Gold

[Springbok]

Disclaimer: what follows is not investment advice, but sharing of information. Anyone who acts on this information, do so out of their own free will.

Right, now that I've got that out of the way...

Gold as an investment is a topic close to my heart and I'd like to share a few thoughts. Most of the West still shuns the yellow metal, but the Chinese, Indians, Russians and Arabs are quietly accumulating as much gold as they can. They see what's happening to the US dollar and know that gold is the ultimate protector of wealth during periods of currency devaluation.

For the man in the street, there are 2 basic ways of investing in gold - either buy shares or the physical metal. Shares carry higher risk (volatility) than the metal itself, so the more conservative route is by buying either Krugerrands or a gold exchange-traded fund (ETF). The advantage of the gold ETF is that it is much more liquid than the Krugerrand. The gold ETF trading on the JSE in South Africa is called Newgold (code GLD) and you buy it just like you would buy any other share. On the Australian Stock Exchange they call it Gold Bullion Securities (code GOLD). All gold ETFs are backed by physical gold and therefore track the gold price directly.

I assume most of my fellow forumites are in the process of settling in Australia eventually, therefore it would make more sense to buy the Australian ETF rather than its South African equivalent. Simply open an account (resident if in Australia, non-resident if still in South Africa) at a stockbroker of your choice, deposit money into your account and then buy the GOLD ETF on the ASX. It's current price should be about A$8 per share.

As with any investment, remember to do your own due diligence before committing any funds. We all have different investment objectives and constraints.

Gold's price history is briefly as follows:

Traded around $200/oz in early 1970s

Peaked at $850/oz in January 1980

Bottomed at $252/oz in 1999

Currently at $630/oz

Commodities usually have long cycles, typically 20 years. The last bear (declining) market in gold lasted from 1980 until 1999, about 20 years. The current bull (rising) market is only 6 years old and although the price has risen by 150%, gold at $630/oz is still cheap. Remember the nominal high of $850/oz in 1980 is equal to roughly $2000/oz today when adjusted for inflation.

The very best source of information in my opinion is the website of veteran gold trader Jim Sinclair. Well worth reading, especially if you are following the financial markets.

The following article basically sums up why gold will continue to soar in years ahead.

Trillion Dollar Killing Act III

Published 0920 EDT Monday November 20 2006

Vol 16 Issue 128

Good Morning: Every so often, someone gets the idea to try and corner some market or other, in the belief that they can force the price of their hoardings upwards, creating a worldwide mania of sorts. It can often produce almost unbelievable winnings for those who are able to cash in big and exit, before the rest of the mob catches on. History is littered with such events, such as the famous "South Sea Bubble" in England and "Tulip Mania" in Holland. While some known rogue nations may have already averted to printing counterfeit US dollars (amounting to easier, albeit illegal ways to vast riches) this could be something already helping to devalue the US unit. Rich nations could achieve similar ends, merely by purchasing gold.

The billionaire Hunt brothers tried to corner the silver market in 1980, and OPEC effectively has been the architect of a massive squeeze in oil over the past 6 years, forcing the price up 8-fold and garnering staggering riches in the process. Saudi Arabia's revenues rose 44% over the past year alone and most oil producing nations have accumulated tens of billions of dollars in reserves that, added altogether, easily surpasses $1 trillion cumulatively over the past few years. This has emboldened many of these nations to want elevate themselves onto the world stage, spending large sums on weaponry.

Back in 1990, Saddam Hussein had designs on cornering the world oil market and for a while succeeded in briefly pushing the price of oil up to about $60 before his best laid plans were thwarted by a coalition response he probably grossly miscalculated. As a result of what is perhaps the greatest military blunder of the 20th century, not removing him from power during the first Iraq invasion may well have laid the groundwork for the oil boom of this decade—a boom which has been greatly exacerbated by 911, the conflict in Iraq and attendant supply disruptions.

Just as in the 1970's, when the first oil shocks occurred, there was a tremendous transfer of wealth from the consuming nations to the producing nations, and the end result was a near-hyperinflation of sorts that culminated in gold soaring to $875 and silver to $50, helped on by the Hunt brothers' designs on the silver market itself. The problem with the Hunt brothers: Their pockets weren't quite deep enough to pull off a total endgame, and the exchanges basically put them temporarily out of business by raising margins etc.

