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- Thu, 23 May 2013 16:18:36 +0000: Is the Patent Cliff a Lethal Blow to Big Pharma? - Casey Research - Research & Analysis
By Doug Hornig, Senior Editor
A little over a year ago in this space, we called your attention to a developing situation in the pharmaceutical industry, as shown by the chart below that dramatically illustrates the arrival of the so-called "patent cliff".
Today, the results are in from 2012. The IMS Institute for Healthcare Informatics has released its annual survey of the US drug market. It found that the market shrank last year for the first time ever.
Specifically, nominal drug spending in the US declined by 1% in 2012, to $325.8 billion. Real per-capita spending dropped even more, by 3.5% to $898.
Branded drug spending dipped by $11.4 billion, to $230.2 billion. Generic drug makers, as you would expect, were the beneficiaries here. Generics were used for a full 84% of dispensed scripts, with overall spending on them growing by $8 billion, not quite offsetting the diminishing dollars spent on branded meds.
This spending slide had the predictable consequence of slamming big pharma.
Eli Lilly, for example, was hit hard. The company's revenues, which reached an all-time high of $24.3 billion in 2011, skidded to $22.6 billion last year. Its revenues look set to keep sliding, as Lilly will lose patent protection for blockbuster Cymbalta – which brings in $4 billion in revenue annually – at the end of this year. This April, Lilly announced it will be dealing with the revenue erosion by laying off up to 1,000 employees in its US sales force.
Merck lost its protection of Singulair – a $5 billion/year drug responsible for 16% of US sales – in August of last year. Looking ahead, Merck had already begun cutting jobs in 2011 and wound up axing 30,000, nearly a third of its workforce. With Singulair sales falling 67% in 4Q12, the company experienced a 7% decline in fourth-quarter profits.
Novartis also took drastic steps ahead of its September 2012 loss of Diovan, which produced $2.5 billion/year in domestic revenues, or 15.9% of US sales. The company did $1.9 billion in cost cutting in 2011, followed by another $1.9 billion in 2012. That included the elimination of 2,400 jobs.
Bristol-Myers Squibb was hammered after losing Plavix, the world's second best-selling drug, last May. By 1Q13, Plavix sales had plummeted 95%, dragging down the company's revenues from $5.25 billion to $3.83 billion, and net income from $1.1 billion to $609 million.
And so on, pretty much down the line.
As the chart shows, this is not a one-time phenomenon. Patent expirations remain relatively high this year and next, and balloon again in 2015, when branded drugs' losses will almost equal last year's, at an estimated $33.5 billion. So, the question must be raised: will big pharma slowly waste away after tumbling over the patent cliff?
The short answer is "no." These are going to be some lean years, no question. But there's some good news, too.
"Initially the figures do look depressing, but I don't think people should be running for the hills just yet," says editor Lisa Urquhart of pharma analysts EP Vantage. "The efforts the industry has put in to change business models, which have included investing more in niche busters, mean this time round things might not be as bad."
In addition, most of the patent expiries from last year involved small-molecule drugs, which are easy to replicate. Going forward, a good number of those expiring are biologics, or large-molecule drugs, and these are not as simple to pick apart.
Big pharma is also emerging from a relative dry spell in the way of new products. Sales of newly introduced drugs – defined as products that have been on the market for less than 24 months – actually grew last year, accounting for $10.8 billion in spending, up from $10.3 billion in 2011. In line with recent trends in the field, the lion's share of new-drug spending came in the specialty category.
Rollouts will continue at a brisk pace, too. IMS projects the launch of new molecular entities (NMEs) to come in at 32-37 per year, potentially including new mechanisms of action in Alzheimer's, autoimmune disorders, diabetes, a number of cancers, and orphan diseases. That would establish a pace of 160-185 NMEs introduced between 2012 and 2016, well above the 140 launched in 2006-2010.
"We're not talking a return to the late '90s or the early 2000s, when there were forty or more some years," and the growth rate was in the high single or double digits, says IMS research chief Michael Kleinrock. He notes that we should expect fewer mega-blockbusters and more high-priced specialty and orphan treatments, and adds that, "Rumors to the contrary, the US market is still alive and well. The patent cliff will take some of those dollars out of the mix, but once it's past its peak … we're going to see a significant rebound in what's available for both branded and generics companies."
Furthermore, although the US market is likely to stagnate – IMS estimates an anemic cumulative growth of 1%-4% from now through 2016 – the emerging nations are poised for explosive 12%-16% growth over the same period.
"In the next five years," Kleinrock says, "we will see the maturation, the evolution, of emerging markets – which are heavily generic and driven by volumes primarily rising from very low-income people that have become more affluent or are otherwise getting better access to medical care."
The US still will remain by far the world's leading drug consumer, with a 31% share of the global market by 2016. But that's sharply down from its 41% share in 2006, with most of the shift going to the "pharmerging" countries, as the IMS calls them. They made up only 14% of the market in 2006 and 20% in 2011, but are predicted to draw nearly even with the US in 2016, when they'll gobble up 30% of the overall pie.
And a substantial pie it will be. Some $1.2 trillion is destined to be spent on pharmaceuticals in 2016, the IMS says – up from $956 billion in 2011 – with a still-hefty $615-645 billion going to branded drugs and $400-430 billion siphoned off by generics.
What does it all mean for big pharma? With sales from existing drugs falling off the patent cliff, there will inevitably be an increased emphasis on development of new therapies that show high earning potential. That means plenty of employment for in-house researchers, but that source is not likely to be rich enough.
The current negative economics of giant mergers probably indicates that we will see few if any of those in the near future. But it's a certainty that big phama is going to be keeping close tabs on smaller companies that have promising drugs in Phase II or III trials. Those are certain to be acquired at an accelerating rate, as their larger brethren seek to restock their R&D shelves in the most cost-effective manner.
Small companies with strong pharmaceutical pipelines are mainstays of the Casey Extraordinary Technology portfolio. While we would never buy shares of a company solely because we were betting on a buyout, that can provide some very nice icing on the cake for early investors when it happens.
