The Daily Reckoning January 17th
The price of gold has been languishing in a trading range for several months, leaving some investors scratching their heads. But a few high-profile investors have been buying all along — and in some cases, really loading up.
It’s a tad puzzling that gold hasn’t broken into new highs, despite enough catalysts to move a herd of stubborn mules. But that’s the hand we’re dealt right now. We can’t get up from the table until the game reaches its conclusion. Besides, I think the stall in prices is giving us one last window to buy before prices break permanently into higher levels for this cycle.
And that’s how a number of prominent investors and institutions are viewing the price action right now. Here’s a sampling of this year’s “gold bugs” and what they’ve been doing about precious metals recently.
Jim Rogers, billionaire and cofounder of the Soros Quantum Fund, publicly stated two months ago that he plans to “sell federal debt and purchase more gold and silver.”
George Soros increased his investment in GLD by a whopping 49% last quarter, to 1.32 million shares. His stake is now worth over $221 million. Many investors don’t realize that he also placed call options on GDX worth $9 million. The most logical explanation is that he thinks gold equities are undervalued and that there’s big money to be made in them within a year.
Brent Johnson, a San Francisco hedge-fund manager, believed in gold so much that he started his own gold fund, Santiago Capital, earlier this year. His latest video points out that there have been “278 global easing moves in the last 14 months.” How does someone not own gold in that kind of environment?
Don Coxe, a highly respected global commodities strategist, stated at the Denver Gold Forum that “now is the best climate I have ever seen for an increase in gold prices.” He told fund managers, mining analysts, and mining executives to prepare for significantly higher gold prices and thus higher gold-mining-stock valuations. “The opportunities ahead are the best I’ve seen.” He thinks a new gold rush is ahead for gold stocks, and that a “lustrous” rally will occur within a year.
Jeffrey Gundlach, cofounder of DoubleLine Capital, predicts that deeply indebted countries and companies will default sometime after 2013. Central banks may forestall these defaults by pumping even more money into the economy — but at the risk of higher inflation in coming years. He recommends buying hard assets including gold, and also “gold-mining firms because we consider them to be bargains.”
These are only some of the individual investors who have made recent news with their bullion buying. But institutions, governments, and others are participating, too…
- Central banks around the world bought a total of 351.8 tonnes of gold (11.3 million ounces) in the first nine months of 2012, up 2% from a year ago.
- Even Argentina added 7 tonnes last year (225,000 ounces), and Colombia 2.3 tonnes (almost 74,000 ounces).
- And of course there’s China. While nothing official has been announced by its central bank, the size of its gold imports and buying habits are mind-boggling.
These data suggest in and of themselves that dips in the gold price are likely being bought — and will continue to be bought — by central banks. They’re not exactly short-term traders. Remember, central banks were net sellers as recently as 2009, so this reversal will likely play out for years.
And then there is India…
I tire of the reports that proclaim something like, “Indian buying dropped this month!” Let’s be clear about India and gold: Imports have more than doubled in three years (through 2011), and investment demand has climbed almost fivefold. And all this occurred while prices were rising and from a nation that already has a strong cultural predisposition towards the metal. Further, silver demand is taking off: sales have jumped 24% this year over last.
There is some government interference, but no slump in demand in India. This trend will continue and may even strengthen when inflation begins making front-page headlines.
- Morgan Stanley’s preferred metal exposure for 2013 is gold, though the company expects silver to outperform it. The bank stated that it believes “nothing has changed with gold’s fundamental thesis: QE 3 (and 4…) and similar commitments from the ECB and BoJ; low nominal and negative real interest rates; ongoing geopolitical risk in the Middle East; and mine supply issues.”
- ScotiaMocatta stated that it will “not be surprised to see prices reach $2,200/oz.” Why? “One of the main reasons we are still bullish is because of the mess the Western world is in. Europe has a debt problem that is proving all but impossible to solve, and all efforts to date have revolved around throwing more money at the problem to avoid the monetary system from breaking down… that should be reason enough to be bullish.”
- Deutsche Bank released a new report essentially declaring that gold is money. “We see gold as an officially recognized form of money for one primary reason: it is widely held by most of the world’s larger central banks as a component of reserves. We would go further, however, and argue that gold could be characterized as ‘good’ money, as opposed to ‘bad’ money which would be represented by many of today’s fiat currencies.”
- Bank of America Merrill Lynch says gold will hit at least $2,000 by the end of 2013.
- JP Morgan now accepts physical gold as collateral.
None of these parties think the gold bull market is over, nor that the price is too high. They recognize the implications of a world floating on fiat currencies, and that government “solutions” to debt and deficit spending will significantly — perhaps catastrophically — dilute the value of currencies, the fallout of which has yet to materialize. As for me, I think that the longer the malaise continues, the more likely the breakout is to be both sudden and dramatic.
We can all speculate about when the next leg up for gold will kick in, but the point for now is to take advantage of the weakness. When the price breaks out of its trading range, are you sure you won’t wish you’d bought a little more?
Where have all the workers gone?
One of the most bizarre happenings in our current economic environment has been the surprising collapse of the number of people in the labor pool. This reality adds a sting to the unemployment numbers. They are falling bit by bit, but so is the total pool of people who are even part of the count. Once people drop out, they disappear economically.
The trend for men in particular goes back half a century, but for all groups, the dropout rate accelerated dramatically after 2008:
Writing in The Wall Street Journal, economist Richard Vedder makes a rather obvious point — obvious once it is stated. If people aren’t working, they aren’t producing. If they aren’t producing, the economy is not growing. For this reason, he attributes a substantial part of the slow growth to this rather plain reality: Millions of people aren’t doing anything.
“If today, the country had the same proportion of persons of working age employed as it did in 2000, the U.S. would have almost 14 million more people contributing to the economy. Even assuming that these additional workers would be 25% less productive on average than the existing labor force, U.S. gross domestic product would still be more than 5% higher ($800 billion, or about $2,600 more per person) than it actually is.”
The larger question concerns how and why this happened. I have my own theories about this, but let’s first look at the evidence that Vedder himself comes up with to show that most of this can be explained by transfer programs like food stamps, disability insurance, student subsidies, and unemployment payments.
Let’s look at each.
Food stamps were a slightly goofy subsidy to the big agriculture lobby back in the 1960s, fobbed off on the public as somehow essential to ending hunger. Today, food is cheaper and more plentiful than ever, and American waistbands reveal this fact. People talk about the plight of the hungry, but it is mostly a myth. We are the most stuffed society in the history of the world.
Yet even now, 47.5 million people are receiving food stamps, with an average benefit of $125 per month. That’s 15% of the population. That’s some pretty serious grocery purchases there. Big Ag is very happy about this. Must be nice to a have a pool of guaranteed customers who live off others.
Vedder makes the point that a major reason people work is to eat. If the eating part is guaranteed, why bother working?
With disability benefits — the government program most famous for massive fraud and abuse — it’s the same story. Back in 1990, only 3 million people took checks. Today, that number is through the roof, so much that almost 8.6 million people get checks that provide the equivalent of a full-time income. And this has happened at a time when medical technology is better than ever at dealing with real disability.
Next comes the whole student racket. Back in 2000, not even 3.9 million young people received Pell Grant awards to go to college. Today, the number is approaching 10 million. Going to school is a great way to avoid having to work. Hey, but maybe all these desk sitters are absorbing fabulous information that they will soon spring on society in the form of dazzling innovations and productivity, and we will look back and say, wow, that was worth it after all.
OK, stop laughing.
Next comes unemployment. In the past, it was never possible to stay unemployed for a full year and still receive benefits. Now it is normal. Congress just keeps extending benefits, probably out of fear that if these people are pushed into the labor market, unemployment will go up and wages will fall and there will be a revolution. It’s literally the case that government is paying millions of people to shut up and stay at home.
What are we to make of Vedder’s picture of the workforce? One gains the image of many millions of people sitting at home drawing checks, pretending to be students, stuffing their faces with tax-funded potato chips, and otherwise just living it up. If that’s really true, that’s not really suffering, is it? The data reported above indicate no real disaster, except for those of us footing the bill.
