Gold & Precious Metals

Rick Rule on Gold, Silver & Why Junior Mining Stocks Have Languished

Posted by Rick Rule via The Daily Bell

on Tuesday, 25 September 2012 14:13

Rick Rule is certainly one of the savviest gold and silver investors around and thus it is quite interesting to get such a deeply informed take on the markets.

Rule

Daily Bell: Junior mining stocks have been lacerated. What’s going on?

Rick Rule: They are getting what they had coming to them. These junior miners acted like small governments for many years. They spent way more than they took in and they over-promised and under-delivered. If you merged every public junior mining company in the world into one company –Junior ExploreCo – that company would lose in a very good year $2 billion. And when I say lose I mean it would spend more on G&A and exploration than it generated by way of property sales, product sales or takeovers. In a bad year it would lose $8 billion. So if you look at the industry as a whole, an industry which year after year loses between $2 billion and $8 billion, you’re stuck with how to value it. Do you value it at 5x losses, 10x losses? What’s the correct price loss ratio? You get my point.

All of the performance in the secondaries is contained in the top 5 percent of the companies and the trick really is stock selection. If you buy the sector from your broker, he or she will live up to that name and you will get broker and broker and broker.

It is my belief right now that the market is beginning to bifurcate, which is an extremely important thing. The bottom 60, 70 or 80 percent of the companies on the TXSV are lurching inevitably toward intrinsic value, which is zero. The top of the exchange, however, is going to be driven by three things: reasonable valuations (notice I didn’t say cheap because I don’t think the market is cheap in the first instance), secondly M&A because of the insatiable need for high quality projects by intermediate and large producers, and third – and this is the most important and also the least well understood thing – discovery.

I think that after ten years of capitalizing the junior exploration sector extravagantly and enabling their better people who spend more and more money in stranger and stranger countries we are on the cusp of a real discovery cycle. You will note, as an example, that it was the funding cycle of the 1970s that lead to the Nevada gold discovery cycle of the 1980s. It takes ten years. Make no mistake, this market, as dismal as some people think this market has been, is still a market that rewards discoveries extravagantly. Witness Gold Quest, 6 cents to $1.16. What is Vor Minerals, .30 cents to $3.80. Africa Oil, .80 cents to $10. These are not dismal market moves.

Part of the reason that the market has been so dismal is because it deserves to be dismal, given the performance of the sector. But when you give this market an excuse to respond it responds in spades and I believe that we are on the cusp of a real discovery cycle as a consequence of having fed cash into the discovery industry for ten years.

….read a deeper explanation and areas to be invested in HERE (take care to read the After Thoughts section at the end of the interview)

 

A Critical – Clear Cut Choice

Posted by Gary North via Market Oracle

on Tuesday, 25 September 2012 10:44

Why You Should Prepare for Econcomic Catastrophe.
 
It is not often that readers get a clear-cut choice between two forecasts. Most forecasts have wiggle room. Not the following.
  1. The United States government will default.
  2. The United States government will not default.

I hold the first position. John T. Harvey holds the second. He wrote a piece for Forbes defending his position: “It Is Impossible For The US To Default“.

I regard this as the most fundamental economic issue facing the U.S. government. I regard it as the most fundamental economic issue facing Americans under age 60.

Mr. Harvey begins.

With so many economic, political, and social problems facing us today, there is little point in focusing attention on something that is not one. The false fear of which I speak is the chance of US debt default. There is no need to speculate on what that likelihood is, I can give you the exact number: there is 0% chance that the US will be forced to default on the debt.

That is the kind of forthrightness that I appreciate. Here is my response. With so many economic, political, and social problems facing us today, it is crucial that we focus attention on something that is both catastrophic and inescapable. The fear of which I speak is the chance of U.S. debt default. There is no need to speculate on what that likelihood is, I can give you the exact number: there is 100% chance that the U.S. will be forced to default on the debt.

UNFUNDED LIABILITIES

Why do I believe this? Because I believe in the analysis supplied by Professor Lawrence Kotlikoff of Boston University. Each year, he analyzes the statistics produced by the Congressional Budget Office on the present value – not future value – of the unfunded liabilities of the U.S. government. The latest figures are up by $11 trillion over the last year. The figure today is $222 trillion.

