Is Gold In A Bubble?

``Gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium." - Murray N. Rothbard, What Has Government Done to Our Money?

In this issue:

Is Gold In A Bubble?

-Fed’s Quantitative Easing Update

-Misrepresenting Gold’s History

-The Misunderstood Role Of Central Bankers

-Appraising Gold And The Origin of Money

-Crack Up Boom Versus Bubble Psychology

Fed’s Quantitative Easing Update

The US Federal Reserve has vastly accelerated its purchases of US treasuries to the tune of about $7 billion, based on the data from the Federal Bank of Cleveland. This has been in breach of its self-imposed limits.

Likewise, the increased treasury purchases appears to be in line with the commencement of the next wave of mortgage resets that seems likely to signify as the next round of strains to the US banking system. As previously noted, ``With the risks of the next wave of resets from the Alt-A, Prime Mortgages, Commercial Real Estate Mortgages, aside from the Jumbo and HELOC looming larger, they are likely to exert more pressure on the banking system” [see past discussion in 5 Reasons Why The Recent Market Slump Is Not What Mainstream Expects].

Figure 1: Sifma, Zero Hedge: US Mortgage and US Treasury Market

Since the crisis erupted, the US government, through its GSE agencies, has virtually been THE mortgage market (see left window: blue bars FED agency mortgages, gray bars private labels).

We see the same trend for US treasuries, the US government via the Federal Reserve is on its way to become the buyer of last resort- since the activation of the QE program last March, Fed purchases (black line, right window) of US treasuries accounts for almost half of the market (Zero Hedge) displacing foreign official holdings (blue line).

The above developments dispel on the flawed notions that the US government will refuse to assume the literal role as the buyer of the last resort, especially under extreme circumstances. As a political institution, once a political expediency arises-such as a renewed threat to the survivability of its banking system that could risk undermining the US dollar standard system-the US Federal Reserve will act according to its perceived priorities. And the actions in the above markets have been telling.

Misrepresenting Gold’s History

The recent spike in gold prices has evoked shrill cries of a “bubble”.

Does rising prices automatically constitute as a mania? What distinguishes a mania from structural changes?

For us, the fundamental issue is to understand the role of gold in the marketplace or in the economy than simply presuppose or generalize a bubble.

Basically, the gold debate can be delineated into two extreme camps: the gold bugs (ideological believers that money should be comprise or be backed by gold or commodity) and its antipode (ideological believers influenced by JMKeynes where gold or commodity as money is deemed as relic or a “barbaric metal”).

Of course the issue can’t be seen as simply black or white because the mainstream fundamentally operates on gray areas, out of the lack of understanding. But have mostly been tilted towards the “Barbaric” metal persuasion.

Here are some examples, (bold emphasis mine)

The Bloomberg quotes the highly distinguished trader Dennis Gartman, ``The gold bull run is not predicated upon inflation but is instead predicated upon the notion that gold is becoming a reservable asset.”

Or from Socgen’s Dylan Grice, ``How can something with no cashflow or earnings power be valued? The simple answer is that it can't be. Intrinsically it is pretty much worthless.”

Ironically Mr. Grice predicts that the price of gold to reach $6,300 primarily because of bubble psychology, the discount value of Gold relative to US dollars issued and “insolvent governments”.

On the other hand, Mr. Gartman does not qualify on the definition of, as well as, elaborate on WHY and HOW gold is “becoming a reservable asset”.

For the Barbaric metal camp, Gold is presented mostly as an unworthy investment (see figure 2)

Figure 2: Socgen: Real Prices of Gold

According to Mr. Grice, ``But the same chart also shows how unreliable gold has been as a store of wealth. A 15th century gold bug who'd stored all of his wealth in bullion, bequeathed it to his children and required them to do the same would be more than a little miffed when gazing down from his celestial place of rest to see the real wealth of his lineage decline by nearly 90% over the next 500 years (though he might take comfort from the knowledge that his financial advisor would be burning in hell). More recently, had you bought at the peak of the last bull market in January 1980 for $850, you'd have suffered a nominal decline of 70% by the time it bottomed in 1999. On an annualised basis you'd have lost 6% pa nominal and 9% real.” (bold highlight mine)

Mr. Grice’s premise seems plausible but blatantly misleads. Why?

Simply because Mr. Grice forgets to remind us that gold (including silver) was NOT held for investment, but was instead USED as money during the aforementioned eras.

And as money, gold and or silver was subjected to liquidity flows depending on the society’s perception of uncertainty, which ultimately determines the level of demand for money relative to the available supply of money. To quote Austrian economist Hans-Hermann Hoppe, ``The holding of money is a result of the systemic uncertainty of human action.”

For instance, in the mid 16^th century the fall of the real price of gold (exchange value relative to other commodities) was mainly due war “conquest” financing.

According to Professor Niall Ferguson in his latest book The Ascent Of Money, ``during the so-called “price revolution”, which affected all of Europe from the 1540s until the 1640s, the cost of food-which had shown no sustained upward trend for three hundred years-rose markedly.” [italics mine]

Professor Ferguson’s account appears very consistent with the real price trend of gold on the chart, especially on the 300 years prior to the eon of war financing.

Moreover, following the Spanish conquest of the Inca Empire by a Spanish colonel Francisco Pizzaro, huge precious metals (money) streamed into Spain, many of which came from the Potosi (otherwise known as Domingo de Santo Tomas-mouth of hell) mines in Bolivia.

Again from Niall Ferguson’s Ascent of Money, ``between 1556 and 1783, the rich hill yielded 45,000 tons of pure silver to be transformed into bars and coins in the Casa de Moneda, and shipped to Seville…Pizarro’s conquest, it seemed, had made the Spanish crown rich beyond the dreams of avarice.” Thus, the relative surplus of gold and silver against other commodities explains anew the depressed real prices of gold and is consistent with the price action of gold chart above.

Yet going into the industrial revolution in 1800s-1913, one would observe that the real price of gold has mostly stabilized.

Notes Professor Michael Rozeff, ``Before there is a central bank and when metals are being used in the money and banking system, there is greater price stability. There is no contest. Pre-1913, the price level falls gently each year on the average by less than ½ of one percent. After 1913, the price level rises each year by 6.8 times as much as it used to decline before 1913 (in absolute value.)” [italics his]

Following the introduction of the US Federal Reserve in 1913, real prices of gold have gyrated mostly higher over time. And the upside volatility has been accentuated after the Nixon Shock or when former President Nixon closed the gold window or ended the Bretton Woods system on the 15^th of August 1971.