But what if the modern-day Hunt brothers were not individuals but an entire country? And not just any old country, but the largest and most populous nation on earth, owning the largest war chest in history, with reserves of over $1 Trillion. Add to that the very real prospect that this time around there's a finite supply of both gold and silver, and the world arguably could run out of both within a decade or so.

The potential to corner a large proportion of the world's gold could have consequences beyond imagination. It could create global turmoil and gum up the engine that has driven not only China's growth, but also that of the whole world—namely the United States economy, which has in the process racked up $9 Trillion in debt. The mammoth U.S. economy, along with the once-almighty U.S. Dollar, could soon become major casualties of some kind of hyperinflation. This would precipitate the greatest bull market ever in gold, thus prompting a cartel of nations to transfer trillions out of U.S. dollar-denominated assets in a mad panic.

The U.S. dollar over the past few years has been systematically weakened, while gold has systematically strengthened. But a concerted "Gold Rush" by nations bulging with record U.S. dollar reserves could result in a kind of buying frenzy as the realization of China's true intentions to corner the gold market become increasingly known. In creating its own 21st century version of Fort Knox—and being able to boast of prestige holdings that could amount to hoarding on a massive scale— China could effectively symbolize a new form of global dominance in gold.

As long time friend and perhaps one of the most totally committed, diehard passionate gold bugs of our era, Marty Weiss attests:

"If China were to lay its $1 trillion in reserves end-to-end using one dollar bills, the trail of paper would stretch for 96,906,565 miles. That's enough to wrap around the widest part of the earth 3,876 times! Clearly, Beijing's coffers are overflowing. In fact, China has the largest foreign reserves of any country in history. Compare that to Washington, which owes nearly $9 trillion (not counting contingent liabilities)! Whose paper currency do you think should have more purchasing power? Naturally, the Yuan.

Yet that's not the case — the dollar remains stronger than the Yuan. But not for long. Here's why ... China is going to corner the world's gold market. I warned of this nearly three years ago, but now the signs are even clearer: Over the next few years, China is essentially going to buy up the world's available gold, just as it is pouncing on whatever oil reserves it can get its hands on. They are literally cornering the market. In the process, the price of the precious yellow metal could soar to well over $1,000 per ounce, and eventually to more than $2,000 an ounce.

Mind you, this won't be intentional on China's part. Beijing will not set out to consciously "corner" the gold market. But that will be the result. Take it from me: I've met with central bankers, banking regulators, and gold traders in China. I know their views on the Yuan and gold. I've been told that China will be buying up huge amounts of gold.

You see, Beijing knows that the rest of the world perceives China's economy as loaded down with hidden debts and plagued by corruption. So as China progresses toward superpower economic status, authorities in Beijing want the country's currency to be a world-class, stable medium of exchange. They envision the Yuan as a major international currency some day, with as much (or more) status than the U.S. dollar. That's why they're going to back the Yuan with gold ... and loads of it.

Consider this: China currently has a mere 1.3% of its reserves in gold (600 tons). That's the lowest of any industrialized economy! To put it into perspective ...

* The U.S. has nearly 75% of its foreign reserves in gold.

* The European Union has 26.5% of its reserves in gold.

* Lithuania, Mozambique and even tiny Nepal all have more of their reserves in gold than does China.

Just to increase its reserves to a mere 5% in gold, Beijing would have to purchase $50 billion worth. That alone could easily send the yellow metal skyrocketing to more than $1,000 an ounce. And if China were to match roughly half of the gold reserves held by the United States, it would have to buy another $300 billion worth. That kind of buying would send gold to more than $2,000 an ounce.

We're getting closer and closer to the day when this scenario starts unfolding. Why? A few months ago, China announced that it will plow at least 2.5% of its trade surplus into gold. That's a staggering $2.5 billion of brand new demand for gold every year. Then, last week, People's Bank of China governor Zhou Xiaochuan said China's government is actively seeking alternative investments to risky U.S. dollars.

