The Skin of the Gods: Part One:

Some 1500 years BC, Egyptian Royalty and other Potentates, were the exclusive owners of gold . They used the lustrous metal as a means of defining their power and importance., both in life and the afterlife. They believed that gold, or Nubia, as it was called,  was ‘the skin of the Gods’ that would grant them immortality. The Pharos would spend most of their short lives in acquiring,  by tribute or slavery , a hoard that would later be used for their entombment. It is believed that as many a million lives  were expended in the production of nearly 7 million ounces of gold from mines in Wadi in the Southern part of what is now Egypt.  Very little of this gold has ever been found (the Valley of the Kings being the exception) leaving scholars and the curious to wonder what happened to the rest. Since gold is  nearly indestructible, and subject to theft, suspicion falls on the Romans who conquered the land of the Pharos and took tribute as payment for their legions.

The Romans  had some very different ideas on the  best uses for gold.  They did not bury their dead in tombs and used gold instead, as a pecuniary medium of exchange. Their idea of using coinage made from different metals would set them apart from the rest of the civilized world., and allow for a standard of living not seen again for a thousand years

They created gold and silver coinage, through a central mint in Rome . They established a fixed ratio, first between Silver and Gold and then,  between Bronze and Copper coinage. This ‘specie’ or payment in kind, allowed for greatly expanded commerce and for the movement of capital to and from Rome as the centre of the Empire.

The whole system worked on trust. Trust that the specie created would in fact be exchangeable into a fixed amount of gold. Unfortunately the Romans would eventually pay a terrible price for their continued breach of this trust. The temptation to create ever-increasing amounts of specie, without regard to the amount of gold available in Roman vaults,  was too great.  The legionnaires had to be paid, as did the growing number of functionaries required to keep the far-flung empire in good order.  In the absence of further conquests and new sources of gold,  regional governors resorted to the  practice of ‘debasing’ or devaluing the currency. This practice  would eventually bring down the Empire and re-introduce their citizen’s to serfdom.

It seems as though  we in the Western World may be doomed to re live this history, for we seem hell-bent on repeating the same mistakes. We are printing specie in amounts never before contemplated in reckless abandon of the economic certainty that to do so will cause a massive reduction in our standard of living.

This is exactly what is happening with the current sovereign Debt Crisis in the European Monetary Union. Driven by the dictates of the European Central Bank and tempted with  soft guarantees  the debts of the likes of Greece and Portugal  are being rolled over and will never likely be repaid. So the Central Bank, as an alternative to devaluation and misery is in effect propping up a system that is doomed to fail.

It was not always thus. The one hundred year period starting with the defeat of Napoleon at  Battle of Waterloo in 1815 and ending with the advent of the First World War in 1914 was the greatest period of prosperity in the known history of mankind. It is all to often forgotten, of this great period of growth, that it  was made possible by a stable monetary system, known as the ‘Gold Standard. Just as the Romans before them, British Bankers, led by N.M. Rothschild, created and maintained a system of  Bills of Payment, and coinage convertible into  gold.   The paper money created was in reality a  system of promissory notes,  “to pay on demand to the bearer” meaning by rote, a sum of ‘gold or gold equivalent’. Heavily embossed notes in variously denominations were originally printed by Chartered Banks, but gradually the task was centralised to the Bank of England.  Meanwhile a central mint owned by the Bank of England issued fixed amounts of gold, silver and copper coinage for the conduct of  everyday commerce.

The highly reliable Pound, or Sterling became the most commonly excepted International medium of exchange because unlike newer nations such as America panics and inflation were rare events and any form of devaluation was very unlikely.

This wonderful system was bought low by the unmanageable debts of nations at war. Too much debt and not enough gold.  Just like the Romans, the citizens of the Western World would pay a terrible price for the monetary chaos that would follow. The Great Depression was the result of unchecked  creation of specie in the Roaring Twenties.

And so it has gone. War Boom and Bust in a never-ending cycle. Without some relaible method of keeping score there is little chance that this terrible cycle can be broken.

