Gold: Robin Hood and Obamanomics

By: John Ing | Tue, May 5, 2009
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Public hangings have become the norm. Media stars such as Jim Cramer, columnists and portfolio managers alike missed the market collapse. Today the market is looking for scapegoats and the witchhunt of the media as well as AIG executives have become sport. A sound-bite culture that reduced books into twitters, sees the same media and portfolio managers blindly embrace in herd-like fashion, a consensus, that the trillions of dollars in bailout funds will somehow turn the economy around, and phew..we avoided that depression. To be sure, no one is questioning the root cause nor the consequences of the trillions of dollars being created. No one among the journalists' ranks are asking who is to pay for all this red ink and what is to become of the economy. It seems easier instead to write glibly about the salaries of the few rather than go the heart of our problems.

The sensationalization of the business news is just too tempting. The financial business has become entertainment and entertainment has become a financial business as the media giants' ratings grew in line with the bull market. Today, everyone seems to have clay feet. But history shows that there is always a few who warned about the excesses and, gave good advice but were largely ignored because they were not mainstream. It was easier for the media to become the cheerleader of the mainstream opinion, forgetting that the stock market is a collection of different opinions. Comedian Jon Stewart was right about Cramer and others, that they really did not have the credentials to give advice but is wrong to blame them for our mess. The real culprit was investor greed and the piling on debt by homeowners, businesses and governments alike in their never ending quest for the American dream.

The Consequence of Change

President Obama promised change to bring a new transparent and bipartisan philosophy to government. Obama promised hope, but like every president before him, reality set in and investors have grown wary of his promises. His first budget is the biggest in America history but is more of the same, with a healthy dose of earmarks. And unlike his predecessor, Mr. Obama's televised appearances have become a new mini-series and despite hopes of a new age, so far he hasn't walked his talk. Obama has not only lost the support of Republicans but also of independent voters. Is Obama to be another Jimmy Carter or Canada's Pierre Trudeau who started with much hope and almost bankrupted a nation?

Obama has adopted more centralist policies favouring an interventionist style of planning from using state money to acquire ownership stakes in its largest banks to nationalizing America's biggest mortgage companies to firing the CEO of its largest auto maker. His central planning includes taxing the productive in order to redistribute income to greener businesses, to giving rebates to low income earners but does little to revive frozen credit markets. And for the financial sector there is confusion as he seems to help out the well connected whilst letting others go. He has also stretched the role of the once independent Federal Reserve, usurping the responsibilities of Congress in committing vast sums of taxpayer dollars without legislative approval. It is little wonder that Mr. Obama risks violating America's basic tenets of liberalism and self-responsibility - this is not the change the market needs to restore trust.

To some, President Obama has become a Robin Hood type, stealing from the rich to give to the poor. This time Wall Street is the villain. Obama has promised, "restoring fairness to the tax code and providing tax relief to working families", plus tax cuts for 95 percent of workers. Sadly, his plans are deeply flawed. First, he plans to raise taxes on middle class families with incomes of $250,000 or more. Yet for the very rich or the top one percent of Americans with incomes of $1 million or more, they will actually pay a lower tax rate than under President Clinton. Second, Mr. Obama has proposed to raise the proportion of American families that do not pay any federal tax from 33 percent to 44 percent but to pay for his plans, he is actually, depending upon fewer Americans to pay for so many. And worse, Obama has repeated his predecessor's policy of deficit spending - something Robin Hood didn't have. While the government is spending billions or maybe trillions to bailout the banks, who is to bailout the taxpayer? Squeezing the middle class has its limitations - even for Robin Hood.

Politics of Bailout

It is time for Mr. Obama to move beyond slick sloganeering, vilifying scapegoats and stirring up populist rage. Talk is cheap. While the restoration of the US banking system and the revival of the economy have made spending a priority, indeed welcomed, deficit spending undermines the very foundation of America's solvency and postpones the painful process of re-establishing stability. And now, Obama's solution to get out of the credit crisis caused by leverage and securitization is more leverage and securitization. He is taking enormous risks. It is not clear this Ivy league educated lawyer turned community organizer understands the massive cost of his remedies. It is time for him to forget about bankers' pay and start dealing with the bankers' debt and their customers' savings that are being devalued every day. Instead of "stress tests", get on with the solvency of the financial system, weakened by a policy of borrowing money that will never be repaid. It is time for America to live within its means.

