"No warning can save people determined to grow suddently rich" - Lord Overstone

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Uncertainty Will Support Gold

News is out that European banks will have to write off 20% of their loan books. The full news on Spain is not out yet, their banks cannot get reasonably priced funding. How can we get growth under these conditions? Despite all this the appetite for risk is apparently returning at least for now. This increasing appetite could last for anything between 1 day and a few months.

Local news Down Under, news flash the Government has invoked a state of emergency over their super tax's opposition by the mining industry. They have decided to advertise to inform us how "right" they are. It just gets better and better doesn't it? Governments are all the same, in the absence of total understanding, facing the self induced need to do something; they interfere with market forces making things worse in the process.

The AUD is falling again tonight as predicted and gold is going up as predicted. This has taken the AUD gold price to $1,471. Our XGD is back up over 6,000 and holding well on the general sell off as we have seen a drop of 12% on the XAO from the high on the 14th April to the close today. In comparison we have seen a drop of only 3.5% for the XGD high of 6278 on April 12th compared to the close of 6056 today.

The XGD has been distorted by the LGL revaluation due to the NCM take over so I have added the emerging producers 5 year chart to show the real lag between smaller cap producers and the AUD gold price. As you can see these stocks are falling slightly here in spite of the AUD price of gold. Now we head into the final weeks of the Australian financial year and buying season.

Australian Gold Emerging Producers Index

On balance this presents opportunity. These undervaluation distortions cannot remain for very long in such a gold friendly economic climate. Some of our favourite larger producers showed appreciation to new all time highs over the past few weeks. I have been saying for some time that these un-weighted charts are less distorted by the heavy weight gold stocks on the ASX and therefore more representative of the sector.

A little story about debt, gold and Bondi beach

I was discussing this current global situation with a colleague and we came up with a fun analogy the world's current, very serious debt situation. Hopefully you will find this entertaining and educational and maybe you might send it to somebody who needs to read it. Seeing as debt and gold are so poorly understood in this day and age I feel it is important to cover this topic with some good old fashioned common sense.

Analogy: a swimmer is caught in a rip; a term describing a tidal phenomena where a strong current (that runs out to sea in a channel) drags you out to sea if you get caught in it. The rip represents any debt trap in this case and they both work in a similar way pulling you into deeper trouble.

For an individual this might apply to your credit cards getting further and further behind until you can't pay off the balance. This stress means you cannot continue to pay off the mortgage and still live your normal lifestyle. The way out of the rip is to float for a while, let the current take you out to sea until the force diminishes. Once clear you can swim sideways for a distance to clear the problem rip area and then let the waves carry you safely back to shore.

In this case the solution of going out with the rip initially is the equivalent of going quiet for a while. You have to cut back your expenses and go without some of your normal pleasures or activities. You may have to cut back on basics if this has progressed too far. Some swimmers thrown in might be lucky enough to wear a golden life jacket and would be able to float out of harms way with greater safety. Some might own shares in the life jacket and life buoy manufacturer so they can get out of harms way too. You will do well to be in this group just in case.

This "go with the flow" and pay the debt down solution idea is too practical, unpopular and logical for sophisticated Governments; after all we vote for them and they are "responsible" for doing something. Their solution is to throw more people into the rip so they can hang on to each other. They must think that will fix the rip. When this does not work they tell the swimmers to swim as hard as they can towards the shore, be patriotic, spend your way to wealth they told us.

When this does not work they get really serious and get a machine in to increase the water flow into the rip. Not being in the water themselves, as they sit in their ivory tower, they can't understand what all the screaming is really all about. Well they sure are doing 'something' which is their job after all. Look at all the water we gave them they claim. This pushes the price of water up but that is OK.

Meanwhile there are a bunch of onlookers on the beach sitting in arm chairs made of gold and soaking up the sun while they watch on in concern. Behind them there are apartments and penthouses overlooking the beach. They were made of gold and silver too.

After a while new data is released and the government notices the news is still bad. The rip is still there despite all their brilliant efforts. They might not be elected at all, now they get nervous. I am sure they are concerned for the swimmers and redouble their efforts. But the news is not as bad as the analysts thought as some swimmers got smart and floated out to sea away from the other struggling swimmers. Some gave up and drowned, may they RIP (rest in peace).

There is still a lot of screaming and the drowning is increasing so they throw more and more swimmers into the rip. They have to go to other beaches for more swimmers where there was no rip, contagion sets in. Rips develop at all the beaches after a while. My goodness the government needs more staff to cope with the crisis and because they manage so many people they deserve a pay rise. Pure genius isn't it. Are you happy with the story so far?

