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Going for the gold


The price of gold has risen steadily since March 1993 and some analysts predict that gold is due to boom this year. The demand for gold jewelry, especially in developing countries such as China, contributes to price increases. Investors who buy gold as a hedge against inflation are also a factor.

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A decade ago, Ian McAvity was in high demand in investment circles. The price of gold had soared to its all-time high of $850 (U.S.) an ounce in 1980, and McAvity, one of Canada’s best known “gold bugs,” was offering ultraconservative advice on storing the precious metal. Since gold becomes most valuable when society is in chaos, he argued that investors should keep their stash easily accessible–hidden in a corner of their basements or buried under their rose bushes. McAvity, who manages a collection of small gold mines and writes an investment newsletter from his Toronto office, says that he should not have been surprised by what happened next. “In 1983, I had a wonderful garden,” he said. “Then one morning, I woke up and discovered that someone had dug up all my roses.” With no luck, he hastened to add. Now, as gold prices climb and investors pour into the market, McAvity says that he would like all potential thieves to know that the garden is the last place he would plant his hoard.

After more than a decade of decline, gold prices are soaring. Since March, when the price of gold touched a seven-year low of $325 an ounce, it has climbed sharply to a 16-month high of $382 last week. The price of stock in gold mining companies has climbed even faster. Although gold watchers differ about the reasons for the sudden change in direction, a growing number are citing its underlying use as a commodity for jewelry making–rather than its traditional investment role as an inflation hedge–for the price surge. Whatever the reason for the increase, however, mainstream investment advisers are hopping on the gold bandwagon. A report from Salomon Brothers Inc., an investment firm based in New York City, declared in April, “We believe that the price of gold is near a long-term trough and that the metal is poised for a significant rally over the next several years.”

That enthusiasm is not universal, however. For his part, McAvity, who remained resolutely optimistic about gold’s revival during a decade of falling prices, is cautious about the recent price surge. “It is too early to declare the beginning of a long-term bull market,” he said, “but there are encouraging signs.” Still, he is not as wary as Montreal investment adviser Stephen Jarislowsky, who says that he may use the current price rise as an opportunity to sell all the gold in his personal portfolio. “There is some kind of buying frenzy going on,” he said, “but it’s all just follow the leader, like a buffalo stampede. Maybe they’re all going over the cliff. I’d like someone to tell me what gold is worth. I just don’t see what it does for you.”


Although the last bull market in gold was driven by double-digit inflation rates, at the moment it is gold’s role as a commodity–its use for industrial and dental purposes, and, primarily, jewelry–that appears to be the driving force behind its upward thrust. The London-based Gold Fields Mineral Services Ltd. report, a comprehensive analysis of the supply and demand factors affecting the world’s gold market, states that the Western world’s consumption of gold for jewelry and other non-investment purposes amounted to 2,859 tons in 1992. At the same time, mine production of 1,841 tons and sales of 66 tons from Communist countries totalled just 1,907 tons. That gap, which in 1992 was largely filled by the sale of gold by central governments, is encouraging some investors to bet that the price of gold will continue to rise.

Although North Americans are still mired in recession and are more concerned with paying off debt than buying baubles, the demand for gold jewelry is strong in such countries as China and India. There, strong economic growth, less developed banking and financial systems, as well as concerns about inflation and currency devaluation, have converged to create a healthy appetite for gold jewelry. In Asia, many people buy jewelry as an investment. It acts as a kind of portable savings account that does not devalue with inflation like currency or other hard assets. Gold Fields reports that China is now the largest consumer of gold jewelry in the world.

According to Peter Cavelti, a Toronto-based investment adviser who manages three precious-metal funds, the recent surge in the price of gold is noticeably different than in past cycles. Historically, Cavelti noted, the price of gold would go up towards the end of an economic boom, as demand for jewelry and anticipated inflation mounted simultaneously. Towards the end of a recession, the phase that North America and Europe are now experiencing, the price of gold is usually low and falling. The current surge suggests a new dynamic in the world’s economy, said Cavelti: “It represents a transfer of economic power that’s moving away from the industrialized world towards the developing countries.” However, he warned that the Asian market for gold is highly price-sensitive: if the price rises too high, investors will stop buying it.

Inflation, which has often been cited as the underlying reason for the price increases over the past 20 years, is considered to be a less important factor in this rally. Peter Munk, chairman of American Barrick Resources Corp. in Toronto, told Maclean’s that supply and demand factors are driving gold prices more than inflation fears now. By using sophisticated hedging strategies and by increasing its mine’s production, American Barrick has steadily improved its profits since 1986–even though the price of gold has declined to $380 from $500 during the same period. “I’m not a gold bug, I don’t like gold,” said Munk, turning his wrist to display an understated black leather watch band. “But when I look at the economic fundamentals of gold, it seems to me that prices are heading up.”