Mr. Obama's change seems to be that government knows best. Mr. Obama's left-ward tilt has been tried in the past and failed miserably. Conventional Keynesian policies cannot solve America's structural problem. It is not the leftward tilt or the promise of new thinking that concerns us, it is the usage of debt as the solution to revive the economy. He has replaced Bush's politics of fear with the politics of bailout. For instance, Mr. Obama's budget directed billions of taxpayer dollars towards a ten-year health care program funded by boosting taxes on the wealthy but at the same time cuts federal funding for hospitals, pharmaceuticals, and managed care companies. For all the talk of rejecting trade barriers, his climate change legislation imposes another tax on imports particularly energy, a new type of green protectionism. His $100 billion budget cut is only 0.0025 percent of his $3.5 trillion budget. And still the lack of credit availability and the restructuring of America's financial and industrial sectors are waiting recovery.

What Was Good For General Motors, Is Good For The Country

As the old saying goes, does it follow then by injecting billions of taxpayers' money into GM, changing the CEO, reneging on contracts and debt obligations is the US better off? To be sure, the systematic impact of the Chrysler bankruptcy and the unwinding problems of its credit defaults, secured debt holders together with the fallout from those legacy union obligations will certainly test that old saying.

And in bailing out its car industry, a protectionist outcry is heard. Protectionism goes beyond imposing trade barriers, it can be more subtle. To some the usage of bailouts gives companies not only a lifeline but in some cases a leg up on their international competitors. Hans-Peter Keitel, the head of the German Bdi Industry federation, noted that the prospect of more government aid was "highly problematic" in terms of competition. He noted that if, "Daimler has received nearly the same amount of money GM is getting; we would have a car war in Europe and overseas". First green protectionism and now bailout protectionism.

In solving their economic woes, the major economies have resorted to trade protectionism reminiscent of the Thirties. The World Bank estimates that 17 of the G20 countries initiated 47 policies that have restricted trade following the November G20 meeting in Washington despite pledging to turn their back on protectionist barriers. And again at the London G20 meeting, a similar promise was made and already we have green and bailout protectionist barriers. Or, how about Congress' restriction on the banks to not employ non-US skilled workers. Employ America policies, green barriers or bailout protectionism will backfire on the Americans. Rather declare what is politically popular, a sounder goal would have been for the G20 nations to do something about trade finance to revive trade.

Broken Trust

Most disturbing is that the current global financial crisis has caused institutions and governments alike to violate their trust with investors. Agreements are being torn up and the Treasury Department isn't even keeping its word that the measures will expedite the recovery. For example, by eliminating preferred dividends to force conversion to common shares, the Fed and Citigroup broke their trust with preferred shareholders who purchased preferreds that were only issued last year. Historically, preferred shares ranked higher than common because dividends are relatively secure. However, while the suspension of the dividends and forced conversion will boost Citigroup's capital ratio, it ends a potential source of funding for the ailing banking sector.

Then there was the threat by President Obama to take back Wall Street's bonuses whether or not there was a contract following the public outrage over the $170 million retention bonuses paid to AIG executives just after they received $180 billion from the American taxpayer. And there are the Swiss, known for their century old banking secrecy, turning over UBS AG's clients' identities which violates Swiss laws because Switzerland's largest bank was threatened with criminal charges in an IRS crackdown on offshore accounts. Or there's Obama's housing package that would allow bankruptcy judges to change mortgage terms in order to help out homeowners, such as reduce principal, interest rates and even extend the length of the loan. In other words they can change the original terms of a contract. In the past, bankruptcy courts were the only ones allowed to rewrite loan terms on primary residences.

The legislation will not only change the sanctity of contracts but exacerbates the pressures on an ailing banking sector giving the banks yet another reason to request another bailout. Another instance of broken trust is the White House pressure to waterdown the FASB accounting rules allowing the banks to duck losses of troubled assets with one stroke of the pen. The losses remain on the books but the "day of reckoning" is simply postponed. Is it any wonder than that no one trusts the Fed, Treasury, White House or even the dollar?

Economic War

The hard times have stirred up populist anger. We believe that by taking advantage of this populist rage, the breach of trust will boomerang as the government shifts from the durability of law and contracts to a product of the political process. Demonizing bankers and their financial institutions will make it harder to repair the financial system, a system based on trust. It works both ways. Obama has started an economic war.

