Border Gold Corp: Geopolitics Plays Interference

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Geopolitics Plays Interference

It seems that once again the direction or trend playing out in the markets has been interrupted by geopolitical tensions heating up between Russia, Ukraine, and the Western powers. Precious metals finished the week on higher footing, with gold initially touching below 1,150 USD this past Friday morning, but going on to finish the day approximately 40 dollars higher just shy of 1,190 USD. The predicament for those who have been anticipating a bottom in the precious metals is determining whether or not this is simply just noise that will once again wash through and see the trend of a stronger greenback and weaker precious metal prices continue.

If weeks prior can provide any indication for what Russia-Ukraine tensions mean, it’s that they have led to unsustainable rallies in the metals market. The escalation of sanctions and threat of increased violence simply subside with time, and metals prices tracked lower accordingly. Thus, a suitable question becomes why does the market again react to similar events we have witness play out before if inevitably, time will pass and they will soon be forgotten?

For certain the liquidity of the gold and precious metal markets is one factor for the surge in prices as the relatively smaller market becomes a very quick and instantaneous hedge for the US dollars and risk assets. Short term investors or traders are less concerned about the price level of gold, but instead will go long gold as it  exhibits its safe haven characteristics during these time periods.

Perhaps another reason though is the ongoing uncertainty surrounding the Russian economy. And although what we are currently witnessing with Russia is simply antagonizing tactics with Ukraine, the likelihood of escalation of sustained violence (or war) becomes more and more likely as their economy worsens. The Russian Ruble has depreciated 23 per cent against the US dollar over the past three months. Inflation becomes a huge issue for the Russian consumer with prices up nearly 8 per cent over the last year, and it is a trend that is likely to continue as the economy is extremely dependent of imports of food and agriculture as they are unable to substitute for what is inadequate domestic production.

As the Russian economy gets choked off from the rest of the world, and it’s the citizens that feel the brunt of the pain and suffering as their lifestyles adjust to a weaker economy that makes the majority of them worse off, options become limited. The uncertainty, which is very much priced into the market for Russian Rubles, and attracting a safe haven bid in precious metals, is how far into a corner is Putin backing himself, and what will be the repercussions of his actions.

And one potential repercussion becomes, as the media has been questioning, the likelihood of another cold war. Ongoing and increased sanctions with Russia are slowly cutting the economic ties to the west. It’s not without coincidence that the largest buyers of physical gold in the last quarter were Russia, Kazakhstan, and Azerbaijan. But all central banks in aggregate have bought gold now for 15 consecutive quarters. These are the long terms investors, and as one UBS analyst put it, in this kind of environment, “diversification would be deemed a logical outcome.”


Border Gold Corp: Game Changer

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Game Changer

Friday was the best single day for gold in 14 months. This is as the markets seem to be playing a risk-on, risk-off tug of war with the US dollar. Despite the strong dollar trade dominating as we witnessed through the beginning of the week, it corresponded to the weakness in gold. The pullback we witnessed in the dollar into the close Friday stems from concerns over what may be the repercussions of a strong dollar for the US economy. Without doubt though, the trend is and has been for lower gold prices. A key day for the gold market was when we swiftly broke the 1181 USD support level, which the market had tested on three prior occasions beginning in June of 2013. As this was the first time the market has been sub-1180 since mid-2010, the physical markets were and are awash with new buyers.

As we learned over the last few weeks, despite the US Federal Reserve calling an end to their current round of experimental monetary stimulus, the game still lives on outside of North America. Although it certainly seems plausible that quantitative easing from the US Fed could make a return should the US economy warrant it, focus is what central banks are doing outside North America, particularly both the ECB and the Bank of Japan (BoJ).

The Bank of Japan shocked the markets into the end of last week as their governor, Haruhiko Kuroda, announced it will increase its purchase of government bonds from 50 trillion yen a year to 80 trillion. This was announced in tandem with the Government Investment Pension Fund announcing they’ll double their allocation to domestic stocks. The BoJ in essence is crowding savers out of an already conservative investment environment that is Japan. And although the BoJ and GPIF are putting through initiatives that will perhaps help Prime Minister Abe generate that desired 2 per cent level of inflation, uncertainty remains whether it can be successful.

