The failed coup in Turkey

Erdogan’s revenge

Turkey’s president is destroying the democracy that Turks risked their lives to defend

MUCH is unknown about the attempted military coup in Turkey on the night of July 15th.

Why was it botched so badly? How far up the ranks did the conspiracy reach? Were the putschists old-style secularists, as their initial communiqué suggested; or were they followers of an exiled Islamist cleric, Fethullah Gulen, as the government claims?

But two things are clear. First, the people of Turkey showed great bravery in coming out onto the streets to confront the soldiers; hundreds died. Opposition parties, no matter how much they may despise President Recep Tayyip Erdogan, united to denounce the assault on democracy. Better the flawed, Islamist-tinged strongman than the return of the generals for the fifth time since the 1960s.

The second, more alarming conclusion is that Mr Erdogan is fast destroying the very democracy that the people defended with their lives. He has declared a state of emergency that will last at least three months. About 6,000 soldiers have been arrested; thousands more policemen, prosecutors and judges have been sacked or suspended. So have academics, teachers and civil servants, though there is little sign they had anything to do with the coup. Secularists, Kurds and other minorities feel intimidated by Mr Erdogan’s loyalists on the streets.

The purge is so deep and so wide—affecting at least 60,000 people—that some compare it to America’s disastrous de-Baathification of Iraq. It goes far beyond the need to preserve the security of the state. Mr Erdogan conflates dissent with treachery; he is staging his own coup against Turkish pluralism. Unrestrained, he will lead his country to more conflict and chaos.

And that, in turn, poses a serious danger to Turkey’s neighbours, to Europe and to the West.

One more earthquake
The failed putsch may well become the third shock to Europe’s post-1989 order. Russia’s annexation of Crimea and invasion of eastern Ukraine in 2014 destroyed the idea that Europe’s borders were fixed and that the cold war was over. The Brexit referendum last month shattered the notion of ineluctable integration in the European Union. Now the coup attempt in Turkey, and the reaction to it, raise troubling questions about the reversibility of democracy within the Western world—which Turkey, though on its fringe, once seemed destined to join.

The turmoil is unsettling NATO, the military alliance that underpins Europe’s democracies.

Without evidence, Mr Erdogan’s ministers blame America for the coup; they have demanded that it extradite Mr Gulen, who lives in Pennsylvania, or risk Turkey turning its back on the West. Electricity to the military base at Incirlik, a hub of American-led air operations against Islamic State (IS), was cut off for a time. Were Turkey an applicant today, it would struggle to qualify for NATO; yet the alliance has no means to expel a member that goes bad.

With the second-largest armed forces in NATO, Turkey has been the forward bastion of the West, first against Soviet totalitarianism and then against the chaos of the Middle East. In the early years of government under Mr Erdogan’s Justice and Development (AK) party, the country became the model of a prospering, stable Muslim democracy. It sought peace with the Kurdish minority, and the economy grew healthily thanks to sensible reforms. The EU opened membership negotiations with Turkey in 2005.

But since major protests in 2013 against plans to build over Gezi Park in Istanbul, and then a corruption scandal, Mr Erdogan has become ever more autocratic. His regime has jailed journalists, eviscerated the army and cowed the judiciary, all in the name of rooting out the “parallel state” Mr Erdogan claims the Gulenists have built. As a cheerleader for the overthrow of Syria’s president, Bashar al-Assad, he turned a blind eye to the passage of jihadists through Turkey. Mr Erdogan wants a new constitution to allow himself to become an executive president, though he hardly lacks power.

He has abandoned all caution to achieve it, not least by letting peace talks with the Kurds break down. Turkey now faces a double insurgency: by the Kurds and the jihadists.

Autocrats R Us
Handled more wisely, the failure of the coup might have been the dying kick of Turkey’s militarists.

Mr Erdogan could have become the magnanimous unifier of a divided nation, unmuzzling the press, restarting peace talks with Kurds and building lasting, independent institutions. Instead he is falling into paranoid intolerance: more like the Arab despots he claims to despise than the democratic statesman he might have become.

Granted, the AK party has won every election since 2002. But Mr Erdogan’s view of democracy is distinctly majoritarian: though only about half of Turks vote for him, he thinks he can do what he wants. It will be principally for Turks themselves to check their president, by peacefully resisting his power grabs and backing his opponents at the ballot box.

Turkey’s Western friends must urge Mr Erdogan to exercise restraint and respect the law. But what if he will not listen? Turkey is a vital ally in the war against IS. It controls the south-eastern approaches to Europe, and therefore the flow of everything from natural gas to Syrian refugees. Europe cannot change geography, but it can make itself less vulnerable, starting with a proper system to control the EU’s external frontiers and handle asylum-seekers. And although Mr Erdogan holds many cards, he is not immune from pressure. Just before the coup he patched up relations with Israel and Russia.

Mr Erdogan’s greatest success—the economy—has become his weak point. Many tourists are now too frightened to visit, so the current-account deficit will only gape wider. To stay afloat the country needs foreign investment and loans, so it must reassure foreigners that it is stable.

With Mr Erdogan acting like a vengeful sultan, that will be hard.

The repercussions of the putsch will be felt for a long time. The coup-makers killed many fellow Turks, discredited the army, weakened its ability to protect the frontier and fight terrorists, rattled NATO and removed the restraints on an autocratic president. A terrible toll for a night of power-lust.

Turkey’s Geopolitical Imperatives

Ankara appears in disarray, but the attempted coup is unlikely to prevent it from taking the necessary steps to emerge as a major power.


The coup attempt has generated a great deal of debate over Turkey’s future. Much of the discussion on this issue is focused on the personality of President Recep Tayyip Erdoğan and the struggle between his supporters and their opponents. Truly understanding the current status of Turkey and where it is likely headed in the future, however, requires moving away from individuals and groups and examining objective geopolitical forces that shape a country’s behavior. This is why we try to make sense of Turkey by examining the imperatives and the constraints it faces.  


In our 2040 forecast, we identified Turkey as a major emerging power. We believe it will project power southwards into the Middle East, westwards into Europe and northwards into the the Black Sea region. However, Turkey is currently mired in problems at home and struggling on the international front. This was the case even before the July 15 coup attempt.

Therefore, the question is: what can be expected from Turkey in the coming years and decades? To answer this question, we will examine Turkey’s imperatives in this Deep Dive. We also need to look at the constraints that the Turks will be operating under. By understanding its imperatives and constraints, we are able to forecast the country’s future evolution – irrespective of which personality or faction is at the helm.

We define imperatives as the actions that a state must take to survive and flourish. They stem from the confluence of its geography, demographics and available resources. The most basic imperative is to control and govern a core territory. Once that is realized, a state then will turn to its second imperative pertaining to the relationships it must maintain with neighboring actors and those further afield.

Imperatives often take a long time to achieve and any country will require a significant amount of time to get to its second and third imperatives. Domestic upheaval, wars, economic downturns and even natural disasters sometimes force nations to retreat from pursuing advanced imperatives to focus on the more basic ones. In the case of Turkey, we have identified five imperatives. 

1. Unify the Turkish Homeland Under a Single Authority 

This is the most basic imperative that any Turkish regime must achieve. All nations have internal divisions that give rise to different sub-national groups. But each country has a core area that must be controlled, as well as one or more peripheral regions that have to be brought under a single political order.

