 Big trouble for the
US Dollar?
David Chapman
January 19, 2004
Hyperboles
are nothing new to gold bugs. One of my favourites was a description
of the coming Islamic Gold Dinar describing it as a neutron bomb
against the US Dollar, worse than anything than Osama Bin Laden
could possibly do. While that may be an overstatement there is
a potential for the Islamic Dinar to cause severe dislocations.
The reasons
behind the Islamic Gold Dinar are simple. Gold cannot be inflated,
nor can it be devalued, nor is it dependent on anybody's promise
to pay. Gold is no one else's liability. Paper assets - currencies,
stocks, bonds, and bank deposits are merely promises to pay something
that is borrowed. Currencies collapse, stocks can go to zero,
bonds default and banks close their doors. All of these are constants
in today's world of paper assets somewhere in the world. And
the Western Nations especially the US are built on a mountain
of paper assets where over the past few years it has taken almost
$7 in new debt to purchase $1 of GDP even as the paper assets
in the stock market are inflating once again and the US$ is falling.
The Islamic
Gold Dinar has been in the works now for a number of years. It
is used in a number of Islamic countries already but thus far
its use remains small. It could soon be gaining wider usage as
it is being promoted widely for Muslims to exchange their paper
currency for the Islamic Gold Dinar. There are a number of Dubai-based
mints and mints in other Islamic countries producing gold dinars
as well as silver dinars. Malaysia adopted the currency in mid-2003
and a number of other Islamic countries are slated to join this
year. It is the intention of the Islamic countries to use the
Islamic Gold Dinar to replace the US Dollar for commercial transactions
between their countries.
There has even
been an electronic dinar website started at www.e-dinar.com.
The member countries of the Islamic Development Bank (some 51
countries) are committed to moving to the use of the Islamic
Gold Dinar as a medium of exchange. The Islamic Dinar is equivalent
in value to the IMF's Special Drawing Rights (SDR's) which is
the unit currency of IMF and itself is backed by gold. There
is also an agency in Dubai set up to handle accounts and payments
between accounts. This is meant to allow the use to spread further
throughout the Muslim world.
While there
has been considerable press about the Islamic Dinar in Muslim
countries it has caught little attention in the Western nations.
That is probably because thus far it has not had much impact.
But as gold continues to go higher and the US Dollar falls further
that may change. We are reminded that while Gold and Silver are
commodities they are also monetary assets.
While the potential
for the growing use of the Islamic Gold Dinar will add to the
monetary demand for gold (and silver) there is another potential
monetary demand looming. That is China where the Chinese government
in 2002 revived the long dormant (for 50 years) Shanghai Gold
Exchange and also authorized the Bank of China and the commercial
banks to trade in gold. Under the previous communist regime there
was a long period of condemnation of gold.
In 2004 the
people of China will be allowed to buy gold for the first time
as an investment since 1949. This could be significant as for
the past two years the Chinese government has been laying the
groundwork. There is estimated to be upwards of US$1.3 trillion
in savings currently in the Chinese banking system. These savings
have helped fuel China's incredible growth but now being free
to buy gold for the first time in years if even a small amount
say 1% it would put pressure on the gold market to fill demands.
As well the
Chinese have been openly concerned about maintaining the value
of the Yuan given a long history of currency collapses. The Bank
of China has been a significant purchaser of gold during the
period when the announcements always seemed to be favouring that
central banks were selling gold. As well the Bank of China has
been a significant purchaser of US securities in order to help
maintain the value of the Yuan against the US$. As a result China's
foreign reserves have been growing and they want to maintain
at least minimal levels of gold (2.4%) as a portion of their
reserves. The Chinese are also very interested in the Islamic
Gold Dinar and the possibility of backing the Yuan with gold.
This could set the stage for Asian countries to be gold based
in an era that the Western Nations maintain a fiat currency system.
We believe
that the gold movements in the Islamic countries and China are
largely being ignored in the Western nations because it has not
as yet become significant. But the day of reckoning may be looming
closer as the potential for a huge surge in demand from 1.3 billion
Chinese and another 1.5 billion Muslims begins to take hold.
India is already the world's largest consumer of Gold and if
we add the potential in the Islamic countries plus China there
would be two further demands for gold (and silver). One demand
would be in the traditional commodity sense for jewellery and
the other for monetary purposes in an area of the world that
holds over half the world's population. None of this would be
positive for the US$ currently the world's reserve currency.
The current
weakness in gold (silver) is being driven by the desire of the
Europeans and the Japanese to slow the advance of their currencies
against the US$. This is temporary as each of them are in a race
to the bottom in currency devaluation. But this correction is
one that could last into the second quarter 2004. We have targets
of at least $400 on Gold and possibly as low as $390 so investors
may wish to be patient before jumping back into the gold market.
Investors are
reminded that still the best way to purchase bullion is by owning
either of Central Fund of Canada (CEF.A-TSX) (www.centralfund.com,
905-648-7878) a closed end trust, and the Millennium BullionFund
(www.bullioonfund.com, 416-777-6691) (Note: I am a director of
the MBF) an open ended mutual fund trust. Central Fund can trade
at a substantial discount or premium to NAV depending upon demand.
The current
pause in gold and silver prices as well as other commodity prices
is also an opportunity to mine for junior exploration plays.
These small companies exploring for minerals in the outer regions
of the world are important in the process. The world is facing
shortages of many commodities as demand world wide increases
particularly from Asia. It takes upwards of 12 years to go from
exploration to a working mine so these juniors are at the forefront.
We have mentioned
some junior mining plays in other articles. We believe these
companies are at the cusp of a significant boom in 2004. There
are many of them out there almost too numerous to mention. Like
the major producers they are currently correcting their first
good move up seen in late 2003. So this is a time to accumulate
while the prices are still low. Three more that we are following
are: MacMillan Gold Corp. (MMG-TSXV) (www.macmillangold.com,
416-867-1101) with properties in Mexico in gold and silver; Spider
Resources Inc. (SPQ-TSXV) (www.spiderresources.com, 416-815-8666)
a company with projects in Ontario, Brazil and the Northwest
Territories involved in base metals and diamonds; and, Canadian
Golden Dragon Resources (CGG-TSXV) (www.goldendragon.com, 416-504-0077)
with exploration in Ontario and Quebec.
 David
Chapman
January 19, 2004
email david@davidchapman.com
www.davidchapman.com
David Chapman is a director
of the Millennium Bullion
Fund.
The opinions, estimates and projections stated
are those of David Chapman as of the date hereof and are subject
to change without notice. David Chapman, as a registered representative
of Union Securities Ltd. makes every effort to ensure that the
contents have been compiled or derived from sources believed
reliable and contain information and opinions, which are accurate
and complete. Neither David Chapman nor Union Securities Ltd.
take responsibility for errors or omissions which may be contained
therein, nor accept responsibility for losses arising from any
use or reliance on this report or its contents. Neither the information
nor any opinion expressed constitutes a solicitation for the
sale or purchase of securities. Union Securities Ltd. may act
as a financial advisor and/or underwriter for certain of the
corporations mentioned and may receive remuneration from them.
David Chapman and Union Securities Ltd. and its respective officers
or directors may acquire from time to time the securities mentioned
herein as principal or agent. Union Securities Ltd. is an independent
investment dealer and is a member of the Toronto Stock Exchange,
the Canadian Venture Exchange, the Investment Dealers Association
and the Canadian Investor Protection Fund.
________________
321gold Inc Miami USA
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