My view: China has probably already started purchasing gold. That's one of the reasons gold is now trading in the $625 range, well above important support levels on the charts between $590 and $600 an ounce. This is why I suggest getting a whole lot more aggressive in gold right now. By the time Beijing officially declares that it's buying gold, it will be too late.

Another Reason Why Gold Can Triple, and Four Ways to Profit:

In terms of the purchasing power of today's dollars, gold reached $2,176 in 1980. But right now, it's trading near $625 an ounce, less than one-third of its inflation-adjusted high. This alone suggests that gold has much more upside. Even if gold got only halfway to its inflation-adjusted price, it would zoom to more than $1,000 an ounce, more than a 50% gain from current levels. So is gold undervalued? You bet it is! Just to catch up with inflation, it would have to soar above $2,000 an ounce. China's buying would just be icing on the cake."

Thanks, Marty, for this excellent and insightful analysis...

But we, too, have been pounding the table about gold, along with Marty. First we've got the current state of global unrest and all that this might entail over the next few years. Next, there's the fact that when the rest of the world gets wind of whales like China, Russia, India and the Middle East competing against each other to buy gold there will be increasing media coverage as the price begins to escalate. Then, everyone from billionaires (of which the planet now has more than 1,000) to the man in the street will want in on the action. Finally, with all of the convenient and efficient new ways to invest in gold, and especially with added leverage, things could move very quickly, heightening expectations. This unfolding scenario will be all the more dramatic if gold production continues to decline, as it has for several years running.

The stunning rebound in Platinum prices of late has the metal defying all laws of technical analysis, soaring from sharp contract lows and rocketing back almost to new record highs. We believe this is foretelling of what lies ahead for the entire precious metals sector (and perhaps base metals too). Freeport MacMoran's bid for Phelps Dodge says it all. As with all recent takeover monsters, Freeport appears hell-bent on increasing in-ground reserves in a world where these increasingly valuable assets are a dwindling reality. Just as fears of a world running out of oil have sent oil prices soaring, it may soon—as in the late 1970s—be gold's turn to soar.

John Richardson (Savant)

For a complimentary subscription to John Richardson's "Investment Intelligence" Report, send an e-mail with "Attention: Savant" in the subject line to marketsavant@gmail.com

[Pieter]

Thanks Springbok, very interesting reading.

I watch the EUR/USD very closely almost everyday, and there is definitely some sort of correlation between the gold price and the dollar. As soon as the gold price go bull (up) the dollar most of time weakens. That is why I always keep an eye on the gold price when trading currencies.

I have to state the same as Springbok, this is not meant to be investment advice.

[Guest Bronwyn]

Damn that FAIS compliance huh?

Springbok - Can't I just give you all my money and you give it back to me this time next year with 30% added on?

I tried that with a stockbroker buddy this year but sadly it didn't go down quite like that...8 months on I'm still down. Serves me right for being greedy.

Bronwyn

[Springbok]

I watch the EUR/USD very closely almost everyday, and there is definitely some sort of correlation between the gold price and the dollar. As soon as the gold price go bull (up) the dollar most of time weakens. That is why I always keep an eye on the gold price when trading currencies.

Historically, there has been a very strong inverse correlation betweeen gold and the US dollar. The two are almost joined at the hip. No wonder gold is sometimes called the anti-dollar. Because gold is the ultimate store of wealth, it is nothing more than a barometer of the health of the US dollar (a fiat currency) and the reason why politicians hate gold with such a passion. A rising gold price tells you one thing - something is wrong with the dollar. Do yourself a favour and read the book Gold Wars: The Battle Against Sound Money as seen from a Swiss Perspective, by Ferdinand Lips.

The 5 keys to a bull market in gold are:

1. a recognized top in the US dollar index (USDX);

2. a recognized top in the US Treasury long bond;

3. a bullish phase in commodities in general (CRB Index);

4. confirmed deficits in the US budget, Current Account and Trade;

5. Declining trust in paper assets.

Although the euro has gained much against the dollar during the last few years, as a paper currency and political experiment it is also inherently flawed. However, watch out for 1.40 USD/EUR, but even better, a 4-digit gold price. Basically it's all part of the Kondratieff wave now in its winter phase, during which debt is cleansed from the economy and gold rising in value as paper currencies experience competitive devaluation. See the case for gold.