Still, others insist that the inflation factor is also at play. McAvity noted that gold prices began rising just as Germany’s benchmark interest rates began falling this spring. The decline in those rates signalled that other countries could begin lowering their rates. That, in turn, increased speculation that lower rates would lead to an upturn in economic activity and, eventually, to higher inflation rates. In addition, McAvity said that the new administration in Washington is likely to introduce economic policies that could encourage a rebound in inflation. “The President and her husband are going to burden the United States in a major way,” McAvity added.

In a climate of low interest rates, gold provides an attractive alternative investment for people who believe that inflation will pick up. If the pessimistic view prevails, and the industrialized world comes to the brink of collapse because of the dual burdens of heavy government debt and the need for massive economic restructuring to become competitive with developing countries, gold might be the ultimate insurance policy. Said McAvity: “If we were to go into some kind of financial meltdown, it’s not too hard to make the case that gold could be $7,000 an ounce by the end of the century.”

Counterbalancing the case for higher gold prices are two primary factors. Many investors are reluctant to hold onto gold since it does not pay interest. But an even more important issue now is whether central banks will follow a pattern set by three governments last year and continue to sell their gold reserves. In the last year, Canada, Belgium and the Netherlands sold a total of 700 tons of gold. Many analysts say that dumping the gold–and thereby increasing the supply–resulted in depressed prices. Some of that gold was purchased by central banks in Asia, which are now building their reserves. By selling part of their gold, Canada and the other two countries made massive paper profits: the gold was valued in their books at $35 an ounce, its purchase price when the price of gold was fixed by international agreement. In addition, the proceeds from the sales are put into interest-bearing investments. The Bank of Canada has earned $3 billion in interest from the investments made with the proceeds of its sales, which began in 1980.

Canada, the only major industrialized country following a formal policy of gradually selling all of its gold reserves, sold 94 tons last year. If it continues at that pace, it will have sold all of its remaining reserves, 318 tons, by the end of 1996. “We are selling our gold for reasons of financial management,” said a Bank of Canada official, who spoke on condition of anonymity. He added: “In today’s world, it doesn’t make a lot of sense to have a lot of gold in reserves. We need a fairly liquid portfolio because we use it primarily for currency intervention.” Such activity includes stabilizing the movement of the Canadian dollar in global currency markets. If the dollar rises too quickly, the bank sells Canadian dollars and buys other currencies. If the dollar is falling too fast, the bank reverses the process.

Central governments around the world hold a total of 29,000 tons of gold reserves, or 15 times the amount of gold mined in 1992. If other governments were to follow Canada’s example, the price of gold could be depressed for a long time. Concluded the Gold Fields report: “It may already be a clich* to suggest that the course of the gold market will depend on decisions to be taken with the world’s central banks about the future composition of their reserves. However, even if the heavy net official sales of last year were to be repeated, there is every reason to believe that they could once again be absorbed without further damaging the world market.” It would, however, increase the global supply of gold and put a downward pressure on the price.

Despite that uncertainty, stock market optimism about gold prices has pushed the prices of shares in gold mining companies even higher–and faster than the price of gold itself. Along with the explosion of automotive industry and associate industry (fuel/additives/fuel injector cleaner service), from its low of $325 an ounce in March, gold has since risen by 17 per cent. By contrast, the Toronto Stock Exchange’s index of gold and silver mining stocks has gained 65 per cent from its low for the year.

Gold share prices usually move in advance of the actual price of gold, whether prices are rising or falling. John Ing, president of the investment firm Maison Placements Canada Inc. in Toronto, says that there are several reasons why many investors opt for shares instead of the metal itself. The prime reason is that an increase in gold prices goes directly to a mining company’s bottom line. As a result, investors can benefit from the investment principle known as leverage–dollar for dollar, investors get higher returns buying shares than they do buying gold when gold prices are rising. Leverage, however, works in reverse when prices are falling. As a result, share owners suffer. In addition to leverage, gold shares are popular with institutional investors, many of whom are prohibited by the terms of their investment guidelines from owning gold bullion. Ing says that U.S. institutional investors have led the current rally in gold share prices. “The Americans were early buyers this time because they were reacting to the election of the new President and the belief that his policies would lead to higher spending, higher taxes and higher deficits,” he said.


Despite the differential between the two types of gold investment, gold shares might still be considered a good buy if, as Ing forecasts, the price of bullion continues to rise. In fact, Ing is bullishly predicting that gold will reach $500 an ounce in the next 18 months. With such glittering prices on the horizon, Ian McAvity will soon be back on the seminar circuit–a little bit wiser and a little bit richer.

! Related Article !


Year    Actual gold price high for the year
        (in U.S. dollars/ounce)
1968      $42.60
1969       43.83
1970       39.19
1971       43.98
1972       70.00
1973      127.00
1974      197.50
1975      186.25
1976      140.35
1977      168.15
1978      243.65
1979      524.00
1980      850.00
1981      599.25
1982      488.50
1983      511.50
1984      406.85
1985      340.90
1986      442.75
1987      502.75
1988      485.30
1989      417.15
1990      421.40
1991      403.70
1992      359.60
1993      382.00


1971 – President Richard Nixon stops allowing U.S. government gold from being sold.