Bits & Bytes
Chaaaarge… (Daily Tech)
What's the most frequently uttered sentence in the English language? OK, we don't actually know. No one does. However, we have a strong candidate. It could be: "I gotta go, my phone's almost out of battery." Heard that one lately? But suppose it could be replaced with: "I gotta recharge the phone, call you back in a minute." Yes, one minute. That dream could soon become reality, thanks to an 18-year-old California high school student, who has invented a way to charge cellphones in 30 seconds or less.
Young at Heart (Science)
One problem with hearts is that as they age, the muscle thickens and no longer works as efficiently. Could that inevitable progression be reversed? Perhaps, according to Harvard researchers. At least, it's been successfully done with mice, using a technique first developed in the 19th century. Whether the same results can be obtained with humans remains to be seen.
Are there corporations you just hate? Companies whose products you wouldn't buy, if only you could untangle the invisible web of corporate affiliations that lies behind that widget in your hand? Buycott is an app that will let you do just that. Simply scan a product's bar code with your smartphone and its corporate family tree will pop up on the screen, in all its intricate glory. You can also join user-created groups that promote boycotts of general business practices as well as specific companies – and on the positive side, join others that encourage buying from companies that support principles in line with your own.
Who's Behind Those Glasses? (New York Times)
We've always figured that we wouldn't have long to wait before the government got involved with Google Glass, and we were right. Last week, a group of eight Congresspersons – the Bipartisan Congressional Privacy Caucus – sent a letter to Larry Page which outlined eight questions for Google and asked for a response by June 14. "We are curious whether this new technology could infringe on the privacy of the average American," the letter read. Will Washington pass regulations on the new device before its general release next year? We shall see.
- Wed, 22 May 2013 18:11:10 +0000: Where’d All the Fear Go? - Casey Research - Research & Analysis
With the US stock market grinding to new nominal highs on what seems like a daily basis, you might be wondering: where'd all the fear go? Just a quarter or two ago, it was cool to be a bear. Analysts were citing a high unemployment rate, weak GDP growth, and swelling debt as just a few of several albatrosses that would prevent the economy from taking off anytime soon.
Fast forward to today, and the bears are in hibernation. The same economic drags persist, but for some reason, most analysts are no longer worried about them. Unless you actively seek out contrarian viewpoints, you're likely to hear all good news all the time.
Maybe the best way to understand this abrupt about-face in sentiment is through the prism of a childhood game: Jenga.
If you're not familiar with Jenga, play begins with a sturdy column of wooden bricks stacked to form a vertical tower. Players take turns removing one block from near the foundation of the tower and placing it on the top. The goal is to make it through your turn without knocking the tower over. As the game progresses, the tower grows taller at the expense of structural integrity, as blocks that once formed a strong foundation are now balancing high in the air.
As the tower becomes more precarious with each turn, the participants become more fearful, and act more cautiously – entirely logical responses, given that the taller the tower grows, the more likely it is to topple.
Applying that principle to financial markets, one would think that, all else equal, a stock market at record highs would induce similar emotions as a too-tall Jenga tower. Because stocks are currently scraping the sky, any slight breeze – perhaps in the form of a bad jobs report or another scandal – could bring them tumbling.
Such a tumble would be especially violent, because it would commence from heights never before seen.
The parallels continue when you consider that several cracks are beginning to form in the ostensible foundation of this stock market rally. Recent earnings have been mediocre at best, and trading volumes have been steadily declining – classic indicators that momentum may be petering out.
I'm sure you see where I'm going with this: sober analysis indicates that the stock market is a wobbly Jenga tower. But investors are not treating it that way. On the contrary, as I quickly skim the financial headlines, I note that US economic confidence is at a five-year weekly high. Two other surveys peg both investor complacency and bullishness at multiyear highs as well.
What gives? My best guess is that investors see a stock market that has risen for five straight years, their 401(k)s or bonuses rising with it, and assume it will continue unabated… which makes as much sense as a Jenga player believing that, because the tower has not fallen in the past few turns, it won't fall for his turn either.
Obviously, no one is that foolish. We all understand that what's important in this scenario is that the tower becomes less sturdy, and thus more likely to fail, with each turn. By eschewing that truth and substituting for it an extrapolation of a past trend, you'd be setting yourself up for disaster.
But as easy as it is to call out that type of reasoning as fallacious, it's exactly what's happening in the stock market today. For some reason, the thinking becomes muddled when money is at stake. And the result is a level of fear in the market today that is incommensurate with the fundamental risks present.
Fear is cheap… cheaper than it has any business being.
So how can we "buy" fear? That's the topic of this week's feature in which Stephen Belmont, chief market strategist and senior partner with futures brokerage RMB Group, measures just how low fear is compared to historical norms. Stephen then goes on to explain how investors can "buy" fear while it's cheap in order to make money when it inevitably spikes, or at least reverts to the mean.
The article was originally published in World Money Analyst, a premium publication dedicated to sharing the best investment ideas of a collection of international experts, each of whom specializes in a different region. Our good friends at Mauldin Economics, which publishes WMA, have allowed us to share this article – usually reserved for subscribers – with our readers.
With that, I'll leave you to explore the piece yourself. For those of you in the US, enjoy the long weekend. I won't be with you next week, but I'm leaving you in the capable hands of Nick Giambruno, editor of InternationalMan.com.
Managing Editor, The Casey Report
Fear Is Cheap… Is It Time to Buy?Steve Belmont, RMB Group
Most markets spend most of their time tracing out the middle of a range, oscillating on either side of their statistical means like a water skier tethered to a boat. They move in the direction of the boat, hopping back and forth across a "wake" that is a trend. The trend can be up, down, or sideways.
It is very difficult to trade these small oscillations – deemed by many analysts as mere "noise" – so we don't try most of the time. But there are periods when a given market pegs so far to one extreme or the other that it becomes hard to ignore. Such is the case with the market that measures fear – known by stock investors the world over as "VIX."
VIX is telling us that fear – at least as it relates to stock prices – is dirt cheap. With what we know about markets and human nature, we do not expect fear to remain cheap forever.
VIX is the symbol for the Chicago Board Options Exchange (CBOE) Volatility Index. It measures the volatility embedded into options traded on the S&P 500 (SPX) and reflects investors' 30-day consensus view of the future. S&P 500 puts grant the buyer the right, but not the obligation, to sell the S&P 500 Index at a fixed price for a limited time.
