Gold still number one

Exploration Review for 2011 by D. R. Wilburn et al. is published in the May 2012 edition of Mining Engineering, published by the Society for Mining, Metallurgy, and Exploration. The survey covered companies that had annual exploration budgets greater than $100 k. Thus small companies like (e.g., Moose Pasture Exploration, Inc.) were not included.

Some highlights:

Areas of exploration interest were divided as follows: Canada, the United States, Australia, Latin America, Africa, Pacific Region, rest of the world.

The area with the greatest exploration money spent was Latin America, followed by Canada and Africa. More exploration targets were reported in Canada, suggesting that the Canadian projects on average were not as far advanced as the LatAm targets.

A troubling aspect of the pattern of expenditure is that the primary focus has been late-stage projects, at the expense of new exploration. This means that although we may see increases in mineral production in the coming years, in the medium to long-term, it will be very difficult to increase (or perhaps even maintain) mineral production.

In terms of exploration effort for non-fuel minerals (meaning no coal or uranium), gold came out on top with 51% of the global exploration budget. Base metals followed at 32%. Diamonds and PGM continued their fall from grace, with only 2.5% and 1% of the entire budget, respectively. Exploration effort for diamonds was at 12% as recently as 2006.

Relative expenditure of exploration: gold vs. copper. 

Data from Exploration Review dating back to 2002.

Gold is still number one. The amount spent on copper appears to have been in decline since 2008, which may mean that the mining industry does not have much faith in the China growth story. Unfortunately, the data in the last few years did not separate copper expenditure from the rest of the base metal complex, so I have used an estimate of 60% of all base metal expenditure was for copper, which was the average for the years where data were available.

Lots more is available at the original site (pay site, sorry about that). Parts of the report should be made available appear later this through USGS.

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Why is gold so important?

Gold is the nearest thing to a substance with constant marginal utility. Constant marginal utility implies that any additional gold you acquire has as much value to you (utility) as the first bit you acquire. There is a minor disagreement to those who assert that gold has constant marginal utility and those (like myself) who argue that it does not, but is closer to that state than any other material for reasons discussed by Aristotle. (Fiat currency -- rather money whose value was to be defined by wise men -- was favoured by Plato).

I am willing to consider Professor Fekete's argument that gold has constant marginal utility, but demand is not infinite due to the phenomenon of interest paid on (non-gold) deposits. The higher the interest, the more likely that an individual will prefer money to gold (discounted for sovereign default, of course). At present, with interest rates being the lowest on record and the discount rate for sovereign default being similarly low, there is understandably a lot of interest in gold.

The constant marginal utility of gold reduces the economic risks of mining it, for it means that the market will never cease buying it (although price may vary). Base metals may have a high price, but their demand is limited, and if demand can be filled by your competitors before you can get them to market, you may not find buyers.

But most mining companies don't base their decisions on exploration on such criteria. For most companies, the question is which commodity will attract retail and institutional investment? Gold turns out to be better than graphite, for example, because it requires no explanation. Everyone knows what gold is. They don't all know what graphite, or rare earths are.

Visit to Mistaken Point

Visited Mistaken Point today.

Mistaken Point lies on the southern tip of the Avalon Peninsula, and is famous for its Ediacaran fossils. Ediacaran fossils are extremely rare and are among the first multicellular lifeforms on Earth. As they had no hard parts (skeletons or shells), they are only expected to be preserved under anoxic conditions or in areas where they were rapidly buried (like the early Cambrian fossils of the Burgess Shale), or (as here) where they have been buried by volcanic ash.

The Mistaken Point fossils are exposed on bedding planes, each of which was covered by the ash of a single volcanic eruption. There are numerous such bedding planes, and as the burial event was so rapid, each bedding surface represents a snapshot of the seafloor at a different times all around 565 million years ago.

There is still some uncertainty as to the phylogeny of these fossils. They appear to be different from any known animals. There have been suggestions that these all belong in a separate multicellular kingdom that is no longer extant. Not all of them have been given formal scientific names. The most common type, which are colloquially called "spindles", are assigned to the Fractofusus genera.

Fractofusus sp. on fossil bed at Mistaken Point.

The animals lived on the seafloor, and most of them seem to have lived like barnacles today--anchored on the seafloor, sweeping the seawater for organic material.

