OUTLOOK 2007, FIAT props MARKETS, GOLD to lead PACK, Watch ‘Big E’!

As market analysts approach the first quarter of a new year, they invariably take up the challenge of attempting to forecast what will happen by the end. Everyone’s looking for winners, be they metals, markets, currencies or stocks. Yet if statistical theories run true the search is futile unless – in some miraculous way –one can read into the future and forecast the ‘unexpected’.

The Financial Times end-of-year edition contained an appropriate comment on this topic by financial journalist John Authors. His column is always sub-titled ‘The Long view’. The writer was a great admirer of his predecessor Phillip Coggan who retired late last year. Authors will have a tough job filling his shoes. On this occasion his weekly column was headed:

‘Geopolitics, credit blow-ups, market forecasts – and the toss of a coin’

“A number of trends have been consistent ever since the bursting of the internet bubble in 2000. The world over, small companies and the value style of investing have outperformed year after year. So has GOLD, so have Industrial Metals, and so has Property. At an international level, so have Emerging Markets. And since Equities hit bottom in 2002, Equities have been a good place to be. At some point, these trends will pull back towards long-term averages. But there is no particular reason to expect these trends to reverse in 2007.

However, if the efficient markets hypothesis is correct, then the coin-tossing analogy is a good one. It holds that ALL information is incorporated into asset prices. Thus only NEW information will CHANGE them. This implies that there is no point playing the game of predicting next year’s market moves, as to do this would require information that is NOT YET KNOWN.”

If one accepts John Authors’ basic findings, the answer to his conundrum would appear to be twofold. First seek to obtain information which is not yet GENERALLY known. Second, ascertain whether under certain special circumstances it is not possible even to PREDICT what is not yet widely appreciated by sensing what to LOOK for. This letter focuses on both with one clear intention: that subscribers benefit and are blessed. His views could of course be wrong, but hopefully even the process to be followed will be an interesting one, treading paths ‘less traveled’ and encouraging others to try the same.

As a faithful member of GATA since the turn of the century, (Gold Anti Trust Action Committee) the writer has long been familiar with over-the-top projections of rising prices for gold versus crashing scenarios for the dollar and Dow. These ‘boom and bust’ forecasts regularly emanate from like-minded friends and associates all over the world. Many are joined at the hip through a common commitment to GATA.

The writer has made a number of similar ‘calls’ in his own capacity. Some, like those on the prices of Uranium, the Rand, and SXR (previously known as AFLEASE), have been good and rewarding – albeit after trials and tribulations in the case of SXR. His most accurate was an article written on March 17, 2000, numbered EM 19, entitled:

At time of publication the NASDAQ was five days past its all-time high of 5,135, reached on March 12, 2000. After quoting the views of Dana Buys of Ixchange, the writer predicted a 50% crash. Here’s what Buys said before the crash:

“This is a market driven by momentum, not value, and who knows where that begins!”

Two-and-a-half years later, on October 10, 2002, the NASDAQ registered an intra-day low of 1108, an overall decline of 78% from top to bottom. That said, honesty demands an admission that none of the writer’s gloomy forecasts of a deepening global market crack ever materialized to the extent predicted. Where collapses occurred – as in the example above - recoveries were swift. After the passage of time some even notched new highs, as in the case of the Dow. Many still gape in amazement at what has happened. It runs counter to common sense.

At the other end of the scale, the oft-proclaimed ‘runaway move’ in gold – blazoned to accompany the collapse in market indices - has also yet to materialize. The price of gold has certainly risen but the pattern of its behavior has been tame – at times inconsistent in relation to surrounding events. Negative economic news often sends gold reeling when it should be going up. GATA members are today fully persuaded that the rightful extent of gold’s potential appreciation has - for at least a decade - been covertly capped by the strong hand of ‘official intervention’. The authorities have used what GATA now refers to as the ‘Gold Cartel’. Whatever the explanation for gold’s poor performance, it still doesn’t exonerate those of us who got it wrong. So what is this ‘Gold Cartel’ and can one hope to stay its clammy hand in the future?

