The following is a gold article which is the flip side of your coin,so who really knows for sure where gold is going.
> January, 1998
>
> The Osiris Report: Stay Away from Gold and Gold Stocks?
>
> By Christos Livadas & Central Investment Agency Research Team
>
> You are probably as curious in hearing a pitch about adding gold to
> your portfolio as you would enjoy investing in Dutch tulip futures, the
> Korean won or a seat on the first Martian space shuttle. One could probably
> sing the praises of Barry Manilow to a larger audience, rather than talk up
> the virtues of owning gold bullion to them. At no time, since gold crashed
> from above $800/oz has investor interest been so lacking. If one were to
> apply to the chilly gold climate that Lord Rothschild cliche of "buy when
> blood is running in the streets," he or she might testify that the bloodbath
> has surpassed flood levels on those streets.
> However, if one is a student of economic theory, one compares supply
> versus demand, relying on ruthlessly inflexible numbers and not whimsical,
> but popular, opinions. In the real world, not the one inhabited by
> politicians, the mainstream media and futures traders, if the supply of
> something dwindles and the demand for this something increases, then that
> same something simply costs more. Nonetheless, if cable television viewers,
> who recently bailed out the DJIA, are bombarded with the prevailing conclusion
> that gold has run its course, an inexorable demise, such spectators can not
> help, but nod their heads, and agree that investing in companies, with stock
> prices at fifteen times revenues, are a safer bet than gold stocks. Simple
> economics are again ignored by the retail, often amateur, investor against
> the backdrop of television actors starring in the roles of market commentator.
> It may serve such investors well to write their favorite television
> commentator and ask him or her, "What's the weather like on your planet?"
> Because gold has become the pariah of the investment community and
> because redemptions of gold-focused mutual funds have achieved
> previously unthinkable levels, you may wish to review your collegiate
> notes from Economics 101. Capricious and irresponsible sentiments tend
> to wither under the heated spotlight of reality.
>
> SUPPLY versus DEMAND
>
> At the current gold price, more than 50% of mined production, around
> 1,100 tonnes annually, is unprofitable. Demand for gold, in 1996,
> exceeded supply by more than 800 tonnes. At the current pace of demand
> for gold, that deficit could well better 1,500 tonnes by the year 2000.
> Gold producers can not replace their reserves, fast enough, to meet this
> demand. What is consumed annually, roughly 100 million ounces, comprises
> the entire reserves of Barrick and Newmont. By the way, none of these
> deficit figures include Hong Kong and Singapore, whose official numbers
> are subject to debate, possibly further increasing the actual
> supply/demand gap.
> The low gold price has chopped off much hopes of profitability within
> this industry. In South Africa, the average full cost of gold production
> is well above the price of spot gold. Only five of South Africa's major
> mines could show a profit, if spot gold merely rose to $320/oz. About
> half of the western world's gold production, on a full cost basis, is
> unprofitable with gold selling at that spot price. Should gold continue
> to stay beneath $320/oz, some estimate that the 1997 supply/demand
> deficit could reach an all-time record, as much as 1,500 tonnes. While
> many expect the markets won't reflect the impact this has on the
> industry until late 1998 or 1999, you should realize that major mining
> companies have been holding emergency meetings, canceling overtime,
> slashing expenditures, delaying tunneling and halted the mining of
> low-grade areas, as well as layoffs. Despite the clamor that senior gold
> producers had wisely hedged, against this crisis, by forward selling,
> possibly as much as 2,000 tonnes, their management are collectively
> panicking over the growing number of mine closures and the possibility
> of negative earnings throughout the first half of 1998.
> With all the noise over central bank sales, it would take about 1,500
> tonnes in central bank sales to absorb the growing demand for gold. This
> year's hullabaloo sprung forth as a result of less than 500 tonnes of
> central bank selling, which hardly cracked a dent in the increasing
> supply deficit. Growing demand is entirely another story.
