Friday, November 25, 2005

Russian Central Bank Gold Reserves to Double

The Russian Central Bank has announced that it is to double its gold reserves.
a move that Michael Kosares of USA Gold says is "the equivalent of the Washington Agreement in 1999, which kick-started the current gold bull market."

Kosares predicts the announcement could have a major impact on the gold price and may be the driving force for the second leg of this gold bull market.

Russian President Vladimir Putin said this week he endorsed the plan of
the Central Bank of Russia to double its gold reserves, and expressed
support for increasing Russia's gold production.

The Russian News and Information Agency reports the Central Bank of Russia's first deputy chairman, Alexei Ulyukayev said the bank would be buying gold "on all markets on which it is available," meaning both domestic and foreign markets.

Michael Kosares of USA Gold provides the following observations:

1. We should not forget that it was central bank buying that broke
the back of the anti-gold cartel in the late 1960s early 1970s. This
paved the way for the massive bull market of the 1970s.

2. Ulyukayev is not talking about paper trading for speculative
purposes. He's talking about buying physical gold and storing it in
reserve as a long-term asset.

3. This policy is a major, decisive departure for the G-8 in that
one of its members will be exchanging currency reserves for gold --
and after a public disclosure. Russia now is receiving a large
amount of foreign exchange for its oil and gas (this will not change
for quite some time), probably in the form of dollars and euros.
This looks like the first step in a long-term program.

4. Russian gold buying will become a new element in the physical
gold market, and likely will put even more pressure on those short
the metal to cover now while it is still cheap -- of course, that
Russia follows through. But I can't see why they would announce such
a plan without meaning it.

5. I rate this announcement by the Russian central bank as the
equivalent of the Washington Agreement in 1999, which kick-started
the current gold bull market. It amounts to a de-jure action that
could have a major impact on the gold market and comprise the
primary driving force for the second leg of this bull market.

Chris Powell of GATA provides this insight into the move by the Russian Central Bank:

Indeed, the unusual resilience of the gold price in recent months --
particularly since GATA's Gold Rush 21 conference in Dawson City,
Yukon, Canada, which was attended by one of President Putin's
economic advisers, Andrey Bykov -- hints that a central bank has
been a buyer for some time now.

Of course Russia's central bank took official note of GATA in June
2004, when another of its deputy chairmen, Oleg Mozhaiskov, told a
meeting of the London Bullion Market Association in Moscow about
GATA's contention that Western central banks had been rigging the
gold market to the detriment of the developing world:

Oleg Mozhaiskov said "Many have heard of the group of economists who came together in the society known as the Gold Anti-Trust Action Committee and started a number of lawsuits against the U.S. government, accusing it of organising an anti-gold conspiracy. They believe that with the assistance of a number of major financial institutions (they mention in particular the Bank for International Settlements, J.P. Morgan Chase, Citigroup, Deutsche Bank, and others), some senior officials have been manipulating the market since 1994. As a result, the price dropped below US$300 an ounce at a time when it should, if it had kept pace with inflation, have reached US$740-760."
Source: Russia's Central Bank Takes Note of Gata.

While GATA, given the Russians' interest, has been trying to convey
much to them, we have no inside information here. The Russians may
be good listeners but they have yet to prove themselves
conversationalists. But if YOU had a load of paper and electronic
currency whose proliferation was unlimited and if you were
disadvantaged by the imperial schemes of the issuer of that
currency, what would YOU do to protect your wealth and your national

Monday, November 21, 2005

Hathaway Interviewed by Barron’s about the Gold Price

Here is an excerpt from the Barron’s interview with John Hathaway in which he paints a bullish picture for the gold market.

By Sandra Ward
Interview with John Hathaway
Portfolio Manager, Tocqueville Gold Fund

Q: What's behind the move higher?
A: There is so much paper around, there are so many financial assets, and it only takes a small diversion from financial assets into gold to push the price higher.

Q: But what would lead to that diversion?
A: People are buying tangible assets, and gold is tangible and probably one of the most liquid and, in some ways, the least risky of all the tangible assets.

Q: There doesn't seem to be a lot of it around.
A: There is not a lot of it around. If you took one-tenth of one percent of global financial assets and stuck them in gold, you would wind up with a couple of years of mine supply. It is a trade you can't do. But it still gets back to the question as to why people would get more interested in gold, and it's not all based on bearishness. India is getting more prosperous, and Indians like gold. China is getting more prosperous, and the Chinese like gold. More disposable income in Asia definitely helps gold.

