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India: Land of Hope and Growth

By Frank Holmes, 29 November

Indian markets have rebounded nicely from the crisis, outperforming both the U.S. and China over the past three years. As of November 23, India’s Sensex was up just over 6 percent for the past three years, while the S&P 500 Index was down more than 16 percent and China’s Shanghai Composite Index was down 43 percent over the same time period.

Looking out for the next 5-10 years, India has one of the strongest growth profiles of any major economy in the world. Rapid urbanization, favorable demographics, key government policy reforms and further globalization of the world economy have India poised to match China’s GDP growth of 8.5-9.5 percent over the next two years before possibly outpacing Chinese growth for the next decade.

The McKinsey Global Institute (MGI) believes India is on the verge of the second greatest urban migration the world has ever seen. MGI sees India’s urban population ballooning to 590 million—nearly twice the size of the United States—by 2030.

This urbanization could send shockwaves through the global commodity balance.

Currently India accounts for just 3.8 percent and 4.8 percent of the world’s metals and primary energy demand, respectively, but Barclays is projecting that India’s metals and primary energy demand will increase by 80 percent and 50 percent, respectively, over the next five years.

India is approaching a tipping point in terms of urbanization. As you can see in both of these charts, once China reached the key 30 percent level of urbanization, both commodity demand and GDP per capita took off.

As the population’s discretionary income increases, people tend to use their money to improve living conditions by buying goods or adding utilities such as running water and electricity to their homes. MGI estimates that the number of Indian households with discretionary spending could jump from just 13 million in 2005 to 89 million by 2025. MGI says discretionary spending will account for 70 percent of consumption growth.

This urban population will not only be wealthier, it will also be younger and better educated than prior generations. The age dependency ratio, which is the ratio of population that is either below or above working age, is expected to shrink from 67.7 percent of the population in 1991 to just over 48 percent of the population by 2025. This means India will have a youthful labor force of roughly 900 million who can adapt easily to advances in technology and other shifts in the global economy.

This anticipated massive urban migration is going to strain India’s cities, airports and roadways so the government is quickly taking steps to expand its existing infrastructure. Currently the government spends 7 percent of the country’s GDP on infrastructure but that is expected to rise to 10 percent of GDP over the next few years, according to Morgan Stanley. That is roughly equal to what China is currently spending on its infrastructure.

This year, infrastructure lending has led the banking sector in 2010. According to CLSA, infrastructure lending from the Reserve Bank of India is up 80 percent from the same time period last year.

Last December I traveled through the Punjab region of India and there is no doubt the country has a long way to go. The roads are crowded, airports inadequate, and sewer systems non-existent, but when I spoke to people I immediately saw the feeling of hope this population carries with it. These people have firmly grasped the American Dream and it is only a matter of time before it comes true.

The Hang Seng Composite Index is a market capitalization-weighted index that comprises the top 200 companies listed on Stock Exchange of Hong Kong, based on average market cap for the 12 months. The Bombay Stock Exchange Sensitive Index (Sensex) is a cap-weighted index. The selection of the index members has been made on the basis of liquidity, depth, and floating-stock-adjustment depth and industry representation. Sensex has a base date and value of 100 on 1978-1979. The index uses free float. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

This article is written by Frank Holmes and with his kind permission, O B Research has been privileged to publish his work on our website. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. To find out more about Frank Holmes’ work, please visit:


Bonds Prices Set to Deflate

Government bonds prices are going to deflate gradually over the next 10-15 years, believes Puru Saxena, chief executive at Puru Saxena Wealth Management. He reveals how he is investing in the fixed income space, in this installment of Protect Your Wealth.

U.S. Reality Check: China, Russia Drop the Dollar

By Tony Richardson, November 26

Chinese Premier Wen Jiabao and Russian President Vladamir Putin announced in St. Petersburg on November 23, 2010, that they will stop using the U.S. dollar to settle bilateral trade and instead use the ruble or the yuan, according to a report in the state- run China Daily. Bilateral trade between the two countries stands at roughly $60 billion. Put in perspective, assuming two-thirds of international trade is transacted in U.S dollars, this accounts for 0.3% of dollar usage in a global economy valued at roughly $30 trillion. This agreement, then, is not particularly meaningful in terms of U.S.-dollar utilization, but when we consider the exponential implications, the effects are huge.