> According to the New York-based CPM Group, gold demand is expected to
> rise to 98.9 million tonnes in 1997 and another 0.08% this year. India,
> the world's second most populated country, accounts for 20.7% of the
> total world fabrication demand. Gold use in India is running well ahead
> of last year's levels and the Indian government announced, in October,
> that it had begun liberalizing its import policy. Demand could increase
> beyond their current pace of 20.4 million ounces (634 tonnes). Italy
> leads Europe in rising demand for gold, with demand running ahead of
> last year by 11.3%. Italian gold fabrication demand stands at 547 tonnes
> or 17.6 million ounces of gold, as the use of gold jewelry in Europe is
> expected to rise at its fastest rate since 1989.
> Unless production increases, which the major mining companies can not
> possibly reverse on a moment's notice, no amount of noise and chatter of
> "gold has lost its luster" can prevent spot gold's price from at least a
> twenty to thirty percent increase. The amount of gold futures contract
> short-selling stands well above 50,000 contracts, which guarantees there
> will be ample bids, should a short squeeze materialize. If such a scenario
> were to unfold, then that momentum could propel gold past $350/oz rather
> quickly, as traders scramble to close out those contracts.
>
> THE TRUTH ABOUT CENTRAL BANK SALES
>
> The central banks and official agencies own 33,000 tonnes of gold,
> which resulted in a decline of about $80 billion in the value of their
> gold holdings. Over the past decade, central bank net sales have
> averaged 250 tonnes annually. In 1996, 19 central banks bought gold
> while 16 sold and of the 16 sellers, only 5 sold 10 tonnes or more. More
> than 70 percent of all central bank sales, during the past ten years,
> came from Belgium, Netherlands and Canada. In mid-1997, the gold markets
> were "shocked" because Australia sold most of its reserves, 167 tonnes,
> and, again, Argentinia sold virtually all of its gold reserves, slightly
> more than 4 million ounces. In actuality, both central bank sales were
> mostly concluded prior to spot gold's collapse below the $350/oz level.
> Yet, the New York and English investment communities have successfully
> convinced the financial press that it was not those sales which explain
> gold's demise, it is those which are to come in the months ahead. Who
> are these central bank sellers?
> If one's sole source of information were financial television, he or
> she would inevitably conclude that central banks were emptying their
> gold vaults and could not dump it into the open market fast enough. In
> reality, gold holdings in the official sector have fluctuated, somewhere
> between 33,000 and 35,000 tonnes for almost 30 years. Cacophony over the
> widely covered central bank sales have reduced that total by less than
> 5%, since 1989. According to the International Monetary Fund, total
> official holdings, over the past three decades, have been reduced by
> 3,000 tonnes, or less than 10%. As of March 1997 official gold holdings
> stood at 34,096 tonnes.
> One might more sensibly infer that central banks would be net buyers
> during 1998. The German Finance Minister has gone on record, announcing,
> "Germany will not sell one ounce of gold." More than 10% of the official
> holdings are held by the German Bundesbank, approximately 3700 tonnes
> or 36% of their total reserves. Jean Pierre Patat of France's Central
> Bank recently stated, "Several central banks which had sold gold from
> their reserves now feel there is no longer an advantage to selling more
> bullion as any advantage was outweighed by the loss on remaining
> reserves from reducing the gold price."
> Gold, as a percentage of a country's reserves, contrasts the outrageous
> and fictitious picture painted by the media. Asian developing nations
> hold only 6% of gold reserves and nearly 28% of world foreign currency
> reserves. Include Japan into the Asian factor and you will find that
> they collectively hold about 9% of gold reserves and nearly 41% of world
> foreign currency reserves. A ONE-PERCENT INCREASE IN THEIR GOLD RESERVE
> HOLDINGS WOULD COST ASIA LESS THAN $6 BILLION. That increase would come
> to more than double the reserves sold by the Australians and Argentines.
> This tiny percentage of gold purchasing would overwhelm the gold
> markets.
> In July, Japan's Prime Minister sent shock waves through the industry
> by stating, "Exchange rate instability might encourage Japan to sell some
> of its US Treasury security holdings and buy gold." There is ample
> evidence that the Japanese have, indeed, been selling some of those
> holdings since his announcement. One good reason why the Japanese may be
> interested in purchasing gold is that gold has become cheaper for them,
> beaten down from 44,000 Yen per ounce of gold, this past Spring, to
> under 36,000 Yen/oz.