The ‘Gold Cartel’ can best be described as a coterie of ‘bullion banks’ – amongst them the likes of Goldman Sachs and JP Morgan. They act in concert with global money groups and international central banks, some of which are privately owned - as in the case of the Fed. Their collective long-term mandate has been to protect the FIAT currency system, especially preserving the continuing international acceptability of the US dollar. They achieve this by suppressing the price of gold so that it never ‘competes’ with the dollar – or for that matter any other FIAT currency. The word ‘FIAT’ is a direct translation of the Latin verb meaning: ‘Let it be done’. It refers to any paper currency whose sole value relies on a Government edict to the effect that it is deemed ‘an acceptable means of settlement’.

In contrast the Latin word ‘specie’ means ‘in the form of’ and refers to precious metals like gold and silver which have been minted in the form of ‘moneta’, the Latin word for ‘mint’. This is real ‘money’ and has intrinsic value. Should a Government explode in revolutionary chaos, previous edicts become worthless whereas ‘moneta’ retains its buying power through thick and thin. This is because the precious metal from which it is minted always retains its underlying value irrespective of the wishes of politicians.

In order to protect the acceptability of international paper currencies like the dollar, the ‘Gold Cartel’ encourages regular central bank sales of the metal to keep a cap on price. These sales often manifest secretly by way of what is euphemistically referred to as ‘gold loans to intermediaries’. The metal ‘loaned’ is immediately onsold, often with no expectation that the central bank lender will ever call for its repayment.

The subdued performance of gold keeps demand under wraps and investors away. Gold loans exaggerate supply despite the fact that free central bank stocks are finite and close to running out. Simultaneously and subtly the Cartel seeks at every turn to discredit the metal’s role as both ‘money’ and a ‘store of value’. To date these efforts have been largely successful, although in recent times the tide of battle has slowly begun to swing in favor of investors. Nonetheless, since the upturn in resource prices began in 2001, Gold’s performance has significantly lagged that of oil and other commodities. Key members of the IMF, like the UK under long-time Minister of Finance Gordon-Brown, have made repeated efforts to pass resolutions to approve disposal of IMF’s gold stocks. Whatever their ‘justification’, the IMF’s underlying motive remains the same - to aid and abet US Treasury efforts to contain the price. IMF stocks are claimed to exceed 3,200 tons. It is possible some have already been ‘lent’. This would help explain continuing Cartel success in suppressing the price – not merely by large-scale ‘shorting’ through derivative markets, but by locating fresh if dwindling physical stocks as well.

Despite last year’s sharp pullback in oil from $78/barrell in May 2006, to $55 by late January 2007, the latter price still comfortably exceeds oil’s 1980 high of $40. It compares with a gold price of $650 on the same day, versus a 1980 high of $875. The two commodities have maintained a relatively close relationship for over 50 years. Based on their respective 1980 peaks, Gold should be $1150 an ounce. The writer believes it will catch up fast during 2007. It should easily outperform equities and commodities. Against bonds it will eventually be a ‘no contest’ as the FIAT system gathers momentum, pumping liquidity to stave off recession and counter market risk. Silver might nudge ahead of gold but it’s nowhere near as liquid and no longer competes in the same monetary arena. It will undoubtedly make a comeback but is more volatile and carries higher risk.

As one enters 2007 there is a prospective change on the horizon which some have suggested might help level the playing field between gold and FIAT. Under pressure from US gold coin specialists Blanchard & Company, the IMF was alleged to have agreed to instruct central bank clients to disclose the status of their respective gold holdings. ‘Gold in the vault’ might in future be distinguished from ‘gold lent out and sold’. It would be exciting if the IMF were ever to carry out its promise. The writer doubts it. If markets ever had proof that two thirds of stocks had physically GONE from central bank vaults – all 20,000 tons of it loaned out and sold – the measly 12,000 tons left would spark a panic rise in gold. It would then make little difference whether the banks chose to write these loans off or call them in. The gold would physically have passed into someone else’s possession, most probably hanging round the necks of Indian brides. Attempting to buy the same gold back would be futile.

The IMF is not that foolish. In a weekend edition of the Financial Times, January 27/28, columnist Kevin Morrison quickly published a denial on behalf of the IMF. THREE DAYS LATER a ‘panel of eminent officials’ chaired by former Director General of the Bank for International Settlements, Andrew Crockett, recommended the SALE of 400 tons of IMF GOLD! The committee responsible included former Fed Chairman Alan Greenspan, ECB President Jean-Claude Trichet and, to the writer’s great disappointment, SA Reserve Bank Governor Tito Mboweni. The bankers grab them all, don’t they? Unsurprisingly Andrew Crockett – according to a recent GATA letter – is currently “President of JP Morgan Chase International, the great gold shorter for the central banks.”

“The Bank for International Settlements was the great coordinator of the central bank gold-price suppression scheme, as acknowledged in JUNE 2005 by the BIS’ own William S. White, head of the bank’s monetary and economic department.”

"The intermediate objectives of central bank cooperation are more varied.

First, better joint decisions, in the relatively rare circumstances where such coordinated action is called for.

Second, a clear understanding of the policy issues as they affect central banks. Hopefully this would reflect common beliefs, but even a clear understanding of differences of views can sometimes be useful.

Third, the development of robust and effective networks of contacts.

Fourth, the efficient international dissemination of both ideas and information that can improve national policy making.

And LAST, the provision of international credits and joint efforts to INFLUENCE ASSET PRICES (especially GOLD and foreign exchange) in circumstances where this might be thought USEFUL."

That is, central banks collaborate -- and since they do so in secret, it may be said that they conspire -- to rig the gold and currency markets. To use White's word, the central banks collaborate "especially" to rig the gold and currency markets.

Thankfully White did not accuse those who read his speech of being ‘conspiracy nuts.’

The above extract, in conjunction with the BIS Committee’s latest recommendation to dump 400 tons of gold, confirms the writer’s belief that rumours to the effect that the IMF was about to undergo a ‘Damascus Road Experience’ with regard to transparency on gold loans, is currently beyond the bounds of possibility. They are far too dishonest and it would seriously undermine their plans to continue capping the price of gold.

In light of such an indifferent track record on macro events, and taking special cognizance of John Authors’ cautious comments at the outset, one may well ask why further pronouncements on gold should prove any more accurate today, at the start of 2007, than they have done in the past. The writer trusts that No.78 – his current letter – will help persuade readers it is possible. There are certain keys. One was well-defined by Authors himself, being the ability to defy ‘efficient markets’ by having prior knowledge of future events. Stock traders call it ‘acting on inside information’.

Exchanges seek to prevent the practice on the premise that speculators take unfair advantage of those at the opposite end of trades. They act in blissful ignorance.

There is a second type of ‘inside knowledge’. It is the ability to construe freely available information in such a way as to derive specific conclusions which are neither appreciated nor understood by the wider body of investors. This gift is the dream of every competent analyst. It is the aim to which they all aspire.

Good chartists are often able to pick up both types of transaction by spotting ‘unusual trading activity’ in the way selected shares behave – especially when breaking up or down against a long-held trend.

Unfortunately both ‘inside information’ and ‘inspired analysis’ will always be vulnerable to intervention by ‘unexpected acts of God’. These can substantially alter any predicted course of events. Some of these ‘acts’ may bless. Others will cause short-term pain. For shareholders of SXR Uranium One, the recent flooding of CAMECO’s Cigar Lake deposit was a case in point. For SXR it proved a blessing. Threatening to deprive world markets of an imminent 18mlbs a year of fresh production, the accident effectively ramped the price of uranium from $54/lb to $72/lb in a matter of weeks. In response, the price of SXR rose sharply. For unsuspecting shareholders of CAMECO it had quite the opposite effect. Not only did the price of their stock initially fall but – unbeknown to most and ultimately more serious - the company had earlier sold a major portion of planned production ‘forward’, at fixed and therefore lower prices. They were banking on a major boost to group supplies from their jointly owned deposit at Cigar Lake. Now they will never get that extra production anytime soon. In fact some doubt the mine will ever reopen. CAMECO would then be forced to repurchase much of that tonnage way above the price at which it was originally sold. Losses could be substantial.

CAMECO’s plight versus the good fortune of SXR, reminds the writer of his earlier days as an aspirant golfer. Those familiar with the game will doubtless recall occasions when a competitor’s ball ends up in ‘the rough’ - better still a nearby pool of water. It earns the obvious comment: “Every shot pleases someone.”

Respected newsletter writer Jim Dines takes the CAMECO saga one step further. He claims that as an experienced chartist he was able to detect – well in advance - from the way the share behaved, that corporate insiders at CAMECO were fully aware that trouble of a sort was brewing. Months prior to announcing an ‘accident’ they were dumping shares in anticipation of what later ‘happened’. In other words the mine was already in trouble but the company buried the news.

There is a third type of ‘inside knowledge’. It is called ‘the prophetic’. The writer referred to it in No.77 when describing economic predictions emanating from ex-South African Kim Clement, a Christian Prophet now living in the US. His past and present prophecies may all be tracked on a website known as ‘The Elijah List’, where subscription is free. The writer took careful note in previous months of his prophetic promises of expected future blessings for the US nation, its economy – even its much-maligned President. It helped him question - and eventually lay down - stubbornly-held beliefs that the Dollar and Dow were both irretrievably doomed. He was able to open his heart to the alternatives. As this letter hopes to demonstrate, it has been an interesting exercise.

Part 1 presents a straight-forward economic analysis of current international events, but from a somewhat contrarian standpoint. Instead of forecasting doom and gloom for world markets, the dollar, and commodities, the writer will advance what he believes are cogent reasons why things could turn out different.

Part 2 will provide prophetic evidence to support the somewhat ‘out of the box’ contentions of Part 1, in order to give them greater credibility. It requires weighing up the imminent advent of ‘Big E’ and the extent to which there are sound reasons to believe that in five to seven years time, US dependence on Middle East oil could be significantly less than it is today – if not a thing of the past.

The writer will conclude No.78 with a detailed mid-term review of the South African ‘Pick Six’ investment selections made in No.77. A seventh will be added. The original six included three gold and three energy stocks. The former consisted of Harmony, AFGOLD and Randgold Exploration. Following Goldfield’s recent acquisition of South Deep from Barrick and Western Areas - a potential 70m ounce gold resource in South Africa’s famous Wits Basin – Goldfield’s becomes the writer’s number one ‘buy’ recommendation in gold counters worldwide. The three energy stocks were SXR Uranium One, Sallies (Fluospar for Uranium Enrichment), and SASOL. The latter was originally included as an alternative ‘oil stock’ due to its oil-from-coal and oil-from-gas technology. However, the advent of ‘Big E’ could have an additional impact on SASOL. This will be explained later. As at the end of January 2007, the original ‘Pick Six’ had appreciated an average of 24,3% since September 22 last year.

More follows for Subscribers:

The full report is 55 pages and includes a full analysis of the shares mentioned above (including SXR’s latest deal and Randgold) as well as a more in-depth look at the current dynamics in the gold and currency markets – why the dollar won’t fall.

Included is an update on Randgold (RANGY). You can find out more about becoming a SUBSCRIBER at Peter George’s website. The address is:

www.investmentindicators.com

Readers are advised that the material contained herein is provided for informational purposes only. The authors and publishers of this letter are not acting as financial advisors in providing the information contained in this publication. Subscribers should not view this publication as offering personalized legal, tax, accounting or investment related advice. Readers are urged to consult an investment professional before making any decisions affecting their finances.

Any statements contained in this publication are subject to change in accordance with changes in circumstances and market conditions. All forecasts and recommendations are based on the currently held opinions and analysis of the authors and publishers. The authors and publishers of this publication have taken every precaution to provide the most accurate information possible. The information & data have been obtained from sources believed to be reliable. However, no representation or guarantee is made that the information provided is complete or accurate. The reader accepts information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Markets change direction with consensus beliefs, which may change at any time and without notice. Past results are not necessarily indicative of future results.

The authors and publishers may or may not have a position in the securities and/or options contained in this publication. They may make purchases and/or sales of these securities from time to time in the open market or otherwise. The authors of articles or special reports contained herein may have been compensated for their services in preparing such articles. Peter George Portfolios (Pty) Ltd and/or its affiliates may receive compensation from the featured company in exchange for the right to publish, reprint and distribute this publication.

No statement of fact or opinion contained in this publication constitutes a representation or solicitation for the purchase or sale of securities or as a solicitation to buy or sell any specific stock, futures or options contract mentioned in this publication. Investors are advised to obtain the advice of a qualified financial & investment advisor before entering any financial transaction.


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