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  • John Williams: A Downhill Run For The Dollar In 2015

    Rosy GDP numbers may have cheered the masses, but John Williams of ShadowStats.com says we're a long way from prosperity. In this interview with The Gold Report, Williams debunks the myth of economic recovery and warns that we still have serious debts to settle. That is why he is recommending caution in 2015 to preserve purchasing power and maintain your standard of living.

    The Gold Report: Your hyperinflation report predicted 2014 would be dominated by economic distress, financial crisis and panics. Were you surprised by the performance of the economy this year?

    John Williams: No, at least not in terms of the actual performance. We're getting some fantasy numbers, which I'll be glad to address. The economic distress continued. If we look at the consumer conditions, generally median household income has continued to be stagnant at a low level of activity, below where it was in 1967 as adjusted by the Consumer Price Index [CPI]. Even though the gross domestic product [GDP] supposedly rebounded in mid-2009-it's 7% above where it was before the recession started in 2007-there's very little that confirms that.

    If the individual consumer is not out there buying, we don't have good activity in the bulk of the U.S. economy. Over 70% of the GDP is tied to personal consumption expenditures, and another couple of percent on top of that is tied to residential investment. If we don't have positive inflation-adjusted growth in income-I'm talking actual household income-we can't possibly have an economy that will grow faster than income growth, other than for a temporary boost from credit expansion, and that is not happening.

    Credit growth is very limited for the consumer. If we look at consumer credit outstanding, although those numbers have gained since the panic of 2008, all the growth there has been in federally owned student loans, not in the type of consumer loans that would usually go into buying washers and dryers and such. Basically, the consumer's liquidity has been constrained. We are also seeing consumer confidence and sentiment numbers that are typical of a recession, not an economic boom. We have a lack of income growth, a lack of adequate credit availability and, generally, a low level of confidence.

    Consider that GDP growth in Q3/14 adjusted for inflation was an annualized 3.9%, and 4.6% in Q2/14. That's two back-to-back quarters of roughly four percentage points. This is the strongest economy in over a decade if you believe the government's statistics, yet I'll challenge you to find someone who thinks that this is that good of an economy. It's just not there. There may be pockets of strength in Silicon Valley or such, but the average homeowner and the average consumer are not seeing it.

    TGR: If there are all of these negative signs going on, why are the GDP numbers so high?

    JW: When Lyndon Johnson was president, he would get to review the GDP numbers every quarter. If he didn't like them, he'd send them back to the Commerce Department and keep sending them back until the Commerce Department gave him what he wanted. We don't have anything quite that overt happening now, but the government understates inflation. The problem is if you use too low a rate of inflation when adjusting economic numbers for inflation, that tends to overstate economic growth. When there is a roughly 2% annual understatement of GDP inflation, it means that GDP is basically overstated by two percentage points. When we look at the current number, 4% annualized GDP growth, we're seeing year-to-year growth of 2.4%. So if we take 2% out of that, you're seeing 0.4% growth. That's negligible.

    As far as what happened in 2014, the economic data do not surprise me that much, because there are always problems with how it is reported. The ongoing problems with the economy continued. We did see a couple of flutters in the stock market. What did surprise me was the strength of the dollar. That's where the risks run for the immediate future, particularly into 2015.

    The dollar is unusually strong, the strongest it's been in some time. If we look at the factors that drive it, the dollar is very vulnerable. Right now, our economy purportedly is booming, and the rest of the world is in recession. So that, on the surface, would tend to result in a strong dollar. I'll contend, though, that our economic growth is not real. The numbers will weaken. Retail sales and industrial production actually have much higher credibility than the GDP in that we'll see indications there of renewed recession. We've already seen a sharp slowing so far in the data for Q4/14.

    TGR: How, in your view, did quantitative easing [QE] and tapering impact the dollar?

    JW: QE was a fraud in how it was put forth. The idea here is that the Federal Reserve was doing this to help the economy. But even as he was expanding QE, Fed Chairman Ben Bernanke explicitly expressed that there is very little the Fed can do to stimulate the economy at this point. The systemic financial panic of 2008 brought the financial system, particularly the banking system, to the brink of collapse. That's where it was headed. The Fed and the Treasury did whatever they had to do to prevent total collapse. They created whatever money they had to create. They lent whatever money they had to; they spent it; they bailed out whatever firms they had to; they guaranteed all deposits.