This means that the government needs $222 trillion to invest in private capital markets that will pay about 5% per year for the next 75 years.

Problem: the world’s capital markets are just about $222 trillion. Then there are the unfunded liabilities of all other Western nations. These total at least what the U.S. does, and probably far more, since the welfare state’s promises are more comprehensive outside the USA.

Conclusion: they will all default.

Mr. Harvey thinks that the U.S. government could choose to default, but it won’t.

We could choose to do so, just as a person trapped in a warehouse full of food could choose to starve, but we could never be forced to. This is not a theory or conjecture, it is cold, hard fact. The reason the US could never be forced to default is that every single bit of the debt is owed in the currency that we and only we can issue: dollars. Unlike Greece, we don’t have to try to earn foreign exchange via exports or beg for better terms. There is simply no level of debt we could not repay with a keystroke.

There are a lot of people inside the camp of the gold bugs who also believe this. They are probably wrong. They are wrong for the same reason why Mr. Harvey is wrong. They do not understand Ludwig von Mises.

MISES ON THE CRACK-UP BOOM

Mises was a senior advisor to the equivalent of the Austrian Chamber of Commerce after World War I. He understood monetary theory. His book on money, The Theory of Money and Credit, had been published in 1912, two years before the war broke out.

In the post-War edition of his book, he wrote of the process of the hyperinflationary breakdown of a currency. He made it clear that such a currency is short-lived. People shift to rival currencies.

The emancipation of commerce from a money which is proving more and more useless in this way begins with the expulsion of the money from hoards. People begin at first to hoard other money instead so as to have marketable goods at their disposal for unforeseen future needs – perhaps precious-metal money and foreign notes, and sometimes also domestic notes of other kinds which have a higher value because they cannot be increased by the State ‘(e.g.the Romanoff rouble in Russia or the ‘blue’ money of communist Hungary); then ingots, precious stones, and pearls; even pictures, other objects of art, and postage stamps. A further step is the adoption of foreign currency or metallic money (i.e. for all practical purposes, gold) in credit transactions. Finally, when the domestic currency ceases to be used in retail trade, wages as well have to be paid in some other way than in pieces of paper which are then no longer good for anything. The collapse of an inflation policy carried to its extreme – as in the United States in 1781 and in France in 1796 does not destroy the monetary system, but only the credit money or fiat money of the State that has overestimated the effectiveness of its own policy. The collapse emancipates commerce from etatism and establishes metallic money again (pp. 229-30).

In 1949, his book Human Actionappeared. In it, he discussed hyperinflation. He called this phase of the business cycle the crack-up boom.

The characteristic mark of the phenomenon is that the increase in the quantity of money causes a fall in the demand for money. The tendency toward a fall in purchasing power as generated by the increased supply of money is intensified by the general propensity to restrict cash holdings which it brings about. Eventually a point is reached where the prices at which people would be prepared to part with “real” goods discount to such an extent the expected progress in the fall of purchasing power that nobody has a sufficient amount of cash at hand to pay them. The monetary system breaks down; all transactions in the money concerned cease; a panic makes its purchasing power vanish altogether. People return either to barter or to the use of another kind of money (p. 424).

Later in the book, Mises discussed the policy of devaluation: the expansion of the domestic money supply in a fruitless attempt to reduce the international value of the currency unit.

If the government does not care how far foreign exchange rates may rise, it can for some time continue to cling to credit expansion. But one day the crack-up boom will annihilate its monetary system. On the other hand, if the authority wants to avoid the necessity of devaluing again and again at an accelerated pace, it must arrange its domestic credit policy in such a way as not to outrun in credit expansion the other countries against which it wants to keep its domestic currency at par (p. 791).Mt. Harvey has described just such a policy. He concluded that the United States government can never go bankrupt. It can print its way out of every obligation.

 

No, it can’t.

