The Colombian economy is going through one of its best economic periods in the last 50 years. Colombia is growing strong. In 2007 the economy grew by 7.52%, investments in the country multiplied, foreign direct investment in Colombia grew, and internal demand became more and more strong.

But in the midst of this moment of splendor for the Colombian economy, inflation hangs over it like a great black cloud that threatens to water down this good moment. The inflation in Colombia continues to increase and worrisome to its authorities, it creates several dilemmas that Colombia must face in resolving this problem of inflation. In the month of May, the Consumer Price Index (CPI) grew by 0.93%, the highest rate for that same month since 1999.

Already, in the first five months of this year, the retail inflation in Colombia has reached 5.12%, and 6.39% for the last 12 months. One needs to be sure to remember that the Central Bank of Colombia has a goal of 4% for inflation with a margin of a percentage point going either way. Clearlythe rate of inflation month to month has gone beyond this proposed goal.

It is for this very reason that one week ago the Central Bank of Colombia decided not to bother with raising interest rates. Currently they remain at 9.75%. In explaining this decision, the Central Bank stated: “Our meeting emphasized that inflation and the expectation of further inflation will continue at levels greater than our goals. This also appears to be happening with several other indicators of basic inflation”.

The Central bank is not only worried about the data present about inflation, but also about strong dynamics that are influencing the financing of consumption. That is a subject that the monetary authority is closely following, due to the impact that it has beyond the phenomenon in the internal demand (and consequently, in the inflationary pressures). This situation of major inflationary pressures and lending levels that encourage consumption is generating the sense that a period of a sustained rise of rates is approaching.

Market analysts are pessimistic about the inflation, since they think that the Central bank of Colombia cannot fulfill its goal of inflation for this year.

In this situation, a logical thing is to hope that the Central Bank of Colombia would decide to increase its interest rate, as the market is expecting. However the Central Bank of Colombia, and its monetary policy, seems to be facing a dilemma in considering whether to maintain or raise the interest rate. Some are pushing for high interest rates along with pressure to increase the currency’s rate of exchange in hopes of creating a context of stability within the Colombian economy. And that, in turn, it creates a situation where foreign investment capital becomes attractive.

These investments of foreign capital, so valued and hoped for by the economy, are generating problems for Colombia since they affect the type of change required to impact the competitiveness of the Colombian economy.

It is for that reason that the Treasury Department decided to elevate from 40% to 50% the minimum liquidity requirements that foreign investors are required to pay prior to creating a portfolio in the country. This policy was established by the Government for more than a year and additionally, the Government established a minimum time of permanence of two years for any Foreign Direct Investment (FDI) entering the country.

Logically these measures have generated a lot of criticism, mainly on the part of those harmed such as large foreign investment banks. However, from my perspective, it is a proper measure to take to limit the negative effects generated by raising interest rates.

It is true that these measures are an attempt to limit the free flow of capital, but I understand that sometimes this is one of the only valid alternatives that exist when dealing with speculative capital.

From my point of view, the message of Colombia is clear. “Colombia is willing to guarantee that foreign capital may enter the country, but at the same time it does not want that capital to work against the stability of the economy. For that reason, Colombia is encouraging those that invest capital in the country remain there for a substantial period of time.”

We will meet again tomorrow,

Horacio Pozzo

Editor’s note: Colombia has returned to its inflationary levels from 90s, and it is taking measures to avoid major inflationary pressures. But these measures are creating as much of a risk for the economy as a dissatisfaction for the international investors. You may leave your comments with us at: www.latinforme.com

For the tale of the tape, the TSX Exchange rallied 1.15%, while the TSX Gold Index added 0.5% and the TSX Venture Exchange, Canada’s largest junior exploration bourse, lost 0.08% with the declining issuers inching past the advancers by a 533 to 497 margin on volume of 182 million shares traded.

It was a good session for shareholders of VMS Ventures. The company recently announced another hot drill hole at its Reed Lake base metal project in Manitoba and adopted a shareholder rights plan. VMS ended the day up C$0.12 at C$0.85.

