“Hoping for the best, prepared for the worst, and unsurprised by anything in between.”
Maya Angelou, from I Know Why the Caged Bird Sings
An engineer is trained through university and in the workforce to apply failure modes and safety factors into their designs. It doesn’t matter if it’s a structure, a circuit, a chemical, or even mechanical equipment.
Running a business is no different.
Restaurants that only offered dine-in service quickly learned that revenue stream was dust during this shutdown post-virus quarantine.
Only those who were ready with online takeout and delivery options continued earning revenue.
The stoic philosopher Seneca wrote, “What catches us by surprise hurts us double.”
If your favorite mining stock has significant production in what I call “negative swap nations,” it could be at serious risk.
I’ve talked to several gold company CEOs and gold fund managers.
Not one knew what a swap line was, nor the difference between a positive swap line nation and a negative swap line nation. As I walked them through my concept, all agreed that the risk factors would soon become impossible to ignore.
Are there built-in risk premiums to the prices of certain stocks?
Yes. But not at the cost of creeping government ownership and eventual nationalization.
The Latin phrase Premeditatio Malorum tells you to prepare for all evils.
And today, I’m going to get you up to speed on the overlooked risks to some of your biggest gold holdings.
I’m not making any friends with this theory, but I must prepare my portfolio for the risks.
If you have a producing asset in a negative swap Line (–swap) country, you must prepare for potential setbacks.
It’s about properly understanding and pricing in risk, something that has become overlooked in the resource sector.
The Importance of Dollar Swap Lines
A swap line provides temporary U.S. dollar relief to the central banks of certain nations (pre-approved by the U.S.) who need these financial lifelines to ease the stress caused by a lack of U.S. dollars in their own nation.
Swap lines are increasing weekly, and more nations will be added.
They will be added only if the nation needing the swap line agrees to the terms of the U.S. government—both financially and geopolitically.
Make no mistake, and don’t listen to the dollar demise crowd. The world still needs more U.S. dollars right now.
We’ll see countries declare bankruptcies, and we’ll see nationalization of assets.
- The International Monetary Fund (IMF) said in March that the global US dollar shortage could cripple many emerging markets.
- The IMF will be giving unsecured loans (in US dollars) to their most reliable members.
Below is a list of countries where US Federal Reserve swap lines exist—think of them as the US Federal Reserve’s lifelines. I call these positive swap line nations (+swap).
Is it just coincidence that these are allies of the United States?
Which Countries Do Not Have Swap Lines?
Countries not listed above do not have swap lines.
So, why am I focusing on swap lines?
It’s because I believe that nations with existing swap lines won’t screw with foreign operating entities (American companies) the way countries without swap lines do.
I still expect higher taxes in all countries as these are the only thing politicians across the world have executed effectively throughout time.
This means mining assets in positive swap line nations won’t nationalize their gold mines, copper mines, etc. Those nations won’t screw with America.
Nations with existing US swap lines won’t put Forex (FX) restrictions on the foreign (American) companies operating there. Negative swap line nations may do so, and many already have.
This will cause less of, and in some cases prevent, those U.S. dollars in swap lines from being sent back home as dividends to the owners of the company.
Basically, the swap lines are monetary lifelines to ease the need for U.S. dollars in their own economies.
So, they won’t mess with Uncle Sam by screwing around and nationalizing foreign (American) companies’ assets on their soil.
The swap lines have worked in alleviating the “near term” desperation for U.S. dollars.
Fundamentally, nothing has changed. Eventually, the swap lines will have to be paid back.
Barrick Gold Just Got the First Threat
Barrick Gold is one of the world’s largest gold companies and produces just over 5 million ounces of gold per year.
Recently, Papua New Guinea threatened to nationalize Barrick Gold’s Porgera gold mine.
Approximately 50% of Barrick’s gold production is in countries that do not have access to U.S. dollar swap lines. Hence, they are in negative swap line nations.
I want us all to be prepared for anything that may happen over the next few months.
I expect over the next 12 months in negative swap line nations that governments will:
- Increase taxes,
- Increase royalties,
- Increase government ownership of the mine and/or
- Slap on FX controls on the foreign gold, silver and base metal producers.
These are big negatives. It has already started in some negative swap line nations, and I expect a lot more to follow. This is something we have front and center on our watchlists.
I think many investors in negative swap line nations will find this to be the case, even with precious metal and base metal producers.
The American government will use swap lines as geopolitical leverage. Expect the unexpected in this new normal we now live in.
That means the whole “benefit” of a weakening foreign currency that attracts investors to mines in emerging market nations may be negated by the government’s need to increase their take of a foreign-owned and operated asset on their soil.
The Most Important Gold M&A Chart in the World
Earlier in this article, I mentioned countries in terms of
- Existing US swap lines (+swap) and
- No US swap lines (–swap).
Let me explain why this is important.
