Like many of his Inca ancestors, Juan Apaza is possessed by gold. Descending into an icy tunnel 17,000 feet up in the Peruvian Andes, the 44-year-old miner stuffs a wad of coca leaves into his mouth to brace himself for the inevitable hunger and fatigue. For 30 days each month Apaza toils, without pay, deep inside this mine dug down under a glacier above the world’s highest town, La Rinconada. For 30 days he faces the dangers that have killed many of his fellow miners—explosives, toxic gases, tunnel collapses—to extract the gold that the world demands. Apaza does all this, without pay, so that he can make it to today, the 31st day, when he and his fellow miners are given a single shift, four hours or maybe a little more, to haul out and keep as much rock as their weary shoulders can bear. Under the ancient lottery system that still prevails in the high Andes, known as the cachorreo, this is what passes for a paycheck: a sack of rocks that may contain a small fortune in gold or, far more often, very little at all.
Apaza is still waiting for a stroke of luck. “Maybe today will be the big one,” he says, flashing a smile that reveals a single gold tooth. To improve his odds, the miner has already made his “payment to the Earth”: a bottle of pisco, the local liquor, placed near the mouth of the mine; a few coca leaves slipped under a rock; and, several months back, a rooster sacrificed by a shaman on the sacred mountaintop. Now, heading into the tunnel, he mumbles a prayer in his native Quechua language to the deity who rules the mountain and all the gold within.
“She is our Sleeping Beauty,” says Apaza, nodding toward a sinuous curve in the snowfield high above the mine. “Without her blessing we would never find any gold. We might not make it out of here alive.”
It isn’t El Dorado, exactly. But for more than 500 years the glittering seams trapped beneath the glacial ice here, three miles above sea level, have drawn people to this place in Peru. Among the first were the Inca, who saw the perpetually lustrous metal as the “sweat of the sun”; then the Spanish, whose lust for gold and silver spurred the conquest of the New World. But it is only now, as the price of gold soars—it has risen 235 percent in the past eight years—that 30,000 people have flocked to La Rinconada, turning a lonely prospectors’ camp into a squalid shantytown on top of the world. Fueled by luck and desperation, sinking in its own toxic waste and lawlessness, this no-man’s-land now teems with dreamers and schemers anxious to strike it rich, even if it means destroying their environment—and themselves—in the process.
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By Eric Hommelberg |
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- Gold remains ultimate form of payment
- US debt levels unsustainable – dollar losing status world reserve currency
- Gold prices required to counter balance all US public debt held in foreign hands exceed the $10.000 mark
- China, Russia calling for new world reserve currency
Gold is sneaking its way towards the $1000 barrier again which is prompting as usual the gold bears to come out swinging declaring the end of the bull market for gold. For newcomers to the gold market it’s very confusing to hear ultra bearish reports from one side calling gold prices to crash, some even predicting gold to crash below the $300 mark while from the other side they’re hearing ultra bullish reports calling for gold prices heading to $5000, some even predicting gold prices to top $10.000. Well, that’s quite a difference and sure enough some analysts will be proven terribly wrong over the next few years.
In my previous piece ‘Gold Heading for $200 or $10.000’ part I wrote a fictive exchange between a staunch gold bull and a newcomer to the gold market being fed with all bearish arguments for gold you can think of. This piece was received very well since it was a real eye-opener especially for newcomers what gold is all about and why it is so much hated by governments today. Readers having missed that piece can read it HERE.
This update is again aimed at newcomers to the gold market and shines a light on all fundamental reasons to own gold.
When I started writing about gold 7 years ago (2002) it was my aim to paint a clear picture about gold’s strong fundamentals pointing to significant higher gold prices the years ahead. I started writing a Gold Drivers Report discussing all critical drivers (declining dollar, increase demand, decline supply, negative real rates, come back in monetary system and record high short positions) that were pointing all to much higher gold prices indeed.
Now after 7 years one could easily argue that the Gold Drivers Report has been a lucky shot indeed since gold did appreciate from $250 to almost $1000 but to set things straight, I’m not writing this piece to prove up my point for the last seven years but to make the case for a record run still ahead of us. Especially during times like these where many gold bears are screaming ‘SELL’ it’s good to know where gold came from, why it did rise from $250 to $1000 in the first place and how the critical drivers that lifted gold are affected these days.