B2Gold tabled some nice numbers from its Quebradona joint venture property in Colombia. Highlights included hole 2, which returned 52.7 metres grading 1.36 grams gold per tonne, 2.1 grams silver and 0.144% copper. By funding the 5,000-metre drill program, B2Gold will earn a 51% stake in the property from AngloGold Ashanti. B2Gold closed unchanged at C$1.40.

High Desert Gold, which is trading at a value of around half its cash in the bank, fought off the sellers by announcing a normal course issuer bid paving the way for the company to buy back up to 10% of its public float or about 3.4 million shares. High Desert ended the day up C$0.035 at C$0.185, which is still well off its C$0.30 cash value.

As we wind down the month of May, knowledge once again looks key to making money on the Canadian markets as only select issues are moving higher. We will see what Thursday trading has in store.

Source: Resource Stock Roundup: Thursday, May 29th, 2008

Buenos Aires, Argentina May 26, 2008

Upon my arrival at home last Friday, my wife approached me with the following question: “What is the UNASUR?” Initially, I really did not know how to respond… I already have answers to some of her questions related to domestic issues such as why she cannot spend more money, why I have my clothing all messed up, who ate something, and others … but explaining the UNASUR really left me with no immediate answers at all.

To give you a little background, last Friday twelve South American countries formally ratified the Union of South American Nations Treaty (UNASUR), a regional integrative initiative going back informally to 2004. UNASUR hopes to strengthen Latin American and Caribbean unity by working together to create solutions to persistent regional problems while at the same time respecting the sovereign rights and territorial integrity of the individual member states. UNASUR hopes to achieve these goals through the development and implementation of policies addressing a diversity of issues such as those related to politics, economics, social and cultural issues, the environment, energy, infrastructure development and more. It is hoped that through addressing these concerns, solutions will also be found for the ongoing problems related to persistent poverty, social exclusion and inequality.

The members of UNASUR are Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, Perú, Surinam, Uruguay and Venezuela. To give you an idea of the importance of the region constituting this union: it includes 388 million citizens with a combined GDP of $ 1.9 billion, (3.5% of the world’s GDP).

UNASUR will be headquartered in Quito, Ecuador and consist of four main bodies: the Council of Heads of State and Government, the Council of Ministers of Foreign Affairs, the Council of Delegates, and the General Secretariat. It will also create a South American Parliament, seated in the city of Cochabamba, Bolivia.

One of those most delighted by the creation of this new union was Brazilian President Lula who pointed out that: “we shall move forward with innovative projects and will fully attain the goal of financial and energetic integration, as well as that of realizing the improvement of regional infrastructure, and the creation of a social cooperation agenda.” Lula, as always, has in mind ambitious ideas where of course, Brazil takes the lead in initiatives.

In reality, the creation of UNASUR has taken many by surprise as it has happened at a moment in history when the union of so many countries seems unimaginable.

Relating to this idea, we should be mindful that this union was created at a time when many Latin American countries have reached a powerful level of macroeconomic and institutional consolidation; achieving international recognition as having gained the much desired investment grade for many of its countries.

The establishment of regional blocks is more viable now with the consolidation of the economy and institutions within these countries, coupled with a long-term vision. The regional blocks of the past have not reached significant achievements in the long run due to difficulties within their individual countries, recurrent crisis and political instability. Mercosur serves as a prime example of these kinds of problems.

In the instance of UNASUR, there is a political and ideological fragmentation among many of the signatory countries. There are countries with serious internal problems such as Bolivia. Venezuela and Argentina are plagued with internal issues as well, but to a lesser extent. There are also member state conflicts such as those between Colombia, Ecuador and Venezuela. Additionally, there are ideological divisions between several countries that make it very difficult to imagine how those countries could go forward with the successful coordination of policies.

UNASUR’s successful unification of regional forces having benefits realized by all member states will depend in part on the influential leadership of Brazil coupled with the lessening of individual differences between countries.

This brings us to the question: what benefits could UNASUR bring investors in the region? I think that there are no short-term benefits. However, if UNASUR is able to successfully establish itself, it can then contribute to the development of the regional financial market (one of its main stated goals) creating one with stronger depth and liquidity than other financial markets of the region. More importantly, UNASUR can contribute to the strengthening of the regional economies, underpinning their growth and development which will benefit the investor who will then find less risk and more profitability in their investments in the region.