In other words, the chart above from 1265-1971 or in 7 centuries gold chiefly performed the role of money. Today, this hasn’t been the case...yet.

To conclude, to use gold real prices as a metric to justify on gold’s poor investment returns is highly inconsistent, flawed and a misrepresentation. Gold’s role today isn’t like in the past where gold functioned as a medium of exchange, which should be nuanced from the current role as non-money commodity.

To add, since gold isn’t used in transactions by the general public today, then fundamentally gold isn’t money. Only to the eyes of central bankers could gold be deemed as a form of money. Thereby comparing gold as money and gold as non-money is like comparing apples to oranges.

The Misunderstood Role Of Central Bankers

Some have cited the activities of central banks as possible indication for inflection points on gold prices. For instance, the sale of UK Chancellor Gordon Brown of 400 tonnes of gold reserves in 1999 coincided with the end of the bear market. In other words, central bankers are thought to resemble retail investors, whom traditionally play the role of the greater fool during market extremes.

Yet like all human beings, while central bankers are subject to the corporeal frailties and could be influenced somewhat by the developments of the marketplace, what seem glaringly overlooked by mainstream’s oversimplification are the governing incentives from which the political bureaucracy operates on.

As Professor Ludwig von Mises rightly notes of the crux of the distinction, ``For it is a fact that as a rule the authorities are inclined to deviate from the profit system. They do not want to operate their enterprises from the viewpoint of the attainment of the greatest possible profit. They consider the accomplishment of other tasks more important. They are ready to renounce profit or at least a part of profit or even to take a loss for the achievement of other ends.” (bold emphasis mine)

So unlike typical investors driven by profits, political leaders and the bureaucracy, being political actors, fundamentally operates on political goals. In short, central banks transactions in the marketplace may represent price insensitivity, and importantly, are most likely subject to political ends that may be extraneous to market forces.

Manias are essentially founded by a massive credit boom and underpinned by government policies to create boom conditions, from which induces investor irrationality responses based on expectations of perpetually easy profits. Therefore, a gold mania cannot mechanically be attributed to central bank activities because this would highly depend on the underlying political goals in support of their activities.

Furthermore, a mania depends on pyramiding leverage or accelerating credit boom. At the present moment, central bank buying of gold has been funded from their stash of US foreign exchange surpluses.

The tiny resort island of Mauritius recently followed India to acquire 2 metric tons from the IMF (Bloomberg).

Figure 3: Virtual Metals: Gold Demand Trends, Central Banks As Net Buyers

In addition, central banks accounted for as net buyers for the second successive quarter this year, where according to mineweb.com, ``the official sector was a net purchaser of gold in the third quarter, although the figures are low, at five tonnes in Q2 and 15 tonnes in Q3. The underlying trend is "expected to remain intact" as central banks, like private investors, continue to look for diversifiers, especially with respect to the dollar. Central banks outside the CBGA agreement that the WGC identified as gold purchasers included Mexico and the Philippines.” (see Figure 3-right window)

It is noteworthy that gold prices continue to rise, in spite of the massive net gold sales by the official sector even when gold’s bullmarket has been on the fringe.

Again from mineweb.com, ``at the end of 1998, world central bank holdings of gold amounted to 33,500 tonnes and that by the end of 2008 this was down to 29,700 tonnes so that the rate of disposal over the decade was the fastest in history - and still the price doubled.”

The important point is that the complexion of gold’s pricing dynamics has been significantly transforming from traditional “jewelry” based to “investment” based (left window). And this has been responsible for today’s buoyant gold prices, even in the face of central bank selling.

There is no better way to parse on central banking mindset than from their statements or “rationalization”. Mineweb’s Rhona O’Connell covers M. Paul Mercier, the European Central Bank's Principal Advisor in Market Operations, who in a recent speech gave four reasons why central bankers value gold.

From Ms. O’Connell (all bold and italics emphasis mine), ``The four primary reasons for a central bank to hold gold were listed as follows:

-Economic security. The physical and chemical characteristics of gold with its high density and resistance to oxidation, for example (unlike silver, the oxidation of which is the cause of tarnishing) combine with the fact that it is the only asset that is no-one else's liability to make it a vital element of foreign exchange reserves. Holding another party's securities always carries the possibility that the behaviour of the counter-party can affect the value of those securities.

-Unexpected needs. There is always a possibility, albeit very low, of highly damaging developments such as war or high inflation that can have a severe impact on sovereign debt, or result in a country's isolation. As the ultimate global means of payment gold is an important insurance policy. It can also be used as international collateral (for example the loan to the Banca d'Italia from the Bundesbank in the early 1970s).

-Confidence. Although gold no longer backs currencies in circulation, M. Mercier argued that it helps to underpin international confidence in any one currency, especially since, without gold's formal backing, currency values are based on faith in one another. He reminded us of the IMF's recent reiteration of the IMF's statement about hoe gold gives a "fundamental strength" to its balance sheet.

-Risk diversification. This, he asserts, is probably even more highly valued by central banks than it is by other investors. There is a considerable body of study that quantifies the ways in which gold brings robustness to a portfolio, most notably, for a central banker, the reduction in volatility.”

Ironically after selling 3,800 tonnes over the period where central banking dogma thought that they have successfully lorded over inflation [see Rediscovering Gold’s Monetary Appeal], counterparty risks, insurance, confidence and risk diversification suddenly becomes an issue for central bankers in reconsidering gold sales.

What has impelled them to raise such concerns?

Obviously signs like this… (all bold emphasis mine)

The Financial Times on India’s IMF’s gold’s purchase, ``Pranab Mukherjee, India’s finance minister, said the acquisition reflected the power of an economy that laid claim to the fifth-largest global foreign reserves: “We have money to buy gold. We have enough foreign exchange reserves.” He contrasted India’s strength with weakness elsewhere: “Europe collapsed and North America collapsed.”

Unsettling concerns over new bubble cycles emanating from the low interest rates regime implemented by the US Federal Reserve as articulated by the Chinese and Japanese leadership, from Bloomberg, ``“The continuous depreciation in the dollar, and the U.S. government’s indication that, in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” Liu, chairman of the China Banking Regulatory Commission, said in Beijing yesterday.

``While lower interest rates will help Americans pare debt, “there are also risks involved in continued low rates,” Shirakawa said today at a Paris Europlace Financial Forum in Tokyo. Having borrowing costs near zero may strain government finances if it spurs speculation that the dollar will continue to slide, he said, while warning that easy policy by officials globally may have repercussions in the long term.

