The Gold Report's  Instablog

Source: JT Long of The Gold Report (5/21/12)

http://www.theaureport.com/pub/na/13417

From gold and silver to energy and oil services, Frank Barbera, editor of The Gold Stock Technician Newsletter, sees a bright future for commodities and their equities. In this exclusive Gold Report interview, Barbera cites large blue-chip and midtier mining companies, especially those now paying dividends, as favorites and suggests that investors looking to protect retirement savings invest in bond funds outside the U.S.

The Gold Report: Europe is in the headlines daily: more leftists coming to power, regional banks suffering, renewed recession appearing to take hold. What is your take on Europe?

Frank Barbera: In the headlines, Europe looks like quite the mess. Imagine being a Greek who saved over a lifetime now facing the possibility of devaluation or Greece leaving the euro. If Greece pulls out of the euro and devalues, most of the people will see their life savings collapse in terms of purchasing power.

In my view, there is a pretty good chance that would spark a contagion. When people in Spain or Italy see Greece pull out and return to a devalued drachma, there will be bank runs in other countries. Money will move out of those banking systems into perceived safer havens. That is how a contagion gets started.

The situation in Spain also is very serious. It has chronically high unemployment, in excess of 24%; youth unemployment is nearly 50%.

All of the leading indicators for Europe are pointing down. Europe seems to be descending into a major recession; even Germany is backsliding toward recession. The breakup of the euro would greatly exacerbate that. Interest rates would shoot up in bond markets around Europe, spreads would blow out.

If you were an Austrian school economist you would say, let it unwind, let the debt default and the governments stand back and do very little. That would be a very severe dose of medicine to take.

Instead, I think we will get more government intervention, as we saw in December 2011, when some of the big Italian and French banks were staring into the abyss of default. The European Central Bank came in, expanded its balance sheet with a long-term repo operation and loaned money to the commercial banks that needed liquidity. At that point, 547 banks asked for help. That liquidity infusion helped the markets stave off a bearish, deflationary downturn for a few months.

Politicians will act only when the cost of not acting exceeds the cost of acting. With markets nearing a panic now, that Minksy moment demanding a political response to market contagion is growing very near. As a result, I think we will soon see more money being printed and more liquidity injections as politicians attempt to stretch the problem out.

TGR: You do not expect a big explosion, but a long, painful, downward spiral?

FB: Not quite either one. I think Europe is on the edge, tap dancing with a deflationary collapse. I do not think the politicians want it to collapse; there is too much of a vested interest in keeping the euro together despite it being an inherently flawed structure.

If Europe wants to stay together, it must take steps toward becoming a real fiscal union. That means buying time by continuing to create liquidity and infuse money. Essentially, the politicians will resort to the printing press. The outcome of that will, over time, be higher inflation rates.

I do not expect an explosion of inflation, but over time there is a definite risk of an increase in inflation, as more and more money is created. Higher inflation combined with rather static "managed" exchange rates will over time amount to an internal devaluation of debt and paper money purchasing power.

TGR: What would that do to commodities?

FB: That is fundamentally very bullish for commodities, especially the precious metals but to some degree also food and energy. Commodities are generally scarce. If you exhaust an oil well, you have to find a new oil well to replace it. Gold is basically very scarce. Both commodity equities and commodities will probably do fairly well, especially equities, in the countries with the biggest problems.

TGR: And what about China? If China is not growing as much as predicted, what impact will Asia have on commodity prices?

FB: I think Asia is going to slow down. Europe is one of Asia's biggest export markets. If Europe slows down to a recession level, that will naturally trim growth and the inflation rate in Asia. China has a potential overcapacity problem due to overinvestment in capital over the last decade. That could take some time to work through, but it is a state-run economy with a better chance of navigating it. The Chinese government may be able to control credit by telling the banks they cannot lend and having the banks obey. Right now, China has an easing policy in place, which might help it mitigate some downside risk. I think China could be heading for a recession, but not for a major collapse.

TGR: Turning to the U.S. economy, we hear that things are improving: upticks in construction spending, declines in joblessness claims. This is an election year. Do we sell in May and go away, or can the markets continue to make further gains?

FB: There are a couple of interesting points to be made. With respect to sell in May and go away, the historic data suggest that is not a bad idea except in an election year. Typically, the few months in front of the election-May to October-are pretty good.

Seasonally, the stock market has a nice tailwind behind it. However, that said, I am afraid that the current news trends show just a steady sequence of bad news coming from Europe and that implies that markets will likely be hostage to the European debt crisis for some time to come. In addition, later this year, around Labor Day, it is estimated that the U.S. will face a second debt ceiling crisis, which is already looking to become a major pre-election issue, and could ultimately result in more credit rating downgrades, so the next few months have several major wildcards already built into the deck.

Finally, I want to acknowledge that this concept that PIMCO has stressed, the "New Normal," still seems to be the overriding theme, which is one of very slow nominal growth and actually flat to negative real growth. As an example, go back and take a look at the U.S. economy between 1995 and 2005, you had a little over a 5% growth rate. In 2008, the U.S. economy slowed to about a 2% growth rate. I think that is what we will see for quite some time to come, so one can say that we live in a world where growth itself is becoming a very scare commodity. In my work, I have dubbed the current recovery, the "Subdued Recovery" as you need to look past the headlines about employment improving to see the devil in the details.