VIX Measures Fear
The greater the investors' fear, the more they will pay for put option protection. The more they pay, the higher the market volatility implied in the cost of the S&P 500 options. This is what VIX measures. Since fear is the strongest human emotion, it's no surprise that VIX rises and falls in proportion to investor fear.
A VIX of 10.00% means option buyers only expect the market to move 10% in the foreseeable future. A VIX reading of 20.00% means option traders expect the market to be twice as volatile. VIX does not measure actual volatility; it measures traders' anticipated volatility, based on how much they are willing to pay for protection against it. The VIX is forward-looking, which means it can spike much higher than actual market volatility.
The VIX tends to rise when investors either expect or experience big market declines; it tends to fall as fear of those declines subsides. This relationship can be seen clearly in the "Monthly VIX" chart below. Note how VIX spiked to 89.00% during the Lehman crash while stocks dropped a much smaller 58%.
Data Source: CQG
Data Source: Reuters/Datalink
Take a look at the long-term chart of the S&P 500 right below the long-term chart of VIX and you'll see just how correlated these two markets are. VIX tends to rise during a stock market fall, and to fall when the market rises. Note how it tends to fluctuate in a well-defined range, from a low of roughly 9% to a high of approximately 45%. (I ignore the Lehman crash spike in VIX to nearly 90% as a "one off" – unlikely to happen again anytime soon.)
By measuring expected volatility, VIX also measures probability. A reading of zero assumes an absolutely flat stock market with no volatility at all. While theoretically possible, that kind of market condition is extremely improbable. This is why VIX has a practical floor at around 9.00% – it is reasonable to assume that stocks as a whole could fluctuate this much in even quiet market conditions. Similarly, VIX rarely climbs above 45.00% because the chances of the market staying that volatile for any length of time are slim.
Data Source: CQG
The thick blue line on the long-term chart above shows multi-decade support in VIX just above 9%. The thick gold line (representing the 276-month moving average of VIX) is a close approximation of the "mean" of expected volatility. It covers almost every conceivable market scenario – bull markets, bear markets, and numerous "crashes." Like the water skier in our metaphor, VIX crisscrosses this "wake" of expected stock market volatility and either reverts to it, or close to it, nearly every year.
Will it do so again this year? Only time will tell. However, with VIX close to its practical low of 9% (currently 12.22%) and the public getting more complacent and starting to pile back in to stocks, now may be a good time to consider adding a bit of fear to one's portfolio. We recommend our trading customers consider doing precisely that.
VIX Futures: A Pure Play on Fear
The underlying value of VIX futures is $1,000 times the Index. That makes VIX futures at a price of 15.00% worth $15,000, and at a price of 45.00% worth $45,000. VIX is purely an electronic contract. Normal trading hours are 8:30 AM to 3:15 PM, and extended trading hours begin at 7:30 AM (all times Central). Liquidity, especially in the first two contract months, is very good and so is open interest.
Since volatility cannot drop below zero, buying VIX futures represents a maximum risk of your buy price times $1,000. Let's say we buy a VIX futures contract at 15.00; the most we can lose is $15,000 plus transaction cost. However, given the fact that VIX has never dropped below 9.00, our practical risk is probably far less.
Use VIX as an Effective Hedge
VIX can be a very effective hedge for a stock portfolio. Let's assume that we purchased one VIX futures contract for each $100,000 of stock exposure in our portfolio in 2010 and 2011, and paid an average of 15.00% ($15,000) for each contract. When VIX subsequently spiked to 47.00% ($47,000) in both years, gains in each futures contract would have offset roughly $32,000 worth of losses (or roughly 32%). Similarly, buying one VIX futures contract for each $200,000 in our portfolio would have offset a loss of approximately 16% in the underlying portfolio.
While there is no guarantee this level of protection will manifest itself in future declines, the charts above clearly show a tendency of VIX to increase sharply during major stock market corrections. Margin to trade one futures contract is currently $5,000. Hedgers should consider posting at least $9,000 to avoid potential margin calls.
With the "Sell in May and go away" timeframe upon us, using VIX futures to hedge is an appealing idea. Consider one futures contract for each $100,000 to $200,000 in portfolio value, depending on your risk tolerance and the level of protection you desire.
We can also take a speculative position in VIX by going long VIX futures at the low end of its historical trading range and using the 20.00% level as a potential exit point. To make either of these long-VIX scenarios work properly, you must be committed to your position and willing to endure shorter-term losses, "rolling" your position forward as the market dictates.
Stephen Belmont is chief market strategist and senior partner with the Rutsen Meier Belmont Group (RMB), a futures and futures options brokerage firm in Chicago specializing in commodities, currencies, and interest rates since 1984. For more info about these 2013 plays, call 800-345-7026 (toll free) or 312-373-4970 (direct), email email@example.com, or visit www.rmbgroup.com.
- Tue, 21 May 2013 17:50:14 +0000: The Hidden Bargain – Uranium - Casey Research - Research & Analysis
By Marin Katusa
Over the past month, gold has seen a considerable decrease in price, dropping almost 15% since the beginning of May. If this trend continues, gold will have its first losing year since 2000. This has led many investors, from the housewives of China to the bankers on Wall Street, looking for a bargain in gold prices.
However, what they don't realize is that there is already a bargain available – in uranium. Despite being the source of 20% of electricity in the United States and 35% in the EU, its price remains at multiyear lows.
Yes, gold has dropped a lot in the past month, but an ounce of gold can still buy almost 35 pounds of uranium at today's prices – that's much more than the historical average of 22 pounds. In fact, back in 2007, an ounce of gold would only net you about five pounds of uranium.
What does this mean? If you consider paper fiat money to be worthless and gold as real money, then the fact that you can buy more of uranium with gold means that uranium is cheap. Right now, we are clearly in the territory of "uranium is cheap relative to gold." Since these types of ratios have a way of going back to their historical averages, this means that in a gold bull environment, uranium is set to increase even more.
Still not convinced about uranium? Join us in our free online video event, The Myth of American Energy Independence, to learn more about the future of nuclear power, energy security in the US, and the uranium sector as a whole. To set the record straight, we have invited some of the most knowledgeable experts in the field, including:
- Spencer Abraham, former US Secretary of Energy
- Lady Barbara Judge, chairman emeritus of the UK Atomic Energy Authority
- Herb Dhaliwal, the former Canadian Minister of Natural Resources
- Rick Rule, CEO of Sprott US Holdings; and
- Amir Adnani, CEO of Uranium Energy Corp.
If you have always wanted to know more about this very important part of today's energy paradigm, then this is one video that you do not want to miss. For those who sign up, you will also receive a free copy of our Global Resource Intelligence report on uranium (a $29 value). Sign up today and get ready to profit from uranium – and the hidden contrarian bull market that's ahead.
Additional Links and Reads
EU Taps Top Oil Traders for Help in Price-Fixing Probe (Globe and Mail)
The price-fixing investigation continues, this time with the focus shifting to the top commodity trading houses of Europe. This is good news for Statoil and Shell, as it appears that they are not suspects in the investigation. It will be interesting to see what transpires, and to see how deep the wormhole goes.
Oil Pumping Suspended as a Result of Attack on Iraqi-Turkish Pipeline (Hydrocarbon Processing)
While oil transportation has now resumed, it is important to note that terrorist attacks or attempts on this pipeline are almost a monthly event. Now that ExxonMobil and other international majors are in Kurdistan, let's see what kind of security and diplomacy they can add to the area. A foreign oil company in Iraq at this point may actually be a good thing.
We expect that this has more to do with Germany's energy security rather than its exports. Germany is definitely reeling from its unrealistic energy goals, and we expect a major overhaul of them in the near future. Germany already subsidies solar very heavily, and the import tax will just make solar even more expensive. Germany cannot really justify this paradigm shift in the current European economy.
- Mon, 20 May 2013 15:59:15 +0000: Platinum and Palladium: A Fundamental Shift - Casey Research - Research & Analysis
Reminder: Tomorrow at 2 p.m. Eastern time we're premiering a must-see online video event for anyone with a drop of contrarian blood in their veins - The Myth of America's Energy Independence: Is Nuclear the Ultimate Contrarian Investment?
Gold is giving gold bugs another scare, with the last couple of trading days taking the price of our favorite investment back below $1,400 per ounce. Are we worried? No; the fundamentals remain in place, and we've no doubts about how this will end up.
That said, we're clearly not out of the woods yet for the near term, which we warned was likely. We alerted Casey subscribers to this threat and issued a second "gold insurance" recommendation (puts on GLD) that netted almost 200% gains as of Friday's close.
We will continue doing what we can to help our readers mitigate near-term risk, while helping them to build positions in companies with the best chances of delivering spectacular returns when gold and silver resume their upward march.
Meanwhile, as you can see below, your Casey Metals Team has a diversification strategy we're recommending, now that a new trend in platinum group metals (PGMs) is solidifying.
We hope you'll take advantage of the opportunity, as prices have recently started rising.
Senior Metals Investment Strategist
Rock & Stock StatsLastOne Month AgoOne Year Ago Gold 1,360.20 1,382.70 1,574.90 Silver 22.26 23.31 28.02 Copper 3.29 3.19 3.48 Oil 95.19 86.97 92.94 Gold Producers (GDX) 26.38 27.38 41.34 Gold Junior Stocks (GDXJ) 10.46 11.48 18.59 Silver Stocks (SIL) 12.85 13.34 17.23 TSX (Toronto Stock Exchange) 12,613.05 11,947.29 11, 330.68 TSX Venture 934.68 923.60 1,228.07
Platinum and Palladium: A Fundamental ShiftJeff Clark, Senior Precious Metals Analyst
Platinum is a precious metal, as is palladium, though to a lesser degree. However, like silver, both are also industrial metals. Unlike silver, it's their industrial use that is the primary price driver for both platinum and palladium – and that use is undergoing a fundamental shift.
The largest source of demand for platinum and palladium is the automotive industry, for use in autocatalysts. In turn, the fortunes of the auto industry are sensitive to the health of the world's major economies. We've been bearish on platinum-group metals for years, primarily because we weren't convinced a healthy – much less roaring – world economy could be sustained when so many governments continue spending beyond their means.
We reconsidered the market last year, when strikes in South Africa – home to 75% of global platinum production and 95% of known reserves – threatened supplies. But as we wrote last December, the strikes ended without great impact on long-term supply.
Since then, however, the fundamentals of this market have changed. Others may disagree with our economic outlook, which is still bearish, but it's due to supply issues – not demand – that our interest is now drawn to these metals, and particularly to palladium.
Here's a look at global supply against auto-industry demand for both metals.
Approximately 55% of platinum and the bulk of palladium supply was used in catalytic systems last year. The shrinking supply that's under way with both metals is obvious, and palladium is approaching a supply/demand crunch.
Here's what's going on…
The fall in platinum supply has been so great that it moved from a surplus in 2011 to a deficit in 2012, with Johnson Matthey estimating that deficit to hit 400,000 ounces, the highest level since 2003.
Why the shift?
- Labor strife and power outages. The mining industry in South Africa is, frankly, a mess. Labor strikes continue to haunt the platinum mining companies. The largest mining union in South Africa, AMCU, recently refused to sign a collective bargaining agreement on worker compensation, and CNBC is predicting a massive strike. Amplats, the world's largest platinum producer, is threatening to cut 14,000 jobs and mothball two operating mines due to various issues. Meanwhile, power outages, a longstanding problem, continue unresolved; they have already forced the closure of some mines and are widely expected to cause further cuts in production. As a result, supply from mining is expected to decline another 10% this year.
- Recycling. This important source of supply is falling in reaction to lower metals prices. It is estimated that recycling fell by 11% in 2012.
- Emission systems. Demand for platinum in autocatalysts dropped by 1% in 2012, mostly due to lower vehicle production in Europe and lower market share of diesel engines. However, emission-system demand from Japan and India is expected to increase, and diesel-emission controls recently introduced in Beijing will also support industrial demand for both metals. Auto sales in China rose a whopping 19.5% in the first two months of the year and are 6.5% higher in the US than a year ago.
- Jewelry. Worldwide demand for platinum jewelry rose last year, with strong demand coming from China and growth in India, and is mainly the consequence of lower prices. Jewelry accounts for 30% of total platinum demand.
- Investment. Although it represents just 6% of total demand for the metal, investor demand nonetheless grew 6.5% last year, adding to pressure on supplies.
