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NEWS: OceanaGold Corporate Update

OceanaGold Corporation wishes to provide a corporate update relating to various media reports in recent days regarding community issues associated with the Didipio Project in Northern Luzon, Philippines.

The Company has been made aware that the Commission on Human Rights of the Philippines (“CHR”) has released a resolution in response to certain allegations made against the Company in 2008/2009. The Company is concerned that it has not been formally notified by the CHR office, yet it would however appear that this report has been made available to certain interest groups and media outlets in the Philippines.

OceanaGold is fully committed to the development of the Didipio Project. The Company continues to maintain its obligations under the leasehold agreement (Financial and Technical Assistance Agreement) and is operating in accordance with the Philippine Mining Act in partnership with the Philippine Government and with local community stakeholders. The Company is compliant with all the laws and regulations associated with operating as a foreign company in the Philippines and is committed to ethical, responsible and sustainable mineral development.

The Company is actively involved in a number of community and humanitarian programs in the local communities situated near the Didipio Project with particular efforts in health and medicine, clean water provision, education, reforestation and environment, community development and infrastructure. The company insists it has met, and is committed to continuing to meet, the human rights of the local community.

OceanaGold CEO, Mick Wilkes stated “The Company is firmly committed to building strong and enduring relationships with our community in the development and ongoing operations of the Didipio Project for the benefit of all stakeholders.”

OceanaGold has commenced pre-construction activities on the Didipio Project, with detailed engineering design of infrastructure and the process plant now underway. Additionally, key members of the project management and construction team are now in place. The Didipio Project is fully financed, has the necessary permits and is on schedule to achieve commercial production in Q1 2013.

Full release (pdf)

J.P. Morgan’s 47% Profit Jump: It’s Your Money!

By Tony Richardson, January 18

A look at how easy money inflates bank earnings

Historically speaking, the roots of J. P. Morgan Chase & Co. make it arguably the most influential financial institution since the turn of the 19th century. JPM enjoys a prominent position as the second largest bank in the U.S. with roughly $2.12 trillion in total assets, and acts as the ‘go-to’ firm for the Federal Reserve in times of economic turbulence.

On January 14, 2011, The Wall Street Journal reported, “J.P. Morgan Chase & Co.’s (JPM) fourth-quarter profit jumped 47%, as the banking giant’s asset quality improved and it said consumers and businesses were looking for more loans.” Full-year 2010 net income totaled $17.4 billion. However, according to this chart from a Bloomberg report on JPM’s 2010 loan history, even though consumers and businesses are looking for more loans, fewer loans are being extended:

How is it that JPM, along with its brothers Bank of America, Citigroup and Wells Fargo – all of which make up the “Big Four” – are able to post such stellar profits in the face of a flagging economy, rising food & energy prices, record foreclosures, high unemployment, and tight credit? The following are three ways easy money pumps up their earnings:

1) Banks earn 0.25% interest on excess reserves held at the Federal Reserve.

Consider the $2.5 billion in free money banks ‘earn’ each year on the $1 trillion in excess reserves held by banks at the Fed – free money the Fed just snaps into existence;

2) A ‘money drop’ from excess reserves is considered earned income. In JPM’s case,

it released $7 billion in pretax reserves which was counted as net profit. And while on deposit at the Fed, that $7 billion ‘earned’ JPM $17.5 million in interest payments; and

3) The most creative “gift” to the banking industry is what I call their “Fed/Treasury-engineered taxpayer-backed guaranteed stream of income.”

How does this work? First, the Fed artificially holds the fed-funds rate down at 0.25%. Then, primary dealers, like the Big Four, borrow from the Fed’s Discount Window at a preferred rate of 0.75%. They borrow billions as they please without even having to give a reason for taking the loan. They put up collateral for loan, and it’s done.

What collateral does the Fed accept? Commercial, industrial, or agricultural loans; consumer loans; residential and commercial real-estate loans; corporate bonds and money-market instruments; obligations of U.S. government agency and government sponsored enterprises; asset-backed securities; collateralized mortgage obligations; U.S. Treasury obligations; and state or political subdivision obligations. Oh, I’m sorry, are you trembling in shock as I did when I realized this? The Fed actually accepts this… stuff as collateral for billions in ultra-low-rate loans to banks.