At the Breton Woods Economic Conference held at the end of the Second World War there was a serious proposal made by Friedrich Hayek, a member of the Austrian School of Economists, to return to a modified form of the Gold Standard. Such a possibility was dashed by the American delegation,  who distrusted the national resolve of European Nations,  ruined by war, to live within their means.

Maybe the Americans were right at the time, but no one could have foreseen the monetary splurge that would follow. In the last fifty years the American Treasury have printed more specie than all the money in the world at the time of Breton Woods. They have borrowed trillions of dollars to pay for almost continuous wars and have shown little resolve to pay to repay even a small portion of the costs incurred.

The World is awash with American Dollars and no one it seems, other than possibly the Chinese Proletariat, has shown any willingness  to point out that just maybe the Emperor, in the form of the United States Treasury, has no clothes. The daily accounting, that takes place on the London Bullion Market every day tells us that it now takes 1300 US dollars to buy an ounce of gold that cost just 35 of the same dollars in 1973 . If for any reason the markets should lose confidence in the US dollar, as an international medium of exchange, many believe that the gold to dollar ratio will go a lot higher. This is why so many doubters all over the World keep the ‘Skin of the Gods close at hand.



Black Swan and the South Sea Bubble:

Black Swan is a metaphor that describes rare events that come as a surprise and have a major impact on the conduct of human affairs.These events are often inappropriately rationalized after the fact with the benefit of hindsight. The theory was developed by Nicholas Taleb and applies, amongst other things, “to the psychological biases that make people blind to the massive role of major events in historical affairs.”

To bring this into focus a Black Swan has been used by pundits to describe  the ‘Housing Bubble’ in 2008, a very rare event, and the subsequent credit crisis, a not so rare event.

Comparisons are often somewhat erroneous but in this case I do not think the pundits have it right. We live in an age where the media is the message and this requires that every event have a catchy name or ‘buzz’ word that can be used in sound bites and social media. It is this need to name an event that turns the process of rationalization on its ear. As we shall see there was in reality very little new or different with the events surrounding the collapse of credit markets in 2008.

Credit crises’ or financial panics have been around for a very long time. They happen whenever an event occurs that destroys the knife-edge confidence that users have in specie (paper money)  Because we rely on government institutions to protect the underlying value of paper as our medium of exchange they are nearly always found wanting, when things go wrong.

To illustrate my point I would like to relate the story of another great credit crisis that took place two hundred years ago in England. when the concept of specie was still very new, as was the concept of a Central Bank.

What came to be known historically as the Great South Sea Bubble got under way in the very early years of the 18th century when the Bank of England tried to manipulate the balance sheet of the nation by transferring war debts to a private company.

Historians are at odds as to who came up with the idea but suspicion  falls on a few enterprising entrepreneurs, likely members a Merchant Bank. They wanted a Charter from Parliament to trade as a monopoly with the Spice Islands of South East Asia.

This was the way things were done in era of colonization. The Hudson Bay Company had a monopoly to trade firs from Canada as had the East India Company for almost everything imaginable from the whole continent of India. The founders of The South Sea Company expected to get very rich from any such franchise so were willing to pay huge bribes to members of parliament to get what they wanted. But the concept lacked political reality, so the idea was hatched for the new company to accept war debts of 50 million pounds as additional compensation for the Crown.

The founders got their way and the Charter was granted  against the wishes of the appointed Directors of The Bank of England. The Bank feared the new company would usurp their powers to control the money supply  and within two years hostilities commenced.

The order of battle was strange indeed. The Bank bid up the price of South Debt, that now included the War  Debt, in the mistaken belief that the prospect of reduced yields would make the investment  less acceptable to the thousands of punters who had flocked to get a piece of the action. The result was the opposite and the price of the South Sea shares quickly spun out of control increasing by over a hundred times.

As the price of the South Sea shares rose speculators jumped in and formed all kinds of other dummy companies, one offs,  supposedly linked in some fashion with the monopoly. They formed companies to ‘Make Salt Water Fresh’ to ‘Manufacture Square Cannon Balls’ and most audacious of all to ‘Carry on an Undertaking of Great Advantage. The capital raised served  only  to enrich the founders and feed the insatiable bubble.

