And why should they be? They’re sitting on the sidelines holding US treasuries worth $797 billion. That’s quite a chunk of change.

Of course I’m talking about China.

The Chinese have been the biggest foreign creditor to the United States and in recent statements they’ve made it clear that Washington needs to maintain the value of the dollar.

“We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I’m a little bit worried,” said Chinese Premier Wen Jiabao.

It’s estimated that around 50% of China’s total reserves are held in US treasuries. And they know that the reserve currency they hold is depreciated with each passing day.

With so much riding on the price of the dollar you can bet that Beijing has been keep a close tally on America’s spending — and the results can’t be pleasing.

To say the least, Chinese faith in the dollar is feigning.

And I’ll give you one guess as to where they are going to spend their $797 billion nest egg… Gold!

Right now China is 6th on the list of world gold holdings with around 1,000 tonnes of gold reserves. Not bad right?

Wrong.

When you look closer at the statistics you can see that China has a mere 1.9% of its total reserve holdings in gold. Compare that to the U.S. with 77% and you’ll start to see China’s future motivation.

China is in the market for a reserve currency that’s stable. And when it comes to stability nothing glitters like gold.

Need proof? Look no further than another developing world powerhouse… India.

Recently India made a bold move to start protecting itself from the U.S. dollar and fiat currencies in general…

News broke that India made a huge gold purchase from the IMF — somewhere in the neighborhood of 200 tonnes.

Previously, the government of India held 350 tonnes of gold reserves. This 200 tonne purchase is a 57% increase in India’s reserves. Now that’s what I call a stand against paper currency!

The Indian transaction may be the largest single central bank purchase of gold ever. The only comparable event was the U.S. government seizure of gold from circulation within the nation back in 1933, along with steady U.S. government purchases in the 1930s and 1940s.

I spoke with an acquaintance of mine who works in the “financial” side of the U.S. government — I cannot say what Cabinet department, but his office has a view of the White House. I asked why the IMF sold the gold to India, and not China.

My acquaintance replied, “It’s all about balance. India holds a lot of U.S. Treasuries and needs gold to diversify its assets. We can’t let all the IMF gold go to China and leave India in the dust. China is already building up its gold reserves due to being the No. 1 gold producer in the world and still a net importer. Besides, if the news hit the wires that China just bought all the IMF gold, it would crush the dollar. So the deal was that India could buy 200 tonnes.”

Put it all together and the global outlook for the U.S. dollar is dreadful. As time passes more countries will try to escape the depreciation of the dollar — and that leads them to one option for wealth preservation: gold.

Okay, so no one wants paper dollars and instead they want gold — that’s easy right?

Not so fast…

Approaching “Peak Gold”

Just like the “peak oil” phenomenon, we’re headed for “peak gold.” It’s all about how much gold is left unprocessed underground. The more we take out, the harder it is to find more. And the harder it is to get to.

For instance, miners used to pan for gold in streams. Today, just to get enough gold for a wedding band, you need to crush up to 20 tons of rock.

And remember, gold isn’t just for jewelry, coins, or bars of bullion. Gold goes into computers, cell phones, and satellites. It’s used in medical lasers, industrial lasers, and in spacecrafts. It plays a major role in medical research. It’s even used for treating some diseases.

According to the World Gold Council, the world mined 2,414 tonnes of gold in 2008 — 64 tonnes less than the year prior. It was even less gold than mined in 2006.

Meanwhile, the amount of gold used in jewelry and industry alone topped 2,186 tonnes — add that to demand for bars and coins (which has really been ramping up lately) and you’ll see that, by necessity, at least 425 tonnes had to come into the market — most likely by central banks out of their dwindling hoards, a practice that cannot continue indefinitely.

And that’s not even including industrial use or the demand from vastly popular gold investment holdings like ETFs!

In fact, when you get down to brass tacks, the supply outlook for gold is down right dismal.

Over the past 10 years large gold discoveries have been inexistent. The discoveries that are being made tend to be in more remote and less geopolitically attractive areas.

Tough new environmental laws and 20 years of low mining investment don’t help. But it’s really geology that’s conspiring against the miners most. Nobody can find the big gold deposits anymore. It looks like they’re all tapped out.

With gold prices up, they’re looking. More holes open up in the ground. More tons of rock go through the mills. But so far, the average quality of the gold they’re finding has gone down.

The low hanging fruit of the gold mining universe — the easy deposits and rich mines — have started to disappear. Gold’s already rare. But it’s getting more rare by the day.

This rarity is running into increasing demand. There isn’t a more fundamental argument for rising prices. And if the U.S. dollar continues to plummet there’ll be no stopping the yellow metal’s upward charge. Again, it’s economics at work. Gold is priced in dollars, so as the currency becomes less valuable, the metal naturally becomes more valuable.

You want to accumulate gold investments now, while prices are still relatively low. Sure, gold prices are at all-time highs, but they still have a long way to go…over $2,000…maybe as high as $3,000…or even $5,000!

Until we meet again,
Byron King
Whiskey & Gunpowder

October 1, 2010

More Reasons Gold Is Going to $2,000 was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Before we delve into the reasons behind all the publicity, here’s the basic skinny on REEs: One, they are rare, at least sort of. Two, they are indispensable to modern technology. Three, the number of active, dedicated producers is tiny, with more than 90% of the world’s supply coming from China.

If you took high school chemistry, you probably remember the periodic table of the elements. But if you’re like most of us, even if you pulled a 95 on the chem final, you may not recall many of the details today. And there’s a better than even chance you never bothered to memorize the names of the REEs. It’s time to get reacquainted.

They’re generally clustered in a separate grouping at the bottom of the table, are known collectively as the lanthanoids, and these are their names, in order of atomic number (57-70): lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, and ytterbium. Yttrium (39) and lutetium (71) are also sometimes included.

Need to Know, Point 1: Rarity

Fact is, we begin with something of a misnomer. These elements are not, strictly speaking, rare. Earth’s crust is full of them. True, they’re not as common as iron, carbon, or silicon, but are about on a par with nickel, copper, and zinc. Even the scarcest is way more abundant than gold, platinum, or palladium.

What is rare about them is that they’re widely dispersed. Very seldom are they found in economically exploitable deposits. Complicating matters further is that there are so many of them, and they clump together. They have to be separated first from the ore and then from each other.

Thus REE production comes primarily from other mines’ byproducts. The miner strips off the metal he’s really after, then sends the REE clusters to a specialty refiner.

Need to Know, Point 2: Applications

It’s safe to say that life as we know it would be very different without the REEs. The more our technological accomplishments pile atop one another, the more crucial these metals become. Because of their unique properties, there are generally no substitutes for them.

Of all the REEs, the one people may have heard of is neodymium. Alloys containing it have revolutionized permanent magnet technology, allowing miniaturization of all sorts of electronic components in appliances, A/V equipment, computers, communication systems, and military gear. Your hard drive probably has neodymium in it. So does your DVD player.

Liquid crystal displays depend on europium. Fiber-optic cables can’t function without erbium. Virtually all specialty glass products, from mirrors to precision lenses, are polished with cerium oxide. Several REEs are essential constituents of both petroleum fluid cracking catalysts and auto emissions-control catalytic converters. Half a dozen REEs go into the manufacture of the energy-efficient fluorescent bulbs that will soon be mandatory. Lanthanum-nickel-hydride rechargeable batteries are replacing older ones based on lead or cadmium. And no REEs, no electric cars. Nor next-generation wind turbines.

That’s only a partial list. But what makes REEs an increasingly sensitive topic is their role in national defense. Here are a few small items that have become dependent on them: jet fighter engines, missile guidance systems, underwater mine detectors, range finders, space-based satellite power plants, and military communications systems.

Think the Pentagon is very, very interested in maintaining a steady REE supply?

Need to Know, Point 3: Supply

95% of the world’s REE production originates in China. If you’re looking for reasons why we’re so nice to the premier Communist power left standing, this is a biggie.

We weren’t always so dependent. Not long ago, mines such as Mountain Pass in California made us nearly self-sufficient in REEs. But in the early ‘90s, China flooded the market with cheaper product, until it had driven all of its competitors out of business.

Today, Mountain Pass is being revived, but the start-up of an old mine is a lengthy and costly process. There are also some from-scratch REE development projects under way in the U.S., as well as Canada and Australia. But for the moment, China holds the hand with all of the high cards in it.

Forget your hard drive. Forget 11th-grade chemistry experiments. This is a national security issue. The American government cannot afford to lose that supply source, period. Maybe someday, but not now.

And that’s what’s behind the recent furor over these obscure elements. Because China threatened just that, a cutoff. The one thing that really gets Washington’s knickers in a twist.

In August, the story broke in the mainstream press. Sources in China leaked news of a draft copy of a report from the Ministry of Industry and Information Technology. It allegedly calls for a total export ban on five of the rare earths, with the rest restricted to a combined export quota of 35,000 metric tons a year, far below annual global consumption of 125,000 tons, and rising fast.

This doesn’t look like a move they’d follow through on, if only because of the lost trade revenues. And it’s only a recommendation; final approval rests with China’s State Council. But consider it an opening shot across our bow, if you wish. Or perhaps they’re telling us they need their REEs for the domestic economy, and we’d best go find our own supplies. Either way, the scramble is on to find alternatives.