``“Monetary easing in advanced economies has stimulated capital inflows to emerging economies,” Shirakawa said. If emerging nations continue to recover at a faster pace than advanced ones, they “might overheat and experience financial turmoil, triggering a recession,” he said.

Hong Kong’s monetary authority likewise includes the FED’s Quantitative Easing program aside from the prevailing low interest regime over concerns on formative bubbles, this from the Wall Street Journal, ``“The question one really has to ask is to what extent quantitative easing is necessary. Is the dosage right, because $2 trillion is a lot of money in the banking system, it’s high power money,” said Norman Chan, monetary authority chief executive. He and Ms. Yellen were at a forum sponsored by the Institute of Regulation & Risk. Ms. Yellen gave a speech that touched on how policymakers should address future asset bubbles.

“In Asian economies, Hong Kong included, we have seen a very massive inflow of funds that is explainable by the very low global interest rates and coupled with this huge amount of quantitative easing,” Mr. Chan said. “This question of potential risk of asset bubbles forming if this is to continue for a long period of time is a big challenge for us,” he said to Ms. Yellen.”

Basically, it’s been a predicament for Asian central banks to raise interest rates because higher rates will widen the currency yield spreads in their favor and exacerbate inward money flows. This, in essence, will blow the region’s asset bubbles faster. Yet by suppressing interest rate asset bubbles could be internally generated.

To quote CLSA’s high profile strategists Christopher Woods (highlight mine), ``The irony is that the more anaemic the Western recovery proves to be, the longer it will take for Western interest rates to normalize and the bigger the resulting asset bubble in Asia. Emerging Asia, not the U.S. consumer, will be the prime beneficiary of the Fed's easy money policy.

And the prospect of fostering asset bubbles has prompted for Asian central banks to consider imposing capital controls.

So Gartman’s argument where “gold is becoming a reservable asset” increasingly seems as a protective or insurance cover against the possible impacts from globalized systematic inflation (instead of no inflation), such as blossoming asset bubbles, emerging malinvestments, rampant speculation, financial and economic imbalances, arbitrages and carry trades, ballooning systemic leverage and surging inflation, which could all end up in tears. All these signify as inexorable monetary disorder.

In other words, many central banks have been insuring themselves, from inflation and counterparty risks by taking on gold as reservable asset. In short, gold’s appears to be gradually regaining its role as money.

Yet it would also be a grievous mistake to read bubbles as routinely blowing and popping without taking into account the magnitude where bubble cycles are becoming larger in scope and more damaging in scale upon impact when the mean reversion occurs.

Figure 4: Socgen, wikipedia: Central Bank Gold Shocks, Zimbabwe Dollar

A more fatal mistake would be to misjudge the impact from a lethal policy mix of flagrant money printing programs and low interest rate regime that could transmogrify a bubble cycle into hyperinflation.

So while global central banks could be buying gold today as shield against bubble cycles, they and everyone else would be stampeding into gold if and when the risks of a currency crisis becomes imminent.

Hence basing a projection on past performance (left window figure 4), where central banks bought during the 70s, which eventually turned into 2 gold shocks of sharply higher gold prices, assumes that present monetary disorder would be resolved in the traditional sense. We aren’t that confident. And Zimbabwe’s real life hyperinflation (right window) which ended last year should serve as reminder.

Appraising Gold And The Origin of Money

Many have made the case of valuing gold by discounting currency in circulation with that of available gold reserves.

As in the case of Socgen Dylan Grice, “So one way to value gold, therefore, is to ask at what gold price the value of outstanding central bank paper would be completely backed by gold. The US owns nearly 263m troy ounces of gold (the world's biggest holder) while the Fed's monetary base is $1.7 trillion. So the price of gold at which the US dollars would be fully gold-backed is currently around $6,300.”

Or based on Professor Michael Rozeff’s Zero Discount Value where ``value for gold such that every outstanding dollar liability in the central bank’s monetary base (currency plus bank reserves) is backed by an equivalent dollar’s worth of gold. It is what the dollar price of gold would be if the central bank’s liabilities were 100 percent backed or covered by gold.”

From our point of view, while these hypotheses could serve as meaningful concepts to measure gold, they are predicated on the assumption where variables (as monetary base) remains stable, secondly the world currency system persists on operating under the present US dollar standard, and lastly assumes that gold’s valuation in the light of current and constant conditions, hence won’t likely serve as accurate barometers, in my view.

Since we believe the world operates in a highly action-reaction dynamic, the complexity of the distribution isn’t likely to lead into a modeled outcome that can be easily captured by math estimates.

Instead we believe that policy actions are likely to be more of an accurate gauge to implied directions of the marketplace.

And it would also be true, to affirm with the behavioral camp, that human emotions will be an elaborate part of the price setting of gold, and thus is likely to cause price exaggerations beyond any models especially in bubble cycles.

In addition, while it seems conceivable to argue that gold’s rise could be a function of a bubble psychology, as per Socgen Dylan Grice, ``If my "valuation" of gold strikes you as a desperate attempt to value something which can't be valued, it's no different from metrics such as the "market cap to clicks" or "ARPU" ratios which were used in the late 1990s during the technology bubble when demand for bullish "valuation analysis" mushroomed”, this observation is far from accurate.

Yet Mr. Grice borrows some monetary aspects to rationalize an argument for a bubble cycle, ``Like today, central banks weren't buying gold in the late 1960s to prop it up, they were abandoning attempts to prop up the dollar.”

Using behavioral aspects he adds, ``Today, central banks are monetising government deficits to accommodate the recessionary effect of the credit crisis. Then the convincing narrative was that with the Middle East controlling our energy from abroad and aggressive trade unions rampant at home, policymakers were no longer in control. Today, the perception of central bank infallibility has been permanently ruptured by their collective failure to see the 2008 crash coming. Nagging concern at their over-willingness to inflate, at the blurring of monetary and fiscal policy and over long-term government solvency gives traction to a similar narrative today.”

In short, Mr. Grice utilizes the behavioral finance perspective to argue for a gold bubble and simultaneously disparage gold’s role in society.

The idea that gold is intrinsically worthless is to argue against 4,000 years of history whereby gold or silver has accounted for as money. To quote Murray Rothbard in What Has Government Done to Our Money?, ``Money is not an abstract unit of account, divorceable from a concrete good; it is not a useless token only good for exchanging; it is not a claim on society; it is not a guarantee of a fixed price level. It is simply a commodity.”