The Government run by Britain’s first Prime Minister Robert Walpole,  finally became alarmed at the monster of their creation and clamped down on the speculators by tightening credit. By so doing  the omniscient powers trampled on those it was trying to help  and caused untold misery to irate constituents.  The  predictable result was the Government take over of the affairs of South Sea and the transfer all of the companies’ debts  and many others to the National Debt.

Applying the theory of Black Swan to this troubled tale yields fascinating comparison to the Housing Bubble and bust of 2008.

It all started with a seemingly wonderful idea promulgated by then President Clinton and the feel good Democrats that every person in the United States should be able to afford to own a house. It did not matter that income levels of the bottom twenty-five percent of the population were not enough to cover mortgage payments. Rather two appointed bodies, the US Treasury and the Federal Reserve Bank, would see to it that credit restrictions would not stand in the way of a new form of security, the Sub-Prime Mortgage that would make it all possible.  A good political strategy but not a winning economic  one since  bankers and other lenders would be able to see the obvious.

It would take some bright young sparks,  on Wall Street to figure out how to make a silk purse out of a sow’s ear by combining lots of sub-prime loans into a fund and, with the compliance of the rating Agencies, reclassifying the end product as  a Triple A Credit.

The grand ruse was a boon for the thousands of sales people who would earn good commissions by selling what were really junk bonds dressed up as the most secure credit available. Soon the easy credit spread to the Mortgage Brokers who, like their cousins in the Merchant Banks, did not let real facts get in the way of a successful credit application.

The rest, as they say, is history. A whole new industry sprung up,just like the one in the South Sea Bubble. As the products packaged and sold became more and more obtuse warning flags were ignored by the Federal Reserve who believed, mistakenly, that common sense would prevail and rising interest rates would correct the problem.   Finally Goldman Sachs had the unmitigated cheek to sell a product that bet against the house, and would only make money if the credit ruse was exposed. It would a hedge fund owner of this product that would expose the real risks involved to the buyers of the Mortgaged Backed Securities and the Merchant Banks that had packaged and sold them.

When Lehman Brothers failed the party was over and credit froze all over the globe. The first to the rescue  were the two institutions that had made the  whole mess possible, the US Treasury and the Federal Reserve Bank. Using the tools available to them the bought back, albeit at a discount, the ‘troubled assets’  the Mortgage Backed Securities, and charged the whole thing to the National Debt. Just as the British Government had done with the South Sea Company two hundred years before.

Marathon Men and the Cartaway Caper

The story of Cartaway has all the baggage typical of a typical micro-cap venture company. It also has a human side that shows us how the business of raising high risk venture capital worked during one of the halcyon periods of mining exploration in Canada.

It seems as though major discoveries of mineral deposits happen about once every ten years,. Periods of great excitement followed by busts and recriminations for all the wrongs committed by those chasing the dream of untold riches. One such period started in the early 1990’s when a small company, Diamond Fields, promoted and financed by Robert Freidland made  the discovery of the  huge Voissey Bay Nickel deposit in Labrador.

Typical to the norm in the speculative exploration business both company and promoter had recently been resurrected from the dead. Following his public and nasty scrap with the Environmental Protection Agency in the United States over the Summitville Heap Leech Gold Mine, Robert had moved to Singapore and recommenced his magic. He acquired control of Diamond Fields, a defunct Arkansas company, that had fallen on hard times. Diamonds were ‘hot’ at the time but ,as luck would have it, discovered a major Nickel deposit instead.

Mining promoters are strange beasts and good ones are rare indeed.  Masonic is one way of describing Robert, who has to be one of the greatest promoters ever to appear on the mining scene. With absolutely no background or training in the science of finding mineral deposits he took to the business like a duck to water. He also had the innate good sense to hire very qualified people who could explain to him what was going on and help him raise the millions required to keep chasing the dream. It is often forgotten that his first and disastrous attempt at the mining business, a small company apply named Galactic had been supported and financed by international engineering giant Bechtel and the Bank of America.