Adam Smith taught us about self-interest. Self interest is a great motivator, but needed is mutual trust and confidence for that self interest and markets to work efficiently. It follows that when investors do not trust government, its institutions or even its regulators, there is no confidence in the future or in fact to work. As an example, government bailouts have cost trillions and the final tally is not yet in. Yet few banks have failed amid hopes that what is good for the banks may be good for the economy as a whole. Instead the government bailouts have simply eliminated moral hazard.

A sounder strategy is to let the weak banks go, recapitalize some using a Resolution Trust type institution and let the healthier ones prosper. Let the lenders who borrowed from leveraged banks and misled borrowers into taking unwise risks with their financial instruments and gambled and lost, fail. Moral hazard would reintroduce risk into the system and, failure. What is needed is less government intervention and a push for transparency which would beget trust. Needed also is a restoration of accountability particularly from institutions that can no longer pass the buck. Peoples' savings have increased because of their self interest to preserve capital. However, Obama's activist intervention has not only eliminated moral hazard but props up both the weak and the larcenous perpetuating the elite cronyism of Wall Street. That must change. Bring back risk with rewards.

Obamanomics: Greatest wealth redistributor

President Obama promised change and has certainly pushed change towards a left leaning direction from Keynsian spending policies to a cap on trade system to the sweeping overhaul of financial institutions. And Obama's spending numbers are enormous, not billions but trillions. And amidst all this red ink, he is pushing for more spending and redistribution. Obamanomics is to be the greatest wealth redistributor in history. And yet, he talks little of the consequence of his policies of change.

In 1930, government spending as a share of GDP was less than 10 percent of America's GDP. Today, Obama's stimulus package seems more political than economic. In hopes of jump starting the economy, Obama's government is spending more on health, energy and education and hints of more intervention and tax hikes instead of tackling the root problems. Indeed almost $300 billion of his budget won't be spent until 2011. Obama has earmarked loans or guarantees totalling a whopping $12.8 trillion equivalent to America's gross domestic product. Thus, the government's take this year as a share of GDP will be a whopping 38 percent. Yet by changing the landscape of American society, no one has asked "what is the price" nor "what is the economic cost?".

The non-partisan Congressional Budget Office (CBO) has even weighed in, forecasting federal deficits of $2.3 trillion higher than White House estimates. And it get's worse. As a share of GDP, the fiscal watchdog says that spending will increase a robust 29 percent for fiscal 2009 which ends this September which is significantly above the 21 percent average over the past forty years. Still, this year's fiscal deficit will hit 13.1 percent of GDP. Significantly in the eighties, the federal government's share of GDP had declined to 21 percent and for a time between 1992 and 2000 that share of GDP decreased to 19 percent. Obama's budget deficit half way through of this fiscal year is already near a record $1 trillion, as the costs of the financial bailout and recession mount.

The triple dose of deficit spending, debt monetization, and stimulus programs which quadrupled the Fed's balance sheet will also have an inflationary effect on hard assets like gold. Unfortunately the cost of Obamanomics is the biggest obstacle to recovery.

The Price is Not Right

And yet in another bailout, Treasury Secretary Tim Geithner's $1 trillion Public-Private Investment Program (PPIP) attempts to bypass Congress because he is reluctant to ask for more money. The plan to buy the banking system's toxic assets is a rehash of former Treasury Secretary Paulson's plan which poses large risks to taxpayers. Geithner's PPIP proposal gives cheap loans to the banks from the 76 year old Federal Deposit Insurance Corp. (FDIC) in the form of a non-recourse subsidy. If the underlying asset to be sold does not match the so called "market" price, another writedown would be needed causing more losses and the need for another capital injection by the government. If the asset is worth more, the private investor keeps the profit. And if the deal loses money, the Investor can walk and the taxpayer loses. This proposal is one more example of the cronyism of the past that leaves profits with the private sector at the public taxpayer expense. And amazingly with the Treasury providing up to half of the equity, the leverage of 10:1 emulates the problems of the leveraged loans in the first place. Again no one is thinking of the consequences here. It gets worse. Today the banks are creating a new group of special purpose entities (spe) to bid for those assets which they can choose with taxpayers' money. Debt on debt will not work and leveraging these complicated pieces of paper will also not work. Spending is not investment.

In The Shadow of Debt

The world has changed. The shadow banking system, once the powerful engine that allowed America to spend more than they earned, buy homes that they could not afford and takeover companies with no money down is shut down. Those days are gone because it's lifeblood, over-the-counter credit derivatives have collapsed. Wall Street has been made insolvent by its own myriad of highly complex structured products that sliced and diced risk which actually multiplied those risks blowing up the financial system.

