Financial Sense Newshour
The BIG Picture Transcription
September 23, 2006
- Engineering a Recovery: Then & Now
- Emails and Q-Calls
- When Investing, understand the fundamentals or become an expert trader: use leverage Sparingly
- Other Voices: Bill Murphy, GATA
- Update on the Gold Market
Engineering a Recovery: Then & Now
JOHN: Well, indeed, here I be, Jim. What? Jim be shy? Well, I would certainly say you have not been shy this year for making some bold predictions. Just to name a few, let’s see: number one, I would say the big one I remember was the Dow would hit a new record this year; two, in order for the Fed to go on pause they needed to hammer the commodity markets, especially gold and oil, and you said that would either be Spring or Summer; three, large cap blue chips were relatively undervalued, and would become the next trend and we would see that emerge the late Spring or Summer; four, it would be another good year for gold investors; and five, a much more recent prediction, a crash, or the end of the world, is a ways off � in other words, the end of the world is not happening tomorrow, things will not be as bad as the consensus was predicting.
Let me play a clip, this was right from the beginning of the year when we came back on in January:
JIM: I also think that depending on when the printing presses start going into overdrive, despite that, you’re going to get a flood of liquidity like we’ve never seen before. And I do think we could see the possibility of a new record on the Dow.
JOHN: Yeah, but as we look at it right now, Jim, the sins of the past almost all clear across the board are about ready to catch up with us, and the piper’s going to demand payment. We’ve been in essence leveraging against the future.
JIM: Exactly. And what they’re going to try to do is the Fed knows it needs to go on pause because if they keep raising beyond 5%, real estate is in a downturn, and if they keep their rate raising cycle up, they’re going to be looking at a full blown real estate crash on their hands, and also maybe even an equity crash. So what they’re going to try to do, as I’ve talked about is, they need to hammer prices.
They’ve been losing this battle on the oil front; they’ve been losing this battle on the gold and commodity front. The reason in a fiat paper system the Fed and the government can create an unlimited amount of dollars. They can create an unlimited amount of bonds, they cannot create barrels of oil or ounces of gold and silver. And so that’s why they’re losing this battle. But the Fed is going to try to hammer these prices that’s what I think they’re trying to do right now. And they’ll use derivatives or they’ll sell forward they’ll do something but it’s a battle they’re going to lose. [2:34]
JOHN: Well, Jim, that was the way it was at the beginning of January. Any more predictions. And if so, what’s the basis for what you’re thinking?
JIM: Well, most of these predictions were macro calls based on our analysis of money flows, credit flows and a lot of detective work on our part. The other thing I think you have to understand too is the Dow has held up relatively well since 2000. Yes, it went down from the 2000 period to 2002 but it went down the least of all the major indexes. Furthermore, in the bull market recovery that began from the July lows of 2002, the hot money was going in to small cap stocks, it was also going into resource stocks. We saw the gold market take off, we saw energy stocks start to take off at the end of 2002. But the majority of Wall Street investors were putting their money in small cap stocks � that was where the hot money was going. Large cap growth stocks such as Walmart, the Microsofts, the drug stocks such as Pfizer, Bud, Coke, GE have gone nowhere. [3:39]
JOHN: And also the Dow hasn’t quite pinged the record you’re quite predicting yet, but the large cap growth stocks and the defensive stocks you’re predicting are what are leading the market right now. So that’s on target.
Well, you know, Jim I’d like to pop back to another prediction that you made where we’ve got here on the program a lot of what we call nasty-grams. We’ve become pretty good at categorizing these things, they generally fall into one of 3 categories: the first one is four-letter words; the second is body parts; and the third is indicating defects in our family ancestry. When you started talking about this in late Spring and everybody finally realized what you were saying you really took a lot of flack, but it looks like you’re getting some good company. If you go to CBS Marketwatch from Friday, which is September 22nd, here’s one of the main stories:
Famed contrarian investor, Marc Faber, better known by his self-appointed nickname, Dr. Doom, has temporarily shed his preference for emerging market stocks for 2 out of favor asset classes: large cap US industrials and technology shares.
My gosh, where have we heard that before, Jim?
JOHN: Oh, yeah. But you know he’s basically saying the same thing we’ve been saying here on the show which is that number one the main reason for his upbeat view is the US consumer may be more resilient in the face of a slowing US housing market than is more widely thought. Also, while housing prices may be easing around the country, Marc believes there is little evidence that a catastrophic drop in home values is imminent. There’s abundant liquidity � what have we been saying here on the show. And he also believes the Bernanke led Fed appears inclined to cut interest rates if the housing market dipped say more than 10%, or the economy slows. So he sees a slowing, not a collapse in the housing market � that’s exactly what we’ve been talking about on this show. So at least if people think I’m crazy and I’m wrong I’m in a room with some pretty smart people.
So that was amazing, John, to see that come out because anybody that has been listening to this show remembers back in the Spring when I was talking about the large cap growth stocks is the next trend; and also about relative valuations they’ve been out of favor. The large growth stocks that everybody would have sold their children to own in the late 90s, GE, Walmart, Pfizer, the consumer growth stocks they’ve gone nowhere in the last couple of years, and in relative terms people remember they have to go back to May or June, where we did a show on intrinsic value we took the Dow 30 stocks and computed intrinsic value in a number of ways, took a look at continuous growth for these stocks, and we were pounding the pavement on it. So it’s nice to have a little company. [6:33]
JOHN: So far your predictions are pretty much on target what about engineering the recovery prediction. Obviously the election isn’t very far away right now?
JIM: Well, to begin with, the Fed knew it had to tread water during this rate raising cycle, and that’s why they raised rates in small increments. It was almost like this Chinese water torture where they were doing it a quarter point, a quarter point�I mean they raised it 17 times. The other factor that we saw is that credit growth never contracted unlike the Fed rate-raising cycle in 99 and 2000. So the credit system in this country was operating at full steam. And this was even evident to me monitoring credit flows at all levels bank loans, construction loans, non-farm credit loans. I mean just take a look at any Federal Reserve report and so far this year credit growth is up about 32%. So if you want to borrow money you can do so very easily, lenders aren’t really restrictive.
In fact, last weekend I sort of did a field trip I went to the housing locations that I wrote about in The Day After Tomorrow, and I was talking to the different builders. Yes, the prices have come down; yes, they’re covering closing costs; yes, they are putting in options. So we’ve seen that part of the movement � but it was amazing when I was talking to them: “Oh, we’ve got all kinds of programs, we have interest-only, short term ARMs, we have fixed rates.” It was just a plethora of different loan programs. I got no indication whatsoever in whoever I talked to that credit was in short supply. It’s like if you want it and you can qualify � and it’s easy to qualify, that was another thing. This was so different when I went through the real estate cycle of 91 through 95 where lenders were more circumspect, they wanted to see more money down, they wanted to see qualified buyers. In other words they were cautious, especially after the Savings and Loan crisis.