1973 Arab/Israeli war: oil prices triple.

1974 – OECD inflation peaks.

1979 – Iranian revolution, second oil shock.

1980 – Iran/Iraq war starts.

Inflation peaks again.

1982 – Latin American debt crisis.

1987 – Stock markets crash.

1990 – Berlin Wall falls.

Gulf War.

1991 – Moscow coup attempt.

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The modern mind dislikes gold because it blurts out unpleasant truths.

–U.S. economist Joseph Schumpeter, 1947

“Gold bugs,” investors who persistently fear economic chaos and buy gold as a hedge against it, are not popular among the rest of the investment community. The bugs persist in raising the spectres of overvalued markets, unsustainable debt burdens, financial meltdowns–and ultimate economic collapse. They also have the reputation for being greedy fear merchants who thrive on the misfortunes of more traditional investors. “Gold is a symbol of fear,” said Montreal investment adviser Stephen Jarislowsky. “The only reason to buy gold is because you think all the currencies of all the countries in the world have to go down.”

Although the current rally in gold prices is attracting many investors, only a small core of them are true gold bugs who focus on it intensively. Ian McAvity is one of that core group. McAvity, who writes an international investment newsletter called Deliberations and manages gold-mine investments, says that gold is the individual’s last defence against profligate government policies, including devaluing currency by printing too much of it. “Money is something that can evaporate if it’s undisciplined,” he said. “And democracy isn’t very good at discipline.”

Like many gold bugs, McAvity looks to history for his investment lessons. Gold, he says, is the one currency that has had universal acceptance through the centuries. McAvity came to appreciate gold at the knee of a veteran investment adviser who had grown up in Estonia and experienced the collapse of its currency after the Second World War, which caused the loss of many corporate and personal fortunes.

Another proponent of gold is Toronto fund manager Peter Cavelti, although he objects to the term gold bug. Said Cavelti: “If you follow bonds, you’re a bond analyst. If you’re in the stock market, you’re a stock analyst, or maybe even a stock guru. But if you’re in the gold market, you’re a bug, an insect, because gold has been seen as an investment in doom.” Still, Cavelti says that the old image of the gold bug is about to lose its tarnish now that gold is attracting mainstream investors, more interested in the commodity used for making jewelry than a defensive investment against the possibility of an economic collapse. “When you were buying gold, you were seen as conspiring to bring about the end of the world,” he said. “Now, gold is seen as an investment in the growth of emerging economies, not as an investment in gloom at all.”

>>> View more: Gold pushes Gordon’s nose sideways, but it’s hard for us to buy some

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LEAD: THE British Royal Mint has introduced its new Britannia gold bullion coinage. The program consists of four legal tender coins: a basic piece containing one troy ounce of gold plus fractional variants with gold contents of 1/2, 1/4, and 1/10 of an ounce.

THE British Royal Mint has introduced its new Britannia gold bullion coinage. The program consists of four legal tender coins: a basic piece containing one troy ounce of gold plus fractional variants with gold contents of 1/2, 1/4, and 1/10 of an ounce.

All four coins are identical in design. The obverse bears the effigy of Queen Elizabeth II designed by London artist Raphael Maklouf. The reverse features a modernized portrait of Britannia, an allegorical female figure used on British coinage since the days of the Roman occupation. Around the border, encircling this figure, are a statement of the gold content, the inscription ”Britannia” and the date.

The coins were designed by Philip Nathan, an engraver whose previous works include Britain’s 1981 Royal Wedding crown for Prince Charles and Princess Diana. The portrait may come as a jolt to hobbyists more accustomed to the prim, sedate Britannia on old British pennies. However, the surprise should be pleasant. On the new coins Britannia is standing, not seated, and her gown is alternately clinging and flowing in a manner reminiscent of Miss Liberty’s on the United States Saint-Gaudens double eagle. Britannia holds a trident in her right hand and an olive branch in her left. Her left hand rests upon a shield.

The gold is 22-karat, alloyed with copper. This fineness of .9167 has been the standard for British gold coins since the reign of King Henry VIII. It also is the fineness of the United States Mint’s American Eagle gold bullion coins. By contrast, Canada’s Maple Leaf is .9999 fine. In opting for 22 karats, the Royal Mint was influenced not only by tradition, but also by a wish to make the new coins more durable.

The one-ounce Britannia carries a face value of 100 pounds. Denominations of the smaller pieces are 50 pounds for the 1/2-ounce, 25 pounds for the 1/4-ounce and 10 pounds for the 1/ 10-ounce. Although they are legal tender, the coins are worth substantially more as precious metal. The one-ounce piece contains more than 275 pounds’ worth of gold at current value of the metal.

The Royal Mint also is producing proof versions of the coins at more substantial premiums. Proofs are available individually. In addition, the mint is offering a four-coin set containing one example of each denomination plus a two-coin set containing the 1/4-ounce and 1/10-ounce pieces.