Q: Yet there are bearish factors behind the bull case for gold.
A: There is an ongoing currency debasing. Look at all the people who were bearish on the dollar a couple of years ago -- they've been been slammed because they put their money into the euro. They should have put it in gold. Warren Buffett just took a loss on part of his position in the euro. He was famous for being bearish on the dollar. How did he activate that? He took a 22 billion euro position because the euro was liquid and gold isn't.

Q: Are you surprised at the behavior of the euro?
A: Not really. It is a piece of garbage, really. There is no national treasury that stands behind it, but a committee of bureaucrats. Then there's the politics and social issues in Europe. There's a big difference in the growth rate between the U.S. and Europe, and there's a big differential in interest rates between the U.S. and Europe. Gold is going to rise against the dollar and the euro and the yen, which it has been doing for quite a while, but it has been doing it quietly, so most people aren't even aware of it.

Q: There are still a lot of skeptics on gold.
A: It's been five years since it's been in a bull market.

Q: Before that it had been in a bear market for about 20.
A: These days, the generations are much shorter. Residual skepticism is all over the place, and it is terrific because it gives the bull case longevity. If everybody were on board the way they are with energy, I would have to think of a new investment theme to work on.

Q: You have written about gold benefiting from a bubble in the U.S. Treasuries market.
A: The bubble is a reflection of the lack of investment alternatives. It is also a reflection of the perceptions of risk and the notion that Treasuries are a safe haven so they should be priced in a different way. There is so much money sloshing around the system, to the extent it is risk-averse it goes into Treasuries. On the other hand, you have negative real rates throughout the yield curve. Latest 12-month inflation is running about 4.7%. An investor has to go out almost 30 years on the yield curve just to get even. There is so much paper around and returns on assets are so hard to come by that it is driving money in this direction, and that's created the bubble. But these conditions are very favorable for gold.

Q: So what will focus people's attention on gold?
A: Hitting $500. That will fixate attention. This has been a stealth bull market. Only years after a bottom has been made do people realize it.

Q: Hasn't there been a disconnect between the price of gold and gold shares?
A: Day by day, tick by tick, they don't do the same thing. But if you go back to 1999, which was the bottom of the bear market in gold, gold has gone from $250 an ounce to nearly double that. And the XAU, a benchmark for gold shares that most people use, has gone from the low 40s to around 115. For the last year or so, the shares have underperformed the metal to some extent, but over a period of time and on a historical basis, the shares give you more octane then the metal itself.

Q: Why are the shares underperforming?
A: Costs are up so much, particularly for open-pit mines, which use a lot of energy pushing dirt around and hauling it. The cost of building a new mine is up a good 30% over what it was five years ago. So the economics of the industry, even though the price of the commodity is up quite a bit, are essentially just as crappy as they were when gold was at its lows.

Q: Will consolidation in the industry help that?
A: Not really. They might help a particular company's business, but it is not going to change the economics. What would change the economics would be a $200-$300 price increase so that gold would then outperform commodities. Gold has underperformed other commodities by about 50% for quite a few years. That tells you oil, copper and a lot of these inputs that gold producers need to get gold out of the ground have outpaced the price of gold. That is a fairly straightforward explanation of why margins have been poor. But there is another factor, and that is it is so easy for a gold company to get money. They have abused their ability to access what has been very low-cost capital by over-issuing shares. The stocks might be 20% higher if so many didn't declare open season on investors by issuing so much new stock.

Q: Do you take an activist role in that sense?
A: I'm very vocal about how investor-unfriendly the success of share issuance is. I'm particularly upset with the Canadian investment banks that do these deals.

Q: What's their defense?
A: The other side of it is that small companies, particularly the ones that are true exploration companies, are analogous to biotech stocks. They have properties that have potential value, but it takes a lot of money for drilling and exploration and metallurgical testing and feasibility before you actually generate revenues. Basically, they have to pass the hat all the time. Issuing shares is a quick and dirty way to get money, and for smaller companies, it's OK. But I object to any company that has a listing here in the U.S. on the New York Exchange or American Stock Exchange doing "bought" deals [in such a deal, a new-share issue is bought entirely by one underwriter to resell to investors].

Q: Is there any evidence that raising money has boosted production?
A: No. We just had a company in yesterday that is a particularly good example of this practice, and if you look at benchmarks like resources per share or ounces of production per share, they have been flat at this company for the last four years. So getting back to your question on why the shares have been sluggish in an environment in which the gold price is going up, it's because costs are way up and these companies issue stock without discipline.