But here’s the interesting part: Banks take out loans at 0.75% and can buy Treasuries that yield on average about 1.65%. Borrow at 0.75% and buy at 1.65%, which gives banks a 0.9% spread. This may not sound like much, but if JPM puts up 20% of its assets, such as listed above ($424-billion worth), they would “earn” $3.82 billion a year, which, after stripping out the $7-billion money drop from excess reserves, would account for over a third of JPM’s full-year 2010 net income. Imagine how juicy earnings reports will be for the other banks over the coming quarters, thanks to Fed/Treasury free money!

All this is great information, but the real kicker is this: The earnings I just described is your money. It derives from taxpayer dollars transferred to banks. And from the money the Fed puts into play through reverse repos and security substitutions on banks’ behalf to the interest the Treasury pays banks, you and I are on the hook for every penny of it.

But there is another problem on the consumer side of the equation. Can you feel the inflationary effects of this Fed/Treasury dollar-proliferation program? The more dollars created, 1) the further each greenback devalues; 2) the more of them international suppliers demand; and 3) the higher producer & consumer prices rise. Certainly you’ve noticed how high gasoline prices have become over these quiet winter-driving months? Oil suppliers are requiring more dollars for the same amount of product. And have you observed how metals (gold, silver, copper) and various other commodities (coffee, cocoa, sugar, corn, wheat, cotton) are moving higher in price? Producers want more dollars for their goods, and those costs are being passed on to the American consumer.

Back to the chart, why aren’t banks as generous in lending to consumers & businesses as the Fed is in lending to banks? Bottom line, it’s not profitable for them. The U.S. went from being a 19th-century producer to a 20th-century consumer. And now that we have passed the production baton to 21st-century emerging nations, and depleted our savings, banks recognize we are crippled with debt and have limited means by which to pay it off.

To add insult to injury – and evidence of how the U.S. no longer where the profits are – Goldman Sachs just announced that the bank holding company is excluding its U.S. clients from the private offering of as much as $1.5 billion in shares of social-media company Facebook, citing “intense media attention.” Say what it wants, but allow me to cut to the chase: If Goldman – a top-in-class laser-focused profit-producing predator – thought the money to be made was in the U.S., it would fight to the finish. But its decision to bar Americans from the private offering, along with JPM’s retreat from U.S. lending, signals that the banking sector has determined the grass is greener outside U.S. borders. To think: An American bank underwriting shares of an American company is shutting out American investors! I guess I will just have to get used to my backseat economic status.

As banks fare well on the back of taxpayer dollars, all I want in return from banks at this point are these: free checking, free debit-card use, and a lollipop on each branch visit.

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:

Is Mexico a Country on Fire?

By Frank Holmes, January 18

Just a three-hour drive from our offices in San Antonio lies an entrance to Mexico, one of the most promising but precarious investment opportunities in global markets. Like stepping on an ant hill, President Felipe Calderon’s war against the drug cartels has created chaos but the country’s economy has proven much tougher than many thought.

San Antonio’s economy has been a direct benefactor of the turmoil as wealthy Mexican citizens have migrated to the area, invigorating the local economy with new entrepreneurial capital and stimulating the high-end real estate market, according to the San Antonio Express-News.

One reason they’ve moved their families here is the increased threat of kidnapping as the faltering cartels look to subsidize their businesses. This isn’t a new phenomenon.

Do you remember 2004’s Man on Fire? In this movie, an ex-CIA agent, played by Denzel Washington, reigns fury on the criminals and corrupt cops responsible for kidnapping a 9-year-old child he was hired to protect. The movie had a major impact on people like me, living so close to the border.

This past weekend, 60 Minutes featured the story of Edelmiro Cavazos, an up-and-coming star in Mexico’s political arena who was kidnapped and murdered by corrupt policeman linked to the drug cartels in August. (Watch the 60 Minutes Piece)

Mexican markets have stood in the face of this turmoil and soldiered on. Over the past three months or so Mexico’s stock market, the BOLSA, has more than doubled the performance of the MSCI Emerging Markets Index, 19.19 percent versus 8.45 percent, respectively.

Sometimes things have to get worse before they can get better.

It’s true—2010 ranks as the deadliest year yet in Mexico’s war against the drug cartels, with 11,041 drug-related deaths as of mid-December, representing a 385 percent increase since 2007, according to global intelligence firm Stratfor.