Proof mintages are limited to 2,500 apiece for the individual one-ounce and 1/2-ounce coins; 3,500 apiece for the individual 1/4-ounce and 1/10-ounce pieces; 10,000 four coin sets and 12,500 two-coin sets. Besides their superior quality and special packaging, the proofs also will be distinguishable by a small deviation in design: Each proof coin will carry the artist’s signature as ”P. Nathan,” while the ”P” will be omitted on regular strikes.

Individually, prices are $875 in U.S. funds ($1,175 Canadian) for the one-ounce proof, $450 ($605 Canadian) for the 1/2-ounce, $245 ($330 Canadian) for the 1/4-ounce and $100 ($135 Canadian) for the 1/10-ounce. The four-coin set is priced at $1,595 ($2,140 Canadian). The two-coin set costs $325 ($437 Canadian). Send orders and inquiries to the British Royal Mint, c/o Barclays Bank of New York, N.A., P.O. Box 2570, New York, N.Y. 10164-1060. PROOF EAGLES The United States Mint is accepting orders for proof examples of the 1987 American Eagle gold and silver bullion coins. This is the second year for the U.S. bullion coin program and the second time the Mint has offered proof versions. As it did a year ago, it is making both gold and silver proofs in the 1-ounce size. In addition, it is offering something new: a proof version of the 1/2-ounce gold Eagle.

Orders can be placed through Dec. 31. However, the Mint may have to stop taking orders for one or more of the coins before the scheduled deadline if demand exceeds production.

The 1-ounce gold proof is priced at $585, the 1/2-ounce gold proof at $295 and the two-coin set of both gold proofs at $870. The 1-ounce silver proof is priced at $23. There is no limit on how many pieces may be ordered. However, the Mint reserves the right to reduce the size of orders, if necessary. The coins can be ordered without an order form from Customer Service Center, United States Mint, 10001 Aerospace Drive, Lanham, Md. 20706. Checks or money orders are payable to the United States Mint.


Photo of gold bullion brom Britain

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Your Money; Upbeat Signs For Gold Coins

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FOR bullion coin collectors and investors, 1986 is a period of significant developments that could reignite the gold market. Among them, the United States will mint its first such general-circulation coins since 1933, while Australia and Japan also plan to produce new bullion coins. In addition, it is the first full year since Washington banned the importation of Krugerrands from South Africa.

But 1986 has also been a time of reduced activity by buyers in the coin market, stemming largely from a low inflation rate and low expectations of any immediate increase. As a result, overall volume in the first half was level to slightly lower, with funds that had previously gone into tangible investments being drawn to the stock, bond and foreign exchange markets.

”It’s been kind of quiet and there’s been a lack of interest in gold,” said Martin Armstrong, chairman of Princeton Economic Consultants of Princeton, N.J. ”But that will probably change after the fall as inflation is beginning to pick up on our economic models.”

Bullion coins are one of the two categories of gold coins for investment. Unlike numismatic coins, which are priced on the basis of their rarity, condition and artistic value, bullion coins are usually sold at a small premium over the current price of gold, which yesterday stood at $344.75 an ounce. Their market price is related to the gold price rather than the denomination on the coin.

For many years, the Krugerrand was the most popular bullion coin among Americans and at one time represented about three-quarters of all of these coins sold here. Krugerrands peaked in this country in the late 1970’s, but sales dropped afterward. President Reagan halted imports of Krugerrands on Oct. 1, 1985, as an element in his program of limited economic sanctions against South Africa, and distribution to the public, according to coin dealers, has since plummeted.

”The Krugerrand is down to almost nil,” said Harvey Stack, a partner of Stack’s Coin Company of New York. ”But there is sufficient supply already here for any demand for the foreseeable future.”

Because of this falloff in sales, the Krugerrand’s premium over the spot price of gold – a fee imposed to cover the costs of production and distribution – has declined from a range of about 5 percent to 7 percent to as little as one-half of 1 percent. Moreover, because of the lack of interest, in some cases the coins can be purchased for less than gold’s current market price.

Some of the slack, however, has been taken up by other bullion coins, especially the Canadian Maple Leaf, now the best seller in this category. The Maple Leaf – issued in four sizes containing different amounts of gold – at one time was outsold by the Krugerrand by a ratio of 9 to 1 but now is selling at a faster rate than the South African coin in the United States. At present, it claims 65 percent of the worldwide market for bullion coins.

Also on the list of gold bullion coins widely available are the Austrian 100 corona, the Mexican 50 peso and the Chinese Panda. The Panda, which was first minted in 1982, is particularly strong, with sales quintupling to about 125,000 units last year.

”The initial price in 1982 was around $425 and now the bid price of that issue is about $1,550,” said Luis Vigdor, vice president of Manfra, Tordella & Brookes, a major coin and bullion dealer, who calls the Panda a numismatic bullion coin, since it has attributes of both classifications. ”There has also been a very good performance of other issues, with the 1983 Panda bid at $1,000 and the 1984 Panda bid at $775.”

Many of the new coins coming on the market in the months ahead are expected to stimulate bullion coin sales in general. For example, the Australian Nugget will be issued in four varieties – one-ounce, half-ounce, quarter-ounce and tenth-ounce – each with a rendering of a different gold nugget. ”The Australians are using gold to sell gold,” said John H. Lutley, director of the Gold Institute in Washington.