The best friends a mining promoter has are the legions of stock sales people who toil in the second echelon of Mine Finance, the folks who raise the high risk capital required to go hunting for mineral  elephants, and get very rich in the process. It is very much a two way street where a good promoter can make a big difference in the outcome.

Once such group of super salesman came in the form of an upstart Security Dealer by the name of First Marathon. No dummies, these guys had figured out a new business model to serve the Mineral Exploration Industry. Rather than simply sell shares in exploration companies to individuals, they would own a piece of (or control) the company raising the money.  In a further stroke of genius they would also own captive mutual funds to gobble up the sales product. If this idea worked, and it did beyond their wildest dreams, they would control the demand and supply side of the equation, a sure recipe for nirvana.

Cartaway, as the name might imply, was a micro-cap company with shares listed on the Alberta Stock Exchange that had started life leasing garbage containers to the good citizens of Kamaloops BC. Apparently the garbage business did not go according to plan and the company had ended up with a share listing but no business, a prime target for the young lions at First Marathon.

A  group of brokers in the Calgary and Vancouver offices  acquired forty six percent of the issued shares of Cartaway from the founders for ten cents a share. Before the ink was dry they then sold another trench of treasury shares to family and friends at a price of twelve cents a share with the proceeds from the sale to launch the company into the mineral exploration business in a big way.

The Young Lions then, as if by magic, acquired mining claims very close to Voissey Bay controlled by their confident Robert Freidland and started work in preparation for a  drill program the following summer. To this point the operation was under control and making a paper profit for the syndicate. With tight control of the ‘Box’ the number of shares issued, every single announcement resulted in further price appreciation and so everyone was happy. But the company lacked a head liar, a leader who could add luster, and bring in the investment dollars needed to fund the exploratory drilling.

The choice for such a leader was John Ivany, a seasoned mining professional with an excellent reputation. John may have known mining as practiced by large companies, but he was totally unprepared for the rough and tumble world of the ‘juniors’. A world wherein the lofty expectations of stock pushers ruled the day and where a chance remark could result in a surge of trading as nervous punters traded on speculation alone. It was very likely just such a remark to the effect that the drill core contained high concentrations of sulfides associated with the Voissey Bay deposit that started the trading frenzy that would bring the house of cards down.

The resulting stock Market action took everyone by surprise. The limited ‘float’ as designed by the young lions suddenly became a liability as the price of the Cartaway Shares soared out of c control attracting the unwanted attention of regulators. It scared the members of the Calgary Office enough so they broke rank and dumped their shares, all of this before the assay results from the drill core were known. The Jeannie was now out of the bottle and the best laid plans of the perpetrators went up in smoke.

When the assay results became available they confirmed what professionals suspected, that the Voissey Bay Formation, hyped by the best mining promoter on the planet, was not present under the Cartaway Claims. And so the stock price crashed back to earth and the game was over.

Unfortunately for those directly involved the story did not end well. Embarrassed regulators levied heavy fines and in some cases lifetime trading suspensions on the control group of brokers. The heaviest penalty was that paid by First Marathon, that never recovered its luster an ended up being saved by a Canadian Chartered Bank.

But there were others, lets just call them associates who did very well and got to keep their profits and their livelihoods. These were the followers or listeners, who were privy to the game going on at Cartaway, and who controlled small listed mining companies that could play along without breaking  the eleventh commandment and getting caught. One or two of these companies staked claims near those owned by Cartaway and enjoyed huge increases in share values as the charade played out. It was like having someone out front to do the heavy lifting without all the risk  and expense of actually exploring.  Maybe these were the smart ones who knew how the game was played and lived to do it ll again when the next great discovery comes along, as it surely will.

King Coal: The man that never was: 2nd edition

It has been bought to my attention by the Edit Police that my previous post on this matter slipped out without edit. For this I apologise and will try again.

The strangest mining story I ever came across involved Metallurgical Coal.

