The Race to the Bottom:

I recently wrote a three-part series entitled “The Skin of the Gods” a very unprofessional attempt to trace, down through the ages, the folly of debasing currency by the unwarranted printing of specie.

Well my friends it now looks as though Armageddon is approaching, in the form of massive and pervasive attempts to re inflate the economies of the E.U. Japan and of course the U.S.

The form of battle appears to be low or sub-zero rates of interest and action by the Central Banks to force liquidity, or create ‘asset bubbles’  by the purchase of, mostly government, debt with ‘funny money’, sometimes referred to as  “quantitative easing”. Central  Bankers are, therefore in a race to the bottom  by following a course that can only devalue their currencies,  in terms  of other paper currencies and, of course gold and other ‘hard’ assets.

The losers in all of this will be the holders of these Y.E.D. (Yen Euro Dollar) currencies, the biggest by far, being the Chinese, who are ‘long’ massive amounts of these currencies due to their export driven economy.  This, no doubt, is why the Chinese  central planners continue to subsidize the purchase of gold, mostly in the form of concentrates containing Arsenic and other impurities, scorned by most industrial nations. The Chinese are also exporting Silver, a non-reserve currency, and importing Gold, a reserve currency, as are the Swiss,  who are going one step further, and actually repatriating gold held by the Federal Reserve Bank of New York.

It is no surprise that China encourages its S.O.E.’s (State Owned Enterprises) to make massive investments in far corners of the globe in liberated Y.E.D. Currencies. The planned US $ 2 billion Paradise Island Gambling Resort in the Bahamas, thought to be the largest civil project in the World, is a typical example. Apparently the country risk, being that of a small independent Island Nation, at almost constant war with the US Treasury, is insufficient to offset the urgent need to place fast depreciating paper currency with hard revenue generating assets.

This is the strange new World that follows the collapse of the Breton Woods Monetary System in August 1971. This is when the  pledge of convertibility of the mighty US Dollar into gold was abrogated in favor of the ‘dirty float’ a term that no one understands or adheres to.

It might well be that the Central Bankers or the Presidents of the Federal Reserve System in the US now are the sole determinants when it comes to the trading ranges of the major currencies. They do so however without any reference to gold or any other reserves. Rather they blather on about percentage s of debt to GDP (gross domestic product) as being the correct measuring stick. This policy smacks of the adage of ‘the blind leading the blind’ and ‘it must be alright because everyone goes along with it’. But  we all know what will happen if just one influential player or creditor  breaks ranks and refuses to accept a currency as settlement for trade.

Will this happen? and if so when? My guess is sooner rather than later. Most likely after the 2016 Presidential Election in the US, or maybe when a major player such as France breaks ranks with the EU Monetary Union. Then we will once again have a new world order based upon a basket of currencies and commodities to which all the major Western countries will swear allegiance, for a little while anyway.

 

The Skin of the Gods Part Three:

In 1973 then President Nixon executed what has come to be known as ‘The Nixon Shock’ by liberating  the  price of gold that had been fixed for thirty-eight years at  US $35 per ounce. With  similar Executive Order he reversed the system of fixed exchange rates  and allowed the dollar to ‘float’ against the other major currencies of the World.

The Vietnam War and President Johnson’s ‘Great Society,’ paid for with borrowed funds, created a ‘Guns and Butter’ situation that let loose the dogs of inflation on an unsuspecting public. The dollar had ruled supreme as the International medium  of exchange since the Breton Woods Economic Summit at the end of the Second World War. The very idea that America did not have enough wealth to fight wars while lavishing  its citizens with expensive social programs came as a shock to a society that has been promised an ever-increasing standard of living. The result of the broken promise was even more shocking.

The Stagflation of the 70’s resulted in never before seen values for gold. In 1972 it took just US $100 to buy and ounce of gold By 1978 it took nearly US $1800 to buy the same ounce of gold. The rot was only stopped by exorbitant  Central Bank Rates of interest that made the dollar palatable for lenders. Expressed in different terms The Bond Market (the lenders) dictated policy to the US Treasury and the Federal Reserve Bank alike.

The surprise here in not that Stagflation occurred, or that the Bond Market ruled supreme. It is rather that Citizens of the Western Trading Nations were so quick to forgive and forget the pain and suffering caused by the policy blunders of their rulers. No doubt the Dot.Com Bubble of the 90’s made life  easier, as did the resulting easy money policy of the Greenspan Federal Reserve.  But the sheer hubris that it was possible to return to the same policies without a repeat of the pain is breath-taking.