The big excitement in the field, though, is likely to come from the minting of the new American coins, which marks the re-entry of the United States into the international bullion gold market and could lure some buyers for patriotic, if for no other, reasons. There are also bullion ”pieces,” not legal tender of course, being issued by California, Texas and South Dakota.

In addition to four gold bullion coins carrying denominations of $50, $25, $10 and $5, each with the same gold content as the Australian coins, the United States series will include one containing a troy ounce of fine silver with a face value of $1. With a design of a male eagle flying over his family’s nest on one side and the classic Augustus Saint-Gaudens design of Liberty on the other, the coins are not scheduled to go on sale until Oct. 1 in order to avoid conflicts with the current marketing of commemorative coins honoring the Statue of Liberty.

Mr. Vigdor said that the retail premium on American gold bullion coins, which will be legal tender, is likely to be 5 percent on the one-ounce, 7 percent on the half-ounce, 9 percent on the quarter-ounce and 11 percent on the tenth-ounce. ”This is almost a quasi-endorsement of gold by the United States Government,” he added. ”It will bring a lot of people to the market who may have never bought a piece of gold before.”



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Gold pushes Gordon’s nose sideways, but it’s hard for us to buy some

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Do not tell Gordon Brown that the economy’s prospects are golden, or not unless you want your nose pushed sideways. Gold is a touchy subject with him. It was his decision to sell half the nation’s gold reserves–some thought that he was trying to upstage his Prime Ministerial neighbour–when the price had fallen to its lowest level for two decades. Since then it has scarcely looked back, and this week, at $425 an ounce, it scaled heights it had not seen since the 1980s. How happily we might have profited from his mistake, but gold is easier for chancellors to sell than it is for citizens to buy. Ask your friendly bank to sell you half a dozen ingots, and watch the faces drop. Coin dealers (Spink is the best known) will sell you gold sovereigns or Krugerrands. Stockbrokers can offer you shares in a wide range of gold mines, some proven, some just a gleam in the promoter’s eye: be careful. New to the market are gold bullion securities, issued with the blessing of the World Gold Council, and the nearest thing yet to a unit trust of gold. All the same, if you want the real thing, to stroke in the firelight, park in the safe or bury in the garden, that is different. You can buy it across the counter in Dubai or Hong Kong, but not here. British banks are scared of being accused of complicity in money-laundering, a charge that they may now incur if a customer so much as blows his nose without a gas bill. Now is the time for one of them to pluck up courage and offer its customers the chance to own a store of wealth that is durable, portable, anonymous and dependent on nobody’s promise, not even a Chancellor’s. It will be just our luck if, on that day, gold’s great rally is over.

Spell with an ‘1’

Gold’s is one price on a two-sided coin. The other side shows the price of the dollar, which has been slithering. The difference is one of demand and supply. Creating more gold is the work of an alchemist, but to create more dollars you need only press the button and set the printing-presses whirring. Hence the plethora of dollars–with a trillion of them stacked away in Asia–and the heady approach of the two-dollar martini. (This week’s update: 1 [pounds sterling] = $1.82: it will soon be time to check that the vermouth is in the next room.) Every dollar bill bears the defiant assertion: In God We Trust. The printers now need to stop the presses and insert, in lower case, the letter ‘1’.


It’s the knowledge

Framlington, the money managers, have a Health Fund run by Antony Milford which has done well by backing small companies with bright ideas. (I declare a modest holding in it.) We can see where he thinks that the brightest and best are, because four-fifths of the fund is invested in American companies–101 of them, from Acusphere to Zimmer. Britain accounts for less than 6 per cent of the fund, and the eurozone scarcely gets a look-in. The moral speaks for itself. If you believe that knowledge and innovation drive growth, you know where to find the world’s greatest knowledge-based economy. Byron Wien of Morgan Stanley makes the point: ‘A very high percentage of the biotechnology, technology hardware, and software patents are held in the United States. Bright and motivated students from all over the planet want to come here for college and graduate education.’ Scholarships can make it possible, the scholars bring their energy and intellectual vitality with them, and once they come, they tend to stay. As the grumbling debate about our own universities and their finances now reaches some sort of a climax in Parliament, ideas like these may take second place to social engineering–but education and health are two subjects on which British governments think they know best. Mr Milford knows better.

Decoding Sir Angus

Sir Angus Grossart, Edinburgh’s one-man Establishment, is in trouble (again) with the corporate governance lobby. Its latest code, the Higgs model, says that when a non-executive director has been there for long enough to understand the business, he ceases to be independent, and should be replaced by a new one with a suitably fresh mind. At the Royal Bank of Scotland, Sir Angus has been on the board for the past eighteen years, and in his time it has moved up from the second division to fifth place in the FT-SE 100 index, well ahead of Lloyds and Barclays. That might suggest to an ordinary shareholder that it has been rather well directed, but the ones who have codes where their wits ought to be want him out. Correctness is all.