That could backfire. REE prices and demand were already dropping last fall as the recession deepened, and China maintains a decided competitive advantage beyond control of supply: lax environmental standards (many REEs are highly toxic). Thus the new companies could spend the fortunes required to come on line, only to find themselves victims of yet another market glut engineered by the Chinese. Still, these metals are so important, it wouldn’t surprise us if the U.S. government subsidized domestic production, rather than risk a squeeze.

The Market

The market took due notice of the China story, driving the stocks of Western REE producers, and would-be producers, nearly straight up. Since late August, Avalon Rare Metals has gained 120%, Arafura Resources is up 75%, Rare Element Resources has added 72%, and Lynas Corp. is 50% higher (China, ever the master strategist, exploited the credit crisis to grab 25% of Arafura and more than 50% of Lynas). Lurking in the background is Molycorp, the private company redeveloping Mountain Pass. It’s planning an IPO that may well come out of the gate red hot.

With market action this frantic, the sector is on the frothy side at the moment. The heady market caps being awarded to these companies are obviously not based on fundamentals, and a savvy investor takes care not to get caught on the wrong side of a bubble.

Even though the Chinese export ban may never materialize, the ever-growing need for REEs is dead serious. And while the current bubble may pop any day, the long-term prospects for successful miners are outstanding.

Regards,
Doug Hornig

October 5, 2009

Why All the Fuss Over Rare Earths? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Sure, the price for gold and oil changes all the time. Prices go up and down, for good and bad reasons. Heck, sometimes prices fluctuate and the reasoning defies logic.

Still, I watch the price points. Deep down, I’m looking to see if the prices for gold and oil are following my long-term view of what ought to happen. That is, my long-term view is that both gold and oil prices are going to rise to astonishing heights.

Scarcity rules. That’s the foundation of my investment thesis. Today, I’ll explain my thinking about gold and leave oil for another time.

Reviewing the Gold Landscape

The first thing to understand, as an old geology professor at Harvard once told me, is that “gold is where you find it.” And the second thing to understand is that no matter where you look, gold is hard to find — and getting harder.

In the past decade, gold-related exploration efforts and expenditures have increased dramatically. I’ve seen numbers adding up to tens of billions of dollars poured by mining companies into gold exploration.

But despite the best efforts of the global mining industry, world gold production has DECREASED since early in this decade. Take a look at the chart below, depicting world gold production 1850-2008.

I Love This Chart

I love this chart. I could spend all day discussing it. For example, look at the very steep rise in gold output during the 1930s. That was during the depths of the worldwide Great Depression. In both the U.S./Canada (blue area), and the rest of the world (gray area), people were digging more and more gold. The Soviets (purple area) increased their gold output too, courtesy of Joseph Stalin and his Gulag. Desperate times call for desperate measures, I suppose. Will that sort of history repeat this time around?

Falling Gold Output, Plus Monetary Inflation

Or look at that massive run-up in gold output from South Africa (green area) in the 1950s and 1960s. That was during a time when South Africa was instituting its post-World War II system of apartheid. Labor was cheap (sorrowfully cheap), and quite a lot of international investment poured into South Africa without moral qualm. The South Africans dug deep and just plain tore into those gold-bearing reef structures of the Witwatersrand Basin.

But notice how quickly the South African gold output declined in the 1970s, as the mines got REALLY deep and the rest of the world began to institute sanctions against South Africa over its apartheid system.

And then look at the gold price run-up that followed in the late 1970s. It was a time of inflation, mainly coming from the U.S. dollar. Yet world gold mine output was dropping as well. Falling output, plus monetary inflation? The gold price skyrocketed. Another bit of useful history, right?

Recent History — the Trend Is Down

Now let’s focus on more recent history, since about 1990. There were large increases in gold output from the U.S./Canada (blue), Australia (gold) and Asia (China orange, non-China open bar). By 2000 or so — the world production peak — gold prices were down toward $300 per ounce and below.

But as the chart shows, in the past 10 years, gold output has shown a marked DECLINE in the major historic gold mining regions. The prolific gold output from the U.S./Canada, Australia and South Africa has followed downward trends. Sure, these regions still lift a lot of ore and pour a lot of melt. But the production trend is DOWN.

Why the downward trend? I suppose you could call it “Peak Gold,” but that term really doesn’t convey the explanation. Let’s highlight some of the reasons for the decline.

In North America, Australia and South Africa, people have been kicking the rocks for 100-150 years. The large deposits and the high-grade good stuff have been discovered. The ore that’s “easy” to mine has been mined. The deeper ore is more expensive to dig, lift and process.

And I have to mention that over time, the culture in so-called “developed” parts of the world has gotten greener. People and policy have turned against mining in the developed world. So mining doesn’t happen where it’s not appreciated.

