A Melman Minute
By: Leonard Melman
Events in Peru over the past 48 hours have surely
added another increment of uncertainty regarding foreign mining ventures in that
nation. World headlines are being generated in the southern part of that nation
as huge crowds, estimated at near 20,000, have been protesting that their region
has been receiving insufficient portions of Peru’s mining tax revenues. As a
protest, they shut down access to the area’s mining access roads and, when the
police were called in to restore order, they turned on the police with a
vengeance, capturing some 60 of them and holding them hostage in an area church.
As a result, mining activity in the area has been
disrupted and the industry must once again look at Peru as a nation where a
relatively high degree of risk now exists. We would also note that Peruvian
President Alain Garcia has a history of leading Peru into trouble as under his
previous term of office in the late 1980’s and early 1990s, Peru had exploding
inflation and massive government corruption.
We have just returned from the Cambridge House World
Investment Conference just concluded in Vancouver BC. Attendance was unusually
high for this time of year, also considering one of the two conference days was
Father’s Day and the weather was particularly splendid. Clearly, many investors
and potential investors were concerned about recent share performance and
desired to hear presentations which might clarify the situation and predict what
could happen going forward. Your editor was fortunate enough to participate in
the opening panel discussion and to present a workshop entitled “Four Dynamic
Trends - Updated June 2008.”
One of the most important concepts discussed was the
idea of special investment opportunities which COULD provide substantial
profits into the future. We emphasize the word “could” because, if anything has
been proven in the past 12-18 months, it is the concept that uncertainty of
outcome in several directions is at a high level. Among the ideas which were
discussed are these:
Platinum - Given the high level of unrest in South
Africa, the fact that many white South Africans who possess high levels of
technical expertise are fleeing the country, and the reality that basic services
such as electric power provision are already deteriorating, it is conceivable
that the mining industry in that nation will be operating with diminished
efficiency - and may even come to a halt production for sustained periods at
some future time. Given that South Africa is far and away the leading producer
of platinum and palladium, and the fact that supplies of those white metals are
already tight, any disruptions in production from South Africa could send their
prices sharply higher. Therefore, investment in North American companies either
producing Platinum Group Metals (PGMs) or having proven resources which could be
brought into production could prove to be a worthwhile investment.
Bonds - One frequently-mentioned speculation had to
do with the anticipation that rising levels of inflation combined with growing
financial uncertainties world-wide would drive interest rates higher and bond
quotes lower. If one wished to speculate on higher interest rates, two vehicles
are readily available, the participation in indexes such as the “TYX” which
directly reflects the rate of interest on a portfolio of 30-year U.S. government
bonds, or by ‘shorting’ the commodity markets for those bonds or other long-term
debt instruments. Several speakers noted that interest rates could move much
higher over time, giving those investments the potential for significant
returns.
Uranium - Several analysts mentioned the reality
that nuclear power is emerging as perhaps the only potential source of massive
supplies of new electricity. Virtually all other sources have some marked
deficiency as power supplied by coal generation is regarded as ‘dirty’; oil
generated power is now enormously expensive with supplies being uncertain as
well; natural gas-fired generation is becoming more expensive as natural gas
prices rise; and hydro-electric generation is either non-available or
environmentally unpalatable. In recent months we have seen several stories
regarding increasing plans to build new nuclear plants and, should those plans
go forward in a meaningful manner, the potential demand for fuel-grade uranium
could soar. Uranium stocks have been beaten-down significantly on average
during the past 18 to 24 months. Speculation now is growing that an important,
positive turn in their fortunes could be in the offing.
NOTE - We would point out that investments in
concepts such as these carry an inherently high level of risk and that no
investments should be made without prior consultation with licensed investment
professionals expert in those fields.
Several other topics came in for extended discussion
including the continued collapse of the American housing markets, the enormous
difficulties faced by the entire international financial community, the growing
worldwide food price crisis which is beginning to effect social order in many
nations and the implications of the upcoming United States Presidential and
Congressional elections.
In summary, a majority of those analysts agreed that
the American housing market still faced a considerable period of difficulty;
credit markets not only continue to encounter huge difficulties but the
consequences of those difficulties are spreading relentlessly; the food crisis
is intensifying and, like petroleum, demand continues to rise steadily while
supplies are coming into question; and the upcoming American elections, no
matter how they turn out, are not likely to provide the basis for a return to
sound economic and business conditions in short order.
Regarding food prices, the long-term chart of Corn
clearly illustrates the spectacular nature of the latest price advances as word
of the inundation of much of the American grain-growing heartland made daily
headlines.
One area of debate which did not produce wide-spread
agreement was the world of petroleum.
Some, your editor included, believe that
demand/supply fundamentals clearly augur for higher petroleum prices over time
and, when pressed for a specific prediction, we offered the belief that
petroleum should hit the $175-200 price level by year-end 2008. (All prices
US$) Other speakers, however, opined that speculation had much to do with the
recent spectacular rise in Crude Oil and that as speculation abated and business
conditions declined, the price of crude could fall sharply.
We will once again repeat that these conferences are
invaluable for investors as well as those among the general public who have an
interest in economic and social conditions. They also provide the opportunity to
discuss specific investments with the multitude of companies providing
information exhibits regarding their enterprises.
Today’s markets have been relatively quiet so far
(as of 8:00 AM PDT) with gold modestly higher after a lower opening, other
precious metals relatively unchanged and base metals slightly lower on balance.
The Canadian dollar is back above 98 cents US and the financial markets are
split with the TSX up about 120 points while the Dow Industrials are down about
25. Crude oil is down about one dollar to near $133.50.
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