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Inflation is coming Are you ready?

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2018 Inflation Edition A special report

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Contents

1 Inflation is Coming Are you Ready?3 Money’s too Tight8 Left behind9 Hanging on 10 Robots to the rescue 10 Swan Song11 We bet on Fire12 Here come the ‘70s 16 The Rise of the Chinese Consumer 17 The next resources Super Cycle 19 Triple digit Oil 21 An accelerating World disorder23 An existential threat gets closer 26 Venezuela’s last gasp27 Back to The Future 29 Challenging US dollar Hegemony 31 A Seismic Shift33 The Art of the deal 34 Trump in a China Shop38 And If there is an inflation problem? 42 Buy Gold. Really. 45 Gold, nickel copper and cobalt too48 K92: Just Getting Started 51 Searching for the next giant mine54 The Next Peru? Kenadyr explores a new frontier

The Inflation Edition April 2018

Inflation is Coming. Are you ready? And its coming, like a Tsunami. At 7:58 Am on Boxing Day 2004, at our cozy beach-side hotel on Thailand’s West Coast, suddenly the earth shook. Not strong enough to cause alarm, it was more noteworthy for its length (several minutes) than its intensity. At least, that is, where we were. It was in reality, a mega-quake with a magnitude of 9.1 at its epicenter around 500 kilo-meters to our Southeast. While it lasted, 1,600 kilometers of the earth’s crust ruptured, moving an estimated 15 me-ters horizontally, and by the time the shaking ended, the sea floor had risen several meters higher. The resulting tsunami took a full two hours to reach our little part of paradise. In the meantime, as it wreaked havoc on much closer lands, we made our way along a manicured path to breakfast. That morning, the ocean was windless, flat and calm as far the eye could see. To my friends a few kilo-meters offshore, the tsunami passed silently, an unseen malevolent force which without warning lowered and then lifted their boat several meters. What was that? From where we sat the breakfast chatter abruptly increased its pitch, as people moved to the restaurant’s beach side, straining to see where all the water had gone. Then, after a few minutes, just as suddenly as it disappeared, the ocean came back. A long white line in the distance. Even then, most were only curious, as if our upscale resort had organized the spectacle. Panic finally began when its enormity was apparent, as the first of a series of cataclysmic walls of water rolled in.

Too often, as happened that infamous boxing day, signs of an approaching danger are ignored. In 2004 the earth shook and the ocean vanished. Still there was no immediate stampede to high ground. More recently the ground shook as crypto-currencies collapsed, US treasury yield’s broke out of a three decade long down trend, and a global stock market plunge erased some $4 trillion in assets. What is occurring I believe, is just the beginning of a generational structural shift. That the global econom-ic environment is changing in a way that, over the coming months and years, will force a complete restructuring of our financial affairs. The pendulum is finally swinging back – after decades of flat-lined wages and in many cases, a declining standard of living – labor has hit a sweet spot of relative scarcity. That many commodities are already in short supply and with this reality, a new regime of inflation and rising interest rates will slowly begin. And as President Trump assembles his trade and Iran war cabinet, America and its dollar hegemony is ending. The financialization of the US economy, the era of rocketing capacity mediator stocks, such as Uber and Airbnb and social media giants is ending too. This is occurring as a two decade long global savings glut evaporates – just when it is needed the most. America’s chronic trade deficit (the last surplus was 1975) combined with a minuscule domestic savings rate and ex-ploding fiscal and national debt, leaves it little alternative than to borrow more. But the US will need to compete for savings with rising Asian consumers and China’s multi-trillion dollar plans to connect all of Eurasia, just to start. So from whom will America borrow from, and at what price? Like my friends offshore when the Tsunami passed, we should be asking a collective “what was that”and plan accordingly. A lower dollar and higher interest rates are on the horizon, possibly a trade war and a real war too and with all this comes both vast opportunity and danger.

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I’ve been laid off from workMy rent is dueMy kids all needBrand new shoesSo I went to the bankTo see what they could doThey said son looks like bad luckGotta hold on you[Chorus]Money’s too tight to mentionI can’t get an unemployment extensionMoney’s too tight to mention Simply Red 1985

Money’s too tight According to the Economic Policy Institute, “the United States lost 5 million manufacturing jobs between January 2000 and December 2014.” At the same time, as the clipping on the right illustrates, just after China joined the World Trade Organization in 2001, job creation went off a cliff. Chi-na’s economy boomed as it manufactured and exported to the US products that used to be made by American work-ers. China then reinvested much of its US trade surplus in treasuries which added to the pool of surplus savings while depressing bond yields. Concurrently, accelerating Chinese energy imports propelled oil prices higher creat-ing a dollar windfall for energy producers such as Saudi Arabia and Russia. The consequent trade surpluses they

experienced, added further to the savings glut. The tipping point was reached as oil prices exceeded $100 per barrel, just as a multi-trillion dollar pool of capital sloshed around a world that was becom-ing increasingly fragile. A housing bubble in the US and excess leverage, of both known and nearly unquantifiable amounts, given the complexity of structured securities, was only part of the approaching catastrophe. It was a proverbial accident waiting to happen, as minuscule bank capital requirements, liquidity mismatches (funding long term obligations with short term borrowing) combined with the infamous Gaussian Copula, which was thought to allow the modeling of complex risks without the need for historical data regarding actual defaults. With the magical Copula in hand, Wall Street quants managed to create, in he space of a mere half dozen years, the $66 trillion CDS/CDO market. Its magic however, only worked as long as real estate prices were increasing. When they started falling, these securities imploded, near-ly taking an already teetering financial system with them. The resulting 2008-09 global financial crisis had little effect on reinvested Chinese or Saudi dollar surpluses as for the most part, their trillions remained safely parked

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in US Treasuries. America’s response to the crisis began with the Troubled Asset Relief Program (TARP) or QE1, where the Federal Reserve bought toxic assets and equity from financial institutions while reducing short term rates to the zero bound. QE1 was fol-lowed by additional Treasury and mortgage purchases under the QE2 & QE3 programs. By May 2017 the central bank’s assets had increased from $882 billion or 6% of GDP prior to the crisis, to $4.47 trillion a record 23.5% of the country’s GDP. The Peoples Bank of China, European Central Bank, Bank of Japan, Bank of Switzerland and Bank of England followed America’s lead in reaction to their own subsequent financial crisis’. The six central banks purchases have increased their total assets from just over $6 trillion in 2007 to $20.2 trillion as of last December. Excluding China, the central bank bond buying included more that $9 trillion worth of mostly long dat-ed government bonds or nearly one in five issued in the $46 trillion market. Similar to Alexander Pope’s warning about vice, formerly unthinkable central bank debt monetization is now widely ‘embraced’ and has produced at its peak, a surreal $14.4 trillion worth of government bonds with negative interest rates.

Unwise allocationsWhen money costs are virtually zero and cash is in near limitless supply, there is very little incentive to allocate it wisely. Take last year’s auction of Argentina 100 year bonds, which was over subscribed by more than three times. As pointed out by Jorge Piedrahita, the CEO of Puma Investments: “When you look back in history, I’m not sure we can find a 20-year period where Argentina has not defaulted.”

The same may be said about share buy backs which had been outlawed in 1933 following the 1929 stock market crash. Though the ban was lifted in 1982, buybacks did not become widespread until the millennium. Now nearly ubiquitous – Goldman Sachs’ corporate desk just reported its highest weekly volume of buybacks on record – they are generally considered bullish at least for a company’s short term share price, but over the long term it is often a different story. An INSEAD study of 1,839 public companies in the United States over 5 years showed that “not only do buybacks not lead to growth in a company’s market value, they are strongly correlated

to a declining market value”. Sears is their poster-child. The company spent $6.9 billion buying its shares and is now worth only $729 million. But these lessons recent and

long past are blithely ignored so long as the market continues to march to new nose-bleed heights. Goldman analyst Christian Mueller-Glissmann noted in a report that: “The average valuation percentile across equity, bonds and

credit in the US is 90%, an all-time high. While equities and credit were more expensive in the Tech Bubble, bonds were comparably attractive at the time. The current valuation percentile is most com-parable to the late 20s, which ended in the ‘Great Depression.”

“Vice is a monster of so frightful mien, As to be hated needs but to be seen; Yet seen too oft, familiar with her face,We first endure, then pity, then embrace.” Alexander Pope

“The market is telling you something... it’s telling you it’s very dangerous...it’s way over-leveraged. Carl Icahn, billionaire, American businessman, investor, and philanthropist.

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Debt Funds Share Buybacks

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While the headline big picture valuations are critical for long term strategies, in the shorter term it is important to remember the old adage that ‘the market can remain irrational a lot longer than one can remain solvent’. Currently 10 year treasury yields have tested a major resistance level, so a corrective spike lower (and corresponding bond rally) would not be all to surprising, especially given that, according to CFTC speculator’s bond shorts are at their largest level in history. After that how things play out is really up to America’s Federal Re-serve and its stomach for a stock market free fall. Bernanke explainsFormer Fed Chairman Ben Bernanke outlined the causes of the 1929 stock market crash and subsequent depres-sion in a H Parker Willis Lecture in Economic Policy in 2004. Basically he cited research by Anna Schwartz and Milton Friedman which attributed the twin collapses to a series of Fed policy errors beginning with rais-ing interest rates to discourage what its board considered exces-sive stock market speculation. Two years later the Fed doubled down on the mistake by raising rates further to defend against a run on the dollar, as speculators converted dollars to gold. All the while the recession deepened and domestic banks collapsed by the thousands, leading to a massive 30% contraction in the money supply. Not mentioned in Bernanke’s speech is the debt bubble that existed during the 1920s and how it played a major part in the global collapse. The period was chronicled in Garet Garret’s 1932 book,

A Bubble that Broke the World. According to Garret, the Fed supplied excessive credit which created during the 1920s’, a ‘false prosperity’ together with a global debt bubble. Garret tells of the ubiquitousness of Latin American and other foreign bonds sold by New York brokers to a gull-

ible public. He emphasized that when the stock market crashed and the bond bubble burst, the losses suffered by small sovereign bond investors were incalculable. Like those bad old days the Fed figured prominently in the original financial bubble’s genesis, just as it did in its reso-

lution. As Morgan Stanley’s Mueller-Glissmann says the similarities to the 1920s proliferate, including bubble valuations for bonds and stocks. In a December 2017 report Artemis Capital calculates

that share buybacks ac-count for over 72% of earnings growth since 2012 and roughly $4 trillion of corporate America’s record $13 trillion debt was spent on share buybacks over the past 10 years. Last April 2017 an IMF study estimated that 20% of US

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Spending on buybacks by companies in the S&P 500

Net % of Fund Managers Saying Equities Are Overvalued

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“we’re working, obviously, toward a major increase in long-term interest rates, and that has a very important impact, as you know, on the whole structure of the economy.” Alan Greenspan former Chairman of the Federal Reserve of the United States

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corporations and $3.9 trillion in debt, are at risk of de-fault should interest rates rise. The chart below illustrates that median debt leverage of S&P companies excluding energy, is at a historic peak. Add to this hugely indebted governments (in the 1920s it was European and South American countries) highly indebted consumers and the rise of populism, largely due to rising inequality, and the future looks fraught. To this latter topic Bridgewater’s Ray Dalio writes: “the top 10% earned 45% of income (com-pared to 50% today), and owned 85% of the wealth (higher than the 75% they own today).

History lessons As Mark Twain says “History doesn’t repeat but it rhymes” The history lessons Bernanke recited during his Parker Willis Lecture are unlikely to be forgotten by the current Fed Chairman Jerome Powell, as he struggles to shrink the Fed’s balance sheet while taming accelerating inflation and accommodating fiscal and trade deficits. We have seen the initial reaction to a miniscule reduction in Fed as-sets. without triggering a financial market rout and global recession. As Powell does this, other than a diminishing influx from Asian and European investors as the central banks’ respective QE programs wind down there will be fewer inflows to moderate bond market yield rises.

Saudi Arabia, once a big buyer, is fighting an expensive war and just its Neom City project, part of an effort to modernize and diversify the economy, is budgeted to cost $500 billion. Rather than a treasury buying surplus, a budget deficit of 7.3% of GDP is forecast. Not only not a buyer, Saudi Arabia is now selling its own sovereign bonds rather than buying America’s. In Russia any excess funds are absorbed by its military or alternatively, purchases of gold bullion. China has its multi-trillion dollar, Eur-asia-connecting ‘One Belt One Road’ initiative to finance, together with an existential need to continue growing its middle class. Last year 60% of China’s GDP growth was attributed to increased consumption as its citizens move up the income ladder. This reality is changing the coun-try’s legendary consumer savings habits, as is demonstrat-ed by near quadrupling of the country’s household debt to GDP ratio. It was 46.8 % last year compared to 11.5% in 2008. If borrowing to consume continues growing at the same pace, they will match America’s 80% in only 4 years. How you can have both high and growing house-hold debt and savings rate doesn’t really add up. The bottom line is that increasing middle class borrowing will likely translate to a lower savings and thus less to invest in the outside world.

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Source: International Monetary Fund

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Wages and Salaries, private industry, state & local government 12 month percent change not seasonally adjusted

Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Source: Bureau of Labor Statistics

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If Mario’s rightIf Mario Draghi the head of the European Central Bank is correct when he says “wages are the primary driver of inflation” then America is about to experience its share of it. In a New York times arti-cle ‘Labor Shortage Gives workers an Edge’ according to Alan Krueger, a Princeton University economist America is “heading for a labour shortage’ while Mark Zandi the Chief Economist at Moody’s Analytics warns that “over the next 20 to 25 years a labor shortage is going to put a binding constraint on growth”. Judging from the latest statistics the shortage has already begun. The National Federation of Independent Business reports that “89 percent of those hiring or trying to hire reported few or no qualified appli-cants for the positions they were trying to fill”. Twenty-two percent of own-ers cited the difficulty of finding qualified workers as their single most important business problem. Reported increases in compensation rose 4 percentage points to net 31% the highest since 2000, and one of the highest readings in the NFIB survey’s history.

At the same time businesses are reporting increased bottlenecks and costs. A report from the American Trucking Associations says the industry needs to hire almost 900,000 more drivers to meet rising demand. According to an industry analysis by DAT Solutions, just one truck was avail-

able for every 12 loads needing to be shipped at the start of 2018. But few are entering the market as constant news of self driving trucks discourages new entrants and

electronic monitoring limits the hours that can be driven. The response has been to increase wages. Derek Leather’s the CEO of trucker Werner Enter-prises says they have increased wages 17% over the past couple of years. Not only do these wage increases add to inflation but the bottlenecks translate to higher transportation charges for their customers - also inflation-

ary. These labor shortages, however, are not limited to the US. In other advanced economies labor is also getting more dear. In Japan the pressure to raise wages is being felt where the shortage is such that there are 1.5 jobs for every applicant and unemployment is at a 25 year low. In Germany, IG Metall, Germany’s biggest union rep-resenting 3.9 million workers just won a 4.3% pay raise and a shorter 28 hour work week. A study, conducted by Prognos AG for the Bavarian Industry Association), predicts Germany will lack millions of skilled workers, technical and medical workers and researchers in the near future. According to Oliver Ehrentraut, author of the study, “One of the main reasons for the growing shortage is Ger-many’s aging population as the number of people of working age is

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“Volatility is an instrument of truth, and the more you deny the truth, the more the truth will find you through volatility. If central banks want to keep saving the day, that is fine. But volatility will then be transmuted through other forms like populism and identity politics and threat-en the fabric of democracy. And that is something that my hedge fund will never be able to protect against.” Christopher Cole, Artemis Capital

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54 59 64 69 74 79 84 89 94 99 04 09 14 19

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US Corporate Credit as a Percentage of GDP

set to fall sharply.” As a result of this demographic change, the labor market situation will considerably worsen over the next 10 to 20 years. France is also experiencing a shortage of skilled labor - in the construction, engineering and IT industries. In the UK a shortage of construction work-ers has hit its worst level on record, according to research conducted by the Federation of Master Builders. A Recruit-ment and Employment Confederation survey showed steep increases in starting salaries for permanent jobs throughout the UK last November. A Financial Times article “UK wages rise as companies struggle to fill vacancies” noted that The office for National Statistics is reporting a 17 year high for the number of unfilled jobs and that “the country’s unemployment rate is close to its lowest level since 1975.” Even in some developing nations wages are on the rise. In Thailand, where immigration is being discour-aged, unemployment is around 1%, the minimum wage is being boosted nationwide. The wage base in its Cap-ital Bangkok is to be increased 5% on the heels of a 3% increase in 2017. It is the same story for Malaysia where year on year wage growth has accelerated from 4% in 2016 to 7.3% last year. Clearly demographics have begun to work in favor of labor.

Left behindBut in some country’s the benefits of low unemployment are not equally shared. France has its underclass of the unskilled, boosting its unemployment rate to 9%. A 2015 article in the Economist Magazine reports: “Youth unemploy-ment of 32% for French-born citizens whose parents arrived from Africa, including sub-Saharan countries and those of the Maghreb”. That was in 2015, thus it does not include the latest wave of a million or so refugees. Newer statistics are hard to come by as ethnic-based census is technically illegal in France. With this latest influx a dreary cycle of crime, poverty and discrimination continues. A millennial version of Hu-

go’s Les Miserables. As these dispossessed seethe their hos-tility towards the French system grows. Riots have become common and more than 600 no-go zones, where ambulances and police will not enter without heavy back up, now exist. Last New Years Eve at least 1000

cars were set alight, an all too common eruption of violence, as this underclass vents their frustration.

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“Our problem going forward isn’t going to be unemployment – over the next 20 to 25 years, a labor shortage is going to put a binding constraint on growth.” Mark Zandi chief economist at Moody’s Analytics

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Hanging on Unlike France, America’s chronically unemployed seem to have almost melted away, ‘Living on’ as the Pink Floyd song goes, ‘in quiet desperation’. Referred to by Ameri-ca’s Bureau of Labor Statistics (BLS) as ‘not in the labor force’ (NLF), if only the segment’s prime age males are counted, their number exceeds 7 million. They also are not included in the latest BLS 6.7 million person, 4.1 % unem-ployment rate. Princeton University Professor Alan Krueger says it will be very difficult to en-tice these workers back into the work force. A Kansas City Federal Reserve paper by Didem Tüzemen, concurs. In a survey he cites ‘less than 15 percent of nonparticipating prime-age men reported that they wanted a job’. Kruger reports that of the lost 7 million, a third already receive disability benefits and another 20% are trying to qualify, making their return

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to work unlikely. Of the rest, most lack the skills neces-sary given the evolution in job requirements. Of greater concern, 44% of all NLF males surveyed reported tak-ing pain medication the previous day. In the US opioid prescriptions per capita have more than tripled between 1999 and 2015, with 42,000 dying from overdoses in 2016. Krueger calculates that opioid users account for 20% of the increase in NLF males. In the study he notes: “the opioid crisis and depressed labor force participation are now intertwined in many parts of the United States”. The White House’ Council of Economic Advisors estimates that in 2015, the economic cost was $504 billion, or 2.8 percent of GDP.