So we were watching this, and this was one of the reasons why, as you just played that clip, back in January I said that we would see a new record in the Dow. Now, we’ve come close to within 100 points, once in May, and more recently here probably in the last week or so. I still believe, by the time we get to December 31st, we’re going to see a new record in the blue chips. [9:03]
JOHN: Ok, Jim we’ve been talking for most of the year that if the Fed was going to be able to go on pause, they were going to have to do some things to allow them to do that and you were talking about cutting interest rates. Now, you said this in January and you also said it again in June. Here’s another clip from one of our previous programs:
JIM: We’ve got rising interest rates and remember we’ve got $1 trillion of adjustable rate mortgages which are due to reset. And a lot of these people aren’t going to be able to meet the payments as those mortgage rates get adjusted upward. We’ve got rising inflation weighing on the market; we’ve got tanking financial markets globally as we’ve seen especially in emerging markets � emerging markets have fallen off a cliff here in the last month; the President’s poll numbers are down. And John, I would predict if all of these conditions the Iraq war is as bad as it’s reported today, we have $3.50 or $4.00 gas prices, the Fed keeps raising interest rates, inflation continues to escalate and the financial markets are in a free fall, I can tell you the Democrats are going to take control over Congress. And as they have made in their party platform, one of their first priorities will begin to put together a committee and hearings on the possibility of impeaching the President. [10:30]
JOHN: Yeah, it’s payback time.
JIM: Yeah, it’s payback time. Second, is they are going to raise taxes, they are going to repeal the tax cuts and also raise taxes at the same time, and also get into price controls and taxes on energy they talking about price controls, breaking up the oil companies, putting price controls on energy. You know if you’re the President sitting in the White House looking at all this, or you’re the Republican Party and saying impeachment, tax raises, price controls, obviously what are you going to do to get out of this mess. [11:04]
JOHN: I believe they see this coming and in seeing it coming then there are counter-moves that are going to have to be made. Usually there’s a series of strokes prior to elections within 2 months say, or a month of the elections.
JIM: Yes, because you don’t want to do it too early because if you do something now people will forget about this come September-October people have a short attention span and they’ll be focusing on something different.
So I’m just putting this as a plausible scenario but I’m seeing a lot of things that make me think this is what’s going to happen. Number one, you develop an exit strategy with Iraq. So imagine for example a peace deal with Iran; we’ve seen within the last 30 days the President of Iran wrote a 16 page letter to President Bush; and then on Thursday you saw Condi Rice give a press conference and saying for the first time in 26 years the US is willing to sit down with Iran. And of course you hear the blustering when the President got Iran’s letter he said no way, you’ve obviously got to play hardball and act tough. Same thing when we tried to open channels on Thursday suggesting a meeting with the United States sitting down and talking with Iran. What did you get on Friday? Iran said, “absolutely not, we’re going right ahead.” But what most people don’t realize, John, politically it’s not what is the headline that you see in the evening news it’s what’s being done quietly through the back channels right now. And let’s put it this way, the traffic is increasing tremendously. [12:37]
JOHN: A rule of thumb in politics is never watch what they say, always watch what they do. And you’re right, everybody’s very busy watching their p’s and they’re not watching exactly where everything is going.
JIM: So, throwing this out, if they can defuse tensions between the United States and Iran, we can get Iran to cooperate in Iraq, because they know they are behind a lot of the insurgency. And if that accommodation and treaty can be arranged between the two of them, watch what would happen by September or October the US or the President announces a gradual pull out of troops.
JOHN: Well, one of the things we’ve been talking about too as we look at the whole total price of oil on the world markets, there’s a segment of it which is called the geopolitical premium, meaning if everyone is real nervous about what’s going on with Iran and what could happen there in the Middle East then of course this has the effect of driving the oil price up. Now, obviously the Bush Administration can’t do much in the straight market supply and demand area but it could bring the GNI the global nervousness index � down and thereby assuage the geopolitical premium part of oil. And that would score at the pumps.
JIM: Sure absolutely, you bring down the price because the supply and demand factors for the price of oil are somewhere around $50 a barrel, you’ve got another $10 premium because of strong investment demand, and then you have a $10 premium that comes in from geopolitical tension. So if you can remove part of that geopolitical tension and also part of the investment demand � in other words, if oil prices start to drop you’re going to have a lot of people exit and cover their long positions in the market and take profits. So number one, you can see September-October, if this can come about, the price of energy comes down which means the price at the gasoline pump comes down. So that helps lower the inflation rate, that helps to take away some of the pain of higher gas prices. And you can imagine the political windfall of announcing for example the United States announces its first stage of troop pullback in Iraq.
The other thing I think they can do, and I think Paulson is going to be good at this, is hammer the commodity markets especially raw material costs. That brings the CPI down and also enables and gives the Fed the excuse it needs to go on pause. At the same time you bring down long term interest rates as the price of commodities come down so there’s less of an inflation premium. You can help refinance part of the debt bomb this trillion dollars of adjustable rate mortgages which becomes due in the next 12 months; and then you also place a stabilizer on falling real estate prices. This enables the Fed to go on pause, they can goose the money supply, they can monetize the debt helping to bring down the long term rates, and with all of this going on the stock market heads to a new high.
So what you have, by the November elections: peace with Iran, troop withdrawal from Iraq, oil premium goes down bringing down gas prices with it, as that happens long term interest rates come down. Commodity prices come down, this brings down the CPI, it allows rates to head lower, the Fed goes on pause, the stock market hits a new record, the result you just checkmated your opposition at election time. [16:09]
JOHN: Well, as we said, that was a series of predictions. So we pretty well said the same thing in January as June, we’ve been fairly consistent and if you recall this same thing came up in the roundtable discussion we had with Frank Barbera and Brian Pretti as well here on the program.
JIM: I’ll throw something here out about that line. We have a Congressional election coming up in November, priority number one, the Democrats said if they take over Congress investigation into the President and possible impeachment hearings. Could it be, given the low standing the President has with his polls right now, the low standing that Congress has that�you know one of the gripes that the President gets right now, people are upset about high fuel prices. So we’ve got this thing going on with Iran. Iran’s President writes a letter to Bush; Condi comes out yesterday and says, “hey, we’re willing to talk.” What if you orchestrate an agreement with Iran, get Iran to back off Iraq, you take maybe a 5 to $10 premium out of the commodity markets because of this Iran thing, come October the US begins pulling troops out of Iraq, you goose the stock market up and there’s peace between Iran and the US, oil prices are back down into the low 60s. [17:37]
JOHN: Well, they’re not pulling troops out at this time and things look a little uppy and downy between Iran and the United States, but a lot of times if you look at some of the jockeying that goes on during these types of things, that doesn’t necessarily mean anything despite the speech at the United Nations this week. Oil prices though have tumbled, gold has obviously been hit hard, commodity prices pull back, stock prices higher, interest rates have fallen from 5 to 4.6%. So, so far, I would say you’re in the qualification area for prophet-rating � how’s that?
JIM: Well, they’re not done yet, John. They still need to change the focus of the financial markets. The Fed knows that it needs to go and start cutting rates because if they can do that then these adjustable rates are also going to be coming down. But they need to change the focus of the financial markets from one of inflation to one of deflation as they did in 2003. This disinflation angle gives them a cover to begin lowering interest rates and to start running the printing press like crazy. I would suspect by the 4th quarter we should be very close to setting the stage for rate cuts in the 1st quarter of 07.
By year end, you’re going to see economic growth should begin slowing further than where it is today. I think the market worries will then focus on a slowing economy: “oh, my goodness, the economy is slowing.” We’ll see housing continue to fall, we don’t see housing bottoming sometime to the end of 2007, early 2008. We should also see lower headline inflation on the CPI and PPI numbers. And they will have their cover to start slashing rates, but they’ve got to have that cover. They’ve got to keep these commodity markets under control at least to election time, they’ve got to do this and change the focus as you recall as they did in 2003. Because they made two changes in the CPI index you had everybody saying, “Oh, deflation, deflation. Oh my goodness, the Fed better fight this.” And wow, did they crank the presses. They brought interest rates down to 1%, and they had the cover to do that so they need that cover now. [19:54]
JOHN: And it’s obvious why the mainline group were talking: “what do you think about this? Why is this going down? How come this is going up?” Well, we’ve already been telling you. But what about the financial markets, the dollar stocks, gold etc?
JIM: I think you were going to see coordinated intervention should probably put a floor underneath stocks. I think global intervention should keep the dollar from cratering because it’s not in anybody’s best interest to have the dollar fall apart right now. They don’t have anything to replace it and if that happens, if we were in a full blown dollar crisis, the other countries would be in problems too Europe would have problems, Japan and even China. So they will try to keep a cap. Also, on major commodity moves they can do that through derivatives. However, I still think gold is going to finish strongly by the end of the year, and I think that oil should be back in the mid-60s this Winter. [20:45]
JOHN: What about investing? Where should investors be putting their money?
JIM: I think what we were going to do is we’re going to cover that in the next two segments where we’re going to talk about the gold market where we’re going to talk about fundamentals of investing. You really need to understand your fundamentals to be an expert trader, and more importantly, do not be using leverage unless you consider yourself one of the best traders out there. I mean this Amaranth fund that just lost $6 billion on their natural gas trades is just a good example. These were pretty sharp guys. [21:20]
Emails and Q-Calls
JOHN: And don’t forget, you are listening to the Financial Sense Newshour at www.financialsense.com, where you’ll find all these files posted � our program weekly at 0700 hrs Greenwich Time, Saturday morning. That works out to about 3am Eastern Daylight Time. And we’re going to go to our Q-Line right now. The Q-Line’s available 24 hours a day for people listening to the program, you’re welcome to call in whenever. In the US and Canada it’s toll-free 1-800 794-6480. We ask you to say your first name and where you’re from. And please try to keep your questions brief, if it gets too long it even gets hard to follow and very difficult to use on the air. The number does work from the rest of the world but it’s not toll-free. 1-800 794-6480, actually you drop the 1’ if you’re calling from offshore.
So, let’s hit our first Q-Line question here, Jim.
Hi Jim and Gang, this is Jeff in Seattle. And my question is about how does inflation from the created dollars that are from the loans in banks, how does that get into the markets when you’re creating inflation from banks making loans and I guess the fractional reserve system? How does that money come out of the banks and into the markets and who are the people that control that money? Thank you and I’m glad you’re back from vacation.
JIM: Well, Jeff, the way the system works right now is, for example, when you make a deposit into a bank they can loan for every dollar that you have on deposit in a demand account which is let’s say a checking account, an additional $9 are created in the banking system. So they can loan out 10 times the amount for each dollar on deposit. And as they make a loan let’s say that you go in and want to borrow let’s say $10,000, well, what they do is they may credit your account with $10,000 which banks do in many loans. And then that money is deposited at the bank and that creates a new demand deposit.
And whatever that demand deposit is � let’s say you take that $10,000 and you write a check to a car company in your neck of the woods, and that car company has an account with another bank, so they take your $10,000, you get the car and that $10,000 gets deposited in their bank. Now their bank can take that $10,000 and loan out they keep 10% on deposit � and then they can make a loan for $9,000.
And then, let’s say, they make a loan to somebody else for $9,000. That person takes the 9,000 and buys something from another merchant who has an account at another bank so he deposits the 9,000 in that bank, the bank keeps 10% on deposit so they can loan 8100. So this $10,000 that gets created originally gets multiplied 10-fold and now all of a sudden you have $100,000 of credit that has been created in the system. So that’s how it gets into the market.
It even gets more complex than that. You can go in, for example, and buy a new home and you take out a mortgage. The bank loans you the money to buy the house, but then what the bank can do is take all those mortgages, let’s say, they made loans to 1,000 people. Then they take those 1,000 mortgages and they wrap them up into a security and they sell it as like a collateralized mortgage obligation on Wall Street. They sell it to Wall Street, they get the money back and they can make new loans. So there’s all kinds of ways that the credit system works. It works both in the banking system and it also works through credit intermediaries; and it also works through the securities system. [25:46]
I have an observation to make on Chevron’s Jack #2 well and the fact it’s being reported that this discovery contains some 50 billion barrels of oil. How is it possible to draw such a conclusion from the testing of this single 28,000 foot total depth well that cost a reported 100 million to drill? Wouldn’t simple logic make it necessary to at least drill some offset wells to confirm the size of the field before such an outlandish reserve be reported? Maybe you can get Matt Simmons to comment on this in your next interview? Thanks for a wonderful show each and every week.
JIM: Sure, they’re going to have to drill some offset wells. Do you remember the same thing happened like I think it was November last year where PEMEX reported a major discovery that they were claiming being one of the biggest discoveries in the Gulf of Mexico. And in fact I asked Matt Simmons about that last time and he said basically what you just said that you have to do more offset wells � there’s a lot more drilling. It’s the same thing as with mining, you know, you stick a whole in the ground and then all of a sudden you bring the samples up and you can say wow!, this was the gold content in the samples. And you can say based on this we think we have because the gold sample is so rich we think we have this amount of ounces. They’re basically making an inferral at that time � inferred ounces, or in the case of this Jack well inferred oil resources but a lot more holes are going to have to be poked in the ground, and then a lot more offsets and other drilling is going to have to take place. You know basically they hit a great well, the first drill looks pretty good and these are rather optimistic projections and when I have Matt on the show next week that will be one of the questions I will bring up as well as well as the major discovery last year by PEMEX. [27:45]
Hi, this is Anna, I’m calling from Olympia, Washington. Jim and John, I love your show and really appreciate what you’re doing and giving a voice of sanity out there. My question out there I wonder whether there is a correlation between when the financial international investors step back from purchasing US Treasuries in July when there was a smaller number of investors and then coincidentally about a month or so later we see gold and oil and commodities knocked off and consequently again some further investment in US Treasuries as a safety haven. I seem to recall this having happened before and I wondered if there is a correlation between those two events you guys don’t seem to miss much, you’ve probably already looked into this but I’d still be interested in hearing about it, thank you.
