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  • Stefan Ioannou's Ways To Ride The Next Zinc And Nickel Waves

    Base metals prices are feeling the undertow but Stefan Ioannou, mining analyst with Haywood Securities, says that this is temporary-and that investors may not have to wait long for the next wave of higher zinc and nickel prices. Ioannou says zinc prices could even reach "bonanza" prices over the medium term. Nickel prices, meanwhile, could rebound as quickly as late 2015. In this interview with The Gold Report, Ioannou discusses some equities well positioned to ride the base metals waves as they come in cycles.

    The Gold Report: In late June, zinc and nickel prices on the London Metals Exchange [LME] dipped on concerns surrounding the economic fallout from Greece exiting the Eurozone. What's your view?

    Stefan Ioannou: When the referendum was first announced in late June there was a big reaction. There is no doubt the issue is a political crisis. However, unless you live in Greece, the actual financial impact is questionable. That's not to say that it hasn't justifiably sparked concern for the well being of the greater Eurozone. Although there is now better clarity regarding the European Union's bailout package, the jury is still out on the ultimate implications of the situation. Nevertheless, we expect general market sentiment regarding the base metals will continue to be centered on Asian demand. Looking further ahead, we continue to anticipate a lack of timely new mine development will lead to a supply constrained market, which will drive market fundamentals.

    TGR: The spot price for zinc flirted with $1.10/pound [$1.10/lb] in May, but now it's around $0.90/lb. Which zinc price is real and which one is the imposter?

    SI: Relatively high zinc inventories are behind the current zinc price. The zinc price spiked to $1.10/lb in the spring, but our feeling at Haywood was that it was a bit too much too soon. Nevertheless, higher prices appeared to be driven by steady inventory drawdowns on the order of 2,000 tonnes per day. This relatively persistent trend saw LME inventories drop by half over the last year. However, more recently we have seen sporadic inventory spikes, on the order of 5,000 tonnes per day, occur more regularly, which in turn has prompted the LME inventory levels to stagnate around the 450,000-tonne to 460,000-tonne level, which hasn't helped near-term zinc pricing or sentiment.

    TGR: What is your near- and medium-term forecast?

    SI: Looking a little further out, there's a strong argument that zinc prices will rally as we go into 2016. We've seen a number of large zinc mines shut down over the last couple of years. The Brunswick mine in New Brunswick, which provided roughly 2% of the world's supply, shut down in 2013. Later this year, the Century mine, Australia's largest open-pit zinc mine, and Ireland's Lisheen mine will cease zinc production. The production from those two mines alone is roughly equivalent to the zinc that's on the LME today. We're losing mines and there aren't any new large-scale projects being developed to fill that gap.

    The market continues to face an undersupplied medium-term outlook, which will drive prices higher. The one black box consideration is China. It has always been able to fill zinc supply gaps. However, the consensus is that a lot of the Chinese production is higher cost and that's why we haven't seen much of it to date. Haywood's zinc price forecast includes US$0.95/lb this year and a long-term price of $1.15/lb. However, in the medium term, say the 2016-2018 timeframe, there is potential to see spectacular prices on the order of $1.50/lb to $2/lb. That said, one thing to remain cognizant of is that higher medium-term pricing will prompt additional production over the longer term, which will eventually balance the market and regulate zinc pricing.

    TGR: Is it fair to say that you are more bullish on zinc than any of the other base metals?

    SI: Yes, at least from a timeline perspective. All commodities are cyclical, but we're the closest to seeing higher zinc prices versus copper or arguably even nickel.

    TGR: Given the performance of nickel equities in recent years investors might call nickel stocks, "fickle" stocks. Are there reasons to believe that could change over the near to medium term?