    When QE was introduced, the Fed flooded the banking system with cash. Normally, banks would take that money and put it into circulation. If they let it go into the normal flow of commerce, we would have had things pick up in lending, and that would have helped turn the economy around. That didn't happen. What the banks did was deposit the funds back into the Federal Reserve as excess reserves in the monetary base. It didn't help businesses at all. This policy was designed to help banking. That's the Fed's primary function in life, to keep the banking system afloat.

    Because of what happened during 2008, it wasn't really a good idea politically to say, "Hey, we're still bailing out the banking system." So the Fed cloaked this policy as an attempt to stimulate the economy. And as the economy remained weak, it would use the weak economy as political cover for increasing the QE. It was helping the banks, but it did nothing to help the domestic economy other than by preventing a complete collapse of the financial system.

    TGR: Is that why it didn't have the effect on the dollar that everyone was predicting?

    JW: It did have an effect on the dollar early on. Whenever there was a rumor that the Fed was going to have to ease more, the dollar would take a hit and gold would rally. When tapering was indicated, the dollar would rally and gold would sink. There was a very direct relationship there.

    Some months back, the economic numbers all of a sudden started to take off in a manner not seen in a decade, not supported by any underlying fundamentals. Then the Fed said it would cut back on its tapering and eliminate its purchases of new Treasury securities, which was seen as a positive for the dollar because it meant the Fed was going to shy away from further, open debasement of the dollar.

    But here's where the risk comes: The U.S. economy has not recovered. It's still in trouble. The numbers, as we move forward into 2015, are going to get much weaker. That's going to, again, increase the speculation of a QE4. That will all be very negative for the dollar and very positive for gold.

    Relative government stability is another big factor in a currency's value. Over the last year, we've seen the domestic political circumstances go from bad to worse. I think the political situation is going to continue to deteriorate.

    We can look at the domestic fiscal circumstances. Now, the cash-based federal deficit shrank this year to less than $0.5 trillion-supposedly good news, but what people don't seem to be thinking about is that the Fed actually monetized 80% of that deficit through quantitative easing. The U.S. government wasn't out there in the markets borrowing openly and honestly. Whatever it was borrowing was also being purchased and taken out of the market by the Fed.

    If we look at the annual deficit using generally accepted accounting principles and account for unfunded liabilities for programs such as Social Security, that deficit increases by about $6 trillion [$6T] per year. On an aggregate basis, including roughly $18T worth of gross federal debt, total federal obligations right now are up around $100T in net present value. That's what the government needs to cover its obligations. It doesn't have that and never will. What that means is the federal government does not have a sustainable financial future. That's the long-term fate of the system here.

    TGR: Do you think the dollar is in a bubble right now and is going to crash?

    JW: I guess you could call it a bubble. I do think it's going to crash. With that crash will come a big spike in oil prices, a big spike in gold and silver prices. The Fed is going to have to ease again. A weak economy means more stress on the banking system, and the Fed is always looking to prop up the banking system.

    What you have to keep in mind with inflation and deflation is that there are different ways of looking at them. I'm looking at inflation and deflation basically from the standpoint of consumer expenditures, what people see in the way of prices of what they're purchasing, as opposed to asset inflation or deflation, where we're looking at financial market values. We can also look at growth in the money supply as a measure of inflation and deflation. Money supply growth actually will start to pick up very sharply as the dollar comes under heavy selling pressure.

    There are some major problems with how inflation is viewed. I'm talking now about practical, day-to-day household operations. How much did it cost me to live last year? How much is it going to cost me to live same way this year? However much that number increases-the cost of maintaining a constant standard of living-is the rate of inflation as far as the average person is concerned. That is the rate of inflation to use for targeting income growth or investment return. The government no longer reports it quite that way; the CPI does not measure inflation from the standpoint of maintaining a constant standard of living, or even from the standpoint of reflecting out-of- pocket expenses.

    But central banks want to create inflation to prop up their economies and markets. Just blindly creating inflation, however, doesn't make any sense.

