Curried Wealth Building
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March 20, 2011
Issue 139  -  If it Weren't for Bad News.....
 
 
The past couple weeks has been pretty rough.  I thought I'd give my thoughts on some of the headlines and how they could affect your investments.
 
Japan
 
The earthquake and tsunami left Japan down on the mat, struggling to get up.  The Japanese have experienced these type things before and they will recover, probably more quickly than you might expect.  Not only was the damage devastating, but the damage done to the nuclear plant could still have far worse consequences. (the odds of having a major health effect on the United States is pretty low, but it will have a large effect on the Japanese)  It is amazing to me how self centric we are as a country.  A lot of people aren't even aware how severe the problems are in the plant.  Although it is unlikely (but not impossible) for the nuclear effects to have much impact on the United States, it will and has, had an impact on the markets, you and me. 
 
The largest effect was on the yen which basically went into a rocket rise.  The yen carry trade was put at risk.  Because Japan has such low interest rates, entities were borrowing yen and then converting them to other assets to make money.  Here is the explanation from Investopedia:
 
Investopedia explains Currency Carry Trade
Here's an example of a "yen carry trade": a trader borrows 1,000 Japanese yen from a Japanese bank, converts the funds into U.S. dollars and buys a bond for the equivalent amount. Let's assume that the bond pays 4.5% and the Japanese interest
rateis set at 0%. The trader stands to make a profit of 4.5% as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then she can stand to make a profit of 45%.

The big risk in a carry trade is the uncertainty of exchange rates. Using the example above, if the U.S. dollar were to fall in
valuerelative to the Japanese yen, then the trader would run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless the position is hedged appropriately.
 
When Japan's disaster starting really affecting the country, fear came in resulting in panic selling.  This had the yen soaring.  This is VERY bad for the carry trade.  Because the trade is very leveraged, a small move in the exchange is bad, and this move was huge.  Enter the powers that be:
 
Yen falls as G7 intervenes in market
 

BEIJING, March 19 (Xinhuanet) -- The G7 has agreed to carry out rare intervention, to restrain a soaring yen, and calm global markets. The move comes after a week of panic trading, amid the nuclear crisis in Japan. But economists say history is not on the bloc's side.

Japan's Finance Minister says the country's central bank had begun to sell yen at midnight GMT. And other central banks from the Group of 7 will intervene as their markets open.

The US dollar immediately surged ... to as high as 81.7 yen, leaving behind a record low of 76.25 hit on Thursday.

Analysts say G7 financial leaders agreed on the joint intervention, because they may be worried that a surge in yen repatriation could unsettle global markets. That could create a crisis of confidence from Asia to Europe and the United States.

But analysts don't generally hold a positive attitude towards the joint action. They say concerted intervention only works when backed by central bank policy tightening.

But in this case, there is almost no chance of the Federal Reserve tightening for months to come. And although the European Central Bank has signaled an intent to hike rates in April, that might not help the dollar against the yen.

The yen had soared due to speculation that Japanese firms would repatriate some of their huge foreign assets, to help meet insurance claims and pay for reconstruction.

Economists say a strong yen could dampen the heavily export-dependent Japanese economy, to recover from the disasters.

The damage toll is already estimated at up to 200 billion US dollars, with Japan almost certain to slip back into recession.

 
This has nothing to do with helping the little guy, it's all about the large banks and hedge funds.  This move in the yen was basically blowing up their balance sheets.  Can't have that.  I like how the story refers to the "rare" intervention.  To say market interventions are rare is a real knee slapper.  Also, notice how analysts are worried about "without tightening of money, this will have a very temporary effect."   That is absolutely true and because we aren't getting any tightening it confirms the ultimate goal of the intervention...protecting the big boys.
 
I've often pointed out how important it is to have cash in a place where you can easily access it.  This is for the time, which may never come, when it becomes impossible to access your money from the bank.  Think that's far fetched?  Not so much: 
 

Mizuho Bank says its ATMs in Japan stopped working

TOKYO, March 17 | Wed Mar 16, 2011 8:37pm EDT

TOKYO, March 17 (Reuters) - Mizuho Bank said on Thursday that all of its automatic teller machines (ATM) throughout Japan have stopped working.