History has shown time and again the consequences of profligate spending and the indiscriminate printing of specie. There is no reason to believe that it will be any different this time around the dance floor. The US Dollar will be devalued by one means or another so that the massive US debts ($ 14 trillion and counting) will be serviced in ‘New Dollars’.

Because the Dollar remains the most commonly excepted medium of exchange in International Trade, many believe that this devaluation will be accomplished by a new World Order for currency alignment, in much the same way as that achieved by Breton Woods in 1946. There is  a good possibility that the measuring stick for this new order, will be a basket of currencies and commodities that will include gold and silver, but not to the extent that the savers of the Eastern World would want.

The is no practical way of returning to the wonderful simplicity of the Gold Standard. The spenders of the Western World would never agree to grant such power to the savers, at least not all at one time. The gold standard worked so well because the Bank of England was in the unique position of being at the center of World Trade and a vast empire ruled by Gunboat diplomacy. England was also an exporter of capital as opposed to an importer of capital (as the United States now is) and thus able to dictate the terms of the Bonds that financed so much of Western Industrialization.

With the hindsight of the Gold Reserve Act as a guide, the coming monetary re-alignment will provide gold owners with a one time lift, but it is very unlikely help gold or silver producers in the longer term. Assuming the basket theory is correct the weighting of gold to the total value of the basket will attempt to fix the value of gold as a constant rather than a variable.  During the first thirty ears of Fort Knox Gold the  miners were very depressed and in some cases were forced to rely on Government largesse for their continued existence.  Only those who mined excellent grades and had long-term contracts with International Jewellers survived.

Gold Miners have never really been a good investment, unless that is you happen to be lucky enough to own shares in a company at the time gold is discovered. The so-called magic multiple accorded to shares of gold companies is based on voodoo mathematics. The idea that somehow a company with more ounces of gold in the ground is worth more that a very profitable one with fewer ounces is nonsense. So is the idea that anyone anywhere knows how to find gold. They do not and there are 3000 years of history to prove the point. The lure of gold is the metal, not the miners, who produce the 99.99% pure metal.

The best method of owning gold ever devised was  structured and sold by the investment division of the Royal Bank of Canada in 1987,  during the last gold rush of the 20th Century. The investment vehicle was a dividend paying share, in a company with a lot of gold, that was exchangeable into a fixed amount of gold, as valued by the London Bullion Market. This vehicle, that is unfortunately no more, was the for-runner of the etf  (Exchange Traded Fund Ticker Symbol g.o.l.d.) designed by the World Gold Council who guaranteed the physical gold bullion for the exchangeability of the fund shares.

The etfs’  are now the best way to own gold without having to pay for storage and insurance of physical bullion and are far safer than taking the chance on a gold miner. The etfs’ also, just happens to be a direct look-alike to the Bills of Exchange issued by Chartered Banks during the early years of twentieth century. There are now etfs’ that link gold in currencies other than US Dollars and offer a near perfect arbitrage between the various exchange rates. They are very liquid and trade around the clock on the various exchanges of the World.

The future for the Skin of the Gods is murky but the chances are great, that despite continuing efforts to marginalize the importance of the metal it will survive as the only reliable store of true value.

 

The Skin of the Gods Part Two:

Goldfields is one of the oldest and most pre-eminent gold companies in the world. Based in South Africa it was a  founding member of the World Gold Council and has done more than any other company to keep gold relevant in the age of specie and paper money. Once a year the company publishes “The Gold Book” a massive tome that tries to make sense of gold as a commodity, subject to supply and demand equations, as are other precious metals such as silver and platinum.The attempt works somewhat but falls far short in explaining the rise and fall of gold values over time expressed in the major currencies of the World

The reason for this is that gold is not, and never has been, merely a commodity. Rather, it remains primarily an international reserve currency, albeit not one that is accepted as legal tender in everyday trade.