Yet gold, as commodity money, didn’t just pop out of nowhere, nor had they been they imposed by Kings or political leaders to be accepted by their constituents as money. On the contrary, historical evidences reveal that money evolved from the market’s selection process.

Some earlier forms of money that were used in select societies, such as cowrie shells in Maldives, peppers and squirrels skins in parts of Europe (The Ascent of Money), fish on the Atlantic sea coast of colonial America, beaver in the old Northwest, and tobacco, in Southern colonies (Rothbard-Mystery of Banking) salt, sugar, iron hoes, feathers, leaves and seeds, land to even huge stones weighing up to 500 lbs in the Pacific Islands of the Yap, failed to generate wider acceptance.

Instead, commodity metals, particularly of the precious metals family –gold, silver and copper- had been largely adopted due to its marketability.

According to Professor Ludwig von Mises in The Theory of Money and Credit, ``There would be an inevitable tendency for the less marketable of the series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained. Which was universally employed as a medium of exchange; in a word money.”

Aside from marketability, commodity money has acquired its role due to added special traits as being highly divisible, portable, high value per unit weight and highly durable (Rothbard-Mystery of Banking).

Yet money in a conventional sense, to quote Professor Niall Ferguson in The Ascent Of Money, is a medium of exchange, which has the advantage of eliminating inefficiencies of barter; a unit of account which facilitates valuation and calculation and a store of value, which allows economic transactions to be conducted over long periods as well as geographical distances.

In other words, it would seem incoherent, if not self contradictory or plain arrogance, for anyone to claim that an object is intrinsically useless yet is considered as the most marketable combined with special traits for it to assume the role of money for thousands of years. It’s like arguing that Manny Pacquiao is a loser in spite of snaring a world record breaking title win!

Crack Up Boom Versus Bubble Psychology

Yet forecasting gold prices at $6,300 driven by plain narrative based bubble psychology is like proposing to buy or exchange something you own for something that is essentially a chimera. Or simply, would you buy rubbish simply because everybody else is doing so? How logically consistent can this be? To recall Warren Buffett’s priceless words of wisdom, ``the dumbest reason in the world to buy a stock [or any investment –mine] is because it's going up.”

Furthermore, the argument for a ‘displacement’ that would trigger a bubble cycle predicated on the rationale of “insolvent governments” ignores the psychology that drives money-FAITH.

In essence, bubble psychology deals with investor irrationality, cognitive biases and the animal spirits, which eventually revert to the mean. It underestimates and overlooks on the impact of the bubble cycles on monetary health conditions and sees a limited effect only to investment assets.

On the other hand, the truism is that money is driven by trust or faith accrued over the long years of established virtues or properties acquired which allowed money to assume its role. Confusing one for the other would be misleading.

Figure 5: Casey Research: Weimar Hyperinflation: How Faith Evaporates

As to how faith in money can vanish (see figure 5-the Weimar Germany experience) beyond the realm of behavioral finance, again this quote from Prof. von Mises, ``But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.”

In finale, my view of rising gold prices is that it reflects on a burgeoning global monetary disorder based on the incumbent operating currency platform (US dollar standard) more than simply bubble symptoms. It’s more than a narrative; it is an underlying degenerating malaise that places at risks faith in our money.

Although a gold bubble cycle CANNOT be discounted, we’d like to see evidences of a credit driven euphoria underpinning private or public sector acquisition. Absent credit expansion, which is the sine qua non fuel for any bubble, rising gold prices signify as a symptom.

Globalization Trends: No Crisis In Research And Development Spending

The recent crisis negatively affected nearly anything BUT research and development spending.

According to the Economist, ``BIG carmakers and drug and technology firms devote the most cash to research and development, according to the European Commission’s latest tally. These types of business rely on developing new products or constantly updating old ones to compete for customers. Toyota was the world's leading R&D spender in 2008. The Japanese carmaker increased its annual R&D budget by 7.6% to €7.6 billion ($10.6 billion), knocking Microsoft off the top spot. Worldwide R&D spending increased by 6.9% in 2008, having also grown by 9% in 2007."

This only serves as proof of the well entrenched globalization trend in spite of the crisis.

To quote Dan McLaughlin, `` Modern society is highly dependent on the division of labor, on vast networks of traders, on information and communications. The goal of modern society is not full employment, but rather the increasing prosperity that comes from continuing innovation and increasing specialization, trade and capital accumulation, where even the poor are better off than most people in the world. Economic freedom in fact reduces unemployment to levels significantly below those in less free countries." (emphasis added)

Or from Peter F. Drucker, ``Innovation is the specific instrument of entrepreneurship. The act that endows resources with a new capacity to create wealth."

Power Of Social Networking: President Obama Responds To A Freedom Advocate Blogger

We have written alot about how web based technology have been democratizing information. Its apparent impact appears to be vastly broadening and filtering into the political space.

Recently, Cuba's controversial freedom advocate blogger Yoani Sánchez received a surprise reply from US President Obama. From Committee to Protect Journalist, (bold highlights mine) [pointer from Professor Mark Perry]

``Cuban blogger Yoani Sánchez was astounded this week by President Barack Obama’s decision to respond a written questionnaire Sánchez submitted to the White House. Still recovering from bruises left by a recent vicious attack by state security agents, she told CPJ from her home in Havana: “This is the best way to get better.”

``The blogger said that she had tried for months to reach the U.S. president through different channels. Sánchez said she had sent written questions to Obama through a wide range of different people before the White House responded. On her blog Generación Y, where she has posted Obama’s answers to her seven questions, Sánchez explained that the questions were based on issues “that keep me from sleeping,” and were born from her personal experience.

``“It was a very pleasant surprise,” Sánchez said, acknowledging that the chances that Obama would reply were minimal. Before responding to the questions, Obama thanked Sánchez for the opportunity to exchange views with her and her readers in Cuba, and congratulated her for receiving Columbia’s University Maria Moors Cabot Award for excellence in Latin American reporting.

“Your blog provides the world a unique window into the realities of daily life in Cuba,” Obama wrote. “It is telling that the Internet has provided you and other courageous Cuban bloggers with an outlet to express yourself so freely, and I applaud your collective efforts to empower fellow Cubans to express themselves through the use of technology. The government and people of the United States join all of you in looking forward to the day all Cubans can freely express themselves in public without fear and without reprisals.”

``Sánchez asked Obama questions that ranged from U.S. foreign policy toward Cuba, to the legitimacy of President Raúl Castro and the potential involvement of the Cuban exile community, the political opposition, and nascent civil society groups.