Given these factors – primarily the first one – a supply deficit stretching into 2014 seems almost certain. Until South Africa can resolve its labor and power issues, pressure on platinum supply will remain, producing a favorable environment for rising prices.
Palladium, platinum's "little brother," also faces a market imbalance. In 2012, the deficit totaled 915,000 ounces, the highest level since 2001.
- Supply. Russia is the second-largest producer of palladium, and some analysts report that rumors of its stockpile being close to depletion are true. Recycling is also falling, and production disruptions in South Africa – the largest producer of palladium – are the same as outlined for platinum. Overall supply of the metal is falling.
- Demand. Autocatalytic demand rose by 7% in 2012, as palladium can be easily substituted for platinum in emission-control systems for gas-powered motors (but not diesel-powered ones), such as are favored in China and India. In fact, several experts we consulted were more bullish on palladium than platinum due to this "substitution factor" – and China just mandated catalytic systems for all cars in the country.
Palladium investment demand was positive last year, though palladium jewelry has yet to gain traction in China, one of the world's biggest jewelry markets. Total jewelry demand for palladium was 11% lower in 2012. However, we expect a greater shift to palladium in the expanding Asian automotive market, which in turn will boost palladium prices.
The fundamental drivers of the palladium market are similar to those for platinum, which makes the palladium market an equally attractive investment.
If this all weren't bad enough, most companies' production costs are now above current platinum and palladium prices. This can only be solved one way: higher metals prices.
The supply disruptions in South Africa combined with secondary factors have led to deficits in both metals that won't be erased overnight. Such imbalances, together with mainstream expectations of global economic growth, create a favorable environment for PGM price appreciation.
This much seems like a safe bet. There is, however, a great deal of speculative upside in the not-inconceivable case of South Africa going off the rails in a major way. Massive – not marginal – supply disruptions in the world's main source of both metals would send their prices through the roof. You get this speculative potential "for free" when you bet on the more conservative projections that call for rising prices regardless.
While we wait for our gold positions to rebound, an investment in platinum and palladium could be very profitable. How to invest? You can learn which company is our #1 pick for this space with a risk-free trial subscription to BIG GOLD.
Note: our longer-term outlook remains in place: most G7 economies are not fundamentally sound and continue to print money. Gold is still our priority asset class, so we don't recommend that investors replace their gold holdings with platinum and palladium investment vehicles. This PGM trend is simply an addition to and diversification of our current investment strategy.
Gold and Silver HEADLINES
Data from the US Census show that South Africa's trade balance with the United States has changed drastically in the last couple of months. In the nine last months, South Africa – by nature a big exporter of commodities – has received two very big shipments of unwrought gold from the US.
"According to the US Bureau, South Africa had a $110m trade surplus with the US in March 2012 and a $401.5m surplus in January 2013. In March 2013 this changed to a deficit of $688.8m."
It's hard to say exactly what this means, but it doesn't look good for South Africa. It's a place to watch carefully.
US to the World: "No Gold Sales to Iran" (Mining.com)
The United States is pressuring governments – especially Turkey and the United Arab Emirates – to cease gold sales to Iranians as part of broader sanctions over Iran's nuclear program.
This is part of the US's strategy to isolate Iran from the international financial system, a keys component of which is an attack on the value of Iranian rial, thereby inducing the Iranian people to demand policy reforms of their government.
Ben Bernanke says gold is not money, but it is clear that the US government recognizes the reality that it is, and is reacting accordingly.
Anti-gold Campaign at Play in India? (Mineweb)
In order to stifle India's appetite for gold, the government has introduced inflation index bonds. The first tranche, amounting to around $364 million, is to be introduced on June 4.
"The concerted effort by the Indian government to discredit gold by imposing several curbs, and channel these consumers away from the precious metal, indicates a desperation that has not gone unnoticed by savvy investors," reports Mineweb. The authorities have said the objective of introducing such bonds is to direct savings into "productive" sources of instruments from the so-called "unproductive" ones, like gold.
This would be funny if it weren't so destructively counterproductive.
This Week in International Speculator and BIG GOLD – Key Updates for Subscribers
- One of our favorite exploration teams has delivered another set of positive drill results. Its flagship project keeps adding value, yet the stock is cheaper.
- A Canadian gold producer released its latest financial statements, delivering another quarter of solid operational results. The stock has gotten cheaper since our last recommendation, and we're buyers.
- This top silver producer announced cutbacks in capital expenditures this year, but we're not concerned.
- One of our gold producers announced that it paid off its hedgebook early, solidifying it as a Best Buy.
- Fri, 17 May 2013 01:12:28 +0000: The Other Side of the Wall - Casey Research - Research & Analysis
By the time you read this, I will be in Asunción, Paraguay, on my way back to the United States for summer.
As we are finalizing the preparations for our departure, I suspect – but can never know for sure – today's missive will be brief.
In today's missive, I plan on providing a book-end to the journey that started about seven months ago when our family moved to the remote Northwest of Argentina.
Argentines have a phrase, "mi lugar," for when you find your special place in this world – the perfect combination of place and people that entirely suits your nature. The phrase translates simply as "my place."
As I have related in past missives, I was very fortunate in my early thirties to be able to spend three years on a quest for paradise on earth, visiting pretty much every country I thought might be a suitable candidate. It turns out, in hindsight, what I was really looking for was not paradise, but mi lugar.
Much like "love at first sight," mi lugar has almost mystical connotations – it is the place in this world where, should you be fortunate enough to find it, you belong more than anywhere else.
When we arrived in Cafayate, it was with some entirely natural trepidation. After all, not only were we going to be living in a remote corner of Argentina, we were bringing along our teenage kids with all that that implies.
It is entirely human to worry about the unforeseeable, and so we pondered all manner of questions and concerns. Would our stumbling knowledge of the local lingo prove a hamper? Would the highly dysfunctional government hereabouts be an impediment at every turn, the bureaucracy frustrating? Would the kids adapt to the new environment and be able to get a good education?
Yet, never ones to worry ourselves into inaction, we plowed ahead and on October 22 set down our bags in Cafayate.
So, how's it gone? Were our fears – any of our fears – realized?
To the extent that it may be of interest to those of you currently contemplating seeking solace on the other side of the wall, I would like to tick down some of the good and the not-so-good we have discovered as a result of our move.
