April 2007


HMS Global Economy

TOO MUCH LIKE 1929

by Bernard Ber
April 27, 2007

The following commentary will describe the final sequence of events that will lead to the implosion of the global economy.

As US real estate prices fall and depress US economic growth, private foreign investors begin to withdraw their capital from the US financial markets. This capital flow would by itself act to elevate the currency value of the country that it is returning to. However, the governments of developing foreign countries have policies in place to fix the exchange rate of their currencies. In order to maintain this fixed exchange rate, foreign central banks will print their own currency and exchange it for US dollars (which are then invested into US government debt). The amount of money printed and exchanged into US dollars by the foreign central bank will necessarily equate to the amount of private capital returning to the country. These central bank policies will act to artificially keep the value of the US dollar elevated and artificially keep US interest rates low…

Click HERE to read this (prophetic?) article

Tedbits
by Ty Andros

Tedbits is authored by Theodore “Ty” Andros, and is registered with TraderView, a registered CTA (Commodity Trading Advisor) and TraderVest LLC a GIB (Guaranteed Introducing Broker). He currently is the principle of TraderView, a managed futures and alternative investment boutique. Mr. Andros began his commodity career in the early 1980’s and became a managed futures specialist beginning in 1985. Mr. Andros duties include marketing, sales, and portfolio selection and monitoring, customer relations and all aspects required in building a successful managed futures and alternative investment brokerage service.
Mr. Andros attended the University of San Diego, and the University of Miami, majoring in Marketing, Economics and Business Administration. He began his career as a broker in 1983, and has worked his way to the creation of TraderView of which he is the sole owner. An adherent of the Austrian School of Economics, Mr. Andros is active in Economic analysis and brings this information and analysis to his clients on a regular basis. Ty prides himself on his personal preparation for the markets as they unfold and developing a loyal clientele.

His latest missive “Blast Off, tsunami of cash hitting the street aka Repatriation!” is a MUST READ.

Toronto Globe and Mail published a wonderful profile of Canadian fund manager and GATA supporter Eric Sprott. The profile mentions the gold-price suppression scheme, and of course Sprott Asset Management was publisher of the groundbreaking study of the manipulation of the gold market, “Not Free, Not Fair.”

A bull in bear’s clothing
What gives Eric Sprott the vision to see opportunity in every discouraging trend? (Hint: It’s a product you, too, consume)

BOYD ERMAN

From Friday’s Globe and Mail
April 27, 2007 at 6:08 AM EDT

Observe the crowd when Eric Sprott heads to the front of a room full of financial types and launches into his routine: Eyes roll, heads shake and hushed voices trade asides.

It’s hardly the reception you’d expect for one of the most successful investors in the country. But it’s not difficult to fathom why Sprott makes audiences uncomfortable. People whose livelihoods depend on the financial markets don’t want to hear yet again that the world is running out of oil, that the price of gold is headed for the moon, that the world’s currencies are doomed to devaluation and the global financial system is on the brink of collapse. And they especially don’t want to hear it from someone who is right so often—a guy who called the end of the technology bubble and the plunge in the U.S. housing market well ahead of time.

In a world fuelled by optimism, Eric Sprott is a big downer—unless you’re one of the investors who has enjoyed the stellar returns in the $4.8 billion worth of hedge and mutual funds he and his team run at Sprott Asset Management.

The firm’s predictions, chronicled in a monthly newsletter that Sprott co-authors, conjure up a Mad Max future where people fight over the last drops of gasoline. “We’re relying on the price of oil going up,” he says. “We’re relying on the price of gold going up, the meltdown of the financial system.” Sprott is so consistently nervous about a stock-market free fall that for the past seven years he’s been telling investors to stay away from his firm’s equity mutual fund, because, unlike his hedge funds, it can’t resort to short-selling to protect against a plunge.

Yet people who know Sprott attribute much of his success to—get this—his sunny outlook.

“He’s an incredibly optimistic person,” says Scott Lamacraft, who has known Sprott since he did a summer-student stint at Sprott Securities in 1993. “That’s what differentiates the great people in business from the not so great. For Eric, the glass is half full. You can be bearish and optimistic at the same time. You can see opportunities where other people don’t.”