Consider the fact that China not only has this trade-settlement arrangement with Russia, but also has a growing list of settlement partners that so far includes Argentina, Brazil, Belarus, Iceland, Indonesia, Japan, Laos, Malaysia, Myanmar, Philippines, Singapore, South Korea, Thailand and Vietnam. And then, if each of these countries develops bilateral trade-settlement partnerships in their own currencies absent the dollar, how would this affect our currency, Fed policy and the U.S. economy?

To understand how this might play out, we need to take an imaginary trip to a border region of China and Russia: Let’s say there is a company called Sino-Russia Industries in China that supplies screws and bolts to a truck maker in Russia. On Tuesday, as this Russian truck maker holds USD$100,000 in its clearing account to cover the cost of the screws and bolts that Sino-Russia Industries supplies, news breaks that the dollar will no longer be used to settle trades. There is, then, no further need for the truck maker to convert rubles into dollars, and its dollars, for all intents and purposes, are worthless.

So what does the truck maker do? The first act the company accountant would take is to ask the bank to sell the dollars for rubles. The bank may do so, but at a discounted rate. Those discounted dollars will be shuffled from place to place until they get to someone who knows where and how to spend those dollars for the best value: In America to buy in-demand consumer products for resale in his home country. We will call this person “Mr. Interman” – short for “Mr. International Businessman”.

As the shock waves rumble throughout the world that the two major powers of China and Russia are shunning the dollar, companies across the globe begin to hold only as many dollars as they must to get by – but no more – for fear that such a settlement deal may be struck between their nation and others in which they trade. Consequently, demand for Treasuries wanes as foreign central banks lower their U.S.-dollar reserves on falling demand for dollar settlement by their respective banking systems.

One way or another, Mr. Interman, a resourceful businessman, finds a way to get those cheap dollars into the U.S. With those funds, he buys plasma TVs, iPods, iPads, laptop computers and anything else of value that he can send back to his country. American retailers begin to notice that their inventory is moving off the shelves at a rapid pace, so they raise prices. But this is OK for Mr. Interman and those like him, because they are finding it quite easy to acquire hefty volumes of U.S. dollars from companies and individuals in exchange for just a limited amount of local currency. How do they do it? They simply put up a sign with a phone number on it that says, “We Buy U.S. Dollars.”

As prices creep higher, those on static salaries and fixed incomes suffer the most.
Why? Dana Bryniarski summarized it best in her comment at USMoneyTalk.com, “The rich get richer, the poor get it free, and well, the middle class gets nothing.”

On prices, Fed Chairman Ben Bernanke said, “…use of the term ‘quantitative easing’ to refer to the Federal Reserve’s policies is inappropriate” and prefers to use the term “securities purchases” as they “work by affecting the yields on the acquired securities and, via substitution effects in investors’ portfolios, on a wider range of assets.” To that, I offer for following quote from William Shakespeare’s Romeo and Juliet: “A rose by any other name would smell as sweet,” for the dilutive effect of “SP2” on the dollar is no different.

I know the reason the Fed is buying hundreds of billions in Treasuries is to help prop up the housing market through “dollar rolls” and “coupon swaps” with Fannie, Freddie and various primary dealers; and I know those bond purchases also help the Treasury Department pay its mass of bills, but what Mr. Bernanke ought to do is go into meetings and hearings with pounds of smelling salts to help everyone snap out of their stupor. Listen: We are $14 trillion in debt; we spend $3.6 trillion a year on a $2 trillion stream of income; the Fed has shifted the printing press into hyper drive on plans to purchase $600 billion more in Treasuries, and we wonder why the international community is backing off, citing “risks in the dollar”? Knock, knock, knock. Is anybody home?

To the Federal Government: I suggest you immediately adopt “preemptive” austerity measures in order to save face. For you don’t want it to appear to the world that you were forced into budget cuts. So unless you choose programs and services to cut from the budget, it may be chosen for you by the bond market, because the foreign-finance window is closing fast.

To Investors: With the China/Russia announcement, it is evident the de-dollar process is underway. The die has been cast. Preserve your wealth and standard of living by buying gold (GLD, CEF), copper (JJC), oil (ERF, PGH), coal (NRP, PVR), iron ore (GNI), and fertilizer (TNH). China and India, each with over 1 billion citizens, are hungry for energy and economic growth. Much of the rest of the world is just plain hungry.