    The positive type of inflation is created by strong demand for products, and because of short supplies, prices rise, but production also will be increasing. That's how the system would normally adjust for it. In this scenario, people are employed, their salaries are increasing, and the economy is growing. The Fed can't create that kind of inflation, at present. They would like to, but they can't. The central banks can't create that type of inflation, certainly not by flooding the system with cheap money that's not being lent to the consumer. They can only create the type of inflation that is driven by currency weakness.

    I'm looking for the dollar to sell off sharply, actually suffer a massive decline, which, in turn, will be reflected in a very strong rise in commodity prices, pushing costs higher, pushing inflation higher, but not strengthening the economy. That's what the central banks are pushing for, which is nonsensical.

    TGR: I recently wrote an article based on comments from former Federal Reserve Chairman Alan Greenspan that he gave at the New Orleans Investment Conference. He denied that the Fed was responsible for the housing bubble and explained that bubbles are easy to see but difficult, if not impossible, to pinpoint when they will implode. Do you agree? What bubbles do you see out there?

    JW: Greenspan is a very interesting character. He has a wonderful vocabulary and was certainly a very influential politician and Fed chairman over the years, but what you just said is largely nonsense. In fact, you can make a strong case for laying the problems that we have right now in the lap of the former Fed chairman.

    There are two things at work here. One, starting about 1970, the U.S. embarked on all sorts of trade practices that encouraged sharp growth in the trade deficit and the weakening of the dollar. As the dollar fell and as domestic production increasingly moved offshore, higher-paying production jobs disappeared. If we look at the government's numbers on the inflation-adjusted income of production workers in the U.S., it is 10-15% below where it was in 1970, and it's been flat for the last couple of decades. This is where the problems developed with consumer income. We can't build wealth on producing hamburgers and providing services. We've become a service-based economy. That does not build wealth as does, let's say, manufacturing automobiles or tanks.

    When I talk about manufacturing, I'm not talking about having an assembly plant. I'm talking about actually having all the subcontractors that make the parts. That's disappeared, and that put the American consumer in a circumstance where he or she just could not support the economy. Alan Greenspan recognized that. So what he did was encourage debt expansion, particularly in areas such as home equity loans. And the debt expansion that followed was what provided the bulk of the growth in the U.S. economy for the decade before the panic in 2008.

    TGR: The housing bubble.

    JW: That was a deliberate policy decision at his end. Had the economy taken a hit much earlier, say back in the time of the 1987 stock market crash, there would have been a period of financial discomfort, but the system would have been cleansed of a lot of abuses that had built up over time, and we could have had positive growth going forward. What we did with the debt expansion was to borrow as much growth as we could from the future and pull it into the earlier periods. There had to be a day of reckoning there.

    TGR: Have we had that cleansing? Did 2008 get all of that out of the system?

    JW: No. All sorts of things are still at work there because the system was not allowed to collapse as it would have. As much as could be was pushed off into the future. We still don't have a healthy, sustainable system. The panic of 2008 is still with us; it's just been pushed a couple of years into the future. We're coming up on it again.

    But let me make one other point here because it's an important one regarding Mr. Greenspan's involvement. A lot of the bubble and its detrimental effects were created by all these derivative instruments-mortgage-backed securities and such-that were created as new investment vehicles and sold to the rest of the world. That area was highly touted by Alan Greenspan and by the Federal Reserve under his control as a way that the banks could spread risk. For example, insurance companies could take that risk by buying these derivative instruments. It was a way of distributing risk within the system.

    The U.S. central bank can be credited with both encouraging an extraordinary debt bubble and in creating and encouraging the derivative instruments that were used to build debt leverage on top of debt leverage that resulted in the collapse in 2008. The Fed and the federal government never addressed the core of the economy's problems, never addressed why is it suffering from a liquidity standpoint. What they did was look for how we could borrow economic growth from the future. They came up with some very creative ways of doing it. When you borrow things from the future, usually you have a period of payback. That's what we're seeing now. That's why we can't get the economy to grow.

    TGR: Can you give us a picture of what we can expect in 2015 and how we can prepare for it?