Employment reports have improved, but when you look at the composition of the jobs that have been created since 2008, most of them have been in low- to moderate-wage categories. Since 2008, the U.S. has actually shed high-wage jobs. That has big implications for something like housing. To buy a house, the first thing you need is a job. The second thing you need is a high-wage job so you can afford to carry a mortgage. Oversupply in the housing market and scarcity of new high-wage job creation is not a recipe for a housing turnaround. To me, that means housing will stay low and maybe plateau for a long time.

On the average personal balance sheet, the two most important assets are a house and retirement savings. In a consumer-led economy, 72% of gross domestic product is consumer spending. If real estate and housing are going to remain depressed, it becomes very important to keep a retirement account buoyant because if any of those asset classes are depressed, a negative wealth effect is created. This leads to a slowdown in spending and the U.S. could easily relapse back into recession.

I think that is why we have seen more central banks intervening. Quantitative easing programs are being enacted every time the stock markets start to weaken. The idea behind that is to create asset inflation and keep retirement accounts at least reasonably buoyant. This way you keep a positive wealth effect and maintain consumer spending, at least enough to sustain slow growth. That is how you give the economy time to restructure and eventually work down and deleverage the big debt load.

TGR: Going back to the commodities, gold and silver are way down from last summer. Are you still bullish on precious metals and other commodities?

FB: I am getting very bullish on gold and silver. I think precious metals as an asset class will do very well and you will see new, all-time highs in both gold and silver over time.

TGR: The equities behind those commodities have not kept up even with the step-up that happened from last year. What will take those equities higher?

FB: That is a pretty interesting situation, a one-off anomaly. It looks as if the mining industry has been negatively affected by rising costs over the last few years. That, along with the fact that there has not been much yield for a long time, left the mining sector and some of the other resource sectors languishing.

I think that is starting to change. Looking out two to five years, if we do see a rising trend in inflation, I think money will look very favorably at resource-related stocks. Today, the multiples on some of those stocks are as cheap as they have ever been. A few years ago, gold mining stocks were selling at 30 to 40 times earnings. They are now down to 6 to 8 times earnings and, in some cases, 8 to 9 times cash flow. That is something you see maybe once every two or three decades. That means there are very cheap stocks and some outstanding values.

In addition, many companies are starting to boost dividends because, even with rising costs, they are doing very well and are reporting solid cash flow gains. So now, all of a sudden, you have a yield kicker. I think that could be the beginning of a very long, positive trend. Given the large markdown we've seen in the last few months, it seems that the market perceives a deflationary threat from Europe and is marking mining stocks down. I suspect that will turn out to be an over-reaction and you will find mining stocks at very attractive levels.

You can say the same thing about a lot of other groups: energy, oil services, large-cap energy, some of the master limited partnerships (MLPs), some major commodity producers in the grain market. There are a lot of areas that investors should be looking at.

TGR: What are some of the undervalued stocks you see in the mining sector?

FB: I like all of the large, blue-chip gold miners: Barrick Gold Corp. (ABX:TSX; ABX:NYSE), Goldcorp Inc. (G:TSX; GG:NYSE) and Newmont Mining Corp. (NEM:NYSE). I probably should disclose that I actually own some of those, so I'm talking my own book.

These companies are selling at very depressed multiples. Newmont recently instituted a nice dividend program, where if the price of gold goes higher, it will automatically boost its dividend. If gold goes through $2,000/ounce in the next few months, Newmont yielding a 4-5% dividend would be an attractive situation.

There are some good quality, midtier emerging seniors like Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) and Eldorado Gold Corp. (ELD:TSX; EGO:NYSE). You have the royalty companies that look attractive, like Franco-Nevada Corp. (FNV:TSX).

SteelPath has a very good fund that has MLPs yielding 6-7%. In the oil services sector, I would name Schlumberger Ltd. (SLB:NYSE) and land drillers like Baker Hughes Inc. (BHI:NYSE) and Nabors Industries Ltd. (NBR:NYSE). It may take a little bit more time and may be a little bit early on some of the land drillers, but as we get closer to the end of the year, they will have some write-downs coming. Once we get past that, a lot of the bad news will be up. Some of those stocks are selling at 7 to 8 times earnings. I definitely see good value in energy services and even in some of the larger-cap oils, like Murphy Oil Corp. (MUR:NYSE), Occidental Petroleum Corp. (OXY:NYSE), ConocoPhillips (COP:NYSE) and Chevron Corporation (CVX:NYSE).

If you want to look outside the U.S., there are the large Chinese oil companies. In Brazil, Petrobras (PBR:NYSE; PETR3:BOVESPA) is selling at some of the cheapest levels in years.

This is a good time to look at the natural resource-related stocks and look to take a very broad, cross-section approach where you own a little in different areas.

TGR: How do you evaluate a royalty company? Just because it pays a dividend does not mean it is a good company.

FB: The royalty companies in the mining space are Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) and Franco-Nevada.

Franco-Nevada is a blue-chip company. It has stellar leadership in Pierre Lassonde, who built up the company from nothing years ago. It has an outstanding portfolio and an enticing balance sheet. Franco-Nevada has resisted this particular downdraft. Large-cap, senior companies like Barrick, Newmont or Goldcorp have seen 30-40% declines in the last few months. Franco-Nevada has basically held even. I believe that Franco-Nevada today is a truly great growth story on the order of some of the best growth stocks we have seen in the last few decades. Royal Gold seems like a pretty well-run company, but in my opinion, I would not put Royal Gold in the same category as Franco-Nevada.

TGR: Assuming that we are facing an inflationary situation over the years ahead, what is your best suggestion in terms of an asset class for conservative investors?