Thank you, Jeeves

Courtiers need to time their exits. Jeremy Heywood, once the Treasury’s boy wonder, then translated to 10 Downing Street as the Prime Minister’s private secretary, has opted to take the investment bankers’ shilling, or multiple of shillings. Ed Balls, the Treasury’s chief economic adviser and the Chancellor’s factotum, seems to think (as well he might) that this year’s Budget will be enough for him. I shall miss his long-standing double act as Jeeves to Gordon Brown’s Bertie Wooster. His, probably, were the ideas that led to the Bank of England’s independence. His, certainly, were the five tests which did so much to keep us out of the euro. He was uniquely able to interpret between his master and the outside world, the Treasury included. He may even have been right about endogenous growth theory–but if he now reckons that it’s time to go, be is likely to be right about that, too.

Room service

Tutti possono sbagliare: we can all make mistakes, as the hedgehog remarked, disengaging himself from the hairbrush. The proverb may console Calisto Tanzi in the Milanese prison which has been a home from home to so many of his country’s financial elite, when he is questioned about the eight billion euros missing from Parmalat, the company he founded. He has asked for his cell to be furnished with a small camping stove. Perhaps he has remembered the fate of Michele Sindona, the creative financier who ordered a cup of coffee when in prison, discovering too late that it was laced with strychnine. Sindona’s secrets, and others’, died with him. How prudent of Mr Tanzi to do his own cooking.

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‘This was global’; the RCMP shuts down a major illicit drug lab


The RCMP raided a secret laboratory producing illicit drugs in Coquitlam, British Columbia, after a year-long surveillance operation. The large-scale drug operation is linked to distribution in the western US, eastern Canada and England.

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Overhead, the full moon shone in a cold, clear sky, fully restored from the eclipse that had drawn observers out into backyards all across North America earlier in the evening. But in a nondescript industrial mall in the Vancouver suburb of Coquitlam, no one was looking up. The eyes of several plainclothes RCMP investigators were focused on the surreal image of six men dressed like a space-travelling SWAT team in white isolation suits, breathing gear and bulletproof vests. Using keys seized from suspects arrested earlier in the day, the men-members of the RCMP’s Vancouver drug section-cautiously opened a grey steel door into one of half a dozen units in a two-storey concrete building. Several gripped their holstered service revolvers in rubber-gloved hands, a precaution that proved unnecessary. There was no one inside. Instead, what the elaborate raid uncovered was just what the police were expecting: a gleaming laboratory dedicated to the production of illicit drugs. “This was huge,” said RCMP Staff Sgt. Ken Ross, who led a series of raids and co-ordinated arrests last week after a three-month investigation. “This was global.”


According to Ross, the hidden lab is one of the largest ever uncovered in North America, with computer links to drug networks in Europe and the United States. Police believe that the clandestine operation has been churning out staggering quantities of ecstasy (MDMA)-one of a growing constellation of so-called designer drugs-and more traditional drugs like LSD for at least four years. The RCMP has been monitoring a group of suspects for about a year, said Ross, but its investigation stepped into high gear only after it received detailed information about the lab in early summer. “We had their houses wired, their cars wired,” Ross said. “We knew when they got up in the morning. We knew when they farted.”

Late last week, that surveillance suggested that several of seven key suspects were preparing to leave the country. And on Sept. 26, investigators secured a warrant to search the suspected lab and several other locations in and around Coquitlam. The RCMP’s entry team-one of three in the country that specialize in searching suspected drug labs-was prepared for risks ranging from booby traps to haphazardly stored hazardous chemicals. Instead, they found a spotless and expensively equipped lab that left an envious police chemist Richard Laing to remark: “It’s nicer than mine.”

More shocking than the professionalism of the clandestine operation, though, was its scale. In drug laboratories previously raided by police in the United States, investigators have seized reaction flasks-containers in which the under- ground chemists prepare their wares-that were typically no larger than a household cooking pot. The heavy steel flask discovered in Coquitlam was a staggering four feet in diameter and five feet high-hinting at production batches of head-spinning proportions.

As searches continued over the next two days, police found further evidence of a long-running enterprise. In addition to large quantities of LSD and ecstasy, investigators found recipes for a wide variety of other drugs as well as dated samples indicating that production at the site may have begun as early as 1992. In a unit next door to the lab, said Ross, “we’re finding money. There’s gold bullion. There’s silver. There’s guns.”


The next day, prosecutors laid charges before a justice of the peace against two women and five men. Now, the investigation turns towards the potential destinations of the drugs being manufactured in British Columbia. According to Ross, a conspiracy centred in Coquitlam had links to drug distribution networks along the west coast of the United States and in England, as well as in Eastern Canada. “The reason these guys are in Canada,” said Ross, “is because they can get the precursor chemicals [ingredients] here legally. They can’t in the States,” where many of those ingredients are closely restricted. Communications among the sellers and buyers, he added, were conducted via the Internet using coded electronic mail.