HYPERINFLATIONARY COLLAPSE

The expansion of the monetary base can go on until such time as commercial banks monetize all of the reserves on their books. Prices then rise to such levels that transactions no longer take place in the official currency unit. The division of labor contracts. The output of capital and labor falls. At some point, people adopt other currency units. They no longer cooperate with each other by means of the hyperinflated currency.

Professor Steve Hanke has co-authored an article on the worst 56 hypernflations. He discovered that most of these in industrial nations were over in a couple of years. The crack-up boom ended them.

No nation can long pursue a policy of hyperinflation. It destroys the currency and destroys the division of labor. The result is starvation. The policy of hyperinflation ends before this phase. Members of society shift to other forms of money.

This is why the policy of hyperinflation is useless in dealing with the 75-year obligations of the federal government to support old people through Social Security, Medicare, Medicaid, and federal pensions. These obligations are inter-generational. Hyperinflation lasts for months, not decades. When the government ends its policy of hyperinflation, it finds that it is still saddled with these obligations.

If the Federal Reserve resorts to hyperinflation, its retirement portfolio will reach zero value unless it shifts to foreign currencies, gold, or other hyperinflation hedges. It will publicly announce that the U.S. dollar is a failed currency, as manipulated by the FED.

If it refuses, then it will oversee Great Depression 2, monetary deflation, and the contraction of the division of labor. The U.S. government will go bankrupt.

If Congress nationalizes the FED, then it will pursue hyperinflation. The crack-up boom will end the experiment.

At that point, all of the obligations to retirees will still remain. But the government will not have the money to pay them. The $222 trillion of present valued unfunded liabilities will still remain unfunded.

The government’s obligations are inter-generational. Hyperinflation is not. The latter in no fundamental way reduces the former.

This means that the government will default. This is 100% guaranteed.

CITING ECONOMIC EXPERTS

Mr. Harvey cites the experts. “Don’t take my word for it. Here are just a few folks from across the political spectrum and in different walks of life saying the same thing.” Then he gives a series of quotations from these men: Alan Greenspan, Peter Zeihan, Erwan Mahe, Mike Norman, Monty Agarwal, L. Randall Wray. Other than Mr. Greenspan, I had heard of none of them. He concludes:

Mind you, that doesn’t mean there might not be other economic or political consequences. Inflation and currency depreciation, for example, are possibilities.

Yes, they surely are, since they are the same thing. But they do not solve the problem of the inevitable default. They merely add to the misery before the default.

Indeed, we have seen neither hide nor hair of inflation or high interest rates during the current run up of the debt. It is critical to bear in mind, too, that these deficits are not a result of the government trying to buy something it cannot otherwise afford (as would be the case for you or me). Rather, they are setting out to generate sufficient demand for goods and services to employ all those willing to work (that said, not every kind of government spending does this effectively, but that’s a different question). As there is no limit to how much debt we can successfully carry, we should be aggressively pursuing the latter goal rather than talking about being “fiscally responsible.” There is nothing responsible about leaving over 12 million Americans out of work.

We have plenty of problems in the world. No point in making one up.

 

CONCLUSION

This appeared in Forbes. The article cited a list of supposed experts, with Alan Greenspan at the head of the list. Somehow, the author expects us to take his argument seriously. We are also supposed to take his cited experts seriously, beginning with Alan Greenspan. We are supposed to imagine that debts are forever, that they need not be repaid, that credit is eternal, that the Baby boomers are not retiring by the millions, that digits can overcome economic theory, that Medicare is solvent, that Social Security is solvent, and that hyperinflation is always available as a way for the government not to default.

The nation is run by people who share his views. So is every Western nation.

This is a very good reason to prepare for a catastrophe, if we are lucky, or possibly several: (1) mass inflation, stabilization, deflation, depression, and government default, or (2) hyperinflation followed by a default. Take your pick.