[Springbok]

Damn that FAIS compliance huh?

Springbok - Can't I just give you all my money and you give it back to me this time next year with 30% added on?

I tried that with a stockbroker buddy this year but sadly it didn't go down quite like that...8 months on I'm still down. Serves me right for being greedy.

Bronwyn

only 30%?? your stockbroker buddy is clearly still stuck with the herd in financials and industrials, tsk, tsk... which firm is he from?? he ought to be fired! it's an absolute shame to be down for the year, the financial fraternity once again got it wrong with resources. They never learn...

A friend asked me which stocks to buy a year ago, so I gave him a few options: Sappi, Didata, Liberty International, Angloplat. Sappi was one of the most-hated shares at the time, still is. He opted for Sappi, bought at R76 in January and still holding at R118. That's 50% already and I told him there's more to come. Be right and sit tight. In March, the propellerheads at Deutsche Bank rated Sappi a "SELL" at R94. My oh my.... the research of those clowns are excellent contrarian indicators. Whatever they say, just do the opposite and you'll make money. I expect them to rate Sappi a "BUY" once it trades above R150. That will be my cue to sell and feed the dogs.

By the way, Didata is up 30% so far this year, Lib-Int has gained 69% and Angloplat added 75%.

[Springbok]

Hi Bronwyn

The Excel file below shows the 50 biggest companies by market capitalization, listed on the JSE.

I grouped them by the 3 main sectors, i.e. resource, industrial and financial.

Looking at the price changes for this year so far, it is patently clear that resources were the winners, an average gain of 59% per stock!

The "dog" of most analysts, Sappi, shows the 7th best gain so far!

Which proves my point that equity analysts are often wrong in their research recommendations.

If you want a core list of stocks worth holding for the longer term, with money you're leaving in S.A. of course, then this is it:

Anglo, BHPBilliton, Angloplat, SABMiller, Liberty International, Sasol, Remgro.

Once again, I've gotta cover my @ss, so the disclaimer in my original post applies and every investor should do his/her own homework before committing any capital.

Cheers

Charl

[Springbok]

Further to my remark that gold "is nothing more than a barometer of the health of the US dollar", here is more by U.S. investment guru Richard Russell:

If gold is just a relic. . .

Russell Comment --November 22, 2006 -- I just placed a one dollar bill on my desk, and next to it I placed a hundred dollar bill. What's the difference between the two bills?

Both bills are composed of the same thing -- linen and cotton. So what's the difference. The difference is the writing on the two bills. Both say they are legal tender "for the payment of all debt, public and private." The only real difference between the two items is that the Treasury states that one will pay off a dollar of debt while the other will pay off a hundred dollars of debt.

Thus, this nation's money has been degraded to the point where the writing on a piece of paper tells you what the thing is worth. This is money by government edict or by fiat. Intrinsically, neither bill is worth a damn thing. And ultimately, they'll both end up as bookmarks or museum pieces.

A measure of a nation's wealth, historically, can be gauged by the true value of its money. I've seen our money change drastically and fundamentally during my short 82 years on this earth. When I was seven years old in 1931 my dad could take his dollars and turn them into a bank for real Constitutional money -- gold. The dollar in those days was a call on gold -- the dollar was, in fact, "as good as gold."

After 1933 you could no longer turn in your dollars for gold, although foreign governments could still demand gold for their debts. In 1971 Nixon arbitrarily closed the gold window, because France was continuing to demand gold for settlement of debts. From that day on foreign governments could no longer settle their debts with the US with gold. After 1971 the dollar became a fiat currency, a claim on absolutely nothing.

Today the US government is absurdly split in its attitude towards gold. If gold is just a relic, then why did the US close the gold window and thus prevent foreign governments from calling in any more of our gold? Today, the US hoards its gold. But the US government doesn't want you to believe that gold is as valuable as the free market suggests that it is. How do I know that? I know it because the Treasury still insists that its own gold is only worth 42.22 dollars an ounce.