The bank did not immediately give a reason for the outage.
 
 
Now this was only one bank chain, but because of the complex connections between banks this could have become wide spread.  Make sure you have a stash to use in an emergency.
 
Another larger effect that we can expect from this disaster is a shortage of parts and therefore products.  Many components and products are made Japan.  It just isn't true that "everything is made in China."  This will have implications on the availability of goods.  There has already been a warning of upcoming shortages of ipad 2s.  This will cause prices to rise.  This fits right in with an accelerating inflation which I believe is imminent.
 
Deficit
 
The U.S. deficit is absolutely out of control.  There just is no other way to describe it.  Don't be fooled by these calls to "cut" spending.  Here is another video from the penny guy explaining what is going on:
 
 
So there you have it, a freeze is nothing of the sort.  If we froze the budget at current levels, we would still be spending WAY more than we actually bring in.  This is all just political theater.  Vying for votes with fake claims and hyperbole. 
More evidence:
 
U.S. Debt Jumped $72 Billion Same Day U.S. House Voted to Cut Spending $6 Billion

Wednesday, March 16, 2011

By Terence P. Jeffrey

(CNSNews.com)

- The national debt jumped by $72 billion on Tuesday even as the Republican-led U.S. House of Representatives passed a continuing resolution to fund the government for just three weeks that will cut $6 billion from government spending.

If Congress were to cut $6 billion every three weeks for the next 36 weeks, it would manage to save between now and late November as much money as the Treasury added to the nation’s net debt during just the business hours of Tuesday, March 15.

At the close of business on Monday, according to the Treasury Department’s

Bureau of the Public Debt, the total national debt stood at $14.166 trillion ($14,166,030,787,779.80). At the close of business Tuesday, the debt stood at $14.237 trillion ($14,237,952,276,898.69), an increase of $71.9 billion ($71,921,489,118.89).

Since the beginning of fiscal year 2011--which began on Oct. 1, 2010--the national debt has climbed from $13.5616 trillion ($13,561,623,030,891.79) to $14.2379 trillion ($14,237,952,276,898.69) an increase of $676.3 billion ($676,329,246,006.90).

Congress would need to cut spending by $6 billion every three weeks for approximately the next six and a half years (338 weeks) just to equal the $676.3 billion the debt has increased thus far this fiscal year.

-END-

 
Do you see how silly all this posturing and preening in front of cameras is?  If the debt is rising by twelve TIMES the amount being talked about to "cut", it just makes the congressional show all the more absurd.  Couple that clip with the following:
 
Government posts biggest monthly deficit ever

The Washington Times

11:46 a.m., Monday, March 7, 2011

The federal government posted its largest monthly deficit in history in February at $223 billion, according to preliminary numbers the Congressional Budget Office released Monday morning.

That figure tops last February’s record of $220.9 billion, and marks the 29th straight month the government has run in the red — a modern record. The last time the federal government posted even a monthly surplus was September 2008, just before the financial collapse.

Last month’s federal deficit is nearly four times as large as the spending cuts House Republicans have passed in their spending bill, and is more than 30 times the size of Senate Democrats’ opening bid of $6 billion.

Senators are slated to vote this week on those two proposals — both of which are expected to fail — and then all sides will go back to the negotiating table to try to work out a final deal.

 
Noticing a pattern here?  Talks of cutting relatively small numbers while the ACTUAL deficit grows like a beanstalk on crack.  The American people are so distracted (on purpose) by the television and "US" magazines that they don't really have a clue.  Maybe their also too worried about just paying their mortgages: 
 

More homeowners going 'upside down' on their mortgages

By Alan J. Heavens

Inquirer Real Estate Writer

A continued decline in prices pushed more homeowners into negative-equity territory in the fourth quarter, CoreLogic reported Tuesday.

Negative equity, often referred to as "underwater" or "upside down," means that borrowers owe more on their mortgages than their homes are worth.

