Gold - The
Weekly Global Perspective
The Central Bank Gold Agreement
Have agreed to stop selling until
the 26th September!
Julian D.W. Phillips
Aug 23, 2005
Excerpts from the "Global
Watch - The Gold Forecaster."
But will they?
We have been reporting closely
on this agreement throughout its life, realising that a great
deal is at stake for the gold market and for the future of gold
as a Reserve Asset. We are fully aware that gold should be an
asset that should behave in a manner consistent with a reserve
asset. But does that mean it must not reflect the volatility
of currencies or demonstrate a market condition that reflects
a loss of confidence in currencies to any extent? Should the
gold market be managed, so as to point to gold being subservient
to paper currencies? Currently, the agreement is under test.
Just how solid is it?
This week came reports from
the European Central Bank that they have crossed the line [500
tonnes] defined in the Agreement by 6.3 tonnes!
The agreement set a 'ceiling',
a limit, of 500 tonnes, with a total for the 5 years of 2500.
It is reasonable to expect such august institutions to keep to
their agreement and to cease selling from now on until the end
of their year, which began on September 26th 2004 and finishes
on the 26th of September this year. That is if they want to retain
their credibility and avoid accusations of 'managing' the market.
Granted the sale that caused
a crossing of the line was between banks [The French and the
Bank for International Settlements] but a sale is still a sale.
Some may assume that they meant sales into the open market? But
the agreement did not specify this.
It does make far more sense
for a Central Bank to sell its holdings to a willing Central
Bank buyer [Russia or China perhaps?], rather than into the open
market because the sale will not affect the market price, but
they don't. Why not?
With the funds holding large
positions and Indian demand absent from the gold market, the
gold price in both the € and the $ will reflect
any further sales. If they do not sell for the next five weeks,
you can be sure that the gold price will spike at some point.
Too many fundamentals are positive for the gold price right now.
However, if the signatories do sell, the gold price should take
a 'dip'. What price integrity?
Country risk when
Investing - Zimbabwe
Platinum is a commodity
hovering in equilibrium between demand and supply. Now above
$900, some believe it will benefit from the commodity aspects
of the market in the metal and the jewellery scene in China.
Little expansion is expected in South African production until
the Rand is somewhat weaker.
This makes the huge deposits
in Zimbabwe particularly attractive and a place where Implats
is poised to dive into the deep end. The Platinum mines operating
there currently are Implats [through its company Zimplats], Mimosa
Platinum, and Aquarium Platinum. [Other groups operating there
include Anglo America, Rio Tinto, of which the Zimbabwe holdings
are a tiny proportion of their total assets.]. We are amazed
to read the following report from Implats: -
"Impala Platinum Mines
intends to expand its operations in the country to produce at
least 1,000,000 ounces of Platinum by 2020, through its two subsidiaries
Zimplats and Mimosa. Impala intends to follow a staggered development
at Zimplats to produce 450,000 ounces of platinum per year within
5 to 10 years. Thereafter this production capacity is envisaged
to more than double within the next 10 to 15 years, when it is
projected that Zimplats, which has the largest known reserves
of unexploited platinum group metals (PGM) in the world, would
be producing 1,000,000 ounces per year.
Mimosa, with a current production
capacity of 70,000 ounces of platinum per year, would more than
double this to 150,000 ounces a year."
But hold on, we say! A key
part to any share analysis is the assessment of country risk
and currency risk, before you even consider the target company
in that country.
Many people are not fully aware
of the dangers that the country and currency risk pose to Zimbabwe
mining operations. These are the greatest dangers to mining we
have seen in the world since Bouganville in Papua New Guinea
- A government controlled exchange
rate through which companies receive their income.
- A limited facility exchange
rate though which they may purchase machinery and other imported
equipment. Should foreign exchange not be available through this
source, companies will have no choice but to access the 'Black
market' for extra forex, at twice or more the Auction rate [currently
at Z$18,500.41:U.S.$1 up on last month Z$9,000:U.S.$1]
- A depreciation of the exchange
rate that has now accelerated to an exponential rate [hyperinflation
- Overnight interest rate of
180% a Repo rate of 202.9%. Government reported inflation of
164% [real inflation 255%] Y-on-Y, 18.1% M-on-M. We do not regard
these figures as reliable, but they are the only ones available
- A government whose destructive
policies appears to know no limits. This is only exceeded by
incompetence and the inadequacies of their bureaucracy. The present
controls on mines will worsen as they remain the only "golden
goose" left there.
As if this were not sufficient
to discourage all Investors from placing hard won assets under
the control of that country, the government now intends the following:
"In order to increase
participation and ownership by historically disadvantaged persons
in the mining industry, companies shall achieve 30% ownership
of the industry assets in 10 years of which 20% shall be achieved
in two years, 25% in seven years and 30% in 10 years from the
date on which these regulations take effect. Mining companies
shall give historically disadvantaged persons a preferred supplier
status, where possible, in all three levels of procurement, namely
capital goods; services; and consumables. Mining companies will
now have to apply to the mining department when they want to
import capital goods, services or consumables and justify their
These are the problems facing
the application of this in Zimbabwe: -
1. Zimbabwe's deficit is 8.7%
2. The country is in such dire
straits that it is seeking a loan from South Africa to provide
the basics for living [food, petrol, etc] of close to $154 million
[I billion Rand]. It needs $356 million to achieve the supply
of the basics for living and stop starvation from growing any
worse. This situation came about when the land seizure of white
owned farms was implemented and the country turned from an exporter
to an importer of food.
3. As a result it has no foreign
exchange whatsoever, with which to purchase these shareholdings.
The only alternative to this is to pay in Zimbabwe dollars [see
4. Zimbabwean Pension funds
are required to invest 30% of their holdings in [prescribed assets]
Government Bonds at market value. The government has ordered
them to assess this 30% at book value, a considerably higher
figure, which will entail the funds to sell their equities to
the extent necessary to fund these purchases. With all funds
doing that at the same time and the Zimbabwe Stock Exchange turnovers
so low, this could bring the Zimbabwe Stock Exchange to its knees,
whilst threatening the solvency of the funds themselves, but
pouring the additional funds into government coffers.
5. Failure to accept the government's
terms with regard to the foreign shareholdings in the mines,
could see a repeat of the invasion of the banks by the police
to forcibly seize the shares. President Robert Mugabe has often
threatened forced company takeovers. A few years ago Mugabe's
supporters invaded companies' premises, trying to take them over
6. Applications to the mining
department for imports with which to functions as mines, will
be mired in delays commonplace amongst the Zimbabwean civil service,
which will for sure cripple the industry.
7. The new regulations will
place the mines effectively under the control of the government,
who would tell the mines who their suppliers should be and will
be and even who they should employ and have as shareholders.
The last time foreign shares
were appropriated was in 1984, when the government raided the
banks to seize nominee held shares and paid with 4% government
bonds for these shares. Had anybody been sufficiently unwise
to retain these bonds, their present value is around Z$2.5 from
the original 100 and the U.S.$ value has dropped from U.S$100
to 0.0135U.S.cents. So if you had U.S.$1,000,000 I Zimbabwe at
the time of the forced acquisition of the last foreign owned
shares, they would be worth U.S.$135 only now, at the "Official"
rate, which is half that or less, at the 'black market' rate
[which is the only way you could get cash out of the country].
So a potential Zimbabwean Investor
would have to ask himself, just how masochistic am I?
Julian D.W. Phillips
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