I am able to relate this tale because for a short while I ran a coal mining company, situated in the Crows Nest Pass in South Western Alberta at the behest of a large Canadian energy company that had made  a hasty and disastrous foray into the business.

The Crows Nest Pass was famous for its coal mines and at one point in history was home to a very large population of relatively well paid coal miners who were willing to take on the horrifying risks of toiling in dangerous underground mines. But by the end of the Second World War the boom was over as the boilers of the  railway steam  locomotives were converted from coal to oil and most mines were shut down.

At about this time a clever entrepreneur by the name of Frank Harquail began to acquire the shares of  coal mining companies that nobody else wanted. These companies owned vast quantities of freehold coal reserves, coal that was suitable for coking. The center-piece of his new prize was a private company, Hillcrest Collieries, secretly owned by the senior managers of the all-powerful CPR Railway that also had the dubious distinction of hosting the largest mining disaster in Canadian history.

It is almost impossible to believe that Frank took such a giant leap of faith without some prior inkling of the nascent demand for Coking Coal from the Japanese Steel Mills. General Douglas Mac Arthur had seen to it that the steel mills were rebuilt after the end of the war, but he could do nothing to replace the existing coal mines that were fast depleting.

The idea of using Coking Coal from Western Canada in Japanese mills was fraught with difficulties. The mines were 700 miles from the nearest port in Vancouver, a port that was designed for wheat not coal. The rail journey required passage over mountainous terrain with fierce winter conditions and it was thought unlikely that the railways would make the required improvements without a real incentive of high freight rates.

The giant trading companies of Japan who had been tasked with the vital role of feeding the new Japanese juggernaut, thought quite differently and began to encourage a new industry by the promise of long-term contracts.

So began the lonely quest of a man with an iron will to succeed in a seemingly impossible dream. He acquired control of Coleman Collieries, a company that was already producing coking coal for a plant in nearby British Columbia, and was able to convince  trading giant Marubeni that he could raise the capital to mechanize the mines and treatment plant. Along the way Frank got a big boost when the Kaiser family, already heavily involved with steel, began development of  the Sparwood property in South East British Columbia after obtaining the promise of a very large long-term contract from Japanese mills.

The expected bonanza was slow to commence because agreed to prices at the West Coast Port bore no resemblance to the realities faced by the new mines or the railway. Young Edgar Kaiser, keen to earn his spurs in the family business, had assumed costs based upon dragline operations in the Western United States, a totally unrealistic scenario in the high Rocky Mountains. Frank knew better but could do little to improve his situation, and so profits remained illusionary while his health deteriorated.

Imagine then the jubilation when out of nowhere there appeared a large energy company with a mandate to acquire a coal operation. Price did not appear to be a problem, and soon any army of consultants (some of whom knew nothing about mining coal) was dispatched to conduct due diligence.

it is at this point that this Horatio Alger like story becomes bizarre. Frank must have had a  visceral dislike for paying any form of taxation. He lived in Las Vegas, a no tax state, and ran his private business from the tax haven of Lyford Key in the Bahamas. Very soon a great deal of cash changed hands and Frank quite literally disappeared off the face of the earth.

Within a year it became apparent that Frank’s dream was not all it had appeared to be. His lieutenants had handled the truth very recklessly when they failed to tell the consultants that a large part of the coal reserves could not be recovered by traditional means thus rendering the price paid by the energy company unrealistic.

After a long an arduous lawsuit a high court found that malfeasance had indeed occurred and awarded damages that almost equalled the entire purchase price.

Meanwhile it became known that Frank had died in very unusual circumstances. He had chartered a large private yacht and sailed, on his deathbed, out into the Aegean Sea where according to his wishes he was buried at sea. He also died intestate (without a will) leaving all but his widow to doubt that he had ever existed.

It is befitting this strange tale have a  happy ending. Frank’s widow Helen, then living on the tax haven of Grand Cayman returned the judgement money (even though it would never have been found) and went on to become a great benefactor to the Island using millions of dollars received from the sale of Frank’s other coal properties in Western Canada.