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Currencies and SA MinersFrank Lechner  (You are going to be given a choice, guess which one is correct?) Much to our chagrin, our aspirations and projections for investment in gold and silver miners is directly related to what happens in the currency markets. The power of gold is so great, that kingdoms were built with gold as the base. Over time though, all prior great civilizations have collapsed arguably through the manipulation of their currency over time. For instance, the Romans started with x amount of gold in a coin for currency purposes, yet as time passed, the amount of gold in the same coin was decreased, replaced with something else, and the value of this coin remained the 'same'. The real value had changed, but the accepted value had not changed. The current fiat based monetary system is the center of the big bang, the beginning of all that follows. The reason for this, is that since the removal of a peg to the gold price, there has been virtually unrestrained capacity to issue fiat currency worldwide. This is not unique to the US; it is a worldwide phenomenon. Each country fully exposed to the vagaries of the current market temperature, in addition to being subject to the whims of various counter parties. The 'managed' currencies that are in use today, are assigned a value based against one another. These values are derived from each particular countries capability to tax the populace, effectively meeting their debt obligations. Understanding of course, that an issued greenback, or digit on a computer transaction, is a debt obligation of the government of that country of origin. There is a debt for the government and a credit for the entity holding the other end of the transaction. Many, many variables go into this creation of a 'perceived' value. We remember too that the value assigned is all 'perceived' and not real. There is no basis of comparison to something 'real' in today's world currencies. A Canadian dollar trades at 83ct to the dollar currently, with much of this difference attributed to the future prospects for each, the size of the economy, and so on. This is where the fun starts. A country, or group of countries, can choose to assign a value, or attempt to manipulate a value of a currency as desired. For instance, when the Yen was rising too rapidly in Japan for the taste of the local government, attempts were made to enter the market on behalf of the Dollar, and against the Yen. The Fed in Washington is on one side trying to depreciate the dollar for whatever their reasons are at the time, while simultaneously the Japanese government is on the other side entering the market to prevent this. In the case of the Chinese, their currency is pegged to the dollar at a fixed rate. If the dollar goes down in value, so does the Yuan, effectively eliminating any 'perceived' gain by the US government in a decreasing dollar value. These manipulations, up and down in the currencies, are used for various political purposes. A government may be under the impression that they can stimulate exports, as the current US policy is, by decreasing the value of the dollar relative to other currencies. As the dollar goes down, in theory, the cost of the goods exported, in the country of delivery will go down, as the local currency will have risen in value. The local currency will purchase more of the imported goods because of the modified exchange rate. A system such as this, leads to any number of shenanigans accordingly. We talked of an oil example a while back, let's look at gold. Gold is priced in US$, then converted to other currency values. Say you are a producer in South Africa, your income is in US$ as the gold is produced and sold, while your costs are in the local currency unit. As has happened recently, the trend of the dollar was down, while the Rand was up. This sounds ok in theory, as you may receive less dollars per ounce of gold, but when converted, more Rand is traded with which to pay costs. This is where the trouble begins. The value of the currency flop was changing much more rapidly than the costs were decreasing in the local currency. Consequently, many miners were caught with decreasing incomes, and flat to higher costs, resulting in hemorrhaging balance sheets. Losses all around, and stock prices reflected this. Stock prices in these countries, especially the marginal producers, rapidly gave up most of their gains achieved through the last cycle. The unions, the governments, and others were all crying foul! In effect, there was nothing these producers could do, except to hold on, until this most recent storm passed. Unions were asking for unrealistic pay raises based on local inflation rates. Remember, we said that costs were stubbornly high in these areas. Companies were attempting to close low volume, or marginal mines, with the government busting their chops the whole time about dewatering, decommissioning, etc. The list of issues these countries have had to deal with throughout this period seems endless. The value of the Rand increased against the dollar to a value of just under R6 per dollar. From there it decreased back to R7.25 per dollar, and currently resides at somewhere around R6.5 per dollar. This was happening while the dollar value of gold remained over $400 per ounce. As hope springs eternal for gold miners, the most recent decrease in the value of the Rand provided visions of profits and dividends in the near future. Effectively, the miners would receive more income, with flat to lower actual costs. I am sure we all understand that the surviving miners, after years of depressed gold prices, are quite adept at wringing out costs to survive. Having said all of this, it will never be proven, nor can it, yet the real possibility exists that this was a coordinated event to accomplish a 'managed' gold price. The miners were on a mighty tear, in the stock markets that is, and they were becoming the talk of the town. They all came crashing back to reality as the Rand rapidly appreciated against the dollar. The gains made in the dollar price were more than offset by the reduction in local purchasing power. The scope of this really isn't that large in the grand scheme of things, when it is understood that the volume of fiat dollars out there vs fiat rand is beyond comparison. The appearance of gold, as the investment of choice was removed, much as a thorn in the lion's paw. History if I may... Many of the miners to first announce an end to their hedge book program, resided in South Africa. Near the end of the bear market, and into the beginning of the bull, all of the talk was of who had hedges, and for how much. They all were beating down the doors to try to release their hedge books, in order that they may capitalize more fully on the coming bull market. This of course was the proper move for a miner, but it most definitely was not welcome news to those who would prefer that gold not gain strength, once again flexing its muscles in the markets. I would argue that the gold price is, and has been consistently massaged to prevent extraordinary gains, thereby sending a clarion call to all, that something is amiss. With South Africa being the largest producer of gold in the world, it only stands to reason that any attempts to affect the gold price would certainly reside there. A little payback may have been in order for the releasing of the hedge books, consequently, the most recent excessive Rand value increase coupled with the accompanying SA share price decreases. The real money will be made in South African stocks when the Rand continues to decrease in value against the dollar, while the dollar price of gold remains stable or even continues to increase. The Holy Grail for these miners will be a steady local currency, and a gold price rising in dollar terms. Then you will see some parties equivalent to anything in the late '70's. I have stated before, that we are in the midst of a gold bull run, much like that of the '70's. If you go back and peruse the charts of gold stocks from the period, you will see the similarities between then and now. The gold stocks took off on a healthy tear, only to be beaten back to whence they came, only to go on to new all time highs of unimaginable heights. Patience, little grasshopper. The South African producers will be huge winners over time. After all, they are the companies with the greatest gold reserves in the world. It is only a question of when, not a question of if. Gold has the 'power' to tell everyone worldwide that all is aok, or in the converse, that something is amiss in the black hole that is the world markets. It has for centuries, and it will continue to be so. This is well known to the markets, and the governments, and this is why currencies are no longer pegged to gold. This is why gold is yet another manipulated market. This is also why your safety net should be made of gold. Do not rely on government for anything, especially the truth. Take Action, and Choose Your Own Path Get Physical!! Frank A. Lechner
321gold Inc |