The lingering question is what will be the impact on Japanese savers who do not see the same availability of government debt to purchase and hold. Will they seek out riskier assets, like equities, as was witnessed in the US through QE? Or, is this another factor supporting a strong dollar trade that sees the Yen sold for the alternative of being positioned in US assets, and the benefit of the deepest most liquid capital and treasury markets in the world?

At a conference this week hosted by the Bank of France, former PIMCO CEO Mohammed El-Erian made some very revealing comments. He said, “this is a world which places too much of a burden on central banks. This is a journey, not a destination. If the journey lasts too long, central banks go from being part of the solution to perhaps being part of the problem.” For the moment, only time will tell how this all plays out.

However, if El-Erian’s assertions prove to be correct, than those buying gold at these levels may be one step ahead of the pack if in fact Central Banks continue on their current path. And at this point there is absolutely no reason to think that they won’t.


Border Gold Corp.: There Will Be Haircuts

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There Will Be Haircuts

It’s puzzling why Europe is more an issue now than it was a few months ago. It seems the market has finally come to grips with the fact that their economy is stagnating, and hopes for growth are diminishing. Disinflation remains a central issue to their economic union. Youth unemployment levels remain disturbingly elevated. And the structural reform and fiscal discipline that many had been looking to member governments to implement and abide by are still yet to be seen.

Even more alarming is that Europe’s second and third largest economies, Italy and France, are disregarding the fiscal agreements made with member countries to rein in their debt levels. The required ratio is to move debt to GDP back towards 60 per cent. France’s debt to GDP ratio is estimated to be near 96 per cent by yearend, and Italy is faring worse at 135 per cent and continuing to grow.

As troubling as the increasing debt levels seen in Europe have become, it’s the latest commentary on the region that represents a fifth of the world’s output that stems concern. The norm seems to suggest with certainty a likely scenario would be a stagnating Japan style economy for the years to come. Some mainstream media has gone even further to suggest something as drastic as a significant debt restructuring. But these really should not strike as anything new, as the ongoing problems have been evident all along. The fact of the matter is with Europe nothing has changed since 2008, and debt restructuring or defaults and the threat of deflation are just becoming that much more of a reality.

Deflation is the central fear in Europe as it could be the contributing factor to their third recession in six years. Some are quick to cite a similar Japan style situation where their economy moved past a deflation episode in the 1990’s, but the dynamics of the two economies are much different. Where with Japan, as the Economist notes, it was a “homogenous society” that was somewhat isolated from the rest of the world, whereas Europe is much more linked to the global economy through emerging markets, and thus contagion once again rears its ugly head.

The greatest fear though is whether their economies will attract new investment going forward. It seems inevitable that growth levels will have trouble measuring up against the debt overhang of the majority of their economies. Thus, the resulting question is how much of that debt could ultimately be subject to restructuring or haircuts. Already in mortgage markets in countries like Ireland, lenders are offering non-recourse loans that prevent lenders from pursuing the borrowers personally. Reckless lending practices are already coming back into place, where mismanagement of debt was the problem in the first place.

With a lack of coordination between fiscal and monetary policy, the negative outlook for Europe continues to weigh on financial markets. If the ECB were to embark on a QE style stimulus where they were to purchase sovereign debt, the question becomes whether that would make a difference and actually address some of the structural problems in their economy. As former Fed Chair Ben Bernanke remarked regarding his own experimental monetary policy, they would have to weigh the “benefits, costs and risks.”


Border Gold Corp.: Fed Free

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Fed Free

It’s a challenge to put a finger on what was the most significant event that took place in financial markets this past week. It might have been the price of crude oil further deteriorating to touch below 80 dollars a barrel for a brief instance on Wednesday, or the volatility index, the VIX coming within a hair of a 30 print. For certain, the most revealing of all markets was for US Treasury bonds as investors in a herd fashion reached for the safe haven and saw yields dip below the 2 handle and touch a low of 1.85 per cent. It is uncertainty that continues to be the theme that casts a shadow over economic growth prospects, but as commentators noted this week, investor complacency amongst the masses leading to excessive risk taking is what is fundamentally shifting these markets.