``Sánchez also raised the issue of limited Internet access in Cuba, asking whether the U.S. embargo has anything to do with it. Obama responded by saying that his administration has taken steps “to promote the free flow of information to and from the Cuban people particularly through new technologies.” But Obama warned that this will not have its full effect without action from Cuba. “I understand the Cuban government has announced a plan to provide Cubans greater access to the Internet at post offices,” said Obama. The president urged the Cuban government “to allow its people to enjoy unrestricted access to the Internet and to information.”

Additional comments..

It is precisely such freedom of expression that serves as important barriers against socialism. Yet governments worldwide, despite the pronouncements of President Obama, has taken aim to control or regulate the cyberspace.

The Lost Decade: US Edition

Mr. Floyd Norris of the New York Times gives us a good account of how US stocks have fared in a relative sense compared to emerging markets and commodities over the past decade or so...


According to Mr. Norris, (all bold highlight mine) ``THE American stock market has soared 64 percent since it hit bottom eight months ago.

``And that leaves it just where it was more than 11 years ago.

``The United States stock market was the world leader in the great bull market of the late 1990s, but more recently it has been a laggard, in large part because of the weakness of the dollar. As the accompanying charts show, a stock investor looking for a part of the world to invest in back in 1998 — and to hold onto until now — could not have done worse than to choose the United States.

``The charts show the movement of the Standard &Poor’s 500 and the S.& P. International 700 in the period since the American index first reached 1,100 on March 24, 1998. The International 700, which encompasses the non-American stocks in the S.& P. Global 1,200, rose much faster in the middle of this decade, then fell faster in the global recession. But since prices bottomed, it has leaped more than 80 percent.

``For the entire period, an investor was better off in emerging markets than in the developed world. The segments of the global index representing Latin America, Australia and emerging Asian countries have soared. The Canadian index also more than doubled, thanks largely to natural resources stocks.

``But prices, as measured in local currencies, are lower now than in 1998 for both the S.& P. Europe 350 and the S.& P./Topix 150, covering Japan. Measured in American dollars, as shown in the charts, those markets posted gains of 20 percent and 7 percent, respectively, because of currency movements.

``On a sector basis, the best place to be over that period, both in the United States and globally, was in energy stocks. Oil prices fell to just above $10 a barrel in late 1998, and few investors saw value in the area. More recently, oil company profits set records as crude soared well above $100 a barrel, and even after the global downturn the price is more than $70.

``Financial stocks have suffered more in the United States than in the rest of the world, but the credit crisis brought down many banks in other regions as well.

``The charts also show 15 well-known companies from around the globe whose share prices are at least 300 percent higher than they were in 1998, and 15 such companies whose prices are less than half what they were then."

Additional comments:

-the return of the S & P 500 to the 1,100 level established 11 years ago implies that the US stocks have been in a bear market. It resembles Japan's lost decade-the American Edition.

This means that investors have largely lost than profited from stock investment.

-losses in the US markets do not account for real or inflation adjusted returns. According to the inflation calculator of the Bls.gov the US dollar has lost 25% of its purchasing power since 1998.This implies that US stocks have yet to recoup the real inflation adjusted levels in spite of the S&P reclaiming the 1,100.

-commodities and emerging markets have been clear outstanding winners.


-the Dow Jones have essentially reflected on the inflation of the US dollar, which have lost 75% in relative terms against gold.

This essentially debunks objections that gold is a lousy investment because it has no income. Chart courtesy of Reuters

-the US dollar isn't the primary source of the 'stagnation' of US stocks but instead reflects on bubble policies imposed by the US government. The US dollar serves only as a market outlet or a manifestation of such imprudent policies.

-This also shows that bubble policies have temporary benefits and don't work or prolongs investor agony over the long run, yet government officials are addicted to them.

-In addition, this also implies that the current policy directives to devalue the US dollar aimed at propping up the banking system and to reduce real liabilities means a wealth transfer and further outperformance of commodities and emerging markets relative to the US.

Popularity Based Politics Equals Waking Up To Frustration

It is election season anew in the Philippines. Yet like in most democracies, elections are turning out to be merely popularity contests.

People are made to believe that alleged changes brought forth by a new leadership, rather than changes in the system, is what matters most. Candidates are chosen based on symbolism and the free goodies that they offer.

Little do the public understand, as Rev. Edmund Optiz warned that ``The state being what it is, it matters little who holds office and wields its inordinate powers. This truth is dawning on some persons today; but the general public, however disillusioned with politicians, still has faith in politics as the means of curing all the ills of society and improving the quality of life. Hopefully, people will someday realize that what counts is the overextension of state power, not who holds public office. The important thing is to refute statist ideas, whatever their guise..."

Real life experiences should serve as examples...

In the US, President Obama had been ushered in as the most popular elected president.

And as we noted in US Politics: Extrapolating Hope and Change to Presidential Term Realities, ``Yet high approval ratings tend to be followed by a collapse over the years."

It's barely been a year and as recently noted in President Obama's Popularity Falling Back To Reality, "Americans seem to be waking up to the harsh realities of life".

Hope appears as being interchanged with unmet expectations or frustrations.

Take this Bloomberg report, ``President Barack Obama’s approval rating has fallen below 50 percent for the first time in polling by Quinnipiac University as U.S. voter discontent grows over the war in Afghanistan.

``Obama’s job approval rating fell to 48 percent in the Nov. 9-16 survey of registered voters nationwide by the Hamden, Connecticut-based university, with 42 percent polled saying they disapproved of the job he is doing."

“In politics, symbols matter, and this is not a good symbol for the White House,” Peter Brown, assistant director of the Quinnipiac University Polling Institute, said in a statement."

It's not just in Quinnipiac University but also among major pollsters...

As Gallup

ZogbyRasmussenreports

Pew Research

And even in Google search trends

So while Wall Street maybe cheering on the recent gains from rising markets, such optimism isn't being translated to the main street.

Our point is: we should realize that economic freedom matters more than delusional popularity contests.

Société Générale: How To Insure One's Portfolio Against A Debt Crisis Induced Economic Collapse

One of Europe's major financial institutions, the Société Générale, in a recent study "Worst Case Debt Scenario" highlighted on the risk of a possible government debt induced crisis that could lead to another global economic collapse.

According to their worst case scenario, one's investment profile should consist of:

-Sell the dollar as a declining dollar could provide a means to reduce global imbalances.

-Positive on fixed income as rates would fall in a Japanese-style recovery. Prefer defensive corporates (telecom, utilities) which have the lowest risk of transitioning into high-yield and should perform well in a more risk averse environment.