Bacteria colony at Mistaken Point.

Charnodiscus procers (left of centre) with recent damage done to the anchoring point- with another Fractofusus at top and possibly Beothikus mistakensis at right, just above the coin.

The animals were probably pretty common 565 million years ago. What makes them rare now is the difficulty of their preservation. These lived in deep water, in a time of frequent volcanic activity, possibly due to rifting of the Iapetus Ocean.

Fossil bed (at bottom) with overlying rocks of the Mistaken Pt. Formation. An ash bed is at most a few cm thick.

Fractofusus surface with thin ash cover (darker areas at upper and lower left, and middle right).

The falling ash (apparently an airborne ash cloud) almost instantaneously killed all the animals at the site, creating a "snapshot" in time.

Edit: This post seems appropriate here.

Travelling in Newfoundland

Have arrived in Newfoundland a few days before the conference. Will be travelling around and not always staying where there is WiFi. Last night, for instance, we were in Brigus, after spending a good part of the day chasing down this.

Tabular berg at Harbour Grace.

The futility of scientific secrecy

"We are, I rather assume, going to have a whole series of crises as a result of increasing scientific knowledge that is adaptable to blowing the hell out of the world."  -- David Lilienthal, chairman of AEC, September 1945.

So why do government actions tend to spawn the opposite result of what was intended? We have already seen how forcing down interest rates may have raised unemployment (rather than lowering it), just as raising interest rates three decades ago had the counter-intuitive effect of reducing unemployment.

We now find that banning texting while driving results in a slight increase in accident rates, probably because texting drivers have to hold the their device below normal sightlines and scan for police, in addition to the task of driving.

The international community (by and large) seems determined to keep Iran from developing the technology required to build a nuclear weapon. At first glance this seems a laudable task. But how effective can it be? Not long ago Shimon Peres gave a speech on the futility of restricting scientific advancement. Knowledge can be disseminated by too many routes.

In 1945 American scientists faced a very similar situation. America had successfully tested and then used nuclear weapons against Japan, and while the scientists involved in the Manhattan Project were not permitted to disseminate the knowledge of what they had done to the world, they recognized that muzzling free scientific communication was doomed to failure.

This story is conveyed very nicely in the May 2012 edition of Physics Today, in this article, which is available free of charge.

A group of scientists, who had not been involved in the atomic bomb project, set themselves about duplicating the procedure, and by 1946, had basically succeeded. They attempted to publish their findings in a book. And that's when the trouble began. Among the things the scientists had done is conjectured possible methods of triggering nuclear detonation--which was the idea the AEC most urgently wished to keep secret. The AEC wanted to censor the book--but there was a problem. If they pointed out what they wanted removed, that would send a clear signal to the authors that their conjectures were probably correct. Furthermore, since these scientists had already given a series of public lectures, anyone who had attended the lectures could read the book and deduce which information the AEC viewed as most sensitive. So there really was no way to prevent the most sensitive information on nuclear weapons from being disseminated.

Eventually the AEC did force some material to be censored (the censored material has thoughtfully been made available here as a pdf).

(As an aside, here is my solution--let's say there are 40 ideas in the book, and six of them are sensitive. Toss a coin, or use some other random method to censor, say ten of the ideas, and allow the rest to pass, even if they turn out to be sensitive material.)

Nevertheless, every so often some physics graduate student would read the material that had been published, and from that deduce how to build a nuclear bomb. Assuming that Iranian scientists are at least as smart as American graduate students, they must already have the knowledge to build a bomb. Assassinating nuclear scientists is futile, and merely establishes a precedent for assassinating scientists engaged in scientific endeavours that might be inconvenient to your country. When American (or, perhaps, Israeli) scientists start dying mysteriously we will know that some form of international parity has been realized.

Unconquerable science

. . . says Shimon Peres in a speech delivered today in Ottawa, as reported here.

Science has changed global governance and can be neither conquered nor defended by armies, Israeli President Shimon Peres said today. His opening remarks to a round table discussion on education and innovation at Rideau Hall drew obvious parallels to Israel's current fears of Iranian nuclear development.