The UNASUR has just been born. It will be necessary to give it time to grow and develop. We hope that the countries comprising this new group allow this to happen.

We will meet again tomorrow,

Horacio Pozzo

Editor’s Note: A new community in South America is born with a variety of diverse and complex objectives spanning cultural, social and economic realms… another aim is the social inclusion, the civic participation, the strengthening of democracy for all… Horacio’s wife is asking questions and Horacio finds he does not know how to respond. If you want to know, keep on reading… Enjoy, and send your comments to the editor here: paola@latinforme.com

Okay, okay, so it has been described as mining’s worst kept secret. Columbia’s President Alvaro Uribe spilt the beans of a major gold find last December. But AngloGold kept mum in spite of widespread media speculation that it was the lucky company.

We knew for sure back in February that it was indeed AngloGold, and that the resource was not only real but significant. One of Isabel’s insiders confirmed that a fair few ounces of the yellow stuff had been struck.

And he wasn’t wrong.

Phew! A significant resource!

According to AngloGold, there is a 12.9m oz glittering gold resource at its wholly owned Columbian project, La Colosa.

And there is still room to increase the resource as drilling to date has only tested a relatively small area.

“Three quality targets require follow-up,” says Anglogold.

So this is only an “inferred” resource, the earliest stage of quantifiable exploration. But it is JORC compliant, so has met Aussie set standards for reporting.

Better still, La Colosa is not Anglogold’s only Columbian project. The Gramelote deposit, discovered in 2006, hosts an inferred resource of 2.12m oz. For now it seems that Gramelote will be put on the backburner.

In fact, the funding and pre-feasibility study of Gramelote will be done by joint venture partner B2Gold. AngloGold has handed over a 51% interest to this Vancouver-based exploration company.

So, quite clearly it believes that La Colosa should take centre stage. After all, it owns a 100% stake in the project, and La Colosa is a much bigger resource! So it is pushing ahead — the plan is to take La Colosa to pre-feasibility by the third quarter of this year.

A frontier worth braving!

AngloGold was the first company to brave Columbia back in 2003, when nobody wanted to touch it.

Columbia is a highly stratified society, with Spanish descendants enjoying much greater wealth than much of local population. Not unlike the British and Dutch in South Africa!

And as in South Africa, crime is a real issue in Columbia. Aside from politically motivated violence, drug-related crime is a major problem — it is the most common cause of death after cancer!

No wonder then that many investors have steered clear! And no wonder AngloGold, with its South African roots, feels at home! It is quite used to operating in challenging environments.

But now AngloGold has some 37,500 sq km of land. The company seems reasonably confident in the current Columbian government, which it says is effective.

It also feels general conditions are good. President Uribe has taken a tough line with both left-wing guerrillas and right-wing paramilitaries. Fair play to him — murders and kidnappings have fallen as a result.

Judging by La Colosa and Gramelote, AngloGold’s foray into Columbia was a risk worth taking. Clearly, it is good news for Columbia too. This could double Columbia’s gold production by 2011!

The safe haven of the big boys

It is this sort of news that reminds us why mining majors are a long-term safe bet. New gold finds are increasingly rare. And investors in these jittery times have become a little jaded. Some are even wondering whether there is, in fact, any gold left underground.

As we’ve mentioned in recent diaries, junior explorers are struggling to raise capital. Understandably, many investors would rather bet on bigger players. They might not yield the massive upside that could be had from junior explorers. But it is possible to get the best of both worlds.

And clearly AngloGold has the experience, and the wisdom that comes with that, to make a project like La Colosa economically viable. Of course we know that this is still very early days— it is going to be six years at least before we see an AngloGold Columbian gold bar.

But even if that never materialises, at least we know Anglo is producing elsewhere. In the first quarter of 2008, output was 1.2m oz, with cash costs of $430 per oz.

The other big news is that AngloGold now has a clear strategy for reducing its hedge book, with plans to raise ZAR11.9bn from shareholders. It is a decision that must still be approved at an extraordinary general meeting next week. Since Aussie chief Mark Cutifani is a firm believer in the outlook for gold, he’ll be doing his best to convince shareholders this is the way forward.