The flip side is that if mining is declining in the developed world, then the future of gold mining must be growing in the developing world, right? Well, yes and no. Of course, it’s true that there are more rocks to kick and ore bodies to uncover in the underexplored regions of the world. But this leads to another problem.

Development Issues in the Developing World

The U.S./Canada, Australia and South Africa all have well-established and (more or less) workable mining laws — despite the best efforts of many current politicians and regulators to screw it all up. These historically producing areas are politically stable. Overall, there’s good mining infrastructure, with road and rail networks, power systems, refining plants, a vendor base, mining personnel and access to capital.

But that’s not the case in many areas of the developing parts of the world. Political stability? Security? Infrastructure? Transport? Power? Refining? Vendors? Personnel? Capital? Everywhere is different, of course. But overall, the entire process is much more problematic. So there’s a lot more risk. When you move away from the traditional mining jurisdictions, the whole process of exploration, development and mining is more expensive.

Thus, the new gold discoveries of the future are going to lack some (if not most, or perhaps all) of the advantages of the developed mining world. That means that the ore deposits of the future will have to offer much higher profit margins, based on size and ore grade, to compensate for the increased risks. Too bad Mother Nature (or Saint Barbara, who looks after miners) doesn’t work that way.

It also means the timeline to develop the mines of the future will likely be stretched over many years while political, legal, bureaucratic, logistical and social issues are ironed out.

Future Gold Output on a Downward Trend

The key driver for the future of worldwide gold supply will be DECLINING output overall over time. Coupled with monetary inflation, you can expect to see MUCH HIGHER GOLD PRICES.

The gold that does come up will be from more distant locales, and deeper levels, or it will be more costly to process from lower-grade ores. The whole gold mining cycle will get more expensive and more risky.

Big Miners Scrambling

Some of the big gold miners — Newmont, for example — are already in a constant, squirrel cage scramble to replace their reserves lost to annual production. Newmont simply cannot grow organically. Newmont can’t “discover” enough new gold resources on its own every year. It doesn’t even try.

Newmont has a reputation within the mining business that it’s being run by accountants, not mining engineers. So the Newmont strategy is simply to go out and “mine gold on Wall Street,” so to speak. If Newmont needs reserves, the company buys a smaller miner. Indeed, Newmont has laid off most of its formerly world-class exploration department. Its in-house geologists spend much of their time looking at other peoples’ mines.

New Deposits Are Out There

There’s a strong exploration and development incentive built into all of this for smaller firms. The current business climate for gold mining has spurred the creation of many small companies that are generating prospects. The players within the industry are smart, hungry junior exploration companies.

The owners and operators of these companies, and their ilk, are bringing new ideas to the mining districts of the world. And despite the ups and downs of the daily gold price, the best of them will have their day. We just have to pick the sharpest, best-run firms… and be patient as history unfolds.

Until we meet again,
Byron W. King

July 17, 2009

Looking at Gold Price Trends was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

And so, without more circumstance at all, I hold it fit that we shake hands and part.

— Shakespeare, Hamlet (Act 1, Scene 5)

I’m not much for gooey goodbyes — even if they’re most likely only temporary.

But on the other hand, I couldn’t just up and stop writing for Whiskey & Gunpowder indefinitely without giving something more to my readers than simply a few parting words. After all, love me, hate me, or love to hate me, some of you have been reading my work in this forum for nearly 3 ½ years. And I don’t take that relationship lightly…

Yes, like it or not, friend or foe, we have a relationship. I know this because I’ve gotten literally thousands of letters and e-mails from you or readers just like you — some of them nearly as long as some of my essays. These notes have ranged in tenor from “attaboy” and “go-get-‘em” to “shame-on-you” and various other things I can’t print.

They’ve also included pleas that I run for office and that I leave the country, the most ribald of jokes and the most somber of personal anecdotes, death wishes, threats, and flirtations that border on marriage proposals, argumentations and affirmations from elected officials, industry leaders, and political insiders — plus the warmest of invitations from ordinary folks to hunt, fish, ride, shoot, drink, or just plain chat with them…

To all those who reached out to chide or cheer me, I give my heartfelt thanks.

But today, I want to give something back to you that transcends mere words. And I honestly believe that whether you like or hate me — or agree with the things I’ve written in these pages over the years or not — what I want to give you today could prove to be one of the best things that has ever happened to your bottom line.

This is not something I’m offering you only as a “thank you” for your readership. It’s something I’m doing because I owe it to you. Literally.

A Debt to My Readers, and My Chance to Repay It — to 115 of You

If I had a buck for every time I’ve claimed in these pages that I’m no economist, market analyst, stock-picker, or financial advisor, I’d have…

Well, I’d have at least twenty bucks or so.