This correction we are witnessing in the equity markets almost seemed long overdue, and the supply glut in the global oil market was perhaps the catalyst that acted to push these markets over the edge. The S&P500 moving over 1000 trading sessions without seeing that down move of 10 per cent or greater has left behind a number of investors waiting to participate in the rebound of US equity markets, and as the buying that took place on Thursday and Friday of this week, and the speedy rebound (for the time being) highlighted how welcomed this correction was.

But perhaps there was another factor contributing to the turnaround we saw towards the end of the week, and it was inspired by comments from St. Louis Fed President James Bullard. Bullard made the point that the FOMC should remain adaptive to when they choose to end their bond purchase program, and even hinted that an end to Quantitative Easing, expected to be announced at the end of this month, could only be temporary as they stand ready to support financial markets and continue to artificially boost asset prices. Bring on the speculation for QE4.

Former PIMCO CEO, Mohammed El-Erian comments that investors should be careful what they wish for. One of Ben Bernanke’s famous quotes when justifying the Fed’s accommodative policy was that the benefits were always outweighing the costs and risks.  If the Fed was to embark on QE4, it would become incrementally harder for their policy committee to justify whether the benefits would outweigh the increasing costs and risks.

The US economy continues to experience record low interest rates. Falling oil prices will ultimately create yet another significant boost to an economy that is 70 per cent consumer driven and now sees gasoline prices 25 percent off their summer highs. And employment as a whole continues to see strong and stable growth above 220 thousand new positions a month. The takeaway though is not what’s driving the US economy via Fed policy. It’s how Fed policy is impacting financial markets, and that’s the reason for concern.

As has always been, the single biggest risk of the Fed’s accommodative policy is how investors have become dependent on their asset purchases in order to see risk assets trade higher. Thursday and Friday are further evidence of this. A sobering reminder comes with this, which is how overcrowded consensus trades have become, and really a question about how deep the liquidity or support in these markets really is when the majority of investors with the same mentality are all selling.


Border Gold: Global Slump

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Global Slump

There have been an increasing number of factors that have begun to put pressure on global financial markets. Just over the past week the International Monetary Fund once again revised lower their outlook for growth, and cited that the global recovery was relatively uneven between different geographic regions. This triggered yet another down move in energy markets, which translates to pressure on a number of smaller commodity based economies (like Canada) and emerging market economies. As well, the Fed released minutes from their September meeting midweek and cited concerns over a stronger US dollar, which led investors to briefly question the timing of the Fed’s tightening schedule. Finally, manufacturing data out of Germany signalled the Eurozone’s perhaps only remaining beacon of light may too be headed for recession.

The aforementioned reasons could all be factors that three years ago would be used to explain higher gold prices. That they are not today gives reason to believe that there will remain attractive buying opportunities in the months to come. Ultimately investors’ appetite for precious metals is not yet there. Gold, as we have witnessed, is not performing as its typical safe haven asset for capital, and part of the reason may still be tied to a loss of confidence following a year when the asset class of precious metals were nearly decimated and gold lost close to 30 percent. In a global environment where investors where holding gold for its relative stability, this traumatizing event would inevitability lead many to seek a safe harbor elsewhere.

The forward looking question though is can gold outperform the US dollar? As the IMF outlines in their most recent report, we remain in an unbalanced global recovery. As North American economists look to whether the US and North American economies can “go at it” alone, with 60 per cent of US exports destined for Canada and Mexico, the IMF, with a more international focus, is left to ponder whether US growth is strong enough to support the rest of the world. The scenario though with the United States acting as the leader and the first to step forward from accommodative monetary policy is the reason for the US dollar strength.

As we witness outside the US, Europe is at a near standstill and recent data seems to point to being on the cusp of a German recession. Brazil, who was once the poster child of the emerging market economies (the B in BRIC) is ahead of Germany now actually in a recession. Analysts continue to call for a slowdown in China as their GDP growth retreats from once double digits to below 7.5 per cent. Passing on the debate of whether the landing will be soft or hard, their demand for the world’s resources at this point seem to be tapering off. This leads to commodities.  We remain plagued with the uncertainty of where this global supply glut can meet a slumping demand.