The first, and possibly most surprising, thing about life in Cafayate has been how social it is. The Argentines are very warm and welcoming people, and we have made a surprising number of local friends. In addition, there are the generally like-minded and almost entirely agreeable owners at La Estancia de Cafayate, complemented by a steady stream of visitors.
Interacting with only one of those groups would be more than enough social life for me, by temperament something of a recluse (my wife always laughs when I say that, but it's true). When taking all three groups into consideration, however, the amount of socializing gets positively over the top.
Case in point, here is a partial list of what we have done in the past week.
- Rode champion Paso Peruano horses on a five-hour ride with the head of one of the best local wine bodegas, followed by an al fresco lunch at his estancia with his extended family. The ride was one of the best in my life, riding spirited horses on beautiful trails, through sand dunes and for several kilometers up an empty river bed.
- Played golf with my local coca-chewing, cigar-smoking cardiologist friend and a new golf buddy, a New Zealander who is renting at La Estancia for six months.
- Watched the last couple of hours of the PGA Players Cup down at the clubhouse on Sunday night. The Clubhouse is normally closed at 6:00 pm on Sunday, but because we asked, they stayed open. That's how it works around here.
- Joined in for an evening of beer pong with some of the younger residents. While I joined in a couple of games, such games are best left to the young and the foolish, so we mainly just observed.
- Had a send-off dinner for my golf partner and his wife, one of our children's tutors (and a wonderful one at that), in the company of a great group of people.
- Played "Mad Max" Volleyball on the sand court at La Estancia. It's called Mad Max Volleyball as a nod to the conditions the first time we played, in a roaring wind, with a rock-hard ball (I still have two swollen knuckles) that had a tendency to pick up nasty little thorns when rolling on the ground outside of the sand court. In our version of the game, hitting the ball back over the net with your head or feet was allowed.
- Worked out at the Athletic Club pretty much every other day.
- Had an al fresco dinner on the plaza at El Terruno, one of my favorite restaurants, with a group of friends.
- Ate parrilla (bar-be-cue) for lunch with another group of friends at El Rancho.
- Participated in a demonstration with the local volunteer firemen (the Bombaros) of the Jaws of Life that a group of us got together to buy. And by demonstration, I mean cutting the roof off an old car… serious fun!
Last week it was a charity poker match, then my wife's big birthday bash with forty friends at the Club… I don't even know forty people in the town in Vermont where we lived the last 25 years.
It just never stops.
In fact, after seeing our friends and enjoying the beauty of a Vermont summer, the next-biggest reason for returning to the States for four months is to get some rest!
Other aspects of life here that represented a significant change from life back on the other side of the wall:
Education of the Kids
Our children are now 14 and 16, ages considered very important in terms of personal development.
Before getting into what they got from living down here, a quick word on what they didn't get. For example…
- They didn't get a state-mandated cookie-cutter curriculum replete with dogma and indoctrination about completely unimportant topics.
- They didn't get an education by teachers whose sole purpose in life is to ultimately get a pension. In fairness, our children had had a couple of good teachers in their public schooling back in the States, but most seemed to have majored in sapping the creative juices out of students with minors in spirit crushing and teaching utter nonsense with a straight face.
- They didn't pick up bad habits from fellow students. They didn't learn how to drink, smoke, do drugs, or have sex at an age when they are not mentally prepared to keep things in perspective. In fact, it became something of a running joke how many times we went to restaurants hereabouts and the kids were offered wine, which they turned down of their own accord. When it's not the forbidden fruit, it's not nearly so desirable.
They didn't live in fear. When I see an article such as this, on the US government's zero tolerance for, well, anything – including stupid kid pranks, I am shocked. Here's a link to the article.
For the time-stressed, a couple of relevant quotes…
The Methuen, Mass., high school student was arrested last week after posting online videos that show him rapping an original song that police say contained "disturbing verbiage" and reportedly mentioned the White House and the Boston Marathon bombing. He is charged with communicating terrorist threats, a state felony, and faces a potential 20 years in prison. Bail is set at $1 million.
And it continues…
Using a zero tolerance approach to track domestic terrorists online is the only reasonable way to analyze online threats these days, especially after the Boston Marathon bombing and news that the suspects had subsequently planned to target Times Square in Manhattan, Mullins says. The way law enforcement agencies approach online activity that appears sinister is this: "If you're not a terrorist, if you're not a threat, prove it," he says.
"This is the price you pay to live in a free society right now. It's just the way it is," Mullins adds.
That method can result in arrests of teenagers whose online activity may be more aptly characterized as stupid pranks.
In February, Jessica Winslow and Ti'jeanae Harris, two high school girls in Rapids Parish, La., were arrested and charged with 10 counts of terrorism each after they allegedly e-mailed threats to students and faculty "to see if they could get away with it," detectives told a local television news station. "We take every threat in our schools as a credible threat, and I am happy to say we have made these arrests," Sheriff William Earl Hilton told reporters.
What they did get, however, was…
- Personalized instruction and coaching for their self-studies. In the beginning, there were another three children in the educational program, but the parents pulled up stakes fairly early on, leaving our two kids with a teacher ratio of 1:1 (except for a number of weeks when children of visiting owners and guests sat in on classes). My daughter, never before confident in math, became passionate about the topic and is now ahead of her grade back in the States. She is also now writing a book. My son is determined to learn computer programming. "Dad," he said to me confidently the other day, "you'll never have to worry about me needing money."
- For much of the time we were here, there weren't a lot of other kids their age around. In hindsight, that worked out just fine. In addition to not picking up the bad habits mentioned above, they quickly adapted to interacting on the level of adults with the residents of La Estancia and those from town (many of whom act like kids anyway). Participating in craft groups, dining out in good company, and joining in on various activities gave them both a great deal of confidence in their interactions with adults. On a number of occasions, they sat in on classes in local schools, and my daughter participated in folkloric dance classes.
- A shared family adventure. We've always been a close family, but living together as foreigners in a foreign land has made us only closer. No small feat given they are both in the challenging mid-teens. While there was, naturally, a certain amount of the teen drama, it always passed quickly and we moved forward in concert. Personally, I have learned to accept that they are no longer children but young adults who need to be able to make their own decisions and reap the rewards or suffer the consequences as a result. All in all, the family dynamic has changed, and only for the better.
