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Over
the years it has been our habit to occasionally include the
words of a guest writer in our Newsletter. This week, we are
handing the soapbox over to one of our longer suffering
investors, Charlie Aitken, MD
of C Aitken Asset Management. The opinions expressed below are
of course his own;
Charlie
Aitken: Among many hundreds of others, I was recently
honoured to attend a service of thanksgiving for the life of
Julian Baring. I first came to know Julian at the inception of
this Fund back in 1988 and my life has been undeniably affected
by his enthusiasm for the yellow metal and the companies that
mine it. In particular the past few years has set me forth on an
unprecedented (for me) analysis of economic history and investor
psychology in respect of gold and indeed other financial asset
classes.
After
the service Graham Birch, asked me whether I would be interested
in cobbling a few words together so as to share my enthusiasm
with other investors and recipients of the Newsletter. Perhaps
the most logical way to provide these thoughts is by way of a
Questions and Answers résumé:-
What Makes You Interested in
Gold?
I
prefer to think of gold as money and not just a commodity. Gold
has maintained its real value in money terms for over two
thousand years. Those who have owned the gold have had both
economic and political power. Gold of course does not represent
someone else’s debt. It has long been metala
non grata with socialist governments and their endless fiat
currency schemes.
There
are various views on what causes the price to rise in value,
inflationary pressures; political instability; possible
conflict/war; economic tension or just good old supply demand
imbalances to name but a few. We currently have all of these
factors in place.
Gold
has been in a near 20 year Bear Market,
why should it change
now?
As
a contrarian
investor I am naturally attracted to an asset class that is
unloved and under owned. It stimulates my interest to enquire
why this is so. I am intrigued that for less than US$3Obn you
can own every quoted gold mining company whereas Microsoft alone
was recently capitalized at some US$600bn.
One
must realise that gold is political. It has a
habit of exposing weaknesses in political plans and monetary
excess throughout the ages. History is also littered with
examples of governments waging war on gold. Focusing on the past
30 years can perhaps guide us to its future course. Most readers
will be aware that Nixon moved the dollar from the gold standard
in 1971 and that by 1973 every other central banker had done the
same. For virtually the first time in history, money creation
was backed up by nothing more than a politician’s promise to
repay it at some unspecified future date. In 1974 in an attempt
to show the world that gold was dead and de-monetized, a
‘barbaric relic’, the US government allowed its citizens to
own gold, having confiscated it under Roosevelt in 1933.
Contrary to their expectations that the price would fall from
the then US$35 level to perhaps US$5 it began a multi year bull
market, rising in price to US$850 in 1980 due to the stagflation
of the 1970’s.
Ironically
the last Bank of England sales, when they sold half of our
reserves, was completed in the early 70’s at an average of
US$35 an oz.
Since
its peak of 1980 the Gold price has gyrated wildly and has
(temporarily?) lost the battle to paper money or credit
creation. Removal of the gold standard has allowed massive
credit expansion culminating today in unprecedented national
debt (particularly in the US) and historically high corporate
and personal debt levels. Massive credit creation has a habit of
ending in tears, with the gold price usually benefiting from its
reversal.
Gold
has been particularly grim
over the past few years. why is this?
A
good question. With the supply/demand imbalance over the past
few years running at 500t or more per annum the price should
have been rising. I for one expected
the move from US$330 to US$400 from 1993 to early 1996 to be the
beginnings of a sustained bull run.
Patently
the gold markets have not been trading as free markets. The
undeclared war against gold must have intensified. In a
testimony to Congress even Fed chairman Greenspan stated that if
the gold price rose it would cast a shadow over the world’s
paper currencies.
Regular
readers of this Newsletter will be well versed with the twin
negatives of Central Bank sales and forward hedging by the
mining community over the past few years and the psychological
effect of this on investors. The twin negatives drove gold down
from US$400 to the US$255 low seen in August 1999. All this at a
time that credit creation has gone into overdrive. Since 1995
broad money supply in the US has increased by a huge US$2.6tr or
60%. Total credit market instruments have surged by an
astounding 54% to US$26.5tr.
But
the price still has not risen?
No,
not yet! Whilst I am suspicious but intrigued by conspiracy
theories, a growing bank of independent investors and analysts
have uncovered widespread efforts to officially suppress the
price of gold. Among them the work of Bill Murphy and his team
at GATA (Visit www.gata.org)
are to be applauded.
The
suggestions are that some 15-26,000t of gold derivatives have
been created and these are mostly hedged short positions that
cannot be unwound or covered in an orderly way in the market.
This gold is not being lent. It is being sold into the market.
The
US$ has replaced gold as the safe haven status particularly over
the most recent years as the financial markets have ballooned.
This may however be starting
to
change. The recent falls in equity prices, most noticeably
NASDAQ’s 40% slide from its peak in March is starting to
affect the credit markets, with dollar swap spreads straining at
very high levels.
A
wider earnings contraction is evident by the day, wage price
inflation is replacing increasingly worthless share option
schemes. All this at a time that a Middle East conflict
increases, OPEC regains the initiative and the US shows a void
in political leadership.
What
is really different this time, relative to previous ends of
credit excess, is the amount of derivatives in play. Allegedly
some US$ 1OOtr if one includes the investment banks; other
financial institutions and the hedge fund community. To put this
into context, the risk of financial meltdown in the autumn of
1998 was down to one hedge fund, LTCM with a market exposure of
US$1tr!
Although
the Washington Agreement of September 1999 effectively drew a
line under the proposed central bank sales, lending has
continued at a high level. At a recent central banking
conference, a representative from Venezuela observed that
continued lower prices of gold only devalues central banks’
own assets. He said that they have lost US$15bn to date in 2000
and only made US$30m from the gold loans. The question must be,
‘Why would central banks continue with this strategy unless
they wished to suppress the price’?
I
recall Julian’s analogy in respect of ‘selling the family
silver’ (read gold) and we are witnessing a transfer from West
to East, which perhaps indicates where the pendulum of power is
heading longer term. Aside of India’s historical belief in the
value of gold and hence the largest acquirers, China,
representing 25% of the world’s population is only just
opening their gold market. The results are fairly predictive.
In
conclusion, whilst my crystal ball may be no clearer than anyone
else’s, analysis and intuition suggests that loyalty is
shortly to be rewarded and rewarded in a big way. It will not be
in a straight line and there will be casualties within the
mining community. Ashanti’s failing, taught us that after the
Washington Agreement rally. The impending scenario would ideally
suit a long/short fund, long the unhedged/short the aggressively
hedged mines, but this is unlikely to be available as a UK
regulated fund in the near future.
Therefore
we are delighted
to remain
invested with Graham
and
his team — without
doubt,
in my opinion, the
best team
in town.
Charlie
Aitken is the MD of C Aitken Asset Management, a South Coast
based advisor.
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2003 Investmentmatters
is published by SMM(B) Ltd.
