The Race for Resources

San Antonio, 5 August 2012
The world watched in awe as American swimmer Michael Phelps became the most decorated Olympian of all time. I’ve read he’s been training in the pool for an average of 6 hours a day, 6 days per week, which equates to about 30,000 hours since age 13 and about 10,000 calories burned during a training day. It’s inspiring to see the incredible results of his tremendous sacrifice and commitment - By Frank Holmes, U.S. Global Investors.
Investing in global markets requires the same sort of stamina, especially at times like this week, when the month’s reading on the manufacturing industry was not encouraging. The J.P. Morgan Global Manufacturing PMI of 48.4 for July was the lowest since June 2009.
However, I believe there are encouraging pockets of strength to energize and inspire investors.
For example, we’re coming up on the anniversary of the first stimulus move that kicked off the global easing cycle. On August 31, 2011, Brazil unexpectedly cut rates by 50 basis points, and since then, ISI says 228 stimulative monetary and fiscal policy moves have been initiated across several countries, including the Philippines, China, France, and Colombia.
In June and July alone, there were nearly 70 moves—the most since the world began this massive easing.
Generally, by the time central banks make a fiscal or monetary easing move, economic deterioration has already occurred. Even with these moves, it still takes several months for the stimulative measures to take effect and work their way through.
But while the world wades in the shallow end of the pool waiting for the economy to warm up, Asia has taken a deep dive into the energy space as they’ve recently announced acquisitions of Canadian resources companies.
In my presentations, I’ve discussed how resources companies have significantly underperformed their underlying commodities. During 2009 and most of 2010, the performance between oil and the S&P 500 Oil & Gas Exploration and Production Index was closely correlated. By the middle of 2011, oil and oil stocks started to separate, with crude continuing to rise while stocks deteriorated. Even with the recent drop in oil prices, oil stocks have continued to lag.

I’ve also discussed the strikingly similar trend occurring between gold and gold stocks. There’s been a spectacular pop in gold stocks recently, but it hasn’t been enough to catch up to gold’s performance.

The disparities mean that the cheapest resources are not found in the ground—they’re listed, and it’s been confirmed by recent energy company acquisitions.
Chinese oil company CNOOC put in a bid of $15 billion to purchase Canada’s Nexen. This was at a 61 percent premium to Nexen’s share price on July 20, according to Bloomberg. As you can see below, not only did the takeout announcement close the gap, now the company is outperforming the price of oil.

If CNOOC’s deal is approved, the state-run oil giant gets even bigger, gaining access to significant energy stores in several areas of the world, including Canada, the Gulf of Mexico, Colombia and West Africa, as shown below.

With a rapidly growing middle class and rising urbanization, Chinese leaders know they need to fill their country’s tremendous energy demands and are continually finding innovative ways to keep their country powered. CNOOC’s acquisition is one way China continues to acquire not only the resources needed to power the country, but also the technological innovations that come from countries with free markets and lower barriers to entry. According to The New York Times, China “has been garnering advanced production technologies to better draw oil and gas from nontraditional areas like deepwater fields and hardened rock formations.”
The other announcement came from Malaysia’s state-owned and natural-gas giant Petronas, which will purchase Canada’s Progress Energy Resources Corp. Petronas is one of the largest producers and shippers of supercooled LNG fuel in the world. According to the Vancouver Sun, the company is “anxious to increase its market share in Asia, where analysts expect demand to surge 75 percent by the end of the decade.”
After Petronas’ original bid was announced, Progress increased 74 percent—a record gain for the company, says Bloomberg. As shown below, Progress now dramatically outperforms the underlying commodity.

Ready to be a Buyer like Asia?
If you’re contrarian investor, there may be an additional reason to jump into the market today. According to research from J.P. Morgan, institutional investors have become extremely negative, as hedge funds “essentially short the market,” meaning that their expectation is that stocks will fall.
J.P. Morgan looked at the rolling 21-day beta of macro fund returns compared to the S&P 500 Index returns and found that the ratio is at an extreme level of -0.26. Research shows that the last two times the ratio fell this low—in September 2010 and February 2012—stocks rallied. In 2010, the S&P 500 climbed 26 percent in five months; in 2012, stocks rose 8 percent in two months.

These signs the market is sending out make it an especially attractive time to “mine” for investment opportunity. In July, we began to see energy stocks and oil get recharged, as the energy sector in the S&P 500 was the second best performer, increasing 4.17 percent and crude oil rose 3.68 percent. Unlike the start of an Olympic race, in investing, there isn’t a signal sounded to let you know when to dive off the starting block into the markets. Just make sure your portfolio is poised to participate in the race for resources.
Ends --

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By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors
Read the article online here:  The Race for Resources

Gold miners need to think differently about costs - Holland - #GOLD

Mineweb reports,


Gold miners need to think differently about costs - Holland

In a remarkable speech to the Melbourne Mining Club, Gold Fields CEO, Nick Holland, questions the manner in which the industry reports costs.

Posted: Thursday , 02 Aug 2012 

GRONINGEN (MINEWEB) - 

In the movie Jerry Maguire, Tom Cruise is a sports agent who, tired of all the BS that goes with ever more demanding bottom lines in the sports management industry, has a moment of clarity.

In the wee hours of the morning, wrapped in a blanket he writes a mission statement that contains the motto "fewer clients, less money".

In the unlikely event that they make a movie about the current state of the gold mining sector, Nick Holland's keynote address to the Melbourne Mining Club could provide a very similar moment.