But just last year, something happened to me that — while it didn’t instantly confer onto me an economics degree or Series-7 certification — gave me a near-instant wealth-building and investing advantage over 99.9% of the investors out there…

And it was all because of YOU. Let me explain what I mean, starting with an anecdote:

Whiskey’s Managing Editor, Greg Grillot, once said to me, “Jimbo, I can always tell when your articles run because my e-mail inbox gets crashed!”

Now, this isn’t to say that more people are reading my essays than those of my Whiskey brothers. In fact, I’d lay odds that far fewer folks read my articles than those of any other regular contributor. My stuff tends to be controversial, so I’m sure a fair number of readers see my name on a piece and automatically hit the “delete” key…

However, for one reason or another, I tend to provoke a lot of action from those that do read my stuff. You’ve written replies of every stripe to my articles, forwarded them to your friends and enemies, posted them on your personal blogs and Web sites — even printed and mailed them to elected officials. This fact alone is what has kept a quasi-literate rube like me writing in this letter alongside such esteemed financial thinkers as Jim Rogers, Doug Casey, Lord Rees-Mogg, Mark Skousen — and Agora’s own wizards Byron King, Chris Mayer, Dan Amoss, Dan Denning, and so many others.

Here’s what I’m getting at…

Because your feedback has kept me in the mix among minds I have no right to call “peers,” I was able to attend an event last July that put me in the midst of those great minds. This changed me from a dollar-dolt into a well-informed observer of monetary policy, markets, commodities, and macro-economics — and made me a much better investor.

That event: The eighth annual Agora Financial Investment Symposium.

As a result of 2007’s Symposium, I’ve completely revamped my approach to money. I’ve seen how the status-quo ways I’d been investing were boneheaded compared to the real money I could be making — if only I had the info the money mainstream’s ignoring or misinterpreting (like what many of this event’s speakers churn out on a regular basis). I also learned ways to protect (and even enhance) my assets from uncertain or volatile economic conditions — secrets that have saved me from losing thousands of dollars in just the last year alone…

Your support of my 3.5-year, 67-article run in Whiskey & Gunpowder has given me a rare opportunity to change the way I think about money and investing — and has likely made me a multi-millionaire over the long term. And because of your continued readership and engagement with my articles, I’m going to get to attend and participate in that event again this summer…

But this time, and by way of a heartfelt “thank you,” I want to invite YOU to come along with me this July 22-25 to the ninth incarnation of this event — once again set in scenic, historic, diverse, temperate, culturally rich, progressive Vancouver, British Columbia.

Here’s the kicker, though:

There are only 115 spots left before the 2008 Symposium is sold out…

How I Went from “0” to “Plugged-In, Knowledgeable Investor” in Four Days Flat

An open-minded and inquisitive investor (like I am now) could glean several lifetimes worth of information and borderline insider savvy from the dozens of exhibitors at a typical year’s Agora Financial Investment Symposium.

For instance, on each of the four days of the 2007 event — before, after, and in-between marquee speakers and special presentations — I meandered through the gorgeous exhibition halls of the elegant Fairmount Hotel Vancouver. And every minute of this time, I found a new, potentially money-making revelation that mainstream investors and the major money press overlook…

In that vast multi-room exhibitor area, I found myself surrounded on all sides by some of the world’s foremost experts from small-to-medium-sized, yet sometimes under-the-radar companies poised for huge growth in industries like:

• Mining
• Oil and gas
• Geothermal energy
• Gold and silver
• Industrial metals
• Diamonds and minerals
• Renewal and alternative power
• Real estate and mortgage
• Shipping and logistics
• Asset and money management
• Mutual funds and other investing vehicles
• Even stamp collecting and investment…

But as dizzying as this wealth of information and opportunity was, it was the Symposium’s captivating roster of A-list speakers that really brought me up to speed on what I was doing wrong with my money, what I should be doing with it, and where we’re headed as a nation and world. I learned an incredible amount from them — and about far more than just money and investing…

Each year’s Agora Financial Investment Symposium has a theme. In 2007, that theme was Rim of Fire: Crisis and Opportunity in the New Asian Era. These themes don’t dictate the content at these events — far from it — but they do loosely color the general commentary…

However, the dialogue at last year’s Symposium was some of the farthest-reaching and diverse economic, financial, and political commentary I’ve ever seen assembled in one place. Just a few such highlights I remember from last year’s event:

BILL BONNER — An animated-yet-soft-spoken, humorous and often improvisational presence at the podium, Bill blows you away with what he’s saying, not how he’s saying it. More than any other speaker I’ve ever heard, he has the ability to make incredibly complex concepts both digestible and entertaining. He also has rare ability to hurl the conversational boomerang far afield, yet still bring it safely home to his core concept. In one of his two speeches, Bonner clued us in on the pitfalls of “crack-up booms” vs. bona-fide booms, the virtues of doing nothing (and how humans can’t stand it), how keeping your assets in cash dollars is becoming a dangerous speculation, and how buying gold can be both the worst AND best thing you can do with your money…