Fresh air and a more active lifestyle. While my son is showing the classic characteristics of being something of a geek (by no means a detriment in this day and age), every day he walked to and from school wearing his heavy backpack and, sporadically, joined in on hikes and long walks around the sizable estancia on school projects (for instance, mapping all of the many fruit and nut trees on the property). In addition to the school walkabouts, our more active daughter also took advantage of the Athletic Club, horseback riding, dancing, hiking, and so forth.
What they didn't get was organized sports of the sort so treasured in the state school system but which, when you get right down to it, doesn't really have anything to do with education or with determining who you will be as an adult. In fact, the argument could be made that if you were a star on the school sports team, you might just be receiving indoctrination for a future stint in the military (for time immemorial, sports has a been a gateway for the military). Likewise, if you were bad at team sports and chosen last, or spent your time on the bench, who's to say that the psychological damage might not last long into adulthood?
In the final analysis, hiring our own tutors and having a hand in a curriculum that focused on the core subjects of reading, writing, and arithmetic – with a side course of Spanish, and all of it structured to inculcate the love of learning – turned out to be a big win. So much so that the kids volunteered to continue studying over the summer with the remote guidance of their lead tutor.
In a phrase, I haven't felt this healthy, this fit, this alive, or this happy in decades. The active lifestyle, the high-quality food, the multitude of good-humored friends, the fun activities… the overall quality of life… have completely reenergized me.
Whereas before a dumb email from a colleague might have sent my blood pressure spiking, now it's all water off this duck's back. Hardly a day passes without me opening my arms to the beautiful skies, a happy grin on my face. Reflexively, I start singing, "Oh, what a beautiful morning" when walking outside first thing each day.
Call me goofy, but it sure feels like stark raving happiness to me.
Speaking of beauty, I have always been one of those people who, lost in thought, took almost no notice of my surroundings, no matter how striking (and Vermont can be pretty striking).
Down here, however, the beauty of the place grabs you by the collar and demands you view it in awe. It is like living in an ever-changing art display with the red rocks of the surrounding mountains the canvas.
Connection to a Community
I've written about this before, so won't dwell. But before moving here, I was only tenuously connected to the community I had lived in for 25 years. While it is not all fun and games – because every community, no matter how like-minded, has its small cadre of serial malcontents – the overwhelming majority of the people at La Estancia and in Cafayate are positive and constructive.
In short, they are people you want to spend time with… and so we do.
Additionally, there is a sense of wanting to help support and enhance the community. One day after lunch at the beautiful new Piattelli Bodega, a friend asked if we'd be interested in adopting a baby burro whose mother had been hit by a car. I didn't have to ponder the matter for more than a minute before agreeing.
And so it was that La Estancia gained a new resident, a three-month-old burro who picked up the name Princess Grace as we walked her into the property and passed by the sign for the five-star Grace Hotel scheduled to open here within the next few months.
And the community is not just physical, but virtual as well. There is constant email correspondence between the owners, and several of us have been involved in a writers' group going on a year now.
There is also a local photography group that a number of us have joined.
Here's my wife's entry for this month, a great shot (in my biased opinion) of the sort of transportation hijinks that are a common sight around here, but which would have you face down on the pavement, your arms handcuffed behind your back, were you to attempt the same in the Land of the Free.
In case you can't tell it from the dog's expression, it is having a great time (think sticking your head out the window, but better). Note his paw on the driver's shoulder… too funny.
The Concept of Time
Despite the active schedule, there is always time to linger over lunch or dinner, to have a siesta, to play a little golf with friends (even if it means getting up before dawn to get my work out of the way).
Today I ducked into town on an errand and ended up stopping for an hour and a half at Baco's café to have coffee with Mauricio the Chilean and Bausti, the son of the owner who is in the final phase of a three-week-long motorcycle ride from Cafayate to Northern Brazil and back.
Once the coffee was finished, the old David would have made his apologies and hit the road. Not anymore, as I settled into my chair at the table on the sidewalk, enjoying the perfect weather and sharing stories, music, and photos with my friends. Mauricio, despite having work to attend to at his lighting and paint store, stuck around as well. There are things far more important than money down here, especially time spent with friends.
The Nature of Reality
In the US and other media-saturated countries, reality is defined by deviants with degrees in manipulating minds. The old standard "If it bleeds it leads" has been bolstered with "If it's green, it's good" and "If it scares, it blares."
I can't stress the point enough… down here none of that counts. Reality is what you have for lunch, it's not some imagined threat lurking around every corner. Terrorists, cyber-surveillance, school lockdowns… none of it matters in the slightest.
As for the stories trumpeted over and over in the global press about the Mad Queen Cristina who is tenuously holding power over these lands, no one really cares. And the inflation has again made Argentina one of the least expensive countries in the world for those of us who are not peso-based.
Last night I had an excellent dinner at the best restaurant on the plaza – and it's a very good restaurant – and the cost of my entree was all of US$7.00.
Adventure Around Every Corner
One of the best things about climbing over the wall is that so many things you will experience are new and, at least to me, interesting and exciting. While here, we have been on stunning hikes, amazing horse treks, wonderful drives deep into the Andes – on one memorable occasion spending a few days at fellow Argentine aficionado Bill Bonner's massive estancia, a place so remote that, to reach it, you have to drive for many kilometers on a dried-up river bed.
A deep-thinking friend of mine once explained how important it is to the maintenance of mental acuity to challenge yourself, even – or maybe especially – when it comes to the mundane. For example, if you are right handed, try brushing your teeth with your left as it forces you to use new connections in your brain.
Moving here from a completely different culture, with a completely different language, forces you out of your comfort zone every single day. For instance, when the patron of the well-known local bodega offered to let me ride his powerful champion stallion – he had heard I was a polo player and so assumed I could handle it – my initial reaction was to think, "Are you crazy?!" Fortunately, that thought was quickly supplanted by one akin to, "When will I ever have an opportunity like this again?" So I took him up on his offer, and what an amazing ride it was.
As our time here is growing short, I will sign off for the day with a few final thoughts.
First and foremost, as you may be able to tell from the above, despite the trepidations we felt before heading down here, my wife and I have not had a single regret… not for a second.
