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Why Deflation Will Torpedo the Economic Recovery

By Clif Droke, March 21

The rising price of food and fuel is garnering more and more attention in the economic news headlines.  There’s a good reason for this since a continued increase in the oil price could easily upset the economic recovery and send the U.S. economy tumbling back into recession.  It could also have an adverse impact on the financial market and not surprisingly, analysts are already beginning to draw parallels between today’s stock market and the one of 2008, which was hurt by (among other things) a record high oil price.

Most of the debate over the rising cost of fuel has centered around its potential inflationary impact on the economy.  What many observers seem to be missing is that within the context of the long-wave cycle, a rising oil price is actually deflationary and can be devastating to the economic outlook.  In this commentary we’ll see how deflation is the real threat to the economic recovery.

Some background is in order before we look at the potential impacts of the deflation.  There are three essential ways of analyzing asset prices: technical, fundamental and cyclical.  We focus primarily on the technical approach with the longer-term cycles providing additional basis for our analysis of the equity market.  The yearly cycles set the stage for the major market trend with the fundamentals serving to fill in the details behind the market’s movements. 

The family of cycles we utilize is the Kress cycle series of 120 years.  The 120-year Kress cycle is the composite of all the lesser component cycles and is scheduled to bottom in later 2014.  It’s known as the Grand Super Cycle but Mr. Kress has taken to calling it the Mega Cycle.  The 120-yeare cycle includes two 60-year master super cycles which correlate to the basic economic cycle, or primary macro economic cycle.  The 60-year cycle includes two 30-year mini economic cycles, or secondary macro economic cycles. 

Also included in this series is a 12-year cycle, which Mr. Kress identifies as the primary directional cycle.  The previous 12-year cycle bottomed in September/October 2002, ending a vicious bear market in stocks.  The current 12-year cycle peaked in September/October 2008, which coincided with the worst part of the credit crash.  Within the 12-year cycle is a secondary directional cycle, the 6-year cycle.  The 6-year cycle takes on special significant right now as it is the only one of the major yearly cycles currently in the rising phase this year and is scheduled to peak around late September/early October this year. 

In a recent report Mr. Kress wrote, “The relationship between the 30-year secondary macro and the 12-year micro economic cycles conveys the current underlying economic strength.”  Keeping in mind that the final 12.5% of a cycle’s duration is the “hard down” phase, Kress points out, “Applied to the 30-year cycle is 3 ¾ years, and retroactively from later 2014 is early 2011.  Regardless of the time of the peak of the 12-year cycle, adding 12 years to the peak of the 30-year cycle, the market conveys underlying residual economic strength.  The median peak for each of the four 30-year cycles of the 120-year cycle are: 1909, 1939, 1969 and 1999.  Adding 12 years to each peak are 1921, 1951, 1981 and 2011.”

This is another way of breaking down the 120-year mega cycle and what Kress has done is to break the 30-year component of the cycle into 12-year segments.  For instance, he looks at the period between 1909 to 1921, which encompassed part of the original 30-year cycle dating back to the previous 120-year cycle bottom of 1894.  The period 1909 to 1921 saw a rather strong overall advance in stock market prices, which makes sense due to the fact that the 120-year cycle that began after 1894 was still in its relative infancy. 

The next 12-year segment was between 1939 and 1951.  The year 1939 was a 30-year cycle peak year but the underlying 120-year cycle advance was still well underway.  This resulted in the 1939-1951 period showing gains in equity prices and the overall stock market level at the end of 1951 was substantially higher than it was in the previous 12-year period of 1909-1921. 

The next 12-year period was between 1969 and 1981.  This period didn’t show quite as much upside bias as did the previous two 12-year periods but it was higher nonetheless.

The latest 12-year period is between 1999 and 2011.  The last 30-year cycle of the current 120-year mega cycle peaked in 1999.  Since then the stock market has struggled on a longer-term basis and the current market level is 15% below the 1999 terminal high.  The chart below, from a recent Kress report, illustrates this phenomenon. 

Kress concludes, “Clearly, on a mega long term basis, the market has been ‘rolling over,’ and is beginning its historic ‘hard down’ phase of the fourth and final 30-year macro economic cycle of the mega 120-year cycle.” 

The implications of this analysis are of paramount importance for the long-term investor.  The impact of the 30-year, 60-year and 120-year long-term cycles is decidedly deflationary in the overall scheme of things and this will be made abundantly clear as we head closer to the cycles’ final bottom in 2014. 