The Marmara region, which includes Istanbul, represents Turkey’s core, while the Anatolian peninsula is the country’s periphery. Since the founding of the modern republic, these two areas have been inhabited by Turks with opposing outlooks. The former, being a wealthy and cosmopolitan region, has been dominated by Western-oriented Turks. In contrast, the interior has been the mainstay of traditional and conservative segments of the population.

For many decades, the Kemalists – followers of the ultra-secular ideology of Turkey’s founder Mustafa Kemal Atatürk – in the civil and military sectors sought to expand their grip beyond the core and into the periphery. However, they have met resistance from religious and social conservatives who refuse to adopt a strict form of secularism. This struggle resulted in multiple coups (in 1960, 1971, 1980, 1998 and the most recent failed attempt on July 15) along with the rise of a number of religiously oriented parties – predecessors of the ruling Justice and Development Party (AKP). Under President Recep Tayyip Erdoğan, the government is attempting the reverse, as a new conservative elite is trying to unify the two areas under a milder American-style secularism that allows religion greater space in civil society.

While the Kemalists were largely entrenched in the state machinery (particularly the security sector), they were not always able to control the elected organs of the republic. However, their opponents have been able to penetrate the civil-military establishment in the last seven to eight years. The Kemalists have weakened but the “Muslim democrats” of the AKP and its supporters have also been limited in their growth. The former camp has been divided over whether democratic continuity should take precedence over strict enforcement of secularism. The highly acrimonious rivalry between the AKP and the Hizmet movement of Fethullah Gülen represents the split within the latter.

The end result is a divided social landscape leading to a situation where state institutions are not under a single authority. These and other divisions among Turkish nationalists have prevented the country from tackling the issue of Kurdish separatism. Given the demographics, it is not possible for the Turks to eliminate the threat of Kurdish separatism. Even significantly weakening it will require greater harmony among the Turks.

2. Establish Independence of Action in Pursuit of Turkish National Interests

The failure of the July 15 coup has shown that significant progress has been made towards a post-Kemalist order under the AKP. But the Turks cannot wait to fully achieve the first imperative before moving on to the next one. 
Turkey and Surrounding Areas
This is because of the growing chaos in the region, which has increased the involvement of global powers and placed pressure on the Turks, leaving them no choice but to push back. But decades of being a NATO member and pursuing European Union membership have limited Turkey’s ability to act unilaterally. Under AKP rule, the country has begun to push towards greater independent actions on the foreign policy front. It is doing this by finding points of leverage in its relationships with the U.S. and the EU, especially with regards to the fight against the Islamic State.

Turkey will need to push back against American pressures. Towards this end, it will have to develop greater leverage with the United States, although this is limited by its NATO membership. Turkey has tried to use the failed coup to enhance its ability to shape American perceptions and behavior. The accusation that the United States had backed the coup and the demand that Washington extradite Gülen are part of this effort.

The resistance to the American strategy against the Islamic State is the biggest example of Turkey trying to gain independence of action. Turkey cannot simply follow the U.S. lead in the international efforts to counter IS. Turkey does not want to be heavily involved in the conflict. But it will need to have a major say in how this war is prosecuted.

The Turks are deeply opposed to American reliance on the Syrian Kurds as strategic partners on the ground in Syria. While IS remains a major threat, Kurdish separatism is an even greater threat given that Turkey faces a significant domestic insurgency in its southeast – a region that it has not been able to pacify. The Turks also oppose American pressure to intervene in Syria because they feel that the United States has the luxury of going home while they will have to deal with the consequences of the war against the Islamic State for a very long time.
Islamic State Caliphate, May 2016
Similarly, Turkey will continue to avoid getting entangled in the U.S. and European efforts against Russia. Russia is not just a neighbor that has great influence on Turkey’s northern flank; Ankara is dependent on Moscow for half of its natural gas supply. This is why the Turks are less enthusiastic about the Intermarium (an alliance among countries between the Baltic Sea and the Black Sea) than some Eastern European nations. This does not mean the Turks don’t have issues with the Russians but Ankara wants to prioritize its national interests, rather than Washington’s needs, in its relations with Moscow.

Iran represents another key conundrum where the Turks cannot simply follow the U.S. lead. The Iranians are the main competitors of the Turks in the Middle East, which is why the Turks will have to deal with them in a complex way. Turkey will work towards reaching an understanding with Iran, especially since the latter has significant influence in Syria and Iraq. This is why the Turks have been pushing for a negotiated settlement of the Iranian nuclear issue.

Turkey views U.S. unwillingness to ease the sanctions after Iran has upheld its end of the bargain as detrimental to Turkish interests. The Turks do not want the Iranians to retaliate by further complicating matters in Iraq and Syria. Ankara knows that it can’t deal with Syria unless it has an understanding with Tehran. In order to achieve these objectives, the Turks have to push back against the United States.

3. Defend the Homeland from External Threats        

The more the Turks are able to gain the ability to independently act in their national interest, the more they will be able to defend themselves against threats from the outside, which is the next imperative.

Close relations with Europe, the problems of the EU and a weak Russia mean that Turkey faces no immediate threats from the west or the north. The outside forces that present the most pressing threat to Turkish security originate from the south. Given the complex conflict that is radiating out of Syria, Turkey faces a number of
challenges from the Middle East. First and foremost, Turkey must prevent the Syrian Kurds from exploiting the conflict to establish a Kurdistan in Syria.
Kurdish Population and Political Groups
The close relations between the Kurdish Democratic Union Party (PYD) in Syria and the Kurdistan Workers’ Party (PKK) in Turkey mean that the Syrian Kurds are very much a domestic security threat to Turkey. This is why the Turks have been hesitant to go after IS, which indirectly keeps the pressure on the Syrian Kurds. However, Turkey must do something about IS because its radical agenda for the region threatens Turkish national security and brings greater international pressure on Ankara. For this reason, Ankara will be working towards a strategy that neutralizes IS without empowering the Syrian Kurds in the process.

While the Islamic State must be curtailed, Turkey cannot be seen as operating on behalf of the United States. Rather, it will seek to confront IS in such a way that doesn’t undermine its credibility as a major Muslim power. Since Turkey is competing with IS and even
Saudi Arabia for the leadership of the region and the wider Sunni Muslim world, it has to be seen as a credible force. Many Arabs will be resistant to Turkish domination because this conjures up memories of Ottoman imperialism.

This is why Turkey has been pushing for the removal of the Bashar al-Assad regime, which grants it influence among
Sunni rebel groups and also within the wider Arab/Sunni Muslim world. But the Turks are not oblivious to the risks of a sudden collapse of the Syrian regime, which is why they will be pressing for a negotiated settlement between the regime (without Assad) and the rebels. Turkey risks major destabilization if there is an abrupt collapse of the regime. This is where Turkish interests clash with those of Saudi Arabia, which is more interested in seeing the collapse of Iranian influence in Syria than a stable post-Assad Syria. 
Ottoman Empire and Safavid Empire Holdings
That said, Iran also represents a major obstacle for Turkey. In sharp contrast to the Ottoman era when the Turks controlled the Levant and Mesopotamia and blocked the Persians, today the Iranians are able to prevent Turkey from shaping these areas. Iran’s influence in the two Arab states that Turkey borders prevents Turkey from projecting power on its southern frontier. Therefore, Turkey will be working to gain leverage in both countries to roll back Iranian influence.

