Following the Big Money

“Those who cannot adjust to change will be swept aside by it. Those who recognize change and react accordongly will benefit.”

—Jim Rogers

Actions not Words

Over the years we’ve chosen to focus on those who put their money where there mouths are. We don’t follow the cheerleaders and fact avoiders – politicians and pundits alike. And, spin from the left, right, or center doesn’t distract us. While some would rather hear the much sweeter sounding music of a Federal Reserve Bank chairman stating a housing crisis was not on the horizon (it certainly was); that quantitative easing (money printing) would be withdrawn (it has not been, and continues to grow); and that economic recovery is just around the corner (we have our serious doubts) – we instead watch some of the most accomplished businessmen in the world as they take stakes in ventures designed simply to make money.

Politicians, bureaucrats, and demagogues have their motives. They are predominantly, in our view, to shape opinion, get re-elected, and re-pay political favors. And that’s why we rarely take them at their word. However, when the super-rich risk vast sums of their own money in attempts to preserve and grow their wealth – we pay close attention.

Brazil’s Richest Man Takes Action

Growing elements of the super-rich are attempting to capitalize on the tangible asset bull market (paper-money bear-market) trend.

Brazilian Billionaire Eike Batista may not be right every time – but he’s been right enough for us to pay attention to certain significant moves he makes. And we believe he’s smart enough to learn from the past, as well as ascertain fundamentals behind current scenarios.

Batista was the founder of TVX Gold, a company he resigned from in 2001 after the company was required to be sold due to lack of cash.[1] Reasons given for the company’s failure included political opposition to a gold mine in Greece, along with the declining price of gold at the time to below $300 an ounce.[2]

Political risk and price risk are most certainly inherent in the mining sector. But we think it’s unlikely Batista got to be the richest man in Brazil by having to learn the same lesson twice. Thus, when he recently acquired the remaining 80% interest in Vancouver based Ventana Gold Corp., several aspects of the deal caught our eye.[3] For starters, it’s our opinion the fundamentals for gold prices today are far superior than when Batiste founded TVX. Effectively, monetary inflation (currency debasement by governments) is becoming more and more obvious – and today gold trades at $1,400 an ounce (vs. below $300 when he resigned from TVX in 2001). Also, Ventana’s flagship La Bodega property is in Colombia, which is considered to be a mining friendly country.[4] Lastly, and as importantly, Batista effectively acquired Ventana at around $450 for each of the company’s 3.5 million ounces at La Bodega — while gold currently trades at $1,400 an ounce. [5]

World’s Richest Man Chimes In

Carlos Slim, ranked by Forbes Magazine as the world’s richest man, has said he plans on increasing his investments in Colombia due to the country’s liberal oil exploration policies, its mineral resources, and burgeoning middle class.[6]

Slim believes commodity prices are rising as emerging market countries like China and India seek to acquire more natural resources to meet the needs of their rapidly growing middle classes.[7] He also believes the declining value of the Dollar is causing those same countries to attempt to preserve the value of their reserves by investing in the tangible assets sector.[8] Slim stated, “They don’t want to have Treasuries… The dollar is weak and there’s no interest, and also with commodities they have reserves for internal consumption.”

We’ve long cautioned about this day coming. As global monetary debasement (led by the U.S.) continues to accelerate – the greatest holders of paper money (certain nations and elements of the super-rich) are seeking to divest from paper to that which cannot be printed (and devalued) – tangible assets and their producers. Why would they not? Why let the US and other governments confiscate their wealth by printing away the value of the paper money they hold?

We believe this trend will continue to accelerate. If so, the increasing velocity of money flying into the tangible asset sector could prove quite interesting. As always, we believe opportunities abound.

While there is a lot of tough reality going on out there – we maintain our positive outlook. That outlook is based on our belief that a bear market in one thing is often a bull market in another.

As we enter this critical time – now, more than ever – we believe investors need to focus on their investment strategies. Those readers who are clients are fully aware of the strategies we’re implementing in light of unfolding economic circumstances. Others may feel free to contact us to learn more.

Sincerely,

Stephan R. Ernharth, JD
Vice President
Ernharth Group
www.ernharth.com

Go to www.ernharth.com/economic-commentaries to read past articles from our Economic Commentary series.

[1] The Globe and Mail, “Brazil’s Eike Batista snags Ventana Gold” February 14, 2011
[2] Ibid
[3] Ibid
[4] Ibid
[5] Bloomberg, “Batista Bid Has Brazil’s Richest Make Explorers Cheap: Real M&A” February 13, 2011
[6] Bloomberg, “Carlos Slim Sees Colombia Rising as Commodity Choice” February 10, 2011
[7] Ibid
[8] Ibid