The US government will only give swap lines to countries that are allies. That’s countries the US government trusts and works closely with and, most importantly, countries that accept and obey the terms and conditions set by the US.
When Russia and China get US swap lines, I’ll change my tune.
Until then, I’m pretty sure I’m spot-on with this framework and its implications.
Let me give you a real-world gold producer example.
I’ve shared this with some of the bigger fund managers in the business, and they had no idea about it. This is not a well-known concept.
It doesn’t matter whether we use places like Argentina or Turkey as our example—this will become the norm over the next few years in all negative swap nations.
A negative swap country like Turkey doesn’t allow you (as a company) to easily sell the gold you’ve produced to international markets (foreign-owned smelters, for example).
This would allow the USDs to go back home to their owners without any meddling of the Turkish government.
Here’s what actually happens:
- The company sells their gold to the government in local currency (Turkish lira, in this case) at the government’s exchange rate (not the real-world rate). This means the foreign company gets screwed on the exchange rate.
- The government takes the gold, which is globally valued in USD.
- The company converts that Turkish lira into USD at the government’s conversion rate. Again, the company gets screwed financially by the government.
- It is very difficult for the company to take those USDs out of the country, and they will most likely have to pay a higher tax to do so. It also takes time to move the money out of the country. You cannot just move gold doré bars out of the country.
The government of Turkey will clip both sides of that sale (steps 1 and 3).
You can see that it is not a good deal for the foreign producer, but what else can they do?
Turkey is a pro-mining nation, but that does not mean that they will not increase taxes on foreign-owned mining and energy assets.
Expect Turkey to do so until they are forced to choose between accepting the US’s terms and conditions to be a positive swap line nation. If they refuse, they will go with the emerging market super powers (EMSP) led by China and Russia.
In places like Argentina, the country has strict foreign controls on money. It is very difficult to move USDs outside of Argentina without getting clipped by unreasonable government exchange rates.
Shockingly, I have spoken to many CEOs of gold-producing companies and not one knew what a swap line was.
When I walked them through my framework, they were all shocked and gained a new perspective on M&A over the next 12 months.
Now, this next chart below is the FIRST of its kind EVER produced.
The chart shows the top 10 gold producers and what percentage of each of their gold is produced in US-positive swap line nations (green) and US-negative swap line nations (red).
Green is good. Red is bad, as it implies higher risk.
The black box is the percentage of the company’s gold production in US-positive swap nations.
The higher the percentage of exposure of their gold production to US-positive swap line nations, the better.
Major gold producers by exposure graph
This chart will eventually be the driving force of the coming M&A rush I see happening in the gold sector.
Right now, many analysts in almost every research outfit give the same financial discounts to gold producers regardless of location.
Most analysts do not account for whether the project is in a US-positive swap or negative swap nation when they create the NPV5 (net present value at a 5% discount) financial models.
This is just wrong.
Not all jurisdictions are the same. And the discount rates do not have to be the same.
I think we’re going to see a major change much faster than anyone expects with regard to gold majors building assets in negative swap nations.
Indiana Jones Speculation: Now You Know the Risks
I’ve been to over 100 countries so far in my career.
Between 2004 and 2010, I literally wore bulletproof vests to visit some projects.
I drove across Iraq with former French Foreign Legion soldiers as our escorts and bodyguards to appraise the potential of an oil well.
Back in 2007, I spent a week in the ICU due to bat dung exposure because I went into an underground mine.
In the rush to be the first to see the potential of a massive silver deposit in Mexico, I went underground unprepared. In this case, I turned out to be right and was the first to publish and finance the 300M+ ounce silver deposit—our subscribers made a killing—but the move was really stupid on my part.
I’ve done some exciting, stupid, and dangerous things and traveled to some crazy places to find the next “big score.”
I became one of the few in the industry who can say that they have “been there, done that,” but I learned a major lesson that I want to share.
Yes, it’s true some big scores are waiting for those who are first to an exotic or war-torn place with a massive tier-one mining deposit.
It makes for a sexy story that sells newsletters, and people love to read about it. Indiana Jones Speculation, I like to call it.
But those success stories are so rare.
The reality is, just as big of a score (and in many cases even bigger scores) can be made when you are patient in major sell-offs in politically stable jurisdictions like the U.S.
Yes, it’s not as sexy.
Yes, it doesn’t sell newsletters.
But we should only care about making the most amount of money with the least possible amount of risk.
Maximum upside with minimal downside risk — that’s my strategy in this market. I’ve talked about it for years now.
And for that reason, I want to prepare everyone for this potential scenario in the gold market.
Know the plan.
Read the playbook and be prepared.
Be prepared both mentally and financially for what to do if gold prices take a big hit.
Luck is being prepared when the opportunity arises.
Editor’s Note: Do you want to avoid making the same mistake every other gold investor is making right now?
Then we urge you to watch this video.
If you’re blindly buying the dips like everyone else out there, you might be in for a rude awakening.