Sunday, January 23, 2011
After a week ago we learned that the central bank of Tunisia had parted with 23% of its gold stash courtesy of now deposed president who fled the country with a 1.5 ton shipment of gold, it appears that Egypt is preparing for a comparable spike in revolutionary activity. Only unlike the now former Tunisian president whose gold sequestering actions were retroactive and thus, quite lucky to succeed, Egypt has taken proactive measures. According to Egypt News, the country's airport has intercepted 59 shipments of gold directed for the Netherlands "worth tens of millions." The gold, as well as an indeterminate amount of foreign currencies, was hidden in pillow cases: uh, cotton may not show up on X-Rays, but gold sure does. We eagerly await to learn how big the decline in the country's official holdings 75.6 tonnes of gold will be after this most recent episode confirming that gold is precisely money. And all this happening despite gold's complete and thorough inedibility.
The freight on Dutch plane bound for Amsterdam were surprised by tearing down two bags within 59 a parcel containing large quantities of gold and foreign currencies worth tens of millions have been reported to officials.
It was the formation of a committee headed by an official of one of the Egyptian banks of the parcels were re-examination of parcels and make sure that no shortages and supervision of shipping on the plane.
Bank of America, the biggest US bank, reported Friday a net loss of $1.2 billion for the fourth quarter, citing falling revenue and a hefty writedown on its home-loan business.
The loss was the second consecutive quarterly setback for the government-rescued bank, after a $7.3 billion loss in the third quarter.
For full-year 2010, Bank of America reported a net loss of $2.2 billion. The bank wrote off $12.4 billion in charges.
That amounted to a loss of 37 cents per share, compared to a loss of 29 cents per share in 2009.
In 2009 the bank had profit of $6.3 billion but for shareholders it was a loss of $2.2 billion following payments to the US Treasury stemming from bailout aid......read on
Investment implies moving some part of one's assets from financial safety to a position of acceptable risk with the hope of increasing wealth over time. What qualifies as "acceptable risk" may thus be seen to be the gating question for the investment criteria of a "prudent man". This has come to be known as the Prudent Man Rule to guide persons entrusted with the finances of others.
Although the rule remains a guiding principle in the fund management industry to this day, at least one key element has changed. In 1971, our understanding of ultimate safety was transformed when President Nixon ended the US government's certification that each dollar in circulation was, in effect, worth exactly 1/35th of an ounce of gold.
Since all major currencies had been linked to gold via the US dollar since 1945, when the US held the majority of monetary reserves, the announcement provoked a momentous change in the financial culture. Cash no longer meant gold: the amount of dollars the Federal Reserve could print would not be restricted to some degree by a stored metallic tangible asset with a finite supply. In a great leap of faith, paper dollars and traded US federal liabilities became "risk-free" assets while gold, long regarded as money itself, was disdained as a "commodity", a volatile "risk asset".
This historically radical new notion was validated by the arbiters of money themselves. Central bankers dumped gold, driving prices down sharply during the 1990s. They thereby reinforced the MBA textbook perceptions that the dollar and US Treasury bonds were "risk-free" assets and gold a "barbarous relic," as John Maynard Keynes famously called it.
Even today, as the gold rally has reached the 10-year mark (following a 20-year bear market), the metal represents a mere 0.6 per cent of total global financial assets (stocks, bonds and cash). This is near the all-time low (0.3 per cent) reached in 2001, and significantly below the 3 per cent it accounted for in 1980 and the 4.8 per cent it was in 1968.
However, there are changes afoot. After a lengthy absence, some asset managers and central bankers are readmitting gold back into the group of prudent asset classes. Assessing the devastation of financial industry and government balance sheets, fiduciaries have been reminded that one of the principle reasons to hold gold - that it is the only major financial asset that does not represent someone else's obligation to repay - is not the arcane concept it once appeared.
I believe the renewed appreciation of risk management is in its infancy and that gold, like stocks and bonds, will recover its relatively small, but significant historical position in the world's investment funds. Considering the tiny size of the gold market, the implications of a potential return of gold into the world's largest portfolios are enormous. For, unlike stocks and bonds, whose supply can increase to meet demand, there is not enough gold to go around at today's prices.
According to International Strategy and Investment Group (ISI), if gold ownership rose from 0.6 per cent of total financial assets to only 1.2 per cent, still less than half its 1980s level, this would equate to an additional 26,000 tonnes, or 16 per cent of aggregate gold worldwide. This represents 10 years' worth of current production.
Is such a momentous development likely? I suggest it is more likely than not, as the metal is set up for a "perfect storm" from a supply/demand standpoint. At a time when mining companies can barely find enough gold to replace their reserves and production growth is anaemic, central banks have not only stopped selling their gold but are now aligning with investors to accumulate it.
As it dawns on the wider market that the bull market in gold is real, the impact on gold mining equities will probably be dramatic. Until recently, in spite of their theoretical leverage, miners have lagged behind the metal's performance. This should not be so surprising. As most analysts haven't changed the long-term pricing of their cash flow models to reflect a sustained bull market in gold, the shares have underperformed amid assumptions that are outmoded.
This disconnect is similar to the experience of energy equities in the early 2000s. Even as oil surged, it was not until investors accepted that oil might not stay low forever and started to factor in higher prices that the equities were revalued. With the total market capitalisation of all gold mining companies only fractionally higher than that of Apple, any move by investors to capture the inherent leverage of these equities could drive stock prices substantially higher.
Asset managers and central banks are just beginning to readmit gold back into the select group of prudent asset classes. That this is occurring at a time when what might be seen as the world's safest financial asset classes may also be its scarcest suggests interesting times ahead for those who own gold.
Thomas Kaplan is Chairman of Tigris Financial Group