Yes, believe it or not, $42.22 an ounce is the price the US places on its entire stock of gold. Why not mark our gold to the market? Oh, the government can't do that, because that would mean that the US was conceding that the dollar was being devalued -- in terms of gold. You see, a rising price for gold in terms of dollars is tantamount to a devaluation of the dollar, and the US government doesn't want that, or I should say, it doesn't want that fact to be known. Keep the public dumb and passive, it's the government's way.

Over recent years the US Treasury has removed the silver from of our coinage. All our money is now composed of base metals. Recently, the government has even tried to steer people from paper to base-metal dollar coins. The reason -- metal coins last longer than "paper dollars." First we had the Susan B. Anthony metal dollars. Nobody wanted these undersized junk coins, and the mint is still sitting with millions of these klunkers. Next came the faux-gold Sacagawea dollar coins. The Treasury couldn't give those duds away.

But the geniuses at the Treasury don't give up easily. The latest scheme by these cone-heads is a series of dollar coins featuring a rotation of deceased Presidents. The new Presidential base-metal dollars will be 9.2% larger than our current junk quarters. The first of the new dollar series will feature George Washington. I can't wait to see this latest item -- maybe I'll even buy a few, and become a coin collector.

Speaking of precious metals, it's important to realize that silver is used industrially while this is not the case with gold. All the gold ever mined is probably above ground (except that which has been lost at sea), but silver is actually running at a deficit, meaning more silver is used and used up than is mined annually. The US strategic stock of silver is now gone.

Be that as it may, the ratio of gold to silver has been declining dramatically in waves over the years. The most recent down-wave began in May 2003. At that time an ounce of gold would buy 80.4 ounces of silver. As of yesterday, an ounce of gold would buy 48.04 ounces of silver, a huge drop in the ratio. This brings up the question -- should subscribers buy silver? Personally, I think it's a good idea, and the easiest way to do it is through the silver ETF (Exchange Traded Fund) called SLV. Each share of SLV is equal to 10 ounces of silver. SLV closed today at 130.30.

[Guest Bronwyn]

Three of our duds were Aspen Pharmaceuticals, Foschini & Richemont Thank goodness for BHP, Anglo American & Investec, or we would have been seriously in trouble. The Std. prefs were also a let-down. I just wish the broker had taken a view (like I told him to) that we needed to be out before the end of the year. I think he bought more medium-term stuff.

We ignored the old 'Sell in May & go away' and bought instead. Oh well, will be much more carefull next time.

[Springbok]

Three of our duds were Aspen Pharmaceuticals, Foschini & Richemont

huh!? RCH wasn't a dud as far as I know... I definitely would've bought Richemont, it's trading just below R40 currently and near its record high, so you MUST be showing a profit on it.

Aspen - not easy to decide on, but I never would've bought Foschini this year, the retail party is over. BHPBilliton is a great stock and it's also listed in Australia, you can put that one in the bottom drawer!

[Springbok]

See what I mean, those damn politicians are stuffing up the gold industry. If only governments would leave gold alone and not fight against it:

Why Gold Has A Difficult Future In Australia

Australasian Investment Review

Sydney, Nov 24, 2006 (ACN Newswire) - Today we start the first of an occasional series of articles on the Australian gold industry from the Gold Report Australia (see below) edited by Rod Holden.*........................

Most Australians don't realise that the Australian gold industry is the fourth largest export earner for the country, generating around $6 billion per year and ranking behind oil & gas, coal and iron ore.

Given that gold is such a crucial industry nationally (don't forget all the employment opportunities as well) it's hard to understand why the industry's future has been ignored by the Federal Government.

The treasurer, Peter Costello wasn't interested in the introduction of a Flow Through Share Scheme to ensure the gold sector would remain strong and continue to add significantly to GDP, but instead decided to continue supporting the Managed Investment Scheme, a similar product giving tax benefits to investors, that has led to companies, especially in the forestry industry, seeing exceptional growth since its inception.

The Flow Through Share Scheme transfers the tax deductions gained from conducting exploration back to the individual investor instead of being carried forward on the company's balance sheet to sometime in the future when the company can realise this loss against a taxable income.

In Canada, the introduction of this system is seen as the reason why it is now the world's leading equity raising market for resource companies.