JIM: Well, the correlation is, for example, they were hammering the gold markets in May and then also starting in May we had a lot more talk about, for example, remember the stock market correction that took place during that period of time. So this was just money switching over to the Treasury side and you certainly saw the bond market peak in May, and since May however, money has been coming back into the Treasury market big money flows by institutions. And a lot of that I think has to do with it’s a trade that Ok, if the economy is going to weaken the Fed will eventually have to go on pause, interest rates will start coming down. That’s probably why you saw this downturn in the Treasury markets. And then also on the commodity markets that was something you saw derivatives hammer in August and September, and we were talking about this as a prelude back in the beginning of the year and also in June for the Fed to go on pause. They really needed to get the gold market [down], they couldn’t afford to see it up in the $700s just as we got going into this election.
In fact, Ann, there is a graph that we’re displaying with today’s broadcast and it’s a graph of Bush’s approval ratings and oil and gas prices, and you can see his approval ratings going down as the price of gas went up. It was an inversion of his approval rating. And also now that the gasoline prices have come down his approval ratings have gone up. This was a graph done by our friend Bud Conrad and it just gets into this. But yeah, a lot of this is being orchestrated right now. [30:16]
When Investing, Understand the Fundamentals or Become an Expert Trader: Use Leverage Sparingly
JOHN: Well, Jim, we have been going through let me just put it this way Maalox moments, I’m shaking my bottle here and trying to get the adult-screw cap off.
JIM: Yeah, what’s next? Combination locks?
JOHN: Kids can do it, I mean I just sit here forever.
Anyway, it is one of those Maalox moments if you’re invested in the metals or in energy, but this isn’t the first time, Jim. I mean we’ve been doing this show together for 5 going on 6 years and we get one or two of these a year I buy this by the gallon from Costco. So what do you think rattles the investor the most?
JIM: I think what shakes investors confidence is how swift and violent these moves are. Let’s face it they’re not pleasant to go through unless you have, in my mind, a long term perspective. If you understand and grasp the fundamentals behind this bull market in commodities then you hold your course and you more likely add to your positions. I mean I’ve been adding to things that I’m doing personally and I look for these kind of opportunities to just keep accumulating because I think this bull market is going to last well into the next decade. And we’re a long, long distance away where I think we’re going to be ultimately in terms of gold prices, energy prices. I think we’re going to be between $200 and $300 oil � not there yet but that’s where we’re heading in the future. Gold prices are going to be easily in the thousands, and silver prices are going to be above 100. So we’ve got a long way to go.
Now are there going to be corrections along the way, yes. So you need to understand that because that’s what helps you sail through these things. As everybody knows I’m a sailor, and there are a lot of times you go out on the ocean you’re trying to get from point A to point B, and all of a sudden the wind may change directions, it may pick up, the seas may get bigger and more stormy, and what you do is you hold your course. You don’t just sit there and jump out of your boat. Some people do, I don’t advise doing that unless you’re adept at trading. But understanding the fundamentals I think are very important. [32:46]
JOHN: $200 or $300 oil?
JIM: Not saying when, yet. But by 2010 we’ll certainly be over 100.
JOHN: Well, I’m keeping this handy [shaking Maalox bottle]. Tell me why are these corrections so violent, anyway. They tend to hit like a lightening stroke and then they tend to be pretty gyrative.
JIM: There are two factors. One, I think you have to put in perspective the size of the commodity market in comparison to the securities market. We talked a little bit about this last week, but you take a look at the commodity trading it’s about $100 billion for the commodity markets versus $50 to 60 trillion for the paper markets. So when money starts going in to the commodity markets, even an increase of a small amount of money has a major impact on the price of commodities. Likewise, when that money starts to sell off � like this hedge fund which had to sell its contracts � you get the reverse effect. So that’s number one: the size of the market. The second reason is an incredible amount of leverage and if you’re leveraged 10 to 1 or 20 to 1 and prices start to move against you, then you have to sell immediately, you have to cut your positions or you’re bankrupt. [34:01]
JOHN: So, if you’re leveraged and your investments go down then you are forced to sell obviously?
JIM: Sure. And when you’re in the futures market it you are leveraged. In addition to this, leveraged funds will also borrow money in many cases. For example, the case of the well known hedge fund Amaranth, by the time they took all their losses, they are still leveraged to the tune of $1.30 of debt for every $1 of equities. So you could see their leverage has come down. But if you take that $1.30 of debt and then you put it into the commodity markets where you’re leveraged 10 to 1 you get this double effect of leverage. That’s why they lost $6 billion in a month. And the funds are now down 55% for this year where previously they had been up several billion dollars. Now they lost $6 billion. It’s similar to Long Term Capital Management. Their losses were very extraordinary because of the degree of leverage that was employed. For example, Amaranth lost $560 million in a single day. That illustrates the point that leverage is a double-edged sword. [35:13]
JOHN: So what do investors do in this situation.
JIM: Well, first, unless you are really adept at trading just don’t use leverage, period. That means no margin if you own stocks, cash if you’re in commodities. And no borrowing from for example, credit cards or taking equity out of homes. Sometimes we’ve seen in the last couple of years, this was of course back when interest rates were lower in the early part of the Fed rate raising cycle when they were just beginning to raise interest rates and the housing market was going at full steam, we’d emails from people saying, “hey, you know, I’m thinking of taking some equity out of the home what do you think if I take some equity out of my home and I buy gold stocks?” No, that’s not a good idea, because you’re borrowing money. And as you’ve just seen here the correction in the gold market, we saw it in May, we saw it recently and even a correction in the oil markets. You just don’t want to be in a position because if you’re not leveraged, well, you know, then you can ride out this storm, you’re not going to have to panic to say, “boy, we’ve got to sell everything because we are just hemorrhaging,” as these hedge funds often find themselves in that kind of a position. [36:27]
JOHN: So if you’re long on Exxon for example you just hold on, or if you hold gold stocks you hold them rather than fold them?
JIM: By all means. If you own oil stocks, let’s take your Exxon example. Exxon’s going to be there tomorrow, and if Exxon prices pull back 5 to 10%, look you’re making a nice dividend, you’re with one of the largest companies in the world and they are selling a product that everybody has to have. You can’t say, “well, I’m not going to buy gas next week.” Or a utility that’s using natural gas to power its plant isn’t going to say, “well, we don’t like the prices where they are right now.” That’s not going to happen. So you can afford to ride these things out.