To Average U.S. Citizen: By God’s grace, most of us are well supplied with food, clothing and shelter. We have considered these basics in life. But in today’s world, it seems we must add two more items to the list: transportation and energy. I therefore suggest, if you haven’t already, that you consider settling down in an area you know you will/can live for a long time – a place conveniently located near your work and a shopping area; and to properly weatherize your home in order to save on energy costs. Also, invest in a deep freezer, and stock it with sale items. Bread and eggs can be frozen, as well.

In addition, the “Big Four” U.S. banks (Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo), which hold about 40% of all U.S. customer deposits, each have operations in more than 100 countries. Four points about them: 1) They are likely holding your cash; 2) thus, they are earning interest on your cash; 3) they are shielded from harm by your tax dollars; and 4) they make lots of money outside the U.S. Hence, as a fair exchange, they should offer every U.S. customer free checking and savings.
If your Big Four bank doesn’t, find a bank that does.

This article is written by Tony Richardson of Richardson Heritage Group and with his kind permission, O B Research has been privileged to publish his work on our website. To find out more about RHG, please visit:

The Duel over the Dual Mandate

By Peter Schiff, November 24

Given the opposing views of the potentially parsimonious new Congress and the continuously accommodative Federal Reserve, there is a movement afoot among Republicans to eliminate the Fed’s “dual mandate.” Prior to 1977, the Fed only had one job: maintaining price stability. However, the stagflation of the 1970s inspired politicians to assign another task: promoting maximum employment. This “mission creep” has transformed the Fed from a monetary watchdog into an instrument of social policy. We would do well to give them back their original job.

The imposition of the “dual mandate” was informed by the Keynesian belief that inflation and unemployment don’t mix. An economic concept known as the “Phillips curve” postulates that low levels of one cause high levels of the other. But, like many things in modern economics, the curve is a fiction. There is no real reason why low inflation would produce unemployment or full employment would create inflation.

On paper, at least, the Fed has appeared to strike the balance that Congress demands. But this is a fool’s errand. The Fed’s dual mandate is the equivalent of asking a corporate CEO to maximize shareholder value by giving away as many free products as possible to consumers.

The best way for the Fed to ensure maximum employment is to focus on its one true job – creating price stability. The irony of the dual mandate is that by trying to satisfy both, the Fed ensures that we will get neither.

While it is true that increases in inflation may occur concurrently with drops in unemployment, there is no logical causality that can be implied. Any correlation simply results from inflation lowering the real cost of employment. Put simply: because inflation reduces wages in real terms, employers can afford to hire more people. So it’s lower wages, not inflation, that puts people to work.

Inflation does nothing to alter the structural issues that cause unemployment. Like everything else, the labor market is governed by the laws of supply and demand. High unemployment results from a wage structure that is too high relative to demand. Demand for labor is a function of productivity, or more accurately, profitability per worker. Absent higher productivity, which takes time to develop, the only way to clear the imbalance is for wages to fall. However, government and unions typically prevent this from happening. Economists describe this as wages being “sticky” on the downside.

Over-taxation and over-regulation further restrict demand and add to unemployment. On that front, one of the worst offenders is the minimum wage law. It doesn’t actually raise wages for anyone, but simply renders unemployable many low-skill workers. By creating inflation, the Fed effectively lowers the minimum wage. Another cause is extended unemployment benefits. Since these payments narrow the disparity between employment and unemployment, and in some cases may even be preferable to accepting a low-paying job, workers are incentivized to reject employment opportunities that they might otherwise accept.

To get around these roadblocks, the Fed lowers the cost of labor through inflation. However, this inefficient solution to a simple problem creates negative consequences for the economy. While wages may go up with inflation, goods prices usually rise faster. The net result offers no benefit for workers. By tricking workers into accepting lower wages, the Fed allows politicians to claim meaningless victories.

In addition, wages are only one cost of employment. Even as inflation lowers real wages, other factors can work to increase employment costs. In the current environment, higher payroll taxes, new health care mandates, economic uncertainty, and the potential for even higher future taxes to fund large budget deficits are all offsetting the “benefits” of lower wages. On top of that, large current budget deficits are crowding out small business credit. The result is that employment costs are rising despite lower real wages. Taken together, these policy mistakes are creating a toxic, job-killing mix.