Sprott has been so good at finding those opportunities that his equity fund—the very one he cautions against buying—has averaged annual returns of about 35% since 2000, according to Globefund. Facts like this feed the legend: Sprott is a man who can make money in any market.

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Sprott, a tall, broad-shouldered 62-year-old, has prospered on both sides of the securities business—brokerage and fund management. Raised in Ottawa, he graduated with a commerce degree from Carleton University in 1965 and headed straight into the investment world as an analyst at Merrill Lynch.

In 1981, he founded his own brokerage firm, Sprott Securities Inc., which he turned into one of the most successful boutique investment dealers in the country. It was known for its focus on research: Fascinated with finding small companies with big potential, Sprott spent long days getting to know businesses and pitching the resulting ideas to fund managers.

But as the end of his second decade at the head of a brokerage approached, Sprott grew frustrated with the routine of coming up with investment ideas for others. Already running the Sprott Canadian Equity Fund, he itched to spend all his time investing. He sold Sprott Securities to his employees and founded Sprott Asset Management Inc. He has no regrets—he’s better off for the change, both intellectually and financially. Sprott’s secret? He reads—voraciously. He rises every morning by 5 a.m. to plow through three newspapers—The Globe and Mail, National Post and The Wall Street Journal, before getting into all the research that accumulates on his desk each day. Other people may run their funds with computer modelling and game theory; Sprott attaches clippings to his missives for investors. “I’m always shocked that you can read things in the newspaper that prove to be incredibly valuable, that a lot of people miss,” he says.

For much of the 1990s, Sprott was a bull, and he didn’t shy away from technology investments. One of his top picks in 1998 was Teklogix International Inc., a maker of wireless gear. It soared more than 400% that year. But as the decade drew to a close, the dizzying heights of the stock market were starting to concern him. In the summer of 2000, he happened across a story in The Wall Street Journal that made him certain that the bubble had to pop.

The article described an analyst who was concerned that some upstart phone companies, known as competitive local exchange carriers (CLECs), wouldn’t be able to pay the interest on their bonds. “I thought, ‘My God, if she’s worried about the bonds of the CLECs, what the hell does that say about Nortel, which sells to the CLECs?'” Sprott says. “How are they going to pay their invoices? That was way before Nortel peaked out. There it was in The Wall Street Journal. We took it as gospel and realized that Nortel was going to have a lot of difficulty.”

At the time of that epiphany, Sprott was already touting investments in gold, metals and energy as a safe haven. He went a step further in the fall of 2000, launching his first hedge fund so he could sell stocks short to protect investors in a market meltdown. Since then, Sprott has generated a compound annual return of 30% in that first hedge fund, and gone on to start two more.

There’s more to the reading than just logging the time, of course. Sprott has trained himself to seek viewpoints from the edge. The “recommended reading” list on Sprott Asset Management’s website is full of apocalyptic titles such as Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression and The Party’s Over: Oil, War and the Fate of Industrial Societies. “You learn to be at the extremes, because at the extremes is where something is going to happen,” says Sprott. “If you read the mainstream, you’re not going to learn anything.”

His employees get the message. “The first thing Eric taught me is to challenge the consensus,” says Lamacraft, who now runs Sprott Securities, recently renamed Cormark Securities Inc. “Don’t just believe what you read on the surface, but get one level deeper and see what’s really going on.”

Reading the viewpoints emanating from Sprott Asset Management, one could easily imagine that the firm is located not on Bay Street but in an underground bunker staffed by equal complements of conspiracy theorists and survivalists. There are suggestions from time to time that central banks are manipulating the gold market to depress prices; Sprott himself is a believer in the peak-oil theory.

“The peak-oil thesis says that if we’ve hit the peak, then production goes down forever,” Sprott says, his tone darkening. “That’s a big statement if it’s true. Forever. Oh my God, can you imagine a world where we’re trying to survive 10 years from now on 60 million barrels, or 15 or 20 years from now on 60 million barrels? It would be such a fight over who is going to get the oil. Because we have to have it. So it could be quite wild.”