    SI: There's definitely a bullish argument for the nickel price over the medium term. One of the key recent events in the nickel space was the Indonesian government's ban on nickel ore exports at the beginning of 2014. The country was a major supplier of nickel laterite ore to China, which the ban basically cut off overnight. The initial global sentiment was that the ban wouldn't last, but it's still in place. It prompted a spike in nickel prices up to about $9/lb last year, but unfortunately nickel is back to about $5.10/lb now.

    Nevertheless, the bullish medium-term argument is that up until now China has been relying on high-grade ore from Indonesia that was stockpiled in China before the ban. That stockpile is dwindling, now below 4 Mt, from over 15 Mt prior to the ban. Once it is consumed, the nickel market will realize that supply is much tighter than today's prices would suggest. China will have to look elsewhere to secure nickel feed for its plants and that could put a squeeze on prices by as early as late 2015. LME inventories have actually increased modestly year-to-date. However, Chinese consumption of this metal, once the country's own stocks have been depleted, could set the stage for higher prices. The key consideration behind this scenario is improving stainless steel demand.

    TGR: The Shanghai futures exchange recently approved Russian nickel miner Norilsk Nickel [GMKN:RTS; NILSY:NASDAQ; MNOD:LSE] for delivery. It's the first foreign company to receive approval. Is this a tangible sign that the Chinese are running shy on nickel?

    SI: The Chinese know better than anyone else how much life is left in that nickel laterite stockpile. Seeing them try to secure supply from Norilsk is a sign that they're thinking 12 months ahead and making the appropriate arrangements.

    TGR: What are some other nickel stories you can share with us?

    SI: Sirius Resources NL (OTC:SRQUF) [SIR:ASX] has a nickel project in Australia that's under construction called Nova-Bollinger, which is a 14 Mt massive sulphide deposit grading about 2% nickel. The company recently received a friendly takeover bid for AU$1.8 billion, which is undoubtedly a very big number for something that is probably geologically similar to Grasset. The reality is that if these explorers develops a 10+ Mt high-grade resource that over time garners a fraction of Sirius's takeover bid, it's still going to be a home run for everyone.

    TGR: Did the initial resource estimate at Tamarack surprise you?

    SI: No. It's right in line with expectations at around 7 Mt grading roughly 2% nickel equivalent. The key is that the Tamarack intrusion is shaped like a tadpole. The current resource is focused on the tail of the tadpole and just a portion of the tail. The resource is open in multiple directions. The reality is that the tail portion of the Tamarack intrusion could easily be 15-20 Mt with additional drilling. The company is starting to step out along the tail and has had some spectacular intercepts earlier this year.

    Tamarack is a joint venture with Rio Tinto Plc [RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK]. Rio Tinto continues to hold onto it because of the potential the tadpole's head offers at depth based on geophysics. Comprehensive drill testing is still required, but if the head of the tadpole represents something like a Voisey's Bay-type structure-50-100 Mt of massive sulphides-it would move the needle for Rio Tinto.

    TGR: Could you mine it in Minnesota?

    SI: Lundin Mining Corp. [LUN:TSX] just started commercial production at its Eagle nickel and copper mine, which is in northern Michigan. That speaks volumes about permitting a mine in the northern U.S. One example people will point to in Minnesota is PolyMet Mining Corp. [POM:TSX; PLM:NYSE.MKT], which has had issues getting its operations permitted. One of the key differences is that Tamarack is not located within a national forest or within federal lands. Furthermore, based on what we have seen to date, Tamarack would most likely be mined using underground methods, which intrinsically entails a significantly smaller surficial footprint.

    TGR: Copper recently made some gains after positive U.S. economic data, but took a deep dive in early July on Chinese economic data. What's your updated copper forecast?

    SI: Right now we are modeling a $2.65/lb average copper price this year, which is in line with year-to-date averages. We anticipate the price will ramp up modestly over the next few years to a long-term price of $3/lb from 2017 forward. This price deck is in line with base case parameters we are seeing in recent copper project feasibility studies.

    TGR: China drives the bus in terms of copper. How is the Shanghai stock market collapse likely to affect copper?

