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The Currency War

By Peter Schiff, November 8

As the world awaits another $600 billion flood from Bernanke’s printing press, central bank governors from Brasília to Tokyo are preparing to respond in kind. This is the monetary equivalent of a nuclear war, except instead of radiation, bombs of inflation threaten to make the world economy uninhabitable for saving and productive enterprise.

While much of the attention has been focused on China and accusations that it is a “currency manipulator,” the first shot in this war was clearly fired by the US Federal Reserve. Last month, the Fed came out with a statement that, for the first time ever, said inflation is rising at a rate “below its mandate.” That is, they acknowledged that the deflation threat had passed, that prices were stable – but they still intended to send prices higher.

Since the Bretton Woods Agreement was signed in the wake of World War II, the global monetary system has been based on the US dollar. This means that when the Fed decides to create trillions of dollars of inflation, other countries can’t simply say, “let them dig their own grave.” Instead, because their international transactions are denominated in dollars, they feel a pressure to maintain relatively stable exchange rates between their currencies and the dollar.

Most countries do this informally and have their own (bad) reasons for maintaining a certain level of inflation. China, however, is more literal in its devotion to the dollar system, perhaps due to its psychology as a new arrival on the world stage. So, in recent history, the People’s Bank of China has largely maintained a “peg,” by which it currently offers to pay 6.8 RMB for every dollar deposited, no matter how many extra dollars the Fed prints. To put it another way, China, and to a certain extent the entire world, is on a Dollar Standard — like the Gold Standard, but based on another fiat currency instead of a precious metal.

What this also means is that China does not intentionally devalue its currency against the dollar, but only to keep pace with the dollar. Chinese Commerce Minister Chen Deming said as much in an interview on October 26: “Uncontrolled” issuance of dollars is “bringing China the shock of imported inflation.” Most emerging markets are the same way. In order to prevent rapid economic dislocations, and often to appease their powerful export lobbies, these countries seek to maintain a status quo versus the dollar – whether through inflation as with China or capital controls as with Brazil and South Korea, or both.

In short, the currency war is really just the rest of the world trying to shield itself from a barrage of nuclear dollars.

The end result is that the entire civilized world is locked in a race to inflate, and no fiat currency is truly safe. In my brokerage business, I advise clients to buy companies – not currencies – in countries that I believe will thrive in the war’s aftermath. China could dump the peg tomorrow and, after a period of adjustment and write-offs, would continue to grow apace. The UK, on the other hand, is happy to be locked in a competitive devaluation as it helps the government avoid imminent default while it puts through budget reforms. But regardless of their strategic positions, all major central banks will likely engage in some money printing to keep their currencies level with the rapidly devaluing US dollar – until the greenback loses its reserve status. (This may happen sooner than later, if an agreement this month between China and Turkey to stop using dollars in their transactions is any indication.)

As the Fed seeks to blow up the global monetary system, I take comfort in the fact that gold cannot fight a currency war because it is not a currency. Gold is money. Currencies used to be backed by money until the global fiat system was introduced under President Nixon. Fiat currency can be printed at will until the economy collapses, as has happened many times in history. Money is impossible to devalue at the whim of politicians because it is naturally scarce. Even in the ruins of Europe after the Second World War, when there was no central authority and chaos reigned, an ounce of gold was worth what it always had been.

If we are witnessing a fight to the death among fiat currencies, then gold is surely the Red Cross – a peaceful arbiter and source of mercy for our accumulated savings. While I do believe that life will go on after this war, as with all others, the thought of the world’s savers all hiding their assets safely in gold brings to mind the old question: What if they gave a war and nobody came?

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:

First Majestic Silver Corp.: Another Record Quarter of Earnings and Cash Flows

First Majestic Silver Corp. is pleased to announce the unaudited financial results for the Company’s third quarter ending September 30, 2010.