-Sell European equities as markets have already priced an economic recovery in 2010e. Under a bear scenario, this optimism could be dashed once restocking is over and fiscal stimulus (especially for the auto sector) has dried up.

-Cherry pick commodities given the diverse nature of this asset class. Agricultural commodities would probably fare best, but are difficult to forecast given high exposure to weather conditions. Mining commodities (particularly gold) are also a hedge against a softening dollar and could be favoured by persistently strong demand from emerging markets, particularly China.

I really don't share the parallels of Japan's experience as the 'right' model for the next crisis and would lean on a highly inflationary backdrop or a debt default.

Nevertheless, like socgen, we are hopeful for a miracle from extraordinary economic growth in emerging markets, based on free trade or globalization to help ease on such imbalances. But internal policies matter.

The complete report shown below:
SocGen - Worst Case Debt Scenario

Global Landgrab or Agricultural Boom?

The following video from Al Jazeera raises alarm over international "land grabbing"-where some countries (like China) have reportedly been purchasing huge tracts of land from other nations (e.g. Congo).

The report's peculiar paradox is that it implies (selling) governments as having little knowledge of their own national interests while international experts "know" better, and have been calling for a world regulatory body like the UN to officiate.

Moreover, landgrabbing is supposedly a coercive activity, yet countries have done deals via bilateral or voluntary exchange-another incoherence.

It also seems a ridiculous assertion for so-called experts to actually perceive knowledge over the "true" worth of international land traded, when these experts aren't even residents from the countries involved!

In addition, it is noteworthy that these experts appears to have upgraded the level their opponents from 'capitalists' to 'governments' in their quest towards global socialism.

From our end, the video, socialism aside, has very significant political economic implications.

It means the deepening dynamics to secure food supplies, it also means a huge demand for agricultural properties and a risk of a geopolitical crisis as corollary to global food crisis.

Alternatively it suggests of prospective agricultural boom.

Why Free Lunch Policies Sells

Free lunch programs are usually best sellers. Why? Because interest groups benefit from it.

In the case of the US, according to mint.com, 47% have ZERO income tax liability in 2009 while 27% will shoulder the burden for the redistribution.

While it is easy to see the numbers and think about noble goals, what is usually missed is that taxes have been punishing the most productive economic agents whom contributes to the gist of the nation's economic growth...to the benefit of the non-productive actors.

Such redistribution leaves a big segment of the population dependent on welfare and vulnerable to scheming political actors.


As Dr Richard Ebeling recently wrote,

``a number of economists, such as Nobel Laureate, James Buchanan, have taught us that the actual politics of government intervention and redistribution has little to do with high-minded notions concerning some hypothetical "public good" or "general interest." The reality of democratic politics is that politicians want campaign contributions and votes to be elected and reelected, and they offer in exchange other people's money. Those who supply those campaign contributions and votes want the money of those others, which they are not able to honestly earn through the free play of open competition in the market place.

``The bias in the democratic process toward political plunder is due to what is called a “concentration of benefits and a diffusion of burdens” that results from various government interventions.

The Internet Age Means Markets Based On Niches Or Specialization

The advent of the internet has given tremendous access to nearly "free" information to practically anyone who has the interest to seek them out.

This can be even seen filtering into mainstream education see A Bet On Free Education and A Bet On Free Education 2: University Bubble, Democratizing Education Via Creative Destruction.

In fact one can argue that the internet has "democratized" information that has allowed people to close the gap of so-called "informational advantages" long held by so-called experts, when the cost of information had been exorbitant or prior to this eon.

Yet democratization of information comes at the cost particularly to those who wish to do online business-particularly on the subscription facet. And that includes me.

That's fundamentally because information providers have been in a steep "invisible" competition.

Research recap quotes a Forrester study that says despite the thrust to increase the online subscription business by information providers, this has been elusive due to the resistance by the market.

From Researchrecap,(bold emphasis mine)

``A recent American Press Institute survey found that 58% of newspaper respondents are considering initiating paid access for currently open/free news and information online, and nearly 25 % expect to implement a paid strategy in the next six months. “This is a big change, considering that 90 % of the responding newspapers currently do not charge for content, and only 3% currently have a paid-only site.”

``But in Publishers Need Multichannel Subscription Models Forrester finds that “most consumers (80%) say they wouldn’t bother to access newspaper and magazine content online if it were no longer free (no surprise), and the rest are split about how they’d like to pay for content:



``What’s more, “those consumers can’t be identified by demographic segmentation alone; publishers must use engagement metrics to target the right consumers with the right offer. And what that offer is will vary: While some consumers say they’d prefer a multichannel subscription bundle, others say they’d consider a single-channel subscription or micropayments. While some consumers voice a preference for Web delivery, others prefer access via mobile devices like phones, eReaders, and netbooks.”

``The situation in Europe is similar, in Who Will Pay For Online Content? Forrester finds that 4% of European Internet users surveyed pay for online news content, and 12% said they would pay for it in the future. The picture is somewhat brighter for music and movies, followed by eBooks and games:

The reluctance to pay for information doesn't mean most have been for free. What has been willingly paid for by subscribers have been specialized content. The Boston Consulting group says that localized information gets more of this business.

From the BCG, (bold highlights mine)

``New research released today shows that consumers are willing to spend small monthly sums to receive news on their personal computers and mobile devices. In a survey of 5,000 individuals conducted in nine countries, BCG found that the average monthly amount that consumers would be prepared to pay ranges from $3 in the United States and Australia to $7 in Italy.

``John Rose, a BCG senior partner based in New York who leads the firm’s global media sector, said, “The good news is that, contrary to conventional wisdom, consumers are willing to pay for meaningful content. The bad news is that they are not willing to pay much. But cumulatively, these payments could help offset one to three years of anticipated declines in advertising revenue.”

``BCG’s survey found that consumers were more likely to pay for certain types of content, specifically news that is:

• Unique, such as local news (67 percent overall are interested; 72 percent of U.S. respondents) or specialized coverage (63 percent overall are interested; 73 percent of U.S. respondents)

• Timely, such as a continual news alert service (54 percent overall are interested; 61 percent of U.S. respondents)

• Conveniently accessible on a device of choice

``In addition, consumers are more likely to pay for online news provided by newspapers than by other media, such as television stations, Web sites, or online portals.

``They are specifically not interested in paying for news that is routinely available on a wide range of Web sites for free.