    SI: Copper is an industrial commodity. It's used to build things. But over the last few years we've seen China use copper and other bulk commodities as collateral in financing mechanisms. However, unlike gold, copper is not money. We would argue this realization has in part, prompted the notable decline in Shanghai copper inventories over the past three months relative to essentially flat inventory levels on the LME.

    We definitely see day-to-day mixed messages in economic data out of China. But over the longer term, the Chinese will continue to consume a lot of copper and going forward will consume more copper in absolute terms, whether it be on large scale regional infrastructure such as power grids, or personal items such as mobile telephones and refrigerators. It just might not happen quite as quickly as we expected a few years ago.

    TGR: What are some copper-focused equities that you cover?

    SI: Producers arethe safe haven for investors because access to capital is rather limited for the developers. Among the producers, the one company I would point toward is Nevsun Resources Ltd. (NYSEMKT:NSU). The company is mining a large, high-grade VMS polymetallic deposit in Eritrea. Bisha has been in production since early 2011 over which time the company has developed a strong relationship with the Eritrean government. Bisha started as a very high-grade gold mine in an oxide cap. Nevsun is now mining supergene ore grading 4-6% copper in an open pit with a low stripping ratio. This is highly profitable.

    Over the next year or so Nevsun will transition from Bisha's supergene enrichment blanket into the primary massive sulphides, which are a mix of copper and zinc. The amount of copper being produced will go down, but the zinc production will come up. The zinc should come to market just as global zinc supply tightens. The timing is perfect. Nevsun has over $440M in cash or about CA$2.60 a share, and no debt, which puts the company in a very strong position to pursue opportunistic corporate growth initiatives.

    TGR: Is it using some of that cash for exploration?

    SI: Last year Nevsun committed $10M to regional exploration in Eritrea along strike from Bisha and some other deposits. The company was extremely successful. Nevsun drilled off a high-grade deposit called Harena, which is already underpinned by a 10 Mt resource that is open in multiple directions and is situated just six miles from Bisha's mill. This year the company is following that up by drilling a series of other satellite targets. VMS deposits typically form in districts or camps. We see that globally. Nevsun has clearly demonstrated that Bisha is in a VMS camp. It's going to be pretty exciting to watch the exploration results this year.

    TGR: With its recent exploration and operational success, is Nevsun clearly on the radar screens of larger players?

    SI: I think so. This could turn into a pretty significant VMS camp very quickly. And the potential of Bisha at depth has never really been looked at in a formal mine plan. One of the big pushes this summer is to update Bisha and Harena's mine plan to consider the economic potential higher throughput and/or ramp-accessed underground mining could offer, noting Bisha's current open-pitable reserve provides mill feed to about 2025 in our model.

    TGR: What is your target and rating on Nevsun?

    SI: Haywood has a CA$5.00 target price and a Buy rating on Nevsun.

    TGR: Do you have any parting thoughts on base metals?

    SI: Patience is key. Investors have to remember that industrial commodities are cyclical both on short-term and, more importantly, long-term cycles. We can see light at the end of the tunnel. We mentioned zinc as a potential 2016 story, which is coming up quickly. There's a solid argument there that we could see bonanza pricing over the medium term. Again, nickel prices are in a trough now, but with dwindling Chinese nickel stockpiles, we could see nickel prices move higher as we move into next year. It's all about catching the wave at the right time and knowing when to get off.

    TGR: Thank you for your market insights today, Stefan.

    This interview was conducted by Brian Sylvester of The Gold Report and can be read in its entirety here.

    Stefan Ioannou has spent the last eight years as a mining analyst covering mid-cap base metal companies at Haywood Securities. Prior to joining Haywood, he worked with a number of exploration and mining companies, as well as government agencies as a field geologist in Nevada and throughout the Canadian Shield in both the gold and base metal sectors.

    Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Interviews page.

