Despite rhetoric and posturing from leaders, neither consensus on direction nor concrete solutions are in the offing for europe. and the United States is approaching that pesky debt ceiling again.

by James West

The evident slow motion suicide by monetary excess that our financial system is undertaking has not been slowed or averted by anything any government has done. Short of “printing” money in unison and on an industrial scale (now widely anticipated), there is nothing the boobs we call governors, economists and bankers can do. The ersatz recovery in the United States is now complemented by fake numbers in the major indices. In other words, those numbers are artificially induced through direct intervention in equities markets and the offices of the President’s Working Group on Capital Markets. The guy in charge of that austere- sounding bunch is looking for re-election in November, so you can be sure he’s got a vested interest in painting with only bright colours.

Maintaining Perspective

At the end of 2008, during the absolute worst of the crash, resource stocks represented by the S&P TSX Venture index bottomed out at 697 towards the end of December. By the end of July 2009, the index had recovered to 1179, roughly ten points higher than it closed this past Friday. It crashed from 2718.75 to 697 in less than six months, and seven months later, it had recovered just 482 points. That was in large part thanks to the TARP, TELF, and stimulus packages announced by the United States government.

Since the post-2009 high of 2423 reached in March of 2011, we have again seen the market sliding back towards the sub- 1000 mark, but this time, its happening so slowly, that its toll on public company treasuries in the junior resource space is far worse. Companies deferred raising money throughout 2011, as the feeling was that the markets were poor, and they would wait for improvement. Well now the markets are worse,and more companies are running on fumes. Deals are getting done. But those are either development stories, or the investors are management, or they’re squeaking through after terms are revised in favour of investors. The worst sign of all is seeing financings announced for $100,000 – $500,000 that were first announced as $ 1,000,000+ financings. The terms are revised for a lower principal amount, plus generally the price is adjusted downward.

Second tier investment banks are going to start swallowing each other in Toronto, and that’s just opportunistic industry cannibalism that is the default survival strategy for that particular layer of the food chain.

Gold and Silver Rally in August?

The gold bugs, among whom I do not count myself, are clamouring for a breakout in the gold price (and by implication silver as well) in August. I have found myself in opposition to that opinion, for several reasons.

But first, I want to discuss the glaring inconsistency among gold manipulation proponents that renders their position weak. If you believe the gold price is manipulated downward by central banks and government to create the appearance of a healthy (er?) U.S. dollar and economy, how can you predict a breakout to the upside in the gold price based on fundamentals? Either the gold price is controlled or its not.

I concur with the concept that the price of precious metals is manipulated, and look to CFTC rules that permit the issuance of contracts many times in excess of what is reasonable, considering the annual production of gold and silver, in both short and long interest. And it is that regulatory failure that facilitates the ability of the major financial institutions involved in the making of the gold futures market to influence prices upward or downward. The natural influence of the laws of supply and demand are significantly compromised when a paper supply of a commodity can be issued and traded out front of the spot price.

Precious metals’ controlled price is the primary fraud maintained by the U.S. to ensure the complete sham of US dollar value, itself the foundation upon which our make-believe prosperity rests. Until there is meaningful regulation of the monetary metals that prevents the banks from originating contracts for gold in quantities more than 100 times that which can be produced in a year, there is no hope of that happening. The basic laws of supply and demand are defeated when financial institutions can create an infinite artificial supply. One day, future generations will look back on this period and marvel at both the scale of the fraud perpetuated daily by governments, and the capacity for delusion and apathy on the part of the electorate in thinking that all is as it should be.

Where’s the Bottom?

A lot of junior mining players are calling this a “bottom”, and the TSX Venture chart does seem to have stopped falling,

and now is drifting more or less sideways. Debt issues continue to plague Europe, and the United States has its next rendezvous with the Debt Ceiling at some point towards the end of Q4 this year. The creativity being expended in the mainstream press to convey the idea that any kind of democratic process exists in the financial services sector is laughably confounded by the never-ending barrage of scandals emanating from the sector.