FB: That is a major issue for the large number of retirees in the U.S., people who used to invest in certificates of deposit, because right now the banks are paying nothing. We have financial repression coming from the Federal Reserve. The book This Time is Different by Carmen Reinhart and Kenneth Rogoff talks about how the Fed will run negative real rates for years and reduce the value of its debts.

Federal Reserve Chairman Ben Bernanke is telling people he will keep the interest rates low for the next three years. I would take him at his word. When I look at the U.S. yield curve, with a 0% short-term rate and negative real yields all the way out to the 30-year bonds, I think that is a recipe for a weakening dollar. Of course, we could have a deflationary outcome in the near term, which could temporarily lift the value of the dollar, but I think a falling dollar will be a major theme over the next few years.

It will be really important for U.S. investors to look at non-dollar bonds. There is a good chance that we will see the final lows in Treasury bond yields in the next 12 months and Treasury bonds will move into a bear market. We hear about this bond bubble a lot. The bonds you have to be worried about are Treasury bonds, not foreign bonds, not emerging market debt, not necessarily even junk bonds.

There are a lot of bonds around the world that are negatively correlated to Treasury bonds. When Treasury bonds move into a bear market and long-term yields start to back up in the U.S., American investors will need to start looking at other income generating categories including assets like global bond funds and emerging market debt funds, and even TIPS funds and MLPs. There are bond categories where you can earn a conservative yield and generate a relatively safe total return. That is one idea: to think globally and become globally diversified.

TGR: Lastly, what is the best investing advice you ever received, whether you took it or not?

FB: The best advice I ever received was not to buy and hold anything, but to maintain a tactical approach and be flexible. Diversify is another good piece of advice.

In difficult economic times, your biggest single advantage is the ability to be tactical, to be nimble and to react to changing market conditions. The one big positive most investors have right now is that the menu of potential investment vehicles has really grown in recent years, including a proliferation of exchange-traded funds (ETF) and mutual funds.

Ten years ago, the average individual could not access Australian or South Korean bonds. Today, we can buy Hyundai stock denominated in South Korean won or South Korean bonds or Australian bonds. There are even ETFs for things like this. Last week, PIMCO launched an emerging market debt fund denominated in local currencies. These are the kinds of products I think will be very useful over the next few years in helping people tactically navigate the kind of economic conditions coming our way.

TGR: Great advice, Frank. Thank you for your time and insight.

Frank Barbera, CMT, is a veteran money manager and is currently the editor of The Gold Stock Technician (GST) newsletter, published since 1993. He uses technical indicators to analyze precious metals and mining stocks, as well as oil and the overall market. Barbera has also managed private equity capital for a number of years, most notably for the Los Angeles-based Caruso Fund, which earned returns in excess of 20% during the last bear market. In his role as a hedge fund manager, he sought to regularly trade precious metals, energy and currencies along with the broad stock market indices. In 2006, Barbera was included in the book Master Traders: Strategies for Superior Returns from Today's Top Traders.

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DISCLOSURE:

1) JT Long of The Gold Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of The Gold Report: Goldcorp. Inc., Franco-Nevada Corp. and Royal Gold Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.

3) Frank Barbera: I personally and/or my family own shares of the following companies mentioned in this interview: Newmont Mining Corp., Franco-Nevada Corp., Yamana Gold Inc., Barrick Gold Corp. and Goldcorp Inc. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this story.

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The People Have Spoken and Precious Metals Will Soar: Leonard Melman

Source: Zig Lambo and JT Long of The Gold Report (5/21/12)

http://www.theaureport.com/pub/na/13414

The elections in Greece and France have shown that in democratic societies the people are the ultimate deciders of how well the best-laid economic plans will work out in the long run. In this exclusive interview with The Gold Report, Leonard Melman, veteran precious metals analyst and publisher of The Melman Report, talks about the implications of the recent European elections on the prospects for the gold and silver markets. He also discusses some of his favorite stock picks for taking advantage of the huge rebound he sees in the metals markets later this year.

TGR: It seems that economists can plan and recommend, and politicians can negotiate and maneuver, and pundits can analyze and predict all they want, yet when the people don't want to play along, it can all mean nothing. Of course, we're talking about the elections in France and Greece. What's going on?

Leonard Melman: What's going on is that the monetary authorities in Europe have decided that austerity is the only way out of the financial dilemma, which I find kind of amusing, because it is their Keynesian activities that created those policies in the first place. Their decision now is that austerity, which is cutting back government programs, is the only thing that will work. The problem is that the public doesn't want their government benefits cut back. So, the message from the French people was that Nicolas Sarkozy, with his austerity, was no longer their friend and François Hollande, with his promise to end austerity, is now the new President. In Greece it's even more dramatic. Greece has been a funny culture for about 40 years living in a dreamland, thinking that nobody has to work and nobody has to pay taxes, which is sort of their national sport.

TGR: Not paying taxes is a national sport?

LM: It's a high art with the people in Greece. Yet they still expect their government to give them early retirement, generous unemployment benefits, etc. That has been supported for the last 40 years by massive government borrowing. And, that's the reality after this election. The people voted out those politicians who, at least on paper, wanted to cut back the size of government. Now there could be a real crisis directly ahead of us.

TGR: Does that mean the Eurozone is going to blow up?

LM: It's under the strongest threat since its creation 13 years ago. Greece cannot pay its debts. Because of the recent election, the monetary authorities who had been providing Greece with funds can no longer be sure that their program is going to be approved by the Greek government. If that's the case, they may suspend further payments to Greece and Greece will officially begin to default on its debt, which will be a likely cause for expulsion from the Eurozone.