    Bottom of Form

    DISCLOSURE:
    1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Stefan Ioannou: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Gold Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (NYSE:I) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8999
    Fax: (707) 981-8998
    Email: jluther@streetwisereports.com

    Jul 16 2:20 PM | Link | Comment!
  • Companies Brent Cook Expects To See On The Other Side Of The Gold Market Wasteland

    Markets are cyclical and even though it feels like the end of the world after years of junior resource stock market declines, history indicates that bear markets are actually an opportunity to own tomorrow's superstars for pennies on the dollar. In this interview with The Gold Report, market veteran and Exploration Insights author Brent Cook shares his travel stories and the companies he thinks will shine when the sun returns to commodity prices.

    The Gold Report: You recently wrote a piece in Exploration Insights reminiscing about the 1997 to 2002 resource market. What did we learn about investing in gold and silver in that five-year window?

    Brent Cook: I first started working for Rick Rule in 1997, just as the last resource bull was dying. The market just kept going down, way below where people thought it could possibly go, and it continued to get worse in 1998, then 1999 and 2000. Eventually it did stop dropping; people started putting money into this sector, and it leveled off.

    What I learned is that successful investing in a bear market takes patience and caution. When you do make an investment, make sure you're betting on good people.

    TGR: One of the things Rick Rule always says is that he's waiting for capitulation. How can you tell if we've had capitulation, and what causes it?

    BC: I don't think we're going to see a capitulation moment; I think it will be more gradual. I see it in my newsletter subscribers. Most of them have been around for a long time, but in the last few months, people who have been with me from the beginning have started falling by the wayside even though we had a 16% gain last year and we are not doing too awfully bad so far this year. They all say they will be back as soon as the market turns. This is what it starts to look like on the bottom.

    I envision it as a band of pioneers walking across the salt flats in July, one by one dropping to the side. One day, we'll turn around, look back and notice the hills are starting to get greener. That's how we'll know capitulation happened, by looking behind us at the wasteland and desolation we crossed.

    TGR: Rick also says that bear markets create bull markets. The years 2002 to 2010 were pretty good for the commodity markets and everyone started to look really smart. Are there lessons to be learned from a bull market?

    BC: There always are. A big one is to take profits along the way and keep some sense of perspective with regards to what a project is actually worth. This is a cyclical business. We go up and down. This has been true going back to the salt traders in early Africa. Supply and demand drive markets. During the last boom, China was building infrastructure and the world was growing. That created a metal shortage, which drove prices way up. That has busted. China's growth is slowing. I don't know what's going to bring the bull market back in commodities this time, but it always comes back and is usually the result of something we were previously unaware of.

    TGR: How is the wasteland you describe as our current market scenario different than what you went through in 1997 to 2002?

    BC: There are actually more similarities than differences. In 1998 nearly every economist said gold was antiquated and of no value in the new age. Financial publications all said you would have to be a fool in a tin hat to buy gold. Today, investors and financial publications are shunning this market again, and to some degree with good reason. In the most recent boom, profits barely increased due to increased input costs and the shift to mining lower grade ore. That left a lot of investors who got the commodity price rise right disillusioned with the sector. The metal prices rose but profits didn't. It is going to take a fair bit of time for previous investors or new investors to see a reason to be in the natural resources market. But it will happen.

    TGR: Does that hold true both for the retail and the institutional investors?

    BC: Yes. Retail investors were hammered in the 1997 downturn. The Bre-X scam triggered the realization that everything was overvalued and much of what was being presented was not true. New NI 43-101 requirements were put in place in an effort to provide more transparency for investors. It certainly helped, but the reality is that a technical report is only as good as the data that goes into it and the persons doing the report.

    I am afraid a lot of these reports are poorly done and do not reflect reality. People must still do their own due diligence and follow results closely. One of the most common problems I see in these reports relates to the resource estimates. A large number of those turned out to be inaccurate, making the financial models based on them wrong. So investors got burned again, this time believing the final mine economics in the report that may have been based on sloppy resource estimates. When a company spends hundreds of millions buying trucks, building mills and excavating rock only to find out the ore in the ground is not what was presented in the resource estimate, it usually loses money. There is a long list of mines that fall into that category.