In the news headlines we’re finally seeing the return of optimism on the economy’s prospects.  Retail sales across many regions of the nation have reached the highest point since 2007 before the financial crisis began.  Economists are prone to see this as good news but as any forward-looking investor knows, good news isn’t usually good for the future outlook.  It’s merely the result of yesterday’s momentum and has already been discounted by the financial market.

For the last three years fear and pessimism have prevailed.  This widespread pessimism was actually beneficial to the economic outlook as it kept producers and consumers from over-spending, over-investing and over-producing.  Now that the economy’s prospects have seemingly improved (at least on the surface), producers, investors and consumers alike are becoming less cautious.  This will set up the next economic and financial market top at some point.  The important thing is not to get too caught up in the headlines, which can easily cause one to make bad economic decisions at critical junctures. 

The problem that now confronts the economy is high commodity prices.  The rising cost of oil alone will push up retail prices for a broad array of goods and services in the coming months.  The question that analysts have been asking lately is whether the rising oil price will be inflationary or deflationary.  The rising oil price would be deflationary if consumers react to it by reducing discretionary spending. 

A recent headline in the Wall Street Journal shed some light on this conundrum: “Families Slice Debt to Lowest in 6 Years.”  The article went on to say that, “U.S. families – by defaulting on their loans and scrimping on expenses – shouldered a smaller debt burden in 2010 than at any point in the previous six years, putting them in position to start spending more.” 

The recent headline optimism has indeed led to increased consumer spending in some areas of the retail economy but this will quickly reverse once consumers begin pricing in the impact of increased fuel costs on their budgets.  A continuation of the crude oil price rally will have a definite deflationary impact in coming months, particularly when the 6-year cycle peaks later this year and is no longer supportive of the economic recovery. 

The secondary theme highlighted by the WSJ article is that consumers still have the mindset of debt reduction, which is a spillover from the credit crisis.  A contraction in consumer credit is decidedly negative for the retail economy, longer term, and is deflationary.  This theme will re-emerge later in the year when the 6-year cycle peaks and the longer-term cycles begin exerting a bigger toll against the financial market and the economy. 

This article is written by Clif Droke and with his kind permission, O B Research has been privileged to publish his work on our website. To find out more about clifdroke.com, please visit:


US to Sell off $142 Billion Toxic Assets

March 21

The US Treasury Department is to begin selling off toxic assets worth an estimated $142bn (£87bn), in an effort to close another chapter of the financial crisis.


The US Treasury said it would offload up to $10bn in mortgage-backed securities

“We will exit this investment at a gradual and orderly pace to maximize the recovery of taxpayer dollars and help protect the process of repair of the housing finance market,” said Treasury official Mary Miller.

The department said it would offload up to $10bn in mortgage-backed securities (MBS) – assets which bundle together scores of often distressed mortgages – each month.

The products, secured by state-backed mortgage giants Fannie Mae and Freddie Mac, were bought as part of the 2008-2009 financial sector bail-out.

Their value plummeted after the housing bubble burst, prompting fears that a spat of writedowns could drag down individual banks and further plunge the financial system into panic.

The Treasury said the market for asset-backed derivatives is now much more robust, three years after the depths of the crisis.

“The market for agency-guaranteed MBS has notably improved since the time Treasury purchased these securities in 2008 and 2009,” it said in a statement.

The Treasury hopes to net $15bn to $20bn profit from the sale, depending on market conditions.

But critics argue that type of profit claim does not take into account other lost opportunities for investing the money.

The Treasury has also recently offloaded its equity stakes in Citigroup, General Motors, Ally Financial and AIG.

US insurer American International Group recently offered to buy back $15.7bn in mortgage-backed securities from the Federal Reserve as part of its efforts to emerge from a government bail-out.

The news came as the US Supreme Court let stand a ruling that the Federal Reserve must disclose details about its emergency lending programs to banks during the financial crisis in 2008.

Source

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NEWS: Avion Gold Announces Fourth Quarter Earnings of US$0.05 Per Share and Cashflow of US$0.08 Per Share

Cash Costs Reduced to $443 Per Ounce Produced in Fourth Quarter 2010

Avion Gold Corporation today announces its financial results for the fourth quarter and year ended December 31, 2010. All amounts are in United States dollars unless otherwise indicated.

Avion will host a conference call at 10:30 AM (EST) on Tuesday, March 22, 2011 to discuss the results. To participate in the call please dial:

International: + 1 416 340 9432
Toll Free:   877 440 9795
Toronto Area:   416 340 9432

Complete audited financial statements and related Management’s Discussion and Analysis will be available under the Company’s profile on www.sedar.com at 7:00 a.m. EST on March 22, 2011.

