Low Hanging Fruit

by Addison Wiggin – April 14, 2011

  • Hysteria, a host of sarcasm and gold forecasts… $1,550 inside a month and $1,600 before year-end… mild by comparison…
  • "Low-hanging fruit" for gold miners in Colombia: Frank Holmes identifies what makes the country so attractive, and Chris Mayer sorts out 40 miners working the country
  • "Margin squeeze" shows up big in latest wholesale price numbers…
  • Last week's budget deal? Turns out MORE than meets the eye… Plus, an amusing letter we had forgotten we'd received from the president…

"Are you guys asleep at the wheel?!" writes a reader. "The main thing you seem to want to write about is 'Is gold in a bubble?' Who gives a hoot?

[We don't usually start the 5 this way, but today it seems appropriate.]

"Hezbollah (read Iran) in alliance with the Mexican drug cartels is on America's doorstep," our cool and calculating correspondent continues. "They are perhaps already sending operatives across the border.

[We'll forgive the rant…]

"And where are our troops? They're busy on the other side of the world! And the attack will probably be a coordinated one all across the country. O'bama will surrender in a matter of days!

[…and the fact that we suddenly have a weak-spined Irish president… because…]

"Wake up! Is gold in a bubble?"

[This kind of hysteria is precisely why we think gold is not yet in a bubble. For that, we'll have to wait 'til the crotte really hits the fan.]

Thanks for writing, though.

Firming up again today, gold is back to $1,466 last we checked. Silver is above $41 once again. These are strong prices… and have brought the forecasters out of the woodwork:

Following on Standard Chartered's forecast yesterday, precious metals consultants GFMS are forecasting gold to reach $1,600 sometime before year-end. A modest forecast, but we respect it.

"Investors continue to be concerned about the outlook for inflation," the firm's surprisingly officious report states, "with governments in general showing little appetite to tighten monetary policy significantly."

Indeed, $1,550 gold could come inside a month, according to Edel Tully, the gold analyst from UBS.

"Lower prices have encouraged physical buying" Ms. Tully writes echoing the "love trade" we cited yesterday, "particularly from China. That physical buyers emerge at lower gold-price levels is another factor making us confident that dips will be supported."

Digging deeper into the mechanics of the gold trade, we find ourselves crossing paths with frequent 5 commentator Frank Holmes.

"Colombia is in the low-hanging fruit stage," with respect to gold exploration, Frank told the audience yesterday at the European Gold Forum in Zurich.

Frankly, we were surprised to learn his keynote even mentioned Colombia. But having just returned from an excursion there, we couldn't help but agree: "Colombia has a pro-business environment that encourages foreign investment in its promising natural resources sector.

"This is very different than its next-door neighbor, Venezuela, whose socialistic government has seized and nationalized private assets. A number of skilled Venezuelans, in fact, have crossed the border to work in Colombia's resource industries."

As surprising as anything else this morning, the World Bank now lists Colombia among the top countries in South America for "Ease of Doing Business" rankings:

Colombia is, according to the World Bank, an even more business-friendly jurisdiction than Mexico, a favorite of gold-mining investors looking for a minimum of "political risk."

"Over 40 international mining companies are poking around Colombia's steamy basins looking for gold," writes Chris Mayer, summarizing his own findings from our expedition. "By 2012, Colombia could produce 3 million ounces of gold annually — more than double what it produced in 2009.

"The gold rush here is just a part of a broader mining boom in Colombia," adds a recent New York Times report, "with gold production climbing more than 30% last year and attracting an array of fortune seekers, from multinational corporations to farmers who have left their fields and picked up shovels."

"Colombia was South America's largest gold producer until 1937," Chris notes. It has a long way to go before it catches Peru, the current leader. But Colombia could become a top-10 global gold producer in the next few years. As it is, Colombia ranks 21st in the world in gold production.

"The turmoil in the country for the last half-century or so has preserved a lot of gold in place, relatively untapped and unexplored. But now with the stability returning to the country, investment dollars are flowing back to Colombia."

[Ed note. Following our trip to Colombia, Chris unearthed a tiny mining company with a market cap of $350 million.

But the deposit it's sitting on is worth potentially $10.8 billion.

Shares can be had right now for $2.25.

Which made the pick ripe for Mayer's Special Situations. "I made 200% on Detour Gold," one reader writes about a previous gold play Chris recommended. "I bought CLM for $3.97," writes another, "and sold it today at $17.81, for a gain of 348.69%. Keep up the good work!"

"I suggest you raise the subscription price of your letters to reflect their quality," writes a third, helpfully.

On the contrary, however, for a limited time, we're offering a lower price of entry to Mayer's Special Situations. Sign up today and you'll immediately get Chris's write-up on his two favorite junior gold stocks — including the Colombian player sitting on a "mountain" of gold.

Wholesale prices jumped 0.7% in February… and that's after all the usual gaming by the Bureau of Labor Statistics. The producer price index (PPI) is up 5.8% from where it was at this time a year ago.

And that's just for finished goods.

At the intermediate stage of production, wholesale prices are up 8.9% over the past year… and crude goods are up 16.4%.