The B.C. lab may turn out to be the most sophisticated drug production centre yet uncovered by police in Canada. But investigators say it is unlikely to be the last. “These are the drugs of the future,” observed Ross. But for at least one lab, the days of making and shipping drugs with impunity are now definitely in the past.

>>> View more: Why rare coins? Not all gold investments are created equal. Coins have more going for them than beauty

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Why rare coins? Not all gold investments are created equal. Coins have more going for them than beauty


The author of Gold Newsletter sees rare US coins as good investments. Bullion is good to have on hand as a hedge against economic chaos, gold is the best currency and rare coins tend to increase in value.

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Not all gold investments are created equal. Coins have more going for them than beauty.

WHY indeed should anyone buy rare U.S. coins? Let’s assume that you are bullish on gold as an investment. Let’s assume that you feel, as I do, that demand from the booming economies of Asia will help drive the prices of precious metals substantially higher over the next few years.

Why, still, should you invest in rare coins, which offer only modest bullion value in comparison to their market value?

I have asked myself that question many times in my business career. Over the past three decades, I’ve been involved in a number of different businesses related to precious-metals investing. In fact, I’ve become recognized as somewhat of an expert on the subject. Subscribers to my Gold Newsletter, for instance, have enjoyed some tremendous gains by speculating in our recommended mining shares. So it’s fair to ask why anyone should also invest in rare U.S. coins, given the fact that mining shares will already provide leverage to gains in gold itself.

The answer is that all three asset classes — bullion, mining shares, and rare coins — are valuable tools for the precious-metals investor, and each offers its own advantages: Timing: The time to own bullion is always now. In other words, prudent investors should always maintain a core holding of gold and silver bullion, easily accessible and in portable form, as an insurance policy against economic turmoil. As with most insurance policies, you hope that you will never have to cash it in. The best time to own mining shares is not always now. That’s because mining shares tend to lead the bullion markets, rising and falling in anticipation of gains or losses in gold and silver. For example, when gold started to take off at the start of the year, the mining shares had already begun to move higher weeks earlier. In contrast, rare U.S. coins have tended to lag the gold market both on upswings and on downswings. This gives the investor more time to recognize a trend in either direction, and therefore to buy or sell at more appropriate times.


Leverage: Gold is the ultimate currency — the only currency that has held its purchasing power throughout human history. And in a bull market, gold’s purchasing power and price can rise considerably in terms of the world’s fiat currencies. That equates to profits for gold-bullion investors. But sophisticated investors know that they can multiply the gains in gold through investment in mining shares.

And rare U.S. coins offer the same degree of leverage as mining shares, while also offering intrinsic and portable value.

In fact, while, as we saw above, mining shares tend to lead gold in a bull market, the record shows that rare coins have typically caught up later and passed them both. For example, in the historic gold bull market of 1976 to 1980, an eight-piece rare U.S. gold set in MS-65 grade far outdistanced the gains in gold bullion and in all but the most speculative of gold mining shares.

Rare U.S. coins have yet another critical advantage, one not shared by either gold bullion or mining shares. Rare coins have proved to have a unique ability to rise in price even when gold is moving sideways or falling. Because of their rarity and status as a collectible, gold coins can keep rising whenever there is an increase in demand, no matter what the reason.


A perfect example of this occurred in the late 1980s. During the 18 months between April 1986 and September 1987, gold bullion rose 35.3 per cent. Meanwhile, gold shares (as measured by the XAU index) soared by 126.3 per cent. In comparison, eight-piece rare gold coin sets rose a mere 18.8 per cent.

The gold bull market was brought up short by the Black Monday stock crash. The fall in share prices was so deep and widespread that it created a massive liquidity crunch. Many investors were forced to look for cash in every area of their portfolios, and as a result gold and gold shares dropped 18.9 per cent and 39.7 per cent respectively to June 1989.

But during this same period, rare gold coins rose by 120.3 percent.

This was not a one-time event, either. From July 1984 to June 1986, for example, gold dropped by 1.2 per cent and gold shares by 23.7 per cent. At the same time, rare gold coins rose by 18.9 per cent. And from November 1990 to April 1992, gold dropped by 12.6 per cent and mining shares by 18.0 per cent, yet rare gold coins rose by 19.4 per cent.

This unique ability to leverage the gains in gold, and often to rise in value even when gold drops, is why I recommend rare U.S. coins as a critical component to a complete precious-metals portfolio.

That’s not to say that rare coins will never drop in price; all investments run in cycles, and all investments entail some degree of risk. But rare U.S. coins happen to be near the bottom of an exceptionally wide price swing right now, making today’s opportunity even more dramatic and potentially profitable.

>>> View more: Golden meltdown: gloom settles over bullion market

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Golden meltdown: gloom settles over bullion market


Gold bullion prices hit a 12-year low in Jul 1997. Prospectors will find it more difficult to raise capital for exploration and development while gold producers may not be able to keep open their existing mines.