Q: Haven't some gold stocks been hurt by strength in local currencies?
A: Certainly the South Africans were hurt because the rand went from something like 13 to the dollar to six to the dollar over a period of a year and a half or two years. That's like cutting the gold price in half. Even though the dollar price of gold has gone up, the rand price of gold is just now getting back to where it was a few years ago. To a lesser extent, strength in the Australian dollar and the Canadian dollar until recently squeezed margins for operations in those countries. But you get around that problem if gold is rising in all those currencies, which it is doing. But we have reached a point where gold isn't really linked to foreign-exchange rates because a lot of people are concerned about paper currencies in general.

Read more here

Thursday, November 17, 2005

Tuesday, November 08, 2005

Bird Flu and the Gold Price

"It is only a matter of time before an avian flu virus - most likely H5N1 - acquires the ability to be transmitted from human to human, sparking the outbreak of human pandemic influenza"
said the WHO's director general, Lee Jong-wook today at a three-day meeting in Geneva at which hundreds of experts are drawing up a strategy to prevent bird flu from developing into a pandemic.

The World Bank warned today that a human pandemic stemming from bird flu could cause a "deeply disruptive and far-reaching shock" to the global economy that would cost up to $800billion. The World Bank predicts a 2 percent fall in global GDP if a human form of the virus were to spread worldwide.

The World Bank's outlook today was quite positive in comparison to a recent lengthy report titled An Investors Guide to Avian Flu. Sherry Copper and Donald Coxe, who work for BMO Nesbitt Burns, a Canadian bank, warn that Bird Flu could trigger an economic collapse similar to the Great Depression of the 1930's, with food, tourism and insurance industries devastated in a relatively short time.

Free Market News Network gives this perspective on bird flu and the gold price:
"If bird flu were to cause a human pandemic through mutation, would eventually drive gold prices higher. Why? An irrefutable and ongoing international crisis such as one that might occur in a rolling pandemic killing millions erodes belief in central government; absent a belief in central government, the value of paper or "fiat" money becomes questionable, then fungible, then worthless.

People in the West, having never for the most part (in this generation, anyway) been exposed to a crisis of survival, do not understand how truly fundamental is the human affinity for gold or silver. Money metals evolved in a fierce competition over 20,000 years - their value is literally "hard-wired" into the human psyche. Should a real crisis loom, the price of metals might well rise in concert with its REALITY (as opposed to HYPE about an impending reality). Throughout the millennia it has been an accurate gauge of panic. Is everyone so sure that the bird flu pandemic is destined to wipe out millions? The price of real money, gold and silver, should tell us so."

"This is the time for every country to prepare their national action plan - and act on it," WHO's director general, Mr Lee said today. "If we are unprepared, the next pandemic will cause incalculable human misery - both directly from the loss of human life and indirectly through its widespread impact on security. No society will be exempt. No economy would be left unscathed."

Perhaps now is a good time to prepare your own bird flu action plan.
Buying a few gold coins could be a wise move at this stage.

Here is a quote from a recent article on this topic titled How Would Gold React to a Pandemic? by Clif Droke.

So how should a gold investor approach a potential bird flu or other widespread health crisis? First, by not panicking or being too hasty to draw conclusions based on a possibility that is still relatively remote. Buying or selling an investment vehicle based solely on fear is a sure recipe for failure in the financial markets. Investment decisions must be based upon one's discipline, whether technically or fundamentally based, which negates the possibility of emotion getting in the way of the buying and selling process.

That said, the fear of a major bird flu outbreak -- even if the chances of an actual pandemic are remote -- will be among the factors supporting the gold price in the next few years. Gold is a major barometer of fear and does tend to rise in value with an increase in public fear and pessimism. Now that we're only eight years away from the bottoming of the K-wave/120-year cycle we've entered the "fear stage" of this long wave cycle. The gold price tends to outperform other investments at two points along the K-wave: the first during the peak inflationary phase (a' la the 1970s). The next during the deflationary phase such as we're now in.

With the "hard down" phase of the 120-year cycle comes an increase in warfare, natural disasters and even pestilential outbreaks (the previous 120-year cycle bottom saw major epidemics of smallpox and cholera). But equally important is the widespread lingering fear that the final few years of the 120-year cycle engenders. This fear, though unwelcome to some, is actually a bolster to the price of many hard assets, including gold and silver. The "Wall of Worry" that is essential to keeping the long-term upward trend of prices intact is kept alive by fear, including fear (whether grounded in reality or not) of various pandemic threats. Gold's longer-term uptrend will most likely continue to be bolstered by such fears.