Nationally, 11.1 million, or 23.1 percent of all residential properties were underwater, compared with 10.8 million, or 22.5 percent in the third quarter.


 
Until this housing mess is stabilized, there is just no way to get the economy back on track without these never ending injections of free money and debt.  The balance sheet is just too poor.  This means that the deficit is only going to worsen.  Some day in the future the United States will pull out of this, but that is years in the future.
 
 
Positions
 
Goro  (closed at $25.30, down $3.30, average price paid, $6.10) 
 
GORO announced earnings this past week, the release:
 

Gold Resource Corporation Reports Fourth Quarter and Year End 2010 Results

Press Release Source: Gold Resource Corporation On Tuesday March 15, 2011, 4:14 pm EDT

DENVER, CO--(Marketwire - 03/15/11) - Gold Resource Corporation (GORO) (AMEX:GORO- News) today announced financial results for the fourth quarter and year ended December 31, 2010. CEO conference call is scheduled March 16, 2011. Gold Resource Corporation is a low-cost gold producer with operations in the southern state of Oaxaca, Mexico.

Overview of Full Year 2010 Results from El Aguila Project

Gold Resource Corporation declared commercial production July 1, 2010. In the first six months of commercial production, Q3 and Q4 of 2010, the El Aguila Project produced 10,493 ounces of gold at a cash cost of $217 per ounce, net of by-product credits, and sold its gold at an average price of $1,201/ounce. The mine generated a gross profit of $9.8 million.

For the year 2010 the Company had a net comprehensive loss of $23 million or ($0.46/share) due primarily to expensing continued Project construction and development costs and to non-cash items.

The Company's 2010 mill production throughput rate averaged 755 tonnes/day and mill head grade averaged 3.7 grams per tonne gold. Extensive and unusually heavy rains during the third quarter and first half of the fourth quarter of 2010 complicated production as lower grade stockpiles with less clay materials were better suited to run during that time. Mill recoveries were 81% in the third quarter and 74% in the fourth quarter, primarily because of the lower head grade run during the fourth quarter. Mill recoveries averaged 77% for the year ended December 31, 2010.

In November, 2010 the Company commenced underground mining and stockpiling of the La Arista high-grade, polymetallic mineralization at the El Aguila Project. The Company announced March 14, 2011 making the transition from processing open pit ore to processing Arista underground ore, in the mill's flotation circuit, ahead of the Company's mid-2011 target. Ore stockpiles remaining from the open pit mine will eventually be processed in the mill's agitated leach circuit. Mill optimization and ramp-up of the Arista polymetallic ore continues.

Gold Resource Corporation's President, Mr. Jason Reid, stated, "2010 was an important year for Gold Resource Corporation as we emerged as a low cost gold producer, an accomplishment achieved by few. We commenced commercial production from our open pit in Q3, continued to optimize operations in Q4 and are developing the Arista underground mine. Even with the challenges of early production and inclement weather we are pleased as the Project continued to demonstrate its low production costs of less than $800,000 per month for the six months of commercial production and produced a mine gross profit of $9.8 million dollars."

"We expect continued reduction of unit cash cost per ounce of gold by using industry standard base metal by-product credits from the Arista deposit which, in addition to gold and silver mineralization, also contains base metal mineralization of copper, lead and zinc. As we continue mill optimization, ramp up and production from the Company's largest deposit discovered to date, La Arista, we look forward to 2011 as a transformational year for Gold Resource Corporation as we target processing higher average grade ore, lower cash costs and greater production levels in 2011," stated Mr. Jason Reid.

Mr. Jason Reid continued, "We remain consistent in our long term objective to return money back to the owners of the Company, its shareholders. Using cash flow generated from mine operations, the Company declared and paid its shareholders a $0.03 per share dividend each month since commencing commercial production July 1, 2010."