Gold cannot behave like a commodity forever. Unfortunately, it seems it will until investor confidence is restored in its ability to act as a relatively stable asset that’s uncorrelated with most other markets, making it that ideal hedge. And as has been most often the case with the precious metal, its shine is revealed after its bigger moves rewarding those already holding it. Right now, however, it maintains it’s near perfect negative correlation to the US dollar, and any dollar strength is inevitability bad for gold in the near term.


#Canvest 2014 Toronto Interview

The first inaugural Canadian Investor Conference was a great success. Over 1200 people convened over the two days to listen to the top thought leaders in finance, resource, technology and venture capital opportunities in Canada. We were happy to film 19 interviews over the two days that we can now share with you. Take time to watch a few or simply hit the “Watch later” option in youtube to save them for later.


Border Gold-Oh, Flower of Scotland

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Oh, Flower of Scotland

Leading up to the referendum on Scottish Independence, one trader remarked “there will be blood on the trading floor Friday” if the Scots were to vote “Yes” and chose to break the 307-year-old union with the United Kingdom. That’s because money was already flowing back into the assets classes that were negatively affected by the uncertainty surrounding Scottish Independence on the basis that a “No” vote would ensue. Evidently, exit polls were giving traders enough information to bet the outcome. The money illustrated the results in Thursday’s referendum as the pound gained approximately 2 per cent from its lows of the week before votes had even been tallied. However, what later resulted was a clear “buy the rumour, sell the news,” as the pound gave back most its gains Friday morning.

The theatrics associated with the unknown outcome definitely took a toll on markets as we head into the tail end of the third quarter. But the underlying theme or message is certainly an important one as an astonishing 45 per cent of the population voted for independence in a referendum that saw approximately 85 per cent of their population participate. The message for those invested in financial markets is that populism has the potential to trump pragmatism when it comes to governance and economics.

Any economist leading up to the vote rationally stood on the side for Scotland to remain a part of the UK. The greatest concern, and one that could only be discussed hypothetically thanks to a lack of detail from Alexander Salmond, leader of the Scottish National Party, was what currency to adopt. With over 9 per cent of Scottish GDP coming from their financial services sector, and part of the benefit being that the pound still serves an important role as an international currency, how would the banks react? Initially Scotland discussed the idea of keeping the pound, an approach known as ‘dollarization’ where the pound still serves as the nation’s currency, but monetary policy and facilities like deposit insurance are not conducted or utilized in Scottish interests. All of these measures that promote stability and longevity in a currency, and thus become a harbour for capital and commerce would be jeopardized.

Other obvious issues surrounded the idea of disruptions to business and a worsening Scottish deficit.  Estimates had it that around 60 per cent of Scottish exports are destined for the other three countries in the United Kingdom. There lacked sufficient reasons other than a phoney idea of nationalism to put up a border only to disrupt trade flow and make moving goods harder for businesses.  Oil reserves in the North Sea were perhaps the saving grace for Scots, but when transfer payments from Westminster equaled the royalties received from North Sea drilling this year, and projections for North Sea oil are vastly diminishing, financing their 7 per cent deficit looks like a challenge. This compares to EU nations, which outlined by the Maastricht treaty look to maintain a deficit-to-GDP of 3 per cent.

There is the angle that it was the Scots incentive to fear Westminster with an independence vote to benefit more from government or take back more autonomy over more local issues of their economy, and the latter outcome will likely prevail. But the takeaway for investors has got to be the potential for instability in nations were a misguided millennial-inspired movement can have such a significant impact.


Border Gold Corp-Dominating Dollar

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Dominating Dollar

The resounding story for the markets these last few weeks has been the unequivocal strength of the US dollar. The dollar closed higher Friday for the ninth straight week as it continues on its best run in 17 years. This has been the move in the dollar that many investment professionals were looking for as they anticipated the US Fed to end their Quantitative Easing program and begin to raise the Federal Funds rate, but the move in the dollar really did not come to fruition until the latter half of this year. That, however, is not the only story that has been supporting the strong dollar trade as a number of both domestic and international factors are weighing in on the foreign exchange markets.