    TGR: Who are some of the trustworthy veterans still around putting their experience to work in the market now?

    BC: Rick Rule, Ross Beaty, Lukas Lundin and Frank Holmes are people I would listen to when they speak. A number of experienced brokers in Vancouver have proved to be smart people. Those people have been through this before and recognize that now is the time to really make money by buying when the market is down. You just have to be patient.

    TGR: You've traveled the world visiting projects. Do things look rosier in other countries? Has the impact of the strong dollar on projects in Canada and Mexico been good for the bottom line?

    BC: Most certainly. The drop in oil and energy prices, as well as the drop in the Canadian dollar, the Australian dollar, and even the euro, has been an advantage to companies operating in those countries versus in the U.S. We have seen a decrease in operating costs. It is a real advantage to companies mining in Australia and Canada, especially.

    We have also seen mining companies severely cut back on development, exploration, and even maintenance. This will lead to the next bull market when supply is eventually constrained due to these short-term cost cutting measures. The metal prices are going to have to move up because companies can't make money right now, and if it isn't profitable to mine, there will eventually be a shortage.

    TGR: In your travels, what are some of the companies that are well positioned for a market rebound?

    BC: I like companies that are fully funded and building a mine. That includes Asanko Gold Inc. (NYSEMKT:AKG) and Guyana Goldfields Inc. (OTCPK:GUYFF) [GUY:TSX]. They're well positioned to be in production when the market turns.

    Further down the line Continental Gold Inc. (OTCQX:CGOOF) [CNL:TSX] is drilling out resources that will one day be profitable.

    TGR: Asanko just announced plans to combine two of its mines in Ghana. Is that about cutting costs?

    BC: I think it was the plan all along. Because the two deposits are so close together, the cost savings in the capital expenditure [capex] on the second mine are substantial. It always made sense to bring that second deposit in as soon as possible to push up production and profitability without too much extra capex.

    TGR: The market seemed to like it.

    BC: Yes. There are very few companies out there building mines in stable places that people can invest in.

    TGR: Continental just updated its resource estimate on the Buriticá project in Colombia. Did you like what you saw?

    BC: I did. In the past, I was a bit negative on the company, particularly on the resource estimate because I had some issues with it. The most recent underground sampling pulled together the high-grade center of the deposit. It looks to me that it has enough gold there to really kick off a mine. And the details of what's happening at depth and along strike will be much better worked out from underground rather than continued drilling. I think it looks pretty good.

    TGR: Is Guyana Goldfields still on schedule to start production this year?

    BC: Yes, as far as I know. It appears to be on schedule, on budget and moving ahead. It's funded, moving toward production. There are not many projects out there that are doing that these days. Funding is tough to come by.

    TGR: What else have you visited recently?

    BC: Richmont Mines Inc. (NYSEMKT:RIC) is an old company that recently discovered considerably more value beneath its Island Gold deposit in Ontario. It's been a decent mine, not great, but recent drilling and underground work have discovered mineralization that's twice as thick and about twice the grade. The advantage is that the mine is already operating. It has the plant. It has the infrastructure. It just needs to dig down and get it.

    This is one of the companies that a major should be looking to take over. It's in a safe jurisdiction. It's built and running. We know what it looks like. This would be extremely profitable once it gets into the higher-grade zone at depth.

    TGR: Based on what we have learned from the last few cycles, how should investors move forward?