Gary North [send him mail ] is the author of Mises on Money . Visit http://www.garynorth.com . He is also the author of a free 20-volume series, An Economic Commentary on the Bible .

http://www.lewrockwell.com

© 2012 Copyright Gary North / LewRockwell.com – All Rights Reserved 
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

hyper-inflation-money

Profit-Makers in the Oil and Gas Service Sector

Posted by The Energy Report

on Monday, 24 September 2012 19:21

Everyone agrees that high energy prices are here to stay, so most companies should perform well in the long run. But what about near-term opportunities? Taylor MacDonald, associate portfolio manager at Pathfinder Asset Management, is looking to service companies for industry outperformance. In this exclusive interview withThe Energy Report, he describes why proprietary niche service companies virtually own the markets they are establishing

COMPANIES MENTIONED : AFRICA OIL CORP. : CORTEX BUSINESS SOLUTIONS INC. : HUSKY ENERGY INC. : NEW ZEALAND ENERGY CORP. : NXT ENERGY SOLUTIONS : PRD ENERGY INC. : RIDGELINE ENERGY SERVICES INC. : SYNODON INC. : TAG OIL LTD.

The Energy Report: It’s been almost a year and a half since your last interview. We’ve had lots of ups and downs in the market. What is your current outlook for oil and gas? Are prices going to be stable or do you expect significant movement one way or the other?

Taylor MacDonald: Eric Sprott put it best when he said something along the lines of “Tell me how many greenbacks the Federal Reserve is going to print and I’ll tell you where oil prices are going” Greater easing is bad for the U.S. dollar and good for things priced in dollars. In a supply-constrained environment, the potential for shocks exists, but demand will continue to grow as long as oil prices don’t run too quickly or so far as to cause too much of a drag on global economic activity.

If there’s an incident in the Middle East that shuts down oil infrastructure in Saudi Arabia or the Strait of Hormuz, we could easily see oil at $150/barrel (bbl) or even $200/bbl. Hopefully that would be temporary. But irrespective of that possibility, we are quite bullish on the energy space. Until someone develops something to supplant it, we are still going to need a lot of oil and gas to fuel global economic activity.

TER: Would additional easing make much difference?

TM: I don’t think there’s any end in sight to easing, which will only continue to devalue the dollar—and that is good for commodities priced in dollars. Realistically, we are looking at steadily higher oil prices going forward.

TER: It seems that most of the easy oil has been found, at least onshore. A lot of activity is taking place offshore in places people didn’t consider potential oil-producing areas. Is this the future of oil and gas production?

TM: That is certainly going to be where we’ll continue to see a lot of action. We look at both new exploration on old fields and new exploration on new fields. Pathfinder has done very well in the past with holdings in Tag Oil Ltd. (TAO:TSX.V) and New Zealand Energy Corp. (NZ:TSX.V; NZERF:OTCQX), two companies that are developing what was previously seen as an “exotic basin.” We’ve also done very well with our holding of Africa Oil Corp. (AOI:TSX.V). We think that companies going into underdeveloped or unproven basins are ripe for the picking. The other place we’ve seen a lot of potential is in companies going into past-producing fields. One company in this arena, which we have a large position in and from which I recently got an update from management is PRD Energy Inc. (PRD:TSX.V). It’s acquiring acres and acres of land in Germany, Lower Saxony, and going back into fields that produced until World War II—and some more recently. PRD is going to rework them by applying modern extraction techniques to fields that have produced a mere fraction of their potential. This could be one of the better plays we see over the next year.

TER: Would you classify these as unconventional oil plays or extensions of existing technology?

TM: These are about as conventional as things get. I think the money that’s going to be made at the moment will be on normal oil and gas production. There is a lot of potential in unconventional reservoirs and new extraction techniques, and in applying conventional techniques to unconventional reservoirs. But right now, the simpler it is, the better.

TER: Have there been any major developments in some of the companies that you talked about last year?

TM: There’s a saying in the mining business that the best way to make money in a mining boom is to be in the business of picks and shovels. We are looking beyond that to “Picks and Shovels 2.0.”

In the oil and gas space, a handful of companies are applying new technologies to old industry problems. The first one is Ridgeline Energy Services Inc. (RLE:TSX.V), which we discussed at length in April 2011. It’s a cutting-edge energy services and water treatment company applying a proprietary technology to treat water from the industrial and commercial wastewater markets. We feel that Ridgeline is likely to be the victor in the race to provide the best solution for the treatment of dirty water from fracking—and really for most kinds of industrial process flow-back water.