The international story is based on the action of western central banks. As the US has passed their inflection point from making policy more to less accommodative, the question through the end of the summer has been what future measures will be taken by the European Central Bank and Bank of Japan? And unfortunately for the Bank of England, despite efforts by Governor Mark Carney to talk up the pound, a referendum on Scottish Independence on the 18th of this month has substantially weakened the pound translating to a stronger greenback.

On the domestic side it’s perhaps investor’s lax expectations that shifted this market. The San Francisco Fed put out a paper this week looking at how investors and futures markets were anticipating when the Fed might begin to tighten policy and at what pace versus what members of the Federal Open Market Committee (FOMC) were actually saying in their most recent June meeting. What the San Francisco Fed found was that the market and investors are behind the curve in anticipating when the Fed will begin to raise rates. This is inherent in an expectation that the accommodative policy will be around longer than the Fed currently plans on delivering.

This all leads into what will be a very important week for the markets. The FOMC meets Tuesday and Wednesday, and following that on Thursday Scotland votes. No question, volatility which has been vacant from currency markets for so long is finding its way back. Accommodative policy from the world’s most influential central bank had dampened volatility from the FX markets. As we’ve learnt, this had an effect of suppressing and stabilizing interest rates at record low levels. But as the Fed shifts back to a less discernible role in the markets, volatility in currencies will begin to rise.

The unknown going forward is what it means for the US dollar, and commodity prices, along with equities and the outlook for earnings of US companies, with a foreign income stream. The same questions holds true for most other financial markets. A stronger dollar provides headwinds and at this stage the dollar looks like it will continue to dominate.


Cambridge House International: A 40 Second Insight

In January of 2014 Cambridge House launched the Cantech Investment Conference with tremendous review. In June of 2014 we launched Canadian Investor Conference Vancouver which included all industries in Canadian venture capital.


In two weeks we are doing it again in Toronto. The Canadian Investor Conference (Canvest) Toronto is taking place Sept. 25/26. at the Sheraton Centre Toronto. The conference features dozens of analysts, money managers, Investment bankers and ceo’s on the podium while Investment opportunities from across the country are showcased on the exhibit floor.


Take a look at this quick video that gives you a snapshot of what a Cambridge event is like!


For a full list of events click here


Cantech, Canvest

Super Mario Shows His Hand

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Super Mario Shows His Hand

Mario Draghi and the European Central Bank (ECB) shocked financial markets this week when they yet again revealed they were prepared to further combat a stagnating European economy. They announced they were lowering three key policy rates to their ‘lower bound’ and unveiled an unconventional QE style stimulus program to purchase non-financial private sector debt. Unfortunately, the implicit message delivered was that their policy options are becoming exhausted, and consequently further accommodative policy saw the euro fall over 2 cents on Thursday against the US dollar.

The trimming of the key policy rates is only somewhat significant as they have taken their deposit rate, the rate of interest charged to financial institutions, further into negative territory. Ideally, no financial institution is going to take a loss or pay the ECB interest to hold their cash overnight, and ultimately it’s a facility that will not be used. In theory, it’s to create the disincentive to deposit funds with the ECB, and instead incentivise them to make money available to the business sector.

The other key lending rate to focus on is the refinancing rate, which the ECB cut to 0.05 percent. This is similar to where the Federal Funds Rate in the US sits between 0 and 0.25 per cent, and at 1 per cent in Canada. And again, a marginal 10 basis point cut does not make a huge material difference to incentivize banks to now borrow more and make loans, but it almost acts as part of a last resort move for the ECB attempting to stave off a deflationary environment.

These further rate cuts seem like a last resort tool for the ECB in terms of utilizing their conventional policy tools, which clearly are not providing the incentives with the liquidity to spur economic activity in the respective economies. With powerhouses like Germany actually seeing GDP growth contract in the latest quarter, and Italy now entering a triple dip recession, this crisis still very much drags on in Europe. But the question is, as monetary policy sees a diminishing impact, can further accommodation prolong the structural reforms so desperately needed?