The shadow market system was huge, leveraged and unregulated. It was a product of free and easy money. Wall Street took their black boxes and securitized everything from car loans to credit cards, and of course, subprime mortgages that helped inflate the asset bubbles. Private equity, hedge funds, and the investment banks bought and sold these alchemic-like securitized pieces of paper and collected huge fees making huge bets. The credit rating agencies even gave these structured products their seal of approval. And of course all these pieces of paper were insured by the world's largest insurance company American International Group (AIG) and everybody prospered until we learned that these pieces of paper were worthless. Bear Stearns failed, then Lehman Brothers failed, and now only two investment banks are left standing.

President Obama has spent trillions to revive to the banking system to no avail - it hasn't worked because those trillions are going to prop up the insolvent banks and those illusionary trillions of worthless obligations. Obama's solution of backdoor nationalisation, liberal spending and the increased use of leverage that got us into this mess in the first place won't work because America's business model is broken.

Specifically, the worst derivatives are the credit default swaps (CDSs) which are a form of insurance against default. The underwriter or seller agrees to insure or "make whole" the buyer of the contract. If the latter suffers a default or other specified credit event that causes a loss on the underlying asset, the seller pays up.

The swaps allowed investors to speculate on the demise of companies and even countries but were originally designed to protect investors from bankruptcies. The conservatorship of mortgage giants Freddie Mac and Fannie Mae triggered defaults causing the settlement of about $500 billion of CDS contracts which jeopardized the solvency of AIG. The government was forced to take on Freddie and Fannie's obligations in order to honour those obligations and bail out AIG which was the lynchpin of the credit default swap market. However, the financial tsunami has resulted in much bigger payouts and settlements than would have been part of the obligation and in fact some bankruptcies like Chrysler and Abitibi Bowater have been triggered because some holders actually benefit from bankruptcies. These derivatives have no intrinsic value other than that derived from some other instrument or instruments can give creditors different economic interests from other creditors. They should be unwound.

America Needs Change

For a sustained economic recovery and working banking system, there is much to do. Needed is the unwinding of those pieces of paper, the reversal of securitisation and allow these credit default swaps to lapse. Securitization allowed the US to prosper under the illusion that the country was more productive than they were. Securitization is just another form of debt and until Obama and the markets acknowledge this, we will stay in the doldrums for a very long time.

Tomorrow's finance will look very different. Leverage will be reduced, banks will become banks again and not conduits. Capital preservation will replace greed, risk will be reduced as well as returns and all that is a good thing. Trust must return.

Another remedy is to reintroduce the Glass-Steagall Act, which split the investment banking from the commercial banks in 1933 as part of the New Deal to regulate, ironically Goldman Sachs and JP Morgan. The Act was repealed during the Clinton regime. Allowing the reinstatement would bring back moral hazard, demolish the "too big to fail" institutional model, eliminate the conflicts of interest and shed more light on the opaque shadow banking scene. This time break up the big banks that have gained strength since the crisis began, and restore banking to banking. More regulation and more government is not the solution, indeed it the problem in the future.

Printing Presses Are Working Overtime

With a blatant show of its power to create money, the Federal Reserve shocked investors by announcing a $1 trillion dollar bailout package that consisted of purchasing $300 billion of US government debt, the doubling of debt purchases issued by Fannie and Freddie Mac, and the acquisition of $100 billion of Fannie and Freddie mortgage backed debt. Buying these securities pushes money into the system and pushes yields down further. The last time the Fed attempted to purchase its own Treasuries was in the 1960s. In less than one year, the Fed has moved interest rates from three percent to near zero and having exhausted interest reductions, have begun "quantitative easing" or the printing of money. The real problem is that not only does "quantitative easing" increases the amount of money in circulation but is a surefire recipe for inflation. Since Labour Day, the Fed's balance sheet of assets has sky-rocketed from $894 billion of largely US treasuries to a whopping $4 trillion of largely mortgages, swaps and toxic securities.

Yet President Obama's stimulus plan requires an additional $3 trillion to $4 trillion in new borrowings over the next two or three years which must either be borrowed from the rest of the world or financed by another bout of "quantitative easing". We believe the ballooning of the US debt in the years ahead will have adverse consequences including the debasement of the US dollar raising the risks of an eventual default of its sovereign debt and even hyperinflation.