Fourth Quarter Highlights

  • The Company had earnings of $18.6 million, or $0.05 per share, and cash flow from operations before working capital adjustments of $26.1 million.
  • The Company sold 27,908 ounces of gold at an average realized price of $1,370 per ounce, which was 10% higher than the average realized price of $1,234 for the previous quarter.
  • Gold revenue was $38.2 million compared to $14.2 million for the comparable quarter of 2009.
  • The Company produced 26,090 ounces of gold at a cash cost per ounce of $443 and total cash costs produced of $520. Cash costs per ounce continued to decline from the previous quarter as the Company achieved additional operating efficiencies.
  • The Company expended $19.4 million on extensive underground development work and on exploration activities.
  • The Company announced that it had increased the grade of measured and indicated resources at the Tabakoto Deposit by 72%.
  • During the fourth quarter, the Company graduated to the TSX.

Full Year 2010 Highlights

  • During 2010, the Company achieved record earnings of $31.5 million, or $0.09 per share compared to $2.6 million or $0.01 per share for the prior year.
  • Gold revenue for the year 2010 was $115.3 million compared to $33.6 million for the prior year. The Company fully benefited from the higher gold prices as it is un-hedged.
  • During 2010, the Company produced 87,631 ounces of gold at a cash cost per ounce of $574 and total cash cost of $657. The Company achieved cash costs of less than $500 per ounce produced for the last two quarters of the year.
  • In 2010, the Company generated operating cash flow before working capital adjustments of $55.7 million compared to $9.3 million in 2009.
  • The Company completed 2010 with cash and cash equivalents of $38.6 million.

Commenting on the fourth quarter and 2010 results, Avion’s Chief Financial Officer, Mr. Greg Duras stated: “Record quarterly and year-end financial results were achieved by the Company generating significant operating cash flow, putting the Company in a strong financial position to sustain its extensive capital programs, including underground development, plant expansion and an aggressive exploration program.”

2011 Outlook

The Company is forecasting 2011 production at 100,000 ounces of gold and its plans to increase to a run rate of 200,000 ounces per year in 2012 are well advanced. Avion’s strong results in 2010 have allowed this plan to be put into action. Since production re-started in February 2009, the Company has managed to achieve significant cost reductions quarter over quarter while building a very strong management team at the mine site. To achieve this goal, Avion is currently focussed on underground development at Tabakoto, contracting Genivar to lead the mill plant expansion, ordering a SAG mill, and constructing most of the site infrastructure needed to support the plan. This has required a significant amount of capital, but because of the significant cash flow in 2010 the Company has been able to complete significant milestones without taking on debt or going to the equity market since April 2010. In 2011, these projects and plans will be further advanced. Underground development ore is being mined, and ore is being mined from several open pit deposits. Activities during 2011 will set the stage for 2012 and achieving the goal of a run rate of 200,000 ounces per year.

Financial Discussion: three months ended December 31, 2010

The Company reported net income of $18,623,126 ($0.05 per share, basic and $0.05 per share, diluted) for the three months ended December 31, 2010, compared to net income of $3,974,977 ($0.02 per share, basic and diluted) for the three months ended December 31, 2009. Other comprehensive income for Q4-2010 amounted to $4,204,330 (Q4-2009: $7,124,277), which represents the foreign exchange difference determined using the current rate method to translate the financial statements to US$.

During Q4-2010, the Company sold 27,908 ounces of gold and generated $38,249,405 in gold sales revenue. In Q4-2009, 13,376 ounces of gold was sold generating $14,176,875 in gold sales revenue. Mining and processing expenses were $14,913,311 (Q4-2009: $7,877,637), which includes $2,132,132 (Q4-2009: $216,792) in amortized deferred stripping costs, and the Company recorded amortization and depletion of $1,133,988 (Q4-2009: $1,796,049). The Company is amortizing deferred property, plant and equipment related to the Tabakoto and Segala on a unit of production basis from the current mine plan. The Company was subject to an aggregate NSR of 7% on metal sales during a portion of the quarter. In November 2010, the Company bought out a 1% royalty for $2,000,000. This amount has been deferred and will be amortized over the life of mine. Royalties expense totaled $2,019,134 (Q4-2009: $1,072,801) for the ounces of gold sold during Q4-2010 up until the buy-out.

During Q4-2010, the Company incurred a non-cash accretion expense of $113,750 related to the Company’s asset retirement obligations acquired through the acquisition of the Mali projects (Q4-2009: $30,812).

The Company recognized an unrealized gain of $379,252 during Q4-2010 (Q4-2009: an unrealized gain of $1,289,046) related to their held-for-trading investments based on the fair market value of these investments as at December 31, 2010.