Every year is getting shorter never seem to find the timePlans that either come to naught or half a page of scribbled linesHanging on in quiet desperation is the English wayThe time is gone, the song is overThought I’d something more to sayPink Floyd, Time 1973

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Swan Song? An excerpt from Berkshire Hathaway’s 2018 annual letter encapsulates all that is wrong with the US equity market: company’s worth buying are impossible to find: “That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimis-tic purchasers. Why the purchasing frenzy? In part, it’s because the CEO job self-selects for “can-do” types. If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life. Once a CEO hungers for a deal, he or she will never lack for forecasts that justify the purchase. Subordinates will be cheering, envision-ing enlarged domains and the compensation levels that typically increase with corporate size. Investment bankers, smelling huge fees, will be applauding as well. (Don’t ask the barber whether you need a hair-cut.) If the historical performance of the target falls short of validating its acquisition, large “synergies” will be forecast. Spreadsheets never disappoint. The ample availability of extraordinarily cheap debt in 2017 further fueled purchase activity. After all, even a high-priced deal will usually boost per-share earnings if it is debt-financed.”

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Robots to the rescue Following China being admitted to the World Trade Organization, millions of US manufacturing jobs were outsourced to low-cost overseas labor markets. In recent years, however, advancements in robotics and changes in consumer habits, are eliminating the developing world’s cheap labor advantage. One example is the growing trend of on-demand customization of products, which typically are much smaller orders requiring fast fulfill-ment. Overseas purchases are generally very large and take months between ordering and delivery. In com-parison, Local robot-intensive production can be as fast as a few days while order size goes all the way down individual orders. Consumers like the ability to quickly get customized products while retailers like not having excess inventory . With overseas delivery often as much as 20% will be left over as tastes or seasons change. Then the leftovers must be cleared at a discount reducing profits and cheapening the brand identity. China’s Tianyuan Garments’ is building a T-shirt factory in Arkansas which consists of 21 lines of Sew-bots – automated sewing machines made by Georgia Tech spin-out Software Automation. Its chairman Tang Xinhong expects the factory, whose principal custom-er is Adidas, to ultimately make 800,000 T-shirts a day with a labor cost of $0.33 per shirt. Xinhong says that by using the technology, which replaces 17 workers for every Sewbot, they will have the lowest labor costs in the world. Another example is Apple iPhone parts supplier Foxconn which was in the news when in 2016 it replaced

60,000 Chinese workers with robots. Foxconn is building a 13,000 employee flat screen plant in Wisconsin, but the States low 3.2% unemployment has some existing businesses worried that the plant will make worse an already acute worker shortage. Anthony Snyder, CEO of the Fox Valley Workforce Development Board says that when the plant is operating in two to three years it will be a concern: “It’s another competitor for the labor we ‘don’t’ have here.” If Fox Valley is to grow their labor force what they pay workers will need to increase.

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Fire & Ice Some say the world will end in fire,Some say in ice.From what I’ve tasted of desireI hold with those who favor fire.But if it had to perish twice,I think I know enough of hateTo say that for destruction Ice is also greatAnd would suffice. Robert Frost 1920

We bet on FireHedge fund legend Paul Tudor Jones is betting on an inflationary fire. In a CNBC interview he warned that Trump’s tax cuts and fiscal spending increases will lead to accelerating inflation. “This reminds me”, Tudor says, “of the late 1960s when we experimented with low rates and fiscal stim-ulus to keep the economy at full employment and fund the Vietnam War.” At that time, similar to President Trump’s efforts to ‘make America great again’, a 1960s President Lyn-don Johnson’s election slogan was “Building a Great Society’. Both presidents enacted economy-boosting tax cuts and added considerably to government largess. President Johnson was out to eliminate poverty and inequality, with the twin fiscal black holes, Medicare and Medicaid, figur-

ing prominently. President Trump is expanding the mili-tary with an almost equal amount of Democrat-dictated, domestic spending. Neither could claim the economy needed the stimulus they were providing. In 1966 unem-ployment was 3.6% compared to the current 4.1%. Nor could they say it was affordable: 1968’s deficit was 2.8% of GDP, compared to 3.5% last year. What happened at the tail end of President John-son’s debt-fueled efforts to build a great society may be instructive. The resulting fiscal deficits combined with a flood of European imports to produce chronic balance of payments deficits and a glut of dollars overseas. Inflation which had been averaging 1.25% for the first half of the 1960s, seemingly came out of nowhere. It more than doubled in 1966 and kept rising to reach 5.46% by 1969. At that time the dollar’s value was fixed to gold and all other currencies were fixed to the dollar. Consequently there were no dollar devaluations to add to the inflation-ary spiral. The years of accelerating domestic inflation, mounting current account deficits and a corresponding need for a cheaper dollar did not go unnoticed. By late 1967 few thought the gold peg could hold and a stampede to convert dollars into gold was soon underway.

U.S. Net International Investment Position % GNP From Board of Governors of the Federal Reserve System International Finance Discussion Papers, # 53, May 1989

The United States as a heavily indebted country Author: David H. Howard

1948 to 1988

Just getting started...

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Here come the ‘70sA 1968 Time Magazine Article, ‘Gold: At the Point of Panic’, says America’s continuing balance of payments deficit, its constantly out-of-balance domestic budget and a rising outflow of money to finance the war in Vietnam, was at the root of the global panic to get out of the dollar. To Robert M. Collins a historian at the University of Missouri at Columbia, “The Crisis of 1968 marked the be-ginning of the end of America’s post war economic boom.” It was also, as it turned out, a precursor to abandoning the gold standard and the ‘70s’ double digit inflation. But if Foreigners panicked to get out of the dollar in 1968 it is remarkable, given the current environ-ment, that they are not rushing to the exits now. In 1968 President Johnson’s America had a healthy plus 11.7% per-sonal savings rate. Its citizens and government were compar-atively thrifty – with domestic and federal debt a respective 43% and 37% of GDP. Dis-cretionary spending accounted for a healthy 65% of the federal budget, meaning many options if spending needed to be cut. Its Net International Investment Position (NIIP), that is, total American investments abroad less to-tal foreign investments in America, was a respectable plus 8% of GDP. The dollar was gold backed so the country could not just print money at will to pay bills. President Trump in comparison looks like a sucker for taking the helm of what looks increasingly like a sinking ship. Both taxpayers and the government are maxed out with debts up to a respective 78% and 103% of GDP. The personal rate sav-ings has plunged to a minuscule 2.3% while the government’s discretionary spending is a mere 28% of the budget. Om-inously, the NIIP has collapsed to -45% of GDP, reaching a negative $8.4 trillion.

A Peterson Institute for International Economics post doesn’t mince words with the title: ‘The Unsustain-able Trajectory of US International Debt’. Its author,

Economist Joseph Gagnon sums it up with: “Never in history has one country owed so much to the rest of the world.” Gagnon expects it to decline further to -53 percent of GDP by 2021 a

zone where most country’s in the past have experienced serious difficulties.

Worsening deficits - weaker dollar Gagnon’s post cites a paper in 2005 by the current and former chief economists of the International Monetary Fund (IMF)—Maurice Obstfeld of Berkeley and Kenneth Rogoff of Harvard, which estimates that the US dollar, which was trading roughly at the same level at the time as it does now, would need to depreciate by around 33% in order to eliminate the trade deficit.

With an approaching $300 billion fiscal stimulus, reducing the trade deficit cer-tainly seems improbable at the current dollar exchange rate.

Not only does the government’s spending risk adding fuel to a growing inflationary fire, but the odds are that it will

“Never in history has one country owed so much to the rest of the world.” Joseph Gagnon Peterson Institute for International Economics

“The Crisis of 1968 marked the beginning of the end of America’s post war economic boom.” It was also, as it turned out, a precursor to abandoning the gold standard and the ‘70s’ double digit inflation.

Dashed line begins 2017 Sources: External Wealth of Nations database, IMF World Economic Database, US Bureau of Economic Analysis , (Cline 2016) Calculated by Brad Setser

U.S Net International Investment Position % GDP 1980 - 2021

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make the trade deficit worse. Like the Jerry Reed coun-try song “She got the gold mine and I got the shaft” America’s trading partners look set to benefit from much of the stimulus, while the US will end up with all of the debt. In a Foreign Affairs, Council on Foreign Relations blog post, economist Brad Setser de-scribes why this is likely: “The closer the economy is to operating at capacity, the more the demand created by the stimulus may bleed out to the rest of the world. That is arguably what happened in q4 of 2017. Domestic demand growth accelerated, with the contribution from demand to GDP growth rising from around 2.5 percent to above 3.5 percent. But an unusually big chunk of that was spent on imports—over 50 percent.” As the trade deficit grows worse America’s approaching trillion dollar fiscal deficits, and the Federal Reserve’s annual $600 billion QT program assure higher bond yields, just as the ECB’s start of its own QE wind-down adds to dollar weakness. This potential outcome is already being reflected in the cost to hedge the dollar against the yen, as they have increased to the point where Euro-debt is more attractive to Japanese investors – another reason for the recent yen and Euro strength compared to the dollar.

Will rising money costs be inflationary? In the July 2017 issue, of Epsilon Theory, ‘Gradually and Then Suddenly’, Ben Hunt asks: “how is it possible... with the easiest money to borrow that corporations have experienced, with all the amazing technological advancements that we read about day in and day out – that companies have not invested more in plant and equipment and technology to improve their labor productivity?” The answer he says is “why would management take the risk – and its definitely a risk – of investing for real growth when they are so awash in easy money that they can beat their earnings guidance with a risk free stock buyback?.” “How does this apply to wage in-flation? It’s the same thing. Why in the world would a company pay up to fill a position when it’s a risk they really don’t need to take... “How does this change? Hunt concludes: “As the Fed slowly raises rates, ... it will force companies to play it less safe. It will force companies to take on more risk. It will force companies to invest more in plant and equipment and technology. It will force companies

to pay up for the skilled workers they need. You want wage inflation? You want productivity growth? Then raise rates!” Hunt has a point, and to it we would add that making money more expensive alters

the buyback calculation dramatically. First there is the in-creasing cost of debt that already exists, then there is the

US non-financial corporate debt has never been higher at more than $ 8 trillion. This debt has in turn helped fund an estimated $5 trillion worth of share buybacks over the past decade.

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added cost of buying additional shares. US non-finan-cial corporate debt has never been higher at more than $8 trillion. This debt has in turn helped fund an estimated $5 trillion worth of share buybacks over the past decade. Economist William Lazonick of the University of Massachusetts at Lowell argues that these buybacks encourage “value extraction over value creation” and have “contributed to employment instability and income inequality.” According to a November 2017 National Bureau of Economic Research paper by Edward Wolff, the top 10% by wealth class (net worth which exceeds US $1.43 mil-lion) owns 93.2% of the country’s stocks and mutual funds. As consumers that 10% can buy only so much - limiting any economic trickle down effect. Instead the result, as Lowell argues, is mainly negative for the vast majority of Americans that don’t own shares, have limited financial resources and depend on business expansion for a job. Not surprisingly it is principally non-listed smaller companies that have started expand-ing – increasing capital investments, and are driving the first wave of demograph-ics-exacerbated wage inflation. They don’t do buybacks. Meanwhile, as Robert Shiller, Pro-fessor of Economics at Yale University says in a CNN report, “smoke and mirrors” has become an acceptable way to feign per share profit growth and increase executive bonuses. Similar to America’s corporate debt growth,

‘40% of total earning per share growth and a third of its gains since 2009 are from share repurchases’. Christopher Cole, Artemis Capital

the impact has been a ‘Trumpian Yuge’. In an Octo-ber, report entitled ‘Volatility and the Alchemy of Risk’, Artemis Capital’s Christopher Cole estimates that 40% of total earning per share growth and a third of its gains since 2009 are from share repurchases.

The unvirtuous circle... It is a wholly unvirtuous circle – Shiller’s smoke and mir-rors – made possible by ultra cheap money, repealed laws against corporate share buybacks, and most recently, a cresting wave of tax-reform-goosed profits. On January 18th Vito Racanelli wrote in Barron’s: “The huge run-up in stock prices has brought the total market capitalization of the Russell 3000 Index — which covers 98.5% of the country’s market cap-italization — to $30 trillion”. This increases, according to Advisor Perspectives, the ratio of the Russell 3000’s mar-ket cap to GDP to a record 137% slightly higher than its dot-com bubble peak of 136.5 % in January 2000.

Obviously extreme valuations? Does this dampen corporations appetite for buybacks? Last month $153.7 billion in planned share repurchases were an-nounced, the most in any month

ever while JP Morgan Chase & Co. expects buybacks to total $800 billion this year. Eleven years ago, Citigroup’s CEO, Chuck Prince was at least candid about the pre-crash market environment. In a 2007 Financial Times interview he said that though the party would end at some point, there was so much liquidity, he didn’t think it would be disrupted by any turmoil in the US sub-

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prime mortgage market. Infamously Prince added: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,” At the time the econ-omy looked rock solid, defaults of speculative-grade debt, for example, were at their lowest level since 1995. Going back further, Artemis Capital’s Christo-pher Cole makes the case that inflation was the source of the 1987 crash while reminding us how – similar to the 1960s – it can come out of nowhere. Cole writes: “At the start of 1987 inflation was at 1.5%, which is lower than today! From 1985 to 1986 the Federal Reserve cut interest rates over 300 basis points to offset a slowdown in growth. Between January and October 1987 inflation violently rose 300 basis points. Nominal rates jumped even higher from 6.98% in January 1987 to 10.23% in October 1987. The Fed tried to keep pace throughout the year but was not fast enough. The quick increase in inflation was blamed on a weak dollar, falling current account balance and rising US debt-to-GDP levels. None of this hurt equity markets , as the market rose 37% through August 25th, 1987. Then the wheels fell off”. As Trump channels Johnson for what looks like spectacularly ill-timed 1960s-vintage fiscal-stimulus policy, ‘70’s style inflation appears unavoidable. The bigger sto-ry, however, is both the end of the 37 year bond bull mar-ket, together with the bubble-inflating era of ultra-cheap credit. To understand why, it is helpful to understand what drove the bull market in the first place. The 1989 disintegration of the Soviet Union and in 2001, China’s accession to the World Trade Organization, were the pri-Page 15

mary sources of a deflationary tail wind that has powered the bond bull market for the past 28 years. With these two events, a vast pool of much lower priced labor was added to the global labor pool. In a column titled “China Wage Levels Equal To Or Surpass Parts Of Europe” Kenneth Rapoza writes: The numbers associated with the integration of China and East Europe are staggering. Counting just the potential workforce, the working population in China and eastern Europe between the working ages of 20 to 64 was 820 million in 1990 and hit 1.2 billion by 2015. The available working population in the industrialized countries of Europe was 685 million before the crack-up of the Soviet Union in1990 and hit 763 million in 2014, a one-time increase of 120% in the workforce that put the brakes on wages for lower skilled workers, according to the BIS.

Labor pool shrinks as middle class grows Critically, this wave has crested as these labor pools are integrated and their numbers contract. A February article in The Christian Science Monitor “Eastern Europe embraces automation to bolster shrinking workforce” captures the essence of this new profoundly important trend. Ac-cording to Reuters correspondent Gerely Szakas: “While policymakers and economists in many parts of the world worry about the potential social negatives of robots displacing humans, here auto-mation is a godsend for companies that want to avoid losing market share.” “Economists warn the labor shortage could have a crippling effect on some of eastern Europe’s economies before the end of this decade, at a time when companies in the west are also complaining about the scarcity of workers, including in Germany, the Netherlands, France, and Britain.”

When Mr. Prince stopped dancing...

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In the 2017 May-June issue of the Harvard Business Review Irene Yuan Sun warns that: “China’s ascendancy in global manufacturing is now coming under structural pressure. A generation under the one-child policy has shrunk the country’s labor pool, causing shortages in its coastal manufacturing hubs. And labor costs have risen sharply in recent years: Hourly manufacturing wages have increased by 12% annually since 2001, and productivity-ad-justed manufacturing wages nearly tripled from 2004 to 2014. In Bloomberg Kevin Hamlin, and Xiaoqing Pi note that not only is the labor pool shrinking but the number of people actually choosing to work is declining as well, “The participation rate... fell from just over 77 percent in 2010 to 72.4 percent in 2015.”... “China is struggling to maintain manufacturing competitiveness as rapid aging causes its workforce to shrink and wages to rise faster than productivity gains.” Wang Feng, a professor of sociology at the University of California, Irvine sees this as a positive trend: “These quite noticeable changes should cause no concern, but can actually be cel-ebrated,” said Wang. “I truly think it is the arrival of a new labor market, moving towards those in other market economies with middle to high incomes.” Rapoza notes that: “Shanghai median wages are not all that much different than Poland’s at $1,569. The same goes for the Czech Repub-lic, with its median salary in Prague, its richest city, sitting around $1,400.”

The Rise of the Chinese Consumer The flip side of higher wages is a giant fast-growing pool of consumers. According to Foreign Policy’s Salvatore Babones, China’s middle class already totals 430 million people and it is expected to reach 780 million within the next 10 years. “The three big urban agglomerations of east-ern China — the areas centered on Beijing, Shanghai, and Hong Kong — have already converged in GDP per capita with developed Asian countries like Taiwan and South Korea, at least in purchasing

power parity terms” he writes. Walter Chow at Joes Data, says Chinese consumers are already buying 1.7 times the number of cars as Amer-ican consumers as of last year. In the future, accord-

ing to Mining Technology, China expects to sell 7 million electric vehicles annually by 2025 – around half of the global total. A typical battery powered car needs 80 kilos of copper and a bus, 370 kilos – so its also great news if you are copper miner. When not driving at home, the Chinese abroad are not insignificant to the world econo-my either. A 2017 UN Tourism study states: “China leads the world for the number of tourists – up 12% from the previous year, with 135 million Chinese tourists spending US $261 bil-lion.” The US in comparison was the second largest with less than half as much –$124 billion in tourist spending.