Ridgeline made the transition from a relatively short research and development (R&D) period (three years) to full commercial deployment, and boasts a formidable list of major clients, including ConocoPhillips (COP:NYSE), Devon Energy Corp. (DVN:NYSE), Enbridge Energy Partners L.P. (EEP:NYSE), EOG Resources Inc. (EOG:NYSE) and Progress Energy Resources Corp. (PRQ:TSX ), to name a few. When we discussed Ridgeline last year, the shares were trading in the $0.50 range. After a meteoric rise to a high of $1.41 last March, the price has come back down to earth and is now settling in the high $0.50s. We recently added a sizeable position to our Pathfinder Partner’s Fund and it is now our single largest share holding. We believe investors would be wise to pick up a position in the company here.

After a number of significant developments, Ridgeline is far better positioned than it was last year. First, it acquired 100% of the global rights for its technology for just less than 35 million shares. This was expected, but still a milestone for the company. Second, the company added a strong new CFO and a new COO as well as a Fortune 500 director. Third, the company set up a fully operational commercial facility with EOG Resources in New Mexico, which we visited earlier this year.

Ridgeline also finalized an agreement to purchase an industrial wastewater pretreatment facility in Los Angeles, where it’s currently treating industrial wastewater streams. Although this application doesn’t get the same attention as the company’s work in the oil and gas space, it has more profitable margins that are multiples of what is seen in oil and gas. And the near- and mid-term revenue growth from the facility should underpin Ridgeline stock at a higher price.

Lastly, the company started manufacturing its water storage units, which are bladder-and-manifold systems. The growth of competitor company Poseidon Concepts Corp. (PSN:TSX) has shown that the market for water storage in the oil and gas industry is massive. Ridgeline’s storage system may not have the same growth, but we do expect it to be a significant contributor to sales and profits as it is rolled out.

This treats a huge and growing problem of water usage and disposal when fracking. It is cost competitive with down-hole disposal—if not cheaper—and also allows reuse of the water in the next frack. Not only does it save on the disposal cost but also on water acquisition cost. This is my favorite company and our largest holding.

TER: What are the growth prospects in terms of revenues?

TM: I expect the company will bring in $27 million (M) in the next year, and then $55–70M the following year. This will be a very high-margin business, especially as Ridgeline branches out into industrial wastewater treatment and into its water storage system. The water storage uses bags, as opposed to Poseidon’s system, which uses giant “kiddie” pools full of water. Poseidon’s system works much better in Alberta, where surface land area is a constraint. The bag system lays flat on the ground and is also fully contained. If land isn’t an issue, as in Texas, and where evaporation is a huge issue, such as with the current drought, the bag system presents a very interesting solution to water storage needs.

TER: And the company is going to make money regardless of what oil prices do because these are services that companies need to use one way or another.

TM: Definitely. Ridgeline also has two other businesses. One of them is treating hydrocarbon contaminated soils at its GreenFill sites; there are many throughout Alberta. The other is an underlying environmental consulting business, which was how the company started. These other business streams help to support the company and add to both the top and bottom lines.

TER: With regard to profit margins, how sensitive to oil prices are most companies at this point, relative to future exploration activities and the profits that they are making right now?

TM: Cost inflation is something that every single business space is currently experiencing, not just oil and gas. Companies must do whatever they can to become more efficient and save on exploration, development and production costs, etc. One company we are very keen on is Calgary-based NXT Energy Solutions (SFD:TSX.V; NSFDF:OTCBB), which has a disruptive, patented and patent-pending airborne survey technology for oil and gas exploration called Stress Field Detection (SFD).

SFD is a little difficult to explain, but it’s essentially a jet with a passive sensor array on board that flies a grid over large swaths of land looking for drops in the gravity stress field. Surveys can be completed in one-tenth of the time and cost of 2-D and 3-D seismic surveys. This doesn’t replace seismic, but rather pinpoints where to shoot the seismic. It allows companies to survey hard-to-reach areas with virtually zero environmental impact. The technology is fully proven and can be used onshore, offshore, and in mountainous terrain. It’s been used and verified by Pacific Rubiales Energy Corp. (PRE:TSX; PREC:BVC), Pengrowth Corp (PGH:NYSE), Pemex (PEMEX:MSX), BP Colombia (NYSE:BP) and Ecopetrol (Colombia’s national oil company).