Mario Draghi said at his press conference that these measures will only work if they come with the structural reforms on the fiscal policy side, and that is left up to the individual European governments.  But as the ECB looks to protect its mandate of price stability in the euro, similar to that of the US Fed, policies in the last week have entered the experimental phase as they begin their targeted bond purchases.

The biggest shortfall of monetary policy in Europe was that it was not filtering through to the businesses that hire workers and advance the economy. As was seen by continuously lowering policy rates, credit has largely remained unavailable to the small and medium size enterprises. The announcement of purchasing asset backed securities is the first step in how the ECB plans to combat this.

As Draghi dictated and the market reacted, this is a policy that ultimately weakens their currency, where on Thursday the euro reacted and fell to its lowest level since July of last year. Many are drawing comparisons to this and the Fed’s Quantitative Easing, or Abenomic’s and its three arrow approach in Japan. Moreover, the ECB is really the last major central bank to join the experimental policy party, and whether they will be successful is not the question, as six years into recovery, investors have learnt the hard lessons of not betting against central banks. Instead, what is the cost of experimental policy and ongoing government malaise?

A question we are still awaiting an answer to here in North America.


Huge tax advantages in Puerto Rico – Louis James

Louis James, Casey Research’s Chief Metals & Mining Investment Strategist, chats with Cambridge House Live anchor Vanessa Collette at the Sprott Natural Resource Symposium in Vancouver.  In this clip Louis chats about his recent move to Puerto Rico and how the US territory’s tax advantages are game changers for investors and entrepreneurs.

Huge tax advantages in Puerto Rico - Louis James

Shock Interview: Dollar will decline and decline steadily – Adrian Day


Dollar will decline and decline steadily - Adrian Day Interview

Adrian Day, one of the world’s top money managers, speaks with Cambridge House Live anchor Vanessa Collette at the Sprott Natural Resource Symposium in Vancouver.  Topics covered include the current state of the US economy (shocking info here!), where he believes the US Dollar is going (down!), and why gold is set to pop over the long-term.  Shocking yet need-to-know info here for all concerned Americans.


Predicting the Unpredictable

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Predicting the Unpredictable

As the markets awoke at the beginning of the week to news of a US air strike on Iraq, one aspect of the risk off trade that had been ensuing became clearer. Those who had been selling equities from the week earlier were doing so because of events in Russia, and definitely not what was leading up to US action in the Middle East. Without a doubt if events were to intensify or the degree of US involvement were  to increase in the region, that might lead to a different story, but oil prices trading at a thirteen month low is one other example of how financial markets are exhibiting a lack of concern over the region.

As the attention of investors has clearly been with equities, the key question to how a broader set of sanctions impact the Russia economy is what now, if any effect will they have on companies with economic or financial ties to Russia. Furthermore, what impact would broadening sanctions do to the global economy? Sanctions now go beyond targeting specific individuals or their firms and encompass entire sectors. As Mohammad El-Erian points out in the Financial Times, this has direct implications to both supply chains and costs companies face, and then of course impacts to consumer demand.

Another threat is that if either country continues to strengthen their sanctions. Although motivation is to put pressure on Vladimir Putin, the sanctions ultimately only punish the Russian citizenry. Furthermore, it gives Putin the out that any hardship is the result of imposed disruptions by the West, and thus allows him to utilize the West as the scapegoat. As the Western European economies are the ones with much stronger economic ties to Russia, it’s the leadership of German Chancellor Angela Merkel and company that have a much larger dog in the fight, and thus need to be where a solution is fostered. It has long been clear that the US has given up their role as the global policeman and looks to play a limiting role in how this plays out.

The politics can be disguised in the near term to mask the real damage being done to the Russia economy. This might not last for much longer. The EU accompanied by the US and other smaller western nations have now sanctioned much of Russia’s financial system by limiting their banks access to parts of western capital markets. This hurts every single foreign investor with capital in Russia. And we can yet again introduce another risk, as their financial sector remains burdened with external debt close to half their foreign exchange reserves.