“The three big urban agglomerations of eastern China — the areas centered on Beijing, Shanghai, and Hong Kong — have already converged in GDP per capita with developed Asian countries like Taiwan and South Korea.” Salvatore Babones, Foreign Policy

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The Next Resource Super Cycle While China’s middle class grows and its labor pool shrinks, the prices of many world’s basic materials have been quietly moving higher. Lumber prices (see chart below) has been soaring since 2015. A series of warm winters have left the spread of tree-killing pine beetles unchecked, just as desert-like con-ditions led to giant forest fires. It will take decades, if ever, for parts of major lumber producing prov-inces such as British Columbia to recover. A Global News headline captures the essence of the disaster: “Wildfires devastate the province like never before”. A trade dispute that ended with the Trump administration slapping on 20% tariff on Canadi-an lumber has added to costs. Material prices are on par with labor shortages as builders’ main worries, a National Association of Home Builders survey showed in January. Like labor, the materials bull market is not a question of unbridled economic growth driving up prices, but instead, con-strained supply. In China, one of the world’s largest sources of metals and coal, the ‘quality’ of economic growth and reducing pollution is the new focus. Early March China unveiled its plan to ensure an“eco-logical civilization” a concept which was at the same time enshrined in its constitution as an amendment. The new strict regulations not only stop polluting factories and mines but also ensure the fast adoption of clean energy technologies. Electric cars (and buses) are one example. And they use up to four times the amount

of copper that petroleum powered vehicles do. But while they add to metals demand, the new rules are also reduc-ing supply. Thousands of polluting small mines are being closed, and larger, more profitably ones are being refitted with less polluting technologies. As China throttles back mining produc-tion, few large mineral deposits are currently being devel-

oped globally to replace the many giant deposits that are shrinking in size and grade as they are mined. A study by Richard Schodde at MinEx Consulting concludes that “after adjusting for the conversion rate and processing loss, it is clear that we are not finding enough gold to sustain future production. Schodde also warns of the potential for a “severe shortfall” in

zinc and nickel resources over the coming years. As reported in the Australian newspaper, a Goldman Sachs Commodity study led by analyst Craig Sainsbury, concluded that, “the lowest level of exploration

spending in almost 30 years and a fixation on dividends is setting up the next resources super cycle”. It notes that while the last com-modities boom was driven by

a surge in demand from China, the next boom will reflect issues with supply. “This time, however, rather than double-digit demand growth driving a mismatch and ultimately current pricing

volatility, it is supply rationalisation, both domestically in China and by major Western mining companies.” During the 2000 to 2011 com-modity cycle, more than $900 billion was invested developing new mines. Towards its frothy conclusion, some eye-popping mistakes were made. Kinross Gold Corp’s (TSX:K) $7 billion purchase of Redback Min-ing is one example. The company

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subsequently wrote down 80% of its value. Rio Tinto’s (LON: RIO) $3.7 billion takeover of Riversdale Mining is another. “Everything that could go wrong with Riversdale did and within months,” according to the SEC in its case against the company’s former CEO Tom Albanese. “Rio Tinto’s own modelling had determined it had a value of between negative $3.45 billion and negative $9 billion” according to the SEC. Failing to disclose these embarrassing details are at the basis of the regulator’s case. Albanese can take some comfort in that his misery was not without company. A Citigroup re-port says 90% of the value of projects acquired between 2007 and ‘11 were eventually written down. At roughly $85 billion it was not a small amount.

Risk avoiding wallflowers Burned once twice shy, pretty much sums up the mindset of the average mining executive. Thomas Biesheuvel describes a typical large company CEO in Bloomberg as “risk avoiding wallflowers”. Randgold Resource CEO, Mark Bristow says: “The mining industry has lost its nerve”. According to Joe Foster a senior manager at VanEck a $46 billion global funds group, “you want companies to create value, and its getting more difficult for them”. As Foster infers, new giant economic dis-coveries are becoming increasingly rare, and though 2017 marked the first annual increase in exploration spending after four years of decline, the time required to take a discovery all the way to become a producing mine, means that any impact on supply is more than a decade away. As a conse-quence the ten year’s pipeline of new deposits is simple to calculate and for many metals it will not be nearly enough to satisfy demand. Extrapolating copper consumption growth at 1.8% per annum, almost half of its 30 year average of 2.9%, Schoddee calcu-lates that by 2043 the world will need to have found and mined more copper than the total amount

of copper produced during the past 3000 years. But the majors are more interested in the here and now, setting the industry up for future supply shortages. Glencore, currently the world’s largest miner by revenues is not, according to its CEO Ivan Glasenberg, investing in any greenfield projects. BHP Billiton the world’s third largest has cut its cap-ital and exploration spending by 75% from its 2013 peak. Rio’s new religion appears to be profitability and making sure shareholders benefit from it. Last month they announced $5.2 billion in dividends – the most ever for the company.

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The writing is, however, on the proverbial wall. And while the big miners may have lost their growth mojo, they do foresee tightening supplies. BHP warns that “in the medium term, we see the need for additional supply to be induced across most of the sectors in which we operate” specifically warning that: “grade decline, increased input costs, water constraints and a scarcity of high-quality future development opportunities are likely to result in the higher prices needed to attract sufficient investment to balance the copper market.” Glasenberg scolds car makers saying in the FT that they have not woken up to “how important cobalt is and how tight cobalt is”. In Rueters a senior executive of Japan’s largest copper smelter, Pan Pacific Copper, Satoshi Arai warns that “the global refined copper market will likely face a shortage of 216,000 tonnes this year” four times the shortfall in 2016. Both McKinsey Global Institute and UK researcher, CRU Group, expect strong growth in demand to combine with restrained production growth to intensi-fy the copper deficit in the coming decade and beyond. It is the same story for gold. Because it takes on average more than a decade for a discovery to be developed into a mine the amount of production coming on line in the next few years can be rough-ly calculated and the outlook is not encouraging. A Deloitte Global Mining group report ‘Tracking The Trends 2018’ notes that for the 10 years prior to 2016, “the amount of gold discovered declined by 85 percent, while reserves have fallen by 40 percent since 2011”. Scotia Mocatta, the bullion bank division of Canada’s Sco-tiabank expects “supply to tighten in 2018 and 2019 as a result of lower capex in recent years,” while the Schodde MinEx chart on the previous page illustrates the in-dustry is “not finding enough gold to sustain future production” for at least the next decade. A December 2017 McKinsey Global Institute report estimates “that global consumption could grow by $23 trillion between 2015 and 2030, and most of this will come from the expanding consuming classes in emerging econ-omies”. Much of this growth will come from China. McKinsey calculates that by 2022, 76% of China’s ur-ban population will have moved into the middle class bracket representing approximately 570 million peo-ple. This is significant because buying gold whether in the form of bullion or jewelery, is deeply embedded in the Asian culture as a primary form of savings.

Triple Digit Oil ? In their 2017 Q4 commentary: Triple Digit Oil Prices are you Ready? natural resource experts Leigh Goehring & Adam Rozenewajg, through their namesake advisory firm Goehring & Rozenewajg and Associates (GRA) continue to build the case for a major oil bull market. This latest report follows up on GRA’s initial call for higher oil prices which was made January 2017 when oil was trading around $50 a barrel. If oil’s price does exceed $100 it won’t be the first time the two analysts have been correct. In 2006, while they managed approxi-mately $5 billion in assets for Chilton Investment Compa-ny, Goehring predicted dramatically higher oil prices, a bold call given the overall sentiment. Oil’s price had just declined from $78 to $57 per barrel when he warned that IEA data indicating an approaching oil glut was wrong because it had overestimated global supply while under-estimating demand. When his predicted supply short-age became apparent, oil rocketed to a record $147 per barrel.

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GRA now calculates that since 2007, oil con-sumption has exceeded conventional oil discoveries by more than 250 billion barrels. The last six years was particularly alarming with only 40 million barrels discov-ered compared to 170 million barrels consumed. This discovery and consumption mismatch will result in much higher oil prices, they conclude, while warning that the discovery and development of America’s shale basins and flawed supply and demand estimates coming from the International Energy Agency (IEA) have masked this alarming and unsustainable global trend. Amin Nasser, chief executive of Saudi Aramco also warns of looming shortages. In a speech at this year’s CERAWeek in Houston, he said that more exploration was needed as the industry had already lost $1 trillion in investments since the downturn, and as a consequence, “Last year, only 7 billion barrels equivalent of oil and gas combined were discovered, which is among the lowest on record”. Saad Rahim the Chief economist at Trafigura, which last year had approximately $100 billion in rev-enues making it one of the world’s largest commodity groups, estimates that the $1 trillion translates to 20 billion barrels of reserves that will remain undeveloped. Aramaco’s Nasser says that increased exploration is essen-tial, not only meet the growth in oil demand but to “ also offset a large natural decline in developed oil fields”.

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He warns that “conservative estimates suggest about 20 million barrels per day of new capacity is required over the next five years”. Like GRA he does not think enough new production is in the development pipeline to supply it. Currently the IEA estimates that demand for oil will jump by 6.9 million barrels a day to 104.7 million barrels a day by 2020, with the US supplying 60% of the increase. GRA says the IEA’s global consumption forecast is too low and notes that the agency has revised its initial estimates upward by an average of 1 mm b/d in eight of the last nine years. GRA also has serious concerns regarding the IEA’s US production figures, noting that its analysis of US shale basins shows that “evidence has emerged suggesting drilling

productivity is peaking and may very well begin to decline – especially in the Bakken and Eagle Ford”. They expect continued growth from the giant Permian play but with the other two plays in

decline they conclude it will be very difficult to replicate the 1.5 mm b/d production growth experienced in 2013 -14. Critically, GRA analysis shows the total additional US, Argentine and Russian shale reserves are dwarfed by the global decline in conventional reserves. The analysts are not alone when they question America’s shale growth sustainability. In a Wall Street Journal article Continental Resources founder Harold Hamm, one of America’s most prominent shale oil pio-neers, recently expressed doubts about US shale produc-tion growth expectations, calling Department of Energy’s estimates a “Phantom forecast that needed huge growth to catch up with projections”. Marc Papa another shale industry giant expressed his doubts while on a panel at this year’s CERA Week by IHS Markit in Houston. “There are good geological spots in shale plays and weaker geological spots, and a lot of the good geological spots have already been drilled,” warning that “you’ve got basically resource exhaustion that is beginning to take place.”

“Last year, only 7 billion barrels equivalent of oil and gas combined were discovered, which is among the lowest on record”. Amin Nasser CEO Saudi Aramco

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An Accelerating World DisorderAdding to GRA’s upside scenario are geopolitical risks that grow day by day. As is usual with this topic, it is hard to avoid the tinderbox that is the Middle East. Turkey’s disputes with its neighbor Greece over oil (deep water ex-ploration) and islands, or its invasion of Syria and threats to American troops, are only small problems. The poten-tial for Saudi upheaval or a new Israeli-Hezbollah-Iran war are far graver risks. More than 20% of the world’s oil supplies come from the region every day heightening the oil-price-boosting impact of any disrup-tion. Less urgent but still worth including is Venezuela’s death spiral and its impact on oil supply. With the recent addition of war hawks John Bolton and potentially Mike Pompeo to President Trump’s cabinet, a conflict with the Iran and North Korea together with the acceleration of Venezuela’s collapse become greater risks. 2018 if anything is unlikely to be boring. The House of Saud has had a close relationship with the US ever since 1933 when Standard Oil Company of California signed a concession agreement with King Abd al-Aziz. A lot has hap-pened since then, suffice it to say that the US imports of Saudi oil are at a 30 year

low, just as America has gone from being a customer to an oil-exporting competitor. Worse for the Saudi’s their most recent petro-dollar surpluses have evaporated as a result of oil’s 2014 price collapse and exploding Saudi social costs. The remaining common ground between the Saudi’s and the current US administration is their de-sire to contain the spread of militant Islam and Iranian expansion, together with a mutual belief that the Iran nuclear deal is deeply flawed. The Saudi’s are also an ‘approved’ buyer of some of America’s most advanced weapons - thus an important customer. Last May the kingdom agreed to purchase $350 billion worth of US weapons, the largest arms deal in American history. Iran is Riyadh’s main ideological and geo-strate-gic rival, and Saudi Arabia has been generally guarded in its responses to the Iran-nuclear agreement. In the London-based Saudi-supporting a-Sharq al-Awsat

newspaper, the headline announcing the deal was “Iran Nuclear Deal Opens the Gates of Evil in the Middle East.” Its former editor, Salam al Dossary, presciently

warning that the deal would allow Iran to expand its terrorist and destabilizing activities throughout the region, as it increased Iran’s wherewithal to support and expand extremist militias. He concluded that: “the real concern is that the deal will open other gates of evil, gates which Iran mastered

knocking at for years even while Western sanctions were still in place.” More recently, Saudi Arabia’s Crown Prince Mohammed bin Salman (MBS) said Iran, Turkey and extremist groups represent a “triangle of evil,”further warning that Turkey, a belligerent NATO member, would like to “reinstate a caliph-ate”. MBS announced in 2016 his ‘Vision

Crown Prince Mohammed bin Salman

“I believe Islam is sensible, Islam is simple, and people are trying to hijack it... we have more allies in the religious establishment, day by day.” Mohammed bin Salman crown prince Saudi Arabia, In Gulf News Saudi Arabia

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2030’: a plan to transform Saudi society, moving it back to its pre-1979 state with many of the features of a liberal modern country. Hence the decision to allow women to drive, open movie theaters and allow public events with mixed sexes. This, however, violates a fragile truce with the country’s Wahhabi clerics. Since the 1979 siege of the Grand Mosque the Royal Family has sought to placate the clerics, initially by rolling back the 1970s’ liberal reforms and then by enforcing and exporting to other parts of the world, the Wahhabi’s hard-line ideology.

A key aspect of MBS’ strategy is to eliminate the until recently near-ubiquitous presence in the Kingdom, of the Muslim Brotherhood, putting MBS at odds with Turkey,

the Brotherhood’s biggest sup-porter. History shows that the Brotherhood has spawned the leadership, of virtually every Levant-based radical Islamist group since its birth in 1928. Former brotherhood members include: Abu Bakr al-Bagh-dadi, Osama bin Laden, and

Ayman al-Zawahiri. MBS is also at the head of an effort to eliminate Brotherhood sympathizers from all educa-tional leadership and teaching positions in the country -

the near opposite of what is occurring in Turkey. If MBS is successful, the global funding of extremists is likely to slow dramatically, and Saudi Ara-bia, with a freer society will be better positioned to diversify its economy away from a dependence on oil. But why is he doing it? Probably in large part out of necessity. Since 1970 the country’s population has grown more than five fold, from 6 million to 31 million and despite its massive oil revenues it cannot afford to continue placating its religious establishment and the rest of the population with generous government programs and subsidies. An astounding 70 percent of all Saudis are under the age of 30, while unemployment is 12.8%, totaling just over 900,000 job seekers. Few have the training to work in the private sector, compared to the 11 million skilled foreigners that work in the

“he has broken with a great number of traditional policies of the Saudi royal family. In effect, he’s leading a revolution from above — so far bloodless, thank God.” Middle East expert Bernard Haykel on Crown Prince Mohammed bi Salman

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country. Of the Saudi’s with jobs, two thirds are ‘em-ployed’ by the government, helping explain why more than 40% of the Saudi budget goes to salaries and allow-ances. Running government deficits of 7% to 15% of GDP, depending on oil prices, while fighting an expensive treasury-depleting war is not something any country can sustain for long, a reality MBS must be cognizant of. His Vision 2030 is a logical, albeit enemy-awakening, reme-dy. The Brotherhood and their ilk, were already his antagonists, – Osama bin Laden believed that “Saudi Arabia had been turned into ‘an American colony” while last year his son Hamza bin Laden called for the overthrow of the Saudi monarchy. To the Brotherhood and their die-hard brethren MBS is likely to have taken a step too far. According to Bernard Haykel, professor of Near Eastern Studies at Princeton University: “He also realizes that women are the better half of the population in terms of human capital. They are the better educated, the harder work-ing, and so if he wants to build up the private sector and diversify the economy, he’s going to have to rely more on women than on men. And he’s done many other things. I mean, he has broken with a great number of traditional policies of the Saudi royal family. In effect, he’s leading a revolution from above — so far bloodless, thank God.” If the sad news of the progressive prince’s assas-sination was to occur it would not be the first. Former Egyptian Prime Minister Mahmoud El Nokrashy Pasha (who was murdered by the brotherhood) is but one ex-ample, while peace-maker, Muhammad Anwar el-Sadat is another. Closer to MBS, in 1975 another would-be Saudi modernizer, King Faisal also met an unfortunate end. It is a black swan event that only the evil could wish for.

The moles are coming...

An existential threat gets closer As MBS eliminates the Brotherhood hydra, Israel’s air force has been busy bombing Isis in the Sinai, and Hez-bollah in Syria with a wack-a-mole frequency. Russia, normally the keeper of Syrian airspace, has stayed on the sidelines. But the tempo is increasing and the targets are getting bigger and closer as Iran’s proxy’s continue to test Israel’s resolve regarding keeping them from its borders.

Worryingly, with the Syrian conflict winding down, the Iranian’s will have more time for Israel-focused mischief, just as a battle hardened Hezbol-lah is likely keen to reinforce its anti-Zionist credentials. A

war in the region would add to oil’s risk premium, just as renewed sanctions and the end of the Iran nuclear deal is likely to translate to costlier crude. “Israel is preparing for war” warns US Senator Lind-sey Graham as quoted in the AL-Monitor. Last Novem-ber, the Israeli air force destroyed an Iran-backed Shia mi-litia base near Damascus. A month ago an Iranian base to the South-west of Damascus was flattened by Israeli missiles. But the dangers do not stop there. The Israeli’s say that Iran has built missile factories within Lebanon for Hezbollah. The Kuwaiti-based Al-Jarida newspa-

“the real concern is that the deal will open other gates of evil, gates which Iran mastered knocking at for years even while Western sanctions were still in place.” Salam al Dossary, Former Editor in Chief, a-Sharq al-Awsat

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per, concurs, quoting a member of Iran’s Islamic Revolutionary Guard Corps member who brags about the new precision-mis-sile-manufacturing capability. Iranian bases in Syria and factories for precision missiles in Lebanon are red lines for Isra-el. They have yet to attack any Lebanese targets and Hezbollah appears to be spoiling for a fight if they do. The militants have formed and trained now combat-hardened pro-Ira-nian military groups across Syria and Iraq over the past several years, as confirmed by Hezbollah expert Nicholas Blanford in AL-Monitor. In a Russian International Affairs Council article, Kirill Semenov, the Director of the Centre of Islamic Research at the Institute of Innovative Development, describes Syri-an-based units that are directly subordinated to the Iranian command of Al-Quds. They include the Fatemiyoun Divi-sion – recruited from Afghan Shiites with 3,000–5,000 of these serving in Syria on a rotational basis and the Paki-stani Zeynabiyun – all available should hostilities break out with Israel. The appointment of John Bolton as National Security Advisor and the just confirmed by Congress ap-pointment of Mike Pompeo as Secretary of State, is like-ly to embolden Israel in its response to Iranian encroach-ment. In the past, Mr. Bolton has advocated pre-emptive military action against Iran and North Korea for their attempts to develop nuclear-weapons programs. Pompeo is as hawkish and it is unlikely that the years have softened their opinions. Instead they are more likely too see them as confirmed. Iran has used the massive revenues made possible by the nuclear deal to spread terror, foment a civil war in Yemen and support the Syrian Assad Regime while

“Iran is busy turning Syria into a base of military entrenchment, and it wants to use Syria and Lebanon as warfronts against its declared goal to eradicate Israel,” Benjamin Netanyahu, Prime Minister of Israel

Iranian dreams

it consolidated its presence in the Levant and developed ballistic missiles. That is only what is obvi-ous and does not cover what they may have done clandestinely. To Bolton and Pompeo, walking away from the nuclear deal is likely a compromise. As the destabilizing odds of an end to the Iran nuclear

agreement increase, a Pandora’s box that was always destined to open will do so sooner than later. When Iran signed the nuclear deal three years ago, its Su-preme Leader Ayatollah Ali Khamenei did not respond by speaking of a new peaceful beginning. Instead he predicted that his sworn enemy Israel “will not see

[the end] of these 25 years”. Last December Seyyed Mousavi, Command-er-in-Chief of Iran’s Army, declared that should Israel re-spond militarily to its ongoing encirclement: “We will destroy

the Zionist entity at lightning speed, and thus shorten the 25 years it still has left”. Adding to the Iranian leadership’s record of bellicosity, former President Hashemi Rafsanjani speaks of war with Israel: “In a nuclear duel in the region, Israel may kill 100 million Muslims. Muslims can sustain such casualties, knowing that, in exchange, there would be no Israel on the map.”