To envision the process, imagine a river with a rock in the middle. As the river, an analogue for the stress field, reaches the rock, it will wrap around it. This means that the river, or again, the stress field, will have to change direction, which shows up in the gravity field, where the SFD can detect it. It’s based on quantum physics. Flying a grid pattern, the SFD equipment measures and detects orientation changes in that stress. A trapped reservoir, for example, will affect the SFD, and allows delineation of prospective areas. The fluid could be oil, gas and/or water. The resulting data shows exactly where to shoot your 2-D and 3-D seismic.

This technology slashes permitting time, lessens environmental impact, and can literally save a company up to 90% on seismic acquisition costs. The technology only requires a flight plan, not exploration permits, which allows NXT to mobilize quickly instead of waiting up to three years just for the seismic permit. SFD also improves the success rate dramatically on wildcat exploration wells in frontier areas. NXT Energy has a growing revenue base and client list, with a rapidly increasing acceptance of the technology. It’s also profitable on an earnings-per-share (EPS) basis over the last two quarters, and is a well-held and well-structured company. We think the company’s future is very bright.

TER: Is this somewhat similar to airborne geophysical surveys for mineral deposits?

TM: Yes. But I would say this is much more precise in that it can tell you exactly where to find million-barrel fields. There’s also the ability to locate water aquifers. Who knows where it could lead? This is one of the most interesting technologies I’ve seen in the business in my years in the industry.

TER: That’s definitely a revolutionary technology. What else do you like in the services?

TM: This may not sound like the sexiest business on the planet, but in some ways it is. Cortex Business Solutions Inc. (CBX:TSX.V) provides an electronic procurement and invoicing system for the oil and gas business. It set up an electronic network to process invoices and convinced Husky Energy Inc. (HSE:TSX) to essentially come on as a beta test. Let’s say Husky operates a hub with 10,000 (10K) different suppliers, ranging from modular assembly to pipe fabrication to wiring to meals and housing for employees, etc. A big rush of invoices come in at the end of the month and all are prone to human error. Using the Cortex system, every time a supplier initiates a document they’ll pay a transaction fee of between $0.25–2.50 depending on the number of invoices sent in a month while the hubs pay a capped monthly fee in the thousands to tens of thousands of dollars. As you can imagine, the system started to take hold.

Husky streamlined invoice receipt and processing functions, saving millions of dollars per year. It even mandated that its suppliers all join the Cortex system. Cortex has now signed more than 40 major buying organizations in Canada and the U.S. onto the system, including such major names as Apache Corp. (APA:NYSE), Hilcorp (private), Energen (EGN:NYSE), Bonavista Energy Corp. (BNP.UN:TSX) and Murphy Oil Corp. (MUR:NYSE). I’d also point out that Cortex has also boarded over 8,000 suppliers to the system and that many of those suppliers are turning into hubs themselves, demonstrating accelerated acceptance. Every added hub creates a new network effect, because most suppliers don’t work for just one company. As you add another hub, your average revenue per supplier, or ARPS, goes up. What I refer to as “manifest destiny” will likely enable Cortex to take over the oil and gas space.

The company’s revenues will grow and multiply. I believe it’s at the beginning of that hockey stick curve we all love to talk about. Cortex is about to turn the corner on profitability and cash flow, and the modeling I’ve done shows the numbers getting pretty heady a year or two out.

TER: Do you think Cortex will lock up the whole business, since there doesn’t appear to be anybody else that’s made significant inroads?

TM: It has signed up two utilities clients, and is also looking into the construction sector. Every major type of industry can probably make their systems better with Cortex. I think we are just starting to see Cortex’s system take hold and it’s one of the ways that oil and gas companies can fight rising costs in other areas of their businesses.

TER: What are your expectations for the company at this point?