I actually don’t think this is entirely the right way to look at it. The reality is that the labor market is broken today because it is not really a market in any normal sense. Many people are shut out due to more substantial problems. People are saddled with debt, terrified to lower their wage expectations, and completely shut out of a system that doesn’t seem to accommodate the old expectations.
Think back to 100 years ago. Unemployment was practically unknown. Why? Because there was (and there still is) stuff to do and people to do it. So long as employers and employees could negotiate without a gigantic state interfering with them, everyone was happy. There was no income tax. There were no added benefits. There were no impositions on the right of association. People bounced from job to job, taking 100% of their earnings in the form of real money.
That was a great system while it lasted. It initially came about after the end of the feudal period and with the rise of the capitalist middle class. Average people actually made money for the first time in the history of the world, and it was pretty cool. There was no shortage of jobs.
That whole system came to an end during the Great Depression and World War II. It began when the government dared to decide who could and could not work and under what terms. This was the first step in what amounted to the nationalization of the labor pool. Kids could not work. No one could work apart from a government-dictated wage. The amount of time they could work would be regulated.
Then, in World War II, two additional changes came about. Taxes would be taken out of the paycheck by the government, and the taxpayer would get back later whatever the government didn’t keep. Millions of people began to think of the government as their benefactor. Wage controls then led some large companies to pay employees in benefits like health care, a practice that was later pushed more broadly.
This is not the way the free market works. Workers prefer to be paid with money, plain and simple. That’s because money is the most liquid good. It can be converted to anything else. It is what gives choice and personal empowerment.
Today, the government’s system is pretty well locked down and super sticky. The costs of bad hires are very high for employers, so they are super cautious. The clarity of the work contract is gone. The market is not being allowed to operate.
Adding to the problem is the issue of housing. Many of the millions of people who have dropped out also own homes they can’t sell at a profit, which means that they are not in a position to move. The house works as a kind of brake on personal progress.
This is a story of demoralization created not by a few government programs, but by hundreds, among which is the boom and bust cycle itself. The excluded workers are victims, and no less so because of their privilege of drinking unlimited amounts of soda at your expense.
Ending this problem is going to require doing far more than cutting food stamp allocations and cleaning up disability graft. It will require a complete dismantling of 100 years of attempts by government to do things to help American workers.
Original article posted on Laissez-Faire Today
Less than a month ago, Shell Oil suffered a major setback to its Arctic drilling program.
Shell’s 28,000-ton drill ship Kulluck ran aground off of Kodiak Island, Alaska, after breaking tow lines during stormy weather. Prior to that, the U.S. Coast Guard evacuated the 18-member crew from the rig.
According to a Coast Guard spokesperson, winds were gusting to 70 miles an hour, and the sea state in the Gulf of Alaska is hurling 40-foot waves at Kulluck, as well as towing and rescue vessels.
Prior to the setback, in September and October 2012, Shell used Kulluck to drill a prospect in the Beaufort Sea, on the north side of Alaska. Shell was in the process of towing Kulluck to Seattle for off-season maintenance. However, a series of weather and mechanical problems began, when a tow line parted and, coincidentally, one of the tow ships lost engine power due to contaminated fuel. After that, the cascade of problems just worsened.
Here’s a shot of the grounded rig:
A Shell spokesperson noted that the Kulluck grounding is a maritime accident. That is, it does not involve actual drilling operations. And on a positive note, the Kulluck has a unique, “Arctic-hardened” design, in which the fuel tanks are isolated in the center in the vessel, encased in heavy steel plating.
To date, Shell has spent nearly $4.5 billion on its offshore program in Alaska (including $292 million to upgrade the Kulluck.) The arctic region reportedly holds tens of billions of barrels of potential oil resource, in a major new oil frontier that is virtually unexplored. If you missed the dialog in 2012, this is a big deal for U.S. offshore industry.
Subsequently, Shell personnel pulled the rig off the rocks, and took it back under tow. There were no apparent leaks from the vessel. Shell and its contractors will give the rig a good inspection and survey, in a nearby Alaska port, with federal and state agents peering over their shoulders. Then, it’s off to the shipyard for a full overhaul.