The Company also incurred a foreign exchange translation loss of $34,610 during the Q4-2010 compared to a gain of $961,447 during Q4-2009.

Financial Discussion: twelve months ended December 31, 2010

The Company reported net income of $31,457,426 ($0.09 per share, basic and diluted) for the twelve months ended December 31, 2010 compared to $2,597,185 ($0.01 per share, basic and diluted) for the thirteen months ended December 31, 2009. Other comprehensive income for the twelve month period in 2010 amounted to $6,397,036 (2009: $6,474,716), which represents the foreign exchange difference determined using the current rate method to translate the financial statements to United States dollars.

During the twelve months ended December 31, 2010, the Company sold 92,630 ounces of gold and generated $115,306,132 in gold sales revenue. The Company commenced commercial production in May 2009, and in the thirteen months ended December 31, 2009, 34,347 ounces of gold was sold generating $33,647,850 in gold sales revenue. Mining and processing expenses were $53,486,908 (2009: $21,295,256), which includes $2,876,703 (2009: $493,240) in amortized deferred stripping costs, and the Company recorded amortization and depletion of $7,759,959 (2009: $3,344,403). The Company is amortizing deferred property, plant and equipment related to the Mali projects on a unit of production basis from the current mine plan. During Q4-2010, the Company revised its estimate of the life of mine to approximately twelve years based on an increase in number of ounces that are estimated from the mine to approximately 2,400,000 ounces. The Company was subject to an aggregate NSR of 7% on metal sales during the period. In November 2010, the Company bought out a 1% royalty for $2,000,000. This amount has been deferred and will be amortized over the life of the mine. Royalties expense totaled $7,273,258 (2009: $2,864,842) for the ounces of gold sold during 2010.

Corporate and administrative expenses for the twelve months ended December 31, 2010 totaled $4,092,667, compared to $3,525,052 for the thirteen months ended December 31, 2009. The significant increase includes higher legal and audit costs, higher promotional costs and higher filing costs resulting from the Company’s listings on both the US over-the-counter market OTCQX International as well as the TSX. The Company continues to share office space and other resources with companies that have common directors and officers.

During the twelve months ended December 31, 2010, the Company incurred a non-cash accretion expense of $455,000 related to the Company’s asset retirement obligations acquired through the acquisition of the Mali projects (2009: $398,875). As well, the Company incurred an interest expense accruing on the Government of Mali loans during 2010. During 2009, the Company incurred interest expense on short term loans payable to Aberdeen International Inc.

The Company recognized an unrealized loss of $910,319 during 2010 (2009: an unrealized gain of $1,248,066) related to their held-for-trading investments based on the fair market value of these investments as at December 31, 2010.

The Company also incurred a foreign exchange translation loss of $3,244,411 during the twelve months ended December 31, 2010 compared to a gain of $668,621 during the ten months ended December 31, 2009.

Full release

South Africa’s Gold Output Dropped 6.4% in 2010

Reuters, March 14

South Africa’s gold production fell 6.4 percent in 2010, an industry body said on Monday, moving the country further away from its former status as the world’s largest producer.

Gold output fell to 191,833.7 kilograms in 2010, the Chamber of Mines said in a quarterly statement.

“Our mines are getting deeper and deeper, we cannot compete with other countries like Russia which can produce gold at a lower cost than what we can,” said Abri du Plessis, chief investment officer at Gryphon Asset Management.

“(The gold produced) is not always of a high grade compared to somewhere else and our labour costs are getting more and more expensive. From those three perspectives, it is a bleak future for our gold companies.”

A drop in South Africa’s output compares with a rise in the top two producers China and Australia, where 2010 production of the precious metal rose 8.6 percent and 17 percent, respectively, compared with the previous 12 months.

South Africa was the world’s largest gold producer for most of the last century and up until 2006, but output has been hit by dwindling grades and stoppages of mines and shafts for safety-related reasons as companies mine ever deeper.

Some South African gold mines reach depths of around 4 km.

The main gold mining firms in South Africa include the world’s No. 3 and Africa’s top gold producer, AngloGold Ashanti, fourth-ranked Gold Fields and fifth-placed Harmony Gold Mining Co..

In the fourth quarter of 2010, South Africa’s gold production fell by 1.6 percent to 49,676.8 kg compared to output in the third quarter. Year on year, gold production was down 3.9 percent in the fourth quarter.

Source

GoldMoney. The best way to buy gold & silver

Mining Industry Faces Potential Geologist Shortage

By Debbie Carlson, Kitco News, March 16

The mining industry is starting to face a dearth of skilled geologists as many veterans are close to retiring and there are not enough students and mid-career scientists to replace them.