JAMES HOWARD KUNSTLER — The blunt, shocking, misanthropic, borderline profane, yet utterly credible Kunstler regaled us with The Long Emergency, a synopsis of his own book of the same title. This treatise debunks the common myths about oil in our time, reveals how U.S. oil extraction history uncannily mirrors Hubbert’s Peak, warns of the dangers of climate change, and blasts the oft-cited, rose-colored notion of a coming “hydrogen economy.” He also illustrates for us in stark (and darkly humorous) terms the diminishing returns of technological innovation in the energy fields, plus what we should be doing to counteract the coming energy crisis…

THE MOGAMBO GURU — Sarcastic, sardonic, wisecracking, hilarious, over-the-top and utterly on-the-mark about a broad cross-section of not only the money world, but also the world in which we live, long-time columnist for Agora and other outlets Mogambo (AKA: Richard Daughty) uses his acid tongue not only to self-aggrandize and self-deprecate, but also to flagellate the American monetary system. He reminds us of the idiocy of fiat currencies like the dollar, how the near-criminality of mercantilism’s rules and tariffs fuel the institutional corruption of the U.S. government, and the dangers of an approaching boom in inflation and rising costs that an Asia-centric global economy could portend for America. Scary, entertaining and thought-provoking all in one animated, acerbic package. That’s the Mogambo Guru in a nutshell…

DOUG CASEY — Everyone’s favorite globetrotting anarchist-investing wizard, wildly successful New York Times bestselling business-book author Doug Casey is truly one of a kind. Gravel-voiced, incendiary, incisive and unabashedly America-bashing, Casey’s talks could be rehearsed, but they come off like 100% improvisation. His presentation, The End of the World as We Know It, outlined the four sections of America’s “big picture,” and how they’re all pointing toward an impending depression. Yet for all his jokes, irreverent anecdotes, doomsday predictions and anarchic rhetoric, Casey’s chock full of nuggets you can take to the bank. His seemingly off-the-cuff speech taught me the basics of stocks, bonds, currencies, real estate, commodities, and the reasons why the corrupt system we live under prevents us from making money on most of them. Casey also explained why, aside from a few select mining stocks that he’s worked hard to uncover, gold is the best investment for the near future. Oh, and he also rattled off the five reasons why none of us should vote in the upcoming Presidential election…

NASSIM NICHOLAS TALEB — Profoundly original and mind-bogglingly intelligent international bestselling author of Fooled by Randomness and The Black Swan, essayist and polymath scholar Taleb explains why conventional methods of data analysis and predicting just about anything under the sun (but especially things economic) are horribly inaccurate, and why so few mainstream experts will ever realize it. To illustrate his point, he eviscerates a mainstream investing bestseller called The Millionaire Mind. Citing the book’s flawed methodology and skewed-toward-sales message, Taleb builds upon this using his mathematical wizardry and grasp of the concept of “randomness” to expose the unsettling reasons why so much of what the conventional wisdom tells us about money and investing is exactly wrong…

Again, these are only a few highlights from four days worth of seminars and advice that I found especially riveting. Space doesn’t permit me to tell you what I got from other favorites like master money wizards Rick Rule and Larry Grossman (also hugely entertaining and humorous speakers, by the way), or my own favorite Agora advisor, Chris Mayer — whose presentation includes multiple jokes from the far-from-PC comic and “redneck” favorite Larry the Cable Guy…

At the time of this writing, nearly all of these folks are coming back for this year’s Symposium. And as if this weren’t enough of an incentive for you to skip down to the bottom of this page and sign up right now, I just found out that one more incredible speaker just signed up for this year’s event for the very first time. Even to a neophyte to money and investing like me, he needs no introduction…

But despite his pristine reputation, I can’t simply blurt his name onto this page. There has to be some sort of build up. And if this is going to be my final Whiskey contribution (for now) how could I wrap it up without some modicum of suspense. That wouldn’t be my style, would it. So for now you’ll have to sit tight and wait for tomorrow’s installment.

Cliffhanging to the very end,

Jim Amrhein
Freedoms Editor
May 29, 2008

The Only Financial Advice I’ll Ever Give You was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Sudbury Basin

The Sudbury Basin, or what is left of it, is about 37 miles long, 17 miles wide, and 9 miles deep. It formed about 1.85 billion years ago when a 6-mile-wide meteorite (some researchers believe that it was a comet) struck the Earth at a hyper-velocity. The impact penetrated the crust as far down as the mantle, and was of such scale of energy that large pieces of the Earth’s crust were in all likelihood blown back, and accelerated far into outer space. It must have been a true Star Trek moment.