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Apparently no sacrifice is too great according to Rafsanjani when it comes to destroying Israel. Israel has given notice that its long range F-15 fighters will not be participating in next months Red Flag exercises with the US in Alaska next month. They might expect Syria to retaliate after they flattened the Tiyas (T4) airbase, northeast of Damascus. Their target was an advanced Iranian air-defense system at the base. Seven Iranian Revolutionary Guards’ Quds Force members, including drone unit commander Colonel Mehdi Dehgan, were killed in the strikes on T4. Preventing Iranian encroachment on land and in the sky is existential. In Lebanon, Iran already has its proxy Hezbollah ready to rain missiles down on Israel’s heartland from bases in all-Kiswah and Damascus airport if there is a conflict. Israel’s next move may be to take out Hezbollah missile factories reportedly in the Bekaa Valley and near Sidon on the Lebanese coast. It is a constant low level conflict with many twists and unintended consequences. The subsequent alleged

chemical attack against the rebel enclave at Douma is a good example. The attack was quickly followed by a mis-sile barrage from French, British and American warships and was aimed at three minor Syrian targets. The timing was just in time for the release of dissident FBI Director James Comey’s tell-all anti-Trump book , ‘A Higher Loy-alty’. But it was also before an OPCW chemical inspec-tion team had a chance to even try to verify the attack raising suspicions that it was more political showboating. There was no negative impact on Syria and its citizens were literally dancing in the streets – relieved by the attacks meekness. The most negatively impacted by the whole event is Israel. Russia plans to give the new S-300 air defense systems to Syria and provide training so that the Syrians may operate the mobile systems according to Russia’s Defense Ministry. The point is to telegraph to the world that they stand behind their allies. When and if the system arrive, when it is oper-ational it will effectively end Israel’s Air dominance over much of Syria. When asked about the system in a BBC interview, Russia’s Foreign Minister Sergey Lavrov said “A few years ago at the request of our partners, we decided not to supply S-300s to Syria, now that this outrageous act of aggression was undertaken by the US, France and UK, we might think how to make sure that the Syrian state is protected.” The system’s arrival could be what Israel needs its F-15s for.

Russia’s Almaz-Antey S-300PMU2 Air defense system

US French & British Missile Strikes

Venezuela’s last gasp “The overwhelming presence of oil did act, indirectly, to deform the economy and national life. Privilege sectors of the population began to acquire the mining mentality of newly rich spend-thrifts. The uninterrupted flow of dollars encouraged imports and expanded commerce to such a degree that the nation became primarily a consumer of foreign products. We began to appear too much like that chaotic California—the paradise of adven-turers and thieves—during the days of the gold rush.’’ Romulo Betancourt, Former President of Venezuela 1945-48 So begins Carlos Rossi’s study: ‘Oil Wealth and the Resource Curse in Venezuela’ as published in the Inter-national Association for Energy Economics in 2011. Since the report was written conditions have hardly improved. As shown in the chart below, Venezuelan GDP has collapsed to levels not seen for 70 years. A tragic 60% of the population lives in extreme poverty. What little food is available to the malnourished pop-ulation is tightly controlled by the government reality which is expected to ensure its success in this May’s elections.

Sales of crude by state-owned PDVSA, prin-cipally to America’s heavy oil refineries, is plummet-ing. When Hugo Chavez first came to power in 1999 production totaled 3.5 million barrels of oil per day. By 2017 the per day total had been halved – at 1.63 million barrels – a death spiral that shows no sign of ending. Of this diminishing amount, a quarter is sold in the domestic market at a massive loss, while anoth-er third is pledged to pay Chinese and Russian loans. What’s left is sold to US refineries for cash which is mostly used to keep the tottering regime afloat. In 1989, at the time of the Soviet Union’s collapse, a common refrain of similarly suffering state employees was “they pretend to pay us and we pretend to work’. PDVSA Suppliers and oil field service compa-nies are now owed an estimated $20 billion and like its employees they likely feel the same way. Oil field maintenance work, which is critical to keep PDVSA’s heavy oil flowing, is at a near standstill. The doom loop of underfunded maintenance leading to lower oil production and even less money for maintenance and so on, started when President Chavez began diverting oil revenues from oil field maintenance to fund gener-ous social programs. A strike by oil workers in 2003 led to mass firings and an exodus of the country’s heavy oil expertise. Many fled to Canada’s oil sands projects in Alberta. The PDVSA and the oil ministry is now un-dergoing another upheaval as its latest strongman Nicola Maduro looks for a scapegoat and to shore up his regime. Oil minister Eulogio Del Pino and most of the PDVSA executive have been fired on trumped

The sad fruits of socialism 20172015201320112009200720052003200119991997199519931991198919871985198319811979197719751973

2,000

1,750

1,500

1,250

1,000

750

500

250

0

US Imports from Venezuela of Crude Oil and Petroleum Products

thousand barrels per day

2018

2014

2010

2006

2002

1998

1994

1990

1986

1982

1978

1974

1970

1966

1962

1958

1954

1950

Source: Venezuela Central Bank up to 2014 World Economic Outlook (IMF) onwards.

Venezuela GDP per capital 1950 -2018 (1950= 100)

240

220

200 180

160

140 120

100

80

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Back to the future Chinese gold-backed oil futures address OPEC grievanc-es dating back to the early ‘70s.In their 2005 research paper, ‘Black Gold, the end of Bretton Woods and the Oil-Price Shocks of the 1970s’, econ-omists David Hammes and Douglas Wills argue that a loss of oil’s purchasing power was a major moti-vator for OPEC’s imposition of oil price increases during the 1970s. Prior to then, the Bretton Woods Agreement had fixed the US dollar to gold and other currencies, while establishing the US dollar as the free world’s global reserve and trading currency. OPEC oil producers’ contracts were stipulated in US dollars which then could be exchanged at knowable rates with other currencies and, perhaps as important to a gold-centric middle east, the dollar was convertible at a fixed price into gold. Once the Bretton Woods agreement collapsed, the purchasing power of their oil, which remained priced in US dollars, quickly eroded. For example by 1973, a contract pricing oil at $4.31 a barrel in US dollars would have bought them $5.82 worth of goods had it originally been quoted in Yen. If the same contract had been convertible for a fixed amount of gold, as they were under the Bretton

12

10

8

6 4

2

0 2010 2011 2012 2013 2014 2015 2016 2017 Source: US Petroleum Information Administration, China General Administration of Customs. note: December US Imports derived from weekly crude oil imports

Monthly U.S. and Chinese gross crude imports million barrels per day

up charges of corruption. The new oil minister and PDVSA CEO is a general from the country’s thuggish national guard. Many of the company’s employees are fleeing the company and country and have been replaced by soldiers from the national guard with scant knowledge regarding crude production. Francisco Monaldi an expert on Venezuela’s oil industry warns that Maduro is giving “a big piece of the pie or the rents to the branch of the army that is responsible for repressing protest and domestic control of the population”. The Trump administration is contemplating cutting off all imports of Venezuelan crude which would would force PDVSA to make deeply discount-ed sales of its heavy sour crude to India or China. Limited financial sanctions already exist but there are none that target the oil industry - although given the country’s trail of unpaid bills and broken contracts few banks are willing to give PDVSA letters of credit. At this point Maduro’s options are limited to dealing with the Russians and Chinese who are also reluctant to extend more credit. Approximately $8 billion worth of bonds must be repaid in 2018 so conditions can only get worse. The flow of oil is expected to plunge by a further 300,000 barrels to around 1.3 million bar-rels of oil per day per day by year end. “Production is collapsing in a way rarely seen in the absence of a war,” writes Francisco Monaldi, in an Atlantic Council Report entitled “The Collapse of The Venezuelan Oil Industry and its Consequences” . Venezuela’s doom loop continues.

King Ibn Saud with SOCAL Officials, 1948

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Woods agreement, the purchasing power of a barrel of oil soared to US $11.83. The collapse of Bretton Woods occurred as a consequence of the Federal Reserve’s con-tinued monetization of government deficits, which combined with growing trade deficits, resulted in its trading partners, accumulating a mountain of dollar reserves. These reserves in turn, increased the domestic money supplies and inflation of the coun-tries accumulating them. Valéry Giscard d’Estaing, Frances’s finance minister during the 1960s, famously called the fiat money benefit America derived from the dollar’s reserve status as its “exorbitant privilege”. By early 1971 America’s dollar liabilities ex-ceeded $70 billion, a number that seems quaint when compared to the current $8.4 trillion in net debt that the US currently owes to foreigners. Compared to 20 years previous however, when US dollar liabilities were minuscule, US gold reserves totaled 21,707 tons, and the global fear was that there would be a dollar shortage, it was an astounding figure. In his 1950 essay entitled ‘Dollar Shortage and oil surplus in 1949-50’ Princeton University’s Horst Mendershausen writes:

“while relieving the foreign dollar needs inherent in the progress toward more effective cooperation with poorer nations, the United States was not able to still the fears abroad that within a few years—the year 1952 used to be considered as the critical — the supply of American dollars might decline greatly and that such a decline might worsen the prospects of

economic improvement and political stability in many parts of the world”. How times can change. From a ‘50s dollar drought to drowning in dollars in the1970s. An initial trickle of dollar-gold conversions became a flood as it became increasingly obvious that, if the conversions continued, the US would run out of gold. By August 15th, 1971, when the dollar’s gold backing did end, there were only 10.6 tonnes left – just enough to cover the first $12 billion of its $70 billion in dollar liabilities. During the first two years of the dollar floating freely, Arab oil producers’ revenues in terms of the other major Western currencies plunged 25%. “To focus only on the US dollar price of oil is to ignore the chaos, falling revenues per unit, and rising prices that the sellers of oil were facing” Hammes and Wills emphasize. Gold has been a store of value in the Middle East for the millenia and it retains a central role in

the Middle Eastern and Asian hawala money transfer system. To their ancient cultures, the dollar is a relatively new and unproven fiat construct. Once the dol-lar’s gold backing ended, a barrel of oil was immediately devalued in gold terms from 10 barrels per ounce of gold to 12 barrels and then almost 35 barrels of oil. The Middle East’s oil producers were acutely aware of there loss of purchas-ing power and reacted in kind. Kuwait’s oil minister Abdulrahman Al-Ateeqi complained just prior to the outbreak of hostilities which led to the first oil embar-go and price shock “What is the point of producing more oil and selling it for an unguar-anteed paper currency?”

Barrels of Oil per Ounce of Gold after the end of dollar-gold convertibility

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

40

35

30

25

20

15

10

5

0

NYMEX OIL long term chart $140

120

100

80

60

40

20

1970 1980 1990 2000 2010 2018

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Challenging US dollar HegemonyThe seeds of the petro-dollar’s dominance were sewn in the chaos of WWII. Prior to the war, Europe and the Far East accounted for the largest part of world trade, Japan and Germany were among the most developed industrialized and export-ing nations, British war ships ruled its oceans, and pound sterling dominated trade. Global exports, as the 1947 IMF annual report notes, were greatly reduced by the “virtual disappearance of Germany and Japan from world markets”, while American exports to Europe were 90% higher than their pre-war volume. Following the war, similar to China today, America became the world’s largest creditor, as it exported products and services the world wanted while lending the money needed to pay for them. In 1945 the US held 75% of the free world’s gold reserves and its economy accounted for 50% of the world’s production and supply of goods. The war also left America in control of half of the world’s readily accessible oil, while Britain controlled the other half. It is in the midst of this multifaceted dominance, that the petro-dollar came into being. Despite American dominance, in 1947 pound sterling still accounted for 87% of global foreign exchange reserves as noted in a study by Catherine R. Schenk at University of Glasgow. At that time foreign exchange was only about 30% of global reserves, but gold holdings were highly concentrated in the USA so that foreign exchange made up about half of global reserves excluding the USA, she notes . Old habits die hard and sterling had been in use internationally since 1860, especially in Asia and Africa. Sterling was globally available, stable and a trusted insti-

tutional network was already in place to facilitate trade. It also had the City of London, – Europe and the world’s – pre-eminent global financial center, with the infrastructure necessary for finance and currency trading, together with a global network of business and political connections. London’s predictable, largely a-political regulatory framework, that was investment-friendly (and expatriate & tax friendly - think of all the Arab princes and Russian oligarchs that currently reside there) added to sterling’s longevity. Brit-ain was also an important cold-war US ally. America’s constant trade surpluses during the 1950s also resulted in, at least initially, a shortage of US dollars. The availability of pound sterling conve-niently alleviated this problem, delaying dollar supremacy until the mid-1950s. All of these factors contributed to slowing its decline as a reserve currency. What assured its eventual multi-decade march to irrelevance was the country’s massive debts, and the implosion of its global income together with the dismantling of its empire. Compared to it’s post-war glory days, America now appears increasingly inward-looking and reminiscent of the UK as

the sun was setting on its empire. The US has gone from the world’s largest creditor to its biggest debtor. It has not had a trade surplus for decades, and its entire (non-GAAP) debt load exceeds $69 trillion. America’s fiscal deficits have persisted since the millen-

nium and are expected could exceed $1 trillion beginning next year. The country’s attachment to Middle East oil has also cooled. US onshore shale production makes America virtually energy self suffi-cient, so instead of depending on the Middle East for oil America’s principal interest is selling its multi-billion dollar weapons systems to them.

Prince Mohammed bin Salman and President Xi Jinping

What assured its [the pound sterling’s] eventu-al multi-decade march to irrelevance was the country’s massive debts, and the implosion of its global income together with the dismantling of its

MAEDEL’S

1939 1945 1947 1948 1949

USA

OTHER

WORLD

INDEX Trends in World Manufacturing and Mining Production 1937=100

150

125

100

75

50

25

0

WORLD ECONOMIC REPORT 1948 UNITED NATIONS

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Enter China. It does need foreign oil and has become the world’s largest energy importer. China’s version of America’s Marshal Plan, the One Belt One Road Initiative (BRI) is already leading to multiple yuan swap agree-ments with countries along the belt. Small yes, but consider them test runs. As the dollar’s long march to suprem-acy illustrated it can be a multi-decade transformation. The BRI is designed to develop a China-centered trading network connecting 65% of the worlds population. China is America’s geostrategic competitor. As such it is unlikely to be hap-py executing petro-dollar trades where every transaction is under the watchful eye and legal writ of American lawmakers. Some of China’s oil suppliers are not at all liked by the US. Angola, Iran and Russia are the first few that come to mind. So a yuan trading block looks inevitable. The only real question is: ‘how long will it take?’ The March 26th debut of yuan-denominated oil futures contracts in Shanghai, gives China a degree of pricing power that is logical step towards yuan-based foreign trade. The country’s gi-ant pool of speculators offers the potential for a deep liquid market similar to its other domestic commodity markets. As shown on the chart right, Asia Pacific commodity exchanges already dominate global commodity futures trading. Last year for example, more than $4 trillion worth of steel derivatives traded on the Shanghai exchange, a good sign as to how well the exchange’s new petro-yu-an futures will do and a favorable comparison to the $11 trillion (annual trade value) international oil futures markets. Shanghai exchange officials were modifying the oil con-tracts’ conditions right up until its debut and have added capital control exemptions and tax holidays to ensure a successful start.

Commodity trading giants Glencore and Tragifura, Mercuria ini-tiated some of the first trades a great initial endorsement and turn-over was at a scale comparable to the UK’s Brent contract which it is meant to challenge. The initial physical customers are limited to China’s giants PetroChina, Sinopec, Cnooc and SinoChem, so this could be a problem. The biggest issue however may be yuan’s low liquidity given it is only about 2% of the world FX market, together with capital controls which hamper the international use of the yuan. Currently the easiest way to trade out of the yuan contract for foreign transactions is to convert the yuan proceeds into dollars which in turn defeats the whole purpose. However one way to avoid converting yuan into the dollar is via the country’s Shanghai Gold Exchange International Bourse (SGEI) gold contracts, which allow foreigners to directly invest in the country’s gold market using offshore yuan. According to the gold contracts’ rules of delivery, a buyer can take delivery from an SGEI certified vault and then export the gold, thus use gold bullion

as a medium of foreign exchange and a store of value for example, that Chi-na’s main crude supplier’s, the Middle Eastern producers are comfortable with. The SGEI vault is in the Shang-hai Free Trade Zone (FTZ) and thus can be both imported and exported as

the FTZ is deemed to be outside of China for customs purposes. This should be attractive to other large oil traders or producers who wish to avoid the US dollar system, because they now can sell their petro-yuan contracts, and instead of converting to dollars, use the yuan proceeds to purchase gold-yuan contracts which upon delivery can be exported to any destination they chose. Between the gold convertibility, the structure of the con-tracts which are for seven different grades, mainly from the Persian Gulf, and the existence of a deep pool of liquidity-providing speculators, the contract is tailor-made for China’s middle-eastern suppliers.

The contract also may enable uncooperative traders to circumvent the US dollar’s geopolitical hegemony, as it provides a way to circumvent an future US sanctions. empire.