    JW: I'll give you a couple of things to look for in 2015. Fundamental economic activity as measured in areas such as retail sales, industrial production, housing starts, payroll numbers and the broadest measure of unemployment-all those numbers are going to deteriorate. The economy is going to head down as we get into reporting in early 2015. Along with that will come renewed expectations of action by the Federal Reserve to accommodate the financial system, particularly the banking system, and the combination of those factors will, I believe, help to trigger a massive decline in the U.S. dollar. As a result of that, we will see spikes in commodity prices, such as oil. We will see a flight to quality in areas such as the precious metals-gold and silver. We will see the stock market and the bond market generally suffer some real selling pressure.

    If interest rates go up, they would start to reflect in inflation numbers. Traditionally, long-term interest rates tend to move with inflation. You might see some upside movement there in the longer-term interest rates, which would depress the bond prices. A return to an accommodative mode for the Fed might rally stocks. But guess what? If we value those stocks in either inflation-adjusted dollars or in Swiss francs, we'll find that the real value of the domestic stock market will be in contraction.

    Even though the Dow could rally to new highs, I would shy away from stocks. I know gold and silver have taken tremendous hits in this last year, but I would suggest holding physical gold and silver as hedges against the loss of purchasing power in the U.S. dollar. If you can put your liquid assets into something like gold, which will preserve the purchasing power of those assets and continue to provide liquidity. Such an investment would likely help you to get through the inflation crisis and whatever crises follow that. When things settle down, you should still be able to function well, having maintained the purchasing power and liquidity of your assets and wealth.

    It's an extraordinary time. I did move my hyperinflation forecast from 2014 into 2015. But the dollar selling can start at any time, with little warning. And there are things that the central bank may do to try and prop up the dollar, but once heavy selling is in place, it's going to be a downhill run for the dollar.

    TGR: Thank you for sharing your insights with us.

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

    Walter J. "John" Williams has been a private consulting economist and a specialist in government economic reporting for more than 30 years. His economic consultancy is called Shadow Government Statistics [ShadowStats.com]. His early work in economic reporting led to front-page stories in The New York Times and Investor's Business Daily. He received a bachelor's degree in economics, cum laude, from Dartmouth College in 1971, and was awarded a master's degree in business administration from Dartmouth's Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar.

    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 Streetwise Interviews page.

    DISCLOSURE:
    1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an employee.
    2) John Williams: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. 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.
    3) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    4) 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.

    5) 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 (i) only in whole (and always including this disclaimer), but (ii) never in part.

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    Dec 17 2:31 PM | Link | Comment!
  • Be Bold And Seek The Sizzle, Says VSA Capital's Paul Renken

    It's time to be bold, says Paul Renken, senior geologist and analyst with London-based VSA Capital. He seeks the "sizzle," or the narrative, in mining equities because the sizzle moves the story. But Renken remains selective and likes to see a significant discovery or acquisition that provides a clear path to investor returns. In this interview with The Mining Report, he recommends a veritable laundry list of companies in numerous commodities operating around the world.

    The Mining Report: You're a survivor. Mining investors want to know what they will need to survive 2015. What's your message?

    Paul Renken: Always know how much you can afford to risk in any particular situation, but it's probably the time to be bold simply because the sector has done worse than anyone has expected over the last year or so. That is essentially forcing out the weak players.

    TMR: Weak players?

    PR: Weak players are those looking for a short-term turn in a particular stock in order to make a short-term gain. There just hasn't been a significant move upward in virtually any of the commodities. In fact, just the opposite has happened. We've had a significant selloff.

    TMR: How should investors play this market? Are you seeking specific situations across all commodities?

    PR: We're being quite selective. For instance, the difficulties in the iron ore market are widely known-iron ore just dipped below US$70/ton-but there are some specific circumstances that warrant a closer look, simply because they were hit early and had the opportunity to fall farther than their peers. The firm is not particularly bullish on iron ore going forward but we expect that the price will be somewhat higher next year, so there is going to be a modest recovery.

    TMR: Are other commodities showing favorable support levels in this market?

    PR: We think that there is going to be continued strength in diamonds and colored stones. That has been a good market this year for equity investors as auction prices have strengthened. The growth market is in Asia for polished stones, both colored and white stones, diamonds and colored gemstones like rubies and sapphires. And that seems to be continuing.