> In retrospect, it has been the anticipation of accelerated central
> bank selling which has fueled the dive in gold's price, not the actual
> selling of the metal. Few traders currently perceive more reward than
> risk to the downside, as the replacement cost for new production greatly
> exceeds the price of spot gold. While market commentators have explained
> that few are interested in adding gold to their portfolios, quite the
> opposite is the case. That there hasn't yet been a stampede of buyers
> and short covering lies closer to the mark.
>
> VALUE OF GOLD
>
> Prior to the Great Depression of the 1930's, one could define the US
> dollar in terms of 23.22 grains of gold and the British Pound sterling
> as 113 grains of gold. If one were to compare today's purchasing power
> parity value of gold against the US dollar, you might be surprised to
> discover that the value of gold in 1835, 1879 and 1934 dollars would be,
> respectively $320.73; $355.09; $366.48. Average those figures and you
> will find out that this average hovers around US$347.
> In a more recent time, 1972, a period when gold was artificially held
> down, it took 20 ounces of gold to "buy the Dow Jones Industrial
> Average." At the peak of the 1980 bull market in gold, one ounce could
> have "bought the Dow." It now takes approximately 27 ounces to
> accomplish this feat. As extensive derivatives speculation continues to
> fuel the paper-based bull market in US equities, gravity may again
> become the great equalizer for this parallel.
> One should scrutinize the tragedy which Australia's central bank has
> begun inflicting upon its nation. While Australia estimates it will gain
> US$70 million annually in interest earnings by investing in US Treasury
> securities, they reduced the value of Australia's gold reserves "in the
> ground" by approximately US$1 billion and other gold resources in that
> country by up to US$2 billion. It would take more than 40 years of such
> interest payments to compensate the Australian treasury for their
> losses, if gold were to remain at current levels. With that decision to
> dump gold reserves, the Australian central bank also reduced the
> economic viability of extracting these resources, at gold's current
> price, jeopardizing many of the jobs in that industry and those
> ancillary industries servicing this sector.
> US and Australian gold producers, who locked in forward selling hedge
> gains of up to $3 billion, are feeling the angst of their shareholders
> who have witnessed a market capitalization decline of more than $15
> billion. This forward selling may well reverse the pendulum, formerly
> having incited momentum to gold's downside, now appears it could lead
> gold's price out of the doldrums. Why would gold producers continue such
> forward selling at uneconomic levels.
> One should not rule out a backwardation, whereby spot gold trades
> above the futures price. This was witnessed in the platinum and palladium
> markets, during the late Spring and Summer of 1997, when the Russians
> failed to make timely deliveries of those metals.
>
> EXPLORATION ACTIVITY
>
> Most incorrectly blame the Alberta-based gold hoax, BRE-X Minerals,
> for the current plight in the Canadian resource stocks. In reality, IF BRE-X
> actually had 100 million ounces, then a slump in world gold prices might
> make some sense. Speculators have short memories, forgetting that other
> world-class gold deposits, such as Delgratia, Corriente and Golden Rule,
> were less than anticipated, if not, themselves, attempts to also swindle
> that sector of the investment community. A chaotic concoction of
> disappointments led the retail US investor and institutional European
> investors to close the door on the support of the Canadian penny
> exploration stocks.
> Had the more clever investors studied the first half of 1996 more
> carefully, they would have discovered that major mining companies were
> heavily selling forward their gold production, into the 21st century,
> thus flooding the market with inventory. Insider reports, readily
> available to any worthy speculator, would have depicted a wave of
> insider selling in April and May 1996. The severe correction, during the
> summer of 1996, was the warning shot that few noted and many ignored.
> Indeed, the penny stocks weren't selling for pennies any more; they had
> grown to fives, tens and twenty-dollar bills. Enormous profits, from
> those who wisely cashed out of BRE-X Minerals in May 1996, were being
> poured back into other speculative Canadian exploration stocks. As is
> oft the case with such markets, many had margined themselves to the
> eyeballs to capitalize upon the mantra of bulk-tonnage, low-grade
> deposits, a chant which then spun throughout that industry, burning up
> phone lines and clogging the mails with four-color brochures. That was
> boom time and now is the bust end of that cycle, with low-grade gold
> deposit translated as uneconomic deposit. Today, few appear eager to
> step to the plate and finance any exploration for the next elephant gold
> deposit. Typically, retail investors are more likely to eschew gold
> exploration stocks until they have rebounded to stratospheric levels,
> affirming their motto of buying high and selling lower.