    BC: Mining and commodities are cyclical. The most money I ever made was from the stocks I bought in the bust between 1997 and 2002. It was extremely hard to do because it was scary. I would buy a stock and then it would drop by half again. You are all alone and the market gives you no encouragement at all. As I said earlier, we are walking across the wasteland in the heat of the day into a dust storm while nearly everyone you know is back at the ranch buying Apple and biotech stocks. I remember I bought Virginia Gold for $1.50, bought it again at $0.75. It had $0.50/share in cash, and at one point, it was selling for $0.35. Over the following decade or so the stock was acquired for $13 and we are still making money on that by way of Osisko Gold Royalties Ltd. [OR:TSX]. In retrospect, that was a fantastic buy, but at the time, I was close to giving up all hope. I posted an article on my website titled "What was it like, Dad?" that relives that last bust.

    We are in a similar situation now. People have given up all hope. I suspect most of your readers have no desire to buy another junior exploration company, but there are some companies out there that have the cash to survive, strong management that knows what a deposit looks like and the ability to make those discoveries. If you can buy them for near cash, that's a screaming deal.

    TGR: You're speaking at the Sprott-Stansberry Vancouver Natural Resource Symposium at the end of July. What do you hope attendees will take away from that event?

    BC: This bouncing along bottom could go for a long time, but this is the time to start identifying the groups, the managements and the projects that really have a chance at succeeding. You can buy them for a lot less now than you will be able to buy them somewhere in the future. My guess is next year things start to look better, but this takes patience.

    TGR: Thank you for your time.

    This interview was conducted by JT Long of The Gold Report and can be read in its entirety here.

    Brent Cook brings more than 30 years of experience to his role as a geologist, consultant and investment adviser. His knowledge spans all areas of the mining business, from the conceptual stage through detailed technical and financial modeling related to mine development and production. Cook's weekly Exploration Insights newsletter focuses on early discovery, high-reward opportunities, primarily among junior mining and exploration companies.

    Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Interviews page.

    Bottom of Form

    DISCLOSURE:
    1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Richmont Mines Inc., Continental Gold Ltd., Asanko Gold Inc. and Guyana Goldfields Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Brent Cook: I own, or my family owns, shares of the following companies mentioned in this interview: Richmont Mines Inc., Continental Gold Ltd. and Asanko Gold Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.

    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Gold Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (NYSE:I) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8999
    Fax: (707) 981-8998
    Email: jluther@streetwisereports.com

    Jul 13 3:10 PM | Link | Comment!
  • China, Greece And The NYSE: Black Swans Or Red Flags?

    Scary. That is the word that kept coming up over and over as the news came in this week. Greece technically defaulted. The Shanghai Composite index dropped some 30%. And then a computer glitch caused the NYSE to be down for three hours. Are these headlines just blips on the equities markets? Do they have long-term implications for resource stocks? To answer these questions, we did what we do best at The Gold Report and asked the experts what is causing all the black swans and what they are doing to protect themselves.

    John Mauldin, the man behind Mauldin Economics and author of "Bull's Eye Investing: Targeting Real Returns in a Smoke and Mirrors Market," gave some background on the China crisis. He credited the current problems in Chinese markets to a shift away from the previous top-down command economy to an organic market. "Inevitably, this transition is causing pain for people accustomed to the old ways," he said in his weekly Thoughts from the Frontline blog.

    That pain came in the form of a 20% fall in the Shanghai Composite over two weeks. Even after the government cut interest rates and bank reserve requirements, halted trading on some stocks, required and participated in stock buybacks, the market fell another 3% on Monday and 6% after that. "Western traders sniffed panic and headed for the exits," Mauldin said.

    And Mauldin doesn't believe the red ink is over yet. "Expect more volatility from China in the second half of this year and, really, for years to come," he warned.

    When asked if he would invest in China at this point, he was not enthusiastic. "Probably not-at least until we see more signs of a bottom and Chinese buyers piling in again. China is a traders' market right now and will be for some time. The best you can do: Follow the momentum and get out quickly when it starts to fade. I think that longer term, China is going to be a fabulous market, but most people are just not going to be able to handle the volatility."