Since the end of June the Ruble has declined close to 7 per cent against the dollar, and measuring since right before Russia annexed Crimea, their central bank has had to raise interest rates from 5.5 per cent to 8 per cent in order to slow the rate at which capital attempts to flee the country.  A diminishing ruble weakens the Russian economy. And to further exacerbate the weakening ruble, Russia’s ban on EU food imports only further weakens the currency as Russian consumers face an enforced inflationary environment paying higher food prices.

Russia’s growth in the last two and a half decades was a result of their economy opening up to the rest of the world and removing the centrally planned level of government. The steps Russia is taking are reminiscent of times past and the Cold War era. The potential for greater geopolitical risk that could result from tensions escalating is one important factor that is maintaining the bid in the gold market. The proven unpredictability of Vladimir Putin seems to suggest that gold is acting as the appropriate hedge.

View the original article here.


Most important video Americans will see today – Doug Casey

Doug Casey

Doug Casey, NY Times’ best-selling author and chairman of Casey Research, chats with Cambridge House Live anchor Vanessa Collette at the Sprott Natural Resource Symposium. They discuss Casey’s documentary film, Meltdown America; why he believes the US is in such serious trouble; and where he sees value in the stock market.

Filmed At the Sprott Natural Resource Symposium July 23rd

A Goldilocks Moment

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A Goldilocks Moment

Who would of figured that in a week when the US economy reported initial estimates of second quarter GDP growth of 4 per cent, that the Dow Jones Industrial Average would simultaneously erase its gains for the year. Investors are grappling with the notion of whether this economy is ready to break out or revert back to the moderate 2 per cent growth levels we’ve witnessed on average since escaping recession. Similar to the jobs report early Friday morning, gains were strong despite missing expectations, but it’s the troubling 2 per cent wage growth barely matching inflation that leads investors to pause and question the economic outlook, particularly as viewed from the lens of the US Federal Reserve, and what corresponding policy could potentially be.

The headline print for US GDP growth is certainly one that appears strong on paper. No question following a dismal start to the year that the three month period ending in June made up for some of the weakness from the winter freeze. But it was the fact that consumption, which attributes for approximately seven tenths of the US economy’s output only advanced at two and a half per cent. This is what leads to questions or uncertainty surrounding whether growth in inventory building by US businesses will be matched by a pickup from the American consumer, or whether the expenditure is simply a trade-off for business spending later in the year. Currently, it seems the latter, that the economy will simply revert back to trend, that seems to resonate with investors as the equity markets seem exhausted at current levels.

Friday’s job numbers added credence to this theme as the number of jobs created no longer seems to be the focal point of the Federal Reserve. As renowned PIMCO economist Paul McCulley suggests, we know longer have a US federal reserve that is satisfied with just lowering the jobless rate. The Fed, under Janet Yellen is making clear their mandate that wage growth and other structural problems in the labour market is of particular importance. So while the broader theme around the US market is strength in full time employment on a monthly basis and encouraged workers rejoining the workforce, the issue and focus for the Fed stays with the measure of long term unemployed, which did tick higher in July, and the need for an increase in wage growth to keep pace with inflation and productivity gains.

This cautiously strong economic environment is congruent with the fashion in which the US dollar is trading. Wednesday of this week, the US dollar index rose to a 10 month high following the GDP numbers, and the way in which the dollar gained fits with this goldilocks economy-not too hot, and not too cold. We are seeing resounding strength in the dollar and the potential for upside, but still the uncertainties of the Fed ending QE, shifting consensus on when the Fed will be able to raise the Federal Funds Rate, and even whether the weakness in the euro will follow through.

The puzzle for the markets in a week when the Dow lost close to 400 points (2.40%) and the S&P close to 50 points (2.46%) was that there was no clear safe haven. Gold floundered, government bonds found modest bids, and the US dollar, albeit, gathering some momentum, stayed relatively quiet. As the markets and the economy recouple into a period of perhaps more normalcy, the question becomes is the inevitable equity correction looming, or is this another buy the dip as markets climb at a not too hot, but not too cold pace.