With the trillion of dollars, yen and euros being printed, why haven't we seen the green shoots of inflation? Simply, liquidity fears together with the economic collapse has kept the velocity of money or the frequency of money being turned over at an all-time low. Those trillions will come home to roost when investors realize that cash is trash in a world of debased fiat currencies.

Honour Your Promises

For four decades, the US dollar has been the world's reserve currency allowing America to borrow and repay its debt in its own currency. Britain once enjoyed that privilege. With 60 percent of the world's assets denominated in dollars, the world is concerned that the greenback's status is threatened by debt monetization and the trillions of dollars being printed every year. In resorting to the printing press, the American government diminishes the value of each dollar in circulation and its safe haven status. Should the US let its dollar decline further, holding dollar assets will no longer be worth the risk. And today, more and more countries are questioning that risk.

Chinese Premier Wen Jiabao drew a line in the sand saying that he was "a little bit worried" about the safety of Chinese assets and called the United States, " to maintain its good credit, honour its promises and to guarantee the safety of China's assets". China has overtaken Japan to become the largest holder of US Treasury bonds accumulating some $2 trillion of foreign exchange reserves of which almost two thirds is held in depreciating US dollars. As America's largest creditor, China has shifted a percentage of those securities to shorter terms, purchased gold and severed the link between the yuan and dollar as an obvious protection for its devalued dollar assets. China also has been buying strategic assets like copper and oil to recycle its reserves. China's central bank governor Zhou Xiaochuan has even called for an alternative to lessen reliance on the dollar by suggesting expansion of the special drawing rights or SDRs which are tied to a basket of major currencies.

The International Monetary Fund's (IMF) cupboard is bare after bailing out so many countries that it has even suggested gold sales. Yet for China and others to give more funding to the IMF, there is a need for a realignment of its quotas or voting rights to reflect the emergence of China's and India's. The Europeans currently have 32 percent of the quotas and the US alone a whopping 17 percent whereas China has only 3.75 percent and India .95 percent quota. Will China with the biggest foreign exchange reserves in the world make a major contribution without strings? Unlikely. Any contribution is limited by politics and the quotas are intertwined. Britain, France. Belgium, the Netherlands, and the U.S. should be prepared to lose some of the quotas as well as some of those executive positions. But is there the political and economic will to reform or is it just the rhetoric of change? Even the proposed gold sales are unlikely.

The Loss Of Independence in a China-centric world

In less than two weeks following that announcement, the Federal Reserve announced that they would buy US dollar assets without naming from whom would buy it. We believe, China's declaration was a warning to the US for the need to buy back its bonds or the US would have difficulties financing future deficits. We believe that the Fed's announcement was not to jumpstart an already weak patient but to provide a backstop for those trillions of repatriated dollar obligations held by offshore players. More telling will be future bond auctions as Britain's government auctions have already seen the weakest demand in more than ten years. In January, the US Treasury reported that sales and purchases of US assets showed a net outflow of almost $150 billion for the month, which is in contrast to the net inflows of almost $200 billion at the height of the credit crisis last October. "The dollar is strong", Obama has said repeatedly, in mantra-like fashion, again more rhetoric and not enough action.

The tug-of-war among countries for a common denominator comes as the US dollar was among the world's worst performing currencies. China could always end the dollar era itself by making the yuan freely convertible to diversify its massive reserves and broaden its non-dollar reserves. Already, China has allowed five major cities on the coast to use yuan in overseas trade settlement to reduce exchange rate risk and a step towards convertibility. China has also signed currency swaps agreements with six countries using the yuan replacing dollars. By letting their currency float to stimulate domestic demand, China could supply the world with freely convertible yuan which would create an alternative to the dollar and confirm at long last the shift in economic power from the West to the East. China is also poised to turn its savings into business investments by acquiring hard assets like commodities, ore bodies and reserves in an effort to reduce its dependency on the dollar. By making the yuan convertible, China could use its massive holdings as a sovereign pool of capital that would assist and acquire badly needed resource assets like commodities, ore bodies and gold.

According to the Chinese Administration of Foreign Exchange (SAFE), the People's Bank of China raised its gold reserves by 454 tonnes or 75 percent to a total of 1,054 tonnes making it the fifth largest holder and despite the increase, China only has 1.6 percent of their foreign exchange reserves in gold. China, the world's largest gold producer, quietly purchased domestic supplies to add to its monetary reserves. The US should be afraid, very afraid.