If that happens, all Greek monetary matters will be restored to the previous currency unit, the drachma. Nobody has the foggiest notion of what the drachma will be worth because it's a totally artificial currency to begin with. We are seeing one consequence that has showed up in the market the last couple of days. Many people in Greece are getting scared and are converting their funds primarily into euros and U.S. dollars.

That's one of the reasons why the dollar has become stronger and precious metals have become weaker. It also raises the specter of a true run on banks as people withdraw their euro assets. Lying in the wings are Spain, Portugal, Italy, Ireland, Iceland, etc. In fact, there are nine Eurozone countries that are in recession. So, if the question is could the Eurozone blow up, I think it is a genuine possibility that several nations could be forced out, which would leave the Eurozone in a shambles.

TGR: With all of this bad news, the precious metals markets don't seem to be responding positively. When will they be impacted by this?

LM: For most Europeans, the U.S. remains the financial bastion of the world. So, when Europeans look to convert assets from weakness into strength, they usually look for U.S. government debt paper. Buying that debt paper makes the U.S. dollar stronger and gold and silver weaker in reflection. That will end when the U.S. dollar weakness begins to show itself; then we should have much more positive action in the metals.

TGR: In light of what's happened here recently, what are your expectations now for gold and silver?

LM: The number of people who are losing, or have lost, faith in conventional politicians and economists to guide the world's affairs is growing. As that continues, I believe more and more of their assets will be turned into the precious metals as the haven of last resort. The question is when. In my annual forecast I said, and still believe, that this trend would accelerate throughout the second half of the year, creating pressure for the precious metals to rise dramatically. October, November, December, I believe, will be great months for the precious metals.

TGR: Is it going to take some great catalytic event for this to happen or will it build slowly?

LM: The French and Greek elections could have provided that catalyst although they're talking about another election in Greece within a month. But, this has shown there's a great difference between what the politicians and economists want to do and what the public will accept.

It's like a drug addict who vows to quit because he knows the harm drugs are doing to him. Three or four days after quitting he's in the agony of withdrawal and will do anything to get more of the drugs. That's the case with several of the nations in Europe. They know the damage that excessive borrowing has done and now they're going to stop cold turkey. But, the people relying on that government borrowing don't want to lose their welfare, retirement or other government checks and they're rioting in the streets. That rioting and disillusionment is in its early stages and could get much worse. That's another reason for precious metals to go much higher. The resolution to undergo austerity is not going to be matched by the public's deeds.

TGR: So how high could gold and silver go?

LM: The downside over the next two months could be about $1,400/ounce (oz). During the latter part of the year, I have forecast a top in gold of about $2,400/oz and a top in silver about $55/oz.

TGR: It seems like $55/oz is a little low on silver compared to $2,400/oz gold. You're not a major silver bull?

LM: I am. Let's say gold bottoms at $1,400/oz and then goes up to $2,400/oz. That's a gain of about 65% or 70%. If gold gets down to $1,400/oz, silver could hit $24-25/oz. If it goes to $55/oz from $25/oz, that's a gain of about 120%. So, as the acceleration develops, I expect silver to go faster than gold. It's been weaker than gold, so it will take a little longer to advance. But, I have always believed that in powerful metals bull markets, silver outperforms gold on the upside, just as during declines it falls faster than gold.

TGR: So, you aren't looking for $75/oz silver as some people are?

LM: Not quite this year. But if this massive disillusion and even distrust of public monetary authorities occurs, who knows what numbers we could be looking at in 2013? But, $55/oz seemed about right when I made the forecast in writing and I'll stick with it.

TGR: Going to mining stocks, which you cover in your Melman Report, the big question that most investors have is when are their mining stocks going to take off and start behaving the way they expect? What do you think?

LM: A couple of numbers illustrate just how much mining stocks have underperformed. In mid-2008, gold was about $900/oz and the Philadelphia Gold and Silver Stock Index (XAU) was 205. Now with gold just under $1,600/oz, the XAU is 147. So, while gold has almost doubled, the major mining shares have dropped by an average of about 40%, and many of the junior shares have fallen by more. So, it's been a dismal period, especially in the last year.

The major difficulty during the past few years has been the longer timelines in advancing exploratory projects to production, due to the regulatory and environmental hurdles. When I started writing about gold and trading shares as a stockbroker in the mid-1970s, it wasn't unusual to advance a project from discovery to production within two or three years. So, you only had to raise sufficient capital to cover that period. Now projects can take 8-15 years to get to production, if they succeed at all. That results in greater capital requirements and a lot more share dilution. That's having a negative impact in the junior sector. The major mines seem to correspond much more closely to the price of the metals themselves. But for the juniors, that long regulatory process creates a major problem for share prices and dilution.

TGR: Let's revisit some of the stocks you talked about last April.

LM: Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.A) continues to produce and have positive cash flow. Its share price in the last year pretty well corresponds to the price of silver, being leveraged in both directions. I like what Great Panther is doing and have no problem suggesting to people that this is a share of real interest.

We also talked about Commerce Resources Corp. (CCE:TSX.V; D7H:FSE; CMRZF:OTCQX) last year. Commerce has done excellent exploration work. It still has the major tantalum project that has been its focus for many years. But, it's also advancing rare earth projects in Québec and other places. So, Commerce continues to do the things that in the past have produced positive results. It's just simply faced with a very adverse marketplace at the moment.

TGR: What do you mean by "adverse"?