It will be working to improve the position of the Syrian rebels on the battlefield, which means fighting the
Islamic State and its caliphate, the Assad regime and the Syrian Kurds. In Iraq, it will support the Kurdistan Regional Government (KRG) to counter the pro-Iranian Shiite-dominated central government. Ankara will be doing so in a way that keeps the KRG dependent on Ankara to avoid fueling Kurdish separatism. Turkey will also work with Iraq’s Sunnis but faces two challenges.

First, the Islamic State’s grip on Sunni territories in Iraq must be broken to revive the position of mainstream Sunnis who are bitterly divided. Second, Turkey must deal with the Kurdish-Sunni ethnic dispute, which is in many ways more serious than the Shiite-Sunni conflict. The Kurds have been encroaching on Sunni territory for years, especially after the Islamic State took Mosul. The dispute is also linked to the Sunni desire to control energy resources. In order to counter Iran, which largely acts through the Shiite community, the Turks will need to work with these two minority groups.

Preventing Iran from gaining the upper hand in
Syria and Iraq is thus the key to the third Turkish imperative. While Iran represents a considerable challenge to Turkey in the short term, Iran is limited in the long term by geography and the fact that Turkey is much stronger politically, economically and militarily.         

4. Pacify the Arab World        

The first three imperatives are all things that Turkey is dealing with right now. The coup is an obvious example of why Turkey needs to consolidate absolute authority of the government over the country; an active war with the Kurds in the southeast is another. Turkey is balancing between the U.S. and Russia as it seeks to secure some independence of action in terms of its foreign affairs. And issues on its southern border in Syria and Iraq demand immediate attention.

Our long-term forecast for Turkey, however, extends beyond the current reality. We expect that Turkey will be emerging as a regional power by 2040.

Turkey will not do this willingly. These are strategic imperatives, not foreign policy prescriptions. They describe the challenges we expect Turkey to face.

We are currently watching the Middle East, Europe and the former Soviet Union experience various forms of fragmentation and conflict and we expect both of those processes to continue. These crises will intensify and create power vacuums – and Turkey will have no choice but to assert itself and fill some of the gaps. Turkey will increasingly be drawn outside of itself.

We expect the first place this will manifest is in stabilizing the chaos in the Arab world. Whether it is the Islamic State or some other as yet unknowable entity, the potential threats to stability emerging out of the Arab world will
force Turkey to act, however reluctantly.

5. Expand into Weakening Areas to the North, West and East

The Arab world will be the most pressing issue for Turkey and the one we expect Turkey will have to address by 2040. It is fragmented and there is already a power vacuum throughout the heart of the Middle East that Turkey is competing to fill along with Iran and Saudi Arabia.

In time, fragmentation in Europe and Russia will also present new challenges to Turkey. To varying degrees, Turkish influence and power will begin to be projected into many of the areas once dominated by the Ottoman Empire. These areas will include, to varying degrees, southeastern Europe, the eastern Mediterranean, the Black Sea region and the Caucasus. That is far into the future and beyond the scope of our forecast to 2040, so we will not address it in any great depth in this report. But that imperative still exists and is important to keep in mind when taking a long-term view of Turkey’s future.
The Ottoman Empire

Currently, Turkey represents a critical component in the U.S. strategy to deal with the Islamic State threat, the chaos in Syria and the wider region. The country is also an essential ingredient of American plans to create the Intermarium as a way to counter Russia along the Kremlin’s western frontier. Ankara, however, has started to resist Washington, as both projects entail risks to Turkish national security and have resulted in serious differences with the Americans.

The situation on Turkey’s southern flank in particular has rapidly deteriorated with growing threats from jihadism and Kurdish separatism. In addition, Turkish hopes of toppling the Syrian regime were dashed when Assad’s forces gained the upper hand against the rebels. The Russian military intervention in Syria – though limited in scope – played a key role in enabling Damascus to go on the offensive. This brought Turkey into conflict with Russia, which intensified when
Turkey shot down a Russian warplane on the Syrian border last November.

Consequently, the Turks found themselves simultaneously at odds with the Americans and the Russians. Ankara could not afford to be in conflict with both, which is why in the past couple of months Ankara has sought to repair relations with Washington and Moscow. On May 5, Erdoğan replaced former Prime Minister Ahmet Davutoğlu who was perceived by Washington as an obstacle to closer U.S.-Turkish cooperation on the Islamic State. In June,
Turkey and Israel agreed in principle to a diplomatic reconciliation, a further nod to Washington's wishes. Then on June 27, Erdoğan apologized in writing to his Russian counterpart, President Vladimir Putin, for the downing of the Russian jet.

The Turks reached an understanding with the Americans regarding
Turkish concerns that the fight against the Islamic State would empower the Kurds in Syria. Erdoğan and his top aides announced in early June that they had received assurances from the Barack Obama administration that anti-IS efforts would not empower the Syrian Kurds. Stepping up its involvement in Syria meant that Turkey had to deal with Russia, which explains why it wanted to mend fences with Moscow.

Turkey finally appeared to be on the path to playing a major role in Syria – in keeping with U.S. strategy for the region. Then came the July 15 coup attempt.

The failed coup underscores that Turkey suffers from a much deeper problem. The issue is not between the civilians and the military; rather, the Turkish military internally is fragmented due to differing views on what its relationship should be with the government. On one side is the old guard Kemalist commanders and officers who have not accepted that the armed forces are subordinate to the elected government. On the other is a new breed of men in uniform who may not agree with the civilians but feel that military intervention in government affairs is a thing of the past.

Despite the fact that the AKP has seen uninterrupted democratic rule since 2002, Turkey has not been able to get over the civil-military divide that has long plagued the country. On the contrary, the efforts to establish civilian supremacy over the military has made matters worse as it has created fissures within the armed forces. The government is trying to restore internal cohesion by purging the military and civilian sectors (including the judiciary) of people who may have been involved in the coup. This process will obviously take time. But these imperatives provide a long-term roadmap of the challenges Turkey faces and would be no different if the coup attempt had never occurred.


Resist the Siren Song of ‘Cheap’ Government Spending

Investment in public works requires a strategy, not just an impulse, to have maximum growth impact. Private investors can help.

Many international organizations and economists emphasize the benefits of investment in boosting demand and counterbalancing excessive savings. Governments should step in with more spending, they argue, especially in countries with external surpluses.

This line of argument misjudges three things: the role of governments in overall investment; the ability of governments to manage projects economically; and the ability of governments to fine-tune demand.

What we need isn’t more money and debt. The best way to stimulate growth is through a sound investment strategy. This requires, first of all, the right set of priorities that focus on facilitating investment in the private sector.

In a market economy, the private sector is responsible for the vast majority of total investment, typically between 80% and 90%. Given the sheer size of private investment, institutional improvements will have the largest effects on investment and growth. And they cost less, too, due to a smaller bureaucracy.