The next step of the actual solution is swimming sideways across the beach for a while and this equates to paying that last credit card payment removing the imminent threat. Now you can create a few savings as a financial buffer, this is equivalent to going sideways for a while as we are not ready for any spending yet. This is not much fun you say, not fashionable maybe even boring. I have tried it in years gone past and promise it must be a lot more comfortable than the rip and certainly better than drowning.

Meanwhile the government hates a lack of spending; we need exponential growth they cry. Of course the government does not reach this "swim sideways" point; they are still in the rip trying to buy time with more water. Next thing they regulate the beach because they should have controlled the rips, the tides, the waves, the sand and swimwear fashion.

The swimmers have relatives who are on the beach and threatening to not vote for them unless they do something. In response they are throwing more and more swimmers, swimming coaches, pedestrians and even the life guards into the rip. The re-regulate the lifeguards, tax the rescue boats and threaten to sue them if they don't stop the disaster. They even turn the machine up harder and pump more water into the rip and out to sea. (Is this the same as over regulation and chronic fiscal irresponsibility?)

Letting the waves carry you back to shore would be the point where you have your financial buffer back in the bank and start to pay a little extra off the mortgage, maybe fix up the car, just slowly. You don't want to upset the buffer you have created as it is your safety net. You still remember the stress of the rip and that scared hungry feeling. You didn't want to drown, end up bankrupt with your possessions repossessed. For a Government this is where your economy would normally return to modest growth.

Finally you reach the shore and take a breather in that golden sun and warm up. This should be normal operation and where you want to be most of the time. Meanwhile the Government has drowned itself, the banks and the States, suffered riots in the streets and defaulted on their debt necessitating a restructure of the entire financial system. It is not just their fault as most of the population votes for those that promise them the most. This is a symptom of the debt based monetary system and because it has been with us so ling it is considered normal.

The citizens that woke up early floated out to sea in that rip on their golden life jackets. They had sorted their own trouble by taking responsibility, before they became too exhausted in that debt rip, so they survived to land back on the beach. Some of the citizens stayed on the beach and some just looked on in horror from their golden penthouses.


These are uncertain times because we are in uncharted waters. We are gradually transitioning into a different world as power shifts from over indebted developed nations to the emerging economies. Head winds, cross currents, rogue waves, fat tail events are all buzz words you should all learn now because you will hear a lot more about them over coming years. Gold and gold stocks have a bright future because in the most simplistic terms, things are uncertain and debt has gotten out of hand. Throwing more money at a debt implosion is just like pumping more water into the rip.

Sovereign debt defaults have come and gone over hundreds of years and they are very traumatic when they occur. However we have never seen such a large number of countries simultaneously in difficulty with debt, and or struggling with structural change before. Europe and the US, the UK and Japan are clearly in decline facing a reduced growth outlook which should no longer be supercharged by hyper-debt.

An added complication which exacerbates uncertainty is the Euro experiment. The Euro only began on the 1st of January 1999 and has been a success during its early years. As if the world needed another major monetary experiment. With the USD acting as the world's fiat reserve currency, and hitting all time highs, I guess it seemed like a good idea at the time. Then the new millennia began and the USD began to tank coinciding with the end of a twenty year bull market.

Countries in the Euro Zone that need to restructure are highly restricted. They cannot lower their currencies to enable export growth. They are restrained by unmanageable levels of debt in some cases and need to completely restructure, declare bankruptcy, default and then get on with rebuilding. Such machinations will eventually create a loss of confidence in currencies and drive gold higher, silver will rise with it. The stocks will follow at times and lead the way at other times. At present they are lagging the physical metals due to risk aversion and de-leveraging. Time to get loaded up in quality, low geared, high growth gold stocks is upon us now. Buy on dips and any remaining weakness. The same goes for the precious metals - a life jacket for the times.

In 2001 gold also awakened from a twenty year slumber which had ended with a hedging induced artificial low into the USD$250 area. Without that hedging experiment gold may not have fallen below the USD$400 area but this is a subject for another essay at some point. This now distorts the apparent magnitude of the rise in the gold price. A three fold rise in gold from $400 to $1200 does not seem as dramatic as a 4.8 fold increase. Gold and silver are not expensive at these levels so don't be fooled.

You need to own precious metals and gold stocks now. You may not find cheaper low cost, unhedged and debt free producers than here Down Under. These metals and the stocks have a high probability of going into a major price spike at some point. There are still several strong bull market waves in front of us for the precious metal complex because this debt problem will unfold slowly. This is GFC Stage 2 so get used to it, things are not "better now" and the right steps to solve the problem are yet to be seen. These steps are unpalatable under our current electoral system and I really do feel for the politicians who are caught between a rock and a very hard place. Disaster presents opportunity so take advantage while you can.

Good trading / investing.


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