Third Quarter 2010 Highlights ($CAD) Change from Q3-2009
Gross Revenue $36.1 million Up 114%
Net Revenue $33.5 million Up 144%
Mine Operating Earnings $16.9 million Up 307%
Net Income after Taxes $10.3 million Up 458%
Cash Flow Per Share (non-GAAP measure) $0.17 per share Up 279%
Earnings Per Share – basic $0.11 per share Up 450%
Silver Ounces Produced (excl eq oz Au/Pb) 1,823,370 oz Ag Up 95%
Silver Equivalent Production 1,920,498 eq. oz. Up 76%
Silver Equivalent Ounces Sold 1,869,393 eq. oz. Up 84%
Total Cash Costs per Ounce US$ 7.42 Down 14%
Direct Cash Costs per Ounce US$ 5.79 Up 4%
Average Revenue per Ounce sold US$ 18.57 Up 23%
Cash and Cash Equivalents (as at Sept 30th) $25.5 million Up $19.6 million


Results of Operations

Consolidated gross revenue (prior to smelting & refining charges, and metal deductions) for the quarter ended September 30, 2010 increased 114% to $36.1 million (US$34.7 million) compared to $16.8 million (US$15.4 million) for the quarter ended September 30, 2009, for an increase of $19.2 million. Compared to the second quarter ended June 30, 2010, consolidated gross revenue increased by $4.3 million or 13%. The increase in revenues in the third quarter of 2010 is primarily attributable to a 15% increase in silver ounces sold compared to the previous quarter. The increase in ounces sold is due to increased production from the plant at the La Encantada Silver Mine as well as from improving operating levels at the La Parrilla Silver Mine which combined to contribute a 95% increase in silver production when compared to the third quarter of 2009.

Net sales revenue (after smelting and refining charges and metals deductions) for the quarter ended September 30, 2010 was $33.5 million, an increase of 144% compared to $13.7 million for the third quarter of 2009. Net sales revenue for the quarter ended September 30, 2010 increased by 16% compared to $29.0 million in the second quarter of 2010. Smelting and refining charges and metal deductions decreased to 7% of gross revenue in the third quarter of 2010 compared to 19%of gross revenue in the third quarter of 2009, due to a shift in the production mix toward silver doré which is a benefit from the new cyanidation plant at La Encantada. Average smelting charges for doré in the third quarter of 2010 were US$0.39 per silver ounce as compared to US$3.84 per silver ounce for concentrates.

Net income after taxes was $10.3 million in the third quarter of 2010 resulting in basic earnings per common share (“EPS”) of $0.11, compared to a net income in the third quarter of 2009 of $1.8 million or an EPS of $0.02. Net income for the third quarter of 2010 was after taking a non-cash future income tax provision of $3.5 million or $0.04 per share and a foreign exchange loss (due to a stronger Peso) which increased by $1.0 million or $0.01 per share over the previous quarter, when net income after taxes was $8.9 million and basic EPS was $0.10.

Mine operating earnings for the third quarter of 2010 increased by 307% to $16.9 million, compared to mine operating earnings of $4.1 million for the third quarter of 2009, and are associated with an increase in net revenue during the third quarter of 2010. When compared to the second quarter of 2010, mine operating earnings increased by 29% from $13.1 million to $16.9 million.

Operating income increased by 617%, or $11.8 million, to $13.8 million for the quarter ended September 30, 2010, from $1.9 million for the quarter ended September 30, 2009, due to the 84% increase in ounces sold and the 23% increase in average US$ revenue per ounce of silver sold. When compared to the second quarter of 2010, operating income increased by 38% from $10.0 million to $13.8 million.

Production of silver, excluding any equivalents from gold, lead or zinc, increased 95% compared to the third quarter of 2009. The Company produced 1,823,370 ounces of silver in the current quarter, 1,538,798 ounces of silver in prior quarter and 935,996 ounces in the third quarter of 2009. In the current quarter, 95% of First Majestic’s revenue resulted from the sale of pure silver making it the purest silver producer relative to its peers.

Total silver equivalents production for the third quarter of 2010 increased 76% from the same quarter of the prior year and 16% from the prior quarter to 1,920,498 ounces of silver equivalents consisting of 1,823,370 ounces of silver, 323 ounces of gold, 1,248,086 pounds of lead and 228,517 pounds of zinc. This compares to the 1,089,481 ounces of silver equivalents produced in the third quarter of 2009, which consisted of 935,996 ounces of silver, 732 ounces of gold, 1,690,354 pounds of lead, and 8,913 pounds of zinc and compares with production in the previous quarter of 1,656,165 ounces of silver equivalents consisting of 1,538,798 ounces of silver, 541 ounces of gold and 1,494,548 pounds of lead.

In the third quarter of 2010, the Company sold 1,869,393 ounces of silver equivalent at an average price of $19.30 per ounce (US$18.57) compared to 1,018,417 ounces in the third quarter of 2009 at an average price of $16.54 per ounce (US$15.07), representing an increase of 84% in shipments over the same quarter in 2009 and a 15% increase over the preceding quarter. The average trading price for silver in the third quarter was US$18.96.