But that doesn’t tell the whole story. The high number of deaths is likely a result from the capturing and killing of several kingpins which set off a power struggle among the remaining crooks. You might think this has created a modern-day Tombstone but the law enforcement captures have left many of the cartels significantly weaker.

When you look closely at Mexico’s economy, you see that it is well-positioned to benefit from improvement in the U.S.

For starters, Mexico offers some 1.5 times leverage to U.S. markets. This means that if the U.S. GDP is set to grow 3 percent, the Mexican economy can grow 4.5-5 percent.

The key to Mexico’s economy is the United States. Roughly 80 percent of Mexico’s exports are postmarked for the U.S. These are exports like cars, textiles and even electronics. No surprise then that 2010’s U.S. recovery had quite the ripple-effect to Mexico’s export sector.

This chart from Greg Weldon shows that Mexico’s total monthly exports have risen well off of their 2009 lows and are now at record high levels, exceeding those seen before the global recession.

Weldon reports that exports jumped 6.2 percent from October to November last year for a total of $28.2 billion—a 26 percent year-over-year rate of growth. In addition, the growth is broad-based, touching the agricultural, manufacturing, automobile and non-oil sectors.

Another key export for Mexico’s economy is people. The Mexico-U.S. border is the top cross-border migration corridor in the world with an annual flow of 11.6 million migrants. The Russia-Ukraine border ranks second with 3.7 million migrants, according to Scotia Capital.

Roughly 10 percent of Mexico’s population lives outside of Mexico, mostly in the United States. Remittances, or money sent home from a foreign country, from these immigrants represent 3 percent of Mexico’s total GDP. Scotia estimates that there is an 86 percent correlation between remittances and retail sales in Mexico.

This time last year, remittances were at a five-year low because of job destruction in the U.S. which hit the Hispanic population especially hard. The Latin labor force had an unemployment rate of 12.1 percent and 12.5 percent in 2009 and 2010, respectively, according to Scotia Capital. This is significantly higher than the U.S., which saw unemployment rates of 9.3 percent and 9.6 percent over the same time periods.

It’s no surprise then that the recovery in the U.S. job market has led to a recovery in remittances and trickled down into Mexico’s retail sales. This next chart from Weldon shows the year-over-year change in Mexico’s retail sales since 2001. After bottoming in mid-2009, the year-over-year change has remained positive since April 2010.

As of October, retail sales in Mexico posted a 4.4 percent year-over-year change—more than twice the level seen in July, according to Weldon. Weldon also reports that outstanding performing loans—meaning those that are up to date on payments—have just reached a new record high.

As investment managers, we don’t have the luxury of just reading the headlines. There’s always much more to the story. We’re aware of the violence and the threat that it poses. However, contrary to what many people think, it appears investors in Mexico can sit back, pop open a Corona and ride the wave of a U.S. economic recovery.

John Derrick, Director of Research for U.S. Global Investors, contributed to this commentary.

For more updates on global investing from Frank and the rest of the U.S. Global Investors team, follow us on Twitter at www.twitter.com/USFunds or like us on Facebook at www.facebook.com/USFunds. You can also watch exclusive videos on what our research overseas has turned up on our YouTube channel at www.youtube.com/USFunds.

By clicking the link above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content. The Mexican Bolsa Index (MEXBOL), or the IPC (Indice de Precios y Cotizaciones), is a capitalization-weighted index of the leading stocks traded on the Mexican Stock Exchange. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. 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:

Are Gold Pool Accounts Safe?

By Jeff Clark, BIG GOLD

One of the cheapest ways to buy and store physical gold and silver is with unallocated (or pool) storage. With unallocated storage, a dealer holds metal that is owned by its customers, but without identifying any particular piece of metal belonging to any particular customer.

The advantages of this method are considerable: you avoid the risks inherent in storing the metal yourself (transport loss, fire, and theft); you can buy or sell just a few ounces of gold and silver at a time; you escape the big bid-ask spreads associated with coins and small bars; and perhaps best of all, storage is usually free.

To provide those benefits, a precious metals dealer buys and sells small quantities of gold and silver to and from its customers throughout the business day. When it needs more metal, it will buy it in the wholesale market. Or when the dealer has more metal than it wants to carry for its own account (because its customers have been net sellers), it will unload the excess in the wholesale market.

