A Melman Minute
| By | Leonard Melman |
|---|
After writing this past Friday that a plethora of investment advisors had turned bearish on the precious metals, yet another prominent name has joined the fray. Bob Doll of Nuveen Asset Management just appeared on a financial TV station to add his name to those offering negative opinions. His argument in short was that the pillars which have driven gold higher in the past simply were not present in today's background.
He was referring to visible inflation, financial panic and ultra-low long term interest rates. In his opinion, those factors were abating and gold simply could not rally in a sustainable manner without them.
Add one more name to the growing tsunami of negative gold commentaries - and more fuel to the contrarian position.
WHERE ARE THE MATHEMATICIANS?
It has long been our thesis that several factors are impeding prosperity in major markets in North America and Europe in particular and governments' determination to counter this trend by 'imposing' prosperity by law is at the heart of financial upheavals which should accrue to the precious metals benefit over time.
One of those factors has been the tendency of corporations to move industrial operations out of the USA and Canada to overseas locations, a trend which has in fact existed for some time. Most analysts have identified lower manufacturing costs as the primary reason for these relocations, but another important factor has been emerging, particularly as it relates to the giant Asian markets.
That factor could easily be a relative abundance of well-trained, highly technical staff in Asia who are particularly adept at mathematical reasoning. The comparative figures would appear to lend support to this consideration and I point in particular to a study recently conducted by the International Student Assessment organization. According to figures published over this past weekend, an important shift in mathematical student competence in favour of Asia and away from the USA and Canada is now underway.
The survey compared results from 2003 with those obtained in 2012 and the differences, in my opinion, are remarkable and bode ill for the North American nations. In 2003, Canada ranked 10th in those standings and the USA came in at 38th. By 2012, the respective rankings were 15th and 45th.
Important other changes also took place at the very top of the list. While the top of the 2003 list was shared by Asian and European nations as well as provinces such as Alberta, BC and Quebec (the results were published in Canada's Globe & Mail so Canadian provinces were included in the standings), the top seven rankings in 2012 were Shanghai-China, Singapore, Chinese Taipei, Korea, Macao-China and Japan. Not one European, African or North American jurisdiction was able to crack this 'top seven'."
In our opinion, as long as Asian enterprise represents not only low costs but exceedingly high technical competence levels, the parade of companies leaving North America and moving to Asia will continue and may even accelerate.
Of course, such moves would reduce business activities and employment in our domestic economies which would then require further government interventions to 'correct' the situation and it is the financial nature of these interventions that we believe will lend support to precious metals markets down the road.
SPEAKING OF INTERVENTIONS...
When will governments step aside and let free markets prevail? One cannot help but ask that question when several news releases over the weekend are taken into consideration.
One story which relates to mining offers a specific example. The nation of Indonesia has ruled that companies which operate mines within Indonesia will no longer be allowed to export ore for processing outside that country. While some major mines with processing within Indonesia will be allowed to continue operations - as will be others which are in the process of constructing processing facilities inside the country - for many others the new law would result in a virtual cessation of operations.
Another anticipated problem is an anticipated developing shortage of nickel should Indonesian exports of bauxite (an important nickel ingredient) be curtailed as that country's mines now provide roughly one-quarter of all such ores. Nickel prices surged by two percent over the weekend and continue to rally this morning.
Whatever the outcome, one thing is certain and that is Indonesia's new law will cause serious distortions within an otherwise functioning marketplace.
Another article of interest was an op-ed piece in this morning's Wall Street Journal which listed the ongoing deterioration within the once ultra-prosperous nation of Argentina. Many people are unaware that about one century ago, Argentina was one of the most prosperous nations on earth and, as the piece suggests, "...it takes a long time to destroy a nation's wealth...", but interventions by Argentina's various governments of the last several decades seem to have done the trick. Published inflation figures now show rates of 10.5% (many suspect it is really higher); the national infrastructure is deteriorating rapidly; police are beginning to walk off the job to protest low earnings and poor conditions; the unofficial value of the Argentinean Peso is fluctuating wildly due to unofficial on-street currency dealings; Argentine's national bank's holdings of foreign currencies are rapidly vanishing and money laundering is reported to be rampant in Buenos Aires.
Many of these outcomes, in our opinion, have been the end result of a major shift in policies away from the free markets which generated past prosperity toward more socialist policies of manipulation and intervention. The changes began in earnest during the Peronista years of the 1950s and are continuing under the present regime of President Kristina Kirchner which followed on the heels of her late husband, Nestor Kirchner.
The enormous damage to the functioning of a free-enterprise economy by such interventions is becoming steadily more apparent and we believe that the year 2014 will see heightened conflict between those legislators who wish to continue the imposition of even more restrictive laws and those who will strive toward the elimination of many such regulations.
Conflict and uncertainties have been handmaidens of historic golden bull markets and it will be most interesting to see the outcome of this struggle as the year progresses.
As of 9:10 AM PST, financial markets in both Canada and the USA are little changed with the TSX Index and the Dow Industrials each down by less than 20 points. Precious metals have moved slightly higher with gold continuing its 2014 rally by trading up $2 to just above $1,250 (see chart) while silver has added 13 cents to $20.30 per ounce. Base metals have turned higher with nickel being a particular standout, now ahead by almost three percent while mining share indexes have gained about one percent.
In other markets, the US Dollar Index is virtually unchanged at 80.77; Crude Oil is 62 cents lower at $92.10 per barrel and the TYX Index of rates on US Treasury 30-year bonds is down by 7 basis points to 3.789%.
All quotes US$ unless otherwise indicated.
Next Melman Minute scheduled for Wednesday, January 15, 2014