The same thing happens if you own commodities stocks whether you’re sitting on base metals, or you’re sitting on gold stocks, you have the luxury that you can ride out the correction. Assuming, however, John � this once again I can’t emphasize this enough � you understand the fundamentals of what’s driving this market and you understand what it is that you own. Why did you buy Exxon? Or why did you buy Newmont? What were the fundamentals that you were thinking about that made you make that investment? Do you understand how things are going at Exxon? These are the things that are very important for you to ask yourself. So when you see these price corrections as we’ve seen recently you can ask as we’ve talked about last week, what has changed? And that is very, very important if you’re going to ride this market. [38:03]
JOHN: If you did that, since you first began recommending energy, metals, and commodity stocks as far back as 2010, I would say people woud be doing just fine. What about trading in and out of these sectors?
JIM: That’s more difficult. I don’t believe you do a lot of trading in the early stages of a bull market. Every bull market has 3 stages to it � like technicians will say there are 5 major moves in a bull market [with] 3 moves up. And you’ll have your first move, or what a technician will call your first wave, then you have a pull back � that’s a second wave down. Then you’ll have your second major upturn and that will be followed by a correction. Then you get the final stage of a bull market, your third upturn.
When things were getting crazy as they were in the internet, things were just really getting silly. When your next door neighbor is bragging how they just got in on a gold IPO and they’re going to raise money and they’re going to discover the lost Dutchman mine � when people start talking like that you’ll know that you’re in that latter stage. We are so far away from that. So when you make a decision to trade one of the problems I have with that is when you’re making a decision to trade you’re making 3 decisions: one, you are at a top; two, what are you going to buy next; and three, can you get back in at the bottom. The problem is getting back in. I know of very few people that can do that successfully and do it consistently. Besides, in a bull market you talk about these 5 moves � 3 moves up and 2 moves down � I mean think back to the tech stocks in 1990 to 2000, that big run up close to a decade, would you have been better off buying Dell, Cisco, Intel and Microsoft and just holding them throughout those phases of the bull market? Or would you have done better constantly trading in and out? I would lay odds that the long term investor made more money. [40:16]
JOHN: You know you covered this concept very well in you’re The Next Big Thing article which I think you wrote back in 2003. And frankly it’s as relevant today as the day you wrote it because the principles still apply. It doesn’t change with what’s going on in the markets.
JIM: Sure and in these bull markets and bear markets, bull markets tend to last longer they’re more long term trending versus bear markets which are shorter term in their duration. But for example, as I wrote in The Next Big Thing, if you would have been in stocks, let’s say you got in 1950, you could have been in stocks till roughly 1966, 1968 � there was an almost 16-18 bull market run in stocks. From about 1966 to 68 to 1982, for 18 years, the next move was in commodities. We had an 18 year bull market cycle in commodities; the place to have made money � gold, silver, oil, collectibles, real estate, tangibles.
Then in 1982, from roughly 1980 to 1990, the place to be for that 10 year period would have been in Japanese stocks because that was the ultimate movement in the Japanese Nikkei. And then of course, the US market did well too from 1982 to 1990, but not as well as Japanese stocks.
From 1990 to the year 2000, the place to be was the US market which outperformed all the other markets in the world but especially in the US markets the technology stocks where the star performers that led that bull market cycle in the final phases of that bull market run that began in 1982.
From roughly about 2000 to the present the place to have been where you’re making all the money are really in commodities whether you’re in base metals, or precious metals, whether you’ve been in gold and energy, natural gas, lead, zinc. And this is just the first phase. The point I’m making here is these are long trending moves, they’re not short term moves and I really vehemently disagree that this is a commodity bubble. There are no surplus warehouses full of all kinds of commodities and your neighbors aren’t talking about buying gold stocks. Maybe a couple may have in oil stocks by now, but they’re not talking about buying gold and precious metals, going into junior gold mining stocks you just don’t see that. [43:00]
JOHN: Now it’s time to go to Other Voices this week and our guest Bill Murphy. [43:12]
Other Voices: Bill Murphy, GATA
JIM: Well, according to the experts everything is fine: inflation is under control, the economy will grow strongly along with corporate profits. There’s not a cloud or a problem in the sky. However there’s another side to the story: one says we may be on the Titanic and surrounded by icebergs. To talk about that, joining me on the program is the proprietor of Le Metropole Café, Bill Murphy.
Bill, we started doing shows back in late Spring and I was saying that if I were to engineer a recovery in an election you would have to hammer the commodity prices because you can’t go on pause if you’re the Fed and say inflation is under control when you have $75 oil and $700 gold; and I also said that we would have a new record in the Dow this year. Fast forward, six months later, here we are, gold has been hammered, oil has been hammered � now they’re talking about $50 oil � inflation is under control; everything is rosy. What’s wrong with that picture?
BILL MURPHY: Well, if you’re part of planet Wall Street you’re happy and if you’re an investor you’re happy and everything is copasetic and it’ll stay that way until the icebergs show up and the Titanic hits them, and if you don’t have your lifeboats you’re in trouble. That’s what’s wrong with it, and it’s creating a false situation for the election of the incumbents. Bush’s poll numbers have gone to almost the exact same percentage that oil and natural gas have sunk, or gasoline has sunk. [44:51]
JIM: What is really amazing � and I’ve talked to a lot of prominent technicians, people that are very well respected in their field, and one of the comments that comes back repeatedly from a lot of them is whenever it looks like the market is about ready to roll over, the NASDAQ, or something bad is happening technically � voila miracles happen in the markets. And many people are aware that there’s a Plunge Protection Committee, and I think there are growing voices now that are saying it is hard fast at work.
BILL: People don’t like to use the word fascist � it gets people cringey a little bit like that � but this is exactly what that system was all about. It’s the big banks and the corporations in lieu of the government running things for their own means and at the expense of the public. For a while it can go on and be fine and dandy, but when things hit the fan, I think we have some serious problems because what in effect you have is � if you want to use that term � a managed economy. And as you’re saying � I’ve noticed the same thing, I write about it every day � just when the market’s going to break down they have the programmed trading goes berserk. It’s not just an empty mouthing here, the programmed trading has gone up from a percentage of the New York Stock Exchange trading since 2002 from 25% to 60% . I mean it’s unbelievable what’s going on here and the stock market hasn’t fallen. I don’t think the Dow has fallen more than 2% on any given day in 4 years. Every time it gets down to that point it stops. [46:29]
JIM: The other thing that is occurring that I think a lot of people if they were to step back and view events and the way the market reacts, would question what happens. What I mean by that, Bill, I saw this early on in 2003, and I’ve seen it periodically since then, where you’ll have for example the Dow dropped at least in 2003 � we’ve seen it on other occasions � you’ll have the market down 150 points in the morning, and it’s based on some kind of economic news or something � who knows why it’s down, but people are selling. And then in the last half hour of trading the market will reverse its loss position and go up � in fact in 2003, we actually had an almost 400 point swing. And the reason given � and this one I remember distinctively in March of 2003 was, “well, the economy lost 7000 jobs less than expected.” Now, Bill, you worked on Wall Street, I can’t help but believe you’ve got fund managers that are sitting there at 9 o’clock in the morning, they get the unemployment numbers and they’re contemplating having investment policy meeting and at the end of the day, “gosh, we lost 7,000 jobs less than expected � let’s rush into the futures pit and buy at any price.”