LM: The rare earths have been hot numbers and then cooled off. When China first announced that it was going to reduce exports to the West, rare earth shares in North America went crazy on the upside and have come back almost as rapidly. So, it's a different situation with them. They're more a hot play of the moment as opposed to gold, which is much longer term.

TGR: But, it's not too late for rare earth to help Commerce's stock price?

LM: Not at all, because rare earths blows hot, then cold. But, then they could very easily blow hot again. The fundamental argument for rare earths is excellent. They are absolutely essential for modern technology, including defense weaponry systems. The fundamental demand for them has nowhere to go but up and questions have been raised about Chinese supply, among others. So, I think the North American rare earth junior mining shares could easily get hot again.

TGR: Will the fact that Commerce has both heavy and light rare earths make a difference?

LM: That's certainly a positive. The more markets you can attract, the better the prospects become.

TGR: How about some of the other companies you talked about that you think are pretty attractive at this point?

LM: I just visited El Tigre Silver Corp.'s (ELS:TSX.V; EGRTF:OTCQX; 5RT:FSE) project in Sonora State, Mexico. It's a fascinating story. The previous operators from approximately 1900 to about 1935 mined approximately 75 million ounces of silver. It was incredibly high-grade material grading an average of 40 ounces per ton (oz/t). They left behind tailings containing around 2.6 to 2.7 oz/t silver. At current prices, that's potentially very profitable material. I believe there are about 1.2 million tons of tailings plus other material that was used to backfill where previous operators had mined.

The net result is that El Tigre is working to get those tailings into production as fast as possible. It hopes to start producing revenue in late 2012 or very early 2013. The project area is entirely prospective. It has very large landholdings near the tailings deposit with the prospect of very early revenues, which will then finance continued exploration. There certainly is the possibility of finding more 40 oz/t ore in the future. Plus, it is also searching for gold and has some very good target areas for that. So, I like the El Tigre story from that basis along with the revenue coming in to finance exploration and development.

TGR: How is it going to reprocess these tailings?

LM: It's going to build a Merrill-Crowe process facility adjacent to the tailings. The material's already crushed so it can do the basic recovery right near the project. That is a very good simple plan.

TGR: What about SilverCrest?

LM: SilverCrest Mines Inc. (SVL:TSX.V; STVZF:OTCQX) is another company I like that is in a similar situation. It has a producing project in northern Mexico called the Santa Elena mine, northeast of Hermosillo in Sonora State. It produced 134,000 oz silver and 9,000 oz gold in the first quarter of the year, giving it significant revenues. It's using those funds to develop additional resources around the mine, particularly to advance a very prospective project called the La Joya, which is in Durango State. So, again, it has revenues, financing and significant exploration and development, rather than having to raise borrowed capital or encounter heavy dilution.

TGR: How soon might it have results or a preliminary economic assessment (PEA) on La Joya?

LM: It's moving very rapidly but I have not yet heard of a PEA or a bankable feasibility study. But, it is advancing its exploration quite rapidly and it could be a very sizeable discovery. Those are the kind of companies that I really think people should do their own due diligence on and explore seriously because the long-term prospects seem to be valid.

TGR: How about some others?

LM: One of the companies I wrote about several years ago is Barkerville Gold Mines Ltd. (BGM:TSX.V), which started production, but apparently encountered some sort of difficulty and temporarily suspended it. It's near the town of Barkerville, which is a great historic mining site in British Columbia surrounded by active exploration and development, where the prospects for future discoveries appear very solid. Now it's just a question of getting back into production and kicking up the cash flow once again.

TGR: What about anything in South America?

LM: I was recently on a tour of GMV Minerals Inc. (GMV:TSX.V) in Guyana, which has great mining prospects and excellent geology. GMV has a very prospective property, which it's already drilled and it has a new program underway. Given the potential for sizeable discoveries, it's a prospect with an excellent risk/reward ratio. Unfortunately the shares have been beat up in this dismal market and have fallen fairly rapidly, from about $1/share last summer, and are $0.09 to $0.10/share now. So, you're risking $0.09 or $0.10/share but with a very significant upside if it makes an excellent discovery.

Just a little note about the geology of northern South America. One of my noted geologist friends told me that the region from Colombia, across Venezuela and the small three countries of Guyana, Suriname and French Guiana, and all the way across to Africa, is excellent elephant hunting territory. So, GMV's in a good place and just has to overcome some problems.

TGR: Would you put Abzu Gold Ltd. (ABS:TSX.V; ABZUF:OTCQX) in Ghana in that bucket?

LM: I've recently talked to Abzu and it is exploring and developing some very excellent projects in Ghana in areas where many of the majors have opened mines. It appears to have great potential. I've only had one telephone meeting with the president of the company and I'm still in the learning process on Abzu. It has what appear to be some very exciting prospects and Ghana has a reputation for being one of the very best African nations for mining/development.

TGR: How about companies in the U.S.?

LM: I like good projects in the United States. Bullfrog Gold Corp. (BFGC:OTCBB) has two projects, one in Arizona and another in Nevada, that have had a lengthy history of exploration and a mountain of material to work with, so it's not starting exploration from scratch. Besides the Bullfrog Hills project in Nevada, its Vulture Mountain project in Arizona has metallurgical work showing gold recovery of up to 90% and even 96% on finely ground material, which is very high. Again, it's early stage but the potential exists for some very excellent risk/reward ratio investing.

TGR: Any others in North America?