    Another commodity that we like here is lithium. The confirmation that Tesla Motors Inc. (NASDAQ:TSLA) will build the "Gigafactory" in Nevada definitely strengthened the outlook for lithium. And other automobile manufacturers are attempting to make electric and hybrid vehicles both popular and commercially profitable, too.

    TMR: Gemstones and lithium. Any others?

    PR: We also see some good support on a longer-term basis for tungsten, simply because the market hasn't been flooded with too much material, unlike what has happened in iron ore and oil.

    TMR: Please outline your investment thesis for junior mining companies in this market.

    PR: We want to see sizzle in the story. It could be a deeply discounted cash flow position that the company is either acquiring or that has been inappropriately discounted. Some investors are also looking for a dividend yield that's relatively secure even though the commodity that the company produces has witnessed some weakness. Another angle is a significant discovery or an acquisition that was made via exploration drilling through a deal. These kinds of sizzle will help move these stories because there are too many junior companies where the project is going to stay where it's at without something to sell it. You also have to have confidence that the story will come to fruition rather than just a blind punt on the gambling table.

    TMR: What are some telltale signs that something is a legitimate story?

    PR: One thing is a clear timeline that is achievable for what the company intends to accomplish. That could be how long it will take to get a permit or how much money it will take to finance a portion of the exploration or development. Those two things let us know that management has a good understanding of the project as it develops. Another one is three-dimensional evidence that there is continuity of high-grade mineralization. An additional good sign is a simple and clear path to how a potential investor would make money because complications essentially make stories much more difficult to believe.

    TMR: How many mistakes are you willing to forgive before you sell?

    PR: If I were an investor in a project, I would have a clear vision as to how much I was prepared to tolerate. I could probably tolerate only one or two errors. But if I owned shares and it becomes clear that the reason I initially invested is not going to happen right away, I would be prepared to exit a position after the first mistake.

    TMR: Are you more willing to discount delays in a market where money is difficult to find?

    PR: The short answer is no. The reason is that most investors are not solely invested in natural resources. They have more than enough other opportunities to risk their capital. That's part of the problem with the sector. Equity performance has been so poor across natural resources for so long that the money has exited to less risky places.

    TMR: Let's start with gold. Gold has bounced up from its bottom of US$1,140/ounce [US$1,140/oz] in early November to as high as a little above $1,230/oz in early December. Please give us your thoughts on gold's fundamentals and how those numbers will influence its performance in 2015?

    PR: At the beginning of the year VSA Capital thought that gold would spend some significant time between US$1,100/oz and US$1,200/oz, but not below that level. We're still working on our forecast for 2015; we expect some modest improvement, but we don't see any big move to the upside-given what we see in current economic and trading activity. There is, however, a tremendous sense of concern-I wouldn't call it foreboding but there is concern-about what is going to happen when the U.S. starts to implement rising interest rates and, in particular, what will happen with the bond market because institutional money is heavily vested there.

    By all measurements the bond market is significantly stretched. If everyone decides to leave bonds and head for the exit at the same time, not everybody is going to get out without significant losses. The U.S. Treasury market is so big and liquid that most of the money will go there, but some of it could go into gold and silver. Even small percentages of the bond market money moving to gold and silver would cause a significant price jump.

    TMR: What are some gold-focused equities that you're following?

    PR: We follow quite a few gold stocks for various reasons. Randgold Resources Ltd. (NASDAQ:GOLD) is a producing stock that is considered a bellwether for gold. It only produces gold, so it's a clean measurement as to the equity movement with gold prices. It's widely followed.

    TMR: Will silver rebound in 2015?

    PR: Silver has been anything but steady over the last couple of months, with a rather drafty fall from US$21/oz all the way down to US$14/oz. It is now around US$17/oz. The real disappointment is that worldwide industrial manufacturing activity is not stronger because silver is largely an industrial metal. The silver-gold ratio is into the 70s-something we haven't seen for years. Silver should outperform gold if manufacturing activity improves because the uptake on ounces produced would be far better. I expect silver to be more volatile than gold as it moves into the $19-21/oz range again next year. That would be a 20% gain.

    TMR: What are some silver-focused equities VSA is tracking?