The other fallacy of the dual mandate is that a fully employed workforce demands higher wages, forcing business to raise prices. More employment increases the supply of goods and services. Yes, employment raises demand, but that demand is satisfied by the additional supply created by a productive economy.

Since wages are the price of labor, wages are themselves prices. To say that rising prices are caused by rising prices makes no sense. Workers cannot demand higher wages unless the increases are justified by higher productivity. If they are, such wage gains will not result in higher goods prices.

The real reason that prices rise, for both goods and wages, is that the Fed creates inflation. This policy undermines the economy by destroying both current savings and the incentives to accumulate future savings. Since savings finance capital investment, lower savings equal weaker economic growth.

So, the best way for the Fed to create maximum employment is to focus on the single mandate of price stability. While a few elected officials seem to be figuring this out, most are just as clueless as the Fed. Unfortunately, even if Congress succeeds in changing the Fed’s mandate, there is not much chance that monetary policy will change significantly. Keynesian thinking is so ingrained in Bernanke and his colleagues that they will exploit any wiggle room in their directives to jump back in the driver’s seat and send us ever faster toward the edge of an economic cliff.

This article is written by Peter Schiff of Europac and with their kind permission, O B Research has been privileged to publish their work on our website. To find out more about Europac, please visit:

Avion Gold Produces 23,609 Ounces at Cash Costs of US$ 498 in Third Quarter 2010

“Third quarter results achieved were very encouraging as the Company generated significant income and operating cash flow. At current gold prices, we believe the Company will have sufficient cash resources from operations to finance its capital intensive programs, which are underway. The Company has completed the third quarter of 2010 with a strong balance sheet and is on track to complete its first full year of commercial production with strong operational and financial results.” said Mr Greg Duras (CFO).

Avion Gold Corporation today announces its financial results for the third quarter of 2010. All amounts are in United States dollars unless otherwise indicated.

Avion will host a conference call at 11:00 AM (EST) on Wednesday, November 24, 2010 to discuss the results. To participate in the call please dial:

International: +1 416 340 2216
Toll Free: 877 240 9772
Toronto Area: 416 340 2216

Highlights include

  • During the third quarter the Company had earnings of $13.6 million, or $0.04 per share, and cash flow from operations before working capital adjustments of $17.3 million.

  • During the third quarter, the Company sold 25,700 ounces of gold at an average realized price of US$ 1,233 per ounce, which was higher than the average realized price of US$ 1,194 for the previous quarter.

  • Gold revenue for the third quarter was $31.7 million compared to $13.9 million for the comparable quarter last year.

  • Net working capital as at September 30, 2010 was $38.1 million (including cash and cash equivalents of $ 28.2 million).

  • Underground development commenced at the Tabakoto deposit on October 6, 2010. The Company also started waste rock stripping at its Dioulafoundou deposit in late October.

  • Subsequent to the end of the quarter, the Company bought out the 1% royalty on the Tabakoto and Segala projects for a cash payment of $2 million.

Commenting on the third quarter results, Avion’s Chief Financial Officer, Mr. Greg Duras stated: “Third quarter results achieved were very encouraging as the Company generated significant income and operating cash flow. At current gold prices, we believe the Company will have sufficient cash resources from operations to finance its capital intensive programs, which are underway. The Company has completed the third quarter of 2010 with a strong balance sheet and is on track to complete its first full year of commercial production with strong operational and financial results.”

Financial Discussion

The Company reported net income of $13,588,390 ($0.04 per share) for the three months ended September 30, 2010 compared to net income of $444,261 ($0.00 per share) for the three months ended September 30, 2009. Other comprehensive income for Q3-2010 amounted to $2,247,567 (Q3-2009: other comprehensive income of $2,602,078), which represents the foreign exchange difference determined using the current rate method to translate the financial statements to US$.

During Q3-2010, the Company sold 25,700 ounces of gold and generated $31,702,673 in gold sales revenue. In Q3-2009, 14,796 ounces of gold was sold generating $13,889,255 in gold sales revenue. Mine and processing expenses were $11,763,087 (Q3-2009: $9,765,102), which includes $278,773, (Q3- 2009: $78,260) in amortized deferred stripping costs, and the Company recorded amortization and depletion of $2,807,928 (Q3-2009: $962,192). 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 over an estimated 333,558 ounces (approximately four years). The Company was subject to an aggregate NSR of 7% on metal sales during the quarter. Royalties expense totaled $2,078,488 for the ounces of gold sold during Q3-2010 (Q3-2009: $1,287,968). Subsequent to the end of the quarter, the Company bought out a 1% royalty for $2,000,000.