Here’s the simple question we must consider:

“Is a healthy risk market possible while the debt in 8 out of 10 of largest economies continues to grow unsustainably, and while economic growth is stalled?”

The answer is obviously no, so where’s the bottom of the market? The fact that its levelled out and started to move sideways is a good sign, but by no means indicates a reversal is in the offing.

This interest rate manipulation debacle comes as no surprise to those of us who are of the conviction that the manipulation of precious metals prices to preserve a good impression of currency health has been a pox on gold and silver prices for nearly 20 years. There has been lots of hay made in that circle as to the likelihood that the exposure of the interest rate scandal will prompt the exposure of the gold and silver manipulation fraud. I don’t share that enthusiasm, as its an old story and so lacks the sensationalism attractive to the press that the interest rate scandal held. But hope springs eternal, and maybe there will be some more attention diverted to that issue. Theoretically, such scrutiny could catalyze a new gold rush that junior explorers would love.

The Solution

There’s a nearly 100% degree of certainty in global markets that the only solution available to banks is the injection of more stimulus into the G20 economies, not just as a way to keep credit paralysis from setting in again, but as the only option available to maintain the illusion of economic growth.

In fact, the U.K., Japan, and China are already knee deep in new stimulus measures, from buying gilts in the case of London to easing mortgage qualifications and reducing bank capital requirements in Beijing. These too, are acts of desperation. The final temporary solution will likely be massive capital injections across the board in the weak G8 countries led by the United States. The only question is, how much? $10 trillion would certainly induce a commodities rally, but that would prove just as temporary as the more than US$20 trillion in public funds injected by the world’s governments and central banks since 2008.

Increasingly, the only way out is a complete revision or the world monetary system and the establishment of a new global currency (The IMF’s “Special Drawing Rights” or SDR is a likely candidate), coincident with a mechanism to forgive the vast majority of sovereign debt. In my opinion, that is the strategy under execution here. Its no coincidence that the world’s major currencies are growing incrementally less viable in concert with one another. Just imagine the “Global Reserve Bank”.

Speculating in  Risk Averse Waters

My observations of the market in these last few months have yielded some useful intelligence. I’ve been trying to focus on the various investment classes that are likely to perform well in risk averse scenarios such as the one we have today.

Among equities, the stocks that maintain positive compression (i.e. investment interest that will convert to buying on positive news) are the following:

1. Exploration companies with “real” assets that make a substantial discovery. (eg. Africa Oil Corp. [TSX.V:AOI], Goldquest Mining Corp. [TSX.V:GQC]); or that are the subject of a takeover bid (eg. Extorre Gold Mines Ltd. [TSX:XG] );

2. Technology companies whose products are disruptive, and on the cusp of commercial adaptation. They tend to move up as new deals are announced. (eg. Orbite Aluminae Inc. [TSX:ORT], NXT Energy Solutions Inc. [TSX.V:SFD], and Mesocoat Inc., majority owned by Abakan Inc. [OTCQB:ABKI]**, Natcore Technology Inc. [TSX.V:NXT]).

The last time the bloom was off the mining rose for prolonged periods was in the nineties with gold wallowing around under $300. That was the period when the technology bubble formed as high school drop outs rolled out internet strategies that were unintelligible to Wall Street, who invested anyways motivated by the fear of losing out.

If the spending in financial marketing is any indication, it looks like mining’s fall from grace may yet again be technology’s opportunity.

Casting a glance around the world, though, there’s not a lot to induce optimism for the rest of 2012 or even 2013. I hear it said almost uniformly that markets are going to turn around at some point in 2012. I fear that is wishful thinking. With the risk aversion permeating markets thanks to the never ending saga of European debt, and that story about to get worse with the revelation of the next debt ceiling hit in the U.S., the futures is looking grim indeed.