Some economists argue that private investment needs be boosted with cheaper finance and more public support. But financing costs are already extremely low and a lack of public money is typically not the problem. The European Union has a huge new fund for leveraging private investment. International and national banks are also very active in supporting investment.

But private investors want a well-functioning institutional framework before committing their money. This includes the clear rule of law with strong property rights, enforceable contracts, an efficient judiciary as well as predictable and unobstructive regulation.

Investors hold back when the risks are too high or the expected returns are too low. They need to have confidence in a country’s institutions and the sustainability of its current policies.

A good investment strategy also realizes that the private sector can play a lead role in public-works investment. Private management and financing is often much more efficient than that of the government, which frequently encounters cost overruns and delays. Privately financed and managed public works can also go wrong, but contrary to what some naysayers claim, 30 years of various countries’ experiences with public-private partnerships or private-infrastructure agencies across the globe give sound options for success.

Many economists, including those at the International Monetary Fund, have recently tried to make the case for using the zero-interest-rate environment—“free money”—to boost public spending. But infrastructure projects need time to prepare. The risk is that this free money will lead to picking politically motivated, ill-prepared and inefficient projects, only later to learn that the returns are below expectations and the infrastructure little improved.

Which brings us to the third criteria of a good investment strategy: It should limit government only to those tasks it can deliver on. Taxpayer money and limited public-management resources should focus on what the private sector won’t do, such as the creation of infrastructure networks that span across borders, or providing public support for social or regional policy objectives.

The financing of such tasks should be part of a country’s medium-term budget strategy. This allows efficient planning and steady financing. Cyclical spending, by contrast, is deadly for the long-term planning that infrastructure investment needs. And given that investment is the first thing to be cut during a downturn, public investment has a tendency to reinforce rather than moderate economic cycles.

It’s time to say goodbye to the mantra of more public spending. We need investment strategies that set the right priorities. Institutional frameworks, not public support, are essential to investment. Much of the infrastructure, including telecom, roads, energy and social housing, can be provided privately, with governments using their money wisely.

Many countries increasingly follow this approach. Germany plans to create a privately managed highway-infrastructure agency to counteract the crumbling of its autobahn network.

It has created an agency to advise local communities on project preparation and financing.

Nonetheless, public investment spending is the most dynamic expenditure component in our 2020 budget framework. That way, public money can work where it is really needed, such as rural broadband access or financially strapped local communities.

This isn’t perfect. Even better institutional frameworks and more private-sector involvement are needed. The G-20 nations are pushing for progress in this regard. During the current Chinese presidency and the German presidency to follow, we and our partners will continue to support and implement such an approach. Boosting investment needs a strategy, not impulse spending.

Mr. Schuknecht is the chief economist for Germany’s ministry of finance.

The Case for Constructive Populism

Kemal Derviş
. Newsart for The Case for Constructive Populism

WASHINGTON, DC – The Brexit vote has unleashed a huge amount of commentary on anti-establishment politics, the failure of experts, the abdication of the left, and much else.

Juxtaposed to the presidential campaign in the United States, Brexit is regarded by many as a wake-up call.
In response, former US Treasury Secretary and former president of Harvard Larry Summers is calling for “responsible nationalism” to counter the often chauvinistic, anti-immigrant, and protectionist language of the populist right. It would be “understood that countries are expected to pursue their citizens’ economic welfare as a primary objective but where their ability to harm the interests of citizens elsewhere is circumscribed.” We would judge international agreements “not by how much is harmonized or by how many barriers are torn down but whether citizens are empowered.”
As Summers and others argue, globalization has brought large gains to the world economy as a whole, but seldom have the winners compensated the losers, directly or indirectly. Moreover, lately the winners have often been much smaller in number than the losers, particularly in a given geographical area, or because of winner-take-all markets. Finally, the economic policies preferred by the “winners” – and adopted under their influence – are usually far from beneficial for all.
All of this is correct. Unfortunately, these arguments often lead political moderates to retreat under the pressure of nativism, aggressive nationalism, and incoherent economic slogans. Those who shout or tweet one-liners and promote narrow identity politics have forced those who believe in a global human community, one bound together by shared interests, to fight a rearguard battle to articulate why the one-liners make little sense.
But this counterattack, if it can be called that, seems unable to formulate even two-liners capable of refuting populist tendentiousness. There are of course decent economic analyses and sensible policy proposals that are being put forward by the moderate camp; but the debate is usually in the language – and body language – of technical experts, inciting yawns, not popular support.
There is an urgent need for a moderate, humanist, global, and “constructive” populism that can counter the extremists, not with complicated mathematical models of, say, the employment implications of Brexit, but with simple yet powerful ideas that resonate with millions. Liberal democracies, when faced with dire challenges, have found such voices before. Think of the rhetoric of Franklin Roosevelt in the 1930s, or of the founding fathers of the European Community.
What makes “constructive” populism constructive is that it simplifies what is known with a reasonable degree of certainty. By contrast, “destructive” populists consciously distort what is known and have no qualms fabricating what isn’t.
This kind of destructive populism is far less common at the local level, where debate focuses on concrete solutions to citizens’ real problems. This does not mean that local politics is easy; witness today’s fraught relations between police and racial minorities in US cities. But, as Bruce Katz and Luise Noring have documented, in many cities in America and around the world, elected officials, civic organizations, and private business often unite beyond party lines to design and find funding for innovative projects in public transport, housing, or economic development.
Where constructive populism is most needed is at the national and international level, because many problems cannot be addressed locally. Consider foreign policy. There is a strong trend in many countries toward the aggressive nationalism that has led to so many catastrophes in history, not least during the first half of the twentieth century.
Some dismiss the dangers of this nationalist resurgence, arguing that economic interdependence will protect us from our own atavistic urges. But this was not the case in the past. After all, the three disastrous decades that started in 1914 followed a period of rapid and deep globalization.
A political message embodying a commitment to constant vigilance in support of peace has again become essential. But it must be made concrete. In the world’s liberal democracies, such a message should emphasize three components: strong defense and intelligence capabilities; the legitimacy of negotiating with friends and foes alike to find common ground; and the understanding that lasting alliances and friendships will be built around shared democratic values and support for human rights.
Short-term commercial or other interests should not be permitted to undermine core matters of principle. If human rights, including women’s rights, for example, are indeed a key element of democratic values, we can negotiate on all kinds of issues with those who suppress them; but as long as there is no progress on these rights, we cannot be true friends and at the same time claim to uphold universal human values. Constructive populism cannot be cynical; it must be realistic, and it must recognize that progress may be gradual and take different forms in different places.
On economic policy, many reasonable disagreements rule out consensus. But it can be argued in simple language that markets work for all only if they are regulated in the interests of all; that public expenditures that create productive assets can reduce the ratio of public debt to national income; and that performance should be measured by how widely the fruits of growth are shared.
The way to overcome identity politics and irresponsible populism is not to meet it in the middle or to fight it with detailed technical analysis. The way to avoid disaster is constructive populism: simple, accurate, and always sincere.

Getting Technical

Dollar Getting Stronger; How High Can It Go?

The greenback continues to rally vs. the world, showing new strength against the yen and Canadian dollar.