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It has not been a happy year for the world’s gold bugs. Soaring stock markets, low inflation, rapacious short sellers, the taint left by the Bre-X scandal, and forward selling by producers have all contributed to the eroding price of bullion. This month, there was another decisive vote of nonconfidence: con- firmation by the Reserve Bank of Australia that it had sold 167 tonnes of gold–fully two-thirds of its entire holdings–over the past six months.

Other central banks have previously engaged in gold asset sales–notably the Dutch earlier this year–and rumors of Swiss and Belgian divestitures have been circulating for months. But the Aussie move appeared to take traders com- pletely by surprise. As a result, reaction last week was swift and brutal. In major markets, gold plunged to a 12-year low, hitting $314 (U.S.) an ounce before staging a modest recovery and closing the week at $321.35. The decline wreaked havoc on the Toronto Stock Exchange’s gold and precious metals index, down five per cent since the beginning of July, and on the share prices of dozens of domestic mining companies. Sighed Robert Buchan, chief executive of Toronto-based Kinross Gold Corp.: “Mining is a stupid way to make a living at the best of times.”


The pall of gloom fell equally upon prospectors and producers. For the former, still adrift in the wake of the Bre-X Minerals Ltd. debacle in Indonesia, depressed gold prices will make it harder to raise exploration and development capital. “There’s certainly not much appetite among investors at the moment for funding exploration costs,” conceded Paul LaFontaine, manager of investor relations for Vancouver-based Golden Knight Resources Inc. Last year, aspiring miners managed to raise a tidy $4.4 billion to finance prospective gold projects. So far this year, said Buchan, it’s a mere fraction of that.

For gold producers, the downward spiral means tough decisions about whether to keep existing mines open. At $300 an ounce, said Maison Placements Inc. analyst John Ing, “more than 60 per cent of the world’s gold mines are simply not economic.” In other words, the costs of production would exceed the revenues generated by sales.

For several mining concerns, those decisions are pressing. Some South African mines–which, because of their depth, are among the world’s highest-cost producers–have already shut down. One Canadian company, Royal Oak Mines Ltd. of Vancouver, announced last week that it will close operations at its Colomac project in the Northwest Territories by year’s end. Its 1996 production costs averaged a steep $370 an ounce. Buchan’s Kinross, whose stock has dropped from a high of $11.35 per share to last week’s $5.70, said it would auction off its high-cost Golden Kopje mine in Zimbabwe and pursue austerity measures at seven other operations. But the company is also sitting atop a timely cash nest egg of $275 million, courtesy of a 1996 debenture issue. In this market, Buchan said, “our goal is to monitor other companies and projects and ultimately to deploy that capital.”

Kinross isn’t the only company prospecting for acquisitions. Peter Munk, chairman and CEO of Toronto-based Barrick Gold Corp., said last week that the next 12 months would yield “tremendous opportunities for companies to streng- then themselves.” One outfit frequently mentioned as a possible takeover target: Toronto-based Greenstone Resources Ltd. The firm, 80-per-cent owned by institutional shareholders such as pension and mutual funds, has three Central American mines in operation, and a fourth under construction. It forecasts low-cost production of 463,000 ounces a year by 1999.

At a minimum, many gold analysts believe, the recent collapse of gold prices is likely to lead to an extended round of industry consolidation, mergers and acquisitions. “There’s a lot of pebbles on the ground now,” said Robert McEwen, CEO and chairman of Toronto-based Goldcorp. “I think out of that the new leaders will emerge, perhaps in a combination of existing companies.”

Some major producers have been partially insulated from bullion’s price woes by forward selling. Barrick, for example, has pre-sold its entire gold produc- tion to the year 2000 at a price of $420 an ounce. Its average cost: $200. Similarly, Vancouver-based Placer Dome Inc. has contracted to sell some 30 per cent of its gold–to the year 2001–at $465 an ounce. But as analyst Ing notes: “The hedging policies that allow Peter Munk to talk eloquently about the merits of Barrick are the same hedging policies that help contribute to weakness in gold prices.” The reason is that, by entering into those arrange- ments, gold producers are betting that the mineral’s spot price will rise no higher over the life of the contract than the agreed-upon figure.


Inevitably, the question that now preoccupies the gold community is whether bullion has bottomed out. “I’m not sure where the bottom is,” said Goldcorp’s McEwen. “We might have already reached it. But I do think that this is a time to be buying.” Other observers note that the gold market has always been driven more by psychology than by fundamentals. Bullish investors argue that global demand for the commodity will continue to expand–principally because of the growing popularity of gold jewelry–and that shuttered mines and curtailed production can only increase gold’s relative scarcity.

Another question concerns the central banks. Are they prepared to liquidate bullion at current prices, or more likely to wait for a rebound in the market? In such a manner, said Vancouver money manager Wayne Deans, “these things often tend to be self-regulating.”

On the other hand, the number of gold short sellers on Comex, the commodities exchange division of the New York Mercantile Exchange, continued to rise last week, with little indication that they were ready to cover exposed positions by buying back into the market. At week’s end, there were 210,000 open-interest contracts registered on the Comex board alone. “I’m still sleep- ing at night,” said McEwen, “but it’s a shorter sleep.”

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