The present size of the Sudbury Basin is just a small remnant of what is believed to have been the original crater of about 155-mile diameter. Subsequent geological processes in Precambrian time, as well as extensive erosion over the past billion years, have extensively deformed the crater into its present, smaller oval shape. And it is certainly one fascinating body of rock.

The original impact crater rapidly filled with magma from the Earth’s mantle, which, over time, crystallized into minerals containing nickel, copper, platinum, palladium, gold, and other metals. As a result of these mineral deposits, the Greater Sudbury area is one of the world’s most important mining districts. The rock formations of Sudbury hold within them some of the world’s largest deposits of nickel and copper ores. One of the major producers of nickel ore and associated nickel products is the International Nickel Co., or INCO, and its subsidiary the International Nickel Company of Canada Ltd.

Smacked Upside the Head by a Meteorite

Last week, the management of INCO, a worldwide metals producer, must have discovered what it was like to get smacked upside the head by a giant meteorite, when shareholders of Falconbridge, another mining company and a significant nickel producer in its own right, rejected an INCO takeover offer. Let’s back up to last year and review what happened.

On Oct. 11, 2005, INCO announced that its board of directors had agreed with the board of directors of Falconbridge Ltd. that INCO take over all of the outstanding common shares of Falconbridge, by way of a “friendly” takeover bid that included both cash and INCO shares. INCO’s assets total in excess of $12 billion. Falconbridge owns over $13 billion in assets. The combined INCO-Falconbridge organization would have been one of the world’s largest producers of both nickel and copper, and controlled one of the mining industry’s most attractive portfolios of low-cost, profitable new mining projects.

Falconbridge, a Canadian company founded in 1928, is one of the world’s leading producers of nickel, copper, zinc, and aluminum. In June 2005, a few months before the INCO offer was announced, Falconbridge had dramatically increased its size by merging with another venerable name in the mining business, Noranda. Thus a merger between INCO and Falconbridge would have created a colossus in the nickel and copper mining business.

In late 2005 and throughout 2006, the INCO offer for Falconbridge was held up by regulatory review in Canada, the U.S., and Euroland. And all the while, commodity prices for nickel, copper, zinc, cobalt, and many other products were moving upward at a rapid rate. In no small measure, this was because of industrial demand from China.

Xstrata Crashes the Party

In May 2006, another mining company named Xstrata PLC made an unsolicited offer to purchase for cash all of the outstanding common shares of Falconbridge. Xstrata is a major global diversified mining group, listed on the London and Swiss stock exchanges and with headquarters located in Zug, Switzerland. Xstrata produces six major types of industrial commodities. These are copper, coking coal, thermal coal, ferrochrome, vanadium, and zinc, with some additional production of gold, silver, and lead. Xstrata’s operations span five continents, namely Europe, Africa, Australia, South America, and North America (more specifically, Canada).

Initially, Xstrata offered C$52.50 in cash for each share of Falconbridge. Falconbridge management replied that it believed that the offer was not enough and did not reflect the full and fair value of Falconbridge shares, nor did Xstrata’s offer give shareholders the opportunity to participate in the growth that was anticipated as a result of the INCO-Falconbridge merger.

In mid-July 2006, Xstrata increased its cash offer for Falconbridge to C$62.50 per common share in cash. Under the terms of the offer, the Falconbridge shareholders would also receive a special cash dividend of C75 cents per common share declared by Falconbridge on July 16, 2006, representing total proceeds of C$63.25 per Falconbridge common share.

The bottom line for Falconbridge shareholders was that the INCO offer was “higher” in the sense that it added up to more in terms of cash per share, plus INCO shares, totaling about C$65.25 per share. But the Xstrata offer of C$63.25 was all in cash and offered a fast payout. For INCO to be successful in its takeover bid for Falconbridge, INCO had to obtain a majority of shares tendered by Friday, July 28, 2006. This did not happen, and thus, the deal fell through.

Money Listens, Money Talks

In the week or so before the July 28 deadline, INCO had only obtained about 20% of the Falconbridge shares to its side of the takeover proposal. But in the past year or so, a large number (estimated to be about 40%) of Falconbridge shares have been bought up by hedge funds. These hedge funds are pools of funds that are invested with a promise of generating a specific return, regardless of whatever else occurs in the financial markets.

In a sense, hedge funds are emblematic of what you might characterize as “tactical” investors who are chasing the highest yields possible over the shortest time frames. A tactical investor is simply pursuing a stock position in a particular situation, almost without regard for the underlying company itself. To the extent that a hedge fund has any investment strategy, it is a “strategy of tactics.” That is, hedge fund managers have little, if any, loyalty to a given company. The hedge fund managers own shares with the expectation of seeing a run-up in the stock price. Then they will move to liquidate the position for the best gain possible. The mandate of hedge funds is to make fast money in the stock market, not to focus on long-term issues of corporate governance.