    PR: We regularly follow Fresnillo Plc (OTCPK:FNLPF) [FRES:LSE]. It's one of the stocks that institutions tend to have in their portfolios, particularly Mexican institutions. By the same token, it's also a stock with consistently falling grades in its overall production profile. We want to see how that affects its margins.

    Another stock that we follow quite closely is Endeavour Silver Corp. (NYSE:EXK). It has a $280M market cap but has witnessed declining margins in 2014 as a result of the declining silver price. It is well-run company, though, so we think those margins will improve.

    Also, Fortuna Silver Mines Inc. (NYSE:FSM) has outperformed its production guidance in the two recent quarters. We think investors should take a look at it.

    TMR: What's the sizzle with Fortuna?

    PR: It caught my attention because it exceeded its production guidance on its operations, as well as its forecast margins between cash costs and all-in costs. We want to see companies that are improving their economic fundamentals on a production basis and don't have to worry about making those improvements by selling assets.

    TMR: When we talked with you in the summer, we discussed tungsten and its market fundamentals. You said earlier that you see modest long-term growth in tungsten prices.

    PR: Earlier this year the World Trade Organization ruled against China's export tariffs on molybdenum and tungsten, and we are uncertain how the Chinese will react. Some commodities like tungsten are highly dependent on one particular country's production or export activity. In this case, it's China. China imposed tariffs because it wants to make sure that it has as much tungsten and molybdenum as necessary to support domestic manufacturing. We doubt China would flood the market with tungsten as it did in the 1970s because the market dynamics are very different. The current ammonium paratungstate [APT] price is around US$350/metric tonne unit [$350/Mtu], which is fair. We think that the tungsten price overall is going to stay steady, if not rise in tandem with inflation in 2015.

    TMR: Can most of the suppliers make money at $350/Mtu?

    PR: Yes, most of the established suppliers can make money at that price.

    TMR: And, finally, let's talk about lithium. Should investors buy into the hype surrounding the lithium necessary for the growing market for lithium ion batteries?

    PR: There is an awful lot of hype and the hype has gotten ahead of what is actually happening. We recently published a lithium piece that determined that the economies of scale would finally develop in the electric vehicle market when at least 0.5-1M vehicles were produced per annum. Tesla is building its Gigafactory in Nevada to produce enough batteries for 0.5M vehicles, so it is definitely trying to produce enough batteries for the commercial electric vehicle market to take off. The Chinese have been locking up lithium deposits in order to be sure that if the market does reach critical mass, it will be the Chinese automakers that have secure lithium supplies for these batteries.

    TMR: Are you following some graphite companies?

    PR: Yes. One is producing now out of Madagascar on a small scale, StratMin Global Resources Plc [STGR:AIM]. It has a £7M market cap.

    TMR: What's one thing we should watch for in 2015?

    PR: You can be quite certain that commodity prices are going to be more volatile than they have been this year, particularly if we start seeing changes in U.S. interest rates, because institutional money will look for places to allocate money. We're talking about billions and billions of dollars moving from one asset class into another.

    TMR: Thank you for your insights, Paul.

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

    Paul Renken has a broad range of experience in various aspects of the mining and minerals business. He began his career as a geologist for Canadian junior resource companies in the Western United States. Owning a stake in a private consulting firm as vice president of exploration, Renken searched for various base metals, precious metals and industrial minerals. In the U.K., he worked in the equity market media outlets of Digitallook and Hemscott before joining VSA as mining analyst in 2006.

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

    DISCLOSURE:
    1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining 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: Fortuna Silver Mines 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) Paul Renken: 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, or had in the past 12 months, 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 (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
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    Dec 16 4:09 PM | Link | Comment!
  • Two Countries You Might Be Surprised To Find Hallgarten's Chris Ecclestone Likes Now

    How tight is money in the mining industry? So much so, according to Chris Ecclestone, mining strategist with Hallgarten & Co., that juniors are punished for resource estimates because the market believes they can't afford to develop their properties further. In this interview with The Gold Report, Ecclestone explains that canny juniors are choosing past-producing properties, which boast dependable resources estimated by majors and already existing infrastructure. And he names two current gold producers he believes are woefully undervalued.

    The Gold Report: Gold rose to $1,200 per ounce [$1,200/oz] Nov. 21 and has stayed close to that price since. Is this evidence of the end of the bear market?