This could have major ramifications for an industry which is experiencing a boom not seen since the 1970s and early 1980s.

Demand for mined products is skyrocketing as countries like China, India and other emerging markets see their economies grow, but the numbers of geologists who can find mineral deposits are starting to shrink. Several geologists who attended last week’s Prospectors & Developers Association of Canada’s conference in Toronto said this graying of the industry is going to be a significant challenge to overcome in the next few years.

Many of the experienced geologists are in their 50s. While there are new students that are coming into the ranks, the industry is missing many mid-career geologists would be in their 40s right now if they were still in the sector, said M. Stephen Enders, president, Society of Economic Geologists. “It’s a lost generation,” he said.

When the mining industry went through its bust in the 1990s, layoffs rippled across the sector, so many geologists took to other fields and never came back. Now with mining profitable again, it’s missing a core constituency of would-be mid-career scientists. That can spell trouble in a few years, Enders said.

“I don’t have specific figures, but a significant number of professionals will be eligible for retirement in 5-10 years. It’s not just in the professional part of the industry, it also includes faculty that teach economic geology and science,” he said.

Brent Cook, editor and geologist of Exploration Insights, lamented the aging of the industry. Cook has been involved in property economics and geology evaluations for over 25 years and he sees the danger of too few geologists. He said consulting firms that do feasibility studies are overworked. “The result is that there’s a lot of sloppy work around,” he said.

Several geologists said as the industry starts to dig for the harder-to-reach deposits, being able to rely on the talents of experienced scientists can make or break a company and the lack of a brain trust could hurt the industry as a whole.

Cook suggested that geology and mining as a profession doesn’t have the cache in the eyes of students from Western countries.  Enders added that while some students are coming from outside the traditional countries of Canada, the U.S. and Australia, those who studied in non-Western universities do not always have the same rigorous education.

Nicole Tardif, geosciences technologist and earth science promoter at Laurentian University’s Department of Earth Sciences, said geology and earth science are not as high of a focus as they should be when students are looking at scientific undergraduate studies. Part of that is just a lack of knowledge that geology exists as a career path for students at the high school or equivalent level.

“It’s a real challenge,” she said, especially as some high schools don’t include earth science as part of their curriculum. Those that do might only focus on biology, she added.

Enders said within earth science curriculum, there are a lot of fields that are drawing students’ interest, such as climate change or earth hazards, like studying earthquakes.

Further, parents can be no help. “Geologists sometimes get a bad rap. Parents ask ‘you don’t want to work in a mine, do you?’ Parents sometimes have no idea of the opportunities out there,” Tardif said.

She added that if the parents do know something about mining, sometimes their view of geologists is of “the guy who was harassing me in the mine.”

Enders said that image problem is something mining has faced for more than 500 years. He cited “De Re Metallica,” a book about mining in Germany published in 1556 which talked about the social and environmental matters at the time.

Cook and Tardif both said in an age where computer programming is a big draw for students, the idea of a scientist working outside of an office doesn’t always appeal. But, Tardif said, if a student likes to travel or enjoys the outside, they can be a good candidate for a geology program. “It does take the right person,” she said.

At PDAC, there were several booths where mining firms were actively recruiting geologists. Tardif said she had 60 undergraduate students looking for summer jobs in the field at the conference and within the first day or so, half already had secured employment.

Cook said mining companies may need to start sourcing geologists from the countries where they are operating to continue to ensure employment.

While Canada is still one of the top areas for mining activity, regions like Latin America have seen great growth in mining. However, Tardif pointed out, at least on the undergraduate level, unless there are universities in those countries where students can attend classes, attending an international school is usually only an option for wealthier students.  She said at Laurentian University, nearly all undergraduate students are Canadian. The graduate courses attract international students, she added.

Tardif said she goes to high schools to talk about geology and she’s tried elementary schools, too. While younger students think rocks and minerals “are cool,” it’s hard to justify spending time with students at that age since it will be several years before they attend college.

In addition to talking to students at universities, the Society for Economic Geologists is in the exploratory stage of creating a curriculum with universities and companies to give more training for students and talented professionals to help them advance their knowledge of the field.

If the trend of fewer educated geologists continues, the worst-case scenario could be that there are fewer discoveries and less efficiency in mining, but Enders doesn’t believe that. “I’m a free-markets guy, so I believe the market will take care of it,” he said.

Current events are starting make more students interested in geology, Enders said. The row China and Japan had earlier over rare earth metals and the perceived dominance China has over these resources have piqued students’ interest.  “People realize we need resources,” he said.

Source

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