Gold: The Consequence And Solution To Obamanomics

Former Fed Chairman Alan Greenspan once wrote and probably wishes not that, "deficit spending is simply a scheme for the confiscation of wealth. Gold stands as a protection of property rights". The US today is the world's largest holder of gold at 261 million ounces. However, relative to its recent expanding monetary base, gold would need to be over $9,000 an ounce. Gold has gone from $35 an ounce to $980 an ounce in the four decades of fiat currencies - will it stay here? Unlikely.

Our view is that Obamanomics will wind up reviving inflation. Today, the major industrialised economies, led by America have fiscal deficits of more than 10 percent of GDP and the monetization of those deficits will create double digit inflation on a global basis. Hyperinflation has happened before. In the 1920s, hyperinflation came very quickly in Germany as the monetization of war reparations fed inflation. In Russia, public spending skyrocketed and hyperinflation followed in 1919. The Ukraine faced hyperinflation in 1994 and there is hyperinflation today in Zimbabwe. Spending whether for war reparation or bailouts must be paid for - through inflation or higher taxes. Inflation seems to be the easier way out. But history shows it is a slippery slope to hyperinflation. After all, inflation is a monetary phenomenon. That in turn creates the risk of a precipitous fall in the dollar.

Honest money has gone the way with a dishonest budget, populist policies and a mountain of debt. Trust in banks, politicians and institutions disappeared with the billions allocated to the very institutions that helped cause America's problems. A voracious appetite for debt lies at the heart of the boom that has gone bust. Without confidence in the dollar, the world has no valid reserve currency. The logical consequence of the trillions of dollars being created is the need for an alternative and gold is a beneficiary- it is both non-inflationary and trustworthy. Gold is nobody's liability.

The bigger picture however is not that the dollar's status as a reserve currency is being questioned but that in the last 18 months, we have been in uncharted waters and the world is searching for alternatives. Gold historically has been that alternative since it is a good index of currency fears and inflation hedge - good money will always drive out bad money. If people believe the dollar is overvalued and will appreciate further, gold is a natural insurance policy and store of value.

The musings about a replacement for the dollar has fuelled an interest in the gold standard. Gold is a barometer of investor anxiety and surrogate for confidence. Judging from its third attempt at $1,000 an ounce, there is growing concern over US economic policy. This crisis is far from over.

Gold provides a discipline against a central bank that loses it and surreptitiously allows money supply to rise. With gold near $1,000 an ounce it has become the world's defacto currency. Gold has reached new highs in every major currency in the world except for the dollar and we believe it will soon achieve new highs, in dollars this time to $2,000 per ounce. While $2000 an ounce may seen high, it is in fact lower than the inflation adjusted price. From 1971 to 1980, gold rose 2,300 percent and is only up some 250 percent from the 1999 low of $255 an ounce. The increase is telling us, not about gold , that a perilous adjustment lies ahead. Gold will be a good thing to have.


The mining industry is beset by big multi-billion price tags for new mines. For example, Donlin Creek's price tag has escalated to $4.5 billion. Mining is a capital intensive business in a capital short world. Meantime, existing gold producers helped by the gold price are enjoying healthy margins but are stuck on a treadmill because future projects are either too capital intensive, too far off in the future or too low grade. As such, we believe that existing players are well positioned to "harvest" proven discoveries while mine supplies continue to decline to twelve year lows. As such M&A activity will pick up.

At that same time unprecedented demand for physical gold from exchanged traded funds (ETFs), central banks and investors have sopped up the glut of paper gold. We believe investors will soon realize that paper gold is "faux" gold, physical gold is tight and the cheapest ounces are still in the ground. Mining stocks will soon enjoy a bull market.

While gold bullion is poised to test the $1000 an ounce level for the third time in less than 12 months, gold stocks remain laggards, partly due to the fact that the gold companies have raised substantial equity in the run-up. Moreover, while the senior producers have been a good place to hide, when gold picked up, investors rotated to the growth oriented midcaps at the expense of the majors. And finally, the ongoing consolidation trend has been quiet of late. That will not last.