In a fascinating 35-page long speech the CEO of gold major, Gold Fields looks at all the things that gold miners have been getting wrong over the last decade and looks at a few ways to solve some of them. Among them is a page dedicated to the manner in which much of the industry reports costs - something about which Holland is clearly passionate.

He points out that while the gold price has gone up at a compound annual growth rate of 21% from 2006 to 2011, all-in costs, what Gold Fields refers to as Notional Cash Expenditure, as risen 16%.

"In five years that means costs have doubled. We've lost a lot of the upside!" But, he says, while this may be the case, "At investor conferences the industry often extols its cash cost performance - that we are making significant operating cash flow margins - sometimes in excess of $1,000 an ounce.

"Who are we trying to kid? We don't kid the investors because they know how much cash we really generate after everything is accounted for. The sell-side also understands this. The only people we're kidding are governments and communities who, not surprisingly, say, okay, you're making super profits, please pay up. And before we know it we have windfall taxes, higher royalties and so on."

Holland compares the current situation to a footballer scoring an own goal every time he or she plays and being proud of it.

"We've got to change the lens through which we and the world view this industry, and start talking about what it really costs to produce an ounce of gold. I don't care if we call it NCE or something else, but to talk about cash costs only is not telling the full story."

Gold miners need to think differently about costs - Holland - GOLD ANALYSIS - Mineweb.com Mineweb

The MasterMetals Blog

Bullion is Now Being Priced for Collapse | Resource Investor #Gold

Bullion is Now Being Priced for Collapse

Where is the gold price today? If you're like many Americans, you have no idea whether it went up, down, or sideways. Fortunately, I know my readers to be more informed – you likely know that after falling from almost $1,900, gold has been trapped around $1,600 since early May. But you may still be curious why despite continued money-printing and abysmal US economic reports, gold hasn't been able to hit new highs.
Here's the truth: gold is currently priced for collapse. Many investors believe the yellow metal has topped out and are selling into every rally.
Nerves of Tin
Being a gold investor is tough business. The last thing any government or corrupt big bank wants is to have a bunch of people putting their savings into hard assets – and gold is one of the hardest of all. So we're constantly up against tides of propaganda saying that gold has no value or is the refuge of doomsayers.
The effect of this is that even heavy gold investors are always waiting for the other shoe to drop. When house prices were rising, no one was worried that the market had peaked or prices were unsustainable. No one was asking whether all the thin-walled McMansions going up would actually be worth anything in a generation. But for gold, Wall Street has been shorting it all the way up!
Nowhere is this pessimism more evident that in gold mining stocks. Rising inflation has driven production costs higher, but the mistaken belief that inflation is contained and Treasuries are a safer haven is keeping a lid on gold prices. As such, many of the major producers have missed their earnings projections, and their share prices have been punished. This has placed a cloud over the entire sector. In fact, the P/E ratios of major gold miners are near record lows. Stock prices reflect future earning expectations, and judging by the low P/Es, Wall Street expects future earnings to plummet. This likely reflects their bearish outlook for gold, which is generally viewed as a bubble about to pop.
Chronic Memory Loss
Unfortunately, there is no public validation for those who have proved the gold doubters wrong. A couple of years ago, I predicted gold would cross $1,500 and even my own staff thought the call was too risky, too extreme. But I knew then, as I know now, that at the end of the day the gold price is not a mystery – it's a proxy for dollar weakness.
Since most investors do not truly understand gold's economic role, they assume the 10-year bull market must be a mania. But manias show parabolic growth detached from any fundamental driver. The definition of a mania is the bidding up of an asset quickly and beyond all long-term justification.
Gold, however, has grown steadily in inverse correlation with real interest rates, as explained by Jeff Clark and Mark Motive in past issues of this newsletter. As a reminder, here's a chart detailing the correlation:

 

(Click to enlarge)  

 

The Opportunity of the Decade
After spending the previous fall and winter testing new nominal highs above $1,800, future investors may come to view spring and summer 2012 as the opportunity of the decade. Gold has shown its strength and retreated. While most investors will take that as a signal that the market has topped, some will take advantage of the general trepidation to add to their positions at hundreds of dollars off the highs.

While I think gold is a bargain at $1,900 considering today's circumstances, the market phobia of a price collapse is allowing us to buy at well under established highs. It's as if you already wanted to go swimming, but you found out when you got there that the pool was heated.
What Happens Next
I've seen markets like this before, and by making some reasonable inferences, I have a good picture of how this could play out. Gold will continue testing the $1,600 barrier until it surprises to the upside. This could be spurred by the announcement of QE III, a calming of fears in Europe, or any shock to the Treasury market. Treasuries have temporarily overtaken gold as the primary safe-haven asset. Once that dynamic is broken, I believe the counterflow into gold will be tremendous.
Right now, there is a haze over investors. Frightful news from Europe and a slowdown in Asia have shaken confidence in any asset that doesn't have the steady track record of US debt. But as I often remind my clients, past performance doesn't guarantee future results. Any news that wakes investors up to the coming collapse of the Treasury market will likely trigger a rush into the one asset with a track record as long as civilization itself.
Prepare For Collapse
The key to this market is to understand that a price collapse is coming – but not for gold. Instead, the market for US dollars and dollar-denominated debt is headed off a cliff, which will send the price of precious metals soaring.
Now is a time for uncommon confidence. Everyone knows Treasuries to be safe, just as they knew house prices would always rise. Then as now, gold's value and utility are doubted. But my readers know better.

read the article online here: Bullion is Now Being Priced for Collapse | Resource Investor