``While encouraging, this willingness to spend is only part of the solution for newspapers. For example, in the United States, advertising—which accounts for around 80 percent of newspaper revenues—is in a steep decline. If consumers start to pay for their news online, it will slow, but not stop, newspapers’ decline. As a result, newspapers must look to innovate on multiple fronts.

``Consumers More Likely to Pay for Online Content from National and Local Newspapers Than from Major Metros"

And this reminds me of marketing guru Seth Godin's counsel,

``The problem with "everyone" is that in order to reach everyone or teach everyone or sell to everyone, you need to so water down what you've got you end up with almost nothing...

``You don't want everyone. You want the right someone.

``Someone who cares about what you do. Someone who will make a contribution that matters. Someone who will spread the word.

``As soon as you start focusing on finding the right someone, things get better, fast. That's because you can ignore everyone and settle in and focus on the people you actually want." (bold highlights mine)

The point is that the industrial age of mass marketing has been gradating into the information "internet" age which focuses on niche or specialized marketing.

In other words, business trends (like the subscription model) in a more globalized setting backed by real time communications are likely to shift markets into highly segmented (localized) or customized backed by real time features, since generalized information is likely free.

This also suggests that traditional metrics in appraising business models or even in economic conditions, largely based on the industrial age won't be accurate or even effective.

Perhaps organizational capital -a procedure implemented by businesses to complete work (wikipedia.org) -will matter more than final output in measuring of productivity.

This also suggest that what we know of as success models of the past won't likely be the same models going forward. So the axiom of past performance don't guarantee future outcomes becomes increasingly elaborate.

Zimbabwe In The Aftermath Of Hyperinflation: Free Markets

We have published so much about the negative aspects of Zimbabwe, such that we even made her as model for government abuses.

The quest for the preservation of political power by President Robert Mugabe eventually led to hyperinflation.

But things do change.

It would be understandable that after enduring the worst, there is no way but up.

But it is Zimbabwe's reform transition that makes it all the while striking-from tyranny to free market.

This article from Alf Field "Zimbabwe's Fresh Start" is a must read... (Thanks to Jeff Tucker of the Mises Blog)

(bold highlights mine)

``In February 2009 Zimbabwe was the only country in the world without debt. Nobody owed anyone anything. Following the abandonment of the Zimbabwe Dollar as the local currency all local debt was wiped out and the country started with a clean slate.

``It is now a country without a functioning Central Bank and without a local currency that can be produced at will at the behest of politicians. Since February 2009 there has been no lender of last resort in Zimbabwe, causing banks to be ultra cautious in their lending policies. The US Dollar is the de facto currency in use although the Euro, GB Pound and South African Rand are accepted in local transactions.

``Price controls and foreign exchange regulations have been abandoned. Zimbabwe literally joined the real world at the stroke of a pen. Money now flows in and out of the country without restriction. Super market shelves, bare in January, are now bursting with products."

Read the rest here.

Some additional important quotes:

Here are the common sins (not only in Zimbabwe but everywhere- the difference is that Zimbabwe went to the extremes) and their consequences...

``There are common denominators in all hyperinflations. Generally government finances reach a point where large budget deficits cannot be financed by taxes or borrowings. The choices come down to austerity (with the government cutting back its spending) or by funding the deficit by creating local currency through the printing press, leading to the inflation tax. This is always a political decision, but the line of least resistance is the printing press. Cutting government expenditures and laying off bureaucratic staff is anathema to most politicians.

``The worst trauma for ordinary people during the hyperinflation was lack of food. This was due mainly to the imposition of price controls. If the cost of production of an item was $10 and the price controllers instructed that the item could only be sold for $5, the business would soon go bankrupt if they sold at the controlled price. The result was that production and imports just dried up, hence the empty shelves in the supermarkets. People survived by shopping in neighboring countries and relied on assistance from South Africa and the aid agencies.

``Companies survived the hyperinflation with great difficulty and often by ignoring laws. Although companies were left without debt post February 2009, they were also left deficient in working capital and had dilapidated plant and equipment. Regular repairs and maintenance could not be afforded. Most companies now require urgent recapitalization.

``The causes were those always present in these events. A weak economy, large government budget deficits, inability to borrow funds combined with the political decision not to cut Government spending. Governments are reluctant to lay off government employees, especially those related to the armed forces. The latter might invite a military coup. The only source of funding left is the creation of new money.

As to how one hedges against hyperinflation from the Zimbabwe nightmare...

``Having seen the impact of hyperinflation at close quarters, my view is that this is the least desirable method for eliminating excessive debt. The population has been traumatized physically (starvation), mentally and financially. Most people did not have foreign assets or local tangible assets, so lost virtually everything. The companies survived using unusual skills, ignoring laws and protecting working capital by holding foreign currency or purchasing equities"

Foreign currencies, equities, unusual "survival" skills and IGNORING LAWS...

Final quote...

``It is fascinating to see how rapidly the economy is recovering. It is a great testament to what can be achieved in a free enterprise environment by the elimination of controls combined with the institution of new money that people trust. It needs to be money that their Government cannot create via the printing (or electronic) press."

Amen

Graphic on Cell Size and Scale

Here is a dandy graphic on the size and scale of a cell from University of Utah-Genetic Science Learning Center. (HT: Paul Kedrosky)

Press on the image to redirect link.

Prediction Fulfilled: Philippine Mining Index Tops 9,000 (Now 11,300!)

``A cynic is a man who knows the price of everything but the value of nothing.”-Oscar Wilde

WAY back in 2003, I turned bullish on gold and wrote a series called the “Rip Van Winkle in Gold”. (No blogging yet for me)

Not content with newsletters to our clients, I submitted my article entitled, “The Philippine Mining Index Lags the World” to two international websites (see link: safehaven.com and goldseek.com) who promptly published my outlook. Of course, I would like to thank safehaven’s Mr. Bruce Stratton and Goldseek’s Mr. Peter Spina for this.

My underlying message: Philippine mining industry, which should benefit from a secular global bullmarket in gold prices, will eventually become a dominant theme for the PSE. In addition, not only in terms of stock prices, but likewise from an increasing share of contributions to the domestic economy.

The last time I followed up my prediction for the Philippine Mining Industry to test the 9,000 level was in May 6, 2007 [see Philippine Mining Index: Reliving The March to 9,000!]

How time flies!

Anyway, the red arrow in 2003 shows that the Philippine Mining Index was at around 1,500 when I made the audaciously unorthodox call. The light orange arrow, where the Philippine Mining Index reached its high in 1987, served as my benchmark. The blue arrow marks today’s milestone breakout.