Of interest, is that in the past few weeks there have been some exciting exploration developments such as Claude Resources of Saskatchewan striking gold at the Madsen Red Lake property in Ontario. The Madsen mine once produced 2.4 million ounces and is on trend to Goldcorp's high grade Red Lake mine. Recent drilling has picked up bonanza-type grades from the #8 zone in a deep drill programme. Also, the diminishing pool of undeveloped gold projects helped Osisko raise almost half a billion dollars which will finance that gold producer. Detour Gold Corporation has cleaned up its capitalization and is better able to develop the big large tonnage, low grade deposit of 12 million plus ounce resource. And amid the consolidation trend, there are new producers such USGold and Allied Nevada Corp. which are bringing on mines this year. Allied Nevada is reopening 100 percent owned Hycroft in Nevada after recently increasing its resource. The company has a healthy balance sheet and management lineage from Kinross. US Gold is bringing on the Magistral mine in Mexico and bumped its reserves at Gold Bar by 64 percent. We believe an over-weighted position to the mid-cap produces is appropriate at this time.



Agnico Eagle Mines Ltd.

Agnico has one of the strongest growth records among the gold producers and the stock is a leading performer. The Company has increased reserves to 18.1 million ounces through organic growth. The company is also a low cost producer at $310 an ounce due to attractive byproduct credits. Agnico brought on Goldex and Kittila in Finland start-up was slower than expected. Goldex has achieved designed capacity. Lapa (Quebec) will start up production by mid year and Pinos Altos in Mexico is on track to pour gold in the third quarter. Agnico will produce about 560,000 ounces this year and will double that production by 2010. We continue to recommend the shares for its growth potential, balance sheet and strong management.

Barrick Gold Corporation

Barrick's new executive officer Aaron Regent reaffirmed Barrick's big growth plans at Pueblo Veijo in the Dominion Republic where it will spend almost $2.7 billion to develop the long life open pit sulphide gold producer as well as plans to expand 100 percent owned Cortez Hill in Nevada. Barrick has a portfolio of 27 mines in mostly secure geographic areas but is need of big ounces to replace production and thus is spending billions replace production. Barrick has an excellent balance sheet and is the largest gold producer in the world as well the largest company in terms of market cap on the TSX. The big problem is that Barrick must replace almost 8 million ounces of annual production which is increasingly becoming more expensive. We expect that Barrick will continue its trend of acquisitions but other than Newmont, there are no longer any big fish around. However Barrick's strong management team. excellent balance sheet together with a strong footprint in geographically secure areas, places Barrick in an opportunistic position at a time when the industry needs capital. We continue to recommend Barrick as among the best of the senior producers. However we believe that the nine plus million ounces of hedges must be reduced by either acquisitions or buybacks since those hedges against Pascua Lama remain a drag on the stock price.

Centerra Gold Inc.

Centerra shares improved due to a long awaited ownership accord with the Kyrgyzstan government over the Kumtor mine. The Agreement boosts Kyrgystan's stake in the project to 33 percent together with an increase in income tax and royalty payments. Parliamentary approval was given. Centerra will produce 740,000 ounces this year and Kumtor will produce the bulk of that at a cash cost of $485 an ounce. The Agreement with the government removes a major uncertainty as well as the threat of nationalization and paves the way for the spinoff of Cameco's 37.9 percent remaining interest. Centerra has a healthy balance sheet, zero debt and generates over $100 million of free cash flow. We continue to recommend purchase.

Goldcorp Inc.

Goldcorp's shares have picked up recently but have been disappointing due to the fact that much of its growth has been generated through acquisitions and the future growth profile is very much down the road. The Penasquito project in Mexico continues to grow in terms of reserves but also the project will cost a whopping $1.6 billion and will not be in production until 2010. Pueblo Viejo, which is run by Barrick won't be into production until 2011 and the price tag is already up to $2.7 billion of which Goldcorp is responsible for 40 percent. Goldcorp's $1.5 billion acquisition of Gold Eagle won't see a payoff until much later. And the high grade crown jewel Red Lake mine has seen better days and requires both the delineation of the HGZ exploration drift and infrastructure expenditures. While Goldcorp will produce 2.3 million ounces this year and has an excellent balance sheet, Goldcorp's lack of growth over the near term is problematic. We prefer Agnico Eagle at these levels.

Newmont Mining Corp.

Denver based Newmont continues to disappoint investors due to a flat production profile, lower earnings and the perception that the company is harvesting its mature mines. Projects such as Hope Bay are very much in the future and is a non starter here. Earlier in the quarter, there were rumours that Barrick was going to takeover Newmont . Both companies have common interests in Nevada and Australia and we believe that a merger would make sense since Newmont throws off free cash flow and has over 85 million ounces of proven and probable gold reserves. Newmont's ownership of Batu Hijua in Indonesia will change as it complies with the government directive to reduce its interest. Batu Hijua is a large gold and copper project and a major cash flow generator. Newmont will spend above $175 million this year, mostly at Yanococha in Peru so the growth profile is largely uninteresting. Nonetheless, we would hold the shares here since the shares are lagging its peers.