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1950 52 54 ‘56 ‘58 ‘60 ‘62 ‘64 ‘66 ‘68 ‘70 ‘72 ‘74 ‘76 ‘78 ‘ 80 ‘82

Currency Distribution and Foreign Exchange ReservesCurrency Distribution of Foreign Exchange Reserves 1950-1982

(SDR Valuation)

1970 Sterling US Dollar

Other

1955

90.0

80.0

70.0

60.0

50.0

40.0

30.0

20.0

10.0

00.0

From: World Production and Supply of goods The Retirement of Sterling as a Reserve Currency after 1945: Lessons for the US Dollar? Catherine R. Schenk University of Glasgow

A Seismic Shift The world’s economic center slowly moves to Asia Of the $1.5 trillion President Trump proposes be spent, according to his 10 year plan for rebuilding the Ameri-ca’s crumbling infrastructure, only $20 billion per year is specifically funded. He hopes the balance, if the pro-gram is ever approved, will come from business and State governments, many which are already struggling to contain crisis-level pension-funding deficits. In con-trast, China is in the midst of the largest infra-structure build-out in world history and is currently two thirds of the way through its 13th, five year US$2.17 trillion infrastructure development plan.

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The contract also may enable uncooperative traders to circumvent the US dollar’s geopolitical hegemony, as it provides a way to circumvent an future US sanctions. Even though an actual transaction may have nothing to do with the US, if it is done using US dollars it will be subject to US law and US sanctions. This is because US dollar SWIFT payments must clear through U.S.-based computers. The 2015 $150 million FIFA corruption scandal is one example. All of the cases of bribery involved other countries and were not technically illegal in the US as the payments were not to government officials. Instead the charges were racketeering, wire fraud, and money laundering with the US claiming jurisdiction be-cause of the US of the Swift system. Another example occurred a year earlier when France’s BNP Paribas paid a record $8.97 billion in fines to the US Treasury for using dollars in transactions with Cuba, Iran, Sudan and Myanmar – countries which at the time were sanctioned by the US. Many country’s chafe at the concept of US laws being imposed globally, especially when they may be in conflict with their own laws and strategic interests. In The Daily, a Gavecal Research bulletin, Charles Gave describes what has evolved from a com-mercial perspective as US “regulatory protectionism“ where American courts grab jurisdiction over US dollar deals made worldwide. “Until a case is resolved, foreign institutions that contest rulings may be excluded from the US financial system. It used to be that consenting parties to a contract could decide the jurisdiction to settle a dispute, but a relentless 20-year land grab by the US courts, lawyers and financial sector has seen the dollar ‘weaponized’, and the US judicial writ now runs globally.” China’s answer is to slowly develop its own version of SWIFT it calls China international payments system (CIPS). So far it can be used for electronic transfers of yuan between Europe and China. The People’s Bank of China is leading the CIPS initiative and 19 Chinese and foreign banks are directly participating in its development; and a further 38 Chinese banks and 138 foreign banks are part of the network. The reality of an, in effect ‘weaponized’ US dollar, can only make future yuan-based transactions a more attractive. China is expected to announce yuan oil contracts with Angola and Russia this summer. Turkey may be also having a close look at petro-yuan yuan-gold trade, especially as it continues deepen its ties with both Iran and Russia. Iran is another candidate. Asadol-lah Asgaroladi the Chairman of the Iran-China Chamber of Commerce expects trade to reach $50 billion this year as China continues to work with Iran to complete major infrastructure proj-ects across the country. The looming end to the Iran Nuclear deal and the latest Russian sanctions add to a sense of urgency .

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Source: SWIFT, Feb 2018

Major International Payments Currencies

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Last year, according to a Rueters report, China spent $323 billion during the first 11 months on trans-portation infrastructure including 5,000 kilometers of new express ways. Spending is expected to occur at the same pace this year and includes plans for an additional 4000 kilometers of railway track of which, 3500 km is high speed. By 2020 its rail system is expected to extend for 149,000 kilometers, 20% of which is high speed. Once completed, eight out of ten cities in China, that have more than one million permanent residents, will be connect by the ultra-fast train system. China already has two thirds of the world’s high speed rail capacity and its Beijing-Shanghai high-speed railway, with a 352 kmh top speed, is currently the world’s fastest. The national system with 3.25 billion passenger trips taken last year, is another record breaker, as the world’s busiest. The country’s infrastructure build-out looks to be just the beginning, as its BRI starts to develop trans-portation networks (and future markets for its products) along six economic corridors spanning Asia, Europe and Africa. U The Nikkei Asian Review (NIR) dubbs it “Chi-na’s Marshall plan,” in reference to the American aid project to help Western Europe rebuild after World War II, although in dollar terms the BRI is about 12 times the size. According to Henry Kissinger, the former US Secretary of State who orchestrated the start in 1972 of America’s usually harmonious relationship with the

People’s Republic of China, “By seeking to connect China to Central Asia and eventually to Europe, the new Silk Road will in effect shift the world’s center of gravity from the Atlantic to the Eurasian landmass”. Che-Ning Liu, Co-head of Global Banking for Asia-Pacific at HSBC says “The BRI will be the main driving force behind global economic growth in the next 20 to 30 years”. Kevin Sneader the Chairman McKinsey & Company’s Asia-Pacific region opines that “At one level, One Belt, One Road has the potential to be perhaps the world’s largest platform for regional collaboration”. Commitments totaling $1.1 trillion to finance BRI infrastructure have already been made by the The Asian Infrastructure Investment Bank, Silk Road Fund and the New Development Bank. It is, however, early days and a lot more money is needed. The Asia Development Bank estimates that it will require $22.6 trillion worth of infrastructure investment by 2030, or $1.5 trillion a year. Trade exceeded US $3 trillion between 2014 and 2016 an amount that is increasing with the BRI’s advancement. The Xinhua News Agency Gao Feng,

spokesperson of the Ministry of Commerce, reported that Trade volume among China and coun-tries along the Belt and Road amounted to 7.4 trillion yuan (about 1.2 trillion U.S. dollars) in 2017, surging 17.8 percent year

on year. Imports outpaced exports at 26.8% compared to 12.1%. BRI trade is also decreasing China’s exposure to

its largest trading partner - the US. “Today, when faced with a new trade war imposed on us, the difference in economic strength between China and the U.S. has never been more favorable to China,” said Mei Xinyu, an analyst at a think tank under China’s Commerce Ministry. In 2017 China’s total exports accounted for 19% of its gross domestic product compared to 35% in 2007. Of this amount, the portion of exports to the US have stayed relatively constant at around 19% of its total exports equaling just under 7% of its GDP.

Che-Ning Liu, Co-head of Global Banking for Asia-Pacific at HSBC says “The BRI will be the main driving force behind global economic growth in the next 20 to 30 years”.

MAEDEL’S

The Art of the deal“My style of deal-making is quite simple and straightforward. I aim very high, and then I just keep pushing and pushing and pushing to get what I’m after.” So writes President Trump in his 1987 best seller ‘Art of the Deal’. Larry Kudlow the President’s , advisor and the White House National Economic Council Director, thinks its “very possible” that in the end there will be no tariffs, adding, “its all part of the process”. Last January’s import tariffs on solar panels and washing machines was the opening salvo regarding China’s unfair trading practices. In March President Trump’s assault was renewed with global, open-ended punitive tariffs on steel and aluminum for a respective 25% and 10% US imports – subsequently countered by China’s $3 billion worth of countervailing duties on 128 products it imports from the US. Bernd Lange, head of the European Parlia-ment’s trade committee, called it a “declaration of war” and, forgetting that it was the US that was running a giant trade deficit and Europe the surplus, inferred that Trump’s thinking was in a ‘mercantilist’ time warp that “dates back 200 years”. Jon Gallinetti, a retired USMC Major Gener-al, pinned the mercantilist label on China, in a review of a book called ‘Death by China’, by White House Director of Trade, Peter Navarro. The good Major explains that China is: “using economic weapons of mercantilism and currency manipulation synergistically with espionage, cyberwarfare, space weapons, resource monopolization, and technology theft to gain domi-nance. In the process, the fundamental economic and

geopolitical strengths that underpin America’s military superiority are being systematically eroded while China becomes increasingly assertive in regional disputes.” James Mattis, the US Defense Secretary, recently warned that China was “leveraging military modern-ization, influence operations, and predatory economics to coerce neighboring countries to reorder the Indo-Pa-cific region to their advantage”. Navarro also accuses both Germany and China of “mercantilist” trade practices. Canada and Mexico have since been exempted from the metal tariffs while NAFTA negotiations with the US continue. Korea has also received an exemption in exchange for giving US car makers better access to its markets and accepting a quota on its steel exports to the US. Punitive duties on steel and aluminum export-ed from European Union, Argentina, Australia, and Brazil, have also been ‘paused’ while discussions with the US are underway. The Trump administration’s strategy effectively narrows down the number of countries that it is target-ing, while the tariffs also send an important, ‘we’ve got your back’, message to a key voting block Republican’s need to win over during this November’s mid-term elections. Threatening tariffs also gives the President something to concede as he negotiates for more equita-ble trading agreements. In Foreign Affairs, Kenneth Rapoza points out that “The point of making the tariffs global—for now—is so China can’t ship steel to Mexico and get it into the U.S.”. In other words, these countries have been exempted from the tariffs on a case by case basis and discussions are ongoing as to how to

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USD/Yuan

09 10 11 12 13 14 15 16 17 18

7.2 7.1

7.0 6.9

6.8

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6.2

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keep the tariffs off - greatly eliminating the potential for cheating, while resulting in a more nuanced trade policy.

Trump in a China ShopOn April 3rd, President Trump renewed his offensive, announcing 25% tariffs on a range of products, which Chad Brown an economist at the Peterson Institute for International Economics estimated would effect $46.2 billion of Chinese exports to the US. Peter Navarro in a subsequent PBS interview said “China has been steal-ing our technology for years” adding that the “dialogue goes back to 2003” and “they have not responded to our concerns”. Trump’s biggest complaint was the ongoing theft of American intellectual property often through China’s requirement for foreign companies doing busi-ness in China to enter into a joint venture with a Chinese partner. The partner, which is often state-owned, then makes disclosing proprietary technology a condition of the joint venture. Too often the Americans say, the tech-nology later turns up being used by a Chinese competitor to make a competing product. Trump also focused his ire on China’s slowness too open up its financial sector and on its import duties on cars saying: “When a car is sent to the United States from China, there is a Tariff to be paid of 2 1/2%. When a car is sent to China from the United States, there is a Tariff to be paid of 25%,” Trump tweeted. “Does that sound like free or fair trade. No, it sounds like STUPID TRADE -- going on for years!” No mention was

made of America’s current 25% light truck import tariffs. The next day President Xi threatened reciprocal penalties on $50 billion worth of products, focusing on Republican voting strongholds. Xi’s choice of soybeans, illustrates this. Midwestern soybean farmers are among the Republican’s most loyal supporters and soybeans are America’s largest export to China, at $12.4 billion of the $130 billion worth of products the US exported there last year. Soybean futures dropped 40 cents per bushel on the announcement. In Irving Texas-based Southeast Farm-press, American Soybean Association President and Iowa farmer, John Heisdorffer predicted the tariffs “will have a devastating effect on every soybean farmer in Ameri-ca” adding that “At a projected 2018 crop of 4.3 billion bushels, soybean farmers lost $1.72 billion in value for our crop this morning alone” As a tit-for-tat US – China trade war becomes a reality, the timing does not look good for Republi-cans when the collateral damage involves the loss of US soybean farmers’ biggest customer. The US Administra-tion’s final tariff decision could be made as early as June. China’s countervailing tariffs, if America goes ahead with its threats, are likely to immediately follow. That would mean soybean tariffs by the end of September - long after crops are planted and two months before harvesting begins. The soybean harvest begins October and US elections are in November just after any bad news – if soybeans sales are effected – come out. Then there are the latest immediately effective, 178% tariffs on US sor-ghum worth $1 billion to US farmers. Awkward timing if you are a Republican trying to get elected. The fact that soybeans are such an important import for China, and that the effect of the tariffs could lead to higher food prices there, shows how politically motivated targeting soybeans is. China, is the world’s biggest pork producer and consumer, and imports mas-sive amounts of soybeans to be used as feed. In 2017 it imported 95mn tons, with around a third of the total coming from the US. Lower cost soybeans from Brazil supplied China just over 50 million tons or just over half of its imports. For the coming year at least, the supply was likely to be divided between the two countries. This leaves China with few options for additional sources if it is to try to shut American soybeans out of its market. Argentina, is the world’s third largest producer and might have been an alternative supplier in the event

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of a US-China trade war, but it has just finished a disas-trous growing season. “Hope has withered for any recovery in Argentine soy yields hit by a four-month drought” is how a Ruet-ers article describes this year’ Argentine crop. Since then conditions have worsened and farmers are reporting 50% yield reductions. Platts, a commodity analytics provider, reports that the expected fall in Argentine soybean pro-duction is being compounded by a “severe protein short-age” in soybean meal production due to inferior-quality beans. What is clear is that beans are in short supply and that may help American soybean growers find alternative buyers so that in the end they get a good price for their crop after all. Judging from the soybean futures market’s reaction, either very few believe the tariffs will become a reality or, thanks to the Argentina’s drought, and the world’s growing appetite for protein, like so many other materials, a tight market may mean American farmers are likely to find alternative buyers.

Doubling downSince China’s tariff announcement, President Trump es-calated the rhetoric by threatening a further $100 billion in tariffs in a ‘I call your 50 and raise you 100’ in a high stakes move to see if President Xi would blink. China is restricted in what it can do next, as there are only another $80 billion or so American exports left for it to slap puni-tive import duties on. It does have other indirect options such as making life hard for US companies already oper-ating in China. If thing got really ugly, China could restrict the export of products or materials US manufacturers depend

on. Rare earth metals (REM) are certainly candidates. They are critical to the manufacture of advanced elec-tronic products and China controls 79% of world supply, a further 10% coming from Australia. America’s only REM source is the mothballed Mountain Pass rare earths mine in California, and incredibly, this source of highly strategic metals is also Chinese controlled. China could also devalue the yuan but this would be highly counter productive regarding its efforts to internationalize the yuan, just as it would harm its grow-ing BRI trading partners. What is required for both is stability and strength. So a yuan devaluation is probably a nonstarter. But maybe a strong counter-punch is not neces-sary. Xi’s goal is likely to be achieving a smooth, gradual and conflict-free ascent to shared hegemony with the US – with China the dominant player in Asia. So he will keep saying nice things to keep things from boiling over, or when easy throw a bone or two to President Trump, in the hope of avoiding an all out trade war. But he is highly unlikely to alter the county’s key strategies. Specifically President Xi is unlikely to alter Chi-na’s ‘Made in China 2025’ program whose principal focus is moving Chinese industry to the highest levels of innova-tion and global production, while raising domestic content of core components. As much as the plan may annoy America’s pres-ident it stands on familiar ground. When the plan first came out in 2015 Scott Kennedy the deputy Director at the Center for Strategic & International Studies consid-ered the plan to be “more consistent with how Germany and Japan approach their economies than the United States”. Kenne-dy adds “The initiative draws direct inspiration from Germany’s

Source:US Census Bureau USA Trade Online

$30

$25

$20

$15

$10

$5

$0

Billio

ns $

World Total

China Rest of the World

Trailing 12 Month Value of U.S. Soybean Exports to the World and to China ,

December 2002 through to February 2018

Dec 2

002

Dec 2

003

Dec 2

004

Dec 2

005

Dec 2

006

Dec 2

007

Dec 2

008

Dec 2

009

Dec 2

010

Dec 2

011

Dec 2

012

Dec 2

013

Dec 2

014

Dec 2

015

Dec 2

016

Dec 2

017

1800

1700

1600

1500

1400

1300

1200

1100

1000

900

800 2010 2012 2014 2016 2018

US Soybean Futures (CFD)

Tight market

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“Industry 4.0” plan, which was first discussed in 2011 and later adopted in 2013. The heart of the “Industry 4.0” idea is intelli-gent manufacturing, i.e., applying the tools of information technology to production”. 2025 also ties in with China’s Belt and Road initiative by calling for increased invest-ment in BRI countries so that Chinese companies become more familiar with future foreign markets and strengthen their overseas investment and operating risk manage-ment. 2025 still emphasizes leveraging access to the Chinese market in exchange for foreign technologies as it is a holdover from an earlier 2010 plan which the former Obama administration tolerated and apparently Pres-ident Trump doesn’t. The Chinese perspective is that 2025 will translate to a more prosperous China with the higher consumption and imports that will accompany China’s economic growth. China is a rising power and far along enough that any sanctions from Trump are unlikely to slow its ascent. The sentiment domestically is both confident that its prosperity will continue and is defiant regarding America’s demand that it alter the way it is developing. Mei Xinyu, an analyst at a think tank under China’s Commerce Ministry sums up the general attitude when he says: “Today, when faced with a new trade war imposed on us, the difference in economic strength between China and the U.S. has never been more favorable to China,” Carlos Gutierrez the former Secretary of Commerce during the 2004 Bush Administration, agrees saying “China is large enough to not rely on the US anymore”. Carl Weinberg, chief economist at High Frequency Economics also agrees saying “We

believe China believes that it has little to fear from U.S. tariffs, and that it sees itself as having more to gain from holding on to the upper ground in the face of U.S. threats,” Weinberg doubts Chinese export volumes will be effected by tariffs because they no domestic substitutes. He says Trump’s Tariffs would be inflationary as U.S. consumers “pay more to buy the same stuff because they have no choice”. As the chart belowshows China’s global trade picture – its current-account surplus, is now almost trivial at only 1.3 percent of gross domestic product at the end of 2017. (Note the massive surpluses Germany quietly accu-mulates). The country’s economy is increasingly dominat-ed by services, consumption and technology. Last year consumption accounted for 58.8 percent of the GDP, with the services sector growing 8.2% and retail sales 10.2%. China’s modernization and own research efforts dwarf most other countries and the results in the form of new technologies are just beginning to show. A record 243,500 international patent applications were filed last year, according to World Intellectual Property Orga-nization. These patents “represent the best new technology that is arising in the world,” WIPO chief Francis Gurry told journalists in Geneva. The US kept the top ranking, with 56,624 filed. Chinese companies and individuals filed a total of 48,882 international patents last year, marking a hike of 13.4 percent from a year earlier, the UN agency said. “At current trends, (China) is projected to overtake the US within three years as the largest source of applications filed under WIPO’s Patent Cooperation Treaty,” the agency said. “One cannot but notice that there has been a remarkable transformation in the Chinese economy, and that China has gone from a position of being largely a user of technologies to a producer of technolo-gies,”later adding “This is part of a larger shift in the geography of innovation, with half of all international patent applications now originating in East Asia,”.

Source: WIPO Satistical Data Base September 2017

Resident Non-resident

Patent grants for the top 20 offices2016 WIPO

Catching up...