LM: There is another company of significant interest called GreenLight Resources Inc. (GR:TSX.V). Its projects are located in New Brunswick and Nova Scotia in the Canadian Maritimes, which haven't had a lot of precious metal mining. It's mainly been coal mining. Coincidentally, New Brunswick was just named the number one jurisdiction in the Fraser University survey of mining jurisdictions. The province encourages mining very significantly. GreenLight has a host of projects and it's already found joint venture partners for two of them, enabling the company to bring in cash for other purposes plus having other companies advance the projects on their own dollar. Greenlight has properties that include graphite and rare earths, which are certainly as hot as you can get, along with magnesium, gold and silver. With a good inventory of projects, joint venture partners and cash at its disposal, I think this is definitely a company worth investigating.

TGR: Where do you think things are headed from here and what should our readers be focusing on to avoid the pitfalls and make some profits when this market turns around?

LM: I like the juniors with production financing that are actively building facilities to go into production, or those like SilverCrest that have already achieved production. That enables them to grow so much faster without serious dilution.

I still love gold and silver. Silver has the added bonus of being an industrial as well as an investment metal. My big picture tells me that the great force behind gold and silver in the coming months and years is the growing fear factor. Once the public perceives that international financial matters are really getting out of control, they will start moving assets from conventional investments into the precious metals.

There was an article in Barron's in December 2010 where the author stated that, according to his research, when inflation begins to accelerate toward hyperinflation, the precious metals tend to rise 2,000% to 50,000% faster than the rate of deterioration of currency. That's an enormous factor down the road and I think, historically, it makes some sense. So, my big picture is that disillusionment with international financial monetary authorities is growing and fear will be rising. Once the image of the U.S. dollar as a pillar of strength begins to diminish, which I expect in the second half of this year, I think we will see real fireworks in the precious metals.

TGR: What is the best investing advice you've ever received, that you've either taken or wished you had taken? And, what's the best advice that you have for people who are just starting out as investors?

LM: The best investment advice that I've received and want to pass on is to look for the one play that, considering the risk involved, has odds that are truly powerful in its favor and that will provide outsize rewards. And, I'll tell you exactly which one I like; the only question is the timing. Right now, interest rates are the lowest they have ever been in history. The one interest rate future that stands out in my mind is Federal Reserve funds that are yielding virtually zero for the short term. Short-term notes are quoted at about 99.87 vs. 100.00 face value. So, they're yielding 0.13% with virtually no risk to the downside. All you're risking is 13 basis points because interest rates aren't likely to ever go below zero. The kicker is that those contracts extend more than two years out. The spring of 2014 contracts are trading now at about 99.65. So, there's 35 points potential downward action. Over the next two years, the pressure to start raising interest rates is going to become severe. If rates reach 3%, these contracts fall to 97.00, which would provide about 265 points of potential profit. Anytime you can put logic behind an investment and have a potential reward that's 9 or 10 times the potential risk, then I'm very interested. I think the logic behind interest rates starting to rise within the next two years is quite powerful.

TGR: Great advice. Thank you so much.

Leonard Melman will be sharing his Precious Metals forecast for the for the 2nd half of 2012 during the World Resource Investment Conference in Vancouver, which takes place on June 3-4, 2012. Click here for more information.

Leonard Melman, publisher of The Melman Report, has been writing about precious and base metals for more than two decades as monthly columnist for California-based ICMJ's Prospecting and Mining Journal and Vancouver's Resource World Magazine. He focuses on how political and financial considerations impact the world of mining and the prices of the metals.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

DISCLOSURE:

1) Zig Lambo of The Gold Report conducted this interview. He personally and/or his family owns shares of the following companies mentioned in this interview: None.

2) JT Long of The Gold Report conducted this interview. She personally and/or her family owns shares of the following companies mentioned in this interview: None.

3) The following companies mentioned in the interview are sponsors of The Gold Report: Great Panther Silver Ltd., Commerce Resource Corp., SilverCrest Mines Inc., Barkerville Gold Mines Ltd., GMV Minerals Inc., Abzu Gold Ltd. and Bullfrog Gold Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.

4) Leonard Melman: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: SilverCrest Mines Inc., El Tigre Silver Corp., Great Panther Silver Ltd., GMV Minerals Inc. and Greenlight Resources Inc. I was not paid by Streetwise Reports for participating in this story.

Streetwise - The Gold Report is Copyright © 2012 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

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The Recovery Is an Illusion: John Williams

Source: JT Long of The Gold Report (5/18/12)

http://www.theaureport.com/pub/na/13404

John Williams, author of the ShadowStats.com newsletter, shines light on his interpretations of the GDP, CPI, unemployment and other government statistics in this exclusive Gold Report interview from the recent Recovery Reality Check conference. Highlights include what the money supply measures tell him and why QE3 will be a hard sell.

The Gold Report: John, at the recent Casey Research Recovery Reality Check conference you described the economic recovery heralded by the Obama administration as an illusion based largely on skewed inflation data. Can you walk us through why, based on your calculations, a recovery is impossible?

John Williams: We can start with the gross domestic product (GDP), which like most economic reports is adjusted for inflation. If you take inflation out of it, what is left should be changes in economic activity, as opposed to changes from prices going up or down.

Reported GDP activity for Q3/11, Q4/11 and Q1/12 was above where it had been going into the recession. Formally, that is a recovery. The problem is that no other major economic series shows that same pattern, which is a physical impossibility if the GDP numbers are accurate.

I contend that the recovery is an illusion created by the government using inflation numbers that are too low when deflating economic series. The lower the inflation rate you use for adjustment, the stronger the resulting inflation-adjusted growth.