BILL: I’ve called it for years the Hail Mary rally. It happens all the time, over and over again, that late in the day the stock market, out of nowhere, rallies. It either goes up on the day, or cuts a sharp loss and makes it a small loss. There’s a decent amount of people now on Wall Street � some of the big hedge funds and other people who are part of the counterparty to this risk management group who know what they’re doing � they wait for this stuff and jump on board. And so it becomes a self-fulfilling thing because they’re traders there to make money � if you and I see it then certainly the big money sees it, they know that they’re out there and they’re making a fortune just trading that way. [48:25]
JIM: Let’s talk about this recent downturn in gold and oil. You’ve worked in the commodity pits so you know � and I want to explain this for our listeners � normally let’s say if you’re buying a futures contract you put down 10% and you borrow 90%. If I wanted to drive down the price of oil, or the price of gold, I could go in through derivatives, and start hammering the price. The minute I start doing that, that starts triggering a downturn in the price and then let’s say somebody else, say, Bill, you’re bullish on gold, or you’re bullish on oil, you’re in the futures pit, but because you’re margin, you’ve only put 10%, I’m driving the price down, you’re incurring big losses, I have to force you to sell.
BILL: That’s right, once the thing starts to feed on itself it changes the moving averages, the technicals, and as a former limit position trader one point in my life I know a little bit about this. What just happened today is staggering. You may know this hedge fund Amaranth that just lost $4.5 billion making a natural gas play among other things, it’s a big story, they’ve lost all this money, they’ve got killed. It’s helped just what you were talking about, it has forced the price down. So who was it announced today who was going to bail them out and take their trades from them? What a coincidence, JP Morgan, Chase, and Citibank � two of the key ringleaders in the gold cartel. This thing is a joke. If you look at the counter party risk management group, and the chairmanship people, it’s Goldman Sachs, Citigroup, Citibank and JP Morgan Chase. I mean and all of sudden it just happened and they’re just coming in coincidentally to bail them out. [50:08]
JIM: It’s absolutely amazing too, just in the month of August, there was a week and within 3 days these were the headlines: on Monday, and I think this was the second week in August, BP announces that they’re shutting down half of their oil production in Alaska because of a pipeline leak � the price of oil goes down instead of up; two days later, it is announced out of London that they’ve picked up these 23 terrorists that were going to blow up 10 planes over the Atlantic and Pacific. Now, given these terrorist events, given the fact that BP was shutting back it’s oil production, cutting it in half (from a main source of our daily oil production), you would expect number one, the price of oil to go up. Given the fact that they just hatched another plot that could have been more gruesome than 9/11 that gold and silver would have gone up. Instead, gold and silver go down, oil goes down and on top of that tech stocks go up. I mean I don’t know about you, Bill, but you know, the first thing on my mind when I see 10 guys, or 23 guys trying to blow up 10 planes, or they’re shutting down half of BP’s production, the first thing that comes on my mind is I’m not going to go out and buy Dell and Cisco.
BILL: Well, I couldn’t agree more. This kind of thing actually has been happening for years but it’s more insidious. And what is just as insidious is that every time there is a US economic report out of Washington, and especially if it shows increased inflation in the United States for the past number of years every single time gold goes down on that day. It doesn’t matter what it says, it goes down. And that’s how they’re creating spin and disinformation in the mind of the investing public is the reason that most people have no interest in gold even though it’s been near $600 an ounce. That’s because they’ve defused its effect and every time it starts to do something they attack it to show that it doesn’t really count. And the reason is because it’s used as an inflation barometer and crisis situation barometer by the general public and many in the investment world. [52:27]
JOHN: So that’s why when these events happen where your first inclination would be maybe I need to buy more gold, or I want to buy oil, they have to attack it to basically discredit it.
BILL: Well, that’s right, it creates its own spin. I call it counterintuitive. Everything happening today � well, not everything � many things, especially related to gold and silver � everything happens is counterintuitive. I mean right now interest rates are at their low. I mean that’s not bearish for gold and silver. None of this makes any sense. Demand is soaring. The premiums out of India are almost at record levels. I heard today that in silver � and this has only happened once before, and this is from the horse’s mouth � they’re actually thinking of actually silver into India by airplane. That’s how big the demand is relative to what these people have done. [53:18]
JIM: And yet we see the price fall on weakness, so the demand for physical metal is going up and yet at the same time they’re driving [it] down. And one of the things that we have often talked about on our show when, you see it also especially in the silver market, where people don’t realize that the paper market drives the physical market. I mean, yes, you can go out and buy � who knows � 5,000 contracts on oil. I’m not so sure it would be as easy to take delivery on 5,000 contracts of oil; or you could go short maybe 1,000 contracts on silver but try to get delivery on this silver.
BILL: That’s exactly right. And that’s the Achilles’ heel of the gold cartel and the price managers of this whole scheme is that they are gradually running out of enough available gold and silver to meet this demand. And so they can win battles like they’ve just done but it’s like keeping a rubber ball under water, I mean they’re creating another slingshot to the upside. I mean it’s coming, they can keep it going, and maybe this time they mobilize enough together right before these November elections � I don’t know � but I know it’s going to explode, both of them. [54:34]
JIM: Well, Bill, if you were an individual investor and we’ve gotten a lot of emails from people that have been frightened over what they’ve seen over oil, what they’ve seen in for example, gold and silver, also the equity shares and also about all the talk that we’re in a commodity bubble, what would they tell them today?
BILL: I would tell them, first of all, say we’ve got $60 oil, the normal relationship is about 15 to 1, so gold fairly priced ought to be $900 right now � that’s the first thing I would say. Second of all, I would say that a commodity bubble � I mean my expertise is in gold but ironically copper is not tanking, it was down 10 cents today and came right back to close unchanged. I mean the copper market which many people use as an indicator instead and it’s way, way overpriced is not falling apart at all; oil is a different case because it needs for the election coming up and gasoline prices going down everybody says how great this is � the price of copper the average person could care less about.[55:38]
JIM: The other thing too is even oil at $60 a barrel I mean 4 years ago it was at 20. And it was interesting because they interviewed T. Boone Pickens last week in BusinessWeek and he was interviewed by Maria Bartiromo from CNBC, and she congratulated him on his call for $3 gasoline and $80 oil, and that was made almost a year ago, and she was asking him, “what do you think about what’s going on in the oil markets now?” And he said, “you know, without even major events, we will revisit $80 oil next year.”