TM: It did about $4.6M over the last year or so, and is trading at $0.18. From January 2013 and moving one year forward, I expect roughly $0.04 of free cash flow per share. Applying a 10 times multiple to that, which is justifiable given the growth curve, we can easily see a double from here. It went from signing one hub a month to four, then six, and now just announced that it signed a total of seven major buying organizations to the system in August. The worse things get for the oil and gas companies, the more they are going to need a service like this, because they are going to want to control costs and have a better handle on information. This is one of the best companies I’ve seen—and because it’s so simple it is very difficult for it to go wrong. We are the company’s second largest shareholder, after Fidelity.

TER: What else do you like?

TM: Another company we find very interesting is Synodon Inc. (SYD:TSX.V), which has developed and field-tested a remote gas-sensing technology called realSens, which it purchased from the Canadian Space Agency and has invested $47M in, to date. This promises to be a game-changer in the gas detection space. There are a range of applications, but the most near-term opportunity is in the gas transmission space, where the sensor is mounted on a helicopter that flies gas pipelines to detect any leaks in both industrial and commercial transmission. Two percent of all gas put into a pipeline doesn’t make it to the other end. More than $300M is spent and more than 2M pipeline leaks are detected globally every year. Synodon’s competitor dominates 80% of that $300M. That alternative method involves manually walking the lines with a “sniffer” device that detects gas. It’s inefficient and extremely costly. There’s also a large legislative environmental concern, which could really give Synodon a push.

This is a best-in-class technology and Synodon has some strategic partners already lined up, like TransCanada Corp. (TRP:TSX) and Enbridge Inc. (ENB:NYSE). The contracts are starting to roll in and the company has been finding massive leaks that previously went undetected.

The reason we got involved with this story is because Paul van Eeden, a preeminent resource newsletter writer, has come on as a director and owns over 20% of the company. That was the vote of confidence we needed to look deeper. This is, without a doubt, a best-in-show company in terms of cost, speed and efficiency, and we think it will become one of the go-to technologies oil and gas producers and distributors use to ensure efficiency and not leave any money on the table.

TER: Is this another revolutionary technology that could get a lock on a particular market?

TM: Absolutely. I think the legislative push could soon require companies to fly pipelines at pre-stated intervals.

TER: Do you like any more conventional plays?

TM: We continue to look for opportunities, and like companies that are applying either new technologies to old basins or old technologies to new basins. There are lots of different ways to make money in this business.

TER: These are interesting stories and we’ll be watching to see how things develop. Thanks for joining us today, Taylor.

TM: My pleasure.

Taylor MacDonald is an associate portfolio manager at Pathfinder Asset Management Limited. He graduated from the Wharton School, University of Pennsylvania, with a bachelor’s in economics in 2004. Prior to Pathfinder, he worked in equity research at Raymond James Ltd. in Vancouver, investment banking with Haywood Securities (UK) Ltd. in London, England, and institutional equity sales at RenCap Securities in New York. He has been a CFA Charterholder since 2009 and is a Level II CAIA candidate.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

DISCLOSURE:
1) Zig Lambo of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: New Zealand Energy Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Taylor McDonald: I personally and/or my family own shares of the following companies mentioned in this interview: Ridgeline Energy Services and Cortex Business Solutions. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.

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A leading precious metals consultancy, Thomson Reuters GFMS, has forecast that investors will buy record amounts of gold in the remainder of 2012. GFMS produces the benchmark supply and demand statistics for the gold market. GFMS forecasts that investors will purchase 973 tons of gold in the second half of 2012, more than during the wild gold market of the summer of 2011. This surge in demand for the yellow metal, GFMS says, will move gold above the $1850 an ounce level, not far from the record high of $1920 hit in September 2011.

GFMS may be right. This past week, gold hit its high for this year at $1790 an ounce on the back of the various global stimulus plans launched by a number of countries around the globe. Primary among the recently announced stimulus plans was the Federal Reserve’s QE3 or as some in the market have called it, QE infinity. Philip Klapwijk of GFMS said that, for the gold market, “QE3 has become talismanic”.