It’s isn’t easy to be a contrarian. Aside from being ostracized for espousing unpopular unconventional views, we occasionally get ridiculed or scoffed or mocked at. I never realized that publication can also be a humbling experience, aside from the self-effacing trait one has learned and gleaned from dealing with markets.

Speculative Stigma, Resource Curse

Anyway, the sharp downside volatility of 2008 meltdown likewise placed into a stern ordeal my beliefs. The mining index got bludgeoned the hardest. This goes to show local investors have yet to assimilate on the risk reward prospects of the industry aside from the realization of the diminishing risk premium relative to the reckless policies engaged by policymakers that enhances the value of mining products.

Moreover, the speculative stigma has yet to be eschewed by public. This has been quite evident even in the political context where populist politics have equated mining as anti-environment. This is where reason has been blinded by unthinking populism predicated on ipse dixitism and of the farcical nobility from the socialist mindset.

By prohibiting trade, supply is taken off the markets from which, in the face of limitless fiat currency issuance by global governments, would only provoke a supply shock that would send prices spiraling higher.

And a spillover of high prices to a wider basket of goods would only result to increased economic hardship in the name of environmental preservation. Moreover there are other opportunity costs from preventing commercial operations (such as increased employment and livelihood, technology transfers and other business opportunities).

Yet if mining has been generalized as totally environmentally destructive then it follows that we should expect economies as Australia, Canada, Chile, New Zealand and others to be vast wastelands. Conversely, considering that the domestic mining industry has largely been in the doldrums due to two decades of falling commodity prices, then the Philippines must have been an environmental model. Unfortunately, none of the two arguments are valid, demagoguery has been unsupported by facts. To add, environmentalism has been converted to religion-where reasoning is proscribed.

At the end of the day, high commodity prices would only compel for a “resource curse”. This means that eventually the political elite and their supporters or the economic rent seeking interests tied to them will use state power to engage in resource extraction. And by preventing trade and competition and by monopolizing commercial activities by the greasing of the public officials, these actions will effectively undermine social and political institutions which should impede growth-the recipe for the resource curse.

Examining The Mining Index

Going back to the mining index, compared to the previous boom, which had been premised on foreign investors buying into the local industry, today’s mining index breakout seems to have been based on several Godfathers’ (to borrow Joe Studwell moniker of domestic economic elite) interests on the publicly listed mines. Perhaps the dynamics mentioned above could be in play.

Principally the mining index boom has mainly been prompted for by the recent explosion of Philex Mining [PX] prices.

PX, a gold mining company, which price per share almost doubled from last month constitutes more than 60% of the Philippine Mining index weighting. In addition Philex’s market cap as a Phisix composite member has stormed to 4.19% as of Friday’s close.

Philex, which has surprisingly surpassed Metrobank [MBT], Globe Telecoms [GLO], Banco De Oro [BDO] and etc., is now among the top 10 or among the Phisix big leaguers.

Although as a caveat, the recent price action of Philex appears to have reached bubble like proportions. PX’s turnover this week constituted about 25% of the Philippine Stock Exchange’s total. The hefty turnover somehow replicates the Meralco saga [see Bubble Thoughts Over Meralco’s Bubble] which makes us leery of the attention PX has been getting.

But don’t get me wrong. Whether it is Meralco or PX they are all headed higher over the longer term. In a bullmarket-generally- all stocks go up to paraphrase Edwin Lefevre.

It is just that the unwarranted short term attention that could pose as a barrier for sustained new interim highs following a record breathtaking run.

It is true that size and heft matters, and this has been the reason for what we might call “survivorship bias” or the tendency to focus on winners at the expense of the mediocre.

The fact of the matter is Nihao Minerals Resources [NI], another mining outfit which could be classified as exploratory since the company has yet to make a buck from actual mine operations, has been a far stellar performer than PX.

NI’s chart has been parabolic or vertical (black candle), has returned almost 5x or 500% since the first quarter of this year and has breached to a new record high prices along with PX.

Moreover given the chart above of the other mining components as part of the local mining index, we can note that all the mines-Apex Mining (light orange) [APX], Lepanto Consolidated (dark green) [LC], Manila Mining (light green) [MA], Atlas Consolidated (blue) [AT] and Geograce Resources (gray) [GEO] have all made substantial moves, but unlike PX and NI are still far from the 2007 highs.

The chart excludes other mining index members particularly Omico Mining [OM] and oil companies Philodrill [OV] and Oriental Petroleum [OPM]

My Two Cents On The Domestic Mining Industry

So here are my thoughts on mining industry:

1. Given the recent explosion of NI and PX, corporate or mine product price fundamentals does not appear to be the key drivers but from alleged interests from new class of investors [including Godfathers] to partake of key stakes in the firm. Of course, loose monetary policies have been the unseen or unrecognized factor behind the reanimation of local equities in general.

2. Since the domestic mining industry remains broadly underinvested and where current crops of mining firms lack the capital to expand or operate, the major catalysts for prospective runs would be speculations on joint ventures and or prospective M&A developments from new investors (they could be foreign or local godfathers)

3. Actions among the mining components appear to be rotational- a classic symptom of bullmarket driven by inflation. This implies that the next major moves could likely come from those that have been in a reprieve.

4. A sustained bullmarket in commodities- arising from monetary “pass through” or from BRIC and emerging markets demand- is likely to underpin the secular case for investing in local mines.

5. Compared to other sectors mines are likely to generate ALPHA. As in the case of PX which traded at about .50 cents (dividend adjusted) per share in 2005, and closed 16.75 per share last Friday or a 3,300% for 4 years (285% p.a,) in spite of the volatility, should be very rewarding for long term investors.

That’s because using the “follow the money trail” analysis underinvestment in a world where money is given for free should translate to a gush into the industry which equally becomes rife for M&A rumors.

6. Market trends are social trends. As mentioned above, the speculative label on the mining industry is a symptom of the lack of social acceptance or persistent aversion emanating from over two decades of depression. Essentially such resistance is psychologically bullish. That’s because despite present levels, only a handful have been invested. In social terms, bandwagon effect occurs when trends are reinforced by confirmation of expectations. In other words, long term trends draws in more converts.

It’s when commodities or the mining industry is seen as “risk free” or deemed as blue chips or becomes the public’s favorite object of discussion- is where the red flag should be raised. As far as we are concerned, such social dynamic seems distant.

From this juncture, we believe that the mining index next goal would conservatively be at least 20,000.

Important disclosure: I am not fortunate to own any of today’s star performers. So it would seem like a pyrrhic victory-right in essence but less lucky in selection.