Then he brightens, saying, “But maybe we’ll find solutions.” Indeed, Sprott has placed big bets on some of those potential solutions. His firm is one of the largest investors in uranium companies, and has also piled into coal producers. Ethanol he’s not so sure about, given that it takes a lot of energy to produce. So far, uranium has paid off spectacularly; coal hasn’t. Maybe coal will climb when the supply of oil gets really tight, Sprott figures. In the meantime, he’s not about to buy more, citing one of his maxims: Don’t push a loser.

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For a wealthy man, Sprott has a regular-guy persona. He tends to order Coors Light even at Toronto’s priciest boîtes, and on a casual Friday you’ll find him in chinos and a Tommy Hilfiger shirt, rather than in the Italian threads that many of his counterparts in the industry sport.

His big indulgences are philanthropy and collecting art. In total, he has donated more than $20 million to his alma mater and an Ottawa hospital. Although he says he’s not the least bit artistic and never dreamed of becoming a collector—he goes all aw-shucks when discussing art—Sprott’s office looks more like the National Gallery than a fund firm.

His is one of the finest private collections of Canadian art: Inuit sculptures adorn the lobby, and the walls are hung with paintings by Emily Carr, the Group of Seven, Jean-Paul Riopelle and Norval Morrisseau. Lately, Sprott has been branching out into impressionists. A van Gogh, no less, hangs just inside the front door.

The strange thing is, this big-time collector is colour-blind. “It’s not the colour that does it for me,” he says. “It’s probably the contrast in the colours.”

Art, philanthropy—enough to keep a man satisfied, no? Sprott does periodically think about slowing down. “I’ve had a good run,” he says. “I don’t need to start something else.” Then he laughs, realizing that he is starting something else—a company that will invest in molybdenum, an obscure metal used to toughen alloy steels. Investors, lured by Sprott’s reputation, anted up $200 million for units in Sprott Molybdenum Participation Corp. in April—twice as much as the firm expected.

“In one way, you wonder why you do it,” Sprott says, turning reflective. “But we believe in it. I think it’s going to be a good thing for people to invest in, so fine. Let’s go do it.”

After last year’s FEDs suspect decision to hide M3 from prying public eyes (to conceal the embarrassing proof of continuous money supply increase), a group of stubborn investors who wouldn’t take no for an answer, put up a financial web site and managed -inter alia- to resuscitate this most-hated-by-central-banks index.

The M3 is back folks!…along with dozens of other indexes and graphs.

M3 is back

Go check’em all out HERE.

Blanchard Economic Research Unit believes the recent failure by the gold price to break through above the $700 level has been due to the selling of bullion by Central Banks which has depressed the price, but this cannot continue indefinitely.

Neal R. Ryan (Blanchard Economic Research Unit)
Thursday , 26 Apr 2007

NEW ORLEANS

It is our firm belief that the reason we have seen the gold market fail to take the $700 level over the past week is due to the continued increase in Central Bank gold sales, specifically those out of the European Central Bank (ECB) system.

Central Banks around the globe can influence gold prices via two methods. CB’s can make outright sales and purchases of gold, or CB’s can loan/swap gold into the market or call those loans/swaps back into their reserves. For the sake of this explanation, we’ll leave the loan/swap segment out because until the IMF changes are implemented in the market allowing for correct accounting of those loans/swaps, we would only be using guesstimates and dumb luck to quantify those levels.

Before the Washington Agreement on Gold (now referred to as the Central Bank Gold Agreement – CBGA) was implemented in 1999, CB’s were free to sell gold willy-nilly into the marketplace with no thresholds on volume or timing. Recognizing that the lack of oversight or control was destroying the value of their gold reserves, the CBGA changed that with signatories agreeing to only sell 400 tonnes annually from 1999-2004. Those levels were augmented in the 2nd Agreement to 500 tonnes annually for the 2004-2009 period. Starting in 1999, CBGA signatories were now restricted to only selling 12.8 million ounces and starting in 2004, 16 million ounces annually into the market. (1 tonne = 32,150 oz.)

Annual supply usually floats around the 120 million ounce level, so CB sales, assuming they fill their allotment each year, represent roughly 10-13% of annual supply into the gold market.

For the first time in the life of both agreements, signatories to the CBGA failed to reach their annual sales allotment coming up nearly 120 tonnes short in the 2006 calendar year. That 120 tonne shortfall in 2006, represented a decrease of about 3.2% in supply into the market.