The new La Encantada cyanidation plant achieved average throughput of 3,477 tonnes per day in the third quarter compared to 2,900 tonnes per day in the second quarter. The La Encantada plant produces silver doré bars which are 93-97% silver with small amounts of lead, gold and other metals making up the balance of the contents in these bars. The economic differences between doré and concentrate production are significant and are beginning to reflect in improved financial numbers. The economics of switching from concentrate production to doré production resulted in a 56% savings of smelting and refining costs per silver ounce for consolidated operations in the third quarter of 2010 compared to the third quarter of 2009.

Total cash costs per ounce (including smelting, refining, metal deductions, transportation and other selling costs, and byproduct credits, which is a non-GAAP measure) for the third quarter of 2010 was US$7.42 per ounce of silver compared to US$8.64 per ounce of silver in the third quarter of 2009 and US$8.20 per ounce in the second quarter of 2010. The cost decrease was attributed to reduced smelting & refining costs (US$1.34 per ounce this quarter versus US$3.08 per ounce for the same quarter last year) related to the converting the production at La Encantada plant to doré production instead of concentrate production.

On a year to date basis, the Company’s cash position has increased by $19.6 million to $25.5 million at the end of the third quarter, and working capital increased by $19.3 million to $24.1 million over the same period. The Company achieved these increases while also investing $11.6 million in plant and equipment and $10.0 million in its mineral properties. In addition, in September and October the Company repaid in advance 100% of the $4.1 million balance of the FIFOMI loans outstanding leaving the Company debt free, excluding the small prepayment facility and capital leases.

In Summary

First Majestic has delivered another quarter of strong operating results thanks to the additional production, earnings and cash flow from operations including the new plant at the La Encantada Silver Mine, which have also come at a time when there’s been a significant increase in the price of silver, which combined, have had an extremely positive impact on the Company’s balance sheet on a year to date basis.

“These are clearly very exciting times in the silver commodity markets and a very exciting time for the Company to be reaping the rewards of over six years of hard work, and which have delivered increased capacities into a very buoyant market. We will continue to focus on the fundamentals of minimizing cash costs and increasing production as we grow First Majestic into a senior silver producer,” commented Keith Neumeyer, President and CEO of First Majestic.

First Majestic is a producing silver company focused in México and is aggressively pursuing its business plan of becoming a senior silver producer through the development of its existing mineral property assets and the pursuit through acquisition of additional mineral assets which contribute to the Company achieving its aggressive corporate growth objectives.

Full release

An Inflationary Death Spiral

By Michael Pento, 9 November, 2010

It seems the Fed has given up on the idea that the country can build a viable and stable economy through the conventional means. Instead, our central bank has resorted to once again growing GDP and increasing employment by the creation of asset bubbles. This is a dangerous game that no one, least of all the Fed, knows how to play.

We learned this past Wednesday that the FOMC decided to increase its purchases of longer-dated Treasuries by $600 billion within the next eight months. That means the Fed is on course to fund about 75% of our annual deficit! Such figures are the stock in trade of banana republics. While most of the rest of the world is fighting inflation and strengthening their currencies, we are doing everything in our power to end the dollar’s status as the world’s reserve.

Canada, China, India, Brazil, and Australia have all recently taken steps to raise interest rates and/or curtail bank lending. Compare that to the US, which has left interest rates at near-zero for almost two years. While other central bankers are tamping down expansionary rhetoric, Fed Chairman Bernanke is on record saying that he will do everything in his power to push up inflation (which he considers too low) and dilute the dollar. Foreign central banks and other investors may soon reconsider their plans to park cash in dollar-denominated assets. In fact, there has been a series of angry statements from top economic policymakers in Beijing, Berlin, Moscow, and Sao Paolo that show rising discontent with Washington. 

The Fed rationalized its decision to upset the global monetary order in a November 4th op-ed by Chairman Bernanke entitled, “What the Fed did and why.” Here’s an excerpt:

“Although asset purchases are relatively unfamiliar as a tool of monetary policy, some concerns about this approach are overstated. Critics have, for example, worried that it will lead to excessive increases in the money supply and ultimately to significant increases in inflation. Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation. We have made all necessary preparations, and we are confident that we have the tools to unwind these policies at the appropriate time. The Fed is committed to both parts of its dual mandate and will take all measures necessary to keep inflation low and stable.”

