from here is whether gold rises that much or the Dow falls that much. This in turn will depend primarily on the extent to which inflation erodes the real value of the Dow - and enhances the monetary value of gold. That is, the greater the amount of inflation, the higher the nominal value of the Dow, and the greater the monetary cost of gold.

Many commentators have warned that US and world markets were in unprecedented bubble territory since the early to mid-1990s. The one-year decline of 2007-2008 seems finally to have justified their warnings.

By the way, the only surprise for gold investors so far in the present market panic has been the extent to which the market has allowed the trading price of precious metal (and commodity) mining shares to fall. As the gold price has remained firm through the stock market correction, there can be little doubt that the earnings of the gold miners will be rising from year to year.

That is, the large miners will ultimately do fine, and their market value will certainly recover to better levels than before, but the same cannot be said for junior miners and explorers. There is now a crisis in the liquidity-dependent small capitalization gold mining and exploration sector.

Bottom line - mineral deposits are very expensive to find, and mines are expensive to permit, build and operate. Small mining and exploration companies depend upon the availability of capital through both the stock market and the banking and credit systems. Interestingly, if the various international inflationary rescue plans that are now being contemplated bear fruit, the smaller miners will benefit doubly: (1) Any fix to the banking system that works (click here for a Canadian perspective) will again at some point make funds available for mineral exploration and mine development; and (2) the global financial repair, however it ultimately works out, will inevitably be extraordinarily inflationary in nature, giving greater value to the products of the miners.

If the rescue plans fail, which is of course a very real possibility, then the current pall over the small cap mineral and mining sector will surely be extended. Inevitably, the bigger miners who can fund exploration and development costs through their increasingly profitable production operations will then be snapping up the best of the juniors, as buyouts by producers will become the only method of funding new mineral exploration and mining ventures.

When this time comes, there will be one critical distinction between the depressed small cap mining sector and the mainstream business sector.... The assets of the explorers and mine developers will be appreciating in real value, even as the assets of consumer-dependent businesses and financial entities continue to fall in real value until such time as Western consumers recover from the credit and debt binge of the past three decades.

Here is another way to think about it. In an environment of coordinated international currency devaluation, currencies will inevitably lose ground against tangible assets. This is a time-honoured economic principle and historical truth that has never once failed to demonstrate itself. When currencies decline in value, things that are real take on value relative to currencies.

I have even begun to think of it this way. Commodities have already become the currency of a planet with a population of 6 billion, 850 million souls (four billion of them Asians) who can easily live without the promises of banks and governments, but who cannot survive without things that are real. Tell me that as Asia rises its citizens will not require - or will fail to obtain as needed - iron, copper, nickel, zinc, lumber, agricultural produce or water. In our current inflationary environment, where governments are now frankly discussing trillions of dollars in rescue packages, the value of money is a fiction - whereas the value of things that are real cannot be questioned.

We also know that, unlike ourselves in the present age, Asians are savers. And while we in the West happily trade away our gold and silver, the savers of the East are snapping it up - in fact, more rapidly than we can hand it over to them, thus creating the recently reported shortages in the physical precious metal markets. Asians require iron and petroleum to live, but they will demand precious metals when they save. These are the fundamental facts in the background which are ever so visible, and yet simply not under discussion.

While we here in the West play with trillions of dollars in electronically created money, the savers of the East are taking a stake in the future through investment in precious metals and other tangible assets. This is the fundamental economic fact of our time.

Present global phenomena can thus be understood in the historical context of the rise of the East, which is a larger historical trend in the background of global economic developments. That is, Western economies are ultimately built on the backs of financially exhausted Western consumers. The distress has many years to continue. Alternatively, Asian economies have so far been built on the savings of thrifty citizens, who are only now entering the consumer marketplace at still quite a gradual pace. Many years of growth in Asia lie ahead, and Asia will become increasingly independent as this region of the globe moves towards domestic sources of revenue, and away from its present export-driven business models.

Now... if a sufficient body of investors can appreciate the subtle distinction between real and imaginary value, it is possible that the small cap mineral and mining sector might recover handily prior to its assimilation by large-scale miners. I for one would like to preserve the independence of the small miners and explorers, but I cannot realize this project alone. There will have to be a sufficient body of other investors who see it as I do.

Time will tell regarding the fate of the junior precious metal mining and exploration sector. My guess is that the timing of the golden tsunami will make it or break it one way or the other. That is, if the golden tsunami arrives sooner, say within the next year, small cap shares may recover quite quickly. Based on my thesis, their assets are literally enduring wealth stored in the ground. If the landfall of the tsunami is delayed by several more years, then the small cap sector will be bought up by the larger mining companies (who certainly understand the value of their assets), and we will see a massive consolidation of the mining sector.

It is ironic that in today's world, governments are spending trillions of dollars in anticipated taxpayer contributions to purchase financial assets that are worthless while at the same time, global investors are spurning the ownership of assets of enduring and appreciating value. But this is the world we live in... bizarre though it may be. There is no other.

18 July 2011: Better late than never. Gold topped $1600 for the first time today, with the recent high $1607.30. All I can say is, "There's more where that came from!"

Here's the chart:

The rate of change is picking up....