    Harry Dent, author of Survive and Prosper newsletter and the book "The Great Boom Ahead," said a version of "I told you so" when we asked him about the bad news on Wednesday. "I have been the greatest forecaster of the greatest overbuilding and debt bubble in the history of emerging markets and that this bubble would burst, especially in the last year where everyday investors have piled into the Chinese stock market as the real estate bubble finally started to cool. This is the beginning of the end and I have been warning that major bubbles like China would see 30% to 40% declines in their first wave down and therefore it was better to get out a bit early than late," he warned.

    Dent credited the slowing of China and world trade in general to the collapse of industrial and energy commodities. A further collapse of China's economy and broader real estate bubble will be even more devastating ahead for oil, gold, iron ore and copper.

    These are not isolated problems, Dent said. "China's bubble burst is much greater than Greece. However, Greece will be a trigger for a chain of defaults from Puerto Rico to Portugal to Illinois-and the first big one in the U.S., the frackers with a $1 trillion industry with over $600 billion in risky or leveraged loans due to default when oil gets back down near $40 or lower. I see $32 per barrel [$32/bbl] in oil in the next year or so and $10-20/bbl by 2023."

    Dent recommended investors get out of all bubble assets: stocks, real estate, commodities and higher yield bonds. Get into cash or reliable cash flow positive investments. Wait for this unprecedented global bubble to burst-then the world is your oyster if you have cash. Cash was king in the Great Depression; it will be again in the next several years."

    Frank Holmes, CEO and chief investment officer at U.S. Global Investors Inc., also warned of more downside to come. "The Chinese stock market has had a great run," he said, pointing out that the Shenzhen index was up 122% for the year, trading at 14 times earnings, before the recent declines. "It still has another 30% to fall before it returns to the mean," he observed.

    While it is easy to get distracted by Greece or China or the next trouble spot, he pointed to the Purchasing Managers Index [PMI], the indicator of operating orders in the manufacturing economy, as the main indicator to watch and right now it is not looking good for China, he said. The HSBC China Manufacturing PMI for China in June was 49.4, a sign that the sector is deteriorating. "90% of the time a negative PMI leads to falling commodity prices," Holmes said. Reduced manufacturing leads to less metal and energy demand.

    Holmes is adjusting by keeping 15-20% of his funds in cash so when August comes, he can buy companies with strong balance sheets. "Right now airlines are doing well because of lower energy costs and healthcare is benefitting from Obamacare and an aging demographic."

    This is a Special to The Gold Report.

    Marin Katusa, author of "The Colder War," says recent changes highlight the problems in China, "which is critical to resources." Back in May, Katusa warned that the next Asian flu pandemic would be caused by the bursting of the Chinese stock market bubble. He credited the rise at least in part to the Shanghai-Hong Kong Stock Connect program, which spiked trading volumes on both indexes. "The beginnings of the Shanghai-Hong Kong Stock connect program caused a shopping spree by mainland Chinese investors inflating the market. In one year the Shenzhen Stock Exchange A shares' price to earnings ratio doubled to a 50 times valuation; over 2x higher than the NYSE composite index," he wrote. "The value between dual-listed Chinese stocks on the Shanghai and Hong Kong exchanges has become distorted. This is partially attributable to more international investors in Hong Kong markets, as well as to less restrictions on balancing the market with short sellers who put downward pressure on stock prices."

    Chris Berry, Disruptive Discoveries Journal writer, described the $3.2 trillion decline in value in the Chinese equity markets as a self-inflicted blow. He took to the Twitterverse Wednesday to talk about the implications for miners. "It appears that metals will be weaker for longer and we may not be truly at the bottom as I once thought we were. Nevertheless we will eventually find a bottom as all economic processes dictate. Each metal has its own supply and demand dynamic, but as markets have become more integrated in recent years, correlations have become more positive. Put simply, as one commodity goes, so goes the rest of them, though correlations aren't always perfect. This has served to make calling a bottom a pointless exercise."

    Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Interviews page.

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