The Federal Reserve said it would purchase $40 billion a month in mortgage-backed securities indefinitely. In addition, the Fed will continue Operation Twist – the buying of longer-dated U.S. treasury notes and bonds. When all is totaled, the market is looking at about $85 billion a month in government bond purchases for an unlimited period of time.

The main characteristic of QE3 that drives the gold market is the fact that the open-ended purchases of all of these Treasuries will be financed by money that does not yet exist! And it’s not just about a fear of future inflation being ignited by all this money creation. It’s a very logical move higher by gold based on recent history of Fed actions and gold prices.

Even ignoring Operation Twist, the Fed will add $40 billion a month, or $480 billion a year, to its balance sheet. If one looks at the Fed’s own website, you will see that it shows current assets of $2.8 trillion. Add $480 billion annually to that and in about five years the Fed’s assets (the foundation of the money supply) will have nearly doubled.

That is exactly what happened in the last five years too…the Fed’s assets doubled. And in what should not be a surprise to gold investors, the price of gold also doubled! For the past decade or so, gold has tracked the increase in Federal Reserve’s assets. Do not be shocked if that pattern continues over the next five or ten years too.

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Chris Vermeulen

The Bottom Line

Posted by Don Valiloux - Timing the Market

on Monday, 24 September 2012 14:45

Downside risk in North American equity markets exceeds upside potential in equity markets during the next 2-3 weeks prior to start of the third quarter earnings report season. Thereafter, prospects turn positive. Selected positive seasonal trades such as gold and energy have performed well, but are approaching their end of their period of seasonal strength. Similarly, selected negative seasonal trades such as Transportation and Semiconductors are approaching the end of their seasonal weakness. The time to take profits in these seasonal trades is rapidly approaching. Short term technical indicators will be useful for determining exit points. A new series of seasonal trades will appear as the end of October approaches.

The weakest period in the year for North American equity markets from September 16th to October 9th is happening again this year. This is the time of year when companies most frequently lower guidance prior to release of third quarter results (i.e. earnings confession season). Lots of examples last week including FedEx, Norfolk Southern and Bed Bath & Beyond! Possibilities of more frequent guidance declines this year are higher than usual. Third quarter year-over-year consensus for Dow Jones Industrial Average companies already calls for a 1.6% decline. Consensus for S&P 500 companies is a decline of 2.7% (down from 2.1% a week ago) despite a 20.2% gain by Apple Computer. Since release of second quarter reports, 80% of S&P 500 companies that changed guidance lowered their guidance. Consensus for TSX 60 companies is an average decline of 7.8%. Despite consensus estimates calling for lower earnings on a year-over-year basis, consensus estimates appear too high and likely will continue to fall prior to release of third quarter results.

Macro events outside of North America also will influence equity markets. A decision by Spain to ask the European Central Bank to purchase Spanish sovereign debt is scheduled on Thursday. The Eurozone consumer confidence index is released on Thursday.

U.S. economic news this week is expected to be mixed. Case-Shiller and Consumer Confidence on Tuesday are potential positive events. Weekly initial jobless claimes, Durable Goods Orders on Thursday and Chicago PMI and Michigan Sentiment on Friday are potential negative events.

Earnings reports this week are not expected to be significant. Focus is on Nike on Thursday.

Historically, North American equity markets have moved lower from mid- September to mid-October during a U.S. Presidential election year (particularly when the polls show a close election as is indicated this year. Thereafter, equity markets have moved higher until at least the beginning of January (The exception was the year 2000 when confirmation of President Bush as President was delayed until January 2001).

Cash on the sidelines is substantial and growing. However, political uncertainties (including the fiscal cliff) preclude major commitments by investors and corporations before the Presidential election.

Equity Trends

The S&P 500 Index slipped 5.62 points (0.38%) last week. Intermediate trend is up. The Index remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought and showing early signs of rolling over (e.g. a fall by RSI below its 70% level on Friday).

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The TSX Composite Index fell 115.87 points (0.93%) last week. Intermediate trend is up. The Index remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are overbought and showing early signs of rolling over (e.g. RSI falling below the 70% level). Strength relative to the S&P 500 Index remains neutral.

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Ed Note: to view another 44 charts on Equities, Currencies and Commodities go HERE