    Chris Ecclestone: It's evidence of a bump upward in gold. The rise has not been so robust that one would be persuaded the tide has turned.

    TGR: What's your opinion of the hypothesis that there is an organized shorting campaign to bring gold down to $1,000/oz?

    CE: I don't believe it. Gold is being pushed around on pretty low volumes by buyers and sellers. The Indian trade isn't what it was. Western buyers are just not there anymore, particularly large speculative buyers.

    TGR: The Toronto Stock Exchange has had recent highs led by mining stocks. Are we seeing a recovery in precious metals equities?

    CE: There's an outsized correlation between the gold price and gold equities. Gold will drop 5%, and then gold equities drop 20%, but it's not so sticky on the way back up. Investors have seen over and over again that being a first mover on gold equities is not worth the effort.

    TGR: Why has the gold price fallen so precipitously?

    CE: People are just not feeling inflationary at the moment. Quantitative easing [QE] is being tapered, and the money supply apocalypse has not occurred. Exhaustion eventually sets in when the same old argument keeps being trotted out and proved wrong.

    TGR: What about the trillions of dollars in new money created since 2008?

    CE: Much of it is being sterilized and recycled and has gone off to other places. The gold bulls talk about the printing presses being run endlessly, but what has happened since 2008 in the West is not comparable to what happened in Zimbabwe in 2008 or Germany in the 1920s. This isn't funny money. It's still owed to the government and will have to be repaid.

    QE consisted of the U.S. government loaning money to banks. The banks loaned it to hedge funds that then put it into emerging markets. One of the reasons why markets like Brazil have been so floppy over the last year is the carry trade is over, and the money is coming back to the original borrowers. They, in turn, are flipping it back to the Federal Reserve or into the U.S. equity markets, which after a brief hiccup are again ebullient. At least it's not going into the U.S. property markets again, which is a good thing because that bubble is not with us anymore.

    TGR: You stress the importance of mining jurisdictions. Which jurisdictions once thought mining friendly are no longer so?

    CE: Chile was a great favorite for years, but it now has some black marks against it. Yamana Gold Inc. (NYSE:AUY) has been hit with a new levy described as a noncash tax charge. How can you have a tax charge that's noncash? It either is or isn't, particularly when levied retroactively.

    Barrick Gold Corp.'s (NYSE:ABX) problems with Pascua-Lama are much more than a simple capital expenditure [capex] blowout. Capex exploded because the process took a lot longer than expected on the Chilean side, not the Argentinean side. Then there's the water problem. Many Chilean projects at whatever capex cannot get water because it is needed at lower altitudes to service the urban areas.

    Mexico has been a happy hunting ground for Canadian miners over the last 10-15 years. When I was based in New York, investors would ask about the cartels. They were told not to worry because they weren't active in mining areas, only in Tijuana. That's now been dispelled as a myth.

    TGR: How is the mining industry dealing with this threat?

    CE: I went to a presentation recently where a company said it was employing people to maintain good relations with the cartels. This sounds like skating on the thin ice of the international anticorruption rules. The miners are not paying off the government but paying off some gangsters threatening to blow up their mines or roads unless they employ some of their factotums as a security force.

    Then there's the issue of royalties. We heard for years that they would never rise in Mexico. Well, after 10-15 years of the country being open for mining, the government had not realized the increased revenues it expected, so it decided to squeeze more juice out of that lemon.

    TGR: Which jurisdictions have become more mining friendly?

    CE: One that potentially could surprise Canadian miners is Bolivia. It has been in the dog house for a long time because of one or two incidents. Another is Cuba. Frankly, Cuba has been mining friendly, it's just that people haven't been willing to admit that companies like Sherritt International Corp. (OTCPK:SHERF) [S:TSX] have had a pretty good run there.

    TGR: What type of companies are likely targets?

    CE: Juniors with companies with unfinanceable projects, basically anything over $500M. A good example is Chesapeake Gold Corp. (OTCPK:CHPGF) [CKG:TSX.V] and its $4 billion, 18.5 Moz gold Metates project in Mexico. Goldcorp Inc. (NYSE:GG) owns about 9% of Chesapeake, and only Goldcorp has the money to finance Metates. This is too rich for Agnico Eagle Mines Ltd. (NYSE:AEM) or even Yamana Gold Inc. (AUY).