Clearly the market thinks it is a good idea. The share price of what one analyst calls “the cheapest gold stock in the world” rose nearly 10% after the news broke. Cutifani too calls AngloGold “the most undervalued story in the gold industry”.

But perhaps the tide is finally turning.

Keeping mining

Erin and IsabelSource: When AngloGold’s Risk Paid Off 

The same is not always true when we talk about trade deficits. Like the falling dollar itself, it’s worth asking the question: How does it affect you, the individual?

The trade deficit – the excess of imports over exports – has a direct and serious effect on the value of our dollars. As long as we continue having big trade deficits, it means we’re spending more money overseas than we’re making at home. Our manufacturing profits are lower than our consumption. If your family’s budget has a “trade deficit” of sorts, you’ll soon be in trouble. If your spouse spends $ 4,000 for every $2,000 you bring home, something eventually gives way. This is what is going on with the trade deficit.

In fact, the trade deficit is one of the most important trends in the economy, and the one most likely to affect the value of the dollar. Combined with our government’s big budget deficit, the trade deficit only accelerates the speed of decline in our dollar’s value.

Speaking in terms of spending power of the dollar, the trade deficit is the third rail of the economy. Here is what has been going on: The United States used to produce goods and sell them not only here at home, but throughout the world. We led the way, but not anymore. The shift away from dominance in the production of things people need has allowed other countries (most notably China and India, and with Colombia, Russia, Brazil, and Mexico not far behind) to pass us up, and now the U.S. consumer has become a buyer instead of a seller.

This international version of conspicuous consumption 1 is financed not from the profits of commerce, but from debt. Let’s think about this for a minute. If we were buying from domestic profits, the trade deficit wouldn’t be such a bad thing. It would mean we were spending money earned from domestic productivity. But this is not what is going on. We are going further and further into debt to buy goods from other countries. Our wealth is being transferred overseas and, at the same time, we are sinking deeper into debt. This is taking place individually as well as nationally. Consumer debt (you know: credit cards, mortgages, lines of credit) is growing to record levels, and the federal current account deficit is moving our multitrillion – dollar national debt into new high territory.

Sure, we should be concerned about retirement income from savings, investments, pension plans, and Social Security. But a bigger danger is that, even with a comfortable retirement nest egg by today’s standards, what if those dollars are worthless when we retire? What then?

The big question today is, how long can this debt-driven economy continue? If you quit your job and refinance your home, you could live for a while on the money. The higher your equity, the longer you would be able to spend, spend, spend. But then what?

This is precisely what is going on in the U.S. economy, and, at some point very soon, we are going to have to face up to it and change our ways. The trade deficit is the best way to track what’s going on. Returning to the analogy of quitting your job and living off of your home equity, you may stay home all day and order an endless array of electronics, furniture, toys, computers, and the like; in other words, you could consume goods in place of working. But remember, you didn’t win the lottery; you are financing this new plan with borrowed money. The lender will want that repaid. So this individual version of a trade deficit (the deficit between generating income and spending money) is what is happening on a national level in the United States.

This is the problem that is directly affecting the value of the dollar; and the situation is getting worse. We know that the dollar is in trouble because we see it depreciating against the floating currencies of other countries.

The United States has a lot of wealth, but that wealth is being consumed very quickly. History shows that no matter how rich you are, you can lose that wealth if you’re not productive. Meanwhile, the dollar’s value falls and – in spite of the Fed’s view that this is a good thing – it means our savings are worth less. Your spending power falls when the dollar falls, and as this continues, the consequences will be sobering.

The dollar’s plunge has taken many people, currency experts of banks included, by surprise. For many of them, it is still impossible to grasp. Some talking head on CNBC said that he was at a complete loss to understand how such weak economies as those seen in the European Union could have a strong currency. For American policy makers and most economists, the huge trade deficit is no problem.

They find it natural that fast-growing countries import money while slow-growing economies export money. At least, that is the recurring theme. So Americans traveling abroad may continue to complain that “it has become so expensive to travel in Europe” as though the problem were somehow the fault of the Europeans. But in fact, it is the declining spending power of the dollar that is to blame, and not just the French, the Italians, and the residents of the so-called chocolate-making countries.