By Michael Kahn


Like Paris in the fall? For Americans, European travel looks like it’s getting cheaper. For investors, foreign assets may cost less as well.
The U.S. Dollar Index exploded higher after the Brexit vote threw a monkey wrench into the European economy last month. On the charts, however, the dollar index itself did not break out. It took more than three weeks for that to happen, but happen it did. The bull market in the dollar is alive and well.
The index moved above resistance in mid-July, set in part by the extreme high on the day the Brexit result was revealed (see Chart 1). Its next resistance level is not far away at roughly 98.25 (the index traded at 96.54 Wednesday afternoon). If it can get through that level, the path to recapture last year’s highs in the 100.50 area would be fairly clear. For perspective: The index is about where it was one year ago, but has risen sharply from its five-years-ago level of around 75.

Chart 1

Investors can track the dollar’s progress using the PowerShares DB US Dollar Index Bullish exchange-traded fund. The specific resistance levels are slightly different, but the analysis is much the same.
Because the index is comprised of a basket of other currencies and the euro makes up about half its weight, we must also monitor the euro chart itself. The CurrencyShares Euro Trust ETF shows an inverted pattern compared with the dollar index, as expected, but it makes a trendline breakdown — weak euro, strong dollar — clear, as well (see Chart 2).

Chart 2

I highlighted this trend break earlier this month and posited that it was quite possible to see the euro currency fall hard, sending the ETF from its then 110 area to around $106 (it traded at $107.50 Wednesday afternoon). That now seems a bit conservative and lower prices, possibly as low as the bottom of its 18-month range near $103.50, are likely.
The British pound predictably got hammered after the Brexit vote and fell quite sharply over the following days. Rather than bouncing from oversold conditions, the CurrencyShares British Pound Sterling Trust just cranked up the volatility. It still trades at roughly the same low levels it did last month. Perhaps such a dramatic decline requires more time to heal before finding its next trend. 

Two more currencies — the Japanese yen and Canadian dollar — seem to confirm dollar strength.

Both are components of the dollar basket. The yen had been heading higher versus the greenback while Canada was trading in line with its southern cousin. Both of those conditions have changed.
The CurrencyShares Japanese Yen Trust was near major resistance after a very strong 2016 performance (see Chart 3). However, it fell abruptly following the July 10 elections in Japan. Prime Minister Shinzo Abe’s ruling coalition earned a strong result in Japan’s upper house, supposedly green lighting the “Abenomics” pro-growth policy.

Chart 3

The yen slid for several days, finally finding support at its 2016 trendline. It managed a bounce earlier this week, but quickly fell back to suggest the yen is weaker than it looks. A trendline breakdown is now more likely.

Finally, the CurrencyShares Canadian Dollar Trust broke down below the bottom of a triangle pattern in effect since April (see Chart 4). It is a small move, but the trend does appear to be to the downside.

Chart 4

Although this ETF is not the most active, its on-balance volume indicator is negative and falling since late April. This is confirmed with a falling on-balance volume for the corresponding Canadian dollar futures contract.

The rally in the U.S. dollar seems to have spread from major European currencies to other important markets around the world. That breadth should give dollar bulls reason to cheer for a few more weeks, if not months, to come.
Michael Kahn, a longtime columnist for, comments on technical analysis at A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.

viernes, julio 29, 2016


Gold: Plan B

By: John Ing

US Campaign Cartoon

It is not only in the political world where we are witnessing traditional mores being broken.

Ride-sharing Uber for example has challenged guidelines, city mandarins and monopolizing taxi cab companies around the world capitalizing on passengers fed up with poor service, and arcane regulations. To allow Uber to operate, city bureaucrats were compelled to introduce new regulations, opening up competition, that broke down long standing monopolies. Change is a good thing.

In the political world, voter frustration, disillusionment and anger has led to a flirtation or call for more radical political solutions. In recent years the public has lost faith in politicians and central bankers because of their failed promises and solutions. This lack of faith had its origins in the 2008 financial crisis which benefited so few at the expense of so many. Brexit was a recent example of the toxic combination of populists' frustration, political missteps and a repudiation of intervention that "nanny state" governments like the EU have pushed for decades. No wonder the loss of relevance by mainstream politicians, politicized central bankers, regulators and the intelligentsia that has given way to a post-factual climate of lies, xenophobia and irrationality at the expense of facts and reason, empowering a new breed of politicians.

Their criticism is often self-serving as well as the rationalization, that the "silent majority" has finally found its voice, After all, after years of listening to "snake oil" politicians, flip-flopping economists and cheerleading media types, no wonder the loss of public esteem fed up with the
20 second sound bites, hopeful or sunny platitudes, academic central bankers and mainstream institutions. Despite accepting the harsh medicine of austerity only a few have prospered like the "too big to fail" banks which have become bigger or Wall Street enjoying the best times ever while $7 trillion dollars later, economic growth remains anemic, 47 million Americans are on food stamps and prosperity remains elusive. Consequently while priorities and politics seem to differ widely, the longer there is this disparity, the less credible markets are likely to greet subsequent remedies and the deeper the sense of disenfranchisement and the loss of faith in promises of "change". Investors beware, better to come up with a Plan B.

Keep Calm and Carry On

The aftershock of the surprise Brexit mess continues amid political turmoil and contagion concerns. Longer term, there is no question that the fears are justified but amazingly, no one had a Plan B.

And that leaves Theresa May the herculean task to negotiate the so called exit clause, Article 50 of the Treaty of Lisbon, severing Britain's 43 year membership. Ironically Mrs May, a "remain" supporter will negotiate the divorce agreement, acceptable to the House of Commons of which the majority are also "remain" supporters, but must ratify the divorce to repeal the 1972 European Commitment Act. Not an easy task. On the assumption of a successful agreement, the earliest notification date would be sometime in 2017 and then 2 years later, the exit sometime in 2020.

But wait. What if the new Prime Minister decided to call an early election, with a desire for a new mandate and, another referendum under a modified divorce agreement modeled after a Norwegian or Swiss type agreement with trade agreements, monthly contributions, passport rights etc. The UK is already compliant with many of EU's dictates, including the single market law. The EU would also have to compromise finding middle ground in order to save the EU itself whose existence is threatened. This second referendum would vote on not only a new government but a new form of EU membership. The world order would change and yet again, the peoples' will would be usurped by politicians. Noteworthy is that gold in sterling jumped 15 percent the night of the Brexit vote. Someone had a Plan B.

Change, Real Change

No wonder then, out of this morass, "outsider" politicians such as Donald Trump, Marie Le Pen in France, Beppe Grillo or Corbyn in the UK were able to capitalize on voter disillusionment.

Polarization, it seems makes good politics leaving moderates on the sidelines. Politicians are complicit in this politics of polarization, hoping to divide and conquer. Even in the world of heightened social media, there is a great divide among those who are acknowledged or swept right, leaving the other "unlikes" in never never land, swipe left. At best, the consequences are not to continue with the status quo, and for a change, real change.

To be sure, more referendums are in the offing. Italy's Matteo Renzi has called for a constitutional referendum in October, spooking a market that sees its third largest bank, Monte dei Pachi hit new lows as ECB warns of its bad loan exposure. Next year there's the French election in May and German election in September. At worse, Brexit and the EU faces a couple years of economic uncertainty, protracted negotiations, refugee influx and a debate over its own existence. The dirty little secret is that change is coming and the markets are unprepared. Trump for President - swipe right? Gold is a good thing to have, a Plan B for everything.