But the facts contradict Bernanke’s claims that monetary policy has not pushed up inflation. The Fed began the current round of accommodation in September of 2007 with a 50 basis point reduction in the Fed funds rate. At that time, the M2 money stock was $7.40 trillion. It has since jumped 18.5% to $8.77 billion. This increase is showing up in the form of higher prices.

The 19 commodities that make up the CRB Index have soared 55% since the beginning of 2009. Unless the Chairman desires to return to an environment where oil is trading at $147 a barrel, these surging commodity prices are already placing consumers and corporations under inflationary duress.

Here’s where the danger lies ahead. Before the recession began in 2007, the ratio between M2 and the monetary base was about 10:1. If the Fed sticks to its announced schedule, the size of the base should grow from $1.96 trillion to about $2.6 trillion by June of 2011. Once banks start lending again and expanding base money through the fractional reserve system, M2 could increase exponentially. An increase in the money supply to $26 trillion (in line with the historic 10-to-1 ratio) would result in a major inflationary shock. However, even if the money multiplier were to remain much lower, the M2 money stock would still be much higher than today. In fact, the compounded annual increase of M2 in the last 4 weeks is currently over 9%.

Unless Bernanke has a “road to Damascus” moment, the money supply will continue to grow and inflation will accelerate over the course of the next few years. To make matters much worse, the interest expense on the nation’s debt could reach over 40% of all revenue by the year 2015.

Faced with negative real interest rates, rapidly rising inflation, and a chronically weak dollar, foreign holders of US Treasury debt and other dollar-denominated holdings may begin to lose their nerve. They may start to repatriate their savings and thereby send Treasury yields soaring. The Fed – which is the Treasury’s buyer of last resort – will then be faced with a perilous decision. The central bank will have to either join foreign sellers of US debt in sending interest rates higher (in the hopes of giving the dollar some footing and allowing high rates to encourage the return of real buyers) or ramp up the printing presses to keep the long end of the yield curve from spiking. It should be obvious that the Fed has already made that decision. They will never allow rates to rise. The debt will be monetized.

I have no doubt that Bernanke will be remarkably successful in his stated goal of driving inflation higher. I simply disagree with his nonchalance about the long-term consequences. There is currently no easy exit strategy for the Fed. There is only the prospect of Americans suffering through either a deflationary depression or hyperinflation. To survive such storm requires careful planning. If only we could convince the big chief to stop doing his rain dance…

This article is written by Michael Pento 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:

OceanaGold Convertible Note Update

OceanaGold Corp. announced an update on the Company’s A$55 million “Barclays” convertible note.

The note contains a “one-off” option exercisable in December 2010, allowing individual holders to put their notes back to the Company for payment at accreted face value.

The deadline for holders to confirm their exercise has now expired. In this regard, around A$2 million of notes were put back to the Company for payment in December 2010.

The remaining A$53 million will now mature in December 2012, with no early redemption applying to this amount.

Full release (pdf)

Goodbye U.S. Dollar; Hello Chinese Yuan

By Tony Richardson, November 6

Hong Kong is Asia’s leading shipping and aviation hub with more worldwide cargo vessel and flight destinations than Chinese ports, and is better able to consolidate smaller shipments and navigate efficient routes, which saves on shipping costs. And because of its unique history and geography, Hong Kong serves as the “gateway” to China for Western companies, and for Chinese manufacturers who likewise rely on Hong Kong to help broker “re-export” arrangements with the West – a process by which Chinese companies export their goods to Hong Kong for preparation to re-export them to their final destination. Re-exportation accounts for about half of Hong Kong’s total trade – HK$2.4 trillion ($310 billion).

Since the handover of this former British colony in 1997, China has grown in its appreciation of Hong Kong as a “mediator” between East and West. That being said, China is yet determined to integrate Hong Kong back into the greater fold. The following is the good, the bad and the ugly of recent developments on Hong Kong, along with details on Chinese efforts to expand use of the yuan in Hong Kong – a process that will eventually cement the decline of the U.S. dollar as the primary international settlement currency:

The Good: On October 29, 2010, the Hong Kong Monetary Authority said yuan deposits at the city’s banks more than doubled to a record 149 billion yuan ($22 billion) in the last six months; and the Hong Kong Hang Seng Index is up 31% over the same period. Hong Kong enjoys one of the lowest unemployment rates in the world – at 4.2%; has a current account surplus of $28.34 billion (2009); and has posted five straight quarters of economic growth. The government’s forecast was raised from a range of 4 to 5% GDP growth back in May to a range of 5 to 6% expansion.