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Analyst Disclosure
Company Name Trading Symbol *Exchange Disclosure code
Barrick Gold ABX T 1
Eldorado ELD T 1
USGold USX T 1
Disclosure Key: 1=The Analyst, Associate or member of their household owns the securities of the subject issuer. 2=Maison Placements Canada Inc. and/or affiliated companies beneficially own more than 1% of any class of common equity of the issuers. 3=<Employee name> who is an officer or director of Maison Placements Canada Inc. or it's affiliated companies serves as a director or advisory Board Member of the issuer. 4=In the previous 12 months a Maison Analyst received compensation from the subject company. 5=Maison Placements Canada Inc. has managed co-managed or participated in an offering of securities by the issuer in the past 12 months. 6=Maison Placements Canada Inc. has received compensation for investment banking and related services from the issuer in the past 12 months. 7=Maison is making a market in an equity or equity related security of the subject issuer. 8=The analyst has recently paid a visit to review the material operations of the issuer. 9=The analyst has received payment or reimbursement from the issuer regarding a recent visit. T-Toronto; V-TSX Venture; NQ-NASDAQ; NY-New York Stock Exchange



John Ing

Author: John Ing

John R. Ing
Maison Placements Canada
130 Adelaide St. West - Suite 906
Toronto, Ont. M5H 3P5
(416) 947-6040

Rating Structure
Analysts at Maison use two main rating structures: a performance rating and a number rating system.
Performance Rating: Out perform: The target price is more than 25% over the most recent closing price. Market Perform: The target price is more than 15% but less than 25% of the most recent closing price. Under Perform: The target price is less than 15% over the most recent closing price.
Number Rating: Our number rating system is a range from 1 to 5. (1=Strong Sell; 2=Sell; 3=Hold; 4=Buy; 5=Strong Buy) With 5 considered among the best performers among its peers and 1 is the worst performing stock lagging its peer group. A 3 would be market perform in line with the TSX market. NR is no rating given that the company is either in registration or we do not have an opinion.
Analysts Certification: As to each company covered in this report, each analyst certifies that the views expressed accurately reflect the analysts personal views about the subject securities or issuers. Each analyst has not, and will not receive, directly or indirectly compensation in exchange for expressing specific recommendations in this report.
Analyst's Compensation: The compensation of the analyst who prepared this research report is based upon in part; the overall revenues and profitability of Maison Placements Canada Inc. Analysts are compensated on a salary and bonus system. Some factors affecting compensation including the productivity and quality of research, support to institutional, investment bankers, net revenues to the equity and investment banking revenue as well as compensation levels for analysts at competing brokerage dealers.
Analyst Stock Holdings: Equity research analysts and members of their households are permitted to invest in securities covered by them. No Maison analyst, or employee is permitted to affect a trade in the security of an issuer whereby there is an outstanding recommendation for a period of thirty calendar days before and five calendar days after the issuance of the research report.
Dissemination of Research: Maison disseminates its hard copy research material to their clients using the postage service and couriers. Samples of our research material are available on our web site. Electronic formats are available upon request.

General Disclosures: This report is approved by Maison Placements Canada Inc. ("Maison") which is a Canadian investment- dealer and a member of the Toronto Stock Exchange and regulated by the Investment Dealers Association. The information contained in this report has been compiled by Maison from sources believed to be reliable, but no representation or warranty, express or implied, is made by Maison, its affiliates or any other person as to its accuracy, completeness or correctness. All estimates, opinions and other information contained in this report constitute Maison's judgment as of the date of this report, are subject not change without notice and are provided in good faith but without legal responsibility or liability. Maison and its affiliates may have an investment banking or other relationship with the company that is the subject of this report and may trade in any of the securities mentioned herein either for their own account or the accounts of their customers. Accordingly, Maison or their affiliates may at any time have a long or short position in any such securities, related securities or in options, futures, or other derivative instruments based thereon. This report is provided for informational purposes only and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. As a result, the securities discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. This material is prepared for general circulation to clients and does not have regard to the investment objective, financial situation or particular needs of any particular person. Investors should obtain advice on their own individual circumstances before making an investment decision. To the fullest extent permitted by law, neither Maison, its affiliates nor any other person accepts any liability whatsoever for any direct or consequential loss arising from any use of the information contained in this report.

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