The World Faces a Holy Trinity of Conditions

For some time our central banks' alchemy has been knee deep in credit creation, inserting money into the world economies to keep them afloat. In the eight years since the crash, central banks led by the Fed have tried every tool in their repertoire to revive their economies and still, the world economies are not as robust as advertised. We believe their strategy is fundamentally flawed. Today in a race to the bottom, yields have yet to revive economic growth with the monetary experiment resulting in almost $13 trillion worth of sovereign debt carrying negative yields. Most of that debt is in Japan and the Eurozone which keeps growing, particularly after Brexit accelerated a global rush to safer assets.

This credit creation exploded in part to the central banks' mistaken belief that if the lending price or rates were controlled, that would control the volume. Wrong. Money became not only too abundant, but essentially free, subsequently driving investors into an ever rising stock market, further out on the curve and of course to pile on more debt. Consequently, the Bank for International Settlements (the bankers bank) in its latest annual report said the world faces a "holy trinity" of conditions: "productivity growth that is unusually low, global debt levels that are historically high, because debt has been acting as a political and social income substitution for income growth, and from a policy maneuver that is remarkably narrow".

To be sure, low rates have helped lower the cost of borrowing for many governments but imposes a huge penalty on savers. The banking system's intermediaries, traditionally the oil that keeps the central-bank machinery functioning has rebelled against the latest move to negative rates. Those big banks have been hesitant to pass on negative rates to their customers while the banks themselves must keep a ratio of capital with the central bank. Ironically, they have become the main victims of low rates.

A Pension Time Bomb Is Ticking

Both Credit Suisse and Deutsche Bank are hitting all-time lows on banking concerns and derivative exposure. Deutsche Bank, Germany's largest bank will not make a profit this year and was only one of two banks to fail the Fed's stress test. Germany's Commerzbank threatened to keep cash in their vaults due to the logistics of maintaining excess cash with the European Central Bank. A fun fact is that the Federal Reserve Bank of Chicago recently tweeted that a pile of $100 bills stacked a mile high would be worth $1.4 billion, suggesting the need for a mine shaft one mile deep or a super vault one mile high to store this money. Instead, were that money converted into gold, it could easily been taken away on a semi, laden with 25 tonnes of gold bars rather than the need for a super vault.

Negative interest rates also adversely affects the profitability and position of insurers, pension funds, planners and pensioners such that there is an estimated $35 trillion of pension liabilities which now yield negative returns, making it difficult for them to meet their future liabilities. To be sure, those liabilities will only grow larger, particularly when many are already underfunded. Politicians beware.

The entire pension system is dependent upon earning a return to pay for future obligations. In essence, our central banks' policy of compressing yields and printing money are mortgaging future pension holders' savings. This raid cannot last. A pension time bomb is in the making.

Markets Are More Concerned About The Return Of Money

Yet Brexit is not our only worry. Added to the stock of money is debt which is a form of money unless repaid. However if not repaid, debt must be restructured and the obligations added to the money stock. Today we have too much debt and too much money. For some time, we have warned that the central banks' multiple rounds of quantitative easing (QE) and negative interest rate policy would founder and, in a spate of diminishing returns, require more stimulus having less effect so that more intervention would be needed. Money or purchasing power has simply lost value and not even a one percent bond yield will coax overextended debtors to consume or invest.

In fact, eight years after the collapse of Lehman Brothers, no bank has started to unwind QE.

The result? Japan is in its second decade of stimulus. The US economy remains in a funk with record low participation labour rates (100 million Americans), a weak retail sector (Target, Footlocker, The Gap), and an acute lack of investment.

It is our view that the debt mountain has prevented monetary policy and zero interest rates from achieving much. To date, we have had ten years of economic booms and busts and each time, debt ratchets up, requiring more bailouts. Another reason is that in response to the 2008 financial collapse, America raised taxes, ratcheted up government spending, imposed layers of regulation like ObamaCare and an ill-advised Dodd-Frank which stifled growth. The system has become more fragile every day. The common denominator here is that debt and risk keeps growing. We believe there is a limit to this money printing exercise. Historically public debt limits were a way of checking unlimited printing power. Greece was a good example when that unlimited printing power met a wall. Although, America's debt to GDP is over 100 percent of GDP, it is much larger if we include entitlements. America, we believe, is in trouble. Yellen's backpedaling on rate increases is another step towards fiscal irresponsibility and hyperinflation. Markets have simply been lulled into a false sense of security on debt.

Central bankers tell us that in this new world order of negative rates there is a riskless return to both borrowers and savers. Less discussed is the extent to which the risk-free return should be determined by the market. In the past bond yields were determined by investor expectations for short term rates with a risk premium, averaging two percentage points. Central banks historically set that return but today have focused on the stock market instead of rate levels resulting in an overvalued stock market and yet, risk remains. Has risk has been priced out of the market? No, we believe the next default will change that. Risk simply has been mispriced. Markets are more concerned about the return of money, rather than the return.

The System Needs A Plan B

In the last fifty years, the collapse of Bretton Woods and its replacement by a fiat currency system based on the US dollar provided policymakers and central bankers latitude in setting policy. Debt lies at the heart of the financial system with America becoming the largest debtor in the world, relying upon the willingness of others to finance its consumption. Money is about trust. Today that debt load is teetering at levels at a time when Puerto Rico, Argentina and even some America's cities have defaulted. Investment rating agency, Fitch has downgraded 14 sovereign borrowers so far this year, including the UK.

Indeed, there was a revolution in the UK. While the Conservatives remained in power, what was overthrown was the concept that the status quo would remain the same. Gold is a barometer of investor anxiety, a hedge against uncertainty and a currency alternative. Rather than depend upon opinion polls, betting sites or media pundits to foretell the unanticipated, economic or financial event, gold historically and today serves as the ultimate protector of wealth. In November, the Americans will elect another president which will be good for gold, but bad for the dollar.

This fall, we believe the system will be tested by American politics this November, Brexit, Italian bank fears. Needed is a Fed exit, but the Fed is reluctant to normalize its experimental monetary policy or even sell assets it purchased in the wake of the financial crisis. The economic consequences are clear. Central banks addicted to cheap money are at the limits of what they can achieve, particularly without the fiscal policy support from their respective governments. Investors and savers are looking for alternative stores of value.

To be sure in the last twenty years, we have seen steady debt accumulation, and a shift of risk to debtors, at the expense of savers. Taxpayer bail-outs have given way to depositor bail-ins. A new monetary order must emerge. What damages trust in the US damages the whole worlds.

The world's major economies have experienced rapid money growth of 10 percent plus per annum in recent years.

Although the Fed is the largest holder of gold, supplies are limited. If gold is a finite currency, its value against not just the dollar, but pounds and the euro too, must rise. Stores of values are needed and in the end, everyone must deal with the consequences of the past. Central banks are part of the problem, not the solution. Gold is everyone's Plan B.