You can expect more "margin squeeze" to show up in the earnings reports due out today, tomorrow and early next week. Costs continue to rise, but a firm's ability to pass along those costs to eager, if befuddled, consumers is limited.

Tomorrow, the BLS delivers the consumer price index (CPI), in which, no doubt, we'll learn once again the cost of living is rock steady for people who don't consume food or energy.

"Inflation, using the reporting methodologies in place before 1980, hit an annual rate of 9.6% in February," reads a remarkable story on CNBC's website, citing our friend John Williams of Shadow Government Statistics.

Remarkable only because of whose byline it comes over.

"Since 1980," writes John Melloy, the executive producer of Fast Money, the best reason to skip CNBC when you find yourself scrolling through channels, "the Bureau of Labor Statistics has changed the way it calculates the CPI in order to account for the substitution of products, improvements in quality (i.e., iPad 2 costing the same as original iPad) and other things."

"Near-term circumstances generally have continued to deteriorate," Mr. Williams writes in advance of tomorrow's new numbers. "Though not yet commonly recognized, there is both an intensifying double-dip recession and a rapidly escalating inflation problem.

"Until such time as financial-market expectations catch up with underlying reality, reporting generally will continue to show higher-than-expected inflation and weaker-than-expected economic results in the month and months ahead."

Uhhh… we think he means the recovery isn't all its cracked up to be… and stocks will fall once traders figure that out.

Unemployment claims grew last week, pushing above the 400,000 level for the first time in a month. At 412,000, the figure is just a wee bit off the Street's guess of 380,000.

Thus, the major stock indexes are down about 0.6% as we write. The S&P 500 appears to be stabilizing around 1,305.

And who could have seen this coming: The "historic budget cuts" negotiated in Washington last week to avert a government shutdown actually amount to… a small increase.

New figures from the Congressional Budget Office reveal that total "discretionary" outlays for fiscal 2011 will be $3.3 billion higher than the CBO had estimated in December.

As that news trickled out yesterday, our Vancouver symposium director Bruce Robertson stumbled onto a fascinating letter from his files.

We don't want to suggest the letter was blowing us off… but all the same, we suspect he was more occupied on the date of that letter with preparing for the third and final presidential debate that evening.

"I have read the comments endorsing the policy of restricting person the right to vote from any person who accepts an entitlement from the government. First let me say that I do not approve of the entitlements that are paid out by our government. But saying that, I would ask those who endorse this idea to stop and think about this and what it might lead to.

"Take, for example, the retired and elderly recipients of Social Security benefits. These people have worked their entire life, paid taxes for that same period and could now be denied the opportunity to vote. This is just one example.

"There are people in this country that would dearly love to be able to control who is allowed to vote. We must never let that happen."

The 5: There is a lot about this conversation about changing the vote we don't get… starting with, in this case, who is the "we" who must never let something happen? The voters?

"Perhaps The 5 would be so kind as to pass on my suggestion to your whiners who enjoy high income… I would like them to imagine what progressive taxation really feels like — that is, paying the rates at the end of World War II.

"They can be very damned sure it does not feel like paying today, in a situation in which Warren Buffett points out that his secretary pays a higher percent of her earnings than he does of his.

"Please spare us the whining by those who are divorced from reality."

The 5: Buffett's prattle about higher income taxes is a curious one. He knows "full well the burden [for higher progressive taxation]," writes our friend Bill Baker in Endless Money, "would fall primarily on members of the upper middle class, who have not yet achieved the threshold that would permit them to shift income to tax-minimizing structures.

"Once a certain threshold of wealth is achieved," Bill explains, having the experience of managing money for many such folk, "taxpayers have some latitude in structuring when and where income originates." Thus, Google executives Larry Page and Sergey Brin "pay themselves just $1 in W-2 income, but each year, they may accrue millions or even billions in unrealized capital gain."

These options are not open to the group usually targeted as the "rich" — your typical six-figure or even low-seven figure earner — i.e., the small business owners who generate the preponderance of job growth that still takes place in this country.

"I have the same answer to everyone proposing how much vote I should have, and how much should be stolen from me." "I have not voted in the 40 years I have been 'allowed to,' and I most certainly never will vote for anyone who claims to have any legitimate right to steal my property to enslave me in any way, shape or form. To all those who claim I must recognize or comply with the 'predators DBA government,' or with the vote or decisions of any majority or group, YOU are my enemy, and the enemy of every honest, ethical, productive being on planet Earth. "Dump their ideas, stop being pawns, stop supporting predators."

The 5: Clearly, there are issues here beyond our scope, imagination or desire to engage. But the fire is intense, so far be it for us to try to simmer things down. If you have a tax restructuring philosophy to get off your chest, please join us in the lounge, er, on the discussion board.


Addison Wiggin
The 5 Min. Forecast

P.S. Swiss asset management ain't what it used to be, that's true. After a case last year in which UBS officials caved to U.S. investigators demanding information from U.S. citizens holding bank accounts in their bank, suspicions abound the Swiss aren't open for business. But visiting a bullion vault in the free zone at the Zurich Airport, we're not so sure… details to come.


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