2010 Q3 & Q4 HIGHLIGHTS

 
--  Achieved commercial production July 1, 2010
--  Produced 10,493 ounces of gold at a cash cost of $217 per ounce
--  Generated $9.8 million mine gross profit
--  Dividend distributions of $0.18 per share for the six months of
    commercial production
--  Cash and cash equivalents of $47.5 million on hand at December 31, 2010
--  Mining, stockpiling ore and continued Arista underground mine
    development

 
While on first glance, it looks like a poor quarter, and it was, the big picture is bright.  With the transition to the higher grade underground ore, the amount of gold and silver being produced should jump greatly.  During the conference call they held on Wednesday, it was related that as they spiral down the underground mine, the ore is getting richer.  They are working on level 6 and they commented that the silver content was 1000-1500 grams/ton.  This is spectacular.  At $34 an ounce, this equates to $1000-1500 a TON.  They are initially going to be producing 500 tons a day.  Gross cash flow from that is, at the low end, $500,000.  Keep in mind that the mill can process 1500 tons a day and as the underground mine is expanded this will be met.  These guys will be throwing off money at an amazing rate.  Just with the silver here, calculating 90% mill rate, that would equate to nearly 500 million dollars a year gross.  The whole company is valued at $1.4 billion.  That's waaaaay too low.
 
Now factoring in their zero cash cost and then their gold and this will be a rocket ship.  Now obviously they have to execute and they didn't do that with the open pit ore, but the underground ore will have little clay and that was the largest issue of concern.  I totally believe they will be a hugely successful business by this time next year.  I would be a buyer of this stock up to $35.
 
Mexus Gold  (closed $.25, down $0.02, average price paid, $.20) 
 
Mexus had an announcement this week:
 
Mexus Gold U.S. Announces Drilling With New Diamond Core Drill in Caborca Mexico
Press Release Source: Mexus Gold U.S. On Monday March 14, 2011, 10:16 am EDT

CARSON CITY, Nev., March 14, 2011 (GLOBE NEWSWIRE) -- Mexus Gold U.S. (OTCBB:MXSG - News) is a company engaged in the evaluation, acquisition, exploration and development of mining properties and conducts salvage operations for the recovery of precious metals. Mexus Gold U.S. announced today the shipment of drilling equipment capable of conducting diamond core drill operations to the Caborca Mexico Mine site. A drilling program scheduled to begin April 1, 2011 will focus on one of several target areas based on recent geological evaluations conducted by the Company. The program will consist of six boreholes to a depth of 400 feet in the geologic area of a prolific quartz vein system. Historical data provided to the Company has indicated the presence of a potential mineral deposit bearing as much as five ounces gold per ton.

President and CEO, Paul Thompson, is pleased the new equipment is arriving at the Caborca Project site. He went on to state, "We are very excited about the prospect of The Caborca Project which consists of 7400 acres (3000 hectares) in Sonora State, Mexico about 50 kilometers northwest of the City of Caborca, Sonora State, Mexico."

Mexus has a property in Nevada, several properties in Mexico, and the rights to the west coast cable.  This new acquisition has lots of surface metal.  This drilling program, because it is such a small one, will probably be done in short order.  This could provide drill results this summer.  Also, the Ocho Hermanos property is nearly set to begin actual mining.  This should provide income within a few months.  Couple that with the beginning of the cable pulling project, which I expect to start by June, and they will have multiple streams of income.
 
I again added shares this week at 25 cents a share.  My gut feeling is that coming this Summer we will see the price start to move higher as  these projects actually start to bear fruit.
 
Stocks    (Current status, OUT, moved out on March 18)
 
I exited my stock position in my retirement funds this week.  The moving averages have turned down and that is usually a bad sign.  We are due a correction and that could come over the next couple months.  I view the risks outweighing the potential gains.  I'm waiting on the sideline until things shake out or QE3 is announced.  I believe the markets will take a substantial hit and THEN QE3 will be announced.
 
Physical Gold  (Closed $1,420,  flat,  average price paid $395)
 
Physical Silver  (Closed $35.28,  down $0.62,  average price paid $5.31)
I'll end with a video that has been viewed over 60 million times and in case you think this guy is only looking for publicity, he's been doing this every Thursday for 3 straight years.  It's a good one for times of strife, have a great week!