This 3.2% decrease in supply has come at the same time we’ve seen an 8% decrease in annual mine supply over the past five years, 80 million ounces of demand via dehedging in the gold market, 2nd and 3rd tier central banks adding to reserves and increased investor demand across the globe.

ECB banks have sold over 76 tonnes of gold into the market over the past five weeks. This is in sharp contrast to the past 6 months when ECB banks had sold only 112 tonnes of gold into the market. We believe that we are still experiencing increased levels of sales this week, so we may yet revise the 76 tonne figure higher in the coming weeks. This huge influx of supply into the market has, in our opinion, been the one drag on the market, but it certainly has its upside.

So what’s the upside?

History has shown that pressure is certainly applied on top of the market during each period of elevated CB sales. This can be no clearer illustration than what happened after the Bank of England and Gordon Brown announced they would sell over 400 tonnes of gold reserves, causing prices to hit 20-year lows in what most traders now refer to as the Brown Bottom. In the last decade, we have also seen the Bank of Canada sell off all of it’s gold holdings, the Banks of Switzerland, Australia, Denmark, Spain, Portugal, Norway, Sweden, and France, amongst others, also sell off a major percentages of their gold holdings into the market. The one thing that has held true is that the gold price has continued to bounce back and head higher as these sales have concluded.

In the past, increased sale levels have had a significant impact on the market, most recently when 80 tonnes were sold into the market over 4 weeks in May of 2006, we saw prices fall from $730 per ounce and test the $575 level. To a lesser extent, we saw +50 tonnes of sales hit the market in September of 2006, sending prices from $605 to $565 per ounce. What we are seeing presently is that sales have increased considerably without the bottom falling out of the market as has been the case in the past. The market is experiencing some price weakness as it struggles to continue to digest these massive sales, but the price has continued to trend higher in the face of these increases. This is a watershed event for the market and investors need to understand what this means to them. The days of massive bank sale increases tanking the market are coming to a close for two reasons.

1. The market has finally demonstrated the ability to gobble up these sales and continue trending higher, even if the increased supply is keeping us from the major price increases we have been expecting.

2. Central banks have shown that they are simply running out of the gold they will part with via sales into the market. It is our belief that the Bank of France is the lone seller of any magnitude left out in the marketplace. Other ECB captive banks have completed their announced sales programs. The two others left with any sizeable gold reserves, Germany and Italy, have never sold gold of any significant amount under the CBGA agreements.

When the Bank of France is finished selling which we believe is coming close to being a reality, the market will have potentially lost a large portion (10-13%) of it’s annual supply. We do expect at some point in the future to see CB sales to increase, but not until the price has had another significant increase as well. The IMF gold sales have been trotted out lately to solve IMF funding issues. Without approval from Congress, which we believe is quite remote, these sales will never take place.

While gold sales have increased over the past five weeks, levels should still be short of the annual allotment from the CBGA, the second time in two years. Look at these sales increases as a gift. They are allowing investors to add to metal holdings at lower prices while not tanking the market and causing investors to lose interest. When the banks are done selling, gold will be in the strongest hands, those of individual investors.

And taking a page from history, the gold price will also be considerably higher.

Neal Ryan is Vice President and Director of Economic Research for Blanchard Economic Research Unit – http://www.blanchardgold.com/
Gold Could Reach $3,736.13 Per Ounce
BY: Lee Rogers
POSTED: 04-21-2007

From 1982 to 2000, the Dow Jones Industrial Average went from a bottom of 776.92 to a peak of 11722.98. This represents an annual compound return of 16.8% over the course of 17 years and 5 months. Ironically this rate of return is almost identical to the annual rate of return gold is delivering in its current bull market run. If we say for argument sake that the gold bull market lasts the same amount of time as the previous run in the DJIA from 1982 to 2000, we can project a gold price of $3,736.13 per ounce of gold by 2016.