So gold bull over or $5000 gold?
Readers who have followed my work over the years know that I belong in the latter camp which calls for gold prices heading to $5000 or more within a few years. I’ve written extensively for reasons why but I want to emphasize that the primary reason for gold investing should be wealth protection, not to get rich quick. Gold heading to $5000 of course reflects the underlying weakness in our current monetary system so the basic question here is what to trust more. Should you trust your hard earned money to gold which has proven itself as the ultimate protection of wealth for more than 6000 years or should you trust the honest bankers keeping your savings in paper instruments yielding astonishing interests of slightly more than one percent? Of course all guaranteed by our beloved government that favors and guarantees a strong dollar.
The gold bears are opting for the latter since they are basically saying that gold will be losing purchasing power. Saying gold will be losing purchasing power equals saying the dollar will be gaining purchasing power. Saying the dollar will be gaining purchasing power equals saying our monetary system is healthy and functioning well.
This week in part I (point 1,2 and 3) we shine a light on our monetary system well being and is part of an extensive summary “10 fundamental reasons to own gold“. Even the staunchest dollar bull will have to admit after reading this piece that all is not well in the financial hemisphere.
10 fundamental reasons to own gold
1. Gold remains ultimate form of payment – No counter party risk
2. Currency debasement – US Dollar losing status as world reserve currency
3. Gold crawling back into the monetary system
4. Negative real rates
5. Falling gold supply vs increased investment demand
6. Gold & Historic averages – gold should be trading above $2300 these days
7. DOW/GOLD ratio points to $5.000+ gold before 2015
8. Gold & US public debt – gold prices required to counter balance all US public debt held in foreign hands exceed the $10.000 mark
9. Large short positions – half of all central bank’s gold has been leased into the market. (about 15.000 tons). Covering these short positions is not possible without catapulting gold prices to unimaginable highs.
10. Gold acting as safe haven in times of rising geopolitical tensions
1. Ultimate form of payment – No counter party risk
Gold still represents the ultimate form of payment in the world.” - Alan Greenspan, Testimony before US House Banking Committee, May 1999
Gold has been used as money for thousands of years, it may have even been the first metal used by humans. A funny detail concerns the oldest known map called the Turin Papyrus, an ancient Egyptian mining map 1320 -1300 BC, which is showing the plan of a gold mine together with indications of the local geology.
The bottom line is that gold has retained its purchasing power over thousands of years and therefore has proven itself as the ultimate protection of wealth. Gold has no counter party risk, gold is not some one else’s liability, gold can not be printed out of thin air, no nation has the capability to destroy the value of gold, gold does speak for itself.
Some one who understood gold’s real value against paper money very well is former French President Charles de Gaulle:
There can be no other criterion, no other standard than gold.
Yes, gold which never changes, which can be turned into ingots
bars, coins, which has no nationality and which is eternally and
universally accepted as the unalterable fiduciary value par exellence”
Charles de Gaulle
In February 1965, President De Gaulle said in a landmark press conference “What the United States owes to foreign countries, it pays, at least in part, with dollars that it can simply issue if it chooses to”.
De Gaulle not too happy with the implication of having the dollar as the reserve currency responded this way:
Since dollars could still be exchanged for gold at the time, De Gaulle instructed the Banque de France to increase the rate at which new dollars were converted to gold bullion and sent the French navy across the Atlantic to hand over dollars and pick up gold bullion in exchange. In 1965 alone, the French navy ferried back over $150 million of gold bullion thereby increasing the proportion of French national reserves held in gold from 71.4% to 91.9%.
The bottom line is that De Gaulle didn’t trust the paper dollar which were circulating in ever increasing quantities and opted for real money which is of course gold.
History leaves no doubt it. The only money that stood the test of time is gold, all other currencies have failed. Gold is the only true protection of wealth.
2. US debt levels unsustainable - Currency debasement inevitable - US Dollar losing status as world reserve currency
You may wonder why De Gaulle didn’t trust the dollar since the US had pledged the dollar to be as good as gold in accordance with the Bretton Woods agreement. The answer is simple. In the mid sixties the US couldn’t finance the Vietnam war without the help of the printing press. Needless to say the US money supply took off thereby debasing its own currency. For the US it didn’t matter since the world was forced anyhow to accept the US dollar as a reserve currency. Yes, the US promised the dollar to be as good as gold and yes, foreign central banks were allowed to exchange their dollars for gold but the US made it very clear that foreign nations exercising their right of exchanging dollars for gold would be considered as ‘American unfriendly’.