Middle Kingdom's Moves

China has emerged as a competitor to Western hegemony. Yet its ascendance is criticized as inadequate. China introduced state sponsored infrastructure spending to revive its economy and their thriving private sector can borrow at normalized rates of returns to reflect risk and investment - what a concept. Similarly, the accusation that China's overinvestment is going to cause a flood of commodities is misguided. China is investing and needs to build up infrastructure, in contrast to the West where consumption at the expense of investment is financed by debt.

One of the problems is that policymakers and the western media accuse China of having a rigged economy. On the contrary, it is the western world that is more rigged, where the bankers having been found manipulating everything from currencies to interest rates (libor) to the London gold fix.

China's growing global clout is matched by its moves in the currency and gold markets. China has become a big buyer of gold boosting its reserves, 11 out of the past 12 months. Gold has a key role in the international accounting system, used as currency at the Bank for International Settlements (BIS) and International Monetary Fund (IMF). Today, China's reserves are stuffed with too many fiat currencies and not enough gold. Consequently China has accumulated more than 1,820 tonnes of gold tripling its reserves since 2008 and is now the fifth largest holder in the world. China is also the world's largest producer at 490 tonnes annually and the largest consumer of gold. China's first gold ETF was only created three years ago and today there are four. While, the US holds the top spot at 8,133 tonnes of gold, it is our belief that will eventually be surpassed by China.

China's desire to diversify its almost $3 trillion of foreign exchange reserves is behind the selling of dollars and Treasuries to support its currency after floating last year. We believe the world's second largest economy's step-by-step move to internationalize the renminbi is another effort to make that currency a reserve currency ending the dollar hegemony. China has a long tradition of hoarding gold. It is our belief that eventually, the renminbi will be backed by gold, unlike the US which abandoned the gold standard in 1971 and now uses a fiat currency.

Shanghai Benchmark

China also wants more influence over the pricing of gold. Since 1919, the benchmark gold fix was denominated in dollars exclusively in London, the heart of bullion trading. Now there is an alternative as China has taken steps to exert more control over a strategic metal, through the introduction of a Shanghai Fix or benchmark for gold denominated in renminbis on the Shanghai Gold Exchange involving China's top banks. As in London, in twice a day auctions, gold demand and supply orders are "matched", however in renminbi. The Shanghai Gold Exchange (SGE) is a key platform in China's sales and purchases. The disclosure that the London dealers rigged the London gold fix is behind the move by China.

Of interest is that since the establishment of the Shanghai gold fix in April, we calculated that 60 percent of the time, the Chinese have traded gold at higher prices than London reflecting stronger demand. In addition, ICBC the world's largest bank and member of both London and the Shanghai Exchange has purchased Deutsche Bank's 2,000 ton vault, one of the biggest in the world to store gold. The Shanghai Exchange's annual gold contracts are now larger than Comex as gold switches from the West to the East. In its first month of trading over 100 tonnes of gold was physically settled on the SGE in contrast to the paltry 0.04 percent of contracts delivered on Comex. To be sure, this time the gold fix, won't be as easy to "fix".

China Will Need to Buy Gold Mines

China's Achilles heel is that its gold mines will run out of reserves by 2020 so the mantle as the world's largest producer will not last too much longer. China will need to invest. Many of its producers have short lived reserves and are struggling to replace those reserves. For this cohort of firms, deeper seated reserves could be exploited by western exploration techniques and production know-how. However, China is overly protective of its producers. And often, Chinese management lack the entrepreneurial thinking since the state owned players tend to be risk averse. In the end, the most important thing is that China will need to change its outlook.

Meantime, North American reserves can last well into the next two decades. We expect Chinese producers to expand overseas, buying up reserves in the ground which are valued at historically low levels. Currently some 13 percent of the world's reserves are in the ground and valued at a fraction of their replacement or even exploration value. We believe, China's search for gold assets has only just begun, as it secures future supplies. So far China's acquisitions have been domestic, reflected recently by Eldorado Gold's selling its Chinese mines for $900 million to local players. We expect China's acquisition of oversea producers will pick up with an emphasis of using their capital to develop the big the in-situ, capital extensive projects. China has a Plan B.


Gold is a beneficiary of negative rates and was one of this year's best performers as investors sought refuge from turbulent markets and Brexit fears. China also was a big buyer while gold held by ETF funds jumped 40 percent to over 2,000 tonnes. Noteworthy was that the gold mining sector outpaced gold bullion. We believe the gold stocks provide superior leverage to the gold price. Over the years miners have plucked the low hanging fruit, developing the most easily accessible deposits but today there is more risk as miners go further and deeper searching for deposits. Mine grade has been cut in half over the last three years and miners have fought back by high grading at the expense of future margins. Cost cutting has taken place with a focus on margin improvement, grade control and balance sheet reparation. High cost production was shuttered and the majority of producers did not replace reserves last year.

Balance sheets improved with the writing down of billions in assets. No longer it seems will the industry grow, for growth sakes. Miners have finally learned how to make a profit on every ounce they produce.

Not surprisingly then the large senior gold producers have gained almost 200% since yearend.

The developers in particular have lifted and a flood of equity issues have replenished their treasuries, making them the next round of producers. TMAC and Osisko filled their treasuries while Richmont Mines raised $31 million to expand the Island Gold Mine. Notwithstanding the performance of the gold miners, we believe they remain cheap, particularly since their reserves in the ground are valued at a market cap per ounce of less than $300 an ounce. It is still cheaper to buy ounces on Bay Street than explore. Goldcorp has bought Kaminak's Coffee project at less than $200 per ounce. There are rumours that China National Gold, the largest gold company in China will purchase with a consortium, Glencore's 360,000 ounce Vasilkovskoye Mine in Kazakhstan, for $2 billion financed by the state backed $40 billion Silk Road Fund.

Silk Road is an ambitious plan to link Europe with China along an ancient network of trade routes spanning some 60 countries.

We continue to expect a $1,400 gold price near term and a $1,600 price over the intermediate-term with an ultimate target at $2,200 an ounce.

Barrick Gold Corp.

Barrick shares have outperformed its peers as the market has rewarded John Thornton's turnaround of Barrick, which slashed debt, cut costs, focused on optimizing core assets and today has one of the lowest AISC in the industry. Possible non-core divestures include the 64 percent stake in Acacia, 50 percent of Zaldivar and the other half of Kalgoorie. And rather than focus on diversified M&A deals, the focus remains on gold. Thornton's well-articulated strategy is finally understood by the market and its management has bought into his partnership structure. Barrick is a world class producer with a renewed focus on strong profitable growth and increasing shareholder value. The miner has an enviable array of tier 1 assets and the largest in-situ resource in the world. Having reduced its debt and regained balance sheet flexibility, it is unlikely that we will see another megadeal. Rather, we expect a continuation of the partnership or joint venture approach which minimizes risk and provides opportunities to establish new strategic partnerships (even outside mining). We continue to like Barrick here.

B2 Gold Corp.

