Auguries — Observe The Fundamentals


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Posted by: Resource Clips
Date: 10.07.11
Sectors: Metals and Mining

Auguries — Observe The Fundamentals

October 6, 2011

By Kevin Michael Grace

Tom Wolfe once said the press was not like vultures but more like fruit flies, descending en masse onto one thing, then departing just as quickly and for no apparent reason. Surveying the global economic situation, as this space is compelled to do, the media (as we call them now) appear more like children, endlessly drawn to the latest bright, shiny object.

It was not that long ago that the American deficit constituted a "crisis." We hear little about that now, even though no serious action has been taken to reduce it. Instead, all our attention has been directed toward Greece, and the markets tumble up and down according to the latest rumours, even as the Greeks themselves give every indication they will reject whatever "rescue plan" the European Central Bankers cook up.

One could hardly guess it by what is served up by Canada's media—surely the worst in the English-speaking world—but our own deficit situation is rather unpleasant, even as Finance Minister Jim Flaherty presumes to lecture the rest of world. Bloomberg reported September 30, "The federal deficit widened during [July] to $1.6 billion, from $473 million a year earlier. Revenue from corporate income taxes fell 13% to $2.2 billion, while income from the federal sales tax was down 13% to $2.63 billion."

Bloomberg noted that "The Finance Department didn't say why corporate income taxes fell in July." But the Finance Department has no need to respond to that question, as the answer is obvious. The real question is why Flaherty persists in his belief that his government possesses a crystal ball that can infallibly predict "modest" growth years into the future.

Flaherty said Tuesday that Ottawa is sticking to its plan to reduce Canada's $40.5-billion deficit to zero by 2014-15. Strangely, however, the Conservatives won a majority government six months ago, yet still haven't announced any cuts. Which rather suggests there is no plan. As does Flaherty's decision to give Deloitte Inc $90,000 a day to suggest possible budget "efficiencies." Lorne Gunter points out in the National Post that "Federal program spending has increased by at least 25% above and beyond the growth in the size of our economy during the Tories' tenure" and concludes that if Flaherty, Finance Minister since February 2006, "doesn't already know where the potential savings are buried, he never will."

Back in March, Mike Shedlock observed that the Ontario deficit is bigger than that of California, America's basket case. In per capita terms, it is more than three times as high: $1,840 to $541. One would have expected this issue to dominate the Ontario election, but one would have been wrong.

Margaret Wente writes in the Globe and Mail, "The big taboo subject is the worsening economic storm. It's hurtling us toward the windshield, and we're the bug. We can't afford the government we've got, and our fiscal situation is only going to get worse. No matter who's elected, services will certainly go down, and taxes will probably go up. None of the candidates will discuss this."

Certainly not fearless, "right-wing" Conservative leader Tim Hudak. His education platform promises, "We will increase spending on K-12 education by $2 billion by the end of our first term... Full-day kindergarten has challenges that need to be addressed, and we believe it can be improved. But it would be a mistake to disrupt its implementation. That's why we will make it fully operational for all four and five year olds in Ontario by 2014."

Despite Hudak's efforts to appear both compassionate and inefficient, the polls predict that Premier Dalton McGuinty will win a third term tonight. Terence Corcoran thunders in the Financial Post, "If a dissembling premier who is dragging Ontario into a black hole of debt—$300 billion or 40% of GDP—can't be unseated after eight years in power, something is missing in the opposition approach."

Or perhaps there is a critical deficiency in democracy. Alison Redmond's surprise victory in Alberta ($3.4 billion deficit) was credited in part to her promise to restore a $107-million cut in the education budget. Alberta spends $10,550 per child (K-12) per year, Ontario $10,600. (Compared to $8,357 in BC and $7,200 in Nova Scotia.) Is a lack of money the problem with our schools? No, the lesson here is that success in politics now depends on refusing to face reality, lest it frighten the voters, who are best distracted with bright, shiny objects like full-day kindergarten.

And this, Peter Schiff says, is why the bull market in gold will continue. Yes, gold fell precipitously from $1,900, but Schiff counsels, "Do not get caught in the exuberance or pessimism of short-term movements, even if they're sharp. Observe the fundamentals—the events in Europe, the looming budget calamity in the US, central bankers' steadfast strategy of debasement, and emerging markets' continued diversification into precious metals. These are the main drivers for gold's long-term appreciation."

Precious metals steadied this week. At press time, gold was at $1,652.50 (up 2.2% from last Thursday), with silver at $31.91 (up 4.4%).

At MarketWatch, Peter Brimelow also cites the importance of emerging markets: "Gold bugs have been shaken by the size of what they see as a manipulative bear raid, but they still believe Asian off-take underpins the market... The Asian physical markets [have begun] to show the high gold premiums to the world market, indicating import demand... By the end of [last] week, India, China, Vietnam and Turkey were reportedly in this mode." Brimelow quotes analyst Edel Tully of UBS: "To be clear, physical demand right now is not just decent, it is exceptionally strong."

Demand for gold and silver equities remains weak, but at the Gold Report, Amine Bouchentouf, author of Commodities For Dummies, maintains that "junior mining companies offer a lot more upside [than ETFs]... When you are buying into a junior miner you are getting physical gold at a deep discount."

Specifically, Bouchentouf has kind words for Avion Gold TSX:AVR, Banro TSX:BAA, Franco-Nevada TSX:FNV, Golden Predator TSX:GPD, New Gold TSX:NGD, Royal Gold TSX:RGL and Silver Predator TSX:SPD.

As predicted here—and everywhere else—takeovers are on the rise, and at Seeking Alpha, David Zanoni reckons the following juniors and mid-caps to be among the next targets: Minefinders TSX:MFL, New Gold TSX:NGD, Northgate Minerals TSX:NGX, Royal Gold TSX:RGL and Taseko Mines TSX:TKO.

At the same source, Jared Cummans lists six miners that offer "viable options for adding exposure to silver": Coeur d'Alene TSX:CDM, Endeavour TSX:EDR, First Majestic TSX:FR, Great Panther TSX:GPR, Pan American TSX:PAA and Silvercorp TSX:SVM.

And at 321Gold, an admittedly "highly biased" Bob Moriarty says, "I was more impressed with the good sense of management of Fortuna Silver TSX:FVI than any company I have seen in a long, long time... If you are a silver bug, you have to love Fortuna Silver."

Finally, Bob Rae declares in the Globe, "The more taboos we can break, the better off we are." Is that an empirical statement, Bob? If the answer is yes, please spare us any embarrassing personal disclosures.


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