Sure enough De Gaulle wasn’t too much impressed and sent the French navy across the Atlantic to hand over dollars and pick up gold bullion in exchange. The US gold reserves were shrinking at such an alarming rate that President Nixon was eventually forced (1971) to close the gold window.
The bottom line is that countries printing their way out of debt will see its currency depreciating. A good example concerns the German Reichsmark. After world war I Germany tried to print its way out of its debt which eventually led to a worthless currency being used to heat up stoves.
Germany : Inflation 1923-24: A Woman feeds her tiled stove with money.
She chose to feed the stove with Money because it cost less than buying the wood with Money
China holds sway over US$
“The U. S. should be afraid, very afraid. Mystery shopper China is questioning the dollar’s status as a reserve currency and, at US$1,000 an ounce, gold has become the world’s de facto currency.” — John Ing, Maison Placements in Canada
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It is a chilling statement from an expert on both gold and China. But he is speaking the truth: In a G2 world (the United States and China), he who is the piper calls the tune, and China holds a US$2-trillion mortgage on the United States and is not happy. This country, along with others that lend money to the United States, such as Saudi Arabia, will determine the value of the U. S. dollar and gold. And they have spoken. They are not buying more U. S. treasuries and are buying gold as a new asset class. China announced that it was doing so quietly, and recent reports are that the Saudis and others have been buying bullion and hocked gold jewellery from around the world.
The only way is up for gold prices because the United States, which backstops the International Monetary Fund, the world’s lender of last resort, has had to become its own lender of last resort.
Washington has cranked up the printing presses in an unprecedented way, replicating the behaviour of its spendthrift corporations and consumers. This year’s budget is US$3.5-trillion, bigger than any in history.
And as Ing points out, the “bi” in this bipolar global economy is China. Beijing has not only started to hoard gold but has continued to talk up a new reserve currency concept to replace the U. S. dollar. The only reason the Chinese and others don’t dump U. S. dollars is because it would be like shooting themselves in the foot.
Inflation, on top of excessive money supply dilution, will (unless mitigated by growth or stoppage) reduce the dollar’s value. Ing estimates that the printing of money to bail out banks, autos and the U. S. economy will create a catch-up in gold bullion prices: “Gold should be US$9,000 an ounce to cover the [current and projected] U. S. monetary base,” he says.
China has become the world’s fifth-biggest gold hoarder, in addition to being the world’s biggest gold producer (through its government-owned mining companies). I also suspect that China is behind the political sabotage in Mongolia, to its north, which has for five years prevented Ivanhoe Mines of Vancouver from producing gold and copper from its massive discovery.
Clearly, China also has been dis-investing from the U. S. dollar by getting slowly into hard assets (stock, commodities or ore bodies), which I have written about. This concerns Washington, which is why Hilary Clinton, U. S. Secretary of State, made her first state “house call” in Beijing to make nice with America’s first mortgagor.
At that time, and publicly, too, China warned the United States about its dollar woes, while suggesting a basket of currencies to replace its pre-eminence. These scary pronouncements were followed by an announcement in Washington a few weeks ago that there would be a massive U. S. Treasury buyback of U. S. bonds. Put another way, the Chinese and others aren’t buying anymore so the surpluses are being mopped up by putting more on the taxpayer tab.
It is an irreversible trend that China and others will continue to disinvest and diversify out of U. S. dollars, and that inflation will further impair the U. S. dollar’s value. That’s because the U. S. monetary/economic rescue is simply Washington’s version of the excesses and over-leveraging that led to the need for a rescue in the first place.
dfrancis@nationalpost.com
NEW YORK (Reuters) - Are base metals as good as gold?
The world’s largest gold companies might be asking themselves that question as growth becomes harder to achieve. And diversifying into other metals appeals to many bankers and analysts who say the so-called gold majors would improve their profiles if they did. But the move could be a risky for gold companies such as Barrick Gold Corp (ABX.TO) or Newmont Mining Corp (NEM.N), whose shares get a premium for being pure gold plays. Base metals and other precious metals such as silver have traditionally been priced at a discount. Growth in gold is becoming more difficult as the companies struggle to replace the large volumes of the metal they have mined economically.