In addition, a number of reports such as payroll employment have no ties whatsoever to pricing or inflation. Payrolls have risen a little bit since the trough, but they just recently recovered the levels they hit before the 2001 recession, some 12 years ago. They have not come close to their pre-2007 highs.

TGR: Would you include the unemployment rate among those unreliable reports, given that it does not count people who have stopped looking for jobs or are underemployed?

JW: It is a matter of definition, but that is right as to the headline number at 8.1%. Looking at the number of people who consider themselves unemployed, there has been no real decline in the unemployment rate. It remains at a level not seen outside of the worst recessions.

If you include people who are out of work and have given up looking for work, but consider themselves unemployed because they would take a job if one were available, the unemployment rate is something over 22%. Again, this is not a number tied to inflation.

TGR: You compared that to the Great Depression in your presentation.

JW: During the Great Depression, the estimated unemployment rate peaked in 1933 at 25%. But that included 27% of the population living and working on farms. Today, less than 2% of the population works on farms. A more meaningful comparison perhaps would be the non-farm unemployment rate, which in the 1930s peaked at about 35%. We are still shy of that.

TGR: Which is a more accurate indicator, the payroll employment rate or the GDP?

JW: The indicator here, in terms of payroll employment or the number of jobs, is well off its peak. There has been no employment growth in 10 years, despite 10% growth in the population. There is no recovery based on the employment data, which is a coincident indicator. That is a more accurate picture of what is happening in the economy than the rosy scenario coming out of the GDP estimates.

Another series that has no ties to inflation is housing starts. This is perhaps the hardest hit area of the economy. It peaked in 2006, has dropped about 75% and is bottom-bouncing. It is stagnant at a historically low level.

Consumer confidence is the same. It plunged and is bottom-bouncing.

TGR: Consumer liquidity is related to consumer confidence. There is a lack of positive, inflation-adjusted income growth. Your statistics show the real average weekly earnings for production for non-supervisory employees was down 0.6% from the first quarter of 2011. It peaked in 1973 and has been going downhill ever since. How important are real earnings and associated retail spending to a recovery?

JW: They are quite important. We are not in recovery because consumers are in severe financial straits. There is a structural problem with income. We have lost a lot of jobs offshore-generally higher paying production jobs-due to our ever-expanding trade deficit.

Not only are average earnings down at an individual level, so is household income. In the 1970s, when earnings peaked, it was more common to have one person in the household working, usually the husband, with the wife at home raising the kids. As individuals saw their income drop off faster than inflation, many households needed to have two people working to make ends meet.

Adjusted for the government's inflation measure, household income continues to shrink month after month. Without real growth in income-growth that's faster than the pace of inflation-you can never have sustained, positive growth in consumption. You can buy short-term growth through debt expansion, but the key is sustainable growth.

TGR: Student loans, which are up 29.9% from 2011, have been in the news lately. Are student loan burdens and their interest rates having a real impact on the economy or are they just an isolated piece?

JW: I think of student loans as one part of outstanding consumer credit. A lot of people looking at the system's liquidity believe that consumer credit outstanding has almost reached its pre-recession high. That is due solely to the expansion of student loans.

Normal consumption lending-credit cards or fixed loans-has been dropping off and is bottom-bouncing. The extraordinary growth in student loans looks like a big problem going forward, a bubble like the mortgage market.

If you look at the overall bank lending, banks' balance sheets are so impaired that they cannot lend normally. Everything considered, bank lending is flat.

TGR: Is our GDP structured such that domestic consumer spending is needed for a recovery?

JW: Consumer spending accounts for 71% of the GDP and everything else is pretty much related to it in some form or another.

For example, look at retail sales. If you remove the artificially depressed inflation numbers imposed by the government, you see a pattern of plunging activity and bottom-bouncing. The same is true for industrial production.

The liquidity problems are at a point now that consumers, both in terms of income and credit, have not been in a position to fuel a recovery. There is no recovery coming. That has all sorts of implications for the markets.

We had a financial panic and a near collapse in 2008. The people in Washington, D.C. had to prevent a collapse. The primary function of the Federal Reserve is to keep the banking system healthy, to keep it afloat. Taking care of the economy and containing inflation are secondary goals.

The federal government and the Fed created, spent, guaranteed or loaned whatever money was needed to keep the banking system alive, and the government will do that again. The problem is, that creates inflation and is not very effective. Yes, we avoided a systemic collapse, but the banking system is still in trouble four years later. The solvency crisis continues. The economy has not recovered. All they have done is kick the proverbial can down the road.

TGR: What do your money-velocity statistics show relative to the existence or absence of a recovery?

JW: I still track what used to be the broadest measure of the money supply, M3. There are three M measures. The M1, the smallest measure, includes cash, checking deposits, traveler's checks and such. The M2 includes M1 plus savings accounts, small time deposits and retail money market funds. That is as far as the Fed goes today.

It used to have an M3 category, which included M2 plus substantial categories such as institutional money funds and large time deposits. The M3 is almost twice as big as the M2. The Fed stopped reporting M3, but I still track it.

A lot of people have noted the strong growth in M2 recently, but I believe that growth is out of context. That growth is due to funds flowing out of M3 accounts into M2 accounts. The broadest measure, M3, had some recent growth, but it is beginning to stagnate and turn down. That is a sign of stress in the system.

I put together a stress measure based on the ratio of M3 to M2. When the ratio is high, you generally have good confidence in the banking system. Big, uninsured funds are flowing into the banks.