This problem is pegged not to some speculative or fuzzy economic cause, even though the concept of currency exchange rates continues to mystify. A historically large trade deficit is at the core of the declining dollar. Somebody needs to get over the notion that our economy is strong and other economies are weak, merely because this is America. In the United States, the reason for the trade deficit is not a high rate of investment as we see in some other countries, but an abysmally low level of national savings. We are spending, not producing.

A second argument offered by some is that “capital flows from high-saving countries to low-saving countries, wanting to grow faster.” Under this reasoning, a deficit country, looking at both consumption and investment, is absorbing more than its own production. But whether this is good or bad for the economy depends on the source and use of foreign funds. Do those funds pay for the financing of consumption in excess of production (as in the United States) or for investment in excess of saving? That is the key question that ought to be asked in the first place about the huge U.S. capital imports.

To quote Joan Robinson, a well-known economist in the 1920s and 1930s close to John Maynard Keynes:

“If the capital inflows merely permit an excess of consumption over production, the economy is on the road to ruin. If they permit an excess of investment over home saving, the result depends on the nature of the investment.”

The huge U.S. capital inflows (economic jargon for money coming into the country), accounting now for more than 6 percent of gross domestic product (GDP), have not financed productive investment; in fact, they are financing more and more debt. Capital grew from 5 percent in 2005 to more than 6 percent in 2006, according to a report from the Bureau of Economic Analysis (BEA), “U.S. International Investment Position.” Our net investments are among the lowest in the world, meaning we prefer spending and borrowing over actual production and growth. The huge capital inflows have not helped finance a higher rate of investment. The United States has been selling its factories and financial assets to pay for consumption.

It’s helpful to use a real means for measuring economic strength. Money coming here from overseas finances higher personal consumption. The steep decline in personal saving is a symptom of our spending, and along with that habit we have lower capital investment and a growing federal budget deficit. In the third quarter of 2005, for the first time ever, the rate actually fell into negative territory – to – 1 percent.

For the tale of the tape, the TSX Exchange added 0.98%, while the TSX Gold Index rallied 0.4% and the TSX Venture Exchange, Canada’s largest junior exploration bourse, ended the session up 0.22% with declining issuers still out paced the advancing issues this time by a 529 to 472 margin with slowing volume of 168 million shares traded.

The world’s largest gold miner, Barrick Gold earned $514 million, or $0.59 a share in the quarter of 2008 a 29% jump over last year’s quarter. The previously well known gold hedger received a price of $925 an ounce of gold in the quarter. Sales in the quarter rang in at $1.96 billion as the company produced 1.7 million ounces of gold at total cash costs of $393 an ounce. All was not rosy however, as this figure is down from the 2 million ounces produced in the same period of 2007 when cash costs came in at $309 an ounce. Barrick ended the day down C$0.01 at C$39.40.

Meanwhile AngloGold Ashanti fared much better after reporting earnings of $105 million for the first quarter of 2008 and production of 1.2 million ounces of gold. Total cash costs for the South African company came in at $430 per ounce and importantly, Anglo finally announced that its La Colosa project in Colombia holds an inferred resource of 12.9 million ounces of gold within 468.8 million tonnes grading 0.86 gram gold per tonne. Anglo ended the session up $3.50 in New York at C$38.31.

Shares in VMS Ventures rallied on news that the junior cut 1.09% copper over 102.5 metres at its Reed Project Discovery Zone in Manitoba. VMS ended the day up C$0.09 at C$0.60.

It was a good day for Sprott Resource as the company inked a deal with Altius to explore for potash in the St. George’s basin in southwestern Newfoundland. Under the deal, Sprott can earn a 60% stake by spending C$2.5 million over 4 years. Sprott ended the session up C$0.52 at C$3.75.

Profit taking was the story of the day for Goldsource Mines. After running up from C$0.30 to nearly C$5 per share on speculation of a major coal find in Saskatchewan, Goldsource ended the day down C$0.26 at C$4.29.

All lights were green for the Canadian markets as investors start to become believers that commodity prices won’t be falling off a cliff anytime soon. We will see what Wednesday trading has in store.