“If your base business is so challenging, why wouldn’t you look at something that has a better model?” asked one banker who follows the industry and spoke on the condition of anonymity.
It could also be a good time for gold companies to consider acquisitions in other metals, as the price of gold has rebounded during the recession, while prices for base metals have dropped sharply, making relative values attractive.
Targets could include companies with copper and gold resources such as First Quantum Mining Ltd (FM.TO), or even Freeport McMoRan Copper & Gold Inc (FCX.N); or other mining companies such as Teck Comico Ltd (TCKb.TO) and Hecla Mining Co (HL.N).
But investors have long looked to gold companies for their relatively high multiples — the average gold company stock is currently valued at about 30 times 2009 earnings — and would be reluctant to give those up.
“The multiple that you get from being a pure gold company is about as premium a multiple as you can derive in the industry. The more diversification, the more your multiple is likely to contract,” said Ron Coll, a mining analyst with Jennings Capital Inc.
Indeed, Brian Hicks, who helps invest more than $2 billion at U.S. Global Investors in San Antonio, said if a gold company over-diversified, it could change his mind on whether to invest in it.
“Larger companies would fare better if they focused on returns rather than growth,” Hicks said. “If (a deal) was dilutive, we might have to look at repositioning.”
STEALTH DIVERSIFICATION
Still, the premiums for the largest gold companies are not that different from their largest competitors in diversified mining.
Newmont and Barrick are currently trading just over 20 times projected earnings, while Rio Tinto (RIO.AX)(RIO.L) and BHP (BHP.AX)(BLT.L) hover around 15 times. And Yamana Gold Inc (YRI.TO), which has a sizable copper business, is trading at a multiple of more than 18 times earning.
Moreover, gold companies already produce other metals as byproducts.
In the first quarter, for instance, Barrick produced 95 million pounds of copper, as well as 1.75 million ounces of gold. Newmont sold 1.27 million ounces of gold and 43 million pounds of copper.
Another mining banker argued that diversification is already happening through investments in new mines that have significant deposits of copper or other metals, as well as gold.
The banker said the companies could wade further into diversification instead of making a big splash by buying into smaller companies and projects.
Indeed, one analyst not authorized to speak on the record said gold companies could produce as much as 30 percent of their revenue from other metals without losing their premiums.
“This is a road they’ve been going down for a long time,” the analyst said. “The question is how far they can push it.”
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Superior Gold Group (http://www.Gold101.com) is Seeing Great Success With its Gold Affiliate Program…
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SANTA MONICA, Calif., May 19 /PRNewswire/ — Superior Gold Group Inc. based out of Santa Monica, CA, has seen an extreme amount of growth in its Gold Affiliate Program (GAP) that was launched earlier this calendar year. SGG boasts it has the most successful Gold Affiliate partnership program in the industry. Since the launch of GAP, it has received inquiries from broker dealers in more than 25 states. With its initial success, CEO Bruce Sands says that SGG intends to grow the GAP more than 300% by 2010. Superior Gold Group is one of the preeminent precious metals dealers in the nation, recognized by several financial magazines - such as Kiplinger - as one of the primary dealers in gold. The Gold Affiliate Program has garnered a massive amount of interest from investment firms nationwide. One of the first of its kind in the nation, the program allows financial consultants to offer their client’s chances to buy gold coins, silver, platinum or palladium. This investment comes in a tangible form that the client can physically hold and secure in a place of their choosing. Most clients choose ownership of physical gold in Gold IRA plans or through home delivery. Bruce Sands, CEO of Superior Gold Group, in an effort to provide better access to physical precious metal markets, developed the cooperation based program for investors. The lack of financial stability in the global markets has made precious metals a safe haven where there are none. “Regardless of traditional portfolio strategies, tangible assets like gold and silver help make retirement portfolios safer from sudden economic and political shifts. Gold and silver have a long, well-documented history of making retirement plans safer and more profitable.” Bruce Sands, CEO, SGG Superior Gold has received heavy interest in the “Gold Affiliate Program,” and will continue to grow the program to match this high level of interest. Superior Gold Group’s goal is to create the preeminent program in this niche. |
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