    Majors such as Goldcorp, Newmont Mining Corp. (NYSE:NEM) and Barrick Gold need to plug holes in their future production, and only companies of this size can realize projects such as Metates.

    TGR: The majors have their own bottom line problems. How can they pay to take on new assets?

    CE: I think they'll pay with shares. Their takeover targets will be able to justify cheap sellouts to their shareholders by pointing out that cash payouts would be derisory, and the buyers will not want to dilute their shares; they need their cash to develop their new properties. They can tell the shareholders that by taking the shares, if the acquisition works out, one plus one will not equal two but rather three, four or five.

    With regard to base metals takeovers, I believe that the zinc story is going to lift off. There are now no properties in the development stage owned by small companies. That means the projects that will be acquired by the majors such as Lundin Mining Corp. (OTCPK:LUNMF)[LUN:TSX] will be in much more formative states.

    TGR: Do you see base metal prices rising in the near term?

    CE: I think nickel could go up despite the Chinese putting on a brave face about the Indonesia shutdown. If copper trades above $3 a pound [$3/lb], it's a good place to be. Everybody's profitable. I'm really bullish about zinc, which I think could break through $1.20/lb in the first half of 2015 and then perhaps rise above $1.50/lb. That would be a pretty massive move from the $0.80/lb where it was wallowing a few months ago.

    TGR: Gold and silver, where do you see them going?

    CE: I wouldn't be surprised to see silver remaining between $15/oz and $18/oz. I don't see gold going much above $1,300/oz in the near future. Declining production will underpin the future gold price. The gold production trend was up slightly over the last decade, but now the big mines in South Africa are pretty much finished, and it's much harder to get grade in new gold mines.

    TGR: You've written that brownfields projects "trump" greenfields projects. Why?

    CE: Basically the work's been done already. We know that there's something there and that it's mineable. In many cases, juniors don't have the money to pay for preliminary economic assessments [PEAs] or preliminary feasibility studies [PFSs]. And if they don't have the money for that, then what's the point of drilling to make the resource bigger? In any case, we all know the market tends to hit stocks that come out with larger resources because that indicates the companies must move on to PEAs and PFSs they can't afford. Those projects are stuck.

    TGR: Is there a way out?

    CE: A number of companies have recently been looking at old mines with historic resources. These used to be treated like the old aunt hidden in the attic. Now the attitude is even though they are not NI 43-101 compliant, these resources were calculated to a very high standard by companies like BHP Billiton Ltd. (NYSE:BHP) and Noranda. We're not talking about Bre-X here. If the historic resource is reliable, why shouldn't companies mine projects on that basis?

    Another advantage of historic resources from shuttered mines is that they were calculated day-by-day as the mine moved forward. These are not theoretical blobs supposedly under the ground. These are real deposits that were really being exploited. These mines have ramps and adits, all sorts of infrastructure. Even if all the equipment has been removed from aboveground, having roads, electricity hookups and water constitute significant savings that you just do not get with greenfield properties.

    TGR: Heading into 2015, what should investors in the gold space be looking for in companies?

    CE: Production and past production. Production is kingly, and past production is princely. Anything else, stay away.

    TGR: Chris, thank you for your time and your insights.

    This interview was conducted by Kevin Michael Grace of The Gold Report and can be read in its entirety here.

    Christopher Ecclestone is a principal and mining strategist at Hallgarten & Company in New York. He is also president, CEO and a director of Geodex Minerals. He was previously head of research at an economic think tank in New Jersey, founder and head of research at the Buenos Aires Trust Company and a corporate finance and equities analyst and freelance consultant on the restructuring of the securities industry in London. He holds a degree from the Royal Melbourne Institute of Technology. Ecclestone is an author at InvestorIntel.

    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 Streetwise Interviews page.

    DISCLOSURE:
    1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher ofThe Gold Report, The Energy Report, The Life Sciences Report and The Mining 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. Goldcorp Inc. is not associated with Streetwise Reports. 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) Christopher Ecclestone: 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 (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

    Dec 15 3:01 PM | Link | Comment!
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