China Current Account to GDP

1981 1988 1995 2002 2009 2016

12%

10 8 6 4 2 0 -2 -4

Source Trading Economics, Eurostat

MAEDEL’S

velopment can only be hardening just as they emphasize the need for a fully developed yuan trading block and less reliance, in all ways, on the U.S.. How will the trade spat end? From over here in Asia it is clear as the light of day that President Xi is pres-ident for life, that his country is unified and behind him, and that, time is on his side. In comparison President Trump’s tenure is relatively short, definitely embattled, while U.S. politics is fractious and tribal with government institutions subverted and too many powerful interest groups pulling in opposite directions. Perhaps as a sign of desperation, President Trump is now considering re-join-ing the TPP – the same 12 nation trading block formed to counter China’s influence in Asia that he so zealously campaigned against prior to his election. Is it an admission that a trade war is unlikely to succeed, that his time is running out and that the risk of a Republican rout in the elections this November is very real? Will we see a face-saving deal from Trump which does little to blunt China’s progress towards re-gional hegemony? For our purposes, the real question is what are the inflationary implications of a trade war where critical imports are suddenly 25% more expensive? Inflation is already baked in the cake as covered in earlier pages. China was one of the few deflationary inputs holding it back. The Chinese president plays a long game while American politics are invariably short-term and pain-avoiding. It is unlikely President Xi will respond to President Trump’s threats and tariffs with anything other than polite words and measures that are reciprocal. And then he will wait.

Polite words and reciprocal measures The Opium war is an old story, and the forced im-portation of narcotics, among other indignities, weighs heavily on the nationalist psyche. President Xi’s rise to power has been as a champion of China’s interests and national pride. Consequently any appearance of caving in to American demands is unthinkable. Since Presi-dent Trump’s $100 billion tariff threat both sides, have been dialing back the rhetoric but, ominously, neither has offered any significant compromises. President Xi’s speech at the Bo’ao Forum for Asia was conciliatory and diplomatically addressed Trump’s complaints while offer-ing little new in the form of concessions. He did offer to reduce automobile import tariffs and open up parts of China’s financial sector – both changes which were already in the pipeline anyway. The opening up of the financial sector, which is well developed and domi-nated by Chinese institutions, is part of its plan for internationalizing the yuan – so nothing new there. At best President Trump’s tariff threat may be a giddy-up, – especially with its latest ban on tech exports to Chi-na’s ZTE – for the Chinese in the same way the recent Russian sanc-tions are. China’s resolve to become self sufficient in technological de-Page 37

Value-added structure of U.S. Imports from China – Billions of U.S. dollars – 2014

Domestic value added Foreign value added100

150

100

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Source: The Brookings Institution

America’s Trade deficit with China – not all that it seems ...

The 1860 Opium war – the last time trading conditions were forced on China by Western powers. The new conditions included the exemption of imports from tariffs while the import and sale of opium, and the export of coolies (a form of indentured labor, that often in reality was another form of slavery) were legalized.

British and French soldiers Capture Peiho Fort

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And if there is an inflation problem? In global advisory giant, GMO’s 3Q, 2017 Quarterly Ben Inker explores “What happen’s if there is an inflation problem?” His model is based on a mildly inflationary environment of 4 to 6%, using the Federal Reserve’s 2012 longer term fed funds rate dot plot for his cal-culations. Rather than debilitating stagflation, he assumes that the economy continues to grow. Us-ing 2% real cash rates as an equilibrium and the corresponding increase in corporate debt costs, he estimates a “conservative” fall in sustainable S&P earnings of around 7.5%. This he calculates would take the S&P to 2340. This however, is the tip of the proverbial ice-berg. The higher inflation would translate to a higher, 6% real return over the cash rate that investors would demand according to Inker. “For this to happen the S&P’s Case Shiller PE would need to fall by 50% – approximately S&P 1200”, he warns. Not all that unthinkable, given that 1200 is where the index was only seven years ago when 10 year treasur-ies were yielding 3.5%. Bond’s, Inker adds, “would be taking it on the chin as well. If the yield on the US Aggregates rose to 7%, which was merely its average yield for the decade of the 1990s, a bond portfolio would be expected to lose around 25%”.

There are decades where nothing happens; and there are weeks where decades happen,” Vladimir Ilyich Lenin.

Sell the news? On their own, rising interest rates and inflation might be all it takes for the US market to follow the Ink-er play-book. But a final leg up, later this year and chance to sell higher, is also possible before the change in narrative is painfully obvious. Compliments of the Trump tax cuts and an already booming economy,

this year’s widely anticipated earnings bonanza and share buybacks may be enough to power the market higher - even to new highs, in spite

of accelerating inflation, a punk dollar, a trade war and quantitative tightening. It is definitely a trade for the brave and should only represent a small part of any portfolio. Cash and short duration debt is the best bet at this juncture. JP Morgan expects share buybacks will total $800 billion in 2018 with a further half trillion dollars

worth of dividends, together almost 6% of the S&P 500’s 22.5 trillion market capitalization. I think it is important to sell on the way up as this year’s expected 18% earnings surge is likely a

one time event, with a 10% rise penciled in for 2019. After that, as operating and interest costs continue to rise, along with inflation and later (2022), a less favor-able tax treatment for corporate interest expenses kicks

SPX Weekly 3,000 2,800 2,600 2,400 2,200 2,000 1,800

1,600

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1,200

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666 09 10 11 12 13 14 15 16 17 18

The Inker line...

For this to happen the S&P’s Case Shiller PE would need to fall by 50% – approximately S&P 1200”, Ben Inker GMO

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AG Bisset Associates LLC.

Deutsch Mark prior to Euro

in, earnings are unlikely to grow at anywhere near the current pace. What will grow are the inflationary effects of tight supplies and rising prices for everything from skilled labor, to copper and soon, thanks to the upcoming Trump tariffs, Chinese supplied consumer goods. Crude oil’s rise and the U.S. dollar’s fall should compliment this inflationary trend. Already, since December 2016, NYMEX crude oil has moved from $40 to $67 – nearly 70% higher. In Europe, Brent crude oil has doubled in price, from $35 to $72. How this adds further fuel to the growing inflationary fire is spelled out in a 2017 IMF working paper ‘Oil Prices and Inflation Dynamics: Evidence From Advanced and Developing Economies’. It shows that every “10 percent increase in global oil inflation increases, on average, domestic inflation by about 0.4 percentage point”. Using the IMF’s calculations oil’s latest price rise should already add between 2% and 4% to the inflation rate in the coming year. Major dollar bear market?AG Bisset, a Connecticut, USA-based currency re-search and FX management specialist, is calling for a major dollar bear market. According to Bisset,“With the dollar at the center of the financial system, currencies have circled the dollar like planets around the sun, each revolution taking 15 years”. The first cycle began with the 1971

collapse of Bretton Woods system of fixed exchange rates. This fourth dollar cycle began, they write, during January last year and it should last until 2026-27. This fits neatly with the tightening of commodity supply of many commodities. It also corresponds to

the ten or more years it takes on average to turn a mineral discovery into a commodity producing asset. The dollar decline, according to Bisset should ultimately bottom at

around US $1.70 per euro and 75 yen to the dollar, compared to their current respective exchange rates of US $1.24 and 107. Bisset’s target does not account for what could be the dollar’s biggest head-wind in the coming years: China and a yen-based trading block and the continued deterioration of both America’s fiscal and trade deficits.

D16 F M A M J J A S O N D17 F M A M J J A S O N D 18F M A

70

60

50

40

NYMEX CRUDE OIL

“Doubt is not a pleasant condition, but certainty is absurd.” Voltaire

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Source NY Federal Reserve calculations based on data accessed through Haver Analytics. Note shaded areas indicate periods designated recessions by the national Bureau of Economic Research

A paper, ‘The International Price System’ by Har-vard University’s Gina Gopinath calculates how a falling U.S. dollar should effect the country’s domestic inflation. She refers to the inflation-dampening advan-tage of the dollar because it is the world’s principal trading currency, as another exorbitant ‘privilege’. This is because every 10% drop in the trade-weighted US dollar only results in a 0.4 to 0.7% percent rise in do-mestic inflation. In comparison the inflationary-effect of a similarly-sized drop in another OECD countries’ currency is roughly twice as much. Trump & the inflation narrativeAs the inflation narrative builds, President Trump keeps adding to it. He has famously pushed through the biggest tax and spending spree in America’s peacetime history, launched a trade war that can only increase the cost of US consumer products and most recently he has turned his focus to Russia – boosting the price of yet another essential US import as he does it. US Sanctions on Russian oligarch Oleg Deri-paska and his company, the aluminum producer Rusal have caused chaos at London Metal’s exchange as they try to deal with warehoused Rusal-sourced aluminum they soon will not be able to trade. Aluminum’s use in a modern economy is nearly ubiquitous and produc-tion sourced from Rusal total’s around 7 percent of the world’s supply. Aluminum’s price was already climb-ing as a result of earlier Trump-induced tariffs on the metal. In total, since the beginning of April aluminum has appreciated 20%.

What could President Trump do next to fur-ther stimulate inflation? Who knows. Perhaps nickel will be next. Russian Norilsk is the world’s largest producer. Or perhaps Roseneft it supplies around 5% of the world’s crude. They are Russian, and perhaps their ‘yuge’-ness may have some appeal. But just in case Trump decides to take a breather, there are plenty of other possibilities for inflation-boosting material shortages. Take cobalt. In the Financial Times Ivan Glasenberg, CEO of Commodity giant Glencore recently warned that “The Chinese will have most of the offtake in cobalt. They’re not going to sell batteries to the world , more likely they’ll produce batteries in China and sell electric vehicles to the world.” The Congo, produced 59% of the world’s cobalt last year, followed by Russia’s 5,600 tons. The supply outlook is so bleak that Glencore thinks the car industry will eventually need to find another metal to use for its batteries.

Are Rare Earth Metals China’s Ace?The rare earth metals market (REM) is another poten-tial inflation driver. China controls 79% of the supply. REM’s are critical to many advanced technologies. Neodymium for example is used in super-magnets. Yttrium-iron-garnet is an essential in electronic war-fare systems. Terbium is used in naval sonar systems. The alloys used in the F-22 Raptor and the F-35 Joint Strike Fighter jet engines contain around 6 percent rhenium. America currently does not produce any 2017 APR JUL OCT 2018 APR

2440 2400

2320

2240

2160

2080

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Global Debt 1997 2007 2017REM’s but instead gets most of its supply from China. The biggest wild card remains crude oil. Not only has the industry not invested enough to meet future de-mand growth, but a third of the world’s supply comes from the Middle East. Relations amongst the many stakeholders continue to fester as a complex mixture of alliances and countries with diametrically opposed ideologies makes future conflicts and oil supply inter-ruptions a virtual certainty.

Is Inflation building?Whether because of of sanctions, tariffs, supply short-ages or wage pressures (Sony just announced a 5% wage hike in an effort to attract new workers out of Japan’s ever-shrinking work force.) the inflationary effects are becoming evident. The New York Federal Reserve’s Underlying Inflation Gauge (UIG) full data set has signaled a break out in inflation similar to what occurred in 2003. The difference this time is that in 2003 U.S. total credit market debt was $33.5 trillion compared to the current $69 trillion. Globally, the debt pile has grown even faster – from $86 trillion to $237 trillion. The Institute for International Finance warns that the consequences of the world’s record debt, “could be a reluctance from central banks to tighten lending condi-tions”. Interest costs on debt that are bearable at 3.8%, (the current investment grade bond yield) may mean cascading insolvencies only a few percentage points higher, and this is their biggest fear. This same risk increases the probability that the world’s central banks

will be slow to react to inflation and that real interest rates will be negative for the foreseeable future. In America the narrative is already being pre-pared. Last November Minneapolis Federal Reserve President Neel Kashkari indicated that the The Feder-al Reserve should be okay with allowing U.S. inflation to run at 2.7 percent. “We’ve been 1.3% for 5+ years so we should be comfortable at 2.7% for 5+ years,” Last month a Bloomberg report ‘Powell Could Put Up With 2.5% Inflation to Keep Growth Pumping’. Fed governor Lau-rence Meyer is quoted saying “I’ve had some hawks on the committee surprise me and say they wouldn’t be worried about a modest overshoot” as long as it’s below 2.5 percent, “Let me be clear: A small and transitory overshoot of 2 percent infla-tion would not be a problem,”he emphasized. Negative interest rates, rising commodity pric-es, wage inflation, trade wars and looming real wars, massive trade and fiscal deficits, a growing $15 trillion net ($21 trillion gross) Federal government debt with almost half held by foreigners. The latest grim news is that interest costs are set to become the biggest Fed-eral Budget item by 2025. America has more foreign debt than any country at any time in history and will soon have to decide having a global military and fund-ing its entitlement programs. This puts America in a poor position to resist China’s efforts to dominate Asia. China, like it or not, is the ascending power and feels it is time to take its rightful leadership role. At the 2017 Margaret Thatch-er Conference on Security, Henry Kissinger warned “never in China’s millennia-long history has it conceived of Source: Committee for a Responsible Federal Budget, Congressional Budget Office

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

US Federal Budget Deficit

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a foreign nation as more than a tributary to it, the Central or “Middle” Kingdom”. He continued by emphasizing the realities of the growing geopolitical competition, “China is a unique, transcending the dimension of the Westpha-lian state: it is at once an ancient civilization, a state, an empire, and a globalized economy. Inevitably, China will seek adaptation of international order compatible with its historical experience, growing power, and strategic vision.” And that experience consists of neighboring country’s acting as friendly “vassal states”. China’s yuan-block is slowly evolving and its Belt Road Initiative is entrenching its influence on neighboring countries. As this occurs the US dollar’s dominance in international trade will erode, and as over the coming years, surplus dollars find their way back to America they will add additional downward pressure on the US dollar. Politics and geopolitics grow more intense and polarized. Giant trade defi-cits and even bigger budget deficits. As the old world order unravels it brings to mind a quote from Bridge-water Associates’ Ray Dalio: “If you don’t own gold you know neither history nor economics.”

Buy Gold. Really. Many investor’s consider gold as useful as a pet rock because it neither grows, nor does it produce income. What it has done for a thousand years is provide a fun-gible and reliable hedge during times of political and

09 10 11 12 13 14 15 16 17 18

US Dollar Index: DXY 104 102 100 98 96 94 92 90 88 86 84 82 80 78 76 74 72 71

economic upheaval. In the West politics and media is becoming increasingly radical and polarized, in lock-step with a growing pre-world-war I like wealth gap. As this occurs, an ascending world power challenges the America dominated post-Bretton Woods floating rate monetary order. For good reason a growing num-ber by now share a unease with how America and the

world is evolving. Despite this few are prepared, and invest as if the near four decade long bond bull market will never end – a reality exemplified by the JP Morgan graphic on the next page. Commodities, of which gold would be a part, take up only 0.2% of portfolios. This is despite all of the evidence that if there ever was a time to allo-cate ‘Ray Dalio’s 5-10%’ of your portfolio to the yellow metal, it is now. The mind boggles to think what would happen to gold bullion and gold-company share prices if

1998 2001 2004 2007 2010 2013 2016 2018

148 144 140 136 132 128 124 120 116 112 107 104 100 96 92 88 84 80 76

125.69*15.06.08

*$1046 – 15.12.03

Gold NYMEX

USDJPY

1900 1800 1700 1600 1500 1400 1300 1200 1100 1000 900 800 700 600 500 400 300 200

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Commodities at 0.2% as a percent of total asset allocation

average portfolio holdings were increased to one or two percent. The DYX declined by almost 14% last year so a rally is overdue. But in Yen terms the dollar has broken important support so any rally is unlikely to last. The dollar/yen price has a clear correlation with gold. When the dollar drops in terms of yen, gold rises and when the dollar rises, gold subsequently declines. Thus the yen’s strength or weakness often signals what the gold price is going to do next. A recent example is when the dollar peaked at 125.69 yen on June 8th, 2015. Gold then bottomed six months later on December 3rd at $1046. It also signaled gold’s 2016 correction and its subsequent rally at the end of the year. Currently, the dollar in yen terms looks, similar to the dollar index, to be starting another leg down. If

this happens gold should start a new leg up. Like Dalio’s 5-10% there is a rational hierar-chy to building a gold portfolio starting with the most conservative: bullion and then broad diversification – that is an index or ETF. From there a diversified gold royalty company is the next step down the risk ladder, followed by large diversified gold producers whose operations are located in low-risk countries and their earnings growth has occurred over past decades. Starting with a royalty company, I will begin with what I expect will be among the best-in-class perform-ers this commodity cycle.

Safer Bet Royal Gold Inc. (RGI) NASDAQ:RGLD TSX:R-GL RGI acquires and manages a royalty and metal streams portfolio from 39 producing properties and currently has a pipeline consisting of royalty interests in 22 projects under development and 132 projects

at the evaluation - exploration stage. A royalty is defined as a percentage of the metal spec-ified in an agreement (in this case gold) that is produced at a particular ore body. A metal stream gives the holder, for an upfront payment to a producer, the right to purchase all or a portion of one or more of the metals produced at a mine, at a specified price or prices, for

any duration agreed to in the agreement. By RGI’s risks are reduced in part because its cash flow is not dependent on the level of profitability of the mining operations which its royalties and metal streams cover.

The profits must only be enough to justify the mine’s continued oper-ation so that the metals covered in the agreement are produced. RGI has a track record of timely royalty and revenue stream acquisitions which is one reason for buying its shares. For example after the mining bubble burst in 2011 it acquired a gold and silver revenue

1900 1920 1940 1960 1980 2000 2020

USA Income Share of the Top Decile

Source: Bridgewater

Source: Bridgewater

Developed World Populism Index

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12% to $2,653 million and free cash flow from $790 million to $1.48 billion, an 88% increase. In 2015 free cash flow was 277 million illustrating how far the company has come. Newmont has one of the stron-gest balance sheets in the sector as exemplified by its Net Debt-to-EBITDA of 0.3. Newmont’s gold reserves per share are 128 ounces – 66% higher than an industry average of 77 ounces of gold . Its all in sustaining cost was $924 per ounce. In 2017 Newmont raised its dividend pay-ments to $0.14 per quarter. Newmont has 534 million shares outstanding thus the dividends cost the compa-ny around $299 million leaving a considerable amount left from the $1.48 billion room to either increase the dividends size, buy back shares, or fund new projects. Either way it is in an ideal position for both the com-pany and its shares grow more valuable.

streaming covering Barrick Gold’s 60% interest in the Pueblo Viejo mine. Barrick was cash-strapped and looking for ways to raise money. The metal stream’s structure now gives RGI excellent leverage on rising silver and gold prices Its past ability to recognize and acquire val-ue is reflected in its diverse portfolio and 80% gross margin. It has a net debt to EBITA of 1.3 times and a $850 million credit line and $124 million in working capital. RGI shares have a 1.2% dividend yield which is 22% of last year’s operating cash flow. It is a very well known company in Europe with only 65 million shares outstanding. In comparison Barrick Gold has 1.167 billion shares. Consequently in the event of gold’s break out RGI should be one of the first to follow.

