Wake Up, Mom and Pop!
Time for a Reality Check
EXTRACTS
by Larry S. Levy
Editor, Arts 'n Mines Newsletter
February 9, 2005

At the Mineral Exploration Roundup held in Vancouver late last month, money manager Jonathan Goodman professed his belief that the world is on the cusp of a "full blown commodity boom." He tells us we are at the early stages of a secular bull market, as opposed to a mere cyclical up tick in prices, the difference being that a secular boom continues for 15 to 25 years. At this stage, we are only into year four.

Further, he explains that significant discoveries of resources are on the wane, just as a continuingly weaker dollar by itself pushes prices higher. And, while Mr. Goodman is saying these things, Wall Street just may be on the verge of re discovers metals and mining.
http://www.sfgate.com/cgi-bin/article.cgi?f=/news/archive/2005/01/26/financial0908EST0054.DTL

Big time traders are starting to notice the world wide decline in copper inventories, as refining bottlenecks are projected. The world's second largest copper producer, Phelps Dodge, Inc., said recently they expect consumption to increase by as much as 5 percent this year. The increase will exceed supply from mines and recycling, they say, adding further pressure to dwindling supplies stored at commodity warehouses.

As these signals of changing times are waved, the mining stocks market seems to remain generally overlooked by the investment community. And, while many think the prices for metals have gone up dramatically in the last couple of years, retail buyers of stocks have not, as yet, moved into this sector as they did at similar points in other cycles. Eventually, I think, something will happen, some spark will be set off that lights a fire under this market. A sudden collapse of the dollar? A rare new discovery like Voisey's Bay? A softening in the housing market?

Speaking of housing, my market (the Phoenix metropolitan area) is showing very strong investor buying. Some 25 percent (up from 15% the previous year) of new home sales are to investors in this, the hottest home building market in the US. Not only that, our stock of rental houses has tripled in two years, and it's not just new homes that make up the larger story. Local experts are saying that the real estate market in general comprises 33% of the areas economy. In other words, 1 dollar out of every 3 is somehow generated from the real estate market - construction, sales, financing, remodeling, furnishing, etc. Frankly, I think this is a dangerous situation, but that's getting off topic.

To a lesser degree, the same thing is happening in the housing markets within many other regions of the county. Is it any wonder, then, that mining stocks have a hard time competing for attention, when every mom and pop investor is trying cash in on the real estate bubble? Sooner or later, that will change, and we may then begin to out perform the sizzling hot market our sector experienced in the late 70's.

In summary, just getting a particular story out on a special situation mining stock may not be all that is required in this market. At present, there are a lot of stories out there and not that many of us participating. While this is an excellent time to assemble a base position within the sector, the market needs something to make it pop, to bring in more players, to make mining stocks the next big thing. No one can say what, or when, but it seems destined to happen. "Change" is the first principal of value.

THE CHINA SYNDROME:
(News related to Asian influences on commodity and other international markets)

14/01/2005 - "Booming demand from China continues to drive iron ore prices higher," ...
http://finance.news.com.au/common/story_page/0,4057,11938404%255E14314,00.html

Rio Tinto, after receiving an average price increase last year of 18.6 percent, is now rumored to be seeking up to a 50 percent increase under one contract.

21/01/2005 - Power grid failures continue to perplex various parts of China's economy, disrupting global markets in many ways.
http://www.bloomberg.com/apps/news?pid=10001013&sid=ay62CI.EneUU&refer=commodity_futures

The latest bit of news in this regard relates to decreased output at zinc refiners, putting increased pressure on international suppliers. Zinc hits a 7-year high. This news spilled over into other markets today, forcing short covering in copper and other metals.

21/01/2005 - Chinese oil imports climb to a record amount. China is now the world's second largest consumer of energy resources.
http://my.netscape.com/corewidgets/news/story.psp?cat=50580&id=2005012115340002902700

25/01/2005 - China is satisfied controls are working - inflation is held back - even as GDP soars for 2004. Economy viewed as "robust."
http://english.peopledaily.com.cn/200501/25/eng20050125_171847.html

06/02/2005 - Auto manufactures to produce 6 million cars this year.
http://english.peopledaily.com.cn/200502/08/eng20050208_173319.html

08/02/2005 - Chain store sales increase 33 percent !!!
http://english.peopledaily.com.cn/200502/08/eng20050208_173319.html

09/02/2005 - China will overtake the United States as the world's leading economic power by 2025.
http://my.netscape.com/corewidgets/news/story.psp?cat=50600&id=2005020819260002441300

QUOTES FROM SELECTED READINGS:

"The idea, however, that China is going to be satisfied with low-cost manufacturing is a complacent fallacy. It already has a burgeoning middle class and as the country becomes more affluent it will consume vast amounts of goods and services. Many of these are already being supplied by indigenous Chinese companies, which are now looking to expand overseas in sectors such as cars, consumer durables, computers and mobile phones. In effect, China is the Japan of 30 years ago -- on a far bigger scale. The sheer size of China's domestic market means that it will spawn world-class competitors who will produce top class goods at knock-down prices. For companies in the West, the message is clear: Think strategically about China now or any short-term gain could quickly become long-term pain."
http://www.taipeitimes.com/News/edit/archives/2004/12/30/2003217320/print

Some thoughts:
In the long run, escalating trade deficits always result in severe economic adjustments.
In the long run, unrestrained fractional reserve banking always results in a full fiat money system and later disaster.
In the long run, legal tender laws always end in economic crisis.
"In the long run, we are all dead." John Maynard Keynes, the 20th Century's most influential economist/monetarist (and leading socialist).

End legal tender laws. End government debt as an "asset" for reserve banking. End the Federal Reserve System.
The cost of such adjustments will be quite painful, but no where nearly as disabling as the eventual cost of doing nothing.

"The study of money, above all other fields in economics, is one in which
complexity is used to disguise the truth or to evade truth, not to reveal it."
John Kenneth Galbraith

© 2005 Larry S. Levy
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Larry S. Levy
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Larry S. Levy is editor of Arts 'n Mines, a private email newsletter for special friends, guests and selected industry insiders. It is not available to the public. EXTRACTS is compiled from portions of the newsletter not dealing with specific mining issues. Mr. Levy also contributes economic and historical commentary on these subjects to international publications. He is retired from his former practice as a property valuations expert, during which time he held leadership roles in the premiere trade associations, lectured, and published articles on valuation topics.