Gold bottomed at $252.80 on July 20, 1999. 6.81 years later on May 12, 2006 gold peaked at $725 per ounce. This represents an annual rate of return of 16.7% which is only .1% off from what we determined the DJIA’s annual rate of return during its bull run from 1982 to 2000. Based upon the 16.7% annual rate of return this is how we came up with the $3,736.13 per ounce figure by 2016. This is actually a conservative figure considering that the last phase of the past two bull markets both the 1970’s precious metals bull and the DJIA bull from 1982 to 2000 ended in mania. The general public entered the markets which meant there were no more buyers and subsequently the long term bulls ended. We could very well see the same thing happen at the end of this bull market in precious metals. It would not be out of the realm of possibility to see gold go up to $5,000 or $10,000 in such a situation. I believe this to be a possibility considering that unlike the 1970’s we have China and India as factors as well as a chronically devaluing USD thanks to our friends at the Federal Reserve.

Using this same analysis we can also roughly determine a peak in gold for 2007. Based upon a 16.7% rate of return compounded for 8 years we arrive at a gold price of $869.64 sometime this year.

This might seem a bit high but considering the lack of interest in the precious metal markets at this moment in time, I don’t believe that to be the case. I still consider this a good time to buy gold and gold stocks simply because of the perceived lack of interest by general market participants. If we examine the traffic ranking of Kitco’s web site which is by far the most visited precious metals site on the Internet, we can see that traffic has bottomed out since the May 2006 peak. What’s even more interesting about this is the gold price isn’t too far off from that May 2006 peak and if we use Kitco’s web site traffic ranking as an indicator, the public has little interest in gold right now. As far as I’m concerned this means we still have a buying opportunity at current levels.

One ratio I follow religiously to determine if gold stocks are fairly priced in relation to the price of gold is the gold to XAU ratio. Amazingly, the gold to XAU ratio is currently at 4.81 which means that gold stocks are still cheap compared to the price of gold. That might seem hard to believe considering the recent run up in both gold and gold stocks, but when gold retraced back to $640 we believed that the market was vastly over sold. At that time the gold to XAU ratio was at 5.00 which I personally have never seen in the past few years that I’ve followed that ratio. That marked a strong buy signal for gold stocks and since that point in time we have seen a surge in gold mining stocks.

On a short term basis I do believe that we will be seeing some more resistance around the $700 level simply because of the market psychology involved with round numbers. We will also likely encounter resistance at the May 2006 peak. Once gold successfully breaks these levels we should see it make a move much higher. If we don’t hit our 2007 price target of $869.64 based off of our analysis, we should definitely see the gold price hit that mark in 2008.

Throughout this precious metals bull market our portfolio of gold, silver and commodity related stocks have performed extremely well. The recent surge in commodity prices has produced solid gains for many of the stocks that we own including new stocks that we purchased in the past few months. Over 80% of our stocks are in positive territory since our purchase date. We are planning on adding a new gold stock to our portfolio on Monday. To buy access to our portfolio and find out what stocks we own and what stock we are adding to it, check out the front page of our site located here.

 

By Wang Min and Zheng Jin
The Wall Street Journal
Wednesday, April 25, 2007

SHANGHAI, China — China should “appropriately” increase its gold reserves and buy strategic resources such as oil and metals in order to broaden the investment channels for its huge foreign-exchange reserves, said People’s Bank of China Vice Governor Xiang Junbo.

Mr. Xiang’s comments yesterday come amid increasing discussion about how China will choose to invest its foreign-exchange reserves, the world’s largest at $1.2 trillion as of the end of March. He said his comments, made in a speech at Fudan University in Shanghai, represent his personal views and don’t necessarily reflect the stance of the central bank.

China’s gold reserves have remained unchanged since December 2002 at 19.29 million fine troy ounces, according to central-bank data.

China is setting up a specialized investment agency to manage a portion of the reserves in a more aggressive fashion. Mr. Xiang said that agency could be funded by setting up a closed-end fund that would raise money from domestic investors, giving it cash to buy reserves from the central bank and invest them elsewhere.

The government should also continue its current policies of investing much of the reserves in low-risk bonds in overseas markets, and injecting some of the reserves into Chinese banks to help their expansion, he said.

Chinese holdings of U.S. Treasury securities totaled $350 billion at the end of 2006, and credit-ratings agency Fitch Ratings estimates that the country holds another $230 billion in U.S. government agency bonds.

Any decline in the U.S. dollar would hurt the value of China’s foreign-exchange reserves, economists said, a prospect that has highlighted the cost of holding such a large portion of the reserves in U.S. Treasury bonds and has increased pressure to diversify.

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