But does it really? He appears to be saying (we are waiting for full text of his remarks before passing full judgement) that information travels freely, without borders. If so, any attack on Iran calculated to keep her from developing nuclear technology would be fruitless.

I am a bit curious as to the exact target of his remarks. He is an old shrewd man--is he calling out Harper?

It isn't the speed; it's the illusion of liquidity

At last the Toronto Star has an opinion piece on high-frequency trading deploring the condition of the markets. Unfortunately the piece focuses on the microsecond advantages that some well-heeled entities have created for themselves by laying millions of dollars of fibre-optic cable, and misses the most important problem--the ability of some players to place and remove bids at inhuman timeframes of thousands per second.

Historically, the person with the best access to information has an advantage over the other participants. I don't view this as being unfair--it's the way it has always been. Furthermore, when those who have an information advantage act on it, they add information to the market, so that the time-advantage of advance knowledge dissipates quickly through the mechanism of the market.

The real problem with rapidly creating and cancelling orders is that it strikes at the fundamental trust underlying the market. When you decide to purchase a stock, you normally do at least a cursory check of liquidity. If, for instance, you look at ABC on the exchange, and the best bid price is $8.00 and the best ask is $2.00, you know there is no liquidity, and it is a stock to be avoided. If the bid is $8.00 and the ask is $7.99, and there are reasonable numbers of shares on offer, then there is liquidity and you should be able to get in or out without too much trouble.

What happens when the entities that have made the best offers have no intention of filling their orders? A casual inspection of market depth might convince other market participants that there is a lot of liquidity available for that particular stock, but the liquidity is an illusion which lures market participants into unsuitable investments and traps them there. Inevitably, the entrapped participants will leave the market and never return.

A store might advertise a product at less than half the usual price, along with a disclaimer that the price may change without notice. We recognize that there may be contingencies that may force the store owner to raise the price. The supplier may call and say there is no more supply. But suppose the contingency that caused the store owner to raise prices was a customer entering the store to buy the product. So the article is advertised as being on sale for $1, but if anyone tries to buy it, the store owner declares a contingent increase in price to $2. The article is for sale at $1, unless someone tries to buy it. How long before the customers stop going to the store? The advertisement may not have been a legally binding contract, but it does create an expectation.

The same expectation is created by the illusion of liquidity. This illusion causes great harm to a motivated buyer (or seller) of securities, particularly if they are motivated to buy or sell a large order. Imagine that you are managing a pension fund, and you find yourself with a million shares of a junior mining stock to sell. You look at market depth, and lo and behold, someone is willing to buy a million shares at, say, 12 cents. You decide that that is an acceptable price; but when you try to fill the order, it is immediately cancelled (perhaps 1000 shares are successfully sold at 12 cents) and replaced by an offer to buy a million shares at 11.5 cents.

Now what? You might wait and see if any more of your offered shares are picked up, but if they are not,  you have a problem. Institutions don't have cheap trades. Your shares are in the form of a certificate in a safe--for you to complete the sale of 1000 shares you have to take the certificate from the safe, deliver it to the transfer agent; have the transfer agent split the share certificate, sending one certificate to the new owner and returning the balance to you; then you have to return the certificate to your safe, but this process has to be audited (i.e. witnessed by a lawyer, who verifies that the certificate is for the correct amount, and has been placed in the correct compartment in the correct safe). All of this costs more than $7.99 that a discount brokerage might charge. So chances are that you will be criticized for a $120 trade.

So you try again at 11.5 cents, but once again only 1000 shares are sold before the buy order is cancelled and replaced by one at 11 cents. Well, you can see how this goes. You keep trying to sell and the price keeps falling until there is real market interest; perhaps at 6 cents--or lower. Had you known that you would have to sell at 6 cents you might never have started. You were lured into a bad trade by the illusion of liquidity.

The practitioners of HFT claim they are supplying liquidity to the market, but this is not the case. They are only creating the illusion of liquidity, and this illusion has drawn a lot of money into the market--money which would not have entered the market without the illusions. Unfortunately, drawing this money into the market is politically advantageous for North American governments who can use it as evidence for an improving economy--consequently there is no interest among the political class for a fair solution to the HFT problem. It is not a problem for them. But it is a problem for everyone else in the market, even, ironically enough, for the high-frequency trading firms.