BILL: Sure, after the elections are completed. I would agree.
JIM: I just wanted people to understand we’ve had clients calling, “why aren’t you selling our oil stocks, how come you didn’t sell our gold stocks.” And I go, “why?”
BILL: A lot of times as I write the big moves will come out of the blue, and especially gold, we’re just getting started, and one day it’s going to go. There’s a reason most people don’t make money in the biggest moves in history � very few do � and this is why. They get shaken out in things like this, they put their money elsewhere, they forget about it, they say they’re going to get back in and they don’t pay attention. The next thing you know it’s going through the roof, and they’re reading about it and they see things much higher than where they got out and they wait for the dip and the dip never comes. You know, you’ve seen that a million times. [57:01]
JIM: That is so truly spoken, Bill. I could think back when gold dipped in 2002 in the Summer where the HUI went from I think 150 back down to 100; I can remember the shakeout that came in the Spring of 2004 where they said China’s economy was going to slow down and that was it for commodities � and of course, China’s economy didn’t slow down, it accelerated and has been ever since. And that was sort of the cover that they were using to take the markets down and here they are again telling people it’s a commodity bubble. A bubble indicates two things to me: one, you have a surplus of supply of everything like we did in technology at the end of the 90s; and secondly, every guy and your neighbor is going out into gold IPOs.
BILL: They can’t even spell gold yet here in the United States. [57:53]
JIM: But you’re absolutely correct, the way gold moves it’s all of a sudden, and people will miss the move, it’ll accelerate. They’re going to wait for the dips to buy back at a low price and they miss it completely. How truly spoken.
BILL: We’ve seen it too many times not to know this, huh?
JIM: Yeah. Well, Bill, if our listeners would like to find out more about your website and your newsletter where you definitely cover the issues of gold and silver markets, and also a lot of outside the box thinking that people don’t hear on Wall Street, why don’t you tell them how they could do so.
BILL: Well, they could sign up for a 2 week free trial at www.lemetropolecafe.com, and they can see if it can be any benefit to them.
JIM: Bill, as always, it’s a pleasure to have you on the Financial Sense Newshour thanks for coming back and talking with us.
BILL: Great to be here, Jim anytime. [58:44]
Update on the Gold Market
JOHN: Well, Jim, you and I have been working together on this program since 2001 and since that time I have known you consistently to be bullish on the gold market, and we talked in either the last or the previous segment about all these [rollercoaster rides] you experience from time to time but you still believe that we’re in a bull market and that things will go much further up. What evidence do you see to support your position on that?
JIM: Well, we see a number of things. Number one, I think that we’re headed for a period of US dollar weakness and that appears more likely as the economic indicators begin to weaken; and also there will be a narrowing of interest rate differentials between let’s say the US and other countries and as US interest rates start to decline that will diminish some of the support that we have seen in the dollar since the Fed began its rate raising cycle back in 2004. Another factor that seems there’s no indication that it’s going to end is the extremely high US current account and fiscal deficit remain very threatening to the dollar. The US current account deficit is going to be much bigger than it was last year so that’s still growing. And I don’t have to tell people � look around you � go into a store, where do you think you buy the things that you see on the shelf. Where are they made? They’re not made here.
Also, as the dollar’s attractiveness loses favor with a lot of the institutions, and may also lead to a rebalancing of foreign reserves by foreign central banks � you hear more and more talk of foreign central banks lessening their dollar holdings. So further tightening in the market and stimulating I think additional fund and other investment activity are positives for the gold market. Geopolitical risk remains very high � just look at Chavez at the UN this week. Energy prices threaten to stimulate inflationary fears. I think we’ll have some softness at least up to the election. And also, everybody’s talking about the Asian surpluses � well, guys, at $60 oil, or $70 oil where it’s been most of the year � you’ve got to think of the petrodollar surpluses that are searching for a home away from the US dollar. And then also, mine production is forecast to remain flat while what we’re seeing is rising operational and capital cost. It is costing, the inflation factor on the mining front has been about 35%. So yes, capital expenditures are going up but a greater portion of those capital expenditures are going towards just paying higher costs for everything � from drills to steel to labor to energy; and staff shortages � I mean trying to find qualified personnel today. So all of the fundamentals are still in place. [1:01:55]
JOHN: Obviously the bears are not going to agree with what you just said, so if we look at some of the negatives in this whole argument what would you think they’d be?
JIM: I think even though real yields remain low right now, one of the things producers remain committed to reducing their hedge books but not maybe at the same rate. The potential for this positive influence diminishes with time as their hedge books begin to decline and contangos rise. And also we’ve seen some pullback on jewelry demand. So the positive thing is investment demand can far outweigh let’s say industrial demand, but there is some weakening on the industrial demand side. [1:02:39]
JOHN: Any other positives you can think of?
JIM: Well, one thing that we saw this year that quite honestly I have not seen in the last 4 or 5 years � normally when the price of gold goes up you see the mining stocks go up about 3 times the price of gold. So if gold prices go up 10%, you would see gold mining stocks go up 30%, and in the case of juniors you could see that even 40 or 50%.
What happened that I saw this year that was very unusual was as the price of gold went up, as we headed into that $700 range, the premium on gold stocks over net asset value � because gold stocks always sold for a premium � that did not happen for the first time in, gosh, 5 or 6 years at least since I’ve been following this sector very strongly. You saw those premiums actually disappear. In fact, I think in May when we had that gold correction there was actually discounts � in other words, the majors were selling for a slight discount when normally they sell for about a 25 to 30% premium; the mid-tiered producers that normally sell for let’s say 20 to 30% discount went to 40% discounts; you’ve got juniors out there selling for 50% discounts.
Now, with the gold price in the $600 range, valuations are starting to creep back up so they’re not selling for discounts and they’re moving closer to their two year averages that we’ve seen over the last couple of years. Right now, you’ve got senior producers and international producers are selling at about a 7% premium above their net asset value, and then the discount on the junior producers is around a 24% discount. So we still have a ways to go and I think one of the things that you’re going to see this year, we’ve seen it, I’ve talked about it in the first part of the year, I can’t remember if it was either January or February I was predicting: look for a wave of mergers. [1:04:46]
JOHN: Perhaps we should draw an analogy here. Could we reasonably say the same thing is happening in the gold sector that happened in the oil sector � there came a pricing point at one point where it was really cheaper say, for example, for Exxon to go out and buy Mobil or something like that than to go out to explore for oil. It just made much more sense on the dollar to do that. Is that same phenomenon happening in the gold sector?