The Gold Standard Newmont Mining, NYSE: NEM is a Colorado, USA-based gold producer. It has reserves of 68.5 million ounces, 73% of which are in the US and Australia. The company produced 5.3 million ounces of gold in 2017 up 8% from the prior year. It expects to produce 4.9 – 5.4 million ounces both this year and in 2019. Based on Barrick Gold’s forward guidance Newmont is likely to replace Barrick as the world’s largest gold producer this year or next. In 2017 the company reduced net debt to $0.8 billion, ending the year with $3.3 billion cash on hand. Adjusted net income for the year was $780 million or $1.46 per share up 26 percent compared to the prior year. Between 2016 and 2017 adjusted EBITDA rose

48 44

40

36

32

28

24

20

16 15

2014 2015 2016 2017 2018

Newmont Mining NYSE: NEM

95 85 75 65

55

45 40 35 30

25

2014 2015 2016 2017 2018

Royal Gold NASDAQ:RGLD TSX:RGL

Source: UBS

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Gold, nickel copper and cobalt too...Writing about Independence Group NL, ASX: IGO, a Perth, Australia-based producer is like taking a walk down memory lane. When I first recommend-ed IGO it was a micro-cap and it is satisfying to see it graduate to the ranks of the mid-cap gold producers. The following is quick summary of the road they took and why it could possibly move up to the next tier - and make us a lot of money as they do it.

The Long Mine: an essential beginningI first recommended IGO almost a decade ago just after it had acquired the mothballed Long Nickel Mine from Western Mining Corporation (WMC) prior to WMC’s takeover by BHP Billiton. IGO was sub-sequently built around the cashflow it derived from Long, using the money wisely, as it joint ventured prospects it had developed in part from a massive Australia-wide geological database acquired from De Beers. The Long Nickel Mine is now winding down and IGO has a second small but steady cash flow gen-erator called the Jaguar – a copper-zinc mine - with lots of exploration upside - but still no big story. Either of these two mines on their own, would not have be interesting when I initially looked at IGO. What I did find attractive was the combination of a management with extensive mine operations and exploration exper-tise, together with cash flow an exceptional exploration package and a JV with giant Anglo Gold Ashanti. One of their prospects, which focused on a gold in soil anomaly, 330 kilometers east-northeast of Kalgoorlie, became the basis of the joint venture with

Anglo Gold. IGO retained a 30% carried interest in the project and Anglo Gold, as operator, 70%. In 2005 Anglo drilled the anomalies, discovering the Tropicana deposit and soon after, the nearby Havana deposit. In 2010 a bankable feasibility study was ap-proved for an operation producing 330,000 to 350,000 ounces per annum over a 10 year mine life. At the time, the deposit’s had a combined JORG resource of 5.01 million ounces and an ore reserve of 3.3 million oz. A later additional nearby discovery called the Bos-ton Shaker together with the development of min-eralization down plunge and along strike at Havana Deeps, collectively increased the Measured Indicated and Inferred Mineral Resource to 7.89 million ounces of gold.

Tropicana: taking IGO to the next level In 2018 the Tropicana’s total gold production is ex-pected to be between 478,000oz and 492,000oz and between 530,000oz–548,000oz in 2019. The Mine is forecast to continue operating until 2027 and produce at least a further 4 million oz. This will probably change as the forecast does not include the potential extension of the Boston Shaker ore body or the Ha-vana South which remain open at depth. Also Anglo has a good record of replacing reserves as it mines – adding enough in the past year to replace the 550,000 ounces mined and end up net ahead 280,000 ozs. Since the Tropicana’s original mining plan was approved, its reserves have been increased by 72%. Cash cost of gold production is approximately USD $522 per oz and AISC USD $801 per oz at the cur-rent A$-US$exchange rate. The company expects its 30% net of production in the first half of 2018 to be 74,500 ounces, a 12% increase from a year previous. Guidance for the first half of this year is for an in-crease to approximately USD $100 million compared to last year’s USD $81 million as a result of higher production and a higher A$ gold price. Critical to the story is that the Tropicana is a significant cash gener-ator, really in an entirely different league compared to its early days. IGO is essentially self funding now and its very capable management is likely to, as they have in the past, use the company’s growing cash pile shrewdly.

10 11 12 13 14 15 16 17 18

9.0 8.0 7.0 6.0

5.0

4.0

3.0 2.5

2.0 1.5

Independence Group NL ASX: IGO ADR- OTC IIDDY

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Nova: a cash machine and more While Tropicana delivers a substan-tial gold-derived cash flow, (and thus leverage to the gold price) the great-er upside comes from the company’s Nova-Bollinger nickel-copper-cobalt mine development and the explora-tion potential surrounding it. The Nova-Bollinger ore body is a shal-low, thick, flat lying deposit with reserves totaling 274,000 tons of nickel, 110,000 tons of copper and 9,000 tons of cobalt with a further resource of 271,000 tons of nickel, 113,000 tons of Copper, and 9,000 tons of cobalt. The Nova -Bollinger was previously owned by Sirius Resourc-es which had started constructing a mine there, when IGO took over the company in a $1.8 billion, share and cash scheme of arrangement. IGO subsequently completed an optimi-zation study which improved the mine’s NPV by 36% while reducing life of mine cash costs by 27% and AISC from A$2.32 /lb nickel to A$1.83. In financial 2017 - its start-up year - the mine produced 3,502 tonnes of nickel, 2,106 tonnes of copper and 112 tonnes of cobalt. First half 2018 guidance is for production to more than double to 8,954 tonnes of nickel, 3,843 tonnes of copper and 290 tonnes of cobalt with a total cash cost of $3.91 – an amount that should decline while as the mine is developed. FY 2018 revenues from the Nova are forecast to be A $124.9 million with an underlying EBITDA of A$59.7 million. Free cash flow is only A $ 2.8 million but the mine’s production is just beginning and as the start-up related expenses are worked through it should rise dramatically.

The Fraser Nickel Copper Cobalt Belt

IGO’s bottom line The company expects that total revenues, including the Long Mine and Jaguar, will be A$354.8 million with an underlying EBITDA of A$133 million both up a respective 59% and 63%. Net cash flow rose 355% to $111.4 million reflecting, principally, the start of Nova-derived revenue. IGO currently has 586 million shares outstanding, a A$3.1 billion market capitaliza-tion, A$171 million in debt, A $51 million cash an A$200 million un-drawn credit line. Now that it is

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beginning to really cash flow the company’s policy is to pay 30% of normalized net profits after tax. While not material just yet, it should become significant in the coming years as the Nova mine development ma-tures. One Australian dollar is currently worth approx-imately 0.76 US dollars.

Adding to IGO’s UpsideIGO has numerous gold, zinc, copper, and nickel green fields exploration initiatives and any of them could be the start of another discovery. But waiting for results or investing because of them would be a fool’s errand as really the odds of success are formidable. Brown field exploration is a much better bet as these deposits tend to occur in clusters. Consequently the IGO’s exploration that is of real interest is where it is testing nickel-copper-cobalt targets near its Nova Mine. These include the Pheonix prospect where it has intersected mineralization which it says is analogous to the Voisey’s Bay deposit in Canada. The Nova deposit sits at the southwestern end of The Fraser Ni-Cu-cobalt belt which is 300 km long and roughly 40 km wide. Until the Nova-Bollinger discovery there was very little interest in it and almost no exploration. Magmatic Ni-Cu deposits are know to cluster along entire belts such as the Pechanga and Raglan and IGO hopes that the same will be true for the Fraser belt.

The Nova discovery and multiple mapped Ni-Cu sulphides in mafic-ultra-mafic rocks along the corridor adds to their optimism. Late last year IGO acquired Windward Resources, and has entered into joint ven-tures with Rumbler Resources, Orion Gold, Sheffield Resources, and Buxton Resources to lock up 14,000 square kms along the belt. The growing shortages of supply in the met-als sector is apparent and nickel is no exception. A deficit of 167,000 tons is projected for this year accel-erating to a multiple of this amount beginning 2023. Gold is also in a bull market, as are copper, zinc and cobalt. IGO is producing all five metals. Plus there is a better than average chance they will extend the Nova-Bollinger deposit’s ore zones. A bonus, which is not at all essential to the story, is that they could find another Nova-sized deposit. IGO’s Fraser Belt is a giant play covering thousands of kilometers. For a junior miner it would be too big as the costs will be formidable. IGO has the cash flow to easily fund exploration. At the same time its gold and nickel production gives good leverage to the metals bull mar-ket. The best place to discover a mine is next to one. Will Independence discover additional deposits in its vicinity or within the belt? Time will tell but there are already some very good catalysts in its pipeline.

If you think Central Banks have a handle on inflation - or just about anything to do with their monetary tinkering think again. Like the Wizard of Oz they sound very impressive from behind the curtain but in reality there is a rea-son why America’s Central Bankers have yet to predict a single crisis for the past half centu-ry. Daniel Tarullo, a former Federal Reserve Bank governor told the Brookings Institution last October: “We do not, at present, have a theory of inflation dynamics that works sufficiently well to be of use for the business of real-time monetary policymaking.” Another ‘we don’t really know what we are do-ing’ admission comes from St. Louis Fed CEO James Bullard who in a WSJ interview memo-

rably described the Fed’s confusion regarding a real world outcomes from QE. “I think everyone’s doing a lot of soul searching about these issues. And, you know, this kind of an era makes you wonder, gee, I grew up with a certain model, and that certain model doesn’t seem to be working, so maybe something else is going on.” At the same time, if you are looking for a reli-able indicator for future inflation, don’t look at the Bond market. According to economist Robert Shiller: “Using data since 1913, when the consumer price index computed by the US Bureau of Labor Statistics starts, we find that the there is almost no correlation between long-term interest rates and ten-year inflation rates over succeeding decades.”

Parting Shot

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K92: Just Getting StartedSimilar to Independence Group’s early years, Van-couver Canada- based K92 Mining TSX-V: KNT began its corporate life with the acquisition of a mothballed but now revenue-generating mine. The company’s namesake Kainantu Mine is in Papua New Guinea and like Royal Gold, K92 also benefited from the same cash-crunch that forced Barrick Gold to raise money by selling metal streams and other assets. K92’s neighbor, Chinese super-major ZiJin Mining also took advantage of Barrick’s predicament when it acquired from the gold giant 50% of the Porgera, one of the world’s richest gold mines. In 2007 Barrick paid High-land Pacific USD $141 million for the Kainantu. It is thought to have spent another $40 million further developing the Irumafimpa deposit, the site of the Kainantu mine, while drilling the neigh-boring Kora deposit and exploring the entire package. A 2015 Independent Technical Report by Anthony Wood-ward at Nolidan Mineral Consultants, noted “Barrick internal reports rank the project very highly on a global scale. The decision to divest the project was made for corporate rationaliza-tion reasons… rather than geological reasons.” The report also highlighted how little it cost to restart the mine –budgeting only US $4 million for its refurbishment. K92 tied up the asset in a US $62 million

deal with Barrick in 2014, which closed the follow-ing March 2nd 2015. It has since raised $81 million, including a gold off-take agreement to finance the project. The company currently has 176 million shares outstanding, increasing to 229,938,000 fully diluted. Of these, 22 million are warrants exercisable at $1.05 which expire this June 27th. K92 was listed on the TSX-V on May 25th, 2016 following a reverse merger with Otterburn Re-sources Corp. As a result of the transaction K92 holds mining lease’s and Exploration licenses covering 410

square km as well as a fully developed mine that is now in operation right in the middle of the super-rich New Guin-ea copper-gold belt. K92 hopes to use the cash flow generated from the mine to expand and develop the Kora while exploring for the much larger deposits Barrick was originally targeting. Its executive is a ringing endorsement of this potential, given their propensity to develop and monetize very large projects. K92’s Chairman and direc-tor, Stuart Angus, is associated with a

few millions-to-billions growth stories. They include copper-giant First Quantum Minerals where he was a director during its formative years, and Bema Gold whose board he sat on until its takeover by Kinross Gold. Another director, Ian Stalker, was the CEO of UraMin until its $2.5B acquisition by Areva. Prior to that ran mining giant Goldfields Ltd.’s international operations. Alex Davidson, Barrick’s former Executive Vice President of Exploration is an advisor to K92. He considers the Kainantu project to be “one of the most prospective in Papua New Guinea”. Production was restarted at K92’s Irumafimpa deposit during October, 2016 and the following Jan-uary the company began blasting an underground incline drive from the Irumafimpa to the Kora deposit approximately 700 meters away. As they developed the underground workings, gold production for their inaugural quarter was 3400 ounces of gold – beating projections by about 10%. That start pretty much set the pace as its results have continued to pleasantly sur-prise ever since.

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High grade The following May, K92 began underground drilling as its new drive approached the Kora – testing for the depos-it’s extension 500 meters on strike and 150 meters down dip from the deposit. That’s when it started to get more interesting as the drilling intercepted 5.4 meters grading 14.1 grams per ton. The next month the focus temporari-ly shifted back to Irumafimpa where grade control drilling intercepted a newsworthy 8.2 meters at 24.65 grams per ton AuEq. and 4 meters at 60.57 grams per ton AuEq. In the meantime the Kora drive design had been changed to accommodate the new discovery by adding an additional footwall drive to allow for additional underground fan drilling and bulk sampling of the new Kora vein exten-sion. As if to emphasize the apparent area’s richness K92 reported that re-logging of archived core had identified previously unreport-ed and museum-worthy gold intervals, the first being a spectacular 0.3 meters averaging 15,350 grams Au per ton and the second a still eye-popping 0.3 meters assaying 6,380 grams Au per tonne. What has followed is a consistent news stream of high-grade drill results – to this day – the majority from the newly discovered Kora North. Some of the better results included intercepts such as 4.75 meters grading 56.4 grams per ton AuEq and 3.27 meters at 41.7 grams per ton. In a matter of months K92 had

added an additional measured and indicated resource totaling 86,500 tonnes averaging 12.23 grams per tonne AuEq to the Kora North.

Mine readyThe company was at the same time busy preparing the Kora for mining, as its CEO john Lewins states: “Since drilling the first discovery hole into this area in May 2017, we have developed a major system access into the area, including the establish-ment of ventilation and services, established drill cuddies and drilled over 30 grade control diamond drill holes, completed the initial mining of an 8,000 tonne bulk sample and have now commenced stoping operations. On the metallurgical front we have consistently achieved above 90% recovery of gold and copper from the treat-ment of the Kora North material mined which overall has averaged approximately 7.5 g/t Au and 0.7% Cu.” Cash costs for the month of January are expect-ed to be below $850 per ounce AuEq meaning that the Kainantu is likely to live up to expectations as a cash cow for K92. January 2018 was the month that the company pronounced its operations to be at a ‘commercial level’ which it defined as having commenced stope produc-tion, together with achieving both a minimum of 60% of designed gold production, and a minimum of 90% of the designed metal recovery from the process plant, for a consecutive 30 days. Meanwhile the Irumafimpa mining continues and reports exceptional results as well. It seems the entire complex is establishing a reputation for richness as head-grades have been considerably higher than anticipated.

M J J A S O N D 17 F M A M J J A S O N D 18 F M A

2.25

2.00

1.75

1.50

1.25

1.00

0.75

0.50

0.25

K92 Mining Inc. TSX-V: KNT

Cash flow driven...

•Kainantu

The New Guinea Copper Gold belt

footwall drive

Underground Decline Drives to Kora North

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In a news release the company said that despite blending high grade material with low grade to optimize recoveries, “the plant reported daily feed grades exceeding 40 g/t Au on a number of days with a peak of 82 g/t over a 12 hour period”. A gravity circuit is to be installed to take care of the problem.

Cash... rolling in2018 is a pivotal year for K92. Q1 production reached a record 9,729 AuEq ounces and 165,976 lbs of copper. Av-erage head grade treated through the Process Plant for Q1 of 16.95 g/t Au and 0.44% Cu. Recoveries for the quarter averaged 91.7% for gold and 91.5% for copper. K92 says it

plans to ramp up Kora production to 400,000 tonnes per annum – almost triple the current rate for the entire operation and produce around of 108,000 AuEq. The initial capital costs are pegged at US $13.8 million for the mine expansion, and a further US $3.3 million for the mill. Sustaining capital is penciled in at $64 million. Cash flow generated from an expanded operation using current metals prices is estimated to be US $558 million over 10 years, generating an after tax NPV of US $316 million (15m level 5% discount). This may change as the deposit as we do not know if there will be further enlargement of the Kora (likely) or what the development of a multiple of gold-rich vein systems in the vicinity will produce.

The curse of too many choices?A vein system near the Kora Barrick called the Kora Deeps produced a long list of eye-popping drill assays. One intercept returned 4 meters of 228.91 grams Au., another 10.6 meters of 184.78 grams. A third assayed 3 meters of 347 grams Au. The list of over 20 incepts goes on with the lowest grade interval a still-respectable 30 me-ters of 2 grams Au and 1.3% copper. The next lowest is 9 meters of 4.74 gram Au. Where it is on the company’s list of priorities is an open question, because the license is covered with similarly prospective targets. One, The Blue Lake, a high sulphide porphyry has the giant mine poten-tial that, had Barrick known of it, they may never have let the Kainantu slip away. Like Cardinals wide-receiver Rod Tidwell in the movie Jerry McGuire, investors are loyal for only so long. K92’s “show me the money” moment arrived at the end of 1Q 2018, and the company delivered. The difference between projections and money in the bank is like night and day and we are seeing this reality in the company’s share price uptrend. K92 is in the land of gold giants as the map on the previous page makes obvious. The best place to find a mine is near another and it already has a cash-flowing small mine and the nearest big one, the Wafi, comes in at 27 million ounces of gold. With its produc-tion growth profile, exceptional brown field and green field exploration potential and with the tail wind of a gold bull market the coming year looks like it will be a very a good one for K92 and its shareholders.

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“Because that is where the money is” said Willie Sutton, America’s most prolific bank robber when asked why he robbed banks. From that statement ‘Sutton’s law’ is derived and more legitimately, invoked to medical students as a metaphor for emphasizing that a doctor should pursue the obvious, most likely diagnosis. In the global hunt for giant mineral deposits it is also applicable, and often demonstrated as geologists rush to stake ground near or on trend with the latest major discovery. But in some parts of the world the potential for massive deposits, though already well-established, remains off-limits because of poor politics, security and corruption. In those areas the rush to acquire projects, if it ever happens, is triggered by the indus-try’s recognition that overall business conditions have indeed changed for the better – often a very slow process.

Mining’s greatest explorerDavid Lowell is widely acclaimed as mining’s greatest explorer, with some 17 giant discoveries under his belt. As he made these discoveries, he also demonstrated what is possible when both the business environment in a mining region goes from bad to good and an alert explorer is early to recognize the transition. In the first instance a 1980s Chile was considered off-limits as it recovered from Salvador Allende’s marxism. Ev-erything of significance, including the world’s largest copper mine, had been nationalized by Allende mak-ing it a no-go area in the mining world. As a result, even a decade later, there were, according to Lowell, no junior mining companies in Chile, despite its new President, Augusto Pinochet, having already instituted business-friendly economic reforms.