And despite the Kulluck grounding, Shell shares are trading slightly up on the year, over $71. The dividend yield is still a husky 5.3%.
In response to the grounded Shell rig, the U.S. Department of the Interior announced that it will perform another “review” of proposed offshore drilling operations in the Arctic region. The review will cover Shell operations, as well as proposed offshore activities by other companies that want to work in the far north.
Along with catching the eye of the Department of the Interior, the setback also fired up another group of folks.
Opponents of drilling note that the waters in the Arctic region are home to a vast expanse of fragile ecosystems. Frigid water temperatures, year-round, make biodegradation of spilled oil all but impossible. Indeed, according to Lois Epstein, Alaska program director for The Wilderness Society, “Shell and its contractors are no match for Alaska’s weather and sea conditions either during drilling operations or during transit.” Let’s discuss…
Early Innings for Arctic Tech
As I was gathering information about the Shell incident, I noticed a snarky comment from someone — who could be anybody, anywhere — to the effect that, “this is what you get for using Gulf of Mexico (GOM) technology in the Arctic, unlike the Russians who are developing purpose-built Arctic tech.”
I’m not sure who this know-it-all is, but let’s address the point. First, I give the Russians great credit for having excellent naval technology, across many sectors. In fact, back in my Navy days, I used to chase Soviet submarines as part of my duties flying Lockheed S-3 “Viking” aircraft. So I know a few things about Russian competence in terms of building good ships to meet particular needs.
Submarines and drill ships are two different things, however. Yes, the Russians can build good submarines. But we have yet to see that Russian “purpose-built Arctic tech” actually hit the water, let alone work and perform well — and that means safely.
I also happen to know a few things about modern, Western offshore energy development technology. It’s not fair — and certainly not accurate — to say that Shell is using “GOM technology” to drill offshore Alaska. There’s plenty of superb, “purpose-built” tech out there, already developed, to drill offshore in extreme environments.
Consider, for example, energy development in the North Sea, and up off the coast of Norway. It’s much the same cold water, stormy seas, winter darkness and ice-problems as offshore Alaska. Look at the success of, say, Norway’s Statoil working in these kinds of extreme environments.
Just this week, in fact, Exxon-Mobil announced a major, $15 billion program to drill offshore eastern Canada, in cold, dark, iceberg-infested waters. It’s a major energy development program, with cooperation and support from the government of Canada, as well as provincial governments — all of whom know a few things about working in extreme climate conditions.
Over the past couple of years, I’ve attended technical sessions on Arctic development, via my annual treks to the Offshore Technology Conference and the American Association of Petroleum Geologists (AAPG) convention. At the industry-level, there’s a sense of “can-do” confidence towards extreme environments, but it’s tempered by a certain humility in the face of actual conditions.
When it comes to Arctic development, offshore Alaska, we’re in the early innings. Heck, we’re scarcely past warm-up pitching and batting practice. There’s much yet to be learned and much new technology yet to be developed. But the capability and potential is out there.
There’s plenty of money to be made, too.
One company I’ve tipped to my readers is Oceaneering International (OII.) The company holds an array of remote-operated vehicle (ROV) and related diving and field services. (The company also designs space suits for NASA, which is pretty cool.)
I first recommended Oceaneering back in May 2010, right in the wake of the BP blowout in the GOM. My reasoning was that the Oceaneering share price was down, due to the U.S. offshore drilling moratorium. But my prediction was that the services and products supplied by Oceaneering would be more important than ever, going forward, in the heightened culture of offshore safety.
Well, Oceaneering shares are currently trading at $58, which is a 5-year high. Better yet, it represents an 80% rise from 2010. The Oceaneering dividend yield is 1.2%, which is more than short term government bonds. All in all, Oceaneering has been a great play.
And do you know what? I foresee better days ahead for this underwater maverick. The company will continue to do well. There’s a large, and growing global market for its services, despite whatever happens with the U.S. economy.
As the arctic market evolves in the U.S. and the offshore industry continues to boom, keep riding this pony.
That’s all for now. Thanks for reading.