In China, the gold mining industry has been supported by that country's National Government. China is now set to take the lead as the top gold producing country in the world through the dramatic liberalisation of their sector over the last four years. [Comment: that's because the Chinese, unlike the West, understands gold and can see the US dollar's demise.]

China is already the world's fourth largest gold producer behind America, Australia and South Africa and the top three have essentially remained stagnant due to the lack of large-scale exploration in the past 10 years.

Since the gold price started to move upwards in 2001, China has put in place measures that allowed large-scale foreign investment in China's gold sector, removed bans on private ownership of bullion and more recently started marketing gold as an investment category and store of wealth to the Chinese people.

The Chinese Government also realised that modern exploration, development and management techniques were the key to the successful development of their gold sector and have put systems in place that are producing a quantum leap in its development.

With Australian companies being rated as some of the best in the world when it comes to finding and developing mineral resources, it's no accident that the best performing foreign gold company in China is Australian.

What has the Federal Government done to ensure that one of Australia's largest export industries remained strong? Absolutely nothing!

Throughout the late 1990s when exploration funding had declined to critically low levels, professionals and the skilled labour force were leaving in droves to pursue more lucrative careers.

At the same time the industry was constantly lobbying the government about the need for support, to at least retain status quo with its labour force.

Now the costs associated with finding and developing resources have blown out dramatically because of labour shortages. There's no sign or any let up in the cost pressures.

So, what's ahead for the Australian gold sector?

It's a good bet that share prices in Australian gold companies will see more growth as the gold price continues to climb.

Fund managers entering the market again in the same fashion as in Q2 this year, could see US$1000/oz broken for the first time, signalling an increase in demand for shares in both producers and explorers as retail investors scramble to take advantage of rising profit margins and exploration success.

There's no doubt that the Australian gold sector will survive, but the days of this country being one of the top three largest gold producing countries in the world, with all the benefits to the economy and the steady growth in research and development of technologies that made the Australian gold sector what it is today, looks set to decline rapidly over the next 10 years.

If the Australian Federal Government had taken the initiative, as China did four to five years ago, the benefits that will be gained in the boom to come could have been exponentially greater and the future of the industry would have been assured for generations to come.

Australia didn't become the nation it is today on the back of a sheep. It was the minerals industry in general, with the Australian gold sector playing a major role in our development and we shouldn't forget it.

You only have to read the books of Geoffrey Blainey (The Rush That Never Ended, Mines In The Spinifex) to appreciate that. Maybe some re-reading of these standards is required in Canberra.

*Rod Holden is the managing director of Gold Report Australia Pty Ltd, a private investment company and information provider specialising in the Australian gold sector. www.goldreport.com.au

AIR publishes a weekly magazine. Subscriptions are free at www.aireview.com.au

About Australasian Investment Review

Australasian Investment Review (AIR) is a free daily news service with a weekly online magazine covering global financial markets with a focus on Australia, New Zealand and Asia.

Each morning (Sydney time) AIR's team of experienced journalists present you with a concise digest of expert opinions and analysis on trends and backgrounds that matter in these markets. AIR is available free of charge.

[Guest Bronwyn]

Sorry Bok, now I am the dud.

It was African Bank , Absa & even JD Group. Not Richemont (file was already packed in a box and I was too lazy to haul it out & check ).

Actually I had blocked the whole sorry mess out of my brain already.

I bet Absa's shares are back on their way up, huh?

[Springbok]

Sorry Bok, now I am the dud.

It was African Bank , Absa & even JD Group. Not Richemont (file was already packed in a box and I was too lazy to haul it out & check ).

Actually I had blocked the whole sorry mess out of my brain already.

I bet Absa's shares are back on their way up, huh?

Hmmm, yes, African Bank went downhill, JD Group so-so. JD Group spent R100 million on security in the past financial year! Crazy the in this country.

Absa is up at R118 again, probably because I started here recently...

[Springbok]

Gold vs. Paper: A History

"No paper currency has ever held its value for very long. Most are ruined within a few years. Some take longer. Even the world’s two most successful paper currencies - the American dollar and the British pound - have each lost more than 95% of their value in the last century... By contrast, every gold coin (and silver, for that matter) that was ever struck is still valuable today - and the coins almost always have more value than when they first came out of the mint."