Many dealers that offer unallocated storage will accommodate customers who want to convert their metal into bars or coins and take delivery. The dealer will charge a so-called “fabrication fee” for this service. The dealer won’t actually pick up a hammer and manufacture the bars or coins the customer wants; instead, the fee represents the price difference between buying 100-ounce or larger bars and buying small bars or coins.

Unallocated storage is an attractive option, which is why we have recommended it to Casey subscribers for a portion of their gold and silver holdings. Of course, there’s no such thing as a free lunch, so we wouldn’t want anyone to rely too heavily on unallocated storage or on any one dealer that offers it. Here are some of the things that might go wrong.

  • Wholesale fraud. A dealer might be a 100% hoax. It may not actually have the metal that customers have paid for, in which case the customers would get hurt. The proprietor would be committing a go-to-jail-forever crime, but it would be easier to pull off, perhaps for many years, with unallocated storage than with allocated storage. A customer who’s bought metal in allocated storage can visit his gold or silver and check the serial numbers on the bars. A customer who’s bought metal in unallocated storage may be allowed a tour of the vault, but all he’s going to see is a whole lotta gold and a whole lotta silver.
  • Employee embezzlement. An honest dealer might have a dishonest employee. If the dealer’s financial controls were lax, the employee could siphon off metal for himself or a confederate. Or if the dealer’s physical controls were lax, the employee could swap bogus bars for real ones. If the embezzlement exceeded the dealer’s net worth plus its insurance, customers would get hurt.
  • Bad bookkeeping. Gold and silver held in unallocated storage is legally the property of the dealer’s customers, not of the dealer itself. So if the dealer goes bankrupt, the metal should not be available to the dealer’s creditors. Customers of a bankrupt dealer should be able to collect their metal and walk away uninjured. That’s how it should work. But if there are problems with the dealer’s bookkeeping, the metal that the dealer and its customers thought was in unallocated storage could be up for grabs. The customers would have to fight the dealer’s creditors to protect themselves – and they might lose.
  • Fabrication delays. When retail interest in gold heats up, much of the demand is for small bars and coins. This can lead to a temporary shortage of small bars and coins that makes it impossible for a dealer to accommodate customers who want to convert their unallocated gold into small pieces and take delivery. If such a thing happens when you want to convert and take delivery, you’ll have to wait. It would be a small problem compared with losing part of your gold, but it would be a problem.

We offer these cautions not because unallocated storage is a bad choice, but because you will be better off if you understand what might go wrong. It’s like the warning of possible side effects that is now standard with any medicine. The warning isn’t a reason not to use the medicine; it is a reason to use the proper dose and to be alert to signs of trouble.

We can’t say exactly how much metal in unallocated storage would be too much. The proper dose is up to you. But here’s a starting point. If you have more than 20% of your gold or silver in unallocated storage with any one dealer, consider moving some of it. It could go to another dealer, or you could convert part of it to coins and take delivery.

This might be a chore, but we suggest that you go to the trouble even if the dealer has come highly recommended, even if your experience with the dealer has been entirely satisfactory, and even if you see no sign of trouble. There is a difference between an event being highly unlikely and an event being impossible. Sooner or later, an investor who neglects that difference gets hurt.

[Check out our hot-off-the-press Annual Gold Forecast Survey edition in BIG GOLD, where we interview 16 gold experts, fund managers, and authors, along with Doug Casey, about what to expect for 2011 and how to invest. It’s available risk-free here.]

Europe Fears Motives of Chinese Super-Creditor

By Ambrose Evans-Pritchard, January 13

The EU authorities fear that China’s purpose in buying eurozone debt may be double-edged, intended to push up the euro exchange rate against the yuan and gain advantage for exports.

China has pledged to use part of its £1.82 trillion reserves to safeguard global stability

Herman Van Rompuy, Europe’s president, said during a visit to Downing Street that the Chinese may have “political” thoughts in the back of their minds for coming to Europe’s help, and gave a strong hint that they are also engaging in currency manipulation.

“When they buy euros, the euro becomes stronger and their currency a little bit weaker. That is not neutral in regard to their competitive position. But I go no further in this topic. It could be too delicate,” he said.

Mr Van Rompuy nevertheless welcomed the latest purchases of bonds from the eurozone periphery as a valuable gesture of support. “They invested even in some weak countries, so they are very confident in the solvency of some countries,” he said.

China has emerged as the transforming force in the eurozone debt crisis over recent days, pledging to use part of its €2.87 trillion (£1.82 trillion) reserves to safeguard global stability. The question is whether the Communist regime is hoping to extract strategic concessions in exchange.

The footsteps of a giant creditor were clearly felt in Portugal’s bond markets on Wednesday, and again on Thursday in Spain and Italy. Madrid sold €3bn of five-year debt at 4.54pc, a full percentage point jump from November but still below the danger level. Italy also enjoyed a benign auction.

The exact role of China is unclear. Chinese vice-premier Li Keqiang promised to buy Spanish debt during a visit to Madrid last week, reportedly up to €6bn (£5bn).

China was the secret buyer in a private placement of €1.1bn of Portuguese debt last week, according to the Wall Street Journal. Finance minister Fernando Teixeira dos Santos said China “may well have been” a key buyer in this week’s debt auction.

China was not the only force at work. Traders say the European Central Bank (ECB) acted aggressively behind the scenes, calling some 20 dealers to buy Portuguese debt in the secondary market.

This created what amounted to a “short-squeeze” in Portuguese bonds just before auction, causing spreads to tighten dramatically and inflicting damage on market makers acting in good faith. City sources say this has caused some bitterness.

Charles Grant, head of the Centre for European Reform and author of a book on EU-China relations, said China’s top goal is to secure an end to the EU arms embargo, imposed after the Tiananmen Square massacre in 1989. It rankles as humiliating treatment for a global superpower that has since changed profoundly.

The EU has refused to move on the sanctions until China ratifies the International Covenant of Civil and Political Rights, and China’s arrest of Nobel peace dissident Liu Xiaobo has further complicated matters.

Yet Brussels has suddenly begun to shift gear. Baroness Ashton, the EU’s foreign policy chief, said the embargo is damaging EU-China ties and called for new thinking to “design a way forward”.

Mr Grant said Britain, France and Germany are all wary of giving ground, cleaving closely to US policy. Washington views China’s growing military might as a strategic threat to the Pacific region. There have already been hot words over the South China Sea, and the Pentagon claims that China has an “operational” ballistic missile able to sink aircraft carriers at long range.

A WikiLeaks cable from the US embassy in Beijing last January cites the EU’s mission chief, Alexander McLachlan, saying Spain had tried to curry favour with Chinese leaders, “seeking advantage at other EU states’ expense”. He said China was fully aware of Madrid’s game but was exploiting intra-EU divisions to gain leverage.

China’s second goal is to secure market economy status from the EU. This would make it much harder for the EU to impose anti-dumping measures against Chinese imports. As it happens, the EU has just lifted its punitive tariff on Chinese shoes.

Mr Grant said Beijing will not risk much cash to woo Europe. “They are very hard-nosed. They may splash some money around for goodwill but they are not going to waste the hundreds of billions that may be needed. Nothing short of meaningful action by Europe’s leaders can genuinely stabilise the eurozone,” he said.

China’s sovereign wealth funds, including the central bank’s exchange fund SAFE, have been severely criticised at home for losing money on US investment banks during the credit crisis, or on dollar losses from US Treasury debt. They will be careful about fresh risks in euroland.

“It is debatable whether China would actually be willing to become buyer of last resort of the debt of a country close to default,” said Julian Jessop from Capital Economics. “Chinese officials are acutely aware of past losses and will not want to be seen to risk their peoples’ capital on a lost cause. Their actions frequently fall short of expectations raised by their words.”

Simon Derrick, from the Bank of New York Mellon, said that China must find somewhere to recycle its fresh reserves or lose control of its own currency. It is already sated with US assets. Holdings are 65pc in dollars, 26pc in euros, 5pc in sterling and 3pc in the yen.

“They may start buying some emerging market bonds but basically the only place they can go is into euros, and buying €6bn of Spanish debt is a good investment if it helps protect their other euro assets,” he said.

Mr Derrick said Beijing appears to take the view that the ECB’s monetary policy is fundamentally more rigorous than the money-printing ventures of the US Federal Reserve. “The Chinese have made it clear that they don’t see any meaningful shift in US policy.”

In the global beauty contest, Europe’s debt still looks less ugly than the main alternative.


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