> With exploration having become the dirtiest eleven-letter word in the
> English language, Canadian junior resource companies are mainly broke.
> In the fourth quarter 1997, the Vancouver stock exchange permitted these
> companies, on a case-by-case basis, to re-price their warrants in order
> to entice private placement holders to fund these juniors and forestall
> the kinetic collapse of the Canadian junior exploration markets.
> Throughout the latter half of 1997, Canadian brokerage firms began
> replacing their recommendations of mining companies with high fliers on
> the NASDAQ. It is estimated that the penny stock brokerage community may
> shrink by half during 1998. In fact, many western Canadian brokers, who
> favored mining issues, have already left the business. The industry-wide
> shakeout has reverberated throughout the community, sparing neither
> investors nor brokerage firms.
> Because mining exploration has reached a standstill, on both the senior
> and junior levels, any serious and real discovery of a new gold deposit
> is likely to be well received by the penny stock culture. Unless that
> gold deposit is also on the order of what BRE-X Minerals promised, that
> would hardly affect the somber outlook of the supply/demand equation.
> One might as well conclude that this planet is more likely to run out of
> significant gold deposits faster than it runs out of oil. It should
> surprise no one reading this article that spot gold could, someday,
> smash the old barrier of $900/oz gold, simply because no new supply came
> into the marketplace soon enough to meet the increasing demand. The
> greatest blow to those short-selling gold is likely to come from the
> very activity, which they brought about: reduced exploration for new
> deposits. Lacking current exploration, the exploration sector of the
> gold industry may take more than two years to again boot up. Until that
> time, inventory will continue to dwindle.
>
> CONCLUSION
>
> Since 1600, gold has outperformed paper currencies. Since World War
> II, it has become US policy to replace gold with the US dollar. If you
> can not grasp the notion that US politicians have had an agenda to do
> away with gold, then read what Alan Greenspan wrote in 1966, long before
> he became head of the US Federal Reserve:
>
> "This is the shabby secret of the welfare statists' tirades against
> gold. Deficit spending is simply a scheme for the 'hidden confiscation'
> of wealth. Gold stands in the way of this insidious process. It stands
> as a protector of property rights. If one grasps this, one has no
> difficulty in understanding the statists' antagonism toward the gold
> standard."
>
> Every human attempt to corner any tangible or intangible asset, on this
> planet, has utterly failed. Whether it was Hitler's or Ghengis Khan's passion
> to corner the market on terror, or the Bank of England's or the Hunt brothers'
> efforts to corner the world market in silver, or OPEC's cartel with oil, no
> one has yet succeeded in monopolizing one asset under one roof. Not Standard
> Oil, not AT&T and now not Microsoft. Why should the US dollar succeed in
> overcoming more than a millenium of trusting gold?
> While the US equities market continues the appearance of still looking
> healthy, there are inherent problems which continue to be ignored. Japan
> holds nearly one quarter of US Treasury Securities, in excess of $320 billion.
> Since the summer of 1997, Japan has been quietly unloading their bonds. Had
> Europe not begun purchasing these bonds at record levels, October 1997's Blue
> Monday might have been renamed "The Day The Markets Died." You may also
> recollect the strong pitches on CNN television, that Monday night, when market
> experts urged US investors to seek a safe haven in US bonds. The bond market
> soared and led to the recovery in US equities. That scenario may not necessarily
> be repeated in the future.
> The time to buy gold stocks is when gold stock funds are the worst
> performing mutual funds, at the bottom of everyone's wish list, not after
> they lead the crowd for the quarter or the year. Frequently, a shakeout in
> such markets occurs prior to the bull-run. In this brief window of
> opportunity may be a time when bargain basement hunting for gold stocks could
> really pay off. More accurately, the time of reckoning will, at last, arrive
> when commentator sentiment celebrates with a ticker-tape funeral parade for
> gold past 120 Broadway. When the last gold bull has become overly cautious,
> then are the markets most likely to reverse on a less temporary basis.
>
> Isn't that the way it mostly happens? |