The great bulk of gold in the World is held in vaults as bullion  that never sees the light of day. Annual gold production of a little less than 700 tons, (22 million ounces) is small enough so as to make very little difference to demand that comes mainly from jewellery manufacturers (India, SE Asia, and China), central banks, and the Communications Industry

Because of the very small float gold prices on the London Exchange tend to be very volatile in the short-term  frequently moving more than 2% in a trading session. A much better gauge of relative gold values is the COMEX Futures Exchange in New York where all the players meet, including those engaged in arbitrage of gold and the dollar as freely trading currencies. In the simple terms, if fund managers believe there will be continued debasement of the dollar by means of printing more specie, they will short the dollar and go long gold. They achieve this by executing forward contracts  in dollars in exchange for gold on COMEX  (usually thirty to ninety days out). This is the institutional method of hedging against currency devaluation in the short-term. It is not suitable for Individual savers and investors since the market has no stops (limits to changes in price during a trading session)

Longer term the likelihood of continued currency devaluation presents a much greater challenge for those who do not wish to suffer the resulting reduction in their standard of living.  The reason for this, can, once again, be found through history.

The Romans showed us how to mint specie tied to the value of gold. Unfortunately they also showed us how to screw up , by minting too many brass and copper coins, thereby debasing or devaluing the central currency and destroying the Empire. Through the ions of time the practice has continued in one form or another, to the extent it can almost be predicted, when, not if, there will be further devaluation of currency in terms of the rate of conversion into gold. In this equation gold is the constant and the various forms of specie are the variable.

Wars are a great equalizer, as are depressions and panics. In these circumstances the central governing bodies, fearing retribution from an angry populace, choose the easy way out and print more specie, as opposed to paying for their folly. It seems as though this undeniable fact is recognized by about half the population of the World. These are the inhabitants of Asia and India who have a healthy distrust of governments and their ability, or willingness to take care of them when things go wrong. No surprisingly these people are the biggest buyers of gold. Take for instance the inhabitants of the Island of Formosa or Taiwan. They fear, rightly, that, given half a chance the Monster of Peking will take back its’ lost Island’ and they will be left to fend for themselves. It is estimated that Taiwanese own gold to the extent of four times all of the currency in circulation. Under normal circumstances this would destroy the local currency, as ‘good money always drives out bad money’. Not so in this case since the Taiwanese are also the World’s greatest savers.

The other half of the citizens of the  World appear willing to take their chances, believing that the omnipotence of central governments in the form of the welfare State will take care of them in their needs.

It is this great divide that sets up the dichotomy that exists in the treatment of gold in the major markets of the World.

It is an open secret that Monetarists ( The Chicago School) who now hold sway over  the policy dictates of Central Bankers would like to get rid of gold. altogether. But they face at least two very large problems.  They cannot control  the elected representatives who give rise to the printing of  the specie that is at the heart of the problem. Instead they are left to warn and cajole law makers of the dangers of uncontrolled spending while they try to devise new methods of controlling the ever-increasing money supply. And, they face an almost insurmountable challenge of convincing the rest of the World, all those who save more than they spend, that they really can control the money supply and thus prevent further devaluation.

So it appears likely that the millions of tons of gold bullion in national vaults will stay put for a while longer. What is much more likely is that gold will be further marginalized by legislation.

In 1935 President Roosevelt, who apparently had a visceral dislike of Bankers, along with the New Deal Democrats passed into law “The Gold Reserve Act”. The Act fixed the price of gold at $35  an ounce, (a 90% devaluation of the dollar), outlawed the use of gold as legal tender, and forbade American Citizens from owning large amounts of gold bullion or coinage. Surprisingly this draconian  act omitted  gold Jewelry leaving the door open for a small portion of gold producers to survive.

The effect of the ‘Great Gold Fix’ was the issuance of nearly $40 billion  in specie ($6 trillion in today’s money)  in exchange for nearly 650 million ounces of gold all held in great secrecy at the United States Mint at Fort Knox in Kentucky.

If this appears vaguely familiar simply substitute US Treasury Bonds for gold and you have the answer.(Quantitive Easing) The whole exercise was designed create inflation as opposed to dis-inflation or depression. We will never know if this grand ruse worked because the Second World War started and fiscal controls were put in place to help the ‘War Effort’ (stop Inflation)

Much the same thing happened in France during the depression following  the Second World War. The French Governments of the day (there were many) was forced to continually devalue the Franc because of the continuing war with Algeria and the fixed exchange rates dictated by the Breton Woods Agreement.  Then along came President de Gaulle who put a stop to the useless war and issued ‘New Francs’ in return for gold held by French Citizens. The result was much the same as with Fort Knox, the second largest hoard of gold in the World and finally monetary stability.

Chances are very great that history will repeat, because monetary realignment, anywhere in the world cannot succeed unless gold is taken out of the equation or at least marginalized. Gold has a two thousand-year history as the best currency and will drive out specie unless this occurs.

 

 

 

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.