The competing offers for Falconbridge by INCO and Xstrata illustrate the point with great clarity. INCO offered Falconbridge shareholders cash and stock totaling more than the Xstrata offer, and with the prospect of the resulting merger allowing the shareholders to participate in future growth of the company. Xstrata’s deal offered a slightly lower overall value (by about C$2), but it was all in cash, thus allowing the hedge fund managers to take the money and run. There was no real need for the hedge fund managers to consider the future prospects of the nickel market, or markets for other industrial metals, that a merged INCO-Falconbridge firm would produce in the future.

Compounding the problems for INCO, many of the hedge funds that own Falconbridge shares also own shares of INCO. The recent announcement by Phelps Dodge that it wants to take over INCO has already placed INCO into play on Wall Street. Teck Cominco also has announced a hostile bid for INCO. And now the hedge fund managers are anticipating that other mining firms might enter into the fray and drive up the price of INCO. Thus the “strategy of tactics” for the hedge funds is to take the Xstrata payday and hold onto their INCO shares in anticipation of another bidding war for the mining firm.

As if on cue, Grupo Mexico SA, one of the largest copper producers in the world and parent of Southern Copper Corp., has reportedly hired U.S. financial advisers to explore taking over Phelps Dodge, and, by implication, INCO. In addition, Companhia Vale do Rio Doce (CVRD) has expressed interest in acquiring INCO. And other firms, such as Rio Tinto, BHP Billiton, or even Russia’s Norilsk could decide to make a play for INCO, if not for Phelps Dodge.

Restructuring the Mining Industry

So the near-term future of the mining industry is probably going to be one of competing takeover offers and eventual consolidations on a massive scale. But whatever happens to INCO, and to the other companies in the heavy metals mining industry, it appears that hedge fund money is going to control the outcome.

In the world of hedge funds, the proverbial tail wags the dog. Hedge fund thinking is entirely short-term, such that any deal will have to be structured to offer cash, instead of commercial paper or other forms of stock. This means that acquiring companies have to issue debt and hope that future prices for their products will be sufficient to pay it down. Keep in mind that while the mining business is inherently a long-term effort (over and above the fact that Sudbury is a 1.85 billion-year-old ore deposit), long-term corporate governance is not high on the priority list for hedge fund managers.

Lots of people, including me, like to think that markets and market mechanisms work even in a massively regulated global industry such as what the mining industry has become. If hedge funds are driving the results of mergers and consolidations of the biggest players in the mining industry, then so be it. Whoever said that company managers should not have to justify their efforts frequently, as opposed to getting a free pass that might otherwise extend for years to construct that so-called “shareholder value”? The hedge fund managers will, in all likelihood, make their short-term plays, take their money off the table, and meet their numbers along the highway of industry consolidation. I do not doubt that they will feel darn good about themselves as they make their visits to the bank.

The free-market implication of all this is that in a world that works, a hedge fund-driven “strategy of tactics” ought to lead to the “right companies” with the “right managers” controlling the “right assets” and running them “right.” The corporate managers who control the big mining companies are just going to have to figure out how to run what are, at root, long-term businesses in an environment of short-term financial pressures and associated manipulations. So the people best at showing “results” will have to rise to the top, and preferably not of the same “results-oriented” ilk as those that ran Enron. It would be a terrible thing for mining assets to fall into incompetent hands, especially in that it takes 6-mile-wide meteorites slamming into the Earth every billion years or so to create some of the really good digs.

But what if things do not work out the way we hope? What if a “strategy of tactics” leads essentially nowhere, and to an end point of no real long-term strategy? What if the “wrong companies” with the “wrong managers” wind up controlling the big assets, and in the long-term, they screw things up because they have structured themselves into unworkable business forms burdened with unpayable debt? Does this wave of big-dig consolidation, being driven by short-term hedge fund thinking, amplify the risk that the mining industry will become a relatively small group of really massive, overleveraged, overly indebted, underinvested behemoths that run their businesses right into the ground? I suppose that is what bankruptcy courts are for, but I would hate to see it come to that.

It takes a long time to make an ore deposit (1.85 billion years at Sudbury). It takes a long time to open a mine, and it takes a long time to get good at running one. Considering all of the moving parts and other rotating machinery involved, you really do have to know what you are doing when you pull ore out of the ground. Then again, in a world of hedge funds and rising commodity prices, I suppose the world will get exactly what it deserves.

Until we meet again…
Byron W. King

August 1, 2006

Money, Mines and Nickel was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.