The Bad: Over the past six months, the Hong Kong dollar is down 9% against the Singapore dollar; down 14% against the Japanese yen; down 14% against the Euro; down 16% against the Swiss franc; and down 19% Australian dollar. Home prices have surged 47% since the beginning of 2009. Hong Kong has no agriculture industry or natural resources to speak of, so its imports make up just over half of GDP – HK$2.7 trillion ($348 billion). Domestic exports represent a mere 1% of total trade. The Hong Kong services sector accounts for 92% of GDP, and industry 7.9% (2009).

And the Ugly: “Hong Kong has a growth rate that is linked to the fastest-growing economy in the world, which is China, and because of its fixed currency link, a monetary policy that is linked to the weakest [the U.S.]”, said Goetz Eggelhoefer, a Singapore-based partner with Rohatyn Group. “[Hong Kong] can’t have strong growth, loose monetary policy, a weak currency and no asset inflation. Something has to give.”

Due to the combination of high growth and easy monetary policy, Hong Kong’s economy is ripe for some serious turbulence, namely, inflation. Assuming the decline in the value of the Hong Kong dollar will cause import prices to rise – slowing economic growth – calls will intensify for the Hong Kong dollar to be decoupled from the U.S. dollar – with the Hong Kong dollar rising at a gradual pace, and trading within a 0.5% daily band.

Consequently, as the Hong Kong dollar rises, the need for Hong Kong to buy U.S. Treasuries in order to maintain its peg falls (now, 1 USD = 7.75 HKD), which would force the Treasury to find replacement buyers, or would increase pressure on the U.S. government to lower spending. And as yuan availability increases, the significance of the Hong Kong dollar would decrease, laying the foundation for its eventual retirement in favor of the yuan (1 USD = 6.66 RMB).

Furthermore, China 1) is allowing use of the yuan as a trade settlement currency in provinces throughout China. Just last month, the Hong Kong Monetary Authority arranged a yuan-swap facility with the People’s Bank of China (PBC) on increasing demand for trade settlement using the yuan. Total trade settlement using the Chinese currency was 126.5 billion yuan ($19 billion) in the July-to-September period, up from 48.7 billion yuan the previous three months; and 2) the PBC initiated a pilot program in August allowing foreign central banks to clear cross-boarder yuan settlements in Hong Kong and Macau.

Despite these impressive achievements, it would be decades before the Chinese yuan replaced the U.S. dollar as a global settlement currency for international trade for the following reasons: 1) the Chinese government limits yuan availability; 2) China’s bond market, which central banks and international companies would access to borrow yuan for payment transactions, is too small to facilitate global trade, compared to the U.S. $5.7 trillion bond market; 3) the Chinese banking system is not yet sophisticated enough to effectively manage the fund stream of a bond market of a depth, breadth and scale required for international trade; 4) the Chinese markets are, on the whole, closed to outside investors; and 5) the flow of imports into China is restricted. Open markets are of paramount importance to international currency acceptance.

If indeed the Hong Kong dollar were allowed to appreciate against the U.S. dollar, how should investors play the change? One clear way is to buy the Hong Kong dollar. You can get exposure to it through E*TRADE’s Global Stock Trading (please see the site for details). You can also buy the iShares MSCI Hong Kong Index Fund ETF, symbol EWH. According to ING Groep NV (February 2010), China-based companies trading on the Hong Kong Hang Seng exchange are priced at a 38% discount to the same companies listed on Chinese exchanges. A rise in the value of the Hong Kong dollar would lift the Index. As things are, the flood of Chinese yuan into Hong Kong, coupled with easy monetary policy, have lifted the Hang Seng Index by the 31% from its May 2010 lows – and this with no change in Hong Kong-dollar value against the U.S. dollar.

Maybe the Hong Kong Monetary Authority will manage inflation risk well; maybe it won’t. But unless the U.S. takes swift, forceful action on three fundamental economic issues: a minimum wage that is comparatively too high; artificially high home prices; and artificially low interest rates, a move to decouple the Hong Kong dollar from the U.S. dollar would solidify the notion in the hearts and minds of the international community that use of the U.S. dollar as a global settlement currency is diminishing. And just as General Macarthur said in a speech before Congress on April 19, 1951, so it may be said of the U.S. dollar: “Old soldiers never die, they just fade away”.