At the crisis point in 2008, the ratio plunged. Immediately, the Fed introduced quantitative easing (QE). When that failed to bring the banks around, it introduced QE2. The ratio of M3 to M2 continues to worsen. I would expect we will see QE3 from the Fed in the not-too-distant future.

The Fed may call it something else, because QE3 will not play well politically to announce the infusion of a couple of trillion dollars into the banking system. The Fed will say it is necessary to stimulate a slowing economy.

This is a very dangerous situation, one that eventually will lead to a massive decline in the U.S. dollar. Global confidence has been lost in the dollar. I think the Fed's next action will trigger renewed dollar selling, leading to dollar inflation, which is already starting to accelerate. Weakness in the dollar tends to spike oil prices, a big factor behind domestic inflation.

We have been having inflation in a weak economy. Instead of being driven by strong demand-which is a relatively happy circumstance for having inflation-inflation today has been created by a weak dollar and unstable monetary policy by the Fed. That is not a happy circumstance. It is a circumstance that promises much higher inflation as people look at preserving their assets.

TGR: The federal government has been reporting inflation between 2% to 3%. You just updated your 2012 hyperinflation report. What is real inflation right now?

JW: The government's numbers are accurate by its definition, but they are not what people think they are. Over the years, the methodologies have changed.

The average person thinks that the Consumer Price Index (CPI) measures inflation, that it reflects the cost of maintaining a constant standard of living. They also believe that it reflects out-of-pocket inflation. It does not, nor does it reflect the cost of maintaining a constant standard of living.

After World War II, the CPI was used to measure the cost of inflation for a fixed basket of goods and services. For example the basket of goods might contain a gallon of gas, a pound of steak and a loaf of bread. The government would measure the same, year after year. However much the price had gone up, that was how much inflation had gone up.

In the 1990s, Fed Chairman Alan Greenspan and Michael Boskin, then chairman of the Council of Economic Advisors, started pushing the story that the CPI was overstating inflation. They figured that adjusting the CPI reporting would reduce the Social Security cost-of-living adjustments. That is why they did it. If they had not changed the CPI, Social Security checks would be about double what they are today.

But at the same time, they introduced a substitution that made the CPI worthless for anyone trying to use it as a target for calculating, for example, what their minimum return on investment should be in order to maintain their standard of living.

If you use an inflation rate that is too low, you get a too-strong inflation growth. You see recovery that is not there, which is what we've been seeing.

Other changes have been made beyond the CPI substitution. Usually, when the government changed its methodology, it published an estimate of the change's effect on inflation. If you add all of those changes together, you find that, since 1980, about five percentage points have been taken away from the annual inflation rate. Another two percentage points can be attributed to changes the government did not consider methodological and therefore did not estimate the effect, but they are very much a factor.

So, seven percentage points have been taken out of the CPI. If inflation is being reported at 2.5%, adding that 7% back in puts inflation up around 9.5 to 10% using the 1980 CPI methodology. Using the 1990 methodology, it would be 6% to 7%. That is what people need to be making to stay ahead of inflation.

TGR: What can individuals do to protect themselves if the hyperinflation you are predicting comes to pass?

JW: We keep moving down the road to hyperinflation. This is not the time to worry about short-term gains or losses in the marketplace. It is the time to make sure your basic wealth and assets are protected against inflation, and that you are in a position to ride out a bad financial storm ahead.

TGR: How do you do that?

JW: Your primary hedge is physical gold; precious metals, including silver; and some assets outside the dollar. I still like the Swiss franc-its ties to the euro will not last. I like the Australian dollar and the Canadian dollar. Having funds actually outside the U.S. is a plus. To get through the crisis, you need a hard asset that is liquid for the near term.

Over the longer haul, gold stocks are wonderful hedges, but if the system gets into real trouble, which I think it will, you may have liquidity issues in the market. I am talking about limitations on the physical ability to transact in the market. You may also have liquidity problems with real estate, although over time, real estate is a tremendous hedge against inflation.

TGR: What is the best investment advice you ever received?

JW: Well, I do not generally take investment advice, but the best investment advice I ever gave myself was to buy gold.

TGR: Advice our readers will appreciate. John, thank you for your time.

Walter J. "John" Williams has been a private consulting economist and a specialist in government economic reporting for 30 years. His economic consultancy is called Shadow Government Statistics. His early work in economic reporting led to front-page stories in The New York Times and Investor's Business Daily. He received a bachelor's degree in economics, cum laude, from Dartmouth College in 1971, and was awarded a Master of Business Administration from Dartmouth's Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar.

Williams went into much more detail about the economic troubles he foresees for America during his presentation at the recent Casey Research Recovery Reality Check Summit. You can hear it in its entirety, as well as every recorded summit presentation with the Summit Audio Collection. It contains over 20 hours of recordings and features contrarian investing legend Doug Casey, Porter Stansberry of "End of America" fame, former director of the US Office of Management and Budget David Stockman, and Thoughts from the Frontline Editor John Mauldin. All together, 31 of the greatest financial minds of our time were on hand to share their views of the economy and offer actionable investment advice, including specific stock picks, to protect you in these troubling times. For more information about how to add this invaluable collection to your resource library, click here.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

DISCLOSURE:

From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise. Charts provided by Shadow Government Statistics. Interviews are edited for clarity.

Streetwise - The Gold Report is Copyright © 2012 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

101 Second St., Suite 110

Petaluma, CA 94952

Tel.: (707) 981-8999

Fax: (707) 981-8998

Email: jluther@streetwisereports.com