The Company also incurred a foreign exchange translation loss of $1,029,595 during the Q3-2010 compared to $422,728 during Q3-2009. The FCFA remained weak compared to the US$ during the quarter and a large proportion of the Company’s net assets are carried in FCFA.

Operations Discussion

Avion produced 23,609 ounces of gold during Q3-2010, which is an 89% improvement over the 12,517 ounces produced in the third quarter of 2009. The Tabakoto plant processed 178,800 tonnes of ore at an average grade of 4.28 g/t Au and the average mill recovery for the quarter was 96.2%. This compares to third quarter of 2009 production of 125,100 tonnes of ore at an average grade of 3.25 g/t Au and a mill recovery of 95.5%.

Capital projects

Avion has contracted Byrnecut Offshore Pty Ltd (“Byrnecut”), a large international mining contractor based in Perth, Australia, to carry out underground development of the Tabakoto deposit. Portal development at the bottom of the existing Tabakoto open pit commenced on October 6, 2010. The contract also includes underground development of the Ségala deposit, to commence in Q1, 2011.

Avion has received a cost estimate report on the Tabakoto plant expansion that supports yearly production of 200,000 ounces of gold per year, subject to completion of a technical report once new mineral resource models are generated based on the 2010 exploration program and development of the Tabakoto underground mine.

The cost estimate report, by an Australian engineering firm, recommended that the Company install a 4,000 tonnes per day semi-autogenous grinding (“SAG”) mill. The Company has also determined that keeping the existing cone crushers and ball mill as a separate circuit will allow for less down time during construction, greater flexibility when operating in the future, and the potential to further increase gold production. With these assumptions, the estimated cost of the expansion, using all new equipment, has been estimated at $57 million. The opportunity exists to procure used equipment, and source from alternative suppliers, in an effort to reduce capital costs. Detailed engineering is now being done by an Engineering, Procurement, Construction Management (“EPCM”) firm, GENIVAR Limited Partnership of Montreal. The intent is to quickly verify the size of the proposed grinding equipment and place orders for a SAG and a ball mill. Avion plans to increase plant throughput from 2,000 tonnes per day to 4,000 tonnes per day. This project is anticipated to be completed in 2012. Activities during 2010 will focus on detailed engineering analysis, and ordering of long lead time equipment. Most of the construction will take place in 2011, with commissioning planned in 2012.

Additionally, the Company has received final reports for all of the leach and gravity gold recovery test work that has been performed on Ségala and Tabakoto sub-grade and low grade mineralized material. The results of this test work will be considered in the final design configuration of the expanded plant. The test work indicated that a significant amount of gold, even in the sub-grade mineralization, can be recovered using a gravity circuit, with recoveries between 72% and 87%, depending on the grind size. Heap leach test work studies were halted once it became evident that gravity gold recoveries were as high as those that might be expected by leaching.

It is estimated that mill source feed will be derived from underground sources at Ségala and Tabakoto. However management believes that recent exploration success at the Dioulafoundou and Djambaye II zones and the acquisition of Axmin’s Kofi Project, have the potential as alternative feed sources for the Tabakoto mill. Continued exploration, in 2010 has the potential to firm up these prospective alternative ore sources. Studies would then evaluate which ore source would provide the best return. The Company has received its Environmental Permit to mine the Dioulafoundou Deposit. Preparations for mining, such as a stream diversion, fencing around the deposit, and access road construction are complete. Subsequent to Q3, the Company started waste rock stripping at Dioulafoundou in late October. In 2011, the Company plans to supplement Ségala open pit ore with production from Dioulafoundou, and development ore from Tabakoto and Ségala underground operations.

Avion has signed capital lease agreements with Volvo Construction Equipment AB of Sweden and Amalgamated Mining Inc. of Canada for the supply of 12 underground haul trucks and a wheel loader, and two underground Caterpillar loaders, respectively. The purchase of this equipment will reduce future operating costs by decreasing the reliance on contractor-supplied mining equipment.

Complete interim financial statements and related Management’s Discussion and Analysis are filed under the Company’s profile on www.sedar.com. All amounts are in United States dollars unless otherwise indicated.

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