JIM: Exactly, John, because if you’re a let’s say Barrick or Anglo, for the first time you can go out and the total cost of acquisition are less than the spot price of gold. The total cost of acquisition means the cost in terms of dollars per ounce to acquire a company � in other words, take them out (buy a public company); the cost of building a mill or putting it into production � the capital costs; and then the operating costs. When you add all 3 of those together, when a mining company has to decide either to make an acquisition versus going out on the exploration side they have to sit there and say, “Ok, how many dollars per ounce is it going to cost us to buy this company?” Then they’re going to have to look at what their capital costs are going to cost them per ounce, what is it going to take to get the permit to build the mill, to build roads, infrastructure so we can go into production. Those are your capital costs. Then, once you’ve got your capital costs in � you’ve built your mill � what is it going to cost us to have guys with back-hoes digging into the ground, putting it into a truck, having the truck process it, take it to the mill, getting rid of the waste and then turning it into a finished gold bar or whatever gold product they make. So those are the operating costs.
So the combination of acquisition cost, capital cost and operating cost � all 3 of these go together � and of course, obviously now the price of gold is roughly about $590 so you have to weigh that. For the first time in a long time, the total acquisition costs are less than the spot price of gold. And so that’s why if you’re a mining company you are saying, “look, I can go out here, and I can send my geologists to try to poke some holes in the ground � first of all, I’m going to take a lot of risk doing that, and from the time I get my permits to do it, stake the land, then get my geologists out there, get the drill crews, the exploration crews out there, start poking the holes and take it and do enough drilling that you have a good idea how big the potential mine can be.” You know, that takes years and years. And even then, once you’ve done all that work then you get the permitting, and then there’s the environmental clearance that has to go through � and that’s not to say that you may get some NGO � non-governmental organization � that’s going to come in and all of a sudden they’re going to file lawsuits against you and stop you.
So there’s a lot of risk and look at the places that you’re going to have to go today. There’s a lot of political risk out there: look at Venezuela, or what is happening in Latin America today where you have a lot of prime ministers and presidents who are saying, “you know what, we are going to increase the tax, we’re going to increase the royalties, we want more of what you guys are making,” or in some cases, “no. we’re going to nationalize what it is that you have, as you’ve seen them do with oil recently.” So you weigh those risks. If you’re a mining company and you say, “you know what, here’s a company that already has the permits, they’ve already done the drilling. It looks like a very profitable deposit. We’ll send our guys out there.” You’re absolutely right, John.
It is cheaper today to go out and acquire ounces than it is for these big companies to go out and try to discover ounces. [1:08:41]
JOHN: Well, obviously, if this is a trend I would say then you would see more acquisitions � a trend like I said.
JIM: Yes, that’s why we believe very strongly in late stage development juniors because we think that they’re going to get taken out. I think as companies survey landscape around the globe and let’s put it just like the Exxons, it’s very hard now, for example, for Barrick as a result of acquiring Placer � it’s going to have 8 million ounces of production � where is Barrick going to find 8 million ounces of new resources to replace the 8 million ounces that they’re going to mine this year. Where’s Newmont going to acquire 6 million ounces? So what you’re going to see is these companies go on the acquisition trail.
Some other things that are happening too is capital expenditure inflation is probably at the highest level in nearly two decades and it has really resulted in huge capital cost overruns for nearly all development projects in the last several years. You know what you thought you were going to spend when you first started to build is costing you a heck of a lot more today than what you anticipated several years ago. You’ve got production back logs, the order books at these companies are growing as demand for gold, investment demand as well as industrial demand continues to keep rising. Even the equipment companies, it is hard to get drills today.
And one of the things that we’re starting to see that just indicates this is juniors are sharing drills. You may be up in Northern Canada where there are certain times of the year that you can’t run your drills so maybe what you do is you’ve got a sharing agreement with another junior that you ship your drills to somebody else � let’s say during the very cold months where you’re limited to what you can do and the drills get shipped south. You’re going to drill sharing. And that’s why you’re seeing a lot of geologists today, they’re very high demand.. It’s very hard to attract talent. And that is one of the things that is making it more difficult. So if you’ve got a talented team in place that’s an existing operation it is just far easier to go out and acquire that. [1:10:51]
JOHN: So overall, looking at the metals is the bull market still in place � no change in that despite the rollercoastering? And by the end of the year we should see higher prices right?
JIM: Absolutely, I think we’re going to be back closer to $700 as we get to the end of the year. I think the merger wave is just in its infancy, I think you have a lot more coming. It’s going to feed all the way down from the top all the way down to the bottom of the food chain: you’ve seen the majors such as Barrick buy Placer; you’ve seen the what the intermediate companies now buying, look what Goldcorp, and Yamana are now doing; and then I think you’re going to see it scale down to even smaller levels � you’ll see a lot of the juniors start to be taken out. [1:11:32]
JOHN: So overall, no Maalox needed you’re not worried about it, and you’re still a confirmed bull.
JIM: Absolutely, I think we’re headed into some very exciting times especially for gold investors. I think this is just beginning. I mean gold is not registering with a lot of investors today. Yes, people in the gold camp, the gold bugs they’re interested in this, they’re holding on. And even in this last cycle here, in this last year or so you’ve seen some of the institutions come in and nibble in this market. But John, we’re a long, long ways from this � and the current consensus is: “well, this is kind of it,” you’ve got that group � the bears saying, “nope, the commodity bubble is over.” You’ve got others that are saying we’ll go through a corrective phase here, this is going to be a corrective phase in a bull market. But traditionally this is a very strong period of the year that we’re heading into, although I think central banks are really trying to keep a lid on this, but we’re entering into the peak season for gold which normally begins late Fall early Winter and goes into the early Spring. [1:12:42]
JOHN: Well, Jim, I know you’re off to the Denver Gold Show this week. And we’ve got an interview coming up with Matt Simmons that I’m looking forward to, so what’s on the schedule as we look ahead.
JIM: I’m really looking forward to that interview next week with Matt Simmons. In fact, one of the questions we’ve gotten a lot of emails, “I hope you ask them about that oil discovery in the Gulf of Mexico because, gosh it’s going to double our reserves etc.” I imagine Matt’s going to tell me the same thing when I asked him about the PEMEX discovery. So that’s Matt Simmons coming up next week.
After that, back by popular request, people were saying, “Ok, there’s a lot of talk about deflation as the economy slows down, and wouldn’t it be great to have Bob Prechter back.” So the first week of October, Bob Prechter will be joining me. Ike Iossif and then also in October, Richard Heinberg, he’s authored several books on peak oil. And at the end of the month in October I’m going to have Andy Kilpatrick, he’s written a book A Permanent Value � I read it on Summer break. The longest book written in the world, I think it was 1700 pages. And November 4th, G. Edward Griffin, The Creature from Jekyll Island; Jonathan Knee, The accidental Investment Banker; and of course, some other guests that we hope to take us to the end of the year. So a lot of great guests coming up John, I’m looking forward to these interviews.
In the meantime, we’ve run out of time here, so on behalf of John Loeffler and myself we’d like to thank you for joining us here on the Financial Sense Newshour, until we talk again have yourself a pleasant weekend. [1:14:20]