The house we built, which is fully paid for (as is the case with virtually all the houses in Argentina), was beautifully constructed. And, thanks to the competence of the architect who oversaw the construction, and the builder, the building went up with less hassle than was the case with our house back in Vermont.
We have fallen in love with the area, most ardently with Cafayate but also the province of Salta and the surrounding countries that, together, form what is called the Southern Cone. While life here, like everywhere, has its challenges, the challenges are nothing that a reasonably intelligent and patient person can't handle. In fact, with a little help from our local lawyer and knowledgeable friends, our interactions with the government amount to next to nothing… and, in most months, literally nothing.
Meanwhile, as noted above, the much-noted inflation here in Argentina has put the place on sale… and at a steep discount. Yet, even the locals in this tight-knit community don't appear to be overly disadvantaged. I suspect that's because, unlike the big city, this is an agricultural area where the cost of input is low, and so is the price of the output… thus the basic stuff of life is extremely cheap.
It is worth mentioning the cost of labor, as well. We have an exceptionally agreeable and hard-working maid who comes in for five or six hours a day, five days a week, at a cost equivalent to $40 a week. Simply put, that means that the drudgery of washing dishes and clothes, dusting, making beds, and so forth simply vanishes from your life, freeing you for far more agreeable pursuits. This is, in my view, almost the very definition of luxury – yet at a price many Americans push over the counter at Starbucks each week.
Now, this is not to say that other places in the world don't have their strengths as well as their weaknesses. If you love to snow ski or sail the big blue sea, this is probably not the place for you… at least not full time.
I also think, despite the low cost of living here, that it's probably not terribly well suited for people without at least some decent amount of money in the bank, or a source of revenue from outside the country. For example, from a job you can do over the Internet. That's because while there is 100% employment here, the local pay scale is low and the challenges of actually starting and running a business here are considerable.
While I have often said that "anyone who can live here and doesn't is a fool," in truth your own special lugar may have a completely different set of characteristics. I understand that some people even like big cities.
Whatever you do, if the place you are living doesn't make you feel alive, then do seriously consider setting out in the quest for a place that does.
This will be the end of what has turned into something of a series on life of an expat family in the Argentine outback. I hope you have found it of some interest and maybe even somewhat inspiring.
If you have any interest in visiting here, drop a note to VIPconnect@LaEst.com and they can help set you up with a customized itinerary. As the North American summer is the South American winter, the weather here will be growing somewhat less than perfect – though the skies are almost always blue with about 320 days of sunshine to chase away the night chills. If you live in the US deep south, I suspect you'd find the weather a refreshing alternative.
For those of you who might enjoy visiting as part of a small VIP group, this November – spring hereabouts – La Estancia will be hosting week-long visits for small groups in three successive weeks. The five-star Grace Resort and Villas will be in full operation, ensuring your stay at La Estancia is truly special. Again, if you are interested in participating, please contact VIPconnect@LaEst.com.
We will again be in residence here and will look forward to a bit of socializing.
The World's Worst Hotel Painting?
Earlier I mentioned a recent game of beer pong with some of the younger set here in Cafayate. The site of the game was a hotel with the odd name of Paris Texas where one of the participants acts as a manager on those rare occasions that a guest darkens the door.
The absentee owner of the hotel apparently fancies himself a painter, and likewise appears to have something of an affinity for the macabre. The result is that the hotel rooms proudly display large canvases of his work. A photograph of one appears here with compliments of Pete Chandler. Now, the really funny thing is that this particular canvas, which is about four feet high from bottom to top, is planted squarely in front of the beds in a room set aside for families with small kids (by virtue that it has a third bed). If you can zoom in, you'll see the blood dripping from the fangs.
Though I suspect you'll be hard pressed to find a worse example of the genre, if you can find a worse hotel painting, feel free to send it along to me at David@caseyresearch.com...
Mark the Dates!
The only Casey Research Summit of the year is being held October 4 – 6 at the beautiful Loews Ventana Canyon Resort in Tucson, Arizona.
Being the only Summit this year, we are pulling out all the stops for the faculty, most of whom are arranging their schedules to participate side by side with the attendees throughout the entire three-day event.
Among the faculty now confirmed is keynote speaker Dr. Ron Paul (who will be attending all three days). For the entire list of faculty, the schedule, and a secure registration form, click here.
I think you'll be most impressed. As always, registration at our events is strictly limited, and we expect a quick sell-out. Hope to see you there!
A Short Note from Doug Casey
A few years ago, Porter Stansberry started what may be the most unusual club in the world, The Atlas 400. He asked me to join, and I did, simply because I both liked the idea and like and trust Porter.
The concept is, in some ways, similar to something I put together years ago called The Eris Society. The idea was to provide a forum for accomplished people who should know each other, but didn't, to hang out together. Everyone enjoyed it and benefitted from it – where else could you expect to be in the same room, as an equal, with the world's leading aircraft designer, the leader of the world's largest outlaw motorcycle club, several billionaires, the most decorated living US soldier, several of the world's leading life-extension scientists, and lots of best-selling authors? Among many others.
Porter has done an excellent variation on that theme. And now that it's been around, and vital, for several years, I feel confident in recommending it.
Atlas is quite expensive, like most proper men's clubs. That's a good idea; it excludes those who aren't successful. And it turns away two out of three applicants. That's also a good idea; it does a pretty good job of excluding the annoying, the pushy, the dull, and those of bad character. And instead of having just one meeting a year, as Eris did, it sponsors a number of adventures, where you can get to know your fellow members while doing something memorable.
I don't know about you, but I'm always up for both making new friends and having fun. The Atlas 400 makes both of those things better and easier. That's a huge plus. It's why I don't go to most cocktail parties; it's like dealing with the public is usually a frustrating waste of time.
Atlas isn't for everybody, but if you can qualify, I think I can assure you that you'll be very pleased with your membership. Feel free to check out this interesting video of club highlights and apply to join The Atlas 400 here.
David again. One other housekeeping item: There's a new Casey phyle starting in downtown Chicago – so if you're interested in getting together with like-minded investors, shoot us an email at firstname.lastname@example.org and we connect you.
And with that, I will sign off for now and return to packing for the trip back to the States. Until next time, thanks for reading and thanks for being a Casey Research subscriber!