B2 Gold produced 135,000 ounces in the quarter reflecting strong results from from Masbate (up 30 percent), Limon, and Otjikoto despite a pit failure. Construction is underway at Fekola in Mali which is on schedule, on budget and will commence production in late 2017. Fully funded Fekola is an open pit mine that will produce 350,000 ounces at a cash cost of $418 per ounce. Once completed, B2Gold will have grown its production from 2015 to 2018 by more than 60 percent, in contrast to projected declines at Eldorado, Kinross and Goldcorp over the same period. B2Gold is also developing Kiaka which is one of the largest undeveloped resources in West Africa. With a strong pipeline, a proven track record and rising growth profile, we recommend the shares here.

Centerra Gold Inc.

Centerra is acquiring Thompson Creek Metals for $1.1 billion in a transaction that will reduce its exposure to Central Asia. Thompson Creek was a problem moly producer whose production was shut down because of low prices. Thompson Creek operates the Mount Milligan copper/gold mine which is a high cost, low grade deposit in British Columbia. We believe the acquisition is expensive and only Thompson Creek's bondholders benefit since Centerra will assume almost $900 million of debt, a heavy price to lessen Centerra's exposure to Kyrgyzstan.

Moreover, Centerra faces ongoing negotiations with the Kyrgz Republic whose government is pushing for a bigger stake in the Kumtor Mine. We prefer B2Gold here.

Detour Gold Corp.

Detour Gold had an analyst tour to show its progress at Detour Mine. The plant averaged 64 ktpd for more than a month, up from design capacity of 55 kptd due to the clearing of the 410 bottleneck. Detour's guidance at 540,000 to 560,000 ounces is on track and the Ontario based miner has become one of Canada's major producers. Detour Gold has only twenty percent of its property explored and the recent lower Detour West results will allow the expansion of Detour Lake's 16.4 million ounces in reserves (23 years). To be sure, Detour's teething issues have been resolved. Detour has $200 million of cash on hand allowing flexibility to refinance their convertible notes next year. We like the shares for its long reserve life.

Eldorado Gold Corp.

Eldorado has been a laggard due to its permitting problems in Greece. Eldorado is a low cost producer operating three core mines which should produce 400,000 ounces this year at AISC of $842 per ounce. Eldorado recently received the official go-ahead permit approving the building at Skouries in Greece which should be commissioned in early 2017. Nonetheless, we expect a slow resolution of the Greek problems and with the resumption of development in Greece.

Eldorado can provide needed jobs and capital, something that Greece needs. Eldorado recently exited China by selling its Chinese gold mines for $900 million to local companies leaving management to concentrate on the development of the Greek mines and return to its core assets, Efemcukuru and Kisladag mines in Turkey which make up about 60 percent of NAV.

Eldorado has a solid balance sheet with pro forma cash of $1.1 billion allowing it to finance Skouries in Greece, Olympias and Certej in Romania. We like the shares down here.

Goldcorp Inc.

Goldcorp acquired Kaminak's Coffee gold project in the Yukon which is a high-grade open pit heap leach project with a resource of three million ounces plus. However, Kaminak is in the middle of nowhere and infrastructure costs will be high. Nonetheless, the acquisition of Kaminak fills a gap and but is insufficient to make up for slower development from Eleonore in Québec, Cerro Negro and Penasquito in Mexico, the flagship which is in a low-grade cycle.

Goldcorp is in need of a rationalization of assets and the company's still has to sort out its Ontario plan having acquired Borden and Cochenour for $2 billion with nothing to show.

Newly minted CEO, David Garofalo still has to reduce overheads, flatten management ranks and refocus operations. Like Agnico-Eagle, McEwen Mining and Barrick, Goldcorp has invested in a portfolio of juniors hoping acorns will grow into trees. In the interim, we prefer Barrick here.

Kinross Gold Corp.

Kinross has expanded reserves at Bald Mountain and Round Mountain which was recently acquired from Barrick. While Kinross paid top dollar the deal makes tactical sense because it replaces declining production. Kinross should produce about 2.7 million ounces this year but faces production declines due to chronic problems at Tasiast in Mauritania where they halted mining and processing due to a work stoppage. Kinross had unveiled a phase 2 expansion plan but the government is hoping to renegotiate Kinross' agreement, so those plans are be on hold. Kinross has eight mines in the Americas, West Africa and the recent acquisition reduces its unhealthy exposure to Russia, which represents about a third of its assets. We prefer Agnico Eagle here.

McEwen Mining

Debt-free McEwen Mining has put in a sterling performance partly due to the turnaround of the Argentine political climate and strengthened mining operations. McEwen Mining plans to build the Gold Bar Mine in Nevada adding to flagship El Gallo in Mexico and San Jose in Argentina. Rob McEwen who is now a dollar a year man has made a point that executives don't need to have a grand salary or a Gulf stream for success. McEwen owns 25 percent of McEwen Mining and at a dollar a year is grossly underpaid. McEwen will produce 144,000 ounces for the next couple years, ramping up to 170,000 ounces in 2018. We continue to like the shares here.

Newmont Mining Corp.

Newmont has reached a deal to sell Batu Hijau in Indonesia for $1.3 billion to an Indonesian/Chinese group. The price is attractive given the fact that the development price tag of Elang alone would have cost billions and Newmont faced export permit delays with Indonesian government. The sale is also attractive from a balance sheet point of view since Newmont will retire almost $600 million of debt with this deal. Newmont is the world's second largest gold company with operations in seven countries and was penalized for its operations in Indonesia. However, looking ahead Newmont has little on the horizon and except for Phoenix, the miner is "harvesting" its assets.

We prefer Barrick here.

Yamana Gold Inc.

Yamana results were in line with expectations and the shares have done well since a rising tide lifts all boats. Yamana has gold operations in five countries with a strong base in South America but it's been plagued with a healthy debt load of $1.7 billion which is why Yamana trades at a discount to its peers. Canadian Malartic (50% owned) continues to perform well.

However, its high cost spinoff Brio Gold has not yet been spun off, hurting overall performance. Yamana produced 308,000 ounces in the first quarter while coproduction cost helped lower AISC. We expect the gold rally will allow Yamana an opportunity to reduce debt and spinoff Brio. Until then, we prefer Eldorado or B2Gold here which have better balance sheets and growth profiles.

Gold Stocks Financial Information
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Analyst Disclosure
Rating: 5 - Strong Buy 4 - Buy 3 - Hold 2 - Sell 1 -Strong Sell
Company NameTrading Symbol*ExchangeDisclosure codeRating
Barrick Gold Corp.ABXT15
Disclosure Key: 1=The Analyst, Associate or member of their household owns the securities of the subject issuer. 2=Maison Placements Canada Inc. and/or affiliated companies beneficially own more than 1% of any class of common equity of the issuers. 3=<Employee name> who is an officer or director of Maison Placements Canada Inc. or it's affiliated companies serves as a director or advisory Board Member of the issuer. 4=In the previous 12 months a Maison Analyst received compensation from the subject company. 5=Maison Placements Canada Inc. has managed co-managed or participated in an offering of securities by the issuer in the past 12 months. 6=Maison Placements Canada Inc. has received compensation for investment banking and related services from the issuer in the past 12 months. 7=Maison is making a market in an equity or equity related security of the subject issuer. 8=The analyst has recently paid a visit to review the material operations of the issuer. 9=The analyst has received payment or reimbursement from the issuer regarding a recent visit. T-Toronto; V-TSX Venture; NQ-NASDAQ; NY-New York Stock Exchange