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FT notices 'financial repression' again but still doesn't question central bankers about it

Section: Daily Dispatches

Maybe in another 10 or 20 years news organizations like the Financial Times will try to interview central bankers about the specific mechanisms of "financial represssion," including intervention in the gold market.

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Financial Repression Fast Becoming a Reality

By Tony Jackson
Financial Times, London
Sunday, March 18, 2012

The concept of financial repression has been on the edge of investors' minds for a while. It ought to move to the centre, for it is becoming a reality.

In essence, the process involves governments using their muscle to force down the real value of their debt. It can take many forms, but they boil down to two.

First, governments push down real interest rates, with or without the help of rising inflation. Second, they oblige domestic institutions such as banks or pension funds to soak up government debt at those lower rates.

To see this starting to happen, consider the UK -- not because it is unique, but because it illustrates both parts of the phenomenon. Take interest rates first.

... Dispatch continues below ...


Sona Discovers Potential High-Grade Gold Mineralization
at Blackdome in British Columbia -- 13.6g over 1.5 Meters

From a Company Press Release
November 22, 2011

VANCOUVER, British Columbia -- With its latest surface diamond drilling program at its 100-percent-owned, formerly producing Blackdome gold mine in southern British Columbia, Sona Resources Corp. has discovered a potentially high-grade gold-mineralized area, with one hole intersecting 13.6 grams of gold in 1.5 meters of core drilling.

"We intersected a promising new mineralized zone, and we feel optimistic about the assay results," says Sona's president and CEO, John P. Thompson. "We have undertaken an aggressive exploration program that has tested a number of target zones. Our discovery of this new gold-bearing structure is significant, and it represents a positive development for the company."

Sona aims to bring its permitted Blackdome mill back into production over the next year and a half, at a rate of 200 tonnes per day, with feed from the formerly producing Blackdome mine and the nearby Elizabeth gold deposit property. A positive preliminary economic assessment by Micon International Ltd., based on a gold price of $950 per ounce over eight years, has estimated a cash cost of $208 per tonne milled, or $686 per gold ounce recovered.

For the company's complete press release, please visit:

At present 10-year UK gilts yield 2.4 per cent, some way below retail price inflation of 3.9 per cent. It is always possible that inflation will fall. But it is worth recalling that the average UK rate over the past decade has been over 3 per cent.

Negative real interest rates are an important feature of repression. While it is not strictly essential for rates to be negative -- they need only be lower than a country's growth rate -- it speeds the process along.

The US scholars Carmen Reinhart and Belen Sbrancia have calculated that in the period 1945-80 -- when governments were liquidating the debts built up in the Second World War -- real yields on Treasury bills in the advanced economies averaged minus 1.6 per cent.

There are, of course, various reasons for UK gilt yields being negative at present. But a big one is quantitative easing, whereby the government has forced yields down by buying up almost a third of the total gilt stock.

Again, there are various good reasons for this policy. But one characteristic of financial repression, as Reinhart and Sbrancia put it, is "a pervasive lack of transparency."

That is, it tends to be a covert byproduct of measures which are otherwise benign. If it could be done overtly, after all, governments could simply raise taxes or slash spending and have done with it.

There are occasional exceptions, such as the US government's conversion of short-term debt in 1951 into 29-year unmarketable bonds. But that episode is instructive, since another key to repression is to push the maturity of debt further out.

Last week's news of UK government plans to issue gilts with maturities of 100 years or more is therefore relevant. No one will be obliged to buy them, but they will give the government more elbow room in the matter of inflation.

Inflation does not aid repression if a government has to borrow in the near future -- that is, if inflation is already in the price. But the average maturity of UK gilts is an unusually long 14.5 years.

So come the day that the UK's finances are back in primary balance, the inflationary door will be wide open. From a policy standpoint, not to take advantage of that might seem positively remiss.

So to the second part of the process -- the dragooning of financial institutions. The most obvious element of this is regulatory pressure on the banks to buy sovereign debt.

Again, note the ostensibly benign purpose. It is of course sensible to make banks hold low-risk liquid assets. But the fact that many sovereign bonds are neither of those things is a clue to the wider agenda.

Next, the pension funds. I wrote recently about how the UK government is pushing local authority pension funds to invest in infrastructure -- that is, to divert funds to projects the central government might otherwise have to pay for.

A starker illustration is the pension fund of the Royal Mail. It is now confirmed that as soon as permission is secured from the European Commission -- expected by the end of this month -- the UK government will take over the fund's L28 billion of assets and L32 billion of liabilities.

The assets will then be sold to pay down government debt. There is apparently some debate over whether the proceeds should go on infrastructure -- that is, capital projects -- or current spending. But after a year or two, who will know the difference?

The liabilities, meanwhile, will vanish off the government's balance sheet. That is, no doubt, fiscally imprudent. But as the pensions consultant John Ralfe points out, it makes little practical difference, since the central government stands behind the Royal Mail and local authority pension funds already.

What are the nation's savers to do about all this? Beyond steering clear of gilts at any price, not a lot.

Ultimately, the only question about debt is who pays for it -- the borrower or the lender. This way, governments hope, that reality will pass unnoticed.

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Prophecy Platinum (TSXV: NKL) and Ursa Major Minerals
Sign Combination Agreement

Company Press Release
Friday, March 2, 2012

VANCOUVER, British Columbia, Canada -- Prophecy Platinum Corp. (TSX-V: NKL, OTC-QX: PNIKF, Frankfurt: P94P) and Ursa Major Minerals Inc. have signed a binding letter of agreement for a business combination through a proposed all-share transaction. In doing so Prophecy and Ursa have acted at arm's length and the transaction has been negotiated at arm's length.

Prophecy will issue one common share in exchange for every 25 outstanding common shares of Ursa. Ursa options and warrants will be exchanged for options and warrants of Prophecy on an agreed schedule.

Prophecy's offer represents a value of about $0.15 per each common share of Ursa based on Prophecy's share price of $3.70 as at March 1, representing a premium of 130 percent to Ursa's March 1 closing price of $0.065.

Prophecy is to subscribe for $1 million common shares of Ursa by way of private placement financing at $0.06 per share, subject to regulatory approval. Upon placement completion, John Lee and Greg Hall, current Prophecy directors, will be appointed to Ursa's board.

Prophecy thus will become a mid-tier resource company with a robust and
diversified pipeline of platinum nickel projects, including:

-- The fully permitted open-pit Shakespeare PGM-Ni-Cu mine close to Sudbury, Ontario, infrastructure with near-term production capabilities.

-- The flagship Wellgreen (Yukon) PGM-Ni-Cu project with more than 10 million ounces of Pt-Pd-Au inferred resource. Drilling is under way and a preliminary economic assessment study is pending.

-- Manitoba's Lynn Lake Ni-Cu project with more than 262 million pounds Ni and 138 million pounds Cu measured and indicated.

For the complete announcement, please visit Prophecy Platinum's Internet site here: