GOLD and the RAND – Safe Havens in the Meltdown

The above PICTURE is designed to be prophetic. It shows two buck standing safely in a stream of cool water. In the background is a raging veldt fire, but it cannot reach them. The buck represent

South Africa

whose sports teams were once called the Springboks.

The cool stream of water is the ‘Safe Haven’ of being a major producer of gold. The roaring fire is the global financial meltdown.

The SCRIPTURE taken from the Old Testament Book of Joel, speaks of a time in the future – and not that long either – when South Africa’s financial circumstances will be turned around, leading to a dramatic strengthening of the RAND. The process will be driven by a coming massive increase in the price of gold over the next three to five years, and a DOUBLING in the country’s production of the metal over the next ten to twelve years. The ‘locusts’ refer to the destructive forces which have ARTIFICIALLY reduced the country’s gold revenue. They achieved this in three ways. First, there exists a powerful international banking ‘cartel’ which over many years has deliberately suppressed the price of gold. A full justification of this statement will be provided. Second, amongst its wider circle of ‘friends’ the cartel numbers certain members of the international business community. Some of these were major producers of gold. Knowing the plans of the cartel, they thought it wise to sell much of their ‘planned’ output of the metal, ‘forward’, in expectation of a dismal future. Finally, when they got it wrong, not only did mines suffer, countries got hurt as well. South Africa’s deep level mines were hardest hit. Production shrank, investors fled, the Rand weakened.

This report will seek to demonstrate why ‘the years that the locusts have EATEN’ have come to an end.

From now on, both GOLD and the RAND will serve as ‘safe havens’ in a global financial meltdown. Over the next three years the Rand/Dollar rate should at least HALVE from R10/$ to R5.

South Africa

’s famous Witwatersrand Gold Basin once contained the world’s largest known deposits of gold. From its discovery in 1886 and over the 123 years that followed, the find has to date yielded 52,000 tons of metal. In 1970 production hit a peak of 1,000 tons, equivalent to 32m ounces. In that year, 75% of the world’s newly-mined gold came from South Africa. Since then it’s been downhill. At first the rate of decline was gradual. It took 23 years to fall from 1000 tons in 1970, to 605 tons by 1993, an average drop of 17 tons a year. In the following 7 years the rate of decline accelerated to 25 tons. By 2000 the figure had receded to 428. In 2007 the country’s international ranking finally slipped from top position, a place held since 1922. China shot ahead, followed in 2008 by the

. In the not too distant future – other things being equal - even

Australia

could overtake. Last year they were only a ton behind, at 219, as South African production hit 220. Admittedly that was largely the result of ESKOM power cuts.

With the commodity boom having burst, SA’s iron ore and platinum production has been cut sharply. ESKOM demand in 2009 will be down at least 7% from its peak of 2008. The Gold industry’s power requirements should no longer present a problem. 2009 should therefore see a bounce back in output from 220 tons to 240.

Nonetheless, because much of South Africa’s remaining gold lies at depth, mining experts, asset managers, and country risk analysts are largely persuaded the country will never again take pole position. ‘VM Limited’ – previously known as ‘Virtual Metals’ - recently published their annual ‘Yellow Book’. In it they described the future of the country’s gold mining industry as ‘bleak’. They should know, their boss, Jessica Cross, spent the last decade aiding, abetting, and promoting, the ‘forward selling’ of gold by miners everywhere. These would certainly have included South Africa’s biggest producer, Anglo American. The damage was huge and the name ‘Virtual Metals’ was appropriate. The company specialized in the sale of metals which had yet to be produced and whose existence was therefore only ‘Virtual’. No wonder the name has been changed to an innocuous sounding ‘VM’.

South Africa

’s relegation to the place of an ‘also ran’ in gold production could not have come at a worse time. World markets have been in meltdown mode, economies are shrinking at a frightening pace, commodity prices, though rallying, are down sharply. The flight to safety has increasingly been limited to the dollar, US Treasuries, and Gold – particularly gold coins. Few see light at the end of the economic tunnel any time soon. The likes of Paul Volcker, George Soros, Professor Nouriel Roubini and others of similar stature in the world of finance are variously predicting up to a decade of depression. Unfulfilled demand for South African Krugerrands has reached groundswell proportions that often command significant premiums on resale. Last month’s coin production by the country’s Chamber of Mines hit a 23-year high, but was a paltry fraction of what it used to be back in 1980. If only supplies of gold could match demand! Even if it were possible, neither the Rand Refinery nor the SA Mint – the first privately owned, the second owned and controlled by the nation’s Reserve Bank – any longer has the capacity they used to have. Both would need to be persuaded that rising demand is going to persist and grow. Last year the Royal Canadian Mint which produces maple Leaf Bullion coins, quadrupled its capacity. In due course the rest will follow.

Certain would-be gold experts, like the Jessica Cross of Virtual Metals mentioned above, currently predict a near-term top in gold. Cross maintains that present high prices will entice out countless tons of scrap. As an erstwhile proponent of ‘hedging’, she should know! Her major clients have doubtless lost millions over the past decade constantly being told the market would go no higher. Based on that presumption, they were advised and assisted to sell gold ‘forward’. Much of it was disposed of between a third and a half of current prices. Predicting tops that never materialized became a passion with the hedging community – starting in 1994, but gaining momentum from 1999 onwards.

As the current economic downturn has gathered pace, emerging markets like South Africa have been left nursing the wounds inflicted by rapidly falling commodity prices. There they probably should have hedged but rarely did! SASOL was an exception. They regularly sold a third of the oil they produced from coal, forward, but only for 12 month periods at a time. Whether they will do it again is now in doubt.

The country’s mining giant Anglo American, to the contrary, called everything wrong and now finds itself in increasing dire straights. Three well-known ‘rating agencies’, S&P, Fitch, and Moody’s, recently gave Anglo’s debt a two notch downgrade. Back in 1994 Anglo began hedging gold production at around $300 an ounce, selling it ‘forward’ at a fixed price five years and more into the future. As deadlines approached they would extend delivery dates and add nominal interest to improve a final price. Other tricks were to sell ‘call options’ and hope they expired worthless. What in retrospect was a momentous decision to become long term bears on gold, coincided with Central Bank efforts to suppress the price.

As a loyal member of GATA – the Gold Anti Trust Action Committee founded by Bill Murphy in 1998 – the speaker has over the years gleaned valuable inside information as to what has been taking place. Anglo’s friends at merchant bank JP Morgan, agents of the US Federal Reserve, probably assured their client, back in 1994, that Central Banks would never let the price run amok as they’d done in 1980. Back then it reached an intra-day high of $875. Ex Fed Chairman Paul Volcker to this day openly regrets having allowed it to happen.

In place of gold, Anglo went for Platinum. In the short-term they benefited from rising demand for catalytic converters from the auto trade. Longer term they hoped to cash in on a whole new market, the metal’s mooted role in the production of hydrogen fuel cells. Here they could miss the boat with the Chinese opting for the ‘Electric Car’, storing power in a Lithium-ion battery. That’s only a year down the line. Longer term, the hydrogen route could well circumvent the fuel cell by sourcing the gas from high temperature cracking of water, using a Pebble Bed Nuclear Reactor. Once engineers overcome the physical storage problem, the effect on global warming will be a big zero. The exhaust emissions from cars burning hydrogen is pure water vapor.

In the ultra short term, the auto industry has been crushed world-wide. Sales are generally down anywhere from 25% to 50%. Japanese exports to the US have fallen 52%. Those to China are down 45%. The impact on the PRICE of Platinum from falling demand for car exhausts has been equally severe. From $2300 an ounce back in March 2008, the metal has more than halved, at one point dipping below the price of gold, then at $750. Most auto makers now face mounting losses and major write-offs. Some, like GM and Chrysler, need massive bailouts and a miracle to survive.

To compound an error, Anglo has over the years relentlessly increased its holding in its platinum subsidiary, Angloplats, to a current 80%. Earlier and at great cost, they also took De Beers private. But who wants diamonds in a depression? Sales are falling off a cliff. De Beers biggest mines are closing down ‘till at least the end of the year. Anglo’s founder, Ernest Oppenheimer, once famously warned his son Harry, never to allow De Beers to run out of cash, especially in a downturn. The great grand children have forgotten the lessons of the 1930’s.

In contrast to its bullish approach towards Platinum, the corporation adopted an avowedly negative strategy towards Gold. It regularly sought opportunities to reduce its stake in its erstwhile gold subsidiary, Anglogold. Yet this was its only depression-proof asset. From owning around 65%, the group now holds a measly 11,8%. Even that is on the chopping block. Despite the best efforts of new Anglogold CEO, Mark Cutifani, the company still has an outstanding hedge of around 6m ounces of gold, sold forward at prices less than HALF current levels. While cutting its gold stake in face of a depression, the group holding company bumped its net debt burden up from $5,2billion at the end of 2007, to $11billion by December 2008. The increase went to fund the purchase of Minas Rio, a Brazilian iron ore company, right at the top of the market.

Unsurprisingly, as losses began to mount, Chief Executive Cynthia Carroll recently urged the Board to pass the final dividend. Ostensibly taken to reduce the risk of having to conduct a ‘rights issue’, it was the first time such drastic action had been taken since 1939. A seventy year record has been broken. In retrospect, Anglo’s lack of faith in gold has been a disgrace and the nation is well rid of them as a force of influence in the industry. Hopefully the new CEO and his growing coterie of fresh shareholders will craft a different way forward. Mining deeper will be a start. Developing a fresh sense of confidence, in both the metal, and the country that hosts many of its mines, will go a long way to restoring shareholder fortunes.

Once over 12m ounces of gold, Anglogold’s forward sales were equivalent to two full years of group output. As South Africa’s major producer, having to deliver 375 tons at 50% below market, significantly reduced the nation’s gold revenues and damaged the mining industry.

The rapid elimination of this practice by Anglogold’s new CEO will enable South Africa’s export income to benefit from the full effect of rising gold prices as the metal soars ever higher. Anglogold recently sold its minority stake in

Australia

’s Boddington mine for $1,1 billion. Hopefully this will enable the group to buy back a further 2m ounces of its hedge before the price takes off. Once the holding company’s last remaining stake has been disposed off, Anglogold would be well advised to change its name.

The collapse of South African gold production, coupled with the negative role played by its major corporation, have together been responsible for generating a growing pessimism about the country’s economic future. It explains why risk analysts have become bearish about the Rand. Zuma’s legal gymnastics have not helped either.

Today there is a common perception about the country’s gold industry. Because much of what remains lies at depth, it will prove too costly to extract. Capital required is excessive and the time it takes to bring new mines on stream is prohibitively long. The precipitous decline of production over recent years supports these conclusions.

The purpose of this report is to demonstrate that given the right market environment, confidence in the country, patience, and good management, the truth can be different. In this event, other things being equal, it would materially affect long and short term prospects for the Rand, the nation’s thermometer of current and future financial health.

As the writer was typing this paragraph he came across an updated reference to South Africa’s ‘Debt-to-GDP’ ratio. Following Finance Minister Trevor Manuel’s latest budget it stands at 25%, down from nearly 50% in the early ‘90’s coinciding with the change to majority rule in 1994. It compares with America’s figure which will shortly top 100%, and Japan’s which has already exceeded 200%.

‘This makes our international exposure more prudent than almost any other country.’

In mid 2007, the Chief Economist of the Chamber of Mines, conveyed to the author of this report certain pertinent facts about the Witwatersrand Gold Basin. He confirmed it had yielded over 51,000 tons of metal since mining first began in 1886. However, he went on to insist that to the best of the Chamber’s knowledge, the Basin still contained an estimated 40,000 tons of gold. Of that amount, 25,000 tons was currently accessible given known mining skills. However, he said only 8,000 tons was at that stage profitable, based on a then gold price of $650 an ounce and a Rand rate of R7/$. That was equivalent to R145, 000 a kilogram. A year ago Anglogold’s new CEO informed its shareholders their company was researching the possibility of mining to a depth of 5,000 meters below surface. Operations at the Group’s Mponeng Mine, previously known as Western Deep Levels, are presently the deepest in the country and already take place below 3,700 meters. More to the point, last quarter’s costs for the mine came in at R90,000 a kilogram of gold produced, versus a current Rand gold price of R300,000. That’s already TWICE what it was two years ago. Despite its depth, the Mponeng mine is highly profitable. Experienced engineers and geologists eventually foresee the industry operating safely down to 6,000 meters.

Clearly, at 5,000 meters, and given CURRENT market conditions, the Wits Basin still has a potentially profitable 25,000 ton gold resource. It will enable the industry to ramp last year’s output, from 220 tons to around 500. South Africa’s huge deposit will still enjoy a FIFTY YEAR LIFE. Admittedly the ramping process will be slow, requiring lots of capital and a decade of time. Once achieved, and properly maintained with the necessary underground development, the Basin would continue to support many years of profitable production.

The effect of such a step change to the nation’s finances, even assuming current market conditions, would be significant. It would be even more exciting if in the interim the price of the metal were to rise by multiples of its current spot of $929 an ounce.

This report will seek to demonstrate that the above two outcomes are more than possible. They are in fact highly likely. In this event, and other things being equal, the short and long term effects on the Rand/Dollar exchange rate will be nothing short of miraculous. In order to understand some of the forces responsible for driving both the gold industry and the price of the metal, it is helpful to go back in time and study major changes which affected the price of the metal in the past, then decide for how long they can continue into the present.

Back in the nineteenth century, and right up until 1934, the price of gold had been fixed by the American Treasury at $20.67 an ounce. As the economic depression of the 1930’s gathered steam, the plight of America’s banks grew worse. Borrowers threw in the towel, much as is happening today. Twenty one years earlier – in 1913 to be precise - the nation’s moneyed elite bribed a would-be President Woodrow Wilson to pass the ‘Federal Reserve Act’, placing control of the country’s money supply in the hands of private bankers. Led by Senator Nelson Aldrich, maternal grandfather to David Rockefeller, the group included J. Pierpont Morgan (Today’s JP Morgan) and Andrew Carnegie. Over the water, pulling strings, sat Lord Rothschild and the Bank of England. The President who caved was Woodrow Wilson. The Act he allowed to pass gave the Fed the right to print and print big! Yet it was – and remains to this day – in total conflict with Article 1, Section 8, of the American Constitution which clearly states:

“Congress shall have the power to COIN money and regulate the value thereof.”

“No state shall make anything but GOLD and SILVER coin a tender in payment of debts.”

Returning to the panic of the 1930’s, one can observe how the right to own and use gold was taken away. In October 1931, to stem the outflow of gold from the US to Britain, the Fed raised its discount rate TWICE in a month. It was the sharpest increase in so brief a period throughout the institution’s entire history. It triggered a spectacular rise in bank runs with 522 commercial banks closing their doors before the month end. The extinction of bank deposits led to an abnormally large DECLINE in the stock of money. This in turn caused DEFLATION and a sharp fall in output.

“forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates.”

By May 1, 1933, all persons were required to deliver all their gold to the Federal Reserve in exchange for a set price of $20.67 an ounce. Violation was punishable by a large fine or up to ten years in jail. Shortly afterwards the Treasury raised the price of gold to $35 an ounce but only for the purpose of international transactions. The US government had devalued the dollar 41%. By sterilizing profits in the hands of Treasury, the economy was prevented from gaining any financial boost. In the absence of confiscation there would otherwise have been a significant incentive for prudent savers to spend a portion of their gains, thereby counteracting the effect of depression.

The price of gold remained fixed at $35 an ounce for Central Bank buyers and sellers, until President Nixon ‘closed the gold window’ in August 1971. By then foreign banks had swallowed a third of America’s gold stocks at artificially low prices.

In 1970, a year before all this happened, and under pressure to generate maximum revenue at an artificially low price, South African gold production hit an all-time peak of 1,000 tons. This fact was mentioned earlier but not the reason. Because prices had been artificially pegged at $35 for so long, mines were under growing pressure to break even, never mind show a profit. To achieve this, mines were high-grading their deposits to survive. They should instead have been mining at an ‘average life-of-mine grade’ to maximize eventual extraction. This would have extended the life of the country’s deposit, but they couldn’t afford to do it.

From 1971 onwards, following closure of the US Central Bank ‘Gold Window’, the price of the metal began to rise. On December 31, 1974, President Ford cancelled the ‘Limitation on Gold purchases’ for US citizens. That freed up massive new buying, which the US Treasury immediately attempted to squash by simultaneously announcing a series of Gold Auctions. The first auction smashed the price of gold back from $180 to $100 an ounce. It happened to coincide with US political pressure on South Africa to force the country’s northern neighbor Rhodesia to forego its declaration of UDI – Unilateral Declaration of Independence – and succumb to ‘Majority Rule’. The US Treasury took the attitude it was far easier to control a high-spending Black-majority government, than a disciplined White government. Welcome Mr Mugabe. Thank you Henry Kissinger!

Apart from attempts to influence white-controlled South Africa, it also marked the beginning of what became an increasing strategy to control the extent of any rise in the price of gold because it reflected negatively on the dollar and all FIAT currencies. As the price rose from $35 in 1971 to $875 in 1980, total mined tonnage of ore increased but output of gold fell as it became financially feasible to extract lower and lower grades. In a belated reaction to changing times, the process of reducing grades only reversed some years after the price in dollars had peaked.

George Bush Senior’s term of office as President came to an end in early 1993. Reporter Jeffrey Steinberg relates how three years into his ‘retirement’, on December 1, 1996, Bush Senior gave an interview to Parade magazine in which he stated:

``I don't want to be at the head table anymore. I care about being a good citizen. I don't join boards of directors, and I don't go into business deals. I've had every opportunity to join in putting a petrochemical plant in Kuwait, a chance to make money. I haven't done it. The way I make a living is giving speeches. Get paid a lot of money for giving a speech. No conflict of interest.''

Steinberg then went on to describe how in stark contrast to his undertaking, the ex-President had indeed acquired a very IMPORTANT foreign corporate affiliation:

“In May 1995, the Canada-based Barrick Gold Corp. created an international advisory board around the personal leadership of Bush, and Bush was designated ``honorary senior adviser'' to that board--a legal fiction to disguise the former President's active role as chief business developer for the company.”

Other members of the Board were Brian Mulroney, ex-Prime Minister of Canada, and Karl Otto Pohl, ex-President of the Bundesbank, Germany’s Central Bank, and an ex-top official of both the International Monetary Fund and the Bank for International Settlements.

Bill Butler, author of the bi-monthly Privateer financial letter, describes how in the two year period from 1994 to 1996:

“The price of gold was unbelievably ‘trapped’ in a $20 trading range between $375 and $395, despite a series of global political and economic crises. These included the Mexican debt crisis, the Californian debt crisis, a global bond market bloodbath, a threatened trade war between the US and Japan, and the US dollar plunging to record lows against both the Yen and the German Mark.”

“The purpose of the trading range was to encourage the attitude that Gold had lost its former use as a ‘hedge’ against price inflation and political and economic crises. This was done very successfully. The last time that Gold reacted to political events was the lead up to the Gulf War way back in 1990.”

With Bush Senior at the helm of Barrick Gold’s ‘International Supervisory Board’, he and his comrades would have been privy IN ADVANCE to all the above strategies to suppress and control the price of gold. It should therefore have come as no surprise to learn that from 1995 onwards, major mining houses ‘in the know’, such as Barrick Gold and Anglogold, both began to sell their gold production forward in earnest.

If 1994-1996 was a no-go time for gold, 1997 was in Butler’s words ‘Annus Horribilis’.

Fortunately, on July 2, before gold could run, the Australian Central Bank announced it had sold 167 tons of gold! What it is to have friends – even national producers!

On August 6 1997, the Dow hit its high for the year, 8,259, but by October the Asian Crisis was in full swing, hitting Hong Kong, Korea and Japan. In the US the Dow lost 1,000 points. By the end of the year Korea was within days of bankruptcy, the Japanese market was in free fall, Asian currencies had crashed. Yet in TWO months Gold had fallen $60 and by the end of 1997 was trading BELOW $300. In Butler’s words:

“The $300 ‘floor’ which had supported Gold ever since it rose above that level in July 1979, had now become a ‘ceiling’.

Yet in 1998, with gold still below $300, the Asian crisis had become, in President Clinton’s own words:

By late 1998 it culminated in the Russian debt default with the Fed lowering interest rates three times in seven weeks. Still gold was unable to move.

1999 began with another currency meltdown in Latin America, this time Brazil. Then there followed a war in Kosovo. Despite all this the Dow went UP, pushing through 10,000 for the first time ever, hitting 11,100 on May 14, 1999.

Back at the ranch, Gold finally began to bubble and the Central Banks knew they now had a problem. For a year the IMF had regularly been announcing plans to SELL GOLD. All G-7 nations came out with statements of approval. This time gold ignored the open threats of the bankers. The price began to push at $290. More important, gold shares in America, South Africa and Australia, literally caught fire. By May 6 of 1999, the XAU Gold Index had risen 46% since the start of the war in the Balkans. It had outpaced the Dow by a factor of three.

Central Banks went into a cold panic. Immediate action was necessary. The Bank of England came to the rescue. On Friday, May 7, 1999, they announced plans to dispose of 400 tons of Gold – half their total stock- in a series of auctions. By the time the first auction was held in July, Gold had once again retreated to its 20-year low of $250. South Africa thanks you, Gordon Brown. You’ve played a vital role in the important process of shrinking our mining industry. Don’t ever offer loans or grants to Africa! If you stop suppressing our gold price we will lend YOU money!

There was a further brief panic in September 1999, when the European Central Bank announced a five-year freeze on the ‘leasing’ and ‘lending’ of gold - all of which had been a euphemism for Central Banks lending to Bullion Banks who would later ‘sell’ the gold for cash. In most cases it is now taken for granted that the Central Banks themselves assumed the risk. In other words the gold has effectively GONE. It hasn’t been LENT, it’s been SOLD. Hence GATA’s assumption that true Central Bank stocks are more likely 12,000 tons and not the 30,000 tons they pretend to have. No wonder the US Treasury refuses to audit its gold stock - 8,150 tons my foot! Most of it has been sold off, either directly, or via ‘Gold Swaps’ where the Treasury ‘borrows’ gold from other Central Banks. The Germans lent them 1700 tons of well-refined gold which they later disposed off in Europe. In exchange, the Bundesbank was allocated an equivalent tonnage of so-called ‘deep storage’ gold in Fort Knox.

As late as February 2001, Gold was again as low as $253. It was not until August 2003, two and a half years later, that Gold finally broke free from the fetters of being contained below $300. Barrick and Anglo made the mistake of believing their ‘Banker Friends’ could do it for years to come. Now they pay the price. Six years on, Barrick’s ‘short’ position has been reduced from 18m ounces to 9m. Anglo’s is down from 12m to 6m. A week ago Barrick’s new CEO Aaron regent, was quoted in the London FT, explaining his strategy on hedging. The company clearly still has a very close relationship with its banker friends – they were given up to NINE years to deliver into a nine million ounce hedge position! Here is what Barrick CEO Aaron Regent said:

With a potential loss of up to $500 an ounce, totaling $4,500 billion, one would hope not. Since annual production fell to 7,4m ounces in 2008, closing the hedge will take more than a year producing at break-even or more likely a loss. Regent went on to tell reporters:

He must be in dreamland! When asked what they intended doing with their outstanding hedge positions, the FT reporter said:

“He indicated that Barrick had higher spending priorities for the time being than to buy back the contracts.”

As a long-time gold bear, Barrick’s attitude fails to surprise. It would serve them right if by the end of 2009 the price of the metal rises from its current level of around $920, to a sparkling $1500. That’s the writer’s call.

From the early 1970’s ‘till the mid 1990’s , the price of gold was observed to have two friends. The one was rising commodity prices, the other falling bond prices. If either or both those relationships suddenly FAILED to stimulate the price of gold – as mysteriously began to happen from 1995 until 2001 – then it stood to reason one of two things had happened. Either someone had discovered a MAJOR new gold field, or a powerful Central Bank was fiddling the price. It was certainly not the former. Mine supplies have been static. It has to be the latter. Can one investigate the facts without being labeled a ‘conspiracy theorist’? The writer will try.

Gold’s relationship with the CRB index of commodity prices lagged significantly from 1995 until early 2001. Historically the two had tended to move in tandem, except in times of severe economic stress as pertain today. Then, despite commodity prices crashing, gold inevitably reverts to its role as a ‘safe haven’.

Gold has another relationship - an ‘inverse one’ with the return on Government Bonds. The ‘real return’ on a bond is its yield AFTER deducting the rate of inflation. When the ‘real return’ on a bond falls or goes negative, the price of gold takes off. The reason is simple. An investor seeking to protect the buying power of his paper money is then better off exchanging it for gold, not bonds. This is because over the centuries gold has rarely lost its ‘buying power’. An ounce which bought a nice suit in 1800, still buys a nice suit today – maybe not QUITE as nice, because the price of gold has fallen behind. It is the prospect of ‘catch-up’ which makes it attractive now – and even more so if governments are about to print.

When did the suppression of gold start in earnest? The newly appointed Director of the White House National Economic Council is a man called Lawrence Summers. In 1988 he and his colleague Robert Barsky, co-authored an article entitled:

Neither of these gentlemen were fools. Their research proved the existence of a strong inverse relationship between the price of gold and the real return on government bonds. Take the current yield on a 30-year government bond. Deduct the latest annualized increase in the Consumer Price Index – i.e. the rate of inflation. If the trend of the figures over a period of time has been FALLING, the price of gold should have been RISING. This then sends a signal to existing bondholders. Be careful. Inflation is about to take off. It could trigger a sell off in bonds. This in turn fires a warning shot across the bows of a central bank. Your attempts to boost liquidity have reached a limit. Under certain circumstances, a central bank could be reluctant to stop. It might actually WISH to generate a measure of inflation in order to fight deflation and depression.

Take the situation which faces the global economy today. Imagine we have a government in power facing a major threat of recession. They wish to stimulate the economy. How convenient it would be if by deliberately SUPPRESSING the price of gold, they were able to LOWER long term interest rates and KEEP them down longer than normal. Borrowers would get a bigger boost than otherwise possible but bond holders would be none the wiser! They would have been hoodwinked.

Would America’s financial authorities ever indulge in such a deceitful practice?

In 1995 Lawrence Summers, the author of ‘Gibson’s Paradox’ joined the Clinton Administration. His first appointment was as Deputy Secretary to the Treasury under Robert Rubin. Then, when Rubin resigned in 1999, Lawrence Summers himself became Treasury Secretary. He only left in 2001 when the Clinton presidency came to an end. On a website entitled ‘Goldensextant’, GATA stalwart, Reg Howe, shows a chart stretching from 1977 to 2001. It plots the real rate of return on a 30-year bond against an inverted price of gold. In other words, the HIGHER gold prices occur at the bottom of the chart on the right. As rates decline on the left of the chart, the chart of gold should have been falling on the right as the price went UP. Instead, from 1995 when Lawrence Summers became Deputy Secretary of the Treasury to Rubin, through to 1999 when he took over, and again until 2001 when Summers himself resigned, real rates were FALLING. See blue line in chart below. Yet instead of the orange gold line FALLING as the price of the metal went up, the orange line ROSE, as the price of gold fell. Interest rates and gold both went down together as their lines DIVERGED. See below. Note how the two lines diverged while Summers was in the driving seat from 1995 until 2001.

See arrows on the right below the date ‘Jan-95’ .………… the starting point.

In Section 4 above, on page 12 and paragraph three, the highlighted section states that in February 2001, gold effectively double-bottomed at $253. Now observe in the chart above where the price of gold, the RED line, intersects with the right hand vertical at between $200 and $300. Look how far away it has moved from the BLUE line below. The blue line is the real rate of return on a 30-year bond. Well done Lawrence Summers! Your intervention into the gold market via bullion banks such as JP Morgan and Goldman Sachs was then highly successful. It certainly helped you keep long term rates lower than they might otherwise have been. Gold should have been $500, where the blue line intersects the right hand vertical. Instead it was trading at $253. It enabled Greenspan to boost the housing market with RECORD low interest rates. Buyers gained the impression they had nothing to worry about. Five years later rates had risen from 1% to 5%. That was in 2006. Now there’s blood in the street.

It is the writer’s contention that TODAY, with the UK attempting to drive long term bond rates to all-time new lows, and the US contemplating the same, gold should be more than DOUBLE its current price of $920.

Logical support for the above statement is found in the profit reports of major gold producers for the years 2007 and 2008, up until when commodity prices crashed in July 2008. Only now are gold mines beginning to enjoy mildly falling costs in the face of sustained prices for gold. If it were not for the current economic downturn, it would not be happening. Gold would still be lagging. It is for this reason that gold shares throughout the world have experienced a total trashing in recent years in relation to the price of the metal. It is entirely due to MANIPULATION.

The FIRST was by then Chairman of the Federal Reserve, Alan Greenspan in an address to Congress on July 24, 1998.

“Central Banks stand ready to lease gold in increasing quantities should the price RISE.”

The Fed would LEASE its gold out to bullion banks who in turn would SELL it into the market. If, as seems clear from Greenspan’s admission, the Fed chose to do this in order to STOP the price of gold from rising, it can probably be taken for granted that the Fed would have assumed the risk of capital loss, not the bullion banks which did the selling. In 1998, when Greenspan made the above statement, the Fed was certainly acting to intervene on the advice of Lawrence Summers and Rubin. It was Summers’ heyday.

The SECOND took place in February 2003. Barrick Gold faced an anti-trust law suit in New Orleans. They were being sued by Blanchard and Company. Barrick’s lawyer told the court:

“You can’t bring the central banks in, because they’re immune. You can’t bring in all the bullion banks, because they’re beyond the jurisdiction of the court.”

“I’m very much troubled by the end result of your argument, which is to the effect that if an outfit is LARGE enough and involves enough people, enough entities, then they can kind of do what they want…that because it involves so many POWERFUL ENTITIES FROM ALL AROUND THE WORLD …it’s going to be immune from being challenged…That’s…not acceptable.”

Here Barrick has openly confessed to participating in a gold price suppression scheme. However, in their defence they claim that in borrowing gold from central banks and selling it, they were simply acting as AGENTS. They could therefore not be sued as they shared ‘Central Bank Sovereign Immunity’.

The THIRD admission of guilt came from the Reserve Bank of Australia in their Annual Report for the year ending 2003. Under the heading ‘Foreign currency reserve assets and gold’ they admitted these were:

‘Held primarily to support intervention in the foreign exchange market….the assets are always available for their intended POLICY purposes.’

The FOURTH and most CANDID admission of guilt came in June 2005, when a certain William R. White was addressing the 75th Annual Conference of the BIS (Bank for International Settlements) in Basel, Switzerland. He was speaking in his capacity as both their Economic Advisor and Head of their Monetary and Economics Department. His audience was a gathering of Central Bankers and academics. White was specifically focusing on the topic of ‘central bank cooperation’, in particular what he referred to as their ‘intermediate objectives’. He listed five. The fifth was as follows:

“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.”

The answer is simple. When world trade and global economies are founded on a paper-based FIAT money system, devoid of innate value, there will be times when a runaway gold price can prove embarrassing. It will tend to expose the extent of TRUE inflation. People might then panic and dump their paper in favor of gold.

There will be other times, like the present, when expectations of a measure of inflation would be welcome. It would prevent people from hoarding and refusing to spend in fear of a growing depression. The act of holding back brings about the VERY circumstances they fear the most. Today having gold go up might counter investors’ worst fears of falling prices and rising unemployment.

On the other hand, if bond yields RISE in anticipation of a growing avalanche of government debt, then having gold take off could trigger a collapse of the BOND BUBBLE and a rush into the SAFE HAVEN of gold. Bankers are caught in a cleft stick. However the strategy they look set to choose is fraught with future problems.

Today the process of printing money is euphemistically called ‘quantitative easing’. The Bank of England has recently launched itself into an experiment. In due course they might be followed by the Fed which for now a trifle more hesitant. The BOE is initially planning to spend up to 75 billion pounds in order to buy government bonds, with the stated purpose of pushing down rates and creating INFLATION. It is madness. The inflation bit is good and necessary and Fed Chief Ben Bernanke explained the reasons as follows:

“In a deflationary situation, generating inflationary pressure is precisely what the policy is trying to accomplish.”

The problem is that one cannot create INFLATIONARY PRESSURES in a vacuum. Tagging along behind will be INFLATIONARY EXPECTATIONS. Once they arrive the bubble in bonds will burst. If in the meantime long term bond rates fall back to 2.5% or 3% - as they were in the US a while ago – the return of a mild 5% rate of annual inflation could cause bond rates to DOUBLE and bond prices to HALVE.

In the FT of March 16, an article by Edward Chancellor described the Bank of England’s buying of gilts with newly printed money as a ‘perilous policy’ and said that:

“Owners of gilts should be quaking in their boots….the bond market will likely crash…in the years to come owners of government debt will be the chief victims of this great monetary experiment.”

If the central banks are going to print – and they almost certainly have to – let them do it without artificially boosting the long term debt markets. Let the funds they create rather REPLACE the need to borrow by paying for government expenditure direct. Failing that, rising rates will cause the Dow to fall even further.

As the world economy stands perched on the edge of what threatens to be a second Great Depression, exceeding that of the 1930’s, it is helpful to go back in time. There are lessons to be learned and opportunities to be grasped if circumstances repeat. When markets crashed in 1929, cash became king. Did anything go up? Yes, the price of gold rose 69% from $20,67 an ounce to $35. It virtually happened overnight. There was also a remarkable coincidence between the lowest figure reached by the Dow, and the subsequent level to which they raised the price of gold, eighteen months later. The two were almost identical, 42 for the Dow versus $35 for gold.

A similar coincidence occurred when gold peaked at $875 in January 1980. For most of the preceding year and a half, the Dow had been trading between 800 and 900.

That brings us to the present. On Monday March 2, 2009, the Dow crashed convincingly below 7,000. On March 9, the Dow closed at 6,620, 54% off its October 2007 peak of 14,280 - time elapsed a year and five months. Apart from registering a 12-year low, its behavior identically matched the rate of decline achieved during the first phase of the Great Crash. On September 3, 1929 the Dow peaked at 381. Over the following year and four months, it fell 54% to 172 by January 2, 1931.

Hopefully this time round the Dow’s second phase rate of decline will be more moderate. Back then it fell a further 75% in the following 18 months, from 172 down to 42, a devastating 89% implosion from its peak of 381. The fate of the Dow now rests with the central banks. Will they print fast and hard enough?

If the Dow fell a more modest 47% over the next 18 months – and technical analysts think this might be sufficient - then expect the Dow to bottom at 3,500 by end July 2010. It’s dependant on central bank intervention. Although Fed Chairman Ben Bernanke is determined to avoid repeating the errors made by his predecessors in the 1930’s, there is to date little evidence that it is making a noticeable difference. More of the ‘Zimbabwe factor’ is urgently needed to regenerate a modest degree of inflation. British Chancellor of the Exchequer Alistair Darling is already doing his bit but in the wrong way. Unless he’s careful, the UK’s housing bubble will be followed by a bond bubble.

If the Dow hits and holds 3,500 by end July 2010, then using the same lag effect which operated in both the 1930’s and 1980’s, Gold should peak around $3,500 an ounce by end 2011 or early 2012. If central bank action were aggressively coordinated, the Dow and other markets might be induced to turn quicker and higher. By the same token, the ultimate target for gold would then be that much higher as well. Some analysts for whom the speaker has great respect – like Alf Field in Australia and Jim Sinclair in the States - are projecting gold to run to between $6,500 and $10,000 – and in the same 3-year time period! See a chart of the Dow/Gold ratio below.

Note how during the early 1930’s and late 1970’s, the Dow/Gold ratio moved towards 1, just above the zero level at the bottom of the chart, and below both horizontal red lines.

The chart below tracks the price of gold from 1970 to the present. The starting point, in relation to the decade that followed, paints a dramatic picture of what took place after Nixon closed the gold window in 1971. The little bump in the road, from 1974 to 1977, understates the pain suffered by American citizens who bought gold in 1974, in the immediate wake of President Ford lifting the nation’s 40-year ban on gold purchases by the public. To quell any initial enthusiasm, Ford’s Treasury Secretary launched a series of gold auctions, under the guise of:

In 12 months the price crashed from $180 to $103. Those who had the courage to stay the course for the next two years were rewarded when the price recovered. If they hung on until February 1980, they earned a better than four-fold bonanza. The price soared from $200 to $875.

The relevance of the chart below for today’s gold investors is to understand the significance of the metal’s sustained break above its $670 monthly closing high of 1980. When this market starts to run again, it’s going to take off like a rocket!

In a recent issue of the Financial Times there was a brief letter from a reader in New York. It was headed:

The man based his statement on the fact that gold touched $850 back in early 1980 and then took 27 years to recover. Even after 30 years of waiting, he says gold has only shown a gross return of 11%. By way of comparison he points out that in the same time period the Dow rose eight -fold from 850 to 6,800. What he forgets is that there is a time and a season for everything under the sun. Had he bought the Dow at its peak of 381 in 1929 he would have had to wait 54 years simply to get his money back! If he bought in 1996, he’s again gone nowhere. If he were to buy it now, at 7,200, he may yet have to wait another ten years to recover his money. If it roars back up to 10,000 as a result of central bank printing of money, he might meet friends who chose to buy gold at $920 instead. To hit the same target, they would have paid less than a seventh of what he’s prepared to pay – horses for courses.

The chart below tracks the performance of the Dow from 1990 to the present. It shows the significance of the recent break below 7, 200 at AB – stretching right back to 1997. It also helps one understand why the index can expect a measure of support around 3,500 at CD. However, unless the Fed prints big time, the Dow and other world markets could easily go lower. A repeat of the 1930’s 89% collapse would bring it right back to 1500.

A look at the chart of the CRB Index of commodity prices on the following page, stretching from 1996 to the present shows the brutal 50% correction from the highs of March 2008. However, it barely matches the pain experienced by the 54% collapse of the Dow over the same time period. Furthermore, if major commodity producers such as Australia, Canada and South Africa had nothing else to their credit than commodities, it would not have set them apart. They would have suffered like everyone else. There will almost certainly be a strong rally for commodities at some point in the near future, but until global economies turn convincingly upwards, the commodity price highs of March 2008 will remain unchallenged and dreams of the past for a number of years to come.

For the year to December 2008, Gold Mining directly contributed 1% to South Africa’s GDP. The indirect benefit amounted to 2.5%. Gold exports formed 7% of the country’s total. None of the above is particularly exciting. However, based on the evidence discussed in this report, the following conclusions may now be drawn.

On the basis that last year’s average price amounted to $875 an ounce, a rise in three years time to $3,500 by the end of 2011, would effectively quadruple receipts in year four, being 2012. This assumes South Africa’s gold production remains constant at 220 tons. In fact the country lost approximately 10% of potential output as a result of ESKOM power cuts. This malaise will reverse in the coming year due to better maintenance, restored coal stocks and reduced demand from customers other than gold mines. Gold output could therefore increase from 220 tons in 2008 to 242 tons for the year to December 2009 – or within 6 months thereafter.

Over the next twelve years, as the price of gold rises dramatically in relation to all other commodity prices, the incentive for the country’s gold mining industry to expand and go deeper will become more and more compelling. Over the coming 12 years, production can potentially more than DOUBLE from 220 tons in 2008 to 500 tons by end 2020.

Allowing for the effect of a quadrupling in the average price of gold, from $875 last year to $3500 for the year to end 2012, gross revenue by way of exports could have increased by a factor of 9 times! Assuming all other figures remained unchanged, gold exports would have risen 9-fold from 7% to (7x9) = 63. The base would also have increased from 100 to [100 + (63-7)] =156. Gold exports would by then constitute [63/156x100] = 40% of South Africa’s total exports!

If the price of gold in year five were to increase from a projected 3,500 to 5,000 – a figure in line with the estimates of certain of the speaker’s friends at GATA, but only HALF those of Messrs Field and Sinclair, – the effect on South Africa’s exports would be to increase gold’s contribution by a factor of 13 times instead of 9 times. Gold’s contribution to total exports would have increased from 7% in 2008, to almost 50% by end 2020!

When viewed in relation to other emerging markets, South Africa’s economic prospects in the long run look far more stable.

Over the medium term the country has a further stabilizing factor in its favor. ESKOM and Government together have a combined total of approximately R800 billion to be spent on a variety of infrastructure programs. Almost HALF will be spent to expand ESKOM. This type of program has taken years of preparation. In ESKOM’s case it is long overdue and if it were it not for the vicious and unexpected global downturn, the pain and disruption would have been far worse. Suddenly ESKOM’s timing looks brilliant. It was not. It was simply God’s mercy and government needs to be grateful. Most other countries are only NOW starting to draw up their plans to counteract the collapse of consumer demand. It could take most of them upwards of a year or more before viable projects are ready to go.

Finally, the country is expecting to host the world soccer final in 2010. The greatest benefit of this particular exercise has been the attention to detail which has gone into preparing the country for a flood of tourists. Government has been jolted into fixing, restoring and renewing everything imaginable. The effort is only now reaching a climax and is going a long way to soften the impact of the global slowdown.

When currency bears point to the country’s widening trade gap, it is important to distinguish between expenditures which fall into the category of ‘living beyond one’s means’ and those which are clearly ‘investments in the future’. South Africa’s large and even growing trade gap stems mainly from the latter. It is therefore unlikely to give rise to more than mild concern. Furthermore, once the price of gold begins to take off, the investment attractions of the Rand will reassert themselves.

It is always useful to pay occasional reference to the so-called ‘MAC INDEX’. This compares the cost of buying an identical food item in each different country simultaneously. The last time the speaker looked, South Africa was bottom of the list. The country could tolerate a HALVING in its current Rand/Dollar rate of over R10/$. At R5/$ a South African-purchased McDonald Hamburger would cost the same as in the US!

For foreign investors, nothing attracts like a gently rising currency. The RISKS of investing in South Africa today – other things being equal – look well below the average. See chart of the Rand below:

Any break below R9,75/$ can trigger a pullback to R8,75/$. If gold takes off and reaches $1500 by year end, the Rand could easily strengthen back to R8/$. By then, despite a stronger currency, the Rand gold price would have increased from R300, 000 a kilogram to around R380,000. With the rest of the world in depression, mining costs other than those of ESKOM power would be falling. With thousands of mineworkers losing their jobs elsewhere, labour costs would at worst be constant.

Within the next three years the writer definitely expects the Rand to come back to its long term trend at between R5/$ and R6/$. In the longer term the Rand should break DOWN below its 20-year trend, moving to between R3/$ and R4.

There are a number of ways in which potential investors can benefit from the above conclusions. The simplest would be to purchase gold bars or Krugerrands. However, now that the mining cost cycle has reversed due to falling commodity prices and growing deflation elsewhere, Gold shares can be expected to OUTPERFORM the metal by a significant margin. With a potentially robust currency in the background, the dollar prices of most South African gold shares look set to play catch-up with their counterparts overseas, having spent a decade in the dog box.

By way of comparison, international gold heavyweights like Newmont are three times more expensive than their South African counterpart Goldfields, despite having similar reserves, substantially smaller resources, and operating in certain environments where the attitude to foreign investors is far less than friendly than that of South Africa – despite all the hassles of Black Economic Empowerment.

Employers need to bear in mind that BEE has distinct social advantages. It softens racial tensions and brings an increasing measure of equality into the workplace. Having said that, its life cycle should nonetheless be cut short if young whites are to be persuaded to return home from overseas. Their skills will be in great demand in the years to come and if BEE can be modified and softened, the attractions of living and working in

South Africa

in the next two decades will become increasingly COMPELLING.

The Rand price of Goldfields is currently below R120 and that of AFGOLD is R1, 50. Assume a R10/$ current exchange rate to bring these prices to Dollars.

By the end of 2009, with gold at $1500, Goldfields should not be less than R200, with potential to R300. AFGOLD should be at least R5, 00 with potential to R10, 00.

PS. In paragraph 1.4 above, headed: ‘The Decline and Fall of Anglo American’ the writer described how Anglo had been reducing its once controlling stake in its gold company, ‘AngloGold Ashanti’. He went on to suggest the following:

‘Once the holding company’s last remaining stake has been disposed off, Anglogold would be well advised to change its name.’

Within minutes of ending this report, Anglo announced it had disposed of its remaining 11% stake to a hedge fund in the US called ‘Paulson and Co’, hopefully nothing to do with America’s ex-Treasury Secretary, Hank Paulson. In an article accompanying the announcement, the authors provided a brief summary of the acquiring fund’s recent track record. See below:

Paulson, 53, manages about $30 billion. His Credit Opportunities Fund soared almost six-fold in 2007 on bets that sub prime mortgages would plummet. Last year, his flagship fund returned 37 percent, compared with a loss of 19 percent for hedge funds on average.

The firm may have made 311 million pounds ($428 million) since September by betting against the shares of Lloyds Banking Group Plc and HBOS Plc, according to regulatory filings last week.

“He made a name by being able to see the potential for extreme economic events and making bets on those that can pay off,” said Michael Dubin, president of New York-based the LongChamp Group Inc., which allocates client money to hedge funds.

The writer was struck by Michael Dubin’s description of Paulson’s ability to foresee ‘extreme economic events’. He further agrees that, under the financial circumstances facing the world today, Paulson’s latest acquisition – a major producer of gold – is the best way of protecting one’s capital. He finds Paulson’s outstanding investment track record very encouraging and is confident that Paulson will push AngloGold to close its outstanding 6m ounce hedge position as soon as possible. Once it has been done, the writer will himself be happy to recommend the purchase of AngloGold to clients and subscribers.

A final word on world markets. The Dow has already rallied from 6,620 to 7,400 at the time of writing. Expect a final push towards 8,000 by the beginning of April. The G20 meeting is due to take place on April 2. Traders often say: ‘Buy on the rumor, sell on the news.’ It is unlikely the G20 will live up to expectations. With global financial damage to stock and property markets approaching a combined total of some $50 trillion, nothing the IMF can do stands much of a chance of halting the slide. Even a $750 billion boost to the fund’s resources is incapable of making a sufficiently significant impact to reverse the course of events any time soon. Once the rally peters out, GOLD will take off.

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The writer trusts this article brings a measure of encouragement to subscribers.

Those with queries may contact the writer’s assistant, Charlene Key.

Telephone number +27 21 700 4880 (Cape Town)

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.

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