Searching for the next giant mine

The Grasberg Copper Gold Mine Indonesia

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First mover advantage Lowell was among the first to recognize the opportunity and as a consequence, could test Chile’s vast potential with little competition, using both the latest developments in copper porphyry exploration (mostly resulting from his work with the late Dr. John Guilbert) together with his knowledge of Chile’s geology. Being an early bird meant Lowell could and did stake a gigantic portfolio covering a copper-rich corridor 35 Km wide and 500 Km long. It began at Chuquicamata, then the world’s largest copper mine and ended at another copper-giant called El Sal-vador. It wasn’t long before his work led to new copper discoveries including La Escondida, translated as ‘the hid-den one’ which is now the world’s largest copper mine. In the early 1990s David Lowell had begun re-fo-cusing his attention from Chile to Peru where murderous Shining Path insurgents, car bomb explosions and recent hyper inflation made it a somewhat less than attractive mining destination. I was publishing The ProTrader, which is now called Maedel’s, out of Zurich, Switzer-land. My principal focus was junior resource companies, together with the geopolitics that were pivotal to their success or failure. As its editor my life was a whirlwind spent crisscrossing the globe, analyzing what I thought were the most promising locations and companies. During a visit to Venezuela’s Kilometer 88, where a classic gold rush was in full swing, I met Cather-ine MacLeod who later became David Lowell’s business partner when she convinced him to co-found a Peru-cen-tric micro-cap called Arequipa Resources. Catherine in-troduced me to Arequipa and Lowell and I quickly recommended the com-pany to my subscribers. I could see that Lowell’s early bird acquisitions had allowed him to acquire at a very low cost an exceptional ‘first mover’ portfolio just as the mining environ-ment had become very friendly. Peru is currently considered among the top mining destinations and even back then Arequipa’s shares quickly began a spectacular, discovery-propelled ascent from pennies to $32 per share.

Lowell’s Escondida: 5 percent of total global copper mine production

“Instead of fishing rods our guides carried Kalashnikovs”

The Wild East Pechora, Komi Republic in Russia, was another exam-ple of the riches that await an alert resource investor. It is about as far away from Peru as one could get and still stay on the planet. Komi is a vast desolate place and in the winter it is among the coldest loca-tions on earth. The Soviet’s infamous Gulag prison system was there. My Russian friends used to joke: ‘When life is really bad you wake up in Komi’. But within its frozen confines were giant petroleum assets. They

were already well-defined but given the dilapidated infrastructure and imploding society, production had all but stopped. But during my first visits, beginning the mid-1990s, I could see rays of hope. Zug Swit-zerland-based billionaire Marc Rich, who was no fool, had already begun operating in Komi and a steady stream of oil majors includ-ing Shell and BP were entering the country. But the risks were much higher than Peru. Unlike Peru their was no Monroe doctrine to act as Your editor at Yhe ProTrader Zurich office

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a subtle long-term American shield (Even Anaconda Mining, who’s Chilean assets were nationalized by Pinochete, was eventually compensated.). Companies operating in Russia were completely on their own, so they had better get it right. Canada’s Bitec Petroleum, bravely re-worked a few of Komi’s frozen oil fields in the midst of the ongoing chaos, and it was the one micro-cap I picked that I thought likely to succeed. On one of my visits as a guest of Bitec, our group was flown in a groaning Mil helicopter to fish on a remote river. Typical of the times, instead of fishing rods our guides carried Kalashnikovs. Bitec was a company that took no chances and having the right team at the right time meant that it flourished despite the difficult environment. Bitec was careful to include within its company key Russian heavyweights, a factor critical to its success. It was subsequently taken over by Lukoil, a company notable not just for its size (it was one of Russia’s largest) but

Gone fishing – in Komi

for being the first company in Russia to issue common shares. And while it seemed premature to sell out, it was probably an offer Bitec would have been foolish to refuse. The lesson here is that trusted and motivated local political assets can make the impossible, possi-ble. I doubt a majority of Canadian operators could have accomplished in Russia what Bitec did during that period. Did I recommend another company doing business there? No. Principally because it was evident that the environment for Western companies was about to get a lot worse – which it did.

Qui Audet Adipiscitur: Who Dares WinsAs if Russian adventure capitalism was not enough, my regular on-the-ground geopolitical tours became some what riskier. That was in 1996-98 during Zaire’s civil war (now the Democratic Republic of the Congo) when I accepted invitations from Earl Yong then the Presi-dent of Arkansas -based American Mineral Fields, to visit the country and its legendary Southern Congolese copper-cobalt belt. During this period Zaire’s ailing kleptocratic President Sese Seko Mobutu was in the midst of being overthrown by Rwanda-backed Laurent Kabila. The largely destroyed city of Lumbumbashi was the re-gion’s mining hub – not that there was any mining being done at the time – and its desperate population made Caracas look safe. Its countryside was not any better, and adding to the risks, reports regarding which warring faction was where, were not always reliable. One project tour immediately started to go side-ways. As our jet rolled to a stop we were surrounded by soldiers from the ‘wrong’ side. Soviet Joy Ride – Author’s selfie in a MIG25 at Mach 2.5

• Pechora, Komi Republic

Victorious so far –Laurent Kabila at the end the Congo Civil war

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Following a restless night in a jungle prison, we were re-leased to join the company. I later found out that Kabi-la’s policy was to treat captured troops with civility if they surrendered: taking their guns and uniforms but letting them keep their personal effects before letting them go. It seems this may have worked in our favor. Our hosts were aligned with Kabila, who virtually controlled the entire area, but evidently this did not include the airstrip. Sur-rendering may have been something our captors already planned to do. During a later visit, at the height of the rebel attack on the Mobutu regime, we learned that AMF had tied up what it had long coveted, when it concluded a $2 billion agreement with Kabila for the Kolwezi cobalt tailings. And so what became of American Mineral field’s? There was still more fighting in the future - cor-porately and militarily. When the smoke cleared AMF

Your’s truly with the Gecamines mining crew 1.2 Km Down at the Kipushi Mine in the Democratic Republic of the Congo

had some serious assets thanks to its first mover advantage together with the expertise of its founder, former DeBeers executive and Diamond fields co-founder Jean-Raymond Boulle. AMF, which later changed its name to Adastra Minerals Inc. had amassed a serious portfolio of assets in Angola, Democratic Republic of Congo, and Zambia and was acquired in 2006 by First Quantum Minerals. In the picture, below we are at a garden party in Lumbum-bashi celebrating Kabila’s victory. African Civil wars are beyond my risk tolerance when it comes to investing these days, maybe I am getting too old. But the AMF story is a very memorable example how chaos, expertise, money, and the first mover advantage can translated to success-fully acquiring and developing giant assets.

Money out there – The Kolwezi cobalt tailings

As our jet rolled to a stop we were surrounded by soldiers from the ‘wrong’ side.

The Next Peru?That the Tien Shan gold belt is the richest in the world, few will argue. The super-giant gold mines (see next page) that traverse its relatively narrow confines says it all. But this part of the world was on the wrong side of the Iron Curtain for most of the 20th century and so incredibly, for all its gold, it is also barely-explored. For these reasons, like Lowell’s quest for gold deposits in a post-anarchy Peru, it is a rare opportunity. Even now, the few that have heard of the place, assume it remains a no go-zone. If they were referring to Uzbekistan or perhaps, Tajikistan, they are probably correct. If it is the Kyrgyz Republic, Central Asia’s only democracy that they are talking about, they are wrong. Like Chile in the 1980s and the Peru in the early ‘90’s, it offers histor-ic opportunity. Since the Tulip revolution in 2010, the Krygyz Republic, which is also known by its old name,

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Kyrgyzstan, has been through two democratic transitions of power, – elections that were ruled free an fair by EU monitors. The World Bank helped design its mining law and since 2014, The Extractive Industries Transparency Initiative (EITI) an Oslo, Norway based international organization has certified the country as a compliant member. Culturally, Bishkek, its capital city, has the feel and look of many small cities in Eastern Europe. This is not surprising since the government erects billboards pro-moting European dress. When asked about this policy Almazbek Atambayev, who at the time was the country’s President, replied: “women who wear mini-skirts don’t become suicide bombers”. I have been active there since 2005, and watched from the Kyrgyz side, the country’s evolution. Take Centerra, the country’s biggest miner. The fact is Centerra has produced gold from its giant Kum-

tor mine for 20 years with out interruption. It was just in the news for an unsolicited offer from London-listed Charaat Gold to buy its mine. Centerra has also been in the news over the years as they struggled with the Kyrgyz government. That happens when you dump two tons of cyanide into a country’s principal watershed or destroy part of a major glacier. Good luck to any company that does that in Canada or Chile. Barrick, for example, has a Chilean tale of woe with no end in sight, regarding its glacier–neighboring Pascua Lama. The bottom line is Centerra and Cameco, the original mine developer, have produced and sold gold over the past 20 years without interruption, and Centerra currently owns a lot more of the Kumtor, than when their parent Cameco first devel-oped the mine.

Centerra Move OverCenterra’s activities are an important part of the Kyrgyz economy and account for around 10% of the country’s GDP which may explain why it is allowed to blast the glacier covering part of its deposit – something that is completely forbidden in most countries. The Kumtor’s importance, however, is diminishing as the country continues to progress and attract major foreign investors since its Tulip revolution eight years ago. ZiJin Mining is the first significant mine developer since then and now China National Gold is investing US $400 million and a further $200 million is to be provided by the Eurasian Development Bank to develop the 2.9 million ounce Jerooy deposit in the Republic. The deposit which has an average grade of 5.8 grams Au per tonne is expected to produce 150,000 ounces of gold annually. Construc-

“women who wear mini-skirts don’t become suicide bombers”.

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Centerra’s Kumtor Mine

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tion is to start this year. Combine the two operations with Charaat Gold’s expected 400,000 ounces per year and they will be producing 675,000 ounces with all of the economic spin-offs that go with it, compared to the Kumtor’s 500,000 ounces annual gold production. This is a healthy diversification anywhere. Charaat is also a great example of how investing in Kyrz Republic has be-come a mush better bet. As it advanced its feasibility, and recruited some of the industry’s better mine developers its shares rose roughly 500%.

ZiJin Mining Bets on a Kyrgyz Future China’s biggest gold miner, super-major Zijin Mining, is likely spinning cash from its Taldy Bulak Levoberezhny (TBL) gold mine near Bishkek. The operation, which is thought to have cash-costs at the bottom quartile for the industry – around $300 per ounce – produces around 125,000 ounces per year. Around the same time that ZiJin paid Barrick Gold $298 million for a 50% interest in the Porgera Mine, it was also in the midst of spending

$362 million to buy and develop the TBL. ZiJin’s interest in the low-cost gold producer is 60%. ZiJin is famous for its record of acquiring at the right time very high quality assets – most recently in Papua and Kyrgyz Republic. What ZiJin didn’t get when it bought the TBL was the entire deposit. Through a quirk of the Soviet system they only acquired the part of the deposit that was within the underlying mining license. The other part remained filed away as an exploration license in another government office, completely separate from the mining department. ZiJin’s 10 square Km mining license was originally part an exploration license called the Borubai which had the Soviet Union not collapsed, this explora-tion license would likely have been developed further and then converted to join the TBL mining license. Instead the data covering the mine’s potential extensions sat gath-ering dust for decades in the exploration archives. That was until a Canadian company and their Kyrgyz partners started going through the archives while piecing together what it all meant. I can speak of this from personal experience be-cause while K92 was maneuvering to acquire its Papua gold mine in 2014, I was part of the original effort with its CEO Alex Becker, to acquire the Borubai license. The company, Kenadyr Mining (TSX-V: KEN), was formed based on an educated guess by a Kyrgyz and for-mer Soviet team of geologists (Alex being one of them). And it was an educated guess. The key to what might be in the Borubai was finding and analyzing a mountain of old Soviet data. Records for 139 Soviet holes totaling more than 81,000 meters were found. These records together with a host of other geological information were only in written form - sometimes hand written notes, in Russian, and it all needed to be checked, converted, translated and digitized. Not a small job - it took four very experienced (ex-Soviet) Kyrgyz geologists more than a year to get through it all. The initial results indicated by the Soviet drilling (and the deposit still remains open) was that the Borubai TBL gold zone extension contained an unclassified C1+C2 resource of 1.8 million ounces averaging 2.3 to 3.6 G Au/T beginning right on the border of ZiJin’s mine. One area, the South Zone even had an old mine drive that extends from ZiJin’s current underground oper-ation through part of the Borubai gold zone. That area

ZiJin Mining’s Taldt Bulak Levoberezhny underground gold mine

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using the (also unclassified) Soviet estimates, contained 900,000 ounces of gold, averaging a high grade of 8.3 grams per tonne with a 4 gram per tonne cut off. Good deals attract good people In 2016 the company raised $12 million and was listed on the TSX-V. The previously mentioned Stuart Angus, who evidently has a nose for good deals, is now Kenadyr’s chairman. Another director of note is Doug Kirwin who has a Lowell-like track record for finding giant deposits. Most prominently was his key role in the discovery of the giant Hugo Dummett deposit at Oyu Tolgoi in Mongolia. CEO, Alex Becker, also has a background worth mention-ing. He acquired and outlined the original Charaat gold deposit when he was vice-president of geology for Apex Asia, (a subsidiary of the Paul Soros controlled, Apex Silver). During Soviet times Alex was the chief geologist of the geological mapping division of the North Kyrgyz Geological Expedition and so as you would expect knows his way around the former (now Kyrgyz) Soviet archives. He is a recognized in the industry as one of the world’s foremost authorities regarding the geology of Central Asia and has published dozens of papers in Scientific Journals.

The Reality Machine The first drilling campaign began May 2017 at the company’s South zone when it reported a exceptional 40 meter intersection averaging 6.17 G/T Au and a further 5 meters averaging 5.8 G/T Au in a hole which con-firmed and improved on the previous Soviet drill results. A second hole testing the Soviet indicated East Zone intersecting an also world-class 50 meters at 8.15 g/t Au.. Later in the year another drill hole intersected 29 meters at 5.35 g/t Au. The second East Zone hole was relatively shallow making an open cut operation something to con-

template in the future. This year’s campaign is off to a very good start as the company continues to ex-tend the East zone. The first hole intercepted intercepting 88 me-ters averaging 1.15 grams per ton Au and a second hole with 70me-ters averaging 2.09 grams per ton Au. The second hole had some great higher grade sections within the 70 meters including 5 meters of 10 grams per tonne Au, 18m of 3.85 grams per tonne Au another 5 meters averaging 5.5 grams per tonne Au. The companty’s CEO Alex Becker interprets the holes as having discovered a new gold zone. Now that Kenadyr has confirmed the gold zones do in fact extend from ZiJin’s deposit into the Borubai ZiJin Mining must be

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somewhat interested. It would be a logical way for them to add to their reserves as they can continue their under-ground workings into the Borubai. Kenadyr has 84.4 million shares out-standing fully diluted, for a market cap slightly less than CAD $12 million or US$9.31 million. A market as un-der valued as this can be revalued extremely quickly given that the drilling actually improved on what the old Soviet drill holes indicated. If only the South zone’s high-grade 900,000 ounces are used Kenadyr’s shares price is valuing those ounces at around $10 per ounce even though ZiJin already has access to the zone through the existing drive. Gold trades at $1324 and ZiJin is literally a few meters away from the Borubai’s high-grade gold zone mining at a cash cost of around $300 per ounce. It is a bit like observing a cat watching a mouse and won-dering when it will pounce.

The Ultimate Upside... While Kenadyr develops the gold zone extensions of the TBL the real long term upside remains in the giant black shale hosted gold deposits that the Tian Shan gold belt is famous for. In the Tien Shan there are more than 250 million ounces of gold reserves established so far in the black shale hosted deposits and this amount is from only a handful of mines. Not on the map but within the belt is Almalyk complex of mines just Southwest of Tashkent. A GoldField’s report attributes 93 million ounces to the complex in secretive Uzbekistan. A 2012 USGS report estimates Almalyk GMK production increasing to 33 tons per year about what one would expect given the size. Other black shale deposits include Sukhoi Log and Olympiada with an eye-popping 130 million ounces of gold between them. Becker’s Charaat is a relatively new discovery, and at 7 million ounces of gold, is the baby of the bunch even though the vast majority of geologists only dream of discovering a deposit that size. Charaat is open on strike and at depth so like many black shale gold deposits, it could keep growing for a long time. Olympiada was only around 8 million ounces when Polyus started exploring its outer limits. Its reserves and resources have since been expanded to a respective 28 million and 44 million ounces of gold.

All locked upRecall Independence Group and how its DeBeer’s data, gave it a game-changing advantage. To duplicate the decades of work of De Beer’s 100 or so strong team geo-logical team would be in the tens of millions of dollars. In comparison the geological data-base in the Kyrgyz Republic, if you know where to look and how to access it, is a massive Soviet-era archive, meticulously crafted by ‘thousands’ of Soviet geologists over many decades right up until the Soviet Union’s collapsed. Kenadyr’s CEO and part of his team were part of this undertaking and know their way around as few do. As a consequence they have already pinpointed the only know ground with the potential to host a giant gold prospect. Think back to David Lowell in Chile and his staking of the Chilean copper belt’s copper-rich corridor beginning at Chuquicamata, and ending at El Salvador 500 Km away. Kenadyr’s 9 licenses cover 1,169 square kilometers, span 800 km from west to east starting at the Charaat black shale gold deposit and ending just after the Kumtor. Unlike Lowell they did not start from scratch but have the field work results from thousands of geologists so that they can zero in on the most prospective ground. This saves a huge amount of time and money while increasing the potential for a black shale gold discovery. These licenses contain according to the Soviet records, approximately 80% of the outcropped Upper Protero-zoic black shale outside of protected areas such as National Parks. One of the licenses extends from the Charaat license and three others covers most of the same outcropped carbonaceous shale hosting Kumtor gold deposit. Work should begin in a month or so and between the Borubai, ZiJin and the company’s explora-tion for giant black shale gold deposits it should be a very interesting year for this bargain-priced stock.

Neil Maedel through Andean Invest acts as advisor in regards to debt restructuring, corporate reorganizations, financings and shareholder relations for publicly listed companies. Andean Invest has acted as an advisor and was on the Board as a founding Director of Kenadyr Mining and acts as an advisor to K92 Mining. Please assume that Andean Invest buys and sells the securities mentioned herein. Andean Invest is a Bahamas-based holding company and Corporate Advisory firm which is wholly owned by Neil Maedel. Maedel’s is published for information purposes only it is neither a solicitation to buy nor sell securities. For further information and for up to date editorial please go to my blog at https://maedelsfinancial.com or email neil@maedelsfinancial.com